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, 2004
------------------------------------
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 000-24168
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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
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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: November 8, 2004
Class Outstanding
---------------------------- ----------------
$.10 par value common stock 2,944,009 shares
TF FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 1O-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2004
INDEX
Page
Number
------
PART I - CONSOLIDATED FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements 3
Item 2. Management's Discussion and Analysis of
Financial Position and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 21
Item 4. Controls and Procedures 21
PART II- OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds 23
Item 3. Defaults Upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits 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
2
TF FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(in thousands)
Unaudited Audited
September 30, December 31,
2004 2003
---- ----
Assets
Cash and cash equivalents $ 6,650 $ 8,241
Certificates of deposit in other financial institutions 38 155
Investment securities available for sale - at fair value 17,630 14,433
Investment securities held to maturity
(fair value of $7,277 and $10,815, respectively) 7,045 10,389
Mortgage-backed securities available for sale - at fair value 109,462 106,774
Mortgage-backed securities held to maturity
(fair value of $17,179 and $24,774, respectively) 16,427 23,630
Loans receivable, net 435,174 404,649
Federal Home Loan Bank stock - at cost 7,573 6,825
Accrued interest receivable 2,469 2,671
Core deposit intangible, net of accumulated amortization
of $2,577 and $2,456, respectively 247 368
Goodwill, net of accumulated amortization of $2,328 4,324 4,324
Premises and equipment, net 5,937 6,268
Other assets 16,481 18,025
-------- --------
Total assets $629,457 $606,752
======== ========
Liabilities and stockholders' equity
Liabilities
Deposits $457,892 $459,343
Advances from the Federal Home Loan Bank 108,078 86,853
Advances from borrowers for taxes and insurance 1,179 1,738
Accrued interest payable 1,961 1,908
Other liabilities 2,172 1,430
-------- --------
Total liabilities 571,282 551,272
-------- --------
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; 2,701,901 and 2,596,037 shares
outstanding at September 30, 2004 and December 31, 2003, net of
treasury shares of 2,381,768 and 2,474,366, respectively. 529 529
Retained earnings 56,301 52,626
Additional paid-in capital 50,394 51,982
Unearned ESOP shares (2,063) (2,196)
Treasury stock - at cost (46,644) (47,043)
Accumulated other comprehensive loss (342) (418)
-------- --------
Total stockholders' equity 58,175 55,480
-------- --------
Total liabilities and stockholders' equity $629,457 $606,752
======== ========
See notes to consolidated financial statements
3
TF FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
For Three Months For Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
2004 2003 2004 2003
---- ---- ---- ----
Interest income
Loans $6,095 $ 5,660 $18,045 $17,336
Mortgage-backed securities 1,490 1,621 4,478 5,318
Investment securities 279 505 839 1,531
Interest bearing deposits and other 4 49 11 463
------ ------- ------- -------
Total interest income 7,868 7,835 23,373 24,648
------ ------- ------- -------
Interest expense
Deposits 1,456 1,638 4,440 5,506
Advances from the Federal Home Loan Bank 758 2,078 2,077 7,558
------ ------- ------- -------
Total interest expense 2,214 3,716 6,517 13,064
------ ------- ------- -------
Net interest income 5,654 4,119 16,856 11,584
Provision for loan losses 150 90 450 270
------ ------- ------- -------
Net interest income after provision for loan losses 5,504 4,029 16,406 11,314
------ ------- ------- -------
Non-interest income
Service fees, charges and other operating income 463 435 1,584 1,320
Bank-owned life insurance 132 154 401 416
Gain (loss) on sale of investment and mortgage-backed securities -- (377) -- 208
available for sale
Gain on sale of real estate -- 110 -- 110
------ ------- ------- -------
Total non-interest income 595 322 1,985 2,054
------ ------- ------- -------
Non-interest expense
Compensation and benefits 2,160 1,996 6,681 6,056
Occupancy and equipment 613 675 1,852 1,905
Federal deposit insurance premium 17 18 53 55
Professional fees 121 110 459 428
Amortization of core deposit intangible 41 49 121 145
Advertising 164 138 490 413
