To our stockholders
Throughout 2002 interest rates continued to decline as the Federal Reserve
attempted to stimulate our weakened economic environment. Technology stocks led
the decline in all major stock markets. The negative impact on household
investment and retirement plans was dramatic. This led many families to seek the
safety of insured deposits where the yields were low but their principal was
protected from loss. Through the introduction of "seven-day-a-week" banking
hours in each of our market areas and by maintaining our focus on superior
customer service initiatives, we experienced a 5% gain in deposits to $442.6
million.
The one bright spot for families around the country was the opportunity to
refinance their mortgages at a much lower interest rate. The rate of refinancing
during 2002 was unprecedented. Because our portfolio contains a large amount of
mortgage-related investment securities and loans, we received a record amount of
prepayments throughout 2002. We ramped up our lending operations to reinvest
these funds in short-to-intermediate-term mortgages and consumer loans. Despite
our best efforts, loan repayments exceeded our lending and loan purchase
transactions. This left us with over $100 million in liquidity at a very low
yield at December 31, 2002.
We plan to continue our aggressive lending and loan purchase programs aimed
primarily at the short and intermediate term to limit our interest rate risk
profile. As prepayments slow, our liquidity will be reinvested at higher rates.
In the first quarter of 2003, we opened our fourteenth branch in the Northern
Liberties section of Philadelphia. This section of Northeast Philadelphia has
experienced a substantial amount of redevelopment in recent years. Property
values are rising and the improvements are expected to continue for the
foreseeable future. We expect this office to be a strong loan and deposit
generator.
We will continue to serve our customers with the personal attention of a
community bank while offering the products and services of a regional bank. We
are committed to increasing profitability and shareholder value in the future.
The Board of Directors and I would like to express our appreciation to our
employees, shareholders and customers for your continued support and confidence.
/s/John R. Stranford
John R. Stranford
President and Chief Executive Officer
1
Corporate Profile and Related Information
TF Financial Corporation (the "Corporation") is the parent company of Third
Federal Savings Bank ("Third Federal" or the "Savings Bank") and its subsidiary
Third Delaware Corporation, TF Investments Corporation, Teragon Financial
Corporation and Penns Trail Development Corporation. At December 31, 2002, total
assets were approximately $721.0 million. The Corporation was formed as a
Delaware corporation in March 1994 at the direction of the Savings Bank to
acquire all of the capital stock that Third Federal issued upon its conversion
from the mutual to stock form of ownership (the "Conversion") and concurrent
$52.9 million initial public offering effective July 13, 1994. At December 31,
2002, total stockholders' equity was approximately $62.8 million. The
Corporation is a unitary savings and loan holding company which, under existing
laws, generally is not restricted in the types of business activities in which
it may engage, provided that Third Federal retains a specified amount of its
assets in housing-related investments.
Third Federal is a federally chartered stock savings bank headquartered in
Newtown, Pennsylvania, which was originally chartered in 1921 under the name
"Polish American Savings Building and Loan Association." Deposits of Third
Federal have been federally insured since 1935 and are currently insured up to
the maximum amount allowable by the Federal Deposit Insurance Corporation (the
"FDIC"). Third Federal is a community oriented savings institution offering a
variety of financial services to meet the needs of the communities that it
serves. Third Federal expanded its operations in Philadelphia and Bucks
Counties, Pennsylvania in June 1992 through its acquisition of Doylestown
Federal Savings and Loan Association ("Doylestown"). In September 1996, Third
Federal expanded its operations into Mercer County, New Jersey, through its
acquisition of three branch offices and approximately $143 million of deposits
from Cenlar Federal Savings Bank. Third Federal added a fourth branch office in
Mercer County in December, 1999 with the Corporation's acquisition of Village
Financial Corporation ("Village"). During the first quarter of 2000 the
Corporation closed the branch facility in its administrative office location in
Newtown and simultaneously opened a larger, freestanding branch at a nearby
site. During the first quarter of 2001 the Corporation closed its branch
facility in Princeton, New Jersey and transferred the deposits to its branch
office in Lawrenceville, New Jersey. During December 2001 the Corporation closed
the sale of $10.2 million in deposits at what had been a leased branch facility
in Warminster, Pennsylvania. As of December 31, 2002 Third Federal operated
thirteen branch offices in Bucks and Philadelphia counties, Pennsylvania and
Mercer County, New Jersey. During the first quarter of 2003 the Savings Bank
opened its fourteenth branch office in the Northern Liberties neighborhood in
Philadelphia.
Third Federal attracts deposits (approximately $442.6 million at December 31,
2002) from the general public and uses such deposits, together with borrowings
mainly from the Federal Home Loan Bank of Pittsburgh (approximately $207.4
million at December 31, 2002) and other funds, primarily to originate or
purchase loans secured by first mortgages on owner-occupied, one-to-four family
residences, or purchase securities secured by such loans. Third Federal also
originates and purchases commercial real estate and multi-family loans,
construction loans and consumer loans, and purchases other investment
securities.
Stock Market Information
Since its issuance in July 1994, the Corporation's common stock has been traded
on the Nasdaq National Market. The daily stock quotation for the Corporation is
listed in the Nasdaq National Market published in The Wall Street Journal, The
Philadelphia Inquirer, and other leading newspapers under the trading symbol of
"THRD".
The number of shareholders of record of common stock as of March 17, 2003, was
approximately 550. This does not reflect the number of persons or entities who
held stock in nominee or "street" name through various brokerage firms.
Dividend Policy
The Corporation's ability to pay dividends to stockholders is dependent in part
upon the dividends it receives from Third Federal. Among other limitations,
Third Federal may not declare or pay a cash dividend on any of its stock if the
effect thereof would cause Third Federal's regulatory capital to be reduced
below (1) the amount required for the liquidation account established in
connection with Third Federal's conversion from mutual to stock form, or (2) the
regulatory capital requirements imposed by the Office of Thrift Supervision
("OTS"). It is the Corporation's policy to pay dividends when it is deemed
prudent to do so. The Board of Directors will consider the payment of a dividend
on a quarterly basis, after giving consideration to the level of profits for the
previous quarter and other relevant information.
Stock Price and Dividend History
Quoted market price Dividend paid
Quarter ended High Low per share
- ------------- ---- --- -------------
December 31, 2002 $25.510 $20.330 $0.15
September 30, 2002 $23.710 $19.700 $0.15
June 30, 2002 $24.800 $22.070 $0.15
March 31,2002 $23.500 $21.050 $0.15
December 31, 2001 $21.750 $18.880 $0.15
September 30, 2001 $23.700 $17.800 $0.15
June 30, 2001 $19.790 $16.950 $0.14
March 31, 2001 $18.063 $15.625 $0.14
2
SELECTED FINANCIAL INFORMATION AND OTHER DATA
Financial Condition At December 31,
---------------
(Dollars in thousands, except per share data) 2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Total assets $721,032 $711,204 $723,297 $721,874 $665,608
Loans receivable, net 370,092 377,635 361,806 287,979 240,841
Mortgage-backed securities available for sale,
at fair value 115,243 99,763 97,914 132,515 75,285
Mortgage-backed securities held to maturity,
at amortized cost 54,592 93,367 135,142 159,888 180,964
Securities purchased under agreements to
resell - - - - -
Investment securities available for sale, at
fair value 27,243 22,671 18,865 21,930 9,042
Investment securities held to maturity, at
amortized cost 14,563 9,866 63,461 66,760 80,895
Cash and cash equivalents(l) 100,580 69,139 10,618 16,715 42,703
Deposits 442,558 422,052 400,851 401,698 438,913
Advances from the Federal Home Loan Bank and
other borrowings 207,359 222,359 259,821 264,299 163,359
Retained earnings 59,978 56,370 52,061 48,905 45,842
Total stockholders' equity 62,840 57,975 53,109 48,447 52,660
Book value per common share $25.31 $23.51 $21.32 $18.81 $18.43
Tangible book value per common share $23.34 $21.44 $18.99 $16.26 $15.84
Summary of Operations At or for the year ended December 31,
-------------------------------------
2002 2001 2000 1999 1998(2)
---- ---- ---- ---- -------
Interest income $40,455 $46,747 $48,708 $47,022 $43,579
Interest expense 22,660 26,908 28,921 27,974 26,195
Net interest income 17,795 19,839 19,787 19,048 17,384
Provision for loan losses 988 500 410 300 60
Non-interest income 3,304 3,172 1,432 1,589 1,535
Non-interest expense 13,414 14,708 14,404 13,529 12,722
Net income before cumulative effect of change
in accounting method 5,092 5,733 4,482 4,422 3,830
Net income 5,092 5,733 4,482 4,422 4,038
Earnings per common share - basic
Continuing operations $2.06 $2.32 $1.76 $1.60 $1.32
Cumulative effect of accounting change - - - - $0.07
Earnings per common share - basic $2.06 $2.32 $1.76 $1.60 $1.39
Earnings per common share - diluted
Continuing operations $1.91 $2.19 $1.72 $1.54 $1.23
Cumulative effect of accounting change - - - - $0.07
Earnings per common share - diluted $1.91 $2.19 $1.72 $1.54 $1.30
Performance Ratios and Other Selected Data
Return on average assets 0.71% 0.82% 0.63% 0.62% 0.58%
Return on average equity 8.47% 10.42% 9.18% 8.60% 7.39%
Average equity to average assets 8.34% 7.83% 6.86% 7.17% 7.74%
Average interest rate spread 2.42% 2.74% 2.70% 2.54% 2.44%
Non-performing loans to total assets 0.53% 0.53% 0.20% 0.18% 0.24%
Non-performing loans to total loans 1.03% 0.99% 0.41% 0.45% 0.65%
Allowance for loan losses to non-performing loans 53.86% 52.22% 115.97% 145.56% 119.16%
Allowance for loan losses to total loans 0.55% 0.52% 0.47% 0.66% 0.78%
Savings Bank regulatory capital
Core 6.85% 6.95% 6.18% 5.76% 6.79%
Tangible 6.85% 6.95% 6.18% 5.76% 6.79%
Risk based 15.25% 14.95% 11.97% 12.83% 17.73%
Dividend payout ratio (3) 31.41% 26.48% 30.23% 31.82% 36.92%
(1) Consists of cash, cash due from banks, interest-bearing deposits with
maturities of less than three months, and federal funds sold.
(2) Income and income related ratios for the year-ended December 31, 1998
include the cumulative effect of a change in accounting for certain
investments of $208,000 (SFAS #133).
(3) Payout ratio is dividends paid for the period divided by earnings per
common share - diluted after cumulative effect of accounting change.
3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
The following discussion and analysis should be read in conjunction with the
Corporation's consolidated financial statements and is intended to assist in
understanding and evaluating the major changes in the financial condition and
results of operations of the Corporation with a primary focus on an analysis of
operating results.
This document contains statements that project the future operations of the
Corporation which involve risks and uncertainties. The Corporation's actual
results may differ significantly from the results discussed in these
forward-looking statements. Statements concerning future performance,
developments, events, expectations for growth and market forecasts, and any
other guidance on future periods, constitute forward-looking statements which
are subject to a number of risks and uncertainties, including interest rate
fluctuations and government and regulatory actions which might cause actual
results to differ materially from stated expectations or estimates. The
Corporation 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
Corporation.
The Corporation's income on a consolidated basis is derived substantially from
its investment in its subsidiary, Third Federal. The earnings of Third Federal
depend primarily on its net interest income. Net interest income is affected by
the interest income that Third Federal receives from its loans and investments
and by the interest expense that Third Federal incurs on its deposits,
borrowings and other sources of funds. In addition, the mix of Third Federal's
interest bearing assets and liabilities can have a significant effect on Third
Federal's net interest income; loans generally have higher yields than
securities; retail deposits generally have lower interest rates than other
borrowings.
Third Federal also receives income from service charges and other fees and
occasionally from sales of investment securities and real estate owned. Third
Federal incurs expenses in addition to interest expense in the form of salaries
and benefits, deposit insurance premiums, property operations and maintenance,
advertising and other related business expenses.
Changes to Financial Condition
Assets. The Corporation's total assets at December 31, 2002 were $721.0 million,
an increase of $9.8 million during the year. The increase was mainly the
combined result of the net change in various asset categories as described more
fully below.
Loans receivable, net, decreased by $7.5 million or 2.0%. During the year,
market interest rates were relatively low compared to the interest rates many
borrowers were paying the Savings Bank on loans held in the Savings Bank's loan
portfolio causing a large number of borrowers with the higher interest rates on
their loans to refinance them. Many of these loans were refinanced elsewhere.
While the Savings Bank originated $80.9 million in loans, repayments of existing
loans totaled $147.3 million. Consequently, the Savings Bank subsidized its own
loan originations with approximately $74.6 million
4
of loan purchases. Purchased loans generally have lower yields than otherwise
equivalent originated loans.
Investment securities available for sale increased by $4.6 million, net, and
mortgage-backed securities available for sale increased by $15.5 million, net
during 2002. The Corporation purchased $103.2 million of these securities during
the year, $38.4 million were sold generating gains of $1.2 million, and $44.7
million matured or were otherwise repaid. The securities sales were undertaken
in order to realize the gains that had accumulated due to decreasing market
interest rates. The securities purchased were generally short-term in nature
with less than a four year average life in order to lessen the Corporation's
interest rate risk as compared to the purchase of longer average life securities
even though the longer securities generally have higher yields.
Mortgage-backed securities held to maturity decreased by $38.8 million or 41.5%
during 2002. This decrease occurred due to the increased prepayment of the
underlying mortgages comprising the securities, which was the result of near
record low mortgage rates throughout the year, resulting in an increased number
of mortgagors refinancing their mortgages into lower interest rates.
As a result of the net decrease in the Corporation's mortgage-related assets,
growth in deposits, and the inability to repay long-term borrowings from the
Federal Home Loan Bank without incurring substantial prepayment penalties, the
Corporation's cash and cash equivalents grew by $31.4 million and totaled $100.6
million or 14% of total assets at December 31, 2002.
Liabilities. The Corporation's total liabilities were $658.2 million at December
31, 2002, an increase of $5.0 million during 2002.
