SECURITIES & AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM lO-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ________________
Commission file number 0-24168
TF FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 74-2705050
State or other jurisdiction of (I.R.S. employer identification no.)
of incorporation organization)
3 Penns Trail, Newtown, Pennsylvania 18940
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 215-579-4000
N/A
Former name, former address and former fiscal year,
if changed since last report.
Indicate by mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes X No _____
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date May 10, 1996
Class Outstanding
$.10 par value common stock 4,523,386 shares
TF FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 1O-Q
FOR THE QUARTER ENDED MARCH 31, 1996
INDEX
Page
Number
PART I - CONSOLIDATED FINANCIAL INFORMATION
Item 1. Financial Statements 1
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II- OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES
TF FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands)
March 31, December 31,
ASSETS 1996 1995
Cash and cash equivalents ................................................. $ 27,893 $ 27,032
Certificates of deposit in other financial institutions ................... 4,021 4,221
Investment securities available for sale - at market value ................ 8,051 15,044
Investment securities held to maturity (market value of.................... $ 22,982 $ 23,880
respectively, for the periods shown) ................................... 23,075 23,640
Mortgage-backed securities available for sale - at market value............ 22,976 29,640
Mortgage-backed securities held to maturity (market value of $131,199
and $139,260 respectively, for the periods shown) ...................... 131,582 137,841
Loans receivable, net...................................................... 285,991 238,275
Federal Home Loan Bank Stock - at cost .................................... 4,918 3,668
Accrued interest receivable ............................................... 3,276 3,430
Real estate acquired through foreclosure, net ............................. 111 129
Premises and equipment, net ............................................... 6,445 6,555
Other assets .............................................................. 857 883
--------- ---------
Total Assets ............................................... $ 519,196 $ 490,358
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits ............................................................... $ 337,992 $ 337,069
Advances from the Federal Home Loan Bank ............................... 98,359 73,359
Advances from borrowers for taxes and insurance ........................ 1,877 1,980
Accrued interest payable ............................................... 3,489 1,763
Other liabilities ...................................................... 3,181 2,855
--------- ---------
Total Liabilities .......................................... 444,898 417,026
--------- ---------
Commitments and contingencies ............................................. -- --
Stockholders' Equity
Preferred stock, no par value; 2,000,000 shares authorized
and none issued ..................................................... -- --
Common stock, $0.10 par value; 10,000,000 shares authorized,
5,290,000 issued; 4,172,679 and 4,164,942
outstanding, respectively, for the periods shown .................... 529 529
Additional paid-in capital ............................................. 51,511 51,475
Net unrealized (loss) gain on investment securities available for sale . (221) 137
Unearned ESOP shares (341,403 and 349,181 shares,
respectively, for the periods shown) - at cost ...................... (3,414) (3,491)
Shares acquired by MSBP ................................................ (1,623) (1,731)
Treasury stock (766,589 and 766,589 shares respectively, for the
periods shown) - at cost ........................................... (11,116) (11,116)
Retained earnings ...................................................... 38,632 37,529
--------- ---------
Total Stockholders' Equity ................................. 74,298 73,332
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $519,196 $ 490,358
======== =========
See notes to consolidated financial statement
1
TF FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share data)
For Three Months
Ended March 31,
1996 1995
Interest income
Loans .......................................................... $5,280 $2,360
Mortgage-backed securities ..................................... 2,769 3,062
Investment securities .......................................... 632 1,106
Interest bearing deposits and other ............................ 309 565
------ ------
TOTAL INTEREST INCOME ......................................... 8,990 7,093
Interest expense
Deposits ....................................................... 3,178 3,202
Borrowings ..................................................... 1,404 0
------ ------
TOTAL INTEREST EXPENSE ........................................ 4,582 3,202
NET INTEREST INCOME ........................................... 4,408 3,891
Provision for loan losses ......................................... 30 15
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES ............ 4,378 3,876
Non-interest income
Gain on sale of real estate acquired through foreclosure ....... 114 4
Gain (loss) on sale of investment securities ................... 223 0
Service fees, charges and other operating income ............... 354 242
------ ------
TOTAL NON-INTEREST INCOME ............................... 691 246
Non-interest expense
Employee compensation and benefits ............................. 1,423 1,280
Occupancy and equipment ........................................ 350 321
