SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM l0-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2002
------------------------
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to _____________
Commission file number 0-24168
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TF FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 74-2705050
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(State or other jurisdiction (I.R.S. employer identification no.)
of incorporation or organization)
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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N/A
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Former name, former address and former fiscal year, if changed
since last report.
Indicate by check whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date: October 28, 2002
-----------------
Class Outstanding
---------------------------- ----------------
$.10 par value common stock 2,722,732 shares
TF FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 1O-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2002
INDEX
Page
Number
------
PART I - CONSOLIDATED FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 17
Item 4. Controls and Procedures 17
PART II- OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
CERTIFICATIONS 20
EXHIBITS 22
2
TF FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(in thousands)
Unaudited Audited
September 30, December 31,
2002 2001
------------ -----------
Assets
Cash and cash equivalents $101,968 $ 69,139
Certificates of deposit in other financial institutions 199 194
Investment securities available for sale - at fair value 27,529 22,671
Investment securities held to maturity (fair value of $15,210 and $9,830,
respectively) 14,581 9,866
Mortgage-backed securities available for sale - at fair value 129,898 99,763
Mortgage-backed securities held to maturity (fair value of $67,435 and
$94,735, respectively) 64,552 93,367
Loans receivable, net 349,611 377,635
Federal Home Loan Bank stock - at cost 11,118 11,368
Accrued interest receivable 3,935 4,154
Core deposit intangible, net 601 775
Goodwill, net 4,324 4,324
Premises and equipment, net 6,882 7,484
Other assets 10,948 10,464
-------- --------
Total assets $726,146 $711,204
======== ========
Liabilities and stockholders' equity
Liabilities
Deposits $438,122 $422,052
Advances from the Federal Home Loan Bank 217,359 222,359
Advances from borrowers for taxes and insurance 897 1,241
Accrued interest payable 3,876 3,762
Other liabilities 3,534 3,815
-------- --------
Total liabilities 663,788 653,229
-------- --------
Commitments and contingencies
Stockholders' equity
Preferred stock, no par value; 2,000,000 shares authorized and none issued.
Common stock, $0.10 par value; 10,000,000 shares authorized, 5,290,000
issued; 2,479,547 and 2,465,986 shares outstanding at September 30, 2002
and December 31, 2001, net of treasury shares of $2,567,268 and
$2,571,712, respectively. 529 529
Retained earnings 58,915 56,370
Additional paid-in capital 51,608 51,652
Unearned ESOP shares (2,431) (2,523)
Treasury stock - at cost (48,809) (48,838)
Accumulated other comprehensive income 2,546 785
-------- --------
Total stockholders' equity 62,358 57,975
-------- --------
Total liabilities and stockholders' equity $726,146 $711,204
======== ========
See notes to consolidated financial statements
3
TF FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share data)
For three months For nine months
ended September 30, ended September 30,
------------------- -------------------
2002 2001 2002 2001
---- ---- ---- ----
Interest income
Loans $ 6,238 $ 7,042 $19,398 $21,355
Mortgage-backed securities 2,872 3,322 9,120 10,670
Investment securities 608 542 1,760 2,452
Interest bearing deposits and other 320 564 800 1,140
------- ------- ------- -------
Total interest income 10,038 11,470 31,078 35,617
------- ------- ------- -------
Interest expense
Deposits 2,565 3,548 8,102 10,716
Advances from the Federal Home Loan Bank and other borrowings 3,059 3,105 9,167 9,761
------- ------- ------- -------
Total interest expense 5,624 6,653 17,269 20,477
------- ------- ------- -------
Net interest income 4,414 4,817 13,809 15,140
Provision for loan losses 150 124 838 373
------- ------- ------- -------
Net interest income after provision for loan losses 4,264 4,693 12,971 14,767
------- ------- ------- -------
Non-interest income
Service fees, charges and other operating income 433 419 1,179 1,189
Bank-owned life insurance 130 43 390 43
Gains on sale of loans and securities available for sale 419 12 419 7
Gains on sale of real estate - - - 444
------- ------- ------- -------
Total non-interest income 982 474 1,988 1,683
------- ------- ------- -------
Non-interest expense
Compensation and benefits 1,945 1,965 5,790 5,801
Occupancy and equipment 570 622 1,724 1,847
Federal deposit insurance premium 18 18 56 57
Professional fees 119 128 304 445
Amortization of core deposit intangible 58 69 174 207
Amortization of goodwill - 111 - 333
Advertising 110 129 330 381
Other operating 613 585 1,781 1,853