Deposits increased by $20.5 million; certificates of deposit increased by $2.0
million, while the remaining or "core" deposit categories increased by $18.5
million. Management believes that deposit growth occurred mainly as a result of
successful sales initiatives and focused advertising campaigns implemented by
the Corporation, but also due to external factors that were causing deposit
growth to occur throughout the community banking industry.
Advances from the Federal Home Loan Bank decreased by $15.0 million. Throughout
the year the Corporation used excess cash from loan and security repayments, and
deposit increases to repay maturing borrowings.
Stockholders' equity. Total consolidated stockholders' equity increased $4.9
million to $62.8 million at December 31, 2002. The increase is largely the
result of $5.1 million in net income, plus a $1.1 million increase in
accumulated other comprehensive income, less $1.5 million in cash dividends paid
to the Corporation's common stockholders. In addition, during the year the
Corporation repurchased approximately 16,900 shares of its common stock at an
average price of $22.26 per share.
5
Average Balance Sheet
The following table sets forth information (dollars in thousands) relating to
the Corporation's average balance sheet and reflects the average yield on assets
and average cost of liabilities for the periods indicated. The yields and costs
are computed by dividing income or expense by the average balance of
interest-earning assets or interest-bearing liabilities, respectively for the
periods indicated.
2002 2001 2000
---- ---- ----
Average Average Average Average Average Average
Balance Interest Yld/Cost Balance Interest Yld/Cost Balance Interest Yld/Cost
------- -------- -------- ------- -------- -------- ------- -------- --------
ASSETS
Interest-earning assets:
Loans receivable (4) $362,104 $25,662 7.09% $359,928 $28,443 7.90% $299,770 $23,756 7.92%
Mortgage-backed securities 200,316 11,423 5.70% 212,951 13,749 6.46% 278,434 18,449 6.63%
Investment securities 50,072 2,271 4.54% 51,384 3,015 5.87% 100,274 6,180 6.16%
Other interest-earning
assets(1) 74,058 1,099 1.48% 49,206 1,540 3.13% 5,236 323 6.17%
-------- ------- -------- ------ -------- ------
Total interest-earning
assets 686,550 40,455 5.89% 673,469 46,747 6.94% 683,714 48,708 7.12%
------- ------ ------
Non interest-earning
assets 34,494 29,202 28,529
-------- -------- --------
Total assets $721,044 $702,671 $712,243
======== ======== ========
LIABILITIES AND
STOCKHOLDERS'EQUITY
Interest-bearing
liabilities:
Deposits $433,522 10,506 2.42% $409,688 14,043 3.43% $410,330 15,082 3.68%
Advances from the FHLB
and borrowings 219,797 12,154 5.53% 230,078 12,865 5.59% 243,656 13,839 5.68%
-------- ------- -------- ------ -------- ------
Total interest-bearing
liabilities 653,319 22,660 3.47% 639,766 26,908 4.20% 653,986 28,921 4.42%
------- ------ ------
Non interest-bearing
liabilities 7,603 7,865 9,432
-------- -------- --------
Total liabilities 660,922 647,631 663,418
Stockholders' equity 60,122 55,040 48,825
-------- -------- --------
Total liabilities and
stockholders' equity $721,044 $702,671 $712,243
======== ======== ========
Net interest income $17,795 $19,839 $19,787
======= ======= =======
Interest rate spread (2) 2.42% 2.74% 2.70%
Net yield on
interest-earning assets (3) 2.59% 2.95% 2.89%
Ratio of average
interest-earning assets
to average interest
bearing liabilities 105% 105% 105%
(1) Includes interest-bearing deposits in other banks.
(2) Interest-rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(3) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
(4) 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.
6
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.
2002 vs 2001 2001 vs 2000
------------ ------------
Increase (decrease) due to Increase (decrease) due to
----------------------------------------------------------------
Volume Rate Net Volume Rate Net
----------------------------------------------------------------
Interest income:
Loans receivable, net $ 171 $(2,952) $(2,781) $ 4,740 $ (53) $ 4,687
Mortgage-backed securities (784) (1,542) (2,326) (4,229) (471) (4,700)
Investment securities (75) (669) (744) (2,884) (281) (3,165)
Other interest-earning assets 577 (1,018) (441) 1,450 (233) 1,217
--------------------------------------------------------------
Total interest-earning assets (111) (6,181) (6,292) (923) (1,038) (1,961)
--------------------------------------------------------------
Interest expense:
Deposits 777 (4,314) (3,537) (23) (1,016) (1,039)
Advances from the FHLB and borrowings (570) (141) (711) (761) (213) (974)
--------------------------------------------------------------
Total interest-bearing liabilities 207 (4,455) (4,248) (784) (1,229) (2,013)
--------------------------------------------------------------
Net change in net interest income $ (318) $(1,726) $(2,044) $ (139) $ 191 $ 52
==============================================================
7
Comparison of Years Ended December 31, 2002 and December 31, 2001
Net Income. Net income was $5.092 million for the fiscal year ended December 31,
2002, a decrease of $641,000 or 11.2% compared with the year ended December 31,
2001. The Corporation's pre-tax income decreased by $1.1 million during 2002
compared with 2001: net interest income decreased by $2.0 million; provisions
for possible loan losses increased by $488,000; non-interest income increased by
$132,000 and non-interest expenses decreased by $1.3 million.
The Corporation's diluted earnings per share were $1.91 during 2002, a 12.8%
decrease from $2.19 diluted earnings per share reported during 2001. The
percentage decrease in diluted earnings per share is slightly larger than the
percentage decrease in net income because a rising common stock price combined
with outstanding stock options created an additional 26,700 dilutive shares.
Total Interest Income. For the year ended December 31, 2002, total interest
income decreased to $40.4 million compared to $46.7 million for the year ended
December 31, 2001. The $6.3 million decrease in interest income was mainly the
result of the repayment of $147.3 million in higher yielding loans receivable,
net of the origination and purchase of $140.9 million in loans at substantially
lower yields. In addition, the Corporation's adjustable rate loans continued to
adjust downward, also due to the continued decrease in market interest rates. As
a result, the overall yield on the Corporation's loan portfolio decreased by 81
basis points during 2002. A similar result of low market interest rates combined
with high loan prepayments caused the average yield on the Corporation's
mortgage-backed securities portfolios to decrease by 76 basis points. At
December 31, 2002 prepayments of mortgage-related earning assets were still
high. Thus, the Corporation's interest income could be adversely affected during
2003 barring an increase in longer term market interest rates and resulting
relief from high loan prepayments.
These mortgage-related loan repayments caused an average of $74.1 million to be
maintained in cash and cash equivalents during 2002, earning an average interest
rate of 1.48%, which is substantially less than these funds were earning while
invested in loans and mortgage-backed securities. At year-end 2002, cash and
cash equivalents totaled $100.6 million and was earning the federal funds rate
minus 25 basis points or approximately 1.00%. Thus, the Corporation's earnings
during 2003 will be significantly affected by the general level of market
interest rates and the timing of its reinvestment of cash and cash equivalents
into other interest-bearing assets, or the use of the cash and cash equivalents
to reduce interest-bearing liabilities.
Total Interest Expense. Total interest expense decreased to $22.7 million from
$26.9 million for the year ended December 31, 2002 compared to 2001. This
decrease is the result of lower market interest rates during the period and,
consequently, lower rates paid on the Corporation's new certificates of deposit;
in addition, the Corporation 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.
Allowance for Loan Losses. The allowance for loan losses was approximately
$2.047 million at December 31, 2002 and $1.972 million at December 31, 2001. The
provision for loan losses was $988,000 during 2002 compared with $500,000 during
2001. Charge-offs were $913,000
8
during 2002 compared to $242,000 during 2001. Charge-offs during 2002 included
approximately $625,000 during the second quarter attributable to a default by
the servicer of the Corporation's purchased lease portfolio. The Corporation now
services these leases itself. While management maintains Third Federal's
allowance for losses at a level which it considers to be adequate to provide for
probable losses, there can be no assurance that further additions will not be
made to the allowance and that such losses will not exceed the estimated
amounts.
Non-interest Income. Total non-interest income was $3.3 million during 2002
compared with $3.2 million during 2001. During 2002 the Corporation sold
approximately $37.2 million mortgage-backed and investment securities available
for sale and realized gains of $1.2 million. During 2001 the Corporation
recorded a one-time gain of $1.1 million related to the sale of $10.8 million in
deposits and the related closure of its Warminster, Pennsylvania branch office.
In addition, during 2001 the Corporation recorded a $444,000 non-recurring gain
on the sale of $1.3 million of land that had been held as a potential site for
an administrative facility. Finally, Third Federal purchased $9 million in
bank-owned life insurance in September 2001. This asset produced an increase in
its cash surrender value, which is included in other operating income, of
$520,000 during 2002 compared with $174,000 during 2001.
Non-interest Expense. Total non-interest expense decreased by $1.3 million
during 2002 compared to 2001. This decrease occurred from a $426,000 decrease in
employee compensation and benefits, and occupancy and equipment expenses that,
in turn, is largely related to the sale of a branch office at the end of 2001.
In addition, during 2002 the Corporation decreased by $236,000 other operating
expenses, $110,000 of which related to bank service charges because the
Corporation ceased drawing checks on and using a third-party bank for its
corporate and customer item processing activities, and rather used its own
personnel and technology. Finally, the Corporation's amortization of goodwill
and other intangible assets decreased by $488,000 upon the required adoption of
Statement of Financial Accounting Standards No. 147 as of January 1, 2002.
Income Tax Expense. The Corporation's effective tax rate was 24.0% during 2002
compared to 26.5% during 2001. The decrease occurred as a result of certain tax
reduction efforts initiated during 2001 and 2000, including the effect of a full
year of income during 2002 related to bank-owned life insurance.
9
Comparison of Years Ended December 31, 2001 and December 31, 2000
Net Income. Net income was $5.733 million for the fiscal year ended December 31,
2001, an increase of $1.251 million or 27.9% compared with the year ended
December 31, 2000.
In addition, the Corporation's basic earnings per share increased by 31.8% to
$2.32 per share during 2001, exceeding the percentage growth in net income by
14%, due to the 25,468 net decrease in shares outstanding during the year. This
decrease occurred as the combined result of the Corporation's share repurchases
during 2001, which resulted in the repurchase of 60,900 shares of common stock,
less 23,276 shares issued as a result of stock option exercises and less 12,156
shares allocated to employee stock ownership plan participants at year end.
Total Interest Income. For the year ended December 31, 2001, total interest
income decreased to $46.7 million compared to $48.7 million from the year ended
December 31, 2000. The $2.0 million decrease in interest income was mainly the
result of a $65.5 million decrease in the average balance of mortgage-backed
securities and a $48.9 million decrease in the average balance of investment
securities. These decreases were mainly the direct result of lower market
interest rates during 2001 compared to 2000, causing an acceleration of
prepayments of the Corporation's mortgage-backed securities and the early
redemption or "call" of the callable bonds in the Corporation's investment
securities portfolios. The Corporation was able to reinvest a portion of these
proceeds into loans receivable that on average increased by $60.1 million during
2001. However, an average of $49.2 million was maintained in cash and cash
equivalents, earning an average interest rate of 3.13%, which is substantially
less than these funds were earning while invested in mortgage-backed securities
or investment securities.
At year-end 2001, cash and cash equivalents totaled $69.1 million and was
earning the federal funds rate minus 25 basis points or approximately 1.50%.
Thus, the Corporation's earnings during 2002 will be significantly affected by
the general level of market interest rates and the timing of its reinvestment of
cash and cash equivalents into other interest-bearing assets, or the use of the
cash and cash equivalents to reduce interest-bearing liabilities.
Total Interest Expense. Total interest expense decreased to $26.9 million from
$28.9 million for the year ended December 31, 2001 compared to 2000. This
decrease is mainly the result of lower market interest rates during the period
and, consequently, lower rates paid on the Corporation's new certificates of
deposit. In addition, the Corporation 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, mainly the federal funds rate. During 2001 the Federal
Reserve Board lowered the federal funds rate eleven times by a total of 475
basis points. The Corporation reacted to this situation by lowering certain
administered deposit account rates by 25 to 75 basis points during the fourth
quarter of 2001.
Allowance for Loan Losses. The allowance for loan losses was approximately $2.0
million at December 31, 2001 and $1.7 million at December 31, 2000. The
provision for loan losses was $500,000 during 2001 compared with $410,000 during
2000. Charge-offs were $242,000 during 2001 compared to $613,000 during 2000. In
addition, the allowance for loan losses was 0.52% of gross loans receivable at
10
December 2001 compared with 0.47% at December 31, 2000 while gross loans
receivable grew by approximately $16.1 million. Thus, the growth in the
allowance for loan losses is consistent with the growth in the loan portfolio
and the level of actual charge-offs. While management maintains Third Federal's
allowance for losses at a level which it considers to be adequate to provide for
probable losses, there can be no assurance that further additions will not be
made to the allowance and that such losses will not exceed the estimated
amounts.
Non-interest Income. Total non-interest income was $3.2 million during 2001
compared with $1.4 million during 2000. Several items had an impact on the $1.8
million increase in non-interest income. The Corporation recorded a one-time
gain of $1.1 million related to the sale of $10.8 million in deposits and the
related closure of its Warminster, Pennsylvania branch office. In addition, the
Corporation recorded a $444,000 non-recurring gain on the sale of $1.3 million
of land that had been held as a potential site for an administrative facility.
Finally, Third Federal purchased $9 million in bank-owned life insurance on
approximately September 1, 2001. This asset produced an increase in its cash
surrender value of $174,000 during 2001, which income is included in other
operating income.
Non-interest Expense. Total non-interest expense increased by $304,000 during
2001 compared to 2000. This increase occurred mainly from a $489,000 or 6.6%
increase in employee compensation and benefits. In addition, during 2001 the
Corporation decreased its advertising expenditures by $204,000 and decreased by
$122,000 other operating expenses, mainly those related to bank service charges
because the Corporation ceased using a third-party bank for its item processing
activities and rather used its own personnel and technology.
