SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X} ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended December 31, 1999
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- or -
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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Commission File Number: 0-24168
TF FINANCIAL CORPORATION
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 74-2705050
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(State or Other Jurisdiction of Incorporation I..R.S. Employer
or Organization) Identification No.)
3 Penns Trail, Newtown, Pennsylvania 18940
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (215) 579-4000
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.10 per share
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(Title of Class)
Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant, based on the average bid and asked prices of the Registrant's
Common Stock as quoted on the Nasdaq System on March 20, 2000, was $31.0 million
(2,141,091 shares at $14.50 per share).
As of March 20, 2000 there were outstanding 2,843,874 shares of the
Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the Fiscal Year Ended
December 31, 1999. (Parts I, II and IV)
2. Portions of the Proxy Statement for the 2000 Annual Meeting of
Stockholders. (Part III)
<PAGE>
PART I
TF FINANCIAL CORPORATION (THE "COMPANY") MAY FROM TIME TO TIME MAKE
WRITTEN OR ORAL "FORWARD-LOOKING STATEMENTS", INCLUDING STATEMENTS CONTAINED IN
THE COMPANY'S FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION (INCLUDING
THIS ANNUAL REPORT ON FORM 10-K AND THE EXHIBITS THERETO), IN ITS REPORTS TO
STOCKHOLDERS AND IN OTHER COMMUNICATIONS BY THE COMPANY, WHICH ARE MADE IN GOOD
FAITH BY THE COMPANY PURSUANT TO THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995.
THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES, SUCH
AS STATEMENTS OF THE COMPANY'S PLANS, OBJECTIVES, EXPECTATIONS, ESTIMATES AND
INTENTIONS, THAT ARE SUBJECT TO CHANGE BASED ON VARIOUS IMPORTANT FACTORS (SOME
OF WHICH ARE BEYOND THE COMPANY'S CONTROL). THE FOLLOWING FACTORS, AMONG OTHERS,
COULD CAUSE THE COMPANY'S FINANCIAL PERFORMANCE TO DIFFER MATERIALLY FROM THE
PLANS, OBJECTIVES, EXPECTATIONS, ESTIMATES AND INTENTIONS EXPRESSED IN SUCH
FORWARD-LOOKING STATEMENTS: THE STRENGTH OF THE UNITED STATES ECONOMY IN GENERAL
AND THE STRENGTH OF THE LOCAL ECONOMIES IN WHICH THE COMPANY CONDUCTS
OPERATIONS; THE EFFECTS OF, AND CHANGES IN, TRADE, MONETARY AND FISCAL POLICIES
AND LAWS, INCLUDING INTEREST RATE POLICIES OF THE BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM, INFLATION, INTEREST RATES, MARKET AND MONETARY
FLUCTUATIONS; THE TIMELY DEVELOPMENT OF AND ACCEPTANCE OF NEW PRODUCTS AND
SERVICES OF THE COMPANY AND THE PERCEIVED OVERALL VALUE OF THESE PRODUCTS AND
SERVICES BY USERS, INCLUDING THE FEATURES, PRICING AND QUALITY COMPARED TO
COMPETITORS' PRODUCTS AND SERVICES; THE WILLINGNESS OF USERS TO SUBSTITUTE
COMPETITORS' PRODUCTS AND SERVICES FOR THE COMPANY'S PRODUCTS AND SERVICES; THE
SUCCESS OF THE COMPANY IN GAINING REGULATORY APPROVAL OF ITS PRODUCTS AND
SERVICES, WHEN REQUIRED; THE IMPACT OF CHANGES IN FINANCIAL SERVICES' LAWS AND
REGULATIONS (INCLUDING LAWS CONCERNING TAXES, BANKING, SECURITIES AND
INSURANCE); TECHNOLOGICAL CHANGES, ACQUISITIONS; CHANGES IN CONSUMER SPENDING
AND SAVING HABITS; AND THE SUCCESS OF THE COMPANY AT MANAGING THE RISKS INVOLVED
IN THE FOREGOING.
THE COMPANY CAUTIONS THAT THE FOREGOING LIST OF IMPORTANT FACTORS IS
NOT EXCLUSIVE. THE COMPANY DOES NOT UNDERTAKE TO UPDATE ANY FORWARD-LOOKING
STATEMENT, WHETHER WRITTEN OR ORAL, THAT MAY BE MADE FROM TIME TO TIME BY OR ON
BEHALF OF THE COMPANY.
Item 1. Business
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BUSINESS OF THE COMPANY
On July 13, 1994, the Registrant, TF Financial Corporation (the
"Company") consummated its public offering for 5,290,000 shares of its common
stock and acquired Third Federal Savings Bank (the "Bank") as part of the Bank's
mutual-to-stock conversion. The Registrant was incorporated under Delaware law
in March 1994. The Registrant is a savings and loan holding company and is
subject to
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regulation by the Office of Thrift Supervision (the "OTS"), the Federal Deposit
Insurance Corporation (the "FDIC") and the Securities and Exchange Commission
(the "SEC"). The Registrant does not transact any material business other than
through its subsidiaries: Third Federal Savings Bank, TF Investments
Corporation, Teragon Financial Corporation, Penns Trail Development Corporation
and Third Delaware Corporation. At December 31, 1999, the Company had total
assets of $721.9 million, total liabilities of $673.4 million and stockholders'
equity of $48.5 million.
BUSINESS OF THE BANK
The Bank is a federally-chartered stock savings bank, which was
originally chartered in 1921 as a Pennsylvania-chartered building and loan
association. The Bank's deposits are insured up to the maximum amount allowable
by the FDIC.
The Bank is a community oriented savings institution offering a variety
of financial services to meet the needs of the communities it serves. The Bank
significantly expanded its operations in Philadelphia and Bucks Counties,
Pennsylvania in June 1992 with its acquisition of Doylestown Federal Savings and
Loan Association ("Doylestown"). In September 1996, the Bank expanded its
operations to include Mercer County, New Jersey with the acquisition of three
branch offices, certain assets and $143 million of deposits from Cenlar Federal
Savings Bank ("Cenlar"). The Bank added a fourth branch office in Mercer County
in December, 1999 with the Company's acquisition of Village Financial
Corporation ("Village"). The Village acquisition was consistent with the Bank's
strategic goal of growing its market share within its market area and reaching
into adjacent market areas, through low-cost, fill-in or market-extension
acquisitions. The Bank currently operates fifteen branch offices in Bucks and
Philadelphia counties, Pennsylvania and in Mercer County, New Jersey. The Bank
expects to open its sixteenth branch office in Bucks County, Pennsylvania during
the first quarter of 2000.
The Bank attracts deposits from the general public and uses such
deposits, together with borrowings and other funds primarily to originate or
purchase loans secured by first mortgages on owner-occupied, one- to four-family
residences in its market area and to invest in mortgage-backed and investment
securities. At December 31, 1999, one- to four-family residential mortgage loans
totaled $168.1 million or 57.9% of the Bank's total loan portfolio. At that same
date, the Bank had approximately $292.4 million or 40.5% of total assets
invested in mortgage-backed securities and $88.7 million or 12.3% of total
assets in investment securities. To a lesser extent, the Bank also originates
commercial real estate and multi-family, construction and consumer loans. The
Bank has one subsidiary, Third Delaware Corporation, which was incorporated in
August 1998 for the purpose of holding and managing investment securities for
the Bank.
Market Area
The Bank operates five offices in Philadelphia County and six offices
in Bucks County, Pennsylvania. These two counties cover the city of Philadelphia
and the northeast suburbs of Philadelphia. The population of these two counties
totals over 2.1 million. The Bank also operates four branch offices in Mercer
County, New Jersey including the recently opened branch office acquired in the
Village acquisition in December 1999. The population of Bucks and Mercer
Counties has experienced distinctly different economic and demographic trends
over recent decades. Whereas Philadelphia County has experienced a population
decline and has offered very limited lending opportunities, Bucks and Mercer
Counties, with growing populations, have offered the Bank much greater lending
opportunities.
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Competition
The Bank faces varying degrees of competition from local thrifts and
credit unions at its various branch locations. Stronger competition has come
from local and much larger regional banks based in and around the Philadelphia
area. Commercial banks hold approximately 80% of the deposit market in
Philadelphia County, 68% in Bucks County and 66% in Mercer County. The Bank's
share of the deposit market in Philadelphia, Bucks and Mercer Counties is very
small, at .70%, 1.74% and 1.23%, respectively.
Lending Activities
General. The Bank's loan portfolio composition consists primarily of
conventional adjustable-rate ("ARM") and fixed-rate first mortgage loans secured
by one- to four-family residences. The Bank also makes commercial real estate
and multi-family loans, construction loans and consumer and other loans. At
December 31, 1999, the Bank's mortgage loans outstanding were $245.3 million, of
which $168.1 million were one- to four-family residential mortgage loans. Of the
one- to four-family residential mortgage loans outstanding at that date, 22.8%
were ARM's and 77.2% were fixed-rate loans. Total ARM mortgage loans in the
Bank's portfolio at December 31, 1999, amounted to $95.8 million or 33.0% of
total mortgage loans. At that same date, commercial real estate and multi-family
residential and construction loans totaled $65.3 million and $12.1 million,
respectively.
Consumer and other loans held by the Bank totaled $44.6 million or
15.4% of total loans outstanding at December 31, 1999, of which $16.8 million or
5.8% consisted of home equity and second mortgages. At that same date commercial
business loans, leases and other loans totaled $9.3 million, $3.2 million and
$15.3 million, respectively.
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The following table sets forth the composition of the Bank's loan
portfolio and mortgage-backed and related securities portfolios in dollar
amounts and in percentages of the respective portfolios at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
1999 1998 1997 1996 1995
-------------------- ---------------- ------------------ ----------------- -----------------
Percent Percent Percent Percent Percent
Amount Total Amount of Total Amount of Total Amount of Total Amount of Total
------ ------- ------ -------- ------ -------- ------ -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family........ $168,057 57.93% $152,819 62.93% $198,328 78.43% $265,618 85.16% $204,430 85.00%
Commercial real estate
and multi-family......... 65,346 22.53 55,208 22.73 26,653 10.54 20,427 6.55 10,294 4.28
Construction............... 12,074 4.16 5,352 2.20 5,052 2.00 4,720 1.51 3,604 1.50
------- ------ ------- ------ ------- ------ ------- ------ ------- ----
Total mortgage loans.. 245,477 84.63 213,379 87.86 230,033 90.97 290,765 93.22 218,328 90.78
Consumer and other loans:
Home equity and second
mortgage................. 16,816 5.80 12,995 5.35 12,147 4.80 9,661 3.10 10,635 4.42
Commercial business........ 9,339 3.22 6,666 2.74 2,798 1.11 3,126 1.00 2,887 1.20
Leases..................... 3,195 1.10 2,305 0.95 1,671 0.66 3,093 0.99 3,590 1.49
Other...................... 15,249 5.26 7,521 3.10 6,230 2.46 5,261 1.69 5,072 2.11
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total consumer and
other loans......... 44,599 15.37 29,487 12.14 22,846 9.03 21,141 6.78 22,184 9.22
------- ------ ------ ------ ------- ------ ------- ------ ------- ------
Total loans........... 290,076 100.00% 242,866 100.00% 252,879 100.00% 311,906 100.00% 240,512 100.00%
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
Less:
Unearned discount, premium,
deferred loan fees, net.. 180 116 139 530 753
Allowance for loan losses.. 1,917 1,909 2,029 1,806 1,484
------- ------- ------- ------- -------
Total loans, net....... $287,979 $240,841 $250,711 $309,570 $238,275
======= ======= ======= ======= =======
Mortgage-backed securities
held-to-maturity:
FHLMC...................... 52,625 32.91 $47,239 26.10% $76,523 53.12% $90,016 58.54% $ 65,834 47.76%
FNMA....................... 24,983 15.63 12,726 7.03 22,927 15.91 27,547 17.92 33,150 24.05
GNMA....................... 46,651 29.18 56,318 31.12 7,483 5.19 6,043 3.93 7,644 5.55
Real estate investment
mortgage conduit......... 35,271 22.06 64,180 35.47 36,389 25.26 29,220 19.00 30,033 21.79
Collateralized mortgage
obligations.............. -- -- -- -- -- 19 0.01
Other mortgage-backed
securities............... 358 0.22 501 0.28 752 0.52 932 0.61 1,161 0.84
------- ------ ------- ------ ------- ------ ------- ------ ------ ------
Total mortgage-backed and
related securities
held-to-maturity....... $159,888 100.00% $180,964 100.00% $144,074 100.00% $153,758 100.00% $137,841 100.00%
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
Mortgage-backed
securities
available-for-sale:
FHLMC.................... 7,233 5.46 $ 13,214 17.55% $ 19,223 52.17% $ 8,905 40.43% $ 15,422 52.03%
FNMA..................... 27,963 21.10 32,178 42.74 7,863 21.34 3,240 14.71 4,010 13.53
GNMA..................... 8,338 6.29 10,284 13.66 -- -- --
Real estate investment
mortgage conduit....... 88,981 67.15 19,609 26.05 9,761 26.49 9,882 44.86 10,208 34.44
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total.................. $132,515 100.00% $ 75,285 100.00% $ 36,847 100.00% $ 22,027 100.00% $ 29,640 100.00%
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
</TABLE>
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Loan Maturity and Repricing Information. The following table sets forth
certain information at December 31, 1999, regarding the dollar amount of loans
maturing in the Bank's loan and mortgage-backed securities portfolios based on
their maturity date. Demand loans, loans having no stated schedule of repayments
and no stated maturity, overdrafts and delinquent loans maturing prior to
December 31, 2000, are reported as due in one year or less. The table does not
include prepayments or scheduled principal repayments.
<TABLE>
<CAPTION>
Due 1/1/00 - Due 1/1/01 - Due After
12/31/00 12/31/04 1/1/05
-------- -------- ------
(In thousands)
<S> <C> <C> <C>
Available for sale:
Mortgage-backed securities .................. -- $ 6,637 $125,878
Held to Maturity:
One-to-four family .......................... $ 127 2,986 164,944
Commercial real estate and multi-family ..... 8 5,953 59,385
Construction ................................ 10,483 1,591 --
Consumer and other .......................... 1,564 23,472 19,259
-------- -------- --------
Total loans receivable ...................... 12,182 34,002 243,588
Mortgage-backed securities .................. 2,289 4,551 153,048
-------- -------- --------
Totals ...................................... $ 14,471 $ 38,553 $396,636
======== ======== ========
</TABLE>
The following table sets forth the dollar amount of all loans and
mortgage-backed securities due after December 31, 2000, which have predetermined
interest rates and which have floating or adjustable interest rates.
Predetermined Floating or
Rates Adjustable Rate
---------- ---------------
(In thousands)
Available for sale:
Mortgage-backed securities ............... $132,515 --
Totals
Held to Maturity:
One-to-four family ....................... $129,569 $ 38,361
Commercial real estate and multi-family .. 34,220 31,118
Construction ............................. -- 1,591
Consumer and other ....................... 29,126 13,605
-------- --------
Total loans receivable ................... 192,915 84,675
Mortgage-backed securities ............... 157,381 218
-------- --------
Totals ................................... $350,296 $ 84,893
======== ========
One- to Four-Family Mortgage Loans. The Bank offers first mortgage
loans secured by one- to four-family residences in the Bank's lending area.
Typically, such residences are single-family homes that serve as the primary
residence of the owner. The Bank generally originates and invests in one- to
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four-family residential mortgage loans in amounts up to 80% of the lesser of the
appraised value or selling price of the mortgaged property. Loans originated in
amounts over 80% of the lesser of the appraised value or selling price of the
mortgaged property, other than loans to facilitate the sale of real estate
acquired through foreclosure, must be owner-occupied and private mortgage
insurance must be provided on the amount in excess of 80%.
Loan originations are generally obtained from existing or past
customers, members of the local community, and referrals from established
builders and realtors within the Bank's lending area. Mortgage loans originated
and held by the Bank in its portfolio generally include due-on sale clauses
which provide the Bank with the contractual right to deem the loan immediately
due and payable in the event that the borrower transfers ownership of the
property without the Bank's consent.
At December 31, 1999, 68.5% of mortgage loans consisted of one- to
four-family residential loans, of which 22.8% were ARM loans.
The Bank offers a variety of ARM loans with terms of 30 years which
adjust at the end of 6 months, one, three, five, seven and ten years and adjust
by a maximum of 1 to 2 % per adjustment with a lifetime cap of 5 to 6% over the
life of the loan. The ARM loans acquired as a result of the Doylestown merger
adjust at the end of one or three years and adjust by a maximum of 2.00% per
adjustment with a lifetime cap of 5.00% over the life of the loan.
The Bank offers fixed-rate mortgage loans with terms of 10 to 30 years,
which are payable monthly. Interest rates charged on fixed-rate mortgage loans
are competitively priced based on market conditions and the Bank's cost of
funds. The origination fees for fixed-rate loans were generally 3.0% at December
31, 1999. Generally, the Bank's standard underwriting guideline for fixed-rate
mortgage loans conform to the FHLMC and FNMA guidelines and may be sold in the
secondary market. While it does not presently do so, the Bank has in the past
sold a portion of its conforming fixed-rate mortgage loans in the secondary
market to federal agencies while retaining the servicing rights certain loans.
The Bank, however, is primarily a portfolio lender. As of December 31,
1999, the Bank's portfolio of loans serviced for others totaled approximately
$15.9 million.
Commercial Real Estate and Multi-Family Loans. The Bank has
historically originated a limited number of loans secured by commercial real
estate including non-owner occupied residential multi-family dwelling units
(more than four units) primarily secured by professional office buildings and
apartment complexes.
The Bank generally originates commercial real estate and multi-family
loans up to 75% of the appraised value of the property securing the loan.
Currently, it is the Bank's philosophy to originate commercial real estate and
multi-family loans only to borrowers known to the Bank and on properties in its
market area. The commercial real estate and multi-family loans in the Bank's
portfolio consist of fixed-rate, ARM and balloon loans which were originated at
prevailing market rates for terms of up to 25 years. The Bank's current policy
is to originate commercial real estate and multi-family loans as ARM's that are
generally amortized over a period of 20 years or as balloon loans which
generally have terms of 5 to 10 years, with 20-25 year amortizations.
Loans secured by commercial and multi-family real estate are generally
larger and involve a greater degree of risk than one- to four-family residential
mortgage loans. Of primary concern in commercial and multi-family real estate
lending is the borrower's creditworthiness and the feasibility and cash flow
potential of the project. Loans secured by income properties are generally
larger and involve greater risks than
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residential mortgage loans because payments on loans secured by income
properties are often dependent on successful operation or management of the
properties. As a result, repayment of such loans may be subject to a greater
extent than residential real estate loans to adverse conditions in the real
estate market or the economy. In order to monitor cash flows on income
properties, the Bank requires borrowers and loan guarantors, if any, to provide
annual financial statements and rent rolls on multi-family loans. At December
31, 1999, the five largest commercial real estate and multi-family loans totaled
$12.5 million with no single loan larger than $3.3 million. At December 31,
1999, all such loans were current and the properties securing such loans are in
the Bank's market area.
Construction Loans. At December 31, 1999, the Bank had $12.1 million of
construction loans or 4.2% of the Bank's total loan portfolio. Construction
financing is generally considered to involve a higher degree of risk of loss
than long-term financing on improved, occupied real estate. Risk of loss on a
construction loan is dependent largely upon the accuracy of the initial estimate
of the property's value at completion of construction or development and the
estimated cost (including interest) of construction. During the construction
phase, a number of factors could result in delays and cost overruns. If the
estimate of construction costs proves to be inaccurate, the Bank may be required
to advance funds beyond the amount originally committed to permit completion of
the development. If the estimate of value proves to be inaccurate, the Bank may
be confronted, at or prior to the maturity of the loan, with a project having a
value which is insufficient to assure full repayment.
Consumer and Other Loans. The Bank also offers consumer and other loans
in the form of home equity and second mortgage loans (referred to hereinafter
collectively as "second mortgage loans"), commercial business loans, automobile
loans and student loans. These loans totaled $44.6 million or 15.4% of the
Bank's total loan portfolio at December 31, 1999. Federal regulations permit
federally chartered thrift institutions to make secured and unsecured consumer
loans up to 35% of an institution's assets. In addition, a federal thrift has
lending authority above the 35% category for certain consumer loans, property
improvement loans, and loans secured by savings accounts. The Bank originates
consumer loans in order to provide a wide range of financial services to its
customers and because the shorter terms and normally higher interest rates on
such loans help maintain a profitable spread between its average loan yield and
its cost of funds.
In connection with consumer loan applications, the Bank verifies the
borrower's income and reviews a credit bureau report. In addition, the
relationship of the loan to the value of the collateral is considered. All
automobile loan applications are reviewed and approved by the Bank. The Bank
reviews the credit report of the borrower as well as the value of the unit which
secures the loan.
The Bank intends to continue to emphasize the origination of consumer
loans. Consumer loans tend to be originated at higher interest rates than
conventional residential mortgage loans and for shorter terms which benefits the
Bank's interest rate gap management. Consumer loans, however, tend to have a
higher risk of default than residential mortgage loans. At December 31, 1999,
$413,000, or .9%, of the Bank's consumer loans were delinquent more than 90
days.
Federal thrift institutions are permitted to make secured or unsecured
loans for commercial, corporate, business or agricultural purposes, including
the issuance of letters of credit secured by real estate, business equipment,
inventories, accounts receivable and cash equivalents. The aggregate amount of
such loans outstanding may not exceed 10% of such institution's assets.
The Bank offers second mortgage loans on one- to four-family
residences. At December 31, 1999, second mortgage and home equity loans totaled
$16.8 million, or 5.8% of the Bank's total loan portfolio. Second mortgage loans
are offered as fixed-rate loans for a term not to exceed 15 years. Such loans
are
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only made on owner-occupied one- to four-family residences and are subject to a
75% combined loan to value ratio. The underwriting standards for second mortgage
loans are the same as the Bank's standards applicable to one- to four-family
residential loans.
The Bank makes commercial business loans on a secured basis and
generally requires additional collateral consisting of real estate. The terms of
such loans generally do not exceed five years. The majority of these loans have
floating interest rates which adjust with changes in market driven indices. The
Bank's commercial business loans primarily consist of short-term loans for
equipment, working capital, business expansion and inventory financing. The Bank
customarily requires a personal guaranty of payment by the principals of any
borrowing entity and reviews the financial statements and income tax returns of
the guarantors. At December 31, 1999, the Bank had approximately $9.3 million
outstanding in commercial business loans, which represented approximately 3.2%
of its total loan portfolio.
Loan Approval Authority and Underwriting. The Board of Directors sets
the authority to approve loans based on the amount, type of loan (i.e., secured
or unsecured) and total exposure to the borrower. Where there are one or more
existing loans to a borrower, the level of approval required is governed by the
proposed total exposure including the new loan. A Lending Vice President may
approve a secured loan up to $250,000 and an unsecured loan up to $50,000
individually. Each In-House Loan Committee member may approve a secured loan up
to $500,000 and an unsecured loan up to $100,000. Any two In-House Loan
Committee members may combine their secured lending authority up to $1.0
million. A majority of the In-House Loan Committee members may approve a secured
loan up to $4.0 million and an unsecured loan up to $250,000. Generally, all
loans over $4.0 million, or loans that cause the proposed total exposure to
exceed $4.0 million, require approval by the Board Loan Committee.
One- to four-family residential mortgage loans are generally
underwritten according to FHLMC and FNMA guidelines. For all loans originated by
the Bank, upon receipt of a completed loan application from a prospective
borrower, a credit report is ordered, income and certain other information is
verified and, if necessary, additional financial information is requested. An
appraisal of the real estate intended to secure the proposed loan is required
which currently is performed by an independent appraiser designated and approved
by the Bank. The Bank makes construction/permanent loans on individual
properties. Funds advanced during the construction phase are held in a
loan-in-process account and disbursed based upon various stages of completion.
The independent appraiser or loan officer determines the stage of completion
based upon its physical inspection of the construction. It is the Bank's policy
to obtain title insurance or a title opinion on all real estate first mortgage
loans. Borrowers must also obtain hazard or flood insurance (for loans on
property located in a flood zone) prior to closing the loan. For loans in excess
of 80% of the loan to value ratio, borrowers are generally required to advance
funds on a monthly basis together with each payment of principal and interest to
an escrow account from which the Bank makes disbursements for items such as real
estate taxes and hazard insurance premiums.
Loans to one Borrower. Current regulations limit loans to one borrower
in an amount equal to 15% of unimpaired capital and retained income on an
unsecured basis and an additional amount equal to 10% of unimpaired capital and
retained income if the loan is secured by readily marketable collateral
(generally, financial instruments, not real estate) or $500,000, whichever is
higher. Penalties for violations of the loan-to-one borrower statutory and
regulatory restrictions include cease and desist orders, the imposition of a
supervisory agreement and civil money penalties. The Bank's maximum loan-to-one
borrower limit was approximately $6.6 million as of December 31, 1999.
At December 31, 1999, the Bank's five largest aggregate lending
relationships had balances ranging from $6.1 to $3.2 million. At December 31,
1999, all of these loans were current.
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Mortgage-Backed Securities
To supplement lending activities, the Bank invests in residential
mortgage-backed securities. Although the majority of such securities are held to
maturity, they can serve as collateral for borrowings and, through repayments,
as a source of liquidity.
The mortgage-backed securities portfolio as of December 31, 1999,
consisted of certificates issued by the Federal Home Loan Mortgage Corporation
("FHLMC") ($59.9 million), Government National Mortgage Association ("GNMA"),
($55.0 million) Federal National Mortgage Association ("FNMA") ($52.9 million),
real estate mortgage investment conduits ("REMICs") ($124.2 million), and other
mortgage-backed securities ($358,000).
At December 31, 1999, the carrying value of mortgage-backed securities
totaled $292.4 million, or 40.5% of total assets. The market value of such
securities totaled approximately $286.7 million at December 31, 1999.
