TF FINANCIAL CORPORATION 2003 ANNUAL REPORT
BOARD OF DIRECTORS
Dennis L. McCartney
John R. Stranford
Robert N. Dusek (Chairman)
George A. Olsen
Carl F. Gregory
Albert M. Tantala
CONTENTS
1 To Our Stockholders
2 Corporate Profile and Related Information
3 Selected Financial Information and Other Data
5 Management's Discussion and Analysis
of Financial Position and Results of Operations
15 Report of Independent Certified Public Accountants
16 Consolidated Statements of Financial Position
17 Consolidated Statements of Operations
18 Consolidated Statement of Changes
in Stockholders' Equity
19 Consolidated Statements of Cash Flows
21 Notes to Consolidated Financial Statements
48 Board of Directors and Management Team
49 Office Locations
TO OUR STOCKHOLDERS
The past year has been one of significant developments at our Company. As you
read about these events, I would like you to know that we have a renewed focus
in our mission to produce a solid, sustainable stream of earnings and dividends,
build value by continuing to invest a portion of earnings back into the banking
franchise, and establish a reputation throughout our Company and the communities
we serve so as to make our employees proud to work for us, and our customers
proud to do business with us. In our view, pride creates loyalty and loyalty is
the cornerstone of highly successful community banking franchises.
As you likely know, there has been a change in leadership at the Company and its
banking subsidiary, Third Federal Bank. As of June 30th, Jack Stranford retired
after over thirty-five years of service. The Board and I thank Jack for guiding
the Company through its first ten years as a public company, and he remains on
TF Financial's Board of Directors. On July 1st, I was appointed President and
Chief Executive Officer of TF Financial and Third Federal Bank. After 30 years
in this industry, I am privileged to be able to use my varied banking background
under the guidance of your Board of Directors to achieve our mission. Long-time
director George Olsen assumed the position of Chairman at Third Federal Bank.
Earlier in the year, directorship of the Company was strengthened with the
addition of Albert Tantala and Dennis McCartney. Finally, it was with great
regret that the Company accepted the resignation of Thomas Gola from the Board
for health reasons. His wit and wisdom will be missed by us all.
Regarding the business of the Company, the most significant event to occur
during the year was the debt refinancing. After months of deliberation, the
management and Board of the Company made the very difficult decision to incur a
sizeable expense in order to eliminate what would have been a tremendous drag on
the Company's financial performance for years. After repaying and refinancing
nearly $188 million in high-cost borrowings, we emerged as a smaller and much
more profitable Company, as borne out by our fourth quarter 2003 core earnings,
with higher regulatory capital ratios. Shareholder and customer reaction to this
event was overwhelmingly positive, and we thank them for their support and
understanding. We truly believe that we have "reset the clock" as it were, and
established the platform from which we intend to grow future earnings.
The commitment of the Board and management to be a highly successful community
bank is stronger than ever. In order to achieve this goal, we know that we need
to establish a reputation as a banking organization that provides a complete
array of products and services to both personal and business customers. We also
know that we must deliver fast, high-quality service in order to set us apart
from our competitors. So, during the year, we added to and improved our product
delivery, technology and customer service, and these efforts will continue into
2004. We also expanded our product offerings for both deposit account customers
and loan prospects. Perhaps most importantly, we strengthened our sales force by
adding key people and new initiatives in our commercial banking and mortgage
lending areas. Further enhancements are underway that will strengthen our
marketing efforts, improve the training of our employees, increase our community
involvement, add to our lending sales force, and further improve the quality and
efficiency of our product delivery systems.
Much is occurring in our markets, but these events and challenges are actually
opportunities for us to achieve our mission. Mergers and acquisitions are
occurring all around us, but they often displace good employees and customers
looking to realign themselves with a high-quality community bank. There
continues to be a substantial number of new regulatory requirements that reshape
our industry. While these new laws and regulations often impose costly and
complex changes, companies such as ours, with the ability to react quickly and
readily adapt technology and operations, will be rewarded.
While all of these events have been going on in and around the Company,
shareholders in TF Financial Corporation enjoyed a 41% total return during 2003.
While it may be unreasonable to expect these returns every year, we believe
that, over the long run, stockholders will continue to benefit from an
investment in our stock, provided that your Board and management achieve what
they fully intend to achieve: building value and earnings by creating and
maintaining a highly regarded, successful retail banking franchise. We thank you
in advance for your continued support.
/s/Kent C. Lufkin
Kent C. Lufkin
President and Chief Executive Officer
1
TF FINANCIAL CORPORATION & SUBSIDIARIES
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Corporate Profile and Related Information
TF Financial Corporation (the "Company") 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, 2003, total assets were
approximately $606.8 million. The Company 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, 2003, total stockholders'
equity was approximately $55.5 million. The Company 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. During the first quarter of 2003 the Savings Bank opened its fourteenth
branch office in the Northern Liberties neighborhood in Philadelphia. As of
December 31, 2003 Third Federal operated branch offices in Bucks and
Philadelphia counties, Pennsylvania and Mercer County, New Jersey.
Third Federal attracts deposits (approximately $459.3 million at December 31,
2003) from the general public and uses such deposits, together with borrowings
mainly from the Federal Home Loan Bank of Pittsburgh (approximately $86.9
million at December 31, 2003) 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 Company's common stock has been traded on
the Nasdaq National Market. The daily stock quotation for the Company 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 22, 2004, 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 Company'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 Company'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
Quarter ended Quoted market price Dividend paid
High Low per share
December 31, 2003 $35.27 $31.50 $0.15
September 30, 2003 $31.97 $28.01 $0.15
June 30, 2003 $32.75 $25.00 $0.15
March 31,2003 $25.95 $24.50 $0.15
December 31, 2002 $25.51 $20.33 $0.15
September 30, 2002 $23.71 $19.70 $0.15
June 30, 2002 $24.80 $22.07 $0.15
March 31, 2002 $23.50 $21.05 $0.15
2
2003 ANNUAL REPORT
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Selected Financial Information and Other Data
At December 31,
(Dollars in thousands, except per share data)
Financial Position 2003 2002 2001 2000 1999
----------------------------------------------------------
Total assets $ 606,752 $ 721,032 $ 711,204 $ 723,297 $ 721,874
Loans receivable, net 404,649 370,092 377,635 361,806 287,979
Mortgage-backed securities available
for sale, at fair value 106,774 115,243 99,763 97,914 132,515
Mortgage-backed securities held to
maturity, at amortized cost 23,630 54,592 93,367 135,142 159,888
Investment securities available for sale,
at fair value 14,443 27,243 22,671 18,865 21,930
Investment securities held to maturity,
at amortized cost 10,389 14,563 9,866 63,461 66,760
Cash and cash equivalents(1) 8,241 100,580 69,139 10,618 16,715
Deposits 459,343 442,558 422,052 400,851 401,698
Advances from the Federal Home Loan
Bank and other borrowings 86,853 207,359 222,359 259,821 264,299
Retained earnings 52,626 59,978 56,370 52,061 48,905
Total stockholders' equity 55,480 62,840 57,975 53,109 48,447
Book value per common share $ 21.37 $ 25.31 $ 23.51 $ 21.32 $ 18.81
Tangible book value per common share $ 19.56 $ 23.34 $ 21.44 $ 18.99 $ 16.26
----------------------------------------------------------
At or for the year ended December 31,
Summary of Operations 2003 2002 2001 2000 1999
----------------------------------------------------------
Interest income $ 32,377 $ 40,455 $ 46,747 $ 48,708 $ 47,022
Interest expense 15,252 22,660 26,908 28,921 27,974
Net interest income 17,125 17,795 19,839 19,787 19,048
Provision for loan losses 330 988 500 410 300
Non-interest income 2,690 3,304 3,172 1,432 1,589
Non-interest expense 28,703 13,414 14,708 14,404 13,529
Net income (loss) $ (5,834) $ 5,092 $ 5,733 $ 4,482 $ 4,422
Earnings (loss) per common share - basic $ (2.30) $ 2.06 $ 2.32 $ 1.76 $ 1.60
Earnings (loss) per common share - diluted $ (2.30) $ 1.91 $ 2.19 $ 1.72 $ 1.54
----------------------------------------------------------
(Continued)
3
TF FINANCIAL CORPORATION & SUBSIDIARIES
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Selected Financial Information and Other Data - Continued
Performance Ratios and Other Selected Data 2003 2002 2001 2000 1999
----------------------------------------------------
Return on average assets n. m. 0.71% 0.82% 0.63% 0.62%
Return on average equity n. m. 8.47% 10.42% 9.18% 8.60%
Average equity to average assets 9.01% 8.34% 7.83% 6.86% 7.17%
Average interest rate spread 2.55% 2.42% 2.74% 2.70% 2.54%
Non-performing loans to total assets 0.38% 0.53% 0.53% 0.20% 0.18%
Non-performing loans to total loans 0.56% 1.03% 0.99% 0.41% 0.45%
Allowance for loan losses to non-performing loans 92.51% 53.86% 52.22% 115.97% 145.56%
Allowance for loan losses to total loans 0.52% 0.54% 0.52% 0.47% 0.66%
Savings Bank regulatory capital
Core 7.29% 6.85% 6.95% 6.18% 5.76%
Tangible 7.29% 6.85% 6.95% 6.18% 5.76%
Risk based 14.47% 15.25% 14.95% 11.97% 12.83%
Dividend payout ratio(2) n. m. 31.41% 26.48% 30.23% 31.82%
----------------------------------------------------
n. m. = not meaningful
(1) Consists of cash, cash due from banks, interest-bearing deposits with
original maturities of less than three months, and federal funds sold.
(2) Payout ratio is dividends paid for the period divided by earnings per
common share.
4
2003 ANNUAL REPORT
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Management's Discussion and Analysis of Financial Position
and Results of Operations
General
The following discussion and analysis should be read in conjunction with the
Company's consolidated financial statements and is intended to assist in
understanding and evaluating the major changes in the financial position and
results of operations of the Company with a primary focus on an analysis of
operating results.
This document contains statements that project the future operations of the
Company which involve risks and uncertainties. The Company'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 Company does not undertake to update any
forward-looking statement, whether written or oral, that may be made from
time-to-time by or on behalf of the Company.
The Company'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 Position
Assets. The Company's total assets at December 31, 2003 were $606.8 million, a
decrease of $114.3 million during the year. This decrease in total assets is a
direct result of a debt refinancing transaction, which occurred during the third
quarter of 2003. At that time, the Company completed a series of transactions
(the "debt refinancing") that resulted in the repayment and refinancing of
$187.4 million of Federal Home Loan Bank borrowings which carried a weighted
average interest rate of 5.46%. $80 million of these borrowings were refinanced
at 3.23%; the remaining $107.4 million was repaid. A prepayment fee of $13.8
million was assessed by the Federal Home Loan Bank. A portion of the funds used
to repay these borrowings came from the sale of $70.2 million of investment
securities available for sale and $9.5 million of mortgage-backed securities
available for sale, which had been yielding a combined 1.93%. The loss on the
sale of these securities was $0.4 million. Management believed that it was in
the best interest of the Company's shareholders and the Bank's employees and
customers to replace these high-cost borrowings in order to improve the
Company's future net interest income and thus its overall financial performance.
