SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM lO-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998
--------------------
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------------- ----------------------
Commission file number 0-24168
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TF FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 74-2705050
- --------------------------------------------------------------------------------
(State or other jurisdiction of incorporation (I.R.S.
or organization) employer identification no.)
3 Penns Trail, Newtown, Pennsylvania 18940
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 215-579-4000
-----------------------------
N/A
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year,
if changed since last report.
Indicate by check _ whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date November 20, 1998
----------------------
Class Outstanding
--------------------------- ----------------
$.10 par value common stock 2,901,812 shares
<PAGE>
TF FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 1O-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
INDEX
Page
Number
------
PART I - CONSOLIDATED FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 19
PART II- OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities 21
Item 3. Defaults upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Materially Important Events 21
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
2
<PAGE>
TF FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(in thousands)
<TABLE>
<CAPTION>
Unaudited Audited
--------- ---------
September 30, December 31,
ASSETS 1998 1997
--------- ---------
<S> <C> <C>
Cash and cash equivalents $ 45,983 41,625
Securities purchased under agreements to resell 0 10,000
Certificates of deposit in other financial institutions 2,338 2,737
Investment securities available for sale - at market value 36,225 32,037
Investment securities held to maturity (market value of $100,332 and $57,944 99,908 57,740
respectively, for the periods shown)
Mortgage-backed securities available for sale - at market value 37,678 36,847
Mortgage-backed securities held to maturity (market value of $233,683 and
$145,723 respectively, for the periods shown) 229,224 144,074
Loans receivable, net 222,886 250,711
Accrued interest receivable 4,323 3,957
Goodwill/Core deposit intangible 7,598 8,274
Premises and equipment, net 8,639 7,889
Other assets 1,353 1,156
--------- ---------
Total Assets $ 696,155 $ 597,047
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $ 449,708 $ 450,429
Advances from the Federal Home Loan Bank 183,359 88,359
Advances from borrowers for taxes and insurance 691 1,591
Accrued interest payable 6,064 2,470
Other liabilities 3,807 4,103
--------- ---------
Total Liabilities 643,629 546,952
--------- ---------
Commitments and contingencies -- --
Stockholders' Equity
Preferred stock, no par value; 2,000,000 shares authorized
and none issued -- --
Common stock, $0.10 par value; 10,000,000 shares authorized,
5,290,000 issued; 2,901,812 and 2,886,251 shares outstanding at September
30, 1998 and December 31, 1997, net of treasury shares of
2,098,418 and 2,102,767 respectively 529 529
Additional paid-in capital 51,942 51,775
Net unrealized (loss) gain on investment securities available for sale 133 169
Unearned ESOP shares-at cost (2,898) (3,010)
Shares acquired by MSBP (575) (895)
Treasury stock - at cost (41,563) (41,649)
Retained earnings 44,958 43,176
--------- ---------
Total Stockholders' Equity 52,526 50,095
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 696,155 $ 597,047
========= =========
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
TF FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share data)
<TABLE>
<CAPTION>
For Quarter For Nine Months
Ended September 30, Ended September 30,
--------- --------- --------- ---------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Interest income
Loans $ 4,555 $ 5,881 $ 14,064 $ 18,294
Mortgage-backed securities 4,524 3,109 12,097 9,488
Investment securities 1,828 1,336 5,155 4,291
Interest bearing deposits and other 472 592 1,202 1,126
--------- --------- --------- ---------
TOTAL INTEREST INCOME 11,379 10,918 32,518 33,199
Interest expense
Deposits 4,425 4,500 13,103 13,820
Borrowings 2,667 1,485 6,241 4,415
--------- --------- --------- ---------
TOTAL INTEREST EXPENSE 7,092 5,985 19,344 18,235
NET INTEREST INCOME 4,287 4,933 13,174 14,964
Provision for loan losses 15 202 45 382
--------- --------- --------- ---------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 4,272 4,731 13,129 14,582
Non-interest income
Gain on sale of real estate acquired through foreclosure 11 0 35 0
Gain (loss) on sale of mortgage-backed securities (1) 88 344 276
Gain on sale of loans 0 249 91 288
Gain on sale of servicing 0 330 0 330
Service fees, charges and other operating income 328 278 974 929
--------- --------- --------- ---------
TOTAL NON-INTEREST INCOME 338 945 1,444 1823
Non-interest expense
Employee compensation and benefits 1,597 1,555 4,882 4,854
Occupancy and equipment 500 593 1,423 1,497
Federal deposit insurance premium 69 73 209 226
Data processing 4 163 453 509
Professional fees 179 148 463 424
Goodwill and other intangible amortization 225 244 675 732
Advertising 91 90 271 278
Other operating 543 640 1,660 1,712
--------- --------- --------- ---------
TOTAL NON-INTEREST EXPENSE 3,208 3,506 10,036 10,232
INCOME BEFORE INCOME TAXES 1,402 2,170 4,537 6,173
Income taxes 534 803 1,687 2,377
--------- --------- --------- ---------
NET INCOME $ 868 $ 1,367 $ 2,850 $ 3,796
========= ========= ========= =========
Basic earnings per share $ 0.30 $ 0.36 $ 0.97 $ 0.99
Diluted earnings per share $ 0.27 $ 0.34 $ 0.88 $ 0.95
Weighted average number of shares outstanding - Basic 2,898,674 3,782,818 2,893,759 3,782,818
Weighted average number of shares outstanding - Diluted 3,185,538 4,028,598 3,226,213 4,028,598
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
TF FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
----------------------
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 2,850 $ 3,796
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of:
Mortgage loan servicing rights 13 65
Deferred loan origination fees (91) (112)
Premiums and discounts on investment securities. net 66 50
Premiums and discounts on mortgage-backed securities and
loans, net 431 168
Amortization of goodwill and core deposit intangible 677 732
Provision for loan losses and provision for losses on real estate 45 382
Depreciation of premises and equipment 613 532
Recognition of ESOP and MSBP expenses 617 632
(Gain) loss on sale of mortgage-backed securities - available for sale (80) (269)
(Gain) on sale of investment securities - available for sale (265) (8)