Debt prepayment fee -- 13,765 -- 13,765
Other operating 627 727 1,873 2,049
------ ------- ------- -------
Total non-interest expense 3,743 17,478 11,529 24,816
------ ------- ------- -------
Income (loss) before income taxes 2,356 (13,127) 6,862 (11,448)
Income tax expense (benefit) 642 (4,562) 1,883 (4,098)
------ ------- ------- -------
Net income (loss) $1,714 $(8,565) $ 4,979 $(7,350)
====== ======= ======= =======
Basic earnings (loss) per share $ 0.64 $ (3.33) $ 1.86 (2.91)
Diluted earnings (loss) per share $ 0.61 $ (3.33) $ 1.77 (2.91)
Dividends paid $ 0.17 $ 0.15 $ 0.49 $ 0.45
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,
-------------
2004 2003
---- ----
Cash flows from operating activities
Net income (loss) $ 4,979 $(7,350)
Adjustments to reconcile net income to net cash provided by operating activities:
Mortgage loan servicing rights -- 11
Deferred loan origination fees (10) (174)
Premiums and discounts on investment securities, net 54 150
Premiums and discounts on mortgage-backed securities and loans, net 565 1,642
Amortization of core deposit intangible 121 145
Provision for loan losses and provision for losses on real estate 450 270
Adjustments to the net realizable value of real estate owned 30 12
Depreciation of premises and equipment 725 809
Recognition of employee stock ownership plan expense 396 427
Gain on sale of investment and mortgage-backed securities available for sale -- (208)
Gain on sale of real estate (1) (123)
Increase in value of bank-owned life insurance (401) (416)
(Increase) decrease in:
Accrued interest receivable 202 1,109
Other assets 1,881 (5,012)
Increase (decrease) in:
Accrued interest payable 53 (379)
Other liabilities 704 1,807
------- ------
Net cash provided (used) by operating activities 9,748 (7,280)
------- ------
Cash flows from investing activities
Loan originations (108,130) (131,604)
Purchases of loans (3,922) (23,035)
Loan principal payments 80,997 121,646
Proceeds from sale of investment securities available for sale -- 70,753
Proceeds from sale of mortgage-backed securities available for sale -- 24,440
Purchases of mortgage-backed securities available for sale (27,701) (65,873)
Purchase of investment securities available for sale (3,040) (95,737)
Proceeds from maturities of investment securities held to maturity 3,295 4,105
Proceeds from maturities of investment securities available for sale -- 40,000
Principal repayments from mortgage-backed securities held to maturity 7,204 26,533
Principal repayments from mortgage-backed securities available for sale 24,489 51,451
Purchase of bank-owned insurance -- (1,500)
(Purchases) and maturities of certificates of deposit in other financial
institutions,net 117 (9)
(Purchases) and redemptions of Federal Home Loan Bank stock, net (748) 164
Proceeds from sales of real estate 32 473
Purchase of real estate held for investment 3 (5)
Purchase of premises and equipment (394) (597)
------- ------
Net cash provided by (used in) investing activities (27,798) 21,205
------- ------
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,
-------------
2004 2003
---- ----
Cash flows from financing activities
Net increase (decrease) in deposits (1,451) 12,190
Net increase (decrease) in advances from Federal Home Loan Bank 21,225 (120,259)
Net increase (decrease) in advances from borrowers for taxes and insurance (559) (208)
Exercise of stock options 2,802 1,009
Purchase of treasury stock, net (4,254) --
Common stock cash dividend (1,304) (1,131)
-------- ---------
Net cash provided by (used in) financing activities 16,459 (108,399)
-------- ---------
Net decrease in cash and cash equivalents (1,591) (94,474)
Cash and cash equivalents at beginning of period 8,241 100,580
-------- ---------
Cash and cash equivalents at end of period $ 6,650 $ 6,106
======== =========
Supplemental disclosure of cash flow information
Cash paid for
Interest on deposits and advances from FHLB $ 6,464 $ 13,443
Income taxes $ 0 $ 250
Non-cash transactions
Transfers from loans to real estate acquired through foreclosure $ 0 $ 1,857
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, 2004
(unaudited) and December 31, 2003 and for the nine-month periods ended
September 30, 2004 and 2003 (unaudited) include the accounts of TF
Financial Corporation (the "Company") and its wholly owned subsidiaries
Third Federal Savings Bank (the "Bank"), TF Investments Corporation and
Penns Trail Development 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, 2004 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, 2003.
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 position or
results of operations.