Mortgage-backed securities represent a participation interest in a pool
of single-family or multi-family mortgages, the principal and interest payments
on which are passed from the mortgage originators, through intermediaries
(generally quasi-governmental agencies) that pool and repackage the
participation interests in the form of securities, to investors such as the
Bank. Such quasi-governmental agencies, which guarantee the payment of principal
and interest to investors, primarily include FHLMC, FNMA and GNMA.
FHLMC issues participation certificates backed principally by
conventional mortgage loans. FHLMC guarantees the timely payment of interest and
the ultimate return of principal within one year. FHLMC securities are indirect
obligations of the United States Government. FNMA is a private corporation
chartered by Congress with a mandate to establish a secondary market for
conventional mortgage loans. FNMA guarantees the timely payment of principal and
interest, and FNMA securities are indirect obligations of the United States
Government. GNMA is a government agency within the Department of Housing and
Urban Development ("HUD") which is intended to help finance government assisted
housing programs. GNMA guarantees the timely payment of principal and interest,
and GNMA securities are backed by the full faith and credit of the United States
Government. Since FHLMC, FNMA and GNMA were established to provide support for
low- and middle-income housing, there are limits to the maximum size of loans
that qualify for these programs. Currently, GNMA limits its maximum loan size to
$240,050 for Veterans Administration ("VA") loans and on average $240,050 for
Federal Housing Authority ("FHA") loans. FNMA and FHLMC limit their loans to
$240,000. To accommodate larger-sized loans, and loans that, for other reasons,
do not conform to the agency programs, a number of private institutions have
established their own home-loan origination and securitization programs.
Mortgage-backed securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a range and have varying maturities. The
underlying pool of mortgages are primarily composed of either fixed-rate
mortgages or adjustable-rate mortgage ("ARM") loans. Mortgage-backed securities
are generally referred to as mortgage participation certificates or pass-through
certificates. As a result, the interest rate risk characteristics of the
underlying pool of mortgages, i.e., fixed-rate or adjustable-rate, as well as
prepayment risk, are passed on to the certificate holder. The life of a
mortgage-backed pass-through security is equal to the life of the underlying
mortgages. Mortgage-backed securities issued by FHLMC, FNMA and GNMA make up a
majority of the pass-through market.
9
<PAGE>
CMOs and REMICs are typically issued by a special-purpose entity (the
"issuer"), which may be organized in a variety of legal forms, such as a trust,
a corporation, or a partnership. The entity aggregates pools of pass-through
securities, which are used to collateralize the mortgage related securities.
Once combined, the cash flows can be divided into "tranches" or "classes" of
individual securities, thereby creating more predictable average durations for
each security than the underlying pass-through pools. Accordingly, under this
security they structure all principal pay downs from the various mortgage pools
are allocated to a mortgage-related class or classes structured to have priority
until it has been paid off. Thus these securities are intended to address the
reinvestment concerns associated with mortgage-backed securities pass-through,
namely that (i) they tend to pay off when interest rates fall, thereby taking
their relatively high coupon with them, and (ii) their expected average life may
vary significantly among the different tranches.
Some CMO and REMIC instruments are most like traditional debt
instruments because they have stated principal amounts and traditionally defined
interest-rate terms. Purchasers of certain other CMO and REMIC instruments are
entitled to the excess, if any, of the issuer's cash inflows, including
reinvestment earnings, over the cash outflows for debt service and
administrative expenses. These mortgage related instruments may include
instruments designated as residual interests, and are riskier in that they could
result in the loss of a portion of the original investment. Cash flows from
residual interests are very sensitive to prepayments and, thus, contain a high
degree of interest-rate risk. Residual interests represent an ownership interest
in the underlying collateral, subject to the first lien of the CMO and REMICs
investors.
The CMOs and REMICs held by the Bank at December 31, 1999, consisted
solely of fixed-rate notes and adjustable-rate notes with contractual maturities
ranging from .8 to 29.4 years. The portfolio of CMOs and REMICs held within the
Bank's mortgage-backed securities portfolio at December 31, 1999, did not
include any residual interests. Further, at December 31, 1999, the Bank's
mortgage-backed securities portfolio did not include any "stripped" CMOs and
REMICs, i.e. CMOs and REMICs that pay interest only and do not repay principal
or CMOs that repay principal only and do not pay interest.
The following table sets forth the carrying value of the Bank's
mortgage-backed securities held in portfolio at the dates indicated.
At December 31,
--------------------------------
1999 1998 1997
--------- -------- --------
(In thousands)
Held to maturity:
GNMA-fixed rate .......................... $ 46,651 $ 56,318 $ 7,483
FHLMC ARMs ............................... 218 269 281
FHLMC-fixed rate ......................... 52,407 46,970 76,242
FNMA-fixed rate .......................... 24,983 12,726 22,927
CMOs ..................................... -- -- --
Remics ................................... 35,271 64,180 36,389
Other mortgage-backed securities ......... 358 501 752
-------- -------- --------
Total mortgage-backed securities ........ $159,888 $180,964 $144,074
======== ======== ========
Mortgage-backed securities
Available-for-sale:
FHLMC .................................... $ 7,233 $ 13,214 $ 19,223
FNMA ..................................... 27,963 32,178 7,863
GNMA ..................................... 8,338 10,284 --
Remics ................................... 88,981 19,609 9,761
-------- -------- --------
Total mortgage-backed securities
available-for-sale ................... $132,515 $ 75,285 $ 36,847
======== ======== ========
10
<PAGE>
Mortgage-Backed Securities Maturity. The following table sets forth the
maturity and the weighted average coupon ("WAC") of the Bank's mortgage-backed
securities portfolio at December 31, 1999. The table does not include estimated
prepayments. Adjustable-rate mortgage-backed securities are shown as maturing
based on contractual maturities.
<TABLE>
<CAPTION>
Contractual
Held Contractual Available-For-
To Maturity Sale
Maturities Due WAC Maturities Due WAC
-------------- --- -------------- ---
(Dollars in thousands)
<S> <C> <C> <C> <C>
Less than 1 year $ 2,289 6.07% $ -- --%
1 to 3 years 2,594 6.99 5,519 7.07
3 to 5 years 1,957 7.23 1,118 6.58
5 to 10 years 17,681 7.34 16,048 6.75
10 to 20 years 15,359 6.80 39,989 6.19
Over 20 years 120,008 6.74 69,841 6.78
------- ---- ------ ----
Total mortgage-backed securities $159,888 6.81% $132,515 6.61%
======= ==== ======= ====
</TABLE>
Non-Performing and Problem Assets
Loan Collection. When a borrower fails to make a required payment on a
loan, the Bank takes a number of steps to have the borrower cure the delinquency
and restore the loan to current status. In the case of residential mortgage
loans and consumer loans, the Bank generally sends the borrower a written notice
of non-payment after the loan is 15 days past due. In the event payment is not
then received, additional letters and phone calls are made. If the loan is still
not brought current and it becomes necessary for the Bank to take legal action,
which typically occurs after a loan is delinquent 90 days or more, the Bank will
commence foreclosure proceedings against any real property that secures the loan
and attempt to repossess any personal property that secures a consumer loan. If
a foreclosure action is instituted and the loan is not brought current, paid in
full, or refinanced before the foreclosure sale, the real property securing the
loan generally is sold at foreclosure.
In the case of commercial real estate and multi-family loans, and
construction loans, the Bank generally attempts to contact the borrower by
telephone after any loan payment is ten days past due and a senior loan officer
reviews all collection efforts made if payment is not received after the loan is
30 days past due. Decisions as to when to commence foreclosure actions for
commercial real estate and multi-family loans and construction loans are made on
a case by case basis. The Bank may consider loan work-out arrangements with
these types of borrowers in certain circumstances.
On mortgage loans or loan participations purchased by the Bank, the
Bank receives monthly reports from its loan servicers with which it monitors the
loan portfolio. Based upon servicing agreements with the servicers of the loan,
the Bank relies upon the servicer to contact delinquent borrowers, collect
delinquent amounts and to initiate foreclosure proceedings, when necessary, all
in accordance with applicable laws, regulations and the terms of the servicing
agreements between the Bank and its servicing agents.
11
<PAGE>
Delinquent Loans. Generally, the Bank reserves for uncollected interest
on loans past due 90 days or more. Loans also are placed on a nonaccrual status
when, in the judgment of management, the probability of collection of interest
is deemed to be insufficient to warrant further collection. When a loan is
placed on nonaccrual status, previously accrued but unpaid interest is deducted
from interest income.
Non-Performing Assets. The following table sets forth information
regarding non-accrual loans and real estate owned by the Bank at the dates
indicated. The Bank had no loans contractually past due 90 days or more or for
which accrued interest has been recorded. At December 31, 1999, the Bank had no
significant impaired loans within the meaning of SFAS No. 114 and SFAS No. 118.
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------
1999 1998 1997 1996 1995
----- ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a non-accrual basis:
Mortgage loans:
One- to four-family ..................... $ 880 $ 896 $ 776 $ 922 $ 999
Commercial real estate and multi-family . 24 97 -- -- 28
Consumer and other ........................ 413 609 606 1,050 776
----- ------ ------ ------ ------
Total non-accrual loans ................ 1,317 $1,602 $1,382 $1,972 $1,803
===== ====== ====== ====== ======
Real estate owned, net .................... $ 546 $ 308 $ 351 $ 112 $ 129
Other non-performing assets ............... -- -- -- -- --
----- ------ ------ ------ ------
Total non-performing assets ............... $1,863 $1,910 $1,733 $2,084 $1,932
====== ====== ====== ====== ======
Total non-accrual loans to net loans ...... 0.46% 0.67% 0.55% 0.64% 0.76%
====== ====== ====== ====== ======
Total non-accrual loans to total assets ... 0.18% 0.24% 0.23% 0.30% 0.37%
====== ====== ====== ====== ======
Total non-performing assets to total assets 0.26% 0.29% 0.29% 0.32% 0.39%
====== ====== ====== ====== ======
</TABLE>
At December 31, 1999, the Bank had no foreign loans and no loan
concentrations exceeding 10% of total loans not disclosed in above the table.
"Loan concentrations" are considered to exist when there are amounts loaned to a
multiple number of borrowers engaged in similar activities that would cause them
to be similarly impacted by economic or other conditions. Loans recorded in the
category of other real estate owned are valued at the lower of book value of
loans outstanding or fair market value less cost of disposal.
At December 31, 1999, the Bank was not aware of any potential problem
loans that are not otherwise included in the foregoing table. "Potential problem
loans" are loans where information about possible credit problems of borrowers
has caused management to have serious doubts about the borrowers' ability to
comply with present repayment terms.
Classified Assets. OTS regulations provide for a classification system
for problem assets of insured institutions which covers all problem assets.
Under this classification system, problem assets of insured institutions are
classified as "substandard," "doubtful," or "loss." An asset is considered
"substandard" if it is inadequately protected by the current net worth and
paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard," with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted. Assets designated
"special mention" by
12
<PAGE>
management are assets included on the Bank's internal watchlist because of
potential weakness but that do not currently warrant classification in one of
the aforementioned categories.
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
problem assets as "loss," it is required either to establish a specific
allowance for losses equal to 100% of that portion of the asset so classified or
to charge off such amount. An institution's determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by the OTS, which may order the establishment of additional
general or specific loss allowances. A portion of general loss allowances
established to cover possible losses related to assets classified as substandard
or doubtful may be included in determining an institution's regulatory capital,
while specific valuation allowances for loan losses generally do not qualify as
regulatory capital.
The following table provides further information in regard to the
Bank's classified assets as of December 31, 1999.
At
December 31,
1999
-------------
(In thousands)
Special mention assets ....... $ 719
Substandard .................. 2,167
Doubtful assets .............. --
Loss ......................... --
------
Total classified assets.... $2,886
======
- -------------
(1) Substandard assets include approximately $296,000 of performing assets that
are less than 90 days delinquent, that are classified for reasons other
than delinquency.
Real Estate Owned. Real estate acquired by the Bank as a result of
foreclosure, judgment or by deed in lieu of foreclosure is classified as real
estate owned ("REO") until it is sold. When property is acquired it is recorded
at the lower of fair value, minus estimated cost to sell, or cost. If the
property subsequently decreases in estimated value from the initial recorded
amount, the Bank will provide an additional valuation allowance, through a
charge to earnings, if the decrease is judged by management to be temporary, or
the Bank will write the property down, through a charge to earnings, to the new
estimated value if the decrease is judged by management to be permanent.
The Bank records loans as in substance foreclosures if the borrower has
little or no equity in the property based upon its documented current fair value
and if the borrower has effectively abandoned control of the collateral or has
continued to retain control of the collateral but because of the current
financial status of the borrower it is doubtful the borrower will be able to
repay the loan in the foreseeable future. In substance, foreclosures are
accounted for as loans until such time that title to the collateral is acquired
by the Bank. There may be significant other expenses incurred such as attorney
and other extraordinary servicing costs involved with in substance foreclosures.
13
<PAGE>
Allowances for Loan Losses. The Bank provides valuation allowances for
estimated losses from uncollectible loans. Management's periodic evaluation of
the adequacy of the allowance for loan losses is based on loss experience, known
and inherent risk in the portfolio, prevailing market conditions, and
management's judgment as to collectibility. The Bank's determination as to the
amount of its allowance for loan losses is subject to review of the federal
regulatory agencies, the OTS and FDIC, which can order the establishment of
additional general or specific loan loss reserves. The allowance for loan losses
is increased by charges to earnings and decreased by charge-offs (net of
recoveries).
The allowance for loan losses is established through a provision for
loan losses based on management's evaluation of the risk inherent in its loan
portfolio and the general economy. Such evaluation, which includes a review of
all loans on which full collectibility may not be reasonably assured, considers
among other matters, the estimated fair value of the underlying collateral,
economic conditions, historical loan loss experience and other factors that
warrant recognition in providing for an adequate loan loss allowance.
The following table sets forth information with respect to the Bank's
allowance for loan losses at the dates and for the periods indicated:
<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period . $ 1,909 $ 2,029 $ 1,806 $ 1,484 $ 1,473
Provision for loan losses ...... 300 60 397 330 72
Charge-offs:
One- to four-family .......... -- -- (1) -- (48)
Commercial and multi-family
real estate loans ............ -- -- -- -- --
Consumer and other loans ..... (296) (180) (173) (8) (13)
Recoveries:
Commercial and multi-family
real estate loans ............ -- -- -- -- --
Consumer and other loans ..... 4 -- -- -- --
------- --------- ------- ---------- -------
Balance at end of year(1) ...... $ 1,917 $ 1,909 $ 2,029 $ 1,806 $ 1,484
======= ========= ======= ========== =======
Ratio of net charge-offs during
the period to average loans
outstanding during the period 0.10% 0.08% 0.06% 0.003% 0.04%
Ratio of allowance for loan
losses to non-performing
loans at the end of the period 145.56% 119.16% 147.0% 91.6% 82.3%
Ratio of allowance for loan
losses to net loans receivable
at the end of period ......... 0.67% 0.79% 0.81% 0.58% 0.62%
Ratio of allowance for loan
losses and foreclosed real
estate to total non-performing
assets at the end of period .. 132.21% 116.07% 137.33% 92.03% 76.8%
</TABLE>
- --------------
(1) The Bank had not incurred any material charge-offs or received any
material recoveries on the one-to four-family and consumer loan
portfolios for any of the periods presented.
14
<PAGE>
The following table sets forth the allocation of the Bank's allowance
for loan losses by loan category and the percent of loans in each category to
total loans receivable, gross, at the dates indicated. The portion of the loan
loss allowance allocated to each loan category does not represent the total
available for future losses which may occur within the loan category since the
total loan loss allowance is a valuation reserve applicable to the entire loan
portfolio.
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------------- ------------------ --------------------- -------------------- ------------------------
Percent of Percent of Percent of Percent of Percent of
Loans to Loans to Loans to Loans to Loans to
Total Total Total Total Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
At end of period
allocated to:
One- to four-family..... $1,098 57.9% $1,205 62.9% $1,503 78.4% $1,330 73.7% $1,042 85.1%
Commercial real estate
and multi-family....... 426 22.5 508 22.8 202 10.5 102 5.7 46 4.1
Construction............ 79 4.2 97 2.2 37 2.0 24 1.3 24 1.6
Consumer and
other loans........... 314 15.4 99 12.1 287 9.1 350 19.3 372 9.2
------ ----- ------- ----- ------- ----- ------- ----- ------ -----
Total allowance......... $1,917 100.0% $ 1,909 100.0% $ 2,029 100.0% $ 1,806 100.0% $1,484 100.0%
====== ===== ======= ===== ======= ===== ======= ===== ====== =====
</TABLE>
15
<PAGE>
Investment Activities
The investment policy of the Bank, which is established by the Board of
Directors and implemented by the Asset Liability Committee, is designed
primarily to provide and maintain liquidity, to generate a favorable return on
investments without incurring undue interest rate and credit risk, and to
complement the Bank's lending activities. In establishing its investment
strategies, the Bank considers its business and growth plans, the economic
environment, the types of securities to be held and other factors. Federally
chartered savings institutions have the authority to invest in various types of
assets, including U.S. Treasury obligations, securities of various federal
agencies, certain certificates of deposit of insured banks and savings
institutions, certain bankers acceptances, repurchase agreements, loans on
federal funds, and, subject to certain limits, commercial paper and mutual
funds.
The following table sets forth certain information regarding the
amortized cost and market values of the Bank's investments at the dates
indicated.
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------
1999 1998 1997
------------------ ------------------ -------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
------- ------- ------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning deposits .... $ 5,984 $ 5,984 $19,267 $19,267 $25,628 $25,628
======= ======= ======= ======= ======= =======
Investment securities
held-to-maturity:
U.S. government and agency
obligations .............. $57,455 $55,500 $73,612 $73,747 $50,278 $50,433
State and political
subdivisions ............. 4,284 4,168 4,283 4,361 2,544 2,593
Corporate debt securities .. 5,021 4,870 3,000 2,986 -- --
------- ------- ------- ------- ------- -------
Total .................... $66,760 $64,538 $80,895 $81,094 $52,822 $53,026
======= ======= ======= ======= ======= =======
Securities available-for-sale:
U.S. government and agency
obligations .............. $11,994 $11,558 $ 8,000 $ 8,045 $31,254 $31,327
State and political
subdivisions ............. 3,783 3,696 -- -- -- --
Corporate Debt
Securities .............. 6,053 5,833 -- -- -- --
Equity securities
(SLMA stock) ............. -- -- -- -- 10 210
Mutual funds ............... 500 493 500 497 500 500
Other .................... 500 350 500 500 -- --
------- ------- ------- ------- ------- -------
Total .................... $22,830 $21,930 $ 9,000 $ 9,042 $31,764 $32,037
======= ======= ======= ======= ======= =======
</TABLE>
16
<PAGE>
Investment Portfolio Maturities
The following table sets forth certain information regarding the
amortized cost, weighted average yields and maturities of the Bank's investment
securities portfolio, exclusive of interest-earning deposits, at December 31,
1999.
<TABLE>
<CAPTION>
Total
One Year or Less One to Five Years Five to Ten Years More than Ten Years Investment Securities (2)
------------------- --------------------- --------------------- ------------------- -------------------------
Amortized Average Amortized Average Amortized Average Amortized Average Amortized Average Market
Cost Yield Cost Yield Cost Yield Cost Yield Cost Yield Value
---- ----- ---- ----- ---- ----- ---- ----- ---- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. government
obligations.... $5,007 6.18% $ -- --% $ -- --% $ -- --% $ 5,007 6.18% $ 5,019
U.S. agency
obligations.... -- -- 53,016 5.91 11,426 6.66 -- -- 64,442 6.05 62,039
Municipal
obligations.... 425 4.49 -- -- 1,590 4.72 6,052 5.56 8,067 5.34 7,864
Corporate
obligations.... -- -- 11,074 5.72 -- -- -- -- 11,074 5.72 10,703
Other
securities(1).. 1,000 4.91 -- -- -- -- -- -- 1,000 4.91 843
------ ---- ------- ---- ------- ---- ------ ---- ------- ---- -------
Total $6,432 5.90% $64,090 5.88% $13,016 6.43% $6,052 5.56% $89,590 5.94% $86,468
====== ==== ======= ==== ======= ==== ====== ==== ======= ==== =======
</TABLE>
- --------------------
(1) Other securities consists of an investment in adjustable-rate
mortgage-backed securities mutual funds. Such investments do not have a
stated maturity and are considered in the one year or less category based
on quarterly repricing of the investment.
(2) Includes $21.9 million of U.S. government and agency obligations and other
investments which are carried as available-for-sale at December 31, 1999.
Investment securities available-for-sale are carried at market value.
17
<PAGE>
Sources of Funds
General. Deposits, borrowings, loan repayments and cash flows generated
from operations are the primary sources of the Bank's funds for use in lending,
investing and other general purposes.
Deposits. The Bank offers a variety of deposit accounts having a range
of interest rates and terms. The Bank's deposits consist of regular savings,
non-interest bearing checking, NOW checking, money market, and certificate
accounts. Of the deposit accounts, $30.6 million or 7.6% consist of IRA, Keogh
or SEP retirement accounts at December 31, 1999.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates and
competition. The Bank's deposits are primarily obtained from areas surrounding
its offices, and the Bank relies primarily on customer service and long-standing
relationships with customers to attract and retain these deposits. The Bank has
maintained a high level of core deposits consisting of regular savings, money
market, non-interest-bearing checking, and NOW checking, which has contributed
to a low cost-of-funds. At December 31, 1999, core deposits amounted to 61.02%
of total deposits.
The following table sets forth the distribution of the Bank's deposit
accounts at the dates indicated and the weighted average nominal interest rates
on each category of deposits presented. The Bank does not have significant
amount of deposits from out-of-state sources. Management does not believe that
the use of year end balances instead of average balances resulted in any
material difference in the information presented.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------ --------------------------------- ----------------------------
Weighted Weighted Weighted
Percent Average Percent Average Percent Average
of Total Nominal of Total Nominal of Total Nominal
Amount Deposits Rate Amount Deposits Rate Amount Deposits Rate
-------- ------ ---- -------- ------ ---- -------- ------ ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Transaction Accounts
Interest-bearing checking accounts $45,804 11.40% 1.20% $ 44,971 10.25% 1.12% $40,360 8.96% 1.01%
Money market accounts 32,793 8.16 3.59 32,556 7.42 3.37 32,777 7.28 3.32
Non-interest-bearing checking
accounts 7,033 1.75 0.00 6,231 1.42 0.00 5,037 1.12 0.00
-------- ------ ---- -------- ------ ---- -------- ------ ----
Total transaction accounts 85,630 21.32 83,758 19.08 78,174 17.36
Fixed-rate passbook accounts 123,033 30.63 2.47 122,213 27.84 2.50 122,952 27.30 2.50
Adjustable-rate passbook accounts 36,457 9.08 4.14 43,651 9.95 4.13 51,277 11.38 4.97
-------- ------ ---- -------- ------ ---- -------- ------ ----
Total passbook accounts 159,490 39.70 165,864 37.79 174,229 38.68
Certificates of deposit 156,578 38.98 4.90 189,291 43.13 5.02 198,026 43.96 5.38
-------- ------ ---- -------- ------ ---- -------- ------ ----
Total deposits $401,698 100.00% 3.47% $438,913 100.00% 3.64% $450,429 100.00% 3.95%
======== ====== ==== ======== ====== ==== ======== ====== ====
</TABLE>
18
<PAGE>
At December 31, 1999, the Bank had outstanding certificates of deposit in
amounts of $100,000 or more maturing as follows:
Amount
------
Maturing Period (In thousands)
---------------
Three months or less ........ $ 1,769
Over three through six months 889
Over six through 12 months .. 3,788
Over 12 months .............. 5,771
-------
Total ................... $12,217
=======
The following table presents, by various rate categories, the amount of
time deposits outstanding at December 31, 1999, 1998 and 1997, and the periods
to maturity of the certificate accounts outstanding at December 31, 1999.
<TABLE>
<CAPTION>
Period to Maturity from
December 31, 1999 At December 31,
-------------------------------------- ------------------------------------------
Within One to
One Year Three Years Thereafter 1999 1998 1997
-------- ----------- ---------- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Time deposits:
2.00% to 2.99% $ -- $ -- $ -- $ -- $ -- $ 18
3.00% to 3.99% 23,769 836 -- 24,605 22,824 16,897
4.00% to 4.99% 44,430 14,618 2,882 61,930 57,733 37,455
5.00% to 5.99% 20,914 28,360 4,160 53,434 94,210 136,860
6.00% to 6.99% 1,505 14,513 365 16,383 14,048 5,944
7.00% to 7.99% 7 122 53 182 208 314
8.00% to 8.99% 44 -- -- 44 221 453
9.00% to 9.99% -- -- -- -- 47 85
------- ------- ------ -------- -------- --------
Total $90,669 $58,449 $7,460 $156,578 $189,291 $198,026
======= ======= ====== ======== ======== ========
</TABLE>
Borrowings
Deposits are the primary source of funds of the Bank's lending and
investment activities and for its general business purposes. The Bank may obtain
advances from the FHLB of Pittsburgh to supplement its supply of lendable funds.
Advances from the FHLB of Pittsburgh are typically secured by a pledge of the
Bank's stock in the FHLB of Pittsburgh and a portion of the Bank's first
mortgage loans and certain other assets. The Bank, if the need arises, may also
access the Federal Reserve Bank discount window. The following tables set forth
the maximum month-end balance, period ending balance, and weighted average
balance of outstanding FHLB advances at the dates and for the periods indicated,
tegether with the applicable weighted average interest rates.
