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 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 0-24168
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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 of (I.R.S. employer identification no.)
incorporation or organization)
3 Penns Trail, Newtown, Pennsylvania 18940
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 215-579-4000
-----------------------------
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: November 7, 2003
----------------
Class Outstanding
--------------------------- ----------------
$.10 par value common stock 2,809,364 shares
TF FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 1O-Q
FOR THE QUARTER ENDED SEPTEMBER 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 21
Item 4. Controls and Procedures 21
PART II- OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 2. Changes in Securities and Use of Proceeds 24
Item 3. Defaults Upon Senior Securities 24
Item 4. Other Information 24
Item 5. Exhibits and Reports on Form 8-K 24
SIGNATURES 25
EXHIBITS
31. Certifications pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 26
32. Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 28
TF FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(in thousands)
Unaudited Audited
September 30, December 31,
2003 2002
---- ----
Assets
Cash and cash equivalents $ 6,106 $100,580
Certificates of deposit in other financial institutions 229 220
Investment securities available for sale - at fair value 11,416 27,243
Investment securities held to maturity (fair value of $10,935 and $15,187,
respectively) 10,408 14,563
Mortgage-backed securities available for sale - at fair value 102,362 115,243
Mortgage-backed securities held to maturity (fair value of $29,469 and
$57,346, respectively) 28,110 54,592
Loans receivable, net 400,766 370,092
Federal Home Loan Bank stock - at cost 11,260 11,424
Accrued interest receivable 2,467 3,576
Core deposit intangible, net of accumulated amortization of $2,416 and
$2,271, respectively 408 553
Goodwill 4,324 4,324
Premises and equipment, net 6,346 6,742
Other assets 20,480 11,880
-------- --------
Total assets $604,682 $721,032
======== ========
Liabilities and stockholders' equity
Liabilities
Deposits $454,748 $442,558
Advances from the Federal Home Loan Bank 87,100 207,359
Advances from borrowers for taxes and insurance 1,122 1,330
Accrued interest payable 2,518 2,897
Other liabilities 5,020 4,048
-------- --------
Total liabilities 550,508 658,192
-------- --------
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; 2,579,272 and 2,482,586 shares outstanding
at September 30, 2003 and December 31, 2002, net of treasury
shares of 2,485,896 and 2,567,268, respectively. 529 529
Retained earnings 51,497 59,978
Additional paid-in capital 51,384 51,647
Unearned ESOP shares (2,249) (2,401)
Treasury stock - at cost (47,262) (48,809)
Accumulated other comprehensive income 275 1,896
-------- --------
Total stockholders' equity 54,174 62,840
-------- --------
Total liabilities and stockholders' equity $604,682 $721,032
======== ========
3
TF FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share data)
For Three Months For Nine Months
Ended September 30, Ended September 30,
-------------------- --------------------
2003 2002 2003 2002
-------- -------- -------- --------
Interest income
Loans $ 5,660 $ 6,238 $ 17,336 $ 19,398
Mortgage-backed securities 1,621 2,872 5,318 9,120
Investment securities 505 608 1,531 1,760
Interest bearing deposits and other 49 320 463 800
-------- -------- -------- --------
Total interest income 7,835 10,038 24,648 31,078
-------- -------- -------- --------
Interest expense
Deposits 1,638 2,565 5,506 8,102
Advances from the Federal Home Loan Bank and other borrowings 2,078 3,059 7,558 9,167
-------- -------- -------- --------
Total interest expense 3,716 5,624 13,064 17,269
-------- -------- -------- --------
Net interest income 4,119 4,414 11,584 13,809
Provision for loan losses 90 150 270 838
-------- -------- -------- --------
Net interest income after provision for loan losses 4,029 4,264 11,314 12,971
-------- -------- -------- --------
Non-interest income
Service fees, charges and other operating income 435 433 1,320 1,179
Bank-owned life insurance 154 130 416 390
Gain (loss) on sale of investment and mortgage-backed (377) 419 208 419
securities available for sale
Gain on sale of real estate 110 - 110 -
-------- -------- -------- --------
Total non-interest income 322 982 2,054 1,988
-------- -------- -------- --------
Non-interest expense
Compensation and benefits 1,996 1,945 6,056 5,790
Occupancy and equipment 675 570 1,905 1,724
Federal deposit insurance premium 18 18 55 56
Professional fees 110 119 428 304
Amortization of core deposit intangible 49 58 145 174
Advertising 138 110 413 330
Debt prepayment fee 13,765 - 13,765 -
Other operating 727 613 2,049 1,781