Income Tax Expense. The Corporation's effective tax rate was 26.5% during 2001
compared to 30.0% during 2000. The decrease occurred as a result of certain tax
reduction efforts initiated during 2001 and 2000.
11
Liquidity and Capital Resources
Liquidity. The Savings Bank'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 Savings Bank's primary sources of funds are deposits,
borrowings, and scheduled amortization and prepayment of loan and
mortgage-backed security principal. Loan prepayments, maturing investments and
mortgage-backed security prepayments are greatly influenced by general interest
rates, economic conditions and competition. During the past several years, the
Savings Bank has used such funds primarily to fund maturing time deposits, pay
savings withdrawals, fund lending commitments, purchase new investments,
repurchase its common stock, and increase the Savings Bank's, along with the
Corporation's, liquidity.
The Savings Bank is currently able to fund its operations internally but has,
when deemed prudent, borrowed funds from the Federal Home Loan Bank. As of
December 31, 2002, such borrowed funds totaled $207.4 million. The amount of
these borrowings that will mature during the twelve months ending December 31,
2003 is $27 million. At December 31, 2002 the Savings Bank had a $20 million
unused line of credit and up to approximately $191 million of additional
collateral-based borrowing capacity at the Federal Home Loan Bank.
The amount of certificate accounts that are scheduled to mature during the
twelve months ending December 31, 2003, is approximately $96.7 million. To the
extent that these deposits do not remain at the Savings Bank upon maturity, the
Savings Bank believes that it can replace these funds with deposits, excess
liquidity, Federal Home Loan Bank advances or other borrowings. It has been the
Savings Bank's experience that substantial portions of such maturing deposits
remain at the Savings Bank.
At December 31, 2002, the Savings Bank had outstanding commitments to originate
loans or fund unused lines of credit of $37.5 million. The loan commitments will
be funded during the twelve months ending December 31, 2003. The unused lines of
credit can be funded at any time. Funds required to fill these commitments will
be derived primarily from current excess liquidity, deposit inflows or loan and
security repayments. At December 31, 2002, the Savings Bank had no outstanding
commitments to sell loans.
The Corporation also has obligations under lease agreements. Payments required
under such lease agreements will be approximately $190,000 during the year
ending December 31, 2003.
Capital. Under current regulations, the Savings Bank must have core capital
equal to 4% of adjusted total assets and risk-based capital equal to 8% of
risk-weighted assets, of which 1.5% must be tangible capital, excluding goodwill
and certain other intangible assets. On December 31, 2002, the Savings Bank met
its three regulatory capital requirements.
Management believes that under current regulations, the Savings Bank will
continue to meet its minimum capital requirements in the foreseeable future.
However, events beyond the control of the Savings Bank, such as increased
interest rates or a downturn in the economy in areas in which the Savings Bank
operates, could adversely affect future earnings and as a result, the ability of
the Savings Bank to meet its future minimum capital requirements.
12
ASSET AND LIABILITY MANAGEMENT
The Savings Bank has established an Asset/Liability Management Committee (ALCO)
for the purpose of monitoring and managing market risk, which is defined as the
risk of loss of net interest income or economic value arising from changes in
market interest rates and prices.
The type of market risk which most affects the Corporation's financial
instruments is interest rate risk, which is best quantified by measuring the
change in net interest income that would occur under specific changes in
interest rates. Substantially all of the Savings Bank's interest bearing assets
and liabilities are exposed to interest rate risk. Loss of economic value is
measured using reports generated by the OTS wherein the current market value of
portfolio equity, or economic value, is measured at different hypothetical
interest rate levels centered on the current term structure of interest rates.
Gap reports are used to measure the amount of, and expected change during a
one-year forward period, the net amount of assets and liabilities repricing,
pre-paying and maturing during future periods.
Because the Corporation's bank subsidiary is a savings bank and is regulated by
the OTS, it has policies or procedures in place for measuring interest rate
risk. These policies and procedures stipulate acceptable levels of interest rate
risk.
Interest Rate Risk Measurements. In order to measure interest rate risk
internally, the Corporation uses computer programs which enable it to simulate
the changes that will occur to the Savings Bank's net interest income ("NII")
over several interest rate scenarios which are developed by "shocking" market
interest rates (i.e. moving them immediately and permanently) up and down in 100
basis point increments from their current levels, and by "ramping" interest
rates in such a manner as to adversely affect the Savings Bank's simulated net
interest income. In addition to the level of interest rates, the most critical
assumption regarding the estimated amount of the Savings Bank's NII is the
expected prepayment speed of the Savings Bank's 1-4 family residential loans,
and related mortgage backed securities, the book value of which comprises
approximately 59% of the Corporation's total assets. For this prepayment speed
assumption the Corporation uses median expected prepayment speeds which are
obtained from a reliable third party source. The Corporation also incorporates
into its simulations the effects of the interest rate caps and interest rate
floors that are part of the majority of the Savings Bank's variable rate loans.
The Corporation uses its business planning forecast as the basis for its NII
simulations. Therefore, planned business activities are incorporated into the
measurement horizon. Such activities include assumptions about substantial new
loan and deposit volumes, the pricing of loan and deposit products, and other
assumptions about future activities that may or may not be realized. In order to
quantify the Corporation's NII exposure at December 31, 2002, the Corporation
focused on the simulation of net interest income in the "ramped up 200 basis
points" and "shocked down 50 basis points" scenarios. The Corporation also used
the results of the most recently available OTS model's forecast of market value
of portfolio equity under different
13
interest rate scenarios. In addition, the Corporation prepared current period
and one-year forward "gap" reports in order to show potential mis-matches of
repricing or cash flows from the Corporation's current and projected interest
rate sensitive assets and liabilities. ALCO evaluated the simulation results,
the OTS model results and the "gap" reports and will make adjustments to the
Savings Bank's planned activities if in its view there is a need to do so.
At December 31, 2002, the most adverse change in net interest income over the
two-year horizon commencing January 1, 2003 using the "ramped up 200 basis
points" and "shocked down 50 basis points" simulation methodologies was a $2.0
million or a 4% decrease in expected net interest income. The Corporation
estimated its one-year positive gap (i.e. assets repricing/maturing in excess of
liabilities repricing/maturing) to be $71.0 million in the "ramped up 200 basis
points" scenario, and $185.1 million in the "shocked down 50 basis points"
scenario, compared to $148.4 million under the "rates unchanged" interest rate
scenario. Essentially, the Corporation's net interest income is highly sensitive
to the movement of short-term interest rates because of the large amount of cash
and cash equivalents on hand at December 31, 2002, and highly sensitive to the
movement of long-term interest rates because of the resulting effect on the
prepayment speeds of the Corporation's mortgage-related earning assets. However,
these measurements are highly subjective in nature and are not intended to be a
forecast of net interest income under any rate scenario for the year 2003 or for
any other period.
Impact of Inflation and Changing Prices
The consolidated financial statements and related data have been prepared in
accordance with accounting principles generally accepted in the United States of
America which require the measurement of financial position and operating
results in terms of historical dollars, without consideration for changes in the
relative purchasing power of money over time caused by inflation.
Unlike industrial companies, nearly all of the assets and liabilities of a
financial institution are monetary in nature. As a result, interest rates have a
more significant impact on a financial institution's performance than general
levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the price of goods and services, since
such goods and services are affected by inflation. In the current interest rate
environment, liquidity and the maturity structure of the Savings Bank's assets
and liabilities are critical to the maintenance of acceptable performance
levels.
14
Critical Accounting Policies
Certain critical accounting policies of the Corporation require the use of
significant judgment and accounting estimates in the preparation of the
consolidated financial statements and related data of the Corporation. 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 condition of a significant amount of debtors should
deteriorate more than the Corporation 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 $2,047,000 at December 31, 2002.
Recent Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) 143, "Accounting for Asset Retirement
Obligations." This Statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. SFAS 143 requires an enterprise to record the
fair value of an asset retirement obligation as a liability in the period in
which it incurs a legal obligation associated with the retirement of a tangible
long-lived asset. SFAS 143 also requires the enterprise to record the contra to
the initial obligation as an increase to the carrying amount of the related
long-lived asset (i.e., the associated asset retirement costs) and to depreciate
that cost over the remaining useful life of the asset. The liability is adjusted
at the end of each period to reflect the passage of time (i.e., accretion
expense) and changes in the estimated future cash flows underlying the initial
fair value measurement. Enterprises are required to adopt SFAS 143 for fiscal
years beginning after June 15, 2002. Management does not expect the adoption of
SFAS 143 to have a material effect on the Corporation's financial position,
results of operations, or cash flows.
In October 2001, the FASB issued SFAS 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS 144 supersedes SFAS 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
and certain provisions of APB Opinion No. 30 "Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS
144 establishes standards for long-lived assets to be disposed of, and redefines
the valuation and presentation of discontinued operations. SFAS 144 is effective
for fiscal years beginning after December 15, 2001, and interim periods within
those fiscal years. The adoption of SFAS 144 did not have a material effect on
the Corporation's financial position, results of operations, or cash flows.
In April 2002, the FASB issued SFAS 145, "Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS
145 eliminates extraordinary accounting treatment for reporting gain or loss on
debt extinguishment, and amends other existing authoritative pronouncements to
make various technical corrections, clarify meanings, or describe their
applicability under changed conditions. The provisions of SFAS 145 related to
the
15
rescission of FASB Statement No. 4 are applicable in fiscal years beginning
after May 15, 2002. Management does not expect the adoption of these provisions
of SFAS 145 to have a material effect on the Corporation's financial position,
results of operations, or cash flows. The provisions related to FASB Statement
No. 13 are effective for transactions occurring after May 15, 2002, and all
other provisions are effective for financial statements issued on or after May
15, 2002; however, early application is encouraged. Debt extinguishments
reported as extraordinary items prior to scheduled or early adoption of SFAS 145
would be reclassified in most cases following adoption. The adoption of these
provisions of SFAS 145 did not have a material effect on the Corporation's
financial position, results of operations, or cash flows.
In June 2002, the FASB issued SFAS 146, "Accounting for Costs Associated with
Exit or Disposal Activities." SFAS 146 requires recording costs associated with
exit or disposal activities at their fair values when a liability has been
incurred. Under previous guidance, certain exit costs were accrued upon
management's commitment to an exit plan, which is generally before an actual
liability has been incurred. The requirements of SFAS 146 are effective
prospectively for exit or disposal activities initiated after December 31, 2002;
however, early application is encouraged. Management does not expect the
adoption of SFAS 146 to have a material effect on the Corporation's financial
position, results of operations, or cash flows.
In November 2002, the FASB issued FASB Interpretation 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (FIN 45). FIN 45 requires that upon
issuance of a guarantee, a guarantor must recognize a liability for the fair
value of an obligation assumed under a guarantee. FIN 45 also requires
additional disclosures by a guarantor in its interim and annual financial
statements about the obligations associated with guarantees issued. The
recognition provisions of FIN 45 are effective for any guarantees issued or
modified after December 31, 2002. Management is currently evaluating the effects
of the recognition provisions of FIN 45; however, it does not expect that the
adoption of these provisions will have a material effect on the Corporation's
financial position, results of operations, or cash flows. The disclosure
requirements are effective for financial statements of interim or annual periods
ending after December 15, 2002. The adoption of the disclosure requirements of
FIN 45 did not have a material effect on the Corporation's financial position,
results of operations, or cash flows.
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation- Transition and Disclosure," which provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based compensation. In addition, SFAS 148 amends the disclosure
requirements of SFAS 123 to require prominent disclosure in both annual and
interim financial statements about the method of accounting for stock-based
compensation and the effect of the method used on reported results. Finally,
SFAS 148 amends APB Opinion 28, "Interim Financial Reporting," to require
disclosure about those effects in interim financial information. SFAS 148 is
effective for fiscal and interim periods ending after December 15, 2002. The
adoption of SFAS 148 did not have a material effect on the Corporation's
financial position, results of operations, or cash flows.
16
Report of Independent Certified Public Accountants
Board of Directors
TF Financial Corporation
We have audited the accompanying consolidated statements of financial
position of TF Financial Corporation and Subsidiaries as of December 31, 2002
and 2001, and the related consolidated statements of earnings, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 2002. These financial statements are the responsibility of
the Corporation's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the following consolidated financial statements present
fairly, in all material respects, the consolidated financial position of TF
Financial Corporation and Subsidiaries as of December 31, 2002 and 2001, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 2002, in conformity
with accounting principles generally accepted in the United States of America.
As discussed in Note A6 to the consolidated financial statements, the
Corporation adopted Statement of Financial Standards No. 147, "Acquisitions of
Certain Financial Institutions," effective January 1, 2002.
