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 September 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 incorporation or organization) (I.R.S.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 5, 1999
----------------
Class Outstanding
---------------------------- ----------------
$.10 par value common 2,760,734 shares
<PAGE>
TF FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 1O-Q
FOR THE QUARTER ENDED SEPTEMBER 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
September 30, December 31, September 30,
1999 1998 1998
---- ---- ----
<S> <C> <C> <C>
Assets
Cash and cash equivalents $16,422 $42,703 $45,983
Certificates of deposit in other financial institutions 1,347 2,238 2,338
Investment securities available for sale - at fair value 21,088 9,042 36,225
Investment securities held to maturity (fair value of $65,267, $81,094 and 66,129 80,895 90,740
$91,164, respectively)
Mortgage-backed securities available for sale - at fair value 119,145 75,285 37,678
Mortgage-backed securities held to maturity (fair value of $164,585, 168,319 180,964 229,224
$182,560, and $233,683, respectively)
Loans receivable, net 285,665 240,841 222,886
Federal Home Loan Bank stock B at cost 12,668 9,168 9,168
Accrued interest receivable 4,572 4,558 4,323
Real estate held for investment 2,348 2,348 ---
Goodwill and other intangible assets 6,763 7,389 7,598
Premises and equipment, net 8,828 9,017 8,639
Other assets 1,392 1,160 1,353
----- ----- -----
Total Assets $714,686 $665,608 $696,155
======== ========= ========
Liabilities and Stockholders' Equity
Liabilities
Deposits $406,612 $438,913 $449,708
Advances from the Federal Home Loan Bank 248,359 163,359 183,359
Advances from borrowers for taxes and insurance 755 1,204 691
Accrued interest payable 4,867 4,166 6,064
Other liabilities 2,825 5,306 3,807
----- ----- -----
Total Liabilities 663,418 612,948 643,629
------- ------- -------
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; 2,759,721, 2,857,932, and 2,901,812 shares
outstanding at September 30, 1999, December 31, 1998 and September 30, 1998,
net of treasury shares of 2,250.626, 2,143,319, and 2,098,418, respectively. 529 529 529
Retained earnings 47,763 45,762 44,958
Additional paid-in capital 52,055 51,957 51,942
Unearned ESOP shares (2,796) (2,888) (2,898)
Shares acquired by MSBP (148) (468) (575)
Treasury stock - at cost (44,323) (42,386) (41,563)
Accumulated other comprehensive income (loss) (1,812) 154 133
------- --- ---
Total Stockholders' Equity 51,268 52,660 52,526
------ ------ ------
Total Liabilities and Stockholders' Equity $714,686 $665,608 $696,155
======== ========= ========
</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 Nine Months
Ended September 30, Ended September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income
Loans $5,481 $4,555 $16,277 $14,064
Mortgage-backed securities 4,687 4,524 12,983 12,097
Investment securities 1,642 1,828 5,040 5,155
Interest bearing deposits and other 72 472 619 1,202
-- --- --- -----
TOTAL INTEREST INCOME 11,882 11,379 34,919 32,518
------ ------ ------ ------
Interest expense
Deposits 3,571 4,425 11,135 13,103
Borrowings 3,457 2,667 9,670 6,241
TOTAL INTEREST EXPENSE 7,028 7,092 20,805 19,344
----- ----- ------ ------
NET INTEREST INCOME 4,854 4,287 14,114 13,174
Provision for loan losses 90 15 180 45
-- -- --- --
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 4,764 4,272 13,934 13,129
----- ----- ------ ------
Non-interest income
Gain on sale of real estate acquired through foreclosure 8 11 4 35
Gain (loss) on sale of loans and securities --- (1) --- 435
Service fees, charges and other operating income 290 328 915 974
--- --- --- ---
TOTAL NON-INTEREST INCOME 298 338 919 1,444
--- --- --- -----
Non-interest expense
Compensation and benefits 1,792 1,597 5,124 4,882
Occupancy and equipment 505 500 1,510 1,423
Federal deposit insurance premium 62 69 195 209
Data processing 5 4 14 453
Professional fees 198 179 547 463
Amortization of goodwill and other intangible assets 209 225 627 675
Advertising 91 91 272 271
Other operating 594 543 1,821 1,613
--- --- ----- -----
TOTAL NON-INTEREST EXPENSE 3,456 3,208 10,110 10,036
----- ----- ------ ------
INCOME BEFORE INCOME TAXES 1,606 1,402 4,743 4,537
Income taxes 551 534 1,679 1,687
--- --- ----- -----
NET INCOME $1,055 $868 $3,064 $2,850
====== ==== ====== ======
Basic earnings per share $0.38 $0.30 $1.10 $0.98
Diluted earnings per share $0.36 $0.27 $1.03 $0.88
Weighted average number of shares outstanding B Basic 2,760 2,899 2,780 2,894
Weighted average number of shares outstanding B Diluted 2,933 3,186 2,965 3,226
See notes to consolidated financial statements
</TABLE>
4
<PAGE>
TF FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $3,064 $2,850
