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, 2003
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
THISTLE GROUP HOLDINGS, CO.
---------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2960768
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(State or other jurisdiction of (IRS 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
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
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Indicate by check whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.)
Yes No X
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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 5, 2003.
Class Outstanding
- --------------------------------------------------------------------------------
$.10 par value common stock 5,208,744
THISTLE GROUP HOLDINGS, CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2003
INDEX
Page
Number
------
PART I - UNAUDITED CONDENSED CONSOLIDATED FINANCIAL INFORMATION OF
THISTLE GROUP HOLDINGS, CO. AND SUBSIDIARIES
Item 1. Unaudited Condensed Consolidated Financial Statements and
Notes Thereto...................................................3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................11
Item 3. Quantitative and Qualitative Disclosures about Market Risk.....15
Item 4. Controls and Procedures........................................16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..............................................17
Item 2. Changes in Securities and Use of Proceeds......................17
Item 3. Defaults upon Senior Securities................................17
Item 4. Submission of Matters to a Vote of Security Holders............17
Item 5. Other Information..............................................17
Item 6. Exhibits and Reports on Form 8-K...............................17
SIGNATURES ............................................................18
EXHIBITS ............................................................19
THISTLE GROUP HOLDINGS, CO. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in Thousands, Except Per Share Data)
- -------------------------------------------------------------------------------------------------------------------------
September 30, December 31,
ASSETS 2003 2002
----------- -----------
Cash on hand and in banks $ 6,226 $ 4,819
Interest-bearing deposits 35,064 19,841
----------- -----------
Total cash and cash equivalents 41,290 24,660
Investments available for sale at fair value
(amortized cost - 2003, $52,747; 2002, $65,098) 55,431 66,239
Mortgage-backed securities available for sale
at fair value (amortized cost - 2003, $357,400; 2002, $361,869) 358,985 369,571
Trading securities 16,359 43,714
Loans receivable (net of allowance for loan losses - 2003, $3,033; 2002, $2,209) 322,847 299,963
Accrued interest receivable 3,786 4,260
Federal Home Loan Bank stock - at cost 13,409 12,497
Real estate acquired through foreclosure - net 1,456 1,717
Office properties and equipment - net 8,161 6,346
Prepaid expenses and other assets 5,226 5,706
Cash surrender value of life insurance 15,623 15,069
Goodwill 7,680 7,680
----------- -----------
TOTAL ASSETS $ 850,253 $ 857,422
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 553,596 $ 492,880
FHLB advances 181,884 220,884
Payable to brokers and dealers 15,524 41,924
Other borrowings 1,650 3,650
Accrued interest payable 892 976
Advances from borrowers for taxes and insurance 1,889 2,611
Accounts payable and accrued expenses 9,397 7,625
Dividends payable 521 473
----------- -----------
Total liabilities 765,353 771,023
----------- -----------
Company-obligated manditorily redeemable preferred securities of a subsidiary trust holding
solely junior subordinated debentures of the Company 10,000 10,000
----------- -----------
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, no par value, 10,000,000 shares authorized,
none issued in 2003 or 2002
Common stock, $.10 par value, 40,000,000 shares authorized, 8,999,989 shares
issued and 5,208,744 shares outstanding at September 30, 2003; 8,999,989
issued and 5,259,424 shares outstanding at December 31, 2002 900 900
Additional paid-in capital 92,897 92,884
Common stock acquired by stock benefit plans (4,920) (5,537)
Treasury stock at cost, 3,791,245 shares at September 30, 2003
and 3,740,565 shares at December 31, 2002 (39,959) (39,068)
Accumulated other comprehensive income 2,817 5,836
Retained earnings - partially restricted 23,165 21,384
----------- -----------
Total stockholders' equity 74,900 76,399
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 850,253 $ 857,422
=========== ===========
See notes to unaudited condensed consolidated financial statements.
3
THISTLE GROUP HOLDINGS, CO. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share Data)
- ---------------------------------------------------------------------------------------------------------------------
For the Three Month For the Nine Months
Ended September 30, Ended September 30,
---------------------- -------------------------
2003 2002 2003 2002
(As Restated - (As Restated -
See Note 13) See Note 13)
INTEREST INCOME:
Interest on loans $ 5,497 $ 6,419 $ 16,712 $ 16,791
Interest on mortgage-backed securities 2,923 3,538 10,409 11,679
Interest on investments:
Taxable 264 282 669 1,250
Tax-exempt 722 804 2,305 2,427
Dividends 75 82 270 284
-------- -------- -------- --------
Total interest income 9,481 11,125 30,365 32,431
-------- -------- -------- --------
INTEREST EXPENSE:
Interest on deposits 3,004 3,376 9,036 10,262
Interest on FHLB advances and other borrowings 2,478 2,500 7,589 7,363
-------- -------- -------- --------
Total interest expense 5,482 5,876 16,625 17,625
-------- -------- -------- --------
NET INTEREST INCOME 3,999 5,249 13,740 14,806
PROVISION FOR LOAN LOSSES 134 150 851 500
-------- -------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 3,865 5,099 12,889 14,306
-------- -------- -------- --------
OTHER INCOME:
Service charges and other fees 354 749 978 1,212
Trading revenues from brokerage operations 415 436 1,058 1,418
Writedown on real estate owned (4) (585) (253) (585)
Gain (loss) on sale of real estate owned - - - 6
Gain on sale of mortgage-backed securities available for sale 408 353 1,515 709
Gain on sale of loans 78 27 231 204
Gain (loss) on sale of investments available for sale 526 2 738 (537)
Rental income 59 59 135 165
Other income - - 15 -
-------- -------- -------- --------
Total other income 1,836 1,041 4,417 2,592
-------- -------- -------- --------
OTHER EXPENSES:
Salaries and employee benefits 2,275 2,383 6,380 6,312
Occupancy and equipment 749 705 2,271 2,036
Professional fees 660 151 991 548
Advertising 92 87 293 289
Interest on redeemable preferred securities 129 156 394 293
Other 949 1,010 3,148 2,809
-------- -------- -------- --------
Total other expenses 4,854 4,492 13,477 12,287
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 847 1,648 3,829 4,611
-------- -------- -------- --------
INCOME TAXES 81 287 661 803
-------- -------- -------- --------
NET INCOME $ 766 $ 1,361 $ 3,168 $ 3,808
======== ======== ======== ========
BASIC EARNINGS PER SHARE $ 0.16 $ 0.28 $ 0.66 $ 0.68
======== ======== ======== ========
DILUTED EARNINGS PER SHARE $ 0.15 $ 0.27 $ 0.63 $ 0.67
======== ======== ======== ========
See notes to unaudited condensed consolidated financial statements.
