SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended December 31, 1997
------------------------------------------------------
- or -
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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Commission File Number: 0-24168
TF FINANCIAL CORPORATION
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 74-2705050
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(State or Other Jurisdiction of Incorporation (I.R.S. Employer
or Organization) Identification No.)
3 Penns Trail, Newtown, Pennsylvania 18940
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (215) 579-4000
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.10 per share
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(Title of Class)
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
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant, based on the average bid and asked prices of the Registrant's
Common Stock as quoted on the Nasdaq System on March 30, 1998, was $63.2 million
(2,237,737 shares at $28.25 per share).
As of March 30, 1998 there were outstanding 3,188,699 shares of the
Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the Fiscal Year Ended
December 31, 1997. (Parts I, II and IV)
2. Portions of the Proxy Statement for the 1998 Annual Meeting of
Stockholders. (Part III)
<PAGE>
PART I
TF FINANCIAL CORPORATION (THE "COMPANY") MAY FROM TIME TO TIME MAKE
WRITTEN OR ORAL "FORWARD-LOOKING STATEMENTS", INCLUDING STATEMENTS CONTAINED IN
THE COMPANY'S FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION (INCLUDING
THIS ANNUAL REPORT ON FORM 10-K AND THE EXHIBITS THERETO), IN ITS REPORTS TO
STOCKHOLDERS AND IN OTHER COMMUNICATIONS BY THE COMPANY, WHICH ARE MADE IN GOOD
FAITH BY THE COMPANY PURSUANT TO THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995.
THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES, SUCH
AS STATEMENTS OF THE COMPANY'S PLANS, OBJECTIVES, EXPECTATIONS, ESTIMATES AND
INTENTIONS, THAT ARE SUBJECT TO CHANGE BASED ON VARIOUS IMPORTANT FACTORS (SOME
OF WHICH ARE BEYOND THE COMPANY'S CONTROL). THE FOLLOWING FACTORS, AMONG OTHERS,
COULD CAUSE THE COMPANY'S FINANCIAL PERFORMANCE TO DIFFER MATERIALLY FROM THE
PLANS, OBJECTIVES, EXPECTATIONS, ESTIMATES AND INTENTIONS EXPRESSED IN SUCH
FORWARD-LOOKING STATEMENTS: THE STRENGTH OF THE UNITED STATES ECONOMY IN GENERAL
AND THE STRENGTH OF THE LOCAL ECONOMIES IN WHICH THE COMPANY CONDUCTS
OPERATIONS; THE EFFECTS OF, AND CHANGES IN, TRADE, MONETARY AND FISCAL POLICIES
AND LAWS, INCLUDING INTEREST RATE POLICIES OF THE BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM, INFLATION, INTEREST RATES, MARKET AND MONETARY
FLUCTUATIONS; THE TIMELY DEVELOPMENT OF AND ACCEPTANCE OF NEW PRODUCTS AND
SERVICES OF THE COMPANY AND THE PERCEIVED OVERALL VALUE OF THESE PRODUCTS AND
SERVICES BY USERS, INCLUDING THE FEATURES, PRICING AND QUALITY COMPARED TO
COMPETITORS' PRODUCTS AND SERVICES; THE WILLINGNESS OF USERS TO SUBSTITUTE
COMPETITORS' PRODUCTS AND SERVICES FOR THE COMPANY'S PRODUCTS AND SERVICES; THE
SUCCESS OF THE COMPANY IN GAINING REGULATORY APPROVAL OF ITS PRODUCTS AND
SERVICES, WHEN REQUIRED; THE IMPACT OF CHANGES IN FINANCIAL SERVICES' LAWS AND
REGULATIONS (INCLUDING LAWS CONCERNING TAXES, BANKING, SECURITIES AND
INSURANCE); TECHNOLOGICAL CHANGES, ACQUISITIONS; CHANGES IN CONSUMER SPENDING
AND SAVING HABITS; AND THE SUCCESS OF THE COMPANY AT MANAGING THE RISKS INVOLVED
IN THE FOREGOING.
THE COMPANY CAUTIONS THAT THE FOREGOING LIST OF IMPORTANT FACTORS IS
NOT EXCLUSIVE. THE COMPANY DOES NOT UNDERTAKE TO UPDATE ANY FORWARD- LOOKING
STATEMENT, WHETHER WRITTEN OR ORAL, THAT MAY BE MADE FROM TIME TO TIME BY OR ON
BEHALF OF THE COMPANY.
Item 1. Business
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BUSINESS OF THE COMPANY
On July 13, 1994, the Registrant, TF Financial Corporation (the
"Company") consummated its public offering for 5,290,000 shares of its common
stock and acquired Third Federal Savings Bank (the "Savings Bank" or "Third
Federal") as part of the Savings Bank's conversion from a mutual to a stock
1
<PAGE>
federally chartered savings bank. The Registrant was incorporated under Delaware
law in March 1994. The Registrant is a savings and loan holding company and is
subject to regulation by the Office of Thrift Supervision (the "OTS"), the
Federal Deposit Insurance Corporation (the "FDIC") and the Securities and
Exchange Commission (the "SEC"). Currently, the Registrant does not transact any
material business other than through its subsidiaries, the Savings Bank, TF
Investments Corporation, Teragon, Inc. and Penns Trail Development Corporation.
Teragon, Inc. was incorporated in May 1997 for the purpose of pursuing mortgage
banking activities. At December 31, 1997, the Company had total assets of $597.0
million, total deposits of $450.4 million and stockholders' equity of $50.1
million.
On August 19, 1994, the Board of Directors approved the change in the
Company's fiscal year from June 30 to December 31.
BUSINESS OF THE SAVINGS BANK
Third Federal, originally organized in 1921 as a Pennsylvania-chartered
building and loan association, converted to a federally chartered mutual savings
and loan association in 1935. The Savings Bank's deposits are insured up to the
maximum amount allowable by the FDIC.
The Savings Bank is a community oriented savings institution offering a
variety of financial services to meet the needs of the community it serves. The
Savings Bank significantly expanded its operations throughout Philadelphia and
Bucks Counties, Pennsylvania in June 1992 through its acquisition of Doylestown
Federal Savings and Loan Association ("Doylestown"). On September 20, 1996,
Third Federal acquired three branch offices, certain assets and $143 million of
deposits from Cenlar Federal Savings Bank, Trenton, New Jersey ("Cenlar"). As a
result of the Cenlar acquisition, Third Federal currently operates eleven branch
offices in Bucks and Philadelphia counties, Pennsylvania and three branch
offices in Mercer County, New Jersey. This acquisition was consistent with the
Savings Bank's strategic goal of growing its market share within its market area
and reaching into adjacent market areas, through low-cost, fill-in or
market-extension acquisitions.
The Savings Bank attracts deposits from the general public and uses
such deposits, together with borrowings and other funds primarily to originate
or purchase loans secured by first mortgages on owner-occupied, one- to
four-family residences in its market area and to invest in mortgage-backed and
investment securities. At December 31, 1997, one- to four-family residential
mortgage loans totaled $198.3 million or 78.4% of the Savings Bank's total loan
portfolio. At that same date, the Savings Bank had approximately $180.9 million
or 30.3% of total assets invested in mortgage-backed securities and $84.9
million or 14.2% of total assets in investment securities. To a lesser extent,
the Savings Bank also originates commercial real estate and multi-family,
construction and consumer loans.
Market Area
Third Federal operates five offices in Philadelphia County and six
offices in Bucks County, Pennsylvania. These two counties cover the city of
Philadelphia and the northeast suburbs of Philadelphia. The population of these
two counties total over 2.1 million. The Savings Bank also operates three branch
offices in Mercer County, New Jersey. The population of Bucks and Mercer
Counties, have experienced distinctly different economic and demographic trends
over recent decades. Whereas Philadelphia County has experienced a population
decline and has offered very limited lending opportunities, Bucks and Mercer
Counties, with growing populations, have offered Third Federal much greater
lending opportunities.
2
<PAGE>
Competition
Third Federal faces varying degrees of competition from local thrifts
and credit unions at its various branch locations. Stronger competition has come
from local and much larger regional banks based in and around the Philadelphia
area. Commercial banks hold approximately 80% of the deposit market in
Philadelphia County, 68% in Bucks County and 66% in Mercer County. Third
Federal's share of the deposit market in Philadelphia, Bucks and Mercer Counties
is very small, at 0.83%, 2.2% and 1.87%, respectively.
Lending Activities
General. The Savings Bank's loan portfolio composition consists
primarily of conventional adjustable-rate ("ARM") and fixed-rate first mortgage
loans secured by one- to four-family residences. The Savings Bank also makes
commercial real estate and multi-family loans, construction loans and consumer
and other loans. At December 31, 1997, the Savings Bank's mortgage loans
outstanding were $230.0 million, of which $198.3 million were one- to
four-family residential mortgage loans. Of the one- to four-family residential
mortgage loans outstanding at that date, 33.0% were ARM's and 67.0% were
fixed-rate loans. Total ARM mortgage loans in the Savings Bank's portfolio at
December 31, 1997, amounted to $84.7 million or 36.8% of total mortgage loans.
At that same date, commercial real estate and multi-family residential and
construction loans totaled $26.7 million and $5.1 million, respectively.
Consumer and other loans held by the Savings Bank totaled $22.8 million
or 9.1% of total loans outstanding at December 31, 1997, of which $12.1 million
or 53.2% consisted of home equity and second mortgages. At that same date
commercial business loans, leases and other loans totaled $2.8 million, $1.7
million and $6.2 million, respectively.
3
<PAGE>
The following table sets forth the composition of the Savings Bank's
loan portfolio and mortgage-backed and related securities portfolios in dollar
amounts and in percentages of the respective portfolios at the dates indicated.
<TABLE>
<CAPTION>
At December 31, At June 30,
-------------------------------------------------------------------------- -----------------------------------
1997 1996 1995 1994 1994 1993
----------------- ---------------- ---------------- ---------------- ----------------- ----------------
Percent Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
----- -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-
family...........$198,328 78.43%$ 265,618 85.16% $204,430 85.00% $ 80,862 69.70% $ 85,641 70.40% $104,577 71.52%
Commercial real
estate
and multi-
family.......... 26,653 10.54 20,427 6.55 10,294 4.28 11,285 9.73 12,456 10.24 16,140 11.04
Construction...... 5,052 2.00 4,720 1.51 3,604 1.50 1,534 1.32 607 0.50 542 0.37
-------- ----- -------- ------ -------- ------ -------- ----- -------- ------ -------- ------
Total
mortgage
loans....... 230,033 90.97 290,765 93.22 218,328 90.78 93,681 80.75 98,704 81.14 121,259 82.93
Consumer and other
loans:
Home equity and
second
mortgage........ 12,147 4.80 9,661 3.10 10,635 4.42 11,663 10.05 11,689 9.61 10,989 7.52
Commercial
business........ 2,798 1.11 3,126 1.00 2,887 1.20 3,679 3.17 4,285 3.52 5,980 4.09
Leases............ 1,671 0.66 3,093 0.99 3,590 1.49 2,194 1.89 2,828 2.33 3,847 2.63
Other............. 6,230 2.46 5,261 1.69 5,072 2.11 4,796 4.14 4,138 3.40 4,145 2.83
-------- ----- -------- ------ -------- ------ -------- ----- -------- ------ -------- ------
Total
consumer
and other
loans...... 22,846 9.03 21,141 6.78 22,184 9.22 22,332 19.25 22,940 18.86 24,961 17.07
-------- ------ -------- ------ -------- ------ ------ ------ -------- ------ -------- ------
Total loans.. 252,879 100.00% 311,906 240,512 100.00% 116,013 100.00% 121,644 100.00% 146,220 100.00%
======== ====== ======== ======== ====== ======== ====== ======== ====== ======== ======
Less:
Unearned
discount,
premium,
deferred
loan fees,
net............. 139 530 753 647 748 1,265
Allowance for
loan
losses.......... 2,029 1,806 1,484 1,473 1,450 1,656
-------- --------- -------- -------- -------- --------
Total loans,
net..........$250,711 $ 309,570 $238,275 $113,893 $119,446 $143,299
======== ========= ======== ======== ======== ========
Mortgage-backed
securities held-
to-maturity:
FHLMC............. 76,523 53.12 $ 90,016 58.54% $ 65,834 47.76% $ 85,524 47.14% $ 68,526 44.41% $ 54,093 56.44%
FNMA.............. 22,927 15.91 27,547 17.92 33,150 24.05 39,713 21.89 29,201 18.93 6,831 7.13
GNMA.............. 7,483 5.19 6,043 3.93 7,644 5.55 9,358 5.16 9,653 6.26 7,480 7.81
Real estate
investment
mortgage
conduit......... 36,389 25.26 29,220 19.00 30,033 21.79 46,603 25.69 46,437 30.10 26,113 27.25
Collateralized
mortgage
obligations..... -- -- -- 19 0.01 213 0.12 471 0.30 1,319 1.37
Other mortgage-
backed
securities...... 752 0.52 932 0.61 1,161 0.84 -- -- -- -- -- --
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total mortgage-
backed and
related
securities
held-to-
maturity......$144,074 100.00% $153,758 100.00% $137,841 100.00% $181,411 100.00% $154,288 100.00% $ 95,836 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======== ====== ======== ======
Mortgage-backed
securities
available-
for-sale:
FHLMC...........$ 19,223 52.17% $ 8,905 40.43% $ 15,422 52.03%
FNMA............ 7,863 21.34 3,240 14.71 4,010 13.53
Real estate
investment
mortgage
conduit....... 9,761 26.49 9,882 44.86 10,208 34.44
-------- ------ -------- ------ -------- -------
Total.........$ 36,847 100.00% $ 22,027 100.00% $ 29,640 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
4
<PAGE>
The following table sets forth the Savings Bank's loan originations and
loan and mortgage-backed and related securities purchases, sales and principal
payments for the periods indicated:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Total loans receivable (gross):
At beginning of period ......................... $ 311,906 $ 240,512 $ 116,013
Mortgage loans originated:
One- to four-family ......................... 52,039 64,643 41,627
Commercial real estate and multi-family ..... 6,222 8,488 --
Construction ................................ 8,090 14,465 6,859
--------- --------- ---------
Total mortgage loans originated ......... 66,351 87,596 48,486
Mortgage loans purchased:
One- to four-family ......................... 14,224 82,363 94,732
Other non-residential ....................... -- 358 --
--------- --------- ---------
Total mortgage loans purchased .......... 14,224 82,721 94,732
--------- --------- ---------
Total mortgage loans originated and purchased . 80,575 170,317 143,218
Consumer loans originated ..................... 6,643 4,473 6,611
Transfer of mortgage loans to real estate owned (249) (242) (136)
Sale of loans ................................. (94,925) (19,591) --
Loans securitized ............................. -- (28,212) --
Principal repayments .......................... (51,071) (55,351) (25,194)
--------- --------- ---------
Total loans receivable at end of period ....... $ 252,879 $ 311,906 $ 240,512
========= ========= =========
Mortgage-backed securities:
Held-to-maturity:
At beginning of period ........................ 153,758 $ 137,841 $ 181,411
Mortgage-backed securities purchased .......... 18,972 45,349 10,198
Mortgage-backed securities sold ............... -- -- --
Transferred to available-for-sale ............. -- -- (29,640)
Amortization and repayments ................... (28,656) (29,432) (24,128)
------- ------- -------
At end of period .............................. $ 144,074 $ 153,758 $ 137,841
========= ========= =========
Available-for-sale:
At beginning of period ........................ 22,027 $ 29,640 $ --
Transferred from held-to-maturity ............. -- -- 29,640
Mortgage-backed securities purchased .......... 37,129 4,952 --
Mortgage-backed securities sold ............... (4,153) (8,943) --
Amortization and repayments ................... (18,156) (3,622) --
--------- --------- ---------
At end of period .............................. $ 36,847 $ 22,027 $ 29,640
========= ========= =========
</TABLE>
5
<PAGE>
Maturity of Loans and Mortgage-backed and Related Securities. The
following table sets forth the maturity of Third Federal's loan and
mortgage-backed securities at December 31, 1997. The table does not include
prepayments or scheduled principal repayments. Prepayments and scheduled
principal repayments on loans totaled $86,800 million for the year ended
December 31, 1997. Adjustable-rate mortgage loans are shown as maturing based on
contractual maturities.
<TABLE>
<CAPTION>
Commercial Mortgage-
One- to Real Estate Backed
Four- and Multi- Consumer Total Loans and Related
Family Family Construction and Other Receivable Securities Total
------ ------ ------------ --------- ---------- ---------- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Non-performing ......... $ 776 $ -- $ -- $ 606 $ 1,382 $ -- $ 1,382
Amounts Due:
Within 3 months ........ 193 7 1,253 16 1,469 776 2,245
3 months to 1 Year ..... 4,721 213 6,353 2,473 13,760 1,448 15,208
After 1 year:
1 to 3 years ......... 7,612 2,369 4,703 1,219 15,903 14,160 30,063
3 to 5 years ......... 12,017 3,332 87 4,839 20,275 22,539 42,814
5 to 10 years ........ 17,648 16,965 -- 10,786 45,399 31,142 76,541
10 to 20 years ....... 57,028 4,244 -- 2,907 64,177 52,051 116,228
Over 20 years ........ 98,335 -- -- -- 98,335 58,805 157,140
Total due after one year 192,638 26,910 4,790 19,751 244,089 178,697 422,780
Total amounts due ...... 198,328 27,130 12,396 22,846 260,700 180,921 441,621
Less:
Allowance for loan loss 1,503 202 37 287 2,029 -- 2,029
Loans in process ....... -- 477 7,344 -- 7,821 -- 7,821
Deferred loan fees ..... 133 -- -- 6 139 -- 139
-------- -------- -------- -------- -------- -------- --------
Total .............. $196,692 $ 26,451 $ 5,015 $ 22,553 $250,711 $180,921 $431,632
======== ======== ======== ======== ======== ======== ========
</TABLE>
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<PAGE>
The following table sets forth the dollar amount of all loans due after
December 31, 1998, which have predetermined interest rates and which have
floating or adjustable interest rates.
Fixed Floating or
Rates Adjustable Rates Total
----- ---------------- -----
(In thousands)
One- to four-family ................... $129,003 $ 63,570 $192,638
Commercial real estate and multi-family 15,520 11,382 26,910
Construction .......................... 148 4,642 4,790
Consumer and other .................... 12,796 6,955 19,751
-------- -------- --------
Total ............................... $157,540 $ 86,549 $244,089
======== ======== ========
One- to Four-Family Mortgage Loans. The Savings Bank offers first
mortgage loans secured by one- to four-family residences in the Savings Bank's
lending area. Typically, such residences are single-family homes that serve as
the primary residence of the owner. The Savings Bank generally originates and
invests in one- to four-family residential mortgage loans in amounts up to 80%
of the lesser of the appraised value or selling price of the mortgaged property.
Loans originated in amounts over 80% of the lesser of the appraised value or
selling price of the mortgaged property, other than loans to facilitate the sale
of real estate acquired through foreclosure, must be owner-occupied and private
mortgage insurance must be provided on the amount in excess of 80%.
Loan originations are generally obtained from existing or past
customers, members of the local community, and referrals from established
builders and realtors within the Savings Bank's lending area. Mortgage loans
originated and held by the Savings Bank in its portfolio generally include
due-on sale clauses which provide the Savings Bank with the contractual right to
deem the loan immediately due and payable in the event that the borrower
transfers ownership of the property without the Savings Bank's consent.
At December 31, 1997, 86.2% of mortgage loans consisted of one- to
four-family residential loans, of which 33.0% were ARM loans. The Savings Bank
has historically not originated a large amount of ARM loans.
The Savings Bank offers a variety of ARM loans with terms of 30 years
which adjust at the end of 6 months, one, three, five, seven and ten years and
adjust by a maximum of 1 to 2 % per adjustment with a lifetime cap of 5 to 6%
over the life of the loan. The ARM loans acquired as a result of the Doylestown
merger adjust at the end of one or three years and adjust by a maximum of 2.00%
per adjustment with a lifetime cap of 5.00% over the life of the loan
The Savings Bank offers fixed-rate mortgage loans with terms of 10 to
30 years, which are payable monthly. The Savings Bank has continued its emphasis
on fixed-rate mortgage loans with terms of 15 years or less. Interest rates
charged on fixed-rate mortgage loans are competitively priced based on market
conditions and the Savings Bank's cost of funds. The origination fees for
fixed-rate loans were generally 3.0% at December 31, 1997. Generally, the
Savings Bank's standard underwriting guideline for fixed-rate mortgage loans
conform to the FHLMC and FNMA guidelines and may be sold in the secondary
market. The Savings Bank has in the past sold a portion of its conforming
fixed-rate mortgage loans in the secondary market to federal agencies while
retaining the servicing rights on certain loans.
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<PAGE>
The Savings Bank, however, is primarily a portfolio lender. As of December 31,
1997, the Savings Bank's portfolio of loans serviced for others totaled
approximately $26.4 million.
Commercial Real Estate and Multi-Family Loans. The Savings Bank has
historically originated a limited number of loans secured by commercial real
estate including non-owner occupied residential multi-family dwelling units
(more than four units) primarily secured by professional office buildings and
apartment complexes.
The Savings Bank generally originates commercial real estate and
multi-family loans up to 75% of the appraised value of the property securing the
loan. Currently, it is the Savings Bank's philosophy to originate commercial
real estate and multi-family loans only to borrowers known to the Savings Bank
and on properties in its market area. The commercial real estate and
multi-family loans in the Savings Bank's portfolio consist of fixed-rate, ARM
and balloon loans which were originated at prevailing market rates for terms of
up to 20 years. The Savings Bank's current policy is to originate commercial
real estate and multi-family loans as ARM's that are generally amortized over a
period of 15 years or as balloon loans which generally have terms of 5 to 10
years, with 20-25 year amortizations.
Loans secured by commercial and multi-family real estate are generally
larger and involve a greater degree of risk than one- to four-family residential
mortgage loans. Of primary concern in commercial and multi-family real estate
lending is the borrower's creditworthiness and the feasibility and cash flow
potential of the project. Loans secured by income properties are generally
larger and involve greater risks than residential mortgage loans because
payments on loans secured by income properties are often dependent on successful
operation or management of the properties. As a result, repayment of such loans
may be subject to a greater extent than residential real estate loans to adverse
conditions in the real estate market or the economy. In order to monitor cash
flows on income properties, the Savings Bank requires borrowers and loan
guarantors, if any, to provide annual financial statements and rent rolls on
multi-family loans. At December 31, 1997, the five largest commercial real
estate and multi-family loans totaled $8.4 million with no single loan larger
than $2.1 million. At December 31, 1997, all such loans were current and the
properties securing such loans are in the Savings Bank's market area.
Construction Loans. At December 31, 1997, the Savings Bank had $5.1
million of construction loans or 2.0% of the Savings Bank's total loan
portfolio. Construction financing is generally considered to involve a higher
degree of risk of loss than long-term financing on improved, occupied real
estate. Risk of loss on a construction loan is dependent largely upon the
accuracy of the initial estimate of the property's value at completion of
construction or development and the estimated cost (including interest) of
construction. During the construction phase, a number of factors could result in
delays and cost overruns. If the estimate of construction costs proves to be
inaccurate, the Savings Bank may be required to advance funds beyond the amount
originally committed to permit completion of the development. If the estimate of
value proves to be inaccurate, the Savings Bank may be confronted, at or prior
to the maturity of the loan, with a project having a value which is insufficient
to assure full repayment.
Consumer and Other Loans. The Savings Bank also offers consumer and
other loans in the form of home equity and second mortgage loans (referred to
hereinafter collectively as "second mortgage loans"), commercial business loans,
automobile loans and student loans. These loans totaled $22.8 million or 9.1% of
the Savings Bank's total loan portfolio at December 31, 1997. Federal
regulations permit federally chartered thrift institutions to make secured and
unsecured consumer loans up to 35% of an institution's assets. In addition, a
federal thrift has lending authority above the 35% category for
8
<PAGE>
certain consumer loans, property improvement loans, and loans secured by savings
accounts. The Savings Bank originates consumer loans in order to provide a wide
range of financial services to its customers and because the shorter terms and
normally higher interest rates on such loans help maintain a profitable spread
between its average loan yield and its cost of funds.
In connection with consumer loan applications, the Savings Bank
verifies the borrower's income and reviews a credit bureau report. In addition,
the relationship of the loan to the value of the collateral is considered. All
automobile loan applications are reviewed and approved by the Savings Bank. The
Savings Bank reviews the credit report of the borrower as well as the value of
the unit which secures the loan.
The Savings Bank intends to continue to emphasize the origination of
consumer loans. Consumer loans tend to be originated at higher interest rates
than conventional residential mortgage loans and for shorter terms which
benefits the Savings Bank's interest rate gap management. Consumer loans,
however, tend to have a higher risk of default than residential mortgage loans.
At December 31, 1997, the Savings Bank had $541,034 in consumer loans delinquent
more than 90 days.
Federal thrift institutions are permitted to make secured or unsecured
loans for commercial, corporate, business or agricultural purposes, including
the issuance of letters of credit secured by real estate, business equipment,
inventories, accounts receivable and cash equivalents. The aggregate amount of
such loans outstanding may not exceed 10% of such institution's assets.
The Savings Bank offers second mortgage loans on one- to four-family
residences. At December 31, 1997, second mortgage and home equity loans totaled
$12.1 million, or 4.9% of the Savings Bank's total loan portfolio. Second
mortgage loans are offered as fixed-rate loans for a term not to exceed 15
years. Such loans are only made on owner-occupied one- to four-family residences
and are subject to a 75% combined loan to value ratio. The underwriting
standards for second mortgage loans are the same as the Savings Bank's standards
applicable to one- to four-family residential loans.
The Savings Bank makes commercial business loans on a secured basis and
generally requires additional collateral consisting of real estate. The terms of
such loans generally do not exceed five years. The majority of these loans have
floating interest rates which adjust with changes in market driven indices. The
Savings Bank's commercial business loans primarily consist of short-term loans
for equipment, working capital, business expansion and inventory financing. The
Savings Bank customarily requires a personal guaranty of payment by the
principals of any borrowing entity and reviews the financial statements and
income tax returns of the guarantors. At December 31, 1997, the Savings Bank had
approximately $2.8 million outstanding in commercial business loans, which
represented approximately 1.1% of its total loan portfolio.
Loan Approval Authority and Underwriting. All loans must be approved by
either two or more loan officers specifically designated by the Board of
Directors or by the Board of Directors, depending on the amount and type of
loan. Any two designated underwriters may approve loans on one- to four-family
residences, not to exceed FHLMC and FNMA conforming single-family limits, which
at December 31, 1997, was $227,150 or consumer loans up to $100,000 providing
the loan meets all of the Savings Bank's underwriting guidelines for consumer
loans. All other loans up to $500,000 must be approved by the Loan Committee.
All loans that exceed $500,000 must be submitted to the Board of Directors for
approval.
One- to four-family residential mortgage loans are generally
underwritten according to FHLMC and FNMA guidelines. For all loans originated by
the Savings Bank, upon receipt of a completed loan application from a
prospective borrower, a credit report is ordered, income and certain other
information
9
<PAGE>
is verified and, if necessary, additional financial information is requested. An
appraisal of the real estate intended to secure the proposed loan is required
which currently is performed by an independent appraiser designated and approved
by the Savings Bank. The Savings Bank makes construction/permanent loans on
individual properties. Funds advanced during the construction phase are held in
a loan-in-process account and disbursed based upon various stages of completion.
The independent appraiser or loan officer determines the stage of completion
based upon its physical inspection of the construction. It is the Savings Bank's
policy to obtain title insurance or a title opinion on all real estate first
mortgage loans. Borrowers must also obtain hazard or flood insurance (for loans
on property located in a flood zone) prior to closing the loan. For loans in
excess of 80% of the loan to value ratio, borrowers are generally required to
advance funds on a monthly basis together with each payment of principal and
interest to an escrow account from which the Savings Bank makes disbursements
for items such as real estate taxes and hazard insurance premiums.
Loans to one Borrower. Current regulations limit loans to one borrower
in an amount equal to 15% of unimpaired capital and retained income on an
unsecured basis and an additional amount equal to 10% of unimpaired capital and
retained income if the loan is secured by readily marketable collateral
(generally, financial instruments, not real estate) or $500,000, whichever is
higher. Penalties for violations of the loan-to-one borrower statutory and
regulatory restrictions include cease and desist orders, the imposition of a
supervisory agreement and civil money penalties. The Savings Bank's maximum
loan- to-one borrower limit was approximately $6.7 million as of December 31,
1997.
