SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________________to _____________________
Commission File Number: 0-24353
THISTLE GROUP HOLDINGS, CO.
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-2960768
- ----------------------------------------------------- -------------------
(State or other jurisdiction of incorporation (IRS Employer
or organization) Identification No.)
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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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.10 per share
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(Title of Class)
Indicate by check mark whether the company (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 company
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO .
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |X|
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). YES NO X .
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Based on the closing sales price of $14.09 per share of the Company's
common stock on March 4, 2003, as reported on the Nasdaq National Market, the
aggregate market value of voting and non-voting stock held by non- affiliates of
the Company was approximately $52.8 million. On such date, 5,267,475 shares of
the Company's Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of 2002 Annual Report to Stockholders (Parts I, II and IV)
2. Portions of Proxy Statement for the 2003 Annual Meeting of Stockholders.
(Part III)
PART I
Forward-Looking Statements
Certain statements contained herein are forward-looking and may be
identified by the use of such words as "believe," "expect," "anticipate,"
"should," "planned," "estimated," and "potential." These forward-looking
statements are based on the current expectations of the Company (as defined
below), and the Company notes that a variety of factors could cause its actual
results and experience to differ materially from the anticipated results or
other expectations expressed in such forward-looking statements. The risks and
uncertainties that may affect the operations, performance, development, and
results of the Company's business include interest rate movements, competition
from both financial and non-financial institutions, changes in applicable laws
and regulations and interpretations thereof, the timing and occurrence (or non-
occurrence) of transactions and events that may be subject to circumstances
beyond the Company's control, and general economic conditions. The Company does
not undertake to update any forward-looking statement, whether written or oral,
that may be made from time to time by or on the Company's behalf.
Item 1. Business
- -----------------
Thistle Group Holdings, Co. (the "Company") is a unitary thrift holding
company incorporated in the Commonwealth of Pennsylvania and headquartered in
Philadelphia, Pennsylvania. The Company's business is conducted principally
through Roxborough Manayunk Bank (the "Bank"). Unless the context indicates
otherwise, all references to the Company refer collectively to the Company and
the Bank, including each of the Company's and the Bank's subsidiaries. For a
description of the Company's other subsidiaries and the Bank's subsidiaries, see
" - Subsidiaries."
The Company provides a full range of banking services through its main
office and twelve branch offices located in the counties of Philadelphia,
Chester, Montgomery, and Delaware in the Commonwealth of Pennsylvania and
Wilmington, Delaware and its transactional web site RMBgo.com. For the year
ended December 31, 2002, the Company had consolidated assets of $857.4 million,
deposits of $492.9 million, and stockholder's equity of $76.4 million.
Competition
The Company is one of many financial institutions serving its market
area of the counties of Philadelphia, Chester, Montgomery, and Delaware in the
Commonwealth of Pennsylvania and Wilmington, Delaware. The competition for
deposit products comes from other insured financial institutions such as
commercial banks, thrift institutions and credit unions in the Company's market
area. Deposit competition also includes a number of insurance products sold by
local agents and investment products such as mutual funds and other securities
sold by local and regional brokers. Loan competition comes primarily from other
insured financial institutions such as commercial banks, thrift institutions and
credit unions and mortgage banking companies.
Lending Activities
Analysis of Loan Portfolio. The following table sets forth selected
data relating to the composition of the Company's loan portfolio by type of loan
and type of security on the dates indicated.
At December 31,
-----------------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
-------------------- ----------------- ------------------ ----------------- -----------------
$ % $ % $ % $ % $ %
--- --- --- --- --- --- --- --- --- ---
(In Thousands)
Real Estate Loans:
Residential................. $125,827 41.44% $125,504 47.72% $121,230 55.41% $110,032 68.95% $108,585 79.91%
Multi-family and commercial. 92,760 30.55 62,532 23.77 54,763 25.03 29,867 18.72 17,542 12.91
Home equity................. 20,178 6.64 15,118 5.75 10,349 4.73 7,914 4.96 8,068 5.94
Construction (net).......... 28,446 9.37 23,677 9.00 14,210 6.49 5,365 3.36 868 0.64
Home equity line of credit.. 8,347 2.75 5,805 2.21 2,650 1.21 604 0.38 202 0.15
Commercial business loans..... 26,557 8.74 28,866 10.97 14,731 6.73 5,496 3.44 269 0.20
Consumer loans:
Line of credit.............. 73 0.02 149 0.06 2 -- 50 0.03 76 0.06
Secured demand note......... -- -- -- -- -- - 76 0.05 50 0.04
Share loans................. 505 0.17 637 0.24 726 0.33 170 0.11 218 0.15
Home improvement............ -- -- -- -- -- -- -- -- 3 --
Other....................... 961 0.32 730 0.28 150 0.07 -- -- -- --
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans................... $303,654 100.00% $263,018 100.00% $218,811 100.00% $159,574 100.00% $135,881 100.00%
====== ====== ====== ====== ======
Less:
Net premiums................ $ 132 $ 254 $ 332 $ 345 $ 344
Deferred fees............... (1,614) (1,541) (1,629) (1,452) (1,281)
Allowance for loan losses... (2,209) (2,511) (1,682) (1,234) (1,036)
-------- -------- -------- -------- --------
Total loans, net............ $299,963 $259,220 $215,832 $157,233 $133,908
======== ======== ======== ======== ========
Loans held for sale........... $ -- $ -- $ 3,528 $ 3,925 $ 2,558
======== ======== ======== ======== ========
2
Loan Maturity Schedules. The following table sets forth the estimated
maturity of the Company's loan portfolio at December 31, 2002. The table does
not include the effects of possible prepayments or scheduled repayments.
Prepayments and scheduled principal repayments of loans totaled $119.1 million
for the year ended December 31, 2002. All mortgage loans are shown as maturing
based on the date of the last payment required by the loan agreement.
Due Due after
within 1 through Due after
1 year 5 years 5 years Total
------- -------- --------- -------
(In Thousands)
Residential and home equity... $ 1,358 $ 8,946 $144,048 $154,352
Multi-family and commercial
real estate................. 6,778 9,947 76,035 92,760
Construction.................. 10,636 13,968 3,842 28,446
Commercial.................... 5,876 15,250 5,431 26,557
Consumer...................... 153 1,246 140 1,539
------- ------- -------- --------
Total......................... $24,801 $49,357 $229,496 $303,654
======= ======= ======== ========
The following table sets forth as of December 31, 2002 the dollar
amount of all loans due after December 31, 2003, which have fixed rates of
interest and which have floating or adjustable interest rates.
Floating or
Adjustable
Fixed Rates Rates Total
----------- ----------- ------
(In Thousands)
Residential and home equity.............. $129,741 $ 23,253 $152,994
Multi-family and commercial real estate.. 32,316 53,666 85,982
Construction............................. 2,395 15,415 17,810
Consumer................................. 5,529 15,152 20,681
Commercial............................... 939 447 1,386
-------- -------- --------
Total.................................. $170,920 $107,933 $278,853
======== ======== ========
Residential Mortgage Loans. The Company offers first mortgage loans
secured by one- to four-family residences in the Company's primary lending area.
Typically, such residences are single family homes that serve as the primary
residence of the owner. The Company offers fixed-rate mortgage loans with terms
of up to 30 years, fixed-rate balloon mortgages with terms up to 15 years and
amortization periods up to 30 years, and adjustable-rate mortgage loans that
generally adjust every one year based upon selected published indices. Owner
occupied residential and non-owner occupied mortgage loans are generally
originated in amounts up to 80% of the lesser of the appraised value or selling
price of the property. Loans up to 97% of the appraised value are available for
owner occupied properties only. Private mortgage insurance is usually required
for the amount in excess of 80% of such value. Mortgage loans originated and
held by the Company in its portfolio generally include due-on sale clauses which
provide the Company with the contractual right to deem the loan immediately due
and payable in the event that the borrower transfers ownership of the property
without the Company's consent.
