SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------- (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT of 1934 ------------------------------------------------------------ For the quarterly period ended June 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ----------------------- ---------------------- Commission file number 0-24168 ------- TF FINANCIAL CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 74-2705050 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. employer identification no.) incorporation or organization) 3 Penns Trail, Newtown, Pennsylvania 18940 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 215-579-4000 ------------------------- N/A - -------------------------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report. Indicate by check _ whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date July 31, 1998 ------------------ Class Outstanding --------------------------- ---------------- $.10 par value common stock 2,898,510 shares TF FINANCIAL CORPORATION AND SUBSIDIARIES FORM 1O-Q FOR THE QUARTER ENDED JUNE 30, 1998 INDEX Page Number ------ PART I - CONSOLIDATED FINANCIAL INFORMATION Item 1. Consolidated Financial Statements 3 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Quantitative and Qualitative Disclosures about Market Risk 17 PART II- OTHER INFORMATION Item 1. Legal Proceedings 18 Item 2. Changes in Securities 18 Item 3. Defaults upon Senior Securities 18 Item 4. Submission of Matters to a Vote of Security Holders 18 Item 5. Other Materially Important Events 18 Item 6. Exhibits and Reports on Form 8-K 18 SIGNATURES 2 TF FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (in thousands) Unaudited Audited --------- ------- June 30, December 31, ASSETS 1998 1997 Cash and cash equivalents $ 33,414 41,625 Securities purchased under agreements to resell 10,064 10,000 Certificates of deposit in other financial institutions 2,437 2,737 Investment securities available for sale - at market value 37,898 32,037 Investment securities held to maturity (market value of $69,863 and $57,944 69,933 57,740 respectively, for the periods shown) Mortgage-backed securities available for sale - at market value 41,723 36,847 Mortgage-backed securities held to maturity (market value of $235,901 and $145,723 respectively, for the periods shown) 234,144 144,074 Loans receivable, net 237,407 250,711 Accrued interest receivable 4,463 3,957 Goodwill/Core deposit intangible 7,823 8,274 Premises and equipment, net 8,523 7,889 Other assets 1,455 1,156 -------- -------- Total Assets $689,284 $597,047 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Deposits $448,625 $450,429 Advances from the Federal Home Loan Bank 178,356 88,359 Advances from borrowers for taxes and insurance 1,721 1,591 Accrued interest payable 5,750 2,470 Other liabilities 3,194 4,103 -------- -------- Total Liabilities 637,646 546,952 -------- -------- 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; 2,892,522 and 2,886,251 shares outstanding at June 30, 1998 and December 31, 1997, net of treasury shares of 2,098,551 and 2,102,767 respectively 529 529 Additional paid-in capital 51,888 51,775 Net unrealized loss on investment securities available for sale (27) 169 Unearned ESOP shares-at cost (2,943) (3,010) Shares acquired by MSBP (682) (895) Treasury stock - at cost (41,565) (41,649) Retained earnings 44,438 43,176 -------- -------- Total Stockholders' Equity 51,638 50,095 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $689,284 $597,047 ======== ======== See notes to consolidated financial statement 3 TF FINANCIAL CORPORATION AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS (in thousands, except per share data) For Six Months For Quarter Ended June 30, Ended June 30, ------------------------ ------------------------ 1998 1997 1998 1997 ---- ---- ---- ---- Interest Income Loans $ 9,509 $12,413 $ 4,605 $ 6,221 Mortgage-backed securities 7,573 6,379 4,335 3,271 Investment securities 3,327 2,955 1,750 1,388 Interest bearing deposits and other 730 534 308 226 ------- ------- ------- ------- TOTAL INTEREST INCOME 21,139 22,281 10,998 11,106 Interest expense Deposits 8,678 9,320 4,364 4,663 Borrowings 3,574 2,930 2,226 1,473 ------- ------- ------- ------- TOTAL INTEREST EXPENSE 12,252 12,250 6,590 6,136 NET INTEREST INCOME 8,887 10,031 4,408 4,970 Provision for loan losses 30 180 15 75 ------- ------- ------- ------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 8,857 9,851 4,393 4,895 Non-interest income Gain on sale of real estate acquired through foreclosure 24 0 25 0 Gain on sale of mortgage-backed securities 345 188 345 115 Gain on sale of loans 91 39 17 40 Service fees, charges and other operating income 646 651 299 333 ------- ------- ------- ------- TOTAL NON-INTEREST INCOME 1,106 878 686 488 Non-interest expense Employee compensation and benefits 3,285 3,299 1,620 1,626 Occupancy and equipment 923 904 484 459 Federal deposit insurance premium 140 153 70 76 Data processing 449 346 274 166 Professional fees 284 276 149 143 Goodwill and other intangible amortization 450 488 225 244 Advertising 180 188 90 90 Other operating 1,117 1,072 541 514 ------- ------- ------- ------- TOTAL NON-INTEREST EXPENSE 6,828 6,726 3,453 3,318 INCOME BEFORE INCOME TAXES 3,135 4,003 1,626 2,065 Income taxes 1,153 1,574 637 800 ------- ------- ------- ------- NET INCOME $ 1,982 $ 2,429 $ 989 $ 1,265 ======= ======= ======= ======= Basic earnings per share $ 0.68 $ 0.63 $ 0.34 $ 0.33 Diluted earnings per share $ 0.61 $ 0.61 $ 0.30 $ 0.32 Weighted average number of shares outstanding - Basic 2,892,522 3,836,006 2,895,580 3,772,709 Weighted average number of shares outstanding - Diluted 3,249,145 4,008,885 3,254,270 4,025,742 See notes to consolidated financial statement 4 UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOW (in thousands) For the Six Months Ended June 30, ------------------------------ 1998 1997 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 1,982 $ 2,429 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of: Mortgage loan servicing rights 9 47 Deferred loan origination fees (91) (77) Premiums and discounts on investment securities net 36 25 Premiums and discounts on mortgage-backed securities and loans net 291 69 Amortization of goodwill and core deposit intangible 451 488 Provision for loan losses and provision for losses on real estate 30 180 Depreciation of premises and eqipment 387 351 Recognition of ESOP and MSBP expenses 411 454 (Gain) loss on sale of mortgage-backed securities - available for sale (80) (188) (Gain) on sale of investment securities - available for sale (265) -- (Gain) loss on sale of real estate acquired through foreclosure (24) -- (Gain) on sale of mortgage servicing rights -- -- (Gain) loss on sale of mortgage loans (91) (39) Decrease (increase) in Acquired interest receivable (506) (568) Other assets (337) (65) Increase (decrease) in Accrued interest payable 3,280 1,255 Other liabilities (1,140) 1,154 -------- ------- NET CASH PROVIDED BY OPERATING ACTIVITIES 4,343 5,515 CASH FLOWS FROM INVESTING ACTIVITIES Loan originating and principal payments on loans, net (6,142) (11,009) Purchases of loans -- (12,663) Proceeds from loan sales 19,496 16,970 Purchases and maturities of certificates of deposit in other financial institutions net 300 769 Purchases and maturities of securities purchased under agreements to resell, net (64) 20,129 Purchases of investment securities - available for sale (137,644) (6,982) Purchases of investment securities - held to maturity (23,030) (68,081) Purchases of mortgage-backed securities - available for sale (16,244) (23,412) Purchases of mortgage-backed securities - held to maturity (114,358) (15,071) Proceeds from maturities of investment securities - held to maturity 23,989 54,680 Proceeds from maturities of investment securities - available for sale 115,472 1,350 Principal repayments from maturities of mortgage-backed securities - held to maturity 24,192 12,144 Principal repayments from maturities of mortgage-backed securities - available for sale 5,627 1,189 Proceeds from the sale of mortgage-backed securities - available for sale 5,683 8,648 Proceeds from the sale of investment securites - available for sale 7,445 -- Purchases and redemptions of Federal Home Loan Bank Stock, net (4,000) -- Proceeds from sales of real estate acquired through foreclosure 114 -- Purchases of premises and equipment (1,021) (187) ------- ------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES $(100,185) $(21,526) 5 TF FINANCIAL CORPORATION AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) For the Six Months Ended June 30, ----------------------- 1998 1997 CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in demand deposits/ NOW accounts, passbook savings accounts and certificates of deposit $ (1,804) $ (8,241) Advances from Federal Home Loan Bank - net 89,997 -- Net (decrease) increase in advances from borrowers for taxes and insurance 130 200 Purchase of treasury stock -- (3,587) Common stock cash dividend (692) (768) NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 87,631 (12,396) NET INCREASE (DECREASE) INCASH AND CAS EQUIVALENTS (8,211) (28,407) Cash and cash equivalents at beginning of period 41,625 54,132 -------- -------- Cash and cash equivalents at end of period $ 33,414 $ 25,725 Supplemental disclosure of cash flow information Cash paid for Interest on deposits and advances $ 8,972 $ 10,995 Income taxes $ 1,692 $ 801 Non-cash transactions Transfers from loans to real estate acquired through foreclosure $ 61 $ 78 See notes to consolidated financial statement 6 TF FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - PRINCIPLES OF CONSOLIDATION The consolidated financial statements as of June 30, 1998, December 31, 1997, and for the three and six month periods ended June 30, 1998 and 1997 include the accounts of TF Financial Corporation (the "Corporation") and its wholly owned subsidiaries Third Federal Savings Bank (the "Savings Bank"), TF Investments Corporation, Penns Trail Development Corporation and Teragon Financial Corporation. The Corporation's business is conducted principally through the Savings Bank. All significant intercompany accounts and transactions have been eliminated in consolidation. NOTE 2 - BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include information or footnotes necessary for a complete presentation of consolidated financial condition, results of operations, and cash flows in conformity with generally accepted accounting principles. However, all adjustments, consisting of normal recurring accruals, which, in the opinion of management, are necessary for fair presentation of the consolidated financial statements have been included. The results of operations for the period ended June 30, 1998 