SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998
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OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-24353
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THISTLE GROUP HOLDINGS, CO.
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-2960768
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(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
6060 Ridge Avenue, Philadelphia, Pennsylvania 19128
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (215) 483-2800
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N/A
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Former name, former address and former fiscal year,
if changed since last report.
Indicate by check _ whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date November 16, 1998.
Class Outstanding
- --------------------------- ----------------
$.10 par value common stock 8,999,989 shares
THISTLE GROUP HOLDINGS, CO.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
INDEX
Page
Number
------
PART I - UNAUDITED CONSOLIDATED FINANCIAL INFORMATION OF
THISTLE GROUP HOLDINGS, CO.
Item 1. Financial Statements and Notes Thereto..................... 1
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 7
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.......................................... 13
Item 2. Changes in Securities...................................... 13
Item 3. Defaults upon Senior Securities............................ 13
Item 4. Submission of Matters to a Vote of Security Holders........ 13
Item 5. Other Materially Important Events.......................... 13
Item 6. Exhibits and Reports on Form 8-K........................... 13
SIGNATURES
THISTLE GROUP HOLDINGS, CO.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS)
September 30, December 31,
1998 1997
------------- ------------
(Unaudited)
ASSETS
Cash on hand and in banks........................................... $ 5,247 $ 2,839
Interest-bearing deposits........................................... 29,706 17,312
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Total cash and cash equivalents................................ 34,953 20,151
Investments held to maturity (approximate fair
value of $41,859 and $35,153)..................................... 40,953 34,529
Investments available for sale at fair value
(amortized cost of $17,565 and $3,231)............................ 17,874 3,698
Mortgage-backed securities available for sale
at fair value (amortized cost of $228,757 and $109,847)........... 231,357 111,486
Loans receivable (net of allowance for loan losses of
$757 and $783).................................................... 118,997 96,280
Loans held for sale................................................. 2,779 1,155
Accrued interest receivable......................................... 3,176 1,795
Federal Home Loan Bank stock - at cost.............................. 4,394 1,702
Real estate acquired through foreclosure - net...................... 175 116
Office properties and equipment - net............................... 2,565 1,504
Prepaid expenses and other assets................................... 3,259 4,234
------- -------
TOTAL ASSETS................................................... $460,482 $276,650
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits.......................................................... $264,030 $230,558
Accrued interest payable.......................................... 361 67
Advances from borrowers for taxes and insurance................... 1,632 2,186
FHLB advances..................................................... 87,884 7,884
Accounts payable and accrued expenses............................. 2,944 4,206
Dividends payable................................................. 450 366
Accrued income taxes.............................................. 1,043 2,096
Deferred income taxes............................................. 1,184 817
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TOTAL LIABILITIES.............................................. 359,528 248,180
------- -------
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, no par value -10,000,000 shares authorized, none
issued in 1998; 2,000,000 shares authorized, none issued in 1997 -- --
Common stock - $.10 par, 40,000,000 shares authorized, 8,999,989
issued and outstanding 1998; $.10 par, 8,000,000 shares authorized,
1,621,000 shares issued and outstanding 1997 900 162
Additional paid-in capital........................................ 94,645 18,455
Employee Stock Ownership Plan..................................... (6,180) --
Unrealized gain on securities available for sale, net of tax..... 1,919 1,390
Retained earnings - partially restricted.......................... 9,670 8,463
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Total stockholders' equity..................................... 100,954 28,470
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.......................... $460,482 $276,650
======== =======
See notes to unaudited consolidated financial statements.
