SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM lO-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1997
-------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------------------ ---------------------
Commission file number 0-24168
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TF FINANCIAL CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 74-2705050
- ------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
3 Penns Trail, Newtown, Pennsylvania 18940
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 215-579-4000
------------
N/A
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if
changed since last report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date November 11, 1997
Class Outstanding
--------------------------- ----------------
$.10 par value common stock 3,187,233 shares
<PAGE>
TF FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 1O-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1997
INDEX
Page
Number
------
PART I - CONSOLIDATED FINANCIAL INFORMATION
Item 1. Unaudited Consolidated Financial Statements 1
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II- OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Materially Important Events 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES
<PAGE>
TF FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 71,286 $ 54,132
Securities purchased under agreements to resell 6,000 25,129
Certificates of deposit in other financial institutions 2,928 4,220
Investment securities available for sale - at market value 41,793 12,652
Investment securities held to maturity (market value of $40,382 and $44,311 $ 39,709 43,462
respectively, for the periods shown)
Mortgage-backed securities available for sale - at market value 33,324 22,027
Mortgage-backed securities held to maturity (market value of $149,691 and
$153,269 respectively, for the periods shown) 148,599 153,758
Loans receivable, net 259,500 309,570
Accrued interest receivable 4,130 4,247
Goodwill/Core deposit intangible 8,499 9,232
Premises and equipment, net 7,708 8,002
Other assets 1,862 1,422
--------- ---------
Total Assets $ 625,338 $ 647,853
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $ 443,584 $ 469,088
Advances from the Federal Home Loan Bank 98,359 98,359
Advances from borrowers for taxes and insurance 1,138 2,364
Accrued interest payable 5,005 2,030
Other liabilities 4,539 3,437
--------- ---------
Total Liabilities 552,625 575,278
--------- ---------
Commitments and contingencies -- --
Stockholders' Equity
Preferred stock, no par value; 2,000,000 shares authorized
and none issued -- --
Common stock, $0.10 par value; 10,000,000 shares authorized,
5,290,000 issued; 3,779,773 and 3,962,544 shares outstanding at September
30, 1997 and December 31, 1996, net of treasury shares of
1,201,568 and 1,008,614 respectively 529 529
Additional paid-in capital 51,802 51,645
Net unrealized loss on investment securities available for sale 250 (127)
Unearned ESOP shares-at cost (3,033) (3,188)
Shares acquired by MSBP (1,002) (1,322)
Treasury stock - at cost (18,218) (14,712)
Retained earnings 42,385 39,750
--------- ---------
Total Stockholders' Equity 72,713 72,575
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 625,338 $ 647,853
========= =========
</TABLE>
See notes to consolidated financial statement
1
<PAGE>
TF FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Nine Months Three Months
Ended September 30, Ended September 30,
1997 1996(1) 1997 1996(1)
<S> <C> <C> <C> <C>
Interest income
Loans $18,294 $17,019 $ 5,881 $ 6,117
Mortgage-backed securities 9,488 7,995 3,109 2,629
Investment securities 4,291 1,840 1,336 612
Interest bearing deposits and other 1,126 930 592 353
------- ------- --------- -------
TOTAL INTEREST INCOME 33,199 27,784 10,918 9,711
Interest expense
Deposits 13,820 9,892 4,500 3,495
Borrowings 4,415 4,537 1,485 1,614
------- ------- --------- -------
TOTAL INTEREST EXPENSE 18,235 14,429 5,985 5,109
NET INTEREST INCOME 14,964 13,355 4,933 4,602
Provision for loan losses 382 210 202 120
------- ------- --------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 14,582 13,145 4,731 4,482
------- ------- --------- -------
Non-interest income
Gain on sale of real estate acquired through foreclosure 0 114 0 0
Gain on sale of mortgage-backed securities 276 223 88 0
Gain on sale of loans 288 37 249 30
Gain on sale of servicing 330 0 330 0
Service fees, charges and other operating income 929 916 278 266
------- ------- --------- -------
TOTAL NON-INTEREST INCOME 1,823 1,290 945 296
------- ------- --------- -------
Non-interest expense
Employee compensation and benefits 4,854 4,261 1,555 1,455
Occupancy and equipment 1,497 996 593 339
Federal deposit insurance premium 226 2,808 73 2,418
Data processing 509 360 163 123
Professional fees 424 437 148 160
Goodwill and other intangible amortization 732 0 244 0
Provision for losses on real estate acquired through foreclosure 0 3 0 0
Advertising 278 230 90 75
Other operating 1,712 1,397 640 519
------- ------- --------- -------
TOTAL NON-INTEREST EXPENSE 10,232 10,492 3,506 5,089
------- ------- --------- -------
INCOME BEFORE INCOME TAXES 6,173 3,943 2,170 (311)
------- ------- --------- -------
Income taxes 2,377 1,656 803 (102)
------- ------- --------- -------
NET INCOME $ 3,796 $ 2,287 $ 1,367 $ (209)
======= ======= ========= =======
Per share data
Earnings per share .93 .54 .33 (.05)
Weighted average number of shares outstanding 4,065 4,243 4,065 4,243
(1) Non-interest expense for the three and nine month periods ended September
30, 1996 includes a $2.2 million one-time assessment by the FDIC mandated
by Federal Legislation in order to recapitalize the Savings Association
Insurance Fund