-------- -------- -------- --------
Total non-interest expense 17,478 3,433 24,816 10,159
-------- -------- -------- --------
Income (loss) before income taxes (13,127) 1,813 (11,448) 4,800
Income tax expense (benefit) (4,562) 438 (4,098) 1,145
-------- -------- -------- --------
Net income (loss) $ (8,565) $ 1,375 $ (7,350) $ 3,655
======== ======== ======== ========
Basic earnings per share $ (3.33) $ 0.55 $ (2.91) $ 1.48
Diluted earnings per share $ (3.33) $ 0.52 $ (2.91) $ 1.38
See notes to consolidated financial statements
4
TF FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the nine months ended
September 30,
2003 2002
--------- ---------
Cash flows from operating activities
Net income (loss) $ (7,350) $ 3,655
Adjustments to reconcile net income to net cash provided by operating activities:
Mortgage loan servicing rights 11 10
Deferred loan origination fees (174) (198)
Premiums and discounts on investment securities, net 150 93
Premiums and discounts on mortgage-backed securities and loans, net 1,642 417
Amortization of core deposit intangible 145 174
Provision for loan losses 282 838
Depreciation of premises and equipment 809 760
Recognition of ESOP and MSBP expenses 427 204
Gain on sale of investment and mortgage-backed securities available for sale (208) (419)
Gain on sale of real estate (123) (60)
Increase in value of bank-owned life insurance (416) (390)
(Increase) decrease in:
Accrued interest receivable 1,109 219
Other assets (5,012) 715
Increase (decrease) in:
Accrued interest payable (379) 114
Other liabilities 1,807 (1,188)
--------- ---------
Net cash provided (used) by operating activities (7,280) 4,944
--------- ---------
Cash flows from investing activities
Loan originations (131,604) (48,234)
Purchases of loans (23,035) (27,188)
Loan principal payments 121,646 102,539
Proceeds from sale of investment securities available for sale 70,753 -
Proceeds from sale of mortgage-backed securities available for sale 24,440 17,427
Purchases of mortgage-backed securities available for sale (65,873) (67,997)
Purchase of mortgage-backed securities held to maturity - (1,139)
Purchase of investment securities available for sale (95,737) (6,453)
Purchase of investment securities held to maturity - (6,821)
Proceeds from maturities of investment securities held to maturity 4,105 2,060
Proceeds from maturities of investment securities available for sale 40,000 2,000
Principal repayments from mortgage-backed securities held to maturity 26,533 29,843
Principal repayments from mortgage-backed securities available for sale 51,451 22,762
Purchase of bank-owned life insurance (1,500) -
Purchase of certificates of deposit in other financial institutions (9) (5)
Purchases and redemptions of Federal Home Loan Bank stock, net 164 250
Proceeds from sales of real estate 473 275
Purchase of real estate held for investment (5) (765)
Purchase of premises and equipment (597) (158)
--------- ---------
Net cash provided by (used in) investing activities 21,205 18,396
--------- ---------
See notes to consolidated financial statements
5
TF FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(in thousands)
For the nine months ended
September 30,
2003 2002
--------- ---------
Cash flows from financing activities
Net increase in deposits 12,190 16,070
Net decrease in advances from Federal Home Loan Bank (120,259) (5,000)
Net decrease in advances from borrowers for taxes and insurance (208) (344)
Exercise of stock options 1,009 249
Purchase of treasury stock, net - (376)
Common stock cash dividend (1,131) (1,110)
--------- ---------
Net cash provided by (used in) financing activities (108,399) 9,489
--------- ---------
Net (decrease) increase in cash and cash equivalents (94,474) 32,829
Cash and cash equivalents at beginning of period 100,580 69,139
--------- ---------
Cash and cash equivalents at end of period $ 6,106 $ 101,968
========= =========
Supplemental disclosure of cash flow information
Cash paid for
Interest on deposits and advances $ 13,443 $ 17,155
Income taxes $ 250 $ 1,600
Non-cash transactions
Transfers from loans to real estate acquired through foreclosure $ 1,857 $ 269
See notes to consolidated financial statements
6
TF FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - PRINCIPLES OF CONSOLIDATION
The consolidated financial statements as of September 30, 2003
(unaudited) and December 31, 2002 and for the nine-month periods ended
September 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 2 - 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 September 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 3 - 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 4 - 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 (loss) for the three-month periods
ended September 30, 2003 and 2002 was $(9,578,000) and $1,682,000, net
of applicable income tax of $(5,084,000) and $596,000, respectively.