1
THISTLE GROUP HOLDINGS, CO.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
(Unaudited)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
INTEREST INCOME:
Interest on loans.......................... $2,161 $2,280 $6,432 $6,658
Interest on mortgage-backed securities..... 2,576 1,564 6,283 4,692
Interest and dividends on investments...... 1,838 1,178 3,671 4,282
----- ----- ----- -----
Total interest income.................... 6,575 5,022 16,386 15,632
----- ----- ------ ------
INTEREST EXPENSE:
Interest on deposits....................... 2,804 2,545 7,978 7,998
Interest on borrowed money................. 520 116 749 346
----- ----- ----- -----
Total interest expense................... 3,324 2,661 8,727 8,344
----- ----- ----- -----
NET INTEREST INCOME.......................... 3,251 2,361 7,659 7,288
PROVISION FOR LOAN LOSSES.................... 15 30 45 90
----- ----- ----- -----
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES.................. 3,236 2,331 7,614 7,198
----- ----- ----- -----
OTHER INCOME:
Gain on sales of real estate owned......... -- -- 2 --
Gain on sale of deposit liabilities........ -- -- -- 2,234
Rental income.............................. 48 43 130 130
Gain on sale of office property and
equipment................................ 81
Other...................................... 86 74 269 223
----- ----- ----- -----
Total other income...................... 134 117 401 2,668
----- ----- ----- -----
OTHER EXPENSES:
Salaries and employee benefits............. 1,019 927 2,881 2,971
Occupancy and equipment.................... 262 218 728 705
Federal insurance premium.................. 36 43 108 121
Professional fees.......................... 72 50 209 170
Advertising and promotion.................. 27 26 102 91
Other...................................... 537 296 1194 1013
----- ----- ----- -----
Total other expenses.................... 1,953 1,560 5,222 5,071
----- ----- ----- -----
INCOME BEFORE INCOME TAXES................... 1,417 888 2,793 4,795
----- --- ----- -----
INCOME TAXES................................. 524 346 1,039 1,788
----- ----- ----- -----
NET INCOME................................... $893 $542 $1,754 $3,007
==== ==== ====== ======
BASIC EARNINGS PER SHARE..................... $.10 N/A N/A N/A
====
DILUTED EARNINGS PER SHARE................... $.09 N/A N/A N/A
====
WEIGHTED AVERAGE SHARES
OUTSTANDING - BASIC........................ 8,371,479 N/A N/A N/A
WIEGHTED AVERAGE SHARES
OUTSTANDING - DILUTED...................... 8,547,339 N/A N/A N/A
See notes to unaudited consolidated financial statements.
2
THISTLE GROUP HOLDINGS, CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(Unaudited)
For the Nine Months
Ended September 30,
-------------------
1998 1997
---- ----
OPERATING ACTIVITIES:
Net income ............................................. $ 1,754 $ 3,007
Adjustments to reconcile income to net cash provided
by operating activities:
Provision for loan loss .............................. 45 90
Depreciation ......................................... 209 170
Amortization of:
Goodwill ............................................. -- 33
Net (discounts) and premiums on:
Loans purchased .................................... (86) (119)
Investments ........................................ (632) 5
Mortgage-backed securities ......................... 650 187
Loss on sale of investments ........................... -- 4
Gain on sale of loans held for sale ................... -- (9)
Gain on sale of deposits .............................. -- (2,234)
Proceeds from sale of loans held for sale ........... -- 1,055
(Gain) Loss on sale of real estate owned .............. (1) 21
(Increase) decrease in other assets ................... (379) 666
Increase (decrease) in other liabilities .............. (1,721) 2,408
--------- ---------
Net cash (used in) provided by operating activities ... (161) 5,284
--------- ---------
INVESTING ACTIVITIES:
Principal collected on:
Mortgage-backed securities .......................... 28,729 9,847
Long-term loans ..................................... 16,829 18,643
Long-term loans held for sale ....................... 47 48
Other loans ......................................... 111 722
Long-term loans originated ............................. (20,008) (13,702)
Long-term loans acquired ............................... (21,335) (821)
Other loans originated ................................. (158) (825)
Purchases of:
Investments .......................................... (33,730) (20,873)
FHLB Stock ........................................... (2,692) (10)
Mortgage-backed securities ........................... (149,392) (18,211)
Office property and equipment ........................ (1,272) (31)
Proceeds from sale of:
Real estate owned .................................... 79 116
Loans ................................................ -- 124
Investments .......................................... -- 984
Office property and equipment ........................ -- 204
Maturities and calls of investments .................... 14,384 31,886
--------- ---------
Net cash provided by (used in) investing activities .... (168,408) 8,101
--------- ---------
FINANCING ACTIVITIES:
Net (decrease) increase in deposits .................... 33,472 (23,525)
Net decrease in advances from borrowers for
taxes and insurance .................................. (554) (617)
Net increase in FHLB borrowings ....................... 80,000 --
Net proceeds from the sale of common stock ............ 70,985 --
Cash dividends declared ................................ (532) (124)
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Net cash (used in) provided by financing activities .... 183,371 (24,266)
--------- ---------
Net (decrease) increase in cash and cash equivalents ... 14,802 (10,881)
--------- ---------
Cash and cash equivalents, beginning of period ......... 20,151 40,929
--------- ---------
Cash and cash equivalents, end of period ............... 34,953 30,048
========= =========
SUPPLEMENTAL DISCLOSURES
Loans transferred to real estate owned ................. $ 168 $ 249
Income taxes paid ...................................... 920 1,000
Interest paid on deposits and funds borrowed ........... 8,434 8,342
See notes to unaudited consolidated financial statements
3
THISTLE GROUP HOLDINGS, CO.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - PRINCIPLES OF CONSOLIDATION
The audited and unaudited consolidated financial statements contained
herein for the periods prior to July 14, 1998 are those of Thistle
Group Holdings, Inc., (the "Mid-Tier Holding Company"), which was
organized for the purpose of holding all of the capital stock of
Roxborough-Manayunk Bank (the "Bank"). The unaudited consolidated
statements contained herein for the periods subsequent to July 14, 1998
are those of Thistle Group Holdings, Co., (the "Company"), and its
subsidiary, the Bank, which was organized in March of 1998 for the
purpose of holding all of the capital stock of the Bank in order to
facilitate the Conversion and Reorganization. The Company's business is
conducted principally through the Bank. All significant intercompany
accounts and transactions have been eliminated in consolidation. See
also Note 3 - Conversion and Reorganization.