See notes to consolidated financial statement
2
</TABLE>
<PAGE>
TF FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
----------------------
1997 1996
---------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 3,796 $ 2,287
Adjustments to reconcile net income to net cash provided by operating
activities:
Amortization of:
Mortgage loan servicing rights 65 2
Deferred loan origination fees (112) (151)
Premiums and discounts on investment securities. net 50 (18)
Premiums and discounts on mortgage-backed securities and
loans.,net 168 59
Amortization of goodwill and core deposit intangible 732 0
Provision for loan losses and provision for losses on real estate 382 213
Depreciation of premises and equipment 532 397
Recognition of ESOP and MSBP expenses 632 660
Gain (loss) on sale of mortgage-backed securities - available for sale (269) (223)
Gain on sale of investment securities available for sale (8) 0
Gain on sale of real estate acquired through foreclosure 0 (114)
Gain on sale of mortgage servicing rights (330) 0
(Gain)/loss on sale of mortgage loans (288) (37)
Decrease (increase) in
Accrued interest receivable 117 (120)
Other assets (1,155) (666)
Increase (decrease) in
Accrued interest payable 2,975 2,332
Other liabilities 862 3,226
------ -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 8,149 7,847
CASH FLOWS FROM INVESTING ACTIVITIES
Loan originations and principal payments on loans. net (13,842) (31,807)
Purchases of loans (13,623) (62,205)
Proceeds from loan sales 77,194 10,566
Purchases and maturities of certificates of deposit in other
financial institutions. net 1,292 3
Purchases and maturities of securities purchased under
agreements to resell, net 19,129 0
Purchases of investment securities - available for sale (48,665) (8,976)
Purchases of investment securities - held to maturity (82,088) (7,708)
Purchases of mortgage-backed securities - available for sale (28,418) (4,943)
Purchase of mortgage-backed securities - held to maturity (15,071) (11,626)
Proceeds from maturities of investment securities - held to maturity 82,680 8,432
Proceeds from maturities of investment securities - available for sale 22,540 9,000
Principal repayments from maturities of mortgage-backed securities-
held to maturity 20,201 20,836
Principal repayments from maturities of mortgage-backed securities-
available for sale 1,520 2,627
Proceeds from the sale of mortgage-backed securities available for sale 16,320 5,338
Proceeds from the sale of investment securities available for sale 510 0
Purchases and redemptions of Federal Home Loan Bank Stock, net 0 (2,250)
Proceeds from sales of real estate acquired through foreclosure 0 439
Proceeds from the sale of loan servicing rights 981 0
Premium paid for deposit liabilities 0 (9,476)
Purchase of premises and equipment (238) (1,576)
------ -------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 40,422 (83,326)
</TABLE>
See notes to consolidated financial statement
3
<PAGE>
TF FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(in thousands)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
---------------------
1997 1996
------------- ------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand deposits/NOW accounts,
passbook savings accounts and certificates of deposit $ (25,504) $ 139,350
Advances from Federal Home Loan Bank - net 0 30,000
Net (decrease) increase in advances from borrowers for taxes
and insurance (1,226) (310)
Purchase of treasury stock (3,677) (3,340)
Common stock cash dividend (1,010) (942)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (31,417) 164,758
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 17,154 89,279
Cash and cash equivalents at beginning of period 54,132 27,032
Cash and cash equivalents at end of period $ 71,286 $ 116,311
========= =========
Supplemental disclosure of cash flow information
Cash paid for
Interest on deposits and advances $ 15,260 $ 12,098
Income taxes $ 1,421 $ 1,578
Non-cash transactions
Transfers from loans to real estate acquired through foreclosure $ 231 $ 275
Securitization of mortgage loans held for investment $ 0 $ 27,854
</TABLE>
See notes to consolidated financial statement
4
<PAGE>
TF FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - PRINCIPLES OF CONSOLIDATION
The consolidated financial statements as of December 31, 1996
and as of and for the three and nine month periods ended September 30, 1997 and
1996 include the accounts of TF Financial Corporation (the "Corporation") and
its wholly owned subsidiaries Third Federal Savings Bank (the "Savings Bank"),
TF Investments Corporation, Penns Trail Development Corporation and Teragon
Financial Corporation. The Corporation's business is conducted principally
through the Savings Bank. All significant intercompany accounts and transactions
have been eliminated in consolidation.
NOTE 2 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements were prepared in
accordance with instructions for Form 10-Q and, therefore, do not include
information or footnotes necessary for a complete presentation of consolidated
financial condition, results of operations, and cash flows in conformity with
generally accepted accounting principles. However, all adjustments, consisting
of normal recurring accruals, which, in the opinion of management, are necessary
for fair presentation of the consolidated financial statements have been
included. The results of operations for the periods ended September 30, 1997 are
not necessarily indicative of the results which may be expected for the entire
fiscal year or any other period. For further information, refer to consolidated
financial statements and footnotes thereto included in the Corporations Annual
Report on Form 10-K for the fiscal year ended
December 31, 1996.
