SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM l0-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 June 30, 1999
-------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-------------------- -------------------
Commission file number 0-24168
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TF FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 74-2705050
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. employer identification
incorporation or organization) 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: August 13, 1999
---------------
Class Outstanding
--------------------------- ----------------
$.10 par value common stock 2,757,798 shares
<PAGE>
TF FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 1O-Q
FOR THE QUARTER ENDED JUNE 30, 1999
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 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk 17
PART II- OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
2
<PAGE>
TF FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(in thousands)
<TABLE>
<CAPTION>
Unaudited Audited Unaudited
` June 30, December 31, June 30,
1999 1998 1998
---- ---- ----
Assets
<S> <C> <C> <C>
Cash and cash equivalents $ 16,467 $ 42,703 $ 43,478
Certificates of deposit in other financial institutions 1,745 2,238 2,437
Investment securities available for sale - at fair value 22,692 9,042 37,898
Investment securities held to maturity
(fair value of $81,126, $81,094 and 80,731 80,895 61,015
$60,945, respectively)
Mortgage-backed securities available for sale - at fair value 95,273 75,285 41,723
Mortgage-backed securities held to maturity
(fair value of $176,574, 179,670 180,964 234,144
$182,560, and $235,901, respectively)
Loans receivable, net 291,363 240,841 237,407
Federal Home Loan Bank stock - at cost 12,668 9,168 8,918
Accrued interest receivable 5,114 4,558 4,463
Real estate held for investment 2,348 2,348 --
Goodwill and other intangible assets 6,972 7,389 7,823
Premises and equipment, net 8,765 9,017 8,523
Other assets 1,359 1,160 1,455
--------- --------- ---------
Total Assets $ 725,167 $ 665,608 $ 689,284
========= ========= =========
Liabilities and Stockholders' Equity
Liabilities
Deposits $ 416,925 $ 438,913 $ 448,625
Advances from the Federal Home Loan Bank 248,359 163,359 178,356
Advances from borrowers for taxes and insurance 1,304 1,204 1,721
Accrued interest payable 4,275 4,166 5,750
Other liabilities 3,088 5,306 3,194
--------- --------- ---------
Total Liabilities 673,951 612,948 637,646
--------- --------- ---------
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; 2,763,318, 2,857,932, and 2,892,522 shares
outstanding at June 30, 1999, December 31, 1998 and June 30, 1998,
net of treasury shares of 2,243,990, 2,143,319, and 2,098,551, respectively 529 529 529
Retained earnings 47,052 45,762 44,438
Additional paid-in capital 52,026 51,957 51,888
Unearned ESOP shares (2,827) (2,888) (2,943)
Shares acquired by MSBP (255) (468) (682)
Treasury stock - at cost (44,212) (42,386) (41,565)
Accumulated other comprehensive income (1,097) 154 (27)
--------- --------- ---------
Total Stockholders' Equity 51,216 52,660 51,638
--------- --------- ---------
Total Liabilities and Stockholders' Equity $ 725,167 $ 665,608 $ 689,284
========= ========= =========
</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 Three Months For Six Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Interest income
Loans $ 5,707 $ 4,605 $ 10,796 $ 9,509
Mortgage-backed securities 4,199 4,335 8,296 7,573
Investment securities 1,817 1,750 3,398 3,327
Interest bearing deposits and other 221 308 547 730
-------- -------- -------- --------
TOTAL INTEREST INCOME 11,944 10,998 23,037 21,139
-------- -------- -------- --------
Interest expense
Deposits 3,707 4,364 7,564 8,678
Borrowings 3,438 2,226 6,213 3,574
TOTAL INTEREST EXPENSE 7,145 6,590 13,777 12,252
-------- -------- -------- --------
NET INTEREST INCOME 4,799 4,408 9,260 8,887
Provision for loan losses 60 15 90 30
-------- -------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 4,739 4,393 9,170 8,857
-------- -------- -------- --------
Non-interest income
Gain (loss) on sale of real estate acquired through foreclosure (10) 25 (4) 24
Gain on sale of loans and securities -- 362 -- 436
Service fees, charges and other operating income 307 299 625 646
-------- -------- -------- --------
TOTAL NON-INTEREST INCOME 297 686 621 1,106
-------- -------- -------- --------
Non-interest expense
Compensation and benefits 1,692 1,620 3,332 3,285
Occupancy and equipment 511 484 1,005 923
Federal deposit insurance premium 65 70 133 140
Data processing 4 274 9 449
Professional fees 184 149 349 284
Amortization of goodwill and other intangible assets 209 225 418 450
Advertising 91 90 181 180
Other operating 678 541 1,227 1,117
-------- -------- -------- --------
TOTAL NON-INTEREST EXPENSE 3,434 3,453 6,654 6,828