4
THISTLE GROUP HOLDINGS, CO. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
- --------------------------------------------------------------------------------------------------
For The Nine Months
Ended September 30,
-----------------------
2003 2002
(As Restated -
See Note 13)
OPERATING ACTIVITIES:
Net income $ 3,168 $ 3,808
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 851 500
Depreciation 1,014 968
Amortization of stock benefit plans 785 678
Loans held for sale originated (17,511) -
Amortization of:
Net premiums (discounts) on:
Loans purchased 97 73
Investments (67) (471)
Mortgage-backed securities 3,560 3,482
(Gain) loss on sale of investments (738) 537
Gain on sale of loans (231) (204)
Gain on sale of mortgage-backed securities (1,515) (709)
Gain on sale of real estate owned - (6)
Proceeds from the sale of loans held for sale 17,762 8,336
Writedown of real estate owned 253 585
Net decrease in trading securities 27,355 3,073
Decrease (increase) in other assets 395 (4,494)
Increase in other liabilities (23,220) (3,432)
--------- ---------
Net cash provided by operating activities 11,958 12,724
--------- ---------
INVESTING ACTIVITIES:
Principal collected on:
Mortgage-backed securities 137,082 108,909
Loans 128,138 85,763
Loans originated (147,873) (133,717)
Loans acquired (4,097) (346)
Purchases of:
Investments (36) (4,762)
Mortgage-backed securities (258,156) (194,900)
Property and equipment (2,829) (1,193)
FHLB stock (912) (1,050)
Maturities and calls of investments 7,560 3,195
Proceeds from the sale of:
Mortgage-backed securities 123,498 45,976
Investments 5,632 16,101
Loans - -
Real estate owned 13 72
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Net cash provided by investing activities (11,980) (75,952)
--------- ---------
FINANCING ACTIVITIES:
Net increase in deposits 60,716 42,117
Net decrease in advances from borrowers for taxes and insurance (722) (683)
Net (decrease) increase in FHLB borrowings (39,000) 21,000
Net (decrease) increase in other borrowings (2,000) 3,500
Issuance of capital securities - 10,000
Purchase of treasury stock (1,091) (16,551)
Net proceeds from exercise of stock options 136 66
Cash dividends (1,387) (1,434)
--------- ---------
Net cash provided by financing activities 16,652 58,015
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NET INCREASE IN CASH AND CASH EQUIVALENTS 16,630 (5,213)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 24,660 22,723
--------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 41,290 $ 17,510
========= =========
SUPPLEMENTAL DISCLOSURES:
Interest paid on deposits and funds borrowed $ 16,709 $ 17,612
Income taxes paid 1,117 1,345
Noncash transfers from loans to real estate owned - 3,164
Noncash transfers of investments held to maturity to available for sale - 51,385
See notes to unaudited condensed consolidated financial statements
5
THISTLE GROUP HOLDINGS, CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1 - PRINCIPLES OF CONSOLIDATION
Thistle Group Holdings, Co., (the "Company") organized in March of 1998, has
four wholly owned subsidiaries: TGH Corp., TGH Securities, Thistle Group
Holdings Capital Trust I, and Roxborough Manayunk Bank (the "Bank"). The Bank
has three wholly owned subsidiaries: RoxDel Corp., Montgomery Service Corp. and
Ridge Service Corp. The Company's business is conducted principally through the
Bank. All significant intercompany accounts and transactions have been
eliminated in consolidation.
NOTE 2 - BASIS OF PRESENTATION
The accompanying unaudited condensed 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
accounting principles generally accepted in the United States of America.
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
three-month period ended September 30, 2003 are not necessarily indicative of
the results which may be expected for the entire fiscal year or any other future
interim period.
These unaudited condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and related notes, which
are incorporated in the Company's Annual Report on Form 10-K for the year ended
December 31, 2002.