------- ------- ------- -------
Total non-interest expense 3,433 3,627 10,159 10,924
------- ------- ------- -------
Income before income taxes 1,813 1,540 4,800 5,526
Income taxes 438 389 1,145 1,429
------- ------- ------- -------
Net income $ 1,375 $ 1,151 $ 3,655 $ 4,097
======= ======= ======= =======
Basic earnings per share $0.55 $0.47 $1.48 $1.66
Diluted earnings per share $0.51 $0.43 $1.34 $1.54
Weighted average number of shares outstanding - basic 2,478 2,462 2,471 2,466
Weighted average number of shares outstanding - diluted 2,716 2,703 2,725 2,663
See notes to consolidated financial statements
4
TF FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the nine months ended
September 30,
-------------
2002 2001
---- ----
Cash flows from operating activities
Net income $3,655 $4,097
Adjustments to reconcile net income to net cash provided by operating activities:
Mortgage loan servicing rights 10 10
Deferred loan origination fees (198) (61)
Premiums and discounts on investment securities, net 93 13
Premiums and discounts on mortgage-backed securities and loans, net 417 (152)
Amortization of goodwill and core deposit intangible 174 540
Provision for loan losses 838 383
Depreciation of premises and equipment 760 649
Gain on sale of premises and equipment - (444)
Recognition of ESOP and MSBP expenses 204 178
Gain on sales of real estate acquired through foreclosure (60) (19)
Gain on sale of loans and securities available for sale (419) (7)
Increase in surrender value of bank-owned life insurance (390) (43)
Decrease in:
Accrued interest receivable 219 1,647
Other assets 715 838
Increase (decrease) in:
Accrued interest payable 114 538
Other liabilities (1,188) (1,451)
------ -------
Net cash provided by operating activities 4,944 6,716
------ -------
Cash flows from investing activities
Loan originations and principal payments on loans, net 54,305 34,396
Purchases of loans (27,188) (29,341)
Proceeds from loan sales - 1,480
Proceeds from sale of mortgage-backed securities available for sale 17,427 4,309
Proceeds from sale of investment securities available for sale - 507
Purchases of mortgage-backed securities held to maturity (1,139) -
Purchases of mortgage-backed securities available for sale (67,997) (8,464)
Purchase of investment securities available for sale (6,453) (4,057)
Purchase of investment securities held to maturity (6,821) -
Proceeds from maturities of investment securities held to maturity 2,060 51,233
Proceeds from maturities of investment securities available for sale 2,000 15,500
Principal repayments from mortgage-backed securities held to maturity 29,843 28,009
Principal repayments from mortgage-backed securities available for sale 22,762 14,935
Purchases and maturities of certificates of deposit in other financial
institutions, net (5) -
Purchases and redemptions of Federal Home Loan Bank stock, net 250 1,674
Proceeds from sales of real estate acquired through foreclosure 275 134
Proceeds from sale of premises and equipment - 1,784
Purchase of real estate held for investment (765) -
Purchase of premises and equipment (158) (119)
Purchase of Bank-owned life insurance - (9,000)
------ -------
Net cash provided by investing activities 18,396 102,980
------ -------
See notes to consolidated financial statements
5
TF FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(in thousands)
For the nine months ended
September 30,
-------------
2002 2001
---- ----
Cash flows from financing activities
Net increase in deposits 16,070 15,223
Net decrease in advances from Federal Home Loan Bank (5,000) (22,500)
Net decrease in other borrowings - (14,962)
Net decrease in advances from borrowers for taxes and insurance (344) (387)
Exercise of stock options 249 256
Purchase of treasury stock, net (376) (998)
Common stock cash dividend (1,110) (1,099)
-------- -------
Net cash provided by (used in) financing activities 9,489 (24,467)
-------- -------
Net increase in cash and cash equivalents 32,829 85,229
Cash and cash equivalents at beginning of period 69,139 10,618
-------- -------
Cash and cash equivalents at end of period $101,968 $95,847
======== =======
Supplemental disclosure of cash flow information
Cash paid for
Interest on deposits and advances $ 17,155 $19,939
Income taxes $ 1,600 $ 1,595
Non-cash transactions
Transfers from loans to real estate acquired through foreclosure $ 269 $ -
See notes to consolidated financial statements
6
TF FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - PRINCIPLES OF CONSOLIDATION
The consolidated financial statements as of September 30, 2002
(unaudited) and December 31, 2001 and for the three-month and
nine-month periods ended September 30, 2002 and 2001 (unaudited)
include the accounts of TF Financial Corporation (the "Company") and
its wholly owned subsidiaries Third Federal Savings Bank (the "Bank"),
TF Investments Corporation, Penns Trail Development Corporation and
Teragon Financial Corporation. The Company's business is conducted
principally through the Bank. All significant intercompany accounts and
transactions have been eliminated in consolidation.
