SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM l0-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 June 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 0-24168
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TF FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 74-2705050
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(State or other jurisdiction (I.R.S. employer identification no.)
of incorporation or organization)
3 Penns Trail, Newtown, Pennsylvania 18940
------------------------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 215-579-4000
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N/A
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Former name, former address and former fiscal year, if
changed since last report.
Indicate by check whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer
as defined in Exchange Act Rule 12b-2. YES NO X
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date: August 1, 2003
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Class Outstanding
---------------------------- ----------------
$.10 par value common stock 2,800,231 shares
TF FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 1O-Q
FOR THE QUARTER ENDED JUNE 30, 2003
INDEX
Page
Number
------
PART I - CONSOLIDATED FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 20
Item 4. Controls and Procedures 20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Changes in Securities and Use of Proceeds 23
Item 3. Defaults Upon Senior Securities 23
Item 4. Other Information 23
Item 5. Exhibits and Reports on Form 8-K 23
SIGNATURES 24
EXHIBITS
31 Certifications pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32 Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
2
TF FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(in thousands)
Unaudited Audited
June 30, December 31,
2003 2002
---- ----
Assets
Cash and cash equivalents $ 37,589 $100,580
Certificates of deposit in other financial institutions 228 220
Investment securities available for sale - at fair value 88,446 27,243
Investment securities held to maturity (fair value of $13,359 and $15,187, 12,696 14,563
respectively)
Mortgage-backed securities available for sale - at fair value 137,213 115,243
Mortgage-backed securities held to maturity (fair value of $37,491 and 35,755 54,592
$57,346, respectively)
Loans receivable, net 359,208 370,092
Federal Home Loan Bank stock - at cost 11,250 11,424
Accrued interest receivable 3,184 3,576
Core deposit intangible, net of accumulated amortization of $2,367 and
$2,271, respectively 457 553
Goodwill 4,324 4,324
Premises and equipment, net 6,659 6,742
Other assets 15,627 11,880
-------- --------
Total assets $712,636 $721,032
======== ========
Liabilities and stockholders' equity
Liabilities
Deposits $448,139 $442,558
Advances from the Federal Home Loan Bank 192,359 207,359
Advances from borrowers for taxes and insurance 1,513 1,330
Accrued interest payable 2,949 2,897
Other liabilities 3,795 4,048
-------- --------
Total liabilities 648,755 658,192
-------- --------
Commitments and contingencies
Stockholders' equity
Preferred stock, no par value; 2,000,000 shares authorized and none issued.
Common stock, $0.10 par value; 10,000,000 shares authorized, 5,290,000
issued; 2,566,352 and 2,482,586 shares outstanding at June 30, 2003 and
December 31, 2002, net of
treasury shares of 2,493,551 and 2,567,268, respectively. 529 529
Retained earnings 60,445 59,978
Additional paid-in capital 51,331 51,647
Unearned ESOP shares (2,302) (2,401)
Treasury stock - at cost (47,410) (48,809)
Accumulated other comprehensive income 1,288 1,896
-------- --------
Total stockholders' equity 63,881 62,840
-------- --------
Total liabilities and stockholders' equity $712,636 $721,032
======== ========
3
TF FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share data)
For Three Months For Six Months
Ended June 30, Ended June 30,
-------------- --------------
2003 2002 2003 2002
---- ---- ---- ----
Interest income
Loans $5,625 $6,429 $11,676 $13,160
Mortgage-backed securities 1,845 3,188 3,697 6,248
Investment securities 518 565 1,026 1,152
Interest bearing deposits and other 168 271 414 480
------ ------ ------ ------
Total interest income 8,156 10,453 16,813 21,040
------ ------ ------ ------
Interest expense
Deposits 1,824 2,707 3,868 5,537
Advances from the Federal Home Loan Bank and other borrowings 2,701 3,071 5,480 6,108
------ ------ ------ ------
Total interest expense 4,525 5,778 9,348 11,645
------ ------ ------ ------
Net interest income 3,631 4,675 7,465 9,395
Provision for loan losses 90 538 180 688
------ ------ ------ ------
Net interest income after provision for loan losses 3,541 4,137 7,285 8,707
------ ------ ------ ------
Non-interest income
Service fees, charges and other operating income 440 329 885 736
Bank-owned life insurance 129 137 262 270
Gain on sale of investment and mortgage-backed
securities available for sale 79 - 585 -
------ ------ ------ ------
Total non-interest income 648 466 1,732 1,006
------ ------ ------ ------
Non-interest expense
Compensation and benefits 2,036 1,916 4,060 3,845
Occupancy and equipment 602 576 1,230 1,154
Federal deposit insurance premium 18 19 37 38
Professional fees 158 105 318 185
Amortization of core deposit intangible 48 58 96 116