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 1,602 1,626 3,137 3,135
Income taxes 577 637 1,128 1,153
-------- -------- -------- --------
NET INCOME $ 1,025 $ 989 $ 2,009 $ 1,982
======== ======== ======== ========
Basic earnings per share $ 0.37 $ 0.34 $ 0.72 $ 0.68
Diluted earnings per share $ 0.35 $ 0.30 $ 0.67 $ 0.61
Weighted average number of shares outstanding - Basic 2,759 2,896 2,790 2,893
Weighted average number of shares outstanding - Diluted 2,967 3,254 2,981 3,249
</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 Six Months Ended
June 30,
--------
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 2,009 $ 1,982
Adjustments to reconcile net income to
net cash provided by operating activities:
Mortgage loan servicing rights 7 9
Deferred loan origination fees (39) (91)
Premiums and discounts on investment securities, net 16 36
Premiums and discounts on mortgage-backed securities and loans, net 379 291
Amortization of goodwill and other intangible assets 417 451
Provision for loan losses and provision for losses on real estate 90 30
Depreciation of premises and equipment 456 387
Recognition of ESOP and MSBP expenses 342 411
(Gain) loss on sale of real estate acquired through foreclosure 4 (24)
(Gain) loss on sale of loans and securities -- (436)
Decrease (increase) in
Accrued interest receivable (556) (506)
Other assets (270) (337)
Increase (decrease) in
Accrued interest payable 109 3,280
Other liabilities (2,218) (1,140)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 746 4,343
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Loan origination and principal payments on loans, net 25,893 (6,142)
Purchases of loans (76,553) --
Proceeds from loan sales -- 19,496
Maturities (purchases) of certificates of deposit
in other financial institutions, net 493 300
Purchases of investment securities available for sale (18,059) (137,644)
Purchases of investment securities held to maturity (144,494) (23,030)
Purchases of mortgage-backed securities available for sale (34,541) (16,244)
Purchase of mortgage-backed securities held to maturity (35,412) (114,358)
Proceeds from sale of investment securities available for sale -- 7,445
Proceeds from sale of mortgage backed securities available for sale -- 5,683
Proceeds from maturities of investment securities held to maturity 147,447 23,989
Proceeds from maturities of investment securities available for sale 2,000 115,472
Principal repayments from mortgage-backed securities held to maturity 36,542 24,192
Principal repayments from mortgage-backed securities available for sale 12,779 5,627
Purchases and redemption of Federal Home Loan Bank Stock, net (3,500) (4,000)
Proceeds from sales of real estate acquired through foreclosure 61 114
Purchase of premises and equipment (204) (1,021)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (87,548) (100,121)
-------- --------
</TABLE>
See notes to consolidated financial statements
5
<PAGE>
TF FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(in thousands)
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
--------
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits (21,988) (1,804)
Advances from Federal Home Loan Bank , net 85,000 89,997
Net (decrease) increase in advances from borrowers for taxes and insurance 100 130
Exercise of stock options 97 --
Purchase of treasury stock (1,970) --
Common stock cash dividend (673) (692)
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 60,566 87,631
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (26,236) (8,147)
Cash and cash equivalents at beginning of period 42,703 51,625
-------- --------
Cash and cash equivalents at end of period $ 16,467 $ 43,478
======== ========
Supplemental disclosure of cash flow information
Cash paid for
Interest on deposits and advances $ 13,669 $ 8,972
Income taxes $ 911 $ 1,692
Non-cash transactions
Transfers from loans to real estate acquired through foreclosure -- $ 61
</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 June 30, 1999, December 31,
1998, June 30, 1998 and for the three and six month periods ended June 30,
1999 and 1998 include the accounts of TF Financial Corporation (the
"Company") and its wholly owned subsidiaries Third Federal Savings Bank
(the "Savings Bank"), TF Investments Corporation, Penns Trail Development
Corporation and Teragon Financial Corporation. The Company'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 all of the disclosures or footnotes required by generally accepted
accounting principles. In the opinion of management, all adjustments,
consisting of normal recurring accruals, necessary for fair presentation of
the consolidated financial statements have been included. The results of
operations for the periods ended June 30, 1999 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 Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1998.
