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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM l0-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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
--------
TF FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 74-2705050
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
3 Penns Trail, Newtown, Pennsylvania 18940
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 215-579-4000
-----------------
N/A
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date: July 24, 2002
-------------
Class Outstanding
---------------------- -------------
$.10 par value common stock 2,723,326 shares
TF FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 1O-Q
FOR THE QUARTER ENDED JUNE 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
PART II- OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
2
TF FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(in thousands)
Unaudited Audited
June 30, December 31,
2002 2001
---- ----
Assets
Cash and cash equivalents $72,627 $69,139
Certificates of deposit in other financial institutions 194 194
Investment securities available for sale - at fair value 27,830 22,671
Investment securities held to maturity (fair value of $15,859 and $9,830, 15,597 9,866
respectively)
Mortgage-backed securities available for sale - at fair value 148,281 99,763
Mortgage-backed securities held to maturity (fair value of $75,462 and 73,066 93,367
$94,735, respectively)
Loans receivable, net 353,731 377,635
Federal Home Loan Bank stock - at cost 11,118 11,368
Accrued interest receivable 4,289 4,154
Core deposit intangible, net 659 775
Goodwill, net 4,102 4,324
Premises and equipment, net 7,039 7,484
Other assets 9,653 10,464
----- ------
Total assets $728,186 $711,204
======== ========
Liabilities and stockholders' equity
Liabilities
Deposits $437,503 $422,052
Advances from the Federal Home Loan Bank 222,359 222,359
Advances from borrowers for taxes and insurance 1,300 1,241
Accrued interest payable 3,313 3,762
Other liabilities 2,870 3,815
----- -----
Total liabilities 667,345 653,229
------- -------
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; 2,477,102 and 2,465,986 shares outstanding
at June 30, 2002 and December 31, 2001, net of
treasury shares of 2,566,674 and 2,571,712, respectively. 529 529
Retained earnings 57,747 56,370
Additional paid-in capital 51,582 51,652
Unearned ESOP shares (2,462) (2,523)
Treasury stock - at cost (48,794) (48,838)
Accumulated other comprehensive income 2,239 785
----- ---
Total stockholders' equity 60,841 57,975
------ ------
Total liabilities and stockholders' equity $728,186 $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 Six Months
Ended June 30, Ended June 30,
-------------- --------------
2002 2001 2002 2001
---- ---- ---- ----
Interest income
Loans $6,429 $7,147 $13,160 $14,313
Mortgage-backed securities 3,188 3,568 6,248 7,348
Investment securities 565 671 1,152 1,910
Interest bearing deposits and other 271 431 480 576
--- --- --- ---
Total interest income 10,453 11,817 21,040 24,147
------ ------ ------ ------
Interest expense
Deposits 2,707 3,577 5,537 7,168
Advances from the Federal Home Loan Bank and other borrowings 3,071 3,156 6,108 6,656
----- ----- ----- -----
Total interest expense 5,778 6,733 11,645 13,824
----- ----- ------ ------
Net interest income 4,675 5,084 9,395 10,323
Provision for loan losses 538 124 688 249
--- --- --- ---
Net interest income after provision for loan losses 4,137 4,960 8,707 10,074
----- ----- ----- ------
Non-interest income
Service fees, charges and other operating income 329 355 736 770
Bank-owned life insurance 137 - 270 -
Gains on sale of real estate and other - 454 - 439
--- --- --- ---
Total non-interest income 466 809 1,006 1,209
--- --- ----- -----
Non-interest expense
Compensation and benefits 1,916 1,899 3,845 3,837
Occupancy and equipment 576 580 1,154 1,225
Federal deposit insurance premium 19 18 38 39
Professional fees 105 88 185 244
Amortization of core deposit intangible 58 69 116 138
Amortization of goodwill 111 111 222 222
Advertising 110 126 220 252
Other operating 522 595 1,168 1,340
--- --- ----- -----
Total non-interest expense 3,417 3,486 6,948 7,297
----- ----- ----- -----
Income before income taxes 1,186 2,283 2,765 3,986
Income taxes 273 595 649 1,040
--- --- --- -----
Net income $913 $1,688 $2,116 $2,946