Advertising 138 110 275 220
Other operating 599 522 1,322 1,168
------ ------ ------ ------
Total non-interest expense 3,599 3,306 7,338 6,726
------ ------ ------ ------
Income before income taxes 590 1,297 1,679 2,987
Income taxes 154 302 464 707
------ ------ ------ ------
Net income $ 436 $ 995 1,215 2,280
====== ====== ====== ======
Basic earnings per share $0.17 $0.40 $0.49 $0.92
Diluted earnings per share $0.16 $0.37 $0.45 $0.86
See notes to consolidated financial statements
4
TF FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the six months ended
June 30,
--------
2003 2002
---- ----
Cash flows from operating activities
Net Income $ 1,215 $ 2,280
Adjustments to reconcile net income to net cash provided by operating activities:
Mortgage loan servicing rights 7 7
Deferred loan origination fees (139) (99)
Premiums and discounts on investment securities, net 26 68
Premiums and discounts on mortgage-backed securities and loans, net 1,179 (264)
Amortization of core deposit intangible 96 116
Provision for loan losses 180 688
Depreciation of premises and equipment 502 507
Recognition of ESOP and MSBP expenses 267 140
Gain on sale of investment and mortgage-backed securities available for sale (585) -
Gain on sale of real estate (12) (57)
Increase in value of bank-owned life insurance (262) (262)
(Increase) decrease in:
Accrued interest receivable 392 (135)
Other assets (219) (117)
Increase (decrease) in:
Accrued interest payable 52 (449)
Other liabilities 59 (483)
------- -------
Net cash provided by operating activities 2,758 1,940
------- -------
Cash flows from investing activities
Loan originations (55,286) (17,821)
Purchases of loans (21,927) (16,685)
Loan principal payments 85,946 57,640
Proceeds from sale of mortgage-backed securities available for sale 15,075 -
Purchases of mortgage-backed securities available for sale (65,873) (62,848)
Purchase of investment securities held to maturity - (6,821)
Purchase of investment securities available for sale (91,122) (6,000)
Proceeds from maturities of investment securities held to maturity 1,830 1,055
Proceeds from maturities of investment securities available for sale 30,000 1,000
Principal repayments from mortgage-backed securities held to maturity 18,862 20,391
Principal repayments from mortgage-backed securities available for sale 27,472 16,511
Purchase of bank-owned life insurance (1,500) -
Purchase of certificates of deposit in other financial institutions (8) -
Purchases and redemptions of Federal Home Loan Bank stock, net 174 250
Proceeds from sales of real estate acquired through foreclosure 96 272
Purchase of premises and equipment (419) (62)
------- -------
Net cash used in investing activities (56,680) (13,118)
------- -------
See notes to consolidated financial statements
5
TF FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(in thousands)
For the six months ended
June 30,
--------
2003 2002
---- ----
Cash flows from financing activities
Net increase in deposits 5,581 15,451
Net decrease in advances from Federal Home Loan Bank (15,000) -
Net decrease in advances from borrowers for taxes and insurance 183 59
Exercise of stock options 915 232
Purchase of treasury stock, net - (337)
Common stock cash dividend (748) (739)
-------- -------
Net cash provided by (used in) financing activities (9,069) 14,666
-------- -------
Net (decrease) increase in cash and cash equivalents (62,991) 3,488
Cash and cash equivalents at beginning of period 100,580 69,139
-------- -------
Cash and cash equivalents at end of period $ 37,589 $72,627
======== =======
Supplemental disclosure of cash flow information
Cash paid for
Interest on deposits and advances $ 9,296 $12,098
Income taxes $ 250 $ 1,000
Non-cash transactions
Transfers from loans to real estate acquired through foreclosure $ 1,857 $ 185
See notes to consolidated financial statements
6
TF FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - RESTATEMENT OF INFORMATION FOR THE PERIOD ENDED JUNE 30, 2002
On October 1, 2002 the FASB issued SFAS No. 147,"Acquisitions of Certain
Financial Institutions." Except for transactions between two or more mutual
enterprises, SFAS No. 147 removed the acquisitions of financial
institutions from the scope of both SFAS No. 72 and FASB Interpretation No.
9 and required that those transactions be accounted for in accordance with
SFAS No. 141 and SFAS No. 142. Thus, the requirement of SFAS No. 72 to
recognize (and subsequently amortize) any excess of the fair value of
liabilities assumed over the fair value of tangible and identifiable
intangible assets acquired ("SFAS 72 goodwill") as an unidentifiable
intangible no longer applied to acquisitions within the scope of SFAS No.
147. Finally, SFAS No. 147 provided that branch acquisitions that meet the
definition of a business should be accounted for as a business combination.
SFAS No. 147 was effective October 1, 2002, although earlier application
was permitted. The Company has elected to apply SFAS No. 147 as of January
1, 2002. In accordance with the provisions of SFAS No. 147 interim
financial statements of the Company issued after January 1, 2002 have been
restated to remove amortization expense associated with SFAS No. 72
goodwill. Such expense totaled $164,000, net of a tax benefit of $58,000
for the six months ended June 30, 2002.