NOTE 3 - CONTINGENCIES
The Company, from time to time, is a party to routine litigation that
arises in the normal course of business. In the opinion of management, the
resolution of this litigation, if any, would not have a material adverse
effect on the Company's consolidated financial condition or results of
operations.
NOTE 4 - OTHER COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income". The Company's other comprehensive income consists of
net unrealized gains on investment securities available for sale. Total
comprehensive income for the three-month periods ended June 30, 1999 and
1998 was $43,000 and $766,000, net of applicable income tax (benefit) of
($51,000) and $494,000, respectively.
Total comprehensive income for the six-month periods ended June 30, 1999
and 1998 was $758,000 and $1,786,000, net of applicable income tax of
$329,000 and $1,028,000, respectively.
7
<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 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 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 Company's total assets at June 30, 1999 and December 31, 1998 totaled $725.2
million and $665.6 million, respectively, an increase of $59.6 million, or 9.0%,
during the six month period. This increase was primarily the result of a $50.5
million increase in loans receivable, an $13.5 million increase in investment
securities, a $18.7 million increase in mortgage-backed securities, and a $3.5
million increase in Federal Home Loan Bank stock. These increases were partially
offset by the $26.2 million decrease in cash and cash equivalents. The increase
in total assets was primarily funded by the $85.0 million increase in advances
from the Federal Home Loan Bank.
The net increase in loans receivable of $50.5 million, or 20.0%, from $240.8
million at December 31, 1998 to $291.4 million at June 30, 1999 was primarily
the result of the purchase of $ 71.9 million of single-family residential
mortgage loans and the purchase of $4.5 million of commercial mortgage loans,
partially offset by loan repayments. While it is management's intent to
originate the majority of its portfolio loans, similar loan products will be
purchased in the secondary markets during periods when in-house originating
capacity is being added or when opportunities to originate in local markets are
not sufficient to satisfy portfolio loan capacity.
8
<PAGE>
Investment securities at June 30, 1999 totaled $103.4 million, which represents
an increase of $13.5 million or 15.0% as compared to $89.9 million at December
31, 1998. Mortgage-backed securities aggregated $274.9 million at June 30, 1999
compared to $256.2 million at December 31, 1998. These increases in securities
balances are due to the reinvestment of cash and cash flow caused by repayments
of mortgage loans and mortgage securities, and the reinvestment of maturing
investment securities.
The increase in Federal Home Loan Bank stock balances was the result of the
purchase of $3.5 million of stock required to support the increase in
outstanding advances from the Federal Home Loan Bank.
Total liabilities increased by $61.0 million during the first half of 1999
primarily as a result of the $85.0 million, or 52.0%, increase in advances from
the Federal Home Loan Bank. This increase was offset by a $22.0 million, or
5.0%, decrease in total deposits balances. The increase in advances from the
Federal Home Loan Bank funded the purchase of loans and securities, and the
decrease in deposit balances.
Total consolidated stockholders' equity of the Company decreased by $1.4 million
or 2.7%, to $51.2 million, or 7.1% of total assets at June 30, 1999, from $52.7
million or 8.0 % of total assets at December 31, 1998. The decrease resulted
from the repurchase of 107,937 shares of common stock at a cost of approximately
$1.8 million, a decrease of $1.3 million in accumulated other comprehensive
income, partially offset by a net increase to retained earnings of $1.3 million
for the six month period. During the first quarter of 1999 management announced
the completion of its then current share repurchase program, and that the
Company's board of directors had authorized the purchase of up to 152,052
additional shares of the Company's stock in the open market during the
subsequent twelve months.