Federal deposit insurance premium .............................. 196 201
Data processing ................................................ 119 114
Professional fees .............................................. 124 90
Provision for losses on real estate acquired through foreclosure 0 2
Advertising .................................................... 75 71
Other operating ................................................ 459 325
------ ------
TOTAL NON-INTEREST EXPENSE .................................... 2,746 2,404
INCOME BEFORE INCOME TAXES ................................ 2,323 1,718
Income taxes ...................................................... 929 709
------ ------
NET INCOME ..................................................... $1,394 $1,009
====== ======
Per share data
Earnings per share ............................................. .32 .21
Weighted average number of shares outstanding ..................... 4,297 4,873
See notes to consolidated financial statement
2
TF FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
For the Three Months
Ended March 31,
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income ............................................................... $ 1,394 $ 1,009
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of:
Purchased loan servicing rights .................................... 0 0
Deferred loan origination fees ..................................... (34) (56)
Premiums and discounts on investment securities. net................ (8) (18)
Premiums and discounts on mortgage-backed securities and
loans. net ......................................................... 14 36
Provision for loan losses and provision for losses on real estate...... 30 17
Depreciation of premises and equipment ................................ 132 126
Recognition of ESOP and MSBP expenses ................................. 220 217
Gain on sale of investment securities ................................. (223) 0
Gain on sale of real estate acquired through foreclosure............... (114) (4)
Decrease (increase) in
Accrued interest receivable ........................................ 153 313
Other assets ....................................................... (273) (255)
Increase (decrease) in
Accrued interest payable ........................................... 1,726 2,076
Other liabilities .................................................. 533 (67)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES.......................... 3,550 3,394
CASH FLOWS FROM INVESTING ACTIVITIES
Loan originations and principal payments on loans. net.................... (12,606) 2,515
Purchases of loans ....................................................... (35,158) 0
Purchases and maturities of certificates of deposit in other
financial institutions. net ........................................... 200 341
Purchases of investment securities held to maturity....................... (3,724) (0)
Proceeds from maturities of investment securities held to maturity........ 4,297 2,101
Proceeds from maturities of investment securities available for sale...... 7,000 8,169
Principal repayments from maturities of mortgage-backed securities-
held to maturity ...................................................... 6,224 5,394
Principal repayments from maturities of mortgage-backed securities-
available for sale .................................................... 1,041 0
Proceeds from the sale of mortgage-backed securities...................... 5,338 0
Purchases and redemptions of Federal Home Loan Bank Stock. net............ (1,250) (468)
Proceeds from sales of real estate acquired through foreclosure........... 439 81
Purchase of premises and equipment ....................................... (22) (51)
-------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES............... (28,221) 18,082
See notes to consolidated financial statement
3
TF FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
For the Three Months
Ended March 31,
1996 1995
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand deposits/NOW accounts,
passbook savings accounts and certificates of deposit $ 923 $ (9,537)
Advances (repayments) of advances from Federal Home Loan Bank............. 25,000 0
Net (decrease) increase in advances from borrowers for taxes
and insurance ......................................................... (103) (738)
Purchase of treasury stock ............................................... (0) (2,387)
Common stock cash dividend ............................................... (288) (242)
NET CASH (USED IN) PRODUCED BY FINANCING ACTIVITIES.................... 25,532 (12,904)
NET INCREASE IN CASH AND CASH EQUIVALENTS ............................ 861 8,572
Cash and cash equivalents at beginning of period.......................... 27,032 42,376
Cash and cash equivalents at end of period ............................... $ 27,893 $ 50,948
-------- --------
Supplemental disclosure of cash flow information
Cash paid for
Interest on deposits and advances .................................. $ 2,856 $ 1,126
Income taxes ....................................................... $ 296 $ 478
Non-cash transactions
Transfers from loans to real estate acquired through foreclosure $ 32 $ 0
See notes to consolidated financial statement
4
TF FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - PRINCIPLES OF CONSOLIDATION
The consolidated financial statements as of December 31, 1995 and as
of and for the three month periods ended March 31, 1996 and 1995 include
the accounts of TF Financial Corporation (the "Corporation") and its
wholly owned subsidiaries Third Federal Savings Bank (the "Savings Bank"),
TF Investments Corporation and Penns Trail Development Corporation. The
Corporation's business is conducted principally through the Savings Bank.
