SECURITIES AND EXCHANGE COMMISSION
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WASHINGTON, D.C. 20549
FORM lO-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
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OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-24168
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TF FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 74-2705050
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(State or other jurisdiction of incorporation (I.R.S. employer
or organization) identification no.)
3 Penns Trail, Newtown, Pennsylvania 18940
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 215-579-4000
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N/A
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Former name, former address and former fiscal year,
if changed since last report.
Indicate by check x whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes X No
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date May 12, 1997
Class Outstanding
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TF FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 1O-Q
FOR THE QUARTER ENDED March 31, 1997
INDEX
Page
Number
------
PART I - CONSOLIDATED FINANCIAL INFORMATION
Item 1. Unaudited Consolidated Financial Statements and Notes Thereto 1
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II- OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Defaults upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Materially Important Events 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES
TF FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands)
March 31, December 31,
ASSETS 1997 1996
---------- ------------
Cash and cash equivalents $ 18,571 $ 54,132
Securities purchased under agreements to resell 17,107 25,129
Certificates of deposit in other financial institutions 4,695 4,220
Investment securities available for sale - at market value 18,540 12,652
Investment securities held to maturity (market value of $55,589 and $ 56,116 43,462
respectively, for the periods shown)
Mortgage-backed securities available for sale - at market value 23,575 22,027
Mortgage-backed securities held to maturity (market value of $163,097 and
$153,269 respectively, for the periods shown) 165,049 153,758
Loans receivable, net 317,967 309,570
Accrued interest receivable 4,258 4,247
Goodwill/Core deposit intangible 8,987 9,232
Premises and equipment, net 7,941 8,002
Other assets 1,562 1,422
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Total Assets $ 644,368 $ 647,853
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $ 460,910 $ 469,088
Advances from the Federal Home Loan Bank 103,359 98,359
Advances from borrowers for taxes and insurance 2,093 2,364
Accrued interest payable 4,282 2,030
Other liabilities 3,861 3,437
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Total Liabilities 574,505 575,278
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Commitments and contingencies -- --
Stockholders' Equity
Preferred stock, no par value; 2,000,000 shares authorized
and none issued -- --
Common stock, $0.10 par value; 10,000,000 shares authorized,
5,290,000 issued; 3,774,816 and 3,962,544 shares outstanding
at March 31, 1997 and December 31, 1996, net of treasury shares of
1,202,614 and 1,008,614 respectively 529 529
Additional paid-in capital 51,702 51,645
Net unrealized gain (loss) on investment securities available for sale (326) (127)
Unearned ESOP shares - at cost (3,125) (3,188)
Shares acquired by MSBP (1,216) (1,322)
Treasury stock - at cost (18,225) (14,712)
Retained earnings 40,524 39,750
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Total Stockholders' Equity 69,863 72,575
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 644,368 $ 647,853
========= =========
See notes to consolidated financial statements
1
TF FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share data)
For Three Months
Ended March 31,
1997 1996
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Interest income
Loans $ 6,192 $ 5,280
Mortgage-backed securities 3,108 2,769
Investment securities 1,567 632
Interest bearing deposits and other 308 309
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TOTAL INTEREST INCOME 11,175 8,990
Interest expense
Deposits 4,657 3,178
Borrowings 1,457 1,404
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TOTAL INTEREST EXPENSE 6,114 4,582
NET INTEREST INCOME 5,061 4,408
Provision for loan losses 105 30
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NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 4,956 4,378
Non-interest income
Gain on sale of real estate acquired through foreclosure 0 114
Gain on sale of investment and mortgage-backed securities 73 223
Gain (loss) on sale of loans (1) 0
Service fees, charges and other operating income 318 354
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TOTAL NON-INTEREST INCOME 390 691
Non-interest expense
Employee compensation and benefits 1,673 1,423
Occupancy and equipment 445 350