NOTE 3 - INVESTMENTS
Investments available for sale at September 30, 2003 and December 31, 2002
consisted of the following:
September 30, 2003 December 31, 2002
Amortized Approximate Amortized Approximate
Cost Fair Value Cost Fair Value
---- ---------- ---- ----------
Municipal bonds - 1 to 5 years......... $ - $ - $ 511 $ 541
Municipal bonds - 5 to 10 years........ 255 256 255 256
Municipal bonds - more than 10 years... 40,199 40,747 50,651 51,328
Mutual funds........................... 1,586 1,586 1,569 1,569
Capital trust securities............... 6,694 6,659 7,457 6,668
Equity investments..................... 3,212 5,382 3,864 5,086
Other.................................. 801 801 791 791
--------- ---------- --------- ----------
Total.................................. $ 52,747 $ 55,431 $ 65,098 $ 66,239
========= ========== ========= ==========
NOTE 4 - MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
Mortgage-backed securities at September 30, 2003 and December 31, 2002 consisted
of the following:
September 30, 2003 December 31, 2002
Amortized Approximate Amortized Approximate
Cost Fair Value Cost Fair Value
---- ---------- ---- ----------
Agency pass-through certificates..................... $ 322,531 $ 324,114 $ 294,095 $ 301,376
Agency real estate mortgage investment conduits...... 28,680 28,670 38,362 38,693
Non-agency collateralized mortgage obligations....... 6,189 6,201 29,412 29,502
--------- ---------- --------- ----------
Total................................................ $ 357,400 $ 358,985 $ 361,869 $ 369,571
========= ========== ========= ==========
NOTE 5 - TRADING SECURITIES
Trading securities are securities owned by TGH Securities, a wholly owned
broker/dealer subsidiary of the Company. Trading securities are recorded on a
trade date basis and are carried at fair value. These securities generally
consist of short-term municipal notes and bonds. Gains and losses, both realized
and unrealized, are included in operating income.
6
NOTE 6 - LOANS RECEIVABLE
Loans receivable at September 30, 2003 and December 31, 2002 consisted of the
following:
September 30, 2003 December 31, 2002
------------------ -----------------
Mortgage loans:
1 - 4 family residential..................... $ 110,859 $ 125,827
Commercial real estate....................... 111,503 92,760
Home equity lines of credit and improvement loans..... 35,368 28,525
Commercial loans .................................... 39,008 26,557
Construction loans - net.............................. 29,035 28,446
Loans on savings accounts............................. 544 505
Consumer loans .................................... 1,259 1,034
---------- ----------
Total loans.................................. 327,576 303,654
---------- ----------
Plus: unamortized premiums............................ 47 144
Less:
Net discounts on loans purchased............. (10) (12)
Deferred loan fees........................... (1,733) (1,614)
Allowance for loan losses.................... (3,033) (2,209)
---------- ----------
Total $ 322,847 $ 299,963
========== ==========
A summary of changes in the allowance for loan losses for the nine months ended
September 30, 2003 and for the year ended December 31, 2002 is as follows:
For the For the
Nine Months Ended Year Ended
September 30, 2003 December 31, 2002
------------------ -----------------
Balance, beginning................. $ 2,209 $ 2,511
Provision.......................... 851 702
Charge-offs........................ (28) (1,004)
Recovery........................... 1 -
--------- --------
Balance ending..................... $ 3,033 $ 2,209
========= ========
NOTE 7 - DEPOSITS
The major types of deposits by amounts and percentages at September 30, 2003 and
December 31, 2002 were as follows:
September 30, 2003 December 31, 2002
Amount % of Total Amount % of Total
------ ---------- ------ ----------
Checking accounts $ 123,907 22.4% $ 91,584 18.6%
Money market accounts 45,966 8.3% 44,191 9.0%
Passbook accounts 138,335 25.0% 124,660 25.3%
Certificate accounts 245,388 44.3% 232,445 47.1%
---------- ----- --------- -----
Total $ 553,596 100.0% $ 492,880 100.0%
========== ====== ========= ======
NOTE 8 - EARNINGS PER SHARE
Basic earnings per share 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 earnings per share 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 Company. The weighted
average shares used in the basic and diluted earnings per share computations for
the three and nine month periods ended September 30, 2003 and 2002 are as
follows:
7
For the For the
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
-------------------- -------------------
Average common shares outstanding- basic 4,794,771 4,888,078 4,812,378 5,639,952
Increase in shares due to dilutive options 214,967 71,805 178,076 91,323
----------- ----------- ----------- -----------
Adjusted shares outstanding - diluted 5,009,738 4,959,883 4,990,454 5,731,275
=========== =========== =========== ===========
NOTE 9 - COMPREHENSIVE INCOME
For the three and nine month periods ended September 30, 2003, the Company
reported total comprehensive (loss) income of approximately $(940), and $149,
respectively. For the three and nine-month periods of the prior year, the
Company reported total comprehensive income of approximately $2,900 and $6,800,
respectively. Items of other comprehensive income consisted of unrealized gains
or (losses), net of taxes, on available for sale securities and reclassification
adjustments for gains or (losses) included in net income.
NOTE 10 - DIVIDENDS
On September 18, 2003, the Company declared a dividend of $.10 per share payable
October 15, 2003 to stockholders of record on September 30, 2003.
NOTE 11 - STOCK-BASED COMPENSATION
In December 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards (SFAS) No. 148, Accounting for
Stock-Based Compensation --Transition and Disclosure, an amendment of FASB
Statement No. 123. SFAS No. 148 amends SFAS No. 123 to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this Statement
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. This statement is effective for financial statements
for fiscal years ending after December 15, 2002. The Company has provided the
required interim disclosures below.