19
<PAGE>
At December 31,
--------------------------------------
1999 1998 1997
---- ---- ----
(Dollars in thousands)
FHLB advances and other borrowings... $264,299 $163,359 $88,359
======= ======= ======
Weighted average interest rate....... 5.37% 5.77% 6.03%
Years Ended December 31,
--------------------------------
1999 1998 1997
-------- -------- --------
(Dollars in thousands)
Maximum balance of FHLB advances and
other borrowings outstanding ....... $268,128 $163,359 $ 98,359
======== ======== ========
Weighted average balance of FHLB
advances and other borrowings
outstanding ........................ $240,371 $163,359 $ 97,837
======== ======== ========
Weighted average interest rate of FHLB
advances and other borrowings ...... 5.37% 5.77% 6.03%
======== ======== ========
The Bank uses convertible FHLB advances for a portion of its funding
needs. These borrowings are fixed rate, fixed term advances that can be
converted to LIBOR-based floating rate advances at the option of the FHLB, on
each quarterly interest payment date, after an initial period. The following
table sets forth information related to these convertible advances.
<TABLE>
<CAPTION>
At December 31, 1999
--------------------
(Dollars in thousands)
Date first convertible Contractual Maturity Contractual
(month/year) Date (month/year) Amount Interest Rate
------------ ----------------- ------ -------------
<S> <C> <C> <C>
Feb-00 Feb-02 $10,000 4.85%
Mar-00 Mar-05 10,000 5.37
May-00 May-05 5,000 5.30
May-00 May-03 10,000 5.59
Aug-00 Aug-03 5,000 5.45
Feb-01 Feb-04 20,000 4.94
May-01 May-03 5,000 5.75
Feb-02 Feb-09 15,000 4.74
Feb-02 Feb-04 25,000 5.10
Apr-02 Apr-08 10,000 5.41
Jun-02 Jun-08 15,000 5.63
Jun-02 Jun-08 10,000 5.61
Feb-03 Feb-06 20,000 5.15
Mar-03 Mar-08 10,000 5.61
Mar-03 Mar-08 25,000 5.70
Feb-04 Feb-09 10,000 5.05
------- ----
$205,000 5.29
=======
</TABLE>
20
<PAGE>
Subsidiary Activity
The Bank is permitted to invest up to 2% of its assets in the capital
stock of, or secured or unsecured loans to, subsidiary corporations, with an
additional investment of 1% of assets when such additional investment is
utilized primarily for community development purposes. Under such limitations,
as of December 31, 1999, the Bank was authorized to invest up to approximately
$14.4 million in the stock of, or loans to, service corporations (based upon the
2% limitation). In addition, the Bank can designate a subsidiary as an operative
subsidiary if it engages only in activities in which it would be permissible for
the Bank to engage. At December 31, 1999, the Bank had one subsidiary, Third
Delaware Corporation. Third Delaware Corporation is a wholly-owned operating
subsidiary of the Bank and was formed in 1998 for the purpose of investing in
marketable securities. At December 31, 1999, the Bank had $55.6 million invested
in Third Delaware Corporation.
Personnel
As of December 31, 1999, the Bank had 155 full-time and 14 part-time
employees. None of the Bank's employees are represented by a collective
bargaining group. The Bank believes that its relationship with its employees is
good.
Executive Officers of the Registrant
Executive Officers of the Bank and the Company:
Carl F. Gregory is Chairman of the Bank. Mr. Gregory was Chief
Executive Officer of the Bank and of the Company from April 1982 until December
1994. He has been with the Bank since 1962 and will continue to represent the
Bank throughout the communities that the Bank serves in his role as Chairman of
the Bank and Director of the Company.
John R. Stranford has been with the Bank since 1968. He presently
serves as President, Chief Executive Officer, Chief Operating Officer and
Director of the Bank and Company. Mr. Stranford has served as Chief Operating
Officer of the Bank since 1984 and President of the Bank since January 1994.
Prior to that time he served in various capacities as an officer of the Bank.
Dennis R. Stewart has been Senior Vice President and Chief Financial
Officer of the Bank and the Company since May 1999. Prior to that, Mr. Stewart
served as Executive Vice President and Chief Financial Officer of First Coastal
Bank in Virginia Beach, Virginia, where he had been employed since 1990.
Elizabeth Davidson Maier is Senior Vice President and Secretary of the
Bank and the Company and has been with the Bank since 1964. Ms. Maier has been
an officer of the Bank since 1974. Prior to that, Ms. Maier held various
positions at the Bank.
Thomas J. Sposito, II has been with the Bank since 1996. He currently
serves as Senior Vice President and Retail Banking Officer. Mr. Sposito's prior
experience includes 11 years as Manager of Retail Banking at Meridian/Corestates
Bank.
Earl A. Pace, Jr. is Senior Vice President and Chief Information
Officer of the Bank. Mr. Pace has been with the Bank since 1997. Previously, he
was President and CEO of Pace Data Systems, an information technology consulting
firm.
21
<PAGE>
Floyd P. Haggar has been with the Bank since 1998. Mr. Haggar currently
serves as Senior Vice President and Chief Lending Officer of the Bank. His prior
experience includes four years as Senior Vice President and Senior Loan Officer
at Carnegie Bank.
The remaining information relating to Directors and Executive Officers
of the Registrant is incorporated herein by reference to the Registrant's Proxy
Statement for the 1999 Annual Meeting of Stockholders.
REGULATION
Set forth below is a brief description of all material laws and
regulations which relate to the regulation of the Bank and the Company. The
description does not purport to be complete and is qualified in its entirety by
reference to applicable laws and regulations.
On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act (the "Act") which will, effective March 11, 2000, permit
qualifying bank holding companies to become financial holding companies and
thereby affiliate with securities firms and insurance companies and engage in
other activities that are financial in nature. The Act defines "financial in
nature" to include securities underwriting, dealing and market making;
sponsoring mutual funds and investment companies; insurance underwriting and
agency; merchant banking activities; and activities that the Federal Reserve
Board has determined to be closely related to banking. A qualifying national
bank also may engage, subject to limitations on investment, in activities that
are financial in nature, other than insurance underwriting, insurance company
portfolio investment, real estate development, and real estate investment,
through a financial subsidiary of the bank.
The Act also prohibits new unitary thrift holding companies from
engaging in nonfinancial activities or from affiliating with a nonfinancial
entity. As a grandfathered unitary thrift holding company, the Company will
retain its authority to engage in nonfinancial activities.
Company Regulation
General. The Company is a unitary savings and loan holding company
subject to regulatory oversight by the OTS. As such, the Company is required to
register and file reports with the OTS and is subject to regulation and
examination by the OTS. In addition, the OTS has enforcement authority over the
Company and its non-savings association subsidiaries, should such subsidiaries
be formed, which also permits the OTS to restrict or prohibit activities that
are determined to be a serious risk to the subsidiary savings association. This
regulation and oversight is intended primarily for the protection of the
depositors of the Bank and not for the benefit of stockholders of the Company.
The Company is also required to file certain reports with, and otherwise comply
with, the rules and regulations of the OTS and the SEC.
QTL Test. As a unitary savings and loan holding company, the Company
generally is not subject to activity restrictions, provided the Bank satisfies
the QTL test. If the Company acquires control of another savings association as
a separate subsidiary, it would become a multiple savings and loan holding
company, and the activities of the Company and any of its subsidiaries (other
than the Bank or any other SAIF-insured savings association) would become
subject to restrictions applicable to bank holding companies unless such other
associations each also qualify as a QTL and were acquired in a supervisory
acquisition.
22
<PAGE>
Bank Regulation
General. As a federally chartered, SAIF-insured savings association,
the Bank is subject to extensive regulation by the OTS and the FDIC. Lending
activities and other investments must comply with various federal statutory and
regulatory requirements. The Bank is also subject to certain reserve
requirements promulgated by the Federal Reserve Board.
The OTS, in conjunction with the FDIC, regularly examines the Bank and
prepares reports for the consideration of the Bank's Board of Directors on any
deficiencies that they find in the Bank's operations. The Bank's relationship
with its depositors and borrowers is also regulated to a great extent by federal
law, especially in such matters as the ownership of savings accounts and the
form and content of the Bank's mortgage documents.
The Bank must file reports with the OTS and the FDIC concerning its
activities and financial condition, in addition to obtaining regulatory
approvals prior to entering into certain transactions such as mergers with or
acquisitions of other savings institutions. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the SAIF and depositors.
The regulatory structure also gives the regulatory authorities extensive
discretion in connection with their supervisory and enforcement activities and
examination policies, including policies with respect to the classification of
assets and the establishment of adequate loan loss reserves for regulatory
purposes. Any change in such regulations, whether by the OTS, the FDIC or the
Congress could have a material adverse impact on the Company, the Bank and their
operations. The Company is also required to file certain reports with, and
otherwise comply with, the rules and regulations of the OTS and the SEC.
Insurance of Deposit Accounts. The Bank's deposit accounts are insured
by the SAIF to a maximum of $100,000 for each insured member (as defined by law
and regulation). The FDIC has the authority, should it initiate proceedings to
terminate an institution's deposit insurance, to suspend the insurance of any
such institution without tangible capital. However, if a savings association has
positive capital when it includes qualifying intangible assets, the FDIC cannot
suspend deposit insurance unless capital declines materially, the institution
fails to enter into and remain in compliance with an approved capital plan or
the institution is operating in an unsafe or unsound manner.
Regardless of an institution's capital level, insurance of deposits may
be terminated by the FDIC upon a finding that the institution has engaged in
unsafe or unsound practices, is in an unsafe or unsound condition to continue
operations or has violated any applicable law, regulation, rule, order or
condition imposed by the FDIC or the institution's primary regulator. The
management of the Bank is unaware of any practice, condition or violation that
might lead to termination of its deposit insurance.
The FDIC charges an annual assessment for the insurance of deposits
based on the risk a particular institution poses to its deposit insurance fund.
This risk classification is based on an institution's capital group and
supervisory subgroup assignment.
Regulatory Capital Requirements. OTS capital regulations require
savings institutions to meet three capital standards: (1) tangible capital equal
to 1.5% of total adjusted assets, (2) a leverage ratio (core capital) equal to
at least 4% of total adjusted assets and (3) a risk-based capital requirement
equal to 8.0% of total risk-weighted assets. In addition, the OTS prompt
corrective action regulation provides that a savings institution that has a
leverage capital ratio of less than 4% (3% for institutions receiving the
highest examination rating) will be deemed to be "undercapitalized" and may be
subject to certain restrictions.
23
<PAGE>
At December 31, 1999, the Bank was in compliance with all of its
regulatory capital requirements.
Dividend and Other Capital Distribution Limitations. The Bank may not
declare or pay a cash dividend on its capital stock if the effect thereof would
be to reduce the regulatory capital of the Bank below the amount required for
the liquidation account established at the time of the Bank's mutual-to-stock
conversion.
Savings associations that would remain at least adequately capitalized
following the capital distribution, and that meet other specified requirements,
are not required to file a notice or application for capital distributions (such
as cash dividends) declared below specified amounts. Savings associations which
are eligible for expedited treatment under current OTS regulations are not
required to file a notice or an application with the OTS if (i) the savings
association would remain at least adequately capitalized following the capital
distribution and (ii) the amount of capital distribution does not exceed an
amount equal to the savings association's net income for that year to date, plus
the savings association's retained net income for the previous two years. Thus,
only undistributed net income for the prior two years may be distributed in
addition to the current year's undistributed net income without the filing of an
application with the OTS. Savings associations which do not qualify for
expedited treatment or which desire to make a capital distribution in excess of
the specified amount, must file an application with, and obtain the approval of,
the OTS prior to making the capital distribution. A savings association that is
a subsidiary of a savings and loan holding company, and under certain other
circumstances, must file a notice with OTS prior to making the capital
distribution. The OTS limitations on capital distributions are similar to the
limitations imposed upon national banks.
Qualified Thrift Lender Test. The Home Owners' Loan Act ("HOLA"), as
amended, requires savings institutions to meet a QTL test. If the Bank maintains
an appropriate level of Qualified Thrift Investments (primarily residential
mortgages and related investments, including certain mortgage-backed securities)
("QTIs") and otherwise qualifies as a QTL, it will continue to enjoy full
borrowing privileges from the FHLB of Pittsburgh. The required percentage of
QTIs is 65% of portfolio assets (defined as all assets minus intangible assets,
property used by the institution in conducting its business and liquid assets
equal to 10% of total assets). Certain assets are subject to a percentage
limitation of 20% of portfolio assets. In addition, savings associations may
include shares of stock of the FHLBs, FNMA and FHLMC as qualifying QTIs. The
FDICIA also amended the method for measuring compliance with the QTL test to be
on a monthly basis in nine out of every 12 months, as opposed to on a daily or
weekly average of QTIs. As of December 31, 1999, the Bank was in compliance with
its QTL requirement with 91.8% of its assets invested in QTIs.
A savings association that does not meet a QTL test must either convert
to a bank charter or comply with the following restrictions on its operations:
(i) the savings association may not engage in any new activity or make any new
investment, directly or indirectly, unless such activity or investment is
permissible for a national bank; (ii) the branching powers of the savings
association shall be restricted to those of a national bank; (iii) the savings
association shall not be eligible to obtain any advances from its FHLB; and (iv)
payment of dividends by the savings association shall be subject to the rules
regarding payment of dividends by a national bank. Upon the expiration of three
years from the date the savings association ceases to be a QTL, it must cease
any activity and not retain any investment not permissible for a national bank
and immediately repay any outstanding FHLB advances (subject to safety and
soundness considerations).
Liquidity Requirements. All savings associations are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may
24
<PAGE>
vary from time to time (between 4% and 10%) depending upon economic conditions
and savings flows of all savings associations. At the present time, the required
liquid asset ratio is 4%. At December 31, 1999, the Bank's liquidity ratio was
17.4%.
Federal Home Loan Bank System. The Bank is a member of the FHLB of
Pittsburgh, one of 12 regional FHLBs that administer the home financing credit
function of savings associations. Each FHLB serves as a reserve or central bank
for its members within its assigned region. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It makes
loans to members (i.e., advances) in accordance with policies and procedures
established by the Board of Directors of the FHLB.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Pittsburgh in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year. At December 31, 1999, the Bank had $13.0 million in
FHLB stock, which was in compliance with this requirement.
Federal Reserve System. The Federal Reserve Board requires all
depository institutions to maintain non-interest bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts) and non-personal time deposits. The balances maintained to
meet the reserve requirements imposed by the Federal Reserve Board may be used
to satisfy the liquidity requirements that are imposed by the OTS. At December
31, 1999, the Bank's total transaction accounts required a reserve level of
$1,837,000 which was entirely offset by the Bank's vault cash on hand.
Savings associations have authority to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve policy generally requires savings
associations to exhaust all OTS sources before borrowing from the Federal
Reserve System. The Bank had no such borrowings at December 31, 1999.
Item 2. Properties
- --------------------
The Company is located and conducts its business at 3 Penns Trail,
Newtown, Pennsylvania. The Bank operates from its main office and 15 branch
offices located in Philadelphia and Bucks Counties, Pennsylvania and Mercer
County, New Jersey. The Bank also owns two lots, one of which has a building,
behind its Doylestown branch office. The building is leased to a third-party and
the other is used as a parking lot for employees and tenants of the Bank. The
net book value of the two lots was $102,000 at December 31, 1999. In addition,
the Bank owns a vacant lot at Newtown Yardley Road and Friends Lane, Newtown,
Pennsylvania. This lot was purchased in 1993 for future expansion and had a net
book value of $1.1 million at December 31, 1999.
25
<PAGE>
The following table sets forth certain information regarding the Bank's
properties:
<TABLE>
<CAPTION>
Leased or Leased or
Location Owned Location Owned
-------- ----- -------- -----
<S> <C> <C> <C>
MAIN OFFICE OPERATIONS OFFICE
Newtown Office Operations Center
3 Penns Trail 62 Walker Lane
Newtown, PA 18940 Owned Newtown, PA 18940(1) Owned
BRANCH OFFICES
Frankford Office Newtown Office
4625 Frankford Avenue 950 Newtown Yardley Road
Philadelphia, PA 19124 Owned Newtown, PA 18940 Leased
Warminster Office Ewing Office
601 Louis Drive 2075 Pennington Road
Warminster, PA Leased Trenton, NJ 08618 Owned
Hamilton Office Mayfair Office
1850 Route 33 Roosevelt Blvd. at Unruh
Hamilton Square, NJ 08690 Owned Philadelphia, PA 19149 Owned
Fishtown Office Doylestown Office
York & Memphis Streets 60 North Main Street
Philadelphia, PA 19125 Owned Doylestown, PA 18901 Owned
Cross Keys Office Feasterville Office
834 North Easton Highway Buck Hotel Complex
Doylestown, PA 18901 Owned Feasterville, PA 19053 Leased
Bridesburg Office Quakerbridge Office
Orthodox & Almond Streets 590 Lawrence Square Blvd.
Philadelphia, PA 19137 Owned Lawrenceville, NJ 08648 Leased
New Britain Office Princeton Office
100 Town Center Princeton Shopping Center
New Britain, PA 18901 Leased 301 N. Harrison Street Leased
Princeton, NJ 08540
Woodhaven Office
Knights Road Center
4014 Woodhaven Road
Philadelphia, PA 19154 Leased
</TABLE>
- -----------------------
(1) This office serves as administrative offices, check processing, training
center, mail processing and storage center for the Bank
26
<PAGE>
Item 3. Legal Proceedings
- --------------------------
Neither the Company nor its subsidiaries are involved in any pending
legal proceedings, other than routine legal matters occurring in the ordinary
course of business, which in the aggregate involve amounts which are believed by
management to be immaterial to the consolidated financial condition or results
of operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
None.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
- --------------------------------------------------------------------------------
Information relating to the market for Registrant's common equity and
related stockholder matters appears under "Stock Market Information" in the
Registrant's 1999 Annual Report to Stockholders on page 10 and is incorporated
herein by reference.
Item 6. Selected Financial Data
- --------------------------------
The above-captioned information appears under "Selected Financial and
Other Data" in the Registrant's 1999 Annual Report to Stockholders on page 11
and is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
-------------
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Registrant's 1999 Annual Report to Stockholders on pages 13 through 18 is
incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
- --------------------------------------------------------------------
Asset and Liability Management
Managing Interest Rate Risk. Interest rate risk is defined as the
sensitivity of the Bank's current and future earnings as well as its capital to
changes in the level of market interest rates. The Bank's exposure to interest
rate risk results from, among other things, the difference in maturities in
interest-earning assets and interest-bearing liabilities. Since the Bank's
assets currently have a longer maturity than its liabilities, the Bank's
earnings could be negatively impacted during a period of rising interest rates
and conversely, positively impacted during a period of falling interest rates.
The relationship between the interest rate sensitivity of the Bank's assets and
liabilities is continually monitored by management. In this regard, the Bank
emphasizes the origination of shorter term or adjustable rate assets for
portfolio while originating longer term fixed rate assets for resale.
Additionally, the origination level of fixed rate assets are continually
monitored and if deemed appropriate, the Bank will enter into forward
commitments for the sale of these assets to ensure the Bank is not exposed to
undue interest rate risk.
The Bank utilizes its investment and mortgage-backed security portfolio
in managing its liquidity and therefore seeks securities with a stated or
average estimated maturities of less than five years. These securities are
readily marketable and provide the Bank with a cash flow stream to fund asset
growth or liability maturities.
27
<PAGE>
A significant portion of the Bank's assets has been funded with CDs
including jumbo CDs. Unlike other deposit products such as checking and savings
accounts, CDs carry a high degree of interest rate sensitivity and therefore,
their renewal will vary based on the competitiveness of the Bank's interest
rates. The Bank has attempted to price its CDs to be competitive at the shorter
maturities (i.e., maturities of less than one year) in order to better match the
repricing characteristics of portfolio loans. At December 31, 1999,
approximately 39.0% of the Bank's deposits were CDs.
The Bank utilizes borrowings from the FHLB in managing its interest
rate risk and as a tool to augment deposits in funding asset growth. The Bank
may utilize these funding sources to better match its longer term repricing
assets (i.e., between one and five years).
The nature of the Bank's current operations is such that it is not
subject to foreign currency exchange or commodity price risk. Additionally,
neither the Company nor the Bank owns any trading assets. At December 31, 1999,
the Bank did not have any hedging transactions in place such as interest rate
swaps, caps, or floors.
As part of its interest rate risk management, the Bank uses the
Interest Rate Risk Exposure Report, which is generated quarterly by the OTS.
This report forecasts changes in the Bank's market value of portfolio equity
("MVPE") under alternative interest rate environments. The MVPE is defined as
the net present value of the Bank's existing assets, liabilities and off-balance
sheet instruments. The calculated estimates of change in MVPE at December 31,
1999 are as follows:
MVPE
-------------------------------------------------------
Change in Interest Rate Amount % Change
----------------------- ------ --------
(In Thousands)
+300 Basis Points $20,609 .57%
+200 Basis Points $31,887 -33%
+100 Basis Points $39,724 -16%
Flat Rate $47,391 0%
-100 Basis Points $50,160 +6%
-200 Basis Points $48,208 +2%
-300 Basis Points $43,169 -9%
Management believes that the assumptions utilized in evaluating the
vulnerability of the Company's earnings and capital to changes in interest rates
approximate actual experience; however, the interest rate sensitivity of the
Bank's assets and liabilities as well as the estimated effect of changes in
interest rates on MVPE could vary substantially if different assumptions are
used or actual experience differs from the experience on which the assumptions
were based.
In the event the Bank should measure an excessive decline in its MVPE
as the result of an immediate and sustained change in interest rate, it has a
number of options which it could utilize to remedy that situation. The Bank
could restructure its investment portfolio through sale or purchase of
securities with more favorable repricing attributes. It could also emphasize
loan products with appropriate maturities or repricing attributes, or it could
attract deposits or obtain borrowings with desired maturities.
28
<PAGE>
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
The Consolidated Financial Statements of TF Financial Corporation and
its subsidiaries are included in the Registrant's 1999 Annual Report to
Stockholders on pages 19 through 56 and are incorporated herein by reference.
Item 9. Changes in and Disagreements With Accountants on Accounting and
- --------------------------------------------------------------------------------
Financial Disclosure
--------------------
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
The information contained under the sections captioned "Proposal 1 -
Election of Directors -- General Information and Nominees" and "-- Biographical
Information" on pages 3 through 5 and "Additional Information About Directors
and Executive Officers -- Section 16(a) Beneficial Ownership Reporting
Compliance" on page 15 of the Registrant's definitive proxy statement for the
Registrant's 2000 Annual Meeting of Stockholders (the "Proxy Statement") is
incorporated herein by reference.
Additional information concerning executive officers is included under
"Item 1. Business -- Executive Officers of the Registrant."
Item 11. Executive Compensation
- --------------------------------
The information relating to executive compensation is incorporated
herein by reference to the information contained under the section captioned
"Director and Executive Officer Compensation" on pages 6 through 15 of the
Registrant's Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
The information relating to security ownership of certain beneficial
owners and management is incorporated herein by reference to the information
contained under the section captioned "Voting Securities and Principal Holders
Thereof" on pages 2 and 3 and in the first table under the section captioned
"Proposal 1 - Election of Directors" on page 4 of the Registrant's Proxy
Statement.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information relating to certain relationships and related
transactions is incorporated herein by reference to the information contained
under the section captioned "Additional Information About Directors and
Executive Officers -- Certain Relationships and Related Transactions" on page 15
of the Registrant's Proxy Statement.
29
<PAGE>
PART IV
Item 14. Exhibits, Financial Statements and Reports on Form 8-K
- ----------------------------------------------------------------
(a) The following documents are filed as a part of this report:
(1) The following financial statements and the report of the
independent auditor of the Company included in the Company's 1999 Annual Report
to Stockholders are incorporated herein by reference.
Independent Auditors' Report
Consolidated Statements of Financial Position as of December 31, 1999 and 1998
Consolidated Statements of Earnings For the Years Ended
December 31, 1999, 1998 and 1997
Consolidated Statement of Changes in Stockholders' Equity and Comprehensive
Income for the Years Ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
The remaining information appearing in the Annual Report to
Stockholders is not deemed to be filed as part of this report, except as
expressly provided herein.
(2) All schedules are omitted because they are not required or
applicable, or the required information is shown in the consolidated financial
statements or the notes thereto.
<TABLE>
<CAPTION>
<S> <C>
(3) Exhibits
(a) The following exhibits are filed as part of this report.
3.1 Certificate of Incorporation of TF Financial Corporation*
3.2 Bylaws of TF Financial Corporation*
4.0 Stock Certificate of TF Financial Corporation*
4.1 The Company's Rights Agreement dated November 22, 1995**
10.1 Third Federal Savings and Loan Association Management Stock Bonus Plan*
10.2 TF Financial Corporation 1994 Stock Option Plan*
10.3 Third Federal Savings Bank Directors Consultation and Retirement Plan***
10.4 TF Financial Corporation Incentive Compensation Plan***
10.5 Severance Agreement with John R. Stranford***
10.6 Severance Agreement with Thomas J. Sposito II****
10.7 Severance Agreement with Earl A. Pace, Jr.*****
10.8 Severance Agreement with Dennis R. Stewart
10.9 TF Financial Corporation 1998 Stock Option Plan****
13.0 1999 Annual Report to Stockholders
21.0 Subsidiary Information
23.0 Consent of Independent Auditor
27.0 Financial Data Schedule
</TABLE>
30
<PAGE>
- --------------
* Incorporated herein by reference from the Exhibits to Form S-1,
Registration Statement, File No. 33-76960.
** Incorporated herein by reference to the Registrants Form 8-A filed with the
Securities and Exchange Commission on November 22, 1995.
*** Incorporated herein by reference to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1995.
**** Incorporated herein by reference to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1997.
*****Incorporated herein by reference to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1998.
(b) Reports on Form 8-K.
During the quarter ended December 31, 1999, the Registrant filed a
Current Report on Form 8-K dated December 8, 1999 (Items 5 and 7) to report the
repurchase of shares of Common Stock representing approximately 6.4 percent of
the outstanding shares prior to the commencement of the Registrant's latest
repurchase program.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized.
