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 June 30, 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 (I.R.S. employer
of incorporation or organization) identification number)
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 check whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes X No _____
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 August 10, 1996
Class Outstanding
$.10 par value common stock 4,297,386 shares
TF FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 1O-Q
FOR THE QUARTER ENDED JUNE 30, 1996
INDEX
Page
Number
PART I - CONSOLIDATED FINANCIAL INFORMATION
Item 1. Unaudited Consolidated 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 15
Item 2. Changes in Securities 15
Item 3. Defaults upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Materially Important Events 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES
TF FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands)
June 30, December 31,
ASSETS 1996 1995
--------- -----------
Cash and cash equivalents $ 24,850 $27,032
Certificates of deposit in other financial
institutions 3,421 4,221
Investment securities available for sale - at
market value 8,076 15,044
Investment securities held to maturity (market
value of $19,741 and $23,880 respectively,
for the periods shown) 19,905 23,640
Mortgage-backed securities available for sale
- at market value 21,882 29,640
Mortgage-backed securities held to maturity
(market value of $126,064 and $139,260 respectively,
for the periods shown) 128,613 137,841
Loans receivable, net 306,224 238,275
Federal Home Loan Bank Stock - at cost 5,168 3,668
Accrued interest receivable 3,308 3,430
Real estate acquired through foreclosure, net 108 129
Premises and equipment, net 6,353 6,555
Other assets 1,002 883
------- -------
Total Assets $528,910 $490,358
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $341,872 $337,069
Advances from the Federal Home Loan Bank 103,359 73,359
Advances from borrowers for taxes and insurance 2,836 1,980
Accrued interest payable 2,171 1,763
Other liabilities 3,550 2,855
------- -------
Total Liabilities 453,788 417,026
------- -------
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; 4,180,379, 4,164,942
shares outstanding at June 30, 1996 and December 31,
1995, net of treasury shares of 766,598 and 766,598
respectively. 529 529
Additional paid-in capital 51,545 51,475
Net unrealized (loss) gain on investment securities
available for sale (384) 137
Unearned ESOP shares (333,678 and 349,161 shares
respectively, for the periods shown) - at cost (3,337) (3,491)
Shares acquired by MSBP (1,515) (1,731)
Treasury stock - at cost (11,116) (11,116)
Retained earnings 39,400 37,529
------- -------
Total Stockholders' Equity 75,122 73,332
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $528,910 $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 Six Months For Quarter
Ended June 30, Ended June 30,
--------------- ----------------
1996 1995 1996 1995
---- ---- ---- ----
Interest income
Loans $ 10,902 $ 4,790 $ 5,622 $ 2,430
Mortgage-backed securities 5,366 6,026 2,597 2,964
Investment securities 1,228 2,112 596 1,006
Interest bearing deposits and other 577 1,258 268 693
------ ------ ----- -----
TOTAL INTEREST INCOME 18,073 14,186 9,083 7,093
Interest expense
Deposits 6,397 6,578 3,219 3,376
Borrowings 2,923 46 1,519 46
------ ------ ----- -----
TOTAL INTEREST EXPENSE 9,320 6,624 4,738 3,422
NET INTEREST INCOME 8,753 7,562 4,345 3,671
Provision for loan losses 90 30 60 15
------ ------ ----- -----
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 8,663 7,532 4,285 3,656
Non-interest income
Gain on sale of real estate acquired
through foreclosure 114 5 0 1
Gain (loss) on sale of mortgage-backed
securities 223 0 0 0
Gain (loss) on sale of loans 7 0 7 0
Service fees, charges and other operating
income 650 493 296 251
------ ------ ----- -----
TOTAL NON-INTEREST INCOME 994 498 303 252
Non-interest expense
Employee compensation and benefits 2,806 2,553 1,383 1,272
Occupancy and equipment 657 670 307 349
Federal deposit insurance premium 390 400 194 200
Data processing 237 222 118 108
Professional fees 277 184 153 94
Provision for losses on real estate acquired
through foreclosure 3 2 3 0
Advertising 155 142 80 71
Other operating 878 641 419 316
------ ------ ----- -----
TOTAL NON-INTEREST EXPENSE 5,403 4,814 2,657 2,410
INCOME BEFORE INCOME TAXES 4,254 3,216 1,931 1,498
Income taxes 1,758 1,308 829 599
------ ------ ----- -----
NET INCOME $ 2,496 $ 1,908 $ 1,102 $ 899
====== ====== ===== =====
Per share data
Earnings per share .58 .40 .26 .19
Weighted average number of shares outstanding 4,301 4,785 4,304 4,702
See notes to consolidated financial statement
2
TF FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
For the Six Months
Ended June 30
-------------------
1996 1995
------- ------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 2,496 $ 1,908
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization of:
Deferred loan origination fees (87) (69)