NOTE 3 - IMPAIRED LOANS
On January 1, 1995 the Corporation adopted Statement of Financial Accounting
Standards (SFAS) No. 114, "Accounting for Creditors for Impairment of a Loan,"
as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan -
Income Recognition and Disclosures." SFAS No. 114 requires that a creditor
measure impairment based on the present value of expected future cash flows
discounted at the loan's effective interest rate, except that as a practical
expedient, a creditor may measure impairment based on a loan's observable market
price, or the fair value of the collateral if the loan is collateral dependent.
Regardless of the measurement method, a creditor must measure impairment based
on the fair value of the collateral when the creditor determines that
foreclosure is probable: SFAS No. 118 allows creditors to use existing methods
for recognizing interest income on impaired loans.
The Savings Bank has identified a loan as impaired when it is probable that
interest and principal will not be collected according to the contractual terms
of the loan agreement. The accrual of interest is discontinued on such loans,
and cash payments received are applied to reduce principal to the extent
necessary to eliminate any doubt as to the ultimate collectibility of principal
either in whole or in part. Loan impairment is measured by estimating the
expected future cash flow and discounting them at the respective effective
interest rate, or by valuing the underlying collateral. An allowance for credit
losses has been established for all loans identified as impaired. The recorded
investment in impaired loans and the valuation for credit losses are as follows:
(in thousands) September 30, 1997
------------------
Principal amount of impaired loans $ 143
Accrued interest -
Deferred loan costs -
---------
Subtotal $ 143
---------
Less valuation allowance 22
---------
Total $ 121
=========
5
<PAGE>
The average recorded investment in impaired loans during the quarter ended
September 30, 1997 was $460,000. Total cash collected on impaired loans during
the quarter ended September 30, 1997 was $14,000 of which $11,000 was credited
to the principal balance outstanding on such loans and $3,000 was recognized as
interest income. Interest that would have been accrued on impaired loans during
the quarter was $13,000. Interest income recognized during the quarter was
$3,000. Management believes the level of impaired loans is immaterial to the
Corporation's financial position or results of operations.
NOTE 4 - CONTINGENCIES
The Corporation, from time to time, is a party to routine litigation, which
arise in the normal course of business. In the opinion of management, the
resolution of these lawsuits would not have a material adverse effect on the
Corporation's consolidated financial condition or results of operations.
A petition for resettlement has been filed by the Savings Bank protesting
assessment of certain prior years' Pennsylvania Mutual Thrift Institutions Tax.
Management believes that the resolution of this liability, if any, would not
have a material adverse effect on the Corporation's financial position or
results of operations.
6
<PAGE>
TF FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
GENERAL
The Corporation's total assets at September 30, 1997 and December 31, 1996
totaled $625.3 million and $647.9 million, respectively, a decrease of $22.6
million or 3.5% for the nine month period. This decrease was primarily as a
result of a $25.5 million or 5.4% decrease in savings deposits which was funded
by reductions in securities purchased under agreements to resell. Savings
deposits decreased over the period as a result of general market conditions.
Loans receivable decreased by $50.1 million, or 16.2%, from $309.6 million at
December 31, 1996 to $259.5 million at September 30, 1997. During this same
period, cash and cash equivalents increased by $17.2 million, or 31.8%,
investment securities increased $25.4 million, or 45.2%, and mortgage backed
securities increased by $6.1 million or 3.5%. The increases in these asset
categories was funded by the decrease in loans receivable.
The decrease in loans receivable of $50.1 million or, 16.2%, from $309.6 million
at December 31, 1996 to $259.5 million at September 30, 1997 was a result of the
sale of $43.6 million of mortgage loans coupled with mortgage loan amortization.
Cash and cash equivalent balances increased by $17.2 million from $54.1 million
at December 31, 1996 to $71.3 million at September 30, 1997 primarily as a
result of the sale of mortgage loans.
Investment securities at September 30, 1997, totaled $81.5 million, which
represents an increase of $25.4 million or 45.2% as compared to December 31,
1996. This increase is primarily due to the reinvestment of cash received from
the sale of mortgage loans.
Mortgage-backed securities totaled $181.9 million at September 30, 1997 as
compared to $175.8 million at December 31, 1996. This increase of $6.1 million
or 32.8% is also attributed mainly to the reinvestment of cash received from the
sale of mortgage loans.