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 Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. NOTE 3 - 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 4 - NEW PRONOUNCEMENTS On January 1, 1998, the Corporation adopted SFAS No. 130, "Reporting Comprehensive Income". SFAS No. 130 establishes standards to provide prominent disclosure of comprehensive income items. Comprehensive income is the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. Other comprehensive income consists of net unrealized gains on investment securities available for sale. Subsequent to the adoption date, all prior period amounts are required to be restated to conform to the provisions of SFAS No. 130. Total comprehensive income for the first six month period ended June 30, 1998 was $1,787,000, compared to $2,305,000 for the six month period ended June 30, 1997. Total comprehensive income for the three month period ended June 30, 1998 was $767,000, compared to $1,588,000 for the three month period ended June 30, 1997. The adoption of SFAS 130 did not have a material impact on the Corporation's financial position or results of operations. 7 On January 1, 1998, the Corporation adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". SFAS No. 131 requires that public business enterprises report certain information about operating segments in a complete set of financial statements of the enterprise and in condensed financial statements of interim periods issued to shareholders. It also requires the reporting of certain information about their products and services, the geographic area in which they operate, and their major customers. The adoption of SFAS No. 131 did not have an impact on the Corporation's financial position or results of operations. The American Institute of Certified Public Accountants (AICPA) executive committee has issued Statement of Position (SOP) 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. The SOP was issued to provide authoritative guidance on the subject of accounting for the cost associated with the purchase or development of computer software. The statement is effective for fiscal years beginning after December 15, 1998 for costs incurred in those fiscal years for all projects, including projects in progress when the SOP is adopted. The adoption of SOP 98-1 is not expected to have a material impact on the Corporation's financial position or results of operations. In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 113, "Accounting for Derivative Instruments and Hedging Activity" SFAS No. 133 established accounting and reporting standards for derivative instruments, including certain derivative instruments imbedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are not met, a derivative may be specifically designated as a hedge. The accounting for changes in fair value of a derivative (gains or losses) depends on the intended use of the derivative and resulting designation. SAFS No. 113 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Early application is permitted only as of the beginning of any fiscal quarter. He Company is currently reviewing the provisions of SFAF No 133. 8 TF FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- GENERAL TF Financial Corporation (the "Company") may from time to time make written or oral "forward-looking statements", including statements contained in the Company's filings with the Securities and Exchange Commission (including this quarterly report on form 10-Q and the exhibits thereto), in its reports to stockholders and in other communications by the Company, which are made in good faith by the Company pursuant to the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve risks and uncertainties, such as statements of the Company's plans, objectives, expectations, estimates and intentions, that are subject to change based on various important factors (some of which are beyond the Company's control). The following factors, among others, could cause the Company's financial performance to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements: the strength of the United States economy in general and the strength of the local economics in which the Company conducts operations; the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System, inflation, interest rate, market and monetary fluctuations; the timely development of and acceptance of new products and services of the Company and the perceived overall value of these products and services by users, including the features, pricing and quality compared to competitors' products and services; the willingness of users to substitute competitors' products and services for the Company's products and services; the success of the Company in gaining regulatory approval of its products and services, when required; the impact of changes in financial services' laws and regulations (including laws concerning taxes, banking, securities and insurance); technological changes, acquisitions; changes in consumer spending and saving habits; and the success of the Company at managing the risks involved in the foregoing. The Company cautions that the foregoing list of important factors is not exclusive. The Company does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company. The Corporation's total assets at June 30, 1998 and December 31, 1997 totaled $689.3 million and $597.0 million, respectively, an increase of $92.3 million or 15.5% for