NOTE 2 - BASIS OF PRESENTATION
The accompanying consolidated financial statements were prepared in
accordance with instructions for Form 10-Q and, therefore, do not
include all information necessary for a complete presentation of
consolidated financial condition, results of operations, and cash flows
in conformity with generally accepted accounting principles. However,
all adjustments, consisting of normal recurring accruals, which, in the
opinion of management, are necessary for a fair presentation of the
consolidated financial statements have been included. The results of
operations for the period ended September 30, 1998 are not necessarily
indicative of the results which may be expected for the entire fiscal
year or any other period.
These statements should be read in conjunction with the consolidated
financial statements and related notes which are incorporated by
reference in the Company's Registration Statement on Form S-1 dated May
14, 1998 (File No. 333-48749).
NOTE 3 - CONVERSION AND REORGANIZATION
On July 14, 1998, FJF Financial, M.H.C. (the "Mutual Holding Company")
completed its mutual to stock conversion (the "Conversion and
Reorganization"). In connection with the Conversion and Reorganization,
Thistle Group Holdings, Co., a Pennsylvania corporation, sold 7,856,370
shares of its common stock in subscription and community offerings at
$10.00 per share. Furthermore, based on an independent appraisal,
existing stockholders of the Mid-Tier Holding Company, other than the
Mutual Holding Company, converted each share of the Mid-Tier Holding
Company into 5.5516 shares of common stock of Thistle Group Holdings,
Co. (the "Exchange"). Upon completion of the Conversion and
Reorganization, the Mutual Holding Company ceased to exist and the Bank
changed its name to Roxborough-Manayunk Bank and became the wholly
owned subsidiary of Thistle Group Holdings, Co. A total of 8,999,989
shares of common stock of Thistle Group Holdings, Co. (excluding
fractional shares issued in the Exchange) were issued in connection
with the Conversion and Reorganization.
For the purpose of granting eligible members of the Bank a priority in
the event of further liquidation, the Bank established a liquidation
account in accordance with applicable regulations. In the event (and
only in such event) of future liquidation of the Bank, an eligible
savings account holder who continues to maintain a savings account
shall be entitled to receive a distribution from the liquidation
account, in the proportionate amount of the then-current adjusted
balance of the savings deposits then held, before any distributions may
be made with respect to capital stock.
The common stock of Thistle Group Holdings, Co. began trading on the
Nasdaq National Market under the symbol "THTL" on July 14, 1998.
4
NOTE 4 - COMMON STOCK ACQUIRED BY THE EMPLOYEE STOCK OWNERSHIP PLAN
As part of the Conversion and Reorganization, the Employee Stock
Ownership Plan (the "ESOP") borrowed funds from the Company and used
the funds to purchase 628,509 shares of common stock. At September 30,
1998, 10,475 shares were committed to be released. None have been
allocated to participants. The Company accounts for its ESOP in
accordance with AICPA Statement of Position 93-6, " Employers'
Accounting for Employee Stock Ownership Plans", which requires the
Company to recognize compensation expense equal to the fair value of
the ESOP shares during the periods in which they become committed to be
released. To the extent that the fair value of the ESOP shares differs
from the cost of such shares, this differential will be charged or
credited to equity as additional paid-in capital. Management expects
the recorded amount of expense to fluctuate as continuing adjustments
are made to reflect changes in the fair value of the ESOP shares.
Employers with internally leveraged ESOP's, such as the Company, do not
report the loan receivable from the ESOP as an asset and do not report
the ESOP debt from the employer as a liability. The Company recorded
compensation expense related to the ESOP of $97,548 for the quarter
ended September 30, 1998.
