TF FINANCIAL CORPORATION
To Our Shareholders:
In 1998, your company completed the restructuring of its team and
systems necessary to take us into the next century as a full service community
bank.
We are very pleased to announce that Floyd Haggar joined our team as
Senior Vice President and Chief Lending Officer. Floyd brings experience in
commercial lending for over 20 years in our local marketplace. With his staff
now in place, we are seeing a substantial increase in our earning assets. Our
commercial loan portfolio grew by 87% for the year as a result of these efforts.
Total assets have increased 11.5% from $597.0 million at December 31,
1997 to $665.6 million at the end of 1998. During the same period, our book
value per share increased 6.2% from $17.36 at December 31, 1997 to $18.43 at
December 31, 1998. Earnings per share rose 4.5% from $1.33 for 1997 to $1.39 for
1998. Our increased earnings have contributed to our steady improvement to
Return on Equity. Return on Equity increased 5.4% from 7.39% in 1997 to 7.79% in
1998.
During this past year, we installed our new client-server computer
system. This new system, which has been tested extensively for Year 2000
compliance, has enabled us to better serve both our consumer and commercial
clientele. In addition, a Year 2000 Steering Committee was established to deal
with the challenges of the millennium change to both our in-house systems as
well as the systems of our vendors and customers.
In October 1998, the Board approved the repurchase of 5% of the
Company's outstanding stock. With the depressed trading value of recent months,
this should have the effect of enhancing stockholder value. Management and the
Board of Directors believe that together with our employees, we have the ability
to face the challenges of increased competition. We are committed to further
increasing earnings growth and maximizing shareholder value while maintaining
our traditions of community banking.
We appreciate the opportunity to continue to serve you.
Sincerely,
/s/John R. Stranford
- --------------------------
John R. Stranford
President and Chief
Executive Officer
TF FINANCIAL CORPORATION
ANNUAL REPORT
DECEMBER 31, 1998
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TABLE OF CONTENTS
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Letter to Stockholders...................................... Front Cover
Corporate Profile and Stock Market Information........................ 2
Selected Financial Information and Other Data......................... 4
Management's Discussion and Analysis of
Financial Condition and Results of Operations....................... 6
Report of Independent Certified Public
Accountants ....................................................... 19
Consolidated Statements of Financial Position........................ 20
Consolidated Statements of Earnings.................................... 21
Consolidated Statement of Changes in Stockholders'
Equity and Comprehensive Income.......................................22
Consolidated Statements of Cash Flows...................................24
Notes to Consolidated Financial Statements........................... 26
Office Locations..................................................... 64
Corporate Information......................................... Back Cover
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, Teragon Financial Corporation and Penns Trail
Development Corporation. At December 31, 1998, total assets were approximately
$665.6 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, 1998, total stockholders'
equity was approximately $52.7 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 Corporation, 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 of Third Federal
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 $438.9 million at
December 31, 1998) from the general public and uses such deposits, together with
borrowings (approximately $163.4 million at December 31, 1998) 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. To a lesser extent, the Savings Bank also
originates and purchases 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 for the past two
fiscal years.
Fiscal 1998 HIGH LOW
----------- ---- ---
First Quarter $29.50 $24.75
Second Quarter $30.00 $24.25
Third Quarter $26.50 $17.38
Fourth Quarter $20.38 $16.13
2
Fiscal 1997 HIGH LOW
----------- ---- ---
First Quarter $19.25 $16.50
Second Quarter $19.63 $13.63
Third Quarter $25.69 $19.13
Fourth Quarter $30.00 $23.25
The number of shareholders of record of common stock as of March 22, 1999, was
approximately 673. This does not reflect the number of persons or entities who
held stock in nominee or "street" name through various brokerage firms. At March
22, 1999, there were 3,041,010 shares of the common stock of the Corporation
outstanding.
Dividend Policy
The Corporation's ability to pay dividends to stockholders is dependent
in part upon the dividends it receives from Third Federal. Among other
limitations, 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
HISTORY
-----------------------------------------------------------------
Financial Declaration Dividend Amount
Period Ended Date (per share)
------------ ----------- ---------------
June 30, 1994 None $0.00
December 31, 1994 January 25, 1995 $0.05
June 30, 1995 July 26, 1995 $0.07
March 31, 1996 April 24, 1996 $0.08
December 31, 1996 January 22, 1997 $0.10
December 31, 1997 January 22, 1998 $0.12
December 31, 1998 January 22, 1999 $0.12
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.
3
SELECTED FINANCIAL INFORMATION AND OTHER DATA
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At December 31,
Financial Condition ---------------
(Dollars in Thousands, except per share data) 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------
Total Assets .................................. $665,609 $597,047 $647,853 $490,358 $431,828
Loans Receivable, Net ......................... 240,841 250,711 309,570 238,275 113,893
Mortgage-backed Securities available
for sale, at fair value ..................... 75,285 36,847 22,027 29,640 --
Mortgage-backed securities held to maturity
at cost ..................................... 180,964 144,074 153,758 137,841 181,411
Securities purchased under agreements to resell -- 10,000 25,129 -- --
Investment securities available
for sale, at fair value ..................... 9,042 32,037 12,652 15,044 41,002
Investment securities held to maturity, at
cost......................................... 80,895 52,822 38,544 23,640 36,531
Cash and cash equivalents(1) .................. 42,703 41,625 54,132 27,032 42,376
Savings deposits .............................. 438,913 450,429 469,088 337,069 347,631
Other borrowings .............................. 163,359 88,359 98,359 73,359 --
Retained earnings ............................. 45,762 43,176 39,750 37,529 34,746
Total stockholders' equity .................... 52,660 50,095 72,575 73,332 79,972
Book value per common share ................... $ 18.43 $ 17.36 $ 18.31 $ 17.08 $ 16.38
Tangible book value per common share .......... $ 15.84 $ 14.49 $ 15.99 $ 17.08 $ 16.38
- ----------------------------------------------------------------------------------------------------------------------
Year ended Six months ended Year ended
------------ ---------------- ----------
Summary of Operations December 31, December 31, June 30,
(Dollars in Thousands, except per ------------ ------------ ----------
Share data) 1998 (3) 1997 1996 (2) 1995 1994 (4) 1994
- ----------------------------------------------------------------------------------------------------------------------
Interest income ................................ $43,579 $43,189 $38,989 $29,630 $13,901 $24,516
Interest expense ............................... 26,195 24,080 20,797 14,403 6,271 12,789
Net interest income ............................ 17,384 19,109 18,192 15,227 7,630 11,727
Provision for loan losses ...................... 60 397 330 72 30 (144)
Non-interest income ............................ 1,579 2,327 1,794 1,161 617 1,903
Non-interest expense ........................... 12,766 13,583 13,745 9,975 4,601 9,452
Net income before cumulative effect
of change in accounting method ............... 3,830 4,874 3,479 3,871 2,180 2,666
Net income ..................................... 4,038 4,874 3,479 3,871 2,607 4,466
Earnings per common share - basic
Continuing operations ....................... $ 1.32 $ 1.33 $ 0.86 $ 0.84 $ 0.45 N/A
Cumulative effect of accounting changes ..... $ 0.07 -- -- -- $ 0.08 N/A
Earnings per common share - basic ........... $ 1.39 $ 1.33 $ 0.86 $ 0.84 $ 0.53 N/A
Earnings per common share - assuming dilution
Continuing operations ....................... $ 1.20 $ 1.25 $ 0.83 -- $ 0.45 N/A
Cumulative effect of accounting changes ..... $ 0.06 -- -- -- $ 0.08 N/A
Earnings per common share - assuming dilution $ 1.26 $ 1.25 $ 0.83 $ 0.83 $ 0.53 N/A
4
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Performance Ratios and Other Year ended Six months ended Year ended
Selected data December, 31 December, 31 June, 30
------------ ------------ ----------
1998(3) 1997 1996(2) 1995 1994(4)(5) 1994
- ----------------------------------------------------------------------------------------------------------------------
Return on average assets .................. 0.61% 0.77% 0.62% 0.88% 1.00% 0.67%
Return on average equity .................. 7.79% 7.39% 4.74% 4.99% 5.40% 8.59%
Average equity to average assets .......... 7.81% 10.46% 12.91% 17.54% 18.48% 7.65%
Average interest rate spread .............. 2.44% 2.72% 2.76% 2.84% 3.15% 2.86%
Non-performing loans to total assets ...... 0.25% 0.23% 0.30% 0.37% 0.42% 0.48%
Non-performing loans to total loans ....... 0.66% 0.55% 0.64% 0.76% 1.48% 1.49%
Allowance for loan losses to non-performing
loans ................................... 119.16% 146.82% 91.60% 82.31% 87.13% 84.71%
Allowance for loan losses to total loans .. 0.79% 0.80% 0.58% 0.62% 1.29% 1.19%
Savings Bank regulatory capital
Core .................................. 6.79% 7.16% 7.77% 12.21% 13.57% 7.37%
Tangible .............................. 6.79% 7.16% 7.77% 12.21% 13.57% 7.37%
Risk based ............................ 17.73% 17.41% 17.68% 27.07% 39.46% 21.27%
Dividend payout ratio (6) 38.10% 32.00% 37.35% 28.92% N/A N/A
1. Consists of cash, cash due from banks, interest-bearing deposits, and
federal funds sold with maturities of less than three months.
2. Includes a $1.4 million after tax one-time special assessment to
recapitalize the Savings Association Insurance Fund ("SAIF").
3. Income and income related ratios for the year ended 12/31/1998 include the
cumulative effect of a change in accounting for certain investments of
$208,000 (SFAS #133).
4. Income related ratios exclude the one-time 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 fiscal year end 6/30/94 (SFAS #109).
5. 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. Payout ratio is dividends paid for the period divided by earnings per
common share assuming dilution after cumulative effect of accounting
changes.
5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
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.
Certain forward-looking statements contained herein are subject to
risks and uncertainties. The Corporation's actual results may differ materially
from those set forth in such forward-looking statements. Reference is made to
the Corporation's reports filed with the Securities and Exchange Commission for
a discussion of factors that may cause such differences to occur.
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 rate of interest earned on interest earning assets and the average rate
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, 1998, December 31, 1997, and December 31, 1996, the average
net interest rate spread was 2.44%, 2.72% and 2.76% respectively.
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 1999 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 five 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.
6
Gap Table -- As of December 31, 1998
3 Months 3 Months 1 to 3 3 to 5 5 to 10 10 to 20 Over 20
or Less to 1 Year Years Years Years Years Years Total
------- --------- ----- ----- ----- ----- ----- -----
Interest-earning assets:
Loans receivable - net (1)....... $51,655 $69,215 $57,838 $28,769 $30,753 $2,489 $122 $240,841
Mortgage-backed securities
available for sale (2) ............ 5,426 12,311 21,619 13,087 15,792 7,050 0 75,285
Mortgage-backed securities held
to maturity (2).................... 13,042 29,595 51,969 31,461 35,972 16,947 1,978 180,964
Investment securities available
for sale........................... 5,007 4,035 0 0 0 0 0 9,042
Investment securities held
to maturity........................ 50,170 9,223 8,142 10,645 2,715 0 0 80,895
Certificates of deposit-other
Bank........................... 972 1,208 58 0 0 0 0 2,238
Other earning assets............. 43,466 2,293 6,112 0 0 0 0 51,871
------- ------- ------- ------ ------ ------ ----- -------
Total interest-earning assets...... $169,738 $127,880 $145,738 $83,962 $85,232 $26,486 $2,100 $641,136
======= ======= ======= ====== ====== ====== ===== =======
Interest-bearing liabilities: (3)
Non-interest bearing deposits.... $ 795 $ 1,985 $ 1,934 $ 925 $ 535 $ 56 $ 1 $ 6,231
NOW and Super NOW accounts....... 3,378 10,132 10,637 7,067 8,877 4,266 614 44,971
Savings accounts................. 4,971 14,913 27,879 30,753 41,252 33,258 12,838 165,864
Money market deposit accounts.... 3,015 9,045 10,856 4,763 3,733 1,017 127 32,556
Certificates of deposit 90,910 42,822 47,832 5,282 2,128 317 0 189,291
Borrowings ...................... 10,000 15,000 30,000 20,000 85,000 3,359 0 163,359
------ ------ ------ ------ ------ ------ ------ -------
Total interest-bearing
Liabilities ................ $113,069 $93,897 $129,138 $ 68,790 $141,525 $ 42,273 $ 13,580 $602,272
======= ====== ======= ======= ======= ====== ======= =======
Interest sensitivity gap........... $ 56,669 $33,983 $16,600 $15,172 $(56,293) $(15,787) $(11,480) $ 38,864
------- ------ ------ ------ ------- ------- ------- -------
Cumulative interest sensitivity
Gap.............................. $ 56,669 $90,652 $107,252 $122,424 $ 66,131 $ 50,344 $ 38,864 $ 38,864
======= ====== ======= ======= ======= ======= ======= =======
Ratio of interest-earning assets
To interest-bearing liabilities... 150.12% 136.19% 112.85% 122.06% 60.22% 62.65% 15.46% 106.45%
======= ====== ======= ======= ======= ======= ======= =======
Ratio of cumulative gap to
Total assets...................... 8.51% 13.62% 16.11% 18.39% 9.94% 7.56% 5.84% 5.84%
======= ====== ======= ======= ======= ======= ======= =======
- ----------------------------------
(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 1998. 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 1998
(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.
