EXHIBIT 13
TF FINANCIAL CORPORATION
ANNUAL REPORT
DECEMBER 31, 1996
TABLE OF CONTENTS
Corporate Profile and Stock Market Information............................ 3
Selected Financial Information and Other Data............................. 5
Letter to Stockholders.................................................... 7
Management's Discussion and Analysis of
Financial Condition and Results of Operations........................... 8
Report of Independent Certified Public
Accountants ........................................................... 23
Consolidated Statements of Financial Condition........................... 24
Consolidated Statements of Income......................................... 25
Consolidated Statement of Changes in Stockholders' Equity...................26
Consolidated Statements of Cash Flows.......................................28
Notes to Consolidated Financial Statements............................... 30
Office Locations......................................................... 64
Corporate Information............................................. Back Cover
2
TF FINANCIAL CORPORATION
Corporate Profile and Related Information
TF Financial Corporation (the "Corporation") is the parent company of Third
Federal Savings Bank ("Third Federal" or the "Savings Bank"), TF Investments
Corporation and Penns Trail Development Corporation. At December 31, 1996, total
assets were approximately $647.9 million. The Corporation was formed as a
Delaware corporation in March 1994 at the direction of the Savings Bank to
acquire all of the capital stock that Third Federal issued upon its conversion
from the mutual to stock form of ownership (the "Conversion") and concurrent
$52.9 million initial public offering effective July 13, 1994. At December 31,
1996, total stockholders' equity was approximately $72.6 million. The
Corporation is a unitary savings and loan holding company which, under existing
laws, generally is not restricted in the types of business activities in which
it may engage, provided that Third Federal retains a specified amount of its
assets in housing-related investments.
Third Federal is a federally-chartered stock savings bank headquartered in
Newtown, Pennsylvania, which was originally chartered in 1921 under the name
"Polish American Savings Building and Loan Association." Third Federal became a
federally chartered mutual savings and loan association under the name "Third
Federal Savings and Loan Association of Philadelphia" in 1935, and a federally
chartered stock savings bank under its present name, and a wholly owned
subsidiary of the company, in July 1994, in connection with its mutual-to-stock
conversion. Third Federal significantly expanded its operations throughout
Philadelphia and Bucks Counties, Pennsylvania, in June 1992 through its
acquisition of Doylestown Federal Savings and Loan Association ("Doylestown").
In September 1996, Third Federal expanded its operations into Mercer County, New
Jersey, through its acquisition of three branches, along with the related
deposits, of Cenlar Federal Savings Bank. Deposits have been federally insured
since 1935 and are currently insured up to the maximum amount allowable by the
Federal Deposit Insurance Corporation (the "FDIC"). Third Federal is a community
oriented savings institution offering a variety of financial services to meet
the needs of the communities that it serves. Third Federal conducts its business
from its main office in Newtown, Pennsylvania, and thirteen full service branch
offices located in Philadelphia and Bucks Counties, Pennsylvania and Mercer
County, New Jersey.
Third Federal attracts deposits (approximately $469.1 million at December 31,
1996) from the general public and uses such deposits, together with borrowings
(approximately $98.4 million at December 31, 1996) and other funds, primarily to
invest in mortgage-backed and investment securities and to originate or purchase
loans secured by first mortgages on owner-occupied, one-to-four family
residences in its market area. To a much lesser extent, the Savings Bank also
originates commercial real estate and multi-family loans, construction loans and
consumer loans.
Stock Market Information
Since its issuance in July 1994, the Corporation's common stock has been traded
on the Nasdaq National Market. The daily stock quotation for the Corporation is
listed in the Nasdaq National Market published in The Wall Street Journal, The
Philadelphia Inquirer, and other leading newspapers under the trading symbol of
"THRD". The following table reflects the closing stock price as published by the
Nasdaq National Market statistical report.
Fiscal 1994 HIGH LOW
----------- ---- ---
July 13, 1994 - September 30, 1994 $12.25 $11.25
October 1, 1994 - December 31, 1994 $12.00 $ 9.75
3
Fiscal 1995 HIGH LOW
First Quarter $12.75 $10.13
Second Quarter $14.38 $12.38
Third Quarter $16.25 $13.25
Fourth Quarter $15.88 $14.50
Fiscal 1996 HIGH LOW
First Quarter $15.38 $14.00
Second Quarter $15.13 $13.94
Third Quarter $15.13 $13.75
Fourth Quarter $16.25 $14.50
The number of shareholders of record of common stock as of the record date of
March 3, 1997, was approximately 738. This does not reflect the number of
persons or entities who held stock in nominee or "street" name through various
brokerage firms. At March 3, 1997, there were 4,224,386 shares outstanding.
Dividend Policy
The Corporation's ability to pay dividends to stockholders is dependent in part
upon the dividends it receives from Third Federal. Third Federal may not declare
or pay a cash dividend on any of its stock if the effect thereof would cause
Third Federal's regulatory capital to be reduced below (1) the amount required
for the liquidation account established in connection with Third Federal's
conversion from mutual to stock form, or (2) the regulatory capital requirements
imposed by the Office of Thrift Supervision ("OTS"). It is the Corporation's
policy to pay dividends when it is deemed prudent to do so. The Board of
Directors will consider the payment of a dividend on a quarterly basis, after
giving consideration to the level of profits for the previous quarter and other
relevant information. The following charts show the Corporation's history of
dividend payments.
Dividend History
[GRAPHIC OMITTED - PLOTTING POINTS BELOW]
Change in Accounting Period
On August 19, 1994, the Board of Directors of TF Financial Corporation approved
a change in the Corporation's fiscal year end from June 30 to December 31. This
change was instituted to enable the Corporation to present its financial reports
on a fiscal year end that is more prevalent in the financial services industry.
6
SELECTED FINANCIAL INFORMATION AND OTHER DATA
=============================================================================================
Financial Condition At December 31, At June 30,
-------------- ----------
(Dollars in Thousands, except 1996 1995 1994 1994 1993 1992
per share data)
=============================================================================================
Total Assets .................. $647,853 $490,358 $431,828 $436,043 $388,681 $362,169
Loans Receivable, net ......... 309,570 238,275 113,893 119,446 143,299 174,955
Mortgage-backed securities
available ..................... 22,027 29,640 -- -- -- --
for sale, at fair Value
Mortgage-backed securities held
to maturity at cost............ 153,758 137,841 181,411 154,288 95,836 76,367
Securities purchased under .... 25,129 -- -- -- -- --
agreements to resell
Investment securities available
for sale, at fair value ....... 12,652 15,044 41,002 40,316 -- --
Investment securities held to
maturity, at cost.............. 38,544 23,640 36,531 25,859 72,137 38,799
Cash and cash equivalents (1) . 54,132 27,032 42,376 78,466 57,948 47,044
Savings deposits .............. 469,088 337,069 347,631 367,133 350,328 326,053
Other borrowings .............. 98,359 73,359 -- 900 3,900 4,800
Retainedearnings .............. 39,750 37,529 34,746 32,139 27,673 24,803
Total stockholder's equity .... 72,575 73,332 79,972 N/A N/A N/A
Book value per common share ... $ 18.31 $ 17.08 $ 16.38 N/A N/A N/A
Tangible book value per common $ 15.99 $ 17.08 $ 16.38 N/A N/A N/A
share
================================================================================================
Summary of Operations Year ended Six months ended
(Dollars in Thousands, except December, 31 December, 31 Year ended June 30,
-------------- ------------ -------------------
per share data) 1996 (2) 1995 1994 1993 1994 1993 1992
================================================================================================
Interest income .............. $38,989 $29,630 $13,901 $12,124 $24,516 $25,88 $28,528
Interest ..................... 20,797 14,403 6,271 6,594 12,789 14,358 18,907
expense
Net interest ................. 18,192 15,227 7,630 5,530 11,727 11,522 9,621
income
Provision for (recovery of) .. 330 72 30 4 (144) 48 1,263
loan losses
Non-interest ................. 1,794 1,161 617 1,249 1,903 1,895 2,784
income
Non-interest ................. 13,745 9,975 4,601 4,690 9,452 9,644 13,024
expense
Net income (loss) before
cumulative effect of change
in accounting method.......... 3,479 3,871 2,180 1,355 2,666 2,870 (2,769)
Net income ................... 3,479 3,871 2,607 3,155 4,466 2,870 (2,769)
(loss)
Per share data
Continuing .............. $ 0.83 $ 0.83 $ 0.45 N/A N/A N/A N/A
operations
Cumulative effect of
accounting changes....... -- -- $ 0.08 N/A N/A N/A N/A
Earnings per common share
& common share equivalent $ 0.83 $ 0.83 $ 0.53 N/A N/A N/A N/A
(footnotes on following page)
5
========================================================================================================================
Performance Ratios and Other Year ended Six months ended
selected data December, 31 December, 31 Year ended June 30,
------------ -------------- ---------------------
1996(2) 1995 1994(3)(4) 1993(3)(4) 1994 1993 1992
========================================================================================================================
Return on average assets....................... 0.62% 0.88 1.00% 0.68% 0.67% 0.77% -0.75%
Return on average equity....................... 4.74% 4.99 5.40% 9.03% 8.59% 10.99% -9.97%
Average equity to average assets............... 12.91% 17.54 18.48% 7.53% 7.65% 7.00% 7.54%
Average interest rate spread................... 2.76% 2.84 3.15% 2.61% 2.86% 2.90% 2.54%
Non-performing loans to total assets........... 0.30% 0.37 0.42% 0.86% 0.48% 1.48% 2.37%
Non-performing loans to total loans............ 0.64% 0.76 1.48% 1.63% 1.49% 2.42% 2.48%
Allowance for loan losses to non-performing
loans.......................................... 91.60% 82.31 87.13% 78.22% 84.71% 47.85% 41.51%
Allowance for loan losses to total loans....... 0.58% 0.62 1.29% 1.25% 1.19% 1.13% 1.01%
Savings Bank regulatory capital
Core ...................................... 7.77% 12.21% 13.57% 7.63% 7.37% 7.12% 6.62%
Tangible .................................. 7.77% 12.21% 13.57% 7.63% 7.37% 7.12% 6.62%
Risk based................................. 17.68% 27.07% 39.46% 20.40% 21.27% 17.30% 13.90%
1. Consists of cash due from banks, interest-bearing deposits, and federal
funds sold with maturities of less than three months.
2. Includes a one-time special assessment to recapitalize the Savings
Association Insurance Fund ("SAIF") - See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Comparison of
Years Ended December 31, 1996 and December 31, 1995 - Net Income"
3. Income related ratios exclude the cumulative effect of a change in
accounting for certain investments of $427,000 for the six months ended
12/31/94 (SFAS #115) and change in accounting for income taxes of $1.8
million for the six month period ended 12/31/93 and fiscal year end 6/30/94
(SFAS #109).
4. Ratios for six month periods are stated on an annualized basis. Such ratios
are not necessarily indicative of the results that may be expected for the
full year.
6
TF FINANCIAL CORPORATION
To Our Stockholders:
The attached financial statements for the year ended December 31, 1996,
reflect our second full calendar year as a stock organization. Because of the
change in our fiscal year end from June 30 to December 31, the twelve month
comparison of results will look at December 31, 1996, December 31, 1995 and June
30, 1994.
After our stock conversion in July of 1994, our efforts were concentrated on
rebuilding our loan origination function. We have almost tripled loans
outstanding to $310 million during this period and we are now beginning to sell
some of our loan production into the secondary market. Approximately half of our
loan growth was funded by maturities and sales of investments and borrowings
with a duration match to the new loans. Our overall interest rate sensitivity
has been further enhanced as a result of this approach.
Net interest income increased by 19.7% to $18.2 million. Net Income of $3.5
million for the fiscal year ended December 31, 1996 showed a $392,000 decrease
over net income of $3.9 million for the fiscal year ended December 31, 1995. The
decrease in earnings for this period is primarily attributable to the one-time
deposit insurance assessment totaling $2.2 million ($1.4 million after tax). The
deposit insurance assessment was the result of a one-time fee assessed to
members of the Savings Association Insurance Fund ("SAIF") for its
recapitalization. Net income, absent of the $1.4 million after tax "SAIF"
recapitalization assessment, was $4.8 million for the fiscal year ended December
31, 1996, as compared to net income of $3.9 million for the fiscal year ended
December 31, 1995. This increase in net income of $.9 million to $4.8 million
(absent the "SAIF" assessment), for the fiscal year ended December 31, 1996,
reflects a 24.9% increase over the similar period in 1995. To further enhance
our earnings per share, the Company repurchased a total of 242,025 shares of
common stock at an average cost of $14.86 during the past year. The stock
repurchases represent 4.6% of the common shares issued in our initial public
offering. Book value per share has increased from $17.08 at December 31, 1995 to
$18.31 at December 31, 1996, through the combination of increased earnings and
stock repurchases.
The consolidation within the banking industry has created an opportunity for
the service oriented local financial institution. We are moving toward the
development of new products and delivery systems to take advantage of this
trend. Growth, through a deeper penetration in our current market areas, will be
our major focus in 1997. Opportunities for new branch locations will be pursued
where they complement our existing branch structure.
We appreciate your continued confidence in the employees, management and Board
of Directors. We will all continue to work to maintain that confidence by
managing your institution in a safe, sound and profitable manner.
Sincerely,
/s/ John R. Stranford
John R. Stranford
President and Chief Executive Officer
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
On July 13, 1994, the Corporation completed a public offering of its
common stock. Any financial information presented for periods prior to that date
is only that of the Savings Bank. On August 19, 1994, the Board of Directors of
the Corporation approved a change in the Corporation's fiscal year end from June
30 to December 31. The following discussion and analysis should be read in
conjunction with the Corporation's consolidated financial statements and is
intended to assist in understanding and evaluating the major changes in the
financial condition and results of operations of the Corporation with a primary
focus on an analysis of operating results.
The Corporation's income on a consolidated basis is derived substantially
from its investment in its subsidiary, Third Federal. The earnings of Third
Federal depend primarily on its net interest income. Net interest income is
affected by the interest income that Third Federal receives from its loans and
investments and by the interest expense that the Savings Bank incurs on its
deposits, borrowings and other sources of funds. The difference between average
rates of interest earned on interest earning assets and the average rates paid
on interest bearing liabilities is the "interest rate spread". When interest
earning assets equal or exceed interest bearing liabilities, any positive
interest rate spread will produce net interest income. During the years ended
December 31, 1996, December 31, 1995, and June 30, 1994, the average net
interest rate spread was 2.76%, 2.84% and 2.86% respectively. During the six
months ended December 31, 1994, the average net interest rate spread was 3.15%.
In addition, Third Federal receives income from service charges and other
fees and occasionally from sales of investment securities and real estate owned.
The Savings Bank 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.
Interest Rate Sensitivity Analysis
The Corporation's asset/liability strategy for 1997 is to maintain its
present positive gap position (interest-earning assets subject to repricing
greater than interest-bearing liabilities subject to repricing) for periods of
up to three years so that the impact of a slightly rising rate environment on
net interest income will not be significant to the Corporation's results of
operations. Effective monitoring of these interest sensitivity gaps is the
priority of the Corporation's asset/liability management committee.