At December 31, 1997, the Savings Bank's five largest aggregate lending
relationships had balances ranging from $2.1 to $6.2 million. At December 31,
1997, all of these loans were current.
Mortgage-Backed Securities
To supplement lending activities, Third Federal invests in residential
mortgage-backed securities. Although the majority of such securities are held to
maturity, they can serve as collateral for borrowings and, through repayments,
as a source of liquidity.
The mortgage-backed securities portfolio as of December 31, 1997,
consisted primarily of fixed-rate certificates issued by the Federal Home Loan
Mortgage Corporation ("FHLMC") ($95.7 million), Government National Mortgage
Association ("GNMA"), ($7.4 million) Federal National Mortgage Association
("FNMA") ($30.8 million), real estate investment mortgage conduit ("REMICs")
($46.2 million), and other mortgage-backed securities ($.8 million).
At December 31, 1997, the carrying value of mortgage-backed securities
totaled $180.9 million, or 30.3% of total assets. The market value of such
securities totaled approximately $182.6 million at December 31, 1997.
Mortgage-backed securities represent a participation interest in a pool
of single-family or multi-family mortgages, the principal and interest payments
on which are passed from the mortgage originators, through intermediaries
(generally quasi-governmental agencies) that pool and repackage the
participation interests in the form of securities, to investors such as the
Savings Bank. Such quasi-governmental agencies, which guarantee the payment of
principal and interest to investors, primarily include FHLMC, FNMA and GNMA.
FHLMC issues participation certificates backed principally by
conventional mortgage loans. FHLMC guarantees the timely payment of interest and
the ultimate return of principal within one year. FHLMC securities are indirect
obligations of the United States Government. FNMA is a private corporation
chartered by Congress with a mandate to establish a secondary market for
conventional
10
<PAGE>
mortgage loans. FNMA guarantees the timely payment of principal and interest,
and FNMA securities are indirect obligations of the United States Government.
GNMA is a government agency within the Department of Housing and Urban
Development ("HUD") which is intended to help finance government assisted
housing programs. GNMA guarantees the timely payment of principal and interest,
and GNMA securities are backed by the full faith and credit of the United States
Government. Since FHLMC, FNMA and GNMA were established to provide support for
low- and middle-income housing, there are limits to the maximum size of loans
that qualify for these programs. Currently, GNMA limits its maximum loan size to
$144,000 for Veterans Administration ("VA") loans and on average $137,750 for
Federal Housing Authority ("FHA") loans. FNMA and FHLMC limit their loans to
$214,600. To accommodate larger-sized loans, and loans that, for other reasons,
do not conform to the agency programs, a number of private institutions have
established their own home-loan origination and securitization programs.
Mortgage-backed securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a range and have varying maturities. The
underlying pool of mortgages are primarily composed of either fixed-rate
mortgages or adjustable-rate mortgage ("ARM") loans. Mortgage-backed securities
are generally referred to as mortgage participation certificates or pass-through
certificates. As a result, the interest rate risk characteristics of the
underlying pool of mortgages, i.e., fixed-rate or adjustable-rate, as well as
prepayment risk, are passed on to the certificate holder. The life of a
mortgage-backed pass-through security is equal to the life of the underlying
mortgages. Mortgage-backed securities issued by FHLMC, FNMA and GNMA make up a
majority of the pass-through market.
CMOs and REMICs are typically issued by a special-purpose entity (the
"issuer"), which may be organized in a variety of legal forms, such as a trust,
a corporation, or a partnership. The entity aggregates pools of pass-through
securities, which are used to collateralize the mortgage related securities.
Once combined, the cash flows can be divided into "tranches" or "classes" of
individual securities, thereby creating more predictable average durations for
each security than the underlying pass-through pools. Accordingly, under this
security they structure all principal pay downs from the various mortgage pools
are allocated to a mortgage-related class or classes structured to have priority
until it has been paid off. Thus these securities are intended to address the
reinvestment concerns associated with mortgage-backed securities pass-through,
namely that (i) they tend to pay off when interest rates fall, thereby taking
their relatively high coupon with them, and (ii) their expected average life may
vary significantly among the different tranches.
Some CMO and REMIC instruments are most like traditional debt
instruments because they have stated principal amounts and traditionally defined
interest-rate terms. Purchasers of certain other CMO and REMIC instruments are
entitled to the excess, if any, of the issuer's cash inflows, including
reinvestment earnings, over the cash outflows for debt service and
administrative expenses. These mortgage related instruments may include
instruments designated as residual interests, and are riskier in that they could
result in the loss of a portion of the original investment. Cash flows from
residual interests are very sensitive to prepayments and, thus, contain a high
degree of interest-rate risk. Residual interests represent an ownership interest
in the underlying collateral, subject to the first lien of the CMO and REMICs
investors.
The CMOs and REMICs held by the Savings Bank at December 31, 1997,
consisted solely of fixed-rate notes and adjustable-rate notes with contractual
maturities ranging from 1 to 27 years. The portfolio of CMOs and REMICs held
within the Savings Bank's mortgage-backed securities portfolio at December 31,
1997, did not include any residual interests. Further, at December 31, 1997, the
Savings Bank's mortgage-backed securities portfolio did not include any
"stripped" CMOs and REMICs, i.e.
11
<PAGE>
CMOs and REMICs that pay interest only and do not repay principal or CMOs that
repay principal only and do not pay interest.
The following table sets forth the carrying value of the Savings Bank's
mortgage-backed securities held in portfolio at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------
1997 1996 1995
------------ ----------- ----------
(In thousands)
<S> <C> <C> <C>
Held to maturity:
GNMA-fixed rate....................... $ 7,483 $ 6,043 $ 7,644
FHLMC ARMs............................ 281 364 407
FHLMC-fixed rate...................... 76,242 89,652 65,427
FNMA-fixed rate....................... 22,927 27,547 33,150
CMOs.................................. -- -- 19
Remics................................ 36,389 29,220 30,033
Other mortgage-backed securities...... 752 932 1,161
-------- --------- --------
Total mortgage-backed securities..... $144,074 $ 153,758 $137,841
======== ========= ========
Mortgage-backed securities
Available-for-sale:
FHLMC $ 19,223 $ 8,905 $ 15,422
FNMA 7,863 3,240 4,010
Remics................................ 9,761 9,882 10,208
-------- --------- --------
Total mortgage-backed securities
available-for-sale................ $ 36,847 $ 22,027 $ 29,640
======= ======= ======
</TABLE>
Mortgage-Backed Securities Maturity. The following table sets forth the
maturity and the weighted average coupon ("WAC") of the Savings Bank's
mortgage-backed securities portfolio at December 31, 1997. The table does not
include estimated prepayments. Adjustable-rate mortgage-backed securities are
shown as maturing based on contractual maturities.
<TABLE>
<CAPTION>
Contractural
Contractual Available-For-
Held To Sale
Maturities Due WAC Maturities Due WAC
-------------- --- -------------- ---
(Dollars in thousands)
<S> <C> <C> <C> <C>
Less than 1 year......................... $ 1,816 6.37% $ 408 6.0 %
1 to 3 years............................. 11,992 6.44 2,168 6.0
3 to 5 years............................. 13,114 6.96 9,425 7.0
5 to 10 years............................ 24,732 7.15 6,410 6.44
10 to 20 years........................... 44,404 7.05 7,647 6.92
Over 20 years............................ 48,016 7.14 10,789 6.92
-------- ---- ------- ----
Total mortgage-backed securities......... $144,074 7.03% $36,847 6.79%
======== ==== ======= ====
</TABLE>
Non-Performing and Problem Assets
Loan Collection. When a borrower fails to make a required payment on a
loan, the Savings Bank takes a number of steps to have the borrower cure the
delinquency and restore the loan to current status. In the case of residential
mortgage loans and consumer loans, the Savings Bank generally sends the borrower
a written notice of non-payment after the loan is 15 days past due. In the event
payment is not then received, additional letters and phone calls are made. If
the loan is still not brought current
12
<PAGE>
and it becomes necessary for the Savings Bank to take legal action, which
typically occurs after a loan is delinquent 90 days or more, the Savings Bank
will commence foreclosure proceedings against any real property that secures the
loan and attempt to repossess any personal property that secures a consumer
loan. If a foreclosure action is instituted and the loan is not brought current,
paid in full, or refinanced before the foreclosure sale, the real property
securing the loan generally is sold at foreclosure.
In the case of commercial real estate and multi-family loans, and
construction loans, the Savings Bank generally attempts to contact the borrower
by telephone after any loan payment is ten days past due and a senior loan
officer reviews all collection efforts made if payment is not received after the
loan is 30 days past due. Decisions as to when to commence foreclosure actions
for commercial real estate and multi-family loans and construction loans are
made on a case by case basis. The Savings Bank may consider loan work-out
arrangements with these types of borrowers in certain circumstances.
On mortgage loans or loan participations purchased by the Savings Bank,
the Savings Bank receives monthly reports from its loan servicers with which it
monitors the loan portfolio. Based upon servicing agreements with the servicers
of the loan, the Savings Bank relies upon the servicer to contact delinquent
borrowers, collect delinquent amounts and to initiate foreclosure proceedings,
when necessary, all in accordance with applicable laws, regulations and the
terms of the servicing agreements between the Savings Bank and its servicing
agents.
Delinquent Loans. Generally, the Savings Bank reserves for uncollected
interest on loans past due 90 days or more. Loans also are placed on a
nonaccrual status when, in the judgment of management, the probability of
collection of interest is deemed to be insufficient to warrant further
collection. When a loan is placed on nonaccrual status, previously accrued but
unpaid interest is deducted from interest income.
13
<PAGE>
Non-Performing Assets. The following table sets forth information
regarding non-accrual loans and real estate owned by the Savings Bank at the
dates indicated. The Savings Bank had no loans contractually past due 90 days or
more or for which accrued interest has been recorded. At December 31, 1997, the
Savings Bank had no restructured loans within the meaning of SFAS No. 15.
<TABLE>
<CAPTION>
At December 31, At June 30,
------------------------------------- ----------------
1997 1996 1995 1994 1994 1993
------ ------- ------- ------- ------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans accounted for on a non-accrual basis:
Mortgage loans:
One- to four-family ..................... $ 776 $ 922 $ 999 $ 928 $1,041 $1,782
Commercial real estate and multi-family . -- -- 28 119 120 994
Consumer and other ........................ 606 1,050 776 639 552 685
------ ------ ------ ------ ------ ------
Total non-accrual loans ................ $1,382 $1,972 $1,803 $1,686 $1,713 $3,461
====== ====== ====== ====== ====== ======
Real estate owned, net .................... $ 351 $ 112 $ 129 $ 139 $ 376 $1,687
Other non-performing assets(1) ............ -- -- -- -- -- 609
------ ------ ------ ------ ------ ------
Total non-performing assets ............... $1,733 $2,084 $1,932 $1,825 $2,089 $5,757
====== ====== ====== ====== ====== ======
Total non-accrual loans to net loans ...... .55% 0.64% 0.76% 1.48% 1.43% 2.42%
====== ====== ====== ====== ====== ======
Total non-accrual loans to total assets ... .23% 0.30% 0.37% 0.39% 0.39% 0.89%
====== ====== ====== ====== ====== ======
Total non-performing assets to total assets .29% 0.32% 0.39% 0.42% 0.48% 1.48%
====== ====== ====== ====== ====== ======
</TABLE>
- ----------------
(1) Other non-performing assets consists of Third Federal's investment in
an administrative building. Such building was sold subsequent to
December 31, 1993.
At December 31, 1997, the Company had no foreign loans and no loan
concentrations exceeding 10% of total loans not disclosed in above the table.
"Loan concentrations" are considered to exist when there are amounts loaned to a
multiple number of borrowers engaged in similar activities that would cause them
to be similarly impacted by economic or other conditions. Loans recorded in the
category of other real estate owned are valued at the lower of book value of
loans outstanding or fair market value less cost of disposal.
At December 31, 1997, the Company was not aware of any potential
problem loans that are not otherwise included in the foregoing table. "Potential
problem loans" are loans where information about possible credit problems of
borrowers has caused management to have serious doubts about the borrowers'
ability to comply with present repayment terms.
Classified Assets. OTS regulations provide for a classification system
for problem assets of insured institutions which covers all problem assets.
Under this classification system, problem assets of insured institutions are
classified as "substandard," "doubtful," or "loss." An asset is considered
"substandard" if it is inadequately protected by the current net worth and
paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard," with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted. Assets designated
"special mention"
14
<PAGE>
by management are assets included on the Savings Bank's internal watchlist
because of potential weakness but that do not currently warrant classification
in one of the aforementioned categories.
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
problem assets as "loss," it is required either to establish a specific
allowance for losses equal to 100% of that portion of the asset so classified or
to charge off such amount. An institution's determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by the OTS, which may order the establishment of additional
general or specific loss allowances. A portion of general loss allowances
established to cover possible losses related to assets classified as substandard
or doubtful may be included in determining an institution's regulatory capital,
while specific valuation allowances for loan losses generally do not qualify as
regulatory capital.
The following table provides further information in regard to the
Savings Bank's classified assets as of December 31, 1997.
At
December 31,
1997
------------
(In thousands)
Special mention assets.................... $ --
Substandard............................... 2,384
Doubtful assets........................... --
Loss ..................................... --
------
Total classified assets................ $2,384
======
- ---------------------
(1) Substandard assets include approximately $1,002,000 of performing
assets that are less than 90 days delinquent, that are classified for
reasons other than delinquency.
Real Estate Owned. Real estate acquired by the Savings Bank as a result
of foreclosure, judgment or by deed in lieu of foreclosure is classified as real
estate owned ("REO") until it is sold. When property is acquired it is recorded
at the lower of fair value, minus estimated cost to sell, or cost.
The Savings Bank records loans as in substance foreclosures if the
borrower has little or no equity in the property based upon its documented
current fair value and if the borrower has effectively abandoned control of the
collateral or has continued to retain control of the collateral but because of
the current financial status of the borrower it is doubtful the borrower will be
able to repay the loan in the foreseeable future. In substance foreclosures are
accounted for as loans until such time that title to the collateral is acquired
by the Savings Bank. There may be significant other expenses incurred such as
attorney and other extraordinary servicing costs involved with in substance
foreclosures.
Allowances for Loan Losses and Real Estate Acquired in Settlement of
Loans. The Savings Bank provides valuation allowances for estimated losses from
uncollectible loans and real estate acquired in settlement of loans.
Management's periodic evaluation of the adequacy of the allowance for loan
losses is based on loss experience, known and inherent risk in the portfolio,
prevailing market conditions, and
15
<PAGE>
management's judgment as to collectibility. The Savings Bank's determination as
to the amount of its allowance for loan losses is subject to review of the
federal regulatory agencies, the OTS and FDIC, which can order the establishment
of additional general or specific loan loss reserves. The allowance for loan
losses is increased by charges to earnings and decreased by charge-offs (net of
recoveries). The Savings Bank provides valuation allowances for losses on real
estate acquired in settlement of loans based on the lower of fair value, minus
estimated cost to sell, or cost.
The allowance for loan losses is established through a provision for
loan losses based on management's evaluation of the risk inherent in its loan
portfolio and the general economy. Such evaluation, which includes a review of
all loans on which full collectibility may not be reasonably assured, considers
among other matters, the estimated fair value of the underlying collateral,
economic conditions, historical loan loss experience and other factors that
warrant recognition in providing for an adequate loan loss allowance.
16
<PAGE>
The following table sets forth information with respect to the Savings
Bank's allowance for loan losses at the dates and for the periods indicated:
<TABLE>
<CAPTION>
For the Years Ended For the Six Months For the Years Ended
December 31, Ended December 31, June 30,
------------------------------- ------------------ ---------------------
1997 1996 1995 1994 1994 1993
---- ---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of period . $ 1,806 $ 1,484 $ 1,473 $ 1,450 $ 1,656 $ 1,800
Provision for loan losses ...... 397 330 72 30 (144) 48
Charge-offs:
One- to four-family .......... (1) -- (48) -- -- --
Commercial and multi-family
real estate loans ............ -- -- -- -- (31) (380)
Consumer and other loans(1) .. (173) (8) (13) (7) (31) (300)
Recoveries:
Commercial and multi-family
real estate loans ............ -- -- -- -- -- 413
Consumer and other loans(1) .. -- -- -- -- -- 75
------- ---------- ------- --------- ------- -------
Balance at end of year(2) ...... $ 2,029 $ 1,806 $ 1,484 $ 1,473 $ 1,450 $ 1,656
======= ========== ======= ========= ======= =======
Ratio of net charge-offs during
the period to average loans
outstanding during the period 0.6% 0.003% 0.04% 0.01% .04% .12%
Ratio of allowance for loan
losses to non-performing
loans at the end of the period 147.0% 91.6% 82.3% 87.3% 84.6% 47.8%
Ratio of allowance for loan
losses to net loans receivable
at the end of period ......... .81% 0.58% 0.62% 1.3% 1.2% 1.2%
Ratio of allowances for loan
losses and foreclosed real
estate to total non-performing
assets at the end of period .. 137.33% 92.03% 76.8% 81.3% 69.4% 29.5%
</TABLE>
- ---------------
(1) Consumer and other loan charge-offs for all periods presented are
almost solely comprised of commercial business loan losses.
(2) Third Federal had not incurred any material charge-offs or received any
material recoveries on the one-to four-family and consumer loan
portfolios for any of the periods presented.
17
<PAGE>
The following table sets forth the allocation of the Savings Bank's
allowance for loan losses by loan category and the percent of loans in each
category to total loans receivable, gross, at the dates indicated. The portion
of the loan loss allowance allocated to each loan category does not represent
the total available for future losses which may occur within the loan category
since the total loan loss allowance is a valuation reserve applicable to the
entire loan portfolio.
<TABLE>
<CAPTION>
At December 31, At June 30,
------------------------------------------------------------------------------- ---------------------------------------
1997 1996 1995 1994 1994 1993
------------------ ------------------- ------------------- ------------------ -------------------- ------------------
Percent of Percent of Percent of Percent of Percent of Percent of
Loans to Loans to Loans to Loans to Loans to Loans to
Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ ----------- ------ ----------- ------ ----------- ------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
At end of
period
allocated
to:
One- to
four-
family......$1,503 78.4 $ 1,330 73.7% $1,042 85.1% $ 990 67.2% $ 958 70.4% $ 788 72.0%
Commercial
real estate
and
multi-
family...... 202 10.5 102 5.7 46 4.1 134 9.1 132 10.2 422 10.9
Construction. 37 2.0 24 1.3 24 1.6 8 0.5 12 0.5 2 0.4
Consumer
and other
loans....... 287 9.1 350 19.3 372 9.2 341 23.2 348 18.9 490 17.1
------ ----- ------- ----- ------ ----- ------ ----- ------ ----- ------ -----
Total
allowance...$2,029 100.0% $ 1,806 100.0% $1,484 100.0% $1,473 100.0% $1,450 100.0% $1,656 100.0%
====== ===== ======= ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
18
<PAGE>
Analysis of the Allowance for Real Estate Owned
At December 31,
----------------------
1997 1996 1995
----------------------
(Dollars in thousands)
Total real estate owned and in
judgment....... ............ $ 359 $ 116 $ 129
===== ===== =====
Allowance balances - beginning $ 3 $ -- $ 11
Provision .................... 5 3 2
Charge-offs .................. -- -- (13)
----- ----- -----
Allowance balances - ending .. $ 8 $ 3 $ --
===== ===== =====
Allowance for losses on real
estate owned and in judgment
to net real estate owned and in
judgment........................ 2.2% 2.5% --%
===== ===== =====
Investment Activities
The investment policy of the Savings Bank, which is established by the
Board of Directors and implemented by the Asset Liability Committee, is designed
primarily to provide and maintain liquidity, to generate a favorable return on
investments without incurring undue interest rate and credit risk, and to
complement the Savings Bank's lending activities. In establishing its investment
strategies, the Savings Bank considers its business and growth plans, the
economic environment, the types of securities to be held and other factors.
Federally chartered savings institutions have the authority to invest in various
types of assets, including U.S. Treasury obligations, securities of various
federal agencies, certain certificates of deposit of insured banks and savings
institutions, certain bankers acceptances, repurchase agreements, loans on
federal funds, and, subject to certain limits, commercial paper and mutual
funds.
19
<PAGE>
The following table sets forth certain information regarding the
amortized cost and market values of the Savings Bank's investments at the dates
indicated.
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------
1997 1996 1995
----------------- ----------------- -------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
--------- ------ --------- ------ --------- ------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning deposits .............. $25,628 $25,628 $38,120 $38,120 $15,606 $15,606
======= ======= ======= ======= ======= =======
Investment securities held-to- maturity:
U.S. government and agency
obligations ........................ 50,278 50,433 $34,976 $34,854 $14,475 $14,739
State and political
subdivisions ....................... 2,544 2,593 3,068 3,040 3,140 3,139
Corporate debt securities ............ 0 0 500 499 6,025 6,002
------- ------- ------- ------- ------- -------
Total .............................. $52,822 $53,026 $38,544 $38,393 $23,640 $23,880
======= ======= ======= ======= ======= =======
Securities available-for-sale:
U.S. government and agency
obligations ........................ $31,254 31,327 $11,976 $12,015 $14,489 $14,448
Equity securities
(SLMA stock) ....................... 10 210 10 139 10 98
------- ------- ------- -------
Mutual funds ......................... 500 500 500 498 500 498
------- ------- ------- ------- ------- -------
Total .............................. $31,764 $32,037 $12,486 $12,652 $14,999 $15,044
======= ======= ======= ======= ======= =======
</TABLE>
20
<PAGE>
Investment Portfolio Maturities
The following table sets forth certain information regarding the
carrying values, weighted average yields and maturities of the Savings Bank's
investment securities portfolio, exclusive of interest-earning deposits, at
December 31, 1997.
<TABLE>
<CAPTION>
One Year or Less One to Five Years Five to Ten Years More than Ten Years Total Investment Securities (2)
------------------- ------------------- ------------------ ------------------- -------------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Market
Value Yield Value Yield Value Yield Value Yield Value Yield Value
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. government
obligations......... $7,015,781 5.85% $ 7,076,660 6.56% $ 0 % $ 0 % $14,092,441 6.20% $14,152,344
U. S. agency
obligations......... 19,991,911 5.58 28,006,892 6.33 16,768,000 7.07 2,955,992 8.22 67,722,795 6.56 67,817,767
Municipal obligations 0 725,000 4.71 0 1,818,963 5.28 2,543,963 5.12 2,592,900
Corporate obligations 0 0 0 0 500,000 5.66 0
Other securities(1).. 500,000 5.66 0 0 0 0 499,499
----------- ---- ----------- ---- ------------ ---- ---------- ---- ----------- ---- -----------
Total..............$27,507,692 5.65% $35,808,552 6.35% $ 16,768,000 7.07% $4,774,955 7.10% $84,859,199 6.46% $ 85,062,510
=========== ==== =========== ==== ============ ==== ========== ==== =========== ==== ===========
</TABLE>
- ------------
(1) Other securities consists of an investment in adjustable-rate
mortgage-backed securities mutual funds. Such investments do not have a
stated maturity and are considered in the one year or less category
based on quarterly repricing of the investment.
(2) Includes $32.0 million of U.S. government and agency obligations and
other investments which are carried as available-for-sale at December
31, 1997. Investment securities available-for-sale are carried at
market value.
21
<PAGE>
Sources of Funds
General. Deposits, borrowings, loan repayments and cash flows generated
from operations are the primary sources of the Savings Bank's funds for use in
lending, investing and other general purposes.
Deposits. The Savings Bank offers a variety of deposit accounts having
a range of interest rates and terms. The Savings Bank's deposits consist of
regular savings, non-interest bearing checking, NOW checking, money market, and
certificate accounts. Of the deposit accounts, $32,497 million or 7.21% consist
of IRA, Keogh or SEP retirement accounts at December 31, 1997.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates and
competition. The Savings Bank's deposits are primarily obtained from areas
surrounding its offices, and the Savings Bank relies primarily on customer
service and long-standing relationships with customers to attract and retain
these deposits. The Savings Bank has maintained a high level of core deposits
consisting of regular savings, money market, non-interest-bearing checking, and
NOW checking, which has contributed to a low cost-of-funds. At December 31,
1997, core deposits amounted to 56.04% of total deposits.
22
<PAGE>
The following table sets forth the distribution of the Savings Bank's
deposit accounts at the dates indicated and the weighted average nominal
interest rates on each category of deposits presented. The Savings Bank does not
have a significant amount of deposits from out-of state sources. Management does
not believe that the use of year end balances instead of average balances
resulted in any material difference in the information presented.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------------------------------
1997 1996 1995
--------------------------- --------------------------- ----------------------------
Weighted Weighted Weighted
Percent Average Percent Average Percent Average
of Total Nominal of Total Nominal of Total Nominal
Amount Deposits Rate Amount Deposits Rate Amount Deposits Rate
------ -------- ------- ------- -------- ------ ------ -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Transaction accounts:
Interest-bearing checking
accounts.................. 40,360 9.00 1.01 $ 42,513 9.06% 0.98% $ 33,581 9.96% 1.57%
Money market accounts...... 32,777 7.28 3.32 29,970 6.39 3.54 10,481 3.11 2.75
Non-interest-bearing
checking accounts........... 5,037 1.12 -- 3,741 0.80 -- 1,573 0.47 --
-------- ------ -------- ------ -------- ------ ----
Total transaction accounts... 78,174 17.35 76,224 16.25 45,635 13.54
Fixed-rate passbook accounts. 122,952 27.30 2.50 127,213 27.12 3.00 120,387 35.72 3.00
Adjustable-rate passbook
accounts.................... 51,277 4.38 4.97 60,452 12.89 4.88 68,247 20.25 4.74
Total 174,229 38.68 187,665 40.01 234,269 69.51
-------- ------ -------- ------ -------- ------
Certificate accounts:
90-day certificates........ 1,340 .30 3.49 2,354 0.50 3.96 4,541 1.35 4.05
Six-month certificates..... 10,743 2.38 4.04 18,861 4.02 4.44 10,351 3.07 4.10
Seven-month certificates... 480 .11 4.27 3,555 0.76 4.93 -- -- --
Eight-month certificates... 33,155 7.38 5.49 -- -- -- -- -- --
Nine-month certificates.... 2,936 .65 4.07 13,116 2.80 4.96 5,144 1.53 5.86
Ten-month certificates..... 3,300 .73 4.33 19,341 4.12 5.29 -- -- --
One-year certificates...... 19,599 4.35 4.69 55,586 11.85 5.28 17,409 5.16 5.08
15-month certificates...... 28,433 6.31 5.70 1,450 0.31 5.54 -- -- --
17-month certificates...... 5,770 1.28 5.74 8,801 1.88 5.53 7,515 2.23 5.75
18-month certificates...... 6,807 1.51 5.50 5,052 1.08 4.83 12,004 3.56 6.07
21-month certificates...... 256 .06 5.07 677 0.14 5.20 -- -- --
Two-year certificates...... 30,445 6.76 5.84 22,632 4.82 5.65 6,139 1.82 4.99
25-month certificates...... 12,537 2.78 5.91 8,666 1.85 5.81 -- -- --
30-month certificates...... 6,419 1.42 5.06 8,539 1.82 5.45 7,371 2.19 4.54
Three-year certificates.... 10,780 2.39 5.85 9,628 2.05 5.55 5,442 1.61 4.55
Four year certificates..... 2,575 .57 5.66 2,645 0.56 5.48 929 0.27 5.33
54 month certificates...... 1,974 .44 5.92 1,975 0.42 5.83 1,921 0.57 5.80
Five year certificates..... 18,341 4.07 5.49 19,356 4.13 5.35 18,274 5.42 5.66
Six-year certificates...... 165 .04 5.48 211 0.04 5.34 -- -- --
Seven-year certificates.... 1 -- 7.40 1 -- 7.30 -- -- --
Eight-year certificates.... 88 .02 5.92 99 0.02 5.80 105 0.03 5.83
10-year.................... 1,072 .24 7.71 1,398 0.30 7.85 1,050 0.31 7.88
Jumbo certificates(1)...... 810 .18 5.00 1,256 0.27 5.40 4,436 1.32 5.12
-------- ------ -------- ------ ---- -------- ------ ----
Total certificate
accounts............... 198,026 43.97 5.38 205,199 43.74 5.30 102,800 30.49 5.22
-------- ------ ---- -------- ------ ---- -------- ------ ----
Total deposits............... $450,429 100.00% 3.95% $469,088 100.00% 4.08% $337,069 100.00% 3.87%
======== ====== ==== ======== ====== ==== ======== ====== ====
</TABLE>
(1) The $810,000 in jumbo certificates of deposit shown at December 31,
1997 does not include certificate deposits in excess of $100,000 with
interest compounded on a daily basis. The jumbo certificate category
includes only certificate deposits in excess of $100,000 with simple
interest paid on an annual basis at a premium of .25% over posted
interest rates.