/s/Grant Thornton LLP
Philadelphia, Pennsylvania
January 23, 2003
17
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
December 31
2002 2001
---- ----
(in thousands)
ASSETS
Cash and cash equivalents $ 100,580 $ 69,139
Certificates of deposit in other financial institutions 220 194
Investment securities available for sale - at fair value 27,243 22,671
Investment securities held to maturity (fair value of $15,187
and $9,830 as of December 31, 2002 and 2001, respectively) 14,563 9,866
Mortgage-backed securities available for sale - at fair value 115,243 99,763
Mortgage-backed securities held to maturity (fair value of $57,346
and $94,735 as of December 31, 2002 and 2001, respectively) 54,592 93,367
Loans receivable, net 370,092 377,635
Federal Home Loan Bank stock - at cost 11,424 11,368
Accrued interest receivable 3,576 4,154
Premises and equipment, net 6,742 7,484
Core deposit intangible asset, net of accumulated amortization of
$2,271 and $2,049 as of December 31, 2002 and 2001, respectively 553 775
Goodwill, net of accumulated amortization of $2,328 4,324 4,324
Other assets 11,880 10,464
--------- ---------
TOTAL ASSETS $ 721,032 $ 711,204
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $ 442,558 $ 422,052
Advances from the Federal Home Loan Bank 207,359 222,359
Advances from borrowers for taxes and insurance 1,330 1,241
Accrued interest payable 2,897 3,762
Other liabilities 4,048 3,815
--------- ---------
Total liabilities 658,192 653,229
--------- ---------
Stockholders' equity
Preferred stock, no par value; 2,000,000 shares authorized
at December 31, 2002 and 2001, none issued - -
Common stock, $0.10 par value; 10,000,000 shares authorized,
5,290,000 shares issued, 2,482,586 and 2,465,986 shares
outstanding at December 31, 2002 and 2001, respectively,
net of shares in treasury: 2002 - 2,567,268; 2001 - 2,571,712 529 529
Retained earnings 59,978 56,370
Additional paid-in capital 51,647 51,652
Unearned ESOP shares (2,401) (2,523)
Treasury stock - at cost (48,809) (48,838)
Accumulated other comprehensive income 1,896 785
--------- ---------
Total stockholders' equity 62,840 57,975
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 721,032 $ 711,204
========= =========
The accompanying notes are an integral part of these statements
18
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended December 31,
2002 2001 2000
---- ---- ----
(in thousands, except per share data)
Interest income
Loans, including fees $ 25,662 $ 28,443 $ 23,756
Mortgage-backed securities 11,423 13,749 18,449
Investment securities 2,271 3,015 6,180
Interest-bearing deposits and other 1,099 1,540 323
-------- -------- --------
TOTAL INTEREST INCOME 40,455 46,747 48,708
-------- -------- --------
Interest expense
Deposits 10,506 14,043 15,082
Borrowings 12,154 12,865 13,839
-------- -------- --------
TOTAL INTEREST EXPENSE 22,660 26,908 28,921
-------- -------- --------
NET INTEREST INCOME 17,795 19,839 19,787
-------- -------- --------
Provision for possible loan losses 988 500 410
NET INTEREST INCOME AFTER PROVISION
FOR POSSIBLE LOAN LOSSES 16,807 19,339 19,377
-------- -------- --------
Non-interest income
Service fees, charges and other operating income 2,114 1,734 1,353
Gain on sale of deposits - 1,092 -
Gain on sale of real estate held for investment - 444 -
Gain (loss) on sale of investment and mortgage-backed securities 1,190 (126) 46
Gain on sale of loans - 28 33
-------- -------- --------
TOTAL NON-INTEREST INCOME 3,304 3,172 1,432
-------- -------- --------
Non-interest expense
Employee compensation and benefits 7,629 7,865 7,376
Occupancy and equipment 2,303 2,493 2,392
Federal deposit insurance premium 75 75 85
Professional fees 408 486 385
Advertising 441 507 711
Other operating 2,336 2,572 2,694
Amortization of core deposit intangible asset 222 266 317
Amortization of goodwill - 444 444
-------- -------- --------
TOTAL NON-INTEREST EXPENSE 13,414 14,708 14,404
-------- -------- --------
INCOME BEFORE INCOME TAXES 6,697 7,803 6,405
Income taxes 1,605 2,070 1,923
-------- -------- --------
NET INCOME $ 5,092 $ 5,733 $ 4,482
======== ======== ========
Earnings per share - basic $ 2.06 $ 2.32 $ 1.76
======== ======== ========
Earnings per share - diluted $ 1.91 $ 2.19 $ 1.72
======== ======== ========
The accompanying notes are an integral part of these statements.
19
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 2002, 2001 and 2000
(in thousands, except share data)
Accumu-
lated
Common Stock Compre-
------------- Additional Unearned Shares hensive Compre-
Par paid-in ESOP acquired by Treasury Retained income hensive
Shares value capital shares MSBP stock earnings (loss) Total income
------ ----- ------- ------ ---- ----- -------- ------- ----- ------
Balance at January 1, 2000 2,576,160 $529 $51,931 $(2,766) $ (71) $(46,996) $ 48,905 $(3,085) $48,447
Allocation of ESOP shares 12,156 - 52 122 - - - - 174
Amortization of MSBP expense - - 33 - 67 - - - 100
Purchase of treasury stock (138,112) - - - - (1,972) - - (1,972)
Cash dividends - common stock - - - - - - (1,326) - (1,326)
Exercise of options 41,250 - (312) - - 795 - - 483
Other comprehensive income,
net of taxes - - - - - - - 2,721 2,721 $ 2,721
Net income for the year ended
December 31, 2000 - - - - - - 4,482 - 4,482 4,482
--------- ---- ------- ------- ----- -------- -------- ------- ------- -------
Comprehensive income $ 7,203
=======
Balance at December 31, 2000 2,491,454 $529 $51,704 $(2,644) $ (4) $(48,173) $52,061 $ (364) $53,109
========= ==== ======= ======= ===== ======== ======== ======= =======
Allocation of ESOP shares 12,156 $ - $ 112 $ 121 $ - $ - $ - $ - $ 233
Amortization of MSBP expense - - 3 - 4 - - - 7
Purchase of treasury stock (60,900) - - - - (1,110) - - (1,110)
Cash dividends - common stock - - - - - - (1,424) - (1,424)
Exercise of options 23,276 - (167) - - 445 - - 278
Other comprehensive income,
net of taxes - - - - - - - 1,149 1,149 $ 1,149
Net income for the year ended
December 31, 2001 - - - - - - 5,733 - 5,733 5,733
---------- ---- ------- ------- ----- -------- -------- ------- ------- -------
Comprehensive income $ 6,882
=======
Balance at December 31, 2001 2,465,986 $529 $51,652 $(2,523) $ - $(48,838) $ 56,370 $ 785 $57,975
========== ==== ======= ======= ===== ======== ======== ======= =======
(Continued)
20
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY - CONTINUED
Years ended December 31, 2002, 2001 and 2000
(in thousands, except share data)
Accumu-
lated
Common Stock Compre-
------------- Additional Unearned Shares hensive Compre-
Par paid-in ESOP acquired by Treasury Retained income hensive
Shares value capital shares MSBP stock earnings (loss) Total income
------ ----- ------- ------ ---- ----- -------- ------- ----- ------
Balance at December 31, 2001 2,465,986 $529 $51,652 $(2,523) $ - $(48,838) $56,370 $ 785 $57,975
========= ==== ======= ======= ==== ======== ======= ====== =======
Allocation of ESOP shares 12,156 $ - $ 151 $ 122 $ - $ - $ - $ - $ 273
Amortization of MSBP expense - - - - - - - - -
Purchase of treasury stock (16,894) - - - - (376) - - (376)
Cash dividends - common stock - - - - - - (1,484) - (1,484)
Exercise of options 21,338 - (156) - - 405 - - 249
Other comprehensive income,
net of taxes - - - - - - - 1,111 1,111 $ 1,111
Net income for the year ended
December 31, 2002 - - - - - - 5,092 - 5,092 5,092
--------- ---- ------- ------- ----- -------- ------- ------ ------- -------
Comprehensive income $ 6,203
=======
Balance at December 31, 2002 2,482,586 $529 $51,647 $(2,401) $ - $(48,809) $59,978 $1,896 $62,840
========= ==== ======= ======= ===== ======== ======= ====== =======
The accompanying notes are an integral part of this statement.
21
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
2002 2001 2000
---- ---- ----
(in thousands)
OPERATING ACTIVITIES
Net income $ 5,092 $ 5,733 $ 4,482
Adjustments to reconcile net income to net cash provided
by operating activities
Amortization of
Mortgage loan servicing rights 14 14 13
Deferred loan origination fees (201) (387) (119)
Premiums and discounts on investment securities, net 108 36 65
Premiums and discounts on mortgage-backed
securities and loans, net 758 (72) (544)
Goodwill and other intangibles 222 710 761
Deferred income taxes (19) (172) (122)
Provision for loan losses and provision for losses on real estate 988 510 459
Depreciation of premises and equipment 1,014 1,092 1,040
Increase in value of bank-owned life insurance (520) (174) -
Stock-based benefit programs 273 240 274
(Gain) loss on sale of
Investment and mortgage-backed securities (1,190) 126 (46)
Real estate acquired through foreclosure (60) (27) (48)
Property, equipment and real estate held for investment - (444) -
Mortgage loans - (28) (33)
Deposits - (1,092) -
(Increase) decrease in
Accrued interest receivable 578 1,369 (565)
Other assets (89) 248 (283)
Increase (decrease) in
Accrued interest payable (865) (908) 921
Other liabilities (318) (470) (122)
--------- -------- --------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 5,785 6,304 6,133
--------- -------- --------
INVESTING ACTIVITIES
Loan originations (80,943) (48,526) (74,555)
Purchases of loans (59,926) (74,647) (72,990)
Loan principal payments 147,296 106,019 71,724
Principal repayments on mortgage-backed securities
held to maturity 41,499 41,456 24,827
Principal repayments on mortgage-backed securities
available for sale 39,005 22,415 11,925
Proceeds from loan sales - 1,480 1,669
Purchases and maturities of certificates of deposit in other
financial institutions, net (26) (3) 656
Purchases of investment and mortgage-backed securities
held to maturity (9,650) - (96,595)
Purchase of investment securities and mortgage-backed
securities available for sale (103,201) (47,364) (11,508)
(Continued)
22
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Year ended December 31,
2002 2001 2000
--------- --------- ---------
(in thousands)
Purchase of bank-owned life insurance $ - $ (9,000) $ -
Proceeds from maturities of investment securities
held to maturity 2,060 51,233 99,726
Proceeds from maturities of investment securities
available for sale 8,000 18,501 -
Proceeds from the sale of investment and mortgage-backed
securities available for sale 38,380 4,890 41,892
(Purchase) redemption of Federal Home Loan Bank stock (56) 1,674 -
(Purchase) sale of property, equipment and real estate held for investment (769) 1,635 -
Proceeds from sales of real estate acquired through foreclosure 275 163 452
Purchase of premises and equipment (272) (357) (1,273)
--------- --------- ---------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 21,672 69,569 (4,050)
--------- --------- ---------
FINANCING ACTIVITIES
Net increase (decrease) in demand deposit/NOW accounts, passbook
savings accounts and certificates of deposit 20,506 31,989 (847)
Funding of sale of deposits - (9,706) -
Net decrease in advances from Federal Home
Loan Bank (15,000) (22,500) (3,674)
Net decrease in securities sold under agreements to repurchase - (14,962) (804)
Net increase (decrease) in advances from borrowers for taxes and insurance 88 83 (40)
Treasury stock acquired (376) (1,110) (1,972)
Exercise of stock options 249 278 483
Common stock dividends paid (1,484) (1,424) (1,326)
--------- --------- ---------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 3,984 (17,352) (8,180)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 31,441 58,521 (6,097)
Cash and cash equivalents at beginning of year 69,139 10,618 16,715
--------- --------- ---------
Cash and cash equivalents at end of year $ 100,580 $ 69,139 $ 10,618
========= ========= =========
Supplemental disclosure of cash flow information
Cash paid for
Interest on deposits and advances from Federal Home Loan Bank $ 23,525 $ 27,816 $ 28,122
Income taxes $ 2,050 $ 2,495 $ 1,675
Non-cash transactions
Transfers from loans to real estate acquired through
foreclosure $ - $ - $ 127
The accompanying notes are an integral part of these statements.
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 and 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
TF Financial Corporation (the Corporation) is a unitary savings and loan
holding company, organized under the laws of the State of Delaware, which
conducts its consumer banking operations primarily through its wholly owned
subsidiary, Third Federal Savings Bank (Third Federal or the Bank). Third
Federal is a federally chartered-stock savings bank insured by the Federal
Deposit Insurance Corporation. Third Federal is a community-oriented savings
institution that conducts operations from its main office in Newtown,
Pennsylvania, ten full-service branch offices located in Philadelphia and
Bucks counties, Pennsylvania, and three full-service branch offices located
in Mercer County, New Jersey. The Bank competes with other banking and
financial institutions in its primary market communities, including
financial institutions with resources substantially greater than its own.
Commercial banks, savings banks, savings and loan associations, credit
unions and money market funds actively compete for savings and time deposits
and loans. Such institutions, as well as consumer finance and insurance
companies, may be considered competitors of the Bank with respect to one or
more of the services it renders.
The Bank is subject to regulations of certain state and federal agencies
and, accordingly, those regulatory authorities periodically examine it. As a
consequence of the extensive regulation of commercial banking activities,
the Bank's business is particularly susceptible to being affected by state
and federal legislation and regulations.
1. Principles of Consolidation and Basis of Presentation
-----------------------------------------------------
The consolidated financial statements include the accounts of Corporation
and its wholly owned subsidiaries: Third Federal, and its wholly owned
subsidiary, Third Delaware Corporation, TF Investments, Teragon Financial
Corporation and Penns Trail Development Corporation (collectively, the
Corporation). All material intercompany balances and transactions have been
eliminated in consolidation.
The accounting policies of the Corporation conform to accounting principles
generally accepted in the United States of America (US GAAP) and predominant
practices within the banking industry. The preparation of financial
statements in conformity with US GAAP requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. The more significant accounting policies are summarized below.
2. Cash and Cash Equivalents
-------------------------
The Corporation considers cash, due from banks, federal funds sold and
interest-bearing deposits in other financial institutions, with original
terms to maturity of less than three months, as cash equivalents for
presentation purposes in the consolidated statements of financial position
and cash flows.
3. Investment and Mortgage-Backed Securities
-----------------------------------------
The Corporation accounts for investment and mortgage-backed securities in
accordance with Statement of Financial Accounting Standards (SFAS) No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." The
Corporation classifies its investment, mortgage-backed and marketable equity
securities in one of three categories: held to maturity, trading, or
available for sale. The Corporation does not presently engage in security
trading activities.
(Continued)
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2002 and 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Investment, mortgage-backed and marketable equity securities available for
sale are stated at fair value, with net unrealized gains and losses excluded
from income and reported in other comprehensive income. Realized gains and
losses on the sale of securities are recognized using the specific
identification method.
Investment and mortgage-backed securities held to maturity are carried at
cost, net of unamortized premiums and discounts, which are recognized in
interest income using the interest method. The Corporation has the ability
and it is management's intention to hold such assets to maturity.