==== ====== ====== ======
Basic earnings per share $0.37 $0.69 $0.86 $1.19
Diluted earnings per share $0.33 $0.64 $0.78 $1.12
Weighted average number of shares outstanding - basic 2,470 2,454 2,467 2,468
Weighted average number of shares outstanding - diluted 2,744 2,647 2,730 2,642
See notes to consolidated financial statements
4
TF FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the six months ended
June 30,
--------
2002 2001
---- ----
Cash flows from operating activities
Net income $2,116 $2,946
Adjustments to reconcile net income to net cash provided by operating activities:
Mortgage loan servicing rights 7 7
Deferred loan origination fees (99) (86)
Premiums and discounts on investment securities, net 68 (5)
Premiums and discounts on mortgage-backed securities and loans, net (264) (142)
Amortization of goodwill and core deposit intangible 338 361
Provision for loan losses 688 250
Depreciation of premises and equipment 507 431
Gain on sale of premises and equipment - (444)
Recognition of ESOP and MSBP expenses 140 114
Gain on sales of real estate acquired through foreclosure (57) (27)
Loss on sale of loans and mortgage-backed securities available for sale - 5
Increase in value of bank-owned life insurance (262) -
(Increase) decrease in:
Accrued interest receivable (135) 1,311
Other assets 1,035 229
Increase (decrease) in:
Accrued interest payable (449) (562)
Other liabilities (1,693) (327)
------- -----
Net cash provided by operating activities 1,940 4,061
----- -----
Cash flows from investing activities
Loan originations and principal payments on loans, net 39,819 9,645
Purchases of loans (16,685) (17,184)
Proceeds from loan sales - 1,227
Proceeds from sale of mortgage-backed securities available for sale - 4,309
Purchases of mortgage-backed securities available for sale (62,848) (8,407)
Purchase of investment securities available for sale (6,000) (3,030)
Purchase of investment securities held to maturity (6,821) -
Proceeds from maturities of investment securities held to maturity 1,055 44,991
Proceeds from maturities of investment securities available for sale 1,000 15,000
Principal repayments from mortgage-backed securities held to maturity 20,391 17,335
Principal repayments from mortgage-backed securities available for sale 16,511 7,716
Purchases and redemptions of Federal Home Loan Bank stock, net 250 1,674
Proceeds from sales of real estate acquired through foreclosure 272 102
Proceeds from sale of premises and equipment - 1,784
Purchase of premises and equipment (62) (133)
---- -----
Net cash provided by (used in) investing activities (13,118) 75,029
-------- ------
See notes to consolidated financial statements
5
TF FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(in thousands)
For the six months ended
June 30,
--------
2002 2001
---- ----
Cash flows from financing activities
Net increase in deposits 15,451 8,294
Net decrease in advances from Federal Home Loan Bank - (22,500)
Net decrease in other borrowings - (14,962)
Net decrease in advances from borrowers for taxes and insurance 59 123
Exercise of stock options 232 26
Purchase of treasury stock, net (337) (801)
Common stock cash dividend (739) (692)
----- -----
Net cash provided by (used in) financing activities 14,666 (30,512)
------ --------
Net increase in cash and cash equivalents 3,488 48,578
Cash and cash equivalents at beginning of period 69,139 10,618
------ ------
Cash and cash equivalents at end of period $72,627 $59,196
======= =======
Supplemental disclosure of cash flow information
Cash paid for
Interest on deposits and advances $12,098 $14,386
Income taxes $1,000 $995
Non-cash transactions
Transfers from loans to real estate acquired through foreclosure $185 $ -
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 June 30, 2002 (unaudited) and
December 31, 2001 and for the three-month and six-month periods ended June
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 June 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 June 30, 2002
and 2001 was $2,850,000 and $1,479,000, net of applicable income tax of
$1,271,000 and $487,000, respectively. Total comprehensive income for the
six-month periods ended June 30, 2002 and 2001 was $3,570,000 and
$3,520,000, net of applicable income tax of $1,398,000 and $1,018,000,
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 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.