Adjustments to reconcile net income to net cash provided by operating
activities:
Mortgage loan servicing rights 10 13
Deferred loan origination fees (51) (91)
Premiums and discounts on investment securities, net 8 66
Premiums and discounts on mortgage-backed securities and loans, net 526 431
Amortization of goodwill and other intangible assets 626 677
Provision for loan losses and provision for losses on real estate 180 45
Depreciation of premises and equipment 674 613
Recognition of ESOP and MSBP expenses 509 617
Gain on sale of real estate acquired through foreclosure (5) (35)
Gain on sale of loans and securities --- (442)
Increase in:
Accrued interest receivable (14) (366)
Other assets (310) (280)
Increase (decrease) in:
Accrued interest payable 701 3,594
Other liabilities (2,481) (172)
------- -----
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,437 7,520
----- -----
CASH FLOWS FROM INVESTING ACTIVITIES
Loan origination and principal payments on loans, net 33,757 22,391
Purchases of loans (78,993) (14,144)
Proceeds from loan sales --- 19,496
Maturities of certificates of deposit in other financial institutions, net 891 399
Purchases of investment securities available for sale (20,732) (206,158)
Purchases of investment securities held to maturity (147,742) (73,617)
Purchases of mortgage-backed securities available for sale (63,482) (16,244)
Purchase of mortgage-backed securities held to maturity (35,412) (126,185)
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 167,937 34,661
Proceeds from maturities of investment securities available for sale 4,000 195,567
Principal repayments from mortgage-backed securities held to maturity 47,825 40,889
Principal repayments from mortgage-backed securities available for sale 16,773 9,729
Purchases and redemption of Federal Home Loan Bank Stock, net (3,500) (4,250)
Proceeds from sales of real estate acquired through foreclosure 195 199
Purchase of premises and equipment (485) (1,363)
----- -------
NET CASH USED IN INVESTING ACTIVITIES (78,968) (105,502)
-------- ---------
See notes to consolidated financial statements
</TABLE>
5
<PAGE>
TF FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(in thousands)
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in deposits (32,301) (721)
Advances from Federal Home Loan Bank , net 85,000 95,000
Net decrease in advances from borrowers for taxes and insurance (449) (900)
Exercise of stock options 119 ---
Purchase of treasury stock (2,117) ---
Common stock cash dividend (1,002) (1,039)
------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES 49,250 92,340
------ ------
NET DECREASE IN CASH AND CASH EQUIVALENTS (26,281) (5,643)
Cash and cash equivalents at beginning of period 42,703 51,625
------ ------
Cash and cash equivalents at end of period $16,422 $45,983
======= =======
Supplemental disclosure of cash flow information
Cash paid for
Interest on deposits and advances $20,207 $15,750
Income taxes $1,011 $1,709
Non-cash transactions
Transfers from loans to real estate acquired through foreclosure $122 $159
See notes to consolidated financial statements
</TABLE>
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, 1999,
December 31, 1998, September 30, 1998 and for the three and nine-month
periods ended September 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 September 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 (LOSS)
On January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income". The Company=s other comprehensive income
consists of net unrealized gains (losses) on investment securities
available for sale. Total comprehensive income for the three-month
periods ended September 30, 1999 and 1998 was $340,000 and $1,028,000,
net of applicable income tax of $131,000 and $628,000, respectively.
Total comprehensive income for the nine-month periods ended September
30, 1999 and 1998 was $1,098,000 and $2,814,000, net of applicable
income tax of $524,000 and $1,666,000, 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 September 30, 1999 and December 31, 1998 totaled
$714.7 million and $665.6 million, respectively, an increase of $49.1 million,
or 7.4%, during the nine-month period. This increase was primarily the result of
a $44.8 million increase in loans receivable, a $28.5 million increase in
investment and mortgage-backed securities, and a $3.5 million increase in
Federal Home Loan Bank stock. These increases were partially offset by the $26.3
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 $44.9 million, or 18.6%, from $240.8
million at December 31, 1998 to $285.7 million at September 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 opportunities to
originate in local markets are not sufficient to satisfy portfolio loan
capacity.