23
<PAGE>
At December 31, 1997, the Savings Bank had outstanding certificates of
deposit in amounts of $100,000 or more maturing as follows:
Amount
------
Maturing Period (In thousands)
- ---------------
Three months or less..................... $1,199
Over three through six months............ 1,806
Over six through 12 months............... 3,420
Over 12 months........................... 2,953
-----
Total................................ $9,378
=====
The following table presents, by various rate categories, the amount of
time deposits outstanding at December 31, 1997, 1996 and 1995, and the periods
to maturity of the certificate accounts outstanding at December 31, 1997.
<TABLE>
<CAPTION>
Period to Maturity from
December 31, 1997
--------------------------------
Within At December 31,
One One to ------------------------------
Year Three Years Thereafter 1997 1996 1995
-------- ---------- ---------- -------- -------- --------
(In thousands)
Time deposits:
<S> <C> <C> <C> <C> <C> <C>
2.00% to 2.99% $ 1 $ 17 $ 0 $ 18 $ 17 $ 273
3.00% to 3.99% 16,830 67 0 16,897 2,927 11,711
4.00% to 4.99% 29,277 7,636 542 37,455 61,355 27,319
5.00% to 5.99% 88,605 44,119 4,136 136,860 129,935 49,298
6.00% to 6.99% 1,307 4,073 564 5,944 9,633 11,578
7.00% to 7.99% 65 82 167 314 628 1,886
8.00% to 8.99% 280 173 0 453 596 735
9.00% to 9.99% 39 46 0 85 108 --
-------- -------- -------- -------- -------- --------
Total ... $136,404 $ 56,213 $ 5,409 $198,026 $205,199 $102,800
======== ======== ======== ======== ======== ========
</TABLE>
24
<PAGE>
Borrowings
Deposits are the primary source of funds of the Savings Bank's lending
and investment activities and for its general business purposes. The Savings
Bank may obtain advances from the FHLB of Pittsburgh to supplement its supply of
lendable funds. Advances from the FHLB of Pittsburgh are typically secured by a
pledge of the Savings Bank's stock in the FHLB of Pittsburgh and a portion of
the Savings Bank's first mortgage loans and certain other assets. The Savings
Bank, if the need arises, may also access the Federal Reserve Bank discount
window to supplement its supply of lendable funds and to meet deposit withdrawal
requirements. The following table sets forth the maximum month-end balance
period and balance, and weighted average balance of outstanding FHLB advances at
the dates and for the periods indicated, together with the applicable weighted
average interest rates.
At December 31,
---------------------------------------
1997 1996 1995
---------- ---------- -----------
(Dollars in thousands)
FHLB advances ................ $ 88,359 $ 98,359 $ 73,359
========== ========== ==========
Weighted average interest rate 6.03% 5.98% 6.07%
Years Ended December 31,
-------------------------------
1997 1996 1995
-------- -------- -------
(Dollars in thousands)
Maximum balance of
FHLB advances outstanding ... $ 98,359 $ 98,359 $73,359
======== ======== =======
Weighted average balance of
FHLB advances outstanding .... $ 97,837 $ 89,343 $16,171
======== ======== =======
Weighted average interest rate
of FHLB advances ............. 6.0% 5.99% 6.22%
======== ======== =======
Subsidiary Activity
Third Federal is permitted to invest up to 2% of its assets in the
capital stock of, or secured or unsecured loans to, subsidiary corporations,
with an additional investment of 1% of assets when such additional investment is
utilized primarily for community development purposes. Under such limitations,
as of December 31, 1997, Third Federal was authorized to invest up to
approximately $12.0 million in the stock of, or loans to, service corporations
(based upon the 2% limitation). At December 31, 1997, the Savings Bank had no
active subsidiaries.
25
<PAGE>
Personnel
As of December 31, 1997, the Savings Bank had 144 full-time and 17
part-time employees. None of the Savings Bank's employees are represented by a
collective bargaining group. The Savings Bank believes that its relationship
with its employees is good.
Executive Officers of the Registrant
Executive Officers of the Savings Bank and Company (these individuals
have held their respective positions with the Company since March 1994):
Carl F. Gregory is Chairman of the Savings Bank. Mr. Gregory was Chief
Executive Officer of the Savings Bank and of the Company from April 1982 until
December 1994. He has been with the Savings Bank since 1962 and will continue to
represent Third Federal throughout the communities that the Savings Bank serves
in his role as Chairman of the Savings Bank and Director of the Company.
John R. Stranford has been with the Savings Bank since 1968. He
presently serves as President, Chief Executive Officer, Chief Operating Officer
and Director of the Savings Bank and Company. Mr. Stranford has served as Chief
Operating Officer of the Savings Bank since 1984 and President of the Savings
Bank since January 1994. Prior to that time he served in various capacities as
an officer of the Savings Bank.
William C. Niemczura has been with the Savings Bank as an officer since
1987. Prior to his current position as Senior Vice President and Chief Financial
Officer, Mr. Niemczura was Assistant Vice President and Vice President-Lending.
Mr. Niemczura is Senior Vice President, Treasurer and Chief Financial Officer of
the Company.
Elizabeth Davidson Maier is Senior Vice President and Secretary of the
Savings Bank and the Company and has been with the Savings Bank since 1964. Ms.
Maier has been an officer of the Savings Bank since 1974. Prior to that, Ms.
Maier held various positions at the Savings Bank.
The remaining information relating to Directors and Executive Officers
of the Registrant is incorporated herein by reference to the Registrant's Proxy
Statement for the 1998 Annual Meeting of Stockholders.
REGULATION
Set forth below is a brief description of all material laws and
regulations which relate to the regulation of the Savings Bank and the Company.
The description does not purport to be complete and is qualified in its entirety
by reference to applicable laws and regulations.
Company Regulation
General. The Company is a unitary savings and loan holding company
subject to regulatory oversight by the OTS. As such, the Company is required to
register and file reports with the OTS and is subject to regulation and
examination by the OTS. In addition, the OTS has enforcement authority over the
Company and its non-savings association subsidiaries, should such subsidiaries
be formed, which also permits the OTS to restrict or prohibit activities that
are determined to be a serious risk to the subsidiary savings association. This
regulation and oversight is intended primarily for the protection of the
depositors of the Savings Bank and not for the benefit of stockholders of the
Company. The
26
<PAGE>
Company is also required to file certain reports with, and otherwise comply
with, the rules and regulations of the OTS and the SEC.
QTL Test. As a unitary savings and loan holding company, the Company
generally is not subject to activity restrictions, provided the Savings Bank
satisfies the QTL test. If the Company acquires control of another savings
association as a separate subsidiary, it would become a multiple savings and
loan holding company, and the activities of the Company and any of its
subsidiaries (other than the Savings Bank or any other SAIF-insured savings
association) would become subject to restrictions applicable to bank holding
companies unless such other associations each also qualify as a QTL and were
acquired in a supervisory acquisition.
Savings Bank Regulation
General. As a federally chartered, SAIF-insured savings association,
the Savings Bank is subject to extensive regulation by the OTS and the FDIC.
Lending activities and other investments must comply with various federal
statutory and regulatory requirements. The Savings Bank is also subject to
certain reserve requirements promulgated by the Federal Reserve Board.
The OTS, in conjunction with the FDIC, regularly examines the Savings
Bank and prepares reports for the consideration of the Savings Bank's Board of
Directors on any deficiencies that they find in the Savings Bank's operations.
The Savings Bank's relationship with its depositors and borrowers is also
regulated to a great extent by federal law, especially in such matters as the
ownership of savings accounts and the form and content of the Savings Bank's
mortgage documents.
The Savings Bank must file reports with the OTS and the FDIC concerning
its activities and financial condition, in addition to obtaining regulatory
approvals prior to entering into certain transactions such as mergers with or
acquisitions of other savings institutions. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the SAIF and depositors.
The regulatory structure also gives the regulatory authorities extensive
discretion in connection with their supervisory and enforcement activities and
examination policies, including policies with respect to the classification of
assets and the establishment of adequate loan loss reserves for regulatory
purposes. Any change in such regulations, whether by the OTS, the FDIC or the
Congress could have a material adverse impact on the Company, the Savings Bank
and their operations. The Company is also required to file certain reports with,
and otherwise comply with, the rules and regulations of the OTS and the SEC.
Insurance of Deposit Accounts. The Savings Bank's deposit accounts are
insured by the SAIF to a maximum of $100,000 for each insured member (as defined
by law and regulation). The FDIC has the authority, should it initiate
proceedings to terminate an institution's deposit insurance, to suspend the
insurance of any such institution without tangible capital. However, if a
savings association has positive capital when it includes qualifying intangible
assets, the FDIC cannot suspend deposit insurance unless capital declines
materially, the institution fails to enter into and remain in compliance with an
approved capital plan or the institution is operating in an unsafe or unsound
manner.
Regardless of an institution's capital level, insurance of deposits may
be terminated by the FDIC upon a finding that the institution has engaged in
unsafe or unsound practices, is in an unsafe or unsound condition to continue
operations or has violated any applicable law, regulation, rule, order or
condition imposed by the FDIC or the institution's primary regulator. The
management of the Savings Bank is unaware of any practice, condition or
violation that might lead to termination of its deposit insurance.
27
<PAGE>
The FDIC charges an annual assessment for the insurance of deposits
based on the risk a particular institution poses to its deposit insurance fund.
This risk classification is based on an institution's capital group and
supervisory subgroup assignment.
Regulatory Capital Requirements. OTS capital regulations require
savings institutions to meet three capital standards: (1) tangible capital equal
to 1.5% of total adjusted assets, (2) a leverage ratio (core capital) equal to
at least 3% of total adjusted assets and (3) a risk-based capital requirement
equal to 8.0% of total risk-weighted assets.
The following table sets forth the Savings Bank's compliance with its
regulatory capital requirements as of December 31, 1997:
Amount Percent
------ -------
(Dollars in thousands)
Tangible capital.......................... $ 42,544 7.16%
Tangible capital requirement.............. 8,902 1.50
-------- -----
Excess over requirement................... $ 33,642 5.66%
======== =====
Core Capital.............................. $ 42,544 7.16%
Core Capital requirement.................. 17,804 3.00
-------- -----
Excess over requirement................... $ 24,740 4.16%
======== =====
Risk-based capital........................ $ 44,573 17.41%
Risk-based capital requirement............ 20,487 8.00
-------- -----
Excess over requirement................... $ 24,086 9.41%
======== =====
Dividend and Other Capital Distribution Limitations. OTS regulations
require the Savings Bank to give the OTS 30 days' advance notice of any proposed
declaration of dividends to the Company, and the OTS has the authority under its
supervisory powers to prohibit the payment of dividends to the Company. In
addition, the Savings Bank may not declare or pay a cash dividend on its capital
stock if the effect thereof would be to reduce the regulatory capital of the
Savings Bank below the amount required for the liquidation account to be
established pursuant to the Savings Bank's Plan of Conversion.
In January 1998, the OTS proposed amendments to its current regulations
with respect to capital distributions by savings associations. Under the
proposed regulation, savings associations that would remain at least adequately
capitalized following the capital distribution, and that meet other specified
requirements, would not be required to file a notice or application for capital
distributions (such as cash dividends) declared below specified amounts. Under
the proposed regulation, savings associations which are eligible for expedited
treatment under current OTS regulations are not required to file a notice or an
application with the OTS if (i) the savings association would remain at least
adequately capitalized following the capital distribution and (ii) the amount of
the capital distribution does not exceed an amount equal to the savings
association's net income for that year to date, plus the savings association's
retained net income for the previous two years. Thus, under the proposed
regulation, only undistributed net income for the prior two years may be
distributed in addition to the current year's undistributed net income without
the filing of an application with the OTS. Savings associations which do not
qualify for
28
<PAGE>
expedited treatment or which desire to make a capital distribution in excess of
the specified amount, must file an application with, and obtain the approval of,
the OTS prior to making the capital distribution. Under certain other
circumstances, savings associations will be required to file a notice with OTS
prior to making the capital distribution. The OTS proposed limitations on
capital distributions are similar to the limitations imposed upon national
banks. The Bank is unable to predict whether or when the proposed regulation
will become effective.
Qualified Thrift Lender Test. The Home Owners' Loan Act ("HOLA"), as
amended, requires savings institutions to meet a QTL test. If the Savings Bank
maintains an appropriate level of Qualified Thrift Investments (primarily
residential mortgages and related investments, including certain mortgage-backed
securities) ("QTIs") and otherwise qualifies as a QTL, it will continue to enjoy
full borrowing privileges from the FHLB of Pittsburgh. The required percentage
of QTIs is 65% of portfolio assets (defined as all assets minus intangible
assets, property used by the institution in conducting its business and liquid
assets equal to 10% of total assets). Certain assets are subject to a percentage
limitation of 20% of portfolio assets. In addition, savings associations may
include shares of stock of the FHLBs, FNMA and FHLMC as qualifying QTIs. The
FDICIA also amended the method for measuring compliance with the QTL test to be
on a monthly basis in nine out of every 12 months, as opposed to on a daily or
weekly average of QTIs. As of December 31, 1997, the Savings Bank was in
compliance with its QTL requirement with 82.8% of its assets invested in QTIs .
A savings association that does not meet a QTL test must either convert
to a bank charter or comply with the following restrictions on its operations:
(i) the savings association may not engage in any new activity or make any new
investment, directly or indirectly, unless such activity or investment is
permissible for a national bank; (ii) the branching powers of the savings
association shall be restricted to those of a national bank; (iii) the savings
association shall not be eligible to obtain any advances from its FHLB; and (iv)
payment of dividends by the savings association shall be subject to the rules
regarding payment of dividends by a national bank. Upon the expiration of three
years from the date the savings association ceases to be a QTL, it must cease
any activity and not retain any investment not permissible for a national bank
and immediately repay any outstanding FHLB advances (subject to safety and
soundness considerations).
Liquidity Requirements. All savings associations are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings associations. At the present time, the required liquid
asset ratio is 5%. At December 31, 1997, the Savings Bank's liquidity ratio was
19.3%.
Federal Home Loan Bank System. The Savings Bank is a member of the FHLB
of Pittsburgh, which is one of 12 regional FHLBs that administer the home
financing credit function of savings associations. Each FHLB serves as a reserve
or central bank for its members within its assigned region. It is funded
primarily from proceeds derived from the sale of consolidated obligations of the
FHLB System. It makes loans to members (i.e., advances) in accordance with
policies and procedures established by the Board of Directors of the FHLB.
As a member, the Savings Bank is required to purchase and maintain
stock in the FHLB of Pittsburgh in an amount equal to at least 1% of its
aggregate unpaid residential mortgage loans, home purchase contracts or similar
obligations at the beginning of each year. At December 31, 1997, the Savings
Bank had $4.9 million in FHLB stock, which was in compliance with this
requirement.
29
<PAGE>
Federal Reserve System. The Federal Reserve Board requires all
depository institutions to maintain non-interest bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts) and non-personal time deposits. The balances maintained to
meet the reserve requirements imposed by the Federal Reserve Board may be used
to satisfy the liquidity requirements that are imposed by the OTS. At December
31, 1997, the Savings Bank's total transaction accounts required a reserve level
of $750,000 which was entirely offset by the Bank's vault cash on hand.
Savings associations have authority to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve policy generally requires savings
associations to exhaust all OTS sources before borrowing from the Federal
Reserve System. The Savings Bank had no such borrowings at December 31, 1997.
Item 2. Description of Property
- ---------------------------------
The Company is located and conducts its business at 3 Penns Trail,
Newtown, Pennsylvania. The Savings Bank operates from its main office and 13
branch offices located in Philadelphia and Bucks Counties, Pennsylvania and
Mercer County, New Jersey. The Savings Bank also owns two lots, one of which has
a building, behind its Doylestown branch office. The building is leased to a
third-party and the other is used as a parking lot for employees and tenants of
Third Federal. The net book value of the two lots was $117,000 at December 31,
1997. In addition, the Savings Bank owns a vacant lot at Newtown Yardley Road
and Friends Lane, Newtown, Pennsylvania. This lot was purchased in 1993 for
future expansion and had a net book value of $1.6 million at December 31, 1997.
The following table sets forth certain information regarding the
Savings Bank's properties:
<TABLE>
<CAPTION>
Leased or Leased or
Location Owned Location Owned
------------- ------- -------- ---------
<S> <C> <C> <C>
MAIN OFFICE
Newtown Office
3 Penns Trail
Newtown, PA 18940 Owned
BRANCH OFFICES
Frankford Office Newtown Office
4625 Frankford Avenue 950 Newtown Yardley Road
Philadelphia, PA 19124 Owned Newtown, PA 18940 Leased
Princeton Office
Princeton Shopping Center Ewing Office
301 N. Harrison Street 2075 Pennington Road
Princeton, NJ 08540 Leased Trenton, NJ 08618 Owned
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Hamilton Office Mayfair Office
1850 Route 33 Roosevelt Blvd. at Unruh
Hamilton Square, NJ 08690 Owned Philadelphia, PA 19149 Owned
Fishtown Office Doylestown Office
York & Memphis Streets 60 North Main Street
Philadelphia, PA 19125 Owned Doylestown, PA 18901 Owned
Cross Keys Office Administrative Office
834 North Easton Highway 62 Walker Lane
Doylestown, PA 18901 Owned Newtown, PA 18940(1) Owned
Woodhaven Office Warminster Office
Knights Road Center 601 Louis Drive
4014 Woodhaven Road Warminster, PA 18974 Leased
Philadelphia, PA 19154 Leased
Bridgesburg Office Feasterville Office
Orthodox & Almond Streets Buck Hotel Complex
Philadelphia, PA 19137 Owned Feasterville, PA 19053 Leased
New Britain Office
100 Town Center
New Britain, PA 18901 Leased
</TABLE>
- --------------------------------------
(1) This office serves as administrative offices, check processing,
training center, mail processing and storage center for the Savings
Bank
Item 3. Legal Proceedings
- --------------------------
Neither the Company nor its subsidiaries are involved in any pending
legal proceedings, other than routine legal matters occurring in the ordinary
course of business, which in the aggregate involve amounts which are believed by
management to be immaterial to the consolidated financial condition or results
of operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
None.
31
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
- -----------------------------------------------------------------
Information relating to the market for Registrant's common equity and
related stockholder matters appears under "Stock Market Information" in the
Registrant's 1997 Annual Report to Stockholders on pages 2 and 3, and is
incorporated herein by reference.
Item 6. Selected Financial Data
- --------------------------------
The above-captioned information appears under "Selected Financial and
Other Data" in the Registrant's 1997 Annual Report to Stockholders on pages 4
and 5, and is incorporated herein by reference.
32
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Conditions and Results
- --------------------------------------------------------------------------------
of Operations
- -------------
Rate/Volume Analysis
The table below sets forth certain information regarding changes in
interest income and interest expense of the Savings Bank for the periods
indicated. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to (i) changes in
volume (changes in average volume multiplied by old rate); (ii) changes in rates
(changes in rate multiplied by old average volume); (iii) total changes in
rate-volume. The combined effects of changes in both volume and rate, which
cannot be separately identified, have been allocated proportionately to the
change due to volume and the change due to rate.
<TABLE>
<CAPTION>
Years Ended Years Ended Twelve Months Ended
------------------------------------ ----------------------------------- ----------------------------------
December 31 December 31 December 31 December 31 December 31, June 30
1997 vs 1996 1996 vs 1995 1995 vs 1994
------------------------------------ ----------------------------------- ----------------------------------
Increase (Decrease) Increase (Decrease) Increase (Decrease)
Due to Due to Due to
------------------------------------ ---------------------------------- ----------------------------------
Volume Rate Net Volume Rate Net Volume Rate Net
------------- ------- --------- ------------ ------- --------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income: ....... (In thousands)
Loans receivable ...... (510) 443 (67) $ 11,645 $ (30) $ 11,615 $ 853 $ (315) $ 538
Mortgage-backed
securities(1) ........ 1,443 31 1,474 (699) (137) (836) 3,506 474 3,980
Investment
securities(1) ........ 2,887 68 2,955 (982) -- (982) (401) 211 (190)
Securities purchased
under agreements to
resell ............... 325 70 395 -- -- -- -- -- --
Other interest-earning
assets ............... 443 (1000) (557) (14) (424) (438) 50 736 786
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total interest-
earning assets..... $ 4,588 $ (388) $ 4,200 $ 9,950 $ (591) $ 9,359 $ 4,008 $ 1,106 $ 5,114
======== ======== ======== ======== ======== ======== ======== ======== ========
Interest expense:
Savings deposits ...... $ 2,922 $ 550 $ 3,472 $ 1,734 $ (363) $ 1,371 $ (724) $ 1,547 $ 823
Borrowed money ........ 145 (334) (189) 4,866 157 5,023 848 (57) 791
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total interest
bearing
liabilities ...... $ 3,067 216 $ 3,283 $ 6,600 $ (206) $ 6,394 $ 124 $ 1,490 $ 1,614
======== ======== ======== ======== ======== ======== ======== ======== ========
Net change in interest
income ............... $ 1,521 (604) $ 917 $ 3,350 $ (385) $ 2,965 $ 3,884 $ (384) $ 3,500
======== ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
- ---------------
(1) Includes interest income on investment securities held-for-sale.
33
<PAGE>
The remaining above-captioned information appears under Management's
Discussion and Analysis of Financial Condition and Results of Operations in the
Registrant's 1997 Annual Report to Stockholders on pages 6 through 15 and is
incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
- --------------------------------------------------------------------
Asset and Liability Management
Managing Interest Rate Risk. Interest rate risk is defined as the
sensitivity of the Company's current and future earnings as well as its capital
to changes in the level of market interest rates. The Bank's exposure to
interest rate risk results from, among other things, the difference in
maturities in interest-earning assets and interest-bearing liabilities. Since
the Bank's assets currently have a longer maturity than its liabilities, the
Bank's earnings could be negatively impacted during a period of rising interest
rates and conversely, positively impacted during a period of falling interest
rates. The relationship between the interest rate sensitivity of the Bank's
assets and liabilities is continually monitored by management. In this regard,
the Bank emphasizes the origination of shorter term or adjustable rate assets
for portfolio while originating longer term fixed rate assets for resale. At
December 31, 1997, approximately 77% of the Bank's loan portfolio were comprised
of loans with original maturities of less than 15 years, balloon mortgages or
adjustable rate loans. Additionally, the origination level of fixed rate assets
are continually monitored and if deemed appropriate, the Bank will enter into
forward commitments for the sale of these assets to ensure the Bank is not
exposed to undue interest rate risk.
The Bank utilizes its investment and mortgage-backed security portfolio
in managing its liquidity and therefore seeks securities with a stated or
average estimated maturities of less than five years. These securities are
readily marketable and provide the Bank with a cash flow stream to fund asset
growth or liability maturities.
A significant portion of the Bank's assets has been funded with CDs
including jumbo CDs. Unlike other deposit products such as checking and savings
accounts, CDs carry a high degree of interest rate sensitivity and therefore,
their renewal will vary based on the competitiveness of the Bank's interest
rates. The Bank has attempted to price its CDs to be competitive at the shorter
maturities (i.e., maturities of less than one year) in order to better match the
repricing characteristics of portfolio loans. At December 31, 1997,
approximately 44% of the Bank's deposits were CDs.
The Bank utilizes borrowings from the FHLB in managing its interest
rate risk and as a tool to augment deposits in funding asset growth. The Bank
may utilize these funding sources to better match its longer term repricing
assets (i.e., between one and five years).
The nature of the Bank's current operations is such that it is not
subject to foreign currency exchange or commodity price risk. Additionally,
neither the Company nor the Bank owns any trading assets. At December 31, 1997,
the Bank did not have any hedging transactions in place such as interest rate
swaps, caps, or floors.
34
<PAGE>
GAP analysis is a useful measurement of asset and liability management,
however, it is difficult to predict the effect of changing interest rates based
solely on this measure. An additional analysis required by the OTS and generated
quarterly is the OTS Interest Rate Exposure Report. This report forecasts
changes in the Bank's market value of portfolio equity ("MVPE") under
alternative interest rate environments. The MVPE is defined as the net present
value of the Bank's existing assets, liabilities and off-balance sheet
instruments. The calculated estimates of change in MVPE at December 31, 1997 are
as follows:
MVPE
- --------------------------------------------------------------------------------
Amount
Change in Interest Rate (In Thousands) % Change
+400 Basis Points $35,571 -37%
+300 Basis Points 41,396 -27%
+200 Basis Points 47,259 -16%
+100 Basis Points 52,581 -7%
Flat Rate 56,334
- -100 Basis Points 57,973 +3%
- -200 Basis Points 58,074 +3%
- -300 Basis Points 58,141 +3%
- -400 Basis Points 60,381 +7%
Management believes that the assumptions utilized in evaluating the
vulnerability of the Company's earnings and capital to changes in interest rates
approximate actual experience; however, the interest rate sensitivity of the
Bank's assets and liabilities as well as the estimated effect of changes in
interest rates on MVPE could vary substantially if different assumptions are
used or actual experience differs from the experience on which the assumptions
were based.
In the event the Bank should experience a mismatch in its desired GAP
ranges or an excessive decline in its MVPE subsequent to an immediate and
sustained change in interest rate, it has a number of options which it could
utilize to remedy such mismatch. The Bank could restructure its investment
portfolio through sale or purchase of securities with more favorable repricing
attributes. It could also emphasize loan products with appropriate maturities or
repricing attributes, or it could attract deposits or obtain borrowings with
desired maturities.
Item 8. Financial Statements
- -----------------------------
The Consolidated Financial Statements of TF Financial Corporation and
its subsidiaries are included in the Registrant's 1997 Annual Report to
Stockholders on pages 17 through 63 and are incorporated herein by reference.
35
<PAGE>
Item 9. Change In and Disagreements with Accountants on Accounting and Financial
- --------------------------------------------------------------------------------
Disclosure
- ----------
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
The information contained under the section captioned "Information with
Respect to Nominees for Director, Directors Continuing in Office and Executive
Officers -- General Information and Nominees" at pages 4 to 6 of the
Registrant's definitive proxy statement for the Registrant's 1998 Annual Meeting
of Stockholders (the "Proxy Statement") is incorporated herein by reference.
Additional information concerning executive officers is included under
"Item 1. Business -- Executive Officers of the Registrant."
Item 11. Executive Compensation
- --------------------------------
The information relating to executive compensation is incorporated
herein by reference to the Registrant's Proxy Statement at pages 7 through 14.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- -------------------------------------------------------------------------
The information relating to security ownership of certain beneficial
owners and management is incorporated herein by reference to the Registrant's
Proxy Statement at pages 2 and 3.
Item 13. Certain Relationships and Related Transactions
- ---------------------------------------------------------
The information relating to certain relationships and related
transactions is incorporated herein by reference to the Registrant's Proxy
Statement at page 15.
36
<PAGE>
PART IV
Item 14. Exhibits and Reports on Form 8-K
- ------------------------------------------
(a) The following documents are filed as a part of this report:
(1) Financial Statements of the Company are incorporated by reference
to the following indicated pages of the 1997 Annual Report to Stockholders.
<TABLE>
PAGE
----
<S> <C>
Independent Auditors' Report......................................................................... 21
Consolidated Statements of Financial Position as of December 31, 1997 and 1996....................... 22
Consolidated Statements of Earnings For the Years Ended
December 31, 1997, 1996 and 1995................................................................... 23
Consolidated Statement of Changes in Stockholders' Equity
for the Years Ended December 31, 1997, 1996 and 1995............................................... 24-25
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995................................................................... 26-27
Notes to Consolidated Financial Statements........................................................... 28-63
</TABLE>
The remaining information appearing in the Annual Report to
Stockholders is not deemed to be filed as part of this report, except as
expressly provided herein.
(2) All schedules are omitted because they are not required or
applicable, or the required information is shown in the consolidated financial
statements or the notes thereto.