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 June 30, 2002 and December 31, 2001 were $728.2
million and $711.2 million, respectively, an increase of $17.0 million, or 2.4%,
during the six-month period. The increase in total assets was primarily the
result of the deployment of deposit growth into various earning asset
categories. Cash and cash equivalents increased by $3.5 million. Investment
securities increased by $10.9 million due to the purchase of $12.8 million of
such securities. Mortgage-backed securities available for sale increased by
$48.5 million as $62.8 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 $20.3 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 $23.9 million in loans receivable.
Total liabilities increased by $14.1 million due to $15.4 million in deposit
growth. Non-interest bearing demand deposits grew by $1.1 million while savings
and money market accounts grew by $12.2 million and
9
interest-bearing checking accounts increased by $3.7 million. Certificates of
deposit decreased by $1.7 million.
Total consolidated stockholders' equity of the Company was $60.8 million or
8.36% of assets at June 30, 2002, compared to $58.0 million or 8.15% of assets
at December 31, 2001. During the first half of 2002 the Company repurchased
15,000 shares of its common stock and issued 20,038 shares pursuant to the
exercise of stock options. As of June 30, 2002, there were approximately 116,000
shares available for repurchase under the previously announced share repurchase
plan, and the Company will continue to repurchase shares as share availability
and market conditions permit.
Asset Quality
During the second quarter of 2002, the Company's provision for loan and lease
losses was $538,000 compared with $124,000 during 2001, an increase of $414,000
that is due to a default by the servicer of the Company's $2.8 million purchased
lease portfolio. The servicer of the Company's purchased lease portfolio failed
to remit to the Company all of the money collected on the Company's behalf. The
Company has since removed the servicer and begun servicing these leases
directly. During the second quarter of 2002 the Company charged-off what is
believed to be its maximum exposure of approximately $625,000 related to this
matter and is pursuing recovery. However, there can be no assurance that
additional charges to the Company's earnings or allowance for loan and lease
losses may not be necessary. Other than the foregoing, the Company has not
experienced any significant deterioration in its asset quality during the first
half of 2002, nor has the Company experienced any significant change in the
composition of its non-performing assets.
The following table sets forth information regarding the Company's asset quality
(dollars in thousands):
June 30, December 31,
2002 2001
---- ----
Non-performing loans $3,925 $3,776
Ratio of non-performing loans to gross loans 1.10% 0.99%
Ratio of non-performing loans to total assets 0.54% 0.53%
Foreclosed property $ - $40
Foreclosed property to total assets 0.00% 0.01%
Ratio of total non-performing assets to total assets 0.54% 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 688 249
Less: charge-off's (recoveries), net 765 155
------ ------
Ending balance, June 30, $1,895 $1,808
====== ======
10
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2002 AND 2001
Net Income. The Company recorded net income of $913,000, or $0.33 per diluted
share, for the three months ended June 30, 2002 as compared to $1,688,000, or
$0.64 per diluted share, for the three months ended June 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 June 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)....................... $360,448 $6,429 7.15% $362,295 $7,147 7.91%
Mortgage-backed securities................. 212,146 3,188 6.03% 220,103 3,568 6.50%
Investment securities...................... 49,845 565 4.55% 46,795 671 5.75%
Other interest-earning assets(2)........... 64,617 271 1.68% 39,904 431 4.33%
------ --- ------ ---
Total interest-earning assets............ 687,056 10,453 6.10% 669,097 11,817 7.08%
------ ------
Non interest-earning assets.................... 34,544 25,235
------ ------