7
Average Balance Sheet
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 in the information presented.
Year Ended December 31, Year Ended December 31, Year ended December 31,
1998 1997 1996
----------------------- ----------------------- -----------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
------- -------- ------- ------- -------- ------- ------- -------- -------
Assets:
Interest-earning assets:
Loans receivable (4).................... $232,924 $18,657 8.01% $293,023 $23,050 7.87% $298,800 $23,116 7.74%
Mortgage-backed securities.............. 251,785 16,357 6.50% 185,391 12,514 6.75% 162,973 11,041 6.77%
Investment securities................... 115,801 6,918 5.97% 90,708 5,683 6.27% 48,359 2,888 5.97%
Other interest-earning assets(1)........ 40,413 1,647 4.08% 42,457 1,942 4.57% 43,024 1,944 4.52%
------ ----- ------ ----- - ------ -----
Total interest-earning assets......... $640,923 $43,579 6.80% $611,579 $43,189 7.06% $553,156 $38,989 7.05%
======== ======= ======== ======= ======= ======
Non interest-earning assets............... 22,428 18,987 $ 14,714
------ ------ -------
Total assets.......................... $663,351 $630,566 $567,870
======== ======== =======
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Savings deposits...................... 447,995 $17,397 3.88% 456,345 $18,211 3.99% $382,511 $14,739 3.85%
Borrowings............................ 152,942 8,798 5.75% 97,942 5,869 5.99% 102,526 6,058 5.91%
------- ----- ------ ----- -- ------- -----
Total interest-bearing liabilities.. $600,937 $26,195 4.36% $554,287 $24,080 4.34% $485,037 $20,797 4.29%
======== ======= ======== ======= ======= ======
Non interest-bearing liabilities.......... 10,582 10,293 9,498
Total liabilities................... 611,519 564,580 494,535
Stockholders' equity...................... 51,832 65,986 73,335
------ ------- -------
Total liabilities and Stockholders'
equity............................ $663,351 $630,566 $567,870
======== ======== =======
Net interest income....................... $17,384 $19,109 $18,192
======= ======= ======
Interest rate spread (2).................. 2.44% 2.72% 2.76%
Net yield on interest-earning assets (3).. 2.71% 3.12% 3.29%
Ratio of interest-earning assets to
Average interest bearing liabilities.... 107% 110% 114%
(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.
8
Changes to Financial Condition
The Corporation's total assets at December 31, 1998 and December 31,
1997 totaled $665.6 million and $597.0 million, respectively, an increase of
$68.6 million or 11.5%. This increase was primarily as a result of the $75.3
million or 41.6% increase in mortgaged-backed securities, the $5.1 million or
6.0% increase in investment securities, the $4.3 million or 86.4% increase in
Federal Home Loan Bank stock, partially offset by the $10.0 million or 100%
decrease in securities purchased under agreements to resell and the $9.9 million
or 3.9% decrease in loans receivable, net. This net increase in assets was
funded by the increase in advances from the Federal Home Loan Bank of $75.0
million or 84.9%, the $2.6 million or 6% increase in retained earnings,
partially offset by the $11.5 million or 2.6% decrease in total savings
deposits. The increase in mortgage-backed securities was directly funded by the
increase in advances from the Federal Home Loan Bank. The decrease in savings
deposits was primarily the result of management's decision to price deposits
less aggressively.
Total consolidated stockholders' equity of the Corporation increased
$2.6 million to $52.7 million at December 31, 1998 from $50.1 million at
December 31, 1997. The 5.1% increase is primarily attributed to the addition of
$4.0 million of net income offset by the $1.4 million payment of dividends to
shareholders. The increase in total consolidated stockholders' equity coupled
with the increase of $68.6 million in total assets resulted in a decrease in
consolidated stockholders' equity as a percentage of total assets to 7.9% at
December 31, 1998 from 8.4 % at December 31, 1997.
Comparison of Years Ended December 31, 1998 and December 31, 1997
Net Income. Net Income of $4.0 million for the fiscal year ended December 31,
1998 decreased $836,000, or 17.2%, over net income of $4.9 million for the
fiscal year ended December 31, 1997. The decrease in earnings is primarily due
to the $1.7 million, or 9.0%, decrease in net interest income, the $748,000, or
32.1%, decrease in non-interest income, partially offset by the $817,000
decrease in non-interest expense, the $275,000 decrease in income tax expense
and the $208,000 cumulative effect of accounting changes. Net interest income
before provision for loan losses was $17.4 million for the fiscal year ended
December 31, 1998 as compared to $19.1 million for the same period in 1997, a
decrease of $1.7 million, or 9.0%. Total interest income increased $390,000 or
0.9% to $43.6 million at December 31, 1998, from $43.2 million at December 31,
1997. For these same periods, total interest expense was $26.2 million and $24.1
million, respectively, an increase of $2.1 million, or 8.8%. Non-interest income
was $1.6 million and $2.3 million, respectively, for these same periods, a
decrease of $748,000, or 32.1%. The decrease in non-interest income was
primarily attributed to the decrease in gain on sale of servicing rights, the
decrease in the gain on sale of loans, the decrease in the gain on sale of
investment securities, the decrease in service charges and other operating
income partially offset by the increase in gain on sale of real estate acquired
through foreclosure. Operating expense (non-interest expense) was $12.8 million
and $13.6 million for the fiscal years ended December 31, 1998 and December 31,
1997, respectively. The decrease in operating expense was attributable to the
decrease in employee compensation and benefits, the decrease in occupancy and
equipment and data processing expenses.
Total Interest Income. For the fiscal year ended December 31, 1998, total
interest income increased to $43.6 million from $43.2 million compared to the
fiscal year ended December 31, 1997. This increase of $390,000, or 0.9%, is due
primarily to the $3.8 million, or 30.7%, increase in income on mortgage-backed
securities. This increase was also due to the $1.2 million, or 21.7%, increase
in interest income on investment securities offset by the $295,000, or 15.2%
decrease in interest on other interest bearing deposits and the $4.4 million, or
19.1% decrease in interest income on loans. The average balance of
mortgage-backed securities increased $66.4 million to $251.8 million from $185.4
million while the average yield on mortgage-backed securities decreased to 6.50%
from 6.75% when comparing these same periods. The increase in total interest
income attributed to investment and mortgage-backed securities and other
interest earning assets of $4.8 million was offset by the decrease
9
in income on loans.
During the same time periods the average balance of investment securities
increased by $25.1 million to $115.8 million from $90.7 million, with the
average yield decreasing to 5.97% from 6.27%. Interest on loans declined by $4.4
million, or 19.1%, for the fiscal year ended December 31, 1998, as compared to
the similar period in 1997 as a result of the decrease in the average balance to
$232.9 million from $293.0 million. Interest on securities purchased under
agreements to resell decreased to $198,000 for the fiscal year ended December
31, 1998 from $555,000 for the fiscal year ended December 31, 1997, primarily as
the result of the decrease in the average balance to $3.6 million from $9.7
million for the same periods. Interest on other interest earning assets
increased by $295,000 or 15.2%, to $1.6 million from $1.9 million for the fiscal
year ended December 31, 1998 compared to the similar period ended December 31,
1997. This decrease is the result of the $2.0 million decrease in the average
balance to $40.4 million from $32.7 million coupled with the decrease in the
average yield to 4.08% from 4.57% for those same periods. The increase in the
average balances of mortgage-backed securities were funded primarily with
advances from the Federal Home Loan Bank and cash flow from repayments.
Total interest expense. Total interest expense increased to $26.2 million for
the fiscal year ended December 31, 1998 from $24.1 million for the fiscal year
ended December 31, 1997. This increase of $2.1 million, or 8.8%, in total
interest expense is a result of the increase in the average balance of Federal
Home Loan Bank advances to $152.9 million from $97.9 million for the fiscal
years ended December 31, 1998 and 1997, respectively, which was partially offset
by the decrease in the average rate paid on advances to 5.75% from 5.99% for
those same periods. The increase in total interest expense was also partially
offset by the $814,000 decrease in interest expense on savings deposits for the
fiscal year ended December 31, 1998. The average balance of savings deposits
decreased $8.4 million to $448.0 million for the fiscal year ended December 31,
1998 from $456.3 million for the same period in 1997 while the average rate paid
decreased to 3.88% from 3.99%. The average balance of interest-bearing
liabilities increased to $600.9 million during the fiscal year ended December
31, 1998 from $554.3 million during the fiscal year ended December 31, 1997
primarily as a result of the increase in Federal Home Loan advances. The
increase in Federal Home Loan Bank advances was used primarily to fund the
purchase of mortgage-backed securities.
Net Interest Income. Net interest income for the fiscal year ended December 31,
1998 decreased by $1.7 million, or 9.0%, to $17.4 million from $19.1 million for
the same period in 1997. This decrease is primarily due to the increase in
interest-bearing liabilities partially offset by the increase in
interest-earning assets. The average balances of interest-bearing liabilities
increased $46.7 million or 8.4% to $600.9 million for the fiscal year ended
December 31, 1998 from $554.3 million for the comparable period in 1997. During
these same periods, the average balances on interest-earning assets increased
$29.3 million or 4.8% to $640.9 million from $611.6 million. The average rate
paid on interest-bearing liabilities increased from 4.34% to 4.36% while the
yield on interest-earning assets decreased from 7.06% to 6.80% for the fiscal
year periods ended December 31, 1997 and 1998 respectively.
Allowance for Loan Losses. The allowance for loan losses decreased $120,000, or
5.9% to $1.9 million at December 31, 1998 from $2.0 million at December 31,
1997. Non-performing loans increased to $1.6 million at December 31, 1998 from
$1.4 million at December 31, 1997. The decrease in the allowance for loan losses
resulted from the deduction of $180,000 of net charge-offs for losses partially
offset by the addition of $60,000 to the provision for loan losses. The
provision for losses on loans is the method by which the allowance for losses on
loans is adjusted during the period. At December 31, 1998, the allowance for
loan losses was 119.2% of non-performing loans as compared to 146.8% of
non-performing loans at December 31, 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
10
will not exceed the estimated amounts.
Non-Interest Income. Total non-interest income decreased $748,000, or 32.1%, to
$1.6 million for the fiscal year ended December 31, 1998 from $2.3 million for
the similar period in 1997. This decrease can be attributed to the $330,000
decrease in the gain on the sale of loan servicing rights, the $58,000 decrease
in gain on the sale of investment securities, the $296,000 decrease in gain on
sale of loans and the decrease in other operating income of $108,000, partially
offset by the increase in gain on sale of real estate acquired through
foreclosure of $44,000.
Non-interest Expense. Total non-interest expense decreased to $12.8 million for
the fiscal year ended December 31, 1998 when compared to $13.6 million for the
similar period in 1997. This decrease of $817,000, or 6.0%, is primarily
attributable to the $244,000 decrease in employee compensation and benefits, the
$208,000 decrease in data processing and the $125,000 decrease in other
operating expense. This decrease was also attributed to a lesser extent to the
$98,000 decrease in occupancy and equipment expense and the $72,000 decrease in
amortization of goodwill and other intangible assets. The decrease in
non-interest expense is, in part, the result of management's implementation of
certain cost cutting measures during the fiscal year ended December 31, 1998.