(3) Exhibits
(a) The following exhibits are filed as part of this report.
3.1 Certificate of Incorporation of TF Financial Corporation*
3.2 Bylaws of TF Financial Corporation*
4.0 Stock Certificate of TF Financial Corporation*
4.1 The Company's Rights Agreement dated November 22, 1995**
10.1 Third Federal Savings and Loan Association Management Stock
Bonus Plan*
10.2 TF Financial Corporation 1994 Stock Option Plan*
10.3 Third Federal Savings Bank Directors Consultation and
Retirement Plan***
10.4 TF Financial Corporation Incentive Compensation Plan***
10.5 Severance Agreement with John R. Stranford***
10.6 Severance Agreement with Thomas J. Sposito, II
10.7 Severance Agreement with William C. Niemczura***
10.8 TF Financial Corporation 1997 Stock Option Plan
11.0 Statement re Computation of Per Share Earnings
13.0 1997 Annual Report to Stockholders
21.0 Subsidiary Information
37
<PAGE>
23.0 Consent of Independent Auditor
27.1 Financial Data Schedule - December 31, 1997
27.2 Restated Financial Data Schedule - September 30, 1997
27.3 Restated Financial Data Schedule - June 30, 1997
27.4 Restated Financial Data Schedule - March 31, 1997
27.5 Restated Financial Data Schedule - December 31, 1996
27.6 Restated Financial Data Schedule - September 30, 1996
27.7 Restated Financial Data Schedule - June 30, 1996
27.8 Restated Financial Data Schedule - March 31, 1996
27.9 Restated Financial Data Schedule - December 31, 1995
(b) Reports on Form 8-K.
None
- --------------------------
* Incorporated herein by reference from the Exhibits to Form S-1,
Registration Statement, File No. 33-76960.
** Incorporated herein by reference to the Registrants Form 8-A filed with
the Securities and Exchange Commission on November 22, 1995.
*** Incorporated herein by reference to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1995.
38
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<CAPTION>
TF FINANCIAL CORPORATION
<S> <C>
Dated: March 31, 1998 By:/s/ John R. Stranford
-------------- --------------------------------
John R. Stranford
President, Chief Executive
Officer and Director
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/ John R. Stranford By: /s/ William C. Niemczura
----------------------------------- -------------------------------------
John R. Stranford William C. Niemczura
President, Chief Executive Officer Senior Vice President, Chief
and Director Financial Officer and Treasurer
(Principal Executive Officer) (Principal Financial and Accounting
Officer)
Date: March 31, 1998 Date: March 31, 1998
-------------- ---------------
By: /s/ Carl F. Gregory By: /s/ Robert N. Dusek
---------------------------------- ------------------------------------
Carl F. Gregory Robert N. Dusek
Director Chairman of the Board
Date: March 31, 1998 Date: March 31, 1998
-------------- ---------------
By: /s/ Thomas J. Gola By: /s/ George A. Olsen
---------------------------------- ------------------------------------
Thomas J. Gola George A. Olsen
Director Director
Date: March 31, 1998 Date: March 31, 1998
-------------- ----------------
</TABLE>
CHANGE IN CONTROL SEVERANCE AGREEMENT
-------------------------------------
THIS CHANGE IN CONTROL SEVERANCE AGREEMENT ("Agreement") entered into
this 1 st day of January, 1997 ("Effective Date"), by and between Third Federal
Savings Bank (the "Savings Bank") and Thomas J. Sposito, II, (the "Employee").
WHEREAS, the Employee is currently employed by the Savings Bank as a
Senior Vice President and Retail Banking Manager, and is experienced in all
phases of the business of the Savings Bank; and
WHEREAS, the parties desire by this writing to set forth the rights and
responsibilities of the Savings Bank and Employee if the Savings Bank should
undergo a change in control (as defined hereinafter in the Agreement) after the
Effective Date.
NOW, THEREFORE, it is AGREED as follows:
1. Employment. The Employee is employed in the capacity as a Senior
Vice President and Retail Banking Manager of the Savings Bank. The Employee
shall render such administrative and management services to the Savings Bank and
TF Financial Corporation ("Parent") as are currently rendered and as are
customarily performed by persons situated in a similar executive capacity. The
Employee's other duties shall be such as the Board of Directors for the Savings
Bank (the "Board of Directors" or "Board") may from time to time reasonably
direct, including normal duties as an officer of the Savings Bank.
2. Term of Agreement. The term of this Agreement shall be for the
period commencing on the Effective Date and ending twenty-four (24) months
thereafter. Additionally, on, or before, each annual anniversary date from the
Effective Date, the term of this Agreement may be extended for an additional one
year period beyond the then effective expiration date upon a determination and
resolution of the Board of Directors that the performance of the Employee has
met the requirements and standards of the Board, and that the term of such
Agreement shall be extended.
3. Termination of Employment in Connection with or Subsequent to
--------------------------------------------------------------
a Change in Control.
-------------------
(a) Notwithstanding any provision herein to the contrary, in the event
of the involuntary termination of Employee's employment under this Agreement,
absent Just Cause, in connection with, or within twenty-four (24) months after,
any Change in Control of the Bank or Parent, Employee shall be paid an amount
equal to two (2) times the prior three (3) calendar year (or lesser period if
not employed for such 3 year period) average compensation paid to the Employee
by the Bank (whether said amounts were received or
1
<PAGE>
deferred by the Employee) and the costs associated with maintaining coverage
under the Bank's medical and dental insurance reimbursement plans similar to
that in effect on the date of termination of employment for a period of one year
thereafter. Said sum shall be paid, at the option of Employee, either in one (1)
lump sum within thirty (30) days of such termination discounted to the present
value of such payment using as the discount rate the "prime rate" as published
in the Wall Street Journal Eastern Edition as of the date of such payment minus
100 basis points, or in periodic payments over the next 24 months, and such
payments shall be in lieu of any other future payments which the Employee would
be otherwise entitled to receive. Notwithstanding the forgoing, all sums payable
hereunder shall be reduced in such manner and to such extent so that no such
payments made hereunder when aggregated with all other payments to be made to
the Employee by the Bank or the Parent shall be deemed an "excess parachute
payment" in accordance with Section 280G of the Internal Revenue Codes of 1986,
as amended (the "Code") and be subject to the excise tax provided at Section
4999(a) of the Code. The term "Change in Control" shall mean: (i) the execution
of an agreement for the sale of all, or a material portion, of the assets of the
Bank or the Parent; (ii) the execution of an agreement for a merger or
recapitalization of the Bank or the Parent or any merger or recapitalization
whereby the Bank or the Parent is not the surviving entity; (iii) a change in
control of the Bank or the Parent, as otherwise defined or determined by the
Office of Thrift Supervision or regulations promulgated by it; or (iv) the
acquisition, directly or indirectly, of the beneficial ownership (within the
meaning of that term as it is used in Section 13(d) of the Securities Exchange
Act of 1934 and the rules and regulations promulgated thereunder) of twenty-five
percent (25%) or more of the outstanding voting securities of the Bank or the
Parent by any person, trust, entity or group. The term "person" means an
individual other than the Employee, or a corporation, partnership, trust,
association, joint venture, pool, syndicate, sole proprietorship, unincorporated
organization or any other form of entity not specifically listed herein.
(b) Notwithstanding any other provision of this Agreement to the
contrary except as provided at Sections 4(b), 4(c), 4(d), 4(e) and 5, Employee
may voluntary terminate his employment under this Agreement within twenty-four
(24) months following a Change in Control of the Bank or Parent, and Employee
shall thereupon be entitled to receive the payment and benefits described in
Section 3(a) of this Agreement, upon the occurrence, or within ninety (90) days
thereafter, of any of the following events, which have not been consented to in
advance by the Employee in writing: (i) if Employee would be required to move
his personal residence or perform his principal executive functions more than
fifty (50) miles from the Employee's primary office as of the signing of this
Agreement; (ii) if in the organizational structure of the Bank or Parent,
Employee would be required to report to a person or persons
2
<PAGE>
deemed to be at a management level below the management level to which Employee
was reporting to prior to the Change in Control; (iii) if the Bank or Parent
should fail to maintain the Employee's base compensation in effect as of the
date of the Change in Control and existing employee benefits plans, including
material fringe benefit, stock option and retirement plans, except to the extent
that such reduction in benefit programs is part of an overall adjustment in
benefits for all employees of the Bank or Parent and does not disproportionately
adversely impact the Employee; (iv) if Employee would be assigned duties and
responsibilities other than those normally associated with his position as
referenced at Section 1, herein, for a period of more than six months; or (v) if
Employee's responsibilities or authority have in any way been materially
diminished or reduced for a period of more than six months.
4. Other Changes in Employment Status.
----------------------------------
(a) Except as provided for at Section 3, herein, the Board of Directors
may terminate the Employee's employment at any time, but any termination by the
Board of Directors other than termination for Just Cause, shall not prejudice
the Employee's right to compensation or other benefits under the Agreement. The
Employee shall have no right to receive compensation or other benefits for any
period after termination for Just Cause. Termination for "Just Cause" shall
include termination because of the Employee's personal dishonesty, incompetence,
willful misconduct, breach of fiduciary duty involving personal profit,
intentional failure to perform stated duties, willful violation of any law, rule
or regulation (other than traffic violations or similar offenses) or final
cease- and-desist order, or material breach of any provision of the Agreement.
(b) If the Employee is removed and/or permanently prohibited from
participating in the conduct of the Savings Bank's affairs by an order issued
under Sections 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act ("FDIA")
(12 U.S.C. 1818(e)(4) and (g)(1)), all obligations of the Savings Bank under
this Agreement shall terminate, as of the effective date of the order, but the
vested rights of the parties shall not be affected.
(c) If the Savings Bank is in default (as defined in Section 3(x)(1) of
FDIA) all obligations under this Agreement shall terminate as of the date of
default, but this paragraph shall not affect any vested rights of the
contracting parties.
(d) All obligations under this Agreement shall be terminated, except to
the extent determined that continuation of this Agreement is necessary for the
continued operation of the Savings Bank: (i) by the Director of the Office of
Thrift Supervision ("Director of OTS"), or his or her designee, at the time that
the Federal Deposit Insurance Corporation ("FDIC") or the Resolution Trust
Corporation
3
<PAGE>
enters into an agreement to provide assistance to or on behalf of the Savings
Bank under the authority contained in Section 13(c) of FDIA; or (ii) by the
Director of the OTS, or his or her designee, at the time that the Director of
the OTS, or his or her designee approves a supervisory merger to resolve
problems related to operation of the Savings Bank or when the Savings Bank is
determined by the Director of the OTS to be in an unsafe or unsound condition.
Any rights of the parties that have already vested, however, shall not be
affected by such action.
(e) Notwithstanding anything herein to the contrary, any payments made
to the Employee pursuant to the Agreement, or otherwise, shall be subject to and
conditioned upon compliance with 12 USC ss.1828(k) and any regulations
promulgated thereunder.
5. Suspension of Employment . If the Employee is suspended and/or
temporarily prohibited from participating in the conduct of the Savings Bank's
affairs by a notice served under Section 8(e)(3) or (g)(1) of the FDIA (12
U.S.C. 1818(e)(3) and (g)(1)), the Savings Bank's obligations under the
Agreement shall be suspended as of the date of service, unless stayed by
appropriate proceedings. If the charges in the notice are dismissed, the Savings
Bank shall, (i) pay the Employee all or part of the compensation withheld while
its contract obligations were suspended and (ii) reinstate any of its
obligations which were suspended.
6. Successors and Assigns.
----------------------
(a) This Agreement shall inure to the benefit of and be binding upon
any corporate or other successor of the Savings Bank which shall acquire,
directly or indirectly, by merger, consolidation, purchase or otherwise, all or
substantially all of the assets or stock of the Savings Bank.
(b) The Employee shall be precluded from assigning or delegating his
rights or duties hereunder without first obtaining the written consent of the
Savings Bank.
7. Amendments. No amendments or additions to this Agreement shall be
binding upon the parties hereto unless made in writing and signed by both
parties, except as herein otherwise specifically provided.
8. Applicable Law. This agreement shall be governed by all respects
whether as to validity, construction, capacity, performance or otherwise, by the
laws of the State of Pennsylvania, except to the extent that Federal law shall
be deemed to apply.
9. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
4
<PAGE>
10. Arbitration. Any controversy or claim arising out of or relating to
this Agreement, or the breach thereof, shall be settled by arbitration in
accordance with the rules then in effect of the district office of the American
Arbitration Association ("AAA") nearest to the home office of the Savings Bank,
and judgment upon the award rendered may be entered in any court having
jurisdiction thereof, except to the extent that the parties may otherwise reach
a mutual settlement of such issue. The Savings Bank shall incur the cost of all
fees and expenses associated with filing a request for arbitration with the AAA,
whether such filing is made on behalf of the Savings Bank or the Employee, and
the costs and administrative fees associated with employing the arbitrator and
related administrative expenses assessed by the AAA. Each party shall be
responsible for any fees incurred on its own behalf with respect to other
expenses, including attorneys' fees, arising from such dispute, proceedings or
actions.
11. Confidentiality.
---------------
(a) Employee agrees that, at all times hereafter, he will keep
all confidential and proprietary business and marketing strategies of Savings
Bank and any and all other information which he learned regarding the Savings
Bank during the course of his employment by Savings Bank, in strictest
confidence and will not disclose any part or aspect thereof to anyone for any
reason unless required by law to do so.
(b) All marketing and business materials, existing or
prospective customer lists or statements, seminar materials, drawings, designs,
books, cards, records, accounts, audio visual reports, slides, files, notes,
memoranda, and other papers, and any software, computer programs, or data base
information or any other information obtained from Savings Bank or connected
with or arising from any affairs of Savings Bank or his employment hereunder
(the "Records"), in the charge or possession or knowledge of Employee shall be
and remain the exclusive property of Savings Bank and shall not be used,
transferred or disclosed in any way by Employee except in the ordinary
performance of Employee's duties for Savings Bank while an employee of Savings
Bank. Upon the termination of Employee's employment, any and all Records of
whatever kind and in whatever form maintained, as well as all copies and
reproductions thereof in the possession or control of Employee shall be turned
over and delivered by Employee to Savings Bank without any hesitancy or delay.
12. Entire Agreement. This Agreement together with any understanding or
modifications thereof as agreed to in writing by the parties, shall constitute
the entire agreement between the parties hereto.
5
TF FINANCIAL CORPORATION
1997 STOCK OPTION PLAN
1. Purpose of the Plan. The Plan shall be known as the TF Financial
Corporation ("Company") 1997 Stock Option Plan (the "Plan"). The purpose of the
Plan is to attract and retain qualified personnel for positions of substantial
responsibility and to provide additional financial incentives to employees,
officers and directors providing services to the Company, or any present or
future parent or subsidiary of the Company to promote the success of the
business. The Plan is intended to provide for the grant of "Incentive Stock
Options," within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended (the "Code") and Non-Incentive Stock Options, options that do
not so qualify. The provisions of the Plan relating to Incentive Stock Options
shall be interpreted to conform to the requirements of Section 422 of the Code.
2. Definitions. The following words and phrases when used in this Plan
with an initial capital letter, unless the context clearly indicates otherwise,
shall have the meaning as set forth below. Wherever appropriate, the masculine
pronoun shall include the feminine pronoun and the singular shall include the
plural.
(a) "Award" means the grant by the Committee of an Incentive
Stock Option or a Non-Incentive Stock Option, or any combination thereof, as
provided in the Plan.
(b) "Board" shall mean the Board of Directors of the Company,
or any successor or parent corporation thereto.
(c) "Change in Control" shall mean: (i) the sale of all, or a
material portion, of the assets of the Company; (ii) the merger or
recapitalization of the Company whereby the Company is not the surviving entity;
(iii) a change in control of the Company, as otherwise defined or determined by
the Office of Thrift Supervision or regulations promulgated by it; or (iv) the
acquisition, directly or indirectly, of the beneficial ownership (within the
meaning of that term as it is used in Section 13(d) of the Securities Exchange
Act of 1934 and the rules and regulations promulgated thereunder) of twenty-five
percent (25%) or more of the outstanding voting securities of the Company by any
person, trust, entity or group. This limitation shall not apply to the purchase
of shares by underwriters in connection with a public offering of Company stock,
or the purchase of shares of up to 25% of any class of securities of the Company
by a tax-qualified employee stock benefit plan which is exempt from the approval
requirements, set forth under 12 C.F.R. ss.574.3(c)(1)(vi) as now in effect or
as may hereafter be amended. The term "person" refers to an individual or a
corporation, partnership, trust, association, joint venture, pool, syndicate,
sole proprietorship, unincorporated organization or any other form of entity not
specifically listed herein. The decision of the Committee as to whether a Change
in Control has occurred shall be conclusive and binding.
(d) "Code" shall mean the Internal Revenue Code of 1986, as
amended, and regulations promulgated thereunder.
(e) "Committee" shall mean the Board or the Stock Option
Committee appointed by the Board in accordance with Section 5(a) of the Plan.
A-1
<PAGE>
(f) "Common Stock" shall mean the common stock of the Company,
or any successor or parent corporation thereto.
(g) "Continuous Employment" or "Continuous Status as an
Employee" shall mean the absence of any interruption or termination of
employment with the Company or any present or future Parent or Subsidiary of the
Company. Employment shall not be considered interrupted in the case of sick
leave, military leave or any other leave of absence approved by the Company or
in the case of transfers between payroll locations, of the Company or between
the Company, its Parent, its Subsidiaries or a successor.
(h) "Company" shall mean the TF Financial Corporation, the
parent corporation of the Savings Bank, or any successor or Parent thereof.
(i) "Director" shall mean a member of the Board of the
Company, or any successor or parent corporation thereto.
(j) "Director Emeritus" shall mean a person serving as a
director emeritus, advisory director, consulting director, or other similar
position as may be appointed by the Board of Directors of the Savings Bank or
the Company from time to time.
(k) "Disability" means (a) with respect to Incentive Stock
Options, the "permanent and total disability" of the Employee as such term is
defined at Section 22(e)(3) of the Code; and (b) with respect to Non-Incentive
Stock Options, any physical or mental impairment which renders the Participant
incapable of continuing in the employment or service of the Savings Bank or the
Parent in his then current capacity as determined by the Committee.
(l) "Dividend Equivalent Rights" shall mean the rights to
receive a cash payment in accordance with Section 12 of the Plan.
(m) "Effective Date" shall mean the date specified in Section
15 hereof.
(n) "Employee" shall mean any person employed by the Company
or any present or future Parent or Subsidiary of the Company.
(o) "Fair Market Value" shall mean: (i) if the Common Stock is
traded otherwise than on a national securities exchange, then the Fair Market
Value per Share shall be equal to the last reported sale price of the Common
Stock on the date of valuation or the date of grant of an option, or if no such
sale is reported on such date than the mean between the last bid and ask price
of such Common Stock on such date or, if there is no bid and ask price on said
date, then on the immediately prior business day on which there was a sale or
bid and ask price. If no such sale or bid and ask price is available, then the
Fair Market Value shall be determined by the Committee in good faith; or (ii) if
the Common Stock is listed on a national securities exchange, then the Fair
Market Value per Share shall be not less than the average of the highest and
lowest selling price of such Common Stock on such valuation date, or if there
were no sales on said date, then the Fair Market Value shall be not less than
the mean between the last bid and ask price on such date. Notwithstanding the
foregoing, for transactions under the Plan occurring prior to the commencement
of trading on a business day, the Fair Market Value shall be determined based
upon information reported at the closing of the prior business day.
A-2
<PAGE>
(p) "Incentive Stock Option" or "ISO" shall mean an option to
purchase Shares granted by the Committee pursuant to Section 8 hereof which is
subject to the limitations and restrictions of Section 8 hereof and is intended
to qualify as an incentive stock option under Section 422 of the Code.
(q) "Non-Incentive Stock Option" or "Non-ISO" shall mean an
option to purchase Shares granted pursuant to Section 9 hereof, which option is
not intended to qualify under Section 422 of the Code.
(r) "Option" shall mean an Incentive Stock Option or
Non-Incentive Stock Option granted pursuant to this Plan providing the holder of
such Option with the right to purchase Common Stock.
(s) "Optioned Stock" shall mean stock subject to an Option
granted pursuant to the Plan.
(t) "Optionee" shall mean any person who receives an Option or
Award pursuant to the Plan.
(u) "Parent" shall mean any present or future corporation
which would be a "parent corporation" as defined in Sections 424(e) and (g) of
the Code.
(v) "Participant" means any employee, officer or director of
the Company or any Parent or Subsidiary of the Company who is selected by the
Committee to receive an Award, or who by the express terms of the Plan is
granted an Award.
(w) "Plan" shall mean the TF Financial Corporation 1997 Stock
Option Plan.
(x) "Savings Bank" shall mean Third Federal Savings Bank,
Newtown, Pennsylvania, or any successor corporation thereto.
(y) "Share" shall mean one share of the Common Stock.
(z) "Subsidiary" shall mean any present or future corporation
which constitutes a "subsidiary corporation" as defined in Sections 424(f) and
(g) of the Code.
3. Shares Subject to the Plan. Except as otherwise required by the
provisions of Section 13 hereof, the aggregate number of Shares with respect to
which Awards may be made pursuant to the Plan shall not exceed 240,000 Shares.
Such Shares may either be from authorized but unissued shares or shares
purchased in the market for Plan purposes.
If an Award shall expire, become unexercisable, or be forfeited for any
reason prior to its exercise, new Awards may be granted under the Plan with
respect to the number of Shares as to which such expiration has occurred.
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4. Six Month Holding Period.
------------------------
Subject to vesting requirements, if applicable, except in the
event of death or disability of the Optionee, a minimum of six months must
elapse between the date of the grant of an Option and the date of the sale of
the Common Stock received through the exercise of such Option.
5. Administration of the Plan.
--------------------------
(a) Composition of the Committee. The Plan shall be
administered by the Board of Directors of the Company or a Committee which shall
consist of not less than two Directors of the Company appointed by the Board and
serving at the pleasure of the Board. All persons designated as members of the
Committee shall meet the requirements of a "Non-Employee Director" within the
meaning of Rule 16b-3 under the Securities Exchange Act of 1934, as amended, as
found at 17 CFR ss.240.16b-3.
(b) Powers of the Committee. The Committee is authorized (but
only to the extent not contrary to the express provisions of the Plan or to
resolutions adopted by the Board) to interpret the Plan, to prescribe, amend and
rescind rules and regulations relating to the Plan, to determine the form and
content of Awards to be issued under the Plan and to make other determinations
necessary or advisable for the administration of the Plan, and shall have and
may exercise such other power and authority as may be delegated to it by the
Board from time to time. A majority of the entire Committee shall constitute a
quorum and the action of a majority of the members present at any meeting at
which a quorum is present shall be deemed the action of the Committee. In no
event may the Committee revoke outstanding Awards without the consent of the
Participant.
The President of the Company and such other officers as shall
be designated by the Committee are hereby authorized to execute written
agreements evidencing Awards on behalf of the Company and to cause them to be
delivered to the Participants. Such agreements shall set forth the Option
exercise price, the number of shares of Common Stock subject to such Option, the
expiration date of such Options, and such other terms and restrictions
applicable to such Award as are determined in accordance with the Plan or the
actions of the Committee.
(c) Effect of Committee's Decision. All decisions,
determinations and interpretations of the Committee shall be final and
conclusive on all persons affected thereby.
6. Eligibility for Awards and Limitations.
--------------------------------------
(a) The Committee shall from time to time
determine the employees, officers and Directors of the Company and the
Subsidiaries who shall be granted Awards under the Plan, the number of Awards to
be granted to each such persons, and whether Awards granted to each such
Participant under the Plan shall be Incentive and/or Non-Incentive Stock
Options. In selecting Participants and in determining the number of Shares of
Common Stock to be granted to each such Participant, the Committee may consider
the nature of the prior and anticipated future services rendered by each such
Participant, each such Participant's current and potential contribution to the
Company and such other factors as the Committee may, in its sole discretion,
deem relevant. Participants who have been granted an Award may, if otherwise
eligible, be granted additional Awards.
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<PAGE>
(b) The aggregate Fair Market Value (determined
as of the date the Option is granted) of the Shares with respect to which
Incentive Stock Options are exercisable for the first time by each Employee
during any calendar year (under all Incentive Stock Option plans, as defined in
Section 422 of the Code, of the Company or any present or future Parent or
Subsidiary of the Company) shall not exceed $100,000. Notwithstanding the prior
provisions of this Section 6, the Committee may grant Options in excess of the
foregoing limitations, provided said Options shall be clearly and specifically
designated as not being Incentive Stock Options.
(c) In no event shall Shares subject to Options
granted to non-employee Directors in the aggregate under this Plan exceed more
than 30% of the total number of Shares authorized for delivery under this Plan
pursuant to Section 3 herein or more than 5% to any individual non-employee
Director. In no event shall Shares subject to Options granted to any Employee
exceed more than 25% of the total number of Shares authorized for delivery under
the Plan.
7. Term of the Plan. The Plan shall continue in effect for a term of
ten (10) years from the Effective Date, unless sooner terminated pursuant to
Section 18 hereof. No Option shall be granted under the Plan after ten (10)
years from the Effective Date.
8. Terms and Conditions of Incentive Stock Options. Incentive Stock
Options may be granted only to Participants who are Employees. Each Incentive
Stock Option granted pursuant to the Plan shall be evidenced by an instrument in
such form as the Committee shall from time to time approve. Each Incentive Stock
Option granted pursuant to the Plan shall comply with, and be subject to, the
following terms and conditions:
(a) Option Price.
(i) The price per Share at which each Incentive
Stock Option granted by the Committee under the Plan may be exercised shall not,
as to any particular Incentive Stock Option, be less than the Fair Market Value
of the Common Stock on the date that such Incentive Stock Option is granted.
(ii) In the case of an Employee who owns Common
Stock representing more than ten percent (10%) of the outstanding Common Stock
at the time the Incentive Stock Option is granted, the Incentive Stock Option
exercise price shall not be less than one hundred and ten percent (110%) of the
Fair Market Value of the Common Stock on the date that the Incentive Stock
Option is granted.
(b) Payment. Full payment for each Share of Common Stock
purchased upon the exercise of any Incentive Stock Option granted under the Plan
shall be made at the time of exercise of each such Incentive Stock Option and
shall be paid in cash (in United States Dollars), Common Stock or a combination
of cash and Common Stock. Common Stock utilized in full or partial payment of
the exercise price shall be valued at the Fair Market Value at the date of
exercise. The Company shall accept full or partial payment in Common Stock only
to the extent permitted by applicable law. No Shares of Common Stock shall be
issued until full payment has been received by the Company, and no Optionee
shall have any of the rights of a stockholder of the Company until Shares of
Common Stock are issued to the Optionee.
(c) Term of Incentive Stock Option. The term of exercisability
of each Incentive Stock Option granted pursuant to the Plan shall be not more
than ten (10) years from the date each such
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<PAGE>
Incentive Stock Option is granted, provided that in the case of an Employee who
owns stock representing more than ten percent (10%) of the Common Stock
outstanding at the time the Incentive Stock Option is granted, the term of
exercisability of the Incentive Stock Option shall not exceed five (5) years.
(d) Exercise Generally. Except as otherwise provided in
Section 10 hereof, no Incentive Stock Option may be exercised unless the
Optionee shall have been in the employ of the Company at all times during the
period beginning with the date of grant of any such Incentive Stock Option and
ending on the date three (3) months prior to the date of exercise of any such
Incentive Stock Option. The Committee may impose additional conditions upon the
right of an Optionee to exercise any Incentive Stock Option granted hereunder
which are not inconsistent with the terms of the Plan or the requirements for
qualification as an Incentive Stock Option. Except as otherwise provided by the
terms of the Plan or by action of the Committee at the time of the grant of the
Options, the Options will be first exercisable at the rate of 20% on the one
year anniversary of the date of grant and 20% annually thereafter during such
periods of service as an Employee, Director or Director Emeritus.
(e) Cashless Exercise. Subject to vesting requirements, if
applicable, an Optionee who has held an Incentive Stock Option for at least six
months may engage in the "cashless exercise" of the Option. Upon a cashless
exercise, an Optionee shall give the Company written notice of the exercise of
the Option together with an order to a registered broker-dealer or equivalent
third party, to sell part or all of the Optioned Stock and to deliver enough of
the proceeds to the Company to pay the Option exercise price and any applicable
withholding taxes. If the Optionee does not sell the Optioned Stock through a
registered broker-dealer or equivalent third party, the Optionee can give the
Company written notice of the exercise of the Option and the third party
purchaser of the Optioned Stock shall pay the Option exercise price plus any
applicable withholding taxes to the Company.