Total consolidated stockholders' equity of the Corporation increased $138,000 to
$72.7 million, or 11.6% of total assets, at September 30, 1997, from $72.6
million or 11.2 % of total assets at December 31, 1996, primarily due to the
$3.6 million in stock repurchases, partially offset by the $2.6 million increase
to retained earnings for the nine month period. The increase in net unrealized
gain on investment securities available for sale of $377,000 from ($127,000) at
December 31, 1996 to $250,000 at September 30, 1997 coupled with the
amortization of stock incentive plans of $632,000 also contributed to this
increase in stockholders equity. On October 23, 1996 the Corporation announced
its intent to repurchase up to 5% of its outstanding common stock in the open
market. The repurchase was completed on April 9, 1997, with a total of 214,869
shares, approximately 5% of outstanding common shares, repurchased at a total
cost of $3.6 million.
On September 26, 1997, the Corporation announced an offer to purchase (the
"Offer to Purchase") up to 900,000 shares of its Common Stock at a cash purchase
price not in excess of $26.00 per share or less than $22.50 per share. The Offer
to Purchase expired at 5:00 p.m. Eastern Time on October 27, 1997. Based on a
final count, 901,199 shares tendered were purchased, representing approximately
22% of the common shares outstanding, and the price at which such shares were
purchased was $26.00 per share. Odd lots tendered at or below the purchase price
totaling 520 shares were purchased in their entirety. The remaining 900,679
shares were purchased on a 83.24% pro rata basis from shareholders who tendered
a total of 1,081,094 shares to the Corporation. All shares not purchased were
returned to tendering shareholders. As a result of this transaction, total
stockholders' equity of the Corporation is expected to decrease by approximately
$23.4 million to $49.3 million. Repurchased shares are expected to be treated as
treasury
7
<PAGE>
stock. As a result of the utilization of $23.4 million for the repurchase of
shares, the Corporation will no longer have such funds available for investment.
This is expected to result in decreased aggregate core earnings for the
Corporation.
8
<PAGE>
Average Balance Sheet
The following tables set forth information relating to the Corporation's average
balance sheet and reflects the average yield on assets and average cost of
liabilities for the periods indicated. The yields and costs are computed by
dividing income or expense by the monthly average balance of interest-earning
assets or interest-bearing liabilities, respectively for the periods indicated.
<TABLE>
<CAPTION>
For Three Months Ended September 30
-------------------------------------------------------------------------
1997 (4) 1996(4)
------------------------------------- -----------------------------------
(Dollars in thousands)
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest earning assets:
Loans receivable, net $ 291,374 $ 5,881 8.07% $ 308,985 $ 6,117 7.92%
Mortgage-backed securities 181,513 3,109 6.85% 162,134 2,629 6.49%
Investment securities 87,645 1,336 6.10% 39,533 612 6.19%
Other interest-earning assets(1) 60,063 592 3.94% 51,955 353 2.72%
---------- ---------- ---------- ---------
Total interest-earning assets $ 620,595 $ 10,918 7.04% $ 562,607 $ 9,711 6.90%
========== ========== ========== =========
Non interest-earning assets 8,635 13,118
---------- ----------
Total assets $ 629,230 $ 575,725
========== ==========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Savings deposits $ 447,731 $ 4,500 4.02% $ 386,945 $ 3,495 3.61%
Borrowed money 98,359 1,485 6.04% 106,692 1,614 6.05%
---------- --------- ---------- ---------
Total interest-bearing liabilities $ 546,090 $ 5,985 4.38% $ 493,637 $ 5,109 4.14
========== ========= ========= =========
Non interest-bearing liabilities 10,930 10,034
---------- ----------
Total liabilities $ 557,020 $ 503,671
---------- ----------
Stockholders' equity 72,210 72,054
Total liabilities and stockholders' equity $ 629,230 $ 575,725
========== ==========
Net interest income $ 4,933 $ 4,602
======== ========
Interest rate spread (2) 2.66% 2.76%
Net yield on interest-earning assets (3) 3.18% 3.27%
Ratio of average interest-earning assets to average
Interest-bearing liabilities 114% 114%
</TABLE>
- ----------------------------------------
(1) Includes interest-bearing deposits in other banks.
(2) Interest-rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(3) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
(4) Ratios have been annualized where applicable.
9
<PAGE>
Average Balance Sheet (continued)
<TABLE>
<CAPTION>
For Nine Months Ended September 30
-----------------------------------------------------------------------
1997 (4) 1996(4)
-----------------------------------------------------------------------
(Dollars in thousands)
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest earning assets:
Loans receivable, net $ 305,978 $ 18,294 7.97% $ 296,431 $ 17,019 7.66%
Mortgage-backed securities 187,608 9,488 6.74% 151,181 7,995 7.05%
Investment securities 89,983 4,291 6.36% 39,842 1,840 6.16%
Other interest-earning assets(1) 35,585 1,126 4.22% 41,215 930 3.01%
----------- -------- ----------- --------
Total interest-earning assets $ 619,154 $ 33,199 7.15% $ 528,669 $ 27,784 7.01%
=========== ======== =========== ========
Non interest-earning assets 18,028 10,579
----------- -----------
Total assets $ 637,182 $ 539,248
=========== ===========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Savings deposits $ 456,475 $ 13,820 4.04% $ 353,537 $ 9,892 3.73%
Borrowed money 98,915 4,415 5.95% 102,803 4,537 5.88%
----------- -------- ----------- --------
Total interest-bearing liabilities $ 555,390 $ 18,235 4.38% $ 456,340 $ 14,429 4.22
=========== ======== =========== ========
Non interest-bearing liabilities 10,427 9,252
Total liabilities $ 565,817 $ 465,592
=========== ===========
Stockholders' equity 71,365 73,656
----------- -----------
Total liabilities and stockholders' equity $ 637,182 $ 538,248
=========== ===========
Net interest income $ 14,964 $ 13,355
======== ========
Interest rate spread (2) 2.77% 2.79%
Net yield on interest-earning assets (3) 3.22% 3.37%
Ratio of average interest-earning assets to average
Interest-bearing liabilities 111% 116%
</TABLE>
- ----------------------------------------
(1) Includes interest-bearing deposits in other banks.