Income Tax Expense. For the fiscal year ended December 31, 1998, income taxes
decreased to $2.3 million from $2.6 million for the same period in 1997. This
decrease of $275,000 is primarily attributed to the decrease in income before
taxes to $6.1 million from $7.5 million for the fiscal year periods ended
December 31, 1998 and 1997, respectively.
Comparison of Years Ended December 31, 1997 and December 31, 1996
Net Income. Net Income of $4.9 million for the fiscal year ended December 31,
1997 increased $1.4 million, or 40.1%, over net income of $3.5 million for the
fiscal year ended December 31, 1996. The increase in earnings is primarily due
to the $917,000, or 5.0%, increase in net interest income, the $533,000, or
29.7%, increase in non-interest income and the $162,000 decrease in non-interest
expense, partially offset by the $150,000 increase in income tax expense. Net
interest income before provision for loan losses was $19.1 million for the
fiscal year ended December 31, 1997 as compared to $18.2 million for the same
period in 1996, an increase of $917,000, or 5.0%. Total interest income
increased $4.2 million or 10.8% to $43.2 million from $39.0 million from
December 31, 1996 to December 31, 1997 respectively. For these same periods,
total interest expense was $24.1 million and $20.8 million, respectively, an
increase of $3.3 million, or 15.8%. Non-interest income was $2.3 million and
$1.8 million, respectively for these same periods, an increase of $533,000, or
29.7%. The increase in non-interest income was attributed to the gains on sale
of investment securities, mortgage loans and loan servicing rights. Operating
expense (non-interest expense) was $13.6 million and $13.7 million for the
fiscal years ended December 31, 1997 and December 31, 1996, respectively. The
decrease in operating expense was attributable to the decrease in federal
deposit insurance premiums and the absence of the one-time "SAIF" assessment of
$2.6 million offset by an increase in the costs associated with the operation of
the branch offices acquired from Cenlar Federal Savings Bank.
Total Interest Income. For the fiscal year ended December 31, 1997, total
interest income increased to $43.2 million from $39.0 million for the fiscal
year ended December 31, 1996. This increase of $4.2 million, or 10.8%, is due
primarily to the $3.0 million, or 108.3%, increase in income on investment
securities to $5.7 million for the fiscal year ended December 31, 1997 from $2.7
million for the same period in 1996. This increase was also due to the $1.5
million, or 13.3%, increase in interest income on mortgage-backed securities to
$12.5 million for the fiscal year ended December 31, 1997 from $11.0 million for
the same period in 1996. The average balance of mortgage-backed securities
increased $22.4 million to $185.4 million from $163.0 million while the average
yield on mortgage-backed securities decreased to 6.75% from 6.77% when comparing
these same periods.
11
The increase in total interest income attributed to investment and
mortgage-backed securities, $4.5 million, was partially offset by the decrease
in income on loans and other interest earning assets. During the same time
periods the average balance of investment securities increased by $46.1 million
to $90.7 million from $44.6 million, with the average yield increasing to 6.27%
from 6.12%. Interest on loans declined by $66,000, or .3%, for the fiscal year
ended December 31, 1997 as compared to the similar period in 1996 as a result of
the decrease in the average balance to $293.0 million from $298.8 million.
Interest on securities purchased under agreements to resell increased to
$555,000 for the fiscal year ended December 31, 1997 from $160,000 for the
fiscal year ended December 31, 1996, primarily as the result in the increase in
the average balance to $9.7 million from $3.8 million for the same periods.
Interest on other interest earning assets declined by $557,000 or 28.7%, to $1.4
million from $1.9 million for the fiscal year ended December 31, 1997 compared
to the similar period ended December 31, 1996, primarily as a result of a
decrease in the average yield to 4.24% from 4.52% coupled with the decrease in
the average balance of other interest earning assets to $32.7 million from $43.0
million for those same periods. The increases in the average balances of
mortgage-backed and investment securities are a result of the reinvestment of
the cash proceeds received from the acquisition of the $137.6 million in deposit
balances from Cenlar Savings Bank on September 20, 1996.
Total interest expense. Total interest expense increased to $24.1 million for
the fiscal year ended December 31, 1997 from $20.8 million for the fiscal year
ended December 31, 1996. This increase of $3.3 million, or 15.8%, in total
interest expense is a result of the increase in the average balance of savings
deposits to $456.3 million from $382.5 million for the fiscal years ended
December 31, 1997 and 1996, respectively, together with the increase in the
average rate paid to 3.99% from 3.85% for those same periods. The increase in
average savings deposits was primarily the result of the acquisition of $137.6
million in deposit balances during 1996. The increase in total interest expense
was partially offset by the $189,000 decrease in interest expense on Federal
Home Loan Bank advances for the fiscal year ended December 31, 1997. The average
balance of Federal Home Loan Bank advances decreased $4.6 million to $97.9
million for the fiscal year ended December 31, 1997 from $102.5 million for the
same period in 1996 while the average rate paid increased to 5.99% from 5.91%.
The average balance of total interest-bearing liabilities increased to $554.3
million during the fiscal year ended December 31, 1997 from $485.0 million
during the fiscal year ended December 31, 1996 primarily as a result of the
acquisition of $137.6 million in deposit balances. The increase in average
balances of savings deposits was utilized primarily to fund the purchase of
investment and mortgage-backed securities.
Net Interest Income. Net interest income for the fiscal year ended December 31,
1997 increased by $917,000, or 5%, to $19.1 million from $18.2 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 $58.4
million or 10.6% to $611.6 million for the fiscal year ended December 31, 1997
from $553.2 million for the comparable period in 1996. During these same
periods, the average balances on interest-bearing liabilities increased $69.3
million or 14.3% to $554.3 million from $485.0 million. The average rate paid on
interest-bearing liabilities increased from 4.29% to 4.34% while the yield on
interest-earning assets increased from 7.05% to 7.06% for the fiscal year
periods ended December 31, 1996 and 1997 respectively.
Allowance for Loan Losses. The allowance for loan losses increased $223,000, or
12.3% to $2.0 million at December 31, 1997 from $1.8 million at December 31,
1996. Such totals correlate to non-performing loans of $1.4 million at December
31, 1997 and $2.0 million at December 31, 1996. The increase in the allowance
for loan losses resulted from the addition of $397,000 to the provision for loan
losses and the deduction of $174,000 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, 1997, the allowance for loan losses
was 146.8% of non-performing loans as compared
12
to 91.6% of non-performing loans at December 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 increased $533,000, or 29.7%, to
$2.3 million for the fiscal year ended December 31, 1997 from $1.8 million for
the similar period in 1996. This increase can be attributed to the gain on the
sale of loan servicing rights of $330,000, the increase in the gain on the sale
of investment securities of $77,000, the increase in the gain on the sale of
loans of $308,000, partially offset by the decrease in other operating income of
$67,000 in 1997, and the absence of the gain on the sale real estate acquired
through foreclosure of $115,000 in 1996.
Non-interest Expense. Total non-interest expense decreased to $13.6 million for
the fiscal year ended December 31, 1997 as compared to $13.7 million for the
similar period in 1996. This decrease of $162,000, or 1.2%, is primarily
attributable to the decrease in federal deposit insurance premiums of $2.6
million offset by a $617,000 increase in employee compensation and benefits, the
$520,000 increase in occupancy and equipment, the $713,000 increase in
amortization of intangibles, and the $323,000 increase in other operating
expense. The decrease in federal deposit insurance premiums was primarily due to
the absence of the "SAIF" assessment previously discussed. The increases in
compensation and benefit costs were primarily a result of increased staffing
necessary to support the operation 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. The increase in occupancy
and equipment expenses are due to 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. The increase in other operating expenses are primarily due to
costs associated with the acquisition of the three branch offices purchased from
Cenlar Federal Savings Bank.
Income Tax Expense. For the fiscal year ended December 31, 1997, income taxes
increased to $2.6 million from $2.4 million for the same period in 1996. This
increase of $150,000 is primarily attributed to the increase in net income
before taxes to $7.5 million from $5.9 million for the fiscal year periods ended
December 31, 1997 and 1996, respectively, while partially offset by the reversal
of certain deferred tax liabilities.
Liquidity and Capital Resources
Under current regulations, the Savings Bank must have core capital
equal to 4% of adjusted 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 December 31, 1998, the Savings Bank exceeded its three regulatory
capital requirements as follows:
Amount Percent
------ -------
Tangible capital $45,034 6.79%
Tangible capital requirement 9,943 1.50%
----- -----
Excess over requirement $35,091 5.29%
======= =====
Core capital......................... $45,034 6.79%
Core capital requirement............. 26,515 4.00%
------ -----
Excess over requirement.............. $18,519 2.79%
======= =====
Risk based capital................... $46,943 17.73%
Risk based capital requirement....... 21,178 8.00%
------ ------
Excess over requirement.............. $25,765 9.73%
======= =====
13
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, 1998, such borrowed funds total $163.4 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
4% 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 4% 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 28.69%,
21.01% and 24.16% at December 31, 1998, 1997 and 1996, respectively, and its
short term liquidity was 19.9%, 11.3%, and 19.8%, at such dates, respectively.
The amount of certificate accounts which are scheduled to mature during
the twelve months ending December 31, 1999, is approximately $133.7 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 substantial portions of such maturing deposits remain at the
Savings Bank.
At December 31, 1998, the Savings Bank had outstanding commitments to
originate loans of $12.2 million. Also outstanding at December 31, 1998 were
commitments to fund unused lines of credit and undisbursed balances of
construction loans of $21.7 million. Funds required to fill these commitments
are derived primarily from current excess liquidity, deposit inflows or loan and
security repayments. At December 31, 1998, the Savings Bank had no outstanding
commitments to sell loans.
14
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.
Year 2000 Issue
Readiness Efforts
In 1998, a comprehensive project plan ("Plan") to address the Year 2000
problem and related issues as those relate to the Corporation's operations was
developed, approved by the Board of Directors and implemented. The Corporation's
Year 2000 effort is proceeding in accordance with the written Plan. Progress
reports are provided to the Board at least monthly.
The Year 2000 issue is the result of potential problems with software
and computer systems or any equipment with computer chips that store the year
portion of the date as just two-digits. Systems using this two-digit approach
may not be able to determine whether 00 represents the year 2000 or 1900. The
problem, if not corrected, will make those systems fail altogether or, even
worse, allow them to generate incorrect calculations causing a disruption of
normal computer and related operations.
The Corporation's Plan is divided into four broad areas of concern:
hardware, software, service providers and customers. Year 2000 issues being
addressed in each of these areas include both information related technology and
non-information related technology. A project team that consists of key members
of The Corporation's technology staff, representatives of functional business
units and senior management was developed. From the assessment, The Corporation
identified and prioritized those systems deemed to be mission critical or those
that have a significant impact on normal operations. Formal communications with
those providers of data processing capabilities and other external counter
parties were initiated in 1997 and 1998 to assess the Year 2000 readiness of
their products and services. Thus far, responses indicate that most of the
significant providers are currently following plans developed to address
processing of transactions beginning January 1, 2000.
Costs
The total cost to The Corporation of these Year 2000 compliance
activities has not been and is not anticipated to be material to its financial
position or results of operations in any given year. In total, The Corporation
estimates that its costs, excluding personnel expenses, for Year 2000
remediation and testing of its computer systems amounted to less than $25,000
for the twelve month period ending December 31, 1998. At September 31, 1998,
there are no material, incomplete tasks pursuant to the Corporation's Plan.
15
Risk Assessment
Based upon current information related to the progress of its major
vendors and service providers, management has determined that the Year 2000
issue will not pose significant operational problems for its computer systems.
The determination is based on the ability of those vendors and service providers
to renovate, in a timely manner, the products and services on which The
Corporation's systems rely. However, The Corporation can give no assurances that
the systems of these suppliers will be timely renovated. The Corporation is
exposed to operational disruptions from external entities that have direct or
indirect business relationships with the Corporation, such as telecommunication
service providers, customers, vendors, payment system providers and others.
Despite the best efforts of management to address these issues, the vast number
of external business relationships makes it impossible to assure that a failure
to achieve compliance by one or more of these entities would not have a material
adverse impact on the operations the Corporation.