Subsequently, the Company's net interest income was $5.5 million during the
fourth quarter of 2003, an increase of $1.4 million when compared with the third
quarter of 2003. Management expects the higher level of net interest income to
continue into 2004.
[GRAPHIC OMITTED]
5
TF FINANCIAL CORPORATION & SUBSIDIARIES
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The Company's loans receivable portfolio at December 31, 2003 was $404.6
million, a $34.6 million or 9.3% increase since December 31, 2002. During 2003
there were $165.9 million of prepayments of existing mortgages in the loans
receivable portfolio; however, offsetting this reduction was the origination of
$178.6 million in predominately consumer and single-family residential mortgage
loans, and the purchase of $24.2 million in newly originated, single-family
residential mortgage loans.
Mortgage-backed securities available for sale decreased by $8.5 million during
2003. During the first six months of 2003 the Company sold $14.5 million of
mortgage-backed securities available for sale, generating gains of $0.6 million.
An additional $9.5 million were sold as part of the debt refinancing. Further
reduction of the mortgage-backed securities available for sale portfolio
occurred due to $62.2 million in repayments throughout 2003. Offsetting these
reductions were the purchases of $82.4 million of such securities. The remaining
net change in the portfolio was caused by $1.7 million amortization of purchase
premiums and a $3.0 million reduction in the fair value of such securities.
Investment securities available for sale decreased by $12.8 million during the
year. During the first six months of 2003 the Company purchased $91.1 million of
such securities in order to redeploy its cash and cash equivalents into
interest-bearing assets with higher yields. During the third quarter of 2003 the
Company sold $70.2 million of these securities as part of the debt refinancing,
plus an additional $0.5 million. During the fourth quarter, the Company
purchased $7.6 million in investment securities available for sale. The
remaining net change in the portfolio was caused by $40.0 million in maturities
and redemptions, and $0.5 million decrease in the fair value of such securities.
Mortgage-backed securities held to maturity decreased by $31.0 million or 56.7%
during 2003. This large decrease occurred due to the high prepayment rate of the
underlying mortgages comprising the securities, which was the result of near
record low mortgage rates throughout 2003, resulting in an increased number of
mortgagors refinancing their mortgages into lower interest rates.
The Company's cash and cash equivalents decreased $92.3 million to $8.2 million
at December 31, 2003. It is the Company's intent to keep cash and cash
equivalents at this minimal level and use its line of credit at the Federal Home
Loan Bank to fund its day-to-day cash needs, if necessary.
Liabilities. The Company's total liabilities were $551.3 million at December 31,
2003, a decrease of $106.9 million during 2003.
Deposits increased by $16.8 million; certificates of deposit increased by $0.2
million, while the remaining or "core" deposit categories increased by $16.6
million. Management believes that deposit growth occurred mainly as a result of
successful sales initiatives and focused advertising campaigns implemented by
the Company, but also due to external factors that caused deposit growth to
occur throughout the community banking industry.
Advances from the Federal Home Loan Bank decreased by $120.5 million, largely
the result of the debt refinancing, which caused a $107.4 million net reduction.
It is the intent of the Company to fund a portion of its interest-bearing
assets, not funded by deposits, with longer term advances from the Federal Home
Loan Bank, and fund its day-to-day cash needs and shorter term interest-bearing
assets not otherwise funded with deposits using draws on its line of credit with
the Federal Home Loan Bank. At December 31, 2003 the Saving Bank's line of
credit was $30 million of which $9.9 million was drawn.
Stockholders' equity. Total consolidated stockholders' equity decreased $7.3
million to $55.5 million at December 31, 2003. The decrease is largely the
result of a $5.8 million net loss, a $2.3 million decrease in accumulated other
comprehensive income, and $1.5 million in cash dividends paid to the Company's
common stockholders. Offsetting these decreases was a $2.3 million increase in
stockholders' equity attributable to the exercise of stock options for 92,092
shares, and the allocation of 20,549 shares to participants in the Company's
employee stock ownership plan.
6
2003 ANNUAL REPORT
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Average Balance Sheet
The following table sets forth information (dollars in thousands) relating to
the Company'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.
2003 2002 2001
--------------------------------------------------------------------------------------------
Average Average Average Average Average Average
balance Interest yld/cost balance Interest yld/cost balance Interest yld/cost
--------------------------------------------------------------------------------------------
ASSETS
Interest-earning assets:
Loans receivable(1) $378,414 23,372 6.18% $362,104 25,662 7.09% $359,928 $28,443 7.90%
Mortgage-backed
securities 154,721 6,725 4.35% 200,316 11,423 5.70% 212,951 13,749 6.46%
Investment securities 62,747 1,806 2.88% 50,072 2,271 4.54% 51,384 3,015 5.87%
Other interest-
earning assets(2) 45,590 474 1.04% 74,058 1,099 1.48% 49,206 1,540 3.13%
-------- ------- -------- ------- -------- -------
Total interest-
earning assets 641,472 32,377 5.05% 686,550 40,455 5.89% 673,469 46,747 6.94%
------- ------- -------
Non interest-
earning assets 33,839 34,494 29,202
-------- -------- --------
Total assets $675,311 $721,044 $702,671
======== ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY:
Interest-bearing liabilities
Deposits 449,925 7,044 1.57% 433,522 10,506 2.42% 409,688 14,043 3.43%
Advances from the FHLB
and borrowings 160,325 8,208 5.12% 219,797 12,154 5.53% 230,078 12,865 5.59%
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities 610,250 15,252 2.50% 653,319 22,660 3.47% 639,766 26,908 4.20%
------- ------- -------
Non interest-bearing
liabilities 4,195 7,603 7,865
-------- -------- --------
Total liabilities 614,445 660,922 647,631
Stockholders' equity 60,866 60,122 55,040
-------- -------- --------
Total liabilities and
stockholders' equity $675,311 $721,044 $702,671
======== ======== ========
Net interest income $17,125 $17,795 $19,839
======= ======= =======
Interest rate spread(3) 2.55% 2.42% 2.74%
Net yield on interest-
earning assets(4) 2.67% 2.59% 2.95%
Ratio of average interest-
earning assets to
average interest-
bearing liabilities 105% 105% 105%
(1) Nonaccrual loans have been included in the appropriate average loan balance
category, but interest on nonaccrual loans has not been included for
purposes of determining interest income.
(2) Includes interest-bearing deposits in other banks.
(3) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(4) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
7
TF FINANCIAL CORPORATION & SUBSIDIARIES
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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.
2003 vs 2002 2002 vs 2001
Increase (decrease) due to Increase (decrease) due to
-------------------------------------------------------------------
Volume Rate Net Volume Rate Net
-------------------------------------------------------------------
Interest income:
Loans receivable, net $ 1,117 $(3,407) $(2,290) $ 171 $(2,952) $(2,781)
Mortgage-backed securities (2,298) (2,400) (4,698) (784) (1,542) (2,326)
Investment securities 489 (954) (465) (75) (669) (744)
Other interest-earning assets (351) (274) (625) 577 (1,018) (441)
-------------------------------------------------------------------
Total interest-earning assets (1,043) (7,035) (8,078) (111) (6,181) (6,292)
-------------------------------------------------------------------
Interest expense:
Deposits 384 (3,846) (3,462) 777 (4,314) (3,537)
Advances from the FHLB
and borrowings (3,097) (849) (3,946) (570) (141) (711)
-------------------------------------------------------------------
Total interest-bearing
liabilities (2,713) (4,695) (7,408) 207 (4,455) (4,248)
-------------------------------------------------------------------
Net change in net
interest income $ 1,670 $(2,340) $ (670) $ (318) $(1,726) $(2,044)
===================================================================
Comparison of Years Ended December 31, 2003 and December 31, 2002
Net Income. Net loss was $5.8 million for the fiscal year ended December 31,
2003. Net income was $5.1 million for the year ended December 31, 2002. The
difference in net income of $10.1 million when comparing the year 2003 with 2002
is largely attributable to the debt refinancing, which produced a net loss for
2003 of $9.3 million after considering the income tax benefit associated with
the transaction.
Pre-tax loss was $9.2 million for 2003. After adjusting for the $14.2 million
pre-tax cost of the debt refinancing, pre-tax income was $5.0 million compared
to pre-tax income of $6.7 million during 2002. This $1.7 million difference is
mainly attributable to a $1.5 million increase in non-interest expense, after
adjusting for the $13.8 million debt repayment fee, as described more fully
below.
Total Interest Income. For the year ended December 31, 2003, total interest
income decreased to $32.4 million compared to $40.5 million for the year ended
December 31, 2002. The $8.1 million decrease in interest income was mainly the
result of the repayment of $165.9 million in higher yielding loans receivable,
which were replaced and supplemented by the origination and purchase of $202.8
million in loans at substantially lower yields. In addition, the Company'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
Company's loan portfolio decreased by 91 basis points during 2003. A similar
result of low market interest rates combined with high loan prepayments caused
the average yield on the Company's mortgage-backed securities portfolios to
decrease by 135 basis points. At December 31, 2003 the rate of prepayment of
mortgage-related earning assets had decreased.
Mortgage-related loan repayments during 2003 caused an average of $45.6 million
to be maintained in cash and cash equivalents during 2003, earning an average
interest rate of 1.04%, which is substantially less than these funds were
earning while invested in loans and mortgage-backed securities. However, by year
end 2003 the Company's cash and cash equivalents had been reduced to $8.2
million from $100.6 million at December 31, 2002 largely as a result of the debt
refinancing, but also due to the Company's increased lending activities,
particularly during the second half of 2003.
Total Interest Expense. Total interest expense decreased to $15.3 million from
$22.7 million for the year ended December 31, 2003 compared to 2002. $3.5
million of this decrease is primarily the result of lower market interest rates
during the period and, consequently, lower rates paid on the Company's new
certificates of deposit; in addition, the Company 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.
In addition, the interest paid on Federal Home Loan Bank advances decreased by
$3.9 million during 2003 compared with 2002, largely because of the debt
refinancing transaction.
8
2003 ANNUAL REPORT
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Allowance for Loan Losses. The allowance for loan losses was approximately $2.1
million at December 31, 2003 and $2.0 million at December 31, 2002. The
provision for loan losses was $330,000 during 2003 compared with $988,000 during
2002. Charge-offs were $266,000 during 2003 compared to $913,000 during 2002.
Charge-offs during 2002 included approximately $625,000 during the second
quarter attributable to a default by the servicer of the Company's purchased
lease portfolio. 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 $2.7 million during 2003
compared with $3.3 million during 2002. During the first six months of 2003 the
Company sold $14.5 million in mortgage-backed securities and recorded gains of
$0.6 million. The debt refinancing during the third quarter of 2003 produced a
loss on sale of securities of $0.4 million. During 2002 the Company sold
approximately $37.2 million mortgage-backed and investment securities available
for sale and realized gains of $1.2 million. Service fees and other operating
income increased by $0.3 million largely due to the introduction of new deposit
account services during the year. However, fee income also includes $0.2 million
of loan prepayment fees, largely attributable to large commercial loans, which,
because of the nature of the fee, are non-recurring in nature. Gain on sale of
real estate of $0.1 million resulted from the sale of operating property during
2003 while there were no such gains during 2002.