(2) Interest-rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(3) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
(4) Ratios have been annualized where applicable.
10
<PAGE>
RESULTS OF OPERATIONS
Net Income. The Corporation recorded net income of $1.4 million for the three
months ended September 30, 1997 as compared to a net loss of ($.2) million for
the three months ended September 30, 1996. Earnings for the three months ended
September 30, 1997 represent an increase of $1.6 million compared to earnings
reported for the same period in 1996. The increase in earnings for this period
is attributable to an increase in net interest income coupled with the absence
of $2.2 million one-time fee assessed to members of Savings Association
Insurance Fund (SAIF) for the recapitalization of SAIF which was reflected in
the September 30, 1996 statement. Net interest income before provisions for loan
losses was $4.9 million for the three month periods ended September 30, 1997 as
compared to $4.6 million for the same period in 1996. For these same periods,
total interest expense was $6.0 million and $5.1 million, respectively.
Non-interest income was $945,000 and $296,000, respectively, for these same
periods. Operating expenses (non-interest expense) were $3.5 million and $5.1
million for the three month periods ended September 30, 1997 and September 30,
1996, respectively.
Net Income of $3.8 million, for the nine months ended September 30, 1997,
reflected a $1.5 million increase over net income of $2.3 million, for the nine
months ended September 30, 1996. The increase in earnings for this period is
attributable to an increase net interest income coupled with the $2.2 million
one-time fee assessed to members of the SAIF which was reflected in the
September 30, 1996 statement. Net interest income before provisions for loan
losses was $15.0 million for the nine month period ended September 30, 1997 as
compared to $13.4 million for the same period in 1996. For these same periods,
total interest expense was $18.2 million and $14.4 million, respectively.
Non-interest income was $1.8 million and $1.3 million, respectively for these
same periods. The increase in non-interest income was attributable to the
increase in gains on the sale of loans, loan servicing, and mortgage-backed
securities for the nine month period ended September 30, 1997. Operating
expenses (non-interest expense) were $10.2 million and $10.5 million for the
nine month periods ended September 30, 1997 and September 30, 1996,
respectively.
Total Interest Income. Total interest income increased by $1.2 million or 12.4%
to $10.9 million for the three months ended September 30, 1997, from $9.7
million for the three months ended September 30, 1996 due primarily to increases
in the average balance of mortgage-backed securities, investment securities and
other interest earning assets offset somewhat by decreases in the average
balances of loans receivable. The average balance of loans receivable decreased
$17.6 million, or 5.7%, to $291.4 million from $309.0 million for the three
months ended September 30, 1997 and 1996, respectively. Interest attributable to
loans receivable decreased $236,000 or 3.9% to $5.9 million from $6.1 million
for these same periods. This decrease is primarily attributable to the decrease
in the average balance of loans receivable partially offset by an increase in
the average yield on loans receivable from 7.92% for the period end September
30, 1996, to 8.07% for the period ended September 30, 1997. Interest on
mortgage-backed securities increased $480,000, 18.3%, for the three month period
ended September 30, 1997, from $2.6 million at September 30, 1996 primarily as a
result of increases in the average balances of these securities in conjunction
with increases in the average yield. The average yield on mortgage-backed
securities increased to 6.85% for the three month period ended September 30,
1997 compared to 6.49 for the similar period in 1996 while the average balance
of mortgage-backed securities increased by $19.4 million or 12.0% when comparing
these two periods. Interest on investment securities increased by $724,000 or
118.3% for the three month period ended September 30, 1997 as compared to the
similar period in 1996. This increase is primarily the result of the increase in
the average balance of investment securities to $87.6 million at September 30,
1997, from 39.5 million at September 30, 1996. Interest on other interest
earning assets increased by $239,000 for the three month period ended September
30, 1997 compared to the similar period ended September 30, 1996 primarily as a
result of the average balance increasing by $8.1 million to $60.1 million,
coupled with a increase in the average yield to 3.94% at September 30, 1997 from
2.72% at September 30, 1996. The increases in the average balances of
mortgage-backed securities, investment securities and other interest-earning
assets are a result of the reinvestment of $43.6 million in proceeds from the
sale of mortgage loans.