Federal deposit insurance premium 77 196
Data processing 180 119
Professional fees 133 124
Goodwill and other intangible amortization 244 0
Provision for losses on real estate acquired through foreclosure 0 0
Advertising 98 75
Other operating 558 459
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TOTAL NON-INTEREST EXPENSE 3,408 2,746
INCOME BEFORE INCOME TAX EXPENSE 1,938 2,323
Income tax expense 774 929
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NET INCOME $ 1,164 $ 1,394
======= =======
Per share data
Earnings per share 0.29 0.32
Earnings per share after cumulative changes 0.29 0.32
Weighted average number of shares outstanding 4,064 4,297
See notes to consolidated financial statements
2
TF FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
For the Three Months
Ended March 31
--------------------
1997 1996
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CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 1,164 $ 1,394
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of:
Mortgage loan servicing rights 23 0
Deferred loan origination fees (43) (34)
Premiums and discounts on investment securities, net (7) (8)
Premiums and discounts on mortgage-backed securities and
loans. net (11) 14
Amortization of goodwill and core deposit intangible 244 0
Provision for loan losses and provision for losses on real estate 105 30
Depreciation of premises and equipment 173 132
Recognition of ESOP and MSBP expenses 228 220
(Gain)/Loss on sale of mortgage-backed securities -
available for sale (73) 0
(Gain) loss on the sale of investment securities 0 (223)
(Gain)/Loss on sale of real estate acquired through foreclosure 0 (114)
(Gain)/Loss on sale of mortgage loans 1 0
Decrease (increase) in
Accrued interest receivable (11) 153
Other assets (120) (273)
Increase (decrease) in
Accrued interest payable 2,251 1,726
Other liabilities 552 533
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NET CASH PROVIDED BY OPERATING ACTIVITIES 4,476 3,550
CASH FLOWS FROM INVESTING ACTIVITIES
Loan originations and principal payments on loans, net (2,822) (12,606)
Purchases of loans (12,211) (35,158)
Proceeds from loan sales 6,518 0
Purchases and maturities of certificates of deposit in other
financial institutions, net (475) 200
Purchases and maturities of securities purchased under
agreements to resell, net 8,022 0
Purchases of investment securities - available for sale (6,982) 0
Purchases of mortgage-backed securities - available for sale (4,935) 0
Purchases of investment securities held to maturity (45,425) (3,724)
Purchase of mortgage-backed securities - held to maturity (15,071) 0
Proceeds from maturities of investment securities held to maturity 30,680 4,297
Proceeds from maturities of investment securities available for sale 1,350 7,000
Principal repayments from maturities of mortgage-backed securities-
held to maturity 5,811 6,224
Principal repayments from maturities of mortgage-backed securities-
available for sale 571 1,041
Proceeds from the sale of mortgage-backed securities -
available for sale 2,647 5,338
3
TF FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
For the Three Months
Ended March 31,
1997 1996
-------- --------
Purchase of premises and equipment $ (112) $ (22)
-------- --------
Purchases and redemptions of Federal Home Loan Bank Stock, net (250) (1,250)
Proceeds from sales of real estate acquired through foreclosure 0 439
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (32,684) (28,221)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand deposits/NOW accounts,
passbook savings accounts and certificates of deposit $ (8,178) $ 923
Advances from Federal Home Loan Bank - net 5,000 25,000
Net (decrease) increase in advances from borrowers for taxes
and insurance (271) (103)
Purchase of treasury stock (3,513) (0)
Common stock cash dividend (391) (288)
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (7,353) 25,532
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (35,561) 861
Cash and cash equivalents at beginning of period 54,132 27,032
Cash and cash equivalents at end of period $ 18,571 $ 27,893
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Supplemental disclosure of cash flow information
Cash paid for
Interest on deposits and advances $ 3,863 $ 2,856
Income taxes $ 47 $ 296
Non-cash transactions
Transfers from loans to real estate acquired
through foreclosure $ 39 $ 32
See notes to consolidated financial statements
4
TF FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - PRINCIPLES OF CONSOLIDATION
The consolidated financial statements as of March 31, 1997, December 31,
1996 and for the three month period ended March 31, 1997 and 1996 include
the accounts of TF Financial Corporation (the "Corporation") and its
wholly owned subsidiaries Third Federal Savings Bank (the "Savings Bank"),
TF Investments Corporation and Penns Trail Development Corporation. The
Corporation's business is conducted principally through the Savings Bank.
All significant intercompany accounts and transactions have been
eliminated in consolidation.