TF FINANCIAL CORPORATION
Dated: March 29, 2000 By: /s/ John R. Stranford
---------------------
John R. Stranford
President, Chief Executive Officer
and Director
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Report has been signed below by the following persons on behalf of
the Registrant and in the capacities indicated as of March 29, 2000.
<TABLE>
<CAPTION>
<S> <C>
By: /s/ John R. Stranford By: /s/ Dennis R. Stewart
------------------------------------- ---------------------
John R. Stranford Dennis R. Stewart
President, Chief Executive Officer Senior Vice President, Chief
and Director Financial Officer and Treasurer
(Principal Executive Officer) (Principal Financial and Accounting
Officer)
By: /s/ Carl F. Gregory By: /s/ Robert N. Dusek
------------------------------------- -------------------
Carl F. Gregory Robert N. Dusek
Director Chairman of the Board
By: /s/ Thomas J. Gola By: /s/ George A. Olsen
------------------------------------- -------------------
Thomas J. Gola George A. Olsen
Director Director
</TABLE>
31
CHANGE IN CONTROL SEVERANCE AGREEMENT
-------------------------------------
THIS CHANGE IN CONTROL SEVERANCE AGREEMENT ("Agreement") entered into this
3rd day of May, 1999 ("Effective Date"), by and between Third Federal Savings
Bank (the "Savings Bank") and Dennis R. Stewart (the "Employee").
WHEREAS, the Employee is currently employed by the Savings Bank as a Senior
Vice President and Chief Financial Officer and is experienced in all phases of
the business of the Savings Bank; and
WHEREAS, the parties desire by this writing to set forth the rights and
responsibilities of the Savings Bank and Employee if the Savings Bank should
undergo a change in control (as defined hereinafter in the Agreement) after the
Effective Date.
NOW, THEREFORE, it is AGREED as follows:
1. Employment. The Employee is employed in the capacity as a Senior Vice
President and Chief Financial Officer of the Savings Bank. The Employee shall
render such administrative and management services to the Savings Bank and TF
Financial Corporation ("Parent") as are currently rendered and as are
customarily performed by persons situated in a similar executive capacity. The
Employee's other duties shall be such as the Board of Directors for the Savings
Bank (the "Board of Directors" or "Board") may from time to time reasonably
direct, including normal duties as an officer of the Savings Bank.
2. Term of Agreement. The term of this Agreement shall be for the period
commencing on the Effective Date and ending twenty-four (24) months thereafter.
Additionally, on, or before, each annual anniversary date from the Effective
Date, the term of this Agreement may be extended for an additional one year
period beyond the then effective expiration date upon a determination and
resolution of the Board of Directors that the performance of the Employee has
met the requirements and standards of the Board, and that the term of such
Agreement shall be extended.
3. Termination of Employment in Connection with or Subsequent to a Change
in Control.
----------------------------------------------------------------------
(a) Notwithstanding any provision herein to the contrary, in the event of
the involuntary termination of Employee's employment under this Agreement,
absent Just Cause, in connection with, or within twenty-four (24) months after,
any Change in Control of the Bank or Parent, Employee shall be paid an amount
equal to two (2) times the prior three (3) calendar year (or lesser period if
not employed for such 3 year period) average annual compensation paid to the
Employee by the Bank (whether said amounts were received or
1
<PAGE>
deferred by the Employee) and the costs associated with maintaining coverage
under the Bank's medical and dental insurance reimbursement plans similar to
that in effect on the date of termination of employment for a period of one year
thereafter. Said sum shall be paid, at the option of Employee, either in one (1)
lump sum within thirty (30) days of such termination, or in periodic payments
over the next 24 months, and such payments shall be in lieu of any other future
payments which the Employee would be otherwise entitled to receive.
Notwithstanding the forgoing, all sums payable hereunder shall be reduced in
such manner and to such extent so that no such payments made hereunder when
aggregated with all other payments to be made to the Employee by the Bank or the
Parent shall be deemed an "excess parachute payment" in accordance with Section
280G of the Internal Revenue Codes of 1986, as amended (the "Code") and be
subject to the excise tax provided at Section 4999(a) of the Code. The term
"Change in Control" shall mean: (i) the sale of all, or a material portion, of
the assets of the Bank or the Parent; (ii) the merger or recapitalization of the
Bank or the Parent whereby the Bank or the Parent is not the surviving entity;
(iii) a change in control of the Bank or the Parent, as otherwise defined or
determined by the Office of Thrift Supervision or regulations promulgated by it;
or (iv) the acquisition, directly or indirectly, of the beneficial ownership
(within the meaning of that term as it is used in Section 13(d) of the
Securities Exchange Act of 1934 and the rules and regulations promulgated
thereunder) of twenty-five percent (25%) or more of the outstanding voting
securities of the Bank or the Parent by any person, trust, entity or group. The
term "person" means an individual other than the Employee, or a corporation,
partnership, trust, association, joint venture, pool, syndicate, sole
proprietorship, unincorporated organization or any other form of entity not
specifically listed herein.
(b) Notwithstanding any other provision of this Agreement to the contrary
except as provided at Sections 4(b), 4(c), 4(d), 4(e) and 5, Employee may
voluntarily terminate his employment under this Agreement within twenty-four
(24) months following a Change in Control of the Bank or Parent, and Employee
shall thereupon be entitled to receive the payment and benefits described in
Section 3(a) of this Agreement, upon the occurrence, or within ninety (90) days
thereafter, of any of the following events, which have not been consented to in
advance by the Employee in writing: (i) if Employee would be required to move
his personal residence or perform his principal executive functions more than
fifty (50) miles from the Employee's primary office as of the signing of this
Agreement; (ii) if in the organizational structure of the Bank or Parent,
Employee would be required to report to a person or persons deemed to be at a
management level below the management level to which Employee was reporting to
prior to the Change in Control; (iii) if the Bank or Parent should fail to
maintain the Employee's base compensation in effect as of the date of the Change
in Control and existing employee benefits plans, including material fringe
2
<PAGE>
benefit, stock option and retirement plans, except to the extent that such
reduction in benefit programs is part of an overall adjustment in benefits for
all employees of the Bank or Parent and does not disproportionately adversely
impact the Employee; (iv) if Employee would be assigned duties and
responsibilities other than those normally associated with his position as
referenced at Section 1, herein, for a period of more than six months; or (v) if
Employee's responsibilities or authority have in any way been materially
diminished or reduced for a period of more than six months.
4. Other Changes in Employment Status.
----------------------------------
(a) Except as provided for at Section 3, herein, the Board of Directors may
terminate the Employee's employment at any time, but any termination by the
Board of Directors other than termination for Just Cause, shall not prejudice
the Employee's right to compensation or other benefits under the Agreement. The
Employee shall have no right to receive compensation or other benefits for any
period after termination for Just Cause. Termination for "Just Cause" shall
include termination because of the Employee's personal dishonesty, incompetence,
willful misconduct, breach of fiduciary duty involving personal profit,
intentional failure to perform stated duties, willful violation of any law, rule
or regulation (other than traffic violations or similar offenses) or final
cease-and-desist order, or material breach of any provision of the Agreement.
(b) If the Employee is removed and/or permanently prohibited from
participating in the conduct of the Savings Bank's affairs by an order issued
under Sections 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act ("FDIA")
(12 U.S.C. 1818(e)(4) and (g)(1)), all obligations of the Savings Bank under
this Agreement shall terminate, as of the effective date of the order, but the
vested rights of the parties shall not be affected.
(c) If the Savings Bank is in default (as defined in Section 3(x)(1) of
FDIA) all obligations under this Agreement shall terminate as of the date of
default, but this paragraph shall not affect any vested rights of the
contracting parties.
(d) All obligations under this Agreement shall be terminated, except to the
extent determined that continuation of this Agreement is necessary for the
continued operation of the Savings Bank: (i) by the Director of the Office of
Thrift Supervision ("Director of OTS"), or his or her designee, at the time that
the Federal Deposit Insurance Corporation ("FDIC") enters into an agreement to
provide assistance to or on behalf of the Savings Bank under the authority
contained in Section 13(c) of FDIA; or (ii) by the Director of the OTS, or his
or her designee, at the time that the Director of the OTS, or his or her
designee approves a supervisory merger to resolve problems related to operation
of the Savings Bank or when
3
<PAGE>
the Savings Bank is determined by the Director of the OTS to be in an unsafe or
unsound condition. Any rights of the parties that have already vested, however,
shall not be affected by such action.
(e) Notwithstanding anything herein to the contrary, any payments made to
the Employee pursuant to the Agreement, or otherwise, shall be subject to and
conditioned upon compliance with 12 USC ss.1828(k) and any regulations
promulgated thereunder.
5. Suspension of Employment . If the Employee is suspended and/or
temporarily prohibited from participating in the conduct of the Savings Bank's
affairs by a notice served under Section 8(e)(3) or (g)(1) of the FDIA (12
U.S.C. 1818(e)(3) and (g)(1)), the Savings Bank's obligations under the
Agreement shall be suspended as of the date of service, unless stayed by
appropriate proceedings. If the charges in the notice are dismissed, the Savings
Bank shall, (i) pay the Employee all or part of the compensation withheld while
its contract obligations were suspended and (ii) reinstate any of its
obligations which were suspended.
6. Successors and Assigns.
----------------------
(a) This Agreement shall inure to the benefit of and be binding upon any
corporate or other successor of the Savings Bank which shall acquire, directly
or indirectly, by merger, consolidation, purchase or otherwise, all or
substantially all of the assets or stock of the Savings Bank.
(b) The Employee shall be precluded from assigning or delegating his rights
or duties hereunder without first obtaining the written consent of the Savings
Bank.
7. Amendments. No amendments or additions to this Agreement shall be
binding upon the parties hereto unless made in writing and signed by both
parties, except as herein otherwise specifically provided.
8. Applicable Law. This agreement shall be governed by all respects whether
as to validity, construction, capacity, performance or otherwise, by the laws of
the Commonwealth of Pennsylvania, except to the extent that Federal law shall be
deemed to apply.
9. Severability. The provisions of this Agreement shall be deemed severable
and the invalidity or unenforceability of any provision shall not affect the
validity or enforceability of the other provisions hereof.
10. Arbitration. Any controversy or claim arising out of or relating to
this Agreement, or the breach thereof, shall be settled by arbitration in
accordance with the rules then in effect of the district office of the American
Arbitration Association ("AAA")
4
<PAGE>
nearest to the home office of the Savings Bank, and judgment upon the award
rendered may be entered in any court having jurisdiction thereof, except to the
extent that the parties may otherwise reach a mutual settlement of such issue.
The Savings Bank shall incur the cost of all fees and expenses associated with
filing a request for arbitration with the AAA, whether such filing is made on
behalf of the Savings Bank or the Employee, and the costs and administrative
fees associated with employing the arbitrator and related administrative
expenses assessed by the AAA. Each party shall be responsible for any fees
incurred on its own behalf with respect to other expenses, including attorneys'
fees, arising from such dispute, proceedings or actions.
11. Confidentiality.
---------------
(a) Employee agrees that, at all times hereafter, he will keep all
confidential and proprietary business and marketing strategies of Savings Bank
and any and all other information which he learned regarding the Savings Bank
during the course of his employment by Savings Bank, in strictest confidence and
will not disclose any part or aspect thereof to anyone for any reason unless
required by law to do so.
(b) All marketing and business materials, existing or prospective customer
lists or statements, seminar materials, drawings, designs, books, cards,
records, accounts, audio visual reports, slides, files, notes, memoranda, and
other papers, and any software, computer programs, or data base information or
any other information obtained from Savings Bank or connected with or arising
from any affairs of Savings Bank or his employment hereunder (the "Records"), in
the charge or possession or knowledge of Employee shall be and remain the
exclusive property of Savings Bank and shall not be used, transferred or
disclosed in any way by Employee except in the ordinary performance of
Employee's duties for Savings Bank while an employee of Savings Bank. Upon the
termination of Employee's employment, any and all Records of whatever kind and
in whatever form maintained, as well as all copies and reproductions thereof in
the possession or control of Employee shall be turned over and delivered by
Employee to Savings Bank without any hesitancy or delay.
12. Entire Agreement. This Agreement together with any understanding or
modifications thereof as agreed to in writing by the parties, shall constitute
the entire agreement between the parties hereto.
5
THE COMMUNITY IS OUR FOCUS
TF FINANCIAL CORPORATION
------------------------
1999 ANNUAL REPORT
<PAGE>
Contents
Introduction 1
Letter to Shareholders 2
Community Banking 5
Board of Directors
and Management Team 8
Financial Statements
and Supplementary Data 9
Office Locations Inside Back Cover
<PAGE>
[GRAPHICS OMITTED]
The demands on the financial services industry have increasingly moved towards
faster, easier, more convenient modes of operation. Here at Third Federal
Savings Bank, we have worked to satisfy those demands without losing sight of
our tradition of personalized service. It is our continued mission to remain
focused on delivering the quality services our customers desire and deserve. Our
reputation was built on a solid foundation of community values, and these values
will continue to guide us as our community grows. We're proud of the customer
relationships we foster.
Your good neighbor since 1921
<PAGE>
To our stockholders:
This past year has been one of challenge and change. Interest rates have been
rising on the anticipation of rate increases by the Federal Reserve Board. Bank
stocks have fallen out of favor with equity pouring into technology stocks. We
have taken advantage of the depressed market in our stock by repurchasing a
total of 10% of our outstanding shares during 1999. Furthermore, on January 18,
2000 our Board authorized the repurchase of an additional 5% of the Company's
stock.
During 1999, our total assets increased 8% to $721 million and our loans
increased 19% to $288 million. Our net income increased by 9.5% to $4.422
million compared to 1998 net income of $4.038 million. Basic earnings per share
rose from $1.39 to $1.60 or 15% while diluted earnings per share rose 21% from
$1.26 to $1.52.
Many new products and services were introduced throughout the year including our
debit card, telephone banking and our Internet web page at www.thirdfedbank.com.
Scheduled for release in the coming months will be online banking, bill paying
services and check imaging. While maintaining our traditions of community
banking we will continue to offer non-traditional banking products and services.
The technology we select will focus on the customer as a way to develop new and
enhance existing relationships. We will focus on determining what our customers
need and then implementing the technology or service to best serve those needs.
Two new branch offices were opened in 1999. Our new Lawrenceville, New Jersey
branch office complements our Mercer County franchise. The second branch office
was opened in Newtown Township, Bucks County, Pennsylvania. We are proud of our
success over the past year in increasing our consumer and commercial loan
portfolios while reducing our ratio of non-performing assets by 10% from 0.29%
to 0.26% of assets, both of which are substantially below industry average.
Management and the Board of Directors are committed to increasing earnings
growth and maximizing stockholder value as well as maintaining our commitment to
our customers and communities throughout our branch network.
Thank you for your continued support, encouragement and the opportunity to serve
you.
/s/ John R. Stranford
President and Chief Executive Officer
2
<PAGE>
We work hard to realize our customers' vision for financial services and
security. By looking through their eyes, we have shaped a business that caters
directly to individual needs. Customer satisfaction is always priority one.
The customer's
perception is [GRAPHICS OMITTED]
our reality.
TF FINANCIAL CORPORATION 1999 ANNUAL REPORT 3
<PAGE>
[GRAPHIC OMITTED]
Our job is not just to listen, but to understand, so we can help provide the
right solutions.
4
<PAGE>
[GRAPHICS OMITTED]
---------------------------
COMMUNITY BANKING
In matters of customer service,
we go the extra step.
In this fast paced world of change, our personal-service banking philosophy
is a welcome alternative to the often less-than-personal treatment you might get
from a "mega-bank." We know that our customers' financial needs are important to
them. What makes us special is that it's also important to us. Community
involvement is, and will continue to be, our most valued tradition.
The value of this tradition is more than just words. It is a working system that
our staff is committed to providing everyday. We are proud of the superior
performance of our employees and the exceptional quality assistance they
provide. It is through them that we understand the distinct needs of each
community, allowing us to continue providing the personalized service we so
greatly value. That is why we are careful to employ a team of professionals that
share our guiding business principle, one that is dedicated to the financial
success of our customers, and in turn, the success of our company.
TF FINANCIAL CORPORATION 1999 ANNUAL REPORT 5
<PAGE>
[GRAPHICS OMITTED]
- --------------------
COMMUNITY BANKING
1999 has been a successful year of growth. We've relied on our shareholders,
customers, and employees for our continued prosperity. From commercial to
personal banking, we continue to work to generate profitable business endeavors
today so our shareholders' enjoy ongoing financial growth.
It is our philosophy to always keep both the shareholders and customers informed
of changing banking trends and services, keeping everyone involved in their
financial futures and abreast of changing technologies. That is why we provide a
multitude of banking services to satisfy all of our customers' needs...
Senior Checking
Debit Cards
Direct Deposit
Investment Accounts
Loans Business Banking
Telephone Banking
Internet Banking
Our debit card provides convenient,
fast and secure access to funds... [VISA CARD GRAPHICS OMITTED]
allowing one card for shopping
and obtaining cash.
6
<PAGE>
[GRAPHICS OMITTED]
At Third Federal Savings Bank, we uphold traditional banking values while
providing a wealth of non-traditional products and services. We strive to
maintain an atmosphere of stability, dependability, trust and loyalty by always
matching customers' needs with the services that best suit those needs.
Soon Internet Baking will allow
customers to view their account,
manage cash and pay bills all online.
TF FINANCIAL CORPORATION 1999 ANNUAL REPORT 7
<PAGE>
--------------------------------------
BOARD OF DIRECTORS AND MANAGEMENT TEAM
[GRAPHICS OMITTED]
TF Financial Corporation
Board of Directors
Carl F. Gregory
Thomas J. Gola
John R. Stranford
George A. Olsen
Robert N. Dusek
Chairman of the Board
Executive Officers
John R. Stranford
President and
Chief Executive Officer
Elizabeth Davidson Maier
Senior Vice President and Corporate Secretary
Dennis R. Stewart
Senior Vice President and
Chief Financial Officer
Third Federal Savings Bank
Board of Directors
John R. Stranford
Robert N. Dusek
George A. Olsen
Thomas J. Gola
Albert M. Tantala
William H. Yerkes, III
William J. Happ, Jr.
Carl F. Gregory
Chairman of the Board
Executive Officers
John R. Stranford
President and
Chief Executive Officer
Elizabeth Davidson Maier
Senior Vice President and
Corporate Secretary
Thomas J. Sposito, II
Senior Vice President and
Retail Banking Officer
Earl A. Pace, Jr.
Senior Vice President and
Chief Information Officer
Floyd P. Haggar
Senior Vice President and
Chief Lending Officer
Dennis R. Stewart
Senior Vice President and
Chief Financial Officer
Independent Auditors
Grant Thornton, LLP
Two Commerce Square
2001 Market Street
Philadelphia, PA 19103-7080
Special Counsel
Malizia Spidi & Fisch, PC
1301 K Street, N.W.
Suite 700 East
Washington, D.C. 20005
Transfer Agent and Registrar
American Securities
Transfer & Trust, Inc.
12039 West Alameda Parkway
Suite #Z-2
Lakewood, CO 80228
8
<PAGE>
Contents
Corporate Profile and Related Information 10
Selected Financial Information and Other Data 11
Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Report of Independent Certified
Public Accountants 19
Consolidated Statements of Financial Position 20
Consolidated Statements of Earnings 21
Consolidated Statement of Changes in
Stockholders' Equity and Comprehensive Income 22
Consolidated Statements of Cash Flows 24
Notes to Consolidated Financial Statements 26
TF FINANCIAL CORPORATION 1999 ANNUAL REPORT 9
<PAGE>
Corporate Profile and Related Information
TF Financial Corporation (the "Corporation") is the parent company of Third
Federal Savings Bank ("Third Federal" or the "Savings Bank") and its subsidiary
Third Delaware Corporation, TF Investments Corporation, Teragon Financial
Corporation and Penns Trail Development Corporation. At December 31, 1999, total
assets were approximately $721.9 million. The Corporation was formed as a
Delaware corporation in March 1994 at the direction of the Savings Bank to
acquire all of the capital stock that Third Federal issued upon its conversion
from the mutual to stock form of ownership (the "Conversion") and concurrent
$52.9 million initial public offering effective July 13, 1994. At December 31,
1999, total stockholders' equity was approximately $48.4 million. The
Corporation is a unitary savings and loan holding company which, under existing
laws, generally is not restricted in the types of business activities in which
it may engage, provided that Third Federal retains a specified amount of its
assets in housing-related investments.
Third Federal is a federally chartered stock savings bank headquartered in
Newtown, Pennsylvania, which was originally chartered in 1921 under the name
"Polish American Savings Building and Loan Association." Deposits of Third
Federal have been federally insured since 1935 and are currently insured up to
the maximum amount allowable by the Federal Deposit Insurance Corporation (the
"FDIC"). Third Federal is a community oriented savings institution offering a
variety of financial services to meet the needs of the communities that it
serves. Third Federal expanded its operations in Philadelphia and Bucks
Counties, Pennsylvania, in June 1992 through its acquisition of Doylestown
Federal Savings and Loan Association ("Doylestown"). In September 1996, Third
Federal expanded its operations into Mercer County, New Jersey, through its
acquisition of three branch offices and approximately $143 million of deposits
from Cenlar Federal Savings Bank. Third Federal added a fourth branch office in
Mercer County in December, 1999 with the Corporation's acquisition of Village
Financial Corporation ("Village"). The Village acquisition was consistent with
Third Federal's strategic goal of growing its market share within its market
area and reaching into adjacent market areas, through low-cost, fill-in or
market-extension acquisitions. Third Federal currently operates fifteen branch
offices in Bucks and Philadelphia counties, Pennsylvania and Mercer County, New
Jersey. Third Federal expects to open its sixteenth branch office in Bucks
County, Pennsylvania during the first quarter of 2000.
Third Federal attracts deposits (approximately $401.7 million at December 31,
1999) from the general public and uses such deposits, together with borrowings
(approximately $264.3 million at December 31, 1999) and other funds, primarily
to invest in mortgage-backed and investment securities and to originate or
purchase loans secured by first mortgages on owner-occupied, one-to-four family
residences. To a lesser extent, Third Federal also originates and purchases
commercial real estate and multi-family loans, construction loans and consumer
loans.
Stock Market Information
Since its issuance in July 1994, the Corporation's common stock has been traded
on the Nasdaq National Market. The daily stock quotation for the Corporation is
listed in the Nasdaq National Market published in The Wall Street Journal, The
Philadelphia Inquirer, and other leading newspapers under the trading symbol of
"THRD".
The number of stockholders of record of common stock as of March 20, 2000, was
approximately 635. This does not reflect the number of persons or entities who
held stock in nominee or "street" name through various brokerage firms. At March
20, 2000, there were 2,843,874 shares of the common stock of the Corporation
outstanding.
Dividend Policy
The Corporation's ability to pay dividends to stockholders is dependent in part
upon the dividends it receives from Third Federal. Among other limitations,
Third Federal may not declare or pay a cash dividend on any of its stock if the
effect thereof would cause Third Federal's regulatory capital to be reduced
below (1) the amount required for the liquidation account established in
connection with Third Federal's conversion from mutual to stock form, or (2) the
regulatory capital requirements imposed by the Office of Thrift Supervision
("OTS"). It is the Corporation's policy to pay dividends when it is deemed
prudent to do so. The Board of Directors will consider the payment of a dividend
on a quarterly basis, after giving consideration to the level of profits for the
previous quarter and other relevant information.
Stock Price and Dividend History
Quarter ended Quoted market price
- ------------- ------------------- Dividend
High Low paid per share
---- --- --------------
December 31, 1999 $15.375 $12.500 $0.13
September 30, 1999 $19.375 $14.500 $0.12
June 30, 1999 $21.188 $15.500 $0.12
March 31,1999 $19.000 $15.875 $0.12
December 31, 1998 $20.375 $16.125 $0.12
September 30, 1998 $26.500 $17.375 $0.12
June 30, 1998 $30.000 $24.250 $0.12
March 31,1998 $29.500 $24.750 $0.12
10
<PAGE>
TF Financial Corporation and Subsidiaries
----------------------------
SELECTED FINANCIAL INFORMATION AND OTHER DATA
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data) At December 31,
Financial condition 1999 1998 1997 1996 1995
------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total assets $721,874 $665,608 $597,047 $647,853 $431,828
Loans receivable, net 287,979 240,841 250,711 309,570 238,275
Mortgage-backed securities available
for sale, at fair value 132,515 75,285 36,847 22,027 29,640
Mortgage-backed securities held to maturity, at cost 159,888 180,964 144,074 153,758 137,841
Securities purchased under agreements to resell -- -- 10,000 25,129 --
Investment securities available for sale, at fair value 21,930 9,042 32,037 12,652 15,044
Investment securities held to maturity, at cost 66,760 80,895 52,822 38,544 23,640
Cash and cash equivalents(l) 16,715 42,703 41,625 54,132 27,032
Deposits 401,698 438,913 450,429 469,088 337,069
Advances from the Federal Home Loan Bank
and other borrowings 264,299 163,359 88,359 98,359 73,359
Retained earnings 48,760 45,762 43,176 39,750 37,529
Total stockholders' equity 48,447 52,660 50,095 72,575 73,332
Book value per common share $ 18.81 $ 18.43 $ 17.36 $ 18.31 $ 17.08
Tangible book value per common share $ 16.26 $ 15.84 $ 14.49 $ 15.99 $ 17.08
======================================================
</TABLE>
<TABLE>
<CAPTION>
At or for the year ended December 31,
Summary of operations 1999 1998 1997 1996 1995
------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income $ 47,022 $ 43,579 $43,189 $38,989 $ 29,630
Interest expense 27,974 26,195 24,080 20,797 14,403
Net interest income 19,048 17,384 19,109 18,192 15,227
Provision for loan losses 300 60 397 330 72
Non-interest income 1,593 1,579 2,327 1,794 1,161
Non-interest expense 13,533 12,766 13,583 13,745 9,975
Net income before cumulative effect
of change in accounting method 4,422 3,830 4,874 3,479 3,871
Net income 4,422 4,038 4,874 3,479 3,871
Earnings per common share - basic
Continuing operations $ 1.60 $ 1.32 $ 1.33 $ 0.86 $ 0.84
Cumulative effect of accounting changes -- $ 0.07 -- -- --
Earnings per common share - basic $ 1.60 $ 1.39 $ 1.33 $ 0.86 $ 0.84
Earnings per common share assuming dilution
Continuing operations $ 1.52 $ 1.20 $ 1.25 $ 0.83 $ 0.83
Cumulative effect of accounting changes -- $ 0.06 -- -- --
Earnings per common share - assuming dilution $ 1.52 $ 1.26 $ 1.25 $ 0.83 $ 0.83
======================================================
</TABLE>
TF FINANCIAL CORPORATION 1999 ANNUAL REPORT 11
<PAGE>
TF Financial Corporation and Subsidiaries
----------------------------
SELECTED FINANCIAL INFORMATION AND OTHER DATA
<TABLE>
<CAPTION>
Performance ratios and other selected data 1999 1998 1997 1996 1995
------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Return on average assets 0.62% 0.58% 0.77% 0.62% 0.88%
Return on average equity 8.60% 7.39% 7.39% 4.74% 4.99%
Average equity to average assets 7.17% 7.74% 10.46% 12.91% 17.54%
Average interest rate spread 2.54% 2.44% 2.72% 2.76% 2.84%
Non-performing loans to total assets 0.18% 0.24% 0.23% 0.30% 0.37%
Non-performing loans to total loans 0.45% 0.65% 0.55% 0.64% 0.76%
Allowance for loan losses to
non-performing loans 145.56% 119.16% 146.82% 91.60% 82.31%
Allowance for loan losses to total loans 0.66% 0.78% 0.80% 0.58% 0.62%
Savings Bank regulatory capital
Core 5.76% 6.79% 7.16% 7.77% 12.21%
Tangible 5.76% 6.79% 7.16% 7.77% 12.21%
Risk-based 12.83% 17.73% 17.41% 17.68% 27.07%
Dividend payout ratio(4) 32.24% 38.10% 32.00% 37.35% 28.92%
</TABLE>
(1) Consists of cash, cash due from banks, interest-bearing deposits with
maturities of less than three months, and federal funds sold.