3
Adjustable-rate mortgage loans buffer the risks associated with changes
in interest rates, but involve other risks because as interest rates increase,
the underlying payments by the borrower increase, thus increasing the potential
for default. At the same time, the marketability of the underlying collateral
may be adversely affected by higher interest rates. The Company's
adjustable-rate loan underwriting policy recognizes these inherent risks and the
Company reviews a credit application accordingly. These risks have not had an
adverse effect on the Company to date. Fixed-rate balloon mortgage loans also
buffer the risks associated with changes in interest rates but involve other
risks because if interest rates increase at the time the balloon payment is due
it could make it more difficult for the borrower to refinance thus increasing
the potential for default. At the same time, the marketability of the underlying
collateral may be adversely affected by higher interest rates.
Home Equity Loans and Home Equity Lines of Credit. The Company
originates home equity loans secured by 1- to 4-family residences. Home equity
loans are originated as fixed-rate loans with terms from 1 to 20 years. Home
equity lines are originated as variable rate loans with terms from 1 to 15
years. These loans reprice with The Wall Street Journal Prime Rate. These loans
are made on owner-occupied, 1- to 4-family residences or vacation homes. The
loans are generally subject to an 90% combined loan-to-value limitation,
including any other outstanding mortgages or liens. Home equity loans are
generally originated for retention in the Company's loan portfolio. For loans in
excess of 80%, the Company does not require private mortgage insurance but
instead self insures.
Multi-Family and Commercial Real Estate Loans. The Company originates
both fixed-rate and adjustable-rate multi-family and commercial real estate
loans within its primary market area. Multi-family loans are generally secured
by apartment buildings and commercial real estate loans are generally secured by
office buildings, retail stores, industrial facilities and other non-residential
buildings.
Adjustable-rate loans for both multi-family and commercial real estate
loans generally reprice every five years based on the daily average yield on
U.S. Treasury securities adjusted to a constant maturity of five years plus a
margin. Such loans may be amortized up to 25 to 30 years with a balloon payment
after 10 to 15 years. Fixed-rate loans are generally 15 year self amortizing
loans, or 5 to 10 year balloons, with up to 25 to 30 year amortizations.
Adjustable-rate and fixed-rate loans are generally made in amounts up to 70% to
80% of the appraised value of the mortgaged property. In making such loans, the
Company evaluates the mortgage primarily on the net operating income generated
by the real estate to support the debt service. Generally, the Company obtains
personal guarantees of the principals of the borrower as additional security.
The Company also considers the financial resources and income level of the
borrower, the borrower's experience in owning or managing similar property, the
marketability of the property and the Company's lending experience, if any, with
the borrower. An origination fee of 0% to 1.5% is usually charged on such loans
and generally these loans carry prepayment penalties for the first five years.
At December 31, 2002, multi-family loans totaled $28.8 million and commercial
real estate loans totaled $64.0 million of this total loan portfolio.
Commercial real estate lending is generally deemed to entail greater
risk than residential real estate lending. The repayment of commercial real
estate loans is generally dependent on the successful operation of the property
and the income it produces. The Company has established a Commercial Credit
Administration Department to better manage these risks.
4
Construction Loans. The Company originates construction loans primarily
for the construction of single family residences and to a lesser extent for
commercial property. Construction loans for single family residences are either
made to individuals or to selected developers.
With respect to construction loans to individuals, such loans have a
maximum term of 12 to 18 months, have fixed or variable rates of interest based
upon the prime rate published in The Wall Street Journal plus a margin and have
loan to value ratios of 80% or less of the appraised value upon completion and
generally do not require the amortization of principal during the term. Upon
completion of construction, the loans convert to permanent residential mortgage
loans.
Residential construction loans to developers and commercial
construction loans generally have terms of 12 to 30 months or less, have maximum
loan to value ratios between 75% and 80% or less of the appraised value upon
completion and generally do not require the amortization of the principal during
the term. The loans are made with floating rates of interest based on the prime
rate (as published in the Wall Street Journal) plus a margin adjusted on a daily
basis. Commercial construction loans may convert to permanent commercial term
loans upon completion of construction. At December 31, 2002, residential
construction loans totaled $13.1 million or 46.1% of the total construction loan
portfolio, which primarily consisted of construction loans to developers and
commercial construction loans totaled $8.7 million or 30.6% of the total
construction loan portfolio.
The Company also originates ground or land loans, both to an individual
to purchase a building lot on which the borrower intends to build their primary
residence, as well as to developers to purchase lots on which to build homes in
phases at a later date or to improve and sell to national home builders to build
in phases homes at a later date. Such loans have terms of 36 months or less with
a maximum loan to value ratio of 65% to 75% of the lower of appraised value or
sale price. The loans are made with floating rates based on the prime rate plus
a margin. At December 31, 2002, land loans (including loans to acquire and
develop land) totaled $6.6 million, or 23.3%, of the total construction loan
portfolio.
Construction financing generally has a higher degree of credit risk
than 1-4 family residential loans. The risk is dependent largely on the value of
the property when completed as compared to the estimated cost, including
interest, of building the property. If the estimated value is inaccurate, the
Company may have a completed project with a value too low to assure full
repayment of the loan. The Company has established a Commercial Credit
Administration Department to better manage these risks.
Commercial Business Loans. The Company grants commercial business loans
directly to business enterprises that are located in its market area. Commercial
business loans have increased from 0.2% of total loans at December 31, 1998 to
8.7% of total loans at December 31, 2002. The Company actively targets and
markets to small and medium sized businesses. The majority of the loans are for
less than $1.0 million. Such loans generally have personal guarantees of the
borrower and consist of a limited number of commercial lines of credit secured
by real estate, some working capital financing secured by accounts receivable
and inventory and, to a limited extent, unsecured lines of credit. Commercial
business loans originated by the Company generally have terms of five years or
less and fixed rates or adjustable rates tied to the prime rate plus a margin.
As of December 31, 2002, commercial business loans amounted to $26.6 million, of
which $2.0 million, or 7.5%, were backed by the full faith and credit of the
U.S. Government.
5
Commercial business loans generally are deemed to entail significantly
greater risk than that which is involved with real estate lending. The repayment
of commercial business loans typically is dependent on the successful operations
and income stream of the borrower. Such risks can be significantly affected by
economic conditions. In addition, commercial lending generally requires
substantially greater oversight efforts compared to residential real estate
lending. In order to better manage these risks, the Company has established a
Commercial Credit Administration Department.
Consumer Loans. Office of Thrift Supervision regulations permit the
Company to make aggregate secured and unsecured consumer loans up to 35% of the
Company's assets. The Company has established a consumer loan department under
the guidance of an individual with 20 years experience. The Company now offers a
full range of auto loans, unsecured personal loans and unsecured personal lines
of credit. This department also handles the origination of home equity loans and
lines of credit loans.
Commercial Credit Administration Department. In July 2000 the Company
hired an individual as Vice President, Credit Administration with over 30 years
of experience in credit administration to establish a Commercial Credit
Administration department at the Bank. The Department currently has four
employees. This Department is independent of the lending department and the Vice
President of Credit Administration reports directly to the Chief Executive
Officer. Credit Administration supports the lending function and attempts to
safeguard the Bank's loan assets by means of established practices for the
extension of credit (underwriting), monitoring and managing of the inherent
risks associated with the commercial loan portfolio.
Purchase and Sale of Loans and Loan Servicing. The Company has been a
seller and purchaser of whole loans and participation in the secondary market.
