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
For the fiscal year ended December 31, 2002
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- or -
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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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 of (I.R.S. Employer Identification No.)
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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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]
Indicate by check mark whether the registrant is an accelerated filer as defined
in Exchange Act Rule 12b-2. YES NO X
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The aggregate market value of the voting common equity held by
non-affiliates of the registrant, based on the closing price of the registrant's
Common Stock as quoted on the Nasdaq System on June 28, 2002 was $46.9 million.
As of March 17, 2003 there were outstanding 2,728,282 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, 2002. (Parts I, II and IV)
2. Portions of the Proxy Statement for the 2003 Annual Meeting of
Stockholders. (Part III)
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 HERETO), 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, 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 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 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 Company was
incorporated under Delaware law in March 1994. The Company is a savings and loan
holding company and is subject to 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 Company does not transact
any material business other than through its direct and indirect subsidiaries:
Third Federal Savings Bank, TF Investments Corporation, Teragon Financial
Corporation, Penns Trail Development Corporation and Third Delaware Corporation.
At December 31, 2002, the Company had total assets of $721 million, total
liabilities of $658 million and stockholders' equity of $63 million.
2
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. As of
December 31, 2002 the Bank operated thirteen branch offices in Bucks and
Philadelphia counties, Pennsylvania and in Mercer County, New Jersey. The Bank's
fourteenth branch office is located in the Northern Liberties section of
Philadelphia and opened during March 2003.
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, 2002, one- to four-family residential mortgage loans
totaled $228 million or 61% of the Bank's total loan portfolio. At that same
date, the Bank had approximately $170 million or 24% of total assets invested in
mortgage-backed securities and $42 million or 6% 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 1998 for the purpose of
holding and managing mortgage-backed securities and investment securities for
the Bank.
Market Area
The Bank operates six offices in Philadelphia County and five 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 three branch offices in Mercer
County, New Jersey, which has a population of approximately 354,000. 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 limited opportunities,
Bucks and Mercer Counties, with growing populations, have offered the Bank much
greater opportunities.
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 75% of the deposit market in
Philadelphia County, 65% 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 .20%, 1.57% 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, 2002, the Bank's mortgage loans outstanding were $251 million, of
which $228 million
3
were secured by first mortgages on one- to four-family residential property. Of
the one- to four-family residential mortgage loans outstanding at that date, 27%
were ARM's and 73% were fixed-rate loans. Total ARM loans in the Bank's
portfolio at December 31, 2002, amounted to $145 million or 39% of total loans.
At that same date, commercial real estate and multi-family residential and
construction loans totaled $85 million and $12 million, respectively.
Consumer and other loans held by the Bank totaled $46 million or 12% of
total loans outstanding at December 31, 2002, of which $25 million or 55%
consisted of home equity and second mortgages. At that same date commercial
business loans, leases and other loans totaled $8 million, $2 million and $10
million, respectively.
4
The following tables set 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.
At December 31,
------------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
---------------- ---------------- ----------------- ------------------- ----------------
Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(Dollars in thousands)
Loans:
Mortgage loans................
One- to four-family.......... $227,953 61.33% $222,016 58.42% $211,065 57.89% $168,057 58.00% $152,819 62.93%
Commercial real estate and
multi-family................ 85,493 23.00 93,572 24.62 77,486 21.25 65,346 22.55 55,208 22.73
Construction................. 12,026 3.23 9,824 2.59 13,950 3.82 12,074 4.16 5,352 2.20
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total mortgage loans.... 325,472 87.56 325,412 85.63 302,501 82.96 245,477 84.71 213,379 87.86
Consumer and other loans:
Home equity and second
mortgage................... 25,480 6.87 25,640 6.75 20,887 5.73 16,816 5.81 12,995 5.35
Commercial business.......... 8,005 2.15 9,285 2.44 14,630 4.01 9,339 3.22 6,666 2.74
Leases....................... 2,246 0.60 3,544 0.93 3,493 0.96 3,195 1.10 2,305 0.95
Other........................ 10,490 2.82 16,154 4.25 23,113 6.34 14,945 5.16 7,521 3.10
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total consumer and other
loans................. 46,221 12.44 54,623 14.37 62,123 17.04 44,295 15.29 29,487 12.14
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans............. 371,693 100.00% 380,035 100.00% 364,624 100.00% 289,772 100.00% 242,866 100.00%
-------- ====== -------- ====== -------- ====== -------- ====== -------- ======
Less:
Unearned discount,( premium),
deferred loan fees, net.... (446) 428 1,104 124 116
Allowance for loan losses.... 2,047 1,972 1,714 1,917 1,909
-------- -------- -------- -------- --------
Total loans, net......... $370,092 $377,635 $361,806 $287,979 $240,841