NOTE 2 - PRINCIPLES OF CONSOLIDATION
The consolidated financial statements as of June 30, 2003 (unaudited) and
December 31, 2002 and for the six-month periods ended June 30, 2003 and
2002 (unaudited) include the accounts of TF Financial Corporation (the
"Company") and its wholly owned subsidiaries Third Federal Savings Bank
(the "Bank"), TF Investments Corporation, Penns Trail Development
Corporation and Teragon Financial Corporation. The Company's business is
conducted principally through the Bank. All significant intercompany
accounts and transactions have been eliminated in consolidation.
NOTE 3 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements were prepared
in accordance with instructions for Form 10-Q and, therefore, do not
include all of the disclosures or footnotes required by accounting
principles generally accepted in the United States of America. In the
opinion of management, all adjustments, consisting of normal recurring
accruals, necessary for fair presentation of the consolidated financial
statements have been included. The results of operations for the period
ended June 30, 2003 are not necessarily indicative of the results which may
be expected for the entire fiscal year or any other period. For further
information, refer to consolidated financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2002.
NOTE 4 - CONTINGENCIES
The Company, from time to time, is a party to routine litigation that
arises in the normal course of business. In the opinion of management, the
resolution of this litigation, if any, would not have a material adverse
effect on the Company's consolidated financial condition or results of
operations.
NOTE 5 - OTHER COMPREHENSIVE INCOME
The Company's other comprehensive income consists of net unrealized gains
on investment securities and mortgage-backed securities available for sale.
Total comprehensive income for the three-month periods ended June 30, 2003
and 2002 was $425,000 and $2,932,000, net of applicable income tax of
$148,000 and $1,299,000, respectively. Total comprehensive income for the
six-month periods ended June 30, 2003 and 2002 was $607,000 and $3,734,000,
net of applicable income tax of $151,000 and $1,455,000, respectively.
7
TF FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - EARNINGS PER SHARE
Three months ended June 30, 2003
--------------------------------
Weighted
(000's) Average
Income Shares Per share
(numerator) (denominator) Amount
----------- ------------- ---------
Basic earnings per share
Income available to common stockholders $ 436 2,516,638 $ 0.17
Effect of dilutive securities
Stock options - 208,264 (0.01)
------- --------- -------
Diluted earnings per share
Income available to common stockholders plus
effect of dilutive securities $ 436 2,724,902 $ 0.16
======= ========= =======
Six months ended June 30, 2003
------------------------------
Weighted
(000's) Average
Income Shares Per share
(numerator) (denominator) Amount
----------- ------------- ---------
Basic earnings per share
Income available to common stockholders $ 1,215 2,502,600 $ 0.49
Effect of dilutive securities
Stock options - 207,467 (0.04)
------- ---------- -------
Diluted earnings per share
Income available to common stockholders plus
effect of dilutive securities $ 1,215 2,710,067 $ 0.45
======= ========== =======
There were options to purchase 34,900 shares of common stock at a
range of $25.33 to $28.00 per share which were outstanding during the
six-month period ended June 30, 2003 that were not included in the
computation of diluted earnings per share because the options'
exercise prices were greater than the average market price of the
common shares.
8
TF FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - EARNINGS PER SHARE (continued)
Three months ended June 30, 2002
--------------------------------
Weighted
(000's) Average
Income Shares Per share
(numerator) (denominator) Amount
----------- ------------- ---------
Basic earnings per share
Income available to common stockholders $ 995 2,470,258 $ 0.40
Effect of dilutive securities
Stock options - 197,525 (0.03)
------- ---------- -------
Diluted earnings per share
Income available to common stockholders plus
effect of dilutive securities $ 995 2,667,783 $ 0.37
======= ========== =======
There were options to purchase 5,000 shares of common stock at $28.00
per share which were outstanding during the three-month period ended
June 30, 2002 that were not included in the computation of diluted
earnings per share because the options' exercise prices were greater
than the average market price of the common shares.
Six months ended June 30, 2002
------------------------------
Weighted
(000's) Average
Income Shares Per share
(numerator) (denominator) Amount
----------- ------------- ---------
Basic earnings per share
Income available to common stockholders $ 2,280 2,466,561 $ 0.92
Effect of dilutive securities
Stock options - 189,937 (0.06)
------- --------- -------
Diluted earnings per share
Income available to common stockholders plus
effect of dilutive securities $ 2,280 2,656,498 $ 0.86
======= ========= =======
There were options to purchase 5,000 shares of common stock at $28.00
per share which were outstanding during the six-month period ended June
30, 2002 that were not included in the computation of diluted earnings
per share because the options' exercise prices were greater than the
average market price of the common shares.
9
TF FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7- STOCK BASED COMPENSATION
The Company has several fixed stock option plans. The Company's employee
stock option plans are accounted for using the intrinsic value method under
APB Opinion No. 25, as permitted by SFAS No. 123. No stock-based
compensation expense is reflected in net income, as all options granted
under the plans had an exercise price equal to the market value of the
underlying common stock on the date of the grant.