NOTE 2 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements were
prepared in accordance with instructions for Form 10-Q and, therefore,
do not include all of the disclosures or footnotes required by
accounting principles generally accepted in the United States of
America. In the opinion of management, all adjustments, consisting of
normal recurring accruals, necessary for fair presentation of the
consolidated financial statements have been included. The results of
operations for the periods ended September 30, 2002 are not necessarily
indicative of the results which may be expected for the entire fiscal
year or any other period. For further information, refer to
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended December
31, 2001.
NOTE 3 - CONTINGENCIES
The Company, from time to time, is a party to routine litigation that
arises in the normal course of business. In the opinion of management,
the resolution of this litigation, if any, would not have a material
adverse effect on the Company's consolidated financial condition or
results of operations.
NOTE 4 - OTHER COMPREHENSIVE INCOME (LOSS)
The Company's other comprehensive income consists of net unrealized
gains on investment securities and mortgage-backed securities available
for sale. Total comprehensive income for the three-month periods ended
September 30, 2002 and 2001 was $1,682,000 and $2,180,000, net of
applicable income tax of $596,000 and $919,000, respectively. Total
comprehensive income for the nine-month periods ended September 30,
2002 and 2001 was $5,416,000 and $5,700,000, net of applicable income
tax of $2,052,000 and $2,255,000, respectively.
NOTE 5- RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the
current period presentation.
7
NOTE 6- NEW ACCOUNTING PRONOUNCEMENTS
On January 1, 2002, the Company adopted Financial Accounting Standards
Board (FASB) Statement of Financial Accounting Standards (SFAS) No.
141, "Business Combinations", SFAS No. 142, "Goodwill and Intangible
Assets", and SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets". The adoption of these statements did not have a
material impact on the financial condition or results of operations of
the Company.
On January 1, 2002, the Company also adopted Statement of Position
(SOP) 01-6, "Accounting by Certain Entities That Lend to or Finance
the Activities of Others", which reconciles and conforms existing
differences in the accounting and financial reporting guidance in the
AICPA Audit and Accounting Guides, Banks and Savings Institutions,
Audits of Credit Unions, and Audits of Finance Companies. It also
carries forward accounting guidance for practices deemed to be unique
to certain financial institutions. The adoption of this SOP had no
impact on the Company's financial position or results of operations.
On October 1, 2002 the FASB issued SFAS No. 147,"Acquisitions of
Certain Financial Institutions." Except for transactions between two
or more mutual enterprises, SFAS No. 147 removes the acquisitions of
financial institutions from the scope of both SFAS No. 72 and FASB
Interpretation No. 9 and requires that those transactions be accounted
for in accordance with SFAS No. 141 and SFAS No. 142. Thus, the
requirement of SFAS No. 72 to recognize (and subsequently amortize)
any excess of the fair value of liabilities assumed over the fair
value of tangible and identifiable intangible assets acquired ("SFAS
72 Goodwill") as an unidentifiable intangible no longer applies to
acquisitions within the scope of SFAS No. 147. In addition, SFAS No.
147 amends SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," to include within its scope long-term customer
relationship intangible assets of financial institutions such as
depositor-relationship intangible assets. Consequently, those
intangible assets are subject to undiscounted cash flow recoverability
tests and impairment loss recognition and measurement provisions.
Finally, SFAS No. 147 provides that branch acquisitions that meet the
definition of a business should be accounted for as a business
combination. SFAS No. 147 is effective October 1, 2002, although
earlier application is permitted. The Company has elected to apply
SFAS No. 147 as of January 1, 2002.