(f) Transferability. An Incentive Stock Option granted
pursuant to the Plan shall be exercised during an Optionee's lifetime only by
the Optionee to whom it was granted and shall not be assignable or transferable
otherwise than by will or by the laws of descent and distribution.
9. Terms and Conditions of Non-Incentive Stock Options. Each
Non-Incentive Stock Option granted pursuant to the Plan shall be evidenced by an
instrument in such form as the Committee shall from time to time approve. Each
Non-Incentive Stock Option granted pursuant to the Plan shall comply with and be
subject to the following terms and conditions.
(a) Options Granted to Directors. Subject to the limitations
of Section 6(c), Non- Incentive Stock Options to purchase 12,000 shares of
Common Stock will be granted to each Director of the Company who is not an
Employee as of the Effective Date, at an exercise price equal to the Fair Market
Value of the Common Stock on such date of grant. Non-Incentive Stock Options to
purchase 8,000 shares of Common Stock will be granted to each Director of the
Savings Bank who is not otherwise a Director of the Company or an Employee as of
the Effective Date, at an exercise price equal to the Fair Market Value of the
Common Stock on such date of grant. The Options will be first exercisable at the
rate of 20% on the one year anniversary of the Effective Date and 20% annually
thereafter during such periods of service as a Director or Director Emeritus of
the Company or the Savings Bank. Such Options shall continue to be exercisable
for a period of ten years following the date of grant without regard to the
continued services of such Director as a Director or Director Emeritus.
Nothwithstanding the foregoing, upon the death or Disability of the Director or
Director Emeritus, such Options shall be deemed immediately 100% exercisable and
shall remain exercisable for a period of three years from such date of death or
Disability. In the event of the Optionee's death, such Options may be exercised
by the
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<PAGE>
personal representative of his estate or person or persons to whom his rights
under such Option shall have passed by will or by the laws of descent and
distribution. Options may be granted to newly appointed or elected non-employee
Directors within the sole discretion of the Committee. The exercise price per
Share of such Options granted shall be equal to the Fair Market Value of the
Common Stock at the time such Options are granted. All Options awarded in
accordance with this Section 9(a) as of the Effective Date shall have Dividend
Equivalent Rights associated with such Options, as detailed at Section 12
herein. All outstanding Awards shall become immediately exercisable in the event
of a Change in Control of the Savings Bank or the Company. Unless otherwise
inapplicable, or inconsistent with the provisions of this paragraph, the Options
to be granted to Directors hereunder shall be subject to all other provisions of
this Plan.
(b) Option Price. The exercise price per Share of Common Stock
for each Non-Incentive Stock Option granted pursuant to the Plan shall be at
such price as the Committee may determine in its sole discretion, but in no
event less than the Fair Market Value of such Common Stock on the date of grant
as determined by the Committee in good faith.
(c) Payment. Full payment for each Share of Common Stock
purchased upon the exercise of any Non-Incentive Stock Option granted under the
Plan shall be made at the time of exercise of each such Non-Incentive Stock
Option and shall be paid in cash (in United States Dollars), Common Stock or a
combination of cash and Common Stock. Common Stock utilized in full or partial
payment of the exercise price shall be valued at its Fair Market Value at the
date of exercise. The Company shall accept full or partial payment in Common
Stock only to the extent permitted by applicable law. No Shares of Common Stock
shall be issued until full payment has been received by the Company and no
Optionee shall have any of the rights of a stockholder of the Company until the
Shares of Common Stock are issued to the Optionee.
(d) Term. The term of exercisability of each Non-Incentive
Stock Option granted pursuant to the Plan shall be not more than ten (10) years
from the date each such Non-Incentive Stock Option is granted.
(e) Exercise Generally. The Committee may impose additional
conditions upon the right of any Participant to exercise any Non-Incentive Stock
Option granted hereunder which is not inconsistent with the terms of the Plan.
Except as otherwise provided by the terms of the Plan or by action of the
Committee at the time of the grant of the Options, the Options will be first
exercisable at the rate of 20% on the one year anniversary of the date of grant
and 20% annually thereafter during such periods of service as an Employee,
Director or Director Emeritus.
(f) Cashless Exercise. Subject to vesting requirements, if
applicable, an Optionee who has held a Non-Incentive Stock Option for at least
six months may engage in the "cashless exercise" of the Option. Upon a cashless
exercise, an Optionee shall give the Company written notice of the exercise of
the Option together with an order to a registered broker-dealer or equivalent
third party, to sell part or all of the Optioned Stock and to deliver enough of
the proceeds to the Company to pay the Option exercise price and any applicable
withholding taxes. If the Optionee does not sell the Optioned Stock through a
registered broker-dealer or equivalent third party, the Optionee can give the
Company written notice of the exercise of the Option and the third party
purchaser of the Optioned Stock shall pay the Option exercise price plus any
applicable withholding taxes to the Company.
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<PAGE>
(g) Transferability. Any Non-Incentive Stock Option granted
pursuant to the Plan shall be exercised during an Optionee's lifetime only by
the Optionee to whom it was granted and shall not be assignable or transferable
otherwise than by will or by the laws of descent and distribution.
10. Effect of Termination of Employment, Disability or Death on
-----------------------------------------------------------------
Incentive Stock Options.
- -----------------------
(a) Termination of Employment. In the event that any
Optionee's employment with the Company shall terminate for any reason, other
than Disability or death, all of any such Optionee's Incentive Stock Options,
and all of any such Optionee's rights to purchase or receive Shares of Common
Stock pursuant thereto, shall automatically terminate on (A) the earlier of (i)
or (ii): (i) the respective expiration dates of any such Incentive Stock
Options, or (ii) the expiration of not more than three (3) months after the date
of such termination of employment; or (B) at such later date as is determined by
the Committee at the time of the grant of such Award based upon the Optionee's
continuing status as a Director or Director Emeritus of the Savings Bank or the
Company, but only if, and to the extent that, the Optionee was entitled to
exercise any such Incentive Stock Options at the date of such termination of
employment, and further that such Award shall thereafter be deemed a
Non-Incentive Stock Option. In the event that a Subsidiary ceases to be a
Subsidiary of the Company, the employment of all of its employees who are not
immediately thereafter employees of the Company shall be deemed to terminate
upon the date such Subsidiary so ceases to be a Subsidiary of the Company.
(b) Disability. In the event that any Optionee's employment
with the Company shall terminate as the result of the Disability of such
Optionee, such Optionee may exercise any Incentive Stock Options granted to the
Optionee pursuant to the Plan at any time prior to the earlier of (i) the
respective expiration dates of any such Incentive Stock Options or (ii) the date
which is one (1) year after the date of such termination of employment, but only
if, and to the extent that, the Optionee was entitled to exercise any such
Incentive Stock Options at the date of such termination of employment.
(c) Death. In the event of the death of an Optionee, any
Incentive Stock Options granted to such Optionee may be exercised by the person
or persons to whom the Optionee's rights under any such Incentive Stock Options
pass by will or by the laws of descent and distribution (including the
Optionee's estate during the period of administration) at any time prior to the
earlier of (i) the respective expiration dates of any such Incentive Stock
Options or (ii) the date which is two (2) years after the date of death of such
Optionee but only if, and to the extent that, the Optionee was entitled to
exercise any such Incentive Stock Options at the date of death. For purposes of
this Section 10(c), any Incentive Stock Option held by an Optionee shall be
considered exercisable at the date of his death if the only unsatisfied
condition precedent to the exercisability of such Incentive Stock Option at the
date of death is the passage of a specified period of time. At the discretion of
the Committee, upon exercise of such Options the Optionee may receive Shares or
cash or a combination thereof. If cash shall be paid in lieu of Shares, such
cash shall be equal to the difference between the Fair Market Value of such
Shares and the exercise price of such Options on the exercise date.
(d) Incentive Stock Options Deemed Exercisable. For purposes
of Sections 10(a), 10(b) and 10(c) above, any Incentive Stock Option held by any
Optionee shall be considered exercisable at the date of termination of
employment if any such Incentive Stock Option would have been exercisable at
such date of termination of employment without regard to the Disability or death
of the Participant.
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<PAGE>
(e) Termination of Incentive Stock Options. Except as may be
specified by the Committee at the time of grant of an Option, to the extent that
any Incentive Stock Option granted under the Plan to any Optionee whose
employment with the Company terminates shall not have been exercised within the
applicable period set forth in this Section 10, any such Incentive Stock Option,
and all rights to purchase or receive Shares of Common Stock pursuant thereto,
as the case may be, shall terminate on the last day of the applicable period.
11. Effect of Termination of Employment, Disability or Death on
Non-Incentive Stock Options. The terms and conditions of Non-Incentive Stock
Options relating to the effect of the termination of an Optionee's employment or
service, Disability of an Optionee or his death shall be such terms and
conditions as the Committee shall, in its sole discretion, determine at the time
of termination of service, unless specifically provided for by the terms of the
Agreement at the time of grant of the Award.
12. Dividend Equivalent Rights. The Committee, in its sole discretion,
may include as a term of any Option, the right of the Optionee to receive
Dividend Equivalent Rights. Such rights shall provide that upon the payment of a
dividend on the Common Stock, the holder of such Options shall receive payment
of compensation in an amount equivalent to the dividend payable as if such
Options had been exercised and such Common Stock held as of the dividend record
date. Such rights shall expire upon the expiration or exercise of such
underlying Options. Such rights are non-transferable and shall attach to Options
whether or not such Options are immediately exercisable. The dividend equivalent
payments associated with Options shall be paid to the Option holder at the
dividend payment date of the Common Stock. All Options granted by the Committee
to Employees as of the Effective Date shall have Dividend Equivalent Rights
associated with such Options. All Options granted to non-employee Directors of
the Company or the Savings Bank as of the Effective Date in accordance Section
9(a) of the Plan shall have Dividend Equivalent Rights associated with such
Options.
13. Recapitalization, Merger, Consolidation, Change in Control and
Other Transactions.
(a) Adjustment. Subject to any required action by the
stockholders of the Company, within the sole discretion of the Committee, the
aggregate number of Shares of Common Stock for which Options may be granted
hereunder, the number of Shares of Common Stock covered by each outstanding
Option, and the exercise price per Share of Common Stock of each such Option,
shall all be proportionately adjusted for any increase or decrease in the number
of issued and outstanding Shares of Common Stock resulting from a subdivision or
consolidation of Shares (whether by reason of merger, consolidation,
recapitalization, reclassification, split-up, combination of shares, or
otherwise) or the payment of a stock dividend (but only on the Common Stock) or
any other increase or decrease in the number of such Shares of Common Stock
effected without the receipt or payment of consideration by the Company (other
than Shares held by dissenting stockholders).
(b) Change in Control. All outstanding Awards shall become
immediately exercisable in the event of a Change in Control of the Company, as
determined by the Committee. In the event of such a Change in Control, the
Committee and the Board of Directors will take one or more of the following
actions to be effective as of the date of such Change in Control:
(i) provide that such Options shall be assumed, or equivalent
options shall be substituted, ("Substitute Options") by the acquiring or
succeeding corporation (or an affiliate thereof), provided that: (A) any such
Substitute Options exchanged for Incentive Stock Options shall meet the
requirements of
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<PAGE>
Section 424(a) of the Code, and (B) the shares of stock issuable upon the
exercise of such Substitute Options shall constitute securities registered in
accordance with the Securities Act of 1933, as amended, ("1933 Act") or such
securities shall be exempt from such registration in accordance with Sections
3(a)(2) or 3(a)(5) of the 1933 Act, (collectively, "Registered Securities"), or
in the alternative, if the securities issuable upon the exercise of such
Substitute Options shall not constitute Registered Securities, then the Optionee
will receive upon consummation of the Change in Control transaction a cash
payment for each Option surrendered equal to the difference between (1) the Fair
Market Value of the consideration to be received for each share of Common Stock
in the Change in Control transaction times the number of shares of Common Stock
subject to such surrendered Options, and (2) the aggregate exercise price of all
such surrendered Options, or
(ii) in the event of a transaction under the terms of which
the holders of the Common Stock of the Company will receive upon consummation
thereof a cash payment (the "Merger Price") for each share of Common Stock
exchanged in the Change in Control transaction, to make or to provide for a cash
payment to the Optionees equal to the difference between (A) the Merger Price
times the number of shares of Common Stock subject to such Options held by each
Optionee (to the extent then exercisable at prices not in excess of the Merger
Price) and (B) the aggregate exercise price of all such surrendered Options in
exchange for such surrendered Options.
(c) Extraordinary Corporate Action. Notwithstanding any
provisions of the Plan to the contrary, subject to any required action by the
stockholders of the Company, in the event of any Change in Control,
recapitalization, merger, consolidation, exchange of Shares, spin-off,
reorganization, tender offer, partial or complete liquidation or other
extraordinary corporate action or event, the Committee, in its sole discretion,
shall have the power, prior or subsequent to such action or event to:
(i) appropriately adjust the number of Shares of
Common Stock subject to each Option, the Option exercise price per Share of
Common Stock, and the consideration to be given or received by the Company upon
the exercise of any outstanding Option;
(ii) cancel any or all previously granted
Options, provided that appropriate consideration is paid to the Optionee in
connection therewith; and/or
(iii) make such other adjustments in connection
with the Plan as the Committee, in its sole discretion, deems necessary,
desirable, appropriate or advisable; provided, however, that no action shall be
taken by the Committee which would cause Incentive Stock Options granted
pursuant to the Plan to fail to meet the requirements of Section 422 of the Code
without the consent of the Optionee.
(d) Acceleration. The Committee shall at all times have the
power to accelerate the exercise date of Options previously granted under the
Plan.
(e) Non-recurring Dividends. Upon the payment of a special or
non-recurring cash dividend that has the effect of a return of capital to the
stockholders, the Option exercise price per share shall be adjusted
proportionately, except to the extent that the Participant shall otherwise
receive payments associated with Dividend Equivalent Rights attributable to such
Options with regard to such special or non-recurring cash dividends.
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<PAGE>
Except as expressly provided in Sections 13(a), 13(b) and 13(e) hereof,
no Optionee shall have any rights by reason of the occurrence of any of the
events described in this Section 13.
14. Time of Granting Options. The date of grant of an Option under the
Plan shall, for all purposes, be the date on which the Committee makes the
determination of granting such Option. Notice of the grant of an Option shall be
given to each individual to whom an Option is so granted within a reasonable
time after the date of such grant in a form determined by the Committee.
15. Effective Date. The Plan shall become effective upon the date of
approval and adoption of the Plan by the Board of the Company, subject to
ratification of the Plan by the stockholders of the Company. The Committee may
make a determination related to Awards as of the Effective Date.
16. Ratification by Stockholders. The Plan shall be ratified by
stockholders of the Company within twelve (12) months before or after the date
the Plan is approved by the Board.
17. Modification of Options. At any time and from time to time, the
Board may authorize the Committee to direct the execution of an instrument
providing for the modification of any outstanding Option, provided no such
modification, extension or renewal shall confer on the holder of said Option any
right or benefit which could not be conferred on the Optionee by the grant of a
new Option at such time, or shall not materially decrease the Optionee's
benefits under the Option without the consent of the holder of the Option,
except as otherwise permitted under Section 18 hereof.
18. Amendment and Termination of the Plan.
-------------------------------------
(a) Action by the Board. The Board may alter, suspend or
discontinue the Plan, except that no action of the Board may increase (other
than as provided in Section 13 hereof) the maximum number of Shares permitted to
be optioned under the Plan, materially increase the benefits accruing to
Participants under the Plan or materially modify the requirements for
eligibility for participation in the Plan unless such action of the Board shall
be subject to approval or ratification by the stockholders of the Company.
(b) Change in Applicable Law. Notwithstanding any other
provision contained in the Plan, in the event of a change in any federal or
state law, rule or regulation which would make the exercise of all or part of
any previously granted Option unlawful or subject the Company to any penalty,
the Committee may restrict any such exercise without the consent of the Optionee
or other holder thereof in order to comply with any such law, rule or regulation
or to avoid any such penalty.
19. Conditions Upon Issuance of Shares; Limitations on Option
--------------------------------------------------------------
Exercise; Cancellation of Option Rights.
- ---------------------------------------
(a) Shares shall not be issued with respect to any Option granted under
the Plan unless the issuance and delivery of such Shares shall comply with all
relevant provisions of applicable law, including, without limitation, the
Securities Act of 1933, as amended, the rules and regulations promulgated
thereunder, any applicable state securities laws and the requirements of any
stock exchange upon which the Shares may then be listed.
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<PAGE>
(b) The inability of the Company to obtain any necessary
authorizations, approvals or letters of non-objection from any regulatory body
or authority deemed by the Company's counsel to be necessary to the lawful
issuance and sale of any Shares issuable hereunder shall relieve the Company of
any liability with respect to the non-issuance or sale of such Shares.
(c) As a condition to the exercise of an Option, the Company may
require the person exercising the Option to make such representations and
warranties as may be necessary to assure the availability of an exemption from
the registration requirements of federal or state securities law.
(d) Notwithstanding anything herein to the contrary, upon the
termination of employment or service of an Optionee by the Company or its
Subsidiaries for "cause" as defined at 12 C.F.R. 563.39(b)(1) as determined by
the Board of Directors, all Options held by such Participant shall cease to be
exercisable as of the date of such termination of employment or service.
(e) Upon the exercise of an Option by an Optionee (or the Optionee's
personal representative), the Committee, in its sole and absolute discretion,
may make a cash payment to the Optionee, in whole or in part, in lieu of the
delivery of shares of Common Stock. Such cash payment to be paid in lieu of
delivery of Common Stock shall be equal to the difference between the Fair
Market Value of the Common Stock on the date of the Option exercise and the
exercise price per share of the Option. Such cash payment shall be in exchange
for the cancellation of such Option. Such cash payment shall not be made in the
event that such transaction would result in liability to the Optionee or the
Company under Section 16(b) of the Securities Exchange Act of 1934, as amended,
and regulations promulgated thereunder.
20. Reservation of Shares. During the term of the Plan, the Company
will reserve and keep available a number of Shares sufficient to satisfy the
requirements of the Plan.
21. Unsecured Obligation. No Participant under the Plan shall have any
interest in any fund or special asset of the Company by reason of the Plan or
the grant of any Option under the Plan. No trust fund shall be created in
connection with the Plan or any grant of any Option hereunder and there shall be
no required funding of amounts which may become payable to any Participant.
22. Withholding Tax. The Company shall have the right to deduct from
all amounts paid in cash with respect to the cashless exercise of Options and
Dividend Equivalent Rights under the Plan any taxes required by law to be
withheld with respect to such cash payments. Where a Participant or other person
is entitled to receive Shares pursuant to the exercise of an Option, the Company
shall have the right to require the Participant or such other person to pay the
Company the amount of any taxes which the Company is required to withhold with
respect to such Shares, or, in lieu thereof, to retain, or to sell without
notice, a number of such Shares sufficient to cover the amount required to be
withheld.
23. No Employment Rights. No Director, Employee or other person shall
have a right to be selected as a Participant under the Plan. Neither the Plan
nor any action taken by the Committee in administration of the Plan shall be
construed as giving any person any rights of employment or retention as an
Employee, Director or in any other capacity with the Company, the Savings Bank
or other Subsidiaries.
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<PAGE>
24. Governing Law. The Plan shall be governed by and construed in
accordance with the laws of the Commonwealth of Pennsylvania, except to the
extent that federal law shall be deemed to apply.
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EXHIBIT 11
<PAGE>
Exhibit No. 11 Statement re: Computation of Per Share Earnings
<TABLE>
<CAPTION>
Year Year
Ended Ended
December 31, 1997 December 31, 1996
--------------------- ---------------------
<S> <C> <C>
Net income.............................................. $ 4,874,000 $ 3,479,000
Weighted average common shares outstanding.............. 3,656,924 4,066,615
Basic Earnings per share................................ $ 1.33 $ .86
Weighted average common shares outstanding.............. 3,656,924 4,066,615
Effect of dilution securities stock options............. 251,667 127,372
Total weighted average common shares outstanding for 4,193,987
diluted earnings per share computation................ 3,908,591
Diluted earnings per share.............................. $ 1.25 $ 0.83
</TABLE>
TF FINANCIAL CORPORATION
ANNUAL REPORT
DECEMBER 31, 1997
TABLE OF CONTENTS
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 ............................................................. 21
Consolidated Statements of Financial Condition ............................ 22
Consolidated Statements of Income ......................................... 23
Consolidated Statement of Changes in Stockholders' Equity ................. 24
Consolidated Statements of Cash Flows ..................................... 26
Notes to Consolidated Financial Statements ................................ 38
Office Locations .......................................................... 64
Corporate Information......................................... Back Cover
<PAGE>
TF FINANCIAL CORPORATION
To Our Shareholders:
I would like to share with you some of the actions we initiated in 1997
that will positively impact shareholder value.
The most significant action initiated by the company was our Modified
Dutch Auction. In October, we offered to purchase shares of our stock at prices
not in excess of $26.00 per share in cash. The tender offer was designed to
enhance shareholder value going forward. When the results were totaled, we had
acquired just over 900,000 shares. Total shares outstanding at the end of the
period have been reduced 27% from 3.963 million at December 31, 1996 to 2.886
million at December 31, 1997.
During the year we were able to improve return on equity to 7.39% from
the year earlier return of 4.74%. Earnings per share improved to $1.25, assuming
dilution, from $ .83 for 1996. While improving earnings, we also substantially
reduced non-performing loans from 0.30% of assets in December 1996 to 0.23% of
assets at the end of 1997. The allowances for loan losses increased from 91.60%
at December 31, 1996 to 146.82% of non-performing loans at December 31, 1997.
In addition, the restructuring of departments within the Bank to shift
our emphasis from wholesale to retail loan services, the addition of three
automated transaction machines (ATM's), the introduction of a Visa credit card,
and the addition of a senior level executive to handle our technology and
information systems will all help further improve our ability to continue to be
the best community bank in our market area.
Although we have invested in talent and resources to safely increase
earnings, we have controlled the expenditures. Our efficiency ratio improved
during 1997 to 61.17% from 69.36% a year earlier. As we move forward with new
products and services, we will continue to monitor expenses.
We have declared a cash dividend each quarter since our first one in
December 1994. That first dividend was $0.05 per share. The amount has increased
steadily through the December 1997 period to $0.12. The stock market has
recognized our accomplishments by trading our stock to a high of $30.00 in
December 1997 from a high during 1996 of $16.25.
The board, management and employees are extremely proud of these
results. We thank you for your continued support and encouragement and the
opportunity to serve you.
Sincerely,
/s/John R. Stranford
- --------------------
John R. Stranford
President and Chief
Executive Officer
<PAGE>
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, Inc. and Penns Trail Development Corporation. At December
31, 1997, total assets were approximately $597.0 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, 1997, total stockholders' equity was approximately $50.1 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 $450.4 million at December 31,
1997) from the general public and uses such deposits, together with borrowings
(approximately $88.4 million at December 31, 1997) and other funds, primarily to
invest in mortgage-backed and investment securities and to originate or purchase
loans secured by first mortgages on owner-occupied, one-to-four family
residences in its market area. To a much lesser extent, the Savings Bank also
originates commercial real estate and multi-family loans, construction loans and
consumer loans.
Stock Market Information
Since its issuance in July 1994, the Corporation's common stock has been traded
on the Nasdaq National Market. The daily stock quotation for the Corporation is
listed in the Nasdaq National Market published in The Wall Street Journal, The
Philadelphia Inquirer, and other leading newspapers under the trading symbol of
"THRD". The following table reflects the closing stock price as published by the
Nasdaq National Market statistical report for the past two fiscal years.
Fiscal 1996 HIGH LOW
----------- ---- ---
First Quarter $ 15.38 $ 14.00
Second Quarter $ 15.13 $ 13.94
Third Quarter $ 15.13 $ 13.75
Fourth Quarter $ 16.25 $ 14.50
<PAGE>
Fiscal 1997 HIGH LOW
----------- ---- ---
First Quarter $ 19.25 $ 16.50
Second Quarter $ 19.63 $ 16.63
Third Quarter $ 25.69 $ 19.13
Fourth Quarter $ 30.00 $ 23.25
2
<PAGE>
The number of shareholders of record of common stock as of March 11, 1998, was
approximately 690. This does not reflect the number of persons or entities who
held stock in nominee or "street" name through various brokerage firms. At March
11, 1998, there were 3,187,233 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
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
<PAGE>
SELECTED FINANCIAL INFORMATION AND OTHER DATA
<TABLE>
<CAPTION>
Financial Condition At December 31, At June 30,
(Dollars in Thousands, except per share data) 1997 1996 1995 1994 1994 1993
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Assets ...................................... $597,047 $647,853 $490,358 $431,828 $436,043 $388,681
Loans Receivable, Net ............................. $250,711 309,570 238,275 113,893 119,043 143,299
Mortgage-backed Securities available
For sale, at fair value ........................... 36,847 22,027 29,640 -- -- --
Mortgage-backed securities held to maturity at cost 144,074 153,758 137,841 181,411 154,288 95,836
Securities purchased under agreements to resell ... 10,000 25,129 -- -- -- --
Investment securities available
For sale, at fair value ........................... 32,037 12,652 15,044 41,002 40,316 --
Investment securities held to maturity, at cost ... 52,822 38,544 23,640 36,531 25,859 72,137
Cash and cash equivalents(1) ...................... 41,625 54,132 27,032 42,376 78,466 57,948
Savings deposits .................................. 450,429 469,088 337,069 347,631 367,133 350,328
Other borrowings .................................. 88,359 98,359 73,359 -- 900 3,900
Retained earnings ................................. 43,176 39,750 37,529 34,746 32,139 27,673
Total stockholder's equity ........................ 50,095 72,575 73,332 79,972 N/A N/A
Book value per common share ....................... $ 17.36 $ 18.31 $ 17.08 $ 16.38 N/A N/A
Tangible book value per common share .............. $ 14.49 $ 15.99 $ 17.08 $ 16.38 N/A N/A
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Summary of Operations Year ended Six months ended Year ended
---------- ---------------- ----------
(Dollars in Thousands, except per December 31, December 31, June 30,
------------ ------------ --------
Share data) 1997 1996 (2) 1995 1994 1993 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income ...................................... $43,189 $38,989 $ 29,630 $ 13,901 $ 12,124 $ 24,516 $25,880
Interest expense ..................................... 24,080 20,797 14,403 6,271 6,594 12,789 14,358
Net interest income .................................. 19,109 18,192 15,227 7,630 5,530 11,727 11,522
Provision for loan losses ............................ 397 330 72 30 4 (144) 48
Non-interest income .................................. 2,327 1,794 1,161 617 1,249 1,903 1,895
Non-interest expense ................................. 13,583 13,745 9,975 4,601 4,690 9,452 9,644
Net income before cumulative effect
Of change in accounting method ...................... 4,874 3,479 3,871 2,180 1,355 2,666 2,870
Net income ........................................... 4,874 3,479 3,871 2,607 3,155 4,466 2,870
Earnings per common share - basic
Continuing operations ............................. $ 1.33 $ 0.86 $ 0.84 $ 0.45 N/A N/A N/A
Cumulative effect of accounting changes ........... -- -- $ 0.08 N/A N/A N/A
Earnings per common share & common share equivalent $ 1.33 $ 0.86 $ 0.84 $ 0.53 N/A N/A N/A
Earnings per common share - assuming dilution
Continuing operations ............................. $ 1.25 $ 0.83 $ 0.83 $ 0.45 N/A N/A N/A
Cumulative effect of accounting changes ........... -- -- $ 0.08 N/A N/A N/A
Earnings per common share & common share equivalent $ 1.33 $ 0.83 $ 0.83 $ 0.53 N/A N/A N/A
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Performance Ratios and Other
Year ended Six months ended Year ended
Selected data December, 31 December 31, June, 30,
------------ ------------ ---------
1997 1996(2) 1995 1994 (3)(4) 1993 (3)(4) 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Return on average assets ......................... 0.77% 0.62% 0.88% 1.00% 0.68% 0.67% 0.77%
Return on average equity ......................... 7.39% 4.74% 4.99% 5.40% 9.03% 8.59% 10.99%
Average equity to average assets ................. 10.46% 12.91% 17.54% 18.48% 7.53% 7.65% 7.00%
Average interest rate spread ..................... 2.72% 2.76% 2.84% 3.15% 2.61% 2.86% 2.90%
Non-performing loans to total assets ............. 0.23% 0.30% 0.37% 0.42% 0.86% 0.48% 1.48%
Non-performing loans to total loans .............. 0.55% 0.64% 0.76% 1.48% 1.63% 1.49% 2.42%
Allowance for loan losses to non-performing loans 146.82% 91.60% 82.31% 87.13% 78.22% 84.71% 47.85%
Allowance for loan losses to total loans ......... 0.80% 0.58% 0.62% 1.29% 1.25% 1.19% 1.13%
Savings Bank regulatory capital
Core ......................................... 7.16% 7.77% 12.21% 13.57% 7.63% 7.37% 7.12%
Tangible ..................................... 7.16% 7.77% 12.21% 13.57% 7.63% 7.37% 7.12%
Risk based ................................... 17.41% 17.68% 27.07% 39.46% 20.40% 21.27% 17.30%
</TABLE>
1. Consists of cash due from banks, interest-bearing deposits, and federal
funds sold with maturities of less than three months.