8
<PAGE>
Investment securities at September 30, 1999 totaled $87.2 million compared to
$89.9 million at December 31, 1998. Mortgage-backed securities aggregated $287.5
million at September 30, 1999 compared to $256.2 million at December 31, 1998.
The combined increase in securities balances is due to the redeployment of cash
equivalents into longer-term securities with higher yields.
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 $50.5 million during the first nine months 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 $32.3 million, or
7.4%, 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 2.6%, to $51.3 million, or 7.2% of total assets at September 30, 1999, from
$52.7 million or 8.0 % of total assets at December 31, 1998. The decrease
resulted primarily from the net repurchase of 107,307 shares of common stock at
a cost of approximately $1.9 million, a decrease of $2.0 million in accumulated
other comprehensive income, partially offset by a net increase to retained
earnings of $2.0 million for the nine-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 nine-month period ended
September 30, 1999.
The following table sets forth information regarding the Company=s asset
quality (dollars in thousands):
<TABLE>
<CAPTION>
September 30, December 31, September 30,
1999 1998 1998
---- ---- ----
<S> <C> <C> <C>
Non-performing loans $1,392 $1,594 $1,734
Ratio of non-performing loans to gross loans 0.48% 0.65% 0.77%
Ratio of non-performing loans to total assets 0.19% 0.24% 0.25%
Foreclosed property $ 240 $ 308 $ 346
Foreclosed property to total assets 0.03% 0.05% 0.05%
Ratio of total non-performing assets to total assets 0.23% 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)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Beginning balance, January 1, $1,909 $2,029
Provision 180 45
Less: charge-off's (recoveries), net 202 (3)
------ -------
Ending balance, September 30, $1,887 $2,077
======= ======
</TABLE>
9
<PAGE>
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999
Net Income. The Company recorded net income of $1,055,000, or $0.38 per diluted
share, for the three months ended September 30, 1999 as compared to $868,000, or
$0.30 per diluted share, for the three months ended September 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 September 30,
Three Months Ended March,
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) $290,693 5,481 7.54% $229,198 $4,555 7.95%
Mortgage-backed securities 290,070 4,687 6.46% 271,596 4,524 6.66%
Investment securities 112,430 1,642 5.84% 125,044 1,828 5.85%
Other interest-earning assets(1) 7,060 72 4.08% 48,034 472 3.93%
----- -- ------ ---
Total interest-earning assets 700,253 11,882 6.79% 673,872 11,379 6.75%
------ ------
Non interest-earning assets 21,793 22,299
------ ------
Total assets 722,046 696,171
======= =======
Liabilities and stockholders= equity:
Interest-bearing liabilities:
Deposits 412,557 3,571 3.46% 451,399 4,425 3.92%
Advances from the FHLB 248,615 3,457 5.56% 181,692 2,667 5.87%
------- ----- ------- -----
Total interest-bearing liabilities 661,172 7,028 4.25% 633,091 7,092 4.48%
----- -----
Non interest-bearing liabilities 9,654 10,946
----- ------
Total liabilities 670,826 644,037
Stockholders= equity 51,220 52,134
------ ------
Total liabilities and stockholders' $722,046 $696,171
======== ========
equity...
Net interest income $4,854 $4,287
====== ======
Interest rate spread (2) 2.54% 2.27%
Net yield on interest-earning assets (3) 2.77% 2.54%
Ratio of average interest-earning assets to
average interest bearing liabilities 106% 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.
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1999 vs. 1998
-----------------------
Increase (Decrease)
Due to
-----------------------
Volume Rate Net
------ ---- ---
<S> <C> <C> <C>
Interest income:
Loans receivable, net $2,352 ($1,426) $926
Mortgage-backed securities 867 (704) 163
Investment securities (183) (3) (186)
Other interest-earning assets (521) 121 (400)
------ --------- -----
Total interest-earning assets 2,515 (2,012) 503
===== ========= =====
Interest expense
Interest-bearing liabilities:
Deposits (361) (493) (854)
Advances from the FHLB 1,676 (886) 790
------ ----- ----
Total interest-bearing liabilities 1,315 (1,379) (64)
------ ----- ----
Net change in net interest income $1,200 ($633) $567
====== ===== ====
</TABLE>
Total Interest Income. Total interest income increased by $503 thousand, or
4.4%, to $11.9 million for the three months ended September 30, 1999 compared
with the third quarter of 1998 primarily because of increases in the average
balance of loans receivable. The increase in the average balance of loans
receivable is primarily attributable to the purchase of $102.8 million of
mortgage loans during the first quarter of 1999 and the fourth quarter of 1998.