The Corporation accounts for derivatives under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" as amended in June, 1999 by
SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities
- Deferral of the Effective Date of FASB Statement No. 133," and in June,
2000, by SFAS No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities," (collectively SFAS No. 133). SFAS No. 133
requires that entities recognize all derivatives as either assets or
liabilities in the statement of financial condition and measure those
instruments at fair value. Under SFAS No. 133 an entity may designate a
derivative as a hedge of exposure to either changes in: (a) fair value of a
recognized asset or liability or firm commitment, (b) cash flows of a
recognized or forecasted transaction, or (c) foreign currencies of a net
investment in foreign operations, firm commitments, available-for-sale
securities or a forecasted transaction. Depending upon the effectiveness of
the hedge and/or the transaction being hedged, any change in the fair value
of the derivative instrument is either recognized in earnings in the current
year, deferred to future periods, or recognized in other comprehensive
income. Changes in the fair value of all derivative instruments not
recognized as hedge accounting are recognized in current year earnings.
SFAS No. 119 "Disclosure About Derivative Financial Instruments and Fair
Value of Financial Instruments" ("SFAS 119") requires disclosures about
financial instruments, which are defined as futures, forwards, swap and
option contracts and other financial instruments with similar
characteristics. On balance sheet receivables and payables are excluded from
this definition. The Corporation did not hold any derivative financial
instruments as defined by SFAS No. 119 at December 31, 2002, 2001 or 2000.
4. Loans Receivable
----------------
Loans receivable are stated at unpaid principal balances less the allowance
for loan losses and net deferred loan origination fees and unamortized
premiums. Loan origination fees and unamortized premiums on mortgage loans
are amortized to income using the interest method over the remaining period
to contractual maturity, adjusted for actual prepayments.
Management's periodic evaluation of the adequacy of the loan loss allowance
is based on the Bank's historical loss experience, known and inherent risks
in the portfolio, adverse situations that may affect the borrower's ability
to repay, the estimated value of any underlying collateral and current
economic conditions. Actual losses may be higher or lower than historical
trends, which vary. The allowance for loan losses is increased by charges to
income and decreased by charge-offs (net of recoveries).
(Continued)
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2002 and 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
The Bank provides an allowance for accrued but uncollected interest when the
loan becomes more than ninety days past due or is identified as impaired.
The allowance is established by a charge to interest income equal to all
interest previously accrued, and income is subsequently recognized only to
the extent that cash payments are received until, in management's judgment,
the borrower's ability to make periodic interest and principal payments is
no longer impaired, in which case the loan is returned to accrual status.
The Corporation accounts for loans in accordance with SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan," as amended by SFAS No.
118, "Accounting by Creditors for Impairment of a Loan - Income Recognition
and Disclosures." SFAS No. 114 requires that a creditor measure impairment
based on the present value of expected future cash flows discounted at the
loan's effective interest rate, except that as a practical expedient, a
creditor may measure impairment based on a loan's observable market price,
or the fair value of the collateral if the loan is collateral dependent.
Regardless of the measurement method, a creditor must measure impairment
based on the fair value of the collateral when the creditor determines that
foreclosure is probable. SFAS No. 118 allows creditors to use existing
methods for recognizing interest income on impaired loans.
The Bank identifies a loan as impaired when it is probable that interest and
principal will not be collected according to the contractual terms of the
loan agreement. The accrual of interest is discontinued on such loans and
cash payments received are applied to reduce principal.
Loan impairment is measured by estimating the expected future cash flows and
discounting them at the respective effective interest rate or by valuing the
underlying collateral. When necessary an allowance for loan losses has been
established for all loans identified as impaired.
5. Premises and Equipment
----------------------
Land is carried at cost. Buildings and furniture, fixtures and equipment are
carried at cost less accumulated depreciation. Depreciation is provided by
the straight-line method over the estimated useful lives of the assets.
(Continued)
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2002 and 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
6. Goodwill and Other Intangible Assets
------------------------------------
In 1996 the Bank acquired three Mercer County, New Jersey offices and
related deposits of Cenlar Federal Savings Bank. The Bank assumed $137.6
million in deposits in exchange for $126.5 million in cash. As a result of
the acquisition, the Bank recorded core deposit intangible of $2.8 million
and goodwill of $6.7 million. The core deposit intangible acquired is being
amortized on an accelerated basis over 10 years. The goodwill acquired from
the acquisition was recorded as an unidentifiable intangible asset under
SFAS No. 72, "Accounting for Certain Acquisitions of Banking or Thrift
Institutions."
On January 1, 2002, the Corporation adopted Financial Accounting Standards
Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 141,
"Business Combinations," SFAS No. 142, "Goodwill and Intangible Assets," and
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets." The adoption of these statements did not have a material impact on
the financial condition or results of operations of the Corporation.
On October 1, 2002 the FASB issued SFAS No. 147,"Acquisitions of Certain
Financial Institutions." Except for transactions between two or more mutual
enterprises, SFAS No. 147 removes the acquisitions of financial institutions
from the scope of both SFAS No. 72 and FASB Interpretation No. 9 and
requires that those transactions be accounted for in accordance with SFAS
No. 141 and SFAS No. 142. Thus, the requirement of SFAS No. 72 to recognize
(and subsequently amortize) any excess of the fair value of liabilities
assumed over the fair value of tangible and identifiable intangible assets
acquired ("SFAS 72 goodwill") as an unidentifiable intangible no longer
applies to acquisitions within the scope of SFAS No. 147. In addition, SFAS
No. 147 amends SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," to include within its scope long-term customer
relationship intangible assets of financial institutions such as
depositor-relationship intangible assets. Consequently, those intangible
assets are subject to undiscounted cash flow recoverability tests and
impairment loss recognition and measurement provisions. Finally, SFAS No.
147 provides that branch acquisitions that meet the definition of a business
should be accounted for as a business combination. SFAS No. 147 was
effective October 1, 2002, although earlier application was permitted. The
Corporation has elected to apply SFAS No. 147 as of January 1, 2002.
The Corporation had $4,324,000 of SFAS 72 goodwill and $553,000 of core
deposit intangible assets at December 31, 2001 remaining from the 1996
branch acquisition that management of the Corporation has concluded was a
business combination in accordance with SFAS No. 147. In addition, the
Corporation has tested the goodwill and core deposit intangible assets for
impairment prior to its fiscal year ending December 31, 2002. No impairment
has been recognized.
(Continued)
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2002 and 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
7. Transfers of Financial Assets
-----------------------------
The Corporation accounts for the transfer of financial assets in accordance
with SFAS No. 140 "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities." The standard is based on
consistent application of a financial-components approach that recognizes
the financial and servicing assets it controls and the liabilities it has
incurred, derecognizes financial assets when control has been surrendered
and derecognizes liabilities when extinguished. The standard provides
consistent guidelines for distinguishing transfers of financial assets from
transfers that are secured borrowings
8. Benefit Plans
-------------
The Corporation has established an Employee Stock Ownership Plan (ESOP)
covering eligible employees with six months of service, as defined by the
ESOP. The Corporation accounts for the ESOP in accordance with the American
Institute of Certified Public Accountants' Statement of Position (SOP) 93-6,
"Employers' Accounting for Employee Stock Ownership Plans." SOP 93-6
addresses the accounting for shares of stock issued to employees by an ESOP.
SOP 93-6 requires that the employer record compensation expense in the
amount equal to the fair value of shares committed to be released from the
ESOP to employees.
(Continued)
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2002 and 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
The Corporation has several fixed stock option plans that allow the
Corporation to grant options to employees and directors for up to 794,000
shares of common stock. The options, which have a term of 10 years when
issued, vest either immediately or over a three to five year period. The
exercise price of each option equals the market price of the Corporation's
stock on the date of grant. The Corporation accounts for stock-based
compensation in accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation," which contains a fair value-based method for valuing
stock-based compensation that entities may use, which measures compensation
cost at the grant date based on the fair value of the award. Compensation is
then recognized over the service period, which is usually the vesting
period. Alternatively, the standard permits entities to continue accounting
for employee stock options and similar instruments under Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees." Entities that continue to account for stock options using APB
Opinion No. 25 are required to make pro forma disclosures of net income and
earnings per share, as if the fair value-based method of accounting defined
in SFAS No. 123 had been applied. The Corporation's employee stock option
plans are accounted for using the intrinsic value method under APB Opinion
No. 25. 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 Corporation's net income and
earnings per share would have been reduced to the pro forma amounts
indicated below. Information for the years ended December 31, 2001 and 2000
has been revised to more accurately account for forfeitures.
2002 2001 2000
--------- --------- ---------
Net income
As reported $ 5,092 $ 5,733 $ 4,482
Deduct: stock-based compensation expense determined
using the fair value method, net of related tax effects 58 64 52
--------- --------- ---------
Pro forma $ 5,034 $ 5,669 $ 4,430
========= ========= =========
Basic earnings per share
As reported $ 2.06 $ 2.32 $ 1.76
Deduct: stock-based compensation expense determined
using the fair value method, net of related tax effects 0.02 0.02 0.02
--------- --------- ---------
Pro forma $ 2.04 $ 2.30 $ 1.74
========= ========= =========
Diluted earnings per share
As reported $ 1.91 $ 2.19 $ 1.72
Deduct: stock-based compensation expense determined
using the fair value method, net of related tax effects 0.01 0.01 0.00
--------- --------- ---------
Pro forma $ 1.90 $ 2.18 $ 1.72
========= ========= =========
Weighted average fair value of options granted during the
year $ 6.60 $ 5.49 $ 3.48
(Continued)
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2002 and 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted
average assumptions used for grants in 2002, 2001 and 2000, respectively: a
dividend yield of 2.78%, 3.23%, and 4.32%; expected volatility of 29%, 30%,
and 30%, risk-free interest rate of 2.78%, 5.02%, and 6.16%, and expected
lives of six years for all options.
9. Income Taxes
------------
The Corporation accounts for income taxes under the liability method
specified in SFAS No. 109, "Accounting for Income Taxes" whereby deferred
income taxes are recognized for the tax consequences of "temporary
differences" by applying enacted statutory tax rates applicable to future
years to differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities. The effect on deferred
taxes of a change in tax rates is recognized in income in the period that
includes the enactment date.
10. Advertising Costs
-----------------
The Corporation expenses advertising costs as incurred.
11. Earnings Per Share
------------------
The Corporation follows the provisions of SFAS No. 128, "Earnings Per
Share." Basic earnings per share excludes dilution and is computed by
dividing income available to common shareholders by the weighted average
common shares outstanding during the period. Diluted earnings per share
takes into account the potential dilution that could occur if securities or
other contracts to issue common stock were exercised and converted into
common stock.
(Continued)
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2002 and 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
12. Comprehensive Income
--------------------
The Corporation follows SFAS No. 130, "Reporting Comprehensive Income." SFAS
No. 130 establishes standards to provide prominent disclosure of
comprehensive income items. Comprehensive income is the change in equity of
a business enterprise during a period from transactions and other events and
circumstances from non-owner sources. The Corporation's other comprehensive
income consists of net unrealized gains and losses on investment securities
available for sale. Comprehensive income for 2002, 2001 and 2000 was
$6,203,000, $6,882,000, and $7,203,000, respectively. The components of
other comprehensive income are as follows:
December 31, 2002
-----------------
Tax
Before tax (expense) Net of tax
amount benefit amount
------ ------- ------
(in thousands)
Unrealized gains on securities
Unrealized holding gains arising during period $ 2,872 $ (976) $ 1,896
Reclassification adjustment for gains realized
in net income (1,190) 405 (785)
-------- ------ -------
Other comprehensive income, net $ 1,682 $ (571) $ 1,111
======== ====== =======
December 31, 2001
-----------------
Tax
Before tax (expense) Net of tax
amount benefit amount
------ ------- ------
(in thousands)
Unrealized gains on securities
Unrealized holding gains arising during period $ 1,615 $ (549) $ 1,066
Reclassification adjustment for losses realized
in net income 126 (43) 83
------- ------ -------
Other comprehensive income, net $ 1,741 $ (592) $ 1,149
======= ====== =======
December 31, 2000
-----------------
Tax
Before tax (expense) Net of tax
amount benefit amount
------ ------- ------
(in thousands)
Unrealized gains on securities
Unrealized holding gains arising during period $ 4,165 $ (1,414) $ 2,751
Reclassification adjustment for gains realized in net income (46) 16 (30)
------- -------- -------
Other comprehensive income, net $ 4,119 $ (1,398) $ 2,721
======= ======== =======
(Continued)
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2002 and 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
13. Segment Reporting
-----------------
The Corporation follows SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 established standards for
the way public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in subsequent interim
financial reports issued to shareholders. It also establishes standards for
related disclosure about products and services, geographic areas, and major
customers. The statement requires that a public business enterprise report
financial and descriptive information about its reportable operating
segments. Operating segments are components of an enterprise about which
separate financial information is available that is evaluated regularly by
the chief operating decision-maker in deciding how to allocate resources and
assess performance. The statement also requires that public enterprises
report a measure of segment profit or loss, certain specific revenue and
expense items and segment assets. It also requires that information be
reported about revenues derived from the enterprises' products or services,
or about the countries in which the enterprises earn revenues and holds
assets, and about major customers, regardless of whether that information is
used in making operating decisions.
The Corporation has one reportable segment, "Community Banking." All of the
Corporation's activities are interrelated, and each activity is dependent
and assessed based on how each of the activities of the Corporation supports
the others. For example, commercial lending is dependent upon the ability of
the Bank to fund itself with retail deposits and other borrowings and to
manage interest rate and credit risk. This situation is also similar for
consumer and residential mortgage lending. Accordingly, all significant
operating decisions are based upon analysis of the Corporation as one
operating segment or unit.
14. Reclassifications
-----------------
Certain prior year amounts have been reclassified to conform to the current
period presentation.
NOTE B - CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of the following:
December 31,
-------------------
2002 2001
-------- --------
(in thousands)
Cash and due from banks $ 6,657 $ 11,176
Interest-bearing deposits in other financial institutions 93,823 57,863
Federal funds sold 100 100
-------- --------
$100,580 $ 69,139
======== ========
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2002 and 2001
NOTE C - SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
The Bank has entered into purchases of securities under agreements to resell
substantially identical securities. However, there were no securities
purchased under agreements to resell during the years ended December 31,
2002 or 2001.