NOTE 4 - OTHER COMPREHENSIVE INCOME
The Company's other comprehensive income (loss) consists of net
unrealized gains (losses) on investment securities and mortgage-backed
securities available for sale. Total comprehensive income (loss) for
the three-month periods ended September 30, 2004 and 2003 was
$2,746,000 and $(9,578,000), net of applicable income tax expense
(benefit) of $1,173,000 and $(5,084,000), respectively. Total
comprehensive income (loss) for the nine-month periods ended September
30, 2004 and 2003 was $5,055,000 and $(8,971,000), net of applicable
income tax expense (benefit) of $1,921,000 and $(4,933,000),
respectively.
7
TF FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - EARNINGS PER SHARE
Three months ended September 30, 2004
-------------------------------------
Weighted
(000's) Average
Income Shares Per share
(numerator) (denominator) Amount
----------- ------------- ------
Basic earnings per share
Income available to common stockholders $ 1,714 2,692,211 $ 0.64
Effect of dilutive securities
Stock options - 108,516 (0.03)
------- --------- ------
Diluted earnings per share
Income available to common
stockholders plus effect of
dilutive securities $ 1,714 2,800,727 $ 0.61
======= ========= ======
Nine months ended September 30, 2004
------------------------------------
Weighted
(000's) Average
Income Shares Per share
(numerator) (denominator) Amount
----------- ------------- ------
Basic earnings per share
Income available to common stockholders $ 4,979 2,673,448 $ 1.86
Effect of dilutive securities
Stock options - 144,734 (0.09)
------- --------- ------
Diluted earnings per share
Income available to common
stockholders plus
effect of dilutive securities $ 4,979 2,818,182 $ 1.77
======= ========= ======
There were options to purchase 31,816 shares of common stock at a
price of $34.14 per share which were outstanding during the nine
months ended September 30, 2004 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 5 - EARNINGS PER SHARE (continued)
Three months ended September 30, 2003
-------------------------------------
Weighted
(000's) Average
Income Shares Per share
(numerator) (denominator) Amount
----------- ------------- ------
Basic earnings (loss) per share
Income (loss) available to
common stockholders $ (8,565) 2,571,947 $ (3.33)
Effect of dilutive securities
Stock options -- 216,749 --
-------- --------- -------
Diluted earnings (loss) per share
Income (loss) available to common
stockholders plus
effect of dilutive securities $ (8,565) 2,788,696 $ (3.33)
======== ========= =======
Nine months ended September 30, 2003
------------------------------------
Weighted
(000's) Average
Income Shares Per share
(numerator) (denominator) Amount
----------- ------------- ------
Basic earnings (loss) per share
Income (loss) available to
common stockholders $ (7,350) 2,525,970 $ (2.91)
Effect of dilutive securities
Stock options - 210,595 --
-------- --------- -------
Diluted earnings (loss) per share
Income (loss) available to
common stockholders plus
effect of dilutive securities (7,350) 2,736,565 $ (2.91)
======== ========= =======
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
nine months ended September 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.
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, 2004 2003
-------------------------------- ---- ----
Net income (loss)
As reported $1,714 $(8,565)
Deduct: stock-based compensation
expense determined using the fair
value method, net of related tax effects 25 17
------ -------
Pro forma $1,689 $(8,582)
====== =======
Basic earnings (loss) per share
As reported $0.64 $(3.33)
Pro forma $0.63 $(3.34)
Diluted earnings (loss) per share
As reported $0.61 $(3.33)
Pro forma $0.61 $(3.34)
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 $95,000 and $140,000 for the
three-month periods ended September 30, 2004 and 2003, respectively.
10
TF FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6- STOCK BASED COMPENSATION (continued)
Nine months ended September 30, 2004 2003
------------------------------- ---- ----
Net income (loss)
As reported $4,979 $(7,350)
Deduct: stock-based compensation expense
determined using the fair value method,
net of related tax effects 76 39
------ -------
Pro forma $4,903 $(7,389)
====== =======
Basic earnings (loss) per share
As reported $1.86 $(2.91)
Pro forma $1.84 $(2.93)
Diluted earnings (loss) per share
As reported $1.77 $(2.91)
Pro forma $1.76 $(2.93)
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 $322,000 and $368,000 for the nine-month periods ended
September 30, 2004 and 2003, respectively.
