10-Q 1 f10q_093003-0036.txt FORM 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 ------------- ------------- Commission file number 0-24353 THISTLE GROUP HOLDINGS, CO. --------------------------- (Exact name of registrant as specified in its charter) Pennsylvania 23-2960768 -------------------------------------------------------------------------------- (State or other jurisdiction of (IRS employer identification no.) Incorporation or organization) 6060 Ridge Avenue, Philadelphia, Pennsylvania 19128 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (215) 483-2800 N/A -------------------------------------------------------------------------------- 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 ------------- ------------- Indicate by check whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.) Yes No X ------------- ------------- 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)

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)

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)

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:

NOTE 4 - MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE Mortgage-backed securities at September 30, 2003 and December 31, 2002 consisted of the following:

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:

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

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:

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:

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.

(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 -----------------------------------------------

(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

* 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)

THISTLE GROUP HOLDINGS CO 10-Q