Contingency Plan
Realizing that some disruption may occur despite its best efforts, The
Corporation is in the process of developing contingency plans for each critical
system in the event that one or more of those systems fail. While this is an
ongoing process, The Corporation expects to have the contingency plan
substantially completed by July 31, 1999.
16
FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
TF FINANCIAL CORPORATION AND SUBSIDIARIES
December 31, 1998 and 1997
CONTENTS
Page
----
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 19
FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION 20
CONSOLIDATED STATEMENTS OF EARNINGS 21
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME 22
CONSOLIDATED STATEMENTS OF CASH FLOWS 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 26
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, 1998
and 1997, and the related consolidated statements of earnings, changes in
stockholders' equity and comprehensive income and cash flows for each of the
three years in the period ended December 31, 1998. 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 that 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, 1998 and 1997, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
/s/Grant Thornton LLP
- ---------------------------
GRANT THORNTON LLP
Philadelphia, Pennsylvania
January 15, 1999
19
TF Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
December 31,
ASSETS 1998 1997
--------- ---------
(in thousands)
Cash and cash equivalents $ 42,703 $ 41,625
Certificates of deposit in other financial institutions 2,238 2,737
Securities purchased under agreements to resell - 10,000
Investment securities available for sale - at market value 9,042 32,037
Investment securities held to maturity (market value of $81,094 and
$53,026 as of December 31, 1998 and 1997, respectively) 80,895 52,822
Mortgage-backed securities available for sale - at market value 75,285 36,847
Mortgage-backed securities held to maturity (market value of $182,560
and $145,723 as of December 31, 1998 and 1997, respectively) 180,964 144,074
Loans receivable, net 240,841 250,711
Federal Home Loan Bank stock - at cost 9,168 4,918
Accrued interest receivable 4,558 3,957
Premises and equipment, net 9,017 7,889
Goodwill and other intangible assets 7,389 8,274
Real estate held for investment 2,348 -
Other assets 1,160 1,156
------- -------
TOTAL ASSETS $665,608 $597,047
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $438,913 $450,429
Advances from the Federal Home Loan Bank 163,359 88,359
Advances from borrowers for taxes and insurance 1,204 1,591
Accrued interest payable 4,166 2,470
Other liabilities 5,306 4,103
------- ------
Total liabilities 612,948 546,952
------- -------
Stockholders' equity
Preferred stock, no par value; 2,000,000 shares authorized
at December 31, 1998 and 1997, none issued - -
Common stock, $0.10 par value; 10,000,000 shares authorized,
5,290,000 shares issued, 2,857,932 and 2,886,251 shares
outstanding at December 31, 1998 and 1997, respectively,
net of shares in treasury: 1998 - 2,143,319; 1997 - 2,102,767 529 529
Retained earnings 45,762 43,176
Additional paid-in capital 51,957 51,775
Unearned ESOP shares (2,888) (3,010)
Shares acquired by MSBP (468) (895)
Treasury stock - at cost (42,386) (41,649)
Accumulated other comprehensive income 154 169
-------- --------
Total stockholders' equity 52,660 50,095
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $665,608 $597,047
======= =======
The accompanying notes are an integral part of these statements.
20
TF Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended December 31,
1998 1997 1996
---------- ---------- ----------
(in thousands, except per share data)
Interest income
Loans, including fees $ 18,657 $ 23,050 $ 23,116
Mortgage-backed securities 16,357 12,514 11,041
Investment securities 6,918 5,683 2,728
Interest-bearing deposits and other 1,647 1,942 2,104
-------- -------- --------
TOTAL INTEREST INCOME 43,579 43,189 38,989
-------- -------- --------
Interest expense
Deposits 17,397 18,211 14,739
Borrowings 8,798 5,869 6,058
-------- -------- --------
TOTAL INTEREST EXPENSE 26,195 24,080 20,797
-------- -------- --------
NET INTEREST INCOME 17,384 19,109 18,192
Provision for possible loan losses 60 397 330
-------- -------- --------
NET INTEREST INCOME AFTER PROVISION
FOR POSSIBLE LOAN LOSSES 17,324 18,712 17,862
-------- -------- --------
Non-interest income
Gain on sale of real estate acquired through foreclosure 44 - 115
Gain on sale of investment and mortgage-backed securities 349 407 330
Gain on sale of loans 91 387 79
Gain on sale of loan servicing rights - 330 -
Service fees, charges and other operating income 1,095 1,203 1,270
-------- -------- --------
TOTAL NON-INTEREST INCOME 1,579 2,327 1,794
-------- -------- --------
Non-interest expense
Employee compensation and benefits 6,201 6,445 5,828
Occupancy and equipment 1,854 1,952 1,432
Federal deposit insurance premium 275 299 2,929
Data processing 459 667 505
Professional fees 554 579 508
Advertising 333 354 292
Other operating 2,205 2,330 2,007
Amortization of goodwill and other intangible assets 885 957 244
-------- -------- --------
TOTAL NON-INTEREST EXPENSE 12,766 13,583 13,745
-------- -------- --------
INCOME BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGE 6,137 7,456 5,911
Income taxes 2,307 2,582 2,432
-------- -------- --------
INCOME BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 3,830 4,874 3,479
Cumulative effect of accounting change 208 - -
-------- -------- --------
NET INCOME $ 4,038 $ 4,874 $ 3,479
======== ======== ========
Earnings per common share - basic $ 1.39 $ 1.33 $ 0.86
Earnings per common share - assuming dilution $ 1.26 $ 1.25 $ 0.83
The accompanying notes are an integral part of these statements.
21
TF Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
Years ended December 31, 1998, 1997 and 1996
Accumulated
Common stock other
---------------- Additional Unearned Shares Compre- Compre-
Par paid-in ESOP acquired by Treasury Retained hensive hensive
Shares value capital shares MSBP stock earnings income Total income
------ ----- ------- ------ ---- ----- -------- ------ ----- ------
(dollars in thousands)
Balance at January 1, 1996 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)
Other comprehensive income, net
of reclassification adjustments
and taxes - - - - - - - (264) (264) $ (264)
Net income for the year ended
December 31, 1996 - - - - - - 3,479 - 3,479 3,479
--------- --- ------ ------- ------- -------- ------ ----- ------ -----
Comprehensive income $3,215
=====
Balance at December 31, 1996 3,962,544 529 51,645 (3,188) (1,322) (14,712) 39,750 (127) 72,575
Allocation of ESOP shares 17,860 - 173 178 - - - - 351
Amortization of MSBP expense - - 31 - 427 - - - 458
Purchase of treasury stock (1,100,068) - (74) - - (27,027) - - (27,101)
Cash dividends on common stock - - - - - - (1,433) - (1,433)
Exercise of stock options 5,915 - - - - 90 (15) - 75
Other comprehensive income, net
of reclassification adjustments
and taxes - - - - - - - 296 296 296
Net income for the year
ended December 31, 1997 - - - - - - 4,874 - 4,874 4,874
--------- --- ------ ------- ------- -------- ------ ----- ------ -----
Comprehensive income $5,170
=====
Balance at December 31, 1997 2,886,251 529 51,775 (3,010) (895) (41,649) 43,176 169 50,095
(Continued)
22
TF Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS'
EQUITY AND COMPREHENSIVE INCOME - CONTINUED
Years ended December 31, 1998, 1997 and 1996
Accumulated
Common stock other
------------------ Additional Unearned Shares Compre- Compre-
Par paid-in ESOP acquired Treasury Retained hensive hensive
Shares value capital shares by MSBP stock earnings income Total income
------ ----- ------- ------ -------- ----- -------- ------ ----- ------
(dollars in thousands)
Balance at December 31, 1997 $2,886,251 $529 $51,775 $(3,010) $(895) $(41,649) $43,176 $169 $ 50,095
Allocation of ESOP shares 12,233 - 166 122 - - - - 288
Amortization of MSBP - - 33 - 427 - - - 460
Purchase of treasury stock (50,000) - (17) - - (924) - - (941)
Cash dividends - common stock - - - - - - (1,387) - (1,387)
Exercise of options 9,448 - - - - 187 (65) - 122
Other comprehensive income, net
of reclassification adjustments
and taxes (15) (15) $ (15)
Net income for the year ended
December 31, 1998 - - - - - - 4,038 - 4,038 4,038
--------- --- ------ ------- ----- -------- ------ --- ------ -----
Comprehensive income $4,023
=====
Balance at December 31, 1998 $2,857,932 $529 $51,957 $(2,888) $(468) $(42,386) $45,762 $154 $52,660
========= === ====== ===== === ====== ====== === ======
The accompanying notes are an integral part of this statement.
23
TF Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
1998 1997 1996
------------ ------------ ------------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,038 $ 4,874 $ 3,479
Adjustments to reconcile net income to net cash provided
by operating activities
Amortization of
Mortgage loan servicing rights 16 68 21
Deferred loan origination fees (118) (156) (197)
Premiums and discounts on investment securities, net 100 63 (69)
Premiums and discounts on mortgage-backed securities
and loans, net 705 208 139
Goodwill and other intangibles 677 957 244
Deferred income taxes (135) (233) (84)
Provision for loan losses and provision for
losses on real estate 60 402 333
Depreciation of premises and equipment 847 708 560
Stock-based benefit programs 748 809 882
Gain on sale of
Investment securities (681) (407) (330)
Real estate acquired through foreclosure (44) - (115)
Mortgage loans (91) (387) (79)
Loan servicing rights - (330) -
(Increase) decrease in
Accrued interest receivable (601) 290 (817)
Other assets 30 (56) (580)
Increase in
Accrued interest payable 1,696 440 267
Other liabilities 1,338 477 723
--------- --------- ---------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 8,585 7,727 4,377
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Loan originations and principal payments on loans, net 30,983 (22,672) (38,475)
Principal repayments on mortgage-backed securities
held to maturity 60,899 33,732 28,450
Principal repayments on mortgage-backed securities available
for sale 19,292 2,746 3,050
Purchases of loans (40,708) (13,927) (83,704)
Proceeds from loan sales 19,496 95,261 22,648
Purchases and maturities of certificates of deposit in other
financial institutions, net 499 1,483 1
Purchases of investment and mortgage-backed securities
held to maturity (293,959) (125,219) (49,069)
Purchase of investment securities and mortgage-backed
securities available for sale (251,164) (140,694) (22,917)
(Continued)
24
TF Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Year ended December 31,
1998 1997 1996
------------ ------------ ------------
(in thousands)
Purchase and maturities of securities purchased under
agreement to resell, net $ 10,000 $ 15,129 $ (25,129)
Proceeds from maturities of investment securities
held to maturity 123,842 83,007 17,551
Proceeds from maturities of investment securities
available for sale 223,376 86,225 20,500
Proceeds from the sale of investment and mortgage-backed
securities available for sale 37,373 22,126 9,279
Proceeds from the sale of loan servicing rights - 981 -
Purchase of Federal Home Loan Bank stock (4,250) - (1,250)
Purchase of real estate held for investment (2,348) - -
Proceeds from sales of real estate acquired through foreclosure 246 - 722
Purchase of premises and equipment (1,975) (595) (2,007)
Premium paid for deposit liabilities - - (9,476)
-------- -------- --------
NET CASH (USED IN) PROVIDED BY
INVESTING ACTIVITIES (68,398) 37,583 (129,826)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in demand deposit/NOW accounts,
passbook savings accounts and certificates of deposit (11,516) (18,659) 132,019
Net increase (decrease) in advances from Federal Home
Loan Bank 75,000 (10,000) 25,000
Net (decrease) increase in advances from borrowers for
taxes and insurance (387) (773) 384
Treasury stock acquired (941) (27,027) (3,596)
Exercise of stock options 122 75 -
Common stock dividends paid (1,387) (1,433) (1,258)
-------- -------- --------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 60,891 (57,817) 152,549
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 1,078 (12,507) 27,100
Cash and cash equivalents at beginning of year 41,625 54,132 27,032
-------- -------- ---------
Cash and cash equivalents at end of year $ 42,703 $ 41,625 $ 54,132
======== ======== =========
Supplemental disclosure of cash flow information
Cash paid for
Interest on deposits and advances $ 24,498 $ 23,640 $ 20,530
Income taxes $ 2,651 $ 2,436 $ 2,235
Non-cash transactions
Transfers from loans to real estate acquired through
foreclosure $ 159 $ 231 $ 327
Securitization of mortgage loans held for investment $ - $ - $ 27,854
The accompanying notes are an integral part of these statements.