Non-Interest Expense. Total non-interest expense, excluding the $13.8 million
debt prepayment fee, increased by $1.5 million during 2003 compared to 2002.
Employee compensation and benefits increased by $557,000 during 2003 compared to
2002: expense related to the employee stock ownership plan increased by $326,000
due to an increase in the shares allocated to plan participants and an increase
in the per share cost associated with these allocations; the expense of the
Company's defined benefit plan increased by $126,000; and, finally, there was a
$66,000 one-time expense associated with the retirement of the Bank's president
at June 30, 2003. The remaining increase in compensation is due to the cost of
staffing a new branch, opened during the first quarter of 2003, and normal
salary increases.
Professional fees increased by $201,000 during 2003 due to increased legal
expense, in part related to the retirement of the Bank's president and
appointment of new senior officers at the Bank, and in part due to the
evaluation and adoption of various policies and procedures required by the
Sarbanes-Oxley Act of 2002. Also, during the second half of 2003 the Company
engaged an outside firm to completely review and then provide on-going
assistance with the Bank's regulatory compliance requirements.
Other operating expenses increased by $511,000 during 2003. Loan expenses
increased by $219,000 due to increased loan production. Other miscellaneous
expenses include $113,000 attributable to estimated and realized losses on
foreclosed real estate, and $110,000 attributable to various deposit item,
robbery, and reconciling item losses that occurred throughout the year.
Income Tax Expense. The Company's effective tax rate was 36.7% during 2003
compared to 24.0% during 2002. The apparent increase in the effective tax rate
during 2003 is due to the pre-tax loss for the year, produced by the debt
refinancing, which produces a tax benefit at a 34% rate, further increased by
the elimination of net non-taxable income from the pre-tax loss. The Company
expects the effective tax rate to return to a rate below the marginal effective
rate of 34% during 2004.
Comparison of Years Ended December 31, 2002 and December 31, 2001
Net Income. Net income was $5.1 million for the fiscal year ended December 31,
2002, a decrease of $0.6 or 11.2% compared with the year ended December 31,
2001.
The Company'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 Company'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 Company'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 Company'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 Company's
mortgage-backed securities portfolios to decrease by 76 basis points.
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%.
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 Company's new certificates of deposit; in
addition, the Company 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.
9
TF FINANCIAL CORPORATION & SUBSIDIARIES
================================================================================
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 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 Company's purchased
lease portfolio.
Non-Interest Income. Total non-interest income was $3.3 million during 2002
compared with $3.2 million during 2001. During 2002 the Company sold
approximately $37.2 million mortgage-backed and investment securities available
for sale and realized gains of $1.2 million. During 2001 the Company 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 Company 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 Company decreased by $236,000 other operating
expenses, $110,000 of which related to bank service charges because the Company
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 Company'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 Company'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.
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
Company'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, 2003, such borrowed funds totaled $86.9 million. The amount of
these borrowings that will mature during the twelve months ending December 31,
2004 is $22.3 million. At December 31, 2003 the Savings Bank had a $30 million
line of credit, $20.1 million of which was unused, and up to approximately $299
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, 2004, is approximately $100.5 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, 2003, the Savings Bank had outstanding commitments to originate
loans or fund unused lines of credit of $76.0 million. The loan commitments will
be funded during the twelve months ending December 31, 2004. 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. Approximately $39 million of these unused lines are not
expected to be funded. At December 31, 2003, the Savings Bank had no outstanding
commitments to sell loans.
The Company also has obligations under lease agreements. Payments required under
such lease agreements will be approximately $215,000 during the year ending
December 31, 2004.
10
2003 ANNUAL REPORT
================================================================================
The following table combines the Company's contractual obligations and
commitments to make future payments as of December 31, 2003.
(in thousands)
Total Less than 1 year 1-3 years 4-5 years After 5 years
----------------------------------------------------------------
Contractual obligations: Payments due by period
FHLB advances $ 86,853 $ 22,268 $ 25,993 $ 27,725 $10,867
Time deposits 146,960 100,450 34,097 12,081 332
Operating leases 643,232 214,902 255,960 172,370 --
-------- -------- -------- -------- -------
Total contractual
obligations $877,045 $337,620 $316,050 $212,176 $11,199
======== ======== ======== ======== =======
Commitments: Amount of commitment expirations by period
Extensions of credit $74,716 $28,593 $24,231 $39 $21,853
Letters of credit 1,276 1,156 120 -- --
Loans sold with recourse 113 -- -- -- 113
------- ------- ------- --- -------
Total commitments $76,105 $29,749 $24,351 $39 $21,966
======= ======= ======= === =======
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, 2003, 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.
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 Company'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 Company'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 Company 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 NII.
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 67%
of the Company's total assets. For this prepayment speed assumption the Company
uses median expected prepayment speeds which are obtained from a reliable third
party source. The Company 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 Company 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 Company's NII exposure at December 31, 2003, the Company focused on
the simulation of net interest income in the "ramped up 200 basis points" and
"shocked down 50 basis points" scenarios. The Company also used the results of
the most recently available OTS model's forecast of market value of portfolio
equity under different interest rate scenarios. In addition, the Company
prepared current period and one-year forward "gap" reports in order to show
potential mis-matches of repricing or cash flows from the Company'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.
11
TF FINANCIAL CORPORATION & SUBSIDIARIES
================================================================================
At December 31, 2003, the most adverse change in net interest income over the
two-year horizon commencing January 1, 2004 using the "ramped up 200 basis
points" and "shocked down 50 basis points" simulation methodologies was a $5.8
million or a 14% decrease in expected net interest income. The Company estimated
its one-year gap (i.e. assets repricing/maturing in excess of liabilities
repricing/maturing is a positive gap) to be negative $69.2 million in the
"ramped up 200 basis points" scenario, and positive $63.7 million in the
"shocked down 50 basis points" scenario, compared to a positive $9.5 million
under the "rates unchanged" interest rate scenario. Essentially, the Company's
net interest income is highly sensitive to the movement of long-term interest
rates because of the resulting effect on the prepayment speeds of the Company's
mortgage-related earning assets. In addition, the Company's deposits are highly
insensitive to the downward movement in short term market rates due to the
perceived inability of the Company to move core deposit rates much lower from
where they are at December 31, 2003. 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 years 2004, 2005 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.
Critical Accounting Policies
Certain critical accounting policies of the Company require the use of
significant judgment and accounting estimates in the preparation of the
consolidated financial statements and related data of the Company. These
accounting estimates require management to make assumptions about matters that
are highly uncertain at the time the accounting estimate is made. Management
believes that the most critical accounting policy requiring the use of
accounting estimates and judgment is the determination of the allowance for loan
losses. If the financial position of a significant amount of debtors should
deteriorate more than the Company has estimated, present reserves for loan
losses may be insufficient and additional provisions for loan losses may be
required. The allowance for loan losses was $2,111,000 at December 31, 2003.
Recent Accounting Pronouncements
The Company adopted FIN 45, "Guarantor's Accounting and Disclosure Requirements
for Guarantees, including Indirect Guarantees of Indebtedness of Others," on
January 1, 2003. FIN 45 requires a guarantor entity, at the inception of a
guarantee covered by the measurement provisions of the interpretation, to record
a liability for the fair value of the obligation undertaken in issuing the
guarantee. The Company issues financial and performance letters of credit.
Financial letters of credit require the Company to make payment if the
customer's financial condition deteriorates, as defined in the agreements.
Performance letters of credit require the Company to make payments if the
customer fails to perform identified non-financial contractual obligations. FIN
45 applies prospectively to guarantees the Company issues or modifies subsequent
to December 31, 2002.
The Company defines the initial fair value of these letters of credit as the fee
received from the customer. The maximum potential undiscounted amount of future
payments on these letters of credit as of December 31, 2003 is $1.3 million and
they expire through 2005. The amounts due under these letters of credit would be
reduced by any proceeds that the Company would be able to obtain in liquidating
the collateral for these loans. The adoption of FIN 45 did not have a material
impact on the Company's consolidated financial position or results of
operations.
In January 2003, the FASB issued FASB Interpretation 46 (FIN 46), "Consolidation
of Variable Interest Entities." FIN 46 clarifies the application of Accounting
Research Bulletin 51, "Consolidated Financial Statements," for certain entities
that do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties
or in which equity investors do not have the characteristics of controlling
financial interest ("variable interest entities"). Variable interest entities
within the scope of FIN 46 will be required to be consolidated by their primary
beneficiary. The primary beneficiary of a variable interest is determined to be
the party that absorbs a majority of the entity's expected losses, receives a
majority of its expected returns, or both. FIN 46 applies immediately to
variable interest entities created after January 31, 2003, and to variable
interest entities in which an enterprise obtains and interest after that date.
Subsequent to the issuance of FIN 46, the FASB issued a revised interpretation,
FIN 46(R), the provisions of which must be applied to certain variable interest
entities by March 31, 2004. The Company does not anticipate a material impact
from the adoption of FIN 46, which will occur in the first quarter of 2004.
12
2003 ANNUAL REPORT
================================================================================
On April 30, 2003 the Financial Accounting Standards Board (FASB) issued
Statement No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities." The Statement amends and clarifies accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities under Statement 133. The new
guidance amends Statement 133 for decisions made: as part of the Derivatives
Implementation Group process that effectively required amendments to Statement
133, in connection with other FASB projects dealing with financial instruments,
and regarding implementation issues raised in relation to the application of the
definition of a derivative, particularly regarding the meaning of an
"underlying" and the characteristics of a derivative that contains financing
components. This Statement clarifies under what circumstances a contract with an
initial net investment meets the characteristic of a derivative as discussed in
Statement 133. In addition, it clarifies when a derivative contains a financing
component that warrants special reporting in the statement of cash flows.
Statement 149 amends certain other existing pronouncements. This Statement is
effective for contracts entered into or modified after June 30, 2003, except as
stated below and for hedging relationships designated after June 30, 2003. The
guidance should be applied prospectively. The provisions of this Statement that
relate to Statement 133 Implementation Issues that have been effective for
fiscal quarters that began prior to June 15, 2003, should continue to be applied
in accordance with their respective effective dates. In addition, certain
provisions relating to forward purchases or sales of when-issued securities or
other securities that do not yet exist, should be applied to existing contracts
as well as new contracts entered into after June 30, 2003. The adoption of SFAS
No. 149 did not have a material effect on the Company's financial position or
results of operations.
On May 15, 2003 the Financial Accounting Standards Board (FASB) issued Statement
No. 150, "Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity." The Statement improves the accounting for certain
financial instruments that, under previous guidance, issuers could account for
as equity. The new Statement requires that those instruments be classified as
liabilities in statements of financial position. Statement 150 affects three
types of freestanding financial instruments: (1) mandatorily redeemable shares,
which the issuing company is obligated to buy back in exchange for cash or other
assets; (2) instruments that do or may require the issuer to buy back some of
its shares in exchange for cash or other assets, including put options and
forward purchase contracts; and (3) obligations that can be settled with shares,
the monetary value of which is fixed, tied solely or predominantly to a variable
such as a market index, or varies inversely with the value of the issuer's
shares. Statement 150 does not apply to features embedded in a financial
instrument that is not a derivative in its entirety. Most of the guidance in
Statement 150 is effective for all financial instruments entered into or
modified after May 31, 2003 and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. The adoption of Statement
150 did not have a material effect on the Company's consolidated financial
position, results of operations or cash flows.