The following table indicates the time periods in which interest-earning
assets and interest-bearing liabilities will mature or reprice in accordance
with their contractual terms or assumed prepayment rates. The assumptions used
in the table are included in the notes thereto. Management believes that the
assumptions used to evaluate the vulnerability of the Savings Bank's operations
to changes in interest rates are reasonable. The interest rate sensitivity of
the Savings Bank's assets and liabilities as shown in the table below could vary
substantially if differing assumptions were used or if actual experience differs
from the assumptions used in the table. For example, although certain assets and
liabilities may have similar maturities or periods to repricing, they may react
in differing degrees to changes in market interest rates. The interest rates on
certain types of assets and liabilities may fluctuate in advance of changes in
market interest rates, while interest rates on other types may lag behind
changes in market rates. Further, in the event of a significant change in
interest rates, prepayment and early withdrawal levels would likely deviate
significantly from those assumed in the table. Finally, the ability of many
borrowers to service their adjustable-rate debt may decrease in the event of an
interest rate increase.
8
Gap Table
3 Months 3 Months 1 to 3 3 to 5 5 to10 10 to 20 Over 20
or Less to 1 Year Years Years Years Years Years Total
------- --------- ----- ----- ----- ----- ----- -----
Interest-earning assets:
Loans receivable - net (1) $ 57,782 $61,713 $74,172 $36,948 $56,231 $19,540 $3,184 $ 309,570
======== ======= ======= ======= ======= ======= ====== =========
Mortgage-backed securities
available for sale (2)...... 1,410 3,677 5,826 3,150 4,817 2,860 287 22,027
Mortgage-backed securities
held to maturity (2)........ 9,432 25,741 40,789 25,200 33,718 16,870 2,008 153,758
Investment securities
available for sale......... 1,636 7,011 4,005 -- -- -- -- 12,652
Investment securities
held to maturity........... 15,576 8,989 9,095 4,884 -- -- -- 38,544
Certificates of deposit-other
banks (5).................. 900 2,066 100 -- -- -- -- 3,066
Other earning assets ........ 77,661 -- -- -- -- -- -- 77,661
-------- ------- ------- ------- ------- ------- ------ ---------
Total interest-earning
assets (4)............... $164,397 $109,197 $133,987 $70,182 $94,766 $39,270 $5,479 $617,278
======== ======= ======= ======= ======= ======= ====== =========
Interest-bearing liabilities: (3)
Non-interest bearing ........
deposits ................... $ 486 $ 1,199 $ 1,255 $ 489 $ 283 $ 29 $ -- $ 3,741
NOW and Super NOW accounts... 3,472 9,281 10,099 6,672 8,381 4,028 580 42,513
Savings accounts ............ 5,806 16,711 31,378 34,834 46,724 37,671 14,541 187,665
Money market deposit accounts 2,448 6,544 7,119 4,703 5,908 2,839 409 29,970
Certificates of deposit ..... 41,598 95,837 59,588 8,176 -- -- -- 205,199
Borrowings (5) -- 16,963 70,000 25,000 -- 3,359 -- 115,322
-------- ------- ------- ------- ------- ------- ------ ---------
Total interest-bearing
liabilities............. $ 53,810 $146,535 $179,439 $ 79,874 $61,296 $ 47,926 $15,530 $584,410
======== ======= ======= ======= ======= ======= ====== =========
Interest sensitivity gap ...... $110,587 $(37,338) $(45,452) $ (9,692) $33,470 $ (8,656) $(10,05) $ 32,868
-------- ------- ------- ------- ------- ------- ------ ---------
Cumulative interest
sensitivity gap................ $110,587 $ 73,249 $ 18,105 $ 28,797 $ 51,575 42,919 32,868
Ratio of interest-earning assets
to interest-bearing liabilities 305.51% 74.52% 74.67% 87.87% 154.60% 89.94% 35.28% 105.62%
======== ======= ======= ======= ======= ======= ====== =========
Ratio of cumulative gap
to total assets................. 16.94% 11.22% 4.26% 2.77% 7.90% 6.58% 5.04%
======== ======= ======= ======= ======= ======= ====== =========
- - ------------------------
(1) Adjustable rate loans are included in the period in which interest rates
are next scheduled to adjust rather than in the period in which they are
due. Fixed rate loans are included in the period in which they are
scheduled to be repaid and adjusted to take into account estimated
prepayments based upon assumptions estimating the prepayments in the
interest rate environment prevailing during the fourth calendar quarter of
1996. The table assumes prepayments and scheduled principal amortization of
fixed-rate loans and mortgage-backed securities, and assumes that
adjustable rate mortgage loans will reprice at contractual repricing
intervals. There has been no adjustment for the impact of future
commitments and loans in process.
(2) Reflects estimated prepayments in the interest rate environment prevailing
during the fourth quarter of 1996.
(3) Certificates of deposit are included in the period in which they are
scheduled to mature. Passbook and statement savings accounts are assumed to
decay at a rate of 12%, 10% and 10% for the first three years,
respectively, and 12% per year thereafter. Passbook, statement savings,
NOW, and MMDA accounts are generally subject to immediate withdrawal,
however, management considers a portion of these accounts to be core
deposits having significantly longer effective maturities based upon the
Savings Bank's historical retention of such deposits in changing interest
rate environments and the presentation of run off of such deposits based
upon the financial industry's experience.
(4) Earning assets do not include Third Federal's investment of $4.9 million in
stock of the Federal Home Loan Bank of Pittsburgh ("FHLB") Although this
asset is interest earning, the Savings Bank's ability to reprice or sell
this asset is limited by the regulations governing membership in the FHLB
system.
(5) Gap Table reflects the assets and liabilities of the savings bank only.
10
Average Balance Sheets
The following tables sets forth information relating to the Corporation's
average balance sheets 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,
however, management does not believe the use of month-end balances has caused
any material difference on the information presented.
Year Ended December 31, Year ended December 31, Year Ended June 30,
1996 1995 1994
------------------------------- -------------------------------- ------------------------------
Average Average Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ---------- ------- -------- ----------
(Dollars in Thousands)
Assets:
Interest-earning assets:
Loans receivable ..............$298,800 $23,117 7.74% $149,741 $11,501 7.68% $138,375 $ 10,963 7.92%
Mortgage-backed securities..... 162,973 11,040 6.77% 173,301 11,877 6.85% 121,937 7,897 6.48%
Investment securities ......... 44,598 2,728 6.12% 64,844 3,870 5.97% 82,544 4,060 4.92%
Securities purchased under
agreements to resell (4) .... 3,761 160 4.25% -- -- -- -- -- --
Other interest-earning
assets(1)................... 43,024 1,944 4.52% 43,271 2,382 5.50% 42,015 1,596 3.80%
-------- ------- ---- -------- -------- ---- -------- --------- ----
Total interest-earning
assets......................$553,156 $38,989 7.05% $431,157 $ 29,630 6.87% $384,871 $ 24,516 6.37%
======== ======= ======== ======== ======== =========
Non interest-earning assets .....$ 14,714 $ 10,901 $ 20,777
-------- -------- --------
Total assets ...............$576,870 $442,058 $405,648
Liabilities and Stockholders'
Equity:
Interest-bearing liabilities:
Savings deposits ............$382,511 $14,739 3.85% $337,699 $ 13,368 3.96% $362,204 $ 12,545 3.46%
Borrowings .................. 102,526 6,058 5.91% 19,870 1,035 5.21% 2,650 244 9.21%
-------- ------- ---- -------- -------- ---- -------- --------- ----
Total interest-bearing.....
liabilities...............$485,037 $20,797 4.29 $357,699 $ 14,403 4.03% $364,854 $ 12,789 3.51%
Non interest-bearing ............$ 9,498 $ 6,528 $ 9,757
liabilities
Total liabilities ......... 494,535 364,097 374,611
Stockholders' equity ............ 73,335 77,961 31,037
-------- -------- --------
Total liabilities and
stockholders' equity.....$567,870 $442,058 $405,648
======== ======== ========
Net interest income ............. $ 18,192 $ 15,227 $ 11,727
======== ======== ========
Interest rate spread (2) ........ 2.76% 2.84% 2.86%
Net yield on interest earning
assets......................... 3.29% 3.53% 3.05%
Ratio of interest-earning
assets to average interest
bearing liabilities............ 114% 121% 105%
(1) Includes interest-bearing deposits in other banks.
(2) Interest-rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(3) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
(4) Ratios have been annualized where applicable.
Average Balance Sheets (continued)
At December 31. Six Months Ended December
---------------------------- ------------------------------------------------------------------
1994(4) 1994(4) 1993(4)
Average Average Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ---------- ------- -------- ----------
(Dollars in Thousands)
Assets:
Interest earning assets:
Loans receivable................. $119,967 $10,124 8.44% $115,597 $ 4,921 8.51% $138,794 $5,760 8.30%
Mortgage-backed securities....... 157,974 10,064 6.37% 179,363 5,678 6.33% 107,638 3,511 6.52%
Investment securities............ 77,182 4,155 5.38% 76,911 2,117 5.51% 78,117 2,022 5.18%
Other interest-earning assets(1). 53,548 1,950 3.64% 41,451 1,185 5.72% 63,058 831 2.64%
------ ----- ---- ------ ----- ---- ------ --- ----
Total interest-earning assets.. $408,671 $26,293 6.43% $413,322 $13,901 6.73% $387,607 $12,124 6.24%
======== ======= ==== ======== ======= ==== ======== ======= ====
Non interest-earning assets........ $ 15,374 $ 23,629 $10,855
-------- -------- -------
Total assets................... $424,045 $436,951 $398,462
======== ======== ========
Liabilities and Stockholders'
Equity:
Interest-bearing liabilities:
Savings deposits............... $358,300 $12,386 3.46% $350,368 $ 6,271 3.58% $356,356 $6,430 3.61%
Borrowings..................... 700 80 11.42% -- -- -- 6,544 164 5.01%
--
Total interest-bearing $359,000 $12,466 3.47% $350,368 $ 6,271 3.58% $362,900 $6,594 3.63%
======== ======= ==== ======== ======= ==== ======== ====== ====
liabilities........................
Non interest-bearing liabilities... $8,813 $ 5,847 $ 5,543
Total liabilities............ 367,813 356,215 368,443
Stockholders' equity............... 56,232 80,736 30,019
------ ------ ------
Total liabilities and $424,045 $436,951 $398,462
======== ======== ========
stockholders' equity...............
Net interest income................ $13,827 $ 7,630 $ 5,530
Interest rate spread (2)........... 2.96% 3.15% 2.61%
Net yield on interest-earning 3.38% 3.69% 2.85%
assets (3).........................
Ratio of interest-earning assets
to average interest-bearing........ 114% 118% 107%
- - ----------------------------------------
(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.
11
Changes to Financial Condition
The Corporation's total assets at December 31, 1996 and December 31, 1995
totaled $647.9 million and $490.4 million, respectively, an increase of $157.5
million or 32.1%. This increase was primarily as a result of the $27.1 million
or 100.3% increase in cash and cash equivalents, the $71.3 million or 29.9.%
increase in loans receivable, the $12.5 million or 32.3% increase in investment
securities, the $8.3 million or 5.0% increase in mortgage-backed securities and
the $25.1 million increase in securities purchased under agreements to resell
for the fiscal year ended December 31, 1996. This asset growth was primarily
funded by the increase in total savings deposits at December 31, 1996 of $132.0
million or 39.2% to $469.1 million as compared to savings deposits of $337.1
million as of December 31, 1995, coupled with the $25.0 million increase in
Federal Home Loan Bank advances. The increase in deposits was primarily the
result of the acquisition of $137.6 million in deposit balances. The acquisition
of the $137.6 million in deposit balances on September 20, 1996 resulted in the
receipt of $126.5 million in cash which funded the increases in cash and cash
equivalents, securities purchased under agreements to resell, investment
securities, loans receivable and mortgage-backed securities. The deposit
acquisition also contributed to the increase in assets for the period with the
addition of $9.5 million in goodwill/core deposit intangible.
Total consolidated stockholders' equity of the Corporation decreased
$757,000 to $72.6 million at December 31, 1996 from $73.3 million at December
31, 1995. The 1.0% decrease is primarily attributed to the repurchase of 242,000
shares of the Corporation's outstanding common stock in the open market, at a
total cost of $3.6 million coupled with the payment of $942,000 in dividends to
shareholders, partially offset by the addition of $3.5 million of net income for
the period. The decrease in total consolidated stockholders' equity coupled with
the increase of $157.5 million in total assets resulted in a decrease in
consolidated stockholders' equity as a percentage of total assets to 11.2% at
December 30, 1996 from 15.0 % at December 31, 1995.
Total assets amounted to $490.4 million at December 31, 1995, an increase
of $58.6 million, or 13.6% from December 31, 1994. A major component of the
asset increase during this period was the $94.7 million of purchased mortgage
loans that were financed by $73.4 million in advances from the Federal Home Loan
Bank of Pittsburgh and the Savings Bank's liquidity. During this same comparable
period, savings deposits decreased by $10.6 million or 3.0% to $337.1 million at
December 31, 1995. The decrease in deposits was primarily due to deposit
withdrawals resulting from management's decision to price deposits more
conservatively.
Comparison of Years Ended December 31, 1996 and December 31, 1995
Net Income. Net Income of $3.5 million for the fiscal year ended December 31,
1996 showed a $392,000 decrease over net income of $3.9 million for the fiscal
year ended December 31, 1995. The decrease in earnings for this period is
primarily attributable to the one-time deposit insurance assessment totaling
$2.2 million ($1.4 million after tax), partially offset by an increase in
earnings in conjunction with gains associated with the sale of real estate and
mortgage-backed securities. The deposit insurance assessment was the result of a
one-time fee assessed to members of the Savings Association Insurance Fund
("SAIF") for its recapitalization. Net income, absent the $1.4 million after tax
"SAIF" recapitalization assessment, was $4.8 million for the fiscal year ended
December 31, 1996, as compared to net income of $3.9 million for the fiscal year
ended December 31, 1995. This increase in net income of $.9 million to $4.8
million (absent the "SAIF" assessment), for the fiscal year ended December 31,
1996, reflects a 24.9% increase over the similar period in 1995. Net interest
income before provisions for loan losses was $18.2 million for the fiscal year
ended December 31, 1996 as compared to $15.2 million for the same period in
1995, an increase of $3.0 million, or 19.5%. For these same periods, total
interest expense was $20.8 million and $14.4 million, respectively, an increase
of $6.4 million, or 44.4%. Non-interest income was $1.8 million and $1.2
million, respectively for these same periods, an increase of 54.5%. The increase
in non-interest income was attributed to the gains associated with the sale of
the real estate and mortgage-backed securities along with a $207,000 increase in
other operating income. Operating expense
12
(non-interest expense) was $13.7 million and $10.0 million for the fiscal year
ending December 31, 1996 and December 31, 1995, respectively. The increase in
operating expense was primarily attributable to the $2.2 million "SAIF"
assessment along with the costs associated with the acquisition of the $137.6
million in deposit balances, and related branch offices of Cenlar Federal
Savings Bank of Trenton, New Jersey.