The Company had $4,324,000 of SFAS 72 Goodwill at December 31, 2001
related to a 1996 branch acquisition that management of the Company
has concluded was a business combination. In accordance with the
provisions of SFAS No. 147, as of July 1, 2002 the Company has
restated its financial information to remove the amortization of
goodwill from the Unaudited Consolidated Statement of Earnings
retroactive to January 1, 2002. Accordingly, net income for the
quarterly periods ended March 31, 2002 and June 30, 2002 is restated
to $1,285,000 and $995,000, respectively. In addition, the Company
will test the goodwill for impairment prior to its fiscal year ending
December 31, 2002. No impairment has been previously recognized.
8
TF FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
TF Financial Corporation may from time to time make written or oral
"forward-looking statements", including statements contained in the Company's
filings with the Securities and Exchange Commission (including this Quarterly
Report on Form 10-Q and the exhibits thereto), in its reports to stockholders
and in other communications by the Company, which are made in good faith by the
Company pursuant to the "Safe Harbor" Provisions of the Private Securities
Litigation Reform Act of 1995.
These forward-looking statements involve risks and uncertainties, such as
statements of the Company's plans, objectives, expectations, estimates and
intentions that are subject to change based on various important factors (some
of which are beyond the Company's control). The following factors, among others,
could cause the Company's financial performance to differ materially from the
plans, objectives, expectations, estimates and intentions expressed in such
forward-looking statements: the strength of the United States economy in general
and the strength of the local economies in which the Company conducts
operations; the effects of, and changes in, trade, monetary and fiscal policies
and laws, including interest rate policies of the Board of Governors of the
Federal Reserve System, inflation, interest rate, market and monetary
fluctuations; the timely development of and acceptance of new products and
services of the Company and the perceived overall value of these products and
services by users, including the features, pricing and quality compared to
competitors' products and services; the willingness of users to substitute
competitors' products and services for the Company's products and services; the
success of the Company in gaining regulatory approval of its products and
services, when required; the impact of changes in financial services' laws and
regulations (including laws concerning taxes, banking, securities and
insurance); technological changes, acquisitions; changes in consumer spending
and saving habits; and the success of the Company at managing the risks involved
in the foregoing.
The Company cautions that the foregoing list of important factors is not
exclusive. The Company does not undertake to update any forward-looking
statement, whether written or oral, that may be made from time to time by or on
behalf of the Company.
Financial Condition
The Company's total assets at September 30, 2002 and December 31, 2001 were
$726.1 million and $711.2 million, respectively, an increase of $14.9 million,
or 2.1%, during the nine-month period. The increase in total assets was
primarily the result of deposit growth that was first used to repay advances
from the Federal Home Loan Bank and then invested in interest-earning assets.
Cash and cash equivalents increased by $32.8 million. Investment securities
increased by $9.6 million due to the purchase of $13.3 million of such
securities. Mortgage-backed securities available for sale increased by $30.1
million as $68.0 million in purchases of such securities more than off-set the
principal paydowns received from these securities. Mortgage-backed securities
held to maturity decreased by $28.8 million due to the high rate of prepayments
of the mortgages underlying these pass-through securities. Similarly, high
prepayments of existing mortgages in the loans receivable portfolio more than
off-set new loans closed and purchased, causing a net decrease of $28.0 million
in loans receivable.
Total liabilities increased by $10.6 million due to $16.1 million in deposit
growth, less $5.0 million in advances from the Federal Home Loan Bank, which
were repaid as they matured. Non-interest bearing
9
demand deposits grew by $1.2 million while interest-bearing checking accounts
increased by $1.6 million. Savings and money market accounts grew by $11.2
million and certificates of deposit increased by $2.1 million.
Total consolidated stockholders' equity of the Company was $62.4 million or
8.59% of total assets at September 30, 2002, compared to $58.0 million or 8.15%
of assets at December 31, 2001. During the first nine months of 2002 the Company
repurchased 16,894 shares of its common stock and issued 21,338 shares pursuant
to the exercise of stock options. As of September 30, 2002, there were
approximately 114,000 shares available for repurchase under a previously
announced share repurchase plan, and the Company will continue to repurchase
shares as share availability and market conditions permit.
Asset Quality
During the third quarter of 2002, the Company's provision for loan and lease
losses was $150,000 compared with $124,000 during the third quarter of 2001. The
Company has not experienced any significant deterioration in its asset quality
during the third quarter of 2002, nor has the Company experienced any
significant change in the composition of its non-performing assets during such
period.