Premiums and discounts on investment
securities, net (12) (23)
Premiums and discounts on mortgage-backed
securities and loans, net 88 65
Provision for loan losses and provision for
losses on real estate 93 32
Depreciation of premises and equipment 271 159
Recognition of ESOP and MSBP expenses 440 480
Gain (loss) on sale of mortgage-backed securities
- available for sale (223) 0
Gain on sale of real estate acquired through
foreclosure (114) (5)
Decrease (increase) in
Accrued interest receivable 122 224
Other assets (415) (193)
Increase (decrease) in
Accrued interest payable 408 572
Other liabilities 986 (236)
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,053 2,914
CASH FLOWS FROM INVESTING ACTIVITIES
Loan originations and principal payments on loans,
net (22,347) (14,816)
Purchases of loans (46,690) 0
Proceeds from loan sales 1,008 0
Purchases and maturities of certificates of deposit
in other financial institutions, net 800 (5,109)
Purchases of investment securities held to maturity (3,724) (4,202)
Purchase of mortgage-backed securities - held to
maturity (4,882) 0
Proceeds from maturities of investment securities
held to maturity 7,464 12,000
Proceeds from maturities of investment securities
available for sale 7,000 7,000
Principal repayments from maturities of mortgage-
backed securities - held to maturity 14,044 9,917
Principal repayments from maturities of mortgage-
backed securitie - available for sale 1,851 0
Proceeds from the sale of mortgage-backed securities 5,338 0
Proceeds from the sale of investment securities
available for sale 0 3,783
Purchases and redemptions of Federal Home Loan Bank
Stock, net (1,500) (468)
Proceeds from sales of real estate acquired through
foreclosure 439 100
Purchase of premises and equipment (69) (53)
------- -------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES (41,268) 8,152
See notes to consolidated financial statement
3
TF FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
For the Six Months
Ended June 30
-------------------
1996 1995
---- ----
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand deposits/NOW
accounts, passbook savings accounts and
certificates of deposit $ 4,803 $ (6,932)
Advances from Federal Home Loan Bank - net 30,000 10,000
Net (decrease) increase in advances from borrowers
for taxes and insurance 856 (181)
Purchase of treasury stock (0) (3,273)
Common stock cash dividend (626) (475)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 35,033 (861)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,182) 10,205
Cash and cash equivalents at beginning of period 27,032 42,376
Cash and cash equivalents at end of period $24,850 $52,581
------ ------
Supplemental disclosure of cash flow information
Cash paid for
Interest on deposits and advances $ 8,192 $ 6,052
Income taxes $ 1,330 $ 993
Non-cash transactions
Transfers from loans to real estate acquired
through foreclosure $ 32 $ 23
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 and six month periods ended June 30, 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 June 30, 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 Corporations
Annual Report on Form 10-K for the fiscal year ended December 31, 1995.
NOTE 3 - IMPAIRED LOANS
On January 1, 1995 the corporation adopted Statement of Financial
Accounting Standards (SFAS) No. 114, "Accounting for Creditors for 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.
5
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:
(in thousands) June 30 1996
------------
Principal amount of impaired loans $ 313
Accrued interest -
Deferred loan costs -
Subtotal $ 313
--------
Less valuation allowance 47
Total $ 266
========
The average recorded investment in impaired loans during the quarter
ended June 30, 1996 was $310,000. Total cash collected on impaired loans
during the quarter ended June 30, 1996 was $157,000 of which $155,000 was
credited to the principal balance outstanding on such loans and $2,000
was recognized as interest income. Interest that would have been accrued
on impaired loans during the quarter was $7,000. Interest income
recognized during the quarter was $2,000.
NOTE 4 - CONTINGENCIES
The Corporation, from time to time, is a party to routine litigation,
which arise 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 June 30, 1996 and December 31, 1995 totaled
$528.9 million and $490.4 million, respectively, an increase of $38.5 million or
7.9% for the six month period. This increase was primarily as a result of the
$67.9 million or 28.5% increase in loans receivable which was partially offset
by decreases in mortgage-backed securities and investment securities. This asset
growth was primarily funded by the $30.0 million increase in Federal Home Loan
Bank advances coupled with repayments of mortgage-backed securities and
maturities of investment securities, supplemented by increases in total savings
deposits at June 30, 1996 of $4.8 million or 1.4% to $341.9 million as compared
to savings deposits of $337.1 million as of December 31, 1995.