In October 2003, the AICPA issued SOP 03-3, "Accounting for Loans or Certain
Debt Securities Acquired in a Transfer." This statement addresses accounting for
differences between contractual cash flows and cash flows expected to be
collected from an investor's initial investment in loans or debt securities
("loans") acquired in a transfer as a result of credit quality deterioration.
The statement requires recognition of the excess of all cash flows expected at
acquisition over the investor's initial investment in the loan as interest
income on a level-yield basis over the life of the loan as the accretable yield.
The loan's contractual required payments receivable in excess of the amount of
its cash flows expected at acquisition (nonaccretable difference) should not be
recognized as an adjustment to yield, a loss accrual or a valuation allowance
for credit risk. This statement is effective for loans acquired in fiscal years
beginning after December 31, 2004. Early adoption is permitted. The adoption of
SOP 03-3 is not expected to have a material effect on the Company's consolidated
financial position, results of operations or cash flows.
In December 2003, the FASB issued SFAS 132 (revised 2003) in response to
requests by users of financial statements for more transparent disclosure of
pension plan assets, obligations, benefit payments, contributions, and net
benefit cost. In light of certain similarities between defined benefit pension
arrangements and arrangements for other post-retirement benefits, SFAS 132
requires similar disclosures for both. This Statement replaces the original SFAS
132 and revises employers' disclosures about pension plans and other
post-retirement benefit plans to require more information about the economic
resources and obligations of such plans. SFAS 132 (revised 2003) amends the
disclosure requirements of SFAS 87, SFAS 88, and SFAS 106, however, the
measurement and recognition guidance is not affected. SFAS 132 (revised 2003) is
effective for financial statements of public companies for the fiscal years
ending after December 15, 2003, except estimated future benefit payment
disclosures and disclosures of certain information about foreign plans are not
required until fiscal years ending after June 15, 2004. The interim-period
disclosures are effective for interim-period financial reports beginning after
December 15, 2003. Disclosures for earlier annual periods presented for
comparative purposes are required to be restated for the percentages of each
major category of plan assets held, the accumulated benefit obligation, and plan
assumptions. The disclosures for earlier interim periods presented for
comparative purposes need to be restated for the components of net benefit cost.
The adoption of the relevant provisions of SFAS 132 (revised 2003) and the
expected adoption of the remaining provisions did not and is not expected to
have a material impact on the Company's financial position or results of
operations.
In June 2003, the Accounting Standards Executive Committee (AcSEC) issued a
proposed SOP, "Allowance for Credit Losses," to provide guidance on how
creditors should determine the allowance for credit losses related to all loans
in accordance with SFAS 5, SFAS 114, and FIN 14. The proposed guidance would
apply to all creditors of loans (except for governmental entities) and not just
financial institutions. AcSEC began its deliberations and will continue to
deliberate the proposed SOP in 2004. Based on informal discussions with the FASB
in early 2004, AcSEC decided to revise the scope of the proposed SOP to provide
guidance related to disclosures only.
The Bank adopted EITF 03-1, "The Meaning of Other than Temporary Impairment and
Its Application to Certain Investments," as of December 31, 2003. EITF 03-1
includes certain disclosures regarding quantitative and qualitative disclosures
for investment securities accounted for under FAS 115, "Accounting for Certain
Investments in Debt and Equity Securities," that are impaired at the balance
sheet date, but for which an other-than-temporary impairment has not been
recognized. The disclosures under EITF 03-4 are required for financial
statements for years ending after December 15, 2003 and are included in the
Company's consolidated financial statements.
13
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14
2003 ANNUAL REPORT
================================================================================
Accountants and Management Consultants
The US Member Firm of Grant Thornton [LOGO]
Grant Thornton International GRANT THONRTON LLP
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, 2003
and 2002, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 2003. 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, 2003 and 2002, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 2003, 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, 2004
Suite 3100
Two Commerce Square
2001 Market Street
Philadelphia, PA 19103-7080
Tel: 215 561-4200
Fax: 215 561-1066
15
TF FINANCIAL CORPORATION & SUBSIDIARIES
================================================================================
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
December 31
----------------------
ASSETS 2003 2002
----------------------
(in thousands)
Cash and cash equivalents $ 8,241 $ 100,580
Certificates of deposit in other financial institutions 155 220
Investment securities available for sale - at fair value 14,433 27,243
Investment securities held to maturity
(fair value of $10,815 and $15,187 as of
December 31, 2003 and 2002, respectively) 10,389 14,563
Mortgage-backed securities available for sale -
at fair value 106,774 115,243
Mortgage-backed securities held to maturity
(fair value of $24,774 and $57,346 as of
December 31, 2003 and 2002, respectively) 23,630 54,592
Loans receivable, net 404,649 370,092
Federal Home Loan Bank stock - at cost 6,825 11,424
Accrued interest receivable 2,671 3,576
Premises and equipment, net 6,268 6,742
Core deposit intangible asset, net of accumulated
amortization of $2,456 and $2,271 as of
December 31, 2003 and 2002, respectively 368 553
Goodwill, net of accumulated amortization of $2,328 4,324 4,324
Other assets 18,025 11,880
----------------------
TOTAL ASSETS $ 606,752 $ 721,032
======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $ 459,343 $ 442,558
Advances from the Federal Home Loan Bank 86,853 207,359
Advances from borrowers for taxes and insurance 1,738 1,330
Accrued interest payable 1,908 2,897
Other liabilities 1,430 4,048
----------------------
Total liabilities 551,272 658,192
----------------------
Stockholders' equity
Preferred stock, no par value; 2,000,000 shares authorized
at December 31, 2003 and 2002, none issued -- --
Common stock, $0.10 par value; 10,000,000 shares authorized,
5,290,000 shares issued, 2,596,037 and 2,482,586 shares
outstanding at December 31, 2003 and 2002, respectively,
net of shares in treasury: 2003 - 2,474,366; 2002 - 2,567,268 529 529
Retained earnings 52,626 59,978
Additional paid-in capital 51,982 51,647
Unearned ESOP shares (2,196) (2,401)
Treasury stock - at cost (47,043) (48,809)
Accumulated other comprehensive income (418) 1,896
----------------------
Total stockholders' equity 55,480 62,840
----------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 606,752 $ 721,032
======================
The accompanying notes are an integral part of these statements
16
2003 ANNUAL REPORT
================================================================================
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31,
----------------------------------
2003 2002 2001
----------------------------------
(in thousands, except per share data)
Interest income
Loans, including fees $ 23,372 $ 25,662 $ 28,443
Mortgage-backed securities 6,725 11,423 13,749
Investment securities 1,806 2,271 3,015
Interest-bearing deposits and other 474 1,099 1,540
----------------------------------
TOTAL INTEREST INCOME 32,377 40,455 46,747
----------------------------------
Interest expense
Deposits 7,044 10,506 14,043
Borrowings 8,208 12,154 12,865
----------------------------------
TOTAL INTEREST EXPENSE 15,252 22,660 26,908
----------------------------------
NET INTEREST INCOME 17,125 17,795 19,839
----------------------------------
Provision for possible loan losses 330 988 500
NET INTEREST INCOME AFTER PROVISION FOR
POSSIBLE LOAN LOSSES 16,795 16,807 19,339
----------------------------------
Non-interest income
Service fees, charges and other operating income 2,372 2,114 1,734
Gain on sale of deposits -- -- 1,092
Gain on sale of real estate 110 -- 444
Gain (loss) on sale of investment and mortgage-backed securities 208 1,190 (126)
Gain on sale of loans -- -- 28
----------------------------------
TOTAL NON-INTEREST INCOME 2,690 3,304 3,172
----------------------------------
Non-interest expense
Employee compensation and benefits 8,186 7,629 7,865
Occupancy and equipment 2,488 2,303 2,493
Federal deposit insurance premium 72 75 75
Professional fees 609 408 486
Advertising 551 441 507
Other operating 2,847 2,336 2,572
Amortization of core deposit intangible asset 185 222 266
Amortization of goodwill -- -- 444
Debt prepayment fee 13,765 -- --
----------------------------------
TOTAL NON-INTEREST EXPENSE 28,703 13,414 14,708
----------------------------------
INCOME (LOSS) BEFORE INCOME TAXES (9,218) 6,697 7,803
Income taxes (benefit) (3,384) 1,605 2,070
----------------------------------
NET INCOME (LOSS) $ (5,834) $ 5,092 $ 5,733
==================================
Earnings (loss) per share - basic $ (2.30) $ 2.06 $ 2.32
==================================
Earnings (loss) per share - diluted $ (2.30) $ 1.91 $ 2.19
==================================
The accompanying notes are an integral part of these statements.
17
TF FINANCIAL CORPORATION & SUBSIDIARIES
================================================================================
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 2003, 2002 and 2001
----------------------------------------------------------------------------------------------------------
(in thousands, except share data)
Accumulated
Other
Common stock Additional Unearned Shares Comprehensive 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, 2001 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
----------------------------------------------------------------------------------------------------------
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
----------------------------------------------------------------------------------------------------------
Allocation of ESOP shares 20,549 -- 401 205 -- -- -- -- 606
Cash dividends -
common stock -- -- -- -- -- -- (1,518) -- (1,518)
Exercise of options 92,902 -- (618) -- -- 1,766 -- -- 1,148
Income tax benefit
arising from stock
compensation -- -- 552 -- -- -- -- -- 552
Other comprehensive
income (loss),
net of taxes -- -- -- -- -- -- -- (2,314) (2,314) $(2,314)
Net income (loss) for
the year ended
December 31, 2003 -- - - -- -- -- -- (5,834) -- (5,834) (5,834)
----------------------------------------------------------------------------------------------------------
Comprehensive
income (loss) $(8,148)
----------------------------------------------------------------------------------------------------------
Balance at
December 31, 2003 2,596,037 $529 $51,982 $(2,196) $ -- $(47,043) $52,626 $ (418) $55,480
----------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of this statement.