======== ======== ======== ======== ========
5
At December 31,
------------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
---------------- ---------------- ----------------- ----------------- ------------------
Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ -------- -------- -------- ------- --------
(Dollars in thousands)
Mortgage-backed securities
held-to-maturity:
FHLMC........................ $ 21,870 40.10% $35,000 37.50% $ 45,971 34.03% $ 52,625 32.91% $ 47,239 26.10%
FNMA......................... 11,781 21.60 15,739 16.90 20,756 15.36 24,983 15.63 12,726 7.03
GNMA......................... 18,278 33.40 29,877 32.00 41,090 30.41 46,651 29.18 56,318 31.12
Real estate investment
mortgage conduit........... 2,519 4.60 12,550 13.40 27,043 20.02 35,271 22.06 64,180 35.47
Other mortgage-backed
securities................. 144 0.30 201 0.20 282 0.18 358 0.22 501 0.28
-------- ------ ------- ------ -------- ------ -------- ------ -------- ------
Total mortgage-backed and
related securities
held-to-maturity......... $ 54,592 100.00% $93,367 100.00% $135,142 100.00% $159,888 100.00% $180,964 100.00%
======== ====== ======= ====== ======== ====== ======== ====== ======== ======
Mortgage-backed securities
available-for-sale:
FHLMC...................... $ 699 0.60% $ 1,108 1.10% $ 1,431 1.46% $ 7,233 5.46% $ 13,214 17.55%
FNMA....................... 11,878 10.30 22,459 22.50 25,679 26.23 27,963 21.10 32,178 42.74
GNMA....................... -- -- 5,515 5.50 7,561 7.72 8,338 6.29 10,284 13.66
Real estate investment
mortgage conduit......... 102,666 89.10 70,681 70.90 63,243 64.59 88,981 67.15 19,609 26.05
-------- ------ ------- ------ -------- ------ -------- ------ -------- ------
Total mortgage-backed
and related securities
available-for-sale..... $115,243 100.00% $99,763 100.00% $ 97,914 100.00% $132,515 100.00% $ 75,285 100.00%
======== ====== ======= ====== ======== ====== ======== ====== ======== ======
6
Loan Maturity and Repricing Information. The following table sets forth
certain information at December 31, 2002, 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, 2003, are reported as due in one year or less. The table does not
include prepayments or scheduled principal repayments.
Due 1/1/03 - Due 1/1/04 - Due After
12/31/03 12/31/07 12/31/07
-------- -------- --------
(In thousands)
Available for sale:
Mortgage-backed securities.................. $ 24 $ 4,693 $110,526
Held to Maturity:
One-to-four family.......................... 1,296 14,035 212,622
Commercial real estate and multi-family..... 2,630 25,589 57,274
Construction................................ 12,026 -- --
Consumer and other.......................... 7,081 16,347 22,793
------- ------- --------
Total loans receivable...................... 23,033 55,971 242,689
Mortgage-backed securities.................. 62 2,897 51,633
------- ------- --------
Totals...................................... $23,095 $58,868 $344,322
======= ======= ========
The following table sets forth the dollar amount of all loans and
mortgage-backed securities due after December 31, 2003, 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................. $115,219 $ --
-------- --------
Totals..................................... $115,219 $ --
======== ========
Held to Maturity:
One-to-four family......................... $165,283 $ 61,374
Commercial real estate and multi-family.... 26,602 56,261
Construction............................... -- --
Consumer and other......................... 30,349 8,791
-------- --------
Total loans receivable..................... 222,234 126,426
Mortgage-backed securities................. 54,295 235
-------- --------
Totals..................................... $276,529 $126,661
======== ========
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
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
7
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.
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 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 range from 0% to 3% depending
on the underlying loan coupon. 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 FHLMC and FNMA while retaining the
servicing rights on certain loans. The Bank, however, is primarily a portfolio
lender. As of December 31, 2002, the Bank's portfolio of loans serviced for
FHLMC or FNMA totaled approximately $4 million.
Commercial Real Estate and Multi-Family Loans. The Bank originates
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 amortization.
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 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, 2002, the five largest commercial real estate and
multi-family loans totaled $18.3 million with no single loan larger than $4.4
million. At December 31, 2002, all such loans were current and the properties
securing such loans are in the Bank's market area.
8
Construction Loans. At December 31, 2002, the Bank had $12 million of
construction loans or 3% 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 $46 million or 12% of the Bank's
total loan portfolio at December 31, 2002. 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 risk management. Consumer loans, however, tend to have a
higher risk of default than residential mortgage loans. At December 31, 2002,
$245,000 or 0.7% 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, 2002, second mortgage and home equity loans totaled
$25 million, or 7% 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
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,
9
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, 2002, the Bank had approximately $8 million outstanding in
commercial business loans, which represented approximately 2% of its total loan
portfolio.
Prior to 2002 the Bank purchased commercial leases; however, the Bank
no longer engages in this activity. These lessees are generally small medical
practitioners located throughout the United States. The average lease is less
than $100,000 and the servicing for such leases had been retained by the
lessor/seller. During 2002 the Bank took control of the servicing due to a
default by the seller/servicer. At December 31, 2002 the purchased lease
portfolio totaled $2 million or 0.6% of total assets.