25
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
TF Financial Corporation (TF Financial) 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 (TF Investments). 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.
The Bank is subject to regulations of certain state and federal agencies
and, accordingly, it is 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
and its wholly owned subsidiaries: Third Federal, TF Investments, Teragon,
Inc., and Penns Trail Development Corporation (collectively, the
Corporation). All material intercompany balances and transactions have been
eliminated in consolidation.
The accounting policies of the Corporation conform to generally accepted
accounting principles and predominant practices within the banking industry.
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.
2. 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.
(Continued)
26
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
3. Investment and Mortgage-Backed Securities
-----------------------------------------
The Corporation accounts for investment and mortgage-backed securities in
accordance with Statement of Financial Accounting Standards (SFAS) No. 115,
Accounting for Certain Investments in Debt and Equity Securities. 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 in other comprehensive income. Realized gains and
losses on the sale of securities are recognized using the specific
identification method.
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. The
Corporation has the ability and it is management's intention to hold such
assets to maturity.
4. Loans Receivable
----------------
Loans receivable are stated at unpaid principal balances less the allowance
for loan losses and net deferred loan origination fees and unamortized
premiums. Loan origination fees and unamortized premiums 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.
The Corporation accounts for loans in accordance with 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.
(Continued)
27
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
5. 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.
6. Goodwill and Other Intangible Assets
------------------------------------
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 recorded 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.
7. Real Estate Held for Investment
-------------------------------
Real estate held for investment is carried at the lower of cost or market
value.
8. Transfers of Financial Assets
-----------------------------
On January 1, 1997, the Corporation adopted SFAS No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, as amended by SFAS No. 127, Deferral of the Effective Date of
Certain Provisions of SFAS No. 125. SFAS No. 125 applies a control-oriented,
financial components approach to financial asset transfer transactions
whereby the Corporation: (1) recognizes the financial and servicing assets
it controls and the liabilities it has incurred; (2) derecognizes financial
assets when control has been surrendered; and (3) derecognizes liabilities
once they are extinguished. Under SFAS No. 125, control is considered to
have been surrendered only if: (i) the transferred assets have been isolated
from the transferor and its creditors, even in bankruptcy or other
receivership; (ii) the transferee has the right to pledge or exchange the
transferred assets or is a qualifying special-purpose entity, and the
holders of beneficial interests in that entity have the right to pledge or
exchange those interests; and (iii) the transferor does not maintain
effective control over the transferred assets through an agreement which
both entitles and obligates it to repurchase or redeem those assets prior to
maturity, or through an agreement which entitles it to repurchase or redeem
those assets if they were not readily obtainable elsewhere. If any of these
conditions are not met, the Corporation accounts for the transfer as a
secured borrowing. The adoption of this statement did not have a material
impact on the Corporation's consolidated financial position or results of
operations.
(Continued)
28
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
9. 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. The Corporation accounts for the ESOP in accordance with the American
Institute of Certified Public Accountants' 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.
On January 1, 1998, the corporation adopted SFAS No. 132, Employers'
Disclosures about Pensions and Other Postretirement Benefits. SFAS No. 132
revises employers' disclosures about pension and other postretirement
benefit plans. It eliminates certain disclosures and requires additional
information about changes in the benefit obligation and the fair values of
plan assets. The financial statement disclosures have been revised to
reflect the provisions of SFAS No. 132.
10. Income Taxes
------------
The Corporation accounts for income taxes under the liability method
specified in SFAS No. 109, Accounting for Income Taxes. Under SFAS No. 109,
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.
11. Advertising Costs
-----------------
The Corporation expenses advertising costs as incurred.
(Continued)
29
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
12. Earnings Per Share
------------------
On December 15, 1997, the Corporation adopted the provisions of SFAS No.
128, Earnings Per Share. SFAS No. 128 eliminates primary and fully diluted
earnings per share and requires presentation of basic and diluted earnings
per share in conjunction with the disclosure of the methodology used in
computing such earnings per share. Basic earnings per share excludes
dilution and is computed by dividing income available to common shareholders
by the weighted average common shares outstanding during the period. Diluted
earnings per share takes into account the potential dilution that could
occur if securities or other contracts to issue common stock were exercised
and converted into common stock. Prior periods' earnings per share
calculations have been restated to reflect the adoption of SFAS No. 128.
13. Comprehensive Income
--------------------
On January 1, 1998, the Corporation adopted SFAS No. 130, Reporting
Comprehensive Income. SFAS 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 and losses on investment securities
available for sale. Comprehensive income for 1998, 1997 and 1996 was
$4,023,000, $5,170,000 and $3,215,000, respectively. The components of other
comprehensive income are as follows:
December 31, 1998
----------------------------------------------
Tax
Before tax (expense) Net of tax
amount benefit amount
---------- -------- ----------
(dollars in thousands)
Unrealized gains on securities
Unrealized holding gains arising
during period $ 324 $ (126) $ 198
Reclassification adjustment for
gains realized in net income (349) 136 (213)
-------- --------- ---------
Other comprehensive income, net $ (25) $ 10 $ (15)
======== ========= =========
(Continued)
30
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
December 31, 1997
----------------------------------------------
Tax
Before tax (expense) Net of tax
amount benefit amount
---------- -------- ----------
(dollars in thousands)
Unrealized gains on securities
Unrealized holding gains arising
during period $ 892 $ (348) $ 544
Reclassification adjustment for
gains realized in net income (407) 159 (248)
-------- --------- ---------
Other comprehensive income, net $ 485 $ (189) $ 296
======== ========= =========
December 31, 1996
----------------------------------------------
Tax
Before tax (expense) Net of tax
amount benefit amount
---------- -------- ----------
(dollars in thousands)
Unrealized gains on securities
Unrealized holding gains arising
during period $ (103) $ 40 $ (63)
Reclassification adjustment for
gains realized in net income (330) 129 (201)
-------- --------- ---------
Other comprehensive income, net $ (433) $ 169 $ (264)
======== ========= =========
14. New Financial Accounting Standards
----------------------------------
On January 1, 1998, the Corporation adopted SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. SFAS No. 131 redefines
how operating segments are determined and requires disclosures of certain
financial and descriptive information about a company's operating segments.
Management has determined that under current conditions, the Corporation
will report one business segment.
(Continued)
31
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activity. SFAS
No. 133 establishes 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 met, a derivative may be specifically designated as a hedge.
The accounting for changes in the fair value of a derivative instrument
(gains and losses) depends on the intended use of the derivative and
resulting designation. SFAS No. 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. Earlier application is permitted
only as of the beginning of any fiscal quarter. On October 1, 1998, the
Corporation adopted SFAS No. 133. Concurrent with the adoption, the
Corporation transferred $23,198,000 of mortgage-backed securities from the
held to maturity category to the available for sale category and recorded
$349,000, net of taxes, of unrealized holding gains in other comprehensive
income. The Corporation also transferred $19,671,000 of mortgage-backed
securities to the trading category and reported a cumulative effect
adjustment of $208,000, net of taxes, resulting from the accounting change.
15. 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,
-----------------------------------
1998 1997 1996
---------- ---------- ----------
(in thousands)
Cash and due from banks $ 25,509 $ 14,222 $ 14,737
Interest-bearing deposits in
other financial institutions 16,444 25,628 38,120
Federal funds sold 750 1,775 1,275
---------- --------- ---------
$ 42,703 $ 41,625 $ 54,132
======== ======== ========
32
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE C - SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
The Bank enters into purchases of securities under agreements to resell
substantially identical securities. Securities purchased under agreements to
resell at December 31, 1997, consist of mortgage-backed securities.
The amounts advanced under these agreements represent short-term loans and
are reflected as a receivable in the consolidated statements of financial
position. The securities underlying the agreements are book-entry
securities. During the period, 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, 1997, 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 $3.6 million and $9.7 million during 1998 and 1997, respectively,
and the maximum amounts outstanding at any month-end during 1998 and 1997,
was $10 million and $25.3 million, respectively.
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, 1998 and 1997, are summarized as follows:
December 31, 1998
----------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
--------- ---------- ---------- ---------
(in thousands)
Investment securities held to maturity
U.S. Government and federal agencies $ 73,612 $ 197 $ (62) $ 73,747
State and political subdivisions 4,283 78 - 4,361
Corporate debt securities 3,000 - (14) 2,986
------- ------ ------- -------
80,895 275 (76) 81,094
Mortgage-backed securities
held to maturity 180,964 1,937 (341) 182,560
------- ------ ------- -------
$261,859 $ 2,212 $ (417) $263,654
======= ====== ======= =======
Investment securities available for sale
U.S. Government and federal agencies $ 8,000 $ 45 $ - 8,045
Mutual funds 500 - (3) 497
Other 500 - - 500
------- ------ ------- -------
9,000 45 (3) 9,042
Mortgage-backed securities
available for sale 75,075 316 (106) 75,285
------- ------ ------- --------
$ 84,075 $ 361 $ (109) $ 84,327
======= ====== ======= ========
(Continued)
33
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE D - INVESTMENT AND MORTGAGE-BACKED SECURITIES - Continued
December 31, 1997
----------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
--------- ---------- ---------- ---------
(in thousands)
Investment securities held to maturity
U.S. Government and federal agencies $ 50,278 $ 190 $ (35) $ 50,433
State and political subdivisions 2,544 49 - 2,593
------- ------ ------- -------
52,822 239 (35) 53,026
Mortgage-backed securities held to maturity 144,074 2,096 (447) 145,723
------- ------ ------- -------
$196,896 $ 2,335 $ (482) $198,749
======= ====== ======= =======
Investment securities available for sale
U.S. Government and federal agencies $ 31,254 $ 75 $ (2) $ 31,327
Equity securities (SLMA stock) 10 200 - 210
Mutual funds 500 - - 500
------- ------ ------- -------
31,764 275 (2) 32,037
Mortgage-backed securities available for sale 36,843 182 (178) 36,847
------- ------ ------- -------
$ 68,607 $ 457 $ (180) $ 68,884
======= ====== ======= =======
Gross realized gains were $349,000, $407,000 and $330,000 for the years
ended December 31, 1998, 1997 and 1996, respectively. These gains resulted
from the sale of investment and mortgage-backed securities of $37.4 million,
$22.1 million and $9.3 million for the years ended December 31, 1998, 1997
and 1996, respectively.
34
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE D - INVESTMENT AND MORTGAGE-BACKED SECURITIES - Continued
The amortized cost and estimated market value of investment and
mortgage-backed securities, by contractual maturity, are shown below.
December 31, 1998
----------------------------------------------------------------
Held to maturity Available for sale
---------------------------- -----------------------------
Estimated Estimated
Amortized market Amortized market
cost value cost value
--------- ---------- ---------- ---------
(in thousands)
Investment securities
Due in one year or less $ 32,829 $ 32,781 $ 1,000 $ 997
Due after one year through five years 23,961 24,085 8,000 8,045
Due after five years through 10 years 19,077 19,106 - -
Due after 10 years 5,028 5,122 - -
------- ------- ------- -------
80,895 81,094 9,000 9,042
Mortgage-backed securities 180,964 182,560 75,075 75,285
------- ------- ------- -------
$261,859 $263,654 $ 84,075 $ 84,327
======= ======= ======= =======
(Continued)
35
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE D - INVESTMENT AND MORTGAGE-BACKED SECURITIES - Continued
The amortized cost, gross unrealized gains and losses, and estimated market
value of mortgage-backed securities, by issuer, are summarized as follows:
December 31, 1998
----------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
--------- ---------- ---------- ---------
(in thousands)
Mortgage-backed securities held to
maturity
FHLMC certificates $ 47,239 $ 1,172 $ (7) $ 48,404
FNMA certificates 12,726 143 (13) 12,856
GNMA certificates 56,318 474 - 56,792
Real estate mortgage investment conduit 64,180 148 (312) 64,016
Other mortgage-backed securities 501 - (9) 492
------- --------- ---------- -------
$180,964 $ 1,937 $ (341) $182,560
======= ========= ========== =======
Mortgage-backed securities available for
sale
FHLMC certificates $ 13,110 $ 106 $ (2) $ 13,214
FNMA certificates 32,119 81 (22) 32,178
GNMA certificates 10,194 90 - 10,284
Real estate mortgage investment conduit 19,652 39 (82) 19,609
------- --------- ---------- -------
$ 75,075 $ 316 $ (106) $ 75,285
======= ========= ========== =======
December 31, 1997
----------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
--------- ---------- ---------- ---------
(in thousands)
Mortgage-backed securities held to
maturity
FHLMC certificates $ 76,523 $ 1,508 $ (44) $ 77,987
FNMA certificates 22,927 340 (71) 23,196
GNMA certificates 7,483 213 - 7,696
Real estate mortgage investment conduit 36,389 35 (319) 36,105
Other mortgage-backed securities 752 - (13) 739
------- -------- ------- -------
$144,074 $ 2,096 $ (447) $145,723
======= ======== ======= =======
(Continued)
36
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE D - INVESTMENT AND MORTGAGE-BACKED SECURITIES - Continued
December 31, 1997
----------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
--------- ---------- ---------- ---------
(in thousands)
Mortgage-backed securities available for
sale
FHLMC certificates $ 19,099 $ 142 $ (18) $ 19,223
FNMA certificates 7,851 36 (24) 7,863
Real estate mortgage investment conduit 9,893 4 (136) 9,761
------- ---------- --------- --------
$ 36,843 $ 182 $ (178) $ 36,847
======== ========== ========= ========
Investment securities having an aggregate amortized cost of approximately
$5.0 million and $7.0 million were pledged to secure public deposits at
December 31, 1998 and 1997, respectively.