Asset Quality
Management of the Company believes that there has been no material adverse
change in the Company's asset quality during the six-month period ended June 30,
1999.
The following table sets forth information regarding the Company's asset quality
(dollars in thousands):
<TABLE>
<CAPTION>
June 30, December 31, June 30,
-------- ------------ --------
1999 1998 1998
---- ---- ----
<S> <C> <C> <C>
Non-performing loans $ 2,199 $ 1,594 $ 1,746
Ratio of non-performing loans to gross loans 0.75% 0.65% 0.73%
Ratio of non-performing loans to total assets 0.30% 0.24% 0.25%
Foreclosed property 243 308 322
Foreclosed property to total assets 0.03% 0.05% 0.05%
Ratio of total non-performing assets to total assets 0.34% 0.28% 0.30%
</TABLE>
Management maintains an allowance for loan losses at levels that are believed to
be adequate; however, there can be no assurances that further additions will not
be necessary or that losses inherent in the existing loan portfolios will not
exceed the allowance. The following table sets forth the activity in the
allowance for loan losses during the periods indicated: (in thousands)
1999 1998
---- ----
Beginning balance, January 1, $ 1,909 $ 2,029
Provision 90 30
Charge-off's, net 83 (4)
------- -------
Ending balance, June 30, $ 1,916 $ 2,063
======= =======
9
<PAGE>
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1999
Net Income. The Company recorded net income of $1,025,000, or $0.35 per diluted
share, for the three months ended June 30, 1999 as compared to $989,000, or
$0.30 per diluted share, for the three months ended June 30, 1998.
Average Balance Sheet
The following table sets forth information relating to the Company'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 average balance of interest-earning assets or
interest-bearing liabilities, respectively for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------
1999 1998
---- ----
Average Average Average Average
Balance Interest Yld/Cost Balance Interest Yld/Cost
------- -------- -------- ------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Loans receivable (4) .................... $300,809 $ 5,707 7.59% $232,336 $ 4,605 7.93%
Mortgage-backed securities .............. 264,431 4,199 6.35% 269,285 4,335 6.44%
Investment securities ................... 116,534 1,817 6.24% 116,558 1,750 6.01%
Other interest-earning assets(1) ........ 21,783 221 4.06% 29,984 308 4.11%
-------- -------- -------- --------
Total interest-earning assets ......... 703,557 11,944 6.79% 648,163 10,998 6.79%
-------- --------
Non interest-earning assets ................. 34,760 23,002
-------- --------
Total assets .......................... 738,317 671,165
======= =======
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Savings deposits ........................ 423,038 3,707 3.51% 447,435 4,364 3.90%
Advances from the FHLB .................. 250,027 3,438 5.50% 161,691 2,226 5.51%
-------- -------- -------- --------
Total interest-bearing liabilities .... 673,065 7,145 4.25% 609,126 6,590 4.33%
-------- -------- -------- --------
Non interest-bearing liabilities ............ 13,725 10,615
Total liabilities ..................... 686,790 619,741
Stockholders' equity ........................ 51,527 51,424
-------- --------
Total liabilities and stockholders' equity $738,317 $671,165
======== ========
Net interest income ......................... $ 4,799 $ 4,408
======== ========
Interest rate spread (2) .................... 2.54% 2.46%
Net yield on interest-earning assets (3) .... 2.73% 2.72%
Ratio of average interest-earning assets to
average interest bearing liabilities ........ 105% 106%
</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.
10
<PAGE>
Rate/Volume Analysis
The following table presents, for the periods indicated, the change in interest
income and interest expense (in thousands) attributed to (I) changes in volume
(changes in the weighted average balance of the total interest earning asset and
interest bearing liability portfolios multiplied by the prior year rate), and
(ii) changes in rate (changes in rate multiplied by prior year volume). Changes
attributable to the combined impact of volume and rate have been allocated
proportionately based on the absolute value of changes due to volume and changes
due to rate.