Total comprehensive income (loss) for the nine-month periods ended
September 30, 2003 and 2002 was $(8,971,000) and $5,416,000, net of
applicable income tax of $(4,933,000) and $2,052,000, respectively.
7
TF FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - EARNINGS PER SHARE
Three months ended September 30, 2003
-------------------------------------
Weighted
(000's) Average
Income Shares Per share
(numerator) (denominator) Amount
----------- ------------- ------
Basic earnings per share
Income available to common stockholders $ (8,565) 2,571,947 $ (3.33)
Effect of dilutive securities
Stock options - - -
-------- --------- --------
Diluted earnings per share
Income available to common stockholders plus
effect of dilutive securities $ (8,565) 2,571,947 $ (3.33)
======== ========= ========
Nine months ended September 30, 2003
------------------------------------
Weighted
(000's) Average
Income Shares Per share
(numerator) (denominator) Amount
----------- ------------- ------
Basic earnings per share
Income available to common stockholders $ (7,350) 2,525,970 $ (2.91)
Effect of dilutive securities
Stock options - - -
-------- --------- --------
Diluted earnings per share
Income available to common stockholders plus
effect of dilutive securities $ (7,350) 2,525,970 $ (2.91)
======== ========= ========
There were no options included in the calculation of diluted earnings per share
for the quarter and year to date periods ended September 30, 2003 because such
securities would be anti-dilutive.
8
TF FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - EARNINGS PER SHARE (continued)
Three months ended September 30, 2002
-------------------------------------
Weighted
(000's) Average
Income Shares Per share
(numerator) (denominator) Amount
----------- ------------- ------
Basic earnings per share
Income available to common stockholders $ 1,375 2,478,252 $ 0.55
Effect of dilutive securities
Stock options - 170,152 (0.03)
-------- --------- --------
Diluted earnings per share
Income available to common stockholders plus
effect of dilutive securities $ 1,375 2,648,404 $ 0.52
======== ========= ========
There were options to purchase 15,000 shares of common stock at $28.00
per share which were outstanding during the three-month period ended
September 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.
Nine months ended September 30, 2002
------------------------------------
Weighted
(000's) Average
Income Shares Per share
(numerator) (denominator) Amount
----------- ------------- ------
Basic earnings per share
Income available to common stockholders $ 3,655) 2,470,501 $ 1.48
Effect of dilutive securities
Stock options - 1183,269 (0.10)
-------- --------- --------
Diluted earnings per share
Income available to common stockholders plus
effect of dilutive securities $ 3,655 2,653,770 $ 1.38
======== ========= ========
There were options to purchase 20,000 shares of common stock at $28.00
per share which were outstanding during the nine-month period ended
September 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 6- 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 September 30, 2003 2002
--------------------------------- ---- ----
Net income
As reported $(8,565) $ 1,375
Deduct: stock-based compensation expense
determined using the fair value method, net of
related tax effects 17 14
------- ------
Pro forma $(8,582) $1,361
======= ======
Basic earnings per share
As reported $(3.33) $ 0.55
Pro forma $(3.34) $ 0.55
Diluted earnings per share
As reported $(3.33) $ 0.52
Pro forma $(3.34) $ 0.52
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 $140,000 and $53,000 for the
three-month periods ended September 30, 2003 and 2002, respectively.