The following table sets forth information regarding the Company's asset
quality (dollars in thousands):
<
September 30, December 31,
------------- ------------
2002 2001
---- ----
Non-performing loans $3,275 $3,776
Ratio of non-performing loans to gross loans 0.93% 0.99%
Ratio of non-performing loans to total assets 0.45% 0.53%
Foreclosed property $ 84 $ 40
Foreclosed property to total assets 0.01% 0.01%
Ratio of total non-performing assets to total assets 0.46% 0.54%
Management maintains an allowance for loan and lease losses at levels that are
believed to be adequate; however, there can be no assurances that further
additions will not be necessary or that losses inherent in the existing loan and
lease portfolios will not exceed the allowance. The following table sets forth
the activity in the allowance for loan and lease losses during the periods
indicated (in thousands):
2002 2001
---- ----
Beginning balance, January 1, $1,972 $1,714
Provision 838 249
Less: charge-off's (recoveries), net 850 155
------ ------
Ending balance, September 30, $1,960 $1,808
====== ======
10
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
Net Income. The Company recorded net income of $1,375,000, or $0.51 per diluted
share, for the three months ended September 30, 2002 as compared to $1,151,000,
or $0.43 per diluted share, for the three months ended September 30, 2001.
Average Balance Sheet
The following table sets forth information relating to the Company's average
balance sheet and reflects the average yield on assets and average cost of
liabilities for the periods indicated. The yields and costs are computed by
dividing income or expense by the average daily balance of interest-earning
assets or interest-bearing liabilities, respectively, for the periods indicated.
Three months ended September 30,
--------------------------------
2002 2001
---------------------------------- ----------------------------------
Average Average Average Average
Balance Interest Yld/Cost Balance Interest Yld/Cost
------- -------- -------- ------- -------- --------
(dollars in thousands)
Assets:
Interest-earning assets:
Loans receivable (1)....................... $348,675 $ 6,238 7.10% $361,960 $ 7,042 7.72%
Mortgage-backed securities................. 205,729 2,872 5.54% 205,605 3,322 6.41%
Investment securities...................... 54,051 608 4.46% 34,769 542 6.18%
Other interest-earning assets(2)........... 80,811 320 1.57% 66,116 564 3.38%
-------- ------- -------- -------
Total interest-earning assets............ 689,266 10,038 5.78% 668,450 11,470 6.81%
------- -------
Non interest-earning assets.................... 34,176 28,862
-------- --------
Total assets............................. $723,442 $697,312
======== ========
Liabilities and stockholders' equity:
Interest-bearing liabilities
Deposits................................... $436,272 2,565 2.33% $411,985 3,548 3.42%
Advances from the FHLB and other
Borrowings...................... 218,989 3,059 5.54% 222,368 3,105 5.54%
-------- ------- -------- -------
Total interest-bearing liabilities....... 655,261 5,624 3.41% 634,353 6,653 4.16%
------- -------
Non interest-bearing liabilities............... 6,908 7,414
-------- --------
Total liabilities........................ 662,169 641,767
Stockholders' equity........................... 61,273 55,545
-------- --------
Total liabilities and stockholders' equity $723,442 $697,312
======== ========
Net interest income............................ $ 4,414 $4,817
======= ======
Interest rate spread (3)....................... 2.37% 2.65%
Net yield on interest-earning assets (4)....... 2.54% 2.86%
Ratio of average interest-earning assets to
average interest bering liabilities......... 105% 105%
(1) 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.
(2) Includes interest-bearing deposits in other banks.
(3) Interest-rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(4) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
11
Rate/Volume Analysis
The following table presents, for the periods indicated, the change in interest
income and interest expense (in thousands) attributed to (i) changes in volume
(changes in the weighted average balance of the total interest earning asset and
interest bearing liability portfolios multiplied by the prior year rate), and
(ii) changes in rate (changes in rate multiplied by prior year volume). Changes
attributable to the combined impact of volume and rate have been allocated
proportionately based on the absolute value of changes due to volume and changes
due to rate.