NOTE 5 - LOANS RECEIVABLE
Loans receivable at September 30, 1998 and December 31, 1997 consisted
of the following (in thousands):
September 30,1998 December 31,1998
----------------- ----------------
Mortgage loans:
1-4 family residential $ 94,784 $ 71,397
Other dwelling units 16,048 16,647
Home equity lines of credit
and improvement loans 8,596 8,210
Commercial nonmortgage loans 285 329
Construction loans 997 1,693
Loans on savings accounts 206 243
Consumer loans 76 156
-------- --------
Total loans 120,992 98,675
Plus: unamortized premiums 178 101
Less:
Net discounts on loans purchased (32) (47)
Loans in process (92) (433)
Deferred loan fees (1,292) (1,233)
Allowance for loan losses (757) (783)
-------- --------
Total $118,997 $96,280
======== =======
NOTE 6 - DEPOSITS
The major types of deposits by amounts and percentages were as follows
(in thousands):
September 30, 1998 December 31, 1997
Amount % of Total Amount % of Total
NOW accounts $16,118 6.1% $15,662 6.8%
Money Market accounts 9,705 3.7% 7,687 3.3%
Passbook accounts 98,656 37.4% 96,158 41.7%
Certificate accounts 139,551 52.8% 111,051 48.2%
--------------------------------------------------------------
Total $264,030 100.0% $230,558 100.0%
==============================================================
5
NOTE 7 - EARNINGS PER SHARE
In March 1997, the Financial Accounting Standards Board ("FASB")
issued Statement Of Financial Accounting Standards ("SFAS") No. 128.
The Statement establishes Standards for computing and presenting
earnings per share ("EPS") and applies to entities with publicly held
common stock or potential common stock. Basic EPS excludes dilution
and is computed by dividing income available to common stockholders by
the weighted-average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur
if securities or other contracts to issue common stock were exercised
or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. Per share
amounts for the quarter ended September 30, 1998 include earnings only
from July 14, 1998, the completion date of the initial public
offering. EPS for the periods prior to the Conversion and
Reorganization have not been presented as they are not comparable.
NOTE 8 - COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income." Statement No. 130 requires the
reporting of comprehensive income in addition to net income from
operations. Comprehensive income is a more inclusive financial
reporting methodology that includes disclosure of certain financial
information that historically has not been recognized in the
calculation of net income. As required, the provisions of Statement
No. 130 have been retroactively applied to previously reported
periods. The application of Statement No. 130 had no material effect
on the Company's consolidated financial condition or operations. For
the three and nine months ended September 30, 1998, the Company
reported other comprehensive income of $237,929 and $529,076
respectively, and $292,118 and $348,885 for the same periods in 1997.
Such increased income consisted entirely of unrealized gains, net of
taxes, on available for sale securities.
NOTE 9 - RECENT ACCOUNTING PRONOUNCEMENTS
Accounting for Derivative Instruments and Hedging Activities. In June
1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The statement is effective for
fiscal years beginning after June 15, 1999 and will not be applied
retroactively. The statement established accounting and reporting
standards for derivative instruments and hedging activity and requires
that all derivatives be measured at fair value and recognized as
either assets or liabilities in the financial statements. Management
of the Company is currently assessing the potential impact of SFAS No.
133 when such statement is adopted.
6
THISTLE GROUP HOLDINGS, CO.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
The Private Securities Litigation Reform Act of 1995 contains safe harbor
provisions regarding forward-looking statements. When used in this discussion,
the words "believes", "anticipates", "contemplates", "expects", and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties which could cause actual results
to differ materially from those projected. Those risks and uncertainties include
changes in interest rates, risks associated with the effect of opening a new
branch, the ability to control costs and expenses, and general market
conditions. Thistle Group Holdings, Co. undertakes no obligation to publicly
release the results of any revisions to those forward-looking statements which
may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
General
Thistle Group Holdings, Co. (the "Company") is a Pennsylvania
Corporation which was organized in March 1998 to acquire all of the Capital
Stock of Roxborough-Manayunk Bank (the "Bank") in the Conversion and
Reorganization. Thistle Group Holdings, Co. is a unitary thrift holding company
which, under existing laws, generally is not restricted in the types of business
activities in which it may engage provided that the Bank retains a specified
amount of its assets in housing-related investments.
The Bank is a federally-chartered stock savings bank. The Bank serves
the Pennsylvania counties of Philadelphia and Delaware through a network of six
offices, providing a full range of retail banking services, with emphasis on the
origination of one-to-four family residential mortgages.
The Bank is primarily engaged in attracting deposits from the general
public through its offices and using those and other available sources of funds
to originate loans secured by one to four-family residences. In addition, the
Bank originates consumer loans, such as home equity loans, and multi-family and
nonresidential real estate loans. Such loans generally provide for higher
interest rates and shorter terms than single-family residential real estate
loans. To a lesser extent, the Bank originates loans secured by existing
multi-family residential and nonresidential real estate.
Because the Conversion and Reorganization was not completed until July
14, 1998, the information provided herein is that of Company for the three and
nine months ended September 30, 1998 and of the Thistle Group Holdings, Inc.
(the "Mid-Tier Holding Company") for all other periods presented.