The Company applies APB Opinion No. 25 and related interpretations in accounting
for stock options and, accordingly, no compensation expense has been recognized
in the financial statements. Had the Company determined compensation expense
based on the fair value at the grant date for its stock options under SFAS No.
123, the Company's net income and income per share would have been reduced to
the pro forma amounts indicated below:
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2003 2002 2003 2002
-------- --------- --------- ---------
Net income, as reported $ 766 $ 1,361 $ 3,168 $ 3,808
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects (26) - (78) -
-------- --------- --------- ---------
Pro forma net income $ 740 $ 1,361 $ 3,090 $ 2,447
======== ========= ========= =========
Earnings per share:
Basic-as reported $ 0.16 $ 0.28 $ 0.66 $ 0.68
Basic-pro forma 0.15 0.28 0.64 0.68
Diluted-as reported 0.15 0.27 0.63 0.67
Diluted-pro forma 0.15 0.27 0.62 0.67
8
NOTE 12 - RECENT ACCOUNTING STANDARDS
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. The Statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under
Statement 133.
The new guidance amends Statement 133 for decisions made as part of the
Derivatives Implementation Group process that effectively required amendments to
Statement 133, in connection with other FASB projects dealing with financial
instruments and regarding implementation issues raised in relation to the
application of the definition of a derivative, particularly regarding the
meaning of an "underlying" and the characteristics of a derivative that contains
financing components.
The amendments set forth in Statement 149 improve financial reporting by
requiring that contracts with comparable characteristics be accounted for
similarly. In particular, this Statement clarifies under what circumstances a
contract with an initial net investment meets the characteristic of a derivative
as discussed in Statement 133. In addition, it clarifies when a derivative
contains a financing component that warrants special reporting in the statement
of cash flows. Statement 149 amends certain other existing pronouncements. Those
changes will result in more consistent reporting of contracts that are
derivatives in their entirety or that contain embedded derivatives that warrant
separate accounting.
This Statement is effective for contracts entered into or modified after
September 30, 2003, and for hedging relationships designated after September 30,
2003. The guidance will be applied prospectively. Currently, the Company has no
derivatives that require application of this statement.
In January 2003, the FASB issued FIN No. 46, Consolidation of Variable Interest
Entities. The Interpretation clarifies the application of Accounting Research
Bulletin No. 51, Consolidated Financial Statements, to certain entities in which
equity investors do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties.
The Company has participated in the issue of trust preferred securities through
a trust established for such purpose. Currently, the Company classifies such
securities after total liabilities and before stockholders' equity on the
Consolidated Balance Sheet. The Company is currently assessing the trust
preferred securities structure and the continued consolidation of the related
trust pursuant to FIN No. 46. Management does not believe the results of such
assessment will result in a material impact on the Company's financial
statements when FIN No. 46 is applied in the fourth quarter of 2003.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This statement
requires that certain financial instruments, which previously could be
designated as equity, now be classified as liabilities on the balance sheet. As
noted above, the Company currently classifies its trust preferred securities
after total liabilities on the balance sheet. As noted above, the Company
currently classifies its trust preferred securities after total liabilities and
before stockholders' equity on the Consolidated Balance Sheet. Under the
provisions of SFAS No. 150, these securities would be reclassified as borrowed
funds. The effective date of SFAS No. 150 has been indefinitely deferred by the
FASB when certain criteria are met. As the structure of the Company's trust
preferred securities meets such criteria, the Company qualifies for this limited
deferral. Therefore, the Company will assess the classification of the trust
preferred securities in conjunction with adoption of FIN No. 46 in the fourth
quarter of 2003, as noted above.
NOTE 13 - ACCOUNTING FOR GOODWILL
On October 1, 2002, the Company adopted SFAS No. 147, Acquisitions of Certain
Financial Institutions, which allows financial institutions, meeting certain
criteria, to reclassify their identifiable intangible asset balances to goodwill
and retroactively cease amortization beginning as of January 1, 2002.
Accordingly, the Company retroactively ceased amortization of goodwill beginning
January 1, 2002 and restated earnings for the quarterly periods in the year
ended December 31, 2002.
9
The following table is a summary of net income and basic and diluted earnings
per share for the three and nine month periods ended September 30, 2002, as
previously reported on Form 10-Q and for the same quarterly period as restated
for the adoption of SFAS No. 147:
Three Months Ended Nine Months Ended
September 30, 2002 September 30, 2002
Net income, as previously reported...................... $ 1,210 $ 3,338
Amortization of goodwill, net of tax.................... 151 470
---------- ----------
Net income, as restated................................. $ 1,361 $ 3,808
========== ==========
Earnings per share:
Basic earnings per share, as previously reported..... $ .25 $ .59
Amortization of goodwill, net of tax................. .03 .09
---------- ----------
Basic earnings per share, as restated................ $ .28 $ .68
========== ==========
Dilute earnings per share, as previously reported.... $ .24 $ .58
Amortization of goodwill, net of tax................. .03 .09
---------- ----------
Diluted earnings per share, as restated.............. $ .27 $ .67
========== ==========
NOTE 14 - PENDING MERGER
On September 22, 2003, the Company entered into an agreement and plan of merger
with Citizens Bank of Pennsylvania and Citizens Financial Group, Inc. pursuant
to which the Company would merge with a to-be-formed subsidiary of Citizens Bank
and each outstanding share of the Company's common stock would be converted into
the right to receive $26.00 per share in cash. The merger is subject to
customary conditions including shareholder and regulatory approval and is
expected to close in January 2004.