11
TF FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7- EMPLOYEE BENEFIT PLANS
Net periodic defined benefit pension expense included the following
components:
Three months ended September 30, 2004 2003
-------------------------------- ---- ----
Service cost $ 57,569 $ 47,686
Interest cost 47,413 46,256
Expected return on plan assets (52,367) (54,317)
Amortization of transition (asset)/obligation 1,002 1,337
Amortization of prior service costs 15,634 15,634
Amortization of unrecognized net actual loss 6,014 3,273
-------- --------
Net periodic benefit cost $ 75,265 $ 59,869
======== ========
Nine months ended September 30, 2004 2003
------------------------------- ---- ----
Service cost $172,706 $143,057
Interest cost 142,240 138,770
Expected return on plan assets (157,103) (162,953)
Amortization of transition (asset)/obligation 3,005 4,011
Amortization of prior service costs 46,902 46,902
Amortization of unrecognized net actual loss 18,042 9,821
-------- --------
Net periodic benefit cost $225,792 $179,608
======== ========
As of September 30, 2004, $30,000 of contributions has been made to the
pension plan. Management does not anticipate any additional
contributions to the pension plan in 2004. The impact of the Pension
Funding Equity Act which was enacted in April 2004 is currently being
evaluated.
NOTE 8- RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the
current period presentation.
12
TF FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL POSITION 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 Position
The Company's total assets at September 30, 2004 and December 31, 2003 were
$629.5 million and $606.8 million, respectively, an increase of $22.7 million,
or 3.7%, during the nine-month period. Cash and cash equivalents decreased by
$1.6 million. Investment securities available for sale increased by $3.2
million, the net effect of the purchases of $3.0 million and a $0.2 million
increase in the market value of these securities. Investment securities held to
maturity decreased by $3.3 million due to the maturities of such securities.
Mortgage-backed securities available for sale increased by $2.7 million as $27.7
million in security purchases was off-set by $24.5 million of principal payments
and premium amortization of $0.5 million. Mortgage-backed securities held to
maturity decreased by $7.2 million as a result of principal repayments. Loans
receivable increased by $30.5 million for the nine-month period. Consumer and
single-family residential mortgage loans of $66.7 million and commercial loans
of $41.4 million comprised loan originations during the first nine months of
2004. Additionally, $3.7 million of newly originated, single-family residential
mortgage loans were purchased during the nine-month period. Offsetting these
increases to loans receivable were $81.0 million of principal repayments.
13
Total liabilities increased by $20.0 million. Deposit growth during the first
nine months of 2004 was $1.5 million. Non-interest bearing demand deposits
increased by $5.7 million while savings, money market, and interest-bearing
checking accounts decreased by a combined $6.6 million. Certificates of deposit
decreased by $0.6 million. Advances from the Federal Home Loan Bank increased by
$21.2 million due to a $25.0 million increase in long-term fixed rate advances
and $5.6 million of short-term advances, less scheduled amortization payments of
$9.4 million.
Total consolidated stockholders' equity of the Company was $58.2 million or
9.24% of total assets at September 30, 2004. During the first three quarters of
2004 the Company repurchased 149,608 shares of its common stock and issued
242,206 shares pursuant to the exercise of stock options. As of September 30,
2004, there were 101,123 shares available for repurchase under the previously
announced share repurchase plan.
Asset Quality
During the first nine months of 2004, the Company's provision for loan losses
was $450,000 compared to $270,000 during the same period in 2003. The resulting
increase in the allowance for loan losses is consistent with the corresponding
increase in balance of loans receivable. As of September 30, 2004, the Company
owned one parcel of foreclosed real estate. This parcel has been recorded as
real estate owned at the lower of the recorded investment in the loan or
estimated fair value in the amount of $0.8 million and is included in other
assets in the statement of financial position at September 30, 2004. 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,
------------- ------------ -------------
2004 2003 2003
---- ---- ----
Non-performing loans $1,813 $2,282 $2,905
Ratio of non-performing loans to gross loans 0.41% 0.56% 0.72%
Ratio of non-performing loans to total assets 0.29% 0.38% 0.48%
Foreclosed property $ 807 $ 868 $1,763
Foreclosed property to total assets 0.13% 0.14% 0.29%
Ratio of total non-performing assets to total assets 0.42% 0.52% 0.77%
Management maintains an allowance for loan 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 portfolios will not
exceed the allowance. The following table sets forth the activity in the
allowance for loan losses during the periods indicated (in thousands):
2004 2003
---- ----
Beginning balance, January 1, $2,111 $2,047
Provision 450 270
Less: charge-off's (recoveries), net 376 345
------ ------
Ending balance, September 30, $2,185 $1,972
====== ======
14
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
Net Income. The Company recorded net income of $1,714,000, or $0.61 per diluted
share, for the three months ended September 30, 2004 as compared to a net loss
of $8,565,000, or $3.33 per diluted share, for the three months ended September
30, 2003.