All significant intercompany accounts and transactions have been
eliminated in consolidation.
NOTE 2 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements were prepared
in accordance with instructions for Form 10-Q and, therefore, do not
include information or footnotes necessary for a complete presentation of
consolidated financial condition, results of operations, and cash flows in
conformity with generally accepted accounting principles. However, all
adjustments, consisting of normal recurring accruals, which, in the
opinion of management, are necessary for fair presentation of the
consolidated financial statements have been included. The results of
operations for the period ended March 31, 1996 are not necessarily
indicative of the results which may be expected for the entire fiscal year
or any other period. For further information, refer to consolidated
financial statements and footnotes thereto included in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1995.
NOTE 3 - IMPAIRED LOANS
On January 1, 1995 the Savings Bank adopted Statement of Financial
Accounting Standards (SFAS) No. 114, "Accounting for 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 Savings Bank has identified 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 to the extent necessary to eliminate any doubt as to the
ultimate collectibility of principal either in whole or in part.
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. An allowance for credit losses has been
established for all loans identified as impaired. The recorded investment
in impaired loans and the valuation for credit losses are as follows:
March 31, 1996
(in thousands)
Principal amount of impaired loans $ 240
Accrued interest ................. --
Deferred loan costs .............. --
Subtotal .................... $ 240
----------
Less valuation allowance ......... 36
Total ....................... $ 204
==========
5
The average recorded investment in impaired loans during the quarter
ended March 31, 1996 was $253,000. Total cash collected on impaired loans
during the quarter ended March 31, 1996 was $54,000 of which $24,000 was
credited to the principal balance outstanding on such loans and $30,000
was recognized as interest income. Interest that would have been accrued
on impaired loans during the quarter was $2,000. Interest income
recognized during the quarter was $30,000.
NOTE 4 - CONTINGENCIES
The Corporation, from time to time, is a party to routine litigation,
which arises in the normal course of business. In the opinion of
management, the resolution of these lawsuits would not have a material
adverse effect on the Corporation's consolidated financial condition or
results of operations.
A petition for resettlement has been filed by the Savings Bank protesting
assessment of certain prior years' Pennsylvania Mutual Thrift Institutions
Tax. Management believes that the resolution of this liability, if any,
would not have a material adverse effect on the Corporation's financial
position or results of operations.
NOTE 5 - CONVERSION FROM MUTUAL SAVINGS AND LOAN ASSOCIATION TO STOCK
SAVINGS BANK AND FORMATION OF SAVINGS AND LOAN HOLDING
COMPANY
On July 13, 1994 Third Federal Savings and Loan Association consummated
its conversion from a federally chartered mutual savings and loan
association to a stock savings bank pursuant to a Plan of Conversion (the
"Conversion ) via the issuance of common stock. In connection with the
Conversion, the Corporation sold 5,290,000 shares of common stock which,
after giving effect to offering expenses of $1.2 million, resulted in net
proceeds of $51.7 million. Pursuant to the Conversion, the Savings Bank
transferred all of its outstanding shares to a newly organized holding
company, TF Financial Corporation, in exchange for 50% of net proceeds.
Upon consummation of the Conversion, the preexisting liquidation rights
of the depositors of the Savings Bank were unchanged. Specifically, such
rights were retained and will be accounted for by the Savings Bank for
the benefit of such depositors in proportion to their liquidation
interests as of the Eligibility Record Date.
6
TF FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Corporation's total assets at March 31, 1996 and December 31, 1995 totaled
$519.2 million and $490.4 million, respectively, an increase of $28.8 million or
5.9% for the three month period. This increase was primarily as a result of the
$47.7 million or 20.0% increase in loans receivable which was offset by
decreases in mortgage-backed securities and investment securities. This asset
growth was primarily funded by the $25.0 million increase in Federal Home Loan
Bank advances supplemented by increases in total savings deposits at March 31,
1996 of $.9 million or .2% to $338.0 million as compared to savings deposits of
$337.1 million as of December 31, 1995.