10
THISTLE GROUP HOLDINGS, CO. AND SUBSIDIARIES
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, new legislation and
regulations and general market conditions.
Pending Merger
On September 22, 2003, the Company entered into an agreement and plan of merger
with Citizens Bank of Pennsylvania and Citizens Financial Group, Inc. pursuant
to which the Company would merge with a to-be-formed subsidiary of Citizens Bank
and each outstanding share of the Company's common stock would be converted into
the right to receive $26.00 per share in cash. The merger is subject to
customary conditions including shareholder and regulatory approval and is
expected to close in January 2004.
Linked Quarter Highlights
Net income for the quarter decreased by $265,000 or $.06 diluted earnings per
share from the quarter ended June 30, 2003. Set forth below is the Company's
earnings information for the quarter ended September 30, 2003 as compared to the
quarter ended June 30, 2003.
(the "Linked Quarter Highlights")
LINKED QUARTER HIGHLIGHTS
-------------------------
(Dollars in Thousands)
- ----------------------------------------------------------------------------
QTR QTR INCREASE % INCREASE
9/30/03 6/30/03 (DECREASE) (DECREASE)
- ----------------------------------------------------------------------------
Interest Income $ 9,481 $ 10,262 $ (781) (7.6%)
- ----------------------------------------------------------------------------
Interest Expense 5,482 5,581 (99) (1.8%)
- ----------------------------------------------------------------------------
Net Interest Income 3,999 4,681 (682) (14.6%)
- ----------------------------------------------------------------------------
Provision for loan losses 134 320 (186) (58.1%)
- ----------------------------------------------------------------------------
Other Income 1,836 1,442 394 27.3%
- ----------------------------------------------------------------------------
Other Expense 4,854 4,545 309 6.8%
- ----------------------------------------------------------------------------
Net Income 766 1,031 (265) (25.7%)
- ----------------------------------------------------------------------------
Cash and cash equivalents 41,290 66,262 (24,972) (37.7%)
- ----------------------------------------------------------------------------
Loans 322,847 320,255 2,592 .8%
- ----------------------------------------------------------------------------
Deposits 553,596 549,975 3,621 .7%
- ----------------------------------------------------------------------------
Stockholders' Equity 74,900 76,320 (1,420) (1.9%)
- ----------------------------------------------------------------------------
o Net income decreased $265,000 due to a decrease in net interest income
of $682,000 and an increase in non-interest expense of $309,000,
partially offset by an increase in non-interest income of $394,000 and
a decrease in the provision for loan losses and income taxes of
$186,000 and $146,000, respectively.
o Net interest income decreased $682,000 primarily as a result of a
decrease in interest income on mortgage-backed securities. The
mortgage-backed securities portfolio continued to experience rapid
repayments during the third quarter. As a result, the average yield on
the portfolio decreased 29 basis points as funds were reinvested at
lower rates.
o The provision for loan losses decreased $186,000. In the quarter ended
June 30, 2003, the Company recognized a higher provision for loan
losses due to the classification of a $2.0 million commercial real
estate loan as substandard.
o Non-interest income for the quarter increased $394,000 due mainly to
gains on the sale of securities.
o Non-interest expense increased $309,000 quarter over quarter. The
increase was primarily the result of an increase in professional fees
incurred in connection with the pending acquisition of the Company by
Citizens Bank.
o Cash and cash equivalents decreased $25.0 million as funds were
reinvested into mortgage-backed securities.
11
Comparison of Financial Condition at September 30, 2003 from December 31, 2002
- ------------------------------------------------------------------------------
Total assets were $850.3 million at September 30, 2003, representing a decrease
of $7.2 million from the balance of $857.4 million at December 31, 2002.
Trading securities decreased $27.4 million, which also resulted in a
corresponding decrease in the payable to brokers and dealers.
Mortgage-backed securities decreased $10.6 million, primarily due to repayments
of $137.1 million, sales of $123.5 million, and a decrease in the unrealized
gain of $5.7 million, offset by purchases of $258.2 million.
Loans receivable increased $22.9 million, or 7.6% to $322.8 million at September
30, 2003 from $300.0 million at December 31, 2002. The increase was primarily
the result of $152.0 million in loan originations and loan purchases, offset by
principal repayments of $128.1 million. One-to-four family residential loans
decreased $15.0 million, or 11.9% while commercial real estate and commercial
loans increased $31.2 million, or 26.1% and home equity loans and lines
increased $6.8 million, or 24.0%.
Deposits increased $60.7 million, or 12.3%, to $553.6 million at September 30,
2003 from $492.9 million at December 31, 2002. Checking accounts increased $32.3
million or 35.3%, money market accounts increased $1.8 million, or 4.0%,
passbook accounts increased $13.7 million, or 11.0 % and certificate accounts
increased $12.9 million, or 5.6 %.
FHLB advances decreased $39.0 million to $181.9 million at September 30, 2003
from $220.9 million at December 31, 2002. The decrease was due mainly to the
repayment of overnight borrowings.