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,
--------------------------------
2004 2003
-------------------------------- -------------------------------
Average Average Average Average
Balance Interest Yld/Cost Balance Interest Yld/Cost
------- -------- -------- ------- -------- --------
(dollars in thousands)
Assets:
Interest-earning assets:
Loans receivable (1)....................... $426,686 $6,095 5.68% $381,005 $5,660 5.89%
Mortgage-backed securities................. 129,715 1,490 4.57% 155,260 1,621 4.14%
Investment securities(2)................... 31,117 340 4.35% 85,847 552 2.55%
Other interest-earning assets(3)........... 685 4 2.32% 21,685 49 0.90%
-------- ------ -------- ------
Total interest-earning assets............ 588,203 7,929 5.36% 643,797 7,882 4.86%
Non interest-earning assets.................... 36,358 ------ 33,670 ------
-------- --------
Total assets............................. $624,561 $677,467
======== ========
Liabilities and stockholders' equity:
Interest-bearing liabilities
Deposits................................... $465,782 1,456 1.24% $452,145 1,638 1.44%
Advances from the FHLB..................... 96,090 758 3.14% 158,357 2,078 5.21%
-------- ------ -------- ------
Total interest-bearing liabilities....... 561,872 2,214 1.56% 610,502 3,716 2.42%
Non interest-bearing liabilities............... 5,327 ------ 3,661 ------
-------- --------
Total liabilities........................ 567,199 614,163
Stockholders' equity........................... 57,362 63,304
-------- --------
Total liabilities and stockholders' equity $624,561 $677,467
======== ========
Net interest income............................ $5,715 $4,166
====== ======
Interest rate spread (4)....................... 3.80% 2.44%
Net yield on interest-earning assets (5)....... 3.87% 2.57%
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) Tax equivalent adjustments to interest on investment securities for the
quarter ended September 30, 2004 and 2003 were $61,000 and $47,000
respectively. Tax equivalent interest income is based upon a marginal
effective tax rate of 34%.
(3) Includes interest-bearing deposits in other banks.
(4) Interest-rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(5) 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,
2004 vs. 2003
-----------------------------------------------
Increase (decrease)
due to
-----------------------------------------------
Volume Rate Net
-----------------------------------------------
Interest income:
Loans receivable, net $1,573 $(1,138) $ 435
Mortgage-backed securities (896) 765 (131)
Investment securities (1,566) 1,354 (212)
Other interest-earning assets (251) 206 (45)
-----------------------------------------------
Total interest-earning assets
(1,140) 1,187 47
===============================================
Interest expense:
Deposits 287 (469) (182)
Advances from the FHLB and other borrowings (657) (663) (1,320)
-----------------------------------------------
Total interest-bearing liabilities
(370) (1,132) (1,502)
===============================================
Net change in net interest income $ (770) $ 2,319 $ 1,549
===============================================
Total Interest Income. Total interest income, on a taxable equivalent basis,
increased by $47,000 or 0.6% to $7.9 million for the quarter ended September 30,
2004, compared with the same quarter of 2003. Low market interest rates on loans
resulted in a significant amount of loan prepayments during the intervening
period, lowering the yield on the remaining portfolio. However, increased loan
originations at the Bank and resulting loan portfolio growth contributed to loan
interest income in a manner that largely offset the impact caused by the lower
market interest rates. Interest income from mortgage-backed securities,
investment securities and other interest-earning assets was lower in the third
quarter of 2004 in comparison to the same period of 2003. This decrease was
largely caused by the reduction in the lower yielding balances maintained in
these types of interest-earning assets as a result of the debt refinancing
transaction executed during the third quarter of 2003.
Total Interest Expense. Total interest expense decreased by $1.5 million to $2.2
million during the three-month period ended September 30, 2004 as compared with
the related quarter of 2003. The decrease in the market interest rates and the
lower rates paid on the Bank's renewing certificates of deposit that had been
originated when market interest rates were higher was more than offset by the
increase in the average balance of deposits during the period. However, the
repayment and refinancing of the Federal Home Loan Bank Advances that occurred
at the end of the third quarter of 2003 was the primary factor in the overall
reduction of interest expense.