(Gain) loss on sale of real estate acquired through foreclosure (35) --
(Gain) on sale of mortgage servicing rights -- (330)
(Gain) loss on sale of mortgage loans (97) (288)
Decrease (increase) in
Accrued interest receivable (366) 117
Other assets (280) (1,155)
Increase (decrease) in
Accrued interest payable 3,594 2,975
Other liabilities (172) 862
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 7,520 8,149
CASH FLOWS FROM INVESTING ACTIVITIES
Loan origination and principal payments on loans. net 22,391 (13,842)
Purchases of loans (14,144) (13,623)
Proceeds from loan sales 19,496 77,194
Purchases and maturities of certificates of deposit in other
financial institutions. net 399 1,292
Purchases and maturities of securities purchased under
agreements to resell, net 10,000 19,129
Purchases of investment securities - available for sale (206,158) (48,665)
Purchases of investment securities - held to maturity (73,617) (82,088)
Purchases of mortgage-backed securities - available for sale (16,244) (28,418)
Purchase of mortgage-backed securities - held to maturity (126,185) (15,071)
Proceeds from maturities of investment securities - held to maturity 34,661 82,680
Proceeds from maturities of investment securities - available for sale 195,567 22,540
Principal repayments from maturities of mortgage-backed securities-
held to maturity 40,889 20,201
Principal repayments from maturities of mortgage-backed securities-
available for sale 9,729 1,520
Proceeds from the sale of mortgage-backed securities - available for sale 5,683 16,320
Proceeds from the sale of investment securities - available for sale 7,445 510
Purchases and redemptions of Federal Home Loan Bank Stock, net (4,250) --
Proceeds from the sale of loan servicing rights -- 981
Proceeds from sales of real estate acquired through foreclosure 199 --
Purchase of premises and equipment (1,363) (238)
--------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (95,502) 40,422
</TABLE>
5
<PAGE>
TF FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
-------------------
1998 1997
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand deposits/NOW accounts,
passbook savings accounts and certificates of deposit $ (721) $(25,504)
Advances from Federal Home Loan Bank net 95,000 --
Net (decrease) increase in advances from borrowers for taxes
and insurance (900) (1,226)
Purchase of treasury stock -- (3,677)
Common stock cash dividend (1,039) (1,010)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 92,339 (31,417)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,357 17,154
Cash and cash equivalents at beginning of period 41,625 54,132
-------- --------
Cash and cash equivalents at end of period $ 45,983 $ 71,286
Supplemental disclosure of cash flow information
Cash paid for
Interest on deposits and advances $ 15,750 $ 15,260
Income taxes $ 1,709 $ 1,421
Noncash transactions
Transfers from loans to real estate acquired through foreclosure $ 159 $ 231
</TABLE>
See notes to consolidated financial statements
6
<PAGE>
TF FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - PRINCIPLES OF CONSOLIDATION
The consolidated financial statements as of September 30, 1998,
December 31, 1997, and for the three and nine month periods ended
September 30, 1998 and 1997 include the accounts of TF Financial
Corporation (the "Corporation") and its wholly owned subsidiaries Third
Federal Savings Bank (the "Savings Bank"), TF Investments Corporation,
Penns Trail Development Corporation and Teragon Financial Corporation.
The Corporation's business is conducted principally through the Savings
Bank. All significant intercompany accounts and transactions have been
eliminated in consolidation.
NOTE 2 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements were
prepared in accordance with instructions for Form 10-Q and, therefore,
do not include information or footnotes necessary for a complete
presentation of consolidated financial condition, results of
operations, and cash flows in conformity with generally accepted
accounting principles. However, all adjustments, consisting of normal
recurring accruals, which, in the opinion of management, are necessary
for fair presentation of the consolidated financial statements have
been included. The results of operations for the period ended September
30, 1998 are not necessarily indicative of the results which may be
expected for the entire fiscal year or any other period. For further
information, refer to consolidated financial statements and footnotes
thereto included in the Corporation's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997.
NOTE 3 - CONTINGENCIES
The Corporation, from time to time, is a party to routine litigation,
which arise in the normal course of business. In the opinion of
management, the resolution of these lawsuits would not have a material
adverse effect on the Corporation's consolidated financial condition or
results of operations.
A petition for resettlement has been filed by the Savings Bank
protesting assessment of certain prior years' Pennsylvania Mutual
Thrift Institutions Tax. Management believes that the resolution of
this liability, if any, would not have a material adverse effect on the
Corporation's financial position or results of operations.
NOTE 4 - NEW PRONOUNCEMENTS
On January 1, 1998, the Corporation adopted SFAS No. 130, "Reporting
Comprehensive Income". SFAS No. 130 establishes standards to provide
prominent disclosure of comprehensive income items. Comprehensive
income is the change in equity of a business enterprise during a period
from transactions and other events and circumstances from non-owner
sources. Other comprehensive income consists of net unrealized gains on
investment securities available for sale. Subsequent to the adoption
date, all prior period amounts are required to be restated to conform
to the provisions of SFAS No. 130. Total comprehensive income for the
nine month period ended September 30, 1998 was $2,814,000, compared to
$4,173,000 for the nine month period ended September 30, 1997. Total
comprehensive income for the three month period ended September 30,
1998 was $1,028,000, compared to $1,620,000 for the three month period
ended September 30, 1997. The adoption of SFAS 130 did not have a
material impact on the Corporation's financial position or results of
operations.
7
<PAGE>
On January 1, 1998, the Corporation adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information". SFAS No. 131
requires that public business enterprises report certain information
about operating segments in a complete set of financial statements of
the enterprise and in condensed financial statements of interim periods
issued to shareholders. It also requires the reporting of certain
information about their products and services, the geographic area in
which they operate, and their major customers. The adoption of SFAS No.