18
2003 ANNUAL REPORT
================================================================================
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
-----------------------------------
2003 2002 2001
-----------------------------------
(in thousands)
OPERATING ACTIVITIES
Net income (loss) $ (5,834) $ 5,092 $ 5,733
Adjustments to reconcile net income to net cash provided
by operating activities
Amortization of
Mortgage loan servicing rights 11 14 14
Deferred loan origination fees (259) (201) (387)
Premiums and discounts on
investment securities, net 170 108 36
Premiums and discounts on
mortgage-backed securities and loans, net 1,941 758 (72)
Goodwill and other intangibles 185 222 710
Deferred income taxes 596 (19) (172)
Provision for loan losses and provision for
losses on real estate 443 988 510
Depreciation of premises and equipment 1,041 1,014 1,092
Increase in value of bank-owned life insurance (553) (520) (174)
Stock-based benefit programs 606 273 240
Tax benefit arising from stock compensation 552 -- --
(Gain) loss on sale of
Investment and mortgage-backed securities (208) (1,190) 126
Real estate acquired through foreclosure (23) (60) (27)
Property, equipment and real estate held for investment -- -- (444)
Real estate (110) -- --
Loans receivable -- -- (28)
Deposits -- -- (1,092)
(Increase) decrease in
Accrued interest receivable 905 578 1,369
Other assets (3,924) (89) 248
Increase (decrease) in
Accrued interest payable (989) (865) (908)
Other liabilities (1,427) (318) (470)
-----------------------------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (6,877) 5,785 6,304
-----------------------------------
INVESTING ACTIVITIES
Loan originations (178,578) (80,943) (48,526)
Purchases of loans (24,176) (59,926) (74,647)
Loan principal payments 165,855 147,296 106,019
Principal repayments on mortgage-backed securities
held to maturity 31,013 41,499 41,456
Principal repayments on mortgage-backed securities
available for sale 62,169 39,005 22,415
Proceeds from loan sales -- -- 1,480
Purchases and maturities of certificates of deposit in
other financial institutions, net 65 (26) (3)
(Continued)
19
TF FINANCIAL CORPORATION & SUBSIDIARIES
================================================================================
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
Year ended December 31,
------------------------------------
2003 2002 2001
------------------------------------
(in thousands)
Purchases of investment and mortgage-backed securities
held to maturity $ -- $ (9,650) $ --
Purchase of investment securities and mortgage-backed
securities available for sale (181,058) (103,201) (47,364)
Purchase of bank-owned life insurance (1,500) -- (9,000)
Proceeds from maturities of investment securities
held to maturity 4,105 2,060 51,233
Proceeds from maturities of investment securities
available for sale 40,000 8,000 18,501
Proceeds from the sale of investment and mortgage-backed
securities available for sale 95,193 38,380 4,890
(Purchase) redemption of Federal Home Loan Bank stock 4,599 (56) 1,674
(Purchase) sale of property, equipment and real estate
held for investment 8 (769) 1,635
Proceeds from sale of real estate 1,277 275 163
Purchase of premises and equipment (751) (272) (357)
------------------------------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 18,221 21,672 69,569
------------------------------------
FINANCING ACTIVITIES
Net increase (decrease) in demand deposit/NOW
accounts, passbook savings accounts and certificates
of deposit 16,785 20,506 31,989
Funding of sale of deposits -- -- (9,706)
Net decrease in advances from Federal Home Loan Bank (120,506) (15,000) (22,500)
Net decrease in securities sold under agreements
to repurchase -- -- (14,962)
Net increase (decrease) in advances from borrowers for
taxes and insurance 408 89 83
Treasury stock acquired -- (376) (1,110)
Exercise of stock options 1,148 249 278
Common stock dividends paid (1,518) (1,484) (1,424)
------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (103,683) 3,984 (17,352)
------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (92,339) 31,441 58,521
Cash and cash equivalents at beginning of year 100,580 69,139 10,618
------------------------------------
Cash and cash equivalents at end of year $ 8,241 $ 100,580 $ 69,139
====================================
Supplemental disclosure of cash flow information
Cash paid for
Interest on deposits and advances from Federal Home Loan Bank $ 16,241 $ 23,525 $ 27,816
Income taxes $ 250 $ 2,050 $ 2,495
Non-cash transactions
Transfers from loans to real estate acquired through foreclosure $ 1,857 $ -- $ --
The accompanying notes are an integral part of these statements.
20
2003 ANNUAL REPORT
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
TF Financial Corporation (the "Company") 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, eleven
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 the Company and
its wholly owned subsidiaries: TF Investments, Teragon Financial Corporation,
Penns Trail Development Corporation and Third Federal, and its wholly owned
subsidiary, Third Delaware Corporation (collectively, the "Company"). All
material intercompany balances and transactions have been eliminated in
consolidation.
The accounting policies of the Company 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 Company 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 Company 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 Company classifies its
investment, mortgage-backed and marketable equity securities in one of three
categories: held to maturity, trading, or available for sale. The Company does
not presently engage in security trading activities.
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.
The Bank adopted EITF 03-1, "The Meaning of Other than Temporary Impairment and
Its Application to Certain Investments," as of December 31, 2003. EITF 03-1
includes certain disclosures regarding quantitative and qualitative disclosures
for investment securities accounted for under FAS 115, "Accounting for Certain
Investments in Debt and Equity Securities," that are impaired at the balance
sheet date, but for which an other-than-temporary impairment has not been
recognized. The disclosures under EITF 03-1 are required for financial
statements for years ending after December 15, 2003 and are included in these
financial statements
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 Company has the ability and it is
management's intention to hold such assets to maturity.
The Company adopted the provisions of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS No. 133), as amended, as of January 1,
2001. The statement requires the Company to recognize all derivative instruments
at fair value as either assets or liabilities. Financial derivative instruments
are reported at fair value in other assets or other liabilities. The accounting
for changes in the fair value of a derivative instrument depends on whether it
has been designated and qualifies as part of a hedging relationship.
Continued
21
TF FINANCIAL CORPORATION & SUBSIDIARIES
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
December 31, 2003 and 2002
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
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).
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 Company accounts for impaired 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.
The Company adopted FIN 45, "Guarantor's Accounting and Disclosure Requirements
for Guarantees, including Indirect Guarantees of Indebtedness of Others," on
January 1, 2003. FIN 45 requires a guarantor entity, at the inception of a
guarantee covered by the measurement provisions of the interpretation, to record
a liability for the fair value of the obligation undertaken in issuing the
guarantee. The Bank issues financial and performance letters of credit.
Financial letters of credit require the Bank to make payment if the customer's
financial condition deteriorates, as defined in the agreements. Performance
letters of credit require the Bank to make payments if the customer fails to
perform identified non-financial contractual obligations. FIN 45 applied
prospectively to guarantees the Bank issued or modified subsequent to December
31, 2002.
In October 2003, The AICPA issued SOP 03-3, "Accounting for Loans or Certain
Debt Securities Acquired in a Transfer." This statement addresses accounting for
differences between contractual cash flows and cash flow expected to be
collected from an investor's initial investment in loans or debt securities
("loans") acquired in a transfer as a result of credit quality deterioration.
The statement requires recognition of the excess of all cash flows expected at
acquisition over the investor's initial investment in the loan as interest
income on a level-yield basis over the life of the loan as the accretable yield.
The loan's contractual required payments receivable in excess of the amount of
its cash flows expected at acquisition (nonaccretable difference) should not be
recognized as an adjustment to yield, a loss accrual or a valuation allowance
for credit risk. This statement is effective for loans acquired in fiscal years
beginning after December 31, 2004. Early adoption is permitted. The adoption of
SOP 03-3 is not expected to have a material effect on the Company's consolidated
financial position, results of operations, or cash flows
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
22
2003 ANNUAL REPORT
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
December 31, 2003 and 2002
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 Company 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 Company.
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 Company elected
to apply SFAS No. 147 as of January 1, 2002.
The Company 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 Company concluded was a business combination
in accordance with SFAS No. 147. In addition, the Company has tested the
goodwill and core deposit intangible assets for impairment prior to its fiscal
year ending December 31, 2003. No impairment has been recognized.
7. Transfers of Financial Assets
The Company 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 Company has established an Employee Stock Ownership Plan (ESOP) covering
eligible employees with six months of service, as defined by the ESOP. The
Company 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.
The Company has several fixed stock option plans that allow the Company 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 Company's stock on the date of grant. The Company 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
Company'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.
Continued
23
TF FINANCIAL CORPORATION & SUBSIDIARIES
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
December 31, 2003 and 2002
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Had compensation cost for the plans been determined based on the fair value of
options at the grant dates consistent with the method of SFAS No. 123,
"Accounting for Stock-Based Compensation," the Company's net income and earnings
per share would have been reduced to the pro forma amounts indicated below.
2003 2002 2001
-----------------------------
Net income (loss) (in thousands)
As reported $ (5,834) $ 5,092 $ 5,733
Deduct: stock-based compensation expense determined
using the fair value method, net of related tax effects 53 58 64
-----------------------------
Pro forma $ (5,887) $ 5,034 $ 5,669
=============================
Basic earnings (loss) per share
As reported $ (2.30) $ 2.06 $ 2.32
Deduct: stock-based compensation expense determined
using the fair value method, net of related tax effects 0.02 0.02 0.02
-----------------------------
Pro forma $ (2.32) $ 2.04 $ 2.30
=============================
Diluted earnings (loss) per share
As reported $ (2.30) $ 1.91 $ 2.19
Deduct: stock-based compensation expense determined
using the fair value method, net of related tax effects 0.03 0.01 0.01
-----------------------------
Pro forma $ (2.33) $ 1.90 $ 2.18
=============================
Weighted average fair value of options granted during the year $ 9.50 $ 6.60 $ 5.49
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 2003, 2002 and 2001, respectively: a dividend
yield of 2.09%, 2.78%, and 3.23%; expected volatility of 32%, 29%, and 30%;
risk-free interest rate of 3.40%, 2.78%; and 5.02%; and expected lives of six
years for all options.
9. Income Taxes
The Company 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 Company expenses advertising costs as incurred.
11. Earnings Per Share
The Company 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
24
2003 ANNUAL REPORT
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
December 31, 2003 and 2002
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
12. Comprehensive Income
The Company 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 Company's other comprehensive income consists of net
unrealized gains and losses on investment securities available for sale.
Comprehensive income (loss) for 2003, 2002 and 2001 was $(8,148,000),
$6,203,000, and $6,882,000, respectively. The components of other comprehensive
income are as follows:
December 31, 2003
-----------------------------------
Before tax Tax (expense) Net of tax
amount benefit amount
-----------------------------------
(in thousands)
Unrealized losses on securities
Unrealized holding (losses) arising during period $(3,297) $ 1,120 $(2,177)
Reclassification adjustment for gains realized
in net income (208) 71 (137)
-----------------------------------
Other comprehensive income (loss), net $(3,505) $ 1,191 $(2,314)
===================================
December 31, 2002
-----------------------------------
Before tax 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
-----------------------------------
Before tax 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
===================================
Continued
25
TF FINANCIAL CORPORATION & SUBSIDIARIES
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
December 31, 2003 and 2002
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
13. Segment Reporting
The Company 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 Company has one reportable segment, "Community Banking." All of the
Company's activities are interrelated, and each activity is dependent and
assessed based on how each of the activities of the Company 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 Company 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,
-------------------
2003 2002
-------------------
(in thousands)
Cash and due from banks $7,888 $6,657
Interest-bearing deposits in other financial institutions 353 93,823
Federal funds sold -- 100
-------------------
$8,241 $100,580
===================
26
2003 ANNUAL REPORT
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
December 31, 2003 and 2002
NOTE C - INVESTMENT AND MORTGAGE-BACKED SECURITIES
The amortized cost, gross unrealized gains and losses, and fair value of the
Company's investment and mortgage-backed securities at December 31, 2003 and
2002, are summarized as follows:
December 31, 2003
-----------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
-----------------------------------------------
(in thousands)
Investment securities held to maturity
State and political subdivisions $ 1,609 $ 126 $ -- $ 1,735
U.S. Government and federal agencies 2,000 11 -- 2,011
Corporate debt securities 6,780 289 -- 7,069
-----------------------------------------------
10,389 426 -- 10,815
Mortgage-backed securities held
to maturity 23,630 1,195 (51) 24,774
-----------------------------------------------
$ 34,019 $ 1,621 $ (51) $ 35,589
===============================================
Investment securities available for sale
U.S. Government and federal agencies $ 2,972 $ -- $ (25) $ 2,947
Corporate debt securities 1,000 -- (7) 993
State and political subdivisions 10,677 34 (218) 10,493
-----------------------------------------------
14,649 34 (250) 14,433
Mortgage-backed securities
available for sale 107,192 541 (959) 106,774
-----------------------------------------------
$ 121,841 $ 575 $ (1,209) $ 121,207
===============================================
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)
27
TF FINANCIAL CORPORATION & SUBSIDIARIES
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
December 31, 2003 and 2002
NOTE C - INVESTMENT AND MORTGAGE-BACKED SECURITIES - Continued
Gross realized gains were $725,000, $1,190,000, and $7,000 for the years ended
December 31, 2003, 2002 and 2001, respectively. These gains resulted from the
sale of investment and mortgage-backed securities of $22.6 million, $37.2
million, and $507,000 for the years ended December 31, 2003, 2002 and 2001,
respectively.