10
TF FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6- STOCK BASED COMPENSATION (continued)
Nine months ended September 30, 2003 2002
-------------------------------- ---- ----
Net income
As reported $(7,350) $3,655
Deduct: stock-based compensation expense
determined using the fair value method, net of
related tax effects 39 45
------- -------
Pro forma $(7,389) $ 3,610
======= =======
Basic earnings per share
As reported $(2.91) $ 1.48
Pro forma $(2.93) $ 1.46
Diluted earnings per share
As reported $(2.91) $ 1.38
Pro forma $(2.93) $ 1.37
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 $368,000 and $147,000 for the
nine-month periods ended September 30, 2003 and 2002, respectively.
NOTE 7- 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 September 30, 2003 and December 31, 2002 were
$604.7 million and $721.0 million, respectively, a decrease of $116.3 million,
or 16.1%, during the nine-month period. This decrease in total assets is a
direct result of a debt refinancing transaction, which occurred during the third
quarter of 2003. At that time, the Company completed a series of transactions
that resulted in the repayment and refinancing of $187.4 million of Federal Home
Loan Bank borrowings which carried a weighted average interest rate of 5.46%.
$80 million of these borrowings were refinanced at 3.23%, the remaining $107.4
million was repaid. A portion of the funds used to repay these borrowings came
from the sale of $79.7 million of investment securities and mortgage-backed
securities, which had been yielding a 1.93%. Over the nine-month period, cash
and cash equivalents were reduced by $94.5 million due to the purchase of higher
yielding investment and mortgage-backed securities and the use of these funds to
originate loans. In addition, $41.8 million of cash and cash equivalents were
used in the Federal Home Loan Bank debt refinancing transaction described above.
Investment securities available for sale decreased by $15.8 million, the net
effect of the sales, calls and maturities of $110.5 million and a decline of
$0.1 million in the market value which were offset by the purchase of $95.7
million of such securities. Investment securities held to maturity
12
decreased by $4.2 million due to calls and maturities of such securities.
Mortgage-backed securities available for sale decreased by $12.9 million
resulting from sales of $24.0 million, principal repayments of $51.5 million, a
decline of $2.0 million in unrealized gains and $1.3 million of premium
amortization, which were off-set by purchases of $65.9 million. Mortgage-backed
securities held to maturity decreased by $26.5 million due to the high rate of
prepayments of the mortgages underlying these pass-through securities. The
Company's loan receivable portfolio at September 30, 2003 was $400.7 million, a
$30.7 million or 8.3% increase since December 31, 2002, and a $41.5 million or
11.6% increase during the third quarter. During the first nine months of 2003,
there were $121.6 million of prepayments of existing mortgages in the loans
receivable portfolio; however, offsetting this reduction was the origination of
$131.6 million in predominately consumer and single-family residential mortgage
loans, and the purchase of $23.0 million in newly originated, single-family
residential mortgage loans. Other assets increased by $8.6 million during the
nine-month period as a result of a $4.9 million federal income tax receivable
resulting from a net operating loss carryback, additions to foreclosed property
of $1.8 million, and additions to bank-owned life insurance of $1.5 million.
Total liabilities decreased by $107.7 million. Deposit growth during the first
nine months of 2003 was $12.1 million. Non-interest bearing demand deposits grew
by $6.1 million while savings, money market, and interest-bearing checking
accounts increased by a combined $9.3 million. Certificates of deposit decreased
by $3.2 million. Advances from the Federal Home Loan Bank decreased by $120.3
million as a consequence of the repayment of $187.4 million and the maturity of
$20 million of such advances. Offsetting these reductions were new borrowings of
$87.1 million.
Total consolidated stockholders' equity of the Company was $54.2 million or
8.96% of total assets at September 30, 2003. During the first three-quarters of
2003 the Company did not repurchase any shares of its common stock and issued
80,372 shares pursuant to the exercise of stock options. As of September 30,
2003, there were approximately 114,000 shares available for repurchase under the
previously announced share repurchase plan.