Generally, the Company sells a participation interest in commercial, commercial
real estate and construction loans and retains servicing for the loans sold
whenever possible. The Company generally purchases a participation interest in
commercial real estate loans and construction loans in its market area. The
Company at times also purchases fixed-rate residential mortgages.
In 2002, the Company began actively selling all conforming fixed-rate
residential mortgage loans with terms in excess of 15 years into the secondary
mortgage market primarily to Federal National Mortgage Association ("FNMA"). The
Company retains servicing on these loans. The sale of these mortgage loans
buffers the risks associated with changes in interest rates and generates
on-going servicing fees.
6
The following table sets forth total loans originated, purchased, sold,
and repaid during the periods indicated.
Year Ended December 31,
---------------------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(In Thousands)
Total gross loans receivable at
beginning of period............... $263,018 $218,811 $159,574 $135,881 $98,675
======== ======== ======== ======== ========
Loans originated:
Construction loans................. 28,817 24,926 16,886 7,512 $ 360
Residential and home equity........ 71,872 47,340 29,007 21,959 26,973
Multi-family and commercial
real estate...................... 47,610 16,977 19,288 18,434 438
Consumer........................... 2,741 1,469 809 228 252
Commercial......................... 31,709 28,513 21,299 1,925 1,927
-------- -------- -------- -------- --------
Total loans originated............... $182,749 $119,225 $ 87,289 $ 50,058 $ 29,950
-------- -------- -------- -------- --------
Loans purchased:
Residential........................ $ 636 $ -- $ 2,450 $ 1,161 $ 36,098
Multi-family and commercial
real estate...................... 356 -- 9,488 2,400 --
Consumer loans..................... -- -- 428 4,160 --
-------- -------- -------- -------- --------
Total loans purchased................ 992 -- 12,366 7,721 36,098
-------- -------- -------- -------- --------
Total loans sold..................... 21,011 4,785 4,371 5,237 --
-------- -------- -------- -------- --------
Loan principal repayments............ 119,130 70,500 35,995 28,790 28,509
-------- -------- -------- -------- --------
Other (debits less credits).......... (2,964) 267 (52) (59) (333)
-------- -------- -------- -------- --------
Net loan activity.................... $ 40,636 $ 44,207 $ 59,237 $ 23,693 $ 37,206
======== ======== ======== ======== ========
Total gross loans receivable at
end of period...................... $303,654 $263,018 $218,811 $159,574 $135,881
======== ======== ======== ======== ========
Loans Held For Sale. The Company can hold as available for sale certain
residential mortgage loans that have an annual yield determined by management to
be at rates not compatible with its asset management strategy. These loans
conform to Federal Home Loan Mortgage Corporation ("FHLMC") and FNMA guidelines
and are readily salable to the secondary market. At December 31, 2002, there
were no loans classified as held for sale.
Loan Commitments. The Company generally grants commitments to fund
fixed-rate single-family mortgage loans for periods of up to 90 days at a
specified term and interest rate. The Company also makes loan commitments for
non-conforming or commercial real estate loans for up to 90 days, which
generally carry additional requirements for funding. The total amount of the
Company's commitments to originate loans as of December 31, 2002 was $38.7
million.
7
Non-Performing Loans and Problem Assets
Loan Delinquencies. When a mortgage loan is 30 days or more delinquent,
the borrower is contacted by mail and telephone and payment is requested. If the
delinquency continues, subsequent efforts will be made to contact the delinquent
borrower. In certain instances, the Company may modify the loan or grant a
limited moratorium on loan payments to enable the borrower to reorganize their
financial affairs. If the loan continues in a delinquent status for 60 days, the
Company will initiate foreclosure proceedings. Any property acquired as the
result of foreclosure or by deed in lieu of foreclosure is classified as real
estate owned ("REO") until such time as it is sold or otherwise disposed of by
the Company. When REO is acquired, it is recorded at the lower of the unpaid
principal balance of the related loan or its fair market value less estimated
costs to sell the property. Any write-down of the property at the time that it
is transferred to REO is charged to the allowance for losses. Any subsequent
write-downs are charged to operations.
Loans are reviewed on a regular basis and are placed on a non-accrual
status when, in the opinion of management, the collection of additional interest
is doubtful. The Company continues to accrue for residential mortgage loans 90
days or more past due, however a reserve is set up for such loans, reversing
amounts previously credited to income. Consumer loans generally are charged off
when the loan becomes 90 days or more delinquent. Interest accrued and unpaid at
the time a loan is placed on non-accrual status is charged against interest
income. Subsequent payments are either applied to the outstanding principal
balance or recorded as interest income, depending on the assessment of the
ultimate collectibility of the loan. The Company engages a third party for loan
review twice a year. The scope of the review is at a minimum 60% of the total
portfolio and includes individual loan reviews, risk rating analysis,
concentration analysis, credit administration review, credit deficiencies, and
analysis of the allowance for loan losses.
Non-Performing Assets. The following table sets forth information with
respect to the Company's non-performing assets for the periods indicated. The
Company has no loans categorized as troubled debt restructurings within the
meaning of Statement of Financial Accounting Standards ("SFAS") No. 15.
At December 31,
------------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- --------- ---------- --------
(In Thousands)
Loans accounted for on a non-accrual basis.. $ -- $2,830 $ -- $ -- $ --
Accruing loans which are contractually past
due 90 days or more:
Residential and home equity............... $ 506 $ 52 $170 $223 $393
Construction loans........................ -- -- -- -- -
Multi-family and commercial real estate... -- -- -- -- -
Commercial................................ -- 296 -- -- -
------ ------ ---- ---- ----
Total....................................... $ 506 $3,178 $170 $223 $393
====== ====== ==== ==== ====
Real estate owned........................... $1,717 $ 81 $ 47 $104 $ 82
====== ====== ==== ==== ====
Total non-performing assets................. $2,223 $3,259 $217 $327 $475
====== ====== ==== ==== ====
Total non-accrual and accrual loans to
net loans................................ .17% 1.23% .08% .14% .28%
====== ====== ==== ==== ====
Total non-performing assets to total assets. .26% .45% .03% .07% .09%
====== ====== ==== ==== ====
8
Classified Assets. Management, in compliance with regulatory
guidelines, has instituted an internal loan review program, whereby loans are
classified as special mention, substandard, doubtful or loss. When a loan is
classified as substandard or doubtful, management is required to establish a
general valuation reserve for loan losses in an amount that is deemed prudent.
General allowances represent loss allowances which have been established to
recognize inherent risk associated with lending activities, but which, unlike
specific allowances, have not been allocated to particular problem assets. When
management classifies a loan as a loss asset, a reserve equal to 100% of the
loan balance is required to be established or the loan is to be charged-off.
An asset is considered "substandard" if it is inadequately protected by
the paying capacity and net worth of the obligor or the collateral pledged, if
any. "Substandard" assets include those characterized by the "distinct
possibility" that the Company will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard," with the added characteristic that
the weaknesses present make "collection or liquidation in full," "highly
questionable and improbable," on the basis of currently existing facts,
conditions, and values. Assets classified as "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
which do not currently expose the Company to a sufficient degree of risk to
warrant classification in one of the aforementioned categories but possess
credit deficiencies or potential weaknesses are required to be designated
"special mention" by management.
The following table sets forth the Company's classified assets in
accordance with its classification system.
At December 31, 2002
--------------------
(In Thousands)
Special Mention.............. $ 75
Substandard(1)............... 2,299
Doubtful .................... --
Loss ........................ --
------
$2,374
======
- ----------
(1) Includes $1.7 million of real estate owned carried at fair value.