Other interest earning assets (cash and cash equivalents) totaled $24.9 million
at June 30, 1996 which represents a decrease of $2.2 million or 8.1% 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 June 30, 1996, totaled $28.0 million, which represents
a decrease of $10.7 million or 27.7% 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 $150.5 million at June 30, 1996 as compared
to $167.5 million at December 31, 1995. This decrease of $17.0 million or 10.1%
is attributed mainly to management's decision to increase liquidity to insure
the availability of funds for current and anticipated future increases in
mortgage lending.
Other assets, inclusive of prepaid expenses, at June 30 1996, totaled $1.0
million, which represents an increase of $119,000 or 13.5% as compared to
December 31, 1995. This increase is comprised primarily of an increase in
accounts receivable due the Savings Bank.
Total consolidated stockholders' equity of the Corporation increased $1.8
million to $75.1 million or 14.2% of total assets at June 30, 1996, from $73.3
million or 15.0% of total assets at December 31, 1995, primarily due to the
addition of $2.5 million of net income for the period ended June 30, 1996,
partially offset by the payment of $626,000 in dividends to shareholders coupled
with the net unrealized loss on investment securities available for sale of
$384,000 at June 30, 1996.
On June 21, 1996 the Corporation announced its intent to repurchase up to 5% of
its outstanding common stock in the open market. The repurchase was completed on
July 8, 1996, with a total of 226,000 shares, approximately 5% of outstanding
common shares, repurchased at a total cost of $3.3 million. Total stockholders'
equity of $75.1 million reported at June 30, 1996, does not reflect the cost of
the repurchase as the repurchase commenced, and was completed, after the end of
the reporting period.
On January 1,1995, 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 Savings Bank will
not be able to collect all amounts due according to the contractual terms of the
loan agreements.
7
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 or six month period ended June 30, 1996.
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 June 30
---------------------------------------------------------------
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........... $299,397 $ 5,622 7.51% $119,693 $ 2,430 8.12%
Mortgage-backed securities...... 153,381 2,597 6.77% 172,586 2,964 6.87%
Investment securities........... 38,143 596 6.25% 70,669 1,006 5.69%
Other interest-earning assets(1) 26,288 268 4.08% 50,207 693 5.52%
------- ----- ------- -----
Total interest-earning assets. $517,209 $9,083 7.02% $413,155 $7,093 6.87%
======= ===== ======= =====
Non interest-earning assets....... 9,281 12,125
------- -------
Total assets.................. $526,490 $425,280
======= =======
Liabilities and Stockholders'
Equity:
Interest-bearing liabilities:
Savings deposits.............. $338,511 $3,219 3.80% $336,819 $3,376 4.01%
Borrowed money................ 103,359 1,519 5.88% 3,333 46 5.52%
------- ----- ------- -----
Total interest-bearing
liabilities................ $441,870 $4,738 4.29% $340,152 $3,422 4.02%
======= ===== ======= =====
Non interest-bearing liabilities.. 9,745 6,422
Total liabilities........... 451,615 346,574
Stockholders' equity.............. 74,875 78,706
Total liabilities and
stockholders' equity....... $526,490 $425,280
======= =======
Net interest income............... $4,345 $3,671
===== =====
Interest rate spread (2).......... 2.73% 2.85%
Net yield on interest-earning
assets (3)....................... 3.36% 3.55%
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
Average Balance Sheet (continued)
For Six Months Ended June 30
-------------------------------------------------------------
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............... $290,154 $ 10,902 7.51% $115,881 $ 4,790 8.27%
Mortgage-backed securities.......... 156,205 5,366 6.87% 175,153 6,026 6.88%
Investment securities............... 39,997 1,228 6.14% 72,359 2,112 5.84%
Other interest-earning assets(1).... 25,344 577 4.55% 48,397 1,258 5.20%
------- ------ ------- ------
Total interest-earning assets..... $511,700 $18,073 7.06% $411,790 $14,186 6.89%
======= ====== ======= ======
Non interest-earning assets........... 9,310 13,206
------- -------
Total assets...................... $521,010 $424,996
======= =======
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Savings deposits.................. $336,833 $ 6,397 3.80% $338,170 $ 6,578 3.89%
Borrowed money.................... 100,859 2,923 5.80% 1,667 46 5.52%
------- ------ ------- -----
Total interest-bearing
liabilities: $437,692 $ 9,320 4.26% $339,837 $6,624 3.90%
======= ===== ======= =====
Non interest-bearing liabilities...... 8,861 5,825
Total liabilities............... 446,553 345,662
Stockholders' equity.................. 74,457 79,334
Total liabilities and
stockholders' equity........... $521,010 $424,996
======= =======
Net interest income................... $8,753 $7,562
====== =====
Interest rate spread (2).............. 2.80% 2.99%
Net yield on interest-earning assets (3) 3.42% 3.67%
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>
9
RESULTS OF OPERATIONS
Net Income. The Corporation recorded net income of $1.1 million for the three