Had compensation cost for the plans been determined based on the fair value
of options at the grant dates consistent with the method of SFAS No. 123,
"Accounting for Stock-Based Compensation," the Company's net income and
earnings per share would have been reduced to the pro forma amounts
indicated below (in thousands, except per share data):
Three months ended June 30, 2003 2002
---------------------------- ---- ----
Net income
As reported $ 436 $ 995
Deduct: stock-based compensation expense
determinded using the fair value method, net
of related tax effects 11 14
------ ------
Pro forma $ 425 $ 981
====== ======
Basic earnings per share
As reported $ 0.17 $ 0.40
Pro forma $ 0.17 $ 0.40
Diluted earnings per share
As reported $ 0.16 $ 0.37
Pro forma $ 0.16 $ 0.37
Stock-based compensation expense included in net income is related to stock
grants in lieu of salary and the Company's employee stock ownership plan.
Such expense totaled $131,000 and $53,000 for the three-month periods ended
June 30, 2003 and 2002, respectively.
10
TF FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7- STOCK BASED COMPENSATION (continued)
Six months ended June 30, 2003 2002
-------------------------- ---- ----
Net income
As reported $ 1,215 $ 2,280
Deduct: stock-based compensation expense
determined using the fair value method,
net of related tax effects 22 31
------- -------
Pro forma $ 1,193 $ 2,249
======= =======
Basic earnings per share
As reported $ 0.49 $ 0.92
Pro forma $ 0.48 $ 0.92
Diluted earnings per share
As reported $ 0.45 $ 0.86
Pro forma $ 0.45 $ 0.85
Stock-based compensation expense included in net income is related to
stock grants in lieu of salary and the Company's employee stock
ownership plan. Such expense totaled $227,000 and $101,000 for the
six-month periods ended June 30, 2003 and 2002, respectively.
NOTE 8- RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the
current period presentation.
11
TF FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company may from time to time make written or oral "forward-looking
statements", including statements contained in the Company's filings with the
Securities and Exchange Commission (including this Quarterly Report on Form 10-Q
and the exhibits thereto), in its reports to stockholders and in other
communications by the Company, which are made in good faith by the Company
pursuant to the "Safe Harbor" Provisions of the Private Securities Litigation
Reform Act of 1995.
These forward-looking statements involve risks and uncertainties, such as
statements of the Company's plans, objectives, expectations, estimates and
intentions that are subject to change based on various important factors (some
of which are beyond the Company's control). The following factors, among others,
could cause the Company's financial performance to differ materially from the
plans, objectives, expectations, estimates and intentions expressed in such
forward-looking statements: the strength of the United States economy in general
and the strength of the local economies in which the Company conducts
operations; the effects of, and changes in, trade, monetary and fiscal policies
and laws, including interest rate policies of the Board of Governors of the
Federal Reserve System, inflation, interest rate, market and monetary
fluctuations; the timely development of and acceptance of new products and
services of the Company and the perceived overall value of these products and
services by users, including the features, pricing and quality compared to
competitors' products and services; the willingness of users to substitute
competitors' products and services for the Company's products and services; the
success of the Company in gaining regulatory approval of its products and
services, when required; the impact of changes in financial services' laws and
regulations (including laws concerning taxes, banking, securities and
insurance); technological changes, acquisitions; changes in consumer spending
and saving habits; and the success of the Company at managing the risks involved
in the foregoing.
The Company cautions that the foregoing list of important factors is not
exclusive. The Company does not undertake to update any forward-looking
statement, whether written or oral, that may be made from time to time by or on
behalf of the Company.
Financial Condition
The Company's total assets at June 30, 2003 and December 31, 2002 were $712.6
million and $721.0 million, respectively, a decrease of $8.4 million, or 1.2%,
during the six-month period. Cash and cash equivalents decreased by $62.9
million. Investment securities available for sale increased by $61.2 million,
the net effect of the purchase of $91.2 million less the calls and maturities of
$30.0 million of such securities. Investment securities held to maturity
decreased by $1.8 million due to calls and maturities of such securities.
Mortgage-backed securities available for sale increased by $21.9 million as
$65.8 million in purchases of such securities more than off-set the $1.0 million
decrease in unrealized gains plus the sale of $14.4 million and the principal
pay-downs of $27.4 million received from these securities. Mortgage-backed
securities held to maturity decreased by $18.8 million due to the high rate of
prepayments of the mortgages underlying these pass-through securities.
Similarly, high prepayments of existing mortgages in the loans receivable
portfolio caused a decrease of $85.9 million in loans receivable. Offsetting
this reduction in existing loans receivable was the origination of $55.2 million
in predominately consumer and single-family residential mortgage loans, and the
purchase of $21.9 million in newly originated, single-family residential
mortgage loans.
12
Total liabilities decreased by $9.4 million. Deposit growth during the first six
months of 2003 was $5.6 million. Non-interest bearing demand deposits grew by
$2.3 million while savings, money market, and interest-bearing checking accounts
increased by a combined $7.6 million. Certificates of deposit decreased by $4.3
million. Advances from the Federal Home Loan Bank decreased by $15.0 million due
to scheduled maturity of advances.