Three months ended
September 30,
2002 vs. 2001
----------------------------------------------
Increase (decrease)
due to
----------------------------------------------
Volume Rate Net
----------------------------------------------
Interest income:
Loans receivable, net $ (252) $ (552) $ (804)
Mortgage-backed securities 14 (464) (450)
Investment securities 841 (775) 66
Other interest-earning assets 631 (875) (244)
---------------------------------------------
Total interest-earning assets 1,234 (2,666) (1,432)
=============================================
Interest expense:
Deposits 1,246 (2,229) (983)
Advances from the FHLB and other borrowings (54) 8 (46)
-----------------------------------------------
Total interest-bearing liabilities 1,192 (2,221) (1,029)
===============================================
Net change in net interest income $ 42 $ (445) $ (403)
===============================================
Total Interest Income. Total interest income decreased by $1.4 million or 12.5%
to $10.0 million for the three months ended September 30, 2002 compared with the
third quarter of 2001 primarily because of the consequences of a substantial
decrease in market interest rates. Since the beginning of the first quarter of
2001, the Federal Reserve Board lowered the federal funds rate eleven times from
6.50% to 1.75%. Longer term market interest rates also decreased significantly.
As a result, the Company's callable investment securities were called, higher
coupon mortgage-related securities were paid down at an accelerated rate, and
loans receivable were refinanced by borrowers at lower rates, or away from the
Bank, resulting in large paydowns of higher yielding loans. In addition, the
interest rates on the Company's adjustable rate loans adjusted downward. Thus,
each component of the Company's earning assets produced less interest income
because of declining market interest rates. In addition, the repayment of these
mortgage-related assets produced cash and cash equivalents in amounts greater
than the Corporation was able to reinvest back into longer-term, higher-yielding
assets; thus, the Company's cash and cash equivalents were significantly higher
during the 2002 period, while the rate earned on these assets, the federal funds
rate minus 25 basis points, was substantially lower during the 2002 period. At
September 30, 2002 cash and cash equivalents totaled $102.0 million or 14.0% of
total assets.
Total Interest Expense. Total interest expense decreased by $1.0 million or
15.5% to $5.6 million for the three-month period ended September 30, 2002. An
increase in deposit interest expense due to an increase in the average balance
of deposits was more than offset by lower market interest rates during the
period and the lower rates paid on the Company's renewing certificates of
deposit that had been originated when market interest rates were higher. In
addition, during the fourth quarter of 2001 and the first nine months of 2002,
the
12
Company lowered the interest rates paid on several of its other deposit products
in order to keep them in line with short term market interest rates, mainly the
federal funds rate.
Non-interest income. Total non-interest income was $982,000 for the three-month
period ended September 30, 2002 compared with $474,000 for the same period in
2001. The increase is due to $419,000 in gains on sales of securities and an
$87,000 increase in income from the Corporation's bank-owned life insurance
which was purchased during August 2001.
Non-interest expense. Total non-interest expense decreased by $194,000 to $3.4
million for the three months ended September 30, 2002 compared to the same
period in 2001. The decrease in non-interest expenses is largely attributable to
the elimination of $111,000 in amortization of goodwill. Please refer to Note 6
of the Notes to Unaudited Consolidated Financial Statements for an explanation.
The Company's effective tax rate during the third quarter of 2002 was 24.2%
compared with 25.3% during the third quarter of 2001. The decrease is due to the
purchase of bank-owned life insurance during August 2001.
13
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
Net Income. The Company recorded net income of $3,655,000, or $1.34 per diluted
share, for the nine months ended September 30, 2002 as compared to $4,097,000,
or $1.54 per diluted share, for the nine months ended September 30, 2001.
Average Balance Sheet
The following table sets forth information relating to the Company's average
balance sheet and reflects the average yield on assets and average cost of
liabilities for the periods indicated. The yields and costs are computed by
dividing income or expense by the average daily balance of interest-earning
assets or interest-bearing liabilities, respectively, for the periods indicated.