NOTE D - INVESTMENT AND MORTGAGE-BACKED SECURITIES
The amortized cost, gross unrealized gains and losses, and fair value of the
Corporation's investment and mortgage-backed securities at December 31, 2002
and 2001, are summarized as follows:
December 31, 2002
-----------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
--------- --------- ------- ---------
(in thousands)
Investment securities held to maturity
State and political subdivisions $ 3,700 $ 180 $ - $ 3,880
U.S. Government and federal agencies 4,000 125 - 4,125
Corporate debt securities 6,863 319 - 7,182
--------- --------- ------- ---------
14,563 624 - 15,187
Mortgage-backed securities held to maturity 54,592 2,754 - 57,346
--------- --------- ------- ---------
$ 69,155 $ 3,378 $ - $ 72,533
========= ========= ======= =========
Investment securities available for sale
U.S. Government and federal agencies $ 15,964 $ 120 $ - $ 16,084
Corporate debt securities 10,034 163 - 10,197
State and political subdivisions 453 11 - 464
Mutual funds 500 - (2) 498
--------- --------- ------- ---------
26,951 294 (2) 27,243
Mortgage-backed securities available for sale 112,663 2,634 (54) 115,243
--------- --------- ------- ---------
$ 139,614 $ 2,928 $ (56) $ 142,486
========= ========= ======= =========
(Continued)
33
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2002 and 2001
NOTE D - INVESTMENT AND MORTGAGE-BACKED SECURITIES - Continued
December 31, 2001
-----------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
--------- --------- --------- ---------
(in thousands)
Investment securities held to maturity
State and political subdivisions $ 5,743 $ 44 $ - $ 5,787
Corporate debt securities 4,123 - (80) 4,043
--------- --------- --------- ---------
9,866 44 (80) 9,830
Mortgage-backed securities held to maturity 93,367 1,449 (81) 94,735
--------- --------- --------- ---------
$ 103,233 $ 1,493 $ (161) $ 104,565
========= ========= ========= =========
Investment securities available for sale
U.S. Government and federal agencies $ 11,018 $ 10 $ (99) $ 10,929
Corporate debt securities 11,070 202 (27) 11,245
Mutual funds 500 - (3) 497
--------- --------- --------- ---------
22,588 212 (129) 22,671
Mortgage-backed securities available for sale 98,656 1,491 (384) 99,763
--------- --------- --------- ---------
$ 121,244 $ 1,703 $ (513) $ 122,434
========= ========= ========= =========
Gross realized gains were $1,190,000, $7,000, and $151,000 for the years
ended December 31, 2002, 2001 and 2000, respectively. These gains resulted
from the sale of investment and mortgage-backed securities of $37.2 million,
$507,000, and $18.9 million for the years ended December 31, 2002, 2001 and
2000, respectively.
Gross realized losses were $0, $133,000, and $105,000 for the years ended
December 31, 2002, 2001 and 2000, respectively. These losses resulted from
the sale of investment and mortgage-backed securities of $0 million, $4.4
million, and $23.0 million for the years ended December 31, 2002, 2001 and
2000, respectively.
(Continued)
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2002 and 2001
NOTE D - INVESTMENT AND MORTGAGE-BACKED SECURITIES - Continued
The amortized cost and fair value of investment and mortgage-backed
securities, by contractual maturity, are shown below.
December 31, 2002
-----------------
Available for sale Held to maturity
------------------ ----------------
Amortized Fair Amortized Fair
cost value cost value
---- ----- ---- -----
(in thousands)
Investment securities
Due in one year or less $ 18,471 $ 18,518 $ - $ -
Due after one year through five years 8,027 8,261 11,193 11,640
Due after five years through 10 years - - 2,155 2,326
Due after 10 years 453 464 1,215 1,121
-------- -------- -------- --------
26,951 27,243 14,563 15,187
Mortgage-backed securities 112,663 115,243 54,592 57,346
-------- -------- -------- --------
$139,614 $142,486 $ 69,155 $ 72,533
======== ======== ======== ========
The amortized cost, gross unrealized gains and losses, and estimated market
value of mortgage-backed securities, by issuer, are summarized as follows:
December 31, 2002
-----------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses Value
--------- --------- ------- ---------
(in thousands)
Mortgage-backed securities held to maturity
FHLMC certificates $ 21,870 $ 1,399 $ - $ 23,269
FNMA certificates 11,781 480 - 12,261
GNMA certificates 18,278 852 - 19,130
Real estate mortgage investment conduit 2,519 23 - 2,542
Other mortgage-backed securities 144 - - 144
--------- --------- ------- ---------
$ 54,592 $ 2,754 $ - $ 57,346
========= ========= ======= =========
Mortgage-backed securities available for sale
FHLMC certificates $ 663 $ 36 - $ 699
FNMA certificates 11,385 493 - 11,878
GNMA certificates - - - -
Real estate mortgage investment conduit 100,615 2,105 (54) 102,666
--------- --------- ------- ---------
$ 112,663 $ 2,634 $ (54) $ 115,243
========= ========= ======= =========
(Continued)
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2002 and 2001
NOTE D - INVESTMENT AND MORTGAGE-BACKED SECURITIES - Continued
December 31, 2001
-----------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses Value
--------- --------- ------- ---------
(in thousands)
Mortgage-backed securities held to maturity
FHLMC certificates $ 35,000 $ 789 $ (36) $ 35,754
FNMA certificates 15,739 168 (35) 15,871
GNMA certificates 29,877 274 - 30,151
Real estate mortgage investment conduit 12,550 218 (3) 12,765
Other mortgage-backed securities 201 - (7) 194
-------- -------- -------- --------
$ 93,367 $ 1,449 $ (81) $ 94,735
======== ======== ======== ========
Mortgage-backed securities available for sale
FHLMC certificates $ 1,077 $ 31 - $ 1,108
FNMA certificates 22,415 74 (30) 22,459
GNMA certificates 5,462 53 - 5,515
Real estate mortgage investment conduit 69,702 1,333 (354) 70,681
-------- -------- -------- --------
$ 98,656 $ 1,491 $ (384) $ 99,763
======== ======== ======== ========
Investment securities having an aggregate amortized cost of approximately
$5.0 and $4.0 million were pledged to secure public deposits at December 31,
2002 and 2001, respectively.
There were no securities held other than U.S. Government and agencies from a
single issuer that represented more than 10% of stockholders' equity.
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2002 and 2001
NOTE E - LOANS RECEIVABLE
Loans receivable are summarized as follows:
December 31,
------------
2002 2001
---- ----
(in thousands)
First mortgage loans (principally conventional)
Secured by one-to-four family residences $ 227,953 $ 222,016
Secured by other non-residential properties 85,493 93,572
Construction loans 12,026 9,824
--------- ---------
325,472 325,412
Net deferred loan origination cost (fees) and unamortized premiums 377 (633)
--------- ---------
Total first mortgage loans 325,849 324,779
--------- ---------
Consumer and other loans
Commercial 8,005 9,285
Home equity and second mortgage 25,480 25,640
Leases 2,246 3,544
Other 10,490 16,154
--------- ---------
46,221 54,623
--------- ---------
Unearned premiums 69 205
--------- ---------
Total consumer and other loans 46,290 54,828
--------- ---------
Less allowance for loan losses (2,047) (1,972)
--------- ---------
Total loans receivable $ 370,092 $ 377,635
========= =========
Activity in the allowance for loan losses is summarized as follows:
December 31,
------------
2002 2001 2000
------- ------- -------
(in thousands)
Balance at beginning of year $ 1,972 $ 1,714 $ 1,917
Provision charged to income 988 500 410
Charge-offs, net (913) (242) (613)
------- ------- -------
Balance at end of year $ 2,047 $ 1,972 $ 1,714
======= ======= =======
Non-performing loans, which include non-accrual loans for which the accrual
of interest has been discontinued and loan balances past due over 90 days
that are not on a non-accrual status but that management expects will
eventually be paid in full, totaled approximately $3.8 million and $3.8
million at December 31, 2002 and 2001, respectively. Interest income that
would have been recorded under the original terms of such loans totaled
approximately $307,000, $284,000, and $112,000 for the years ended December
31, 2002, 2001 and 2000, respectively. No interest income has been
recognized on non-accrual loans for any of the periods presented.
(Continued)
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2002 and 2001
NOTE E - LOANS RECEIVABLE - Continued
The Bank has no concentration of loans to borrowers engaged in similar
activities that exceeded 10% of loans at December 31, 2002 and 2001. In the
ordinary course of business, the Bank has granted loans to certain executive
officers, directors and their related interests. Related party loans are
made on substantially the same terms as those prevailing at the time for
comparable transactions with unrelated persons and do not involve more than
the normal risk of collectibility. The aggregate dollar amount of these
loans was approximately $1,112,000, and $1,039,000 at December 31, 2002 and
2001, respectively. For the year ended December 31, 2002, principal
repayments of approximately $27,000 were received and $100,000 was disbursed
to executive officers, directors or their related interests.
NOTE F - LOAN SERVICING
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial position. The unpaid principal balances
of these loans are summarized as follows:
December 31,
2002 2001
------- -------
(in thousands)
Mortgage loan servicing portfolios
FHLMC $ 3,758 $ 6,789
Other investors 8,203 7,068
------- -------
$11,961 $13,857
======= =======
Custodial balances maintained in connection with the foregoing loan
servicing totaled approximately $149,000, and $287,000 at December 31, 2002
and 2001, respectively. The net servicing revenue on mortgage loans serviced
for others is immaterial for all periods presented.
NOTE G - PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
December 31,
Estimated ---------------------
useful lives 2002 2001
------------ ------- -------
(in thousands)
Buildings 30 years $ 6,483 $ 6,454
Leasehold improvements 5 years 1,264 1,264
Furniture, fixtures and equipment 3-7 years 8,390 8,147
------- -------
16,137 15,865
Less accumulated depreciation 11,238 10,224
------- -------
4,899 5,641
Land 1,843 1,843
------- -------
$ 6,742 $ 7,484
======= =======
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2002 and 2001
NOTE H - GOODWILL AND CORE DEPOSIT INTANGIBLE ASSET
A reconciliation of net income and earnings per share to amounts excluding
goodwill amortization for years prior to 2002 is as follows:
(000s in thousands except per share amounts) 2002 2001 2000
------ ------ ------
Reported net income $5,092 $5,733 $4,482
Add back: goodwill amortization, net of related tax benefit - 293 293
------ ------ ------
Adjusted net income $5,092 $6,026 $4,775
====== ====== ======
Basic earnings per share
Reported net income $ 2.06 $ 2.32 $ 1.76
Add back: goodwill amortization, net of related tax benefit - 0.12 0.12
------ ------ ------
Adjusted net income $ 2.06 $ 2.44 $ 1.88
====== ====== ======
Diluted earnings per share
Reported net income $ 1.87 $ 2.15 $ 1.71
Add back: goodwill amortization, net of related tax benefit - 0.11 0.11
------ ------ ------
Adjusted net income $ 1.87 $ 2.26 $ 1.82
====== ====== ======
Core deposit intangible amortization for each of the five years subsequent to
December 31, 2002 is estimated to be as follows:
Year ending December 31,
------------------------
2003 $185,000
2004 154,500
2005 129,250
2006 83,989
--------
$552,739
========
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2002 and 2001
NOTE I - DEPOSITS
Deposits are summarized as follows:
December 31,
Deposit type 2002 2001
- ------------ -------- --------
(in thousands)
Demand $20,810 $18,200
NOW 48,496 46,990
Money Market 43,677 42,557
Passbook savings 182,813 169,576
-------- --------
Total demand, transaction and passbook deposits 295,796 277,323
Certificates of deposit 146,762 144,729
-------- --------
$442,558 $422,052
======== ========
The aggregate amount of certificates of deposit with a minimum denomination
of $100,000 was approximately $19.7 million and $17.3 million at December
31, 2002 and 2001, respectively.
At December 31, 2002, scheduled maturities of certificates of deposit are as
follows:
Year ending December 31,
- --------------------------------------------------------------------------------
2003 2004 2005 2006 2007 Thereafter Total
---- ---- ---- ---- ---- ---------- -----
(in thousands)
$96,669 $27,193 $16,233 $1,471 $4,883 $ 313 $146,762
======= ======= ======= ====== ====== ====== ========
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2002 and 2001
NOTE J - ADVANCES FROM THE FEDERAL HOME LOAN BANK AND OTHER BORROWINGS
Advances from the Federal Home Loan Bank consist of the following:
December 31,
------------
2002 2001
---- ----
Contractual Weighted Weighted
maturity date Amount average rate Amount average rate
- ------------- ------ ------------ ------ ------------
(in thousands)
2002 $ - - % $15,000 5.52%
2003 27,000 5.70 27,000 5.70
2004 52,000 5.23 52,000 5.23
2005 5,000 6.58 5,000 6.58
2006 25,000 5.44 25,000 5.44
2008 70,000 5.62 70,000 5.62
2009 25,000 4.86 25,000 4.86
2010 3,359 6.70 3,359 6.70
-------- ---- -------- ----
$207,359 5.46% $222,359 5.46%
======== ==== ======== ====
The advances are collateralized by Federal Home Loan Bank stock and certain
first mortgage loans and mortgage-backed securities. Unused lines of credit
at the Federal Home Loan Bank were $20 million at December 31, 2002.
NOTE K - BENEFIT PLANS
The Bank maintains a 401(k) profit-sharing plan for eligible employees.
Participants may contribute up to 15% of pretax eligible compensation. The
Bank makes discretionary matching contributions equal to 100% of the first
$600 deferred. Contributions to the 401(k) plan totaled $52,000, $48,000,
and $48,000 in 2002, 2001 and 2000, respectively.
(Continued)
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2002 and 2001
NOTE K - BENEFIT PLANS - Continued
The Bank has a non-contributory defined benefit pension plan covering
substantially all full-time employees meeting certain eligibility
requirements. The benefits are based on each employee's years of service and
an average earnings formula. An employee becomes fully vested upon
completion of five years of qualifying service. It is the policy of the Bank
to fund the maximum amount allowable under the individual aggregate cost
method to the extent deductible under existing federal income tax
regulations.