2. Includes a one-time special assessment to recapitalize the Savings
Association Insurance Fund ("SAIF") - See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Comparison of
Years Ended December 31, 1996 and December 31, 1995 - Net Income"
3. Income related ratios exclude the cumulative effect of a change in
accounting for certain investments of $427,000 for the six months ended
12/31/94 (SFAS #115) and change in accounting for income taxes of $1.8
million for the six month period ended 12/31/93 and fiscal year end 6/30/94
(SFAS #109).
4. Ratios for six month periods are stated on an annualized basis. Such ratios
are not necessarily indicative of the results that may be expected for the
full year.
5
<PAGE>
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, 1997, December 31, 1996, and December 31, 1995, the average
net interest rate spread was 2.72%, 2.76% and 2.84% 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 1998 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.
<PAGE>
Gap Table
<TABLE>
<CAPTION>
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
-------- -------- --------- --------- -------- ------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable - net (1) .. $ 50,859 $ 65,747 $ 42,256 $ 28,444 $ 50,680 $ 11,745 $ 980 $ 250,711
Mortgage-backed
securities available
for sale (2)............... 3,823 6,006 11,491 5,452 6,325 3,328 422 36,847
Mortgage-backed securities
held to maturity (2)....... 14,947 23,482 44,930 21,318 24,732 13,014 1,651 144,074
Investment securities
available for sale .......... 16,993 7,015 8,029 0 0 0 0 32,037
Investment securities
held to maturity .......... 10,530 0 7,815 12,815 21,662 0 0 52,822
Certificates of deposit-
other Bank................... 1,137 1,200 400 0 0 0 0 2,737
Other earning assets .......... 52,033 1,231 3,279 0 0 0 0 56,543
-------- -------- --------- --------- -------- ------- ------ ---------
Total interest-
earning assets .............. $150,322 $104,681 $ 118,200 $ 68,029 $103,399 $28,087 $3,053 $ 575,771
======== ======== ========= ========= ======== ======= ====== =========
Interest-bearing
liabilities: (3)
Non-interest bearing
deposits .................... $ 462 $ 1,148 $ 1,200 $ 1,928 $ 271 $ 28 0 $ 5,037
NOW and Super NOW
accounts .................. 3,426 9,160 9,966 6,584 8,271 2,381 572 40,360
Savings accounts .............. 5,394 15,514 29,132 32,340 43,379 34,972 13,498 174,229
Money market deposit
accounts .................... 3,336 8,622 10,515 4,842 4,029 1,274 159 32,777
Certificates of deposit ....... 32,684 103,619 56,213 5,510 0 0 0 198,026
Borrowings .................... 0 25,000 60,000 0 0 3,359 0 88,359
--------- -------- -------- --------- -------- --------- ------- --------
Total interest-bearing
Liabilities ................. $ 45,302 $163,063 $167,026 $ 51,204 $ 55,950 $ 42,014 $14,229 $538,788
========= ======== ======== ========= ======== ========= ======= ========
Interest sensitivity gap ...... $ 105,020 $(58,382) $ (48,826) $ 16,825 $ 47,449 $ (13,927) $(11,176) $ 36,983
========= ======== ======== ========= ======== ========= ======= ========
Cumulative interest
sensitivity Gap.............. $ 105,020 $ 46,638 $(2,188) $ 14,637 $ 62,086 $ 48,159 $ 36,983 $ 36,983
========= ======== ======== ========= ======== ========= ======= ========
Ratio of interest-
earning assets To
interest-bearing
liabilities ................. 331.82% 64.20% 70.77% 132.86% 184.81% 66.85% 21.46% 106.86%
========= ======== ======== ========= ======== ========= ======= ========
Ratio of cumulative
gap to Total assets ... ...... 17.60% 7.81% -0.37% 2.45% 10.40% 8.07% 6.20% 6.20%
========= ======== ======== ========= ======== ========= ======= ========
</TABLE>
- ----------------------------------
(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
1997. 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 1997
(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
<PAGE>
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.
<TABLE>
<CAPTION>
Year Ended December 31, Year Ended December 31, Year Ended December 31,
1997 1996 1995
-------------------------------- ------------------------------- --------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (4) $293,023 $23,050 7.87% $298,800 $23,116 7.74% $149,741 $11,501 7.68%
Mortgage-backed securities 185,391 12,514 6.75% 162,973 11,041 6.77% 173,301 11,877 6.85%
Investment securities 90,708 5,683 6.27% 44,598 2,728 6.12% 64,844 3,870 5.97%
Securities purchased under
Agreements to resell 9,744 555 5.70% 3,761 160 4.25% -- -- --
Other interest-earning assets(1) 32,713 1,387 4.24% 43,024 1,944 4.52% 43,271 2,382 5.50%
-------- ------ -------- ------ --------
Total interest-earning assets $611,579 $43,189 7.06% $553,156 $38,989 7.05% $431,157 $29,630 6.87%
-------- -------- --------
Non interest-earning assets 18,987 $14,714 $10,901
-------- -------- --------
Total assets $630,566 $567,870 $442,058
======== ======== ========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Savings deposits 456,345 $18,211 3.99% $382,511 $14,739 3.85% $337,699 $13,368 3.96%
Borrowings 97,942 5,869 5.99% 102,526 6,058 5.91% 19,870 1,035 5.21%
------ ----- ------- ----- ------- -----
Total interest-bearing
liabilities.................. $554,287 $24,080 4.34% $485,037 $20,797 4.29% $357,569 $14,403 4.03%
======== ======= ======== ======= ======== =======
Non interest-bearing liabilities 10,293 9,498 $6,528
Total liabilities 564,580 494,535 364,097
Stockholders' equity 65,986 73,335 77,961
-------- -------- --------
Total liabilities and
Stockholders' equity $630,566 $567,870 $442,058
======== ======== ========
Net interest income $19,109 $18,192 $15,227
======= ======= =======
Interest rate spread (2) 2.72% 2.76% 2.84%
Net yield on interest-earning assets (3) 3.12% 3.29% 3.53%
Ratio of interest-earning assets to
Average interest bearing liabilities 110% 114% 121%
</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) 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
<PAGE>
Changes to Financial Condition
The Corporation's total assets at December 31, 1997 and December 31,
1996 totaled $597.0 million and $647.9 million, respectively, a decrease of
$50.9 million or 7.9%. This decrease was primarily as a result of the $12.5
million or 23.1% decrease in cash and cash equivalents, the $15.1 million or
60.2% decrease in securities purchased under agreements to resell, the $58.9
million or 19.0% decrease in loans receivable, partially offset by the $33.7
million or 65.8% increase in investment securities and the $5.1 million or 2.9%
increase in mortgage-backed securities for the fiscal year ended December 31,
1997. The decrease in loans receivable was primarily the result of the sale of
$43.6 million of mortgage loans, coupled with the normal amortization of such
loans. This net decrease in assets funded the decrease in total savings deposits
of $18.7 million or 4.0% at December 31, 1997 to $450.4 million from $469.1
million as of December 31, 1996, the $10.0 million or 10.2% decrease in Federal
Home Loan Bank advances, along with the increase in treasury stock of $26.9
million to $41.6 million at December 31, 1997. The decrease in savings deposits
was primarily the result of management's decision to price deposits less
aggressively. The decrease in Federal Home Loan Bank Advances was due to
maturing advances during the period.
Total consolidated stockholders' equity of the Corporation decreased $22.5
million to $50.1 million at December 31, 1997 from $72.6 million at December 31,
1996. The 31.0% decrease is primarily attributed to the repurchase of shares of
the Corporation's outstanding common stock, at a total cost of $27.0 million
coupled with the payment of $1.4 million in dividends to shareholders, partially
offset by the addition of $4.9 million of net income for the period. The
decrease in total consolidated stockholders' equity coupled with the decrease of
$50.9 million in total assets resulted in a decrease in consolidated
stockholders' equity as a percentage of total assets to 8.4% at December 31,
1997 from 11.2 % at December 31, 1996.
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. The increase in total interest income attributed to
investment and mortgage-backed securities, $4.5 million, was partially offset by
9
<PAGE>
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 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
10
<PAGE>
$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.
Comparison of Years Ended December 31, 1996 and December 31, 1995
Net Income. Net Income of $3.5 million for the fiscal year ended December 31,
1996 showed a $392,000 decrease over net income of $3.9 million for the fiscal
year ended December 31, 1995. The decrease in earnings for this period is
primarily attributable to the one-time deposit insurance assessment totaling
$2.2 million ($1.4 million after tax), partially offset by an increase in
earnings in conjunction with gains associated with the sale of real estate and
mortgage-backed securities. The deposit insurance assessment was the result of a
one-time fee assessed to members of the Savings Association Insurance Fund
("SAIF") for its recapitalization. Net income, absent of the $1.4 million after
tax "SAIF" recapitalization assessment, was $4.8 million for the fiscal year
ended December 31, 1996, as compared to net income of $3.9 million for the
fiscal year ended December 31, 1995. This increase in net income of $.9 million
to $4.8 million (absent the "SAIF" assessment), for the fiscal year ended
December 31, 1996, reflects a 24.9% increase over the similar period in 1995.
Net interest income before provisions for loan losses was $18.2 million for the
fiscal year ended December 31, 1996 as compared to $15.2 million for the same
period in 1995, an increase of $3.0 million, or 19.5%. For these same periods,
total interest expense was $20.8 million and $14.4 million, respectively, an
increase of $6.4 million, or 44.4%. Non-interest income was $1.8 million and
$1.2 million, respectively for these same periods, an increase of 54.5%. The
increase in non-interest income was attributed to the gains associated with the
sale of the real estate and mortgage-backed securities along with a $207,000
increase in other operating income. Operating expense (non-interest expense) was
$13.7 million and $10.0 million for the fiscal year ending December 31, 1996 and
December 31, 1995, respectively. The increase in operating expense was primarily
attributable to the $2.2 million "SAIF" assessment along with the costs
associated with the acquisition of the $137.6 million in deposit balances, and
related branch offices of Cenlar Federal Savings Bank of Trenton, New Jersey.
Total Interest Income. For the fiscal year ended December 31, 1996, total
interest income increased to $39.0 million from $29.6 million for the fiscal
year ended December 31, 1995. This increase of $9.4 million, or 31.6%, is due
primarily to the increase in income on loans receivable to $23.1 million at
December 31, 1996 from $11.5 million at December 31, 1995, this increase of
$11.6 million, or 101.0%, was somewhat offset by the decrease in
11
<PAGE>
income on mortgage-backed securities, investment securities and other interest
earning assets. During the same time periods the average balance of loans
receivable increased by $149.1 million to $298.8 million from $149.7 million,
with the average yield increasing to 7.74% from 7.68%. Interest on
mortgage-backed securities decreased $836,000, or (7.0%), from December 31, 1995
to December 31, 1996. The average yield on mortgage-backed securities decreased
to 6.77% from 6.85%, while the average balance of mortgage-backed securities
decreased by $10.3 million when comparing these two periods. Interest on
investment securities declined by $1.1 million or, 29.5%, for the fiscal year
ended December 31, 1996 as compared to the similar period in 1995 as a result of
the decrease in the average balance to $44.6 million from $64.8 million for the
same periods. Interest on securities purchased under agreements to resell
increased to $160,000 for the fiscal year ended December 31, 1996 from $0 for
the fiscal year ended December 31, 1995, primarily as the result in the increase
in the average balance to $3.8 million from $0 for the same periods. Interest on
other interest earning assets declined by $438,000, or 18.4%, for the fiscal
year ended December 31, 1996 compared to the similar period ended December 31,
1995 primarily as a result of a decrease in the average yield to 4.52% at
December 31, 1996 from 5.50% at December 31, 1995. The increases in the average
balances of loans receivable and the decreases in the average balances of
mortgage-backed securities and investment securities are a result of
management's decision to increase the origination and purchase of mortgage
loans.
Total interest expense. Total interest expense increased to $20.8 million for
the fiscal year ended December 31, 1996 from $14.4 million for the fiscal year
period ended December 31, 1995. This increase of $6.4 million, or 44.4%, in
total interest expense is a result of the increase in the average balance of
Federal Home Loan Bank advances to $102.5 million from $19.9 million for the
fiscal years ended December 31, 1996 and 1995, respectively, coupled with the
increase in the average balance of savings deposits by $44.8 million, or 13.3%,
for the same periods. The increase in savings deposits was primarily result of
the acquisition of $137.6 million in deposit balances. The average balance of
total interest-bearing liabilities increased to $485.0 million during the fiscal
years ended December 31, 1996 from $357.6 million during the fiscal year ended
December 31, 1995 as a result of the increase in Federal Home Loan Bank
borrowings and the acquisition of deposit balances. The increase in borrowings
was utilized primarily to fund the origination or purchase of mortgage loans.
Net Interest Income. Net interest income for the fiscal year ended December 31,
1996 increased by $3.0 million or 19.5% to $18.2 million from $15.2 million for
the same period in 1995. This increase is primarily due to the increase in
interest-earning assets partially offset by the increase to interest-bearing
liabilities. The average balances of interest-earning assets increased to $553.2
million for the fiscal year ended December 31, 1996 from $431.2 million, or
28.3%, for the comparable period in 1995. During these same periods, the average
balances on interest-bearing liabilities increased to $485.0 million from $357.6
million, or 35.6%. The cost of interest-bearing liabilities increased from 4.03%
to 4.29% while the yield on interest-earning assets increased from 6.87% to
7.05% for the fiscal year periods ended December 31, 1995 and 1996 respectively.
Allowance for Loan Losses. The allowance for loan losses increased $322,000, or
21.7% to $1.8 at December 31, 1996 from $1.5 million at December 31, 1995, as a
result of increased lending activity during the period. Such totals correlate to
non-performing loans of $2.0 million at December 31, 1996 and $1.8 million at
December 31, 1995. The increase in the allowance for loan losses resulted from
the addition of $330,000 to the provision for loan losses and the deduction of
$8,000 of net charge offs for losses on loans. The provision for losses on loans
is the method by which the allowance for losses is adjusted during the period.
At December 31, 1996, the allowance for loan losses was 91.6% of non-performing
loans as compared to 82.3% of non-performing loans at December 31, 1995. While
management maintains its allowance for losses at a level which it considers to
be adequate to provide for potential losses, there can be no assurance that
further additions will not be made to the allowance and that such losses will
not exceed the estimated amounts.
Non-Interest Income. Total non-interest income increased to $1.8 million for the
fiscal year period ended December 31, 1996 from $1.2 million, or 54.5%, for the
similar period in 1995. This increase can be attributed to the increase in the
gain on the sale of real estate acquired through foreclosure of $33,000 and an
increase in the gain on the sale of mortgage-backed securities totaling
$314,000. The remainder of the increase can be attributed to an
12
<PAGE>
increase of $207,000 in service fee income, which was a result of increased loan
servicing activity during the period, coupled with a $79,000 gain on the sale of
loans.
Non-interest Expense. Total non-interest expense increased to $13.7 million for
the fiscal years ended December 31, 1996 as compared to $10.0 million for the
similar period in 1995. This increase of $3.7 million, or 37.8%, is primarily
attributable to the increase in federal deposit insurance premiums of $2.1
million, a $749,000 increase in employee compensation and benefits, the $62,000
increase in professional fees, the $429,000 increase in other operating costs
and the increase of $244,000 in amortization of intangibles. The increase in
federal deposit insurance premium was due to the "SAIF" assessment previously
discussed. The increases in compensation and benefit costs were primarily a
result of increased staffing necessary to support the acquisition of the three
branch offices associated with the acquisition of the $137.6 million of deposit
balances, coupled with salary increases resulting from annual performance
reviews. Benefit costs were also increased due to the increases in costs
associated with Employee Stock Ownership Plans utilizing Corporation stock
(portions of the costs of benefit plans utilizing Corporation stock change as
the market value of the stock changes). The increase in other operating expenses
are primarily due to increases in the costs associated with current lending
activities coupled with the costs associated with the continued operation of the
three branch offices purchased from Cenlar Federal Savings Bank. The increase in
amortization of intangibles was the result of the acquisition of the $137.6
million in deposit balances.
Income Tax Expense. For the fiscal year ended December 31, 1996, income taxes
decreased to $2.4 million from $2.5 million for the same period in 1995. This
decrease of $38,000 is primarily attributed to the decrease in net income before
taxes to $5.9 million from $6.3 million for the fiscal year periods ended
December 31, 1996 and 1995, respectively, primarily as a result of the SAIF
assessment previously mentioned.
Liquidity and Capital Resources
Under current regulations, the Savings Bank must have core capital equal to 3%
of total assets and risk-based capital equal to 8% of risk-weighted assets, of
which 1.5% must be tangible capital, excluding goodwill and certain other
intangible assets.
On December 31, 1997, the Savings Bank exceeded its three regulatory capital
requirements as follows:
Amount Percent
------ -------
Tangible capital ............. $42,544 7.16%
Tangible capital requirement . 8,902 1.50%
Excess over requirement ...... $33,642 5.66%
Core Capital ................. $42,544 7.16%
Core Capital requirement ..... 17,804 3.00%
Excess over requirement ...... $24,740 4.16%
Risk based capital ........... $44,573 17.41%
Risk based capital requirement 20,487 8.00%
Excess over requirement ...... $24,086 9.41%
13
<PAGE>
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, 1997, such borrowed funds total $88.4 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 21.01%,
24.16% and 12.48% at December 31, 1997, 1996 and 1995, respectively, and its
short term liquidity was 11.3%, 19.8%, and 7.0%, at such dates, respectively.
The amount of certificate accounts which are scheduled to mature during
the twelve months ending December 31, 1998, is approximately $136.3 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, 1997, the Savings Bank had outstanding commitments to originate
loans of $22.7 million. Also outstanding at December 31, 1997 were commitments
to purchase $304,000 of loans from correspondents along with commitments to
purchase $1.5 million of investment securities. Funds required to fill these
commitments are derived primarily from current excess liquidity, deposit inflows
or loan and security repayments. At December 31, 1997, the Savings Bank had
outstanding commitments to sell loans of $6.9 million.
Impact of Inflation and Changing Prices
The consolidated financial statements and related data have been
prepared in accordance with generally accepted accounting principles which
require the measurement of financial position and operating results in terms of
historical dollars, without consideration for changes in the relative purchasing
power of money over time caused by inflation.
Unlike industrial companies, nearly all of the assets and liabilities
of a financial institution are monetary in nature. As a result, interest rates
have a more significant impact on a financial institution's performance than
general levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the price of goods and services, since
such goods and services are affected by inflation. In the current interest rate
14
<PAGE>
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
The Corporation is utilizing both internal and external resources to identify,
correct or reprogram, and test its computer systems for the year 2000
compliance. The year 2000 problem is the result of computer programs being
written using two digits rather than four to define the applicable year. The
Corporation presently believes that the year 2000 problem will not pose
significant operational problems for the Corporation's computer systems as so
modified and reprogramed. It is anticipated that all reprogramming efforts will
be completed by December 31, 1998, allowing adequate time for testing. To date,
confirmations have been received from the Corporation's primary processing
vendors that plans are being developed to address processing of transactions in
the year 2000. Management believes the year 2000 compliance expense will not
have a material adverse effect on the Corporation.
Other Matters
On September 26, 1997 the Corporation commenced a "Modified Dutch
Auction" self tender offer for the purchase of up to 900,000 shares, or
approximately 22% of its 4,088,432 common shares outstanding at that time. The
"Modified Dutch Auction" self tender offer expired on October 27, 1997 with
shareholders tendering 1,064,083 shares or approximately 26% of the common
shares outstanding. The Corporation repurchased 901,199 shares or approximately
84.5% of all shares tendered, with all shares tendered and not purchased
returned to stockholders. The shares repurchased were repurchased at a price of
$26.00 per share with a total cost of $23.4 million.
15
<PAGE>
FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
TF FINANCIAL CORPORATION AND SUBSIDIARIES
December 31, 1997 and 1996
<PAGE>
C O N T E N T S
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 21
FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION 22
CONSOLIDATED STATEMENTS OF EARNINGS 23
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY 24
CONSOLIDATED STATEMENTS OF CASH FLOWS 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 28
<PAGE>
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, 1997
and 1996, and the related consolidated statements of earnings, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1997. 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, 1997 and 1996, and the
consolidated results of their operations and their consolidated cash flows for
each of the years in the three-year period ended December 31, 1997 in conformity
with generally accepted accounting principles.
/s/ Grant Thornton
Philadelphia, Pennsylvania
January 22, 1998
<PAGE>
TF Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
December 31,
<TABLE>
<CAPTION>
1997 1996
------- -------
ASSETS (in thousands)
<S> <C> <C>
Cash and cash equivalents $ 41,625 $ 54,132
Certificates of deposit in other financial institutions 2,737 4,220
Securities purchased under agreements to resell 10,000 25,129
Investment securities available for sale - at market value 32,037 12,652
Investment securities held to maturity (market value of $53,026 and
$38,393 as of December 31, 1997 and 1996, respectively) 52,822 38,544
Mortgage-backed securities available for sale - at market value 36,847 22,027
Mortgage-backed securities held to maturity (market value of $145,723
and $153,269 as of December 31, 1997 and 1996, respectively) 144,074 153,758
Loans receivable, net 250,711 309,570
Federal Home Loan Bank stock - at cost 4,918 4,918
Accrued interest receivable 3,957 4,247
Premises and equipment, net 7,889 8,002
Goodwill and other intangible assets 8,274 9,232
Other assets 1,156 1,422
------- -------
TOTAL ASSETS $ 597,047 $ 647,853
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $ 450,429 $ 469,088
Advances from the Federal Home Loan Bank 88,359 98,359
Advances from borrowers for taxes and insurance 1,591 2,364
Accrued interest payable 2,470 2,030
Other liabilities 4,103 3,437
------- -------
Total liabilities 546,952 575,278
------- -------
Stockholders' equity
Preferred stock, no par value; 2,000,000 shares authorized
at December 31, 1997 and 1996, none issued -- --
Common stock, $0.10 par value; 10,000,000 shares authorized,
5,290,000 shares issued, 2,886,251 and 3,962,544 shares
outstanding at December 31, 1997 and 1996, respectively,
net of shares in treasury: 1997 - 2,102,767; 1996 - 1,008,614 529 529
Retained earnings 43,176 39,750
Additional paid-in capital 51,775 51,645
Unearned ESOP shares (3,010) (3,188)
Shares acquired by MSBP (895) (1,322)
Treasury stock - at cost (41,649) (14,712)
Net unrealized gain (loss) on securities available for sale, net of tax 169 (127)
------- -------
Total stockholders' equity 50,095 72,575
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 597,047 $ 647,853
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
22
<PAGE>
TF Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended December 31,
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C>
Interest income
Loans, including fees $23,050 $23,116 $11,501
Mortgage-backed securities 12,514 11,041 11,877
Investment securities 5,683 2,728 3,870
Interest-bearing deposits and other 1,942 2,104 2,382
------- ------- -------
TOTAL INTEREST INCOME 43,189 38,989 29,630
------- ------- -------
Interest expense
Deposits 18,211 14,739 13,368
Borrowings 5,869 6,058 1,035
------- ------- -------
TOTAL INTEREST EXPENSE 24,080 20,797 14,403
------- ------- -------
NET INTEREST INCOME 19,109 18,192 15,227
Provision for possible loan losses 397 330 72
------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE
LOAN LOSSES 18,712 17,862 15,155
------- ------- -------
Non-interest income
Gain on sale of real estate acquired through foreclosure -- 115 82
Gain on sale of investment securities 407 330 16
Gain on sale of loans 387 79 --
Gain on sale of loan servicing rights 330 -- --
Service fees, charges and other operating income 1,203 1,270 1,063
------- ------- -------
TOTAL NON-INTEREST INCOME 2,327 1,794 1,161
------- ------- -------
Non-interest expense
Employee compensation and benefits 6,445 5,828 5,079
Occupancy and equipment 1,952 1,432 1,357
Federal deposit insurance premium 299 2,929 791
Data processing 667 505 448
Professional fees 579 508 446
Advertising 354 292 276
Other operating 2,330 2,007 1,578
Amortization of goodwill and other intangible assets 957 244 --
------- ------- -------
TOTAL NON-INTEREST EXPENSE 13,583 13,745 9,975
------- ------- -------
INCOME BEFORE INCOME TAXES 7,456 5,911 6,341
Income taxes 2,582 2,432 2,470
------- ------- -------
NET INCOME $ 4,874 $ 3,479 $ 3,871
======= ======= =======
Earnings per common share - basic $ 1.33 $ 0.86 $ 0.84
Earnings per common share - assuming dilution $ 1.25 $ 0.83 $ 0.83
</TABLE>
The accompanying notes are an integral part of these statements.
23
<PAGE>
TF Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Net unrealized
gain (loss) on
Common stock securities
--------------- Additional Unearned Shares available
Par paid-in ESOP acquired by Treasury Retained for sale, net
Shares value capital shares MSBP stock earnings of tax Total
------ ----- ------- ------ ---- ----- -------- -------------- -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 4,875,812 $ 529 $ 51,234 $ (3,809) $ (2,090) $ -- $34,746 $ (638) $79,972
Allocation of ESOP shares 31,719 -- 117 318 -- -- -- -- 435
Shares awarded by MSBP 24,000 -- -- -- -- -- -- -- --
Amortization of MSBP expense -- -- 124 -- 359 -- -- -- 483
Purchase of treasury stock (765,500) -- -- -- -- (11,100) -- -- (11,100)
Treasury stock acquired from ESOP (1,089) -- -- -- -- (16) -- -- (16)
Cash dividends on common stock -- -- -- -- -- -- (1,088) -- (1,088)
Net unrealized gain on securities
available for sale -- -- -- -- -- -- -- 775 775
Net income for the year ended
December 31, 1995 -- -- -- -- -- -- 3,871 -- 3,871
--------- --- ------ ------ ------ ------- ------ ---- ------
Balance at December 31, 1995 4,164,942 529 51,475 (3,491) (1,731) (11,116) 37,529 137 73,332
Allocation of ESOP shares 30,319 -- 147 303 -- -- -- -- 450
Shares awarded by MSBP 9,308 -- -- -- -- -- -- -- --
Amortization of MSBP expense -- -- 23 -- 409 -- -- -- 432
Purchase of treasury stock (242,025) -- -- -- -- 3,596) -- -- (3,596)
Cash dividends on common stock -- -- -- -- -- -- (1,258) -- (1,258)
Net unrealized loss on securities
available for sale -- -- -- -- -- -- -- (264) (264)
Net income for the year ended
December 31, 1996 -- -- -- -- -- -- 3,479 -- 3,479
--------- --- ------ ------ ------ ------- ------ ---- ------
Balance at December 31, 1996 3,962,544 529 51,645 (3,188) (1,322) (14,712) 39,750 (127) 72,575
</TABLE>
(Continued)
24
<PAGE>
TF Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY - CONTINUED
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Net unrealized
gain (loss) on
Common stock securities
--------------- Additional Unearned Shares available
Par paid-in ESOP acquired by Treasury Retained for sale, net
Shares value capital shares MSBP stock earnings of tax Total
------ ----- ------- ------ ---- ----- -------- -------------- -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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)
Net unrealized gain on investment
securities available for sale -- -- -- -- -- -- -- 296 296
Exercise of stock options 5,915 -- -- -- -- 90 (15) -- 75
Net income for the year
ended December 31, 1997 -- -- -- -- -- -- 4,874 -- 4,874
--------- ----- ------- ------- ------- -------- ------- ---------- --------
Balance at December 31, 1997 2,886,251 $ 529 $51,775 $(3,010) $ (895) $(41,649) $43,176 $ 169 $ 50,095
========= ===== ======= ======= ======= ======== ======= ========== ========
</TABLE>
The accompanying notes are an integral part of this statement.