Total Interest Income. For the fiscal year ended December 31, 1996, total
interest income increased to $39.0 million from $29.6 million for the fiscal
year ended December 31, 1995. This increase of $9.4 million, or 31.6%, is due
primarily to the increase in income on loans receivable to $23.1 million at
December 31, 1996 from $11.5 million at December 31, 1995, this increase of
$11.6 million, or 101.0%, was somewhat offset by the decrease in income on
mortgage-backed securities, investment securities and other interest earning
assets. During the same time periods the average balance of loans receivable
increased by $149.1 million to $298.8 million from $149.7 million, with the
average yield increasing to 7.74% from 7.68%. Interest on mortgage-backed
securities decreased $836,000, or (7.0%), from December 31, 1995 to December 31,
1996. The average yield on mortgage-backed securities decreased to 6.77% from
6.85%, while the average balance of mortgage-backed securities decreased by
$10.3 million when comparing these two periods. Interest on investment
securities declined by $1.1 million or, 29.5%, for the fiscal year ended
December 31, 1996 as compared to the similar period in 1995 as a result of the
decrease in the average balance to $44.6 million from $64.8 million for the same
periods. Interest on securities purchased under agreements to resell increased
to $160,000 for the fiscal year ended December 31, 1996 from $0 for the fiscal
year ended December 31, 1995, primarily as the result in the increase in the
average balance to $3.8 million from $0 for the same periods. Interest on other
interest earning assets declined by $438,000, or 18.4%, for the fiscal year
ended December 31, 1996 compared to the similar period ended December 31, 1995
primarily as a result of a decrease in the average yield to 4.52% at December
31, 1996 from 5.50% at December 31, 1995. The increases in the average balances
of loans receivable and the decreases in the average balances of mortgage-backed
securities and investment securities are a result of management's decision to
increase the origination and purchase of mortgage loans.
Total Interest Expense. Total interest expense increased to $20.8 million for
the fiscal year ended December 31, 1996 from $14.4 million for the fiscal year
period ended December 31, 1995. This increase of $6.4 million, or 44.4%, in
total interest expense is a result of the increase in the average balance of
Federal Home Loan Bank advances to $102.5 million from $19.9 million for the
fiscal years ended December 31, 1996 and 1995, respectively, coupled with the
increase in the average balance of savings deposits by $44.8 million, or 13.3%,
for the same periods. The increase in savings deposits was primarily result of
the acquisition of $137.6 million in deposit balances. The average balance of
total interest-bearing liabilities increased to $485.0 million during the fiscal
years ended December 31, 1996 from $357.6 million during the fiscal year ended
December 31, 1995 as a result of the increase in Federal Home Loan Bank
borrowings and the acquisition of deposit balances. The increase in borrowings
was utilized primarily to fund the origination or purchase of mortgage loans.
Net Interest Income. Net interest income for the fiscal year ended December 31,
1996 increased by $3.0 million or 19.5% to $18.2 million from $15.2 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-bearing
liabilities. The average balances of interest-earning assets increased to $553.2
million for the fiscal year ended December 31, 1996 from $431.2 million, or
28.3%, for the comparable period in 1995. During these same periods, the average
balances on interest-bearing liabilities increased to $485.0 million from $357.6
million, or 35.6%. The cost of interest-bearing liabilities increased from 4.03%
to 4.29% while the yield on interest-earning assets increased from 6.87% to
7.05% for the fiscal year periods ended December 31, 1995 and 1996 respectively.
13
Allowance for Loan Losses. The allowance for loan losses increased $322,000, or
21.7% to $1.8 at December 31, 1996 from $1.5 million at December 31, 1995, as a
result of increased lending activity during the period. Such totals correlate to
non-performing loans of $2.0 million at December 31, 1996 and $1.8 million at
December 31, 1995. The increase in the allowance for loan losses resulted from
the addition of $330,000 to the provision for loan losses and the deduction of
$8,000 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.
At December 31, 1996, the allowance for loan losses was 91.6% of non-performing
loans as compared to 82.3% of non-performing loans at December 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 $1.8 million for the
fiscal year period ended December 31, 1996 from $1.2 million, or 54.5%, for the
similar period in 1995. This increase can be attributed to the increase in the
gain on the sale of real estate acquired through foreclosure of $33,000 and an
increase in the gain on the sale of mortgage-backed securities totaling
$314,000. The remainder of the increase can be attributed to an increase of
$207,000 in service fee income, which was a result of increased loan servicing
activity during the period, coupled with a $79,000 gain on the sale of loans.
Non-Interest Expense. Total non-interest expense increased to $13.7 million for
the fiscal years ended December 31, 1996 as compared to $10.0 million for the
similar period in 1995. This increase of $3.7 million, or 37.8%, is primarily
attributable to the increase in federal deposit insurance premiums of $2.1
million, a $749,000 increase in employee compensation and benefits, the $62,000
increase in professional fees, the $429,000 increase in other operating costs
and the increase of $244,000 in amortization of intangibles. The increase in
federal deposit insurance premium, was due to the "SAIF" assessment previously
discussed. The increases in compensation and benefit costs were primarily a
result of increased staffing necessary to support the acquisition of the three
branch offices associated with the acquisition of the $137.6 million of deposit
balances, coupled with salary increases resulting from annual performance
reviews. Benefit costs were also increased due to the increases in costs
associated with Employee Stock Ownership 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 primarily due to increases in the costs associated with current lending
activities, coupled with the costs associated with the continued operation of
the three branch offices purchased from Cenlar Federal Savings Bank. The
increase in amortization of intangibles was the result of the acquisition of the
$137.6 million in deposit balances.
Income Tax Expense. For the fiscal year period ended December 31, 1996, income
taxes decreased to $2.4 million from $2.5 million for the fiscal years ended
Fiscal year. This decrease of $38,000 is primarily attributed to the decrease in
net income before taxes to $5.9 million from $6.3 million for the fiscal year
periods ended December 31, 1996 and 1995, respectively, primarily as a result of
the SAIF assessment previously mentioned.
Comparison of Years Ended December 31, 1995 and June 30, 1994
Net Income. The Corporation recorded net income of $3.9 million for the fiscal
year ended December 31, 1995 ("December 1995"), as compared to net income of
$4.5 million for the fiscal year ended June 30, 1994 ("June 1994"). Included in
June 1994's income was a $1.8 million one time positive adjustment to income
resulting from the adoption of Statement of Financial Accounting Standards
(SFAS) No. 109 "Accounting for Income Taxes". Excluding this accounting change
from the June 1994 period, earnings from continuing operations for the year
ended December 31, 1995 of $3.9 million increased by $1.2 million (45.2%)
compared to the $2.7 million in earnings from continuing operations for the year
ended June 30, 1994.
Total Interest Income. Total interest income increased by $5.1 million or 20.9%
to $29.6 million for December 1995,
14
from $24.5 million for June 1994. This increase was primarily attributable to
the $46.3 million increase in the average balance of total interest-earning
assets to $431.2 million for December 1995 from $384.9 million for June 1994
aided by an increase in the average yield on total interest-earning assets of 50
basis points (100 basis points equals 1%) or 7.8% from 6.37% for June 1994
compared to 6.87% for December 1995. Interest on loans receivable increased $0.5
million, or 4.9%, from $11.0 million in June 1994 to $11.5 million for December
1995 primarily attributable to the increase in the average balances of loans
receivable offset partially by the 24 basis point decline in the average yield
on loans receivable. The average balance of loans receivable increased $11.4
million, or 8.2% to $149.7 million for December 1995 compared to $138.4 million
for June 1994. The average yield on loans receivable declined to 7.68% for
December 1995 compared to 7.92% for June 1994 primarily as a result of the lower
rates of interest available in the markets for mortgage loan products. Interest
on mortgage-backed securities increased by $4.0 million, or 50.4%, to $11.9
million for December 1995 from $7.9 million for June 1994 mainly as a result of
the increase in the average balance of mortgage-backed securities aided by an
increase in the average yield on mortgage-backed securities. The average balance
on mortgage-backed securities increased to $173.3 million for December 1995 from
$121.9 million for June 1994 while the average yield on these securities
increased from 6.48% for June 1994 to 6.85% for December 1995. The increase in
mortgage-backed securities is due mainly to management's decision to invest the
proceeds of the stock conversion primarily into mortgage-backed securities. The
increase in interest yield on these securities was due primarily to the
relatively higher rates of interest being available in the markets during the
latter half of 1994. Income from other interest-earning assets increased $0.8
million offset in part by the decline of $0.2 million in interest earned on
investment securities for the periods being compared. Other interest-earning
assets increased on average by $1.3 million, or 3.0% to $43.3 million for
December 1995 from $42.0 for June 1994 while the average yield on these assets
(primarily overnight loans of Fed Funds) increased from 3.8% to 5.5% for these
periods. The primary reason for the increases in average yields was the
availability of higher market rates of interest on short term investments during
the latter half of 1994 and the first half of 1995. Management's policy during
the latter portion of 1994 was to increase investments in mortgage backed
securities and investment securities in anticipation of increased loan demand in
1995.
Total Interest Expense. Total interest expense increased to $14.4 million for
December 1995 from $12.8 million for June 1994 while the average balance of
total interest-bearing liabilities decreased to $357.6 million for December 1995
from $364.9 million for June 1994. The increase in total interest expense is
attributable to the increases in the average cost of savings deposits as well as
the increased average balance of borrowed money. The decreased average amount of
savings deposits was accompanied by an increase in the average cost of deposits
from 3.46% in June 1994 to 3.96% in December 1995. Management believes that the
primary reason for the reductions in deposits was the maturity and withdrawal of
certificates of deposit and the reinvestment of such deposits in alternative
investment products with potentially higher rates of return. The cost of
borrowed money increased as a result of an increase in the average amounts of
borrowed money of $17.2 million of Federal Home Loan Bank advances during 1995
that had an average cost of 5.21%.
Net Interest Income. Net interest income increased $3.5 million or 29.8% for
December 1995 over the similar period ending June 1994. This increase was
primarily the result of total interest income increasing more rapidly than total
interest expense as the Corporation's interest-earning assets repriced faster
than its interest-bearing liabilities during the rising interest rate
environment.
Allowance For Loan Losses. Third Federal's allowance for loan losses was $1.5
million at December 31, 1995, and June 30, 1994. Such totals correlate to
non-performing loans of $1.8 million at December 31, 1994 and $1.7 million at
June 30, 1994. 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 $72,000 for the year ended December 31, 1995 as compared to ($144,000)
for the year ended June 30, 1994. As a result of the 1995 provision, Third
Federal's allowance for loan losses constituted 82.3% of non-performing loans at
December 31, 1995 as compared to 84.7% of non-performing loans at June 30, 1994.
The decreased percentage of the allowance/non-performing loan ratio is primarily
attributable to the increase in non-performing loans. Management policy is to
review the overall allowance on a periodic basis and
15
to maintain the allowance at a level deemed appropriate based on an analysis of
the loan portfolio and non-performing loans.
Non-interest Income. Total non-interest income decreased to $1.2 million for
December 1995 compared to $1.9 million for June 1994. This decrease is partially
attributable to the $386,000 recovery of taxes as a result of the invalidation
of Philadelphia's mortgage transfer tax recorded in the year ended June 30, 1994
which was not present in December 1995, and $533,000 in gains on sale of real
estate owned which decreased to $82,000 for December 1995. Gains on sale of real
estate owned or held for sale in June 1994 were primarily attributed to the sale
of assets acquired through the merger with Doylestown and will not be recurring.
Non-interest Expense. Total non-interest expense (operating expenses) increased
$425,000 or 4.5% from $9.5 million in June 1994 to $9.9 million in December
1995. The major cause of this increase was the $545,000 (12.0%) increase in
employee compensation and benefits due to normal salary increases, the hiring of
additional personnel and the increased costs of stock based benefit programs, as
well as the $107,000 increase in professional fees resulting from the
Corporation becoming a public company. These increases were offset in part by a
$236,000 reduction in other operating costs comprised mainly of reductions of
insurance and surety bond costs and miscellaneous operating costs.
Income Tax Expense. Income taxes increased by $912,000 or 55.1%, to $2.6 million
for the year ended December 31, 1995, from $1.7 million for the year ended June
30, 1994. The primary reason for the increase was the $2.1 million increase in
net income before income taxes and cumulative effects of changes in accounting.
The Corporation has adopted the Financial Accounting Standards Board SFAS No.
109 "Accounting for Income Taxes". This required accounting method change
resulted in a one-time cumulative effect of $1.8 million in the operations for
the period ended June 30, 1994. The Corporation's effective tax rate was 39.9%
for the year ended December 31, 1995 compared to 38.3% for the year ended June
30, 1994.
Comparison of Six Month Periods Ended December 31, 1994 and 1993
Net Income. The Corporation recorded net income of $2.6 million for the six
month period ended December 31, 1994 ("December 1994"), as compared to net
income of $3.2 million for the six month period ended December 31, 1993
("December 1993"). Included in December 1994's income was a $0.4 million one
time positive adjustment to income resulting from the adoption of Statement of
Financial Accounting Standards (SFAS) No. 115 "Accounting for Certain
Investments in Debt and Equity Securities". Included in December 1993's income
was a $1.8 million one-time positive adjustment resulting from a change in the
method for accounting for income taxes due to the adoption of SFAS No. 109.
Excluding these accounting changes from both periods, earnings from continuing
operations for the six month period ended December 31, 1994 of $2.2 million
increased by $0.8 million compared to $1.4 million earnings from continuing
operations for the six month period ended December 31, 1993.
Total Interest Income. Total interest income increased by $1.8 million or 14.7%
to $13.9 million for December 1994, from $12.1 million for December 1993. This
increase was primarily attributed to the $71.7 million increase in the average
balance of mortgage-backed securities to $179.4 million for December 1994 from
$107.6 million for December 1993 offset somewhat by a decrease in the average
yield on these securities of 19 basis points (100 basis points equals 1%) or
2.9% from 6.33% for December 1994 compared to 6.52% for December 1993. Interest
on mortgage-backed securities increased by $2.2 million, or 61.7%, to $5.7
million for December 1994 from $3.5 million for December 1993. The increase in
mortgage-backed securities is due mainly to management's decision to invest the
proceeds of the stock conversion primarily into short term mortgage-backed
securities. The decrease in interest yield on these securities was due primarily
to the prepayment of higher yielding securities and the investing of funds into
shorter term, lower yielding securities. The increased yield on mortgage-backed
securities was partially offset by decreases of $0.8 million in interest on
loans receivable caused primarily by the decline in the average balances
outstanding. Management's
16
policy during the latter portion of 1994 was to increase holdings of both
mortgage-backed securities and investment securities to offset reductions in
loan production.
Total Interest Expense. Total interest expense decreased to $6.3 million for
December 1994 from $6.6 million for December 1993. The average balance of total
interest-bearing liabilities decreased to $350.4 million for December 1994 from
$362.9 million for December 1993. The decreased size of deposits was accompanied
by a reduction in the average cost of deposits from 3.61% in December 1993 to
3.58% in December 1994. Management believes that the primary reason for the
reductions in deposits and costs was the maturity and withdrawal of certificates
of deposit and the reinvestment of such deposits in alternative investment
products with potentially higher rates of return. The cost of borrowed money
decreased as a result of the repayment of $3.9 million of Federal Home Loan Bank
advances during 1994 that were outstanding in December 1993 and had an average
cost of 8.0%.
Net Interest Income. Net interest income increased $2.1 million or 38.0% for
December 1994 over the similar period ending December 1993. This increase was
the result of total interest income rising more rapidly than total interest
expense as the Corporation's interest-earning assets repriced faster than its
interest-bearing liabilities during the rising interest rate environment.