16
Non-interest income. Total non-interest income was $595,000 for the three-month
period ended September 30, 2004 compared with $322,000 for the same period in
2003. Net losses on sales of mortgage-backed securities and investments
available for sale during the third quarter of 2003 totaled $377,000 while,
conversely, there were no such sales during the same period in 2004. In
addition, the Company recorded a gain of $110,000 during the third quarter of
2003 on the sale of real estate while there was no such gain during the third
quarter of 2004.
Non-interest expense. Total non-interest expense decreased by $13.7 million to
$3.7 million for the three months ended September 30, 2004 compared to the same
period in 2003. The decrease in non-interest expense was associated with the
debt prepayment fee of $13.8 million paid during the third quarter of 2003 as a
result the repayment and refinancing of Federal Home Loan Bank borrowings.
Without this fee, non-interest expenses increased by $30,000 during the third
quarter of 2004 compared with the third quarter of 2003. Compensation and
benefit expenses were higher by $164,000 due largely to additional mortgage
origination and commercial lending personnel added during the fourth quarter of
2003 and the first nine months of 2004. Occupancy and equipment costs dropped
due to a one time $62,000 expense booked during the third quarter of 2003
associated with revisions in the useful lives of certain depreciable and
amortizable assets. Additionally, other operating expenses decreased $100,000
between the two quarters primarily due to $80,000 of various deposit items,
reconciling and other losses, which were expensed during the third quarter of
2003.
17
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
Net Income. The Company recorded net income of $4,979,000, or $1.86 per diluted
share, for the nine months ended September 30, 2004 as compared to a net loss of
$7,350,000, or $2.91 per diluted share, for the nine months ended September 30,
2003.
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,
-------------------------------
2004 2003
-------------------------------- ---------------------------------
Average Average Average Average
Balance Interest Yld/Cost Balance Interest Yld/Cost
------- -------- -------- ------- -------- --------
(dollars in thousands)
Assets:
Interest-earning assets:
Loans receivable (1)....................... $418,765 $18,045 5.76% $370,543 $17,336 6.26%
Mortgage-backed securities................. 130,835 4,478 4.57% 163,697 5,318 4.34%
Investment securities...................... 30,563 1,001 4.37% 73,131 1,644 3.01%
Other interest-earning assets(2)........... 1,299 11 1.13% 59,882 463 1.03%
-------- ------- -------- -------
Total interest-earning assets............ 581,462 23,535 5.41% 667,253 24,761 4.96%
Non interest-earning assets.................... 34,841 ------- 34,789 -------
-------- --------
Total assets............................. $616,303 $702,042
======== ========
Liabilities and stockholders' equity:
Interest-bearing liabilities
Deposits................................... $467,304 4,440 1.27% $447,049 5,506 1.65%
Advances from the FHLB..................... 87,494 2,077 3.17% 186,377 7,558 5.42%
-------- ------- -------- -------
Total interest-bearing liabilities............. 554,798 6,517 1.57% 633,426 13,064 2.76%
Non interest-bearing liabilities............... 5,453 ------- 5,439 -------
-------- --------
Total liabilities........................ 560,251 638,865
Stockholders' equity........................... 56,052 63,177
-------- --------
Total liabilities and stockholders' equity $616,303 $702,042
======== ========
Net interest income............................ $17,018 $11,697
======= =======
Interest rate spread (3)....................... 3.84% 2.20%
Net yield on interest-earning assets (4)....... 3.91% 2.34%
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) Tax equivalent adjustments to interest on investment securities for the
nine months ended September 30, 2004 and 2003 were $162,000 and $113,000
respectively. Tax equivalent interest income is based upon a marginal
effective tax rate of 34%.
(3) Includes interest-bearing deposits in other banks.
(4) Interest-rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(5) 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,
2004 vs. 2003
-------------------------------------------
Increase (decrease)
Due to
-------------------------------------------
Volume Rate Net
-------------------------------------------
Interest income:
Loans receivable, net $ 2,733 $(2,024) $ 709
Mortgage-backed securities (1,258) 418 (840)
Investment securities (1,484) 841 (643)
Other interest-earning assets (519) 67 (452)
-------------------------------------------
Total interest-earning assets
(528) (698) (1,226)
===========================================
Interest expense:
Deposits 381 (1,447) (1,066)
Advances from the FHLB and other borrowings (3,075) (2,406) (5,481)
-------------------------------------------
Total interest-bearing liabilities
(2,694) (3,853) (6,547)
===========================================
Net change in net interest income $ 2,166 $ 3,155 $ 5,321
===========================================
Total Interest Income. Total interest income, on a taxable equivalent basis,
decreased by $1.2 million or 5.0% to $23.5 million for the nine months ended
September 30, 2004 as compared with the first nine months of 2003. Low market
interest rates on loans resulted in a significant amount of loan prepayments
during the intervening period, lowering the yield on the remaining portfolio.