NOTE 2 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements were prepared
in accordance with instructions for Form 10-Q and, therefore, do not
include information or footnotes necessary for a complete presentation of
consolidated financial condition, results of operations, and cash flows in
conformity with generally accepted accounting principles. However, all
adjustments, consisting of normal recurring accruals, which, in the
opinion of management, are necessary for fair presentation of the
consolidated financial statements have been included. The results of
operations for the period ended March 31, 1997 are not necessarily
indicative of the results which may be expected for the entire fiscal year
or any other period. For further information, refer to consolidated
financial statements and footnotes thereto included in the Corporations'
Annual Report on Form 10-K for the fiscal year ended December 31, 1996.
NOTE 3 - IMPAIRED LOANS
On January 1, 1995 the Corporation adopted Statement of Financial
Accounting Standards (SFAS) No. 114, "Accounting for Creditors for
Impairment of a Loan," as amended by SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures."
SFAS No. 114 requires that a creditor measure impairment based on the
present value of expected future cash flows discounted at the loan's
effective interest rate, except that as a practical expedient, a creditor
may measure impairment based on a loan's observable market price, or the
fair value of the collateral if the loan is collateral dependent.
Regardless of the measurement method, a creditor must measure impairment
based on the fair value of the collateral when the creditor determines
that foreclosure is probable. SFAS No. 118 allows creditors to use
existing methods for recognizing interest income on impaired loans.
The Savings Bank has identified a loan as impaired when it is probable
that interest and principal will not be collected according to the
contractual terms of the loan agreement. The accrual of interest is
discontinued on such loans, and cash payments received are applied to
reduce principal to the extent necessary to eliminate any doubt as to the
ultimate collectibility of principal either in whole or in part.
Loan impairment is measured by estimating the expected future cash flows
and discounting them at the respective effective interest rate, or by
valuing the underlying collateral. An allowance for credit losses has been
established for all loans identified as impaired. The recorded investment
in impaired loans and the valuation for credit losses are as follows:
(in thousands) March 31, 1997
Principal amount of impaired loans 603
Accrued interest --
Deferred loan costs --
----
Subtotal $603
----
Less valuation allowance 128
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Total $475
====
5
The average recorded investment in impaired loans during the quarter
ended March 31, 1997 was $606,000. Total cash collected on impaired loans
during the quarter ended March 31, 1997 was $10,000 of which $7,000 was
credited to the principal balance outstanding on such loans and $3,000
was recognized as interest income. Interest that would have been accrued
on impaired loans during the quarter was $13,000. Interest income
recognized during the quarter was $3,000.
NOTE 4 - CONTINGENCIES
The Corporation, from time to time, is a party to routine litigation,
which arise in the normal course of business. In the opinion of
management, the resolution of these lawsuits would not have a material
adverse effect on the Corporation's consolidated financial condition or
results of operations.
A petition for resettlement has been filed by the Savings Bank protesting
assessment of certain prior years' Pennsylvania Mutual Thrift Institutions
Tax. Management believes that the resolution of this liability, if any,
would not have a material adverse effect on the Corporation's financial
position or results of operations.
NOTE 5 -ACQUISITIONS
On September 20, 1996, the Savings Bank acquired three Mercer County, New
Jersey offices and related deposits of Cenlar Federal Savings Bank. The
Savings Bank assumed $137.6 million in deposits in exchange for $126.5
million in cash. This transaction 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 pursuant to a core deposit study. The goodwill
acquired is being amortized on a straight line basis over 15 years.
6
TF FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
GENERAL
The Corporation's total assets at March 31, 1997 and December 31, 1996 totaled
$644.4 million and $647.9 million, respectively, a decrease of $3.5 million, or
.5%, for the three month period. This decrease was primarily as a result of the
$35.5 million, or 65.6%, decrease in cash and cash equivalents along with the
$8.0 million, or 31.9%, decrease in securities purchased under agreements to
resell. The decrease was partially offset by the increase in investment
securities of $18.6 million or 33.2%, along with the $12.8 million, or 7.3%,
increase in mortgage-backed securities coupled with the $8.4 million, or 2.7%,
increase in loans receivable for the three month period ended March 31, 1997.
This net decrease in assets was primarily the result of the decrease in total
savings deposits at March 31, 1997 of $8.2 million or, 1.8%, to $460.9 million
as compared to savings deposits of $469.1 million as of December 31, 1996. This
decrease was partially offset by $5.0 million increase in Federal Home Loan Bank
advances. The decrease in cash and cash equivalents and securities purchased
under agreements to resell funded the increases in investment securities,
mortgage-backed securities and loans receivable in addition to funding the net
decrease in deposits for the period.