months ended June 30, 1996 as compared to net income of $.9 million for the
three months ended June 30, 1995. Earnings for the three months ended June 30,
1996 represent an increase of $.2 million compared to earnings reported for the
same period in 1995. The increase in earnings for this period is attributable to
an increase in core earnings. Net interest income before provisions for loan
losses was $4.3 million for the three month periods ended June 30, 1996 as
compared to $3.7 million for the same period in 1995. For these same periods,
total interest expense was $4.7 million and $3.4 million, respectively.
Non-interest income was $303,000 and $252,000, respectively, for these same
periods. Operating expenses (non-interest expense) were $2.7 million and $2.4
million for the three month periods ending June 30, 1996 and June 30, 1995,
respectively.
Net Income of $2.5 million for the six months ended June 30, 1996 showed a
$588,000 increase over net income of $1.9 million for the six months ended June
30, 1995. 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 $8.8 million for the six month period ended June 30, 1996 as
compared to $7.6 million for the same period in 1995. For these same periods,
total interest expense was $9.3 million and $6.6 million, respectively.
Non-interest income was $994,000 and $498,000, 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 $5.4 million and $4.8
million for the six month periods ending June 30, 1996 and June 30, 1995,
respectively.
Total Interest Income. Total interest income increased by $2.0 million or 28.1%
to $9.1 million for the three months ended June 30, 1996, from $7.1 million for
the three months ended June 30, 1995 due primarily to increases in the average
balance of loans receivable offset somewhat by decreases in the average balances
of investment securities, mortgage backed securities and other interest earning
assets. The average balance of loans receivable increased 150.1% to $299.4
million from $119.7 million for the three months ended June 30, 1996 and 1995,
respectively. Interest attributable to loans receivable increased $3.2 million
or 131.4% to $5.6 million from $2.4 million for these same periods. This
increase is primarily attributed to the increase in the average balance of loans
receivable partially offset by a decrease in the average yield on loans
receivable from 8.12% for the period end June 30, 1995, to 7.51% for the period
ending June 30, 1996. Interest on mortgage-backed securities decreased $367,000
(12.4%) primarily as a result of principal repayment of these securities. The
average yield on mortgage-backed securities decreased to 6.77% for the three
month period ended June 30, 1996 compared to 6.87% for the similar period in
1995 while the average balance of mortgage-backed securities declined by $19.2
million when comparing these two periods. Interest on investment securities
declined by $410,000 for the three month period ended June 30, 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 $425,000 for
the three month period ended June 30, 1996 compared to the similar period ended
June 30, 1995 primarily as a result of the average balance declining by $23.9
million to $26.2 million, coupled with a decrease in the average yield to 4.08%
at June 30, 1996 from 5.52% at June 30, 1995. 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.
For the six months ended June 30, 1996, total interest income increased to $18.1
million from $14.2 million for the six months ended June 30, 1995. This increase
of $3.9 million, or 27.4%, is due primarily to the increase in income on loans
receivable, somewhat offset by the decrease in income on mortgage-backed
securities, investment securities and other interest earning assets. Interest on
loans receivable increased by $6.1 million, or 127.6%, to $10.9 million at June
30, 1996, from $4.8 million at June 30, 1995. During the same time periods the
average balance of loans receivable increased by $174.3 to $290.2 million from
$115.9 million. Interest on mortgage-backed securities decreased $660,000
(11.0%) from June 30, 1995 to June 30, 1996, primarily as a result of principal
repayment of these securities. The average yield on mortgage-backed securities
decreased to 6.87% for
10
the six month period ended June 30, 1996 compared to 6.88% for the similar
period in 1995 while the average balance of mortgage-backed securities declined
by $18.9 million when comparing these two periods. Interest on investment
securities declined by $884,000 for the six month period ended June 30, 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 $681,000 for
the six month period ended June 30, 1996 compared to the similar period ended
June 30, 1995 primarily as a result of the average balance declining by $23.1
million to $25.3 million, coupled with a decrease in the average yield to 4.55%
at June 30, 1996 from 5.20% at June 30, 1995. 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 $4.7 million for the
three month period ended June 30, 1996 from $3.4 million at June 30, 1995. This
increase in total interest expense is a result of the increases in the average
balance of Federal Home Loan Bank advances. Federal Home Loan Bank advances
increased from $3.3 million at June 30, 1995 to $103.4 million at June 30, 1996.