Nine months ended September 30,
Three Months Ended March,
2002 2001
-------------------------------- -------------------------------
Average Average Average Average
Balance Interest Yld/Cost Balance Interest Yld/Cost
------- -------- -------- ------- -------- --------
(dollars in thousands)
Assets:
Interest-earning assets:
Loans receivable (1)....................... $360,215 $19,398 7.20% $360,781 $21,355 7.91%
Mortgage-backed securities................. 206,506 9,120 5.90% 218,401 10,670 6.53%
Investment securities...................... 50,650 1,760 4.65% 54,614 2,452 6.00%
Other interest-earning assets(2)........... 66,499 800 1.61% 39,088 1,140 3.90%
-------- ------- -------- -------
Total interest-earning assets............ 683,870 31,078 6.08% 672,884 35,617 7.08%
------- -------
Non interest-earning assets.................... 34,890 27,432
-------- --------
Total assets............................. $718,760 $700,316
======== ========
Liabilities and stockholders' equity:
Interest-bearing liabilities
Deposits................................... $430,857 8,102 2.51% $405,332 10,716 3.53%
Advances from the FHLB and
other Borrowings..................... 221,223 9,167 5.54% 232,679 9,761 5.61%
-------- ------- -------- -------
Total interest-bearing liabilities....... 652,080 17,269 3.54% 638,011 20,477 4.29%
------- -------
Non interest-bearing liabilities............... 7,340 7,986
-------- --------
Total liabilities........................ 659,420 645,997
Stockholders' equity........................... 59,340 54,319
-------- --------
Total liabilities and stockholders' equity.. $718,760 $700,316
======== ========
Net interest income............................ $13,809 $15,140
======= =======
Interest rate spread (3)....................... 2.54% 2.79%
Net yield on interest-earning assets (4)....... 2.70% 3.01%
Ratio of average interest-earning assets to
average interest bearing liabilities........... 105% 105%
(1) 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.
(2) Includes interest-bearing deposits in other banks.
(3) Interest-rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(4) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
14
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.
Nine months ended
September 30,
2002 vs. 2001
------------------------------------------
Increase (decrease)
due to
------------------------------------------
Volume Rate Net
------------------------------------------
Interest income:
Loans receivable, net $ (33) $(1,924) $(1,957)
Mortgage-backed securities (561) (989) (1,550)
Investment securities (168) (524) (692)
Other interest-earning assets 790 (1,130) (340)
-----------------------------------------
Total interest-earning assets 28 (4,567) (4,539)
=========================================
Interest expense:
Deposits 1,013 (3,627) (2,614)
Advances from the FHLB and other borrowings (476) (118) (594)
-----------------------------------------
Total interest-bearing liabilities 537 (3,745) (3,208)
=========================================
Net change in net interest income $(509) $ (822) $(1,331)
=========================================
Total Interest Income. Total interest income decreased by $4.5 million or 12.7%
to $31.1 million for the nine months ended September 30, 2002 compared with the
first nine months of 2001 primarily because of the consequences of a substantial
decrease in market interest rates. Since the beginning of the first quarter of
2001, the Federal Reserve Board lowered the federal funds rate eleven times from
6.50% to 1.75%. Longer term market interest rates also decreased significantly.
As a result the Company's callable investment securities were called, higher
coupon mortgage-related securities were paid down at an accelerated rate, and
loans receivable were refinanced by borrowers at lower rates, or away from the
Bank, resulting in large paydowns of higher yielding loans. In addition, the
interest rates on the Company's adjustable rate loans adjusted downward. Thus,
each component of the Company's earning assets produced less interest income
because of declining market interest rates. In addition, the repayment of these
mortgage-related assets produced cash and cash equivalents in amounts greater
than the Corporation was able to reinvest back into longer-term, higher-yielding
assets; thus, the Company's cash and cash equivalents were significantly higher
during the 2002 period, while the rate earned on these assets, the federal funds
rate minus 25 basis points, was substantially lower during the 2002 period. At
September 30, 2002 cash and cash equivalents totaled $102.0 million or 14.0% of
total assets.
Total Interest Expense. Total interest expense decreased by $1.3 million or
15.7% to $17.3 million for the nine-month period ended September 30, 2002. An
increase in deposit interest expense due to an increase in the average balance
of deposits was more than offset by lower market interest rates during the
period and the lower rates paid on the Company's renewing certificates of
deposit that had been originated when market interest rates were higher. In
addition, during the fourth quarter of 2001 and the first nine months of 2002,
the Company lowered the interest rates paid on several of its other deposit
products in order to keep them in line with short term market interest rates,
mainly the federal funds rate.
15
Non-interest income. Total non-interest income was $1,988,000 for the nine-month
period ended September 30, 2002 compared with $1,683,000 for the same period in
2001. The net increase is due to $419,000 in gains on sales of securities during
the third quarter of 2002 and a $347,000 increase in income from the
Corporation's bank-owned life insurance which was purchased during August 2001,
off-set in part by $444,000 non-recurring gain on the sale of real estate which
occurred during the second quarter of 2001.