The following table sets forth the pension plan's funded status and amounts
recognized in the consolidated statements of financial position at the dates
indicated.
December 31,
------------------
2002 2001
------- -------
(in thousands)
Change in benefit obligation
Benefit obligation at beginning of year $ 1,991 $ 3,017
Service cost 172 114
Interest cost 163 194
Plan amendments 42 -
Actuarial loss (405) (96)
Benefits paid (161) (1,238)
------- -------
Benefits obligation at end of year $ 2,612 $ 1,991
======= =======
Change in plan assets
Fair value of plan assets at beginning of year $ 2,323 $ 2,713
Actual return on plan assets 114 391
Employer contribution 450 457
Benefits paid (161) (1,238)
------- -------
Fair value of plan assets at end of year $ 2,725 $ 2,323
======= =======
Funded status
Unfunded accumulated benefits $ 114 $ 331
Unrecognized transition obligation 9 15
Unrecognized net actuarial loss (gain) 325 (245)
Unrecognized prior service cost 344 364
------- -------
Prepaid benefit cost $ 792 $ 465
======= =======
(Continued)
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2002 and 2001
NOTE K - BENEFIT PLANS - Continued
2002 2001 2000
---- ---- ----
Weighted-average assumptions as of December 31
Discount rate 6.75% 7.00% 7.50%
Expected return on plan assets 8.00 8.00 8.00
Rate of compensation increase 4.00 4.00 4.00
Components of net periodic benefit cost
Service cost $ 172 $ 114 $ 68
Interest cost 163 194 210
Expected return on plan assets (185) (231) (204)
Amortization of prior service cost 67 58 65
----- ----- -----
Net periodic benefit cost $ 217 $ 135 $ 139
===== ===== =====
The Corporation also maintains the following benefit plans:
1. Employee Stock Ownership Plan
The Corporation established an internally leveraged ESOP for eligible
employees who have completed six months of service with the Corporation or
its subsidiaries. The ESOP borrowed $4.2 million from the Corporation to
purchase 423,200 newly issued shares of common stock. The Corporation makes
discretionary contributions to the ESOP in order to service the ESOP's debt.
Any dividends received by the ESOP will be used to pay debt service. The
ESOP shares initially were pledged as collateral for its debt. As the debt
is repaid, shares are released from collateral and allocated to qualifying
employees based on the proportion of debt service paid in the year. The
Corporation accounts for its ESOP in accordance with SOP 93-6. As shares are
released from collateral, the Corporation reports compensation expense equal
to the current market price of the shares, and the allocated shares are
included in outstanding shares for earnings per share computations. ESOP
compensation expense was $197,000, $162,000, and $112,000 in 2002, 2001 and
2000, respectively.
2002 2001
---------- ----------
Allocated shares 133,200 126,600
Unreleased shares 240,100 252,300
---------- ----------
Total ESOP shares 373,300 378,900
========== ==========
Fair value of unreleased shares $5,933,900 $5,323,500
========== ==========
(Continued)
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2002 and 2001
NOTE K - BENEFIT PLANS - Continued
2. Stock Option Plans
------------------
A summary of the status of the Corporation's fixed stock option plans as of
December 31, 2002, and changes for each of the years in the three-year
period then ended is as follows:
2002 2001 2000
---- ---- ----
Weighted Weighted Weighted
average average Average
Number exercise Number exercise Number Exercise
of price per of price per of price per
shares share shares share shares share
------ ----- ------ ----- ----- -----
Outstanding at beginning of year 652,443 $13.52 659,759 $13.23 698,185 $13.27
Options granted 32,150 24.77 24,275 20.30 45,930 13.82
Options exercised (21,338) 11.66 (23,276) 11.81 (41,250) 11.72
Options forfeited (4,282) 15.93 (8,315) 15.03 (43,106) 15.62
------- ------- -------
Outstanding at end of year 658,973 $14.11 652,443 $13.52 659,759 $13.23
======= ======= =======
The following table summarizes information about stock options outstanding
at December 31, 2002:
Options outstanding Options exercisable
------------------------------------------ ---------------------------
Weighted
Number average Weighted Number Weighted
outstanding at remaining average exercisable at average
Range of exercise December 31, contractual exercise December 31, exercise
prices 2002 life (years) price 2002 price
------ ---- ------------ ----- ---- -----
$11.50-14.13 393,770 2.15 years $11.64 377,570 $11.56
$14.50-18.00 195,343 4.14 years 15.97 187,410 16.02
$19.00-28.00 69,860 8.69 years 22.88 15,182 22.17
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2002 and 2001
NOTE L - INCOME TAXES
The components of income tax expense are summarized as follows:
Year ended December 31,
2002 2001 2000
---- ---- ----
(in thousands)
Federal
Current $ 1,623 $ 2,257 $ 1,875
Charge in lieu of income tax relating to stock compensation - 3 170
Deferred (19) (172) (122)
------- ------- -------
1,604 2,088 1,923
State and local - current 1 (18) -
------- ------- -------
Income tax provision $ 1,605 $ 2,070 $ 1,923
======= ======= =======
The Corporation's effective income tax rate was different than the statutory
federal income tax rate as follows:
Year ended December 31,
-----------------------
2002 2001 2000
---- ---- ----
Statutory federal income tax 34.0% 34.0% 34.0%
Increase (decrease) resulting from
Tax-exempt income (8.3) (5.3) (6.7)
State tax, net of federal benefit 0.0 0.0 0.0
Other (1.7) (2.2) 2.7
---- ---- ----
24.0% 26.5% 30.0%
==== ==== ====
(Continued)
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2002 and 2001
NOTE L - INCOME TAXES - Continued
Deferred taxes are included in the accompanying consolidated statements of
financial position at December 31, 2002 and 2001, for the estimated future
tax effects of differences between the financial statement and federal
income tax bases of assets and liabilities according to the provisions of
currently enacted tax laws. No valuation allowance was recorded against
deferred tax assets at December 31, 2002 and 2001. The Corporation's net
deferred tax asset (liability) at December 31, 2002 and 2001, was composed
of the following:
December 31,
------------
2002 2001
---- ----
(in thousands)
Deferred tax assets
Deferred loan origination fees $ 12 $ 35
Deferred compensation 330 351
Allowance for loan losses, net 746 586
Amortization 221 361
------- -------
1,309 1,333
------- -------
Deferred tax liabilities
Accrued pension expense 492 534
Unrealized gain on securities available for sale 976 405
Other 32 33
------- -------
1,500 972
------- -------
Deferred tax (liability) asset $ (191) $ 361
======= =======
The Corporation files its income tax returns on the basis of a fiscal tax
year ending June 30.
The Bank is required, beginning in 1998, to recapture approximately $2.4
million of its total tax bad debt reserve of approximately $8.1 million into
taxable income over a six-year period. Deferred tax liabilities have been
accrued in respect of the amount of the reserve to be recaptured.
The Bank is not required to recapture approximately $5.7 million of its tax
bad debt reserve, attributable to bad debt deductions taken by it prior to
1988, as long as the Bank continues to operate as a bank under federal tax
law and does not use the reserve for any other purpose. In accordance with
SFAS No. 109, the Bank has not recorded any deferred tax liability on this
portion of its tax bad debt reserve. The tax that would be paid were the
Bank ultimately required to recapture that portion of the reserve would
amount to approximately $1.9 million.
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2002 and 2001
NOTE M - REGULATORY MATTERS
The Bank is subject to minimum regulatory capital standards promulgated by
the Office of Thrift Supervision (OTS). Failure to meet minimum capital
requirements can initiate certain mandatory - and possible additional
discretionary - actions by regulators that, if undertaken, could have a
direct material effect on the Corporation's consolidated financial
statements. Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, the Bank must meet specific capital guidelines
that involve quantitative measures of the Bank's assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting
practices. The Corporation's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors. Such minimum capital standards generally
require the maintenance of regulatory capital sufficient to meet each of
three tests, hereinafter described as the tangible capital requirement, the
core capital requirement and the risk-based capital requirement. The
tangible capital requirement provides for minimum tangible capital (defined
as stockholders' equity less all intangible assets) equal to 1.5% of
adjusted total assets. The core capital requirement provides for minimum
core capital (tangible capital plus certain forms of supervisory goodwill
and other qualifying intangible assets) equal to 4% of adjusted total assets
at December 31, 2002.
As of December 31, 2002, management believes that the Bank met all capital
adequacy requirements to which it was subject.
Regulatory capital
------------------
December 31, 2002
-----------------
Tangible Core Risk-based
Capital Percent Capital Percent Capital Percent
------- ------- ------- ------- ------- -------
Capital under generally
accepted accounting principles $55,712 7.80% $55,712 7.80% $55,712 16.66%
Unrealized gain on certain
available-for-sale securities (1,896) (0.27) (1,896) (0.27) (1,896) (0.57)
Goodwill and other intangible assets (4,877) (0.68) (4,877) (0.68) (4,877) (1.46)
Additional capital items
General valuation allowances - limited - - - - 2,047 0.62
------- ----- ------- ----- ------- -----
Regulatory capital computed 48,939 6.85 48,939 6.85 50,983 15.25
Minimum capital requirement 10,712 1.50 28,565 4.00 26,746 8.00
------- ----- ------- ----- ------- -----
Regulatory capital - excess $38,227 5.35% $20,374 2.85% $24,237 7.25%
======= ===== ======= ===== ======= =====
(Continued)
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2002 and 2001
NOTE M- REGULATORY MATTERS - Continued
Regulatory capital
------------------
December 31, 2001
-----------------
Tangible Core Risk-based
Capital Percent Capital Percent Capital Percent
------- ------- ------- ------- ------- -------
Capital under generally
accepted accounting principles $55,074 7.78% $55,074 7.78% $55,074 16.10%
Unrealized loss on certain
available-for-sale securities (785) (0.11) (785) (0.11) (785) (0.23)
Goodwill and other intangible assets (5,099) (0.72) (5,099) (0.72) (5,099) (1.50)
Additional capital items
General valuation allowances - limited - - - - 1,972 0.58
--------- ----- --------- ----- --------- -----
Regulatory capital computed 49,190 6.95 49,190 6.95 51,162 14.95
Minimum capital requirement 10,618 1.50 28,313 4.00 27,374 8.00
--------- ----- --------- ----- --------- -----
Regulatory capital - excess $ 38,572 5.45% $ 20,877 2.95% $ 23,788 6.95%
========= ===== ========= ===== ========= =====
At December 31, 2002, the Bank met all regulatory requirements for
classification as a "well-capitalized" institution. A "well-capitalized"
institution must have risk-based capital of 10% and core capital of 5%. The
Bank's capital exceeded the minimum required amounts for classification as a
"well-capitalized" institution. There are no conditions or events that have
occurred that management believes have changed the Bank's classification as
a "well-capitalized" institution.
The Bank maintains a liquidation account for the benefit of eligible savings
account holders who maintained deposit accounts in the Bank after the Bank
converted to a stock form of ownership. The Bank may not declare or pay a
cash dividend on or repurchase any of its common shares if the effect
thereof would cause the Bank's stockholders' equity to be reduced below
either the amount required for the liquidation account or the regulatory
capital requirements for insured institutions.
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2002 and 2001
NOTE N - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Corporation is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments are primarily commitments to extend
credit and standby letters of credit. Such financial instruments are
recorded in the consolidated financial statements when they become
receivable or payable. Those instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized
in the consolidated statements of financial position. The contract or
notional amounts of those instruments reflect the extent of the Bank's
involvement in particular classes of financial instruments.
The Corporation's exposure to credit loss in the event of non-performance by
the other party to the financial instrument for commitments to extend credit
and standby letters of credit is represented by the contractual amount of
those instruments. The Corporation uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
Unless noted otherwise, the Corporation requires collateral to support
financial instruments with credit risk.
Financial instruments, the contract amounts of which represent credit risk,
are as follows:
December 31,
------------
2002 2001
---- ----
(in thousands)
Commitments to extend credit $35,983 $28,799
Standby letters of credit 1,548 2,338
Loans sold with recourse 163 175
--------- ---------
$ 37,694 $ 31,312
========= =========
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. The Corporation evaluates each
customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained, if it is deemed necessary by the Corporation upon
extension of credit, is based on management's credit evaluation of the
borrower. Collateral held generally includes residential and some commercial
property.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers. Typically, the Bank
issues letters of credit to other financial institutions and generally does
not require collateral for standby letters of credit.
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2002 and 2001
NOTE O - COMMITMENTS AND CONTINGENCIES
The Bank had no commitments to sell mortgage loans to investors at December
31, 2002 and 2001.
The Bank leases branch facilities for periods ranging up to seven years.
These leases are classified as operating leases and contain options to renew
for additional periods. Rental expense was approximately $279,000, $316,000,
and $343,000 for the years ended December 31, 2002, 2001 and 2000,
respectively.
The minimum annual rental commitments of the Bank under all non-cancelable
leases with terms of one year or more are as follows:
Year ending December 31,
------------------------
2003 $190,001
2004 139,364
2005 78,285
2006 38,475
2007 38,475
Thereafter 38,475
--------
$523,075
========
The Corporation has agreements with certain key executives that provide
severance pay benefits if there is a change in control of the Corporation.
The agreements will continue in effect until terminated or not renewed by
the Corporation or key executives. Upon a change in control, the Corporation
shall make a lump-sum payment or continue to pay the key executives'
salaries per the agreements, and reimburse the executive for certain
benefits for one year. The maximum contingent liability under the agreements
at December 31, 2002 was approximately $2,439,000.
From time to time, the Corporation and its subsidiaries are parties to
routine litigation that arises in the normal course of business. In the
opinion of management, the resolution of these lawsuits would not have a
material adverse effect on the Corporation's consolidated financial position
or results of operations.