The increased interest income attributable to the increased balance of loans
receivable was partially offset by the decrease to the average yield on loans
receivable. Two factors, each the result of lower market interest rates during
the relevant period, caused the yield to decrease: accelerated repayment of
loans with higher coupons, and lower yields on loans purchased as compared to
the then-current portfolio yield.
Total Interest Expense. Total interest expense decreased to $7.0 million for the
three-month period ended September 30, 1999 from $7.1 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 deposits decreased 38.8 million, or 8.6%, from $451.4
million for the three-month period ended September 30, 1998 to $413.0 million
for the three-month period ended September 30, 1999. The average rate paid on
deposits decreased from 3.92% for the three-month period ended September 30,
1998 to 3.46% for the
11
<PAGE>
three-month period ended September 30, 1999. The decrease in the average
balances and the average rate paid on deposits resulted from the maturity of
higher rate deposits combined with management's efforts to price deposits at
lower rates.
Non-interest income. Total non-interest income was $298 thousand for the
three-month period ended September 30, 1999 compared with $338 thousand for the
same period in 1998. The decrease is attributable to $55 thousand of
miscellaneous, non-recurring income that was received during the third quarter
of 1998.
Non-interest expense. Total non-interest expense increased by $248 thousand to
$3.5 million for the three months ended September 30, 1999 compared to the same
period in 1998. Compensation and benefits expenses increased by $195 thousand
during the third quarter of 1999 compared to the year earlier period due in
large part to the higher number of filled positions during the 1999 quarter.
12
<PAGE>
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
Net Income. The Company recorded net income of $3,064,000 or $1.03 per diluted
share for the nine months ended September 30, 1999 as compared to $2,850,000 or
$0.88 per diluted share for the nine months ended September 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>
Nine Months Ended September 30,
Three Months Ended March,
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) $284,928 $16,277 7.62% $235,460 $14,064 7.96%
Mortgage-backed securities 272,139 12,983 6.36% 247,944 12,097 6.51%
Investment securities 117,037 5,040 5.74% 115,216 5,155 5.97%
Other interest-earning assets(1) 16,734 619 4.93% 38,022 1,202 4.22%
------ --- ------ -----
Total interest-earning assets 690,838 34,919 6.74% 636,642 32,518 6.81%
------ ------
Non interest-earning assets 24,455 22,277
------ ------
Total assets 715,293 658,919
======= =======
Liabilities and stockholders= equity:
Interest-bearing liabilities:
Deposits 420,949 11,135 3.53% 449,929 13,103 3.88%
Advances from the FHLB 232,628 9,670 5.54% 147,248 6,241 5.65%
------- ----- ------- -----
Total interest-bearing liabilities 653,577 20,805 4.24% 597,177 19,344 4.32%
------ ------
Non interest-bearing liabilities 9,936 10,336
----- ------
Total liabilities 663,513 607,513
Stockholders' equity 51,780 51,406
------ ------
Total liabilities and stockholders' $715,293 $658,919
======== ========
equity
Net interest income $14,114 $13,174
======= =======
Interest rate spread (2) 2.50% 2.49%
Net yield on interest-earning assets (3) 2.72% 2.76%
Ratio of average interest-earning assets to
average interest bearing liabilities 106% 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.
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 vs. 1998
-----------------------------------------
Increase (Decrease)
Due to
-----------------------------------------
Volume Rate Net
------ ---- ---
<S> <C> <C> <C>
Interest income:
Loans receivable, net $3,170 ($957) $2,213
Mortgage-backed securities 1,319 (433) 886
Investment securities 121 (236) (115)
Other interest-earning assets (865) 280 (583)
Total interest-earning assets 3,745 (1,344) 2,401
Interest expense
Interest-bearing liabilities:
Deposits (820) (1,148) (1,968)
Advances from the FHLB 3,631 (202) 3.429
Total interest-bearing liabilities 2,811 (1,350) 1,461
Net change in net interest income $934 $6 $940
</TABLE>
Total Interest Income. Total interest income increased by $2.4 million, or 9.0%,
to $34.9 million for the nine months ended September 30, 1999 compared with the
first nine 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 $102.8
million of mortgage loans in the first quarter of 1999 and the fourth quarter of
1998. The increased interest income attributable to the increased average
balance of loans receivable was partially offset by the decrease to the average
yield on loans receivable. Two factors, each the result of lower market interest
rates during the relevant period, caused the yield to decrease: accelerated
repayment of loans with higher coupons, and lower yields on loans purchased as
compared to the then-current portfolio yield.