Total stockholders' equity decreased $1.5 million to $74.9 million at September
30, 2003 from $76.4 million at December 31, 2002, primarily due to a decrease in
accumulated other comprehensive income of $3.0 million, and by dividends paid of
$1.4 million offset by net income of $3.2 million. Because of interest rate
changes, the Company's accumulated other comprehensive income (loss) may
fluctuate for each interim and year-end period.
Non-performing Assets
The following table sets forth information regarding non-performing loans and
real estate owned.
At At
September 30, 2003 December 31, 2002
------------------ -----------------
(Dollars in Thousands)
Total non-performing loans (1)................. $ 975 $ 506
Real estate owned.............................. 1,456 1,717
-------- --------
Total non-performing assets.................... $ 2,431 $ 2,223
======== ========
Total non-performing loans to
total loans...................................... 0.30% 0.17%
Total non-performing assets to
total assets................................... 0.29% 0.26%
Allowance for loan loss........................ $ 3,033 $ 2,209
Allowance for loan losses as a percentage
of total non-performing assets................. 124.76% 99.37%
Allowance for loan losses as a percentage
of total non-performing loans.................. 311.08% 437.00%
Allowance for loan losses as a percentage
of total average loans......................... 0.95% 0.78%
(1) Non-performing loans exclude loans restructured and performing under their
modified terms. Such loans totaled $ 2.0 million and $0 for the periods
ended September 30, 2003 and December 31, 2002, respectively.
12
Comparison of Operations for the Three-Month and Nine-Month Periods Ended
- --------------------------------------------------------------------------------
September 30, 2003 and 2002
- ---------------------------
Net income for the quarter ended September 30, 2003 decreased $595,000 or 43.7%
over the quarter ended September 30, 2002. Net income for the nine months ended
September 30, 2003 decreased $640,000 or 16.8% over the nine months ended
September 30, 2002.
Net interest income for the quarter ended September 30, 2003 decreased $1.2
million or 23.8% over the quarter ended September 30, 2002. Net interest income
for the nine months ended September 30, 2003 decreased $1.1 million or 7.2% over
the nine months ended September 30, 2002.
Interest income for the quarter ended September 30, 2003 decreased $1.6 million
or 14.8% over the quarter ended September 30, 2002, primarily due to a decrease
in the average yield on interest-earning assets of 137 basis points, partially
offset by an increase in the average balance of $68.4 million. Interest expense
for the quarter ended September 30, 2003 decreased $394,000 or 6.7% over the
quarter ended September 30, 2002 due to a decrease in the average cost of funds
on interest-bearing liabilities of 61 basis points, partially offset by an
increase in the average balance of $83.1 million.
Interest income for the nine months ended September 30, 2003 decreased $2.1
million, or 6.4%, over the nine months ended September 30, 2002, primarily due
to a decrease in the average yield on interest-earning assets of 99 basis
points, partially offset by an increase in the average balance of $80.6 million.
Interest expense for the nine months ended September 30, 2003 decreased $1.0
million, or 5.7%, over the nine months ended September 30, 2002 due to a
decrease in the average cost of funds on interest-bearing liabilities of 63
basis points, partially offset by an increase in the average balance of $90.3
million.
The provision for loan losses for the quarter ended September 30, 2003 decreased
$16,000 over the quarter ended September 30, 2002. The provision for loan losses
for the nine months ended September 30, 2003 increased $351,000 over the nine
months ended September 30, 2002. The Company's allowance for loan losses as a
percentage of total average loans was .95% at September 30, 2003 versus .72% at
September 30, 2002. Loans classified substandard were $2.9 million at September
30, 2003 versus $102,000 at September 30, 2002.
Non-interest income for the quarter ended September 30, 2003 increased $795,000
over the quarter ended September 30, 2002 primarily due to gains on the sale of
securities and the absence of a writedown on real estate owned. During the
quarter ended September 30, 2002, there was a writedown on real estate owned of
$585,000.
Non-interest income for the nine months ended September 30, 2003 increased $1.8
million over the nine months ended September 30, 2002 primarily due to gains on
the sale of mortgage-backed and investment securities.
Non-interest expense for the quarter ended September 30, 2003 increased $362,000
or 8.1% over the quarter ended September 30, 2002 due mainly to an increase in
professional fees of $509,000 incurred in connection with the pending
acquisition of the Company by Citizens Bank.
Non-interest expense for the nine months ended September 30, 2003 increased $1.2
million or 9.7% over the nine months ended September 30, 2002 due mainly to
increases in professional fees, occupancy and equipment costs, and other
operating expenses of $443,000, $235,000 and $339,000, respectively. The
increase in professional fees is due mainly to the pending acquisition as
discussed above. The increase in occupancy and equipment costs is due to
increases in maintenance and depreciation expense. The increase in other
operating expense is due to increases in operating expenses including telephone,
security, postage, supplies and information technology-related expenses.
The Company's income tax expense for the quarter ended September 30, 2003
decreased $206,000, or 71.8%. For the nine-month period, income tax expense
decreased $142,000, or 17.7%. The decline in income tax expense for the 2003
periods was due to lower earnings and, in the case of the quarter ended
September 30, 2003, a decline in the Company's effective tax rate. The Company's
effective tax rates for the three and nine months ended September 30, 2003 were
9.6% and 17.3%, respectively compared to 17.4% for the three and nine months
ended September 30, 2002. The Company's effective tax rate has been lower than
the statutory rate of 34% due primarily to its holdings of municipal obligations
that are exempt from federal tax.