(2) Includes a $1.4 million after tax one-time special assessment to
recapitalize the Savings Association Insurance Fund ("SAIF").
(3) Income and income related ratios for the year-ended December 31, 1998
include the cumulative effect of a change in accounting for certain
investments of $208,000 (SFAS #133).
(4) Payout ratio is dividends paid for the period divided by earnings per
common share assuming dilution after cumulative effect of accounting
changes.
12
<PAGE>
Management's discussion and analysis of
financial condition and results of operations
General
The following discussion and analysis should be read in conjunction with the
Corporation's consolidated financial statements and is intended to assist in
understanding and evaluating the major changes in the financial condition and
results of operations of the Corporation with a primary focus on an analysis of
operating results.
This document contains statements that project the future operations of the
Corporation which involve risks and uncertainties. The Corporation's actual
results may differ significantly from the results discussed in these
forward-looking statements. Statements concerning future performance,
developments, events, expectations for growth and market forecasts, and any
other guidance on future periods, constitute forward-looking statements which
are subject to a number of risks and uncertainties, including interest rate
fluctuations and government and regulatory actions which might cause actual
results to differ materially from stated expectations or estimates.
The Corporation's income on a consolidated basis is derived substantially from
its investment in its subsidiary, Third Federal. The earnings of Third Federal
depend primarily on its net interest income. Net interest income is affected by
the interest income that Third Federal receives from its loans and investments
and by the interest expense that the Third Federal incurs on its deposits,
borrowings and other sources of funds. In addition, the mix of the Third
Federal's interest bearing assets and liabilities can have a significant effect
on the Third Federal's net interest income; loans generally have higher yields
than securities; retail deposits generally have lower interest rates than other
borrowings.
Third Federal also receives income from service charges and other fees and
occasionally from sales of investment securities and real estate owned. Third
Federal incurs expenses in addition to interest expense in the form of salaries
and benefits, deposit insurance premiums, property operations and maintenance,
advertising and other related business expenses.
Changes to Financial Condition
The Corporation's total assets at December 31, 1999 and December 31, 1998
totaled $721.9 million and $665.6 million, respectively, an increase of $56.3
million or 8.5%. This increase was primarily as a result of the $36.2 million or
14.1% increase in mortgaged-backed securities, and a $47.1 million or 19.6%
increase in loans receivable. These increases were offset by a decrease in cash
and cash equivalents of $26.0 million. Deposit balances decreased by $37.2
million, mainly as a result of decreased certificates of deposit balances
resulting from management's decision to price certificates of deposit less
aggressively. The net increase in assets and decrease in deposits were funded by
the increase in advances from the Federal Home Loan Bank (the "FHLB") of $85.2
million and a $15.8 million increase in other borrowings.
Total consolidated stockholders' equity decreased $4.2 million to $48.4 million
at December 31, 1999. The decrease is largely the result of $4.4 million in net
income offset by a $3.2 million decrease in accumulated other comprehensive
income and a $4.6 million increase in the cost of treasury stock. During the
year the Corporation repurchased approximately 304,000 shares of its common
stock in order to benefit from what management perceived to be a depressed
market value of the Corporation's common stock.
TF FINANCIAL CORPORATION 1999 ANNUAL REPORT 13
<PAGE>
Average Balance Sheet
The following table sets forth information (dollars in thousands) relating to
the Corporation's average balance sheet and reflects the average yield on assets
and average cost of liabilities for the periods indicated. The yields and costs
are computed by dividing income or expense by the average balance of
interest-earning assets or interest-bearing liabilities, respectively for the
periods indicated.
<TABLE>
<CAPTION>
Year ended December 31,
1999 1998 1997
--------------------------------------------------------------------------------------------
Average Average Average Average Average Average
Balance Interest Yld/Cost Balance Interest Yld/Cost Balance Interest Yld/Cost
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Loans receivable (4) $285,439 $21,843 7.65% $232,924 $18,657 8.01% $293,023 $23,050 7.87%
Mortgage-backed
securities 278,537 17,831 6.40% 251,785 16,357 6.50% 185,391 12,514 6.75%
Investment securities 113,731 6,646 5.84% 115,801 6,918 5.97% 90,708 5,683 6.27%
Other interest-
earning assets(1) 14,331 702 4.90% 40,413 1,647 4.08% 42,457 1,942 4.57%
------------------ ------------------- -----------------
Total interest-
earning assets 692,038 47,022 6.79% 640,923 43,579 6.80% 611,579 43,189 7.06%
------ ------ ------
Non interest-earning assets 25,803 22,428 18,987
------- ------- -------
Total assets 717,841 663,351 630,566
======= ======= =======
Liabilities and
stockholders' equity
Interest-bearing liabilities:
Deposits 416,514 14,645 3.52% 447,995 17,397 3.46% 456,345 18,211 3.99%
Advances from the
FHLB and borrowings 240,371 13,329 5.55% 152,942 8,798 5.75% 97,942 5,869 5.99%
------------------ ------------------- -----------------
Total interest-
bearing liabilities 656,885 27,974 4.26% 600,937 26,195 4.36% 554,287 24,080 4.34%
------ ------ ------
Non interest-
bearing liabilities 9,514 10,582 10,293
-------- -------- --------
Total liabilities 666,399 611,519 564,580
Stockholders' equity 51,442 51,832 65,986
-------- -------- --------
Total liabilities and
stockholders' equity $717,841 $663,351 $630,566
======== ======== ========
Net interest income $ 19,048 $ 17,384 $ 19,109
======== ======== ========
Interest rate spread (2) 2.53% 2.44% 2.72%
Net yield on interest-
earning assets (3) 2.75% 2.71% 3.12%
Ratio of average interest-
earning assets to average
interest bearing liabilities 105% 107% 110%
</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.
14
<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>
1999 vs 1998 1998 vs 1997
----------------------------------------------------------------
Increase (decrease) Increase (decrease)
due to due to
----------------------------------------------------------------
Volume Rate Net Volume Rate Net
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans receivable, net $ 4,055 $ (869) $ 3,186 $(4,810) $ 417 $(4,393)
Mortgage-backed securities 1,727 (253) 1,474 3,483 360 3,843
Investment securities (123) (149) (272) 1,053 182 1,235
Other interest-earning assets (1,226) 281 (945) 91 (386) (295)
--------------------------------------------------------------
Total interest-earning assets 4,433 (990) 3,443 (183) 573 (390)
==============================================================
Interest expense:
Deposits (1,186) (1,566) (2,752) 325 (1,139) (814)
Advances from the
FHLB and borrowings 4,848 (317) 4,531 2,734 195 2,929
--------------------------------------------------------------
Total interest-bearing liabilities 3,662 (1,883) 1,779 3,059 (944) 2,115
==============================================================
Net change in net interest income $ 771 $ 893 $ 1,664 $(3,242) $1,517 $(1,725)
==============================================================
</TABLE>
Comparison of Years Ended December 31, 1999 and December 31, 1998
Net Income. Net income was $4.4 million for the fiscal year ended December 31,
1999, an increase of $384,000 or 9.5% compared with the year ended December 31,
1998.
The increase in earnings is mainly the result of a $1.7 million increase in net
interest income, offset by an increase of $240,000 in the provision for possible
loan losses, and a $767,000 increase in non-interest expenses. In addition,
during 1998 the Corporation recorded $208,000 (after tax) income related to the
adoption of Statement of Financial Accounting Standards No. 133, while no such
income was recorded during 1999.
Total Interest Income. For the year ended December 31, 1999, total interest
income increased to $47.0 million compared to $43.6 million from the year ended
December 31, 1998. The $3.4 million increase in interest income was mainly the
result of a $52.5 increase in the average balance of loans receivable which
occurred as a result of the purchase of $83.6 million of loans during the year,
offset by net reductions in loans receivable of $35.6 million caused by
repayments of existing loans having exceeded new loan originations.
Interest income also increased due to a $26.8 million increase in the average
balance of mortgage-backed securities. Offsetting these items which caused
interest income to increase was the reduction caused by a $26.1 million decrease
in the average balance of the Corporation's other interest-earning assets that
were low yielding and short-term in nature. Also having a negative effect on the
Corporation's 1999 interest income was the high level of loan prepayments early
in the year, the result of relatively low market rates of interest that cause
borrowers to seek to refinance their existing loans.
Total Interest Expense. Total interest expense increased to $28.0 million for
the year ended December 31, 1999. This increase is mainly the result of an $87.4
million increase in the average balance of FHLB advances and other borrowings.
Offsetting this increase were the reductions attributable to a lower level of
deposits at a lower average cost. Each of these elements was the result of a
lowering of certificate of deposit balances caused by management's decision to
price such deposits less aggressively.
Allowance For Loan Losses. The allowance for loan losses was approximately $1.9
million at December 31, 1999 and 1998. Non-performing loans were approximately
$1.3 million at December 31, 1999 compared to $1.6 million a year earlier.
Charge-off's were $292,000 during 1999 compared to $180,000 during 1998. At
December 31, 1999 the allowance for loan losses was 145.6% of non-performing
loans as compared to 119.2% of non-performing loans at December 31, 1998. While
management maintains Third Federal's allowance for losses at a level which it
considers to be adequate to provide for potential losses, there can be no
assurance that further additions will not be made to the allowance and that such
losses will not exceed the estimated amounts.
TF FINANCIAL CORPORATION 1999 ANNUAL REPORT 15
<PAGE>
Non-Interest Income. Total non-interest income was $1.6 million during 1999
compared with $1.6 million during 1998. During 1999 the Corporation recorded
gains on the sale of real estate of $354,000 compared to $44,000 during 1998.
The 1999 gains included $350,000 related to the sale of the Corporation's real
estate held for investment, and $4,000 related to real estate acquired through
foreclosure. During 1998 the Corporation recorded a total of $440,000 from the
sales of loans and securities, while there were no such gains recorded during
1999.
Non-Interest Expense. Total non-interest expense increased by $767,000 during
1999 compared to 1998. This increase occurred mainly from a $569,000 increase in
employee compensation and benefits, the result of a new branch office, lending,
sales and support staff associated with the expansion of the Corporation's
retail banking facilities and efforts. In addition, during 1998, the Corporation
ceased outsourcing its information technology needs, resulting in a shift of
expenses out of data processing and into other non-interest expense categories.
Income Tax Expense. The Corporation's effective tax rate was 35.1% during 1999
compared to 39.6% during 1998. The decrease occurred as a result of certain tax
reduction efforts initiated during 1998.
Comparison of Years Ended December 31, 1998 and December 31, 1997
Net Income. Net Income of $4.0 million for the fiscal year ended December 31,
1998 decreased $836,000, or 17.2%, over net income of $4.9 million for the
fiscal year ended December 31, 1997.
The decrease in earnings is primarily due to the $1.7 million, or 9.0%, decrease
in net interest income, the $748,000, or 32.1%, decrease in non-interest income,
partially offset by the $817,000 decrease in non-interest expense, the $275,000
decrease in income tax expense and the $208,000 cumulative effect of accounting
changes.
Total Interest Income. For the fiscal year ended December 31, 1998, total
interest income increased to $43.6 million from $43.2 million compared to the
fiscal year ended December 31, 1997. This increase of $390,000, or 0.9%, is due
primarily to the $3.8 million, or 30.7%, increase in income on mortgage-backed
securities, a $1.2 million, or 21.7%, increase in interest income on investment
securities, offset by a $4.4 million, or 19.1% decrease in interest income on
loans. The average balance of mortgage-backed securities increased $66.4 million
to $251.8 million from $185.4 million while the average balance of loans
decreased by $60.1 million. In addition, the average balance of investment
securities increased by $25.1 million to $115.8 during 1998 million from $90.7
million during 1997.
Total Interest Expense. Total interest expense increased to $26.2 million for
the fiscal year ended December 31, 1998 from $24.1 million for the fiscal year
ended December 31, 1997. This increase of $2.1 million, or 8.8%, in total
interest expense is a result of the increase in the average balance of FHLB
advances to $152.9 million from $97.9 million for the fiscal year ended December
31, 1997. The increase in total interest expense was partially offset by an
$814,000 decrease in interest expense on deposits, mainly attributable to lower
market interest rates. The increase in FHLB advances was used primarily to fund
the purchase of mortgage-backed securities.
Allowance For Loan Losses. The allowance for loan losses decreased $120,000, or
5.9%, to $1.9 million at December 31, 1998 from $2.0 million at December 31,
1997. Non-performing loans increased to $1.6 million at December 31, 1998 from
$1.4 million at December 31, 1997. The decrease in the allowance for loan losses
resulted from $180,000 of net charge-off's, partially offset by the addition of
$60,000 to the allowance. While management maintains its allowance for losses at
a level which it considers to be adequate to provide for potential losses, there
can be no assurance that further additions will not be made to the allowance and
that such losses will not exceed the estimated amounts.
Non-Interest Income. Total non-interest income decreased $748,000, or 32.1%, to
$1.6 million for the fiscal year ended December 31, 1998 from $2.3 million for
the same period in 1997. This decrease can be attributed to the $330,000
decrease in the gain on the sale of loan servicing rights, the $58,000 decrease
in gain on the sale of investment securities, the $296,000 decrease in gain on
sale of loans and the decrease in other operating income of $108,000, partially
offset by the increase in gain on sale of real estate acquired through
foreclosure of $44,000.
Non-Interest Expense. Total non-interest expense decreased to $12.8 million for
the fiscal year ended December 31, 1998 when compared to $13.6 million for the
same period in 1997. This decrease of $817,000, or 6.0%, is primarily
attributable to the $244,000 decrease in employee compensation and benefits, the
$208,000 decrease in data processing and the $125,000 decrease in other
operating expense. The decrease in non-interest expense is, in part, the result
of management's implementation of certain cost cutting measures during the
fiscal year ended December 31, 1998.
Income Tax Expense. For the fiscal year ended December 31, 1998, income taxes
decreased to $2.3 million from $2.6 million for the same period in 1997. This
decrease of $275,000 is primarily attributed to the decrease in income before
taxes to $6.1 million from $7.5 million for the fiscal year periods ended
December 31, 1998 and 1997, respectively.
16
<PAGE>
Liquidity and Capital Resources
Liquidity. The Savings Bank's liquidity is a measure of its ability to fund
loans, pay withdrawals of deposits, and other cash outflows in an efficient,
cost-effective manner. The Savings Bank's primary sources of funds are deposits,
borrowings, and scheduled amortization and prepayment of loan and
mortgage-backed security principal. During the past several years, the Savings
Bank has used such funds primarily to fund maturing time deposits, pay savings
withdrawals, fund lending commitments, purchase new investments, repurchase its
common stock, and increase the Savings Bank's, along with the Corporation's,
liquidity. The Savings Bank is currently able to fund its operations internally
but has, when deemed prudent, borrowed funds from the FHLB. As of December 31,
1999, such borrowed funds totaled $248.5 million. Loan prepayments, maturing
investments and mortgage-backed security prepayments are greatly influenced by
general interest rates, economic conditions and competition.
The Savings Bank is required under federal regulations to maintain certain
specified levels of "liquid investments", which include certain United States
government obligations and other approved investments. Current regulations
require the Savings Bank to maintain liquid assets of not less than 4% of its
net withdrawable accounts plus short term borrowings. Short-term liquid assets
must consist of not less than 1% of such accounts and borrowings, which amount
is also included within the 4% requirement. These levels may be changed from
time to time by the regulators to reflect current economic conditions. The
Savings Bank was in compliance with all of its liquidity requirements at
December 31, 1999.
The amount of certificate accounts that are scheduled to mature during the
twelve months ending December 31, 2000, is approximately $90.7 million. To the
extent that these deposits do not remain at the Savings Bank upon maturity, the
Savings Bank believes that it can replace these funds with deposits, excess
liquidity, FHLB advances or other borrowings. It has been the Savings Bank's
experience that substantial portions of such maturing deposits remain at the
Savings Bank.
At December 31, 1999, the Savings Bank had outstanding commitments to originate
loans or fund unused lines of credit of $54.8 million. Funds required to fill
these commitments will be derived primarily from current excess liquidity,
deposit inflows or loan and security repayments. At December 31, 1999, the
Savings Bank had no outstanding commitments to sell loans.
Capital. Under current regulations, the Savings Bank must have core capital
equal to 4% of adjusted total assets and risk-based capital equal to 8% of
risk-weighted assets, of which 1.5% must be tangible capital, excluding goodwill
and certain other intangible assets. On December 31, 1999, the Savings Bank met
its three regulatory capital requirements.
Management believes that under current regulations, the Savings Bank will
continue to meet its minimum capital requirements in the foreseeable future.
However, events beyond the control of the Savings Bank, such as increased
interest rates or a downturn in the economy in areas in which the Savings Bank
operates, could adversely affect future earnings and as a result, the ability of
the Savings Bank to meet its future minimum capital requirements.
Asset And Liability Management
The Savings Bank has established an Asset/Liability Management Committee (ALCO)
for the purpose of monitoring and managing market risk, which is defined as the
risk of loss arising from changes in market rates and prices.
The type of market risk which most affects the Corporation's financial
instruments is interest rate risk, which is best quantified by measuring the
change in net interest income that would occur under specific changes in
interest rates. Substantially all of the Savings Bank's interest bearing assets
and liabilities are exposed to interest rate risk.
Because the Corporation's bank subsidiary is a savings bank and is regulated by
the OTS, it has policies or procedures in place for measuring interest rate
risk. These policies and procedures stipulate acceptable levels of interest rate
risk.
Net Interest Income ("NII"). In order to measure interest rate risk internally,
the Corporation uses computer programs which enable it to simulate the changes
that will occur to the Savings Bank's NII over several interest rate scenarios
which are developed by "shocking" interest rates (i.e. moving them immediately
and permanently) basis points up and down in 100 basis point increments from the
current level of interest rates, and by "ramping" interest rates in such a
manner as to adversely affect the Savings Bank's simulated net interest income.
In addition to the level of interest rates, the most critical assumption
regarding the estimated amount of the Savings Bank's NII is the expected
prepayment speed of the Savings Bank's 1-4 family residential loans, and related
mortgage backed securities, the book value of which comprises approximately 64%
of the Corporation's total assets. For this prepayment speed assumption the
Corporation uses median expected prepayment speeds which are obtained from a
reliable third party source. The Corporation also incorporates into its
simulations the effects of the interest rate caps and interest rate floors that
are part of the majority of the Savings Bank's variable rate loans.
The Corporation uses its business planning forecast as the basis for its NII
simulations. Therefore, planned business activities are incorporated into the
measurement horizon. Such activities include assumptions about substantial new
loan and deposit volumes, the pricing of loan and deposit products, and other
assumptions about future activities that may or may not be realized. In order to
quantify the Corporation's NII exposure, the Corporation focuses on the
simulation of net interest income in the "ramped up 100 basis points over 12
months" scenario. ALCO evaluates the simulation results and makes adjustments to
the Savings Bank's
TF FINANCIAL CORPORATION 1999 ANNUAL REPORT 17
<PAGE>
planned activities if in its view there is a need to do so. At December 31,
1999, the change in net interest income over a one-year horizon using these
methodologies was a $511,000 or a 2.3% decrease in expected net interest income.
However, these measurements are highly subjective in nature and are not intended
to be a forecast interest income under any rate scenario for the year 2000 or
for any other period.
Impact of Inflation and Changing Prices
The consolidated financial statements and related data have been prepared in
accordance with generally accepted accounting principles which require the
measurement of financial position and operating results in terms of historical
dollars, without consideration for changes in the relative purchasing power of
money over time caused by inflation.
Unlike industrial companies, nearly all of the assets and liabilities of a
financial institution are monetary in nature. As a result, interest rates have a
more significant impact on a financial institution's performance than general
levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the price of goods and services, since
such goods and services are affected by inflation. In the current interest rate
environment, liquidity and the maturity structure of the Savings Bank's assets
and liabilities are critical to the maintenance of acceptable performance
levels.
Impact of Future Accounting Pronouncements
Future accounting pronouncements being presently discussed have not been
formulated in detail sufficient to enable the Corporation to assess their impact
on the future financial condition or results of operations of the Corporation.
Year 2000
Like many financial institutions, the Corporation relies on computers to conduct
its business and information systems processing. Industry experts were concerned
that on January 1, 2000, some computers might not be able to interpret the new
year properly, causing computer malfunctions. Some banking industry experts
remain concerned that some computers may not be able to interpret additional
dates in the year 2000 properly. The Corporation has operated and evaluated its
computer systems following January 1, 2000 and has not identified any errors or
experienced any computer system malfunctions. The Corporation will continue to
monitor its information systems to assess whether its systems are at risk of
misinterpreting any future dates and will develop appropriate contingency plans
to prevent any potential system malfunction or correct any system failures. The
Corporation has not been informed of any such problem experienced by any of its
vendors or customers, nor by any of the municipal agencies that provide services
to the Corporation.
Nevertheless, it is too soon to conclude that there will not be any problems
arising from the Year 2000 problem, particularly at some of the Corporation's
vendors. The Corporation will continue to monitor its significant vendors of
goods and services with respect to Year 2000 problems they may encounter as
those issues may affect the Corporation's financial position, results of
operations and cash flows. The Corporation does not believe at this time that
these potential problems will materially impact the ability of the Corporation
to continue its operations; however, no assurance can be given that this will be
the case.
18
<PAGE>
Accountants and
Management Consultants GRANT THORNTON [LOGO]
The US Member Firm of GRANT THORNTON LLP
Grant Thornton International
Report of Independent Certified Public Accountants
Board of Directors
TF Financial Corporation
We have audited the accompanying consolidated statements of financial
position of TF Financial Corporation and Subsidiaries as of December 31, 1999
and 1998, and the related consolidated statements of earnings, changes in
stockholders' equity and comprehensive income and cash flows for each of the
three years in the period ended December 31, 1999. These financial statements
are the responsibility of the Corporation's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
TF Financial Corporation and Subsidiaries as of December 31, 1999 and 1998, and
the consolidated results of their operations and their consolidated cash flows
for each of the three years in the period ended December 31, 1999, in conformity
with generally accepted accounting principles.
/s/ Grant Thornton LLP
Philadelphia, Pennsylvania
January 13, 2000
Suite 300
Two Commerce Square
2001 Market Street
Philadelphia, PA 19103-7080
Tel: 215 561-4200
Fax: 215 561-1066
TF FINANCIAL CORPORATION 1999 ANNUAL REPORT 19
<PAGE>
TF Financial Corporation and Subsidiaries
-------------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
(in thousands) Year ended December 31,
Assets 1999 1998
-------------------------
<S> <C> <C>
Cash and cash equivalents $ 16,715 $ 42,703
Certificates of deposit in other
financial institutions 847 2,238
Investment securities available for sale - at market value 21,930 9,042
Investment securities held to maturity (market value
of $64,538 and $81,094 as of December 31, 1999 and 1998, respectively) 66,760 80,895
Mortgage-backed securities available for sale - at market value 132,515 75,285
Mortgage-backed securities held to maturity
(market value of $154,188 and $182,560
as of December 31, 1999 and 1998, respectively) 159,888 180,964
Loans receivable, net 287,979 240,841
Federal Home Loan Bank stock - at cost 13,042 9,168
Accrued interest receivable 4,958 4,558
Premises and equipment, net 9,177 9,017
Goodwill and other intangible assets, net 6,570 7,389
Real estate held for investment - 2,348
Other assets 1,493 1,160
-----------------------
Total assets $721,874 $665,608
=======================
Liabilities and stockholders' equity
Liabilities
Deposits $401,698 $438,913
Advances from the Federal Home Loan Bank 248,533 163,359
Other borrowings 15,766 -
Advances from borrowers for taxes and insurance 1,198 1,204
Accrued interest payable 3,749 4,166
Other liabilities 2,483 5,306
-----------------------
Total liabilities 673,427 612,948
-----------------------
Stockholders' equity
Preferred stock, no par value; 2,000,000 shares
authorized at December 31, 1999 and 1998, none issued - -
Common stock, $0.10 par value; 10,000,000 shares authorized,
5,290,000 shares issued, 2,576,160 and 2,857,932 shares outstanding
at December 31, 1999 and 1998, respectively, net of shares in treasury:
1999 - 2,437,226; 1998 - 2,143,298 529 529
Retained earnings 48,760 45,762
Additional paid-in capital 52,076 51,957
Unearned ESOP shares (2,766) (2,888)
Shares acquired by MSBP (71) (468)
Treasury stock - at cost (46,996) (42,386)
Accumulated other comprehensive income (loss) (3,085) 154
-----------------------
Total stockholders' equity 48,447 52,660
-----------------------
Total liabilities and stockholders' equity $721,874 $665,608
=======================
</TABLE>
The accompanying notes are an integral part of these statements.