Total interest income increased by $5.4 million or 19.4% to $33.2 million for
the nine months ended September 30, 1997, from $27.8 million for the nine months
ended September 30, 1996 due primarily to increases in the average balance of
mortgage-backed securities and investment securities. Interest income form loans
increased to $18.3 million for the nine
11
<PAGE>
months ended September 30, 1997, from $17.0 million for the same period in 1996.
Interest on mortgage-backed securities increased $1.5 million, or 18.7% for the
nine month period ended September 30, 1997, from $8.0 million at September 30,
1996 primarily as a result of increases in the average balances of these
securities in conjunction with decreases in the average yield. The average
balance of mortgage-backed securities increased by $36.4 million or 24.1% when
comparing these two periods. Interest on investment securities increased by $2.5
million or 133.2% for the nine month period ended September 30, 1997 as compared
to the similar period in 1996. This increase is primarily the result of the
increase in the average balance of investment securities to $90.0 million at
September 30, 1997, from $39.8 million at September 30, 1996. Interest on other
interest earning assets increased by $196,000 for the nine month period ended
September 30, 1997 compared to the similar period ended September 30, 1996
primarily as a result of the increase in the average yield to 4.22% at September
30, 1997 from 3.01% at September 30, 1996. The increases in the average balances
of mortgage-backed securities, investment securities and other interest-earning
assets are a result of the reinvestment of $43.6 million in proceeds from the
sale of mortgage loans.
Total Interest Expense. Total interest expense increased to $6.0 million for the
three month period ended September 30, 1997 from $5.1 million at September 30,
1996. This increase in total interest expense is a result of the increases in
the average balance and average rate paid on savings deposits. The average
balance of savings deposits increased from $386.9 million at September 30, 1996
to $447.7 million at September 30, 1997. The average rate paid on savings
deposits increased from 3.61% in the September 30, 1996 period to 4.02% in the
September 30, 1997 period. This increase was mainly attributable to the
acquisition of deposits from the Cenlar Federal Savings Bank (Cenlar)
acquisition. The average balance of total interest bearing liabilities increased
to $546.1 million during the three months ended September 30, 1997 from $493.6
million for the three months ended September 30, 1996 as a result of the
increase in savings deposits partially offset by decreases in the average
balance and rate of Federal Home Loan Bank advances.
Total interest expense of $14.4 million for the nine months ended September 30,
1996 increased $3.8 million for the nine month period ended September 30, 1997
to $18.2 million. This increase in total interest expense is a result of the
increases in the average balance and average rate of savings deposits. The
average balance of total interest bearing liabilities increased to $555.4
million during the nine months ended September 30, 1997 from $456.3 million
during the nine months ended September 30, 1996 primarily as a result of the
increase in savings deposits.
Net Interest Income. Net interest income for the three month period ended
September 30, 1997 increased by $331,000 or 8.7% to $5.0 million from $4.6
million for the same period in 1996. This increase is primarily due to the
increase in interest earning assets partially offset by the increase in interest
bearing liabilities. The average balance of interest earning assets increased to
$620.6 million for the three months ended September 30, 1997 from $562.6 million
for the similar period in 1996. During these same periods, the average balances
on interest-bearing liabilities increased to $546.1 million from $493.6 million.
The cost of interest bearing liabilities increased from 4.14% to 4.38% while the
yield on interest earning assets increased from 6.90% to 7.04% for the three
month periods ended September 30, 1996 and 1997 respectively.
Net interest income for the nine month period ended September 30, 1997 increased
by $1.6 million or 11.9% to $15.0 million from $13.4 million for the same period
in 1996. This increase is primarily due to the increase in interest earning
assets partially offset by the increase in interest earning liabilities. The
average balances of interest earning assets increased to $619.2 million for the
nine months ended September 30, 1997 from $528.7 million for the similar period
in 1996. During these same periods, the average balances on interest bearing
liabilities increased to $555.4 million from $456.3 million. The cost of
interest bearing liabilities increased from 4.22% to 4.38% while the yield on
interest earning assets increased from 7.01% to 7.15% for the nine month periods
ended September 30, 1996 and 1997 respectively.
Allowance for Loan Losses. The allowance for loan losses increased at September
30, 1997 to $2.1 million from $2.0 million at September 30, 1996. Such totals
correlate to non-performing loans of $1.3 million at September 30, 1997 and $1.8
million at September 30, 1996. The increase in the allowance for loan losses of
$160,000 resulted from the addition of $202,000 to the provision for loan losses
and the deduction of $42,000 of net charge offs for losses on loans. The
provision for losses on loans is the method by which the allowance for losses is
adjusted during the period. The provision
12
<PAGE>
for losses on loans was $202,000 for the three months ended September 30, 1997.
At September 30, 1997, the allowance for loan losses was 154.0% of
non-performing loans as compared to 95.8% of non-performing loans at September
30, 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 to $945,000 for the
three months ended September 30, 1997 from $296,000 for the same period in 1996.