There were no securities held other than U.S. Government and agencies from a
single issuer that represented more than 10% of stockholders' equity.
NOTE E - LOANS RECEIVABLE
Loans receivable are summarized as follows:
December 31,
-------------------------
1998 1997
-------- --------
(in thousands)
First mortgage loans (principally conventional)
Secured by one-to-four family residences $152,819 $198,328
Secured by other non-residential properties 55,208 26,653
Construction loans 5,352 5,052
------- -------
213,379 230,033
Less net deferred loan origination fees and unamortized premiums 67 133
------- -------
Total first mortgage loans $213,312 $229,900
------- -------
(Continued)
37
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE E - LOANS RECEIVABLE - Continued
December 31,
-------------------------
1998 1997
-------- --------
(in thousands)
Consumer and other loans
Commercial $ 6,666 $ 2,798
Home equity and second mortgage 12,995 12,147
Leases 2,305 1,671
Other 7,521 6,230
------- -------
29,487 22,846
Less unearned discount 49 6
------- -------
Total consumer and other loans 29,438 22,840
Less allowance for loan losses 1,909 2,029
------- -------
Total loans receivable $240,841 $250,711
======= =======
Activity in the allowance for loan losses is summarized as follows:
December 31,
------------------------------------------------
1998 1997 1996
------------ ------------ -------------
(in thousands)
Balance at beginning of year $ 2,029 $ 1,806 $ 1,484
Provision charged to income 60 397 330
Charge-offs, net (180) (174) (8)
--------- --------- ---------
Balance at end of year $ 1,909 $ 2,029 $ 1,806
========= ========= =========
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 $1.6 million and $1.4
million at December 31, 1998, and 1997, respectively. Of such amounts,
approximately $900,000 and $800,000 at December 31, 1998 and 1997, 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 $43,000, $19,000 and $30,000 for the years ended
December 31, 1998, 1997 and 1996, respectively. No interest income has been
recognized on non-accrual loans for any of the periods presented.
(Continued)
38
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE E - LOANS RECEIVABLE - Continued
The Corporation accounts for loans in accordance with SFAS No. 114, as
amended by SFAS No. 118. 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. As of December 31, 1998 and 1997, the
recorded investment in impaired loans was immaterial.
The Bank has no concentration of loans to borrowers engaged in similar
activities which exceeded 10% of loans at December 31, 1998 and 1997. 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 $385,000 and $401,000 at December 31, 1998 and 1997,
respectively. For the year ended December 31, 1998, principal repayments of
approximately $16,000 were received and no funds were disbursed to executive
officers, directors or their related interests.
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,
---------------------------
1998 1997
--------- --------
(in thousands)
Mortgage loan servicing portfolios
FHLMC $ 15,116 $ 18,775
Other investors 6,103 7,630
-------- --------
$ 21,219 $ 26,405
======== ========
(Continued)
39
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE F - LOAN SERVICING - Continued
Custodial balances maintained in connection with the foregoing loan
servicing totalled approximately $408,000 and $523,000 at December 31, 1998
and 1997, respectively. The net servicing revenue on mortgage loans serviced
for others is immaterial for all periods presented.
NOTE G - PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
December 31,
Estimated ----------------------
useful lives 1998 1997
------------ ---- ----
(in thousands)
Buildings 30 $ 5,906 $ 5,790
Leasehold improvements 5 709 322
Furniture, fixtures and equipment 3-7 6,436 4,955
--------- ---------
13,051 11,067
Less accumulated depreciation 7,293 6,437
--------- ---------
5,758 4,630
Land 3,259 3,259
--------- ---------
$ 9,017 $ 7,889
========= =========
NOTE H - DEPOSITS
Deposits are summarized as follows:
December 31,
----------------------
1998 1997
---- ----
(in thousands)
Demand $ 6,231 $ 5,037
NOW 44,971 40,360
Money Market 32,556 32,777
Passbook savings - fixed rate 122,213 122,952
Passbook savings - adjustable rate 43,651 51,277
-------- --------
Total demand, transaction and
passbook deposits 249,622 252,403
Certificates of deposit 189,291 198,026
------- -------
$438,913 $450,429
======= =======
(Continued)
40
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE H - DEPOSITS - Continued
The aggregate amount of certificates of deposit with a minimum denomination
of $100,000 was approximately $13.3 million and $9.4 million at December 31,
1998 and 1997, respectively.
At December 31, 1998, scheduled maturities of certificates of deposit are as
follows:
Year ending December 31,
--------------------------------------------------------------------------------------------------------------
1999 2000 2001 2002 2003 Thereafter Total
----------- ------------ ------------ ------------ ------------ ---------- ------------
(in thousands)
$133,732 $ 23,582 $ 24,250 $ 3,282 $ 4,128 $ 317 $189,291
======= ======== ======== ========= ========= ========= =======
NOTE I - ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank consist of the following:
December 31,
--------------------------------------------------------------------
1998 1997
----------------------------- ----------------------------
Weighted Weighted
Due date Amount average rate Amount average rate
-------- ------ ------------ ------ ------------
(in thousands)
1998 $ - - % $ 30,000 5.85%
1999 30,000 6.05 30,000 6.05
2000 25,000 6.13 25,000 6.13
2003 20,000 5.60 - -
2005 15,000 5.37 - -
2008 70,000 5.61 - -
2010 3,359 6.70 3,359 6.70
------- --------
$163,359 5.77 $ 88,359 6.03
======= ========
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 $30 million at December 31, 1998.
41
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE J - BENEFIT PLANS
The Bank maintains a 401(k) profit-sharing plan for eligible employees.
Contributions to the plan are at the discretion of the Board of Directors.
There were no profit-sharing plan contributions for the years ended December
31, 1998, 1997 and 1996.
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.
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,
------------------------------
1998 1997
----------- -----------
(in thousands)
Change in benefit obligation
Benefit obligation at beginning of year $ 2,609 $ 3,004
Service cost 62 157
Interest cost 201 160
Actual gain 250 (670)
Increase due to plan amendments 171 -
Benefits paid (161) (42)
---------- ---------
Benefits obligation at end of year $ 3,132 $ 2,609
========= =========
Change in plan assets
Fair value of plan assets at beginning of year $ 1,762 $ 1,338
Actual return on plan assets (50) 244
Employer contribution 410 222
Benefits paid (161) (42)
--------- ---------
Fair value of plan assets at end of year $ 1,961 $ 1,762
========= =========
Funded status
Unrecognized transaction asset $ (1,171) $ (847)
Unrecognized net actuarial loss 31 36
Unrecognized prior service cost 543 419
Prepaid (accrued) benefit cost 201 (256)
--------- ---------
$ (396) $ (648)
========= =========
(Continued)
42
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE J - BENEFIT PLANS - Continued
1998 1997 1996
------------ ------------ ------------
Weighted-average assumptions as of December 31
Discount rate 7.25% 6.00% 6.00%
Expected return on plan assets 8.00 8.00 8.00
Rate of compensation increase 4.00 6.00 6.00
Components of net periodic benefit cost
Service cost $ 62 $ 157 $ 173
Interest cost 201 160 196
Expected return on plan assets (157) (116) (143)
Amortization of prior service cost 52 52 56
---------- ---------- ---------
Net periodic benefit cost $ 158 $ 253 $ 282
========== ========== =========
The Corporation also maintains 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. 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 are recorded as a reduction of retained earnings;
dividends on unallocated ESOP shares are recorded as a reduction of debt and
accrued interest. ESOP compensation expense was $288,000, $351,000 and
$450,000 in 1998, 1997 and 1996, respectively.
Allocated shares 119,500
Unreleased shares 288,800
---------
Total ESOP shares 408,300
=========
Fair value of unreleased shares $4,981,800
=========
(Continued)
43
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
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, 24,000 shares on
December 18, 1995, and 9,308 shares on December 15, 1997, 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; $460,000, $458,000 and $432,000 was amortized to expense in
1998, 1997 and 1996, respectively. At December 31, 1998, 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
No. 25 and related interpretations. The plans allow the Corporation to grant
options to employees and directors for up to 794,000 shares of common stock.
The options, which have a term of 10 years when issued, vest either
immediately or over a three to five year period. The exercise price of each
option equals the market price of the Corporation's stock on the date of
grant. Had compensation cost for the plans been determined based on the fair
value of 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.
1998 1997 1996
-------- -------- --------
Net income
As reported $ 4,038 $ 4,874 $ 3,479
Pro forma $ 3,885 $ 4,726 $ 3,365
Basic earnings per share
As reported $ 1.39 $ 1.33 $ 0.86
Pro forma $ 1.34 $ 1.29 $ 0.83
Diluted earnings per share
As reported $ 1.26 $ 1.25 $ 0.83
Pro forma $ 1.21 $ 1.21 $ 0.80
(Continued)
44
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE J - BENEFIT PLANS - Continued
These pro forma amounts may not be representative of future disclosures
because they do not take into effect the pro forma compensation expense
related to grants before 1995.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1998, 1997 and 1996, respectively: no
dividend yield for all years; expected volatility of 34%, 21% and 12.1%,
risk-free interest rate of 5.25%, 6.4% and 6.4%; and expected lives of five
years for all options.
A summary of the status of the Corporation's fixed stock option plans as of
December 31, 1998, and changes for each of the years in the three-year
period then ended was as follows:
1998 1997 1996
--------------------- -------------------- ----------------------
Weighted Weighted Weighted
average average average
Number exercise Number exercise Number exercise
of price per of price per of price per
shares share shares share shares share
---------- -------- ------- --------- ------ ---------
Outstanding at beginning of year 695,875 $13.08 551,833 $12.06 514,480 $11.82
Options granted 13,325 22.46 170,155 16.62 41,103 15.09
Options exercised (10,486) 12.85 (5,915) 11.50 (1,667) 11.50
Options forfeited (2,695) 15.78 (20,198) 16.50 (2,083) 11.50
------- ------- -------
Outstanding at end of year 696,019 $13.24 695,875 $13.08 551,833 $12.06
======= ======= =======
Options exercisable at year-end 524,813 478,919 461,285
======= ======= =======
Weighted average fair value of
options granted during year $ 8.72 $ 5.42 $ 4.34
The following table summarizes information about stock options outstanding
at December 31, 1998:
Options outstanding Options exercisable
--------------------------------------------- ---------------------------
Weighted
Number average Weighted Number Weighted
outstanding at remaining average exercisable at average
Range of exercise December 31, contractual exercise December 31, exercise
prices 1998 life (years) price 1998 price
---------------- -------------- ----------- ---------- -------------- ---------
$11.50 to $17.25 675,154 6.8 years $12.97 522,482 $12.14
$18.00 to $19.25 15,615 9.2 years 18.73 2,248 18.32
$26.00 to $27.88 5,250 9.5 years 27.79 83 26.00
(Continued)
45
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE J - BENEFIT PLANS - Continued
Total compensation cost recognized for stock-based employee compensation
awards was approximately $116,000, $99,000 and $28,000 for 1998, 1997 and
1996, respectively.