The increase in loans receivable of $8.4 million, or 2.7%, to $318.0 million at
March 31, 1997 from $309.6 million at December 31, 1996 was primarily the result
of the origination of $11.9 million in mortgage loans coupled with the purchase
of $12.1 million in mortgage loans, partially offset by the sale of $6.6 million
in mortgage loans coupled with the repayment of $9.0 million in mortgage loans.
The increase in mortgage-backed securities of $12.8 million or 7.3% to $188.6
million at March 31, 1997 from $175.8 million at December 31, 1996 was primarily
the result of the purchase of $20.0 million of mortgage-backed securities which
was partially offset by principal repayments from maturities along with the sale
of the mortgage-backed securities.
Investment securities at March 31, 1997, totaled $74.7 million, which represents
a increase of $18.6 million or 33.2% as compared to $56.1 million at December
31, 1996.
Total consolidated stockholders' equity of the Corporation decreased $2.7
million to $69.9 million at March 31, 1997 from $72.6 million at December 31,
1996. The 3.7% decrease is primarily attributed to the repurchase of 194,000
shares of the Corporation's outstanding common stock in the open market, at a
total cost of $3.5 million coupled with the payment of $390,800 in dividends to
shareholders, partially offset by the addition of $1.2 million of net income for
the period. The decrease in total consolidated stockholders' equity in
conjunction with the decrease of $3.5 million in total assets resulted in a
decrease in consolidated stockholders' equity as a percentage of total assets to
10.8% at March 31, 1997 from 11.2 % at December 31, 1996.
On January 1, 1995, the Corporation adopted the provisions of Statement of
Financial Accounting Standards No. 114 and 118 (SFAS 114 & 118) "Accounting by
Creditors for Impairment of a Loan" which generally applies to all loans
including loans that are restructured as a troubled debt restructuring involving
a modification of terms. The adoption of SFAS 114 & 118 was mandated by the
Statement of Financial Accounting Standards Board. According to SFAS 114 and
118, impairment of a loan occurs when it is probable that the Savings Bank will
not be able to collect all amounts due according to the contractual terms of the
loan agreements.
The measurement of impaired loans is generally based upon the present value of
expected future cash flows discounted at the historical effective interest rate,
except that all collateral dependent loans may be measured for impairment based
upon the fair value of the collateral. The accounting of SFAS 114 and 118 did
not have a material impact on the financial position or results of operations of
the Corporation during the three or three month period ended March 31, 1997.
7
Average Balance Sheet
The following tables set forth information relating to the Corporation's average
balance sheet and reflects the average yield on assets and average cost of
liabilities for the periods indicated. The yields and costs are computed by
dividing income or expense by the monthly average balance of interest-earning
assets or interest-bearing liabilities, respectively for the periods indicated.
For Three Months Ended March 31,
-----------------------------------------------------------------
1997 (4) 1996 (4)
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(Dollars in thousands) Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- -----------
Assets:
Interest earning assets:
Loans receivable, net........... $310,389 $ 6,192 7.98% $280,911 $ 5,280 7.52%
Mortgage-backed securities...... 185,167 3,108 6.71% 159,029 2,769 6.96%
Investment securities........... 101,023 1,567 6.20% 41,850 632 6.04%
Other interest-earning assets(1) 24,130 308 5.11% 24,401 309 5.07%
-------- ------ ---- -------- ------ ----
Total interest-earning assets. $620,709 $11,175 7.20% $506,191 $8,990 7.10%
======== ====== ==== ======== ====== ====
Non interest-earning assets....... 22,540 9,338
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Total assets.................. $643,249 $515,529
======== ========
Liabilities and Stockholders'
Equity:
Interest-bearing liabilities:
Savings deposits.............. $462,572 $4,657 4.03% $335,155 $ 3,178 3.79%
Borrowed money................ 100,026 1,457 5.83% 98,359 1,404 5.71%
-------- ------ ---- -------- ------ ----
Total interest-bearing
liabilities................. $562,598 $6,114 4.35% $433,514 $4,582 4.23%
======== ====== ==== ======== ====== ====
Non interest-bearing liabilities.. 9,327 7,979
Total liabilities........... 571,925 441,493
Stockholders' equity.............. 71,324 74,037
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Total liabilities and
stockholders' equity....... $643,249 $515,530
======== ========
Net interest income............... $5,061 $4,408
====== ======
Interest rate spread (2).......... 2.85% 2.87%
Net yield on interest-earning
assets (3)...................... 3.26% 3.48%
Ratio of average interest-earning
assets to average interest-
bearing liabilities............. 110% 117%
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(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.