20
<PAGE>
TF Financial Corporation and Subsidiaries
--------------------------------
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Year Ended December 31,
(in thousands except per share data) 1999 1998 1997
---------------------------
<S> <C> <C> <C>
Interest income
Loans, including fees $21,843 $18,657 $23,050
Mortgage-backed securities 17,831 16,357 12,514
Investment securities 6,646 6,918 5,683
Interest-bearing deposits and other 702 1,647 1,942
---------------------------
Total interest income 47,022 43,579 43,189
---------------------------
Interest expense
Deposits 14,645 17,397 18,211
Borrowings 13,329 8,798 5,869
---------------------------
Total interest expense 27,974 26,195 24,080
---------------------------
Net interest income 19,048 17,384 19,109
Provision for possible loan losses 300 60 397
---------------------------
Net interest income after provision
for possible loan losses 18,748 17,324 18,712
---------------------------
Non-interest income
Gain on sale of real estate 354 44 --
Gain on sale of investment and mortgage-backed securities -- 349 407
Gain on sale of loans -- 91 387
Gain on sale of loan servicing rights -- -- 330
Service fees, charges and other operating income 1,239 1,095 1,203
---------------------------
Total non-interest income 1,593 1,579 2,327
---------------------------
Non-interest expense
Employee compensation and benefits 6,770 6,201 6,445
Occupancy and equipment 2,055 1,854 1,952
Federal deposit insurance premium 258 275 299
Data processing 19 459 667
Professional fees 718 554 579
Advertising 320 333 354
Other operating 2,572 2,205 2,330
Amortization of goodwill and other intangible assets 821 885 957
---------------------------
Total non-interest expense 13,533 12,766 13,583
---------------------------
Income before income taxes and
cumulative effect of accounting change 6,808 6,137 7,456
Income taxes 2,386 2,307 2,582
---------------------------
Income before cumulative effect of
accounting change 4,422 3,830 4,874
Cumulative effect of accounting change -- 208 --
---------------------------
Net income $ 4,422 $ 4,038 $ 4,874
===========================
Earnings per common share - basic $ 1.60 $ 1.39 $ 1.33
Earnings per common share - assuming dilution $ 1.52 $ 1.26 $ 1.25
</TABLE>
The accompanying notes are an integral part of these statements.
TF FINANCIAL CORPORATION 1999 ANNUAL REPORT 21
<PAGE>
TF Financial Corporation and Subsidiaries
--------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
Years ended December 31, 1999, 1998, 1997
<TABLE>
<CAPTION>
Accumu-
lated
Other
Addi- Shares Compre-
Common Stock tional Unearned acquired hensive
Par paid-in ESOP by Treasury Retained income Comprehensive
(in thousands, except share data)Shares value capital shares MSBP stock earnings (loss) Total income
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 3,962,544 $ 529 $ 51,645 $(3,188) $(1,322) $(14,712) $39,750 $ (127) $ 72,575
Allocation of ESOP shares 17,860 -- 173 178 -- -- -- -- 351
Amortization of MSBP expense -- -- 31 -- 427 -- -- -- 458
Purchase of treasury stock (1,100,068) -- (74) -- -- (27,027) -- -- (27,101)
Cash dividends on
common stock -- -- -- -- -- -- (1,433) -- (1,433)
Exercise of stock options 5,915 -- -- -- -- 90 (15) -- 75
Other comprehensive income,
net of reclassification
adjustments and taxes -- -- -- -- -- -- -- 296 296 296
Net income for the year
ended December 31, 1997 -- -- -- -- -- -- 4,874 -- 4,874 4,874
--------------------------------------------------------------------------------------------------
Comprehensive income $5,170
==================================================================================================
Balance at December 31, 1997 2,886,251 529 51,775 (3,010) (895) (41,649) 43,176 169 50,095
Allocation of ESOP shares 12,233 -- 166 122 -- -- -- -- 288
Amortization of MSBP -- -- 33 -- 427 -- -- -- 460
Purchase of treasury stock (50,000) -- (17) -- -- (924) -- -- (941)
Cash dividends -
common stock -- -- -- -- -- -- (1,387) -- (1,387)
Exercise of options 9,448 -- -- -- -- 187 (65) -- 122
Other comprehensive loss,
net of reclassification
adjustments and taxes -- -- -- -- -- -- -- (15) (15) $ (15)
Net income for the year ended
December 31, 1998 -- -- -- -- -- -- 4,038 -- 4,038 4,038
--------------------------------------------------------------------------------------------------
Comprehensive income $4,023
==================================================================================================
Balance at December 31, 1998 2,857,932 529 51,957 (2,888) (468) (42,386) 45,762 154 52,660
</TABLE>
(Continued)
22
<PAGE>
TF Financial Corporation and Subsidiaries
--------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME - CONTINUED
Years ended December 31, 1999, 1998, 1997
<TABLE>
<CAPTION>
Accumu-
lated
Other
Addi- Shares Compre-
Common Stock tional Unearned acquired hensive
Par paid-in ESOP by Treasury Retained income Comprehensive
(in thousands, except share data)Shares value capital shares MSBP stock earnings (loss) Total income
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 2,857,932 $529 $ 51,957 $(2,888) $(468) $(42,386) $45,762 $ (154) $52,660
Allocation of ESOP shares 12,156 -- 86 122 -- -- -- -- 208
Shares awarded by MSBP -- -- -- -- -- -- -- -- --
Amortization of MSBP expense -- -- 33 -- 397 -- -- -- 430
Purchase of treasury stock (303,578) -- -- -- -- (4,800) -- -- (4,800)
Cash dividends on
common stock -- -- -- -- -- -- (1,359) -- (1,359)
Exercise of options 9,650 -- -- -- -- 190 (65) -- 125
Other comprehensive loss,
net of taxes -- -- -- -- -- -- -- (3,239) $(3,239) (3,239)
Net income for the year
ended December 31, 1999 -- -- -- -- -- -- 4,422 -- 4,422 4,422
------------------------------------------------------------------------------------------------
Comprehensive income $ 1,183
================================================================================================
Balance at December 31, 1999 2,576,160 $529 $ 52,076 $(2,766) $ (71) $(46,996) $48,760 $3,085 $48,447
================================================================================================
</TABLE>
The accompanying notes are an integral part of this statement.
TF FINANCIAL CORPORATION 1999 ANNUAL REPORT 23
<PAGE>
TF Financial Corporation and Subsidiaries
------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(in thousands) Year ended December 31,
1999 1998 1997
------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 4,422 $ 4,038 $ 4,874
Adjustments to reconcile net income to net cash provided
by operating activities
Amortization of
Mortgage loan servicing rights 14 16 68
Deferred loan origination fees (75) (118) (156)
Premiums and discounts on investment securities, net 36 100 63
Premiums and discounts on mortgage-backed securities
and loans, net 607 705 208
Goodwill and other intangibles 819 677 957
Deferred income taxes 99 (135) (233)
Provision for loan losses and provision for losses on real estate 306 60 402
Depreciation of premises and equipment 903 847 708
Stock-based benefit programs 637 748 809
Gain on sale of
Investment securities -- (681) (407)
Real estate acquired through foreclosure (5) (44) --
Sale of real estate held for investment (350) -- --
Mortgage loans -- (91) (387)
Loan servicing rights -- -- (330)
(Increase) decrease in
Accrued interest receivable (400) (601) 290
Other assets (208) 30 (56)
Increase (decrease) in
Accrued interest payable (417) 1,696 440
Other liabilities (2,822) 1,338 477
------------------------------------
Net cash provided by operating
activities 3,566 8,585 7,727
------------------------------------
Cash flows from investing activities
Loan originations and principal payments on loans, net 35,634 30,983 (22,672)
Principal repayments on mortgage-backed securities
held to maturity 56,448 60,899 33,732
Principal repayments on mortgage-backed securities available
for sale 20,258 19,292 2,746
Purchases of loans (83,643) (40,708) (13,927)
Proceeds from loan sales -- 19,496 95,261
Purchases and maturities of certificates of deposit in other
financial institutions, net 1,391 499 1,483
Purchases of investment and mortgage-backed securities
held to maturity (189,650) (293,959) (125,219)
Purchase of investment securities and mortgage-backed
securities available for sale (108,882) (251,164) (140,694)
</TABLE>
(Continued)
24
<PAGE>
TF Financial Corporation and Subsidiaries
----------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
<TABLE>
<CAPTION>
(in thousands) Year ended December 31,
1999 1998 1997
-----------------------------------
<S> <C> <C> <C>
Purchase and maturities of securities purchased under
agreement to resell, net $ -- $ 10,000 $ 15,129
Proceeds from maturities of investment securities
held to maturity 174,104 123,842 83,007
Proceeds from maturities of investment securities
available for sale 6,000 223,376 86,225
Proceeds from the sale of investment and mortgage-backed
securities available for sale 3,145 37,373 22,126
Proceeds from the sale of loan servicing rights -- -- 981
Purchase of Federal Home Loan Bank stock (3,874) (4,250) --
Sale (purchase) of real estate held for investment 2,698 (2,348) --
Proceeds from sales of real estate acquired through foreclosure 195 246 --
Purchase of premises and equipment (1,063) (1,975) (595)
-----------------------------------
Net cash (used in) provided by
investing activities (87,239) (68,398) 37,583
-----------------------------------
Cash Flows from financing activities
Net decrease in demand deposit/NOW accounts, passbook
savings accounts and certificates of deposit (37,215) (11,516) (18,659)
Net increase (decrease) in advances from Federal Home
Loan Bank 85,174 75,000 (10,000)
Net increase in securities sold under agreements to repurchase 15,766 -- --
Net decrease in advances from borrowers for taxes and insurance (6) (387) (773)
Treasury stock acquired (4,800) (941) (27,027)
Exercise of stock options 125 122 75
Common stock dividends paid (1,359) (1,387) (1,433)
-----------------------------------
Net cash provided by (used in)
financing activities 57,685 60,891 (57,817)
-----------------------------------
Net increase (decrease) in cash and
cash equivalents (25,988) 1,078 (12,507)
Cash and cash equivalents at beginning of year 42,703 41,625 54,132
-----------------------------------
Cash and cash equivalents at end of year $ 16,715 $ 42,703 $ 41,625
===================================
Supplemental disclosure of cash flow information
Cash paid for
Interest on deposits and advances $ 28,391 $ 24,498 $ 23,640
Income taxes $ 1,988 $ 2,651 $ 2,436
Non-cash transactions
Transfers from loans to real estate acquired through foreclosure $ 434 $ 159 $ 231
</TABLE>
The accompanying notes are an integral part of these statements.
TF FINANCIAL CORPORATION 1999 ANNUAL REPORT 25
<PAGE>
TF Financial Corporation and Subsidiaries
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
TF Financial Corporation (TF Financial) is a unitary savings and loan holding
company, organized under the laws of the State of Delaware, which conducts its
consumer banking operations primarily through its wholly owned subsidiaries,
Third Federal Savings Bank (Third Federal or the Bank) and TF Investments
Corporation (TF Investments). Third Federal is a federally chartered-stock
savings bank insured by the Federal Deposit Insurance Corporation. Third Federal
is a community-oriented savings institution which conducts operations from its
main office in Newtown, Pennsylvania, ten full-service branch offices located in
Philadelphia and Bucks counties, Pennsylvania, and four full-service branch
offices located in Mercer County, New Jersey. The Bank competes with other
banking and financial institutions in its primary market communities, including
financial institutions with resources substantially greater than its own.
Commercial banks, savings banks, savings and loan associations, credit unions
and money market funds actively compete for savings and time deposits and loans.
Such institutions, as well as consumer finance and insurance companies, may be
considered competitors of the Bank with respect to one or more of the services
it renders.
The Bank is subject to regulations of certain state and federal agencies and,
accordingly, it is periodically examined by those regulatory authorities. As a
consequence of the extensive regulation of commercial banking activities, the
Bank's business is particularly susceptible to being affected by state and
federal legislation and regulations.
1. Principles of Consolidation and Basis of Presentation
-----------------------------------------------------
The consolidated financial statements include the accounts of TF Financial and
its wholly owned subsidiaries: Third Federal, and its wholly owned subsidiary,
Third Delaware Corporation, TF Investments, Teragon Financial Corporation and
Penns Trail Development Corporation (collectively, the Corporation). All
material intercompany balances and transactions have been eliminated in
consolidation.
The accounting policies of the Corporation conform to generally accepted
accounting principles and predominant practices within the banking industry. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. The more significant
accounting policies are summarized below.
2. Cash and Cash Equivalents
-------------------------
The Corporation considers cash, due from banks, federal funds sold and
interest-bearing deposits in other financial institutions, with original terms
to maturity of less than three months, as cash equivalents for presentation
purposes in the consolidated statements of financial position and cash flows.
3. Investment and Mortgage-Backed Securities
-----------------------------------------
The Corporation accounts for investment and mortgage-backed securities in
accordance with Statement of Financial Accounting Standards (SFAS) No. 115,
Accounting for Certain Investments in Debt and Equity Securities. This statement
requires the Corporation to classify its investment, mortgage-backed and
marketable equity securities in one of three categories: held to maturity,
trading, or available for sale. The Corporation does not presently engage in
security trading activities.
Investment, mortgage-backed and marketable equity securities available for sale
are stated at fair value, with net unrealized gains and losses excluded from
income and reported in other comprehensive income. Realized gains and losses on
the sale of securities are recognized using the specific identification method.
Investment and mortgage-backed securities held to maturity are carried at cost,
net of unamortized premiums and discounts, which are recognized in interest
income using the interest method. The Corporation has the ability and it is
management's intention to hold such assets to maturity.
26
<PAGE>
TF Financial Corporation and Subsidiaries
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
4. Loans Receivable
----------------
Loans receivable are stated at unpaid principal balances less the allowance for
loan losses and net deferred loan origination fees and unamortized premiums.
Loan origination fees and unamortized premiums on mortgage loans are amortized
to income using the interest method over the remaining period to contractual
maturity, adjusted for actual prepayments.
Management's periodic evaluation of the adequacy of the loan loss allowance is
based on the Bank's historical loss experience, known and inherent risks in the
portfolio, adverse situations that may affect the borrower's ability to repay,
the estimated value of any underlying collateral and current economic
conditions. Actual losses may be higher or lower than historical trends, which
vary. The allowance for loan losses is increased by charges to income and
decreased by charge-offs (net of recoveries).
The Bank provides an allowance for accrued but uncollected interest when the
loan becomes more than ninety days past due or is identified as impaired. The
allowance is established by a charge to interest income equal to all interest
previously accrued, and income is subsequently recognized only to the extent
that cash payments are received until, in management's judgment, the borrower's
ability to make periodic interest and principal payments is no longer impaired,
in which case the loan is returned to accrual status.
The Corporation accounts for loans in accordance with SFAS No. 114, Accounting
by Creditors for Impairment of a Loan, as amended by SFAS No. 118, Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures.
5. Premises and Equipment
----------------------
Land is carried at cost. Buildings and furniture, fixtures and equipment are
carried at cost less accumulated depreciation. Depreciation is provided by the
straight-line method over the estimated useful lives of the assets.
The Corporation accounts for impairment of assets in accordance with SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of, which provides guidance on when to recognize and how
to measure impairment losses of long-lived assets and certain identifiable
intangibles, and how to value long-lived assets to be disposed of. No impaired
assets existed at December 31, 1999 and 1998.
6. Goodwill and Other Intangible Assets
------------------------------------
In 1996, the Bank acquired three Mercer County, New Jersey offices and related
deposits of Cenlar Federal Savings Bank. The Bank assumed $137.6 million in
deposits in exchange for $126.5 million in cash. As a result of the acquisition,
the Bank recorded core deposit intangible of $2.9 million and goodwill of $6.6
million.
The core deposit intangible acquired is being amortized on an accelerated basis
over 10 years. The goodwill acquired is being amortized on a straight-line basis
over 15 years. Amortization expense for 1999, 1998 and 1997 was $819,000,
$677,000 and $957,000, respectively.
7. Real Estate Held for Investment
-------------------------------
Real estate held for investment is carried at the lower of cost or market value.
8. Transfers of Financial Assets
-----------------------------
The Corporation accounts for the transfer of financial assets in accordance with
SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, as amended by SFAS No. 127, Deferral of the
Effective Date of Certain Provisions of SFAS No. 125. SFAS No. 125 applies a
control-oriented, financial components approach to financial asset transfer
transactions whereby the Corporation: (1) recognizes the financial and servicing
assets it controls and the liabilities it has incurred; (2) derecognizes
financial assets when control has been surrendered; and (3) derecognizes
liabilities once they are extinguished.
TF FINANCIAL CORPORATION 1999 ANNUAL REPORT 27
<PAGE>
TF Financial Corporation and Subsidiaries
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Under SFAS No. 125, control is considered to have been surrendered only if: (i)
the transferred assets have been isolated from the transferor and its creditors,
even in bankruptcy or other receivership; (ii) the transferee has the right to
pledge or exchange the transferred assets or is a qualifying special-purpose
entity, and the holders of beneficial interests in that entity have the right to
pledge or exchange those interests; and (iii) the transferor does not maintain
effective control over the transferred assets through an agreement which both
entitles and obligates it to repurchase or redeem those assets prior to
maturity, or through an agreement which entitles it to repurchase or redeem
those assets if they were not readily obtainable elsewhere. If any of these
conditions are not met, the Corporation accounts for the transfer as a secured
borrowing.
9. Benefit Plans
-------------
The Corporation has established an Employee Stock Ownership Plan (ESOP) covering
eligible employees with six months of service, as defined by the ESOP. The
Corporation accounts for the ESOP in accordance with the American Institute of
Certified Public Accountants' Statement of Position (SOP) 93-6, Employers'
Accounting for Employee Stock Ownership Plans. SOP 93-6 addresses the accounting
for shares of stock issued to employees by an ESOP. SOP 93-6 requires that the
employer record compensation expense in the amount equal to the fair value of
shares committed to be released from the ESOP to employees. In addition, the
Corporation established a Management Stock Bonus Plan (MSBP) for directors and
key personnel.
The Corporation accounts for stock-based compensation in accordance with SFAS
No. 123, Accounting for Stock-Based Compensation, which contains a fair
value-based method for valuing stock-based compensation that entities may use,
which measures compensation cost at the grant date based on the fair value of
the award. Compensation is then recognized over the service period, which is
usually the vesting period. Alternatively, the standard permits entities to
continue accounting for employee stock options and similar instruments under
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees. Entities that continue to account for stock options using APB Opinion
No. 25 are required to make pro forma disclosures of net income and earnings per
share, as if the fair value-based method of accounting defined in SFAS No. 123
had been applied. The Corporation's employee stock option plan is accounted for
under APB Opinion No. 25.
On January 1, 1998, the corporation adopted SFAS No. 132, Employers' Disclosures
about Pensions and Other Postretirement Benefits. SFAS No. 132 revises
employers' disclosures about pension and other postretirement benefit plans. It
eliminates certain disclosures and requires additional information about changes
in the benefit obligation and the fair values of plan assets. The financial
statement disclosures have been revised to reflect the provisions of SFAS No.
132.
10. Income Taxes
------------
The Corporation accounts for income taxes under the liability method specified
in SFAS No. 109, Accounting for Income Taxes. Under SFAS No. 109, deferred
income taxes are recognized for the tax consequences of "temporary differences"
by applying enacted statutory tax rates applicable to future years to
differences between the financial statement carrying amounts and the tax bases
of existing assets and liabilities. Under SFAS No. 109, the effect on deferred
taxes of a change in tax rates is recognized in income in the period that
includes the enactment date.
11. Advertising Costs
-----------------
The Corporation expenses advertising costs as incurred.
12. Earnings Per Share
------------------
The Corporation follows the provisions of SFAS No. 128, Earnings Per Share. SFAS
No. 128 eliminates primary and fully diluted earnings per share and requires
presentation of basic and diluted earnings per share in conjunction with the
disclosure of the methodology used in computing such earnings per share. Basic
earnings per share excludes dilution and is computed by dividing income
available to common shareholders by the weighted average common shares
outstanding during the period. Diluted earnings per share takes into account the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised and converted into common stock.
28
<PAGE>
TF Financial Corporation and Subsidiaries
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
13. Comprehensive Income
On January 1, 1998, the Corporation adopted SFAS No. 130, Reporting
Comprehensive Income. SFAS 130 establishes standards to provide prominent
disclosure of comprehensive income items. Comprehensive income is the change in
equity of a business enterprise during a period from transactions and other
events and circumstances from non-owner sources. The Corporation's other
comprehensive income consists of net unrealized gains and losses on investment
securities available for sale. Comprehensive income for 1999, 1998 and 1997 was
$1,183,000 and $4,023,000 and $5,170,000, respectively. The components of other
comprehensive income (loss) are as follows (in thousands):
<TABLE>
<CAPTION>
December 31, 1999
-------------------------------
Before tax Tax Net of tax
amount benefit amount
----------------------------
<S> <C> <C> <C>
Unrealized losses on securities
Unrealized holding losses arising during period $(4,927) $ 1,688 $(3,239)
----------------------------
Other comprehensive loss, net $(4,927) $ 1,688 $(3,239)
============================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998
Tax
Before tax (expense) Net of tax
amount benefit amount
----------------------------
<S> <C> <C> <C>
Unrealized losses on securities
Unrealized holding losses arising during period $ 324 $(126) $ 198
Reclassification adjustment for gains realized
in net income (349) 136 (213)
---------------------------
Other comprehensive income, net $ (25) $ 10 $ (15)
===========================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
Tax
Before tax (expense) Net of tax
amount benefit amount
-------------------------------
<S> <C> <C> <C>
Unrealized gains on securities
Unrealized holding gains arising during period $ 892 $(348) $ 544
Reclassification adjustment for gains realized
in net income (407) 159 (248)
-----------------------------
Other comprehensive income, net $(485) $(189) $ 296
=============================
</TABLE>
TF FINANCIAL CORPORATION 1999 ANNUAL REPORT 29
<PAGE>
TF Financial Corporation and Subsidiaries
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
14. Segment Reporting
-----------------
On January 1, 1998, the Corporation adopted SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. SFAS No. 131 redefines how
operating segments are determined and requires disclosures of certain financial
and descriptive information about a company's operating segments. Management has
determined that, under current conditions, the Corporation will report one
business segment.
15. Derivatives
-----------
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activity. SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments imbedded in other contracts, and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. If certain conditions are met, a derivative may
be specifically designated as a hedge. The accounting for changes in the fair
value of a derivative instrument (gains and losses) depends on the intended use
of the derivative and resulting designation. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. Earlier
application is permitted only as of the beginning of any fiscal quarter. On
October 1, 1998, the Corporation adopted SFAS No. 133. Concurrent with the
adoption, the Corporation transferred $23,198,000 of mortgage-backed securities
from the held to maturity category to the available for sale category and
recorded $349,000, net of taxes, of unrealized holding gains in other
comprehensive income. The Corporation also transferred $19,671,000 of
mortgage-backed securities to the trading category and reported a cumulative
effect adjustment of $208,000, net of taxes, resulting from the accounting
change.
16. Reclassifications
-----------------
Certain prior year amounts have been reclassified to conform to the current
period presentation.
NOTE B - CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of the following (in thousands):
December 31,
1999 1998
-----------------
Cash and due from banks $11,578 $25,509
Interest-bearing deposits in other financial institutions 5,037 16,444
Federal funds sold 100 750
-----------------
$16,715 $42,703
=================
30
<PAGE>
TF Financial Corporation and Subsidiaries
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE C - SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
The Bank enters into purchases of securities under agreements to resell
substantially identical securities. There were no outstanding securities
purchased under agreements to resell at December 31, 1999 or 1998.
The amounts advanced under these agreements represent short-term loans and are
reflected as a receivable in the consolidated statements of financial position.
The securities underlying the agreements are book-entry securities. During the
period, the securities were delivered by appropriate entry into a third-party
custodian's account designated by the Bank under a written custodial agreement
that explicitly recognizes the Bank's interest in the securities. Securities
purchased under agreements to resell averaged $1.4 million and $3.6 million
during 1999 and 1998, respectively, and the maximum amounts outstanding at any
month-end during 1999 and 1998, was $10.3 million and $10.0 million,
respectively.