25
<PAGE>
TF Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,874 $ 3,479 $ 3,871
Adjustments to reconcile net income to net cash provided
by operating activities
Amortization of
Mortgage loan servicing rights 68 21 --
Deferred loan origination fees (156) (197) (117)
Premiums and discounts on investment securities, net 63 (69) (31)
Premiums and discounts on mortgage-backed securities
and loans, net 208 139 166
Goodwill and other intangibles 957 244 --
Deferred income taxes (233) (84) 140
Provision for loan losses and provision for losses on real estate 402 333 74
Depreciation of premises and equipment 708 560 509
Stock-based benefit programs 809 882 919
Gain on sale of
Investment securities (407) (330) (16)
Real estate acquired through foreclosure -- (115) (82)
Mortgage loans (387) (79) --
Loan servicing rights (330) -- --
(Increase) decrease in
Accrued interest receivable 290 (817) (7)
Other assets 19 (580) (238)
Increase in
Accrued interest payable 440 267 980
Other liabilities 477 723 697
--------- --------- ---------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 7,802 4,377 6,865
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Loan originations and principal payments on loans, net (22,672) (38,475) (37,289)
Principal repayments on mortgage-backed securities
held to maturity 33,732 28,450 24,171
Principal repayments on mortgage-backed securities available
for sale 2,746 3,050 --
Purchases of loans (13,927) (83,704) (87,165)
Proceeds from loan sales 95,261 22,648 --
Purchases and maturities of certificates of deposit in other
financial institutions, net 1,483 1 (214)
Purchases of investment and mortgage-backed securities
held to maturity (125,219) (49,069) (18,445)
Purchase of investment securities and mortgage-backed
securities available for sale (140,694) (22,917) --
</TABLE>
(Continued)
26
<PAGE>
TF Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Year ended December 31,
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
(in thousands)
<S> <C> <C> <C>
Purchase and maturities of securities purchased under
agreement to resell, net $ 15,129 $ (25,129) $ --
Proceeds from maturities of investment securities held to maturity 83,007 17,551 20,987
Proceeds from maturities of investment securities available for sale 86,225 20,500 23,000
Proceeds from the sale of investment and mortgage-backed securities
available for sale 22,126 9,279 4,014
Proceeds from the sale of loan servicing rights 981 -- --
Purchase of Federal Home Loan Bank stock -- (1,250) (1,968)
Proceeds from sales of real estate acquired through foreclosure -- 722 221
Purchase of premises and equipment (595) (2,007) (370)
Premium paid for deposit liabilities -- (9,476) --
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 37,583 (129,826) (73,058)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in demand deposit/NOW accounts,
passbook savings accounts and certificates of deposit (18,659) 132,019 (10,562)
Net (decrease) increase in advances from Federal Home Loan Bank (10,000) 25,000 73,359
Net (decrease) increase in advances from borrowers for
taxes and insurance (773) 384 256
Treasury stock acquired (27,027) (3,596) (11,116)
Common stock dividends paid (1,433) (1,258) (1,088)
--------- --------- ---------
NET CASH (USED IN) PROVIDED BY FINANCING
ACTIVITIES (57,892) 152,549 50,849
--------- --------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (12,507) 27,100 (15,344)
Cash and cash equivalents at beginning of year 54,132 27,032 42,376
--------- --------- ---------
Cash and cash equivalents at end of year $ 41,625 $ 54,132 $ 27,032
========= ========= =========
Supplemental disclosure of cash flow information
Cash paid for
Interest on deposits and advances $ 23,640 $ 20,530 $ 13,423
Income taxes $ 2,436 $ 2,235 $ 1,943
Non-cash transactions
Transfers from loans to real estate acquired through
foreclosure $ 231 $ 327 $ 127
Transfer of investment and mortgage-backed securities
to available for sale $ -- $ -- $ 29,640
Securitization of mortgage loans held for investment $ -- $ 27,854 $ --
</TABLE>
The accompanying notes are an integral part of these statements.
27
<PAGE>
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
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), TF
Investments Corporation (TF Investments) and Teragon, Inc. (Teragon), a
mortgage banking subsidiary (collectively, "the Corporation"). Third
Federal is a federally chartered stock savings bank insured by the Federal
Deposit Insurance Corporation. Third Federal is a community-oriented
savings institution which conducts operations from its main office in
Newtown, Pennsylvania, ten full-service branch offices located in
Philadelphia and Bucks counties, Pennsylvania, and three full-service
branch offices located in Mercer County, New Jersey. The Bank competes with
other banking and financial institutions in its primary market communities,
including financial institutions with resources substantially greater than
its own. Commercial banks, savings banks, savings and loan associations,
credit unions and money market funds actively compete for savings and time
deposits and loans. Such institutions, as well as consumer finance and
insurance companies, may be considered competitors of the Bank with respect
to one or more of the services it renders.
The Bank is subject to regulations of certain state and federal agencies
and, accordingly, they are periodically examined by those regulatory
authorities. As a consequence of the extensive regulation of commercial
banking activities, the Bank's business is particularly susceptible to
being affected by state and federal legislation and regulations.
1. Principles of Consolidation and Basis of Presentation
---------------------------------------------------------------------
The consolidated financial statements include the accounts of TF Financial
and its wholly-owned subsidiaries: Third Federal, TF Investments, Teragon
and Penns Trail Development Corporation. All material intercompany balances
and transactions have been eliminated in consolidation.
The accounting policies of the Corporation conform to generally accepted
accounting principles. The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. The more significant accounting
policies are summarized below.
2. Acquisitions
------------
On September 20, 1996, the Bank acquired three Mercer County, New Jersey
offices and related deposits of Cenlar Federal Savings Bank. The Bank
assumed $137.6 million in deposits in exchange for $126.5 million in cash.
As a result of the acquisition, the Bank added a core deposit intangible of
$2.9 million and goodwill of $6.6 million.
(Continued)
28
<PAGE>
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997 and 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
The core deposit intangible acquired is being amortized on an accelerated
basis over 10 years. The goodwill acquired is being amortized on a
straight-line basis over 15 years.
3. Cash and Cash Equivalents
-------------------------
The Corporation considers cash, due from banks, federal funds sold and
interest-bearing deposits in other financial institutions, with original
terms to maturity of less than three months, as cash equivalents for
presentation purposes in the consolidated statements of financial position
and cash flows.
4. Investment and Mortgage-Backed Securities
-----------------------------------------
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 as a separate component of stockholders'
equity, net of income taxes. Realized gains and losses on the sale of
securities are recognized using the specific identification method.
Investment and mortgage-backed securities held to maturity are carried at
cost, net of unamortized premiums and discounts, which are recognized in
interest income using the interest method over the period to maturity.
Mortgage-backed securities are stated at the principal amount outstanding
(cost), adjusted for amortization of premiums and accretion of fees and
discounts using the interest method. The Corporation has the ability and it
is management's intention to hold such assets to maturity.
5. 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).
(Continued)
29
<PAGE>
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997 and 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
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."
6. 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.
7. Mortgage Servicing Rights
-------------------------
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 both
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)
30
<PAGE>
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997 and 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
8. 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.
9. 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.
10. Advertising Costs
-----------------
The Corporation expenses advertising costs as incurred.
(Continued)
31
<PAGE>
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997 and 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
11. 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.
12. New Financial Accounting Standards
----------------------------------
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 130, "Reporting Comprehensive Income," which is effective for years
beginning after December 15, 1997. This new statement requires entities
presenting a complete set of financial statements to include details of
comprehensive income. Comprehensive income consists of net income or loss
for the current period and income, expenses, gains, and losses that bypass
the income statement and are reported directly in a separate component of
equity. The adoption of SFAS No. 130 will not have a material impact on the
Corporation's consolidated financial position or results of operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which is effective for all periods
beginning after December 15, 1997. SFAS No. 131 requires that public
business enterprises report certain information about operating segments in
complete sets of financial statements of the enterprise and in condensed
financial statements of interim periods issued to shareholders. It also
requires that public business enterprises report certain information about
their products and services, the geographic areas in which they operate,
and their major customers.
13. Reclassifications
-----------------
Certain prior year amounts have been reclassified to conform to the current
period presentation.
32
<PAGE>
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997 and 1996
NOTE B - CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------
1997 1996 1995
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Cash and due from banks $14,222 $14,737 $ 9,926
Interest-bearing deposits in other financial institutions 25,628 38,120 15,606
Federal funds sold 1,775 1,275 1,500
------- ------- -------
$41,625 $54,132 $27,032
======= ======= =======
</TABLE>
NOTE C - SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
The Bank enters into purchases of mortgage-backed securities under
agreements to resell substantially identical securities. Securities
purchased under agreements to resell at December 31, 1997 and 1996 consist
of mortgage-backed securities.
The amounts advanced under these agreements represent short-term loans and
are reflected as a receivable in the consolidated statement of financial
position. The securities underlying the agreements are book-entry
securities. During the year, the securities were delivered by appropriate
entry into a third-party custodian's account designated by the Bank under a
written custodial agreement that explicitly recognizes the Bank's interest
in the securities. At December 31, 1997 and 1996, these agreements matured
within 30 days and substantially all agreements to resell securities
purchased were outstanding with one dealer. Securities purchased under
agreements to resell averaged $9.7 million and $3.8 million during 1997 and
1996, respectively, and the maximum amounts outstanding at any month-end
during 1997 and 1996 was $25.3 million and $25.1 million, respectively.
33
<PAGE>
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997 and 1996
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, 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1997
-------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
---- ----- ------ -----
(in thousands)
<S> <C> <C> <C> <C>
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
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
-----------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
---- ----- ------ -----
(in thousands)
<S> <C> <C> <C> <C>
Investment securities held to maturity
U.S. Government and federal agencies $ 34,976 $ 57 $ (179) $ 34,854
State and political subdivisions 3,068 3 (31) 3,040
Corporate debt securities 500 -- (1) 499
--------- --------- --------- ---------
38,544 60 (211) 38,393
Mortgage-backed securities held to maturity 153,758 1,136 (1,625) 153,269
--------- --------- --------- ---------
$ 192,302 $ 1,196 $ (1,836) $ 191,662
========= ========= ========= =========
</TABLE>
(Continued)
34
<PAGE>
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997 and 1996
NOTE D - INVESTMENT AND MORTGAGE-BACKED SECURITIES - Continued
<TABLE>
<CAPTION>
December 31, 1996
-------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
---- ----- ------ -----
(in thousands)
<S> <C> <C> <C> <C>
Investment securities available for sale
U.S. Government and federal agencies $ 11,976 $ 40 $ (1) $ 12,015
Equity securities (SLMA stock) 10 129 -- 139
Mutual funds 500 -- (2) 498
-------- -------- -------- --------
12,486 169 (3) 12,652
Mortgage-backed securities available for sale 22,401 75 (449) 22,027
-------- -------- -------- --------
$ 34,887 $ 244 $ (452) $ 34,679
======== ======== ======== ========
</TABLE>
Gross realized gains were $407,000, $330,000 and $16,000 for the years
ended December 31, 1997, 1996 and 1995, respectively. These gains resulted
from the sale of investment and mortgage-backed securities of $22 million,
mortgage-backed securities of $9.3 million and the sale of investment
securities of $4 million for the years ended December 31, 1997, 1996 and
1995, respectively.
The amortized cost and estimated market value of investment and
mortgage-backed securities, by contractual maturity, are shown below.
<TABLE>
<CAPTION>
December 31, 1997
-------------------------------------------
Held to maturity Available for sale
--------------------- ---------------------
Estimated Estimated
Amortized market Amortized market
cost value cost value
---- ----- ---- -----
(in thousands)
<S> <C> <C> <C> <C>
Investment securities
Due in one year or less $ 3,499 $ 3,501 $ 23,777 $ 24,009
Due after one year through five years 27,780 27,868 7,987 8,028
Due after five years through 10 years 16,768 16,799 -- --
Due after 10 years 4,775 4,858 -- --
-------- -------- -------- --------
52,822 53,026 31,764 32,037
Mortgage-backed securities 144,074 145,723 36,843 36,847
-------- -------- -------- --------
$196,896 $198,749 $ 68,607 $ 68,884
======== ======== ======== ========
</TABLE>
(Continued)
35
<PAGE>
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997 and 1996
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:
<TABLE>
<CAPTION>
December 31, 1997
------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
---- ----- ------ -----
(in thousands)
<S> <C> <C> <C> <C>
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
========= ========= ========= =========
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
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
---- ----- ------ -----
(in thousands)
<S> <C> <C> <C> <C>
Mortgage-backed securities held to maturity
FHLMC certificates $ 90,016 $ 697 $ (698) $ 90,015
FNMA certificates 27,547 198 (261) 27,484
GNMA certificates 6,043 205 -- 6,248
Real estate mortgage investment conduit 29,220 34 (643) 28,611
Other mortgage-backed securities 932 2 (23) 911
--------- --------- --------- ---------
$ 153,758 $ 1,136 $ (1,625) $ 153,269
========= ========= ========= =========
Mortgage-backed securities available for sale
FHLMC certificates $ 8,956 $ 52 $ (103) $ 8,905
FNMA certificates 3,314 23 (97) 3,240
Real estate mortgage investment conduit 10,131 -- (249) 9,882
--------- --------- --------- ---------
$ 22,401 $ 75 $ (449) $ 22,027
========= ========= ========= =========
</TABLE>
(Continued)
36
<PAGE>
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997 and 1996
NOTE D - INVESTMENT AND MORTGAGE-BACKED SECURITIES - Continued
Investment securities having an aggregate amortized cost of approximately
$7 million and $1 million were pledged to secure public deposits at
December 31, 1997 and 1996, 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:
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1996
---- ----
(in thousands)
<S> <C> <C>
First mortgage loans (principally conventional)
Secured by one-to-four family residences $198,328 $265,618
Secured by other non-residential properties 26,653 20,427
Construction loans 5,052 4,720
------- -------
230,033 290,765
Less net deferred loan origination fees and unamortized premiums 133 521
------- -------
Total first mortgage loans 229,900 290,244
------- -------
Consumer and other loans
Commercial 2,798 3,126
Home equity and second mortgage 12,147 9,661
Leases 1,671 3,093
Other 6,230 5,261
------- -------
22,846 21,141
Less unearned discount 6 9
------- -------
Total consumer and other loans 22,840 21,132
Less allowance for loan losses 2,029 1,806
------- -------
Total loans receivable $250,711 $309,570
======== ========
</TABLE>
(Continued)
37
<PAGE>
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997 and 1996
NOTE E - LOANS RECEIVABLE - Continued
Activity in the allowance for loan losses is summarized as follows:
December 31,
------------------------------
1997 1996 1995
---- ---- ----
` (in thousands)
Balance at beginning of year $ 1,806 $ 1,484 $ 1,473
Provision charged to income 397 330 72
Charge-offs (174) (8) (61)
------- ------- -------
Balance at end of year $ 2,029 $ 1,806 $ 1,484
======= ======= =======
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 $1.4 million and $2
million at December 31, 1997 and 1996, respectively. Of such amounts,
approximately $800,000 at December 31, 1997 and 1996 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 $19,000, $30,000 and $49,000 for the years ended December 31,
1997, 1996 and 1995, respectively. No interest income has been recognized
on non-accrual loans for any of the periods presented.
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.
(Continued)
38
<PAGE>
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997 and 1996
NOTE E - LOANS RECEIVABLE - Continued
Loan impairment is measured by estimating the expected future cash flows
and discounting them at the respective effective interest rate or by
valuing the underlying collateral. An allowance for credit losses has been
established for all loans identified as impaired. The recorded investment
in impaired loans and the valuation for credit losses are as follows:
December 31,
--------------
1997 1996
---- ----
(in thousands)
Principal amount of impaired loans $ 81 $ 601
Less valuation allowance 12 128
----- ------
$ 69 $ 473
===== ======
The average recorded investment in impaired loans during the years ended
December 31, 1997 and 1996 was $463,000 and $433,000, respectively.
Total cash collected on impaired loans during the year ended December 31,
1997 was $447,000, of which $434,000 was credited to the principal balance
outstanding on such loans and $13,000 was recognized as interest income.
Interest that would have been accrued on impaired loans during the year was
$43,000.
Total cash collected on impaired loans during the year ended December 31,
1996 was $300,000, of which $253,000 was credited to the principal balance
outstanding on such loans and $47,000 was recognized as interest income.
Interest that would have been accrued on impaired loans during the year was
$46,000.
The Bank has no concentration of loans to borrowers engaged in similar
activities which exceeded 10% of total loans at December 31, 1997 and 1996.
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 $493,000 and $511,000 at December 31, 1997
and 1996, respectively. For the year ended December 31, 1997, principal
repayments of approximately $18,000 were received and no funds were
disbursed to executive officers, directors or their related interests.
39
<PAGE>
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997 and 1996
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,
------------------
1997 1996
---- ----
(in thousands)
Mortgage loan servicing portfolios
FHLMC $18,775 $66,521
Other investors 7,630 5,861
------- -------
$26,405 $72,382
======= =======
Custodial balances maintained in connection with the foregoing loan
servicing totalled approximately $523,000 and $1,490,000 at December 31,
1997 and 1996, 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 1997 1996
------------ ---- ----
(in thousands)
Buildings 30 $ 5,790 $ 5,715
Leasehold improvements 5 322 333
Furniture, fixtures and equipment 3-7 4,955 4,436
------- -------
11,067 10,484
Less accumulated depreciation 6,437 5,741
------- -------
4,630 4,743
Land 3,259 3,259
------- -------
$ 7,889 $ 8,002
======= =======
40
<PAGE>
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997 and 1996
NOTE H - DEPOSITS
Deposits are summarized as follows:
December 31,
-------------------
Deposit type 1997 1996
- ------------------------------------------------ -------- --------
(in thousands)
Demand $ 5,037 $ 3,741
NOW 40,360 42,513
Money Market 32,777 29,970
Passbook Savings - Fixed Rate 122,952 127,213
Passbook Savings - Adjustable Rate 51,277 60,452
-------- --------
Total demand, transaction and
passbook deposits 252,403 263,889
Certificates of Deposit 198,026 205,199
-------- --------
$450,429 $469,088
======== ========
The aggregate amount of certificates of deposit with a minimum denomination
of $100,000 was approximately $9.4 million and $8.6 million at December 31,
1997 and 1996, respectively.
At December 31, 1997, scheduled maturities of certificates of deposit are
as follows:
Year ending December 31,
---------------------------------------------------------------------------
1998 1999 2000 2001 2002 Thereafter Total
-------- -------- -------- -------- -------- ---------- --------
(in thousands)
$136,326 $ 44,391 $ 11,821 $ 2,103 $ 2,948 $ 437 $198,026
======== ======== ======== ======== ======== ======== ========
41
<PAGE>
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997 and 1996
NOTE I - ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank consist of the following:
December 31,
------------------------------------------------------
1997 1996
---------------------- --------------------------
Weighted Weighted
Due date Amount average rate Amount average rate
-------- ------ ------------ ------ ------------
(in thousands)
1997 $ - - % $10,000 5.57%
1998 30,000 5.85 30,000 5.85
1999 30,000 6.05 30,000 6.05
2000 25,000 6.13 25,000 6.13
2010 3,359 6.70 3,359 6.70
------ ---- ------- ----
$88,359 6.03% $98,359 5.98%
======= ==== ======= ====
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 and $32 million at December
31, 1997 and 1996, respectively.
NOTE J - BENEFIT PLANS
The Bank has a non-contributory defined benefit pension plan covering
substantially all full-time employees meeting certain eligibility
requirements. The benefits are based on each employee's years of service
and an average earnings formula. An employee becomes fully vested upon
completion of five years of qualifying service. It is the policy of the
Bank to fund the maximum amount allowable under the individual aggregate
cost method to the extent deductible under existing federal income tax
regulations.
Additionally, the Bank maintains a profit-sharing plan for eligible
employees. Profit-sharing contributions are at the discretion of the Board
of Directors. There were no profit-sharing plan contributions for the years
ended December 31, 1997, 1996 and 1995.
(Continued)
42
<PAGE>
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997 and 1996
NOTE J - BENEFIT PLANS - Continued
The following table sets forth the pension plan's funded status and amounts
recognized in the consolidated statements of financial position at the
dates indicated.
December 31,
--------------------
1997 1996
---- ----
(in thousands)
Actuarial present value of benefit obligations
Accumulated benefit obligation
Vested $ 1,765 $ 1,796
Non-vested 186 137
------- -------
$ 1,951 $ 1,933
======= =======
Projected benefit obligation for service rendered
to date $(2,609) $(3,004)
Plan assets at fair value (primarily listed stocks,
cash and short-term investments) 1,762 1,338
------- -------
Projected benefit obligation in excess of plan assets (847) (1,666)
Unrecognized net (gain) loss from past experience
different from that assumed and effects of changes
in assumptions (256) 542
Unrecognized net obligation being recognized over
15 years 36 41
Prior service cost not yet recognized in net periodic
pension cost 419 466
------- -------
Accrued pension cost $ (648) $ (617)
======= =======
The net pension cost included the following components:
Year ended December 31,
-------------------------
1997 1996 1995
----- ----- -----
(in thousands)
Service cost - benefits earned during the year $ 157 $ 173 $ 159
Interest cost on projected benefit obligation 160 196 202
Actual return on plan assets (244) (59) (193)
Net amortization and deferral 180 (28) 92
----- ----- -----
Net pension costs $ 253 $ 282 $ 260
===== ===== =====
(Continued)
43
<PAGE>
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997 and 1996
NOTE J - BENEFIT PLANS - Continued
Assumptions used to develop the net periodic pension cost were as follows:
Year ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
Discount rate 6.00% 6.00% 6.00%
Expected long-term rate of return on assets 8.00 8.00 8.50
Rate of increase in compensation levels 4.00 6.00 6.00
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. In July 1994, the ESOP borrowed $4.2
million from the Corporation to purchase 423,200 newly issued shares of
common stock. The Corporation makes discretionary contributions to the ESOP
in order to service the ESOP's debt. Any dividends received by the ESOP
will be used to pay debt service. The ESOP shares initially were pledged as
collateral for its debt. As the debt is repaid, shares are released from
collateral and allocated to qualifying employees based on the proportion of
debt service paid in the year. The Corporation accounts for its ESOP in
accordance with SOP 93-6. Accordingly, the debt of the ESOP is recorded as
debt and the shares pledged as collateral are reported as unearned ESOP
shares in the consolidated statements of financial position. As shares are
released from collateral, the Corporation reports compensation expense
equal to the current market price of the shares, and the allocated shares
are included in outstanding shares for earnings per share computations.
Dividends on allocated ESOP shares will be recorded as a reduction of
retained earnings; dividends on unallocated ESOP shares will be recorded as
a reduction of debt and accrued interest. ESOP compensation expense was
$351,000, $450,000 and $435,000 in 1997, 1996 and 1995, respectively.
Allocated shares 122,218
Unreleased shares 300,982
----------
Total ESOP shares 423,200
==========
Fair value of unreleased shares $9,029,460
==========
(Continued)
44
<PAGE>
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997 and 1996
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, 1996 in the form of
restricted stock payable over five years from the date of grant. The
recipients of the restricted stock are entitled to all voting and other
stockholder rights, except that the shares, while restricted, may not be
sold, pledged or otherwise disposed of and are required to be held in
escrow. In the event the recipient terminates association with the
Corporation for reasons other than death, disability or change in control,
the recipient forfeits all rights to the allocated shares under restriction
which are cancelled and revert to the Corporation for reissuance under the
plan. Shares acquired by MSBP of $2.1 million were recorded at the date of
award based on the market value of shares acquired by the Corporation.
Shares acquired by the MSBP, which are shown as a separate component of
stockholders' equity, are being amortized to expense over the five-year
vesting period; $458,000, $432,000 and $483,000 was amortized to expense in
1997, 1996 and 1995, respectively. At December 31, 1997, 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.
1997 1996 1995
---- ---- ----
Net income
As reported $ 4,874 $ 3,479 $ 3,871
Pro forma $ 4,726 $ 3,365 $ 3,871
Basic earnings per share
As reported $ 1.33 $ 0.86 $ 0.84
Pro forma $ 1.29 $ 0.83 $ 0.83
Diluted earnings per share
As reported $ 1.25 $ 0.83 $ 0.83
Pro forma $ 1.21 $ 0.80 $ 0.83
(Continued)
45
<PAGE>
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997 and 1996
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 1997, 1996 and 1995, respectively: no
dividend yield for all years; expected volatility of 21%, 12.1% and 12.1%;
risk-free interest rate of 6.4%, 6.4% and 5.7%; 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, 1997, and changes for each of the years in the three years
then ended was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------ ------------------ --------------------
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
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 551,833 $11.82 514,480 $11.82 460,480 $11.50
Options granted 170,155 16.62 41,103 15.09 55,000 14.53
Options exercised (5,915) 11.50 (1,667) 11.50 (500) 11.50
Options forfeited (20,198) 16.50 (2,083) 11.50 (500) 11.50
------- ------- -------
Outstanding at end of year 695,875 13.08 551,833 12.06 514,480 11.82
======= ======= =======
Options exercisable at year-end 545,924 501,730 306,820
======= ======= =======
Weighted average fair value of
options granted during year $ 5.42 $ 4.34 $ 3.83
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
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 1997 life (years) price 1997 price
------ ---- ------------ ----- ---- -----
<S> <C> <C> <C> <C> <C>
$11.50 to $17.25 686,720 7.5 years $12.99 544,529 $12.13
$18.00 to $19.25 9,155 9.6 years $18.57 1,395 $18.50
</TABLE>
Total compensation cost recognized for stock-based employee compensation
awards was approximately $99,000, $28,000 and $16,000 for 1997, 1996 and
1995, respectively.
46
<PAGE>
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997 and 1996
NOTE K - INCOME TAXES
The components of income tax expense are summarized as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------
1997 1996 1995
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Federal
Current $ 2,420 $ 2,173 $ 2,033
Deferred (233) (84) 140
------- ------- -------
2,187 2,089 2,173
State and local - current 395 343 297
------- ------- -------
Income tax provision $ 2,582 $ 2,432 $ 2,470
======= ======= =======
</TABLE>
The Corporation's effective income tax rate was different than the
statutory federal income tax rate as follows:
Year ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
(in thousands)
Statutory federal income tax 34.0% 34.0% 34.0%
Increase (decrease) resulting from
Tax-exempt income (1.8) (2.7) (1.6)
State tax, net of federal benefit 3.5 3.8 3.0
Other (1.1) 5.9 3.5
---- ---- ----
34.6% 41.0% 38.9%
==== ==== ====
(Continued)
47
<PAGE>
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997 and 1996
NOTE K - INCOME TAXES - Continued
Deferred taxes are included in the accompanying consolidated statements of
financial position at December 31, 1997 and 1996 for the estimated future
tax effects of differences between the financial statement and federal
income tax bases of assets and liabilities given the provisions of
currently enacted tax laws. No valuation allowance was recorded against
deferred tax assets at December 31, 1997 and 1996. The Corporation's net
deferred tax asset at December 31, 1997 and 1996 was comprised of the
following:
December 31,
------------
1997 1996
---- ----
(in thousands)
Deferred tax assets
Deferred loan origination fees $130 $154
Deferred compensation 135 112
Accrued pension expense 68 68
Amortization 123 --
Unrealized loss on securities available for sale -- 81
---- ----
456 415
---- ----
Deferred tax liabilities
Allowance for loan losses, net 37 148
Unrealized gain on securities available for sale 108 --
---- ----
145 148
---- ----
Deferred tax asset $311 $267
==== ====
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)
48
<PAGE>
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997 and 1996
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,
-----------------------
1997 1996 1995
----- ----- -----
(in thousands)
Recognition of deferred tax expenses (benefits)
Loan losses $(111) $ 2 $ 147
Deferred compensation (24) (110) (2)
Deferred loan origination fees 24 24 24
Depreciation -- -- (29)
Amortization (122) -- --
----- ----- -----
$(233) $ (84) $ 140
===== ===== =====
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 3% of adjusted total assets.