NOTE K - INCOME TAXES
The components of income tax expense are summarized as follows:
Year ended December 31,
----------------------------------------------
1998 1997 1996
---- ---- ----
(in thousands)
Federal
Current $ 2,162 $ 2,420 $ 2,173
Deferred (152) (233) (84)
--------- --------- ---------
2,010 2,187 2,089
State and local - current 297 395 343
--------- --------- ---------
Continuing operations 2,307 2,582 2,432
Cumulative effect of accounting change 125 - -
--------- --------- ---------
Income tax provision $ 2,432 $ 2,582 $ 2,432
========= ========= =========
The Corporation's effective income tax rate was different than the statutory
federal income tax rate as follows:
Year ended December 31,
---------------------------
1998 1997 1996
---- ---- ----
(in thousands)
Statutory federal income tax 34.0% 34.0% 34.0%
Increase (decrease) resulting from
Tax-exempt income (3.6) (1.8) (2.7)
State tax, net of federal benefit 3.1 3.5 3.8
Other 6.1 (1.1) 5.9
------ ------ ------
39.6% 34.6% 41.0%
====== ====== ======
(Continued)
46
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE K - INCOME TAXES - Continued
Deferred taxes are included in the accompanying consolidated statements of
financial position at December 31, 1998 and 1997, for the estimated future
tax effects of differences between the financial statement and federal
income tax bases of assets and liabilities according to the provisions of
currently enacted tax laws. No valuation allowance was recorded against
deferred tax assets at December 31, 1998 and 1997. The Corporation's net
deferred tax asset at December 31, 1998 and 1997, was comprised of the
following:
December 31,
-----------------------
1998 1997
---------- ---------
(in thousands)
Deferred tax assets
Deferred loan origination fees $ 107 $ 130
Deferred compensation 176 135
Allowance for loan losses, net 79 68
Amortization 226 123
Other 3 -
--------- --------
591 456
--------- --------
Deferred tax liabilities
Accrued pension expense 20 37
Unrealized gain on securities
available for sale 98 108
--------- --------
118 145
--------- --------
Deferred tax asset $ 473 $ 311
========= ========
The Corporation files its income tax returns on the basis of a fiscal tax
year ending June 30.
Prior to 1996, the Bank was permitted to deduct a percentage of its taxable
income as an addition to a bad debt reserve for tax purposes regardless of
the Bank's charge-off experience. This special deduction was repealed for
taxable years following 1995. The Bank is now required to compute its bad
debt deductions for tax purposes using the specific charge-off method.
Moreover, the Bank is required, beginning in 1998, to recapture
approximately $2.4 million of its total tax bad debt reserve of
approximately $8.1 million into taxable income over a four-year period.
Deferred tax liabilities have been accrued in respect of the amount of the
reserve to be recaptured.
The Bank is not required to recapture approximately $5.7 million of its tax
bad debt reserve, attributable to bad debt deductions taken by it prior to
1988, as long as the Bank continues to operate as a bank under federal tax
law and does not use the reserve for any other purpose. In accordance with
SFAS No. 109, the Bank has not recorded any deferred tax liability on this
portion of its tax bad debt reserve. The tax that would be paid were the
Bank ultimately required to recapture that portion of the reserve, would
amount to approximately $1.9 million.
(Continued)
47
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
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:
Year ended December 31,
--------------------------------------------
1998 1997 1996
-------- --------- ----------
(in thousands)
Recognition of deferred tax expenses (benefits)
Loan losses $ (118) $ (111) $ 2
Deferred compensation (40) (24) (110)
Deferred loan origination fees 24 24 24
Amortization (103) (122) -
Pension 88 - -
Reserves (3) - -
------ ------ ------
$ (152) $ (233) $ (84)
====== ====== ======
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 Bank must meet specific capital guidelines
that involve quantitative measures of the Bank'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 4% of adjusted total assets
at December 31, 1998.
(Continued)
48
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE L - REGULATORY MATTERS - Continued
As of December 31, 1998, management believes that the Bank met all capital
adequacy requirements to which it was subject.
Regulatory capital
----------------------------------------------------------------------
December 31, 1998
----------------------------------------------------------------------
Tangible Core Risk-based
capital Percent capital Percent capital Percent
-------- ------- ------- ------- ---------- -------
Capital under generally accepted
accounting principles
Corporation $ 52,660 8.00% $ 52,660 8.00% $ 52,660 19.68%
Bank 52,577 7.93 52,577 7.93 52,577 19.86
Unrealized gain on certain
available-for-sale securities
Corporation (154) (0.02) (154) (0.02) (154) (0.06)
Bank (154) (0.02) (154) (0.02) (154) (0.06)
Goodwill and other intangible assets
Corporation (7,389) (1.12) (7,389) (1.12) (7,389) (2.76)
Bank (7,389) (1.12) (7,389) (1.12) (7,389) (2.79)
Additional capital items
General valuation allowances-limited
Corporation - - - - 1,909 0.72
Bank - - - - 1,909 0.72
------- ------ ------- ------ ------- ------
Regulatory capital computed
Corporation 45,117 6.86 45,117 6.86 47,026 17.58
Bank 45,034 6.79 45,034 6.79 46,943 17.73
Minimum capital requirement
Corporation 9,871 1.50 26,323 4.00 21,405 8.00
Bank 9,943 1.50 26,515 4.00 21,178 8.00
------- ------ ------- ------ ------- ------
Regulatory capital - excess
Corporation $ 35,246 5.36% $ 18,794 2.86% $ 25,621 9.58%
======= ====== ======= ====== ======= ======
Bank $ 35,091 5.29% $ 18,519 2.79% $ 25,765 9.73%
======= ====== ======= ====== ======= ======
(Continued)
49
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE L - REGULATORY MATTERS - Continued
Regulatory capital
----------------------------------------------------------------------
December 31, 1997
----------------------------------------------------------------------
Tangible Core Risk-based
capital Percent capital Percent capital Percent
-------- ------- ------- ------- ------- -------
Capital under generally accepted
accounting principles
Corporation $ 50,095 8.51% $ 50,095 8.51% $ 50,095 19.56%
Bank 50,987 8.58 50,987 8.58 50,987 19.91
Unrealized gain on certain
available-for-sale securities
Corporation (169) (0.03) (169) (0.03) (169) (0.06)
Bank (169) (0.03) (169) (0.03) (169) (0.06)
Goodwill and other intangible assets
Corporation (8,274) (1.41) (8,274) (1.41) (8,274) (3.23)
Bank (8,274) (1.39) (8,274) (1.39) (8,274) (3.23)
Additional capital items
General valuation allowances-limited
Corporation - - - - 2,029 0.79
Bank - - - - 2,029 0.79
------- ----- ------- ----- ------- -----
Regulatory capital computed
Corporation 41,652 7.07 41,652 7.07 43,681 17.06
Bank 42,544 7.16 42,544 7.16 44,573 17.41
Minimum capital requirement
Corporation 8,831 1.50 17,662 3.00 20,491 8.00
Bank 8,902 1.50 17,804 3.00 20,487 8.00
------- ----- ------- ----- ------- -----
Regulatory capital - excess
Corporation $ 32,821 5.57% $ 23,990 4.07% $ 23,190 9.06%
======= ===== ======= ===== ======= =====
Bank $ 33,642 5.66% $ 24,740 4.16% $ 24,086 9.41%
======= ===== ======= ===== ======= =====
(Continued)
50
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE L - REGULATORY MATTERS - Continued
At December 31, 1998, 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 $20 million and $12 million, respectively.
There are no conditions or events which have occurred that management
believes have changed the Bank's classification as a "well-capitalized"
institution.
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 1999, the Bank
Insurance Funds (BIF) will pay $322 million of FICO debt service, and SAIF
will pay $458 million.
During 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 FDIC 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.
The Bank maintains a liquidation account for the benefit of eligible savings
account holders who maintained deposit accounts in the Bank after the Bank
converted to a stock form of ownership. 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 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.
(Continued)
51
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE M - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK - Continued
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.
Financial instruments, the contract or notional amounts of which represent
credit risk, are as follows:
December 31,
----------------------------
1998 1997
---------- ----------
(in thousands)
Commitments to extend credit $ 30,341 $ 22,720
Commitments to purchase loans - 304
Standby letters of credit 3,604 787
Loans sold with recourse 364 572
-------- --------
$ 34,309 $ 24,383
======== ========
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 had no commitments to sell mortgage loans to investors at December
31, 1998 compared to $6.9 million outstanding at December 31, 1997.
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 $315,000, $296,000
and $229,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
(Continued)
52
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE N - COMMITMENTS AND CONTINGENCIES - Continued
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,
1999 $ 280
2000 159
2001 124
-----
$ 563
=====
The Bank has a contract with a third-party computer processing center which
expires in 2002 with an annual commitment of approximately $109,000.
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, 1998, was
approximately $1,956,000.
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 Corporation's consolidated financial position
or results of operations.
NOTE O - SIGNIFICANT CONCENTRATIONS OF CREDIT RISK
The Bank is principally engaged in originating and investing in one-to-four
family residential and commercial 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 or purchased 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 and commercial 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.
53
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
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 or available for sale 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.
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,
---------------------------------------------------------------
1998 1997
-------------------------- -----------------------------
Estimated Estimated
fair Carrying fair Carrying
value value value value
--------- -------- --------- --------
(in thousands)
Cash and cash equivalents $ 42,703 $ 42,703 $ 41,625 $ 41,625
Investment securities 90,136 89,937 85,063 84,859
Mortgage-backed securities 257,845 256,249 182,570 180,921
Securities purchased under
agreements to resell - - 10,000 10,000
(Continued)
54
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE P - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued
The fair value of financial instruments with stated maturities has been
estimated using the present value of cash flows, discounted at rates
approximating current market rates for similar assets and liabilities.
December 31,
--------------------------------------------------------------
1998 1997
-------------------------- ----------------------------
Estimated Estimated
fair Carrying fair Carrying
value value value value
--------- -------- --------- --------
(in thousands)
Assets
Interest-bearing deposits with banks $ 2,244 $ 2,238 $ 2,740 $ 2,737
Liabilities
Deposits with stated maturities 187,816 189,291 197,345 198,026
Borrowings with stated maturities
Short-term (due within 6 months) 14,978 15,000 5,000 5,000
Long-term 145,303 148,359 83,178 83,359
The fair value of financial instrument liabilities with no stated maturities
is generally presumed to approximate the carrying amount (the amount payable
on demand).
December 31,
--------------------------------------------------------------
1998 1997
-------------------------- ----------------------------
Estimated Estimated
fair Carrying fair Carrying
value value value value
--------- -------- --------- --------
(in thousands)
Deposits with no stated
maturities $ 249,622 $ 249,622 $ 252,403 $ 252,403
======= ======= ======= =======
The fair value of the net loan portfolio has been estimated using the
present value of 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,
--------------------------------------------------------------
1998 1997
-------------------------- ----------------------------
Estimated Estimated
fair Carrying fair Carrying
value value value value
--------- -------- --------- --------
(in thousands)
Net loans $ 245,375 $ 240,841 $ 254,568 $ 250,711
======= ======= ======= =======
(Continued)
55
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE P - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued
There is no material difference between the carrying amount and the
estimated fair value of off-balance-sheet items totalling approximately
$34.3 million and $24.4 million at December 31, 1998 and 1997, 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 - SERVICE FEES, CHARGES AND OTHER OPERATING INCOME AND OTHER OPERATING
EXPENSE
Year ended December 31,
-----------------------
1998 1997 1996
---- ---- ----
(in thousands)
Service fees, charges and other operating income
Loan servicing fees $ 317 $ 512 $ 577
Late charge income 85 92 98
Deposit service charges 435 471 439
Other income 258 128 156
--------- --------- ---------
$ 1,095 $ 1,203 $ 1,270
========= ========= =========
Other operating expense
Employee education $ 34 $ 49 $ 22
Insurance and surety bond 142 149 129
Office supplies 233 318 272
Postage 163 218 207
Telephone 173 130 103
Service charges on bank accounts 280 111 83
Supervisory examination fees 140 144 112
Other expenses 1,040 1,211 1,079
--------- --------- ---------
$ 2,205 $ 2,330 $ 2,007
========= ========= =========
NOTE R - 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.