NOTE D - INVESTMENT AND MORTGAGE-BACKED SECURITIES
The amortized cost, gross unrealized gains and losses, and estimated market
value of the Corporation's investment and mortgage-backed securities at December
31, 1999 and 1998, are summarized as follows (in thousands):
<TABLE>
<CAPTION>
December 31, 1999
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
-----------------------------------------------
<S> <C> <C> <C> <C>
Investment securities held to maturity
U.S Government and federal agencies $ 57,455 $ 12 $ (1,967) $ 55,500
State and political subdivisions 4,284 22 (138) 4,168
Corporate debt securities 5,021 -- (151) 4,870
-----------------------------------------------
66,760 34 (2,256) 64,538
Mortgage-backed securities
held to maturity 159,888 159 (5,859) 154,188
-----------------------------------------------
$ 226,648 $ 193 $ (8,115) $ 218,726
===============================================
Investment securities available for sale
U.S. Government and federal agencies $ 11,994 $ -- $ (436) $ 11,558
State and political subdivisions 3,783 -- (87) 3,696
Corporate debt securities 6,053 -- (220) 5,833
Mutual funds 500 -- (7) 493
Other 500 -- (150) 350
-----------------------------------------------
22,830 -- (900) 21,930
Mortgage-backed securities
available for sale 136,291 16 (3,792) 132,515
-----------------------------------------------
$ 159,121 $ 16 $ (4,692) $ 154,445
===============================================
</TABLE>
TF FINANCIAL CORPORATION 1999 ANNUAL REPORT 31
<PAGE>
TF Financial Corporation and Subsidiaries
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE D - INVESTMENT AND MORTGAGE-BACKED SECURITIES - Continued
<TABLE>
<CAPTION>
December 31, 1998
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
-------------------------------------------------
<S> <C> <C> <C> <C>
Investment securities held to maturity
U.S Government and federal agencies $ 73,612 $ 197 $ (62) $ 73,747
State and political subdivisions 4,283 78 -- 4,361
Corporate debt securities 3,000 -- (14) 2,986
-------------------------------------------------
80,895 275 (76) 81,094
Mortgage-backed securities
held to maturity 180,964 1,937 (341) 182,560
-------------------------------------------------
$ 261,859 $ 2,212 $ (417) $ 263,654
===============================================
Investment securities available for sale
U.S. Government and federal agencies $ 8,000 $ 45 $ -- $ 8,045
Mutual funds 500 -- (3) 497
Other 500 -- -- 500
-------------------------------------------------
9,000 45 (3) 9,042
Mortgage-backed securities
available for sale 75,075 316 (106) 75,285
-------------------------------------------------
$ 84,075 $ 361 $ (109) $ (84,327)
===============================================
</TABLE>
Gross realized gains were $-0- and $349,000 and $407,000 for the years ended
December 31, 1999, 1998 and 1997, respectively. These gains resulted from the
sale of investment and mortgage-backed securities of $3.1 million, $37.4 million
and $22.1 million for the years ended December 31, 1999, 1998 and 1997,
respectively.
The amortized cost and estimated market value of investment and mortgage-backed
securities, by contractual maturity, are shown below.
<TABLE>
<CAPTION>
December 31, 1999
Held to maturity Available for sale
-------------------------------------------
Estimated Estimated
Amortized market Amortized market
cost value cost value
-------------------------------------------
<S> <C> <C> <C> <C>
Investment securities
Due in one year or less $ 5,389 $ 5,402 $ 1,000 $ 843
Due after one year through five years 48,012 46,415 16,047 15,465
Due after five years through 10 years 11,090 10,531 2,000 1,926
Due after ten years 2,269 2,190 3,783 3,696
------------------------------------------
66,760 64,538 22,830 21,930
Mortgage-backed securities 159,888 154,188 136,291 132,515
------------------------------------------
$226,648 $218,726 $ 159,121 $154,445
==========================================
</TABLE>
32
<PAGE>
TF Financial Corporation and Subsidiaries
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE D - INVESTMENT AND MORTGAGE-BACKED SECURITIES - Continued
<TABLE>
<CAPTION>
December 31, 1998
-----------------------------------------
Held to maturity Available for sale
-----------------------------------------
Estimated Estimated
Amortized market Amortized market
cost value cost value
-----------------------------------------
<S> <C> <C> <C> <C>
Investment securities
Due in one year or less $ 32,829 $ 32,781 $ 1,000 $ 997
Due after one year through five years 23,961 24,085 8,000 8,045
Due after five years through 10 years 19,077 19,106 -- --
Due after 10 years 5,028 5,122 -- --
-----------------------------------------
80,895 81,094 9,000 9,042
Mortgage-backed securities 180,964 182,560 75,075 75,285
-----------------------------------------
$261,859 $263,654 $ 84,075 $ 84,327
=========================================
</TABLE>
The amortized cost, gross unrealized gains and losses, and estimated market
value of mortgage-backed securities, by issuer, are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1999
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
--------------------------------------------
<S> <C> <C> <C> <C>
Mortgage-backed securities held to maturity
FHLMC certificates $ 52,625 $ 94 $ (1,742) $ 50,977
FNMA certificates 24,983 28 (1,066) 23,945
GNMA certificates 46,651 37 (2,011) 44,677
Real estate mortgage investment conduit 35,271 -- (1,036) 34,235
Other mortgage-backed securities 358 -- (4) 354
--------------------------------------------
$ 159,888 $ 159 $ (5,859) $154,188
===========================================
Mortgage-backed securities available for sale
FHLMC certificates $ 7,331 $ 5 $ (103) $ 7,233
FNMA certificates 29,780 10 (1,827) 27,963
GNMA certificates 8,759 -- (421) 8,338
Real estate mortgage investment conduit 90,421 1 (1,441) 88,981
--------------------------------------------
$ 136,291 $ 16 $ (3,792) $132,515
============================================
</TABLE>
TF FINANCIAL CORPORATION 1999 ANNUAL REPORT 33
<PAGE>
TF Financial Corporation and Subsidiaries
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE D - INVESTMENT AND MORTGAGE-BACKED SECURITIES - Continued
<TABLE>
<CAPTION>
December 31, 1998
----------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
-----------------------------------------------
<S> <C> <C> <C> <C>
Mortgage-backed securities held to maturity
FHLMC certificates $ 47,239 $ 1,172 $ (7) $ 48,404
FNMA certificates 12,726 143 (13) 12,856
GNMA certificates 56,318 474 -- 56,792
Real estate mortgage investment conduit 64,180 148 (312) 64,016
Other mortgage-backed securities 501 -- (9) 492
-----------------------------------------------
$ 180,964 $ 1,937 $ (341) $ 182,560
===============================================
Mortgage-backed securities available for sale
FHLMC certificates $ 13,110 $ 106 $ (2) $ 13,214
FNMA certificates 32,119 81 (22) 32,178
GNMA certificates 10,194 90 -- 10,284
Real estate mortgage investment conduit 19,652 39 (82) 19,609
-----------------------------------------------
$ 75,075 $ 316 $ (106) $ 75,285
===============================================
</TABLE>
Investment securities having an aggregate amortized cost of approximately $5.0
million and $5.0 million were pledged to secure public deposits at December 31,
1999 and 1998, respectively.
There were no securities held other than U.S. Government and agencies from a
single issuer that represented more than 10% of stockholders' equity.
NOTE E - LOANS RECEIVABLE
Loans receivable are summarized as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
1999 1998
-------------------
<S> <C> <C>
First mortgage loans (principally conventional)
Secured by one-to-four family residences $168,057 $152,819
Secured by other non-residential properties 65,346 55,208
Construction loans 12,074 5,352
-------------------
245,477 213,379
Less net deferred loan origination fees and unamortized premiums 99 67
-------------------
Total first mortgage loans $245,378 $213,312
===================
</TABLE>
34
<PAGE>
TF Financial Corporation and Subsidiaries
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
December 31,
1999 1998
---------------------
Consumer and other loans
Commercial $ 9,339 $ 6,666
Home equity and second mortgage 16,816 12,995
Leases 3,195 2,305
Other 14,945 7,521
---------------------
44,295 29,487
Unearned premiums (discount) 223 (49)
---------------------
Total consumer and other loans 44,518 29,438
Less allowance for loan losses 1,917 1,909
---------------------
Total loans receivable $ 287,979 $ 240,841
=====================
Activity in the allowance for loan losses is summarized as follows:
December 31,
1999 1998 1997
-----------------------------
Balance at beginning of year $ 1,909 $ 2,029 $ 1,806
Provision charged to income 300 60 397
Charge-offs, net (292) (180) (174)
-----------------------------
Balance at end of year $ 1,917 $ 1,909 $ 2,029
=============================
Non-performing loans, which include non-accrual loans for which the accrual of
interest has been discontinued and loan balances past due over 90 days that are
not on a non-accrual status but that management expects will eventually be paid
in full, totalled approximately $1.3 million and $1.6 million at December 31,
1999, and 1998, respectively. Interest income that would have been recorded
under the original terms of such loans totalled approximately $70,000 and
$43,000 and $19,000 for the years ended December 31, 1999, 1998 and 1997,
respectively. No interest income has been recognized on non-accrual loans for
any of the periods presented.
The Corporation accounts for loans in accordance with SFAS No. 114, as amended
by SFAS No. 118. SFAS No. 114 requires that a creditor measure impairment based
on the present value of expected future cash flows discounted at the loan's
effective interest rate, except that as a practical expedient, a creditor may
measure impairment based on a loan's observable market price, or the fair value
of the collateral if the loan is collateral dependent. Regardless of the
measurement method, a creditor must measure impairment based on the fair value
of the collateral when the creditor determines that foreclosure is probable.
SFAS No. 118 allows creditors to use existing methods for recognizing interest
income on impaired loans.
The Bank identifies a loan as impaired when it is probable that interest and
principal will not be collected according to the contractual terms of the loan
agreement. The accrual of interest is discontinued on such loans and cash
payments received are applied to reduce principal.
Loan impairment is measured by estimating the expected future cash flows and
discounting them at the respective effective interest rate or by valuing the
underlying collateral. An allowance for credit losses has been established for
all loans identified as impaired.
TF FINANCIAL CORPORATION 1999 ANNUAL REPORT 35
<PAGE>
TF Financial Corporation and Subsidiaries
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE E - LOANS RECEIVABLE - Continued
The Bank has no concentration of loans to borrowers engaged in similar
activities which exceeded 10% of loans at December 31, 1999 and 1998. In the
ordinary course of business, the Bank has granted loans to certain executive
officers, directors and their related interests. Related party loans are made on
substantially the same terms as those prevailing at the time for comparable
transactions with unrelated persons and do not involve more than the normal risk
of collectibility. The aggregate dollar amount of these loans was approximately
$368,000 and $385,000 at December 31, 1999 and 1998, respectively. For the year
ended December 31, 1999, principal repayments of approximately $17,000 were
received and no funds were disbursed to executive officers, directors or their
related interests.
NOTE F - LOAN SERVICING
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial position.
The unpaid principal balances of these loans are summarized as follows (in
thousands):
December 31,
1999 1998
-----------------
Mortgage loan servicing portfolios
FHLMC $11,944 $15,116
Other investors 3,933 6,103
-----------------
$15,877 $21,219
=================
Custodial balances maintained in connection with the foregoing loan servicing
totalled approximately $437,000 and $408,000 at December 31, 1999 and 1998,
respectively. The net servicing revenue on mortgage loans serviced for others is
immaterial for all periods presented.
NOTE G - PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows (in thousands):
Estimated December 31,
useful lives 1999 1998
----------------------------------
Buildings 30 years $ 5,723 $ 5,906
Leasehold improvements 5 years 1,004 709
Furniture, fixtures and equipment 3-7 years 7,077 6,436
------------------
13,804 13,051
Less accumulated depreciation 8,128 7,293
------------------
5,676 5,758
Land 3,501 3,259
------------------
$ 9,177 $ 9,017
==================
36
<PAGE>
TF Financial Corporation and Subsidiaries
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE H - DEPOSITS
Deposits are summarized as follows (in thousands):
December 31,
Deposit type 1999 1998
- -------------------------------------------------------------
Demand $ 7,033 $ 6,231
NOW 45,804 44,971
Money Market 32,793 32,556
Passbook savings - fixed rate 123,033 122,213
Passbook savings - adjustable rate 36,457 43,651
-------------------
Total demand, transaction and
passbook deposits 245,120 249,622
Certificates of deposit 156,578 189,291
-------------------
$401,698 $438,913
===================
The aggregate amount of certificates of deposit with a minimum denomination of
$100,000 was approximately $12.2 million and $13.3 million at December 31, 1999
and 1998, respectively.
At December 31, 1999, scheduled maturities of certificates of deposit are as
follows:
Year ending December 31,
2000 2001 2002 2003 2004 Thereafter Total
----------------------------------------------------------------------
$90,669 $52,701 $5,749 $5,694 $1,387 $ 378 $156,578
======================================================================
NOTE I - ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank consist of the following (in
thousands):
December 31,
1999 1998
-----------------------------------------------------------------------
Contractual Weighted Weighted
maturity date Amount average rate Amount average rate
-----------------------------------------------------------------------
1999 $ - -% $ 30,000 6.05%
2000 35,174 5.53 25,000 6.13
2001 5,000 6.52 - -
2002 10,000 4.85 - -
2003 20,000 5.60 20,000 5.60
2004 45,000 5.03 - -
2005 15,000 5.35 15,000 5.35
2006 20,000 5.15 - -
2008 70,000 5.62 70,000 5.62
2009 25,000 4.86 - -
2010 3,359 6.70 3,359 6.70
-------- ---------
$248,533 5.77 $163,359 6.03
======== ========
The advances are collateralized by Federal Home Loan Bank stock and certain
first mortgage loans and mortgage-backed securities. Unused lines of credit at
the Federal Home Loan Bank were $9.8 million at December 31, 1999.
TF FINANCIAL CORPORATION 1999 ANNUAL REPORT 37
<PAGE>
TF Financial Corporation and Subsidiaries
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE J - BENEFIT PLANS
The Bank maintains a 401(k) profit-sharing plan for eligible employees.
Participants may contribute up to 15% of pretax eligible compensation. The Bank
makes discretionary matching contributions equal to 100% of the first $600
deferred. Contributions to the 401(k) plan totaled $40,000, $43,000, and $44,000
in 1999, 1998 and 1999, respectively.
The Bank has a non-contributory defined benefit pension plan covering
substantially all full-time employees meeting certain eligibility requirements.
The benefits are based on each employee's years of service and an average
earnings formula. An employee becomes fully vested upon completion of five years
of qualifying service. It is the policy of the Bank to fund the maximum amount
allowable under the individual aggregate cost method to the extent deductible
under existing federal income tax regulations.
The following table sets forth the pension plan's funded status and amounts
recognized in the consolidated statements of financial position at the dates
indicated (in thousands).
December 31,
--------------------
1999 1998
--------------------
Change in benefit obligation
Benefit obligation at beginning of year $ 3,132 $ 2,609
Service cost 46 62
Interest cost 203 201
Actuarial gain (loss) (394) 250
Increase due to plan amendments -- 171
Benefits paid (89) (161)
--------------------
Benefits obligation at end of year $ 2,898 $ 3,132
===================
Change in plan assets
Fair value of plan assets at beginning of year $ 1,961 $ 1,762
Actual return on plan assets 41 (50)
Employer contribution 69 410
Benefits paid (89) (161)
--------------------
Fair value of plan assets at end of year $ 2,382 $ 1,961
===================
Funded status
Unfunded accumulated benefits $ (516) (1,171)
Unrecognized transition obligation 25 31
Unrecognized net actuarial loss (gain) (59) 201
Unrecognized prior service cost 305 543
--------------------
Prepaid (accrued) benefit cost $ (245) $ (396)
===================
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------
<S> <C> <C> <C>
Weighted-average assumptions as of December 31
Discount rate 6.50% 7.25% 6.00%
Expected return on plan assets 8.00 8.00 8.00
Rate of compensation increase 4.00 4.00 6.00
Components of net periodic benefit cost
Service cost $ 47 $ 62 $ 157
Interest cost 203 201 160
Expected return on plan assets (176) (157) (116)
Amortization of prior service cost 65 52 52
-------------------------------
Net periodic benefit cost $ 139 $ 158 $ 253
===============================
38
</TABLE>
<PAGE>
TF Financial Corporation and Subsidiaries
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE J - BENEFIT PLANS - Continued
The Corporation also maintains the following benefit plans:
1. Employee Stock Ownership Plan
-----------------------------
In 1994, the Corporation established an internally leveraged ESOP for eligible
employees who have completed six months of service with the Corporation or its
subsidiaries. The ESOP borrowed $4.2 million from the Corporation to purchase
423,200 newly issued shares of common stock. The Corporation makes discretionary
contributions to the ESOP in order to service the ESOP's debt. Any dividends
received by the ESOP will be used to pay debt service. The ESOP shares initially
were pledged as collateral for its debt. As the debt is repaid, shares are
released from collateral and allocated to qualifying employees based on the
proportion of debt service paid in the year. The Corporation accounts for its
ESOP in accordance with SOP 93-6. Accordingly, the debt of the ESOP is recorded
as debt and the shares pledged as collateral are reported as unearned ESOP
shares in the consolidated statements of financial position. As shares are
released from collateral, the Corporation reports compensation expense equal to
the current market price of the shares, and the allocated shares are included in
outstanding shares for earnings per share computations. Dividends on allocated
ESOP shares are recorded as a reduction of retained earnings; dividends on
unallocated ESOP shares are recorded as a reduction of debt and accrued
interest. ESOP compensation expense was $151,000, $288,000 and $351,000 in 1999,
1998 and 1997, respectively.
1999 1998
-----------------------
Allocated shares 122,000 119,500
Unreleased shares 276,600 288,800
-----------------------
Total ESOP shares 398,600 408,300
=======================
Fair value of unreleased shares $3,665,000 $4,981,800
=======================
2. Management Stock Bonus Plan
---------------------------
The Board of Directors also adopted a MSBP which was approved by the
Corporation's stockholders on October 13, 1994. The MSBP provides that up to
211,600 shares of common stock may be granted, at the discretion of the Board,
to directors and key officers at no cost to the individuals. The Corporation
granted 178,292 shares on November 18, 1994, 24,000 shares on December 18, 1995,
and 9,308 shares on December 15, 1997, in the form of restricted stock payable
over five years from the date of grant. The recipients of the restricted stock
are entitled to all voting and other stockholder rights, except that the shares,
while restricted, may not be sold, pledged or otherwise disposed of and are
required to be held in escrow. In the event the recipient terminates association
with the Corporation for reasons other than death, disability or change in
control, the recipient forfeits all rights to the allocated shares under
restriction which are cancelled and revert to the Corporation for reissuance
under the plan. Shares acquired by MSBP of $2.1 million were recorded at the
date of award based on the market value of shares acquired by the Corporation.
Shares acquired by the MSBP, which are shown as a separate component of
stockholders' equity, are being amortized to expense over the five-year vesting
period; $430,000, $460,000 and $458,000 was amortized to expense in 1999, 1998
and 1997, respectively. At December 31, 1998, there were no shares reserved for
future grants under the plan.
3. Stock Option Plans
------------------
The Corporation has fixed stock option plans accounted for under APB Opinion No.
25 and related interpretations. The plans allow the Corporation to grant options
to employees and directors for up to 794,000 shares of common stock. The
options, which have a term of 10 years when issued, vest either immediately or
over a three to five year period. The exercise price of each option equals the
market price of the Corporation's stock on the date of grant. Had compensation
cost for the plans been determined based on the fair value of options at the
grant dates consistent with the method of SFAS No. 123, Accounting for
Stock-Based Compensation, the Corporation's net income and earnings per share
would have been reduced to the pro forma amounts indicated on the following
page.
TF FINANCIAL CORPORATION 1999 ANNUAL REPORT 39
<PAGE>
TF Financial Corporation and Subsidiaries
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE J - BENEFIT PLANS - Continued
1999 1998 1997
--------------------------
Net income (in thousands)
As reported $4,422 $4,038 $4,874
Pro forma $4,243 $3,885 $4,726
Basic earnings per share
As reported $1.60 $1.39 $1.33
Pro forma $1.53 $1.34 $1.29
Diluted earnings per share
As reported $1.52 $1.26 $1.25
Pro forma $1.46 $1.21 $1.21
These pro forma amounts may not be representative of future disclosures because
they do not take into effect the pro forma compensation expense related to
grants before 1995.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1999, 1998 and 1997, respectively: a dividend
yield of 3.73%, 0% and 0%; expected volatility of 30%, 34% and 21%, risk-free
interest rate of 5.87%, 5.25% and 6.4%; and expected lives of six, five and five
years for all options.
A summary of the status of the Corporation's fixed stock option plans as of
December 31, 1999, and changes for each of the years in the three-year period
then ended was as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------------------------------------------
Weighted Weighted Weighted
average average average
Number exercise Number exercise Number exercise
of price per of price per of price per
shares share shares share shares share
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 696,019 $13.24 695,875 $13.08 551,833 $12.06
Options granted 17,515 16.31 13,325 22.46 170,155 16.62
Options exercised (9,650) 13.00 (10,486) 12.85 (5,915) 11.50
Options forfeited (6,017) 20.24 (2,695) 15.78 (20,198) 16.50
------- ------- -------
Outstanding at end of year 697,867 $13.26 696,019 $13.24 695,875 $13.08
======= ======= =======
Options exercisable at year-end 578,917 524,813 478,919
======= ======= =======
Weighted average fair value of
options granted during year $ 4.57 $ 8.72 $ 5.42
</TABLE>
40
<PAGE>
TF Financial Corporation and Subsidiaries
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE J - BENEFIT PLANS - Continued
The following table summarizes information about stock options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
------------------------------------------------------------------------------------------
Weighted
Number average Weighted Number Weighted
outstanding at remaining average exercisable at average
Range of exercise December 31, contractual exercise December 31, exercise
prices 1999 life (years) price 1999 price
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$11.50 to $17.25 675,423 5.5 years $ 13.00 574,038 $12.42
$18.00 to $19.25 17,194 8.5 years 19.00 3,829 18.53
$26.00 to $27.88 5,250 8.3 years 27.90 1,050 27.90
</TABLE>
Total compensation cost recognized for stock-based employee compensation awards
was approximately $117,000, $116,000 and $99,000 for 1999, 1998 and 1997,
respectively.
NOTE K - INCOME TAXES
The components of income tax expense are summarized as follows (in thousands):
Year ended December 31,
1999 1998 1997
----------------------------
Federal
Current $ 2,254 $ 2,162 $ 2,420
Deferred 99 (152) (233)
----------------------------
2,353 2,010 2,187
State and local - current 33 297 395
----------------------------
Continuing operations 2,386 2,307 2,582
Cumulative effect of accounting change -- 125 --
----------------------------
Income tax provision $ 2,386 $ 2,432 $ 2,582
============================
The Corporation's effective income tax rate was different than the statutory
federal income tax rate as follows:
<TABLE>
<CAPTION>
Year ended December 31,
1999 1998 1997
---------------------------------
<S> <C> <C> <C>
Statutory federal income tax 34.0% 34.0% 34.0%
Increase (decrease) resulting from
Tax-exempt income (5.1) (3.6) (1.8)
State tax, net of federal benefit 0.3 3.1 3.5
Other 5.9 6.1 (1.1)
---------------------------------
35.1% 39.6% 34.6
=================================
</TABLE>
TF FINANCIAL CORPORATION 1999 ANNUAL REPORT 41
<PAGE>
TF Financial Corporation and Subsidiaries
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE K - INCOME TAXES - Continued
Deferred taxes are included in the accompanying consolidated statements of
financial position at December 31, 1999 and 1998, for the estimated future tax
effects of differences between the financial statement and federal income tax
bases of assets and liabilities according to the provisions of currently enacted
tax laws. No valuation allowance was recorded against deferred tax assets at
December 31, 1999 and 1998. The Corporation's net deferred tax asset at December
31, 1999 and 1998, was composed of the following:
December 31,
1999 1998
---------------
Deferred tax assets
Deferred loan origination fees $ 83 $ 107
Deferred compensation 288 176
Allowance for loan losses, net 202 79
Amortization 290 226
Unrealized loss on securities available for sale 1,590 --
Other -- 3
---------------
2,453 591
---------------
Deferred tax liabilities
Accrued pension expense 391 20
Unrealized gain on securities available for sale -- 98
---------------
391 118
---------------
Deferred tax asset $2,062 $ 473
===============
The Corporation files its income tax returns on the basis of a fiscal tax year
ending June 30.
The Bank, is required, beginning in 1998, to recapture approximately $2.4
million of its total tax bad debt reserve of approximately $8.1 million into
taxable income over a six-year period. Deferred tax liabilities have been
accrued in respect of the amount of the reserve to be recaptured.
The Bank is not required to recapture approximately $5.7 million of its tax bad
debt reserve, attributable to bad debt deductions taken by it prior to 1988, as
long as the Bank continues to operate as a bank under federal tax law and does
not use the reserve for any other purpose. In accordance with SFAS No. 109, the
Bank has not recorded any deferred tax liability on this portion of its tax bad
debt reserve. The tax that would be paid were the Bank ultimately required to
recapture that portion of the reserve, would amount to approximately $1.9
million.
42
<PAGE>
TF Financial Corporation and Subsidiaries
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE L - REGULATORY MATTERS
The Bank is subject to minimum regulatory capital standards promulgated by the
Office of Thrift Supervision (OTS). Failure to meet minimum capital requirements
can initiate certain mandatory - and possible additional discretionary - actions
by regulators that, if undertaken, could have a direct material effect on the
Corporation's consolidated financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices. The Corporation's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors. Such minimum capital standards
generally require the maintenance of regulatory capital sufficient to meet each
of three tests, hereinafter described as the tangible capital requirement, the
core capital requirement and the risk-based capital requirement. The tangible
capital requirement provides for minimum tangible capital (defined as
stockholders' equity less all intangible assets) equal to 1.5% of adjusted total
assets. The core capital requirement provides for minimum core capital (tangible
capital plus certain forms of supervisory goodwill and other qualifying
intangible assets) equal to 4% of adjusted total assets at December 31, 1999.
As of December 31, 1999, management believes that the Bank met all capital
adequacy requirements to which it was subject.