(Continued)
49
<PAGE>
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997 and 1996
NOTE L - REGULATORY MATTERS - Continued
As of December 31, 1997, management believes that the Bank met all capital
adequacy requirements to which it was subject to.
<TABLE>
<CAPTION>
Regulatory capital
----------------------------------------------------------------------------
December 31, 1997
----------------------------------------------------------------------------
Tangible Core Risk-based
capital Percent capital Percent capital Percent
-------- ------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
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%
======== ==== ======== ==== ======== ====
</TABLE>
(Continued)
50
<PAGE>
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997 and 1996
NOTE L - REGULATORY MATTERS - Continued
<TABLE>
<CAPTION>
Regulatory capital
------------------------------------------------------------------------------------
December 31, 1996
------------------------------------------------------------------------------------
Tangible Core Risk-based
capital Percent capital Percent capital Percent
-------- ------- ------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Capital under generally accepted
accounting principles
Corporation $ 72,575 11.36% $ 72,575 11.36%$ 72,575 24.71%
Bank 59,208 9.20 59,208 9.20 59,208 20.18
Unrealized loss on certain
available-for-sale securities
Corporation 127 0.02 127 0.02 127 0.04
Bank 127 0.01 127 0.01 127 0.04
Goodwill and other intangible assets
Corporation (9,232) (1.44) (9,232) (1.44) (9,232) (3.14)
Bank (9,232) (1.43) (9,232) (1.43) (9,232) (3.14)
Additional capital items
General valuation allowances - limited
Corporation -- -- -- -- 1,806 0.62
Bank -- -- -- -- 1,806 0.62
-------- ---- ------- ---- ------- -----
Regulatory capital computed
Corporation 63,470 9.94 63,470 9.94 65,276 22.23
Bank 50,103 7.78 50,103 7.78 51,909 17.70
Minimum capital requirement
Corporation 9,581 1.50 19,162 3.00 23,492 8.00
Bank 9,655 1.50 19,310 3.00 23,468 8.00
-------- ---- ------- ---- ------- -----
Regulatory capital - excess
Corporation $ 53,889 8.44% $44,308 6.94% $41,784 14.23%
======== ==== ======= ==== ======= =====
Bank $ 40,448 6.28% $30,793 4.78% $28,441 9.70%
======== ==== ======= ==== ======= ====
</TABLE>
(Continued)
51
<PAGE>
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997 and 1996
NOTE L - REGULATORY MATTERS - Continued
At December 31, 1997, 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 $19 million and $13 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 1998, 1999 and 2000,
the Bank Insurance Funds (BIF) will pay $322 million of FICO debt service,
and SAIF will pay $458 million.
During 1998, 1999 and 2000, 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 2000, 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)
52
<PAGE>
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997 and 1996
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,
-----------------
1997 1996
------- -------
(in thousands)
Commitments to extend credit $22,720 $24,858
Commitments to purchase loans 304 2,852
Standby letters of credit 787 819
Loans sold with recourse 572 587
------- -------
$24,383 $29,116
======= =======
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 commitments to sell mortgage loans to investors of $6.9
million and $4.7 million outstanding at December 31, 1997 and 1996,
respectively.
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 $296,000,
$229,000 and $193,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.
(Continued)
53
<PAGE>
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997 and 1996
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,
------------------------
1998 $ 230
1999 52
2000 35
-----------
$ 317
===========
The Bank has a five-year 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, 1997
was $1,486,973.
From time to time, the Corporation and its subsidiaries are parties to
routine litigation, which arises in the normal course of business. In the
opinion of management, the resolution of these lawsuits would not have a
material adverse effect on the consolidated financial position or results
of operations.
NOTE O - SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
The Bank is principally engaged in originating and investing in one-to-four
family residential real estate loans in eastern Pennsylvania and New
Jersey. The Bank offers both fixed and adjustable rates of interest on
these loans which have amortization terms ranging to 30 years. The loans
are generally originated on the basis of an 80% loan-to-value ratio, which
has historically provided the Bank with more than adequate collateral
coverage in the event of default. Nevertheless, the Bank, as with any
lending institution, is subject to the risk that residential real estate
values in the primary lending area will deteriorate, thereby potentially
impairing collateral values in the primary lending area. However,
management believes that residential real estate values are presently
stable in its primary lending area and that loan loss allowances have been
provided for in amounts commensurate with its current perception of the
foregoing risks in the portfolio.
54
<PAGE>
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997 and 1996
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,
------------------------------------------
1997 1996
-------------------- --------------------
Estimated Estimated
fair Carrying fair Carrying
value value value value
----- ----- ----- -----
(in thousands)
Cash and cash equivalents $ 41,625 $ 41,625 $ 54,132 $ 54,132
Investment securities 85,063 84,859 51,045 51,196
Mortgage-backed securities 182,570 180,921 175,296 175,785
Securities purchased under
agreements to resell 10,000 10,000 25,129 25,129
(Continued)
55
<PAGE>
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997 and 1996
NOTE P - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued
Fair value of financial instruments with stated maturities has been
estimated using present value cash flow, discounted at a rate approximating
current market for similar assets and liabilities.
<TABLE>
<CAPTION>
December 31,
-----------------------------------------
1997 1996
------------------- -------------------
Estimated Estimated
fair Carrying fair Carrying
value value value value
----- ----- ----- -----
(in thousands)
<S> <C> <C> <C> <C>
Assets
Interest-bearing deposits with banks $ 2,740 $ 2,737 $ 4,221 $ 4,220
Liabilities
Deposits with stated maturities 197,345 198,026 204,744 205,199
Borrowings with stated maturities
Short-term (due within 6 months) 5,000 5,000 10,038 10,000
Long-term 83,178 83,359 89,422 88,359
</TABLE>
Fair value of financial instrument liabilities with no stated maturities
has been estimated to equal the carrying amount (the amount payable on
demand).
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------
1997 1996 1995
------------------- -------------------- --------------------
Estimated Estimated Estimated
fair Carrying fair Carrying fair Carrying
value value value value value value
----- ----- ----- ----- ----- -----
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Deposits with no stated
maturities $252,403 $252,403 $263,889 $263,889 $234,269 $234,269
======== ======== ======== ======== ======== ========
</TABLE>
The fair value of the net loan portfolio has been estimated using present
value cash flows, discounted at the approximate current market rates
adjusted for non-interest operating costs and giving consideration to
estimated prepayment risk and credit loss factors.
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------
1997 1996 1995
------------------- -------------------- --------------------
Estimated Estimated Estimated
fair Carrying fair Carrying fair Carrying
value value value value value value
----- ----- ----- ----- ----- -----
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Net loans $254,568 $250,711 $307,942 $309,570 $242,154 $238,275
======== ======== ======== ======== ======== ========
</TABLE>
(Continued)
56
<PAGE>
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997 and 1996
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
$24.4 million and $29.1 million at December 31, 1997 and 1996,
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,
-----------------------
1997 1996 1995
------ ------ ------
(in thousands)
Service fees, charges and other operating income
Loan servicing fees $ 512 $ 577 $ 395
Late charge income 92 98 83
Deposit service charges 471 439 435
Other income 128 156 150
------ ------ ------
$1,203 $1,270 $1,063
====== ====== ======
Other operating expense
Employee education $ 49 $ 22 $ 35
Insurance and surety bond 149 129 129
Office supplies 318 272 218
Postage 218 207 173
Telephone 130 103 77
Service charges on bank accounts 111 83 82
Supervisory examination fees 144 112 103
Other expenses 1,211 1,079 761
------ ------ ------
$2,330 $2,007 $1,578
====== ====== ======
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)
57
<PAGE>
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997 and 1996
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.
<TABLE>
<CAPTION>
Year ended December 31, 1997
-----------------------------------------
Weighted
average
Income shares Per share
(numerator) (denominator) amount
----------- ------------- ------
<S> <C> <C> <C>
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
========== ========= ========
</TABLE>
(Continued)
58
<PAGE>
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997 and 1996
NOTE S - EARNINGS PER SHARE - Continued
<TABLE>
<CAPTION>
Year ended December 31, 1996
----------------------------------------
Weighted
average
Income shares Per share
(numerator) (denominator) amount
----------- ------------- ------
<S> <C> <C> <C>
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
========== ========= ========
</TABLE>
There were options to purchase 13,103 shares of common stock at $15.88 per
share were outstanding during the year 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, 1997.
<TABLE>
<CAPTION>
Year ended December 31, 1995
----------------------------------------
Weighted
average
Income shares Per share
(numerator) (denominator) amount
----------- ------------- ------
<S> <C> <C> <C>
Net income $3,871,000
==========
Basic earnings per share
Income available to common stockholders $3,871,000 4,583,610 $ 0.84
========
Effect of dilutive securities
Stock options -- 76,107
---------- ---------
Diluted earnings per share
Income available to common stockholders plus
effect of dilutive securities $3,871,000 4,659,717 $ 0.83
========== ========= ========
</TABLE>
There were options to purchase 52,000 shares of common stock at a range of
$14.75 to $15.06 per share were outstanding during the year 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; 42,000 of the options, which expire through December 18,
2005, were still outstanding at December 31, 1997.
59
<PAGE>
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997 and 1996
NOTE T - SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
------------------------------------------
Dec 31, Sept. 30, June 30, March 31,
1997 1997 1997 1997
-------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
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 tax provision 1,283 2,170 2,065 1,938
Income tax provision 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
</TABLE>
<TABLE>
<CAPTION>
Three months ended
------------------------------------------
Dec 31, Sept. 30, June 30, March 31,
1996 1996 1996 1996
-------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Total interest income $ 11,205 $ 9,711 $ 9,083 $ 8,990
Total interest expense 6,368 5,109 4,738 4,582
-------- -------- -------- --------
Net interest income 4,837 4,602 4,345 4,408
Provision for possible loan losses 120 120 60 30
-------- -------- -------- --------
Net interest income after provision 4,717 4,482 4,285 4,378
Other income 504 296 303 691
Other expenses 3,253 5,089 2,657 2,746
-------- -------- -------- --------
Income (loss) before income tax provision
(benefit) 1,968 (311) 1,931 2,323
Income tax provision (benefit) 776 (102) 829 929
-------- -------- -------- --------
Net income (loss) $ 1,192 $ (209) $ 1,102 $ 1,394
======== ======== ======== ========
Earnings (loss) per common share - basic $ 0.31 $ (0.04) $ 0.26 $ 0.33
Earnings (loss) per common share - assuming dilution $ 0.29 $ (0.05) $ 0.26 $ 0.33
</TABLE>
60
<PAGE>
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997 and 1996
NOTE U - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
Condensed financial information for TF Financial Corporation (parent
company only) follows:
BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
-----------------
1997 1996
------- -------
(in thousands)
ASSETS
<S> <C> <C>
Cash $ 127 $ 70
Certificates of deposit - other institutions 171 154
Investment in Third Federal 47,081 59,208
Investment in TF Investments 2,832 27,580
Investment in Teragon 28 --
Other assets 8 12
------- -------
Total assets $50,247 $87,024
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Loan payable to TF Investments $ 103 $ 9,740
Payable to Third Federal and other liabilities 49 4,709
------- -------
Total liabilities 152 14,449
Stockholders' equity 50,095 72,575
------- -------
Total liabilities and stockholders' equity $50,247 $87,024
======= =======
</TABLE>
(Continued)
61
<PAGE>
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997 and 1996
NOTE U - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY - Continued
STATEMENT OF EARNINGS
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------
1997 1996 1995
------- ------- -------
(in thousands)
<S> <C> <C> <C>
INCOME
Dividend income from subsidiaries $ 1,276 $ -- $ 4,220
Interest income 10 10 6
------- ------- -------
Total income 1,286 10 4,226
------- ------- -------
EXPENSES
Interest 256 722 118
Other 226 257 257
------- ------- -------
Total expenses 482 979 375
------- ------- -------
Income (loss) before undistributed earnings
of subsidiaries 803 (969) 3,851
Undistributed earnings of subsidiaries 4,072 4,448 20
------- ------- -------
NET INCOME $ 4,874 $ 3,479 $ 3,871
======= ======= =======
</TABLE>
(Continued)
62
<PAGE>
TF Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997 and 1996
NOTE U - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY - Continued
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------
1997 1996 1995
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 4,874 $ 3,479 $ 3,871
Adjustments to reconcile net income to net cash
(used in) provided by operating activities
Undistributed earnings from subsidiaries (4,072) (4,448) (20)
Net change in assets and liabilities (4,656) 4,676 (20)
-------- -------- --------
Net cash (used in) provided by operating
activities (3,854) 3,707 3,831
-------- -------- --------
Cash flows from investing activities
Capital distribution to/from subsidiaries 42,025 -- --
Purchase and maturities of certificates of deposit
in other financial institutions, net (17) (4) (151)
-------- -------- --------
Net cash provided by (used in) investing
activities 42,008 (4) (151)
-------- -------- --------
Cash flows from financing activities
Cash dividends paid to stockholders (1,433) (1,258) (1,088)
Net (decrease) increase in borrowings from
TF Investments (9,637) 1,022 8,718
Treasury stock acquired (27,027) (3,596) (11,116)
-------- -------- --------
Net cash used in financing activities (38,097) (3,832) (3,486)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH 57 (129) 194
Cash at beginning of year 70 199 5
-------- -------- --------
Cash at end of year $ 127 $ 70 $ 199
======== ======== ========
Supplemental disclosure of cash flow information
Cash paid during the year for income taxes $ 63 $ 80 $ 32
======== ======== ========
</TABLE>
63
<PAGE>
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
<TABLE>
<CAPTION>
<S> <C> <C>
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) 348-0921
New Britain Office Cross Keys Office Warminster Office
100 Town Center 834 North Easton Highway 601 Louis Drive
New Britain, PA 18901-5199 Doylestown, PA 18901-1007 Warminster, PA 18974-2843
(215) 345-5800 (215) 348-5566 (215) 672-7990
Loan Center
950 Newtown-Yardley Road
Newtown, PA 18940-4018
(215) 968-4444
</TABLE>
PHILADELPHIA COUNTY, PENNSYLVANIA BRANCHES
<TABLE>
<CAPTION>
<S> <C> <C>
Frankford Office Mayfair Office Bridesburg Office
4625 Frankford Ave. Roosevelt Blvd. at Unruh Orthodox & Almonds Sts.
Philadelphia, PA 19124-5889 Philadelphia, PA 19149-2494 Philadelphia, PA 19137-1626
(215) 289-1440 (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
</TABLE>
MERCER COUNTY, NEW JERSEY BRANCHES
<TABLE>
<CAPTION>
<S> <C> <C>
Ewing Office Princeton Office Hamilton Square Office
2075 Pennington Road Princeton Shopping Center 1850 Route 33
Trenton, NJ 08618-1003 301 N. Hamilton Street Hamilton Square, NJ 08690-1712
(609) 883-7033 Princeton, NJ 08540-3512 (609) 890-1333
(609) 683-4488
</TABLE>
<PAGE>
MEET OUR BORAD OF DIRECTORS AND MANAGEMENT TEAM
[GROUP PHOTO]
William J. Happ, Jr., William H. Yerkes, III, Thomas J. Gola, George A.
Olsen, Albert M. Tantala, John R. Stranford, Carl F. Gregory, Robert N. Dusek
<TABLE>
<CAPTION>
TF Financial Corporation
Board of Directors
<S> <C> <C>
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 Earl A. Pace, Jr.
Senior Vice President and President and Chief Senior Vice President
Chief Financial Officer Executive Officer Chief Information Officer
Thomas J. Sposito, II Elizabeth Davidson Maier
Senior Vice President and Senior Vice President and
Retail Banking Officer Corporate Secretary
</TABLE>
================================================================================
<TABLE>
<CAPTION>
<S> <C> <C>
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,NW., Ste. 700 East 938 Quail Street, Suite 101
Philadelphia, PA 19103-7080 Washington, D.C. 20005 Lakewood, CO 80215-5513
</TABLE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Parent
- ------
TF Financial Corporation
Percentage State of
Subsidiaries Owned Incorporation
- ------------ ---------- -------------
Third Federal Savings Bank (a) 100% United States
TF Investments Corporation (a) 100% Delaware
Teragon, Inc. 100% Delaware
Penns Trail Development Corporation (a) 100% Delaware
- ---------------------
(a) The operations of this subsidiary are included in the consolidated
financial statements contained in the 1997 Annual Report to
Stockholders incorporated herein by reference.
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated January 22, 1998, accompanying the consolidated
financial statements and schedules incorporated by reference or included in the
Annual Report of TF Financial Corporation and Subsidiaries on Form 10-K for the
year ended December 31, 1997. We hereby consent to the incorporation by
reference of said report in the Registration Statements of TF Financial
Corporation and Subsidiaries on Form S-8 (File No. 33-87176, effective December
7, 1994, and File No. 333-09235, effective July 31, 1996).
/s/ Grant Thornton LLP
Philadelphia, Pennsylvania
March 30, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION DERIVED FROM THE
QUARTERLY REPORT ON FORM 10-K405 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 41,625
<INT-BEARING-DEPOSITS> 2,737
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 68,884
<INVESTMENTS-CARRYING> 265,780
<INVESTMENTS-MARKET> 267,633
<LOANS> 252,740
<ALLOWANCE> 2,029
<TOTAL-ASSETS> 597,047
<DEPOSITS> 450,429
<SHORT-TERM> 30,000
<LIABILITIES-OTHER> 8,164
<LONG-TERM> 58,359
0
0
<COMMON> 529
<OTHER-SE> 49,566
<TOTAL-LIABILITIES-AND-EQUITY> 597,047
<INTEREST-LOAN> 23,050
<INTEREST-INVEST> 18,197
<INTEREST-OTHER> 1,942
<INTEREST-TOTAL> 43,189
<INTEREST-DEPOSIT> 18,211
<INTEREST-EXPENSE> 24,080
<INTEREST-INCOME-NET> 19,109
<LOAN-LOSSES> 397
<SECURITIES-GAINS> 407
<EXPENSE-OTHER> 13,583
<INCOME-PRETAX> 7,456
<INCOME-PRE-EXTRAORDINARY> 7,456
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,874
<EPS-PRIMARY> 1.33
<EPS-DILUTED> 1.25
<YIELD-ACTUAL> 3.12
<LOANS-NON> 0
<LOANS-PAST> 1,382
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,806
<CHARGE-OFFS> 174
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 2,029
<ALLOWANCE-DOMESTIC> 2,029
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,029
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<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> .99
<EPS-DILUTED> .95
<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>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1997
<CASH> 25,725
<INT-BEARING-DEPOSITS> 3,451
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 54,599
<INVESTMENTS-CARRYING> 267,777
<INVESTMENTS-MARKET> 268,047
<LOANS> 317,855
<ALLOWANCE> 1,989
<TOTAL-ASSETS> 640,746
<DEPOSITS> 460,847
<SHORT-TERM> 0
<LIABILITIES-OTHER> 10,313
<LONG-TERM> 98,359
0
0
<COMMON> 529
<OTHER-SE> 70,698
<TOTAL-LIABILITIES-AND-EQUITY> 640,746
<INTEREST-LOAN> 12,413
<INTEREST-INVEST> 9,334
<INTEREST-OTHER> 534
<INTEREST-TOTAL> 22,281
<INTEREST-DEPOSIT> 9,320
<INTEREST-EXPENSE> 12,250
<INTEREST-INCOME-NET> 10,031
<LOAN-LOSSES> 180
<SECURITIES-GAINS> 188
<EXPENSE-OTHER> 6,726
<INCOME-PRETAX> 4,003
<INCOME-PRE-EXTRAORDINARY> 4,003
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,429
<EPS-PRIMARY> .63
<EPS-DILUTED> .61
<YIELD-ACTUAL> 3.23
<LOANS-NON> 0
<LOANS-PAST> 1,933
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,806
<CHARGE-OFFS> 3
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,983
<ALLOWANCE-DOMESTIC> 1,983
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,983
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-END> MAR-31-1997
<CASH> 18,571
<INT-BEARING-DEPOSITS> 4,695
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 42,115
<INVESTMENTS-CARRYING> 221,165
<INVESTMENTS-MARKET> 218,686
<LOANS> 316,057
<ALLOWANCE> 1,910
<TOTAL-ASSETS> 644,368
<DEPOSITS> 460,910
<SHORT-TERM> 5,000
<LIABILITIES-OTHER> 10,236
<LONG-TERM> 98,359
0
0
<COMMON> 529
<OTHER-SE> 69,334
<TOTAL-LIABILITIES-AND-EQUITY> 644,368
<INTEREST-LOAN> 6,192
<INTEREST-INVEST> 4,675
<INTEREST-OTHER> 308
<INTEREST-TOTAL> 11,175
<INTEREST-DEPOSIT> 4,657
<INTEREST-EXPENSE> 6,114
<INTEREST-INCOME-NET> 5,061
<LOAN-LOSSES> 105
<SECURITIES-GAINS> 73
<EXPENSE-OTHER> 3,408
<INCOME-PRETAX> 1,938
<INCOME-PRE-EXTRAORDINARY> 3,943
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,164
<EPS-PRIMARY> .30
<EPS-DILUTED> .29
<YIELD-ACTUAL> 3.26
<LOANS-NON> 0
<LOANS-PAST> 1,998
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,513
<CHARGE-OFFS> 8
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,910
<ALLOWANCE-DOMESTIC> 1,910
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,910
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 54,132
<INT-BEARING-DEPOSITS> 4,220
<FED-FUNDS-SOLD> 25,129
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 34,679
<INVESTMENTS-CARRYING> 191,662
<INVESTMENTS-MARKET> 192,302
<LOANS> 311,376
<ALLOWANCE> 1,806
<TOTAL-ASSETS> 647,853
<DEPOSITS> 469,088
<SHORT-TERM> 0
<LIABILITIES-OTHER> 7,831
<LONG-TERM> 98,359
0
0
<COMMON> 529
<OTHER-SE> 72,046
<TOTAL-LIABILITIES-AND-EQUITY> 647,853
<INTEREST-LOAN> 23,116
<INTEREST-INVEST> 13,769
<INTEREST-OTHER> 2,104
<INTEREST-TOTAL> 38,989
<INTEREST-DEPOSIT> 14,739
<INTEREST-EXPENSE> 20,797
<INTEREST-INCOME-NET> 18,192
<LOAN-LOSSES> 330
<SECURITIES-GAINS> 330
<EXPENSE-OTHER> 13,745
<INCOME-PRETAX> 5,911
<INCOME-PRE-EXTRAORDINARY> 5,911
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,479
<EPS-PRIMARY> .86
<EPS-DILUTED> .83
<YIELD-ACTUAL> 3.29
<LOANS-NON> 0
<LOANS-PAST> 1,972
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,484
<CHARGE-OFFS> 8
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,806
<ALLOWANCE-DOMESTIC> 1,806
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,806
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1996
<CASH> 116,311
<INT-BEARING-DEPOSITS> 4,218
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 41,420
<INVESTMENTS-CARRYING> 179,284
<INVESTMENTS-MARKET> 176,684
<LOANS> 295,213
<ALLOWANCE> 1,626
<TOTAL-ASSETS> 663,092
<DEPOSITS> 476,419
<SHORT-TERM> 5,000
<LIABILITIES-OTHER> 11,617
<LONG-TERM> 98,359
0
0
<COMMON> 529
<OTHER-SE> 71,168
<TOTAL-LIABILITIES-AND-EQUITY> 663,092
<INTEREST-LOAN> 17,019
<INTEREST-INVEST> 9,835
<INTEREST-OTHER> 930
<INTEREST-TOTAL> 27,784
<INTEREST-DEPOSIT> 9,892
<INTEREST-EXPENSE> 14,429
<INTEREST-INCOME-NET> 13,355
<LOAN-LOSSES> 210
<SECURITIES-GAINS> 223
<EXPENSE-OTHER> 10,492
<INCOME-PRETAX> 3,943
<INCOME-PRE-EXTRAORDINARY> 3,943
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,287
<EPS-PRIMARY> .55
<EPS-DILUTED> .54
<YIELD-ACTUAL> 3.37
<LOANS-NON> 0
<LOANS-PAST> 1,760
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,484
<CHARGE-OFFS> 8
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,686
<ALLOWANCE-DOMESTIC> 1,686
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,686
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1996
<CASH> 24,850
<INT-BEARING-DEPOSITS> 3,421
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 29,958
<INVESTMENTS-CARRYING> 148,518
<INVESTMENTS-MARKET> 145,805
<LOANS> 307,790
<ALLOWANCE> 1,566
<TOTAL-ASSETS> 528,910
<DEPOSITS> 341,872
<SHORT-TERM> 5,000
<LIABILITIES-OTHER> 8,557
<LONG-TERM> 98,359
0
0
<COMMON> 529
<OTHER-SE> 74,583
<TOTAL-LIABILITIES-AND-EQUITY> 528,910
<INTEREST-LOAN> 10,902
<INTEREST-INVEST> 6,594
<INTEREST-OTHER> 577
<INTEREST-TOTAL> 18,073
<INTEREST-DEPOSIT> 6,397
<INTEREST-EXPENSE> 9,320
<INTEREST-INCOME-NET> 8,753
<LOAN-LOSSES> 90
<SECURITIES-GAINS> 223
<EXPENSE-OTHER> 5,403
<INCOME-PRETAX> 4,254
<INCOME-PRE-EXTRAORDINARY> 4,254
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,496
<EPS-PRIMARY> .59
<EPS-DILUTED> .59
<YIELD-ACTUAL> 3.42
<LOANS-NON> 36
<LOANS-PAST> 1,805
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,484
<CHARGE-OFFS> 8
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,566
<ALLOWANCE-DOMESTIC> 1,566
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,566
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> MAR-31-1996
<CASH> 27,893
<INT-BEARING-DEPOSITS> 4,021
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 31,027
<INVESTMENTS-CARRYING> 154,657
<INVESTMENTS-MARKET> 154,181
<LOANS> 287,504
<ALLOWANCE> 1,513
<TOTAL-ASSETS> 519,196
<DEPOSITS> 337,992
<SHORT-TERM> 5,000
<LIABILITIES-OTHER> 8,547
<LONG-TERM> 93,359
0
0
<COMMON> 529
<OTHER-SE> 73,769
<TOTAL-LIABILITIES-AND-EQUITY> 519,196
<INTEREST-LOAN> 5,280
<INTEREST-INVEST> 3,401
<INTEREST-OTHER> 309
<INTEREST-TOTAL> 8,990
<INTEREST-DEPOSIT> 3,178
<INTEREST-EXPENSE> 4,582
<INTEREST-INCOME-NET> 4,408
<LOAN-LOSSES> 30
<SECURITIES-GAINS> 223
<EXPENSE-OTHER> 2,746
<INCOME-PRETAX> 2,323
<INCOME-PRE-EXTRAORDINARY> 2,323
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,394
<EPS-PRIMARY> .33
<EPS-DILUTED> .33
<YIELD-ACTUAL> 3.48
<LOANS-NON> 56
<LOANS-PAST> 1,545
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,484
<CHARGE-OFFS> 1
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,513
<ALLOWANCE-DOMESTIC> 1,513
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,513
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 27,032
<INT-BEARING-DEPOSITS> 4,221
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 44,684
<INVESTMENTS-CARRYING> 161,481
<INVESTMENTS-MARKET> 163,140
<LOANS> 239,759
<ALLOWANCE> 1,484
<TOTAL-ASSETS> 490,358
<DEPOSITS> 337,069
<SHORT-TERM> 5,000
<LIABILITIES-OTHER> 6,598
<LONG-TERM> 68,359
0
0
<COMMON> 529
<OTHER-SE> 72,803
<TOTAL-LIABILITIES-AND-EQUITY> 490,358
<INTEREST-LOAN> 11,501
<INTEREST-INVEST> 15,747
<INTEREST-OTHER> 2,382
<INTEREST-TOTAL> 29,630
<INTEREST-DEPOSIT> 13,368
<INTEREST-EXPENSE> 14,403
<INTEREST-INCOME-NET> 15,227
<LOAN-LOSSES> 72
<SECURITIES-GAINS> 16
<EXPENSE-OTHER> 9,975
<INCOME-PRETAX> 6,341
<INCOME-PRE-EXTRAORDINARY> 6,341
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,871
<EPS-PRIMARY> .84
<EPS-DILUTED> .83
<YIELD-ACTUAL> 3.53
<LOANS-NON> 56
<LOANS-PAST> 1,747
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,463
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,484
<ALLOWANCE-DOMESTIC> 1,484
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,484
</TABLE>