Asset Quality
During the nine-month period ended September 30, 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 September 30, 2003. Management of the Company believes
that there has not been any significant deterioration in its asset quality
during such period.
The following table sets forth information regarding the Company's asset quality
(dollars in thousands):
September 30, December 31, September 30,
------------- ------------ -------------
2003 2002 2002
---- ---- ----
Non-performing loans $2,905 $3,822 $3,275
Ratio of non-performing loans to gross loans 0.72% 1.03% 0.93%
Ratio of non-performing loans to total assets 0.48% 0.53% 0.45%
Foreclosed property $1,763 $ 84 $ 84
Foreclosed property to total assets 0.29% 0.01% 0.01%
Ratio of total non-performing assets to total assets 0.77% 0.54% 0.46%
13
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 270 838
Less: charge-off's (recoveries), net 345 850
------ ------
Ending balance, September 30, $1,972 $1,960
====== ======
14
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
Net Income. The Company recorded a net loss of $8,565,000, or $3.33 per diluted
share, for the three months ended September 30, 2003 as compared to net income
of $1,375,000, or $0.52 per diluted share, for the three months ended September
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 September 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)....................... $381,005 $5,660 5.89% $348,675 $ 6,238 7.10%
Mortgage-backed securities................. 155,260 1,621 4.14% 205,729 2,872 5.54%
Investment securities...................... 85,847 505 2.33% 54,051 608 4.46%
Other interest-earning assets(2)........... 21,685 49 0.90% 80,811 320 1.57%
-------- ------ -------- -------
Total interest-earning assets............ 643,797 7,835 4.83% 689,266 10,038 5.78%
------ -------
Non interest-earning assets.................... 33,670 34,176
-------- --------
Total assets............................. $677,467 $723,442
======== ========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Deposits................................... $452,145 1,638 1.44% $436,272 2,565 2.33%
Advances from the FHLB and
other borrowings......................... 158,357 2,078 5.21% 218,989 3,059 5.54%
-------- ------ -------- -------
Total interest-bearing liabilities....... 610,502 3,716 2.42% 655,261 5,624 3.41%
------ -------
Non interest-bearing liabilities............... 3,661 6,908
-------- --------
Total liabilities.......................... 614,163 662,169
Stockholders' equity........................... 63,304 61,273
-------- --------
Total liabilities and stockholders' equity.... $677,467 $723,442
======== ========
Net interest income............................ $4,119 $ 4,414
====== =======
Interest rate spread (3)....................... 2.41% 2.37%
Net yield on interest-earning assets (4)....... 2.54% 2.54%
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.
15
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
September 30,
2003 vs. 2002
--------------------------------
Increase (decrease)
due to
--------------------------------
Volume Rate Net
--------------------------------
Interest income:
Loans receivable, net $ 2,763 $(3,341) $ (578)
Mortgage-backed securities (617) (634) (1,251)
Investment securities 1,214 (1,317) (103)
Other interest-earning assets (171) (100) (271)
--------------------------------
Total interest-earning assets 3,189 (5,392) (2,203)
================================
Interest expense:
Deposits 596 (1,523) (927)
Advances from the FHLB and other borrowings (805) (176) (981)
--------------------------------
Total interest-bearing liabilities (209) (1,699) (1,908)
================================
Net change in net interest income $ 3,398 $(3,693) $ (295)
================================
Total Interest Income. Total interest income decreased by $2.2 million or 21.9%
to $7.8 million for the three months ended September 30, 2003 compared with the
third 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
was substantially lower during the 2003 period.
Total Interest Expense. Total interest expense decreased by $1.9 million to $3.7
million for the three-month period ended September 30, 2003 compared with the
third quarter of 2002. 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.
The repayment and refinancing of the Federal Home Loan Bank Advances toward the
end of the third quarter of 2003 also contributed to the overall reduction of
interest expense.