Three Months Ended
June 30,
1999 vs. 1998
-------------------------------
Increase (Decrease)
-------------------------------
Due to
-------------------------------
Volume Rate Net
-------------------------------
Interest income:
Loans receivable, net $ 2,341 ($1,239) $ 1,102
Mortgage-backed securities (77) (59) (136)
Investment securities (3) 70 67
Other interest-earning assets (83) (4) (87)
------------------------------
Total interest-earning assets 2,179 (1,233) 946
=============================
Interest expense
Interest-bearing liabilities:
Savings deposits (232) (425) (657)
Advances from the FHLB 1,240 (28) 1,212
Total interest-bearing liabilities 1,008 (437) 555
------------------------------
Net change in net interest income $ 1,170 ($ 779) $ 391
=============================
Total Interest Income. Total interest income increased by $946 thousand, or
8.6%, to $11.9 million for the three months ended June 30, 1999 compared with
the second quarter of 1998 primarily because of increases in the average balance
of loans receivable. The increase in the interest on loans receivable is
primarily attributable to the purchase of $76.4 million of mortgage loans in the
first quarter of 1999. The increased interest income attributable to the
purchase of mortgage loans was partially offset by the decrease to the average
yield on loans receivable resulting from the early repayment during the period
of higher yielding mortgage loans. In addition, the yield on the mortgage loans
purchased was less than the average yield on the portfolio due to the interest
rate environment that existed at the time of the purchase.
Total Interest Expense. Total interest expense increased to $7.1 million for the
three-month period ended June 30, 1999 from $6.6 million for the same period in
1998 primarily due to increased advances from the Federal Home Loan Bank which
were used to fund asset growth and deposit outflows. The average rate paid on
Federal Home Loan Bank advances decreased due to the effect of lower rates on
new advances, and the Company's use of lower cost convertible advances for a
portion of its funding needs.
The average balance of savings deposits decreased $24.4 million, or 5.5%, from
$447.4 million for the three month period ended June 30, 1998 to $423.0 million
for the three-month period ended June 30, 1999. The average rate paid on savings
deposits decreased from 3.90% for the three month period ended June 30, 1998 to
3.51% for the three month period ended June 30, 1999. The decrease in the
average balances and the average
11
<PAGE>
rate paid on savings deposits were the consequences of decreased market interest
rates and management's efforts to price deposits at lower rates.
Non-interest income. Total non-interest income was $297 thousand for the
three-month period ended June 30, 1999 compared with $686 thousand for the same
period in 1998. The decrease is attributable to a $362 thousand decrease in the
gain on sale of loans and investments.
Non-interest expense. Total non-interest expense decreased by $19 thousand to
$3.4 million for the three months ended June 30, 1999 compared to the same
period in 1998. Data processing decreased by $270 thousand as a result of
conversion to an in-house data processing system, which occurred during the
second quarter of 1998. Professional fees increased by $35 thousand as a result
of consulting fees associated with Year 2000 compliance remediation and testing.
In addition, compensation and benefits, occupancy and equipment, and other
expenses increased by a combined $236 thousand, also due to the conversion to an
in-house data processing system.
12
<PAGE>
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999
Net Income. The Company recorded net income of $2,009,000 or $0.67 per diluted
share for the six months ended June 30, 1999 as compared to $1,982,000 or $0.61
per diluted share for the six months ended June 30, 1998.
Average Balance Sheet
The following table sets forth information relating to the Company'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 average balance of interest-earning assets or
interest-bearing liabilities, respectively for the periods indicated.
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1999 1998
---- ----
Average Average Average Average
Balance Interest Yld/Cost Balance Interest Yld/Cost
------- -------- -------- ------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Loans receivable (4) ....................... $282,033 $ 10,796 7.66% $238,592 $ 9,509 7.97%
Mortgage-backed securities ................. 263,025 8,296 6.31% 236,119 7,573 6.41%
Investment securities ...................... 110,459 3,398 6.15% 110,302 3,327 6.03%
Other interest-earning assets(1) ........... 25,416 547 4.30% 33,014 730 4.42%
-------- -------- -------- --------
Total interest-earning assets ............ 680,933 23,037 6.77% 618,027 21,139 4.68%
-------- --------
Non interest-earning assets .................. 33,682 22,266 6.84%
-------- --------
Total assets ............................. 714,615 609,420
======== ========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Savings deposits ......................... 427,373 7,564 3.54% 449,193 8,678 3.86%
Advances from the FHLB ................... 224,630 6,213 5.53% 130,025 3,574 5.50%
-------- -------- -------- --------
Total interest-bearing liabilities ..... 652,003 13,777 4.23% 579,218 12,252 4.23%
-------- -------- -------- --------
Non interest-bearing liabilities ............. 10,742 10,034
Total liabilities ...................... 662,745 589,252
Stockholders' equity ......................... 51,870 51,041
-------- --------
Total liabilities and stockholders' equity 714,615 640,293
======== ========
Net interest income .......................... $ 4,461 $ 8,887
======== ========
Interest rate spread (2) ..................... 2.54% 2.61%
Net yield on interest-earning assets (3) ..... 2.72% 2.88%
Ratio of average interest-earning assets to
Average interest bearing liabilities ......... 104% 107%
</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.