Other interest earning assets (cash and cash equivalents) totaled $27.9 million
at March 31, 1996 which represents an increase of $.8 million or 3.2% as
compared with December 31, 1995. Other earning assets remained level throughout
the period since amortized payments, as well as the maturities, of investment
securities, mortgage-backed securities and loans were reinvested in equivalent
investments.
Investment securities at March 31, 1996, totaled $31.1 million, which represents
a decrease of $7.6 million or 19.5% as compared to December 31, 1995. The
decrease is primarily due to the use of maturing securities to fund increases in
loans receivable as an alternative to borrowing money.
Mortgage-backed securities totaled $154.6 million at March 31, 1996 as compared
to $167.5 million at December 31, 1995. This decrease of $12.9 million or 7.7%
is attributed mainly to management's decision to increase liquidity to insure
the availability of funds for anticipated future increases in mortgage lending.
Other assets, inclusive of prepaid expenses, at March 31, 1996, totaled
$857,000, which represents a decrease of $26,000 or 2.9% as compared to December
31, 1995. This decrease is comprised primarily of the decrease in accounts
receivable due the Savings Bank.
Total consolidated stockholders' equity of the Corporation increased $1.0
million to $74.3 million or 14.3% of total assets at March 31, 1996, from $73.3
million or 14.9% of total assets at December 31, 1995, primarily due to the
addition of $1.4 million of net income for the period, partially offset by the
payment of $288,000 in dividends to shareholders coupled with the net unrealized
loss on investment securities available for sale of $221,000 at March 31, 1996.
During the first quarter of 1995, the Corporation adopted the provisions of
Statement of Financial Accounting Standards No. 114 and 118 (SFAS 114 & 118)
"Accounting by Creditors for Impairment of a Loan" which generally applies to
all loans including loans that are restructured as a troubled debt restructuring
involving a modification of terms. The adoption of SFAS 114 & 118 was mandated
by the Statement of Financial Accounting Standards Board. According to SFAS 114
and 118, impairment of a loan occurs when it is probable that the Bank will not
be able to collect all amounts due according to the contractual terms of the
loan agreements.
The measurement of impaired loans is generally based upon the present value of
expected future cash flows discounted at the historical effective interest rate,
except that all collateral dependent loans may be measured for impairment based
upon the fair value of the collateral. The accounting of SFAS 114 and 118 did
not have a material impact on the financial position or results of operations of
the Corporation during the three month period ended March 31, 1996.
7
Average Balance Sheet
The following tables set forth information relating to the Corporation's
average balance sheet and reflects the average yield on assets and average cost
of liabilities for the periods indicated. The yields and costs are computed by
dividing income or expense by the monthly average balance of interest-earning
assets or interest-bearing liabilities, respectively, for the periods indicated.
For Three Months Ended March 31,
1996 (4) 1995(4)
(Dollars in thousands) Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
Assets:
Interest earning assets:
Loans receivable, net ............................. $280,911 $ 5,280 7.52% $112,068 $ 2,360 8.42%
Mortgage-backed securities ........................ 159,029 2,769 6.96% 177,719 3,062 6.89%
Investment securities ............................. 41,850 632 6.04% 74,049 1,106 5.97%
Other interest-earning assets(1) .................. 24,401 309 5.07% 48,826 565 4.63%
-------- -------- --------
Total interest-earning assets ................... $506,191 $ 8,990 7.10% $412,662 $ 7,093 6.88%
======== ======== ======== ========
Non interest-earning assets ......................... 9,338 12,049
-------- --------
Total assets .................................... $515,529 $424,711
======== ========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Savings deposits ................................ $335,155 $ 3,178 3.79% $339,520 $ 3,202 3.77%
Borrowed money .................................. 98,359 1,404 5.71% 0 0 N/A
-------- -------- --------
Total interest-bearing liabilities ............ $433,514 $ 4,582 4.23% $339,520 $ 3,202 3.77%
======== ======== ======== ========
Non interest-bearing liabilities .................... 7,978 5,229
Total liabilities ............................. 441,492 344,749
Stockholders' equity ................................ 74,037 79,962
Total liabilities and stockholders' equity $515,529 $424,711
======== ========
Net interest income ................................. $ 4,408 $ 3,891
======== ========
Interest rate spread (2) ............................ 2.87% 3.11%
Net yield on interest-earning assets (3) ............ 3.48% 3.77%
Ratio of average interest-earning assets to average
interest-bearing liabilities ...................... 117% 121%
- ----------------------------------------
<FN>
(1) Includes interest-bearing deposits in other banks.