the six month period. This increase was primarily a result of the $94.9 million increase in mortgage-backed securities, coupled with the $18.1 million increase in investment securities, partially offset by the $8.2 million decrease in cash and cash equivalents, and the $13.3 million decrease in loans receivable. The increase in total assets was funded by the $90.0 million increase in advances from the Federal Home Loan Bank. Total liabilities increased to $637.6 million at June 30, 1998 from $547.0 at December 31, 1997. This increase was primarily the result of the $90.0 million, or 101.8%, increase in advances from the Federal Home Loan Bank to $178.4 million at June 30, 1998 from $88.4 million at December 31, 1997. Total deposits balances decreased by $1.8 million from $450.0 million at December 31, 1997 to $448.6 million at June 30, 1998. The decrease in loans receivable of $13.3 million or, 5.3%, from $250.7 million at December 31, 1997 to $237.4 million at June 30, 1998 was a result of mortgage loan repayments. Cash and cash equivalent balances decreased by $8.2 million, or 19.7%, from $41.6 million at December 31, 1997 to $33.4 million at June 30, 1998 primarily as a result of its reinvestment into mortgage-backed and investment securities. Investment securities at June 30, 1998 totaled $107.8 million, which represents an increase of $18.1 million or 20.2% as compared to $89.7 million at December 31, 1997. This increase is primarily due to the reinvestment of 9 cash and cash flow caused by repayments of mortgage loans. Mortgage-backed securities totaled $275.8 million at June 30, 1998 as compared to $180.9 million at December 31, 1997. This increase of $94.9 million or, 52.5%, is a result the investment of the proceeds of the $90.0 million of Federal Home Loan advances, coupled with the decrease in cash and cash equivalents. Total consolidated stockholders' equity of the Corporation increased $1.5 million or 3.0%, to $51.6 million, or 7.49% of total assets, at June 30, 1998, from $50.1 million or 8.39 % of total assets at December 31, 1997, primarily due to the $1.2 million increase to retained earnings for the six month period. The amortization of stock incentive plans of $300,000 also contributed to this increase in stockholders' equity. 10 Average Balance Sheet The following table sets 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. Three Months Ended June 30, Three Months Ended June 30, ------------------------------- ----------------------------- 1998(5) 1997(5) ------------------------------- ----------------------------- Average Average Average Yield/ Average Yield/ Balance Interest Cost Balance Interest Cost ------- -------- ---- ------- -------- ---- (Dollars in Thousands) Assets: Interest-earning assets: Loans receivabe(4)......................... $232,336 $ 4,605 7.93% $316,050 $ 6,221 7.87% Mortgage-backed securities................. 269,285 4,335 6.44% 196,144 3,271 6.67% Investment securities...................... 116,558 1,750 6.01% 81,281 1,388 6.83% Other interest-earning assets(1)........... 29,984 308 4.11% 22,563 226 4.01% ------- ------ ------ ------ Total interest-earning assets........ $648,163 $10,998 6.79% $616,038 $11,106 7.21% -------- ------- -------- ------- Non interest-earning assets................ 23,002 23,029 ------- ------- Total assets......................... $671,165 $639,067 ======== ======== Liabilities and Stockholders' Equity: Interest-bearing liabilities: Savings deposits......................... 447,435 $ 4,364 3.90% $459,122 $ 4,663 4.06% Borrowings............................... 161,691 2,226 5.51% 98,359 1,473 5.99% ------- ----- ------- ----- Total interest-bearing liabilities... $609,126 $ 6,590 4.33% $557,481 $ 6,136 4.40% ======== ======= ==== ======== ======= ==== Non interest-bearing liabilities............. 10,615 11,025 Total liabilities.................... 619,741 568,506 Stockholders' equity......................... 51,424 70,561 ------- ------ Total liabilities and stockholders' equity............................. $671,165 $639,067 ======== ======== Net interest income.......................... $ 4,408 $ 4,970 ======= ======= Interest rate spread(2)...................... 2.46% 2.81% Net yield on interest-earning assets(3)...... 2.72% 3.23% Ratio of average interest-earning assets to average interest bearing liabilities....... 106% 111% (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) Nonaccrual loans have been included in the appropriate average loan balance category, but interest on nonaccrual loans has not been included for purposes of determining interest income. (5) Ratios have been annualized where applicable. 11 Average Balance Sheet (continued) Six Months Ended June 30, Six Months Ended June 30, ------------------------------- ----------------------------- 1998(5) 1997(5) ------------------------------- ----------------------------- Average Average Average Yield/ Average Yield/ Balance Interest Cost Balance Interest Cost ------- -------- ---- ------- -------- ---- Assets: Interest-earning assets: Loans receivabe(4)......................... $238,592 $ 9,509 7.97% $313,320 $12,413 7.93% Mortgage-backed securities................. 236,119 7,573 6.41% 190,656 6,379 6.69% Investment securities...................... 110,302 3,327 6.03% 91,152 2,955 6.48% Other interest-earning assets(1)........... 33,014 730 4.42% 23,347 534 4.57% ------- ------ ------ ------ Total interest-earning assets........ $618,027 $21,139 6.84% $618,375 $22,281 7.21% -------- ------- -------- ------- Non interest-earning assets................ 22,266 22,783 ------- ------- Total assets......................... $640,293 $641,158 ======== ======== Liabilities and Stockholders' Equity: Interest-bearing liabilities: Savings deposits......................... 449,193 $ 8,678 3.86% $460,847 $ 9,320 4.04% Borrowings............................... 130,025 3,574 5.50% 99,192 2,930 5.91% ------- ----- ------- ----- Total interest-bearing liabilities... $579,218 $12,252 4.23% $560,039 $12,250 4.37% ======== ======= ==== ======== ======= ==== Non interest-bearing liabilities............. 10,034 10,176 Total liabilities.................... 589,252 570,215 Stockholders' equity......................... 51,041 70,943 ------- ------ Total liabilities and stockholders' equity............................. $640,293 $641,158 ======== ======== Net interest income.......................... $ 8,887 $10,031 ======= ======= Interest rate spread(2)...................... 2.61% 2.84% Net yield on interest-earning assets(3)...... 2.87% 3.24% Ratio of average interest-earning assets to average interest bearing liabilities....... 107% 110% (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) Nonaccrual loans have been included in the appropriate average loan balance category, but interest on nonaccrual loans has not been included for purposes of determining interest income. (5) Ratios have been annualized where applicable. 12 RESULTS OF OPERATIONS Net Income. The Corporation recorded net income of $1.0 million for the three months ended June 30, 1998 as compared to $1.3 million for the three months ended June 30, 1997. This decrease of $300,000, or 23.1%, was primarily the result of the decrease in total interest income from $11.1 million at June 30, 1997 to $11.0 million at June 30, 1998, in conjunction with the increase in total interest expense from $6.1 million at June 30, 1997 to $6.6 million at June 30, 1998. Net interest income before provisions for loan losses was $4.4 million for the three month period ended June 30, 1998 as compared to $5.0 million for the same period in 1997. Non-interest income was $700,000 and $500,000, respectively, for these same periods. Operating expenses (non-interest expense) were $3.5 million for the three month period ended June 30, 1998 and $3.3 million for the three month period ended June 30, 1997. The Corporation recorded net income of $2.0 million for the six months ended June 30, 1998 as compared to $2.4 million for the six months ended June 30, 1997. This decrease of $400,000, or 16.7%, was primarily the result of the decrease in total interest income from $22.3 million at June 30, 1997 to $21.1 million at June 30, 1998. Net interest income before provision for loan losses was $8.9 million for the six month period ended June 30, 1998 as compared to $10.0 million for the same period in 1997. For these same periods, total interest expense remained level at $12.3 million. Non-interest income was $1.1 million and $900,000, respectively, for these same periods. Operating expenses (non-interest expense) remained level at $6.8 million and $6.7 million for the six month periods ended June 30, 1998 and June 30, 1997, respectively. Total Interest Income. Total interest income decreased by $100,000 or 0.9% to $11.0 million for the three months ended June 30, 1998, from $11.1 million for the three months ended June 30, 1997 due primarily to decreases in the average balance of loans receivable somewhat offset by increases in the average balance of mortgage-backed securities, investment securities and other interest earning assets. The average balance of loans receivable decreased $83.8 million, or 26.5%, to $232.3 million from $316.1 million for the three months ended June 30, 1998 and 1997, respectively. The decrease in the average balance of loans receivable is primarily attributable to the sale of $43.6 million of mortgage loans in the third quarter of 1997, coupled with mortgage loan repayments. Interest attributable to loans receivable decreased $1.6 million or 25.8% to $4.6 million from $6.2 million for these same periods. This decrease is primarily attributable to the decrease in the average balance of loans receivable partially offset by an increase in the average yield on loans receivable from 7.87% for the three month period end June 30, 1997, to 7.93% for the three month period ended June 30, 1998. Interest on mortgage-backed securities increased $1,000,000, or 30.3%, for the three month period ended June 30, 1998, from $3.3 million at June 30, 1997 primarily as a result of increases in the average balances of mortgage-backed securities to $269.3 million at June 30, 1998 from $196.1 million at June 30, 1997. The increase in income attributable to the increase in the average balance of mortgage-backed securities was partially offset by a decrease in the average yield of the securities to 6.44% at June 30, 1998 from 6.67% at June 30 1997. Interest on investment securities increased to $1.8 from $1.4 million for the three month periods ended June 30, 1998 and 1997 respectively, primarily as a result of the increase in the average balance of investment securities to $116.6 million at June 30, 1998 from $81.3 million at June 30, 1997. Interest on other interest-earning assets increased by $100,000 for the three month period ended June 30, 1998 compared to the similar period ended June 30, 1997 primarily as a result of the average balance increasing by $7.4 million to $30.0 million, coupled with the increase in the average yield to 4.11% at June 30, 1998 from 4.01% at June 30, 1997. The increases in the average balances of investment securities and other interest-earning assets are primarily the result of the reinvestment of $43.6 million in proceeds from the sale of mortgage loans. The increase in the average balance of mortgage-backed securities is primarily the result of the reinvestment of borrowed funds coupled with the reinvestment of mortgage loan repayments. The average balance of total interest earning assets increased $32.2 million, or 5.2%, to $648.2 million at June 30, 1998 from $616.0 million at June 30, 1997. Total interest income decreased by $1.2 million or 5.4% to $21.1 million for the six months ended June 30, 1998, from $22.3 million for the six months ended June 30, 1997 due primarily to decreases in the average balance of loans receivable somewhat offset by increases in the average balance of mortgage-backed securities, investment securities and other interest earning assets. The average balance of loans receivable decreased $74.6 million, or 23.8%, to $238.6 million from $313.2 million for the six months ended June 30, 1998 and 1997, respectively. The decrease in the average balance of loans receivable is primarily attributable to the sale of $43.6 million of mortgage loans coupled with mortgage loan amortization. Interest attributable to loans receivable decreased $2.9 million or 23.4% to $9.5 million from $12.4 million for these same periods. 13 This decrease is primarily attributable to the decrease in the average balance of loans receivable partially offset by an increase in the average yield on loans receivable from 7.93% for the period end June 30, 1997, to 7.97% for the period ended June 30, 1998. Interest on mortgage-backed securities increased $1.2 million, or 18.8%, for the six month period ended June 30, 1998, from $6.4 million at June 30, 1997 primarily as a result of increases in the average balances of mortgage-backed securities to $236.1 million at June 30, 1998 from $190.7 million at June 30, 1997. The increase in income attributable to the increase in the average balance of mortgage-backed securities was partially offset by a decrease in the average yield of the securities to 6.41% at June 30, 1998 from 6.69% at June 30 1997. Interest on investment securities increased to $3.3 from $3.0 million for the six month periods ended June 30, 1998 and 1997 respectively, primarily as a result of the increase in the average balance of investment securities to $110.3 million at June 30, 1998 from $91.2 million at June 30, 1997. Interest on other interest-earning assets increased by $200,000 for the six month period ended June 30, 1998 compared to the similar period ended June 30, 1997 primarily as a result of the average balance increasing by $9.7 million to $33.0 million. The increases in the average balances of investment securities and other interest-earning assets are primarily the result of the reinvestment of $43.6 million in proceeds from the sale of mortgage loans. The increase in the average balance of mortgage-backed securities is primarily the result of the reinvestment of borrowed funds coupled with the reinvestment of mortgage loan amortization. The average balance of total interest earning assets decreased $400,000, or .1%, to $618.0 million at June 30, 1998 from $618.4 million at June 30, 1997. Total Interest Expense. Total interest expense increased to $6.6 million for the three month period ended June 30, 1998 from $6.1 million at June 30, 1997. This increase in total interest expense is a result of the increase in the average balance of borrowed money partially offset by the decrease in the average balance of savings deposits. The average balance of borrowed money increased from $98.4 million at June 30, 1997 to $161.7 million at June 30, 1998. The average balance of savings deposits decreased from $459.1 million at June 30, 1997 to $447.4 million at June 30, 1998. The average rate paid on borrowed money decreased from 5.99% at June 30, 1997 to 5.51% at June 30, 1998. The average rate paid on savings deposits decreased from 4.06% in the June 30, 1997 period to 3.90% in the June 30, 1998 period. As a result of the decrease in the average balance and average rate paid on savings deposits, coupled with the increase in the average balance of borrowed money, the portion of total interest expense attributable to savings deposits decreased to $4.4 million from $4.7 million at June 30, 1998 and 1997 respectively. The average balance of total interest-bearing liabilities increased to $609.1 million at June 30, 1998 from $557.5 million at June 30, 1997 primarily as a result of increase in Federal Home Loan Bank advances which were used to fund asset growth. Total interest expense remained level at $12.3 million six month periods ended June 30, 1998 and June 30, 1997 respectively. The average balance of borrowed money increased from $99.2 million at June 30, 1997 to $130.0 million at June 30, 1998. The average balance of savings deposits decreased from $460.8 million at June 30, 1997 to $449.2 million at June 30, 1998. The average rate paid on borrowed money decreased from 5.91% at June 