13
<PAGE>
Rate/Volume Analysis
The following table presents, for the periods indicated, the change in interest
income and interest expense (in thousands) attributed to (I) changes in volume
(changes in the weighted average balance of the total interest earning asset and
interest bearing liability portfolios multiplied by the prior year rate), and
(ii) changes in rate (changes in rate multiplied by prior year volume). Changes
attributable to the combined impact of volume and rate have been allocated
proportionately based on the absolute value of changes due to volume and changes
due to rate.
Six Months Ended
June 30,
1999 vs. 1998
-----------------------------
Increase (Decrease)
Due to
-----------------------------
Volume Rate Net
-----------------------------
Interest income:
Loans receivable, net $ 2,279 ($ 992) $ 1,287
Mortgage-backed securities 1,051 (328) 723
Investment securities 5 66 71
Other interest-earning assets (164) (19) (183)
-----------------------------
Total interest-earning assets 3,172 (1,274) 1,898
=============================
Interest expense
Interest-bearing liabilities:
Savings deposits (412) (702) (1,114)
Advances from the FHLB 2,619 20 2,639)
Total interest-bearing liabilities 2,207 (682) 1,525
-----------------------------
Net change in net interest income $ 964 ($ 591) $ 373
=============================
Total Interest Income. Total interest income increased by $1.9 million, or 9.0%,
to $23.0 million for the six months ended June 30, 1999 compared with the first
six months of 1998 primarily because of increases in the average balance of
loans receivable and mortgage-backed securities. The increase in the average
balances of loans receivable is primarily attributable to the purchase of $76.4
million of mortgage loans in the first quarter of 1999. The increased interest
income attributable to the purchase of mortgage loans was partially offset by
the decrease to the average yield on loans receivable resulting from the early
repayment during the period of higher yielding mortgage loans. In addition, the
yield on the mortgage loans purchased was less than the average yield on the
portfolio due to the interest rate environment that existed at the time of the
purchase.
Total Interest Expense. Total interest expense increased to $13.8 million for
the six-month period ended June 30, 1999 from $12.3 million for the same period
in 1998 primarily due to increased advances from the Federal Home Loan Bank
which were used to fund asset growth and deposit outflows.
The average balance of savings deposits decreased $21.8 million, or 4.9%, from
$449.2 million for the six month period ended June 30, 1998 to $427.4 million
for the six-month period ended June 30, 1999. The average rate paid on savings
deposits decreased from 3.86% for the six month period ended June 30, 1998 to
3.54% for the six month period ended June 30, 1999. The decrease in the average
balances and the average rate paid on savings deposits resulted from decreased
market interest rates and management's efforts to price deposits at lower rates.
14
<PAGE>
Non-interest income. Total non-interest income was $621 thousand for the
six-month period ended June 30, 1999 compared with $1.1 million for the same
period in 1998. The decrease of $485 thousand is primarily attributable to the
decrease in the gain on sale of loans and securities
Non-interest expense. Total non-interest expense decreased $174 thousand to $6.7
million for the six months ended June 30, 1999 compared to the same period in
1998. Data processing decreased by $440 thousand as a result of conversion to an
in-house data processing system, which occurred during the second quarter of
1998. Professional fees increased by $64 thousand as a result of consulting fees
associated with Year 2000 compliance remediation and testing. In addition,
compensation and benefits, occupancy and equipment, and other expenses increased
by a combined $239 thousand, also due to the conversion to an in-house data
processing system.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
The Company'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. There has been no material adverse change during six-month period ended
June 30, 1999 in the ability of the Company and its subsidiaries to fund their
operations.