Allowance For Loan Losses. The Savings Bank's allowance for loan losses was $1.5
million at December 31, 1994, and June 30, 1994. Such totals correlate to
non-performing loans of $1.7 million at December 31, 1994 and June 30, 1994. 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
December 1994 as compared to $4,000 for June 1994. As a result of the 1994
provision, Third Federal's allowance for loan losses constituted 88.2% of
non-performing loans at December 31, 1994 as compared to 84.7% of non-performing
loans at June 30, 1994. The increased percentage of the allowance/non-performing
loan ratio is primarily attributable to a reduction in non-performing loans, the
additional provision, and management's periodic review of the overall level of
the allowance.
Non-interest Income. Total non-interest income decreased to $0.6 million for
December 1994 compared to $1.2 million for December 1993. This decrease is
partially attributable to the $386,000 recovery of taxes as a result of the
invalidation of Philadelphia's mortgage transfer tax recorded in the six months
ended December 31, 1993 which was not present in December 1994. Even though
gains on sale of real estate owned or held for sale increased by $152,000 for
December 1994, these gains were primarily offset by the $204,000 decline in
service fees and charges.
Non-interest Expense. Total non-interest expense (operating expenses) decreased
$89,000 or 1.9% from $4.7 million in December 1993 to $ 4.6 million in December
1994. The major cause of this decrease was the $135,000 reduction in advertising
costs due to a reduction in advertising for loan and deposit products and an
$111,000 decrease in other operating costs due to overall improvements in
operating efficiencies. These decreases more than offset increases of $78,000 in
compensation due to increased costs of maintaining qualified personnel $26,000
in deposit insurance premiums, and $137,000 in professional fees.
Income Tax Expense. Income taxes increased by $706,000 or 96.7%, to $1.4 million
for the six month period ended December 31, 1994, from $0.7 million for the six
month period ended December 31, 1993. The primary reason for the increase was
the $1.5 million increase in net income before income taxes and cumulative
effects of changes in accounting. The Corporation has adopted the Financial
Accounting Standards Board SFAS No. 109 "Accounting for Income Taxes". This
required accounting method change resulted in a one-time cumulative effect of
$1.8 million in the operations for the period ended June 30, 1994. The
Corporation's effective tax rate was 39.7% for the six month period ended
December 31, 1994 compared to 35.0% for the six month period ended December 31,
1993.
17
Liquidity and Capital Resources
Under current 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 December 31, 1996, the Savings Bank exceeded with its three regulatory
capital requirements as follows:
Amount Percent
------ -------
Tangible capital............................... $50,103 7.78%
Tangible capital requirement................... 9,655 1.50%
------- -----
Excess over requirement........................ $40,448 6.28%
======= =====
Core Capital................................... $50,103 7.78%
Core Capital requirement....................... 19,310 3.00%
------- -----
Excess over requirement........................ $30,793 4.78%
======= ====
Risk based capital............................. $51,909 17.70%
Risk based capital requirement................. 23,468 8.00%
------- -----
Excess over requirement........................ $28,441 9.70%
======= ====
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,
borrowings, and scheduled amortization and prepayment of loan and
mortgage-backed security 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, repurchase its
common stock, and increase the Savings Bank's along with the Corporation's
liquidity. The Savings Bank is currently able to fund its operations internally
but has, when deemed prudent, borrowed funds from the Federal Home Loan Bank of
Pittsburgh. As of December 31, 1996, such borrowed funds total $98.4 million.
Loan prepayments, 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
18
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 24.16%, 12.48% and 22.93% at December 31, 1996, 1995
and 1994, respectively, and its short term liquidity was 19.8%, 7.0% and 15.18%,
at such dates, respectively.
The amount of certificate accounts which are scheduled to mature during
the twelve months ending December 31, 1997, is approximately $137.8 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 other borrowings. It has been the Savings Bank's
experience that a substantial portion of such maturing deposits remain at the
Savings Bank.
At December 31, 1996, the Savings Bank had outstanding commitments to
originate loans of $24.9 million. Also outstanding at December 31, 1996 were
commitments to purchase $2.9 million of loans from correspondents along with
commitments to purchase $2.0 million of investment securities. Funds required to
fill these commitments are derived primarily from current excess liquidity,
deposit inflows or loan and security repayments. At December 31, 1996, the
Savings Bank had outstanding commitments to sell loans of $4.7 million.
Impact of Inflation and Changing Prices
The consolidated financial statements and related data have been prepared
in accordance with generally accepted accounting principles 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.
19
FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
TF FINANCIAL CORPORATION AND SUBSIDIARIES
December 31, 1996 and 1995
20
C O N T E N T S
Page
----
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 3
FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION 4
CONSOLIDATED STATEMENTS OF EARNINGS 5
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY 6
CONSOLIDATED STATEMENTS OF CASH FLOWS 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10
21
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, 1996
and 1995, and the related consolidated statements of earnings, changes in
stockholders' equity and cash flows for the years ended December 31, 1996 and
1995, the six-month period ended December 31, 1994 and the year ended June 30,
1994. 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 generally accepted auditing
standards. 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 our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of TF Financial
Corporation and Subsidiaries as of December 31, 1996 and 1995, and the
consolidated results of their operations and their consolidated cash flows for
the years ended December 31, 1996 and 1995, the six-month period ended December
31, 1994 and the year ended June 30, 1994 in conformity with generally accepted
accounting principles.
As described in the notes to the consolidated financial statements, the
Corporation changed its method of accounting for certain investments in debt and
equity securities for the six-month period ended December 31, 1994 and income
taxes for the year ended June 30, 1994.
Philadelphia, Pennsylvania
January 22, 1997
22
TF Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
December 31,
1996 1995
-------- --------
(in thousands)
ASSETS
Cash and cash equivalents $ 54,132 $ 27,032
Certificates of deposit in other financial institutions 4,220 4,221
Securities purchased under agreements to resell 25,129 --
Investment securities available for sale - at market value 12,652 15,044
Investment securities held to maturity (market value of $38,393 and
$23,880 as of December 31, 1996 and 1995, respectively) 38,544 23,640
Mortgage-backed securities available for sale - at market value 22,027 29,640
Mortgage-backed securities held to maturity (market value of $153,269
and $139,260 as of December 31, 1996 and 1995, respectively) 153,758 137,841
Loans receivable, net 309,570 238,275
Federal Home Loan Bank stock - at cost 4,918 3,668
Accrued interest receivable 4,247 3,430
Premises and equipment, net 8,002 6,555
Goodwill and other intangible assets 9,232 --
Other assets 1,422 1,012
--------- ---------
TOTAL ASSETS $ 647,853 $ 490,358
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $ 469,088 $ 337,069
Advances from the Federal Home Loan Bank 98,359 73,359
Advances from borrowers for taxes and insurance 2,364 1,980
Accrued interest payable 2,030 1,763
Other liabilities 3,437 2,855
--------- ---------
Total liabilities 575,278 417,026
--------- ---------
Stockholders' equity
Preferred stock, no par value; 2,000,000 shares authorized
at December 31, 1996 and 1995, none issued -- --
Common stock, $0.10 par value; 10,000,000 shares authorized,
5,290,000 shares issued, 3,962,544 and 4,164,942 shares
outstanding at December 31, 1996 and 1995, respectively,
net of shares in treasury: 1996 - 1,008,614; 1995 - 766,589 529 529
Retained earnings 39,750 37,529
Additional paid-in capital 51,645 51,475
Unearned ESOP shares (3,188) (3,491)
Shares acquired by MSBP (1,322) (1,731)
Treasury stock - at cost (14,712) (11,116)
Net unrealized (loss) gain on securities available for sale, net of tax (127) 137
--------- ---------
Total stockholders' equity 72,575 73,332
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 647,853 $ 490,358
--------- ---------
The accompanying notes are an integral part of these statements.
23
TF Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
Six-month
period ended
Year ended December 31, December 31, June 30,
-----------------------
1996 1995 1994 1994
---- ---- ---- -----
(in thousands)
Interest income
Loans, including fees $23,116 $ 11,501 $ 4,921 $ 10,963
Mortgage-backed securities 11,041 11,877 5,678 7,897
Investment securities 2,728 3,870 2,117 4,060
Interest-bearing deposits and other 2,104 2,382 1,185 1,596
------- -------- -------- --------
TOTAL INTEREST INCOME 38,989 29,630 13,901 24,516
------- -------- -------- --------
Interest expense
Deposits 14,739 13,368 6,271 12,545
Borrowings 6,058 1,035 -- 244
------- -------- -------- --------
TOTAL INTEREST EXPENSE 20,797 14,403 6,271 12,789
------- -------- -------- --------
NET INTEREST INCOME 18,192 15,227 7,630 11,727
Provision for (recoveries of) loan losses 330 72 30 (144)
------- -------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 17,862 15,155 7,600 11,871
------- -------- -------- --------
Non-interest income
Gain on sale of real estate acquired through foreclosure 115 82 152 533
Gain (loss) on sale of investment securities 330 16 14 (244)
Gain on sale of real estate held for sale -- -- -- 532
Gain on sale of loans 79 -- -- --
Unrealized loss on valuation of investments held for sale- -- -- (648)
Service fees, charges and other operating income 1,270 1,063 451 1,730
------- -------- -------- --------
TOTAL NON-INTEREST INCOME 1,794 1,161 617 1,903
------- -------- -------- --------
Non-interest expense
Employee compensation and benefits 5,828 5,079 2,334 4,534
Occupancy and equipment 1,432 1,357 634 1,317
Federal deposit insurance premium 2,929 791 421 810
Data processing 505 448 216 469
Professional fees 508 446 269 339
Advertising 292 276 42 268
Other operating 2,007 1,578 685 1,715
Amortization of goodwill and other intangible assets 244 -- -- --
------- -------- -------- --------
TOTAL NON-INTEREST EXPENSE 13,745 9,975 4,601 9,452
------- -------- -------- --------
INCOME BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGES 5,911 6,341 3,616 4,322
Income taxes 2,432 2,470 1,436 1,656
------- -------- -------- --------
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING
CHANGES 3,479 3,871 2,180 2,666
Cumulative effect of accounting changes -- -- 427 1,800
------- -------- -------- --------
NET INCOME $ 3,479 $ 3,871 $ 2,607 $ 4,466
======= ======== ======== ========
Earnings per share
Continuing operations $ 0.83 $ 0.83 $ 0.45 $ --
Cumulative effect of accounting changes -- -- 0.08 --
------- -------- -------- --------
Primary earnings per share $ 0.83 $ 0.83 $ 0.53 $ --
======= ======== ======== ========
The accompanying notes are an integral part of these statements.
24
TF Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 1996 and 1995, six-month period ended December 31,
1994 and year ended June 30, 1994
Net unrealized
Common Stock gain (loss) on
------------ securities
Additional Unearned Shares available
Par paid-in ESOP acquired by Treasury Retained for sale, net
Shares value capital shares MSBP stock earnings of tax Total
------ ------ ---------- ------- ----------- -------- -------- ----------- -------
(dollars in thousands)
Balance at July 1,
1993 $ - $ - $ - $ - $ - $ - $27,673 $ - $27,673
Net income for the
year ended June
30, 1994 - - - - - - 4,466 - 4,466
Balance at June 30,
1994 - - - - - - 32,139 - 32,139
Shares issued upon
conversion to
stock form of
ownership $5,290,000 529 51,202 - - - - - 51,731
Cumulative effect of
change in accounting
method for investment
securities on July 1,
1994 - - - - - - - (427) (427)
Common stock acquired
by ESOP (423,200) - - (4,232) - - - - (4,232)
Allocation of ESOP
shares 42,320 - 32 423 - - - - 455
Shares acquired by
MSBP (211,600) - - - (2,135) - - - (2,135)
Shares awarded by
MSBP 178,292 - - - - - - - -
Amortization of MSBP
expense - - - - 45 - - - 45
Net unrealized loss
on securities
available for sale - - - - - - - (211) (211)
Net income for the
six-month period
ended December 31,
1994 - - - - - - 2,607 - 2,607
-------- ------- ------ ------ ------- ---- ------- ----- -------
Balance at December
31, 1994 4,875,812 529 51,234 (3,809) (2,090) - 34,746 (638) 79,972
(Continued)
25
TF Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 1996 and 1995, six-month period ended December 31,
1994 and year ended June 30, 1994
Net unrealized
Common Stock gain (loss) on
------------ securities
Additional Unearned Shares available
Par paid-in ESOP acquired by Treasury Retained for sale, net
Shares value capital shares MSBP stock earnings of tax Total
------ ------ ---------- ------- ----------- -------- -------- ----------- -------
(dollars in thousands)
Allocation of ESOP
shares $ 31,719 $ - $ 117 $ 318 $ - $ - $ - $ - $ 435
Shares awarded by
MSBP 24,000 - - - - - - - -
Amortization of MSBP
expense - - 124 - 359 - - - 483
Purchase of treasury
stock (765,500) - - - - (11,100) - - (11,100)
Treasury stock
acquired from ESOP (1,089) - - - - (16) - - (16)
Cash dividends on
common stock - - - - - - (1,088) - (1,088)
Net unrealized gain
on securities
available for sale - - - - - - - 775 775
Net income for the
year ended December
31, 1995 - - - - - - 3,871 - 3,871
--------- ------ --------- -------- -------- ------- ------- -------- --------
Balance at December
31, 1995 4,164,942 529 51,475 (3,491) (1,731) (11,116) 37,529 137 73,332
Allocation of ESOP
shares 30,319 - 147 303 - - - - 450
Shares awarded by
MSBP 9,308 - - - - - - - -
Amortization of MSBP
expense - - 23 - 409 - - - 432
Purchase of treasury
stock (242,025) - - - - (3,596) - - (3,596)
Cash dividends on
common stock - - - - - - (1,258) - (1,258)
Net unrealized gain
on securities
available for sale - - - - - - - (264) (264)
Net income for the
year ended
December 31, 1996 - - - - - - 3,479 - 3,479
--------- ------ --------- -------- -------- ------- ------- -------- --------
Balance at December
31, 1996 3,962,544 $ 529 $ 51,645 $ (3,188) $(1,322) $(14,712) $ 39,750 $ (127) $ 72,575
========= ====== ========= ======== ======== ======= ======= ======== ========
The accompanying notes are an integral part of this statement.