Critical Accounting Policies
- ----------------------------
The following is a summary of those accounting policies that the Company
considers to be critical as they require management's most difficult judgments
as a result of the need to make estimates about the effects of matters that are
inherently uncertain.
13
Allowance for Loan Losses- the allowance for loan losses represents management's
estimate of probable losses based on information available as of the date of the
financial statements. The allowance for loan losses is based on management's
evaluation of the collectibility of the loan portfolio, including past loan loss
experience, known and inherent losses, information about specific borrower
situations and estimated collateral values, and economic conditions.
The Company's allowance review procedures consist of the following:
- Identifying large balance loans for individual review under Statement
of Financial Accounting Standards No. 114, "Accounting by Creditors for
Impairment of a Loan". In general, these consist of large balance
commercial loans and commercial mortgages (Statement 114 loans).
- Calculating the estimated fair value, using observable market prices,
discounted cash flows or the value of the underlying collateral for
Statement 114 loans which are determined to be impaired as defined by
Statement 114.
- Classifying all non-impaired large balance loans based on credit risk
ratings and allocating an allowance for loan losses based on
appropriate factors, including recent loss history for similar loans.
- Identifying all smaller balance homogeneous loans for evaluation
collectively under the provisions of Statement of Financial Accounting
Standards No. 5, "Accounting for Contingencies". In general, these
loans include residential mortgages, consumer loans, installment loans,
smaller balance commercial loans and mortgages.
- Reviewing the results to determine the appropriate balance of the
allowance for loan losses. This review gives additional consideration
to factors such as the mix of loans in the portfolio, the balance of
the allowance relative to total loans and non-performing assets, trends
in the overall risk profile of the portfolio, trends in delinquencies
and non-accrual loans and local and national economic conditions.
Goodwill- With the adoption of Statement of Financial Accounting Standards 142
and 147, effective January 1, 2002 the Company ceased amortization of goodwill.
The recorded goodwill is subject to impairment testing to determine whether
write-downs of the recorded balances are necessary. Such testing is based upon a
number of factors, which are based upon assumptions and management judgments.
These factors include among other things, future growth rates, discount rates,
and earnings capitalization rates.
Liquidity and Capital Resources
- -------------------------------
On September 30, 2003, the Bank was in compliance with its three regulatory
capital requirements as follows:
Amount Percent
------ -------
(Dollars in Thousands)
Tangible capital...................... $ 55,874 6.91%
Tangible capital requirement.......... 12,127 1.50%
--------- -------
Excess over requirement............... $ 43,747 5.41%
========= =======
Core capital.......................... $ 55,874 6.91%
Core capital requirement.............. 32,339 4.00%
--------- -------
Excess over requirement............... $ 23,535 2.91%
========= =======
Risk based capital.................... $ 58,907 13.21%
Risk based capital requirement........ 35,668 8.00%
--------- -------
Excess over requirement............... $ 23,239 5.21%
========= =======
The Company's primary sources of funds are deposits, borrowings, 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 Company is the origination and purchase
of mortgage loans, mortgage-backed securities and other investments. During the
nine months ended September 30, 2003, the Company originated $147.9 million of
mortgage loans. The Company also purchases loans and mortgage-backed securities
to reduce liquidity not otherwise required for local loan demand. Purchases of
loans and mortgage-backed securities totaled $262.3 million during the
nine-month period ended September 30, 2003. Other investment activities include
investment in U.S.
14
government and federal agency obligations, municipal bonds, debt and equity
investments in financial services firms, FHLB of Pittsburgh stock, commercial
and consumer loans.
The Company'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 Company's operating, financing and investing activities
during any given period. At September 30, 2003, cash and cash equivalents
totaled $41.3 million. The Bank's liquidity ratio was 7.47 % at September 30,
2003.
The Company anticipates that it will have sufficient funds available to meet its
current commitments. As of September 30, 2003, the Company had $35.3 million in
commitments to fund loans. Certificates of deposit, which were scheduled to
mature in one year or less, as of September 30, 2003 totaled $136.4 million.
Management believes that a significant portion of such deposits will remain with
the Company.
Additional Key Operating Information and Ratios
- -----------------------------------------------
For the For the
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2003(1) 2002(1) 2003(1) 2002(1)
------- ------- ------- -------
Return on average assets .36% .71% .51% .68%
Return on average equity 4.04% 7.18% 5.52% 6.13%
Yield on average interest-earning assets 4.89% 6.26% 5.28% 6.27%
Cost of average interest-bearing liabilities 2.94% 3.55% 3.02% 3.65%
Interest rate spread (2) 1.95% 2.71% 2.26% 2.63%
Net interest margin (3) 2.17% 3.07% 2.50% 2.99%
At September 30, 2003 At December 31, 2002
--------------------- --------------------
Tangible book value per share (4) $12.91 $13.07
(1) The ratios for the three and nine month periods are annualized and yields
were adjusted for the effects of tax-free investments using the statutory
tax rate.
(2) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(3) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
(4) Tangible book value per share represents stockholders' equity less goodwill
divided by the number of shares issued and outstanding.