131 did not have an impact on the Corporation's financial position or
results of operations.
The American Institute of Certified Public Accountants (AICPA)
executive committee has issued Statement of Position (SOP) 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use. The SOP was issued to provide authoritative guidance on
the subject of accounting for the cost associated with the purchase or
development of computer software. The statement is effective for fiscal
years beginning after December 15, 1998 for costs incurred in those
fiscal years for all projects, including projects in progress when the
SOP is adopted. The adoption of SOP 98-1 is not expected to have a
material impact on the Corporation's financial position or results of
operations.
In September 1998, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activity." SFAS No.
133 established accounting and reporting standards for derivative
instruments, including certain derivative instruments imbedded in other
contracts, and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair
value. If certain conditions are not met, a derivative may be
specifically designated as a hedge. The accounting for changes in fair
value of a derivative (gains or losses) depends on the intended use of
the derivative and resulting designation. SAFS No. 133 is effective for
all fiscal quarters of fiscal years beginning after September 15, 1999.
Early application is permitted only as of the beginning of any fiscal
quarter. On October 1, 1998 the Corporation adopted SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activity".
Concurrent with the adoption of SFAS No. 133, the Company reclassified
$33.3 million of mortgage-backed securities from "held to maturity" to
"available for sale" and $9.2 million of mortgage-backed securities
from "held to maturity" to "trading".
8
<PAGE>
TF FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
GENERAL
TF Financial Corporation (the "Company") may from time to time make written or
oral "forward-looking statements", including statements contained in the
Company's filings with the Securities and Exchange Commission (including this
Quarterly Report on Form 10-Q and the exhibits thereto), in its reports to
stockholders and in other communications by the Company, which are made in good
faith by the Company pursuant to the "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995.
These forward-looking statements involve risks and uncertainties, such as
statements of the Company's plans, objectives, expectations, estimates and
intentions, that are subject to change based on various important factors (some
of which are beyond the Company's control). The following factors, among others,
could cause the Company's financial performance to differ materially from the
plans, objectives, expectations, estimates and intentions expressed in such
forward-looking statements: the strength of the United States economy in general
and the strength of the local economics in which the Company conducts
operations; the effects of, and changes in, trade, monetary and fiscal policies
and laws, including interest rate policies of the Board of Governors of the
Federal Reserve System, inflation, interest rate, market and monetary
fluctuations; the timely development of and acceptance of new products and
services of the Company and the perceived overall value of these products and
services by users, including the features, pricing and quality compared to
competitors' products and services; the willingness of users to substitute
competitors' products and services for the Company's products and services; the
success of the Company in gaining regulatory approval of its products and
services, when required; the impact of changes in financial services' laws and
regulations (including laws concerning taxes, banking, securities and
insurance); technological changes, acquisitions; changes in consumer spending
and saving habits; and the success of the Company at managing the risks involved
in the foregoing.
The Company cautions that the foregoing list of important factors is not
exclusive. The Company does not undertake to update any forward-looking
statement, whether written or oral, that may be made from time to time by or on
behalf of the Company.
Financial Condition
The Corporation's total assets at September 30, 1998 and December 31, 1997
totaled $696.2 million and $597.0 million, respectively, an increase of $99.2
million or 16.6% for the nine month period. This increase was primarily a result
of the $86.0 million increase in mortgage-backed securities, coupled with the
$46.4 million increase in investment securities and the $4.4 million increase in
cash and cash equivalents, partially offset by the $27.8 million decrease in
loans receivable and the $10.0 million decrease in securities purchased under
agreements to resell. The increase in total assets was primarily funded by the
$95.0 million increase in advances from the Federal Home Loan Bank. Total
liabilities increased to $643.6 million at September 30, 1998 from $547.0 at
December 31, 1997. This increase was primarily the result of the $95.0 million,
or 107.5%, increase in advances from the Federal Home Loan Bank to $183.4
million at September 30, 1998 from $88.4 million at December 31, 1997. Total
deposits balances decreased by $700,000 from $450.4 million at December 31, 1997
to $449.7 million at September 30, 1998.
The decrease in loans receivable of $27.8 million, or 11.1%, from $250.7 million
at December 31, 1997 to $222.9 million at September 30, 1998 was a result of
mortgage loan repayments.
Cash and cash equivalent balances increased by $4.4 million, or 10.6%, from
$41.6 million at December 31, 1997 to $46.0 million at September 30, 1998
primarily as a result of the reinvestment of cash flow generated through the
repayment of mortgage loans.
9
<PAGE>
Balances of securities purchased under agreements to resell decreased by $10.0
million, or 100.0%, from $10.0 million at December 31, 1997 to $0 at September
30, 1998 primarily as a result of the reinvestment of maturing balances to
investment securities.
Investment securities at September 30, 1998 totaled $136.1 million, which
represents an increase of $46.4 million or 51.7% as compared to $89.7 million at
December 31, 1997. This increase is primarily due to the reinvestment of cash
and cash flow caused by repayments of mortgage loans and mortgage securities,
coupled with the reinvestment of maturing securities purchased under agreements
to resell balances.
Mortgage-backed securities totaled $266.9 million at September 30, 1998 as
compared to $180.9 million at December 31, 1997. This increase of $86.0 million
or, 47.5%, is a result the investment of the proceeds of the $95.0 million of
Federal Home Loan advances, coupled with cash flow caused by repayments of
mortgage loans.
Total consolidated stockholders' equity of the Corporation increased $2.4
million or 4.8%, to $52.5 million, or 7.55% of total assets, at September 30,
1998, from $50.1 million or 8.39 % of total assets at December 31, 1997,
primarily due to the $1.8 million increase to retained earnings for the nine
month period. The amortization of stock incentive plans of $400,000 also
contributed to this increase in stockholders' equity.