26
TF Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six-month
Year ended December 31, period ended Year ended
---------------------- December 31, June 30,
1996 1995 1994 1994
--------- --------- ------------- ----------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,479 $ 3,871 $ 2,607 $4,466
Adjustments to reconcile net income to net cash provided
by operating activities
Amortization of
Purchased loan servicing rights 21 -- -- 524
Deferred loan origination fees (197) (117) (106) (230)
Premiums and discounts on investment securities, net (69) (31) (29) 304
Premiums and discounts on mortgage-backed securities
and loans, net 139 166 132 (291)
Goodwill and other intangibles 244 -- -- --
Deferred income taxes 84 140 434 --
Provision for loan losses and provision for losses on real estate 333 74 41 (143)
Depreciation of premises and equipment 560 509 258 557
Stock-based benefit programs 882 919 358 --
(Gain) loss on sale of
Investment securities (330) (16) (14) 244
Real estate held for sale -- -- -- (532)
Real estate acquired through foreclosure (115) (82) (152) (533)
Mortgage loans (79) -- -- --
Unrealized loss on investments held for sale -- -- -- 648
(Increase) decrease in
Accrued interest receivable (817) (7) (51) (143)
Other assets (748) (238) 1,135 (731)
Increase (decrease) in
Accrued interest payable 267 980 (187) (274)
Other liabilities 723 697 (917) (1,103)
------- ------- -------- ------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 4,377 6,865 3,509 2,763
------- ------- -------- ------
CASH FLOWS FROM INVESTING ACTIVITIES
Loan originations and principal payments on loans, net (38,475) (37,289) 5,358 37,233
Principal repayments on mortgage-backed securities
held to maturity 28,450 24,171 13,438 29,590
Principal repayments on mortgage-backed securities available
for sale 3,050 -- -- --
Purchases of loans (83,704) (87,165) -- --
Proceeds from loan sales 22,648 -- -- --
Purchases and maturities of certificates of deposit in other
financial institutions, net 1 (214) (310) 1,096
Purchases of investment and mortgage-backed securities
held to maturity (49,069) (18,445) (54,310) (145,039)
Purchase of investment securities and mortgage-backed
securities available for sale (22,917) -- (7,955) --
(continued)
27
TF Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Six-month
period ended Year ended
Year ended December 31, December 31, June 30,
----------------------
1996 1995 1994 1994
---- ---- ---- ----
(in thousands)
Purchase and maturities of securities purchased under
agreement to resell $ (25,129) $ -- $ -- $ --
Proceeds from maturities of investment securities held to maturity 17,551 20,987 2,861 29,756
Proceeds from maturities of investment securities available for sale 20,500 23,000 7,000 --
Proceeds from the sale of investment securities available and
held for sale 9,279 4,014 -- 18,749
(Purchase) redemption of Federal Home Loan Bank stock (1,250) (1,968) -- 111
Development of real estate acquired through foreclosure -- -- -- (4)
Proceeds from sales of real estate acquired through foreclosure 722 221 489 3,585
--------- --------- -------- -------
Purchase of premises and equipment (2,007) (370) (216) (1,541)
Premium paid for deposit liabilities (9,476) -- -- --
NET CASH USED IN INVESTING ACTIVITIES (129,826) (73,058) (33,645) (26,518)
--------- --------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand deposit/NOW accounts,
passbook savings accounts and certificates of deposit 132,019 (10,562) (19,502) 16,805
Net increase (decrease) in advances from Federal Home Loan Bank 25,000 73,359 (900) (3,000)
Net increase (decrease) in advances from borrowers for
taxes and insurance 384 256 (3) (445)
Proceeds from issuance of common stock, net -- -- 16,586 30,913
Common stock acquired by MSBP -- -- (2,135) --
Treasury stock acquired (3,596) (11,116) -- --
Common stock dividends paid (1,258) (1,088) -- --
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES 152,549 50,849 (5,954) 44,273
--------- --------- -------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 27,100 (15,344) (36,090) 20,518
Cash and cash equivalents at beginning of period 27,032 42,376 78,466 57,948
--------- --------- -------- -------
Cash and cash equivalents at end of period $ 54,132 $ 27,032 $ 42,376 $78,466
========= ========= ======== =======
Supplemental disclosure of cash flow information
Cash paid for
Interest on deposits and advances $ 20,530 $ 3,423 $ 6,459 $13,064
Income taxes $ 2,235 $ 1,943 $ 1,203 $ 978
Non-cash transactions
Transfers from loans to real estate acquired through
foreclosure $ 327 $ 127 $ 110 $ 597
Transfer of investment and mortgage-backed securities
to available for sale $ -- $ 29,640 $ -- $40,316
Securitization of mortgage loans held for investment $ 27,854 $ -- $ -- $ --
The accompanying notes are an integral part of these statements.
28
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
TF Financial Corporation (the Corporation) is a unitary savings and loan
holding company, organized under the laws of the State of Delaware, which
conducts its consumer banking operations primarily through its wholly-owned
subsidiaries, Third Federal Savings Bank (Third Federal or the Bank) and TF
Investments Corporation. Third Federal is a federally chartered stock savings
bank insured by the Federal Deposit Insurance Corporation. Third Federal is a
community-oriented savings institution which conducts operations from its
main office in Newtown, Pennsylvania, ten full-service branch offices located
in Philadelphia and Bucks counties, Pennsylvania, and three full-service
branch offices located in Mercer County, New Jersey. The Bank competes with
other banking and financial institutions in its primary market communities,
including financial institutions with resources substantially greater than
its own. Commercial banks, savings banks, savings and loan associations,
credit unions and money market funds actively compete for savings and time
deposits and loans. Such institutions, as well as consumer finance and
insurance companies, may be considered competitors of the Bank with respect
to one or more of the services it renders.
During 1994, the Board of Directors of Third Federal Savings and Loan
Association (the Association) adopted a plan of conversion (the Plan or the
Conversion) whereby the Association converted to a federally chartered stock
savings bank known as Third Federal Savings Bank whereby the Bank issued all
of its outstanding stock to a newly formed holding company, TF Financial
Corporation (the Corporation). The conversion to the stock form of ownership
was completed on July 13, 1994, culminating in the issuance of 5,290,000
shares of common stock of the Corporation to the public. The consolidated
financial statements for the periods prior to July 1994 are those of the
Association prior to conversion.
The Bank is subject to regulations of certain state and federal agencies and,
accordingly, they are periodically examined by those regulatory authorities.
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 TF Financial
Corporation and its wholly-owned subsidiaries: Third Federal Savings Bank, TF
Investments Corporation (TF Investments) and Penns Trail Development
Corporation. All material intercompany balances and transactions have been
eliminated in consolidation.
The accounting policies of the Corporation and its subsidiaries conform to
generally accepted accounting principles. The preparation of financial
statements in conformity with generally accepted accounting principles
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.
(Continued)
29
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
2. Acquisitions
------------
On September 20, 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 added a core deposit intangible of $2.9
million and goodwill of $6.6 million.
The core deposit intangible acquired is being amortized on an accelerated
basis over 10 years. The goodwill acquired is being amortized on a
straight-line basis over 15 years.
3. Cash and Cash Equivalents
-------------------------
The Corporation considers cash, due from banks, federal funds sold and
interest-bearing deposits in other financial institutions, with original
terms to maturity of less than three months, as cash equivalents for
presentation purposes in the consolidated statements of financial position
and cash flows.
4. Investment and Mortgage-Backed Securities Available for Sale
------------------------------------------------------------
The Corporation adopted Statement of Financial Accounting Standards (SFAS)
No. 115, "Accounting for Certain Investments in Debt and Equity Securities,"
in 1994. This statement requires the Bank to classify its investment,
mortgage-backed and marketable equity securities in one of three categories:
held to maturity, trading or available for sale. The Corporation does not
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 as a separate component of stockholders' equity, net
of income taxes. Realized gains and losses on the sale of securities are
recognized using the specific identification method.
The cumulative effect of the change in accounting for certain investments in
debt and equity securities of $427,000, net of income taxes, is reflected in
the consolidated statement of earnings for the six-month period ended
December 31, 1994.
5. Investment and Mortgage-Backed Securities Held to Maturity
----------------------------------------------------------
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 over the period to maturity.
Mortgage-backed securities are stated at the principal amount outstanding
(cost), adjusted for amortization of premiums and accretion of fees and
discounts using the interest method. The Corporation has the ability and it
is management's intention to hold such assets to maturity.
(Continued)
30
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
6. Loans Receivable
----------------
Loans receivable are stated at unpaid principal balances less the allowance
for loan losses and net deferred loan origination fees and discounts. Loan
origination fees and discounts 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).
Uncollectible interest on loans that are contractually past due is charged
off, or an allowance is established based on management's periodic
evaluation. 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 back to normal, in which case the loan is returned to accrual
status.
On January 1, 1995, the Corporation adopted 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."
The adoption of SFAS No. 114, as amended, had no material effect on the
Corporation's consolidated financial position or results of operations.
7. Real Estate Acquired through Foreclosure
----------------------------------------
Real estate acquired through foreclosure is initially recorded at the lower
of the loan's unpaid principal balance (cost) or the fair value at the date
of foreclosure less estimated selling expenses. Costs relating to development
and improvement of property are capitalized, whereas costs relating to the
holding of property are expensed. Valuations are periodically performed by
management and a loss provision is established by a charge to operations if
the carrying value of a property exceeds its estimated fair value.
8. 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.
On January 1, 1996, the Corporation adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,"
which provides guidance on when to recognize and how to measure impairment
losses of long-lived assets and certain identifiable intangibles and how to
value long-lived assets to be disposed of. The adoption of SFAS No. 121 did
not have a material impact on the Corporation's consolidated financial
position or results of operations.
(Continued)
31
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
9. Mortgage Servicing Rights
-------------------------
On January 1, 1996, the Corporation adopted SFAS No. 122, "Accounting for
Mortgage Servicing Rights," which requires that a mortgage banking enterprise
recognize as separate assets rights to service mortgage loans for others,
however those servicing rights are acquired. In circumstances where mortgage
loans are originated, separate asset rights to service mortgage loans are
only recorded when the enterprise intends to sell such loans. The adoption of
SFAS No. 122 did not have a material impact on the Corporation's consolidated
financial position or results of operations.
The Financial Accounting Standards Board (FASB) issued SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," as amended by SFAS No. 127, which provides
accounting guidance on transfers of financial assets, servicing of financial
assets, and extinguishments of liabilities. This statement is effective for
transfers of financial assets, servicing of financial assets, and
extinguishments of liabilities occurring after December 31, 1996. Adoption of
this new statement is not expected to have a material impact on the
Corporation's consolidated financial position or results of operations.
10. Benefit Plans
-------------
The Corporation has established an Employee Stock Ownership Plan (ESOP)
covering eligible employees with one year of service, as defined by the ESOP.
In November 1993, the American Institute of Certified Public Accountants
(AICPA) issued 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. In addition, the
Corporation established a Management Stock Bonus Plan (MSBP) for key
directors and personnel.
On January 1, 1996, the Corporation adopted SFAS No. 123, "Accounting for
Stock-Based Compensation," which contains a fair value-based method for
valuing stock-based compensation that entities may use, which measures
compensation cost at the grant date based on the fair value of the award.
Compensation is then recognized over the service period, which is usually the
vesting period. Alternatively, the standard permits entities to continue
accounting for employee stock options and similar instruments under
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock
Issued to Employees." Entities that continue to account for stock options
using APB Opinion No. 25 are required to make pro forma disclosures of net
income and earnings per share, as if the fair value-based method of
accounting defined in SFAS No. 123 had been applied. The Corporation's
employee stock option plan is accounted for under APB Opinion No. 25.
(Continued)
32
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
11. Income Taxes
------------
The Corporation adopted, effective July 1, 1993, SFAS No. 109, "Accounting
for Income Taxes," which requires a change from the deferred method to the
asset and liability method of accounting for income taxes. Under the asset
and liability method, 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. Under SFAS No. 109, the effect on deferred taxes of a change in
tax rates is recognized in income in the period that includes the enactment
date. The cumulative effect of the change in accounting method of $1.8
million was reported in the consolidated statement of earnings for the year
ended June 30, 1994.
12. Advertising Costs
-----------------
The Corporation expenses advertising costs as incurred.
13. Earnings Per Share
------------------
Primary earnings per share is computed by dividing net income by the weighted
average number of common shares outstanding, including common stock
equivalents (stock options), during the period (4,193,987, 4,638,000 and
4,881,295 shares at December 31, 1996, 1995 and 1994, respectively). Fully
diluted earnings per share is not materially different from primary earnings
per share. Common shares outstanding gives effect to issued shares, less
unallocated shares held by the ESOP, and the remaining common shares reserved
for issuance under the MSBP. The provisions of APB Opinion No. 15, "Earnings
Per Share," are not applicable for the year ended June 30, 1994, as the Bank
converted to the stock form of ownership in July 1994.
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,
-----------------------------------
1996 1995 1994
---------- ------------ ----------
(in thousands)
Cash and due from banks $ 14,737 $ 9,926 $ 9,308
Interest-bearing deposits in other
financial institutions 38,120 15,606 31,898
Federal funds sold 1,275 1,500 1,170
--------- --------- ---------
$ 54,132 $27,032 $42,376
======== ======== ========
33
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE C - SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
The Bank enters into purchases of mortgage-backed securities under agreements
to resell substantially identical securities. Securities purchased under
agreements to resell at December 31, 1996 consist of mortgage-backed
securities.
The amounts advanced under these agreements represent short-term loans and
are reflected as a receivable in the consolidated statement of financial
position. The securities underlying the agreements are book-entry securities.
During the year, the securities were delivered by appropriate entry into a
third-party custodian's account designated by the Bank under a written
custodial agreement that explicitly recognizes the Bank's interest in the
securities. At December 31, 1996, these agreements matured within 30 days and
substantially all agreements to resell securities purchased were outstanding
with one dealer. Securities purchased under agreements to resell averaged
$3.8 million during 1996, and the maximum amounts outstanding at any
month-end during 1996 was $25.1 million.
NOTE D - INVESTMENT AND MORTGAGE-BACKED SECURITIES
The amortized cost, gross unrealized gains and losses, and estimated market
value of the Corporation's investment and mortgage-backed securities at
December 31, 1996 and 1995 are summarized as follows:
December 31, 1996
-----------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
---------- ---------- ---------- ----------
(in thousands)
Investment securities held to maturity
U.S. Government and federal agencies $ 34,976 $ 57 $ (179) $ 34,854
State and political subdivisions 3,068 3 (31) 3,040
Corporate debt securities 500 -- (1) 499
--------- --------- --------- ---------
38,544 60 (211) 38,393
Mortgage-backed securities held to maturity 153,758 1,136 (1,625) 153,269
--------- --------- --------- ---------
$ 192,302 $ 1,196 $ (1,836) $ 191,662
========= ========= ========= =========
Investment securities available for sale
U.S. Government and federal agencies $ 11,976 $ 40 $ (1) $ 12,015
Equity securities (SLMA stock) 10 129 -- 139
Mutual funds 500 -- (2) 498
---------
12,486 169 (3) 12,652
Mortgage-backed securities available for sale 22,401 75 (449) 22,027
--------- --------- --------- ---------
$ 34,887 $ 244 $ (452) $ 34,679
========= ========= ========= =========
(Continued)
34
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE D - INVESTMENT AND MORTGAGE-BACKED SECURITIES - Continued
December 31, 1995
-----------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
---------- ---------- ---------- ---------
(in thousands)
Investment securities held to maturity
U.S. Government and federal agencies $ 14,475 $ 313 $ (49) $ 14,739
State and political subdivisions 3,140 21 (22) 3,139
Corporate debt securities 6,025 15 (38) 6,002
--------- --------- --------- ---------
23,640 349 (109) 23,880
Mortgage-backed securities held to maturity 137,841 2,201 (782) 139,260
--------- --------- --------- ---------
$ 161,481 $ 2,550 $ (891) $ 163,140
========= ========= ========= =========
Investment securities available for sale
U.S. Government and federal agencies$ $ 14,489 $ -- $ (41) $ 14,448
Equity securities (SLMA stock) 10 88 -- 98
Mutual funds 500 -- (2) 498
--------- --------- ---------
14,999 88 (43) 15,044
Mortgage-backed securities available for sale 29,477 416 (253) 29,640
--------- --------- --------- ---------
$ 44,476 $ 504 $ (296) $ 44,684
========= ========= ========= =========
Net realized gains (losses) were $330,000 for the year ended December 31,
1996, $16,000 for the year ended December 31, 1995, $14,000 for the six-month
period ended December 31, 1994, and ($244,000) for the year ended June 30,
1994. These gains (losses) resulted from the sale of mortgage-backed
securities of $9.3 million for the year ended December 31, 1996, the sale of
investment securities of $4 million for the year ended December 31, 1995, the
maturity of securities of $3 million for the six-month period ended December
31, 1994, and the sale of securities of $18.7 million for the year ended June
30, 1994.