Gross realized losses were $517,000, $0, and $133,000 for the years ended
December 31, 2003, 2002 and 2001, respectively. These losses resulted from the
sale of investment and mortgage-backed securities of $72.4 million, $0 million,
and $4.4 million for the years ended December 31, 2003, 2002 and 2001,
respectively.
The amortized cost and fair value of investment and mortgage-backed securities,
by contractual maturity, are shown below.
December 31, 2003
------------------------------------------
Available for sale Held to maturity
------------------------------------------
Amortized Fair Amortized Fair
cost value cost value
------------------------------------------
(in thousands)
Investment securities
Due in one year or less $ -- $ -- $ 1,004 $ 1,017
Due after one year through five years 3,971 3,939 9,170 9,576
Due after five years through 10 years 611 613 -- --
Due after 10 years 10,067 9,881 215 222
-----------------------------------------
14,649 14,433 10,389 10,815
Mortgage-backed securities 107,192 106,774 23,630 24,774
-----------------------------------------
$121,841 $121,207 $ 34,019 $ 35,589
=========================================
The amortized cost, gross unrealized gains and losses, and estimated market
value of mortgage-backed securities, by issuer, are summarized as follows:
December 31, 2003
-----------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
-----------------------------------------------
(in thousands)
Mortgage-backed securities held to maturity
FHLMC certificates $ 8,407 $ 544 $ -- $ 8,951
FNMA certificates 7,205 211 (50) 7,366
GNMA certificates 8,007 440 -- 8,447
Real estate mortgage investment conduit 11 -- (1) 10
Other mortgage-backed securities -- -- -- --
-----------------------------------------------
$ 23,630 $ 1,195 $ (51) $ 24,774
===============================================
Mortgage-backed securities available for sale
FHLMC certificates $ 8,523 $ 23 $ (21) $ 8,525
FNMA certificates 18,522 14 (151) 18,385
GNMA certificates -- -- -- --
Real estate mortgage investment conduit 80,147 504 (787) 79,864
-----------------------------------------------
$ 107,192 $ 541 $ (959) $ 106,774
===============================================
(Continued)
28
2003 ANNUAL REPORT
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
December 31, 2003 and 2002
NOTE C - INVESTMENT AND MORTGAGE-BACKED SECURITIES - Continued
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
===============================================
Investment securities having an aggregate amortized cost of approximately $3.0
and $5.0 million were pledged to secure public deposits at December 31, 2003 and
2002, 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.
The table below indicates the length of time individual securities, both
held-to-maturity and available-for-sale, have been in a continuous unrealized
loss position at December 31, 2003:
Less than 12 months 12 months or longer Total
- ----------------------------------------------------------------------------------------------------------------
Description of Number of Fair Unrealized Fair Unrealized Fair Unrealized
Securities securities value loss value loss value loss
- ----------------------------------------------------------------------------------------------------------------
(in thousands)
Agency 1 $ 2,947 $ (25) $ -- $ -- $ 2,947 $ (25)
Corporate 1 993 (7) -- -- 993 (7)
Municipals 9 7,582 (218) -- -- 7,582 (218)
MBS 21 59,778 (1,004) 56 (6) 59,834 (1,010)
- ----------------------------------------------------------------------------------------------------------------
Total temporarily
impaired investments 32 $ 71,300 $ (1,254) $ 56 $ (6) $ 71,356 $ (1,260)
================================================================================================================
Management has concluded that the unrealized losses above are temporary in
nature since they are primarily related to market interest rates and are not
related to the underlying credit quality of the issuers. Additionally, the
Company has the intent and ability to hold these investments for the time
necessary to recover the amortized cost.
29
TF FINANCIAL CORPORATION & SUBSIDIARIES
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
December 31, 2003 and 2002
NOTE D - LOANS RECEIVABLE
Loans receivable are summarized as follows:
December 31,
----------------------
2003 2002
----------------------
(in thousands)
First mortgage loans (principally conventional)
Secured by one-to-four family residences $ 276,849 $ 227,953
Secured by other non-residential properties 74,109 85,493
Construction loans 6,591 12,026
----------------------
357,549 325,472
Net deferred loan origination cost (fees) and
unamortized premiums 903 377
----------------------
Total first mortgage loans 358,452 325,849
----------------------
Consumer and other loans
Commercial 15,185 8,005
Home equity and second mortgage 25,199 25,480
Leases 1,371 2,246
Other 6,532 10,490
----------------------
48,287 46,221
Unamortized premiums 21 69
----------------------
Total consumer and other loans 48,308 46,290
----------------------
Less allowance for loan losses (2,111) (2,047)
----------------------
Total loans receivable $ 404,649 $ 370,092
======================
Activity in the allowance for loan losses is summarized as follows:
December 31,
---------------------------------------
2003 2002 2001
---------------------------------------
(in thousands)
Balance at beginning of year $ 2,047 $ 1,972 $ 1,714
Provision charged to income 330 988 500
Charge-offs, net (266) (913) (242)
---------------------------------------
Balance at end of year $ 2,111 $ 2,047 $ 1,972
=======================================
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 $2.3 million and $3.8 million at December 31,
2003 and 2002, respectively. Interest income that would have been recorded under
the original terms of such loans totaled approximately $171,000, $307,000, and
$284,000 for the years ended December 31, 2003, 2002 and 2001, respectively. No
interest income has been recognized on non-accrual loans for any of the periods
presented.
The Bank has no concentration of loans to borrowers engaged in similar
activities that exceeded 10% of loans at December 31, 2003 and 2002. 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
$1,291,000, and $987,000 at December 31, 2003 and 2002, respectively. For the
year ended December 31, 2003, principal repayments of approximately $37,000 were
received and $24,000 was disbursed to executive officers, directors or their
related interests.
30
2003 ANNUAL REPORT
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
December 31, 2003 and 2002
NOTE E - 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,
-------------------
2003 2002
-------------------
(in thousands)
Mortgage loan servicing portfolios
FHLMC $2,018 $3,758
Other investors 5,367 8,203
-------------------
$7,385 $11,961
===================
Custodial balances maintained in connection with the foregoing loan servicing
totaled approximately $80,000, and $149,000 at December 31, 2003 and 2002,
respectively. The net servicing revenue on mortgage loans serviced for others is
immaterial for all periods presented.
NOTE F - PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
December 31,
Estimated -----------------------
useful lives 2003 2002
---------------------------------------
(in thousands)
Buildings 30 years $6,046 $ 6,483
Leasehold improvements 5 years 1,266 1,264
Furniture, fixtures and equipment 3-7 years 8,932 8,390
---------------------
16,244 16,137
Less accumulated depreciation 11,668 11,238
---------------------
4,576 4,899
Land 1,692 1,843
---------------------
$ 6,268 $ 6,742
=====================
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
December 31, 2003 and 2002
NOTE G - GOODWILL AND CORE DEPOSIT INTANGIBLE ASSET
A reconciliation of net income and earnings per share to amounts excluding
goodwill amortization is as follows:
2003 2002 2001
----------------------------------
(in thousands except per share amounts)
Reported net income (loss) $ (5,834) $ 5,092 $ 5,733
Add back: goodwill amortization, net of related tax benefit -- -- 293
----------------------------------
Adjusted net income (loss) $ (5,834) $ 5,092 $ 6,026
==================================
Basic earnings (loss) per share
Reported net income (loss) $ (2.30) $ 2.06 $ 2.32
Add back: goodwill amortization, net of related tax benefit -- -- 0.12
----------------------------------
Adjusted net income (loss) $ (2.30) $ 2.06 $ 2.44
==================================
Diluted earnings (loss) per share
Reported net income (loss) $ (2.30) $ 1.91 $ 2.19
Add back: goodwill amortization, net of related tax benefit -- -- 0.11
----------------------------------
Adjusted net income (loss) $ (2.30) $ 1.91 $ 2.30
==================================
Core deposit intangible amortization for each of the three years subsequent to
December 31, 2003 is estimated to be as follows:
Year ending December 31,
-------------------------
(in thousands)
2004 $155
2005 129
2006 84
-------------------------
$368
=========================
NOTE H - DEPOSITS
Deposits are summarized as follows:
December 31,
-------------------
2003 2002
-------------------
(in thousands)
Deposit type
Demand $ 26,375 $ 20,810
NOW 52,647 48,496
Money Market 44,688 43,677
Passbook savings 188,673 182,813
-------------------
Total demand, transaction and passbook deposits 312,383 295,796
Certificates of deposit 146,960 146,762
-------------------
$459,343 $442,558
===================
Continued
32
2003 ANNUAL REPORT
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
December 31, 2003 and 2002
NOTE H - DEPOSITS - Continued
The aggregate amount of certificates of deposit with a minimum denomination of
$100,000 was approximately $22.2 million and $19.7 million at December 31, 2003
and 2002, respectively.
At December 31, 2003, scheduled maturities of certificates of deposit are as
follows:
Year ending December 31,
- -------------------------------------------------------------------------------
2004 2005 2006 2007 2008 Thereafter Total
- -------------------------------------------------------------------------------
(in thousands)
$100,450 $29,827 $4,270 $6,131 $5,950 $ 332 $146,960
===============================================================================
NOTE I - ADVANCES FROM THE FEDERAL HOME LOAN BANK AND OTHER BORROWINGS
Advances from the Federal Home Loan Bank consist of the following:
December 31,
------------------------------------------------------
2003 2002
--------------------------------------------------
Weighted Weighted
Amount average rate Amount average rate
--------------------------------------------------
(in thousands)
Principal payments
due during
2003 $ -- --% $ 27,000 5.70%
2004 22,268 2.38 52,000 5.23
2005 12,787 3.23 5,000 6.58
2006 13,206 3.23 25,000 5.44
2007 13,639 3.23 -- --
Thereafter 24,953 3.23 98,359 5.46
------------------------------------------------
$86,853 3.01% $207,359 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, 2003.
NOTE J - BENEFIT PLANS
The Bank maintains a 401(k) profit-sharing plan for eligible employees.
Participants may contribute up to 15% of pre-tax eligible compensation. The Bank
makes matching discretionary contributions equal to 75% of the initial $1,000
deferral. Contributions to the 401(k) plan totaled $58,000, $52,000, and $48,000
in 2003, 2002 and 2001, respectively.