8
RESULTS OF OPERATIONS
Net Income. The Corporation recorded a net income of $1.2 million for the three
months ended March 31, 1997 as compared to net income of $1.4 million for the
three months ended March 31, 1996. This decrease of $.2 million in net income
for this period is primarily attributable to the increase in total non-interest
expense of $662,000, or 24.1%, to $3.4 million for the three months ended March
31, 1997 as compared to $2.7 million for the three months ended March 31, 1996,
and a decrease in total non-interest income of $301,000, or 43.6%, to $390,000
from $691,000 for the same periods. The decrease was partially offset by the
increase in net interest income before provisions for loan losses of $653,000,
or 14.8%, to $5.1 million for the three months ended March 31, 1997 as compared
to $4.4 million for the same period in 1996. This increase in net interest
income is a result of an increase in core earnings. The increase in non-interest
expense is primarily attributable to increased costs associated with the
acquisition of $137.6 in deposits along with three branch offices from Cenlar
Federal Savings Bank in September 1996, while the decrease in non-interest
income was attributed to the gains associated with the sale of the real estate
and mortgage-backed securities which totalled $73,000 for the period ended March
31, 1997 as compared to $337,000 for the period ended March 31, 1996. For these
same periods, total interest income was $11.2 million and $9.0 million,
respectively, while total interest expense was $6.1 million and $4.6 million,
respectively.
Total Interest Income. Total interest income increased by $2.2 million, or
24.3%, to $11.2 million for the three months ended March 31, 1997, from $9.0
million for the three months ended March 31, 1996 due primarily to increases in
the average balance of loans receivable, investment securities and mortgage
backed securities. The average balance of loans receivable increased 10.5% to
$310.4 million from $280.9 million for the three months ended March 31, 1997 and
1996, respectively. Interest attributable to loans receivable increased $912,000
or 17.3% to $6.2 million from $5.3 million for these same periods. This increase
is primarily attributed to the increase in the average balance of loans
receivable in conjunction with an increase in the average yield on loans
receivable from 7.52% for the three months end March 31, 1996, to 7.98% for the
period ended March 31, 1997. Interest on mortgage-backed securities increased
$339,000 (12.2%) primarily as a result of the increase in the average balance of
$26.2 million, or 16.4%, to $185.2 million from $159.0 million for the three
months ended March 31, 1997 and 1996 respectively. The average yield on
mortgage-backed securities decreased to 6.71% for the three months ended March
31, 1997 compared to 6.96% for the similar period in 1996. Interest on
investment securities increased by $935,000 for the three month period ended
March 31, 1997 as compared to the similar period in 1996 as a result of the
increase in the average balance of $59.1 million, or 141.1%, to $101.0 million
from $41.9 million for the periods ended March 31, 1997 and 1996 respectively.
The average yield on investment securities increased to 6.20% for the three
months ended March 31, 1997 compared to 6.04% for the similar period in 1996.
Interest on other interest earning assets remained level at $308,000 as compared
to $309,000 for the two periods respectively.
Total Interest Expense. Total interest expense increased to $6.1 million for the
three months ended March 31, 1997 from $4.6 million for the three months ended
March 31, 1996. This increase of $1.5 million or 32.6% in total interest expense
is a result of the increase in the average balance of savings deposits of $127.4
million or 38.0% during the quarter ended March 31, 1997. The increase in
savings deposits was primarily a result of the acquisition of $137.6 million in
deposit balances. The average balance of total interest bearing liabilities
increased to $562.6 million during the three months ended March 31, 1997 from
$433.5 million during the three months ended March 31, 1996 primarily as a
result of the acquisition of these deposit balances.
Net Interest Income. Net interest income for the three month period ended March
31, 1997 increased by $653,000 or 14.8% to $5.1 million from $4.4 million for
the same period in 1996. 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 $620.1
million for the three months ended March 31, 1997 from $506.2 million for the
similar period in 1996. During these same periods, the average balances on
interest-bearing liabilities increased to $562.6 million from $433.5 million.