Allowance for Losses on Loans. The Company's management evaluates the
need to establish reserves against losses on loans and other assets each year
based on estimated losses on specific loans and on any real estate held for sale
or investment when a finding is made that a loss is estimable and probable. Such
evaluation includes a review of all loans for which full collectibility may not
be reasonably assured and considers, among other matters, the estimated market
value of the underlying collateral of problem loans, prior loss experience,
economic conditions and overall portfolio quality. These provisions for losses
are charged against earnings in the year they are established.
The Company monitors its allowance for loan losses and makes additions
to the allowance as economic conditions dictate. The allowance for loan losses
is maintained at a level that represents management's best estimates of losses
in the loan portfolio at the balance sheet date. However, there can be no
assurance that the allowance for losses will be adequate to cover losses which
may be realized in the future and that additional provisions for losses will not
be required.
9
The following table sets forth information with respect to the
Company's allowance for loan losses at the dates indicated:
At December 31,
----------------------------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(In Thousands)
Total loans outstanding, net(1).......... $299,963 $259,220 $215,832 $157,233 $133,908
======== ======== ======== ======== ========
Average loans outstanding, net(1)........ $284,879 $238,164 $184,915 $144,808 $110,059
======== ======== ======== ======== ========
Allowance balances
(at beginning of period).............. $ 2,511 $ 1,682 $ 1,234 $ 1,036 $ 783
Provision................................ 702 847 480 240 270
Net (Charge-offs) recoveries :
Residential............................ -- (18) (32) (42) (17)
-------- -------- -------- -------- --------
Multifamily and Commercial real estate (834) -- -- -- --
--------
Consumer................................. (15) -- -- -- --
--------
Commercial............................... (155) -- -- -- --
--------
Allowance balance (at end of period)..... $ 2,209 $ 2,511 $ 1,682 $ 1,234 $ 1,036
======== ======== ======== ======== ========
Allowance for loan losses as a percent
of total loans outstanding............. .74% .97% .78% .78% .77%
======== ======== ======== ======== ========
Net loans charged off (recovery) as
a percent of average loans outstanding. .35% .01% .02% .03% .01%
======== ======== ======== ======== ========
- --------------------------
(1) Does not include loans available for sale.
10
Analysis of the Allowance for Loan Losses. The following table sets
forth the breakdown of the allowance for loan losses by loan category and the
percent of loans in each category to total loans receivable for the periods
indicated. The allocation of the allowance to each category is not necessarily
indicative of future losses and does not restrict the use of the allowances to
absorb losses in any category.
At December 31,
-----------------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
----------------------------------------- ----------------------------------------------------------
Percent of Percent of Percent of Percent of Percent of
Loans to Loans to Loans to Loans to Loans to
Total Total Total Total Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ --------- ------ ---------- ------ --------- ------ ---------- ------ ----------
(In Thousands)
Residential and
home equity(1)........ $ 267 60.20% $ 256 64.67% $ 475 67.84% $ 470 77.65% $ 487 86.64%
Multi-family and commercial
real estate(2)............ 1,324 30.55 1,689 23.77 1,060 25.03 709 18.72 549 12.91
Consumer loans.............. 78 0.51 33 0.58 - 0.40 - 0.19 - 0.25
Commercial loans............ 540 8.74 533 10.97 147 6.73 55 3.44 - 0.20
------ ------- ------ ------ ------- ------ ------ ------ ------ ------
Total allowance........... $2,209 100.00% $2,511 100.00% $ 1,682 100.00% $1,234 100.00% $1,036 100.00%
====== ====== ====== ====== ======= ====== ====== ====== ====== ======
- ------------------
(1) Includes construction loans.
(2) For 2001, includes $707 valuation allowance related to $2,800 of
impaired loans.
11
Investment Activities
The Company is required under federal regulation to maintain a
sufficient level of liquid assets (including specified short-term securities and
certain other investments), as determined by management and defined and reviewed
for adequacy by the OTS during its regular examinations. The OTS, however, does
not prescribe by regulation a minimum amount or percentage of liquid assets. The
level of liquid assets varies depending upon several factors, including: (i) the
yields on investment alternatives, (ii) management's judgment as to the
attractiveness of the yields then available in relation to other opportunities,
(iii) expectation of future yield levels, and (iv) management's projections as
to the short-term demand for funds to be used in loan origination and other
activities.
Investment securities, including mortgage-backed securities, are
classified at the time of purchase, based upon management's intentions and
abilities, as securities held to maturity or securities available for sale. Debt
securities acquired with the intent and ability to hold to maturity are
classified as held to maturity and are stated at cost and adjusted for
amortization of premium and accretion of discount, which are computed using the
level yield method and recognized as adjustments of interest income. Other debt
securities are classified as available for sale to serve principally as a source
of liquidity. Securities classified as trading are securities owned by TGH
Securities, the Company's wholly owned broker dealer subsidiary.
Current regulatory and accounting guidelines regarding investment
securities (including mortgage backed securities) require the Company to
categorize securities as "held to maturity," "available for sale" or "trading."
As of December 31, 2002, the Company had securities classified as "available for
sale" in the amount of $435.8 million and securities classified as "trading" in
the amount of $43.7 million. Securities classified as "available for sale" are
reported for financial reporting purposes at fair value with net changes in fair
value from period to period included as a separate component of stockholders'
equity, net of income taxes. Securities classified as trading are carried at
fair value and are recorded on a trade date basis with changes recognized in
operations. At December 31, 2002, the Company's securities available for sale
had an amortized cost of $427.0 million and fair value of $435.8 million
(unrealized gain of $8.8 million). Changes in the fair value of securities
available for sale do not affect the Company's income. In addition, changes in
the fair value of securities available for sale do not affect the Bank's
regulatory capital requirements or its loan-to-one borrower limit.
At December 31, 2002, the Company's investment portfolio policy allowed
investments in instruments such as: (i) U.S. Treasury obligations, (ii) U.S.
federal agency or federally sponsored agency obligations, (iii) mortgage-backed
securities, (iv) banker's acceptances, (v) certificates of deposit, and (vi)
investment grade corporate bonds, and commercial paper, (vii) equity securities,
(viii) capital trust securities, and (ix) mutual funds. The board of directors
may authorize additional investments.
The Bank maintains a significant portfolio of mortgage-related
securities (including mortgage- backed securities and collateralized mortgage
obligations ("CMOs") as a means of investing in housing- related mortgage
instruments and to absorb excess liquidity and supplement the Company's lending
activity. Mortgage-backed securities (which also are known as mortgage
participation certificates or pass- through certificates) represent a
participation interest in a pool of single-family or multi-family residential
mortgages. The principal and interest payments on mortgage-backed securities are
passed from the mortgage originators, as servicer, through intermediaries
(generally U.S. Government agencies and government-sponsored enterprises) that
pool and repackage the participation interests in the form of securities, to
investors such as the Bank. Such U.S. Government agencies and government
sponsored enterprises, which guarantee the payment of principal and interest to
investors, primarily include FHLMC,
12
FNMA and the Government National Mortgage Association ("GNMA"). The Bank also
invests in certain non-agency mortgage-related securities rated AAA by national
securities rating agencies.
FHLMC is a public corporation chartered by the U.S. Government. FHLMC
issues participation certificates backed principally by conventional mortgage
loans. FHLMC guarantees the timely payment of interest and the ultimate return
of principal on participation certificates. FNMA is a private corporation
chartered by the U.S. Congress with a mandate to establish a secondary market
for mortgage loans. FNMA guarantees the timely payment of principal and interest
on FNMA securities. FHLMC and FNMA securities are not backed by the full faith
and credit of the United States, but because FHLMC and FNMA are U.S.
Government-sponsored enterprises, these securities are considered to be among
the highest quality investments with minimal credit risks. GNMA is a government
agency within the Department of Housing and Urban Development which is intended
to help finance government-assisted housing programs. GNMA securities are backed
by Federal Housing Administration ("FHA") and the Department of Veterans Affairs
("VA"), and the timely payment of principal and interest on GNMA securities are
guaranteed by the GNMA and backed by the full faith and credit of the U.S.