Comparison of Financial Condition
The Company had total assets of $460.5 million as of September 30, 1998,
representing an increase of $184.0 million or 66% from the balance of $276.6
million as of December 31, 1997. The net increases of $35 million in interest
bearing deposits and investment securities, $120 million in mortgage-backed
securities, and $24 million in loans were funded with $71 million of the net
proceeds from the stock offering, additional FHLB advances of $80 million and an
increase of $33 million in deposits.
Cash and cash equivalents increased $14.8 million or 73% from $20.1 million at
December 31, 1997 to $34.9 million at September 30, 1998 primarily due to
proceeds not yet deployed from the stock offering.
Investments and mortgage-backed securities increased $140.4 million or 94% from
$149.7 million at December 31, 1997 to $290.1 million at September 30, 1998. The
increase was primarily due to $60 million in current coupon mortgage-backed
securities purchased in connection with wholesale leverage transactions funded
with FHLB advances, and purchases of $34 million and $89 million of investments
and mortgage-backed securities, respectively, funded with the proceeds from the
stock offering, maturities and repayments.
Loans increased $24.3 million or 25% from $97.4 million at December 31, 1997 to
$121.7 million at September 30, 1998. This increase was the result of the
purchase of a $21 million whole loan package purchased as part of a leverage
transaction and originations of $20 million, offset by $17 million in principal
repayments.
7
Deposits increased $33.4 million or 15% from $230.5 million at December 31, 1997
to $264.0 million at September 30, 1998. Certificates of deposit (primarily 1
year) increased $28 million representing the majority of the increase.
FHLB advances increased $80 million from $7.8 million at December 31, 1997 to
$87.8 million at September 30, 1998. The additional borrowings have scheduled
maturity dates through September 2008 and a weighted average interest rate of
5.4%.
Total stockholders' equity increased $72.4 million from $28.5 million at
December 31, 1997 to $100.9 million at September 30, 1998 primarily due to net
proceeds from the stock offering, and net income, net of dividends declared and
paid.
Non-performing Assets
The following table sets forth information regarding non-performing
loans and real estate owned.
At At
September 30, December 31,
------------- ------------
1998 1997
---- ----
(in Thousands)
Total non-performing loans................ $448 $ 716
Real estate owned......................... 175 116
---- ---
Total non-performing assets............... $623 $ 832
==== ====
Total non-performing loans to
total loans............................. .36% .74%
==== ===
Total non-performing assets to
total assets............................ .14% .30%
==== ===
Allowance for loan loss $757 $783
Allowance for loan losses as a percentage
of non-performing assets 121% 94%
Allowance for loan losses as a percentage
of total non-performing loans
169% 109%
Allowance for loan losses as a percentage
of total loans .62% .80%
Comparison of Earnings for the Three and Nine Months Ended September 30, 1998
and 1997
Net Income. Net income for the three and nine months ended September
30, 1998 increased $351,000 or 65% and decreased $1.2 million or 42%,
respectively, over the same periods in 1997. The increase for the three month
period is due to an increase in net interest income offset by increases in
non-interest expense. The decrease for the nine month period is due to the $1.5
million after tax gain in 1997 from the sale of two branch offices offset
somewhat by an increase in net interest income.
Total Interest Income. Interest income increased $1.5 million or 31%,
and $754,000 or 5%, for the three and nine months ended September 30, 1998,
respectively, as compared to the same periods in 1997. The increase in the three
month period was due to an increase of $123 million in the average balance of
interest-earning assets offset by a decrease in the average yield of 81 basis
points. There was rate compression during the current quarter due primarily to
the growth resulting from immediate infusion of capital from the stock
conversion and general market conditions. The increase for the nine month period
was due to an increase of $33.7 million in the average balance of
interest-earning assets offset by a decrease in the average yield of 50 basis
points.
8
Total Interest Expense. Interest expense increased $663,000 or 25% and
$383,000 or 5%, for the three and nine months ended September 30, 1998,
respectively, as compared to the same periods in 1997. The increase in the three
month period was primarily to an increase of $52.5 million in the average
balance of interest-bearing liabilities and to a lesser extent by an increase of
11 basis points in the average cost of funds. The Company borrowed an additional
$80 million in advances from the FHLB with a weighted average rate of 5.4%
during the quarter ended September 30, 1998 in connection with a leveraging
strategy thus increasing the average balances and cost of funds.
Net Interest Income. Net interest income increased $890,000 or 38% and
$371,000 or 5%, due to the reasons discussed above. In addition, the net
interest spread, the difference between the average rate earned and the average
rate paid, decreased by 92 basis points to 2.26% from 3.18% for the quarter
ended September 30, 1998 and decreased 57 basis points to 2.61% from 3.18% for
the nine months ended September 30, 1997.
Provision for Losses on Loans. The provision for losses on loans for
the three and nine months ended September 30, 1998 totaled $15,000 and $30,000,
respectively, compared to $45,000 and $90,000 for the same periods in 1997.