NOTE P - SIGNIFICANT CONCENTRATIONS OF CREDIT RISK
The Bank is principally engaged in originating and investing in one-to-four
family residential and commercial real estate loans in eastern Pennsylvania
and New Jersey. The Bank offers both fixed and adjustable rates of interest
on these loans that have amortization terms ranging to 30 years. The loans
are generally originated or purchased on the basis of an 80% loan-to-value
ratio, which has historically provided the Bank with more than adequate
collateral coverage in the event of default. Nevertheless, the Bank, as with
any lending institution, is subject to the risk that residential real estate
values in the primary lending area will deteriorate, thereby potentially
impairing collateral values in the primary lending area. However, management
believes that residential and commercial real estate values are presently
stable in its primary lending area and that loan loss allowances have been
provided for in amounts commensurate with its current perception of the
foregoing risks in the portfolio.
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2002 and 2001
NOTE Q- FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires all entities to disclose the estimated fair value of their assets
and liabilities considered to be financial instruments. For the Bank, as for
most financial institutions, the majority of its assets and liabilities are
considered financial instruments as defined in SFAS No. 107. However, many
such instruments lack an available trading market as characterized by a
willing buyer and willing seller engaging in an exchange transaction. Also,
it is the Corporation's general practice and intent to hold its financial
instruments to maturity or available for sale and to not engage in trading
or significant sales activities. Therefore, the Corporation and the Bank had
to use significant estimations and present value calculations to prepare
this disclosure.
Changes in the assumptions or methodologies used to estimate fair values may
materially affect the estimated amounts. Also, management is concerned that
there may not be reasonable comparability between institutions due to the
wide range of permitted assumptions and methodologies in the absence of
active markets. This lack of uniformity gives rise to a high degree of
subjectivity in estimating financial instrument fair values.
Fair values have been estimated using data which management considered the
best available, as generally provided by estimation methodologies deemed
suitable for the pertinent category of financial instrument. The estimation
methodologies, resulting fair values and recorded carrying amounts are as
follows:
Fair value of loans and deposits with floating interest rates is generally
presumed to approximate the recorded carrying amounts.
Fair value of financial instruments actively traded in a secondary market
has been estimated using quoted market prices.
December 31,
------------
2002 2001
---- ----
Fair Carrying Fair Carrying
value value value value
----- ----- ----- -----
(in thousands)
Cash and cash equivalents $100,580 $100,580 $ 69,139 $ 69,139
Investment securities 42,431 41,806 32,501 32,537
Mortgage-backed securities 172,589 169,835 194,498 193,130
(Continued)
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2002 and 2001
NOTE Q - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued
The fair value of financial instruments with stated maturities has been
estimated using the present value of cash flows, discounted at rates
approximating current market rates for similar assets and liabilities.
December 31,
------------
2002 2001
---- ----
Fair Carrying Fair Carrying
value value value value
----- ----- ----- -----
(in thousands)
Assets
Interest-bearing deposits with banks $ 220 $ 220 $ 194 $ 194
Liabilities
Deposits with stated maturities 149,033 146,762 146,227 144,729
Borrowings with stated maturities
Short-term (due within 6 months) 15,125 15,000 - -
Long-term 210,613 192,359 231,648 222,359
The fair value of financial instrument liabilities with no stated maturities
is generally presumed to approximate the carrying amount (the amount payable
on demand).
December 31,
------------
2002 2001
---- ----
Fair Carrying Fair Carrying
value Value value value
----- ----- ----- -----
(in thousands)
Deposits with no stated maturities $295,796 $295,796 $277,323 $277,323
======== ======== ======== ========
The fair value of the net loan portfolio has been estimated using the
present value of cash flows, discounted at the approximate current market
rates adjusted for non-interest operating costs, and giving consideration to
estimated prepayment risk and credit loss factors.
December 31,
------------
2002 2001
---- ----
Fair Carrying Fair Carrying
value value value value
----- ----- ----- -----
(in thousands)
Net loans $382,796 $370,092 $386,302 $377,635
======== ======== ======== ========
(Continued)
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2002 and 2001
NOTE Q - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued
The fair value of commitments to extend credit is estimated based on the
amount of unamortized deferred loan commitment fees. The fair value of
letters of credit is based on the amount of unearned fees plus the estimated
cost to terminate the letters of credit. Fair values of unrecognized
financial instruments including commitments to extend credit and the fair
value of letters of credit are considered immaterial.
The Bank's remaining assets and liabilities are not considered financial
instruments. No disclosure of the relationship value of the Bank's deposits
is required by SFAS No. 107.
NOTE R - SERVICE FEES, CHARGES AND OTHER OPERATING INCOME AND OTHER OPERATING
EXPENSE
Year ended December 31,
-----------------------
2002 2001 2000
---- ---- ----
(in thousands)
Service fees, charges and other operating income
Loan servicing fees $ 338 $ 241 $ 329
Late charge income 99 105 126
Deposit service charges 750 835 548
Bank-owned life insurance value increase 520 174 -
Other income 407 379 350
------ ------ ------
$2,114 $1,734 $1,353
====== ====== ======
Other operating expense
Insurance and surety bond $ 146 $ 128 $ 120
Office supplies 192 249 202
Loan expense 272 359 342
Loan servicing fees 127 223 258
Postage 299 261 140
Telephone 262 286 242
Service charges on bank accounts 95 205 423
Supervisory examination fees 148 141 138
Other expenses 795 720 829
------ ------ ------
$2,336 $2,572 $2,694
====== ====== ======
NOTE S - SHAREHOLDER RIGHTS PLAN
The Corporation adopted a Shareholder Rights Plan (the Rights Plan) to
protect shareholders from attempts to acquire control of the Corporation at
an inadequate price. Under the Rights Plan, the Corporation distributed a
dividend of one Preferred Share Purchase Right (a Right) for each share of
outstanding common stock. The rights are currently not exercisable and will
expire on November 22, 2005, unless the expiration date is extended or
unless the Corporation earlier redeems the Rights.
(Continued)
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2002 and 2001
NOTE S - SHAREHOLDER RIGHTS PLAN - Continued
After the Rights become exercisable, under certain circumstances, the Rights
(other than rights held by a 15% beneficial owner or an "acquiring person")
will entitle the holders to purchase one one-hundredth of a share of a new
series of junior participating preferred stock at an exercise price of $45
or purchase either the Corporation's common shares or the common shares of
the potential acquirer at a substantially reduced price.
The Corporation is entitled to redeem the Rights at $0.01 per Right prior to
the acquisition by a person or group of beneficial ownership of 15% or more
of the Corporation's common stock. Following the acquisition by a person or
group of beneficial ownership of 15% or more of the Corporation's common
stock and prior to an acquisition of 50% or more, the Board of Directors may
exchange the Rights (other than Rights owned by such person or group), in
whole or in part, at an exchange ratio of one share of common stock (or one
one-hundredth of a share of the new series of junior participating preferred
stock) per Right.
The Rights Plan was not adopted in response to any specific effort to
acquire control of the Corporation. The issuance of rights has no dilutive
effect, did not affect the Corporation's reported earnings per share, and
was not taxable to the Corporation or its shareholders.
NOTE T - EARNINGS PER SHARE
The following tables illustrate the reconciliation of the numerators and
denominators of the basic and diluted earnings per share computations
(dollars in thousands, except per share data). Diluted earnings per share
calculations for the years ended December 31, 2001 and 2000 have been
revised to more accurately account for the tax benefit associated with the
exercise of non-qualified stock options. As originally reported, diluted
earnings per share for the years ended December 31, 2001 and 2000 were $2.15
and $1.71, respectively.
Year ended December 31, 2002
----------------------------
Weighted
average
Income shares Per share
(numerator) (denominator) Amount
----------- ------------- ------
Basic earnings per share
Income available to common stockholders $ 5,092 2,473,044 $ 2.06
Effect of dilutive securities
Stock options - 175,144 (0.15)
------- --------- -------
Diluted earnings per share
Income available to common stockholders plus
effect of dilutive securities $ 5,092 2,648,188 $ 1.91
======= ========= =======
There were options to purchase 27,150 shares of common stock at a range of
$25.35 to $28.00 per share which were outstanding during 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.
(Continued)
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2002 and 2001
NOTE T - EARNINGS PER SHARE - Continued
Year ended December 31, 2001
----------------------------
Weighted
average
Income shares Per share
(numerator) (denominator) Amount
----------- ------------- ------
Basic earnings per share
Income available to common stockholders $ 5,733 2,466,149 $ 2.32
Effect of dilutive securities
Stock options - 148,412 (0.13)
------- --------- -------
Diluted earnings per share
Income available to common stockholders plus
effect of dilutive securities $ 5,733 2,614,561 $ 2.19
======= ========= =======
There were options to purchase 10,000 shares of common stock at a range of
$20.88 to $28.00 per share which were outstanding during 2001 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.
Year ended December 31, 2000
----------------------------
Weighted
average
Income shares Per share
(numerator) (denominator) amount
----------- ------------- ------
Basic earnings per share
Income available to common stockholders $ 4,482 2,540,242 $ 1.76
Effect of dilutive securities
Stock options - 58,895 (0.04)
------- --------- -------
Diluted earnings per share
Income available to common stockholders plus
effect of dilutive securities $ 4,482 2,599,137 $ 1.72
======= ========= =======
There were options to purchase 207,929 shares of common stock at a range of
$14.75 to $28.00 per share which were outstanding during 2000 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.
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2002 and 2001
NOTE U - SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATE (UNAUDITED)
Three months ended
------------------
Dec. 31, Sept. 30, June 30, March 31,
2002 2002 2002 2002
------ ------- ------- -------
(in thousands, except per share data)
Total interest income $9,377 $10,038 $10,453 $10,587
Total interest expense 5,390 5,625 5,778 5,867
Net interest income 3,987 4,413 4,675 4,720
Provision for possible loan losses 150 150 538 150
------ ------- ------- -------
Net interest income after provision 3,837 4,263 4,137 4,570
Other income 1,316 982 466 540
Other expenses 3,255 3,433 3,306 3,420
------ ------- ------- -------
Income before income taxes 1,898 1,812 1,297 1,690
Income taxes 460 438 302 405
------ ------- ------- -------
Net income $1,438 $ 1,374 $ 995 $ 1,285
====== ======= ======= =======
Earnings per share - basic $ 0.58 $ 0.55 $ 0.40 $ 0.52
Earnings per share - assuming dilution $ 0.54 $ 0.52 $ 0.37 $ 0.49
(Continued)
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2002 and 2001
NOTE U - SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED) - Continued
Three months ended
------------------
Dec. 31, Sept. 30, June 30, March 31,
2001 2001 2001 2001
------- ------- ------- -------
(in thousands, except per share data)
Total interest income $11,130 $11,470 $11,817 $12,330
Total interest expense 6,431 6,653 6,733 7,091
Net interest income 4,699 4,817 5,084 5,239
Provision for possible loan losses 127 124 124 125
------- ------- ------- -------
Net interest income after provision 4,572 4,693 4,960 5,114
Other income 1,489 474 809 400
Other expenses 3,784 3,627 3,486 3,811
------- ------- ------- -------
Income before income taxes 2,277 1,540 2,283 1,703
Income taxes 641 389 595 445
------- ------- ------- -------
Net income $ 1,636 $ 1,151 $ 1,688 $ 1,258
======= ======= ======= =======
Earnings per share - basic $ 0.66 $ 0.47 $ 0.69 $ 0.51
Earnings per share - assuming dilution $ 0.62 $ 0.44 $ 0.65 $ 0.49
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2002 and 2001
NOTE V - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
Condensed financial information for TF Financial Corporation (parent company
only) follows:
BALANCE SHEET
December 31,
------------
2002 2001
------- -------
(in thousands)
ASSETS
Cash $ 5,683 $ 2,458
Certificates of deposit - other institutions 220 194
Investment securities available-for-sale - -
Investment in Third Federal 53,311 52,551
Investment in TF Investments 2,282 2,261
Investment in Teragon 9 10
Investment in Penns Trail Development 1,045 275
Other assets 315 226
------- -------
Total assets $62,865 $57,975
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Total liabilities $ 25 $ -
Stockholders' equity 62,840 57,975
------- -------
Total liabilities and stockholders' equity $62,865 $57,975
======= =======
STATEMENT OF EARNINGS
Year ended December 31,
-----------------------
2002 2001 2000
---- ---- ----
(in thousands)
INCOME
Equity in earnings of subsidiaries $5,269 $5,825 $4,573
Interest and dividend income 110 108 140
Other - 29 -
------ ------ ------
Total income 5,379 5,962 4,713
EXPENSES
Other 287 229 231
------ ------ ------
Total expenses 287 229 231
------ ------ ------
NET INCOME $5,092 $5,733 $4,482
====== ====== ======
(Continued)
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2002 and 2001
NOTE V - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY - Continued
STATEMENT OF CASH FLOWS
Year ended December 31,
2002 2001 2000
------- ------- -------
(in thousands)
Cash flows from operating activities
Net income $ 5,092 $ 5,733 $ 4,482
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Equity in earnings of subsidiaries (5,269) (5,825) (4,573)
Gain on sale of investment securities - (7) -
Net change in assets and liabilities (64) (97) (56)
------- ------- -------
Net cash used in operating activities (241) (196) (147)
------- ------- -------
Cash flows from investing activities
Capital distribution from subsidiaries 5,853 2,053 2,938
Capital contribution to subsidiary (750) - -
Sale of investment securities available for sale - 507 -
Purchase and maturities of certificates of deposit
in other financial institutions, net (26) (4) (9)
------- ------- -------
Net cash provided by investing activities 5,077 2,556 2,929
------- ------- -------
Cash flows from financing activities
Cash dividends paid to stockholders (1,484) (1,424) (1,326)
Treasury stock acquired (376) (1,110) (1,972)
Exercise of stock options 249 278 483
------- ------- -------
Net cash used in financing activities (1,611) (2,256) (2,815)
------- ------- -------
NET INCREASE (DECREASE) IN CASH 3,225 104 (33)
------- ------- -------
Cash at beginning of year 2,458 2,354 2,387
------- ------- -------
Cash at end of year $ 5,683 $ 2,458 $ 2,354
======= ======= =======
Supplemental disclosure of cash flow information
Cash paid during the year for income taxes $ - $ - $ -
======= ======= =======
59