16
Non-interest income. Total non-interest income was $322,000 for the three-month
period ended September 30, 2003 compared with $982,000 for the same period in
2002. The decrease is primarily due to $377,000 in net losses on sales of
mortgage-backed securities and investment securities available for sale during
the third quarter of 2003 while, conversely, there were gains of $419,000 on
such gains during the same period in 2002. In addition, the Company recorded a
gain of $110,000 during the third quarter of 2003 on the sale of real estate.
The income from the Company's bank-owned life insurance was $27,000 higher for
the third quarter 2003 as compared with the same quarter in 2002 because of
additional purchases of bank-owned life insurance at the end of the second
quarter of 2003.
Non-interest expense. Total non-interest expense increased by $14.0 million to
$17.5 million for the three months ended September 30, 2003 compared to the same
period in 2002. The increase in non-interest expense was associated with the a
debt prepayment fee of $13.8 million paid as a result the repayment of Federal
Home Loan Bank borrowings. Also, compensation and benefit expenses were higher
by $51,000 due to amounts paid to the retiring president of the Company as well
as increased costs associated with the Company's employee stock ownership plan
which is impacted by the higher share price during the third quarter of 2003
compared with 2002. Occupancy and equipment expense was higher during the third
quarter of 2003 compared to 2002 by an additional $62,000 due to revisions in
the useful lives of certain depreciable and amortizable assets.
17
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
Net Income. The Company recorded a net loss of $7,350,000, or $2.91 per diluted
share, for the nine months ended September 30, 2003 as compared to net income of
$3,655,000, or $1.38 per diluted share, for the nine months ended September 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.
Nine months ended September 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)....................... $370,543 $17,336 6.26% $360,215 $19,398 7.20%
Mortgage-backed securities................. 163,697 5,318 4.34% 206,506 9,120 5.90%
Investment securities...................... 73,131 1,531 2.80% 50,650 1,760 4.65%
Other interest-earning assets(2)........... 59,882 463 1.03% 66,499 800 1.61%
-------- ------- -------- -------
Total interest-earning assets............ 667,253 24,648 4.94% 683,870 31,078 6.08%
------- -------
Non interest-earning assets.................... 34,789 34,890
-------- --------
Total assets............................. $702,042 $718,760
======== ========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Deposits................................... $447,049 5,506 1.65% $430,857 8,102 2.51%
Advances from the FHLB and
other borrowings......................... 186,377 7,558 5.42% 221,223 9,167 5.54%
-------- ------- -------- -------
Total interest-bearing liabilities....... 633,426 13,064 2.76% 652,080 17,269 3.54%
------- -------
Non interest-bearing liabilities............... 5,439 7,340
-------- --------
Total liabilities.......................... 638,865 659,420
Stockholders' equity........................... 63,177 59,340
-------- --------
Total liabilities and stockholders' equity.... $702,042 $718,760
======== ========
Net interest income............................ $11,584 $13,809
======= =======
Interest rate spread (3)....................... 2.18% 2.54%
Net yield on interest-earning assets (4)....... 2.32% 2.70%
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.
18
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.
Nine months ended
September 30,
2003 vs. 2002
-------------------------------
Increase (decrease)
Due to
-------------------------------
Volume Rate Net
-------------------------------
Interest income:
Loans receivable, net $ 851 $(2,913) $(2,062)
Mortgage-backed securities (1,671) (2,131) (3,802)
Investment securities 866 (1,095) (229)
Other interest-earning assets (73) (264) (337)
-------------------------------
Total interest-earning assets (27) (6,403) (6,430)
===============================
Interest expense:
Deposits 479 (3,075) (2,596)
Advances from the FHLB and other borrowings (1,471) (192) (1,609)
-------------------------------
Total interest-bearing liabilities (938) (3,267) (4,205)
===============================
Net change in net interest income $ 914 $(3,136) $(2,225)
===============================
Total Interest Income. Total interest income decreased by $6.4 million or 20.7%
to $24.6 million for the nine months ended September 30, 2003 compared with the
corresponding period 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 was substantially lower during the 2003 period.
Total Interest Expense. Total interest expense decreased by $4.2 million to
$13.1 million for the nine-month period ended September 30, 2003. The interest
expense decrease reflects 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.