Government. Because FHLMC, FNMA and GNMA were established to provide support for
low-and middle-income housing, there are limits to the maximum size of loans
that qualify for these programs which is currently $322,700.
Mortgage-related securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed-rate or adjustable-
rate loans. As a result, the risk characteristics of the underlying pool of
mortgages (i.e., fixed-rate or adjustable rate) as well as prepayment risk, are
passed on to the certificate holder. Thus, the life of a mortgage-backed
pass-through security thus approximates the life of the underlying mortgages.
The Bank's mortgage-related securities include CMOs. CMOs were
developed in response to investor concerns regarding the uncertainty of cash
flows associated with the prepayment option of the underlying mortgagor and are
typically issued by governmental agencies, governmental sponsored enterprises
and special purpose entities, such as trusts, corporations or partnerships,
established by financial institutions or other similar institutions. A CMO can
be (but is not required to be) collateralized by loans or securities which are
insured or guaranteed by FNMA, FHLMC or the GNMA. In contrast to pass-through
mortgage-related securities, in which cash flow is received pro rata by all
security holders, the cash flow from the mortgages underlying a CMO is segmented
and paid in accordance with a predetermined priority to investors holding
various CMO classes. By allocating the principal and interest cash flows from
the underlying collateral among the separate CMO classes, different classes of
bonds are created, each with its own stated maturity, estimated average life,
coupon rate and prepayment characteristics.
A senior-subordinated structure often is used with CMOs to provide
credit enhancement for securities which are backed by collateral which is not
guaranteed by FNMA, FHLMC or the GNMA. These structures divide mortgage pools
into various risk classes: a senior class and one or more subordinated classes.
The subordinated classes provide protection to the senior class. When cash flow
is impaired, debt service goes first to the holders of senior classes. In
addition, incoming cash flows also may go into a reserve fund to meet any future
shortfalls of cash flow to holders of senior classes. The holders of
subordinated classes may not receive any funds until the holders of senior
classes have been paid and, when appropriate, until a specified level of funds
has been contributed to the reserve fund.
13
Mortgage-related securities generally bear yields which are less than
those of the loans which underlie such securities because of their payment
guarantees or credit enhancements which reduce credit risk to nominal levels.
However, mortgage-related securities are more liquid than individual mortgage
loans and may be used to collateralize certain obligations of the Bank.
Investment Portfolio. The following table sets forth the carrying value
(fair value or amortized cost, as applicable) of the Company's investment
securities portfolio, short-term investments, FHLB stock, mortgage-backed
securities, and trading securities at the dates indicated.
At December 31,
-----------------------------------------
2002 2001 2000
-------- -------- --------
(In Thousands)
Investment Securities:
Trading securities.............. $ 43,714 $ 14,261 $ 28,034
-------- -------- --------
FHLB and FHLMC bonds............ -- 15,201 16,203
Other agencies.................. 791 769 47,874
Municipal bonds................. 52,125 48,623 46,101
Mutual funds.................... 1,569 1,530 1,439
Capital trust securities........ 6,668 8,040 10,727
Subordinated debt............... -- 750 750
-------- -------- --------
Total investment securities... 61,153 74,913 123,094
-------- -------- --------
Interest-bearing deposits........ 19,841 18,814 16,188
FHLB of Pittsburgh stock......... 12,497 8,844 8,594
Mortgage-backed securities....... 369,571 299,216 258,870
Equity investments............... 5,086 4,989 5,104
-------- -------- --------
Total Investments............. $511,862 $421,037 $439,884
======== ======== ========
14
Investment Portfolio Maturities. The following table sets forth certain
information regarding the carrying values, weighted average yields and
maturities of the Company's investment and mortgage-backed securities portfolio
at December 31, 2002. The table does not include trading securities, equity
investments, interest bearing deposits, federal funds sold and FHLB stock, and
does not take into consideration the effects of scheduled repayments or the
effects of possible prepayments.
One Year or Less One to Five Years Five to Ten Years More than Ten Years Total Investment Securities
------------------ ------------------ ----------------- ------------------- ---------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Fair
Value Yield(%) Value Yield(%) Value Yield(%) Value Yield(%) Value Yield(%) Value
-------- ------ -------- ------- -------- ------- ------ -------- -------- -------- -----
(Dollars in Thousands)
Municipal bonds(1).... $ -- % $541 4.75% $ 256 4.75% $51,328 4.93% $52,125 4.93% $52,125
Mutual funds.......... 1,569 2.55 -- -- -- -- -- -- 1,569 2.55 1,569
Capital trust
securities. -- -- -- -- 2,278 6.54 4,390 9.17 6,668 7.97 6,668
Other................. 791 2.00 -- -- -- -- -- 791 2.00 791
Mortgage-backed
securities:
GNMA pass-through... -- -- -- -- -- -- 60,652 5.97 60,652 5.97 60,652
FNMA pass-through... -- -- -- -- 22,821 4.33 156,196 4.60 179,017 4.57 179,017
FHLMC pass-through.. -- -- -- -- 7,225 4.96 54,482 3.49 61,707 3.66 61,707
FHLMC REMICs........ -- -- -- -- 14,610 5.23 24,083 5.25 38,693 5.24 38,693
Non-Agency CMOs (2). -- -- -- -- -- -- 29,502 3.52 29,502 3.52 29,502
------ ---- ------- -------- -------- --------
Total............... $2,360 2.36% $541 4.75% $47,190 4.81% $380,633 4.71% $430,724 4.68% $430,724
====== ==== ==== ==== ======= ==== ======== ==== ======== ==== ========
- -----------------------
(1) Tax exempt securities are presented on a coupon basis.
(2) Includes "AAA" rated securities of Washington Mutual Mortgage Securities
Corporation and First Horizon Mortgage Pass-Through Trust with book values
of $9,937, and $19,474, respectively, and fair values of $9,943, and
$19,558, respectively.
15
Sources of Funds
General. Deposits are the major source of the Company's funds for
lending and other investment purposes. In addition to deposits, the Company
derives funds from the amortization, prepayment or sale of loans, maturities of
investment securities and operations. Scheduled loan principal repayments are a
relatively stable source of funds, while deposit inflows and outflows and loan
prepayments are significantly influenced by general interest rates and market
conditions. The Company can also borrow from the Federal Home Loan Bank ("FHLB")
of Pittsburgh and the Federal Reserve.
Deposits. Consumer and commercial deposits are attracted principally
from within the Company's primary market area through the offering of a broad
selection of deposit instruments including checking, regular savings, money
market deposits, term certificate accounts and individual retirement accounts.
Deposit account terms vary according to the minimum balance required, the time
periods the funds must remain on deposit and the interest rate, among other
factors. The Company regularly evaluates the internal cost of funds, surveys
rates offered by competing institutions, reviews the Company's cash flow
requirements for lending and liquidity and executes rate changes when deemed
appropriate. The Company does not obtain funds through brokers, nor does it
solicit funds outside the Commonwealth of Pennsylvania or the State of Delaware.
Information regarding the average balances of various deposits and rates paid
thereon for the three years ended December 31, 2002, 2001 and 2000, contained in
average balance sheet under the section captioned "Management's Discussion and
Analysis of Financial Operations" in the Company's Annual Report to Stockholders
for the year ended December 31, 2002 (the "Annual Report"), is incorporated
herein by reference.
Jumbo Certificates of Deposit. The following table indicates the amount
of the Company's certificates of deposit of $100,000 or more by time remaining
until maturity as of December 31, 2002.