Total assets............................. $721,600 $694,332
======== ========
Liabilities and stockholders' equity:
Interest-bearing liabilities
Deposits................................... $432,918 2,707 2.51% $403,810 3,577 3.55%
Advances from the FHLB and other
Borrowings...................... 222,359 3,071 5.54% 227,345 3,156 5.57%
------- ----- ------- -----
Total interest-bearing liabilities....... 655,277 5,778 3.54% 631,155 6,733 4.28%
----- -----
Non interest-bearing liabilities............... 7,674 8,778
----- -----
Total liabilities.......................... 662,951 639,933
Stockholders' equity........................... 58,649 54,399
------ ------
Total liabilities and stockholders' equity.... $721,600 $694,332
======== ========
Net interest income............................ $4,675 $5,084
====== ======
Interest rate spread (3)....................... 2.57% 2.81%
Net yield on interest-earning assets (4)....... 2.73% 3.05%
Ratio of average interest-earning assets to
average interest bearing liabilities........... 105% 106%
(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
June 30,
2002 vs. 2001
------------------------------------------------------
Increase (decrease)
due to
------------------------------------------------------
Volume Rate Net
------------------------------------------------------
Interest income:
Loans receivable, net $(36) $(682) $(718)
Mortgage-backed securities (126) (254) (380)
Investment securities 242 (348) (106)
Other interest-earning assets 984 (1,144) (160)
----------------------------------------------------
Total interest-earning assets 1,064 (2,428) (1,364)
====================================================
Interest expense:
Deposits 1,490 (2,360) (870)
Advances from the FHLB and other borrowings (69) (16) (85)
----------------------------------------------------
Total interest-bearing liabilities 1,421 (2,376) (955)
====================================================
Net change in net interest income $(357) $(52) $(409)
====================================================
Total Interest Income. Total interest income decreased by $1.4 million or 11.5%
to $10.5 million for the three months ended June 30, 2002 compared with the
second 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 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 June 30, 2002 cash and cash
equivalents totaled $72.6 million.
Total Interest Expense. Total interest expense decreased by $1.0 million or
14.2% to $5.8 million for the three-month period ended June 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 half 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.
12
Non-interest income. Total non-interest income was $466,000 for the three-month
period ended June 30, 2002 compared with $809,000 for the same period in 2001.
The decrease is due to a $444,000 non-recurring gain on the sale of real estate
which occurred during the second quarter of 2001, off-set in part by a $137,000
increase in the cash surrender value of bank-owned life insurance which was
purchased during the third quarter of 2001.
Non-interest expense. Total non-interest expense decreased by $69,000 to $3.4
million for the three months ended June 30, 2002 compared to the same period in
2001. The decrease in non-interest expenses is largely attributable to a
decrease in the other operating expense category in which loan servicing fees
decreased by $24,000 due to a decrease in the amount of loans serviced by
others, and service charges on bank accounts decreased by $35,000 because the
Company began servicing customer accounts in-house using item processing and
statement rendering capabilities installed during the first quarter of 2001. The
Company's effective tax rate during the second quarter of 2002 was 23.0%
compared with 26.1% during the second quarter of 2001. The decrease is due to
the purchase of bank-owned life insurance during the third quarter of 2001.
13
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
Net Income. The Company recorded net income of $2,116,000, or $0.78 per diluted
share, for the six months ended June 30, 2002 as compared to $2,946,000, or
$1.12 per diluted share, for the six months ended June 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.