(2) Interest-rate spread represents the difference between the average yield
on interest-earning assets and the average cost of interest-bearing
liabilities.
(3) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
(4) Ratios have been annualized where applicable.
</FN>
8
RESULTS OF OPERATIONS
Net Income. The Corporation recorded net income of $1.4 million for the three
months ended March 31, 1996 as compared to net income of $1.0 million for the
three months ended March 31, 1995. Earnings for the three months ended March 31,
1996 represent an increase of $.4 million compared to earnings reported for the
same period in 1994. The increase in earnings for this period is attributable to
an increase in core earnings in conjunction with gains associated with the sale
of real estate and investment securities. Net interest income before provisions
for loan losses was $4.4 million for the three month periods ended March 31,
1996 as compared to $3.9 for the same period in 1995. For these same periods,
total interest expense was $4.6 million and $3.2 million, respectively. Non-
interest income was $691,000 and $246,000, respectively, for these same periods.
The increase in non-interest income was attributed to the gains associated with
the sale of the real estate and investment securities previously mentioned.
Operating expenses (non-interest expense) were $2.7 million and $2.4 million for
the three month periods.
Total Interest Income. Total interest income increased by $1.9 million or 26.7%
to $9.0 million for the three months ended March 31, 1996, from $7.1 million for
the three months ended March 31, 1995 due primarily to increases in the average
balance of loans receivable and increases in the average yield on
mortgage-backed securities, investment securities and other interest earning
assets offset somewhat by decreases in the average balances of investment
securities and other interest earning assets. The average balance of loans
receivable increased 150.7% to $280.9 million from $112.1 million for the three
months ended March 31, 1996 and 1995, respectively. Interest attributable to
loans receivable increased $2.9 million or 123.7% to $5.3 million from $2.4
million for these same periods. Interest on mortgage-backed securities decreased
$293,000 (9.6%) primarily as a result of principal repayment combined with the
sale of $5.2 million of these securities. The average yield on mortgage-backed
securities increased to 6.96% for the three month period ended March 31, 1996
compared to 6.89% for the similar period in 1995 while the average balance of
mortgage-backed securities declined by $18.7 million when comparing these two
periods. Interest on investment securities declined by $474,000 for the three
month period ended March 31, 1996 as compared to the similar period in 1995 as a
result of declining balances due to maturities. Interest on other interest
earning assets declined by $256,000 for the three month period ended March 31,
1996 compared to the similar period ended March 31, 1995 primarily as a result
of the average balance declining by $24.4 million to $24.4 million at March 31,
1996. The increases in the average balances of loans receivable and the
decreases in the average balances of mortgage-backed securities, investment
securities and other interest earning assets are a result of management's
decision to increase mortgage lending.
Total Interest Expense. Total interest expense increased to $4.6 million for the
three month period ended March 31, 1996 from $3.2 million at March 31, 1995.
This increase in total interest expense is a result of the increases in the
average balance of Federal Home Loan Bank advances. The cost of borrowed money
has increased in the quarter ended March 31, 1996 as a result of the increase of
the average outstanding borrowings from $0 in Federal Home Loan Bank advances at
March 31, 1995 to $98.4 million at March 31, 1996. The average balance of total
interest bearing liabilities increased to $433.5 million during the three months
ended March 31, 1996 from $339.5 million during the three months ended March 31,
1995 as a result of an increase in Federal Home Loan Bank borrowings to $98.4
million at March 31, 1996.