10
<PAGE>
Average Balance Sheet
The following table sets forth information relating to the Corporation's average
balance sheet and reflects the average yield on assets and average cost of
liabilities for the periods indicated. The yields and costs are computed by
dividing income or expense by the monthly average balance of interest-earning
assets or interest-bearing liabilities, respectively for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended September 30, Three Months Ended September 30,
1998 (5) 1997(5)
----------------------------- ------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Loans receivable (4).................... $229,198 $4,555 7.95% $291,374 $5,881 8.07%
Mortgage-backed securities.............. 271,596 4,524 6.66% 181,513 3,109 6.85%
Investment securities................... 125,044 1,828 5.85% 87,645 1,336 6.10%
Other interest-earning assets(1)........ 48,034 472 3.93% 60,062 592 3.94%
Total interest-earning assets......... $673,872 $11,379 6.75% $620,594 $10,918 7.04%
======== ======= ======== =======
Non interest-earning assets............... 22,299 $8,636
------ ------
Total assets.......................... $696,171 $629,230
======== ========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Savings deposits...................... 451,399 $4,425 3.92% $447,731 $4,500 4.02%
Borrowings............................ 181,692 2,667 5.87% 98,359 1,485 6.04%
------- ----- ------ -----
Total interest-bearing liabilities.. $633,091 $7,092 4.48% $546,090 $5,985 4.38%
======== ====== ======== ======
Non interest-bearing liabilities.......... 10,946 10,930
Total liabilities................... 644,037 557,020
Stockholders' equity...................... 52,134 72,210
------ ------
Total liabilities and Stockholders'
equity.............................. $696,171 $629,230
======== ========
Net interest income....................... $4,287 $4,933
====== ======
Interest rate spread (2).................. 2.27% 2.66%
Net yield on interest-earning assets (3).. 2.54% 3.18%
Ratio of Average interest-earning assets
to Average interests bearing liabilities.. 106% 114%
</TABLE>
(1) Includes interest-bearing deposits in other banks.
(2) Interest-rate spread represents the difference between the average yield
on interest-earning assets and the average cost of interest-bearing
liabilities.
(3) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
(4) Nonaccrual loans have been included in the appropriate average loan balance
category, but interest on nonaccrual loans has not been included for
purposes of determining interest income.
(5) Ratios have been annualized where applicable.
11
<PAGE>
Average Balance Sheet (continued)
<TABLE>
<CAPTION>
Nine Months Ended September 30, Nine Months Ended September 30,
1998 (5) 1997 (5)
----------------------------- -----------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Loans receivable (4).................... $235,460 $14,064 7.96% $305,978 $18,294 7.97%
Mortgage-backed securities.............. 247,944 12,097 6.51% 187,608 9,488 6.74%
Investment securities................... 115,216 5,155 5.97% 89,983 4,291 6.36%
Other interest-earning assets(1)........ 38,022 1,202 4.22% 35,585 1,126 4.22%
------ ----- ------ -----
Total interest-earning assets......... $636,642 $32,518 6.81% $619,154 $33,199 7.15%
======== ======= ======== =======
Non interest-earning assets............... 22,277 $18,028
Total assets.......................... $658,919 $637,182
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Savings deposits...................... 449,929 $13,103 3.88% $456,475 $13,820 4.04%
Borrowings............................ 147,248 6,241 5.65% 98,915 4,415 5.95%
------- ----- ------ -----
Total interest-bearing liabilities.. $597,177 $19,344 4.32% $555,390 $18,235 4.38%
======== ======= ======== =======
Non interest-bearing liabilities.......... 10,336 10,427
Total liabilities................... 607,513 565,817
Stockholders' equity...................... 51,406 71,365
------ ------
Total liabilities and Stockholders'
equity.............................. $658,919 $637,182
======== ========
Net interest income....................... $13,174 $14,964
======= =======
Interest rate spread (2).................. 2.49% 2.77%
Net yield on interest-earning assets (3).. 2.76% 3.22%
Ratio of Average interest-earning assets
to Average interest bearing liabilities... 107% 111%
</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.
(5) Ratios have been annualized where applicable.
12
<PAGE>
RESULTS OF OPERATIONS
Net Income. The Corporation recorded net income of $868,000 for the three months
ended September 30, 1998 as compared to $1.4 million for the three months ended
September 30, 1997. This decrease of $500,000, or 35.7%, was primarily the
result of the increase in total interest expense from $6.0 million for the three
months ended September 30, 1997 to $7.1 million for the three months ended
September 30, 1998, partially offset by an increase in total interest income of
$500,000. Net interest income before provisions for loan losses was $4.3 million
for the three month period ended September 30, 1998 as compared to $4.9 million
for the same period in 1997. Non-interest income was $300,000 and $900,000,
respectively, for these same periods. Operating expenses (non-interest expense)
were $3.2 million for the three month period ended September 30, 1998 and $3.5
million for the three month period ended September 30, 1997.
The Corporation recorded net income of $2.9 million for the nine months ended
September 30, 1998 as compared to $3.8 million for the nine months ended
September 30, 1997. This decrease of $900,000, or 23.7%, was primarily the
result of the decrease in total interest income from $33.2 million for the nine
month period ended September 30, 1997 to $32.5 million for the nine month period
ended September 30, 1998. Net interest income before provision for loan losses
was $13.2 million for the nine month period ended September 30, 1998 as compared
to $15.0 million for the same period in 1997. For these same periods, total
interest expense increased to $19.3 million from $18.2 million. Non-interest
income was $1.4 million and $1.8, respectively, for these same periods.
Operating expenses (non-interest expense) were $10.0 million and $10.2 million
for the nine month periods ended September 30, 1998 and September 30, 1997,
respectively.