Total consolidated stockholders' equity of the Company was $63.9 million or
8.96% of assets at June 30, 2003. During the first half of 2003 the Company did
not repurchase any shares of its common stock and issued 72,717 shares pursuant
to the exercise of stock options. As of June 30, 2003, there were approximately
114,000 shares available for repurchase under the previously announced share
repurchase plan, and the Company will continue to repurchase shares as share
availability and market conditions permit.
Asset Quality
During the first half of 2003 the Company completed foreclosure proceedings on
two related parcels of commercial real estate with a combined loan balance of
$1.7 million. These loans were non-performing at December 31, 2002. These
parcels have been recorded as real estate owned at the lower of the recorded
investment in the loan or estimated fair value in the amount of $1.7 million and
are included in other assets in the statement of financial condition at June 30,
2003. Management of the Company believes that there has not been any significant
deterioration in its asset quality during the first half of 2003.
The following table sets forth information regarding the Company's asset
quality (dollars in thousands):
June 30, December 31, June 30,
-------- ------------ --------
2003 2002 2002
---- ---- ----
Non-performing loans $2,231 $3,822 $3,925
Ratio of non-performing loans to gross loans 0.62% 1.03% 1.10%
Ratio of non-performing loans to total assets 0.31% 0.53% 0.54%
Foreclosed property $1,857 $ 84 -
Foreclosed property to total assets 0.26% 0.01% 0.00%
Ratio of total non-performing assets to total assets 0.57% 0.54% 0.54%
Management maintains an allowance for loan and lease losses at levels that are
believed to be adequate; however, there can be no assurances that further
additions will not be necessary or that losses inherent in the existing loan and
lease portfolios will not exceed the allowance. The following table sets forth
the activity in the allowance for loan and lease losses during the periods
indicated (in thousands):
2003 2002
---- ----
Beginning balance, January 1, $2,047 $1,972
Provision 180 688
Less: charge-off's (recoveries), net 304 765
------ ------
Ending balance, June 30, $1,923 $1,895
====== ======
13
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2003 AND 2002
Net Income. The Company recorded net income of $436,000, or $0.16 per diluted
share, for the three months ended June 30, 2003 as compared to $995,000, or
$0.37 per diluted share, for the three months ended June 30, 2002.
Average Balance Sheet
The following table sets forth information relating to the Company's average
balance sheet and reflects the average yield on assets and average cost of
liabilities for the periods indicated. Yield and cost are computed by dividing
income or expense by the average daily balance of interest-earning assets or
interest-bearing liabilities, respectively, for the periods indicated.
Three months ended June 30,
2003 2002
---------------------------------- ---------------------------------
Average Average Average Average
Balance Interest Yld/Cost Balance Interest Yld/Cost
------- -------- -------- ------- -------- --------
(dollars in thousands)
Assets:
Interest-earning assets:
Loans receivable (1)....................... $363,906 $5,625 6.20% $360,448 $ 6,429 7.15%
Mortgage-backed securities................. 172,259 1,845 4.30% 212,146 3,188 6.03%
Investment securities...................... 76,608 518 2.71% 49,845 565 4.55%
Other interest-earning assets(2)........... 64,376 168 1.05% 64,617 271 1.68%
-------- ------ -------- -------
Total interest-earning assets............ 677,149 8,156 4.83% 687,056 10,453 6.10%
------ -------
Non interest-earning assets.................... 35,748 34,628
-------- --------
Total assets............................. $712,897 $721,684
======== ========
Liabilities and stockholders' equity:
Interest-bearing liabilities
Deposits................................... $446,212 1,824 1.64% $432,918 2,707 2.51%
Advances from the FHLB and other
Borrowings...................... 197,249 2,701 5.49% 222,359 3,071 5.54%
-------- ------ -------- -------
Total interest-bearing liabilities....... 643,461 4,525 2.82% 655,277 5,778 3.54%
------ -------
Non interest-bearing liabilities............... 6,266 7,879
-------- --------
Total liabilities........................ 649,727 663,156
Stockholders' equity........................... 63,170 58,528
-------- --------
Total liabilities and
stockholders' equity.................. $712,897 $721,684
======== ========
Net interest income............................ $3,631 $ 4,675
====== =======
Interest rate spread (3)....................... 2.01% 2.56%
Net yield on interest-earning assets (4)....... 2.15% 2.73%
Ratio of average interest-earning assets to
average interest bearing liabilities......... 105% 105%
(1) Nonaccrual loans have been included in the appropriate average loan balance
category, but interest on nonaccrual loans has not been included for
purposes of determining interest income.
(2) Includes interest-bearing deposits in other banks.
(3) Interest-rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(4) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
14
Rate/Volume Analysis
The following table presents, for the periods indicated, the change in interest
income and interest expense (in thousands) attributed to (i) changes in volume
(changes in the weighted average balance of the total interest earning asset and
interest bearing liability portfolios multiplied by the prior year rate), and
(ii) changes in rate (changes in rate multiplied by prior year volume). Changes
attributable to the combined impact of volume and rate have been allocated
proportionately based on the absolute value of changes due to volume and changes
due to rate.