Six months ended June 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)....................... $366,435 $13,160 7.24% $360,169 $14,313 8.01%
Mortgage-backed securities................. 206,999 6,248 6.09% 224,934 7,348 6.59%
Investment securities...................... 48,921 1,152 4.75% 64,849 1,910 5.94%
Other interest-earning assets(2)........... 59,225 480 1.63% 25,237 576 4.60%
------ --- ------ ---
Total interest-earning assets............ 681,580 21,040 6.23% 675,189 24,147 7.21%
------ ------
Non interest-earning assets.................... 34,922 26,712
------ ------
Total assets............................. $716,502 $701,901
======== ========
Liabilities and stockholders' equity:
Interest-bearing liabilities
Deposits................................... $428,105 5,537 2.61% $401,938 7,168 3.60%
Advances from the FHLB and other
Borrowings...................... 222,359 6,108 5.54% 237,994 6,656 5.64%
------- ----- ------- -----
Total interest-bearing liabilities....... 650,464 11,645 3.61% 639,932 13,824 4.36%
------ ------
Non interest-bearing liabilities............... 7,536 8,275
----- -----
Total liabilities.......................... 658,000 648,207
Stockholders' equity........................... 58,502 53,694
------ ------
Total liabilities and stockholders' equity.... $716,502 $701,901
======== ========
Net interest income............................ $9,395 $10,323
====== =======
Interest rate spread (3)....................... 2.61% 2.86%
Net yield on interest-earning assets (4)....... 2.78% 3.08%
Ratio of average interest-earning assets to
average interest bearing liabilities........... 105% 106%
(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.
Six months ended
June 30,
2002 vs. 2001
--------------------------------------------------
Increase (decrease)
due to
--------------------------------------------------
Volume Rate Net
--------------------------------------------------
Interest income:
Loans receivable, net $674 $(1,827) $(1,153)
Mortgage-backed securities (563) (537) (1,100)
Investment securities (417) (341) (758)
Other interest-earning assets 948 (1,044) (96)
---------------------------------------------------
Total interest-earning assets 642 (3,749) (3,107)
===================================================
Interest expense:
Deposits 1,209 (2,840) (1,631)
Advances from the FHLB and other borrowings (431) (117) (548)
---------------------------------------------------
Total interest-bearing liabilities 778 (2,957) (2,179)
===================================================
Net change in net interest income
$(136) $(792) $(928)
===================================================
Total Interest Income. Total interest income decreased by $3.1 million or 12.9%
to $21.0 million for the six months ended June 30, 2002 compared with the first
half 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 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 June 30, 2002 cash and cash
equivalents totaled $72.6 million.
Total Interest Expense. Total interest expense decreased by $2.2 million or
15.8% to $11.6 million for the six-month period ended June 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 half 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 $1,006,000 for the six-month
period ended June 30, 2002 compared with $1,209,000 for the same period in 2001.
The decrease is due to a $444,000 non-recurring gain on the sale of real estate
which occurred during the second quarter of 2001, off-set in part by a $270,000
increase in the cash surrender value of bank-owned life insurance which was
purchased during the third quarter of 2001.
Non-interest expense. Total non-interest expense decreased by $349,000 to $6.9
million for the six months ended June 30, 2002 compared to the same period in
2001. Compensation and benefits expense was reduced by a $93,000 reduction in
pension expense caused by participants who had very high balances leaving the
plan. 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 half 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 $48,000 due to a decrease in the amount of loans serviced by others,
and decreased service charges on bank accounts which were lower by $99,000
because the Company began servicing customer accounts using the in-house item
processing and statement rendering capabilities installed during the first
quarter of 2001. The Company's effective tax rate during the first half of 2002
was 23.5% compared with 26.1% during the first half of 2001. The decrease is due
to the purchase of bank-owned life insurance during the third quarter of 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 six-month period ended
June 30, 2002 in the ability of the Company and its subsidiaries to fund their
operations.
At June 30, 2002, the Company had commitments outstanding under letters of
credit of $1.0 million, commitments to originate loans of $5.7 million, and
commitments to fund undisbursed balances of closed loans and unused lines of
credit of $25.7 million.
Capital Requirements
The Bank is in compliance with all of its capital requirements as of June 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 six months ended June 30, 2002.
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: August 9, 2002 John R. Stranford
---------------------
President and CEO
(Principal Executive Officer)
/s/ Dennis R. Stewart
---------------------
Date: August 9, 2002 Dennis R. Stewart
--------------------
Senior Vice President and
Chief Financial Officer
(Principal Financial & Accounting Officer)
19