Net Interest Income. Net interest income for the three month period ended March
31, 1996 increased by $517,000 or 13.3% to $4.4 million from $3.9 million for
the same period in 1995. This increase is primarily due to the increase in
interest earning assets offset by the increase to interest earning liabilities.
The average balances of interest-earning assets increased to $506.2 million for
the three months ended March 31, 1996 from $412.6 million for the similar period
in 1995. During these same periods, the average balances on interest-bearing
liabilities increased to $433.5 million from $339.5 million. The cost of
interest-bearing liabilities increased from 3.77% to 4.23% while the yield on
interest-earning assets increased from 6.88% to 7.10% for the three month
periods ended March 31, 1995 and 1996 respectively.
9
Allowance for Loan Losses. The allowance for loan losses remained relatively
stable at March 31, 1996 and March 31, 1995 at approximately $1.5 million. Such
totals correlate to non-performing loans of $1.6 million at March 31, 1996 and
$1.8 million at March 31, 1995. The increase in the allowance for loan losses of
$28,000 resulted from the addition of $87,000 to the provision for loan losses
and the deduction of $59,000 of net charge offs for losses on loans. The
provision for losses on loans is the method by which the allowance for losses is
adjusted during the period. The provision for losses on loans was $30,000 for
the three months ended March 31, 1996. At March 31, 1996, the allowance for loan
losses was 94.9% of non-performing loans as compared to 89.6% of non-performing
loans at March 31, 1995. While management maintains its allowance for losses at
a level which it considers to be adequate to provide for potential 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 increased to $691,000 for the
three month period ended March 31, 1996 from $246,000 for the similar period in
1995. This increase can be attributed to the increase in the net gain on the
sale of real estate acquired through foreclosure of $110,000 in conjunction with
the net gain on the sale of investment securities totalling $223,000. The
remainder of the increase can be attributed to an increase of $112,000 in
service fee income, which was a result of increased loan origination activity
during the period.
Non-interest Expense. Total non-interest expense has increased by $342,000 to
$2.7 million for the three months ended March 31, 1996 as compared to $2.4
million for the similar period in 1995. This increase is primarily attributed to
the $143,000 increase in employee compensation and benefits, the $29,000
increase in occupancy and equipment expenses, the $34,000 increase in
professional fees and the $134,000 increase in other operating costs. The
increases in compensation and benefit costs were primarily as a result of
increases to staffing necessary to support increased lending activity, coupled
with salary increases resulting from annual performance reviews. Benefit costs
were also increased due to the increases in costs associated with benefit plans
utilizing Corporation stock (portions of the costs of benefit plans utilizing
Corporation stock change as the market value of the stock changes.) The increase
in other operating expenses are due to increases in the costs associated with
current lending activities.
Income Tax Expense. Income taxes increased by $220,000 to $929,000 for the three
month period ended March 31, 1996, from $709,000 for the three months ended
March 31, 1995. The primary reason for this increase was the increase in net
income before taxes to $2.3 million from $1.7 million for the three month
periods ended March 31, 1996 and 1995, respectively.
10
Liquidity and Capital Resources
Under current Office of Thrift Supervision (OTS) regulations, the Savings Bank
must have core capital equal to 3% of 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. The OTS has proposed amending its
regulations in such a manner that would increase the core capital requirements
for most thrift institutions from 3% to 4% or 5%, depending upon the
institutions financial condition and other factors. Although the final form of
the regulation cannot be foreseen, if adopted as proposed, the Savings Bank
would expect its core capital requirements to increase to at least 4%.
On March 31, 1996, the Savings Bank was in compliance with its three regulatory
capital requirements as follows:
Amount Percent
(dollars in thousands)
Tangible capital ............. $56,859 10.9%
Tangible capital requirement . 7,796 1.5
------- -----
Excess over requirement ...... $49,063 9.4%
======= =====
Core capital ................. $56,859 10.9%
Core capital requirement ..... 15,592 3.0
------- -----
Excess over requirement ...... $41,267 7.9%
======= =====
Risk based capital ........... $58,372 26.07%
Risk based capital requirement 17,909 8.0
------- -----
Excess over requirement ...... $40,463 16.07%
======= =====
Management believes that under current regulations, the Savings Bank will
continue to meet its minimum capital requirements in the foreseeable future.