(Continued)
35
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE D - INVESTMENT AND MORTGAGE-BACKED SECURITIES - Continued
The carrying value and estimated market value of investment and
mortgage-backed securities, by contractual maturity, are shown below.
December 31, 1996
--------------------------------------------
Held to maturity Available for sale
-------------------- ---------------------
Estimated Estimated
Carrying market Carrying market
value value value value
---------- --------- -------- ---------
(in thousands)
Investment securities
Due in one year or less $ 10,474 $ 10,474 $ 8,647 $ 8,647
Due after one year through five years 12,303 12,209 4,005 4,005
Due after five years through 10 years 13,767 13,724 -- --
Due after 10 years 2,000 1,986 -- --
-------- -------- -------- --------
38,544 38,393 12,652 12,652
Mortgage-backed securities 153,758 153,269 22,027 22,027
-------- -------- -------- --------
$192,302 $191,662 $ 34,679 $ 34,679
======== ======== ======== ========
The amortized cost, gross unrealized gains and losses, and estimated market
value of mortgage-backed securities, by issuer, are summarized as follows:
December 31, 1996
----------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
---------- ---------- ----------- ----------
(in thousands)
Mortgage-backed securities held to maturity
FHLMC certificates $ 90,016 $ 697 $ (698) $ 90,015
FNMA certificates 27,547 198 (261) 27,484
GNMA certificates 6,043 205 -- 6,248
Real estate mortgage investment conduit 29,220 34 (643) 28,611
Other mortgage-backed securities 932 2 (23) 911
--------- --------- -------- ---------
$ 153,758 $ 1,136 $ (1,625) $ 153,269
========= ========= ========= ==========
Mortgage-backed securities available for sale
FHLMC certificates $ 8,956 $ 52 $ (103) $ 8,905
FNMA certificates 3,314 23 (97) 3,240
Real estate mortgage investment conduit 10,131 -- (249) 9,882
--------- -------- -------- ---------
$ 22,401 $ 75 $ (449) $ 22,027
========= ======== ========= =========
(Continued)
36
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE D - INVESTMENT AND MORTGAGE-BACKED SECURITIES - Continued
December 31, 1995
-----------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
-----------------------------------------------
(in thousands)
Mortgage-backed securities held to maturity
FHLMC certificates $ 65,834 $ 1,225 $ (80) $ 66,979
FNMA certificates 33,150 522 (138) 33,534
GNMA certificates 7,644 353 -- 7,997
Real estate mortgage investment conduit 30,033 95 (534) 29,594
Collateralized mortgage obligations 19 -- -- 19
Other mortgage-backed securities 1,161 6 (30) 1,137
--------- --------- --------- ---------
$ 137,841 $ 2,201 $ (782) $ 139,260
========= ========= ========= =========
Mortgage-backed securities available for sale
FHLMC certificates $ 15,081 $ 373 $ (32) $ 15,422
FNMA certificates 4,012 42 (44) 4,010
Real estate mortgage investment conduit 10,384 1 (177) 10,208
--------- --------- --------- ---------
$ 29,477 $ 416 $ (253) $ 29,640
========= ========= ========= =========
Investment securities having an aggregate amortized cost of approximately $1
million were pledged to secure public deposits at December 31, 1996 and 1995.
There were no securities held other than U.S. Government and agencies from a
single issuer that represented more than 10% of stockholders' equity.
On November 15, 1995, the FASB issued a Special Report entitled "A Guide to
Implementation of Statement No. 115 on Accounting for Certain Investments in
Debt and Equity Securities." This guide allows enterprises to reassess the
appropriateness of the classification of all securities held. A one-time
reassessment can be made on one day between November 15, 1995 and December
31, 1995. Reclassifications from the held-to-maturity category that result
from this one-time reassessment will not call into question the intent of an
enterprise to hold other debt securities to maturity in the future.
Based on this Special Report, on December 26, 1995, management reclassified
certain mortgage-backed securities from the held-to-maturity category to the
available-for-sale category. The transfer was made to satisfy asset/liability
management objectives and provide an additional source of liquidity to
originate and purchase loans in 1996. The transfer was made at fair value and
resulted in an estimated net unrealized gain of approximately $163,000 and an
increase in retained earnings of approximately $107,000, net of income taxes,
based on current market values.
37
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE E - LOANS RECEIVABLE
Loans receivable are summarized as follows:
December 31,
-------------------
1996 1995
-------- --------
(in thousands)
First mortgage loans (principally conventional)
Secured by one-to-four family residences $265,618 $204,430
Secured by other non-residential properties 20,427 10,294
Construction loans 4,720 3,604
--------- ---------
290,765 218,328
Less
Net deferred loan origination fees 885 882
Net unearned discount (unamortized premium) (364) (138)
--------- ---------
521 744
Total first mortgage loans 290,244 217,584
--------- ---------
Consumer and other loans
Commercial 3,126 2,887
Home equity and second mortgage 9,661 10,635
Leases 3,093 3,590
Other 5,261 5,072
--------- ---------
21,141 22,184
Less unearned discount 9 9
---------- ---------
Total consumer and other loans 21,132 22,175
Less allowance for loan losses 1,806 1,484
--------- ---------
Total loans receivable $309,570 $238,275
========= =========
Activity in the allowance for loan losses is summarized as follows:
December 31,
----------------------------- June 30,
1996 1995 1994 1994
-------- ------- -------- -------
(in thousands)
Balance at beginning of period $ 1,484 $ 1,473 $ 1,450 $ 1,656
Provision charged to income 330 72 30 (144)
Charge-offs (8) (61) (7) (62)
------- ------- ------- -------
Balance at end of period $ 1,806 $ 1,484 $ 1,473 $ 1,450
======= ======= ======= =======
(Continued)
38
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE E - LOANS RECEIVABLE - Continued
Non-performing loans, which include non-accrual loans for which the accrual
of interest has been discontinued and loan balances past due 90 days or more
that are not on a non-accrual status but that management expects will
eventually be paid in full, totalled approximately $2 million and $1.8
million at December 31, 1996 and 1995, respectively. Of such amounts,
approximately $900,000 and $1 million at December 31, 1996 and 1995,
respectively, are residential mortgage loans secured by one-to-four family
residences for which management has experienced insignificant charge-offs.
Interest income that would have been recorded under the original terms of
such loans totalled approximately $30,000 for the year ended December 31,
1996, $49,000 for the year ended December 31, 1995, $67,000 for the six-month
period ended December 31, 1994, and $134,000 for the year ended June 30,
1994. No interest income has been recognized on non-accrual loans for any of
the periods presented.
On January 1, 1995, the Bank adopted 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 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:
December 31,
---------------------
1996 1995
---------- ---------
(in thousands)
Principal amount of impaired loans $ 601 $ 265
Accrued interest - -
Deferred loan costs - -
--------- ---------
601 265
Less valuation allowance 128 40
--------- ---------
$ 473 $ 225
========= =========
(Continued)
39
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE E - LOANS RECEIVABLE - Continued
The average recorded investment in impaired loans during the years ended
December 31, 1996 and 1995 was $433,000 and $271,000, respectively.
Total cash collected on impaired loans during the year ended December 31,
1996 was $300,000, of which $253,000 was credited to the principal balance
outstanding on such loans and $47,000 was recognized as interest income.
Interest that would have been accrued on impaired loans during the year was
$46,000.
Total cash collected on impaired loans during the year ended December 31,
1995 was $20,000, of which $12,000 was credited to the principal balance
outstanding on such loans and $8,000 was recognized as interest income.
Interest that would have been accrued on impaired loans during the year was
$25,000. Interest income recognized during the year was $8,000.
The Bank has no concentration of loans to borrowers engaged in similar
activities which exceeded 10% of total loans at December 31, 1996 and 1995.
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 $511,000 and $541,000 at December 31, 1996 and
1995, respectively. For the year ended December 31, 1996, loans of
approximately $41,000 were disbursed to officers and directors, while
principal repayments of approximately $71,000 were received.
NOTE F - LOAN SERVICING
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial position. The unpaid principal balances
of these loans are summarized as follows:
December 31,
---------------------
1996 1995
--------- -----------
(in thousands)
Mortgage loan servicing portfolios
FHLMC $ 66,521 $ 25,440
Other investors 5,861 1,506
--------- ---------
$ 72,382 $ 26,946
======== ========
Custodial balances maintained in connection with the foregoing loan servicing
totalled approximately $1,490,000 and $547,000 at December 31, 1996 and 1995,
respectively. The net servicing revenue on mortgage loans serviced for others
is immaterial for all periods presented.
40
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE G - PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
December 31,
Estimated ----------------
useful lives 1996 1995
------------ ---- -----
(in thousands)
Buildings 30 $ 5,715 $ 4,863
Leasehold improvements 5 333 237
Furniture, fixtures and equipme 3-7 4,436 4,064
--------- ---------
10,484 9,164
Less accumulated depreciation (5,741) (5,363)
--------- ---------
4,743 3,801
Land 3,259 2,754
--------- ---------
$ 8,002 $ 6,555
========= =========
NOTE H - DEPOSITS
Deposits are summarized as follows:
December 31,
Deposit type and weighted average ----------------
interest rate 1996 1995
--------------------------------- ---- ----
(in thousands)
Demand
December 31, 1996 0.00% $ 3,741
December 31, 1995 0.00% $ 1,573
NOW
December 31, 1996 0.98% 42,513
December 31, 1995 1.57% 33,581
Money Market
December 31, 1996 3.54% 29,970
December 31, 1995 2.75% 10,481
Passbook Savings - Fixed Rate
December 31, 1996 3.00% 127,213
December 31, 1995 3.00% 120,387
Passbook Savings - Adjustable Rate
December 31, 1996 4.88% 60,452
December 31, 1995 4.74% 68,247
-------- --------
Total demand, transaction and
passbook deposits 263,889 234,269
(Continued)
41
(Continued)
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE H - DEPOSITS - Continued
December 31,
Deposit type and weighted average ----------------------
interest rate 1996 1995
--------------------------------- ------ ----------
(in thousands)
Certificates of Deposit
December 31, 1996 5.30% $205,199
December 31, 1995 5.22% $102,800
------- ---------
$469,088 $337,069
The aggregate amount of certificates of deposit with a minimum denomination
of $100,000 was approximately $8.6 million and $4.4 million at December 31,
1996 and 1995, respectively.
Interest expense on deposits for the periods indicated below is summarized as
follows:
December 31, June 30,
------------------------------ -----------
1996 1995 1994 1994
------- -------- -------- -----------
(in thousands)
Money market $ 508 $ 312 $ 168 $ 337
Passbook savings 6,264 7,110 3,393 7,387
NOW 397 520 253 656
Certificates of deposit 7,570 5,426 2,457 4,165
--------- --------- --------- ---------
$ 14,739 $ 13,368 $ 6,271 $ 12,545
======== ======== ========= ========
At December 31, 1996, scheduled maturities of certificates of deposit are as
follows:
Year ending December 31,
------------------------------------------------------------------
1997 1998 1999 2000 2001 Thereafter Total
-------- ------- ------- ------ ------ ---------- --------
Amount $137,811 $44,153 $15,434 $5,908 $1,552 $ 341 $205,199
======= ======= ======= ======= ======= ========= =======
Weighted average
interest rate 5.12% 5.49% 5.57% 5.76% 5.56% 5.93%
==== ==== ==== ==== ==== ====
23
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE I - ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank consist of the following:
December 31,
---------------------------------------------------
1996 1995
------------------------- ------------------------
Weighted Weighted
Due date Amount average rate Amount average rate
-------- -------- ------------ -------- -------------
(in thousands)
1997 $ 10,000 5.57% $ 5,000 5.57%
1998 30,000 5.85 10,000 5.57
1999 30,000 6.05 25,000 5.97
2000 25,000 6.13 15,000 6.29
2001 - - 15,000 6.39
2010 3,359 6.70 3,359 6.70
--------- ----- --------- -----
$ 98,359 5.98 $ 73,359 6.07%
======== ==== ======== =====
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 $32 million and $45 million at December
31, 1996 and 1995, respectively.
NOTE J - BENEFIT PLANS
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.
Additionally, the Bank maintains a profit-sharing plan for eligible
employees. Profit-sharing contributions are at the discretion of the Board of
Directors. The contributions to the profit-sharing plan were $187,000 for the
year ended June 30, 1994. There were no profit-sharing plan contributions for
the years ended December 31, 1996 and 1995 or for the six-month period ended
December 31, 1994.
(Continued)
43
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE J - BENEFIT PLANS - Continued
The following table sets forth the pension plan's funded status and amounts
recognized in the consolidated statements of financial position at the dates
indicated.
December 31,
----------------------
1996 1995
-------- ---------
(in thousands)
Actuarial present value of benefit obligations
Accumulated benefit obligation
Vested $ 1,796 $ 2,453
Non-vested 137 267
---------- ----------
$ 1,933 $ 2,720
========= =========
Projected benefit obligation for service rendered
to date $ (3,004) $ (3,594)
Plan assets at fair value (primarily listed stocks,
cash and short-term investments) 1,338 2,069
--------- ---------
Projected benefit obligation in excess of plan assets (1,666) (1,525)
Unrecognized net gain from past experience
different from that assumed and effects of changes
in assumptions 542 440
Unrecognized net obligation being recognized over
15 years 41 47
Adjustment to recognize minimum liability - (125)
Prior service cost not yet recognized in net periodic
pension cost 466 512
---------- ---------
Accrued pension cost $ (617 $ (651)
========== =========
The net pension cost included the following components:
Six-month
period ended Year ended
Year ended December 31, December 31, June 30,
----------------------
1996 1995 1994 1994
----------- ---------- ------ ------
(in thousands)
Service cost - benefits earned during the period $ 173 $ 159 $ 98 $ 255
Interest cost on projected benefit obligation 196 202 100 220
Actual return on plan assets (59) (193) (100) (197)
Net amortization and deferral (28) 92 28 130
----- ----- ----- -----
Net pension costs $ 282 $ 260 $ 126 $ 408
===== ===== ===== =====
(Continued)
44
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE J - BENEFIT PLANS - Continued
Assumptions used to develop the net periodic pension cost were as follows:
Six-month
period ended Year ended
Year ended December 31, December 31, June 30,
1996 1995 1994 1994
---- ---- ---- ----
(in thousands)
Discount rate 6.00% 6.00% 6.75% 6.75%
Expected long-term rate of return on assets 8.00 8.50 8.50 8.50
Rate of increase in compensation levels 6.00 6.00 6.00 6.00
In conjunction with and subsequent to the Conversion, the Corporation adopted
the following benefit plans:
1. Employee Stock Ownership Plan
-----------------------------
In 1994, the Corporation established an internally leveraged ESOP for
eligible employees who have completed six months of service with the
Corporation or its subsidiaries. In July 1994, the ESOP borrowed $4.2 million
from the Corporation to purchase 423,200 newly issued shares of common stock.