Quantitative and Qualitative Disclosures about Market Risk
- ----------------------------------------------------------
Qualitative Analysis. There have been no material changes from the Qualitative
Analysis information regarding market risk disclosed under the heading "Net
Portfolio Value" in the Company's Management's Discussion and Analysis of
Financial Condition and Results of Operations included in the annual report on
Form 10-K for the year ended December 31, 2002.
Quantitative Analysis. Exposure to interest rate risk is actively monitored by
management. The Company's objective is to maintain a consistent level of
profitability within acceptable risk tolerances across a broad range of
potential interest rate environments. The Company uses the OTS Net Portfolio
Value ("NPV") Model to monitor its exposure to interest rate risk, which
calculates changes in net portfolio value. Reports generated from assumptions
provided and modified by management are reviewed by the Asset/Liability
Management Committee and reported to the Board of Directors quarterly. The
Interest Rate Sensitivity of the Net Portfolio Value Report shows the degree to
which balance sheet line items and net portfolio value are potentially affected
by a 100 to 300 basis point (1 basis point equals 1/100th of a percentage point)
upward and downward parallel shift (shock) in the Treasury yield curve.
Since the NPV Model measures exposure to interest rate risk of the Bank to
assure capital adequacy for the protection of the depositors, only the Bank's
financial information is used for the model. However, the Bank is the primary
subsidiary and most significant asset of the Company, therefore the OTS NPV
model provides a reliable basis upon which to perform the quantitative analysis.
The following table presents the Bank's NPV as of September 30, 2003. The NPV
was calculated by the OTS, based on information provided by the Bank.
15
Net Portfolio Value
Net Portfolio Value As a % of Assets
------------------- ------------------------------------
Change in Rates Net Portfolio
In Basis Points Dollar Amount Dollar Change % Change Value Ratio Basis Point Change
- --------------- ------------- ------------- -------- ----------- ------------------
300 $ 29,072 $ (33,562) (54%) 3.68% (373)
200 42,305 (20,329) (32%) 5.24% (218)
100 54,084 (8,551) (14%) 6.54% (88)
0 62,634 - - 7.42% -
(100) 61,205 (1,430) (2%) 7.17% (25)
(200) * * * * *
(300) * * * * *
* Scenario not used due to the low prevailing interest rate environment
Controls and Procedures
- -----------------------
a) Evaluation of disclosure controls and procedures. Based on their
--------------------------------------------------
evaluation of the Company's disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")),
the Company's principal executive officer and principal financial officer have
concluded that as of the end of the period covered by this Quarterly Report on
Form 10-Q such disclosure controls and procedures 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 control over financial reporting. During the
-------------------------------------------------------
quarter under report, there was no change in the Company's internal control over
financial reporting that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
16
THISTLE GROUP HOLDINGS, CO. AND SUBSIDIARIES
PART II
ITEM 1. LEGAL PROCEEDINGS
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 a security interest, claims involving the
making and servicing of real property loans, and other issues incident to the
business of the Company. In the Company's opinion, such lawsuits pending or
known to be contemplated against the Company at September 30, 2003 would have no
material effect on the operations or income of the Company or the Bank, taken as
a whole.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4 OTHER INFORMATION
None
ITEM 5. EXHIBITS AND REPORTS ON FORM 8-K
a) The following Exhibits are filed as part of this report:
2.1 Agreement and Plan of Merger, dated as of September 22, 2003,
by and among Citizens Bank of Pennsylvania, Citizens
Financial Group, Inc. and Thistle Group Holdings, Co.*******
3(i) Articles of Incorporation****
3(ii) Amended Bylaws*****
4.1 Shareholder Rights Plan**
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***
10.9 Consulting Agreement with Jerry Naessens******
10.10 Amended Non-Qualified Retirement and Death Benefit with
Jerry Naessens******
10.11 Split Dollar Life Insurance Agreement with
Jerry Naessens******
31 Certifications Pursuant to Rule 13a - 14 (a)
32 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
b) Reports on Form 8-K
On October 21, 2003 the Company filed a Form 8-K (Items 7 and 9),
which included the Company's third-quarter 2003 earnings release,
dated October 20, 2003.
On September 24, 2003, the Company filed a Current Report on Form 8-K
reporting under Item 5 that it had entered into a definitive merger
agreement with Citizens Bank of Pennsylvania and Citizens Financial
Group, Inc.
- ----------------
* 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. (File No. 000-24353)
**** Incorporated by reference to the identically numbered exhibits to the Form
10-K for the year ended December 31, 1999 filed on March 30, 2000. (File
No. 000-24353)
17
***** Incorporated by reference to the identically numbered exhibit to the
Form 10-K for the year ended December 31, 2001 filed on March 12, 2002.
(File No. 000-24353)
****** Incorporated by reference to the identically numbered exhibits to the
Form 10-K for the year ended December 31, 2002 filed on March 19, 2003.
(File No. 000-24353)
******* Incorporated by reference to the identically numbered exhibit to the
Company's Current Report on Form 8-K filed September 24, 2003.
THISTLE GROUP HOLDINGS, CO. AND SUBSIDIARIES
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 14, 2003 By: /s/ John F. McGill, Jr.
--------------------------------
John F. McGill, Jr.
Chief Executive Officer
(Principal Executive Officer)
Date: November 14, 2003 By: /s/ Pamela M. Cyr
--------------------------------
Pamela M. Cyr
Chief Financial Officer
(Principal Financial Officer)