Provisions for losses included charges to reduce the recorded balances of
mortgage loans receivable and the collateral real estate to their estimated net
realizable value or fair value, as applicable. Such provisions are based on
management's estimate of net realizable value or fair value of the collateral,
as applicable, considering the current and currently anticipated further
operating or sales conditions, thereby causing these estimates to be
particularly susceptible to changes that could result in a material adjustment
to results of operations in the near term. Recovery of the carrying value of
such loans and its collateral is dependent to a great extent on economic,
operating and other conditions that may be beyond the Bank's control.
Management will continue to review its loan portfolio to determine the
extent, if any, to which further additional loss provisions may be deemed
necessary. There can be no assurance that the allowance for losses will be
adequate to cover losses which may in fact be realized in the future and that
additional provisions for losses will not be required.
Other Income. Other income for the three months ended September 30,
1998 remained consistent with the quarter ended September 30, 1997. Other income
for the nine months ended September 30, 1998 decreased $2.2 million over the
same period of the prior year due to a non-recurring gain of $2.2 million on the
sale of two branch offices in May 1997.
Other Expenses. Other expenses increased $393,000 or 25% for the three
months ended September 30, 1998 as compared to the same period in 1997. This
increase was primarily due to a $100,000 ($50,000 of which is non-recurring)
increase in depreciation, training, and communication expenses related to the
purchase and installation of a $1.2 million, year 2000 compliant, PC-based
client server system, a $22,000 increase in professional services due to SEC and
OTS required filings as public company, a $100,000 increase in salaries and
related expenses, and non-recurring charges of $50,000 related to the
termination of the Mid-Tier Holding Company. Other expenses increased $152,000
or 3% for the nine months ended September 30, 1998 as compared to the same
period of 1997. This increase represents an increase in the items discussed
above with the exception of salaries and related expenses which decreased by
$100,000 as well as a decrease in expenses related to operating two branch
offices for five months in 1997 prior to their sale. The decrease in salaries
and related expenses was mainly due to a decrease in profit sharing
contributions. Contributions are based upon net income which was higher in 1997
due to the sale of the two branch offices. Also, as of July 1998 contributions
have been suspended.
The Company is in the process of reviewing the supplemental pension
agreement triggered by the death of Chairman John F. McGill Sr. on October 6,
1998. While management has not completed its review of the agreement it is
believed there will be a charge of not greater than $150,000 after tax taken
against earnings in the fourth quarter ended December 31, 1998 in connection
with this benefit.
Income Tax Expense. Income tax for the three months ended September 30,
1998 increased due to the increase in earnings. Income tax expense for the nine
months ended September 30, 1998 decreased over the same period of the prior year
due to the decrease in earnings.
9
Liquidity and Capital Resources
On September 30, 1998, the Bank was in compliance with its three
regulatory capital requirements as follows:
Amount Percent
------ -------
(in thousands)
Tangible capital......................... $60,671 13.75%
Tangible capital requirement............. 6,615 1.50
------ -----
Excess over requirement.................. $54,056 12.25%
======= ======
Core capital............................. $60,671 13.75%
Core capital requirement................. 13,230 3.00
------ -----
Excess over requirement.................. $47,441 10.75%
======= ======
Risk based capital....................... $61,428 53.24%
Risk based capital requirement........... 9,229 8.00
------ -----
Excess over requirement.................. $52,199 45.24%
======= =====
The Bank's primary sources of funds are deposits and proceeds from
principal and interest payments on loans, mortgage-backed securities and other
investments. While maturities and scheduled amortization of loans and
mortgage-backed securities are a predictable source of funds, deposit flows and
mortgage prepayments are greatly influenced by general interest rates, economic
conditions, competition and the consolidation of the financial institution
industry.
The primary investment activity of the Bank is the origination and
purchase of mortgage loans, mortgage-backed securities and other investments.
During the nine months ended September 30, 1998, the Bank originated $20 million
of mortgage loans. The Bank also purchases loans and mortgage-backed securities
to reduce liquidity not otherwise required for local loan demand. Purchases of
mortgage loans and mortgage-backed securities totaled $21 million and $149
million, respectively, during the nine month period. Other investment activities
include investment in FHLB of Pittsburgh stock, consumer loans U.S. government
and federal agency obligations, equity securities of financial institutions and
capital trust securities.
The Bank has other sources of liquidity if a need for additional funds
arises. Although the Bank has historically not utilized borrowings as a source
of funds, at September 30, 1998, the Bank had outstanding $87.8 million in
advances from the FHLB of Pittsburgh. These advances were obtained in connection
with leverage transactions including the purchase of a $21 million whole loan
package and $60 million of current coupon mortgage-backed securities. In
addition, other sources of liquidity can be found in the Bank's balance sheet,
such as investment securities maturing within one year and unencumbered
mortgage-backed securities that are readily marketable.