The average balance of total interest bearing liabilities increased to $441.9
million during the three months ended June 30, 1996 from $340.2 million during
the three months ended June 30, 1995 as a result of the increase in Federal Home
Loan Bank borrowings.
Total interest expense of $9.3 million increased $2.7 million for the six month
period ended June 30, 1996 compared to $6.6 million for the six months ended
June 30, 1995. This increase in total interest expense is a result of the
increases in the average balance of Federal Home Loan Bank advances. The average
balance of total interest bearing liabilities increased to $437.7 million during
the six months ended June 30, 1996 from $339.8 million during the six months
ended June 30, 1995 as a result of the increase in Federal Home Loan Bank
borrowings.
Net Interest Income. Net interest income for the three month period ended June
30, 1996 increased by $674,000 or 18.3% to $4.4 million from $3.7 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 bearing liabilities.
The average balances of interest-earning assets increased to $517.2 million for
the three months ended June 30, 1996 from $413.1 million for the similar period
in 1995. During these same periods, the average balances on interest-bearing
liabilities increased to $441.8 million from $340.1 million. The cost of
interest-bearing liabilities increased from 4.02% to 4.29% while the yield on
interest-earning assets increased from 6.87% to 7.02% for the three month
periods ended June 30, 1995 and 1996 respectively.
Net interest income for the six month period ended June 30, 1996 increased by
$1.2 million or 15.8% to $8.8 million from $7.6 million for the same period in
1995. This increase is primarily due to the increase in interest earning assets
partially offset by the increase to interest earning liabilities. The average
balances of interest-earning assets increased to $511.7 million for the six
months ended June 30, 1996 from $411.8 million for the similar period in 1995.
During these same periods, the average balances on interest-bearing liabilities
increased to $437.7 million from $339.8 million. The cost of interest-bearing
liabilities increased from 3.90% to 4.26% while the yield on interest-earning
assets increased from 6.89% to 7.06% for the six month periods ended June 30,
1995 and 1996 respectively.
Allowance for Loan Losses. The allowance for loan losses remained stable at June
30, 1996 and June 30, 1995 at approximately $1.6 and $1.5 million respectively.
Such totals correlate to non-performing loans of $2.0 million at June 30, 1996
and $1.8 million at June 30, 1995. The increase in the allowance for loan losses
of $107,000 resulted from the addition of $132,000 to the provision for loan
losses and the deduction of $25,000 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 $60,000 for
the three months ended June 30, 1996. At June 30, 1996, the allowance for loan
losses was 79.4% of non-performing loans as compared to 79.9% of non-performing
loans at June 30, 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.
11
Non-interest Income. Total non-interest income increased to $303,000 for the
three months ended June 30, 1996 from $252,000 for the same period in 1995. This
increase can be attributed to the increase in service fee income, which was a
result of increased loan origination activity during the period.
Total non-interest income increased to $994,000 for the six month period ended
June 30, 1996 from $498,000 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 $114,000 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 $157,000 in service fee income, which was a result
of increased loan origination activity during the period.
Non-interest Expense. Total non-interest expense increased by $247,000 to $2.7
million for the three months ended June 30, 1996 as compared to $2.4 million for
the similar period in 1995. This increase is primarily attributed to the
$111,000 increase in employee compensation and benefits, the $59,000 increase in
professional fees and the $103,000 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.
Total non-interest expense has increased to $5.4 million for the six months
ended June 30, 1996 as compared to $4.8 million for the similar period in 1995.