This increase of $649,000 can be primarily attributable to the increase to the
gain on sale of mortgage-backed securities of $88,000, the net increase to the
sale of loans of $219,000 and the net increase to the sale of servicing of
$330,000.
Total non-interest income increased to $1.8 million for the nine month period
ended September 30, 1997 from $1.3 million for the similar period in 1996. This
increase can be attributable to the increase to the gain on sale of
mortgage-backed securities of $53,000, the net increase to the sale of loans of
$251,000 and the net increase to the sale of servicing of $330,000, partially
offset by the decrease in the gain on real estate acquired through foreclosure
of $114,000.
Non-interest Expense. Total non-interest expense decreased by $1.6 million to
$3.5 million for the three months ended September 30, 1997 as compared to $5.1
million for the similar period in 1996. This decrease is primarily attributed to
the decrease of $2.3 million in federal deposit insurance premiums partially
offset by a $100,000 increase in employee compensation and benefits, a $254,000
increase in occupancy and equipment, a $40,000 increase in data processing
expense, a $244,000 increase in amortization of goodwill and other intangibles,
and a $121,000 increase in other operating costs. The decrease in federal
deposit insurance premiums was the result of the $2.2 million one-time fee
assessed to members of the SAIF for the recapitalization of the SAIF which was
reflected in the September 30, 1996 statement. The increases in compensation and
benefit costs were primarily as a result of increased staffing necessary to
support three additional retail offices which were acquired through the Cenlar
acquisition. Benefit costs were also increased due to the increases in costs
associated with benefit plans utilizing Corporation stock (portions of the costs
of benefit plans utilizing Corporation stock change as the market value of the
stock changes). Data processing, occupancy and equipment and other operating
expenses were also increased due to this acquisition. The cost of the
acquisition of the three retail offices is being amortized over a 15 year period
and this amortization resulted in additional expense of $244,000 for the period
ended September 30, 1997.
Total non-interest expense has decreased to $10.2 million for the nine months
ended September 30, 1997 as compared to $10.5 million for the similar period in
1996. This decrease of $.3 million is primarily attributable to a $2.6 million
decrease in Federal deposit insurance premiums partially offset by a $593,000
increase in employee compensation and benefits, a $501,000 increase in occupancy
and equipment, a $149,000 increase in data processing costs, a $732,000 increase
in goodwill and other intangible amortization, and a $315,000 increase in other
operating costs. These increases were partially offset by. The increases were
mainly due to the increased costs associated with the Cenlar acquisition.
Benefit costs were also increased due to the increases in costs associated with
benefit plans utilizing Corporation stock (portions of the costs of benefit
plans utilizing Corporation stock change as the market value of the stock
changes).
Income Tax Expense. Income taxes increased by $905,000 to $803,000 for the three
month period ended September 30, 1997, from $(102,000) for the three months
ended September 30, 1996. The primary reason for this increase was the increase
in net income before taxes to $2.2 million at September 30, 1997, from a net
loss of ($311,000) at September 30, 1996. The change was primarily the result of
the SAIF Assessment.
For the nine month period ended September 30, 1997, income taxes increased to
$2.4 million from $1.7 million for the nine months ended September 30, 1996.
This increase of $721,000 is primarily attributed to the increase in net income
before taxes to $6.2 million from $3.9 million for the nine month periods ended
September 30, 1997 and 1996, respectively.
13
<PAGE>
Liquidity and Capital Resources
Under current Office of Thrift Supervision (OTS) regulations, the Savings Bank
must have core capital equal to 3% of total assets and risk-based capital equal
to 8% of risk-weighted assets, of which 1.5% must be tangible capital, excluding
goodwill and certain other intangible assets.
On September 30, 1997, the Savings Bank was in compliance with its three
regulatory capital requirements as follows:
Amount Percent
------ -------
(dollars in thousands)
Tangible capital $42,782 6.9%
Tangible capital requirement 9,299 1.5
----- ---
Excess over requirement $33,483 5.4%
======= ===
Core capital $42,782 6.9%
Core capital requirement 18,598 3.0
------ ---
Excess over requirement $24,184 3.9%
======= ===
Risk based capital $44,925 17.4%
Risk based capital requirement 20,615 8.0
------ ---
Excess over requirement $24,310 9.4%
======= ===
Management believes that under current regulations, the Savings Bank will
continue to meet its minimum capital requirements in the foreseeable future.
Events beyond the control of the Savings Bank, such as increased interest rates
or a downturn in the economy in areas in which the Savings Bank operates, could
adversely affect future earnings and as a result, the ability of the Savings
Bank to meet its future minimum capital requirements. Subsequent to the period
ended September 30, 1997, the Savings Bank paid a dividend to TF Financial
Corporation totaling $16.5 million, proceeds of which were utilized to
repurchase shares tendered through the modified dutch auction. The regulatory
capital of the Savings Bank after the transaction will exceed regulatory capital
requirements.