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.
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 source of funds are deposits and scheduled
amortization and prepayment of loan and mortgage backed principal. 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, and increase 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 of Pittsburgh. As of March 31, 1996, such
borrowed funds total $98.4 million. Loan payments, maturing investments and
mortgage-backed security prepayments are greatly influenced by general interest
rates, economic conditions and competition.
The Savings Bank is required under federal regulations to maintain certain
specified levels of "liquid investments", which include certain United States
government obligations and other approved investments. Current regulations
require the Savings Bank to maintain liquid assets of not less than 5% of its
net withdrawable accounts plus short term borrowings. Short term liquid assets
must consist of not less than 1% of such accounts and borrowings, which amount
is also included within the 5% requirement. These levels may be changed from
time to time by the regulators to reflect current economic conditions. The
Savings Bank has generally maintained liquidity far in excess of regulatory
requirements. The Savings Bank's regulatory liquidity was 12.9% and 23.2% at
March 31, 1996 and 1995, respectively, and its short term liquidity was 9.2% and
16.1%, at such dates, respectively.
11
The amount of certificate accounts which are scheduled to mature during the
twelve months ending March 31, 1997 is approximately $77.5 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, FHLB advances or outside borrowings. It has been the Savings Bank's
experience that a substantial portion of such maturing deposits remain at the
Savings Bank.
At March 31, 1996, the Savings Bank had outstanding commitments to originate
loans of $19.2 million. Also outstanding at March 31, 1996 were commitments to
purchase $6.0 million of loans from correspondents. Funds required to fill these
commitments are derived primarily from current excess liquidity, deposit inflows
or loan and security repayments. At March 31, 1996, the Savings Bank had
outstanding commitments to sell loans of $782,000.
Recent Developments - Disparity in Insurance Premiums
Due to a disparity in the capitalization of federal deposit insurance funds,
effective September 30, 1995, the Federal Deposit Insurance Corporation ("FDIC")
lowered the insurance premium for members of the Bank Insurance Fund ("BIF") to
a range of between 0.04% and 0.31% of deposits while maintaining the current
range of between 0.23% and 0.31% of deposits for members of the Savings
Association Insurance Fund ("SAIF"). In November 1995, the FDIC again lowered
BIF premiums further whereby most BIF insured institutions would pay only the
statutory minimum of $2,000 annually. These reductions in insurance premiums for
BIF members could place SAIF members, including Third Federal, and as a result,
the Corporation at a material competitive disadvantage to BIF members which
could have a material adverse effect on the results of operations and financial
condition of the Savings Bank in future periods.
Several alternatives to mitigate the effect of the BIF/SAIF insurance premium
disparity have recently been proposed with one plan being introduced in the
United State Congress which would require all SAIF member institutions,
including the Bank, to pay a one-time fee of up to 0.85% on the amount of
deposits held, on a date to be determined, by the member institution to complete
the recapitalization of the SAIF. If this proposal is enacted by Congress, based
on deposit balances as of March 31, 1995, for example, management estimates that
an 0.85% assessment would result in a pre-tax expense of $2.9 million and $1.8
million after tax. Management is unable to predict whether this proposal or any
similar proposal will be enacted or whether future SAIF premiums will be reduced
to a level equal to that of BIF premiums.
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TF FINANCIAL CORPORATION AND SUBSIDIARIES
PART II
ITEM 1. LEGAL PROCEEDINGS
Neither the Corporation nor the Savings Bank was engaged in
any legal proceeding of a material nature at March 31, 1996.
From time to time, the Corporation is a party to legal
proceedings in the ordinary course of business wherein it
enforces its security interest in loans.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS ON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER MATERIALLY IMPORTANT EVENTS
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
13
TF FINANCIAL CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TF FINANCIAL CORPORATION
Date: May 10, 1996 By: /s/ John R. Stranford
John R. Stranford
President and CEO
(Principal Executive Officer)
Date: May 10, 1996 By: /s/ William C. Niemczura
William C. Niemczura
Senior Vice President and
Chief Financial Officer
(Principal Financial & Accounting Officer)
14