The Bank is required to maintain minimum levels of liquid assets as
defined by OTS regulations. The requirement, which may be varied at the
direction of the OTS depending upon economic conditions and deposit flows, is
based upon a percentage of deposits and short-term borrowings. The required
minimum ratio is currently 4.0%. The Bank's liquidity ratio was 19.38% at
September 30, 1998.
The Bank's most liquid assets are cash and cash equivalents, which
include investments in highly liquid short-term investments. The level of these
assets is dependent on the Bank's operating, financing and investing activities
during any given period. At September 30, 1998, cash and cash equivalents
totaled $34.9 million.
The Bank anticipates that it will have sufficient funds available to
meet its current commitments. As of September 30, 1998, the Bank had $1.3
million in commitments to fund loans. Certificates of deposit which were
scheduled to mature in one year or less as of September 30, 1998 totaled $122.5
million. Management believes that a significant portion of such deposits will
remain with the Bank.
10
Impact of Inflation and Changing Prices
The consolidated financial statements of the Company and notes thereto,
presented elsewhere herein, have been prepared in accordance with GAAP, which
require the measurement of financial position and operating results in terms of
historical dollars without considering the change in the relative purchasing
power of money over time due to inflation. The impact of inflation is reflected
in the increased cost of the Company's operations. Unlike most industrial
companies, nearly all the assets and liabilities of the Company are financial.
As a result, interest rates have a greater impact on the Company's performance
than do the effects of general levels of inflation. Interest rates do not
necessarily move in the same direction or to the same extent as the prices of
goods and services.
Additional Key Operating Ratios
For the For the
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1998(1) 1997(1) 1998(1) 1997(1)
------- ------- ------- -------
Return on average assets............. .88% .79% .72% 1.39%
Return on average equity............. 5.30% 7.88% 5.61% 15.12%
Yield on average interest-earning assets
6.79% 7.60% 7.03% 7.53%
Cost of average interest-bearing
liabilities 4.53% 4.42% 4.42% 4.35%
Interest rate spread (2)............. 2.26% 3.18% 2.61% 3.18%
Net interest margin.................. 3.36% 3.57% 3.29% 3.51%
At September 30,
1998
----------------
Tangible book value per share...................... $11.22
- ----------------
(1) The ratios for the three and nine month period are annualized.
(2) Interest rate spread represents the difference between the average
yield on interest-earning assets and the average cost of
interest-bearing liabilities.
Year 2000
The Company currently has a Year 2000 Project Plan and Review Team in
place. As recommended by the Federal Financial Institutions Council, the Plan
encompasses the following phases: Awareness, Assessment, Renovation, Validation,
and Implementation. These phases will enable the Company to identify risks,
develop an action plan, perform adequate testing and complete certification that
its processing systems will be Year 2000 ready. Execution of the Plan is
currently on target.
The Company has just completed the Renovation Phase which included among
other things, changing the information processing system, the most essential
system to the Bank. The information processing system was purchased from Open
Solutions Incorporated, Glastonbury, Connecticut. The system has been certified
by its vendor as Year 2000 compliant. The system was installed at the Bank in
late July 1998. It is a PC-based client server system, which, management
believes, will serve the Bank well beyond the Year 2000. The total cost of the
system was approximately $1.2 million with additional annual cost of
approximately $344,000 for depreciation, software cost, and maintenance. During
the Renovation Phase the Company contacted all other material vendors,
suppliers, and customers regarding their Year 2000 state of readiness. The
Company is currently in the process of reviewing those responses.
The Company is beginning Phase 4, Validation, which involves testing of
all internal systems as well as testing with vendors. The Validation Phase is
targeted for completion in June 1999. The Implementation Phase is to
11
certify that systems are Year 2000 ready, along with assurances that any new
systems are compliant on a going-forward basis. The Implementation Phase is
targeted for completion by December 1999. No assurance can be given that the
Year 2000 Project Plan will be completed successfully by the Year 2000, in which
event the Company could incur significant costs. If the provider of the
information processing system is unable to resolve a potential problem in time,
the Company would likely experience significant data processing delays,
mistakes, or failures. These delays, mistakes, or failures could have a
significant adverse impact on the financial statements of the Company.
Successful and timely completion of the Year 2000 Project Plan is based
on management's best estimates derived from various assumptions of future
events, which are inherently uncertain, including the progress and results of
the Company's testing plans, and all vendors, suppliers and customer readiness.