The cost of interest-bearing liabilities increased from 4.23% to 4.35% while the
yield on interest-earning assets increased from 7.10% to 7.20% for the three
month periods ended March 31, 1997 and 1996 respectively.
Allowance for Loan Losses. The allowance for loan losses increased by $397,000
to approximately $1.9 at March 31, 1997 from $1.5 million at March 31, 1996.
Such totals correlate to non-performing loans of $2.0 million at March 31, 1997
and $1.6 million at March 31, 1996. The increase in the allowance for loan
losses resulted from the addition of $405,000 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. The provision for losses on loans was $105,000 for
9
the three months ended March 31, 1997. At March 31, 1997, the allowance for loan
losses was 95.6% of non-performing loans as compared to 94.9% of non-performing
loans at March 31, 1996. 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 decreased to $390,000 for the
three month period ended March 31, 1997 from $691,000 for the similar period in
1996. This decrease can be attributed to the decrease in the gain on the sale of
real estate acquired through foreclosure of $114,000 in conjunction with the
$150,000 decrease in the gain on the sale of investment securities. The
remainder of the decrease can be attributed to an decrease of $36,000 in service
fee income, which was a result of decreased loan origination activity during the
period.
Non-interest Expense. Total non-interest expense increased by $662,000 to $3.4
million for the three months ended March 31, 1997 as compared to $2.7 million
for the similar period in 1996. This increase is primarily attributed to the
$250,000 increase in employee compensation and benefits, the $95,000 increase in
office occupancy and equipment, the $61,000 increase in data processing expense,
the $9,000 increase in professional fees, the $244,000 increase in goodwill and
other intangible amortization, the $23,000 increase in advertising and the
$99,000 increase in other operating costs. The increases in compensation and
benefits, office occupancy and equipment, data processing, goodwill and other
intangible amortization and other operating costs, are primarily the result of
increased costs associated with the acquisition and continued operation of three
branch offices along with $137.6 million in deposit's. 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 compensation and benefit costs also increased as a result of
salary increases resulting from annual performance reviews.
Income Tax Expense. Income taxes decreased by $155,000 to $774,000 for the three
month period ended March 31, 1997, from $929,000 for the three months ended
March 31, 1996. The primary reason for this decrease was the decrease in net
income before taxes to $1.9 from $2.3 million for the three month periods ended
March 31, 1997 and 1996, respectively.
Liquidity and Capital Resources
Under current Office of Thrift Supervision (OTS) regulations, the Savings Bank
must have core capital equal to 3% of total assets and risk-based capital equal
to 8% of risk-weighted assets, of which 1.5% must be tangible capital, excluding
goodwill and certain other intangible assets. The OTS has proposed amending its
regulations in such a manner that would increase the core capital requirements
for most thrift institutions from 3% to 4% or 5%, depending upon the
institutions financial condition and other factors. Although the final form of
the regulation cannot be foreseen, if adopted as proposed, the Savings Bank
would expect its core capital requirements to increase to at least 4%.
On March 31, 1997, the Savings Bank was in compliance with its three regulatory
capital requirements as follows:
Amount Percent
------ -------
(dollars in thousands)
Tangible capital $51,427 8.0%
Tangible capital requirement 9,663 1.5
------- ----
Excess over requirement $41,764 6.5%
======= ====
Core capital $51,427 8.0%
Core capital requirement 19,326 3.0
------- ----
Excess over requirement $32,101 5.0%
======= ====
Risk based capital $53,337 18.4%
Risk based capital requirement 23,245 8.0
------- ----
Excess over requirement $30,092 10.4%
======= ====
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
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Savings Bank to meet its future minimum capital requirements.
The Savings Bank's liquidity is a measure of its ability to fund loans, pay
withdrawals of deposits, and other cash outflows in an efficient, cost effective
manner. The Savings Bank's primary source of funds are deposits and scheduled
amortization and prepayment of loan and mortgage backed principal. During the
past several years, the Savings Bank has used such funds primarily to fund
maturing time deposits, pay savings withdrawals, fund lending commitments,
purchase new investments, and increase liquidity. The Savings Bank is currently
able to fund its operations internally but has, when deemed prudent, borrowed
funds from the Federal Home Loan Bank of Pittsburgh. As of March 31, 1997, such
borrowed funds total $103.4 million. Loan payments, maturing investments and
mortgage-backed security prepayments are greatly influenced by general interest
rates, economic conditions and competition.