Three months ended
June 30,
2003 vs. 2002
-------------------------------------------
Increase (decrease)
due to
-------------------------------------------
Volume Rate Net
-------------------------------------------
Interest income:
Loans receivable, net $ 408 $(1,212) $ (804)
Mortgage-backed securities (531) (812) (1,343)
Investment securities 1,017 (1,064) (47)
Other interest-earning assets (1) (102) (103)
-------------------------------------------
Total interest-earning assets
893 (3,190) (2,297)
===========================================
Interest expense:
Deposits 541 (1,424) (883)
Advances from the FHLB and other borrowings (344) (26) (370)
-------------------------------------------
Total interest-bearing liabilities
197 (1,450) (1,253)
===========================================
Net change in net interest income (696) $(1,740) $(1,044)
===========================================
Total Interest Income. Total interest income decreased by $2.3 million or 22.0%
to $8.1 million for the three months ended June 30, 2003 compared with the
second quarter of 2002 primarily because of the consequences of record low
market interest rates. As a result, during the past year the Bank's callable
investment securities were called, higher coupon mortgage-related securities
were paid down at an accelerated rate, and loans were refinanced by borrowers at
lower rates, or away from the Bank, resulting in large pay-downs of higher
yielding loans. In addition, the interest rates on the Bank's adjustable rate
loans adjusted downward. Furthermore, the rate earned on Company's cash and cash
equivalents were substantially lower during the 2003 period.
Total Interest Expense. Total interest expense decreased by $1.3 million to $4.5
million for the three-month period ended June 30, 2003. The increase in the
average balance of deposits was more than offset by lower market interest rates
during the period and the lower rates paid on the Bank's renewing certificates
of deposit that had been originated when market interest rates were higher. In
addition, the Bank lowered the interest rates paid on several of its other
deposit products in order to keep them in line with short term market interest
rates and the Bank's competitors.
Non-interest income. Total non-interest income was $648,000 for the three-month
period ended June 30, 2003 compared with $466,000 for the same period in 2002.
The increase is primarily due to $79,000 in gains on sales of mortgage-backed
securities available for sale during the second quarter of 2003 while there were
no such sales during the 2002 period. In addition, retail banking fees were
$103,000 higher due in large part to a $70,000 increase in commercial loan
prepayment fees and a $33,000 increase in overdraft fees.
15
Non-interest expense. Total non-interest expense increased by $293,000 to $3.5
million for the three months ended June 30, 2003 compared to the same period in
2002. The increase in operating expense was associated with the opening of a new
branch location in Philadelphia during the early part of 2003. Benefits expenses
also were higher by $78,000 due to the cost of the Corporation's employee stock
ownership plan where the cost of shares released is impacted by the higher share
price during the second quarter of 2003 compared with 2002. In addition, the
Corporation's loan origination expense were $33,000 higher during the second
quarter of 2003, corresponding to an increase in loans originated to $31.3
million compared with $7.8 million during the second quarter of 2002.
16
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
Net Income. The Company recorded net income of $1,215,000, or $0.45 per diluted
share, for the six months ended June 30, 2003 as compared to $2,280,000, or
$0.86 per diluted share, for the six months ended June 30, 2002.
Average Balance Sheet
The following table sets forth information relating to the Company's average
balance sheet and reflects the average yield on assets and average cost of
liabilities for the periods indicated. Yield and cost are computed by dividing
income or expense by the average daily balance of interest-earning assets or
interest-bearing liabilities, respectively, for the periods indicated.
Six months ended June 30,
2003 2002
---------------------------------- ----------------------------------
Average Average Average Average
Balance Interest Yld/Cost Balance Interest Yld/Cost
------- -------- -------- ------- -------- --------
(dollars in thousands)
Assets:
Interest-earning assets:
Loans receivable (1)....................... $365,226 $11,676 6.45% $366,435 $13,160 7.24%
Mortgage-backed securities................. 167,985 3,697 4.44% 206,999 6,248 6.09%
Investment securities...................... 66,670 1,026 3.10% 48,921 1,152 4.75%
Other interest-earning assets(2)........... 79,297 414 1.05% 59,225 480 1.63%
-------- ------- -------- -------
Total interest-earning assets............ 679,179 16,813 4.99% 681,580 21,040 6.23%
------- -------
Non interest-earning assets.................... 35,355 35,084
-------- --------
Total assets............................. $714,534 $716,664
======== ========
Liabilities and stockholders' equity:
Interest-bearing liabilities
Deposits................................... $444,459 3,868 1.75% $428,105 5,537 2.61%
Advances from the FHLB and other
Borrowings...................... 200,619 5,480 5.51% 222,359 6,108 5.54%
-------- ------- -------- -------
Total interest-bearing liabilities....... 645,078 9,348 2.92% 650,464 11,645 3.61%
------- -------
Non interest-bearing liabilities............... 6,344 7,844
-------- --------
Total liabilities........................ 651,422 658,308
Stockholders' equity........................... 63,112 58,356
-------- --------
Total liabilities and
stockholders' equity................... $714,534 $716,664
======== ========
Net interest income............................ $ 7,465 $ 9,395
======= =======
Interest rate spread (3)....................... 2.07% 2.62%
Net yield on interest-earning assets (4)....... 2.22% 2.78%
Ratio of average interest-earning assets to
average interest bearing liabilities........... 105% 105%
(1) Nonaccrual loans have been included in the appropriate average loan balance
category, but interest on nonaccrual loans has not been included for
purposes of determining interest income.