Certificates
Maturity Period of Deposits
--------------- ------------
(In Thousands)
Within three months................ $ 4,791
Three through six months........... 7,375
Six through twelve months.......... 10,436
Over twelve months................. 13,761
-------
$36,363
=======
Borrowings
Deposits are the primary source of funds of the Company's lending and
investment activities and for its general business purposes. The Bank may obtain
advances from the FHLB of Pittsburgh to supplement its supply of lendable funds.
Advances from the FHLB of Pittsburgh are typically secured by a pledge of the
Bank's stock in the FHLB of Pittsburgh and a portion of the Company's first
mortgage loans and certain other assets. The following table sets forth certain
information as to FHLB advances at the dates indicated.
16
As of and For the
Year Ended December 31,
---------------------------------------
2002 2001 2000
----------------- ----------------- -----------
(Dollars In Thousands)
FHLB advances..................................... $220,884 $176,884 $171,884
Weighted average interest rate of FHLB advances... 4.53% 5.32% 5.30%
Maximum amount of advances at any month end....... $220,884 $201,884 $206,884
Average amount of advances........................ $191,971 $179,736 $174,901
Weighted average interest rate of average amount
of advances................................... 5.10% 5.34% 5.59%
Subsidiaries
TGH Corp.
TGH Corp., a Delaware Corporation, was organized by the Company in 1999
to hold certain investments. TGH Corp. is not a material part of the Company's
operations.
TGH Securities
TGH Securities, a Pennsylvania corporation, was formed by the Company
in February 2000, and commenced business on May 23, 2000. TGH Securities, a
registered broker-dealer, buys and sells short- term municipal bonds.
Other Subsidiaries
The Bank has three subsidiaries, Ridge Service Corporation, which is
inactive, Montgomery Service Corporation, which manages a small commercial real
estate property and invested in small business investment companies, and Roxdel
Corp., which holds investments.
Personnel
As of December 31, 2002, the Company had 129 full-time employees and 30
part-time employees. The employees are not represented by a collective
bargaining unit. The Company believes its relationship with its employees to be
satisfactory.
Regulation
Set forth below is a brief description of certain laws which relate to
the regulation of the Company and the Bank. The description does not purport to
be complete and is qualified in its entirety by reference to applicable laws and
regulations.
Regulation of the Company
Recent Legislation to Curtail Corporate Accounting Irregularities. On
July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002
(the "Act"). The Securities and Exchange Commission (the "SEC") has promulgated
certain regulations pursuant to the Act and will continue to
17
propose additional implementing or clarifying regulations as necessary in
furtherance of the Act. The passage of the Act and the regulations implemented
by the SEC subject publicly-traded companies to additional and more cumbersome
reporting regulations and disclosure. Compliance with the Act and corresponding
regulations may increase the Company's expenses.
General. The Company is a unitary savings and loan holding company
subject to regulatory oversight by the OTS. As such, the Company is required to
register and file reports with the OTS and is subject to regulation and
examination by the OTS. In addition, the OTS has enforcement authority over the
Company and its non-savings association subsidiaries, should such subsidiaries
be formed, which authority also permits the OTS to restrict or prohibit
activities that are determined to be a serious risk to the subsidiary savings
association. This regulation and oversight is intended primarily for the
protection of the depositors of the Bank and not for the benefit of stockholders
of the Company.
As a unitary savings and loan holding company, the Company generally is
not subject to any restrictions on its business activities. While the
Gramm-Leach-Bliley Act (the "GLB Act") terminated the "unitary thrift holding
company" exemption from activity restrictions on a prospective basis, the
Company enjoys grandfathered status under this provision of the GLB Act because
it acquired the Bank prior to May 4, 1999. As a result, the Company's freedom
from activity restrictions as a unitary savings and loan holding company was not
affected by the GLB Act. However, if the Company were to acquire control of an
additional savings association, its business activities would be subject to
restriction under the Home Owners' Loan Act. Furthermore, if the Company were in
the future to sell control of the Bank to any other company, such company would
not succeed to the Company's grandfathered status under the GLB Act and would be
subject to the same activity restrictions. The continuation of the Company's
exemption from restrictions on business activities as a unitary savings and loan
holding company is also subject to the Company's continued compliance with the
Qualified Thrift Lender ("QTL") test. See "- Regulation of the Bank - Qualified
Thrift Lender Test."
Regulation of the Bank
General. Set forth below is a brief description of certain laws that
relate to the regulation of the Bank. The description does not purport to be
complete and is qualified in its entirety by reference to applicable laws and
regulations. As a federally chartered, SAIF-insured savings association, the
Bank is subject to extensive regulation by the OTS and the Federal Deposit
Insurance Corporation ("FDIC"). Lending activities and other investments must
comply with various federal statutory and regulatory requirements. The Bank is
also subject to certain reserve requirements promulgated by the Federal Reserve
Board.
The OTS regularly examines the Bank and prepares reports for the
consideration of the Bank's Board of Directors on any deficiencies that are
found in the Bank's operations. The Bank's relationship with its depositors and
borrowers is also regulated to a great extent by federal and state law,
especially in such matters as the ownership of savings accounts and the form and
content of the Bank's mortgage documents.
The Bank must file reports with the OTS concerning its activities and
financial condition, in addition to obtaining regulatory approvals prior to
entering into certain transactions such as mergers with or acquisitions of other
savings institutions. This regulation and supervision establishes a
comprehensive framework of activities in which an institution can engage and is
intended primarily for the protection of
18
the SAIF and depositors. The regulatory structure also gives the regulatory
authorities extensive discretion in connection with their supervisory and
enforcement activities and examination policies, including policies with respect
to the classification of assets and the establishment of adequate loan loss
reserves for regulatory purposes.
Insurance of Deposit Accounts. The deposit accounts held by the Bank
are insured by the SAIF to a maximum of $100,000 for each insured member (as
defined by law and regulation). Insurance of deposits may be terminated by the
FDIC upon a finding that the institution has engaged in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations or has
violated any applicable law, regulation, rule, order or condition imposed by the
FDIC or the institution's primary regulator.
The Bank is required to pay insurance premiums based on a percentage of
its insured deposits to the FDIC for insurance of its deposits by the SAIF.
Under the risk-based system established by the FDIC for setting deposit
insurance premiums, the 2003 insurance assessment rates for SAIF-member
institutions range from 0% to .27% of insured deposits on an annualized basis,
with the assessment rate for most savings institutions set at 0%.
In addition, all FDIC-insured institutions are required through 2017 to
pay assessments to the FDIC to fund interest payments on bonds issued by the
Financing Corporation ("FICO"), an agency of the Federal government established
to recapitalize the predecessor to the SAIF. The current annual assessment rate
is approximately .0168% of insured deposits.
Loans to One Borrower. A savings association may not make a loan or
extend credit to a single or related group of borrowers in excess of 15% of the
associations's unimpaired capital and surplus. An additional amount may be lent,
equal to 10% of the unimpaired capital and surplus, under certain circumstances.
At December 31, 2002, the Bank's lending limit for loans to one borrower was
approximately $8.5 million and the Bank had no outstanding commitments that
exceeded the loans to one borrower limit at the time originated or committed.
Regulatory Capital Requirements. OTS capital regulations require
savings institutions to meet three capital standards: (1) tangible capital equal
to 1.5% of total adjusted assets, (2) core capital equal to at least 3% of total
adjusted assets for savings institutions that receive the highest supervisory
rating for safety and soundness and 4% of total adjusted assets for all other
thrifts, and (3) risk-based capital equal to 8% of total risk-weighted assets.
At December 31, 2002, the Bank was in compliance with its regulatory capital
requirements.