However, increased loan originations at the Bank and the resulting loan
portfolio growth contributed to loan income in a manner that largely offset the
impact caused by the lower market interest rates. Interest income from
mortgage-backed securities, investment securities and other interest-earning
assets was lower during the first nine months of 2004 in comparison to the same
period of 2003. This decrease was largely caused by the reduction in the lower
yielding balances maintained in these types of interest-earning assets as a
result of the debt refinancing transaction executed during the third quarter of
2003.
Total Interest Expense. Total interest expense decreased by $6.5 million to $6.5
million during the nine-month period ended September 30, 2004 as compared with
the same period in 2003. The decrease in the market interest rates during the
period and the lower rates paid on the Bank's renewing certificates of deposit
which had been originated when market interest rates were higher contributed to
this reduction. Yet, the repayment of $120 million of Federal Home Loan Bank
Advances and the refinancing of the remaining debt at significantly lower rates
is the foremost reason for the overall reduction of interest expense.
19
Non-interest income. Total non-interest income was $1,985,000 for the nine-month
period ended September 30, 2004 in contrast with $2,054,000 for the same period
in 2003. The decrease was primarily due to $208,000 in net gains on sales of
mortgage-backed securities available for sale and a gain of $110,000 on the sale
of real estate during 2003 while, conversely, there were no such sales of either
securities or real estate during the same period in 2004. Retail banking fees
were $264,000 greater over the period as a result of a $188,000 increase in
overdraft and uncollected fees. Also, the collection of mortgage brokerage fees
and a growth in other loan fees contributed to the increase during the period.
Non-interest expense. Total non-interest expense decreased by $13.3 million to
$11.5 million for the nine months ended September 30, 2004 compared to the same
time in 2003. The decrease in non-interest expense was mainly associated with
the debt prepayment fee of $13.8 million paid as a consequence of the repayment
and refinancing of Federal Home Loan Bank borrowings in 2003. Excluding the debt
prepayment fee, non-interest expense increased by $478,000. During 2004,
compensation and benefit expenses increased by $625,000 over the same period of
2003. The increase in salary and compensation costs of the Company resulted from
the hiring of additional mortgage origination and commercial lending personnel,
and increased anticipated incentive compensation expense because this expense is
related to the net income of the Company. Occupancy and equipment costs dropped
due to a one time $62,000 expense booked during 2003 associated with revisions
in the useful lives of certain depreciable and amortizable assets. Other
operating expenses decreased $176,000 between the two periods mostly as a result
of various deposit items and reconciling losses of $170,000 that were expensed
during 2003.
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 the nine-month period
ended September 30, 2004 in the ability of the Company and its subsidiaries to
fund their operations.
At September 30, 2004, the Company had commitments outstanding under letters of
credit of $1.2 million, commitments to originate loans of $30.4 million, and
commitments to fund undisbursed balances of closed loans and unused lines of
credit of $59.5 million. There has been no material change during the nine
months ended September 30, 2004 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, 2004.
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, 2004.
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
CRITICAL ACCOUNTING POLICIES
Certain critical accounting policies of the Company require the use of
significant judgment and accounting estimates in the preparation of the
consolidated financial statements and related data of the Company. These
accounting estimates require management to make assumptions about matters that
are highly uncertain at the time the accounting estimate is made. Management
believes that the most critical accounting policy requiring the use of
accounting estimates and judgment is the determination of the allowance for loan
losses. If the financial position of a significant amount of debtors should
deteriorate more than the Company has estimated, present reserves for loan
losses may be insufficient and additional provisions for loan losses may be
required. The allowance for loan losses was $2,185,000 at September 30, 2004.