Market Risk Analysis
The goal of the Bank's asset/liability policy is to manage interest
rate risk so as to maximize net interest income over time in changing interest
rate environments. Management monitors the Bank's net interest spreads (the
difference between yields received on assets and rates paid on liabilities) and,
although constrained by market conditions, economic conditions, and prudent
underwriting standards, it offers deposit rates and loan rates in an attempt to
maximize net interest income. Management also attempts to fund the Bank's assets
with liabilities of a comparable duration to minimize the impact of changing
interest rates on the Bank's net interest income. Since the relative spread
between financial assets and liabilities is constantly changing, the Bank's
current net interest income may not be an indication of future net interest
income.
The Bank has sought to manage its interest rate risk by maintaining a
high degree of liquid assets and short-term securities, coupled with the
purchase of mortgage-backed securities secured by adjustable rate mortgage
loans.
The Bank is also managing interest rate risk by the origination of
multi-family residential loans with a balloon payment after five to seven years.
In general, these loans have higher yields, shorter maturities and greater
interest rate sensitivity than traditional 1-4 family residential real estate
loans.
The Bank constantly monitors its deposits in an effort to decrease
their interest rate sensitivity. Rates of interest paid on deposits at the Bank
are priced competitively in order to meet the Bank's asset/liability management
objectives and spread requirements. As of September 30, 1998, the Bank's savings
accounts, checking accounts and money market deposit accounts totaled $124.5
million or 47 % of its total deposits. The Bank believes, based on historical
experience, that a substantial portion of such accounts represent non-interest
rate sensitive core deposits.
The Bank's Board of Directors is responsible for reviewing and
approving the asset and liability policies. The Board meets quarterly to review
interest rate risk and trends, as well as liquidity and capital ratios and
requirements. The Bank's management is responsible for administering the
policies and determinations of the Board of Directors with respect to the Bank's
asset and liability goals and strategies. Management expects that the Bank's
asset and liability policies and strategies will continue as described above so
long as competitive and regulatory conditions in the financial institution
industry and market interest rates continue as they have in recent years.
12
THISTLE GROUP HOLDINGS, CO.
PART II
ITEM 1. LEGAL PROCEEDINGS
Neither the Company nor the Bank was engaged in any legal proceeding
of a material nature at September 30, 1998. From time to time, the
Company is a party to routine legal proceedings in the ordinary course
of business, such as claims to enforce liens, condemnation proceedings
on properties in which the Company holds security interests, claims
involving the making and servicing of real property loans, and other
issues incident to the business of the Company. There were no lawsuits
pending or known to be contemplated against the Company at September
30, 1998 that would have a material effect on the operations or income
of the Company or the Bank, taken as a whole.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NOT APPLICABLE
ITEM 5. OTHER MATERIALLY IMPORTANT EVENTS
See Note 3 to the Unaudited Consolidated Financial Statements
regarding the Conversion and Reorganization.
In October 1998, William A. Lamb Sr. was appointed to fill the seat
left vacant when John F. McGill Sr. passed away on October 6, 1998.
Mr. Lamb serves as a Board member Roxborough-Manayunk Bank. Jerry A.
Naessens, current Board member of the Company and Chief Financial
Officer of Roxborough-Manayunk Bank was appointed to fill Mr. McGill's
Board seat at Roxborough-Manayunk Bank.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - see attached
(b) Reports on Form 8-K.
On July 14, 1998, Thistle Group Holdings, Co., filed a Current
Report on Form 8-K announcing the completion of the Conversion
and Reorganization, including the sale and issuance of 9,000,000
shares of common stock of Thistle Group Holdings, Co. See also
Note 3 to Unaudited Consolidated Financial Information included
in this Form 10Q.
3(i) Articles of Incorporation of Thistle Group Holdings, Co.*
3(ii) Bylaws of Thistle Group Holdings, Co.*
4 Specimen Stock Certificate of Thistle Group Holdings, Co.*
10.1 1992 Stock Option Plan of Roxborough-Manayunk Federal Savings
Bank*
10.2 1992 Management Stock Bonus Plan of Roxborough-Manayunk Federal
Savings Bank*
10.3 1994 Stock Option Plan of Roxborough-Manayunk Federal Savings
Bank*
10.4 1994 Management Stock Bonus Plan of Roxborough-Manayunk Federal
Savings Bank*
10.5 Employment Agreement with John F. McGill*
10.6 Employment Agreement with Jerry Naessens*
10.7 Employment Agreement with John F. McGill, Jr.*
-------------------
* Incorporated by reference to the Registrant's Registration Statement on
Form S-1 initially filed with the Commission on March 26, 1998 (File No.
333-48749).
13
THISTLE GROUP HOLDINGS, CO. AND SUBSIDIARY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THISTLE GROUP HOLDINGS, CO.
Date: November 13, 1998 By: /s/ John F. McGill, Jr.
-------------------------------------
John F. McGill, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 13, 1998 By: /s/ Jerry Naessens
-------------------------------------
Jerry Naessens
Chief Financial Officer and Secretary
(Principal Officer)