The Savings Bank is required under federal regulations to maintain certain
specified levels of "liquid investments", which include certain United States
government obligations and other approved investments. Current regulations
require the Savings Bank to maintain liquid assets of not less than 5% of its
net withdrawable accounts plus short term borrowings. Short term liquid assets
must consist of not less than 1% of such accounts and borrowings, which amount
is also included within the 5% requirement. These levels may be changed from
time to time by the regulators to reflect current economic conditions. The
Savings Bank has generally maintained liquidity far in excess of regulatory
requirements. The Savings Bank's regulatory liquidity was 26.6% and 12.9% at
March 31, 1997 and 1996, respectively, and its short term liquidity was 19.1%
and 9.2%, at such dates, respectively.
The amount of certificate accounts which are scheduled to mature during the
twelve months ending December 30, 1997, is approximately $137.1 million. To the
extent that these deposits do not remain at the Savings Bank upon maturity, the
Savings Bank believes that it can replace these funds with deposits, excess
liquidity, FHLB advances or outside borrowings. It has been the Savings Bank's
experience that a substantial portion of such maturing deposits remain at the
Savings Bank.
At March 31, 1997, the Savings Bank had outstanding commitments to originate
loans of $8.9 million. Also outstanding at March 31, 1997 were commitments to
purchase $277,000 of loans from correspondents along with commitments to
purchase $3.0 million of mortgage-backed securities. Funds required to fill
these commitments are derived primarily from current excess liquidity, deposit
inflows or loan and security repayments. At March 31, 1997, the Savings Bank had
outstanding commitments to sell loans of $8.2 million.
Recent Developments
The FASB has issued Statement of Financial Accounting Standards No. 128,
"Earnings Per Share", which is effective for financial statements issued after
December 15, 1997. Early adoption of the new standard is not permitted. The new
standard eliminated primary and fully diluted earnings per share and requires
presentation of basic and diluted earnings per share together with disclosure of
how the per share amounts were computed. The adoption of this new standard is
not expected to have a material impact on the disclosure of earnings per share
in the financial statements. The effect of adopting this new standard has not
been determined.
In August 1996, the Internal Revenue Code of 1986 (the "Code") was revised to
equalize the taxation of thrifts and banks. Thrifts, such as the Savings Bank,
no longer have a choice between the percentage of taxable income method and the
experience method in determining additions to bad debt reserves. Thrifts with
$500 million of assets or less may still use the experience method, which is
generally available to small banks currently. Larger thrifts, such as the
Savings Bank, must use the specific charge off method regarding bad debts. Any
reserve amounts added after 1987 will be taxed over a six year period beginning
in 1996; however, bad debt reserves set aside through 1987 are generally not
taxed. An institution may delay recapturing into income its post-1987 bad debt
reserves for an additional two years if it meets a residential-lending test.
This law is not expected to have a material impact on the Savings Bank. At March
31, 1997, the Savings Bank had $326,000 of post 1987 bad debt reserves.
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TF FINANCIAL CORPORATION AND SUBSIDIARIES
PART II
ITEM 1. LEGAL PROCEEDINGS
Neither the Corporation nor the Savings Bank was engaged in
any legal proceeding of a material nature at March 31, 1997.
From time to time, the Corporation is a party to legal
proceedings in the ordinary course of business wherein it
enforces its security interest in loans.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS ON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER MATERIALLY IMPORTANT EVENTS
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
(i) The Corporation filed a Current Report on Form 8-K dated
April 9, 1997 with the Securities and Exchange
Commission ("SEC") to report the issuance of a press
release announcing the Corporation had completed the
repurchase in the open market of 214,869 shares of the
Corporation's common stock totalling approximately 5% of
its outstanding shares.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TF FINANCIAL CORPORATION
Date: May 12, 1997 By: /s/ John R. Stranford
----------------- -----------------------------------
John R. Stranford
President and CEO
(Principal Executive Officer)
Date: May 12, 1997 By: /s/ William C. Niemczura
----------------- ------------------------------------
William C. Niemczura
Senior Vice President and
Chief Financial Officer
(Principal Financial & Accounting
Officer)
13