For purposes of the OTS capital regulations, tangible capital is
defined as core capital less all intangible assets, except for certain mortgage
servicing rights, and less certain investments. Core, or Tier 1, capital is
defined as common stockholders' equity, noncumulative perpetual preferred stock
and minority interests in the equity accounts of consolidated subsidiaries,
certain nonwithdrawable accounts and pledged deposits of mutual savings
associations and qualifying supervisory goodwill, less nonqualifying intangible
assets, certain mortgage servicing rights and certain investments.
The risk-based capital standard for savings institutions requires the
maintenance of total risk-based capital of 8% of risk-weighted assets.
Risk-based capital equals the sum of core and supplementary capital. The
components of supplementary capital include, among other items, cumulative
perpetual preferred stock, perpetual subordinated debt, mandatory convertible
subordinated debt, intermediate-term preferred stock, general valuation loan and
lease loss allowances up to a maximum of 1.25% of risk-weighted assets,
19
and up to 45% of unrealized gains on equity securities. Overall, supplementary
capital is limited to 100% of core capital. A savings association must calculate
its risk-weighted assets by multiplying each asset and off-balance sheet item by
various risk factors as determined by the OTS, which range from 0% for cash to
100% for delinquent loans, property acquired through foreclosure, commercial
loans, and other assets.
In addition to the above regulatory capital requirements, the OTS's
prompt corrective action regulation classifies savings associations by capital
levels and provides that the OTS will take various corrective actions, including
imposing significant operational restrictions, against any thrift that fails to
meet the regulation's capital standards. Under this regulation, a "well
capitalized" savings association is one that has a total risk-based capital
ratio of at least 10%, a Tier 1 risk-based capital ratio of at least 6% and a
leverage capital ratio of 5%, and is not subject to any capital order or
directive. A thrift is deemed "adequately capitalized" category if it has a
total risk-based capital ratio of at least 8%, a Tier 1 risk-based capital ratio
of at least 4%, and a leverage capital ratio of at least 4%. Institutions with
lower capital levels are deemed to be "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized," depending on their capital
levels. A thrift that falls within any of the three undercapitalized categories
is subject to severe regulatory sanctions under the prompt corrective action
regulation. At December 31, 2002, the Bank was classified as "well capitalized."
Dividend and Other Capital Distribution Limitations. The OTS imposes
various restrictions or requirements on the ability of savings institutions to
make capital distributions, including cash dividends.
A savings association, such as the Bank, that is a subsidiary of a
savings and loan holding company must file an application or a notice with the
OTS at least 30 days before making a capital distribution. Savings associations
are not required to file an application for permission to make a capital
distribution and need only file a notice if the following conditions are met:
(1) they are eligible for expedited treatment under OTS regulations, (2) they
would remain adequately capitalized after the distribution, (3) the annual
amount of capital distribution does not exceed net income for that year to date
added to retained net income for the two preceding years, and (4) the capital
distribution would not violate any agreements between the OTS and the savings
association or any OTS regulations. Any other situation would require an
application to the OTS.
The OTS may disapprove an application or notice if the proposed capital
distribution would: (i) make the savings association undercapitalized,
significantly undercapitalized, or critically undercapitalized; (ii) raise
safety or soundness concerns; or (iii) violate a statue, regulation, or
agreement with the OTS (or with the FDIC), or a condition imposed in an
OTS-approved application or notice. Further, a federal savings association, like
the Bank, cannot distribute regulatory capital that is needed for its
liquidation account.
Qualified Thrift Lender Test. Federal savings institutions must meet
one of two Qualified Thrift Lender ("QTL") tests. To qualify as a QTL, a savings
institution must either (i) be deemed a "domestic building and loan association"
under the Internal Revenue Code by maintaining at least 60% of its total assets
in specified types of assets, including cash, certain government securities,
loans secured by and other assets related to residential real property,
educational loans and investments in premises of the institution or (ii) satisfy
the statutory QTL test set forth in the Home Owner's Loan Act by maintaining at
least 65% of its "portfolio assets" in certain"Qualified Thrift Investments".
Qualified thrift investments consist primarily of an institution's residential
mortgage loans and other loans and investments relating to residential real
estate and manufactured housing and also include student, credit card and small
business loans, stock issued by a Federal Home Loan Bank, the FHLMC and the
FNMA, and other enumerated assets. For purposes of the statutory QTL test,
portfolio assets are defined as total assets minus intangible
20
assets, property used by the institution in conducting its business, and liquid
assets equal to 10% of total assets. A savings institution must maintain its
status as a QTL on a monthly basis in at least nine out of every 12 months. A
failure to qualify as a QTL would result in a number of sanctions, including
certain operating restrictions. At December 31, 2002, the Bank was in compliance
with its QTL requirement, with 76.4% of its assets invested in Qualified Thrift
Investments.
Federal Home Loan Bank System. The Bank is a member of the FHLB of
Pittsburgh, which is one of 12 regional FHLBs that administers the home
financing credit function of savings associations. Each FHLB serves as a reserve
or central bank for its members within its assigned region. It is funded
primarily from proceeds derived from the sale of consolidated obligations of the
FHLB System. It makes loans to members (i.e., advances) in accordance with
policies and procedures established by the Board of Directors of the FHLB.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Pittsburgh in an amount equal to the greater of 1% of its aggregate
unpaid residential mortgage loans, home purchase contracts or similar
obligations at the beginning of each year or 5% of the Bank's advances from the
FHLB. At December 31, 2002, the Bank was in compliance with this requirement.
Federal Reserve System. The Federal Reserve Board requires all
depository institutions to maintain non-interest bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW, and Super
NOW checking accounts) and non-personal time deposits. The balances maintained
to meet the reserve requirements imposed by the Federal Reserve Board may be
used to satisfy the liquidity requirements that are imposed by the OTS. At
December 31, 2002, the Bank was in compliance with these Federal Reserve Board
requirements.
Item 2. Properties
- ------------------
The Company conducts its business through its main office located in
Philadelphia, Pennsylvania and its 12 branch locations throughout Philadelphia,
Chester, Montgomery, and Delaware counties, Pennsylvania and Wilmington,
Delaware. Eight of the Company's office and branch facilities are owned by the
Company and five branch facilities are leased. Management of the Company
considers the physical condition of each of the Company's administrative and
branch offices to be good and adequate for the conduct of the Company's
business. At December 31, 2002 property and equipment totalled approximately
$6.3 million.
Item 3. Legal Proceedings
- --------------------------
The Company is periodically involved as a plaintiff or defendant in
various legal actions, such as actions to enforce liens, condemnation
proceedings on properties in which the Company holds mortgage interests, matters
involving the making and servicing of mortgage loans and other matters incident
to the Company's business. In the opinion of management, none of these actions
individually or in the aggregate is believed to be material to the financial
condition or results of operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended December 31, 2002.
21
Part II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
- --------------------------------------------------------------------------------
The information contained in the Section captioned "Stock Market
Information" in the Annual Report and incorporated herein by reference.
Item 6. Selected Financial Data
- --------------------------------
The information contained in the table captioned "Selected Consolidated
Financial Data and Other Data" in the Annual Report is incorporated herein by
reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Annual Report is incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
- --------------------------------------------------------------------
The information contained in the sections captioned "Market Rate Risk",
"Gap Table," and "Net Portfolio Value" in the Annual Report are incorporated
herein by reference.
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
The Company's consolidated financial statements listed in Item 15 are
incorporated herein by reference from the Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
- --------------------------------------------------------------------------------
None.
Part III
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
The information contained under the sections captioned "Section 16(a)
Beneficial Ownership Reporting Compliance" and "Proposal I" - "Election of
Directors" and "- Biographical Information" in the Registrant's 2003 Proxy
Statement (the "Proxy Statement") are incorporated herein by reference.