30, 1997 to 5.50 at June 30, 1998. The average rate paid on savings deposits decreased from 4.04% in the June 30, 1997 period to 3.86% in the June 30, 1998 period. As a result of the decrease in the average balance and average rate paid on savings deposits, coupled with the increase in the average balance of borrowed money, the portion of total interest expense attributable to savings deposits decreased to $8.7 million from $9.3 million at June 30, 1998 and 1997 respectively. The average balance of total interest-bearing liabilities increased to $579.2 million at June 30, 1998 from $560.0 million at June 30, 1997 primarily as a result of increase in Federal Home Loan Bank advances which were used to fund asset growth. Net Interest Income. Net interest income for the three month period ended June 30, 1998 decreased by $600,000, or 12.0%, to $4.4 million from $5.0 million for the same period in 1997. The decrease was primarily the result of the decrease in total interest income in conjunction with the increase in total interest expense. The average balance of total interest-earning assets increased $32.2 million, or 5.2%, to $648.2 million at June 30, 1998 from $616.0 million at June 30, 1997. During these same periods, the average balances on interest-bearing liabilities increased to $609.1 million from $557.5 million. The cost of interest-bearing liabilities decreased from 4.40% to 4.33% while the yield on interest-earning assets decreased from 7.21% to 6.79% for the three month periods ended June 30, 1997 and 1998 respectively. The increase in the average balance of interest earning assets and interest earning liabilities was primarily the result of the increase in Federal Home Loan Borrowings and the subsequent reinvestment of the cash proceeds into Mortgage-backed securities. Net interest income for the six month period ended June 30, 1998 decreased by $1.1 million, or 11.0%, to $8.9 million from 14 $10.0 million for the same period in 1997. The decrease was primarily the result of the decrease in total interest income in conjunction with the increase in total interest expense. The average balance of total interest-earning assets remained flat at $618.0 million and $618.4 million at June 30, 1998 and June 30, 1997 respectively. During these same periods, the average balances on interest-bearing liabilities increased to $579.2 million from $560.0 million. The cost of interest-bearing liabilities decreased from 4.37% to 4.23% while the yield on interest-earning assets decreased from 7.21% to 6.84% for the six month periods ended June 30, 1997 and 1998 respectively. Allowance for Loan Losses. The allowance for loan losses increased at June 30, 1998 to $2.1 million from $2.0 million at June 30, 1997. Such totals correlate to non-performing loans of $1.7 million at June 30, 1998 and $2.0 million at June 30, 1997. The increase in the allowance for loan losses of $80,000 resulted from the addition of $247,000 to the provision for loan losses and the deduction of $167,000 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 $15,000 for the three months ended June 30, 1998. At June 30, 1998, the allowance for loan losses was 118.1% of non-performing loans as compared to 102.6% of non-performing loans at June 30, 1997. 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 $686,000 for the three months ended June 30, 1998 from $488,000 for the same period in 1997. This increase of $198,000 can be primarily attributable to the increase in the gain on sale of investment securities of $230,000 and the increase of $25,000 to the gain on sale of real estate acquired through foreclosure, partially offset by the decrease of $34,000 to service fees, charges and other operating income, and the decrease of $23,000 to the gain on sale of loans. Total non-interest income increased to $1.1 million for the six months ended June 30, 1998 from $878,000 for the same period in 1997. This increase of $228,000 can be primarily attributable to the increase in the gain on sale of investment securities of $157,000, the increase of $52,000 to the gain on sale of loans, and the increase of $24,000 to the gain on sale of real estate acquired through foreclosure, partially offset by the decrease of $5,000 to service fees, charges and other operating. Non-interest Expense. Total non-interest expense increased $200,000 to $3.5 million for the three months ended June 30, 1998 as compared with $3.3 million for the similar period in 1997. Employee compensation and benefits remained level at $1.6 million for the compared periods, while occupancy and equipment increased by $25,000, data processing increased by $108,000, other operating costs increased by $27,000, and other intangibles decreased by $19,000. Advertising, professional fees and federal deposit insurance expense all remained relatively level for the period. The increases to occupancy and equipment and data processing expenses were a result of Technology investments related to a data processing system conversion. Total non-interest expense increased $100,000 to $6.8 million for the six months ended June 30, 1998 as compared with $6.7 million for the similar period in 1997. Employee compensation and benefits remained level at $3.3 million for the compared periods, while occupancy and equipment increased by $19,000, data processing increased by $103,000, other operating costs increased by $45,000, and other