Non-interest expense. Total non-interest expense decreased by $765,000 to $10.2
million for the nine months ended September 30, 2002 compared to the same period
in 2001. The decrease in non-interest expenses is largely attributable to the
elimination of $333,000 in amortization of goodwill. Please refer to Note 6 of
the Notes to Unaudited Consolidated Financial Statements for an explanation.
Occupancy and equipment expense decreased in part because the Company sold one
of its branch offices during the fourth quarter of 2001, and also because
maintenance expenses were unusually high during the first quarter of 2001 due to
inclement weather. Professional fees were lower during the first nine months of
2002 compared to the year earlier period mainly due to $60,000 of costs incurred
during the first quarter of 2001 associated with the implementation of in-house
item processing and statement rendering capabilities. The decrease in the other
operating expense category is caused by decreased loan servicing fees which were
lower by $73,000 due to a decrease in the amount of loans serviced by others,
and decreased deposit account servicing charges, net of a related increase in
postage expense, which were lower by $89,000 because the Company began servicing
customer accounts using in-house item processing and statement rendering
capabilities installed during the first quarter of 2001. The Company's effective
tax rate during the first nine months of 2002 was 23.9% compared with 25.9%
during the first nine months of 2001. The decrease is due to the purchase of
bank-owned life insurance during August 2001.
16
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
The Company's liquidity is a measure of its ability to fund loans, pay
withdrawals of deposits, and other cash outflows in an efficient, cost-effective
manner. The Company's short-term sources of liquidity include maturity,
repayment and sales of assets, excess cash and cash equivalents, new deposits,
broker deposits, other borrowings, and new advances from the Federal Home Loan
Bank. There has been no material adverse change during nine-month period ended
September 30, 2002 in the ability of the Company and its subsidiaries to fund
their operations.
At September 30, 2002, the Company had commitments outstanding under letters of
credit of $1.5 million, commitments to originate or purchase loans of $31.0
million, and commitments to fund undisbursed balances of closed loans and unused
lines of credit of $27.1 million.
Capital Requirements
The Bank is in compliance with all of its capital requirements as of September
30, 2002.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Asset and Liability Management
The Company's market risk exposure is predominately caused by interest rate
risk, which is defined as the sensitivity of the Company's current and future
earnings, the values of its assets and liabilities, and the value of its capital
to changes in the level of market interest rates. Management of the Company
believes that there has not been a material adverse change in market risk during
the nine months ended September 30, 2002.
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Chief Executive Officer and the Chief Financial Officer (the "Certifying
Officers") have evaluated the effectiveness of the Company's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
report and have concluded that such controls and procedures ensured that
material information was made known to them, particularly during the period in
which this report was being prepared.
Internal Controls
The Certifying Officers have concluded that there were no significant
deficiencies in the design or operation of internal controls which could
adversely affect the Company's ability to record, process, summarize and report
financial data; nor have there been any significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
17
TF FINANCIAL CORPORATION AND SUBSIDIARIES
PART II
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Certification pursuant to 18 U.S.C.ss.1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
(b) Reports on Form 8-K
None
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TF FINANCIAL CORPORATION
/s/ John R. Stranford
---------------------
Date: November 13, 2002 John R. Stranford
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Dennis R. Stewart
---------------------
Date: November 13, 2002 Dennis R. Stewart
Senior Vice President and
Chief Financial Officer
(Principal Financial & Accounting Officer)
19
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, John R. Stranford, President and Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of TF Financial
Corporation (Registrant);
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the Registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the
effectiveness of the Registrant's disclosure controls and procedures as of a
date within 90 days prior to the filing date of this quarterly report (the
"Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the Registrant's auditors and the audit committee of
Registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the Registrant's ability to record, process,
summarize and report financial data and have identified for the Registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal controls; and
6. The Registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ John R. Stranford
---------------------
Date: November 13, 2002 John R. Stranford
President and Chief Executive Officer
(Principal Executive Officer)
20
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Dennis R. Stewart, Senior Vive President and Chief Financial Officer, certify
that:
1. I have reviewed this quarterly report on Form 10-Q of TF Financial
Corporation (Registrant);
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the Registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the Registrant's auditors and the audit committee of
Registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the Registrant's ability to record, process,
summarize and report financial data and have identified for the Registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal controls; and
6. The Registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ Dennis R. Stewart
---------------------
Date: November 13, 2002 Dennis R. Stewart
Senior Vice President and
Chief Financial Officer
(Principal Financial & Accounting Officer)
21