<TABLE>
<CAPTION>
Regulatory capital
December 31, 1999
Tangible Core Risk-based
capital Percent capital Percent capital Percent
----------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Capital under generally accepted
accounting principles $45,246 6.26% $45,246 6.26% $45,246 13.33%
Unrealized (loss) on certain
available-for-sale securities 2,987 0.41 2,987 0.41 2,987 0.88
Goodwill and other intangible assets (6,570) (0.91) (6,570) (0.91) (6,570) (1.94)
Additional capital items
General valuation allowances -
limited -- -- -- -- 1,917 0.56
----------------------------------------------------------------
Regulatory capital computed 41,663 5.76 41,663 5.76 43,580 12.83
Minimum capital requirement 10,843 1.50 28,916 4.00 27,156 8.00
----------------------------------------------------------------
Regulatory capital - excess $30,820 4.26% $12,747 1.76% $16,424 4.83%
================================================================
</TABLE>
TF FINANCIAL CORPORATION 1999 ANNUAL REPORT 43
<PAGE>
TF Financial Corporation and Subsidiaries
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE L - REGULATORY MATTERS - Continued
<TABLE>
<CAPTION>
Regulatory capital
December 31, 1998
Tangible Core Risk-based
capital Percent capital Percent capital Percent
----------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Capital under generally accepted
accounting principles $52,577 7.93% $52,577 7.93% $52,577 19.86%
Unrealized gain on certain
available-for-sale securities (154) (0.02) (154) (0.02) (154) (0.06)
Goodwill and other intangible assets (7,389) (1.12) (7,389) (1.12) (7,389) (2.79)
Additional capital items
General valuation allowances -
limited -- -- -- -- 1,909 0.72
----------------------------------------------------------------------
Regulatory capital computed 45,034 6.79 45,034 6.79 46,943 17.73
Minimum capital requirement 9,943 1.50 26,515 4.00 21,178 8.00
----------------------------------------------------------------------
Regulatory capital - excess $35,091 5.29% $18,519 2.79% $25,765 9.73%
======================================================================
</TABLE>
At December 31, 1999, the Bank met all regulatory requirements for
classification as a "well-capitalized" institution. A "well-capitalized"
institution must have risk-based capital of 10% and core capital of 5%. The
Bank's capital exceeded the minimum required amounts for classification as a
"well-capitalized" institution by $10 million and $5 million, respectively.
There are no conditions or events which have occurred that management believes
have changed the Bank's classification as a "well-capitalized" institution.
The Bank maintains a liquidation account for the benefit of eligible savings
account holders who maintained deposit accounts in the Bank after the Bank
converted to a stock form of ownership. The Bank may not declare or pay a cash
dividend on or repurchase any of its common shares if the effect thereof would
cause the Bank's stockholders' equity to be reduced below either the amount
required for the liquidation account or the regulatory capital requirements for
insured institutions.
44
<PAGE>
TF Financial Corporation and Subsidiaries
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE M - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Corporation is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments are primarily commitments to extend credit and
standby letters of credit. Such financial instruments are recorded in the
consolidated financial statements when they become receivable or payable. Those
instruments involve, to varying degrees, elements of credit and interest rate
risk in excess of the amount recognized in the consolidated statements of
financial position. The contract or notional amounts of those instruments
reflect the extent of the Bank's involvement in particular classes of financial
instruments.
The Corporation's exposure to credit loss in the event of non-performance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amount of those
instruments. The Corporation uses the same credit policies in making commitments
and conditional obligations as it does for on-balance-sheet instruments.
Unless noted otherwise, the Corporation requires collateral to support financial
instruments with credit risk.
Financial instruments, the contract amounts of which represent credit risk, are
as follows (in thousands):
December 31,
1999 1998
-----------------
Commitments to extend credit $54,778 $30,341
Standby letters of credit 3,687 3,604
Loans sold with recourse 278 364
-----------------
$58,743 $34,309
=================
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. The Corporation evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
it is deemed necessary by the Corporation upon extension of credit, is based on
management's credit evaluation of the borrower. Collateral held generally
includes residential and some commercial property.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. Typically, the Bank issues letters of
credit to other financial institutions and generally does not require collateral
for standby letters of credit.
TF FINANCIAL CORPORATION 1999 ANNUAL REPORT 45
<PAGE>
TF Financial Corporation and Subsidiaries
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE N - COMMITMENTS AND CONTINGENCIES
The Bank had no commitments to sell mortgage loans to investors at December 31,
1999 and 1998.
The Bank leases branch facilities for periods ranging up to seven years. These
leases are classified as operating leases and contain options to renew for
additional periods. Rental expense was approximately $298,000, $315,000 and
$296,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
The minimum annual rental commitments of the Bank under all non-cancellable
leases with terms of one year or more are as follows:
Year ending December 31,
2000 $ 138
2001 140
2002 140
2003 128
2004 103
Thereafter 170
------------
$ 819
============
The Bank has a contract with a third-party computer processor which expires in
2002 with an annual commitment of approximately $109,000.
The Corporation has employment agreements with certain key executives that
provide severance pay benefits if there is a change in control of the
Corporation. The agreements will continue in effect on a year-to-year basis
until terminated or not renewed by the Corporation or key executives. Upon a
change in control, the Corporation shall continue to pay the key executives'
salary per the agreements and certain benefits for one year. The maximum
contingent liability under the agreements at December 31, 1999, was
approximately $2,003,000.
From time to time, the Corporation and its subsidiaries are parties to routine
litigation, which arises in the normal course of business. In the opinion of
management, the resolution of these lawsuits would not have a material adverse
effect on the Corporation's consolidated financial position or results of
operations.
NOTE O - SIGNIFICANT CONCENTRATIONS OF CREDIT RISK
The Bank is principally engaged in originating and investing in one-to-four
family residential and commercial real estate loans in eastern Pennsylvania and
New Jersey. The Bank offers both fixed and adjustable rates of interest on these
loans which have amortization terms ranging to 30 years. The loans are generally
originated or purchased on the basis of an 80% loan-to-value ratio, which has
historically provided the Bank with more than adequate collateral coverage in
the event of default. Nevertheless, the Bank, as with any lending institution,
is subject to the risk that residential real estate values in the primary
lending area will deteriorate, thereby potentially impairing collateral values
in the primary lending area. However, management believes that residential and
commercial real estate values are presently stable in its primary lending area
and that loan loss allowances have been provided for in amounts commensurate
with its current perception of the foregoing risks in the portfolio.
46
<PAGE>
TF Financial Corporation and Subsidiaries
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE P - FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosures about Fair Value of Financial Instruments, requires
all entities to disclose the estimated fair value of their assets and
liabilities considered to be financial instruments. For the Bank, as for most
financial institutions, the majority of its assets and liabilities are
considered financial instruments as defined in SFAS No. 107. However, many such
instruments lack an available trading market as characterized by a willing buyer
and willing seller engaging in an exchange transaction. Also, it is the
Corporation's general practice and intent to hold its financial instruments to
maturity or available for sale and to not engage in trading or significant sales
activities. Therefore, the Corporation and the Bank had to use significant
estimations and present value calculations to prepare this disclosure.
Changes in the assumptions or methodologies used to estimate fair values may
materially affect the estimated amounts. Also, management is concerned that
there may not be reasonable comparability between institutions due to the wide
range of permitted assumptions and methodologies in the absence of active
markets. This lack of uniformity gives rise to a high degree of subjectivity in
estimating financial instrument fair values.
Fair values have been estimated using data which management considered the best
available, as generally provided by estimation methodologies deemed suitable for
the pertinent category of financial instrument. The estimation methodologies,
resulting fair values and recorded carrying amounts are as follows:
Fair value of loans and deposits with floating interest rates is generally
presumed to approximate the recorded carrying amounts.
Fair value of financial instruments actively traded in a secondary market has
been estimated using quoted market prices (in thousands).
December 31,
--------------------------------------
1999 1998
--------------------------------------
Estimated Estimated
fair Carrying fair Carrying
value value value value
--------------------------------------
Cash and cash equivalents $ 16,715 $ 16,715 $ 42,703 $ 42,703
Investment securities 86,468 88,690 90,136 89,937
Mortgage-backed securities 286,703 292,403 257,845 256,249
TF FINANCIAL CORPORATION 1999 ANNUAL REPORT 47
<PAGE>
TF Financial Corporation and Subsidiaries
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE P - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued
The fair value of financial instruments with stated maturities has been
estimated using the present value of cash flows, discounted at rates
approximating current market rates for similar assets and liabilities.
<TABLE>
<CAPTION>
December 31,
1999 1998
-------------------------------------------
Estimated Estimated
fair Carrying fair Carrying
value value value value
-------------------------------------------
<S> <C> <C> <C> <C>
Assets
Interest-bearing deposits with banks $ 845 $ 847 $ 2,244 $ 2,238
Liabilities
Deposits with stated maturities 155,952 156,578 187,816 189,291
Borrowings with stated maturities
Short-term (due within 6 months) 40,937 40,940 14,978 15,000
Long-term 202,554 223,359 145,303 148,359
</TABLE>
The fair value of financial instrument liabilities with no stated maturities is
generally presumed to approximate the carrying amount (the amount payable on
demand).
<TABLE>
<CAPTION>
December 31,
1999 1998
-----------------------------------------
Estimated Estimated
fair Carrying fair Carrying
value value value value
-----------------------------------------
<S> <C> <C> <C> <C>
Deposits with no stated maturities $245,120 $245,120 $249,622 $249,622
======================================
</TABLE>
The fair value of the net loan portfolio has been estimated using the present
value of cash flows, discounted at the approximate current market rates adjusted
for non-interest operating costs, and giving consideration to estimated
prepayment risk and credit loss factors.
<TABLE>
<CAPTION>
December 31,
-----------------------------------------
1999 1998
-------------------- --------------------
Estimated Estimated
fair Carrying fair Carrying
value value value value
-----------------------------------------
<S> <C> <C> <C> <C>
Net loans $285,800 $287,979 $245,375 $240,841
========================================
</TABLE>
48
<PAGE>
TF Financial Corporation and Subsidiaries
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE P - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued
There is no material difference between the carrying amount and the estimated
fair value of off-balance-sheet items totalling approximately $58.7 million and
$34.3 million at December 31, 1999 and 1998, respectively, which are primarily
comprised of floating rate loan commitments priced to market at funding.
The Bank's remaining assets and liabilities are not considered financial
instruments. No disclosure of the relationship value of the Bank's deposits is
required by SFAS No. 107.
NOTE Q - SERVICE FEES, CHARGES AND OTHER OPERATING INCOME AND OTHER OPERATING
EXPENSE
<TABLE>
<CAPTION>
Year ended December 31,
1999 1998 1997
------------------------
<S> <C> <C> <C>
Service fees, charges and other operating income (in thousands)
Loan servicing fees $ 358 $ 317 $ 512
Late charge income 74 85 92
Deposit service charges 548 435 471
Other income 259 258 128
------------------------
$1,239 $1,095 $1,203
========================
Other operating expense (in thousands)
Employee education $ 36 $ 34 $ 49
Insurance and surety bond 127 142 149
Office supplies 202 233 318
Postage 137 163 218
Telephone 187 173 130
Service charges on bank accounts 385 280 111
Supervisory examination fees 139 140 144
Other expenses 1,359 1,040 1,211
------------------------
$2,572 $2,205 $2,330
========================
</TABLE>
NOTE R - SHAREHOLDER RIGHTS PLAN
The Corporation adopted a Shareholder Rights Plan (the Rights Plan) to protect
shareholders from attempts to acquire control of the Corporation at an
inadequate price. Under the Rights Plan, the Corporation distributed a dividend
of one Preferred Share Purchase Right (a Right) for each share of outstanding
common stock. The rights are currently not exercisable and will expire on
November 22, 2005, unless the expiration date is extended or unless the Rights
are earlier redeemed by the Corporation.
TF FINANCIAL CORPORATION 1999 ANNUAL REPORT 49
<PAGE>
TF Financial Corporation and Subsidiaries
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE R - SHAREHOLDER RIGHTS PLAN - Continued
After the Rights become exercisable, under certain circumstances, the Rights
(other than rights held by a 15% beneficial owner or an "acquiring person") will
entitle the holders to purchase one one-hundredth of a share of a new series of
junior participating preferred stock at an exercise price of $45 or purchase
either the Corporation's common shares or the common shares of the potential
acquirer at a substantially reduced price.
The Corporation is entitled to redeem the Rights at $0.01 per Right prior to the
acquisition by a person or group of beneficial ownership of 15% or more of the
Corporation's common stock. Following the acquisition by a person or group of
beneficial ownership of 15% or more of the Corporation's common stock and prior
to an acquisition of 50% or more, the Board of Directors may exchange the Rights
(other than Rights owned by such person or group), in whole or in part, at an
exchange ratio of one share of common stock (or one one-hundredth of a share of
the new series of junior participating preferred stock) per Right.
The Rights Plan was not adopted in response to any specific effort to acquire
control of the Corporation. The issuance of rights has no dilutive effect, did
not affect the Corporation's reported earnings per share, and was not taxable to
the Corporation or its shareholders.
NOTE S - EARNINGS PER SHARE
The following table illustrates the reconciliation of the numerators and
denominators of the basic and diluted earnings per share computations (dollars
in thousands, except per share data):
<TABLE>
<CAPTION>
Weighted
average
Income shares Per share
(numerator)(denominator) amount
------------------------------------
<S> <C> <C> <C>
Net income $ 4,422
=========
Basic earnings per share
Income available to common stockholders $ 4,422 2,759,690 $ 1.60
======
Effect of dilutive securities
Stock options -- 158,666
Diluted earnings per share ----------------------
Income available to common stockholders
plus effect of dilutive securities $ 4,422 2,918,356 $ 1.52
==================================
50
</TABLE>
<PAGE>
TF Financial Corporation and Subsidiaries
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE S - EARNINGS PER SHARE - Continued
There were options to purchase 246,109 shares of common stock at a range of
$14.50 to $28.00 per share which were outstanding during 1999 which were not
included in the computation of diluted earnings per share because the options'
exercise prices were greater than the average market price of the common shares.
The options, which expire through October 31, 2009, were still outstanding at
December 31, 1999.
<TABLE>
<CAPTION>
Year ended December 31, 1998
Weighted
average
Income shares Per share
(numerator) (denominator) amount
-------------------------------------
<S> <C> <C> <C>
Basic earnings per share
Income before cumulative effect of accounting change $ 3,830 $ 1.32
Cumulative effect of accounting change 208 0.07
-------- --------
Income available to common stockholders $ 4,038 2,894,651 $ 1.39
======== ========
Effect of diluted securities
Stock options 300,844
---------
Diluted earning per share
Income before cumulative effect of accounting change $ 3,830 $ 1.20
Cumulative effect of accounting change 208 0.06
-------- --------
Income available to common stockholders
Plus effect of dilutive securities $ 4,038 3,195,495 $ 1.26
===================================
</TABLE>
There were options to purchase 5,250 shares of common stock at a range of $26.00
to $28.00 per share which were outstanding during 1998 which were not included
in the computation of diluted earnings per share because the options' exercise
prices were greater than the average market price of the common shares. The
options, which expire through December 31, 2008, were still outstanding at
December 31, 1998.
<TABLE>
<CAPTION>
Year ended December 31, 1997
Weighted
average
Income shares Per share
(numerator)(denominator) amount
--------------------------------
<S> <C> <C> <C>
Net income $ 4,874
=========
Basic earnings per share
Income available to common stockholders $ 4,874 3,656,924 $ 1.33
========
Effect of dilutive securities
Stock options -- 251,667
---------------------
Diluted earnings per share
Income available to common stockholders
effect of dilutive securities $ 4,874 3,908,591 $ 1.25
================================
</TABLE>
There were no antidilutive options at December 31, 1997.
TF FINANCIAL CORPORATION 1999 ANNUAL REPORT 51
<PAGE>
TF Financial Corporation and Subsidiaries
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE T - SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATE (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
Dec. 31, Sept. 30 June 30, March 31,
1999 1999 1999 1999
---------------------------------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Total interest income $12,103 $11,882 $11,944 $11,093
Total interest expense 7,169 7,028 7,145 6,632
Net interest income 4,934 4,854 4,799 4,461
Provision for possible loan losses 120 90 60 30
---------------------------------------
Net interest income after provision 4,814 4,764 4,739 4,431
Other income 674 298 297 324
Other expense 3,423 3,456 3,434 3,220
---------------------------------------
Income before taxes 2,065 1,606 1,602 1,535
Income taxes 707 551 577 551
---------------------------------------
Net income $ 1,358 $ 1,055 $ 1,025 $ 984
=======================================
Earnings per share - basic $ 0.50 $ 0.38 $ 0.37 $ 0.35
Earnings per share - assuming dilution $ 0.49 $ 0.36 $ 0.35 $ 0.33
</TABLE>
52
<PAGE>
TF Financial Corporation and Subsidiaries
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE T - SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATE (UNAUDITED) - CONTINUED
<TABLE>
<CAPTION>
Three months ended
Dec. 31, Sept. 30 June 30, March 31,
1998 1998 1998 1998
----------------------------------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Total interest income $11,061 $11,379 $10,998 $10,141
Total interest expense 6,851 7,092 6,590 5,662
Net interest income 4,210 4,287 4,408 4,479
Provision for possible loan losses 15 15 15 15
----------------------------------------
Net interest income after provision 4,195 4,272 4,393 4,464
Other income 135 338 686 420
Other expense 2,730 3,208 3,453 3,375
----------------------------------------
Income before income taxes and
cumulative effect of accounting change 1,600 1,402 1,626 1,509
Net income 620 534 637 516
----------------------------------------
Income before cumulative effect
of accounting change 980 868 989 993
Cumulative effect of accounting change 208 -- -- --
----------------------------------------
Net income $ 1,188 $ 868 $ 989 $ 993
========================================
Earning per common share before cumulative
effect of accounting change
Basic $ 0.34 $ 0.30 $ 0.34 $ 0.34
Diluted $ 0.32 $ 0.27 $ 0.30 $ 0.31
Cumulative effect of accounting change
Basic 0.07 -- -- --
Diluted 0.06 -- -- --
Earnings per common share
Basic $ 0.41 $ 0.30 $ 0.34 $ 0.34
Diluted $ 0.38 $ 0.27 $ 0.30 $ 0.31
</TABLE>
TF FINANCIAL CORPORATION 1999 ANNUAL REPORT 53
<PAGE>
TF Financial Corporation and Subsidiaries
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE U - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
Condensed financial information for TF Financial Corporation (parent company
only) follows (in thousands):
BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
1999 1998
------------------
ASSETS
<S> <C> <C>
Cash $ 2,387 $ 990
Certificates of deposit - other institutions 181 172
Investment securities available-for-sale 350 500
Investment in Third Federal 42,409 49,221
Investment in TF Investments 2,564 2,439
Investment in Teragon 19 23
Investment in Penns Trail Development 412 196
Other assets 125 14
------------------
Total assets $48,447 $53,555
=================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Loan payable to TF Investments $ -- $ --
Payable to Third Federal and other liabilities -- $ 895
------------------
Total liabilities -- 895
Stockholders' equity 48,447 $52,660
-----------------
Total liabilities and stockholders' equity $48,447 $53,555
=================
</TABLE>
54
<PAGE>
TF Financial Corporation and Subsidiaries
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE U - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY - CONTINUED
STATEMENT OF EARNINGS
Year ended December 31,
1999 1998 1997
-----------------------
INCOME
Equity in earnings of subsidiaries $4,528 $4,203 $5,346
Interest and dividend income 125 13 10
------------------------
Total income 4,653 4,216 5,356
------------------------
EXPENSES
Interest -- 8 256
Other 231 170 226
------------------------
Total income 231 178 482
------------------------
NET INCOME $4,422 $4,038 $4,874
========================
TF FINANCIAL CORPORATION 1999 ANNUAL REPORT 55
<PAGE>
TF Financial Corporation and Subsidiaries
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE U - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY - CONTINUED
STATEMENT OF CASH FLOW
<TABLE>
<CAPTION>
December 31,
1999 1998 1997
-----------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 4,422 $ 4,038 $ 4,874
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Equity in earnings of subsidiaries (4,528) (4,203) (5,346)
Net change in assets and liabilities (954) 840 (3,732)
-----------------------------------
Net cash provided by (used in) operating
activities (1,060) 675 (4,204)
-----------------------------------
Cash flows from investing activities
Capital distribution from subsidiaries 8,500 2,998 43,300
Purchase of investment securities available for sale -- (501) --
Purchase and maturities of certificates of deposit
in other financial institutions, net (9) (1) (17)
-----------------------------------
Net cash (used in) provided by investing
activities 8,491 2,496 42,283
-----------------------------------
Cash flows from financing activities
Cash dividends paid to stockholders (1,359) (1,387) (1,433)
Net (decrease) increase in borrowing from
TF Investments -- (103) (9,637)
Treasury stock acquired (4,800) (941) (27,027)
Exercise of stock options 125 122 75
-----------------------------------
Net cash used in financing activities (6,034) (2,309) (38,022)
-----------------------------------
NET INCREASE IN CASH 1,397 863 57
Cash at beginning of year 990 127 70
-----------------------------------
Cash at end of year $ 2,387 $ 990 $ 127
===================================
Supplemental disclosure of cash flow information
Cash paid during the year for income taxes $ 57 $ 63 $ 63
===================================
</TABLE>
56
<PAGE>
------------------------
THIRD FEDERAL SAVINGS BANK
Corporate Office
3 Penns Trail
Newtown, PA 18940-3433
215.579.4000
Operations
215.579.4600
www.thirdfedbank.com - e-mail: [email protected]
- --------------------------------------------------------------------------------
Bucks County, Pennsylvania Branches
Feasterville Office
Buck Hotel Complex
Feasterville, PA 19053-2209
215.364.7096
New Britain Office
600 Town Center
New Britain, PA 18901-5199
215.345.5800
Cross Keys Office
834 North Easton Highway
Doylestown, PA 18901-1007
215.348.5566
Warminster Office
601 Louis Drive
Warminster, PA 18974-2843
215.672.7990
Newtown Office
950 Newtown-Yardley Road
Newtown, PA 18940-4018
215.968.4444
Doylestown Office
60 North Main Street
Doylestown, PA 18901-3730
215.348.9021
[GRAPHICS OMITTED]
- --------------------------------------------------------------------------------
Philadelphia County, Pennsylvania Branches
Frankford Office
4625 Frankford Avenue
Philadelphia, PA 19124-5889
215.289.1400
Fishtown Office
York & Memphis Streets
Philadelphia, PA 19125-3029
215.423.2314
Mayfair Office
Roosevelt Blvd. at Unruh
Philadelphia, PA 19149-2494
215.332.7650
Bridesburg Office
Orthodox & Almond Streets
Philadelphia, PA 19137-1626
215.743.6673
Woodhaven Office
Knights Road Center
Knights & Woodhaven Roads
Philadelphia, PA 19154-2810
215.824.0151
- --------------------------------------------------------------------------------
Mercer County, New Jersey Branches
Ewing Office
2075 Pennington Road
Trenton, NJ 08618-1003
609.883.7033
Princeton Office
Princeton Shopping Center
301 N. Harrison Street
Princeton, NJ 08540-3512
609.683.4488
Hamilton Square Office
1850 Route 33
Hamilton Square, NJ 08690-1712
609.890.1333
Quakerbridge Road Office
590 Lawrence Square Blvd.
Lawrenceville, NJ 08648-2674
609.689.1010
Exhibit 21
<PAGE>
SUBSIDIARIES OF THE REGISTRANT
Parent
- ------
TF Financial Corporation
Percentage Jurisdiction of
Subsidiaries Owned Incorporation
- ------------ ----- -------------
Third Federal Savings Bank (a) 100% United States
TF Investment Corporation (a) 100% Delaware
Teragon Financial Corporation 100% Pennsylvania
Penns Trail Development Corporation (a) 100% Delaware
Third Delaware Corporation (a)(b) 100% Delaware
- ---------------
(a) The operations of this subsidiary are included in the consolidated
financial statements contained in the 1999 Annual Report to Stockholders
incorporated herein by reference.
(b) Third Delaware Corporation is a wholly-owned subsidiary of Third Federal
Savings Bank.
Exhibit 23
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTS
We have issued our report dated January 13, 2000, accompanying the
consolidated financial statements and schedules incorporated by reference or
included in the Annual Report of TF Financial Corporation and Subsidiaries on
Form 10-K for the year ended December 31, 1999. We hereby consent to the
incorporation by reference of said report in the Registration Statements of TF
Financial Corporation and Subsidiaries on Form S-8 (File No. 33-87176, effective
December 7, 1994, File No. 333-09235, effective July 31, 1996 and File No.
333-27085, effective May 14, 1997).
/s/ Grant Thornton LLP
Philadelphia, Pennsylvania
March 24, 2000
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 16,715
<INT-BEARING-DEPOSITS> 847
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 154,445
<INVESTMENTS-CARRYING> 381,093
<INVESTMENTS-MARKET> 373,171
<LOANS> 289,896
<ALLOWANCE> 1,917
<TOTAL-ASSETS> 721,874
<DEPOSITS> 401,698
<SHORT-TERM> 40,940
<LIABILITIES-OTHER> 7,430
<LONG-TERM> 223,359
0
0
<COMMON> 529
<OTHER-SE> 47,918
<TOTAL-LIABILITIES-AND-EQUITY> 721,874
<INTEREST-LOAN> 21,843
<INTEREST-INVEST> 24,477
<INTEREST-OTHER> 702
<INTEREST-TOTAL> 47,022
<INTEREST-DEPOSIT> 14,645
<INTEREST-EXPENSE> 27,974
<INTEREST-INCOME-NET> 19,048
<LOAN-LOSSES> 300
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 13,533
<INCOME-PRETAX> 6,808
<INCOME-PRE-EXTRAORDINARY> 6,808
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,422
<EPS-BASIC> 1.60
<EPS-DILUTED> 1.52
<YIELD-ACTUAL> 2.75
<LOANS-NON> 0
<LOANS-PAST> 2,886
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,909
<CHARGE-OFFS> (296)
<RECOVERIES> 4
<ALLOWANCE-CLOSE> 1,917
<ALLOWANCE-DOMESTIC> 1,917
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,917
</TABLE>