Total Interest Income. Total interest income increased by $500,000 or 4.6% to
$11.4 million for the three months ended September 30, 1998, from $10.9 million
for the three months ended September 30, 1997, due primarily to increases in the
average balance of mortgage-backed securities and investment securities
partially offset by decreases in the average balance of loans receivable and
other interest earning assets. The average balance of loans receivable decreased
$62.2 million, or 21.3%, to $229.2 million for the three months ended September
30, 1998, from $291.4 million for the three months ended September 30, 1997. The
decrease in the average balance of loans receivable is primarily attributable to
the sale of $43.6 million of mortgage loans in the third quarter of 1997,
coupled with mortgage loan repayments. Interest attributable to loans receivable
decreased $1.3 million or 22.0% to $4.6 million for the three month period ended
September 30, 1998, from $5.9 million for the three month period ended September
30, 1997. This decrease is primarily attributable to the decrease in the average
balance of loans receivable coupled with a decrease in the average yield on
loans receivable from 8.07% for the three month period end September 30, 1997,
to 7.95% for the three month period ended September 30, 1998. Interest on
mortgage-backed securities increased $1.4 million, or 45.2%, for the three month
period ended September 30, 1998, from $3.1 million for the three month period
ended September 30, 1997 primarily as a result of increases in the average
balances of mortgage-backed securities to $271.6 million at September 30, 1998
from $181.5 million at September 30, 1997. The increase in income attributable
to the increase in the average balance of mortgage-backed securities was
partially offset by a decrease in the average yield of the securities to 6.66%
at September 30, 1998 from 6.85% at September 30, 1997. Interest on investment
securities increased to $1.8 million from $1.3 million for the three month
periods ended September 30, 1998 and 1997 respectively. This increase of
$500,000, or 38.6%, was primarily as a result of the increase in the average
balance of investment securities to $125.0 million at September 30, 1998 from
$87.6 million at September 30, 1997. Interest on other interest-earning assets
decreased by $120,000 for the three month period ended September 30, 1998
compared to the similar period ended September 30, 1997 primarily as a result of
the average balance decreasing by $12.1 million to $48.0 million, coupled with
the decrease in the average yield to 3.93% at September 30, 1998 from 3.94% at
September 30, 1997. The increases in the average balances of investment
securities is the result of the reinvestment of $43.6 million in proceeds from
the sale of mortgage loans coupled with cash flows from repayments of mortgage
loans. The increase in the average balance of mortgage-backed securities is
primarily the result of the reinvestment of borrowed funds into mortgage-backed
securities coupled with the reinvestment of mortgage loan repayments, partially
offset by the repayment of mortgage-backed securities. The average balance of
total interest earning assets increased $53.3 million, or 8.6%, to $673.9
million for the three months ended September 30, 1998 from $620.6 million for
the three months ended September 30, 1997.
13
<PAGE>
Total interest income decreased by $700,000 or 2.11% to $32.5 million for the
nine months ended September 30, 1998, from $33.2 million for the nine months
ended September 30, 1997 due primarily to the decrease in the average balance of
loans receivable, partially offset by increases in the average balance of
mortgage-backed securities, investment securities and other interest earning
assets. The average balance of loans receivable decreased $70.5 million, or
23.0%, to $235.5 million from $306.0 million for the nine months ended September
30, 1998 and 1997, respectively. The decrease in the average balance of loans
receivable is primarily attributable to the sale of $43.6 million of mortgage
loans in the third quarter of 1997, coupled with mortgage loan repayments.
Interest attributable to loans receivable decreased $4.2 million or 23.0% to
$14.1 million for the nine month period ended September 30, 1998, from $18.3
million for the nine month period ended September 30, 1997. This decrease is
primarily attributable to the decrease in the average balance of loans
receivable coupled with a decrease in the average yield on loans receivable from
7.97% for the nine month period end September 30, 1997, to 7.96% for the nine
month period ended September 30, 1998. Interest on mortgage-backed securities
increased $2.6 million, or 27.4%, for the nine month period ended September 30,
1998, from $9.5 million for the nine months ended September 30, 1997, primarily
as a result of increases in the average balances of mortgage-backed securities
to $247.9 million at September 30, 1998 from $187.6 million at September 30,
1997. This increase was partially offset by a decrease in the average yield of
the securities to 6.51% at September 30, 1998 from 6.74% at September 30, 1997.
Interest on investment securities increased to $5.2 million from $4.3 million
for the nine month periods ended September 30, 1998 and 1997, respectively. This
increase of $900,000, or 20.9%, was primarily as a result of the increase in the
average balance of investment securities to $115.2 million at September 30, 1998
from $90.0 million at September 30, 1997. Interest on other interest-earning
assets increased by $76,000 for the nine month period ended September 30, 1998
compared to the similar period ended September 30, 1997 primarily as a result of
the average balance increasing by $2.4 million to $38.0 million for the nine
months ended September 30, 1998 from $35.6 million for the nine months ended
September 30, 1997. The increases in the average balances of investment
securities is the result of the reinvestment of $43.6 million in proceeds from
the sale of mortgage loans coupled with cash flows from repayments of mortgage
loans. The increase in the average balance of mortgage-backed securities is
primarily the result of the reinvestment of borrowed funds into mortgage-backed
securities, coupled with the reinvestment of mortgage loan repayments, partially
offset by the repayment of mortgage-backed securities. The average balance of
total interest earning assets increased $17.4 million, or 2.8%, to $636.6
million at September 30, 1998 from $619.2 million at September 30, 1997.