Total Interest Expense. Total interest expense increased to $20.8 million for
the nine-month period ended September 30, 1999 from $19.3 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 deposits decreased $29.0 million, or 6.4%, from $450.0
million for the nine-month period ended September 30, 1998 to $420.9 million for
the nine-month period ended September 30, 1999. The average rate paid on
depositsdecreased from 3.88% for the nine-month period ended September 30, 1998
to 3.53% for the nine-month period ended September 30, 1999. The decrease in the
average balances and the average rate paid on deposits
14
<PAGE>
resulted from the maturity of higher rate deposits combined with management's
efforts to price deposits at lower rates.
Non-interest income. Total non-interest income was $919 thousand for the
nine-month period ended September 30, 1999 compared with $1.4 million for the
same period in 1998. The decrease of $525 thousand is primarily attributable to
the decrease in the gain on sale of loans and securities
Non-interest expense. Total non-interest expense increased $74 thousand to $10.1
million for the nine months ended September 30, 1999 compared to the same period
in 1998. Data processing decreased by $435 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 $84 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 $490 thousand, primarily 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. The Company's short-term sources of liquidity include maturity,
repayment and sales of assets, excess cash and cash equivalents, new deposits,
broker deposits, and new advances from the Federal Home Loan Bank. There has
been no material adverse change during nine-month period ended September 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 17.2% and 25.4% at September 30, 1999
and 1998, respectively.
At September 30, 1999, the Savings Bank had outstanding commitments to originate
loans of $11.5 million, to purchase investment securities of $677 thousand and
to fund undisbursed balances of closed loans and unused lines of credit of $31.2
million.
Capital Requirements
The Savings Bank is in compliance with all of its capital requirements as of
September 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 (APlan@) 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 thousand of these expenses
had not been incurred at September 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 mission-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 throughout the remainder of
1999. In order to ensure the availability of a command and control center, the
Company installed during the third quarter of 1999 a natural gas powered
generator at its primary data processing facility. This generator is intended to
enable the Company to keep its core customer account processing systems on-line
for an extended period of time.
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.
17
<PAGE>
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 nine months ending September 30, 1999.
18
<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
None
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
None
19
<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 12, 1999 John R. Stranford
-----------------
President and CEO
(Principal Executive Officer)
/s/Dennis R. Stewart
---------------------------------
Date: November 12, 1999 Dennis R. Stewart
-----------------
Senior Vice President and
Chief Financial Officer
(Principal Financial & Accounting
Officer)
20
<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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 16,422
<INT-BEARING-DEPOSITS> 1,347
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 140,233
<INVESTMENTS-CARRYING> 374,681
<INVESTMENTS-MARKET> 370,085
<LOANS> 287,552
<ALLOWANCE> 1,887
<TOTAL-ASSETS> 714,686
<DEPOSITS> 406,612
<SHORT-TERM> 25,000
<LIABILITIES-OTHER> 8,447
<LONG-TERM> 223,359
0
0
<COMMON> 529
<OTHER-SE> 50,739
<TOTAL-LIABILITIES-AND-EQUITY> 714,686
<INTEREST-LOAN> 16,277
<INTEREST-INVEST> 18,023
<INTEREST-OTHER> 619
<INTEREST-TOTAL> 34,919
<INTEREST-DEPOSIT> 11,135
<INTEREST-EXPENSE> 20,805
<INTEREST-INCOME-NET> 14,114
<LOAN-LOSSES> 180
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 10,110
<INCOME-PRETAX> 4,743
<INCOME-PRE-EXTRAORDINARY> 3,064
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,064
<EPS-BASIC> 1.10
<EPS-DILUTED> 1.03
<YIELD-ACTUAL> 2.72
<LOANS-NON> 0
<LOANS-PAST> 1,392
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,909
<CHARGE-OFFS> 203
<RECOVERIES> 1
<ALLOWANCE-CLOSE> 1,887
<ALLOWANCE-DOMESTIC> 1,887
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,887
</TABLE>