The Corporation makes discretionary contributions to the ESOP in order to
service the ESOP's debt. Any dividends received by the ESOP will be used to
pay debt service. The ESOP shares initially were pledged as collateral for
its debt. As the debt is repaid, shares are released from collateral and
allocated to qualifying employees based on the proportion of debt service
paid in the year. The Corporation accounts for its ESOP in accordance with
SOP 93-6. Accordingly, the debt of the ESOP is recorded as debt and the
shares pledged as collateral are reported as unearned ESOP shares in the
consolidated statements of financial position. As shares are released from
collateral, the Corporation reports compensation expense equal to the current
market price of the shares, and the allocated shares are included in
outstanding shares for earnings per share computations. Dividends on
allocated ESOP shares will be recorded as a reduction of retained earnings;
dividends on unallocated ESOP shares will be recorded as a reduction of debt
and accrued interest. ESOP compensation expense was $450,000, $435,000 and
$358,000 in 1996, 1995 and 1994, respectively. The ESOP shares as of December
31, 1996 were as follows:
Allocated shares 104,358
Unreleased shares 318,842
Total ESOP shares 423,200
Fair value of unreleased shares $5,181,182
(Continued)
45
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE J - BENEFIT PLANS - Continued
2. Management Stock Bonus Plan
---------------------------
The Board of Directors also adopted a MSBP which was approved by the
Corporation's stockholders on October 13, 1994. The MSBP provides that up to
211,600 shares of common stock may be granted, at the discretion of the
Board, to key directors and officers at no cost to the individuals. The
Corporation granted 178,292 shares on November 18, 1994 and 24,000 shares on
December 18, 1995 and 9,308 shares on December 15, 1996 in the form of
restricted stock payable over five years from the date of grant. The
recipients of the restricted stock are entitled to all voting and other
stockholder rights, except that the shares, while restricted, may not be
sold, pledged or otherwise disposed of and are required to be held in escrow.
In the event the recipient terminates association with the Corporation for
reasons other than death, disability or change in control, the recipient
forfeits all rights to the allocated shares under restriction which are
cancelled and revert to the Corporation for reissuance under the plan. Shares
acquired by MSBP of $2.1 million were recorded at the date of award based on
the market value of shares acquired by the Corporation. Shares acquired by
the MSBP, which are shown as a separate component of stockholders' equity,
are being amortized to expense over the five-year vesting period; $432,000,
$483,000 and $45,000 was amortized to expense in 1996, 1995 and 1994,
respectively. At December 31, 1996, there were no shares reserved for future
grants under the plan.
3. Stock Option Plans
------------------
The Corporation has fixed stock option plans accounted for under APB Opinion
25 and related interpretations. The plans allow the Corporation to grant
options to employees and directors for up to 554,000 shares of common stock.
The options, which have a term of 10 years when issued, vest either
immediately or over a three-year period. The exercise price of each option
equals the market price of the Corporation's stock on the date of grant.
Accordingly, no compensation cost has been recognized for the plans. Had
compensation cost for the plans been determined based on the fair value of
the options at the grant dates consistent with the method of SFAS No. 123,
"Accounting for Stock-Based Compensation," the Corporation's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below.
1996 1995
---------- -----------
Net income As reported $ 3,479 $ 3,871
Pro forma $ 3,365 $ 3,871
Primary earnings per share As reported $ 0.83 $ 0.83
Pro forma $ 0.80 $ 0.83
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes options-pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995, respectively: dividend yield of
0% and expected volatility of 12.1% for all years; risk-free interest rates
of 6.4% and 5.7%; and expected lives of five years.
(Continued)
46
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE J - BENEFIT PLANS - Continued
A summary of the status of the Corporation's fixed stock option plans as of
December 31, 1996, 1995 and 1994, and changes during the periods ending on
those dates is presented below:
1996 1995 1994
------------------- ----------------------- -------------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
------ ------- ------- ----------- ------- ---------
Outstanding at beginning of year 514,480 $ 11.82 460,480 $ 11.50 -- $ --
Granted 41,103 $ 11.82 15.09 $ 14.83 460,480 $ 11.50
Exercised (1,667) $ 15.09 11.50 $ 11.50 -- --
Forfeited (2,083) $ 11.50 11.50 $ 11.50 -- --
-------- ------- ------ --------- ------- ---------
Outstanding at end of year 551,833 $ 12.06 514,480 $ 11.82 460,480 $ 11.50
Options exercisable at year-end 501,730 306,820
Weighted average fair value of
options granted during the year $ 4.34 $ 3.83
The following information applies to options outstanding at December 31,
1996:
Number outstanding 551,833
Range of exercise prices $10.83-$15.88
Weighted average exercise price $12.06
Weighted average remaining contractual life 8 years
Total compensation cost recognized for stock-based employee compensation
awards was approximately $28,000 and $16,000 for 1996 and 1995, respectively.
NOTE K - INCOME TAXES
As previously discussed in note A11, the Bank adopted SFAS No. 109 as of July
1, 1993. The cumulative effect of the change in accounting method increased
net income by approximately $1.8 million and is reported separately in the
consolidated statement of earnings for the period ended June 30, 1994. Prior
years' financial statements have not been restated to apply the provisions of
SFAS No. 109. SFAS No. 109 had no effect on the income tax provision for the
year ended June 30, 1994, exclusive of such cumulative effect adjustment.
(Continued)
47
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE K - INCOME TAXES - Continued
The components of income tax expense before extraordinary credit are
summarized as follows:
Six-month
period ended Year ended
Year ended December 31, December 31, June 30,
1996 1995 1994 1994
---------- -------- ---------- -----
(in thousands)
Federal
Current $ 2,173 $ 2,033 $ 841 $ 473
Deferred (84) 140 434 683
-------- -------- -------- ---------
2,089 2,173 1,275 1,156
-------- -------- -------- ---------
State and local
Current 343 297 161 276
Deferred - - - 224
--------- --------- ---------- --------
343 297 161 500
--------- --------- ---------- --------
Income tax provision before
extraordinary credit $ 2,432 $ 2,470 $ 1,436 $ 1,656
======== ======== ======== ========
The Corporation's effective income tax rate was different than the statutory
federal income tax rate as follows:
Six-month
period ended Year ended
Year ended December 31, December 31, June 30,
1996 1995 1994 1994
---- ----- ----- ----
(in thousands)
Statutory federal income tax 34.0% 34.0% 34.0% 34.0%
Increase (decrease) resulting from
Tax-exempt income (2.7) (1.6) (1.2) (2.3)
Bad debt deduction -- -- -- (0.9)
State tax, net of federal benefit 3.8 3.0 2.9 7.6
Other 5.9 3.5 4.0 (0.1)
---- ---- ---- ----
41.0% 38.9% 39.7% 38.3%
==== ==== ==== ====
(Continued)
48
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE K - INCOME TAXES - Continued
Deferred taxes are included in the accompanying consolidated statements of
financial position at December 31, 1996 and 1995 for the estimated future tax
effects of differences between the financial statement and federal income tax
bases of assets and liabilities given the provisions of currently enacted tax
laws. No valuation allowance was recorded against deferred tax assets at
December 31, 1996 and 1995. The Corporation's net deferred tax asset at
December 31, 1996 and 1995 was comprised of the following:
December 31,
-----------------------
1996 1995
---------- ------------
(in thousands)
Deferred tax assets
Deferred loan origination fees $ 154 $ 178
Deferred compensation 112 2
Accrued pension expense 68 68
---------- ----------
334 248
Deferred tax liabilities
Allowance for loan losses, net 148 146
Unrealized gain on securities available for sale 43 70
---------- ----------
191 216
Deferred tax asset $ 143 $ 32
========= =========
The Corporation files its income tax returns on the basis of a fiscal tax
year ending June 30.
The Bank is allowed a special bad debt deduction based on a percentage of
taxable income (presently 8%) or on specified experience formulas, subject to
certain limitations based upon aggregate loan balances at the end of the
year. The Bank used the percentage-of-taxable income method in fiscal tax
year 1994 and anticipates using the same method for its fiscal tax year 1995.
If the amounts deducted are used for purposes other than for loan losses,
such as in a distribution in liquidation or otherwise, or if the Bank would
cease to be a qualified thrift lender under the tax law, the amounts deducted
would be subject to federal income tax at the then current corporate tax
rate. Prior to July 1, 1994, no deferred taxes were recorded for the excess
of the cumulative percentage of income bad debt deductions in excess of the
loan loss allowance provided for financial statement purposes. Effective with
the adoption of SFAS No. 109, however, the Bank is required to record, and
has recorded, a deferred tax asset related to the allowance for loan losses
reported for financial reporting purposes, and a deferred tax liability for
percentage of income bad debt deductions after December 31, 1987. In
accordance with SFAS No. 109, the Bank has not recorded a deferred tax
liability of approximately $1.9 million related to approximately $5.7 million
of cumulative percentage of income bad debt deductions prior to December 31,
1987.
(Continued)
49
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE K - INCOME TAXES - Continued
Deferred tax expense (benefit) results from temporary or timing differences
in the recognition of revenue and expense for tax and financial reporting
purposes. The sources and effect of these temporary and timing differences
are as follows:
Six-month
period ended Year ended
Year ended December 31, December 31, June 30,
1996 1995 1994 1994
---- ---- ---- ----
(in thousands)
Recognition of previously deferred tax benefits $ -- $ -- $ -- $ 620
Loan losses (2) 147 254 300
Deferred compensation 110 (2) 165 (99)
Deferred loan origination fees (24) 24 12 24
Depreciation -- (29) -- --
Pension expense -- -- -- (68)
Unrealized securities losses -- -- 3 (220)
Allowance on real estate held for sale -- -- -- 350
----- -----
$ 84 $ 140 $ 434 $ 907
===== ===== ===== =====
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 Corporation's consolidated financial
statements. Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, the Corporation must meet specific capital
guidelines that involve quantitative measures of the Corporation's assets,
liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. The Corporation's capital amounts and
classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors. Such minimum capital
standards generally require the maintenance of regulatory capital sufficient
to meet each of three tests, hereinafter described as the tangible capital
requirement, the core capital requirement and the risk-based capital
requirement. The tangible capital requirement provides for minimum tangible
capital (defined as stockholders' equity less all intangible assets) equal to
1.5% of adjusted total assets. The core capital requirement provides for
minimum core capital (tangible capital plus certain forms of supervisory
goodwill and other qualifying intangible assets) equal to 3% of adjusted
total assets. An OTS proposal, if adopted in present form, would increase the
core capital requirement to a range of 4% - 5% of adjusted total assets for
substantially all savings associations. An OTS regulation affecting all
savings institutions, which was adopted in 1995, imposes an addition to the
risk-based capital requirement based on an institution's sensitivity to
interest rate risk. There was no material change to the Bank's excess
regulatory capital position as a result of these changes in the regulatory
capital requirement. The risk-based capital requirement currently provides
for the maintenance of core capital plus general loss allowances equal to 8%
of risk-weighted assets. In computing risk-weighted assets, the Bank
multiplies the value of each asset on its statement of financial position by
a defined risk-weighting factor (e.g., one-to-four family residential loans
carry a risk-weighted factor of 50%).
(Continued)
50
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE L - REGULATORY MATTERS - Continued
As of December 31, 1996, management believes that the Bank met all capital
adequacy requirements to which it was subject to.
Regulatory capital
-------------------------------------------------------------------------
Tangible Core Risk-based
capital Percent capital Percent capital Percent
--------- ------- ------- ------- ---------- --------
Capital under generally accepted
accounting principles
Corporation $ 72,575 11.36% $72,575 11.36% $ 72,575 24.71%
Bank 59,208 9.20 59,208 9.20 59,208 20.18
Unrealized loss on certain
available-for-sale securities
Corporation 127 0.02 127 0.02 127 0.04
Bank 127 0.01 127 0.01 127 0.04
Goodwill and other intangible assets
Corporation (9,232) (1.44) (9,232) (1.44) (9,232) (3.14)
Bank (9,232) (1.43) (9,232) (1.44) (9,232) (3.14)
Additional capital items
General valuation allowances - limited
Corporation -- -- -- -- 1,806 0.62
Bank -- -- -- -- 1,806 0.62
-------- ----- ------- ----- -------- -----
Regulatory capital computed
Corporation 63,470 9.94 63,470 9.94 65,276 22.23
Bank 50,103 7.78 50,103 7.78 51,909 17.70
Minimum capital requirement
Corporation 9,581 1.50 19,162 3.00 23,492 8.00
Bank 9,655 1.50 19,310 3.00 23,468 8.00
-------- ---------- -------- -------- -------- -----
Regulatory capital - excess
Corporation $ 53,889 8.44% $44,308 6.94% $41,784 14.23%
======== ==== ======= ==== ======= =====
Bank $ 40,448 6.28% $30,793 4.78% $28,441 9.70%
======== ==== ======= ==== ======= ====
(Continued)
51
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE L - REGULATORY MATTERS - Continued
At December 31, 1996, 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 by $22.6 million and $17.9 million,
respectively. There are no conditions or events which have occurred that
management believes have changed the Bank's category.
On September 30, 1996, the President signed into law the Deposit Insurance
Funds Act of 1996 to recapitalize the Savings Association Insurance Fund
(SAIF) administered by the Federal Deposit Insurance Corporation (FDIC) and
to provide for the repayment of Financial Institution Collateral Obligation
(FICO) bonds issued by the United States Treasury Department. Pursuant to
this law, the FDIC levied a one-time special assessment of SAIF deposits
equal to $0.657 per $100 of the SAIF-assessable deposit base as of March 31,
1995. Based on the Bank's deposits as of March 31, 1995, the Bank paid a
special assessment of $2.2 million to recapitalize the SAIF. This expense was
accrued for in the third quarter of 1996. During 1997, 1998 and 1999, the
Bank Insurance Funds (BIF) will pay $322 million of FICO debt service, and
SAIF will pay $458 million.
During 1997, 1998 and 1999, the average regular annual deposit insurance
assessment is estimated at $0.0129 per $100 of deposits for BIF deposits and
$0.0644 per $100 of deposits for SAIF deposits. Individual institution
assessments will continue to vary according to their capital and management
ratings. As always, the FIDC will be able to raise the assessments as
necessary to maintain the funds at their target capital ratios provided by
law. After 1999, BIF and SAIF will share the FICO cost equally. Under current
estimates, BIF and SAIF assessment bases would each be assessed at the rate
of approximately $0.024 per $100 of deposits.
NOTE M - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Corporation is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers and to reduce its own exposure to fluctuations in interest rates.
These financial instruments include commitments to extend credit, standby
letters of credit, interest rate caps and floors written. Such financial
instruments are recorded in the consolidated financial statements when they
become payable. Those instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
consolidated statements of financial position. The contract or notional
amounts of those instruments reflect the extent of the Bank's involvement in
particular classes of financial instruments.