Total Interest Expense. Total interest expense increased to $7.1 million for the
three month period ended September 30, 1998 from $6.0 million for the same
period in 1997. This increase in total interest expense is a result of the
increase in the average balance of borrowed money, in conjunction with the
increase in the average balance of savings deposits. The average balance of
borrowed money increased from $98.4 million for the three month period ended
September 30, 1997 to $181.7 million for the three month period ended September
30, 1998. The average balance of savings deposits increased from $447.7 million
for the three month period ended September 30, 1997 to $451.4 million for the
three month period ended September 30, 1998. The average rate paid on borrowed
money decreased from 6.04% for the three month period ended September 30, 1997
to 5.87% for the same period in 1998. The average rate paid on savings deposits
decreased from 4.02% for the three month period ended September 30, 1997 to
3.92% for the three month period ended September 30, 1998. As a result of the
decrease in the average rate paid on savings deposits, partially offset by the
increase in the average balance of savings deposits, the portion of total
interest expense attributable to savings deposits decreased to $4.4 million from
$4.5 million for the three month period ended September 30, 1998 and 1997,
respectively. The portion of total interest expense attributable to borrowed
money increased to $2.7 million from $1.5 million for the periods ended
September 30, 1998 and 1997 respectively. This increase is primarily the result
of the increase in the average balance of borrowed money, partially offset by
the decrease in the average rate paid for borrowed funds. The average balance of
total interest-bearing liabilities increased to $633.1 million for the three
month period ended September 30, 1998 from $546.1 million for the three month
period ended September 30, 1997 primarily as a result of increase in Federal
Home Loan Bank advances which were used to fund asset growth.
Total interest expense increased to $19.3 million for the nine month period
ended September 30, 1998 from $18.2 million for the nine month period ended
September 30, 1997. This increase in total interest expense is a result of the
increase in the average balance of borrowed money partially offset by the
decrease in the average balance of savings deposits. The average balance of
borrowed money increased from $98.9 million for the nine month period ended
September 30, 1997 to $147.2 million for the
14
<PAGE>
nine month period ended September 30, 1998. The average balance of savings
deposits decreased from $456.5 million for the nine month period ended September
30, 1997 to $449.9 million for the nine month period ended September 30, 1998.
The average rate paid on borrowed money decreased from 5.95% for the nine month
period ended September 30, 1997 to 5.65% for the nine month period ended
September 30, 1998. The average rate paid on savings deposits decreased from
4.04% for the nine month period ended September 30, 1997 to 3.88% for the nine
month period ended September 30, 1998. As a result of the decrease in the
average rate paid on savings deposits in conjunction with the decrease in the
average balance of savings deposits, the portion of total interest expense
attributable to savings deposits decreased to $13.1 million from $13.8 million
for the nine month periods ended September 30, 1998 and 1997 respectively. The
portion of total interest expense attributable to borrowed money increased to
$6.2 million from $4.4 million for the periods ended September 30, 1998 and 1997
respectively. This increase is primarily the result of the increase in the
average balance of borrowed money, partially offset by the decrease in the
average rate paid for borrowed funds. The average balance of total
interest-bearing liabilities increased to $597.2 million for the nine month
period ended September 30, 1998 from $555.4 million for the nine month period
ended September 30, 1997 primarily as a result of increase in Federal Home Loan
Bank advances which were used to fund asset growth.
Net Interest Income. Net interest income for the three month period ended
September 30, 1998 decreased by $600,000, or 12.2%, to $4.3 million from $4.9
million for the same period in 1997. The decrease was primarily the result of
the increase in total interest expense partially offset by the increase in total
interest income. The average balance of total interest-earning assets increased
$53.3 million, or 8.6%, to $673.9 million at September 30, 1998 from $620.6
million at September 30, 1997. During these same periods, the average balances
of interest-bearing liabilities increased to $633.1 million from $546.1 million.
The cost of interest-bearing liabilities increased from 4.38% to 4.48% while the
yield on interest-earning assets decreased from 7.04% to 6.75% for the three
month periods ended September 30, 1997 and 1998, respectively. The increase in
the average balance of interest earning assets and interest earning liabilities
was primarily the result of the increase in Federal Home Loan Bank borrowings
and the subsequent reinvestment of the cash proceeds into mortgage-backed
securities.
Net interest income for the nine month period ended September 30, 1998 decreased
by $1.8 million, or 12.0%, to $13.2 million from $15.0 million for the same
period in 1997. The decrease was primarily the result of the decrease in total
interest income in conjunction with the increase in total interest expense. The
average balance of total interest-earning assets increased to $636.6 million
from $619.1 million at September 30, 1998 and September 30, 1997, respectively.
During these same periods, the average balances of interest-bearing liabilities
increased to $597.2 million from $555.4 million. The cost of interest-bearing
liabilities decreased from 4.38% to 4.32% while the yield on interest-earning
assets decreased from 7.15% to 6.81% for the nine month periods ended September
30, 1997 and 1998, respectively.
Allowance for Loan Losses. The allowance for loan losses remained level at $2.1
million at September 30, 1998 and September 30, 1997. Such totals correlate to
non-performing loans of $1.7 million at September 30, 1998 and $1.3 million at
September 30, 1997. The increase in the allowance for loan losses of $48,000
resulted from the addition of $45,000 to the provision for loan losses and the
addition of $3,000 of recoveries net of charge-offs for losses on loans. The
provision for losses on loans is the method by which the allowance for losses is
adjusted during the period. The provision for losses on loans was $15,000 for
the three month period ended September 30, 1998. At September 30, 1998, the
allowance for loan losses was 119.2% of non-performing loans as compared to
154.0% of non-performing loans at September 30, 1997. While management maintains
its allowance for losses at a level which it considers to be adequate to provide
for potential losses, there can be no assurance that further additions will not
be made to the allowance and that such losses will not exceed the estimated
amounts.
Non-interest Income. Total non-interest income decreased to $338,000 for the
three month period ended September 30, 1998 from $945,000 for the same period in
1997. This decrease of $607,000 is primarily attributable to the decrease in the
gain on sale of investment securities of $89,000 and the decrease of $579,000 in
the gain on sale of loans and loan servicing, partially offset by the increase
of $50,000 in service fees, charges and other operating income, and the increase
of $11,000 in the gain on sale of real estate acquired through foreclosure.