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's regulatory liquidity was 22.6% and 17.6% at June 30, 1999 and
1998, respectively.
The amount of certificate accounts that are scheduled to mature during the
twelve-month period ending June 30, 2000 is approximately $110.8 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, broker
deposits, excess liquidity, or advances from the Federal Home Loan Bank. It has
been the Savings Bank's experience that a substantial portion of such maturing
deposits remains at the Savings Bank.
At June 30, 1999, the Savings Bank had outstanding commitments to originate
loans of $3.7 million, to purchase investment securities of $2.0 million and to
fund undisbursed balances of closed loans and lines of credit of $20.1 million.
Funds required to fill these commitments will be derived from current excess
liquidity, loan and security repayments, deposit growth, or borrowings from the
Federal Home Loan Bank.
Capital Requirements
The Savings Bank is in compliance with all of its capital requirements as of
June 30, 1999.
15
<PAGE>
YEAR 2000
Readiness Efforts
The following discussion of the implications of the Year 2000 problem for the
Company contains numerous forward- looking statements based on inherently
uncertain information. The cost of the project is based on management's best
estimates, which are derived utilizing a number of assumptions regarding future
events including the continued availability of internal and external resources,
third party modifications and other factors. However, there can be no guarantee
that these events will occur as planned and actual results could differ.
Moreover, although management believes it will be able to make the necessary
systems modifications in advance, there can be no guarantee that failure to
modify the systems would not have a material adverse effect on the Company.
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 issue is the result of potential problems with software and
computer systems or any equipment with computer chips that store the year
portion of the date as just two-digits. Systems using this two-digit approach
may not be able to determine whether 00 represents the year 2000 or 1900. The
problem, if not corrected, could make those systems fail altogether or possibly
cause them to generate incorrect calculations resulting in 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 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 service providers
were initiated in 1997 and 1998 to assess the Year 2000 readiness of their
products and services.
Thus far, responses indicate that the significant providers are currently
following plans developed to address processing of transactions beginning
January 1, 2000. The Company has contacted all significant commercial borrowers
to ensure that each one is following a plan intended to mitigate Year 2000 risks
to their business. In addition, the Company has used statement inserts and
direct mailings in order to make its depositors aware of Year 2000 issues. The
Company contacted all non-information technology suppliers (i. e. utility
systems, telephone systems, etc.) regarding their Year 2000 state of readiness.
These parties have indicated that they have established Year 2000 plans and are
in various stages of remediation and testing. We are unable to test the Year
2000 readiness of our significant suppliers of utilities. We are relying on the
utility companies' internal testing and representations in order for the Company
to conclude that they will be able to deliver the resources necessary for the
Company to operate its systems. The Company is unable to determine what recourse
it will have should these utilities fail to successfully resolve their Year 2000
issues.
16
<PAGE>
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 personnel expenses, for Year 2000 remediation and testing of its
computer systems will amount to less than $90 thousand for the twelve month
period ending December 31, 1999. Approximately $10,000 of these expenses had not
been incurred at June 30, 1999.
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 vendors and service providers to
renovate, in a timely manner, the products and services on which the Company's
systems rely. To date, management has received assurances by the majority of its
vendors and service providers that they will be Year 2000 compliant. While most
are on schedule, the Company can give no assurance that the systems of these
suppliers will be timely renovated. The Company is exposed to operational
disruptions from external entities that have direct or indirect business
relationships with the Company, such as telecommunications service providers,
customers, vendors, payment systems providers and others. Despite the best
efforts of management to address these issues, the vast number of external
business relationships makes it impossible to assure that a failure to achieve
compliance by one or more of these entities would not have a material adverse
impact on the operations of the Company.
Contingency Plans
Realizing that some disruption may occur despite its best efforts, the Company
has developed 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's
contingency plan is substantially complete. The Company's contingency plan
provides for the replacement of a service provider, or substitution of
alternative procedures in the case of a process, as soon as it becomes apparent
that any service provider will fail to perform or that any process will fail.
This phase of the plan will be tested and validated during the third quarter of
1999.