NEW ACCOUNTING PRONOUNCEMENTS
On March 31, 2004, the Financial Accounting Standards Board (FASB) issued a
proposed Statement, "Share-Based Payment an Amendment of FASB Statements No. 123
and APB No. 95", that addresses the accounting for share-based payment
transactions in which an enterprise receives employee services in exchange for
(a) equity instruments of the enterprise or (b) liabilities that are based on
the fair value of the enterprise's equity instruments or that may be settled by
the issuance of such equity instruments. Under the FASB's proposal, all forms of
share-based payments to employees, including stock options, would be treated the
same as other forms of compensation by recognizing the related cost in the
income statement. The expense of the award would generally be measured at fair
value at the grant date. Current accounting guidance requires that the expense
relating to so-called fixed plan employee stock options only be disclosed in the
footnotes to the financial statements. The proposed Statement would eliminate
the ability to account for share-based compensation transactions using APB
Opinion No. 25, "Accounting for Stock Issued to Employees." On October 13, 2004,
FASB voted to delay the adoption of this proposed standard by public companies
until their first fiscal quarter beginning after June 15, 2005. The Company
continues to evaluate this proposed statement and its effects on its results of
operations.
In March 2004 the Securities and Exchange Commission staff released Staff
Accounting Bulletin (SAB) 105, "Loan Commitments Accounted for as Derivative
Instruments." SAB 105 requires that a lender should not consider the expected
cash flows related to loan servicing or include any internally developed
intangible assets in determining the fair value of loan commitments accounted
for as derivatives. The Company adopted SAB 105 effective for commitments
entered into after June 30, 2004. The requirements of SAB 105 apply to the
Company's mortgage interest rate lock commitments related to loans held for
sale. At September 30, 2004, the Company did not have such commitments subject
to the provisions of SAB 105. The Company's application of SAB 105 did not have
a material impact on the effect on the Company's financial position or results
of operations.
On September 30, 2004, the FASB issued a staff position EITF Issue 03-1-1 which
delayed the effective date for the measurement and recognition guidance
contained in paragraphs 10-20 of EITF Issue 03-1 from reporting periods
beginning after June 15,2004, until implementation guidance is issued. The Bank
adopted EITF 03-1, The Meaning of Other than Temporary Impairment and Its
Application to Certain Investments, as of December 31, 2003. EITF 03-1 includes
certain disclosures regarding quantitative and qualitative disclosures for
investment securities accounted for under FAS 115, "Accounting for Certain
Investments in Debt and Equity Securities," that are impaired at the balance
sheet date, but an other-than-temporary impairment has not been recognized.
Paragraphs 10-20 of EITF Issue No.03-1 give guidance on how to evaluate and
recognize an impairment loss that is other than temporary. On September 15, 2004
the FASB issued a proposed staff position EITF Issue 03-1-a to address the
implementation guidance to evaluate and recognize other than temporary
impairment. The Company is in the process of determining the impact that this
EITF will have on its financial statements.
22
TF FINANCIAL CORPORATION AND SUBSIDIARIES
PART II
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table provides information on repurchases by the
Company of its common stock in each month for the nine months
ended September 30, 2004:
Total Number of Maximum Number of
Shares Purchased as Shares that may yet
Total Number Part of Publicly be Purchased Under
of Shares Average Price Announced Plan of the Plans or
Month Ended Purchased Paid per Share Program Programs
----------- --------- -------------- ------- --------
January 31, 2004 -- -- -- 114,082
February 29, 2004 -- -- -- 114,082
March 31, 2004 38,000 $32.00 -- 114,082
April 30, 2004 -- -- -- 114,082
May 31, 2004 -- -- -- 114,082
June 30, 2004 359 $28.63 359 113,723
July 31, 2004 36,115 $26.99 2,800 110,923
August 31, 2004 47,432 $26.93 800 110,123
September 30, 2004 27,702 $28.01 9,000 101,123
The total number of shares repurchased during the quarter includes
45,334 shares repurchased in conjunction with the exercise of 132,333 stock
options. The repurchase poses no modification to the rights of stockholders.
Furthermore, there has been no change in the ability of the Company to pay
dividends or any material change in the working capital of the Company. The
stock repurchase did not alter the previously approved stock repurchase plan of
the Company.
23
TF FINANCIAL CORPORATION AND SUBSIDIARIES
PART II
ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None
ITEM 5. OTHER INFORMATION None
ITEM 6. EXHIBITS
(a) Exhibits
10. TF Financial Corporation Incentive Compensation Plan
31. Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32. Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
24
TF FINANCIAL CORPORATION
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.
Date: November 12, 2004 /s/ Kent C. Lufkin
----------------------- ------------------
Kent C. Lufkin
President and CEO
(Principal Executive Officer)
Date: November 12, 2004 /s/ Dennis R. Stewart
----------------------- ---------------------
Dennis R. Stewart
Executive Vice President and
Chief Financial Officer
(Principal Financial & Accounting Officer)