(2) Includes interest-bearing deposits in other banks.
(3) Interest-rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(4) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
17
Rate/Volume Analysis
The following table presents, for the periods indicated, the change in interest
income and interest expense (in thousands) attributed to (i) changes in volume
(changes in the weighted average balance of the total interest earning asset and
interest bearing liability portfolios multiplied by the prior year rate), and
(ii) changes in rate (changes in rate multiplied by prior year volume). Changes
attributable to the combined impact of volume and rate have been allocated
proportionately based on the absolute value of changes due to volume and changes
due to rate.
Six months ended
June 30,
2003 vs. 2002
------------------------------------------------------
Increase (decrease)
due to
-----------------------------------------------
Volume Rate Net
-----------------------------------------------
Interest income:
Loans receivable, net $ (43) $ (1,441) $ (1,484)
Mortgage-backed securities (1,047) (1,504) (2,551)
Investment securities 759 (885) (126)
Other interest-earning assets 304 (370) (66)
-----------------------------------------------
Total interest-earning assets
(27) (4,200) (4,227)
===============================================
Interest expense:
Deposits 589 (2,258) (1,669)
Advances from the FHLB and other borrowings (594) (34) (628)
-----------------------------------------------
Total interest-bearing liabilities
(5) (2,292) (2,297)
===============================================
Net change in net interest income $ (22) $ (1,908) $ (1,930)
===============================================
Total Interest Income. Total interest income decreased by $4.2 million or 20.0%
to $16.8 million for the six months ended June 30, 2003 compared with the first
half of 2002 primarily because of the consequences of record low market interest
rates. As a result, during the past year the Bank's callable investment
securities were called, higher coupon mortgage-related securities were paid down
at an accelerated rate, and loans were refinanced by borrowers at lower rates,
or away from the Bank, resulting in large pay-downs of higher yielding loans. In
addition, the interest rates on the Bank's adjustable rate loans adjusted
downward. Furthermore, the rate earned on Company's cash and cash equivalents
were substantially lower during the 2003 period.
Total Interest Expense. Total interest expense decreased by $2.3 million to $9.3
million for the six-month period ended June 30, 2003. The interest expense
increase due to an increase in the average balance of deposits was more than
offset by lower market interest rates during the period and the lower rates paid
on the Bank's renewing certificates of deposit that had been originated when
market interest rates were higher. In addition, the Bank lowered the interest
rates paid on several of its other deposit products in order to keep them in
line with short-term market interest rates and the Bank's competitors.
Non-interest income. Total non-interest income was $1,732,000 for the six-month
period ended June 30, 2003 compared with $1,006,000 for the same period in 2002.
The increase is primarily due to $585,000 in gains on sales of mortgage-backed
securities available for sale during the second quarter of 2003 while there were
no such sales during the 2002 period. In addition, retail banking fees were
$134,000 higher due in large part to a $94,000 increase in commercial loan
prepayment fees and a $52,000 increase in overdraft fees.
18
Non-interest expense. Total non-interest expense increased by $612,000 to $7.3
million for the six months ended June 30, 2003 compared to the same period in
2002. Compensation and benefits expense was higher during the 2003 period due to
a $93,000 one time reduction in pension expense during the first quarter of 2002
caused by participants who had very high balances leaving the plan. Benefits
expenses also were higher by $126,000 due to the cost of the Corporation's
employee stock ownership plan where the cost of shares released is impacted by
the higher share price during the first half of 2003 compared with 2002.
Occupancy and equipment expense increased in part because maintenance expenses
were unusually high during the first quarter of 2003 due to inclement weather.
In addition, the Corporation's loan origination expense were $64,000 higher
during the first six months of 2003, corresponding to an increase in loans
originated to $55.3 million compared with $17.8 million during the same period
of 2002.
19
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
The Company's liquidity is a measure of its ability to fund loans, pay
withdrawals of deposits, and other cash outflows in an efficient, cost-effective
manner. The Company's short-term sources of liquidity include maturity,
repayment and sales of assets, excess cash and cash equivalents, new deposits,
broker deposits, other borrowings, and new advances from the Federal Home Loan
Bank. There has been no material adverse change during six-month period ended
June 30, 2003 in the ability of the Company and its subsidiaries to fund their
operations.
At June 30, 2003, the Company had commitments outstanding under letters of
credit of $1 million, commitments to originate loans of $30.0 million, and
commitments to fund undisbursed balances of closed loans and unused lines of
credit of $31.2 million. There has been no material change during the six months
ended June 30, 2003 in any of the Company's other contractual obligations or
commitments to make future payments.