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.
Continued
33
TF FINANCIAL CORPORATION & SUBSIDIARIES
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
December 31, 2003 and 2002
NOTE J - BENEFIT PLANS - Continued
The following tables sets forth the projected benefit obligation, funded status
of the defined benefit pension plan and the amounts reflected in the
consolidated statements of financial position, and fair value of assets of the
plan.
December 31,
------------------
2003 2002
------------------
(in thousands)
Reconciliation of Projected Benefit Obligation
Benefit obligation at beginning of year $ 2,612 $ 1,991
Service cost 191 172
Interest cost 185 163
Plan amendments -- 42
Actuarial (gain) loss 388 405
Benefits paid (348) (161)
------------------
Benefits obligation at end of year $ 3,028 $ 2,612
==================
Reconciliation of Fair Value of Assets
Fair value of plan assets at beginning of year $ 2,726 $ 2,323
Actual return on plan assets 390 114
Employer contribution -- 450
Benefits paid (348) (161)
------------------
Fair value of plan assets at end of year $ 2,768 $ 2,726
==================
Reconciliation of Funded Status
Funded status $ (260) $ 114
Unrecognized transition obligation 4 9
Unrecognized net actuarial loss (gain) 527 325
Unrecognized prior service cost 281 344
------------------
Prepaid (accrued) benefit cost at end of year $ 552 $ 792
==================
The accumulated benefit obligation at December 31, 2003 and 2002 was $2,511,000
and $2,155,000 respectively.
Employer contributions and benefits paid in the above table include only those
amounts contributed directly to, or paid directly from, plan assets. The
expected employer contribution for 2004 is $0.
2003 2002
------------------
Weighted-average assumptions used to
determine benefit obligations, end of year
Discount rate 6.25% 6.75%
Rate of compensation increase 4.00 4.00
Expected long-term return of plan assets 8.00 8.00
Continued
34
2003 ANNUAL REPORT
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
December 31, 2003 and 2002
NOTE J - BENEFIT PLANS - Continued
2003 2002 2001
-------------------------
Components of net periodic benefit cost
Service cost $ 191 $ 172 $ 114
Interest cost 185 163 194
Expected return on plan assets (217) (185) (231)
Amortization of prior service cost 63 63 58
Amortization of transition obligation (asset) 4 4 --
Recognized net actuarial (gain) loss 13 -- --
-------------------------
Net periodic benefit cost $ 239 $ 217 $ 135
=========================
2003 2002 2001
-------------------------
Weighted-average assumptions used to determine net costs
as of December 31
Discount rate 6.25% 6.75% 7.00%
Expected return on plan assets 8.00 8.00 8.00
Rate of compensation increase 4.00 4.00 4.00
The long-term rate of return on assets was developed through analysis of
historical market returns, current market conditions and the fund's past
experience. Estimates of future market returns by asset category are lower than
actual long-term historical returns in order to reflect current market
conditions.
Estimated future benefits payments are as follows:
(in thousands)
--------------------------------
2004 $ 300
2005 309
2006 335
2007 186
2008 215
2009-2013 1,255
Continued
35
TF FINANCIAL CORPORATION & SUBSIDIARIES
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
December 31, 2003 and 2002
NOTE J - BENEFIT PLANS - Continued
The asset allocation for the Bank's pension plans at the end of 2003 and 2002,
and the target allocation for 2004, by asset category, follows. The fair value
of plan assets for these plans is $2.8 million and $2.8 million at the end of
2003 and 2002 respectively.
Percentage of plan assets at year end
-------------------------------------
2004 2003 2002
Asset Category
Equity securities 40% 41% 31%
Fixed income securities 30% 14% 20%
Cash 30% 45% 49%
-------------------------------------
Total 100% 100% 100%
=====================================
The Bank's pension plan assets are managed by the Trustees of the Retirement
Plan of the Bank. Assets are rebalanced at the end of each quarter. The Bank's
investment strategy with respect to pension assets is to maximize return while
protecting principal. The Trustees have the flexibility to adjust the asset
allocation and move funds to the asset class that offers the most opportunity
for investment returns.
The Company also maintains the following benefit plans:
1. Employee Stock Ownership Plan
The Company established an internally leveraged ESOP for eligible employees who
have completed six months of service with the Company or its subsidiaries. The
ESOP borrowed $4.2 million from the Company to purchase 423,200 newly issued
shares of common stock. The Company 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 Company accounts for its ESOP in accordance with
SOP 93-6. As shares are released from collateral, the Company 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 $523,000, $197,000, and $162,000 in
2003, 2002 and 2001, respectively.
2003 2002
---------------------------
Allocated shares 144,600 133,200
Unreleased shares 218,400 240,100
---------------------------
Total ESOP shares 363,000 373,300
---------------------------
Fair value of unreleased shares $7,472,100 $5,933,900
===========================
Continued
36
2003 ANNUAL REPORT
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
December 31, 2003 and 2002
NOTE J - BENEFIT PLANS - Continued
2. Stock Option Plans
A summary of the status of the Company's fixed stock option plans as of December
31, 2003, and changes for each of the years in the three-year period then ended
is as follows:
2003 2002 2001
-----------------------------------------------------------------------------
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 658,973 $14.11 652,443 $13.52 659,759 $13.23
Options granted 40,248 32.42 32,150 24.77 24,275 20.30
Options exercised (92,902) 12.34 (21,338) 11.66 (23,276) 11.81
Options forfeited (20,605) 21.09 (4,282) 15.93 (8,315) 15.03
------- ------- -------
Outstanding at end of year 585,714 $15.40 658,973 $14.11 652,443 $13.52
======= ======= =======
The following table summarizes information about stock options outstanding at
December 31, 2003:
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 2003 life (years) price 2003 price
- ----------------------------------------------------------------------------------------------------
$10.83 - 14.30 313,508 1.16 years $11.64 304,908 $11.59
$14.31 - 18.00 180,957 3.11 years 15.98 176,761 16.01
$18.01 - 34.14 91,249 8.53 years 27.17 23,296 22.75
NOTE K - INCOME TAXES
The components of income tax expense are summarized as follows:
Year ended December 31,
-----------------------------
2003 2002 2001
-----------------------------
(in thousands)
Federal
Current $(4,364) $ 1,623 $ 2,257
Charge in lieu of income tax relating to stock compensation 379 -- 3
Deferred 596 (19) (172)
-----------------------------
(3,389) 1,604 2,088
State and local - current 5 1 (18)
-----------------------------
Income tax provision (benefit) $(3,384) $ 1,605 $ 2,070
=============================
Continued
37
TF FINANCIAL CORPORATION & SUBSIDIARIES
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
December 31, 2003 and 2002
NOTE K - INCOME TAXES - Continued
The Company's effective income tax rate was different than the statutory federal
income tax rate as follows:
Year ended December 31,
----------------------------------
2003 2002 2001
----------------------------------
(in thousands)
Statutory federal income tax (benefit) (34.0)% 34.0% 34.0%
Increase (decrease) resulting from
Tax-exempt income (2.6) (8.3) (5.3)
State tax, net of federal benefit (0.0) 0.0 0.0
Other (0.1) (1.7) (2.2)
-----------------------------------
(36.7)% 24.0% 26.5%
===================================
Deferred taxes are included in the accompanying consolidated statements of
financial position at December 31, 2003 and 2002, 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, 2003 and 2002. The Company's net deferred tax asset (liability) at
December 31, 2003 and 2002, was composed of the following:
December 31,
----------------
2003 2002
----------------
(in thousands)
Deferred tax assets
Deferred loan origination fees $ -- $ 12
Deferred compensation 230 330
Allowance for loan losses, net 650 746
Amortization 70 221
Unrealized loss on securities AFS 215 --
Other 3 --
----------------
1,168 1,309
Deferred tax liabilities
Accrued pension expense 492 492
Unrealized gain on securities available for sale -- 976
Other 272 32
----------------
764 1,500
----------------
Deferred tax (liability) asset $ 404 $ (191)
================
The Company 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.
38
2003 ANNUAL REPORT
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
December 31, 2003 and 2002
NOTE L - 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
Company'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 Company'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, 2003.
As of December 31, 2003, management believes that the Bank met all capital
adequacy requirements to which it was subject.
Regulatory capital
December 31, 2003
---------------------------------------------------------------------
Tangible Core Risk-based
Capital Percent Capital Percent Capital Percent
---------------------------------------------------------------------
Capital under generally
accepted accounting principles $ 48,241 8.00% $ 48,241 8.00% $ 48,241 15.15%
Unrealized gain on certain
available-for-sale securities 418 0.07 418 0.07 418 0.13
Goodwill and other intangible assets (4,692) (0.78) (4,692) (0.78) (4,692) (1.47)
Additional capital items
General valuation allowances - limited -- -- -- -- 2,111 0.66
---------------------------------------------------------------------
Regulatory capital computed 43,967 7.29 43,967 7.29 46,078 14.47
Minimum capital requirement 9,047 1.50 24,127 4.00 25,483 8.00
---------------------------------------------------------------------
Regulatory capital - excess $ 34,920 5.79% $ 19,840 3.29% $ 20,595 6.47%
====================================================================
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 loss 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 50,986 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% $ 24,240 7.25%
====================================================================
Continued
39
TF FINANCIAL CORPORATION & SUBSIDIARIES
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
December 31, 2003 and 2002
NOTE L - REGULATORY MATTERS - Continued
At December 31, 2003, 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.
NOTE M - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company 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 Company'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 Company uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments.
Unless noted otherwise, the Company requires collateral to support financial
instruments with credit risk.
Financial instruments, the contract amounts of which represent credit risk, are
as follows:
December 31,
----------------------------------
2003 2002
----------------------------------
(in thousands)
Commitments to extend credit $74,716 $35,983
Standby letters of credit 1,276 1,548
Loans sold with recourse 113 163
----------------------------------
$76,105 $37,694
==================================
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 Company evaluates each customer's creditworthiness
on a case-by-case basis. The amount of collateral obtained, if it is deemed
necessary by the Company 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.
40
2003 ANNUAL REPORT
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
December 31, 2003 and 2002
NOTE N - COMMITMENTS AND CONTINGENCIES
The Bank had no commitments to sell mortgage loans to investors at December 31,
2003 and 2002.
The Bank leases branch facilities and office space 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 $304,000,
$279,000, and $316,000, for the years ended December 31, 2003, 2002 and 2001,
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,
-------------------------
2004 $214,902
2005 143,817
2006 112,143
2007 113,645
2008 58,725
Thereafter --
-------------------------
$643,232
=========================
The Company has agreements with certain key executives that provide severance
pay benefits if there is a change in control of the Company. The agreements will
continue in effect until terminated or not renewed by the Company or key
executives. Upon a change in control, the Company 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, 2003 was approximately
$994,900.
From time-to-time, the Company 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 Company's consolidated financial position or results of
operations.
NOTE O - 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 areas will deteriorate, thereby potentially impairing collateral values
in the primary lending areas. However, management believes that residential and
commercial real estate values are presently stable in its primary lending areas
and that loan loss allowances have been provided for in amounts commensurate
with its current perception of the foregoing risks in the portfolio.