The Savings Bank's liquidity is a measure of its ability to fund loans, pay
withdrawals of deposits, and other cash outflows in an efficient, cost effective
manner. The Savings Bank's primary source of funds are deposits and scheduled
amortization and prepayment of loan and mortgage backed principal. During the
past several years, the Savings Bank has used such funds primarily to fund
maturing time deposits, pay savings withdrawals, fund lending commitments,
purchase new investments, and increase liquidity. The Savings Bank is currently
able to fund its operations internally but has, when deemed prudent, borrowed
funds from the Federal Home Loan Bank of Pittsburgh. As of September 30, 1997,
such borrowed funds total $98.4 million. Loan payments, maturing investments and
mortgage-backed security prepayments are greatly influenced by general interest
rates, economic conditions and competition.
The Savings Bank is required under federal regulations to maintain certain
specified levels of "liquid investments", which include certain United States
government obligations and other approved investments. Current regulations
require the Savings Bank to maintain liquid assets of not less than 5% of its
net withdrawable accounts plus short term borrowings. Short term liquid assets
must consist of not less than 1% of such accounts and borrowings, which amount
is also included within the 5% requirement. These levels may be changed from
time to time by the regulators to reflect current economic conditions. The
Savings Bank has generally maintained liquidity far in excess of regulatory
requirements. The Savings Bank's regulatory liquidity was 22.7% and 20.5% at
September 30, 1997 and 1996, respectively, and its short term liquidity was
16.7% and 16.3%, at such dates, respectively.
The amount of certificate accounts which are scheduled to mature during the
twelve months ending September 30 1998, is approximately $116.1 million. To the
extent that these deposits do not remain at the Savings Bank upon maturity, the
14
<PAGE>
Savings Bank believes that it can replace these funds with deposits, excess
liquidity, FHLB advances or outside borrowings. It has been the Savings Bank's
experience that a substantial portion of such maturing deposits remain at the
Savings Bank.
At September 30, 1997, the Savings Bank had outstanding commitments to originate
loans of $11.0 million. Funds required to fill these commitments are derived
primarily from current excess liquidity, deposit inflows or loan and security
repayments. At September 30, 1997, the Savings Bank had outstanding commitments
to sell loans of $10.9 million.
15
<PAGE>
TF FINANCIAL CORPORATION AND SUBSIDIARIES
PART II
ITEM 1. LEGAL PROCEEDINGS
Neither the Corporation nor the Savings Bank was engaged in any legal
proceeding of a material nature at September 30, 1997. From time to
time, the Corporation is a party to legal proceedings in the ordinary
course of business wherein it enforces its security interest in loans.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS ON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER MATERIALLY IMPORTANT EVENTS
On September 26, 1997, the Corporation commenced a Modified Dutch Auction
self-tender offer for up to 900,000 common shares, or approximately 22% of its
4,088,432 shares then outstanding. The offer allowed common shareholders to
specify prices at which they were willing to tender their shares at a price not
greater than $26.00 and not less than $22.50 per share. The period in which
shares could be tendered ended at 5:00 p.m. on October 31, 1997. As a result of
this tender offer, 901,199 shares were purchased by the Corporation at a price
of $26.00 per share, or $23,431,174. The Corporation now has 3,187,233 common
shares outstanding.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TF FINANCIAL CORPORATION
Date: November 14, 1997 /s/ John R. Stranford
----------------- ---------------------
John R. Stranford
President and CEO
(Principal Executive Officer)
Date: November 14, 1997 /s/ William C. Niemczura
----------------- ------------------------
Senior Vice President and
Chief Financial Officer
(Principal Financial & Accounting Officer)
17
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1997
<CASH> 71,286
<INT-BEARING-DEPOSITS> 2,928
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 75,117
<INVESTMENTS-CARRYING> 263,425
<INVESTMENTS-MARKET> 265,189
<LOANS> 261,516
<ALLOWANCE> 2,016
<TOTAL-ASSETS> 625,338
<DEPOSITS> 443,584
<SHORT-TERM> 0
<LIABILITIES-OTHER> 10,682
<LONG-TERM> 98,359
0
0
<COMMON> 529
<OTHER-SE> 72,184
<TOTAL-LIABILITIES-AND-EQUITY> 625,338
<INTEREST-LOAN> 18,294
<INTEREST-INVEST> 13,779
<INTEREST-OTHER> 1,126
<INTEREST-TOTAL> 33,199
<INTEREST-DEPOSIT> 13,820
<INTEREST-EXPENSE> 18,235
<INTEREST-INCOME-NET> 14,964
<LOAN-LOSSES> 382
<SECURITIES-GAINS> 276
<EXPENSE-OTHER> 10,232
<INCOME-PRETAX> 6,173
<INCOME-PRE-EXTRAORDINARY> 6,173
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,796
<EPS-PRIMARY> .93
<EPS-DILUTED> .93
<YIELD-ACTUAL> 3.24
<LOANS-NON> 0
<LOANS-PAST> 1,311
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,983
<CHARGE-OFFS> 42
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 2,016
<ALLOWANCE-DOMESTIC> 2,016
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,016
</TABLE>