Item 11. Executive Compensation
- --------------------------------
The information contained under the section captioned "Proposal I --
Election of Directors - Director and Executive Compensation" in the Proxy
Statement is incorporated herein by reference.
22
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
- --------------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
-----------------------------------------------
Information required by this item is incorporated herein by
reference to the Section captioned "Voting Securities and
Principal Holders Thereof -- Security Ownership of Certain
Beneficial Owners" of the Proxy Statement.
(b) Security Ownership of Management
--------------------------------
Information required by this item is incorporated herein by
reference to the sections captioned "Voting Securities and
Principal Holders Thereof -- Security Ownership of Certain
Beneficial Owners" and "Proposal I -- Election of Directors"
of the Proxy Statement.
(c) Changes in Control
------------------
Management of the Company knows of no arrangements, including
any pledge by any person of securities of the Company, the
operation of which may at a subsequent date result in a change
in control of the Company.
(d) Securities Authorized for Issuance Under Equity Compensation
Plans
--------------------------------------------------------------
Set forth below is information as of December 31, 2002 with respect to
compensation plans under which equity securities of the Registrant are
authorized for issuance.
Equity Compensation Plan Information
(a) (b) (c)
Number of securities
remaining available for
Number of securities Weighted-average future issuance under
to be issued upon exercise of exercise price of equity compensation plans
outstanding options, outstanding options, (excluding securities
warrants and rights warrants and rights reflected in column (a))
-------------------- -------------------- ------------------------
Equity compensation plans approved by shareholders:
1994 Stock Option Plan...................... 5,551 2.07 --
1999 Stock Option Plan...................... 711,536 9.18 52,652
1999 Restricted Stock Plan.................. 89,784 0.00 64,794
Equity compensation plans not approved by
shareholders................................ n/a n/a n/a
------- ----- -------
TOTAL................................. 806,871 $8.11 117,446
======= ===== =======
23
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information required by this item is incorporated herein by
reference to the section captioned "Proposal I -- Election of Directors" and
"Voting Securities and Principal Holders Thereof" of the Proxy Statement.
Item 14. Controls and Procedures
- ---------------------------------
(a) Evaluation of disclosure controls and procedures. Based on their
evaluation as of a date within 90 days of the filing date of this Annual Report
on Form 10-K, the Registrant's principal executive officer and principal
financial officer have concluded that the Registrant's disclosure controls and
procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934 (the "Exchange Act")) are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms.
(b) Changes in internal controls. There were no significant changes in
the Registrant's internal controls or in other factors that could significantly
affect these controls subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Item 15. Exhibits, Financial Statements, and Reports on Form 8-K
- -----------------------------------------------------------------
(a) Listed below are all financial statements and exhibits filed as
part of this report, and are incorporated by reference.
1. The consolidated statements of financial condition of
the Company and subsidiaries as of December 31, 2002
and 2001, and the related consolidated statements of
income, changes in stockholders' equity and cash
flows for each of the years in the three year period
ended December 31, 2002, together with the related
notes and the independent auditors' report of
Deloitte & Touche LLP, independent certified public
accountants.
2. Schedules omitted as they are not applicable.
3. Exhibits
The following Exhibits are filed as part of this
report:
3(i) Articles of Incorporation****
3(ii) Amended Bylaws*****
4.1 Shareholder Rights Plan**
4.2 Indenture, dated as of April 10, 2002 between the Company and
Wilmington Trust Company as Trustee ******
4.3 Amended and Restated Declaration of Trust for Thistle Group Holdings
Capital Trust I, dated as of April 10, 2002 among the Company, Wilmington
Trust Company as Delaware Trustee and Institutional Trustee and John F. McGill, Jr.
and Douglas R. Moore as Administrators ******
4.4 Guarantee Agreement of Thistle Group Holdings, Co., dated April 10, 2002
between the Company and Wilmington Trust Company, as Trustee******
10.1+ 1992 Stock Option Plan of Roxborough-Manayunk Federal Savings Bank*
10.2+ 1992 Management Stock Bonus Plan of Roxborough-Manayunk Bank*
10.3+ 1994 Stock Option Plan of Roxborough-Manayunk Bank*
10.4+ 1994 Management Stock Bonus Plan of Roxborough-Manayunk Bank*
10.5+ Employment Agreement with John F. McGill, Jr.****
10.6+ Employment Agreement with Jerry Naessens*
10.7+ 1999 Stock Option Plan ***
10.8+ 1999 Restricted Stock Plan***
24
10.9+ Consulting Agreement with Jerry Naessens
10.10+ Amended Non-Qualified Retirement and Death Benefit Agreement with
Jerry Naessens
10.11+ Split Dollar Life Insurance Agreement with Jerry Naessens
13 Portions of the 2002 Annual Report to Stockholders
21 Subsidiaries of the Company (See "Item 1 - Business")
23 Consent of Deloitte & Touche LLP
99 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
------------------------
* Incorporated by reference to the identically numbered exhibit to the
Company's Form S-1 Registration Statement No. 333-48749 filed on March 27,
1998.
** Incorporated by reference to Exhibit 1 to the Company's Form 8-A filed on
September 30, 1999.
*** Incorporated by reference to the appropriate exhibit of the Company's proxy
material filed on June 21, 1999.
**** Incorporated by reference to the identically number exhibits to the Form
10-K for December 31, 1999 filed on March 30, 2000.
*****Incorporated by reference to the identically numbered exhibit to the Form
10-K for December 31, 2001 filed on March 12, 2002.
****** Not filed in accordance with the provisions of Item 601(b)(4)(iii) of
Regulation S-K. The Company agrees to provide a copy of these documents to
the Commission upon request.
+ Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K.
A Form 8-K, dated October 17, 2002 was filed with the SEC on
October 18, 2002 which reported under Items 5 and 9 that the
Registrant had executed a Standstill Agreement with Jewelcor
Management, Inc., Seymour Holtzman, James A. Mitarotonda and
Barington Companies Equity Partners, L.P. No financial
statements were filed with this report.
25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 as of March 19, 2003
THISTLE GROUP HOLDINGS, CO.
By: /s/John F. McGill, Jr.
-----------------------------------
John F. McGill, Jr., President and
Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirement of the Securities Exchange Act of 1934,
this report has been signed below on March 19, 2003 by the following persons on
behalf of the Registrant and in the capacities indicated.
/s/John F. McGill, Jr. /s/Jerry A. Naessens
- ------------------------------------ --------------------------------------------
John F. McGill, Jr. Jerry A. Naessens
President, Chief Executive Officer, Director
and Chairman
(Principal Executive Officer)
/s/Francis E. McGill, III /s/Add B. Anderson, Jr.
- ------------------------------------ --------------------------------------------
Francis E. McGill, III Add B. Anderson, Jr.
Secretary and Director Director
/s/James C. Hellauer /s/William A. Lamb
- ------------------------------------ --------------------------------------------
James C. Hellauer William A. Lamb
Director Director
/s/Charles A. Murray /s/Pamela M. Cyr
- ------------------------------------ --------------------------------------------
Charles A. Murray Pamela M. Cyr
Director Chief Financial Officer
(Principal Financial and Accounting Officer)
26
SECTION 302 CERTIFICATION
I, John F. McGill, Jr., Chief Executive Officer, certify that:
1. I have reviewed this annual report on Form 10-K of Thistle Group Holdings,
Co.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 19, 2003 /s/John F. McGill, Jr.
-----------------------------------
John F. McGill, Jr.
Chief Executive Officer
27
SECTION 302 CERTIFICATION
I, Pamela M. Cyr, Chief Financial Officer, certify that:
1. I have reviewed this annual report on Form 10-K of Thistle Group Holdings,
Co.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 19, 2003 /s/Pamela M. Cyr
-----------------------------------
Pamela M. Cyr
Chief Financial Officer
28