This increase of $589,000 is primarily attributable to a $253,000 increase in
employee compensation and benefits, the $93,000 increase in professional fees
and the $237,000 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 $230,000 to $829,000 for the three
month period ended June 30, 1996, from $599,000 for the three months ended June
30, 1995. The primary reason for this increase was the increase in net income
before taxes to $1.9 million from $1.5 million for the three month periods ended
June 30, 1996 and 1995, respectively.
For the six month period ended June 30, 1996, income taxes increased to $1.8
million from $1.3 million for the six months ended June 30, 1995. This increase
of $450,000 is primarily attributed to the increase in net income before taxes
to $4.3 million from $3.2 million for the six month periods ended June 30, 1996
and 1995, respectively.
12
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 June 30, 1996, the Savings Bank was in compliance with its three regulatory
capital requirements as follows:
Amount Percent
(dollars in thousands)
Tangible capital $58,137 11.0%
Tangible capital requirement 7,949 1.5
------ -----
Excess over requirement $50,188 9.5%
====== =====
Core capital $58,137 11.0%
Core capital requirement 15,898 3.0
------ -----
Excess over requirement $42,239 8.0%
====== =====
Risk based capital $59,703 25.61%
Risk based capital requirement 18,652 8.0
------ -----
Excess over requirement $41,051 17.61%
====== =====
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 June 30, 1996, such
borrowed funds total $103.4 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 12.34% and 24.4% at
June 30, 1996 and 1995, respectively, and its short term liquidity was 8.32% and
18.0%, at such dates, respectively.
13
The amount of certificate accounts which are scheduled to mature during the
twelve months ending June 30 1997, is approximately $78.3 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 June 30, 1996, the Savings Bank had outstanding commitments to originate
loans of $10.8 million. Also outstanding at June 30, 1996 were commitments to
purchase $9.9 million of loans from correspondents along with commitments to
purchase $4.9 million of mortgage-backed securities. Funds required to fill
these commitments are derived primarily from current excess liquidity, deposit
inflows or loan and security repayments. At June 30, 1996, the Savings Bank had
outstanding commitments to sell loans of $1.8 million.
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 the Savings Bank 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,
and the competition, 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 June 30, 1996, 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.
On August 2, 1996 U. S. Congress passed the Small Business Job Protection Act of
1996. If signed by the President and enacted into law, this bill would, among
other things, equalize the taxation of thrifts and banks. Previously, thrifts
had been able to deduct a portion of their bad-debt reserves set aside to cover
potential loan losses ("bad-debt reserves"). Furthermore, the bill will repeal
current law mandating recapture of thrifts' bad debt reserves if they convert to
banks. Bad debt reserves set aside through 1987 will not be taxed, however, any
reserves taken since January 1, 1988, will be taxed over a six year period
beginning in 1997. Institutions can delay theses taxes for two years if they
meet a residential-lending test. At June 30, 1996, the Savings Bank had $326,000
of post 1987 bad-debt reserves. If this bill were to become law as currently
drafted, it is not expected to have a material adverse effect on the financial
condition or results of operations of the Corporation taken as a whole.
14
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 June 30, 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
On June 7, 1996 the Savings Bank announced that it had entered
into a branch purchase and deposit assumption agreement with
Cenlar Federal Savings Bank of Trenton, New Jersey to acquire
three branch offices and their related deposits. The branch
offices are located in Ewing, Hamilton Square and Princeton,
New Jersey and have combined deposits of approximately $143
million. The transaction is expected to close in the latter
half of September 1996 and currently is awaiting final
regulatory approvals.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
(i) The Corporation filed a Current Report on Form 8-K with
the Securities and Exchange Commission ("SEC") dated June 7,
1996, to report that the Savings Bank had entered into a
Branch Purchase and Deposit Assumption Agreement to acquire
three branch offices and $143 million of deposits from Cenlar
Federal Savings Bank, Trenton, New Jersey.
(ii) The Corporation filed a Current Report on Form 8-K with
the SEC dated June 21, 1996, to report the issuance of a press
release announcing the Corporation's intent to repurchase up
to 5% of its outstanding common stock in the open market.
(iii) The Corporation filed a Current Report on Form 8-K with
the SEC dated July 8, 1996, to report the repurchase in the
open market of 226,000 shares of the Corporation's common
stock totalling approximately 5% of its outstanding shares.
15
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: August 10, 1996 By: /s/ John R. Stranford
John R. Stranford
President and CEO
(Principal Executive Officer)
Date: August 10, 1996 By: /s/ William C. Niemczura
William C. Niemczura
Senior Vice President and
Chief Financial Officer
(Principal Financial & Accounting Officer)
16