15
<PAGE>
Total non-interest income decreased to $1.4 million for the nine months ended
September 30, 1998 from $1.8 million for the same period in 1997. This decrease
of $400,000 can be primarily attributable to the decrease in the gain on sale of
loans and loan servicing of $527,000, partially offset by the increase in the
gain on sale of investment securities of $68,000, the increase of $35,000 in the
gain on sale of real estate acquired through foreclosure and the increase of
$45,000 in service fees, charges and other operating income.
Non-interest Expense. Total non-interest expense decreased $300,000 to $3.2
million for the three months ended September 30, 1998 as compared with $3.5
million for the similar period in 1997. Employee compensation and benefits
remained level at $1.6 million for the compared periods, while occupancy and
equipment decreased by $93,000, data processing decreased by $159,000, other
operating costs decreased by $97,000, amortization of other intangibles
decreased by $19,000 and professional fees increased by $31,000. Advertising and
federal deposit insurance expense remained relatively level for the period. The
decreases to occupancy and equipment and data processing expenses were a result
of cost reductions related to a data processing system conversion.
Total non-interest expense decreased $200,000 to $10.0 million for the nine
months ended September 30, 1998 as compared with $10.2 million for the similar
period in 1997. Employee compensation and benefits remained level at $4.9
million for the compared periods, while occupancy and equipment decreased by
$74,000, data processing decreased by $56,000, other operating costs decreased
by $52,000, amortization of other intangibles decreased by $57,000 and
professional fees increased by $39,000. Advertising and federal deposit
insurance expense remained relatively level for the period. The decreases to
occupancy and equipment and data processing expenses were a result of cost
reductions related to a data processing system conversion.
Income Tax Expense. Income taxes decreased by $269,000 to $534,000 for the three
month period ended September 30, 1998, from $803,000 for the three months ended
September 30, 1997. The primary reason for this decrease was the decrease in net
income before taxes to $1.4 million for the three months ended September 30,
1998, from $2.2 million for the three months ended September 30, 1997.
Income taxes decreased by $690,000 to $1.7 million for the nine month period
ended September 30, 1998, from $2.4 million for the nine months ended September
30, 1997. The primary reason for this decrease was the decrease in net income
before taxes to $4.5 million for the nine months ended September 30, 1998, from
$6.2 million for the nine months ended September 30, 1997.
16
<PAGE>
Liquidity and Capital Resources
Under current Office of Thrift Supervision (OTS) regulations, the Savings Bank
must have core capital equal to 4% of total assets and risk-based capital equal
to 8% of risk-weighted assets.
On September 30, 1998, the Savings Bank was in compliance with its two
regulatory capital requirements as follows:
Amount Percent
------ -------
(dollars in thousands)
Core capital $44,491 6.4%
Core capital requirement 27,693 4.0
------- ---
Excess over requirement $16,798 2.4%
======= ===
Risk based capital $46,568 18.5%
Risk based capital requirement 20,092 8.0
------- ---
Excess over requirement $26,476 10.5%
======= ====
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 from
the Federal Home Loan Bank and other borrowings and scheduled amortization and
prepayment of loan and mortgage-backed securities principal. During the past
several years, the Savings Bank has used such funds primarily to fund maturing
time deposits, pay savings withdrawals, fund lending commitments, purchase
mortgage-backed securities and other investments, and increase liquidity. The
Savings Bank is currently able to fund its operations internally but has, when
deemed prudent, borrowed funds from the Federal Home Loan Bank of Pittsburgh. As
of September 30, 1998, such borrowed funds total $183.4 million. Loan payments,
maturing investments and mortgage-backed security prepayments are greatly
influenced by general interest rates, economic conditions and competition.
The Savings Bank is required under federal regulations to maintain certain
specified levels of "liquid investments", which include certain United States
government obligations and other approved investments. Current regulations
require the Savings Bank to maintain liquid assets of not less than 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 25.37% and 22.7% at
September 30, 1998 and 1997, respectively.
The amount of certificate accounts, which are scheduled to mature during the
twelve months ending September 30, 1999, is approximately $153.6 million. To the
extent that these deposits do not remain at the Savings Bank upon maturity, the
Savings Bank believes that it can replace these funds with deposits, excess
liquidity, FHLB advances or outside borrowings. It has been the Savings Bank's
experience that a substantial portion of such maturing deposits remain at the
Savings Bank.
At September 30, 1998, the Savings Bank had outstanding commitments to originate
loans of $19.3 million and to purchase investment securities of $13.1 million.
Funds required to fill these commitments are derived primarily from current
excess liquidity or loan and security repayments. At September 30, 1998, the
Savings Bank had no outstanding commitments to sell loans.
17
<PAGE>
Year 2000
Readiness Efforts
In 1998, a comprehensive project plan ("Plan") to address the Year 2000 problem
and related issues as those relate to the Company's operations was developed,
approved by the Board of Directors and implemented. The Company's Year 2000
effort is proceeding in accordance with the written Plan. Progress reports are
provided to the Board at least monthly.
The Year 2000 problem is the result of potential problems with software
and computer systems or any equipment with computer chips that store the year
portion of the date as just two-digits. Systems using this two-digit approach
may not be able to determine whether 00 represents the year 2000 or 1900. The
problem, if not corrected, will make those systems fail altogether or, even
worse, allow them to generate incorrect calculations causing a disruption of
normal computer and related operations.
The Company's Plan is divided into four broad areas of concern: hardware,
software, service providers and customers. Year 2000 issues being addressed in
each of these areas include both information related technology and
non-information related technology. A project team that consists of key members
of the Company's technology staff, representatives of functional business units
and senior management was developed. From the assessment, the Company has
identified and prioritized those systems deemed to be mission critical or those
that have a significant impact on normal operations. Formal communications with
those providers of data processing capabilities and other external counter
parties were initiated in 1997 and 1998 to assess the Year 2000 readiness of
their products and services. Thus far, responses indicate that most of the
significant providers are currently following plans developed to address
processing of transactions beginning January 1, 2000.