In addition, the Savings Bank has developed a currency availability plan in
order to address the anticipated but unknown amount of additional currency that
could be needed to fund cash withdrawals requested by customers as the end of
1999 approaches. The need for additional currency poses significant risks to the
Company, its employees, and customers. There can be no assurances that these
risks can be entirely mitigated or that the Company will not experience
significant adverse consequences resulting from the need to have available large
amounts of currency during the periods immediately preceding and following
January 1, 2000.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Asset and Liability Management
The Company's market risk exposure is predominately caused by interest rate
risk, which is defined as the sensitivity of the Company's current and future
earnings, the values of its assets and liabilities, and the value of its capital
to changes in the level of market interest rates. Management of the Company
believes that there has not been a material adverse change in market risk during
the six months ending June 30, 1999.
17
<PAGE>
TF FINANCIAL CORPORATION AND SUBSIDIARIES
PART II
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
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
The 1999 Annual Meeting of Stockholders (the "Meeting") of the Company
was held on April 28, 1999. There were outstanding and entitled to
vote at the Meeting 3,041,010 shares of Common Stock of the Company.
There were present at the meeting or by proxy the holders of 2,815,387
shares of Common Stock representing 92.58% of the total eligible votes
to be cast. Proposal 1 was to elect John R. Stranford as director of
the Company. Proposal 2 was a shareholder proposal to repeal or amend
various provisions of the Company's Certificate of Incorporation and
by-laws. Proposal 3 was a shareholder proposal recommending that the
Board of Directors take certain action to initiate a possible sale of
the Company. The results of the voting at the Meeting are as follows
(percentages in terms of votes cast):
Proposal 1 FOR: 2,610,220 PERCENT FOR: 92.7%
Proposal 2 FOR: 452,739 PERCENT FOR: 21.4%
AGAINST: 1,636,953 PERCENT AGAINST: 77.8%
ABSTAIN: 16,510 PERCENT ABSTAIN: 0.8%
Proposal 3 FOR: 302,492 PERCENT FOR: 14.4%
AGAINST: 1,774,032 PERCENT AGAINST: 84.2%
ABSTAIN: 29,678 PERCENT ABSTAIN: 1.4%
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27-Financial Data Schedule(In Electronic Filing Only)
(b) Reports on Form 8-K
On April 30, 1999, a Current Report on Form 8-K was filed with the SEC to report
the results of voting at the Company's 1999 Annual Meeting of Stockholders and
the appointment of a new Senior Vice President and Chief Financial Officer for
the Company.
18
<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: August 13, 1999 John R. Stranford
President and CEO
(Principal Executive Officer)
/s/ Dennis R. Stewart
------------------------------------------
Date: August 13, 1999 Dennis R. Stewart
Senior Vice President and
Chief Financial Officer
(Principal Financial & Accounting Officer)
19
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 16,467
<INT-BEARING-DEPOSITS> 1,745
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 117,965
<INVESTMENTS-CARRYING> 378,366
<INVESTMENTS-MARKET> 375,665
<LOANS> 289,447
<ALLOWANCE> 1,916
<TOTAL-ASSETS> 725,167
<DEPOSITS> 416,925
<SHORT-TERM> 30,000
<LIABILITIES-OTHER> 8,667
<LONG-TERM> 218,359
0
0
<COMMON> 529
<OTHER-SE> 50,687
<TOTAL-LIABILITIES-AND-EQUITY> 725,167
<INTEREST-LOAN> 10,796
<INTEREST-INVEST> 11,694
<INTEREST-OTHER> 547
<INTEREST-TOTAL> 20,037
<INTEREST-DEPOSIT> 7,564
<INTEREST-EXPENSE> 13,777
<INTEREST-INCOME-NET> 9,260
<LOAN-LOSSES> 90
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 6,654
<INCOME-PRETAX> 3,137
<INCOME-PRE-EXTRAORDINARY> 3,137
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,009
<EPS-BASIC> .72
<EPS-DILUTED> .67
<YIELD-ACTUAL> 2.72
<LOANS-NON> 0
<LOANS-PAST> 2,199
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,909
<CHARGE-OFFS> 83
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,916
<ALLOWANCE-DOMESTIC> 1,916
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,916
</TABLE>