19
Non-interest income. Total non-interest income was $2,054,000 for the nine-month
period ended September 30, 2003 compared with $1,988,000 for the same period in
2002. Net gains of $208,000 on the sale of investments and mortgage-backed
securities available for sale were realized during the nine-month period of 2003
while $419,000 of such gains were realized during the 2002 period. Also, the
Company reported a gain of $110,000 during this period of 2003 on the sale of
real estate. Service fees, charges and other operating income were $131,000
higher during the 2003 period mainly due to a $42,000 increase in commercial
loan prepayment fees and an $89,000 increase in overdraft fees. Income from the
Company's bank-owned life insurance was $26,000 higher for the nine-month period
of 2003 as compared with the same time frame in 2002 because of additional
purchases of bank-owned life insurance at the end of the second quarter of 2003.
Non-interest expense. Total non-interest expense increased by $14.7 million to
$24.8 million for the nine months ended September 30, 2003 compared to the same
period in 2002. The increase in non-interest expense was mainly associated with
the debt prepayment fee of $13.8 million paid as a result the repayment of
Federal Home Loan Bank borrowings. Compensation and benefits expense was
$266,000 higher during the 2003 period due, in part, 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
reflect a $221,000 increase related to the cost of the Company's employee stock
ownership plan where the cost of shares released is impacted by the higher share
price during the first nine months of 2003 compared with 2002. Occupancy and
equipment expense reflect an additional $62,000 caused by revisions in the
useful lives of certain depreciable and amortizable assets. Also, maintenance
expenses were unusually high during the first quarter of 2003 due to inclement
weather. In addition, the Company's loan origination expenses were $74,000
higher during the first nine months of 2003, corresponding to an increase in
loans originated of $131.6 million compared with $48.2 million during the same
period of 2002.
20
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 nine-month period ended
September 30, 2003 in the ability of the Company and its subsidiaries to fund
their operations.
At September 30, 2003, the Company had commitments outstanding under letters of
credit of $1 million, commitments to originate loans of $28.1 million, and
commitments to fund undisbursed balances of closed loans and unused lines of
credit of $40.6 million. There has been no material change during the nine
months ended September 30, 2003 in any of the Company's other contractual
obligations or commitments to make future payments.
Capital Requirements
The Bank was in compliance with all of its capital requirements as of September
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 nine months ended September 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.
21
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 September 30, 2003,
except as stated below and for hedging relationships designated after September
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 September 30,
2003. The Company does not expect the adoption of SFAS No. 149 to have a
material effect on the Company's financial condition or results of operations.
22
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.
In October 2003, the AICPA issued SOP 03-3, Accounting for Loans or Certain Debt
Securities Acquired in a Transfer. This statement addresses accounting for
differences between contractual cash flows and cash flows expected to be
collected from an investor's initial investment in loans or debt securities
("loans") acquired in a transfer as a result of credit quality deterioration.
The statement requires recognition of the excess of all cash flows expected at
acquisition over the investor's initial investment in the loan as interest
income on a level-yield basis over the life of the loan as the accretable yield.
The loan's contractual required payments receivable in excess of the amount of
its cash flows expected at acquisition (nonaccretable difference) should not be
recognized as an adjustment to yield, a loss accrual or a valuation allowance
for credit risk. This statement is effective for loans acquired in fiscal years
beginning after December 31, 2004. Early adoption is permitted. Management is
currently evaluating the provisions of SOP 03-3.
23
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 October 28, 2003 the Company filed a Form 8-K wherein the
Company included the press release announcing the Company's
earnings for the third quarter of 2003.
On September 12, 2003, the Company filed a Form 8-K wherein
the company included a Press Release announcing the
refinancing of certain debt of the Company's wholly-owned
subsidiary, Third Federal Savings Bank.
24
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
Date: November 13, 2003 /s/ Kent C. Lufkin
-----------------------------------------
Kent C. Lufkin
President and CEO
(Principal Executive Officer)
Date: November 13, 2003 /s/ Dennis R. Stewart
-----------------------------------------
Dennis R. Stewart
Executive Vice President and
Chief Financial Officer
(Principal Financial & Accounting Officer)
25