Capital Requirements
The Bank is in compliance with all of its capital requirements as of June 30,
2003.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Asset and Liability Management
The Company's market risk exposure is predominately caused by interest rate
risk, which is defined as the sensitivity of the Company's current and future
earnings, the values of its assets and liabilities, and the value of its capital
to changes in the level of market interest rates. Management of the Company
believes that there has not been a material adverse change in market risk during
the six months ended June 30, 2003.
CONTROLS AND PROCEDURES
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.
Changes in Internal Controls 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.
20
NEW ACCOUNTING PRONOUNCEMENTS
In January 2003 the FASB issued FIN Number 46, "Consolidation of Variable
Interest Entities." This Interpretation of ARB No. 51, "Consolidated Financial
Statements," was issued to address perceived weaknesses in accounting for
entities commonly known as special-purpose or off-balance-sheet entities, but
the guidance applies to a larger population of entities. FIN 46 provides
guidance for identifying the party with a controlling financial interest
resulting from arrangements or financial interests rather than from voting
interests. FIN 46 defines the term "variable interest entity" (VIE) and is based
on the premise that if a business enterprise has a controlling financial
interest in a VIE, the assets, liabilities, and results of the activities of the
VIE should be included in the consolidated financial statements of the business
enterprise. An enterprise that consolidates a VIE is the primary beneficiary of
the VIE. The primary beneficiary is the party whose variable interest(s) absorbs
a majority of the entity's expected losses, receives a majority of its expected
residual returns, or both. FIN 46 requires the primary beneficiary of a VIE, as
well as other enterprises that hold a significant variable interest in a VIE, to
provide certain financial statement disclosures. Some disclosures are required
in all financial statements issued after January 31, 2003 if it is reasonably
possible that an enterprise will consolidate or disclose information about a VIE
when FIN 46 becomes effective. FIN 46 applies immediately to VIEs created after
January 31, 2003 and to VIEs in which an enterprise obtains an interest after
that date. For variable interests in VIEs created before February 1, 2003, FIN
46 applies to public enterprises no later than the beginning of the first
interim or annual period beginning after June 15, 2003. The adoption of the
provisions of FIN 46 by the Company has not and will not have a material impact
on the Company's financial condition or results of operations.
On April 30, 2003 the Financial Accounting Standards Board (FASB) issued
Statement 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 Board 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. 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. This Statement is
effective for contracts entered into or modified after June 30, 2003, except as
stated below and for hedging relationships designated after June 30, 2003. The
guidance should be applied prospectively. The provisions of this Statement that
relate to Statement 133 Implementation Issues that have been effective for
fiscal quarters that began prior to June 15, 2003, should continue to be applied
in accordance with their respective effective dates. In addition, certain
provisions relating to forward purchases or sales of when-issued securities or
other securities that do not yet exist, should be applied to existing contracts
as well as new contracts entered into after June 30, 2003. The Company is
presently evaluating this new standard but does not expect the adoption of SFAS
No. 149 to have a material effect on the Company's financial condition or
results of operations.
21
NEW ACCOUNTING PRONOUNCEMENTS (continued)
On May 15, 2003 the Financial Accounting Standards Board (FASB) issued Statement
No. 150, Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity. The Statement improves the accounting for certain
financial instruments that, under previous guidance, issuers could account for
as equity. The new Statement requires that those instruments be classified as
liabilities in statements of financial position. Statement 150 affects three
types of freestanding financial instruments: (1) mandatorily redeemable shares,
which the issuing company is obligated to buy back in exchange for cash or other
assets; (2) instruments that do or may require the issuer to buy back some of
its shares in exchange for cash or other assets, including put options and
forward purchase contracts; and (3) obligations that can be settled with shares,
the monetary value of which is fixed, tied solely or predominantly to a variable
such as a market index, or varies inversely with the value of the issuer's
shares. Statement 150 does not apply to features embedded in a financial
instrument that is not a derivative in its entirety. Most of the guidance in
Statement 150 is effective for all financial instruments entered into or
modified after May 31, 2003 and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. The Company does not expect
Statement 150 to have a material effect on the Company's consolidated financial
position, results of operations or cash flows.
22
TF FINANCIAL CORPORATION AND SUBSIDIARIES
PART II
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
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) Exhibits
31. Certification pursuant to 18 U.S.C. ss. 1350, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
32. Certification pursuant to 18 U.S.C. ss. 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
On July 24, 2003 the Company filed a Form 8-K wherein the Company
included the press release announcing the Company's earnings for the
second quarter of 2003.
23
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.
TF FINANCIAL CORPORATION
/s/ Kent C. Lufkin
------------------
Date: August 13, 2003 Kent C. Lufkin
--------------- President and CEO
(Principal Executive Officer)
/s/ Dennis R. Stewart
---------------------
Date: August 13, 2003 Dennis R. Stewart
--------------- Executive Vice President and
Chief Financial Officer
(Principal Financial &
Accounting Officer)
24