Costs
The total cost to the Company of these Year 2000 compliance activities has not
been and is not anticipated to be material to its financial position or results
of operations in any given year. In total, the Company estimates that its costs,
excluding personal expenses, for Year 2000 remediation and testing of its
computer systems will amount to less than $25,000 for the twelve month period
ending December 31, 1998. At September 30, 1998, there are no material,
incomplete tasks pursuant to the Plan.
Risk Assessment
Based upon current information related to the progress of its major vendors and
service providers, management has determined that the Year 2000 issue will not
pose significant operational problems for its computer systems. The
determination is based on the ability of those vendors and service providers to
renovate, in a timely manner, the products and services on which the Company
systems rely. However, the Company can give no assurance that the systems
of these suppliers will be timely renovated.
Contingency Plan
Realizing that some disruption may occur despite its best efforts, the Company
is in the process of developing contingency plans for each critical system in
the event that one or more of those systems fail. While this is an ongoing
process, the Company expects to have the contingency plan substantially
completed by July 31, 1999.
18
<PAGE>
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 Company'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 Company's
assets currently have a longer maturity than its liabilities, the Company'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 Company's assets
and liabilities is continually monitored by management. In this regard, the
Company emphasizes the origination of shorter term or adjustable rate assets for
portfolio while originating longer term fixed rate assets for resale. At
September 30, 1998, approximately 76% of the Company's loan portfolio was
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 Company
will enter into forward commitments for the sale of these assets to ensure the
Company is not exposed to undue interest rate risk.
The Company 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 that ten years. These securities are readily
marketable and provide the Company with a cash flow stream to fund asset growth
or liability maturities.
A significant portion of the Company's assets has been funded with
certificates of deposit ("CD"), 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 Company's interest rates. The Company 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 September 30, 1998, approximately 46% of the Company's
deposits were CDs.
The Company utilizes borrowings from the Federal Home Loan Bank ("FHLB") in
managing its interest rate risk and as a tool to augment deposits in funding
asset growth. The Company may utilize these funding sources to better match its
longer term repricing assets (i.e., between one and five years). At September
30, 1998, approximately 28.5% of the Company's liabilities were FHLB borrowings.
The nature of the Company's current operations is such that it is not subject to
foreign currency exchange or commodity price risk. Additionally, neither the
Company nor the Savings Bank owns any trading assets. At September 30, 1998, the
Company did not have any hedging transactions in place such as interest rate
swaps, caps, or floors.
19
<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
Company's market value of portfolio equity ("MVPE") under alternative interest
rate environments. The MVPE is defined as the net present value of the Company's
existing assets, liabilities and off-balance sheet instruments. The calculated
estimates of change in MVPE at June 30, 1998 are as follows:
MVPE
-----------------------------------------------------------------
- ----------------------------- -------------------------- -----------------------
Change in Interest Rate Amount % Change
- ----------------------------- -------------------------- -----------------------
+400 Basis Points $51,592 -13%
- ----------------------------- -------------------------- -----------------------
+300 Basis Points $54,913 -7%
- ----------------------------- -------------------------- -----------------------
+200 Basis Points $58,067 -1%
- ----------------------------- -------------------------- -----------------------
+200 Basis Points $60,003 +2%
- ----------------------------- -------------------------- -----------------------
Flat Rate $58,838 0%
- ----------------------------- -------------------------- -----------------------
- -100 Basis Points $55,836 -5%
- ----------------------------- -------------------------- -----------------------
- -200 Basis Points $49,964 -15%
- ----------------------------- -------------------------- -----------------------
- -300 Basis Points $44,698 -24%
- ----------------------------- -------------------------- -----------------------
- -400 Basis Points $39,547 -33%
- ----------------------------- -------------------------- -----------------------
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
Company'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 Company 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 Company 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.
20
<PAGE>
TF FINANCIAL CORPORATION AND SUBSIDIARIES
PART II
ITEM 1. LEGAL PROCEEDINGS
Neither the Corporation nor the Savings Bank
was engaged in any legal proceeding of a
material nature at August 14, 1998. From time
to time, the Corporation is a party to legal
proceedings in the ordinary course of business
wherein it enforces its security interest in
loans.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TF FINANCIAL CORPORATION
/s/John R. Stranford
------------------------------------------
Date: November 20, 1998 John R. Stranford
President and CEO
(Principal Executive Officer)
/s/William C. Niemczura
------------------------------------------
Date: November 20, 1998 William C. Niemczura
Senior Vice President and
Chief Financial Officer
(Principal Financial & Accounting Officer)
22
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION DERIVED FROM THE
QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 45,983
<INT-BEARING-DEPOSITS> 2,338
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 73,903
<INVESTMENTS-CARRYING> 329,132
<INVESTMENTS-MARKET> 334,015
<LOANS> 224,986
<ALLOWANCE> 2,100
<TOTAL-ASSETS> 696,155
<DEPOSITS> 449,708
<SHORT-TERM> 35,000
<LIABILITIES-OTHER> 10,562
<LONG-TERM> 148,359
0
0
<COMMON> 529
<OTHER-SE> 51,997
<TOTAL-LIABILITIES-AND-EQUITY> 696,155
<INTEREST-LOAN> 14,064
<INTEREST-INVEST> 17,252
<INTEREST-OTHER> 1,202
<INTEREST-TOTAL> 32,518
<INTEREST-DEPOSIT> 13,103
<INTEREST-EXPENSE> 19,344
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<INCOME-PRE-EXTRAORDINARY> 4,537
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<EPS-PRIMARY> .97
<EPS-DILUTED> .88
<YIELD-ACTUAL> 2.76
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<ALLOWANCE-CLOSE> 2,077
<ALLOWANCE-DOMESTIC> 0
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<ALLOWANCE-UNALLOCATED> 2,077
</TABLE>