(Continued)
56
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE R - SHAREHOLDER RIGHTS PLAN - Continued
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.
NOTE S - EARNINGS PER SHARE
The following table illustrates the reconciliation of the numerators and
denominators of the basic and diluted earnings per share computations.
Year ended December 31, 1998
---------------------------------------------
Weighted
average
Income shares Per share
(numerator) (denominator) amount
--------- ----------- ---------
Basic earnings per share
Income before cumulative effect of accounting change $ 3,830 $ 1.32
Cumulative effect of accounting change 208 0.07
--------- ------
Income available to common stockholders $ 4,038 2,894,651 $ 1.39
========= ======
Effect of dilutive securities
Stock options 300,844
---------
Diluted earnings per share
Income before cumulative effect of accounting change $ 3,830 $ 1.20
Cumulative effect of accounting change 208 0.06
--------- ------
Income available to common stockholders
plus effect of dilutive securities $ 4,038 3,195,495 $ 1.26
========= ========= ======
(Continued)
57
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE S - EARNINGS PER SHARE - Continued
There were options to purchase 5,250 shares of common stock at a range of
$26.00 to $28.00 per share which were outstanding during 1998 which were not
included in the computation of diluted earnings per share because the
options' exercise prices were greater than the average market price of the
common shares. The options, which expire through December 31, 2008, were
still outstanding at December 31, 1998.
Year ended December 31, 1997
--------------------------------------------------
Weighted
average
Income shares Per share
(numerator) (denominator) amount
--------- ----------- ---------
Net income $ 4,874,000
==========
Basic earnings per share
Income available to common stockholders $ 4,874,000 3,656,924 $ 1.33
======
Effect of dilutive securities
Stock options - 251,667
---------- ----------
Diluted earnings per share
Income available to common stockholders plus
effect of dilutive securities $ 4,874,000 3,908,591 $ 1.25
========== ========== ======
Year ended December 31, 1996
--------------------------------------------------
Weighted
average
Income shares Per share
(numerator) (denominator) amount
--------- ----------- ---------
Net income $ 3,479,000
==========
Basic earnings per share
Income available to common stockholders $ 3,479,000 4,066,615 $ 0.86
======
Effect of dilutive securities
Stock options - 127,372
---------- ---------
Diluted earnings per share
Income available to common stockholders plus
effect of dilutive securities $ 3,479,000 4,193,987 $ 0.83
========== ========= ======
(Continued)
58
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE S - EARNINGS PER SHARE - Continued
There were options to purchase 13,103 shares of common stock at $15.88 per
share which were outstanding during 1996 which were not included in the
computation of diluted earnings per share because the options' exercise
price was greater than the average market price of the common shares. The
options, which expire on December 18, 2006, were still outstanding at
December 31, 1996.
NOTE T - SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATE (UNAUDITED)
Three months ended
---------------------------------------------------------------
Dec. 31, Sept. 30, June 30, March 31,
1998 1998 1998 1998
-------- --------- -------- ---------
(in thousands, except per share data)
Total interest income $ 11,061 $ 11,379 $ 10,998 $ 10,141
Total interest expense 6,851 7,092 6,590 5,662
Net interest income 4,210 4,287 4,408 4,479
Provision for possible loan losses 15 15 15 15
-------- -------- -------- --------
Net interest income after provision 4,195 4,272 4,393 4,464
Other income 135 338 686 420
Other expenses 2,730 3,208 3,453 3,375
-------- -------- -------- --------
Income before income taxes and
cumulative effect of accounting
change 1,600 1,402 1,626 1,509
Income taxes 620 534 637 516
-------- -------- -------- --------
Income before cumulative effect
of accounting change 980 868 989 993
Cumulative effect of accounting change 208 - - -
-------- -------- -------- --------
Net income $ 1,188 $ 868 $ 989 $ 993
======== ======== ======== ========
(Continued)
59
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE T - SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED) - Continued
Three months ended
---------------------------------------------------------------
Dec. 31, Sept. 30, June 30, March 31,
1998 1998 1998 1998
-------- --------- -------- ---------
(in thousands, except per share data)
Earnings per common share before cumulative
effect of accounting change
Basic $ 0.34 $ 0.30 $ 0.34 $ 0.34
Diluted $ 0.32 $ 0.27 $ 0.30 $ 0.31
Cumulative effect of accounting change
Basic 0.07 - - -
Diluted 0.06 - - -
Earnings per common share
Basic $ 0.41 $ 0.30 $ 0.34 $ 0.34
Diluted $ 0.38 $ 0.27 $ 0.30 $ 0.31
Three months ended
---------------------------------------------------------------
Dec. 31, Sept. 30, June 30, March 31,
1998 1998 1998 1998
-------- --------- -------- ---------
(in thousands, except per share data)
Total interest income $ 9,990 $ 10,918 $ 11,106 $ 11,175
Total interest expense 5,845 5,985 6,136 6,114
--------- --------- --------- ---------
Net interest income 4,145 4,933 4,970 5,061
Provision for possible loan losses 15 202 75 105
--------- --------- --------- ---------
Net interest income after provision 4,130 4,731 4,895 4,956
Other income 504 945 488 390
Other expenses 3,351 3,506 3,318 3,408
--------- --------- --------- ---------
Income before income taxes 1,283 2,170 2,065 1,938
Income taxes 205 803 800 774
--------- --------- --------- ---------
Net income $ 1,078 $ 1,367 $ 1,265 $ 1,164
========= ========= ========= =========
Earnings per common share - basic $ 0.34 $ 0.36 $ 0.33 $ 0.30
Earnings per common share - assuming dilution $ 0.30 $ 0.34 $ 0.32 $ 0.29
60
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE U - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
Condensed financial information for TF Financial Corporation (parent company
only) follows:
BALANCE SHEET
December 31,
---------------------
1998 1997
---- ----
(in thousands)
ASSETS
Cash $ 990 $ 127
Certificates of deposit - other institutions 172 171
Investment securities available-for-sale 500 -
Investment in Third Federal 49,221 47,081
Investment in TF Investments 2,439 2,832
Investment in Teragon 219 28
Other assets 14 8
------ ------
Total assets $53,555 $50,247
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Loan payable to TF Investments $ - $ 103
Payable to Third Federal and other liabilities 895 49
------ ------
Total liabilities 895 152
Stockholders' equity 52,660 50,095
------ ------
Total liabilities and stockholders' equity $53,555 $50,247
====== ======
(Continued)
61
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE U - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY - Continued
STATEMENT OF EARNINGS
Year ended December 31,
----------------------------------------------
1998 1997 1996
---------- ----------- -----------
(in thousands)
INCOME
Dividend income from subsidiaries $ 3,198 $ 1,276 $ -
Interest income 13 10 10
--------- --------- ---------
Total income 3,211 1,286 10
--------- --------- ---------
EXPENSES
Interest 8 256 722
Other 170 226 257
--------- --------- ---------
Total expenses 178 482 979
--------- --------- ---------
Income (loss) before undistributed earnings
of subsidiaries 3,033 804 (969)
Undistributed earnings of subsidiaries 1,005 4,070 4,448
--------- --------- ---------
NET INCOME $ 4,038 $ 4,874 $ 3,479
========= ========= =========
(Continued)
62
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE U - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY - Continued
STATEMENT OF CASH FLOWS
Year ended December 31,
--------------------------------------------
1998 1997 1996
-------- --------- --------
(in thousands)
Cash flows from operating activities
Net income $ 4,038 $ 4,874 $ 3,479
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Undistributed earnings from subsidiaries (1,005) (4,070) (4,448)
Net change in assets and liabilities 857 (4,733) 4,676
------ ------- -------
Net cash provided by (used in) operating
activities 3,890 (3,929) 3,707
------ ------- -------
Cash flows from investing activities
Capital distribution (to) from subsidiaries (217) 42,025 -
Purchase of investment securities available for sale (500) - -
Purchase and maturities of certificates of deposit
in other financial institutions, net (1) (17) (4)
------ ------- -------
Net cash (used in) provided by investing
activities (718) 42,008 (4)
------ ------- -------
Cash flows from financing activities
Cash dividends paid to stockholders (1,387) (1,433) (1,258)
Net (decrease) increase in borrowings from
TF Investments (103) (9,637) 1,022
Treasury stock acquired (941) (27,027) (3,596)
Exercise of stock options 122 75 -
------- ------- -------
Net cash used in financing activities (2,309) (38,022) (3,832)
------- ------- -------
NET INCREASE (DECREASE) IN CASH 863 57 (129)
Cash at beginning of year 127 70 199
------- ------- -------
Cash at end of year $ 990 $ 127 $ 70
======= ======= =======
Supplemental disclosure of cash flow information
Cash paid during the year for income taxes $ 36 $ 63 $ 80
======= ======= =======
63
THIRD FEDERAL SAVINGS BANK
OFFICE LOCATIONS
CORPORATE OFFICE
3 Penns Trail
Newtown, PA 18940-3433
(215) 579-4000
OPERATIONS
(215) 579-4600
BUCKS COUNTY, PENNSYLVANIA BRANCHES
Newtown Office Feasterville Office Doylestown Office
3 Penns Trail Buck Hotel Complex 60 North Main St.
Newtown, PA 18940-3433 Feasterville, PA 19053-2209 Doylestown, PA 18901-3730
(215) 579-4607 (215) 364-7096 (215) 348-9021
Newtown Office New Britain Office Cross Keys Office
950 Newtown-Yardley Road 600 Town Center 834 North Easton Highway
Newtown, PA 18940-4018 New Britain, PA 18901-5199 Doylestown, PA 18901-1007
(215) 968-4444 (215) 345-5800 (215) 348-5566
Warminster Office
601 Louis Drive
Warminster, PA 18974-2843
(215) 672-7900
PHILADELPHIA COUNTY, PENNSYLVANIA BRANCHES
Frankford Office Mayfair Office Bridesburg Office
4625 Frankford Ave. Roosevelt Blvd. at Unruh Orthodox & Almond Sts.
Philadelphia, PA 19124-5889 Philadelphia, PA 19149-2494 Philadelphia, PA 19137-1626
(215) 289-1400 (215) 332-7650 (215) 743-6673
Fishtown Office Woodhaven Office
York & Memphis Sts. Knights Road Center
Philadelphia, PA 19125-3029 Knights & Woodhaven Rds.
(215) 423-2314 Philadelphia, PA 19154-2810
(215) 824-0151
MERCER COUNTY, NEW JERSEY BRANCHES
Ewing Office Princeton Office Hamilton Square Office
2075 Pennington Road Princeton Shopping Center 1850 Route 33
Trenton, NJ 08618-1003 301 N. Harrison St. Hamilton Square, NJ 08690-1712
(609) 883-7033 Princeton, NJ 08540-3512 (609) 890-1333
(609) 683-4488
64
TF Financial Corporation
Board of Directors
Carl F. Gregory Robert N. Dusek John R. Stranford
Thomas J. Gola Chairman of the Board George A. Olsen
Executive Officers
William C. Niemczura John R. Stranford Elizabeth Davidson Maier
Senior Vice President President and Chief Senior Vice President and
and Treasurer Executive Officer Corporate Secretary
Third Federal Savings Bank
Board of Directors
John R. Stranford Carl F. Gregory Thomas J. Gola
Robert N. Dusek Chairman of the Board William H. Yerkes, III
George A. Olsen William J. Happ, Jr.
Albert M. Tantala
Executive Officers
William C. Niemczura John R. Stranford Elizabeth Davidson Maier
Senior Vice President and President and Chief Senior Vice President and
Chief Financial Officer Executive Officer Corporate Secretary
Thomas J. Sposito, II Earl A. Pace, Jr. Floyd P. Haggar
Senior Vice President and Senior Vice President Senior Vice President and
Retail Banking Officer Chief Information Officer Chief Lending Officer
Independent Auditors Special Counsel Transfer Agent and Registrar
Grant Thornton, LLP Malizia, Spidi, Sloane & Fisch, P.C. American Securities Transfer &
Two Commerce Square One Franklin Square Trust, Inc.
2001 Market Street 1301 K Street, N.W., Ste. 700 East 938 Quail Street, Suite 101
Philadelphia, PA 19103-7080 Washington, DC 20005 Lakewood, CO 80215-5513