The Corporation's exposure to credit loss in the event of non-performance by
the other party to the financial instrument for commitments to extend credit
and standby letters of credit is represented by the contractual notional
amount of those instruments. The Corporation uses the same credit policies in
making commitments and conditional obligations as it does for
on-balance-sheet instruments.
Unless noted otherwise, the Corporation requires collateral to support
financial instruments with credit risk.
(Continued)
52
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE M - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK - Continued
Financial instruments, the contract or notional amounts of which represent
credit risk, are as follows:
December 31,
----------------
1996 1995
---- ----
(in thousands)
Commitments to extend credit $ 24,858 $ 19,496
Commitments to purchase loans 2,852 30,737
Standby letters of credit 819 491
Loans sold with recourse 587 846
-------- --------
$ 29,116 $ 51,570
======== ========
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. The Corporation evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained, if it is deemed necessary by the Corporation upon extension of
credit, is based on management's credit evaluation of the counterparty.
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.
NOTE N - COMMITMENTS AND CONTINGENCIES
The Bank leases branch facilities for periods ranging up to seven years.
These leases are classified as operating leases and contain options to renew
for additional periods. Rental expense was approximately $229,000, $193,000
and $95,000 for the years ended December 31, 1996, 1995 and 1994,
respectively, and $188,000 for the year ended June 30, 1994.
The minimum annual rental commitments of the Bank under all non-cancellable
leases with terms of one year or more are as follows:
Year ending December 31,
1997 $ 198
1998 125
1999 48
2000 32
2001 -
-----
$ 403
(Continued)
53
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE N - COMMITMENTS AND CONTINGENCIES - Continued
The Bank has a five-year contract with a third-party computer processing
center which expires in 1997 with an annual commitment of approximately
$500,000.
The Corporation has employment agreements with certain key executives that
provide severance pay benefits if there is a change in control of the
Corporation. The agreements will continue in effect on a year-to-year basis
until terminated or not renewed by the Corporation or key executives. Upon a
change in control, the Corporation shall continue to pay the key executives'
salary per the agreements and certain benefits for one year. The maximum
contingent liability under the agreements at December 31, 1996 was
$1,227,000.
From time to time, the Corporation and its subsidiaries are parties 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 consolidated financial position or results of
operations.
NOTE O - SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
The Bank is principally engaged in originating and investing in one-to-four
family residential real estate loans in eastern Pennsylvania and New Jersey.
The Bank offers both fixed and adjustable rates of interest on these loans
which have amortization terms ranging to 30 years. The loans are generally
originated on the basis of an 80% loan-to-value ratio, which has historically
provided the Bank with more than adequate collateral coverage in the event of
default. Nevertheless, the Bank, as with any lending institution, is subject
to the risk that residential real estate values in the primary lending area
will deteriorate, thereby potentially impairing collateral values in the
primary lending area. However, management believes that residential real
estate values are presently stable in its primary lending area and that loan
loss allowances have been provided for in amounts commensurate with its
current perception of the foregoing risks in the portfolio.
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 Corporation's general practice and intent to hold its financial
instruments to maturity and to not engage in trading or significant sales
activities. Therefore, the Corporation and the Bank had to use significant
estimations and present value calculations to prepare this disclosure.
Changes in the assumptions or methodologies used to estimate fair values may
materially affect the estimated amounts. Also, management is concerned that
there may not be reasonable comparability between institutions due to the
wide range of permitted assumptions and methodologies in the absence of
active markets. This lack of uniformity gives rise to a high degree of
subjectivity in estimating financial instrument fair values.
(Continued)
54
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
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,
--------------------------------------------------------------
1996 1995 1994
------------------- ------------------- --------------------
Estimated Estimated Estimated
fair Carrying fair Carrying fair Carrying
value value value value value value
--------- -------- ---------- -------- --------- --------
(in thousands)
Cash and cash equivalents $ 54,132 $ 54,132 $ 27,032 $ 27,032 $ 42,376 $42,376
Investment securities 51,045 51,196 38,924 38,684 76,274 77,533
Mortgage-backed securities 175,296 175,785 168,900 167,481 171,880 181,411
Securities sold under
agreements to repurchase 25,129 25,129 -- -- -- --
Fair value of financial instruments with stated maturities has been estimated
using present value cash flow, discounted at a rate approximating current
market for similar assets and liabilities.
December 31,
---------------------------------------------------------------
1996 1995 1994
-------------------- ------------------- --------------------
Estimated Estimated Estimated
fair Carrying fair Carrying fair Carrying
value value value value value value
--------- --------- ---------- ------- --------- ---------
(in thousands)
Assets
Interest-bearing deposits
with banks $ 4,221 $ 4,220 $ 4,231 $ 4,221 $ 3,977 $ 4,007
Liabilities
Deposits with stated
maturities 204,744 205,199 102,083 102,800 87,854 87,047
Borrowings with stated
maturities
Short-term 10,038 10,000 5,003 5,000 -- --
Long-term 89,422 88,359 67,648 68,359 -- --
(Continued)
55
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE P - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued
Fair value of financial instrument liabilities with no stated maturities has
been estimated to equal the carrying amount (the amount payable on demand).
December 31,
-----------------------------------------------------------------------
1996 1995 1994
------------------- ----------------------- -----------------------
Estimated Estimated Estimated
fair Carrying fair Carrying fair Carrying
value value value value value value
--------- -------- ---------- ---------- --------- ----------
(in thousands)
Deposits with no stated
maturities $263,889 $263,889 $234,269 $234,269 $260,584 $260,584
======== ======== ======== ======== ======== ========
The fair value of the net loan portfolio has been estimated using present
value 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,
-------------------------------------------------------------------
1996 1995 1994
-------------------- --------------------- --------------------
Estimated Estimated Estimated
fair Carrying fair Carrying fair Carrying
value value value value value value
--------- --------- --------- --------- --------- ----------
(in thousands)
Net loans $307,942 $309,570 $242,154 $238,275 $111,700 $113,893
======= ======= ======= ======= ======= =======
There is no material difference between the carrying amount and the estimated
fair value of off-balance-sheet items totalling approximately $29.1 million,
$51.6 million and $6.1 million at December 31, 1996, 1995 and 1994,
respectively, which are primarily comprised of floating rate loan commitments
priced to market at funding.
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 - CONVERSION TO STOCK FORM OF OWNERSHIP
On July 13, 1994, the Association pursuant to a plan of conversion (the
Plan), completed its conversion from a federally chartered mutual savings and
loan association to a federally chartered stock savings bank via the issuance
of common stock. Pursuant to the Plan, the Bank transferred all of its newly
issued shares to a newly organized holding company, TF Financial Corporation,
and the Corporation sold 5.3 million shares of common stock at $10 per share
which, after giving effect to offering expenses of $1.2 million, resulted in
net cash proceeds of $51.7 million.
(Continued)
56
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE Q - CONVERSION TO STOCK FORM OF OWNERSHIP - Continued
In the event of a complete liquidation (and only in such event), each
eligible savings account holder will be entitled to receive a liquidation
distribution from the liquidation account in the amount of the then current
adjusted balance of deposit accounts held before any liquidation distribution
may be made with respect to the common shares. Except for the repurchase of
stock and payment of dividends by the Bank, the existence of the liquidation
account will not restrict the use or further application of such retained
earnings.
At the date of the conversion, the Bank established a liquidation account in
an amount equal to retained earnings reflected in the statements of financial
position used in the conversion offering circular. The liquidation account
will be maintained for the benefit of eligible savings account holders who
maintained deposit accounts in the Bank after conversion.
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 R - SERVICE FEES, CHARGES AND OTHER OPERATING INCOME AND OTHER OPERATING
EXPENSE
Six-month
period ended Year ended
Year ended December 31, December 31, June 30,
1996 1995 1994 1994
---------- ----------- ------------ ----------
(in thousands)
Service fees, charges and other
operating income
Loan servicing fees $ 577 $ 395 $ 95 $ 382
Late charge income 98 83 39 97
Deposit service charges 439 435 236 499
Recovery of local taxes - - - 386
Other income 156 150 81 366
-------- -------- --------- --------
$ 1,270 $ 1,063 $ 451 $ 1,730
======= ======= ======== =======
Other operating expense
Employee education $ 22 $ 35 $ 11 $ 25
Insurance and surety bond 129 129 89 199
Office supplies 272 218 108 169
Postage 207 173 80 184
Telephone 103 77 38 79
Service charges on bank accounts 83 82 31 122
Supervisory examination fees 112 103 49 89
Other expenses 1,079 761 279 848
------- --------- -------- --------
$ 2,007 $ 1,578 $ 685 $ 1,715
======= ======== ======== ========
57
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE S - SHAREHOLDER RIGHTS PLAN
The Corporation adopted a Shareholder Rights Plan (the Rights Plan) to
protect shareholders from attempts to acquire control of the Corporation at
an inadequate price. Under the Rights Plan, the Corporation distributed a
dividend of one Preferred Share Purchase Right (a Right) for each share of
outstanding common stock. The rights are currently not exercisable and will
expire on November 22, 2005, unless the expiration date is extended or unless
the Rights are earlier redeemed by the Corporation.
After the Rights become exercisable, under certain circumstances, the Rights
(other than rights held by a 15% beneficial owner or an "acquiring person")
will entitle the holders to purchase one one-hundredth of a share of a new
series of junior participating preferred stock at an exercise price of $45 or
purchase either the Corporation's common shares or the common shares of the
potential acquirer at a substantially reduced price.
The Corporation is entitled to redeem the Rights at $0.01 per Right prior to
the acquisition by a person or group of beneficial ownership of 15% or more
of the Corporation's common stock. Following the acquisition by a person or
group of beneficial ownership of 15% or more of the Corporation's common
stock and prior to an acquisition of 50% or more, the Board of Directors may
exchange the Rights (other than Rights owned by such person or group), in
whole or in part, at an exchange ratio of one share of common stock (or one
one-hundredth of a share of the new series of junior participating preferred
stock) per Right.
The Rights Plan was not adopted in response to any specific effort to acquire
control of the Corporation. The issuance of rights has no dilutive effect,
did not affect the Corporation's reported earnings per share, and was not
taxable to the Corporation or its shareholders.
58
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE T - SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED)
Three months ended
---------------------------------------
Dec. 31, Sept. 30, June 30, March 31,
1996 1996 1996 1996
-------- --------- ------- ----------
Total interest income $11,205 $ 9,711 $ 9,083 $ 8,990
Total interest expense 6,368 5,109 4,738 4,582
------ ------ ------ ------
Net interest income 4,837 4,602 4,345 4,408
Provision for possible loan losses 120 120 60 30
------ ------
Net interest income after provision 4,717 4,482 4,285 4,378
Other income 504 296 303 691
Other expenses 3,253 5,089 2,657 2,746
------ ------ ------ ------
Income before income tax provision 1,968 (311) 1,931 2,323
Income tax provision 776 (102) 829 929
------ ------ ------ ------
Net income $ 1,192 $ (209) $ 1,102 $ 1,394
====== ====== ====== ======
Earnings per share (1) $ 0.29 $(0.05) $ 0.26 $ 0.32
Three months ended
------------------------------------
Dec. 31, Sept. 30, June 30, March 31,
1995 1995 1995 1995
---- ----- ------- ------
Total interest income $ 8,019 $ 7,425 $ 7,093 $ 7,093
Total interest expense 4,122 3,657 3,422 3,202
------ ------ ------ -------
Net interest income 3,897 3,768 3,671 3,891
Provision for possible loan losses 21 21 15 15
------ ------ ------ ------
Net interest income after provision 3,876 3,747 3,656 3,876
Other income 311 352 252 246
Other expenses 2,507 2,556 2,410 2,404
------ ------ ------ ------
Income before income tax provision 1,680 1,543 1,498 1,718
Income tax provision 666 594 599 709
------ ------ ------ ------
Net income $1,014 $ 949 899 $ 1,009
====== ====== ====== ======
Earnings per share (1) $ 0.23 $ 0.20 $ 0.19 $ 0.21
(1) Per share data presented represents both primary and fully diluted share
computations.
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE U - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
Condensed financial information for TF Financial Corporation (parent company
only) follows:
BALANCE SHEET
December 31,
1996 1995
(in thousands)
ASSETS
Cash $ 70 $ 199
Certificates of deposit - other institutions 154 150
Investment in Third Federal 59,208 55,500
Investment in TF Investments 27,580 26,224
Other assets 12 6
------------------------
Total assets $ 87,024 $ 82,079
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Loan payable to TF Investments $ 9,740 $ 8,718
Payable to Third Federal and other liabilities 4,709 29
--------- ----------
Total liabilities 14,449 8,747
Stockholders' equity 72,575 73,332
-------- --------
Total liabilities and stockholders' equity $ 87,024 $ 82,079
======== ========
60
(Continued)
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE U - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY - Continued
STATEMENT OF EARNINGS
Six-month
period ended
Year ended December 31, December 31,
-------------------------
1996 1995 1994
--------- ---------- -----------
1994
(in thousands)
INCOME
Dividend income from subsidiaries $ - $ 4,220 $ -
Interest income 10 6 -
--------- --------- ----------
Total income 10 4,226 -
--------- --------- ----------
EXPENSES
Interest 722 118 -
Other 257 257 56
---------- -------- -----------
Total expenses 979 375 56
--------- ---------- ---------
(Loss) income before income
taxes and undistributed
earnings of subsidiaries (969) 3,851 (56)
Income taxes - - -
--------------------- ----------
(Loss) income before
undistributed earnings
of subsidiaries (969) 3,851 (56)
Undistributed earnings of subsidiaries 4,448 20 2,663
--------- ---------- -------
NET INCOME $ 3,479 $ 3,871 $ 2,607
========= ========= =======
61
(Continued)
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE U - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY - Continued
STATEMENT OF CASH FLOWS
Six-month
period ended
Year ended December 31, December 31,
-------------------------------
1996 1995 1994
--------- --------- ---------------
(in thousands)
Cash flows from operating activities
Net income $ 3,479 $ 3,871 $ 2,607
Adjustments to reconcile net income to net cash
provided by operating activities
Undistributed earnings from subsidiaries (4,448) (20) (2,663)
Net change in assets and liabilities 4,676 (20) 41
Net cash provided by operating activities 3,707 3,831 (15)
--------
Cash flows from investing activities
Capital contributions to subsidiaries -- -- (47,479)
Purchase and maturities of certificates of deposit
in other financial institutions, net (4) (151) --
-------- -------- --------
Net cash used in investing activities (4) (151)
-------- -------- --------
Cash flows from financing activities Net proceeds from issuance of common
stock after
considering benefit plans -- -- 47,499
Cash dividends paid to stockholders (1,258) (1,088) --
Net increase in borrowings from TF Investments 1,022 8,718 --
Treasury stock acquired (3,596) (11,116) --
-------- -------- --------
Net cash (used in) provided by financing
activities (3,832) (3,486) 47,499
-------- -------- --------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (129) 194 5
Cash and cash equivalents at beginning of period 199 5 --
--------
Cash and cash equivalents at end of period $ 70 $ 199 $ 5
======== ======== ========
Supplemental disclosures
Cash paid during the year for income taxes $ 80 $ 32 $ -
======== ======== ========
62