NOTE P - 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
Company'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 Company 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.
Continued
41
TF FINANCIAL CORPORATION & SUBSIDIARIES
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
December 31, 2003 and 2002
NOTE P - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued
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,
-------------------------------------------------
2003 2002
-------------------------------------------------
Fair Carrying Fair Carrying
value value value value
-------------------------------------------------
(in thousands)
Cash and cash equivalents $ 8,241 $ 8,241 $100,580 $100,580
Investment securities 25,248 24,822 42,430 41,806
Mortgage-backed securities 131,548 130,404 172,589 169,835
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,
--------------------------------------------
2003 2002
--------------------------------------------
Fair Carrying Fair Carrying
value value value value
--------------------------------------------
(in thousands)
Assets
Interest-bearing deposits with banks $ 155 $ 155 $ 220 $ 220
Liabilities
Deposits with stated maturities 147,937 146,960 149,033 146,762
Borrowings with stated maturities 86,618 86,853 225,738 207,359
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,
--------------------------------------------
2003 2002
--------------------------------------------
Fair Carrying Fair Carrying
value value value value
--------------------------------------------
(in thousands)
Deposits with no stated maturities $312,383 $312,383 $295,796 $295,796
=========================================
Continued
42
2003 ANNUAL REPORT
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
December 31, 2003 and 2002
NOTE P - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued
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,
--------------------------------------------
2003 2002
--------------------------------------------
Fair Carrying Fair Carrying
value value value value
--------------------------------------------
(in thousands)
Net loans $412,741 $404,649 $382,796 $370,092
=========================================
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 not material.
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 Q - SERVICE FEES, CHARGES AND OTHER OPERATING INCOME AND OTHER OPERATING
EXPENSE
Year ended December 31,
------------------------
2003 2002 2001
------------------------
(in thousands)
Service fees, charges and other operating income
Loan servicing fees $ 358 $ 338 $ 241
Late charge income 100 99 105
Deposit service charges 923 750 835
Bank-owned life insurance value increase 553 520 174
Other income 438 407 379
------------------------
$2,372 $2,114 $1,734
========================
Other operating expense
Insurance and surety bond $ 180 $ 146 $ 128
Office supplies 234 192 249
Loan expense 491 272 359
Loan servicing fees 32 127 223
Postage 299 299 261
Telephone 283 262 286
Service charges on bank accounts 85 95 205
Supervisory examination fees 147 148 141
Other expenses 1,096 795 720
------------------------
$2,847 $2,336 $2,572
========================
43
TF FINANCIAL CORPORATION & SUBSIDIARIES
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
December 31, 2003 and 2002
NOTE R - SHAREHOLDER RIGHTS PLAN
The Company adopted a Shareholder Rights Plan (the Rights Plan) to protect
shareholders from attempts to acquire control of the Company at an inadequate
price. Under the Rights Plan, the Company 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 Company earlier
redeems the Rights.
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 Company's common shares or the common shares of the potential
acquirer at a substantially reduced price.
The Company 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
Company's common stock. Following the acquisition by a person or group of
beneficial ownership of 15% or more of the Company'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 Company. The issuance of rights has no dilutive effect, did not
affect the Company's reported earnings per share, and was not taxable to the
Company or its shareholders.
NOTE S - 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):
Year ended December 31, 2003
-----------------------------------------
Weighted average
Income shares Per share
(numerator) (denominator) amount
-----------------------------------------
Basic earnings (loss) per share
Income (loss) available to common stockholders $(5,834) 2,541,677 $(2.30)
Effect of dilutive securities
Stock options -- -- --
-----------------------------------------
Diluted earnings (loss) per share
Income available to common stockholders plus
effect of dilutive securities $(5,834) 2,541,677 $(2.30)
=========================================
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
44
2003 ANNUAL REPORT
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
December 31, 2003 and 2002
NOTE S - 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.
NOTE T - SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATE (UNAUDITED)
Three months ended
---------------------------------------------
Dec. 31, Sept. 30, June 30, March 31,
2003 2003 2003 2003
---------------------------------------------
(in thousands, except per share data)
Total interest income $7,729 $7,835 $8,156 $8,657
Total interest expense 2,188 3,716 4,525 4,823
Net interest income 5,541 4,119 3,631 3,834
Provision for possible loan losses 60 90 90 90
---------------------------------------------
Net interest income after provision 5,481 4,029 3,541 3,744
Other income 636 322 648 1,084
Other expenses 3,887 17,478 3,599 3,739
---------------------------------------------
Income before income taxes 2,230 (13,127) 590 1,089
Income taxes 714 (4,562) 154 310
---------------------------------------------
Net income (loss) $1,516 $(8,565) $ 436 $ 779
=============================================
Earnings (loss) per share - basic $ 0.59 $ (3.33) $ 0.17 $ 0.31
Earnings (loss) per share - assuming dilution $ 0.54 $ (3.33) $ 0.16 $ 0.29
Continued
45
TF FINANCIAL CORPORATION & SUBSIDIARIES
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
December 31, 2003 and 2002
NOTE T - SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATE (UNAUDITED) - Continued
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
NOTE U - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
Condensed financial information for TF Financial Corporation (parent company
only) follows:
December 31,
----------------------
2003 2002
----------------------
(in thousands)
BALANCE SHEET
ASSETS
Cash $ 4,953 $ 5,683
Certificates of deposit - other institutions 155 220
Investment in Third Federal 46,597 53,311
Investment in TF Investments 2,321 2,282
Investment in Teragon 7 9
Investment in Penns Trail Development 1,010 1,045
Other assets 488 315
----------------------
Total assets $55,531 $62,865
======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Total liabilities $ 51 $ 25
Stockholders' equity 55,480 62,840
----------------------
Total liabilities and stockholders' equity $55,531 $62,865
======================
Continued
46
2003 ANNUAL REPORT
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
December 31, 2003 and 2002
NOTE U - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY - Continued
STATEMENT OF OPERATIONS
Year ended December 31,
----------------------------
2003 2002 2001
----------------------------
(in thousands)
INCOME
Equity in earnings of subsidiaries $(5,556) $ 5,269 $ 5,825
Interest and dividend income 99 110 108
Other -- -- 29
----------------------------
Total income (loss) (5,457) 5,379 5,962
----------------------------
EXPENSES
Other 377 287 229
----------------------------
Total expenses 377 287 229
----------------------------
NET INCOME (LOSS) $(5,834) $ 5,092 $ 5,733
============================
Year ended December 31,
-----------------------------
2003 2002 2001
-----------------------------
(in thousands)
STATEMENT OF CASH FLOWS
Cash flows from operating activities
Net income (loss) $(5,834) $ 5,092 $ 5,733
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Equity in (earnings) loss of subsidiaries 5,556 (5,269) (5,825)
(Gain) on sale of investment securities -- -- (7)
Net change in assets and liabilities (147) (64) (97)
-----------------------------
Net cash used in operating activities (425) (241) (196)
-----------------------------
Cash flows from investing activities
Capital distribution from subsidiaries -- 5,853 2,053
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 65 (26) (4)
-----------------------------
Net cash provided by investing activities 65 5,077 2,556
-----------------------------
Cash flows from financing activities
Cash dividends paid to stockholders (1,518) (1,484) (1,424)
Treasury stock acquired -- (376) (1,110)
Exercise of stock options 1,148 249 278
-----------------------------
Net cash used in financing activities (370) (1,611) (2,256)
-----------------------------
NET INCREASE (DECREASE) IN CASH (730) 3,225 104
Cash at beginning of year 5,683 2,458 2,354
-----------------------------
Cash at end of year $ 4,953 $ 5,683 $ 2,458
=============================
Supplemental disclosure of cash flow information
Cash paid during the year for income taxes $ -- $ -- $ --
=============================
47
BOARD OF DIRECTORS AND MANAGEMENT TEAM
================================================================================================
TF FINANCIAL CORPORATION
- ------------------------------------------------------------------------------------------------
Board of Directors Executive Officers
Robert N. Dusek Kent C. Lufkin
Chairman of the Board President and Chief Executive Officer
Carl F. Gregory Dennis R. Stewart
Executive Vice President and Chief Financial Officer
Dennis L. McCartney
Elizabeth Davidson Maier
George A. Olsen Senior Vice President and Corporate Secretary
John R. Stranford
Albert M. Tantala
THIRD FEDERAL SAVINGS BANK
- ------------------------------------------------------------------------------------------------
Board of Directors Executive Officers
George A. Olsen Kent C. Lufkin
Chairman of the Board President and Chief Executive Officer
Carl F. Gregory Dennis R. Stewart
Chairman Emeritus Executive Vice President and Chief Financial Officer
Robert N. Dusek Floyd P. Haggar
Senior Vice President and Chief Lending Officer
William J. Happ, Jr.
Cynthia G. Mullen
Kent C. Lufkin Senior Vice President and Retail Banking Officer
Dennis L. McCartney Elizabeth Davidson Maier
Senior Vice President
Kenneth A. Swanstrom
Lorraine A. Wolf
Albert M. Tantala Corporate Secretary
Independent Auditors Special Counsel Transfer Agent and Registrar
Grant Thornton LLP Malizia Spidi & Fisch, P.C. Computershare Investor Services
Two Commerce Square 1100 New York Avenue, NW 350 Indiana Street
2001 Market Street Suite 340 West Suite 800
Philadelphia, PA 19103-7080 Washington, DC 20005 Golden, CO 80401
48
THIRD FEDERAL SAVINGS BANK LOCATIONS
Corporate Office Operations
3 Penns Trail 215.579.4600
Newtown, PA 18940-3433 www.thirdfedbank.com
215.579.4000 e-mail: service@thirdfedbank.com
PENNSYLVANIA BRANCHES
Bucks County
Feasterville Office New Britain Office Cross Keys Office
Buck Hotel Complex 600 Town Center 834 North Easton Highway
Feasterville, PA 19053-2209 New Britain, PA 18901-5199 Doylestown, PA 18901-1007
215.364.7096 215.345.5800 215.348.5566
Newtown Office Doylestown Office
Route 332 and Campus Drive 60 North Main Street
Newtown, PA 18940-4018 Doylestown, PA 18901-3730
215.968.4444 215.348.9021
Philadelphia County
Frankford Office Fishtown Office Mayfair Office
4625 Frankford Avenue York & Memphis Streets Roosevelt Blvd. at Unruh
Philadelphia, PA 19124-5889 Philadelphia, PA 19125-3029 Philadelphia, PA 19149-2494
215.289.1400 215.423.2314 215.332.7650
Bridesburg Office Woodhaven Office Northern Liberties Office
Orthodox & Almond Streets Knights Road Center 905 North 2nd Street
Philadelphia, PA 19137-1626 Knights & Woodhaven Roads Philadelphia, PA 19123-4226
215.743.6673 Philadelphia, PA 19154-2810 215.922.0217
215.824.0151
NEW JERSEY BRANCHES
Mercer Couty
Ewing Office Quakerbridge Road Office Hamilton Square Office
2075 Pennington Road Village Square Plaza 1850 Route 33
Ewing, NJ 08618-1003 Lawrenceville, NJ 08648-2674 Hamilton Square, NJ 08690-1712
609.883.7033 609.689.1010 609.890.1333