intangibles decreased by $38,000. Advertising, professional fees and federal deposit insurance expense all remained relatively level for the period. The increases to occupancy and equipment and data processing expenses were a result of Technology investments related to a data processing system conversion. Income Tax Expense. Income taxes decreased by $163,000 to $637,000 for the three month period ended June 30, 1998, from $800,000 for the three months ended June 30, 1997. The primary reason for this decrease was the decrease in net income before taxes to $1.6 million at June 30, 1998, from $2.1 million at June 30, 1997. Income Tax Expense. Income taxes decreased by $421,000 to $1.2 million for the six month period ended June 30, 1998, from $1.6 million for the six months ended June 30, 1997. The primary reason for this decrease was the decrease in net income before taxes to $3.1 million at June 30, 1998, from $4.0 million at June 30, 1997. 15 Liquidity and Capital Resources Under current Office of Thrift Supervision (OTS) regulations, the Savings Bank must have core capital equal to 4% 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. On June 30, 1998, the Savings Bank was in compliance with its three regulatory capital requirements as follows: Amount Percent ------ ------- (dollars in thousands) Tangible capital $43,335 6.3% Tangible capital requirement 10,289 1.5 ------ --- Excess over requirement $33,046 4.8% ======= === Core capital $43,335 6.3% Core capital requirement 27,438 4.0 ------ --- Excess over requirement $15,897 2.3% ======= === Risk based capital $45,398 17.0% Risk based capital requirement 21,362 8.0 ------ --- Excess over requirement $24,036 9.0% ======= === Management believes that under current regulations, the Savings Bank will continue to meet its minimum capital requirements in the foreseeable future. Events beyond the control of the Savings Bank, such as increased interest rates or a downturn in the economy in areas in which the Savings Bank operates, could adversely affect future earnings and as a result, the ability of the Savings Bank to meet its future minimum capital requirements. The Savings Bank's liquidity is a measure of its ability to fund loans, pay withdrawals of deposits, and other cash outflows in an efficient, cost-effective manner. The Savings Bank's primary source of funds are deposits and scheduled amortization and prepayment of loan and mortgage-backed securities principal. During the past several years, the Savings Bank has used such funds primarily to fund maturing time deposits, pay savings withdrawals, fund lending commitments, purchase new investments, and increase liquidity. The Savings Bank is currently able to fund its operations internally but has, when deemed prudent, borrowed funds from the Federal Home Loan Bank of Pittsburgh. As of June 30, 1998, such borrowed funds total $178.4 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 17.6% and 14.5% at June 30, 1998 and 1997, respectively, and its short-term liquidity was 7.9% and 6.5%, at such dates, respectively. The amount of certificate accounts, which are scheduled to mature during the twelve months ending June 30, 1999, is approximately $158.4 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. 16 At June 30, 1998, the Savings Bank had outstanding commitments to originate loans of $ 3.7 million, to purchase mortgage-backed securities of $3.9 million, and to purchase investment securities of $260,000. Funds required to fill these commitments are derived primarily from current excess liquidity or loan and security repayments. At June 30, 1998, the Savings Bank had outstanding commitments to sell loans of $101,000. Year 2000 Issue The Corporation is utilizing both internal and external resources to identify, correct or reprogram, and test its computer systems for the year 2000 compliance. The Year 2000 problem is the result of computer programs being written using two digits rather than four to define the applicable year. The Corporation presently believes that the Year 2000 problem will not pose significant operational problems for the Corporation's computer systems as so modified and reprogrammed. It is anticipated that all reprogramming efforts will be completed by December 31, 1998, allowing adequate time for testing. To date, confirmations have been received from the Corporation's primary processing vendors that plans are being developed to address processing of transactions in the Year 2000. Management believes the year 2000 compliance expense will not have a material adverse effect on the Corporation. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There were no material changes to the information provided for the period ended December 31, 1997. 17 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 August 14, 1998. 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 AND USE OF PROCEEDS Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. ITEM 5. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits None (b) Reports on Form 8-K None 18 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 /s/John R. Stranford ---------------------------------- Date: August 14, 1998 John R. Stranford President and CEO (Principal Executive Officer) /s/William C. Niemczura --------------------------------- Date: August 14, 1998 Senior Vice President and Chief Financial Officer Principal Financial & Accounting Officer) 19