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 $100,000 and an unsecured loan up to $25,000
individually. Each In-House Loan Committee member may approve a secured loan up
to $250,000 and an unsecured loan up to $50,000, except the President's
authority is two times these amounts. Any two In-House Loan Committee members
may combine their secured lending authority. A majority of the In-House Loan
Committee members may approve a secured loan up to $1.5 million and an unsecured
loan up to $200,000. Generally, all loans over $1.5 million, or loans that cause
the proposed total exposure to exceed $1.5 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 $7.6 million as of December 31, 2002.
At December 31, 2002, the Bank's five largest aggregate lending
relationships had balances ranging from $3.6 to $5.3 million. At December 31,
2002, 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, 2002,
consisted of pass-through certificates issued by the Federal Home Loan Mortgage
Corporation ("FHLMC") ($23 million), Government National Mortgage Association
("GNMA"), ($18 million) Federal National Mortgage Association ("FNMA") ($24
million), real estate mortgage investment conduits formed by these same agencies
("REMICs") ($105 million), and other mortgage-backed securities ($144,000).
At December 31, 2002, the amortized cost of mortgage-backed securities
totaled $167 million, or 23% of total assets, and the market value of such
securities totaled approximately $173 million.
The Bank's mortgage-backed securities are so-called "pass-throughs"
which 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. The REMIC securities are composed of the
same loan types as the pass through certificates, but offer differing
characteristics as to their expected cash flows depending on the class of such
securities purchased. The Bank's REMICs are primarily "planned amortization
classes" that, when purchased, offered a high probability of predictable cash
flows.
11
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,
--------------------------------
2002 2001 2000
-------- -------- --------
(In thousands)
Held to maturity:
GNMA-fixed rate .......................... $ 18,278 $29,877 $ 41,090
FHLMC ARMs ............................... 91 131 168
FHLMC-fixed rate ......................... 21,779 34,869 45,803
FNMA-fixed rate .......................... 11,781 15,739 20,756
REMICs ................................... 2,519 12,550 27,043
Other mortgage-backed securities ......... 144 201 282
-------- ------- --------
Total mortgage-backed securities
held to maturity ..................... $ 54,592 $93,367 $135,142
======== ======= ========
Mortgage-backed securities
Available-for-sale:
FHLMC .................................... $ 699 $ 1,108 $ 1,431
FNMA ..................................... 11,878 22,459 25,679
GNMA ..................................... -- 5,515 7,561
REMICs ................................... 102,666 70,681 63,243
-------- ------- --------
Total mortgage-backed securities
available-for-sale ................... $115,243 $99,763 $ 97,914
======== ======= ========
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, 2002. The table does not include estimated
prepayments. Adjustable-rate mortgage-backed securities are shown as maturing
based on contractual maturities.
Contractual
Contractual Held Available
To Maturity -For-Sale
Maturities Due WAC Maturities Due WAC
-------------- --- -------------- ---
(Dollars in thousands)
Less than 1 year..................... $ 62 7.18% $ 24 6.38%
1 to 3 years......................... 110 9.01 538 6.83
3 to 5 years......................... 2,787 7.34 4,155 6.09
5 to 10 years........................ 4,423 7.09 45,985 5.74
10 to 20 years....................... 2,894 6.96 46,169 5.41
Over 20 years........................ 44,316 6.62 18,372 6.05
------- ---- -------- ----
Total mortgage-backed securities..... $54,592 6.72% $115,243 5.68%
======= ==== ======== ====
12
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 more than 90 days, 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. At December 31, 2002 the
Bank used third-party servicers to service $149.3 million in mortgage loans,
including one servicer that serviced $104.7 million. All of the Bank's
third-party mortgage loan servicers are regulated financial institutions or are
approved by either HUD, FNMA, or FHLMC to service loans on their behalf.
Delinquent Loans. Generally, the Bank reserves for uncollected interest
on loans past due more than 90 days; these loans are included in the table of
nonaccrual loans below. 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 and the further accrual of interest ceases unless the underlying
facts that prompted a nonaccrual determination are deemed to have improved
significantly.
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 more than 90 days for
which accrued interest has been recorded. At December 31, 2002, the Bank had one
significant lending relationship involving two loans that were impaired loans
within the meaning of SFAS No. 114 and SFAS No. 118. Subsequent to December 31,
2002 these loans were foreclosed upon and the property became real estate owned
by the Bank. These loans totaled $1.7 million and are collateralized by
commercial real estate. The Bank expects to recover some or all of its loan
balances through the liquidation of the collateral, which has been appraised at
an amount in excess of $1.7 million. The Bank does not expect a material loss on
the liquidation of the collateral, although the timing and ultimate recovery of
any proceeds are unknown at this time.
13
Non-performing assets At December 31,
-------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(Dollars in thousands)
Loans accounted for on a non-accrual basis:
Mortgage loans:
One- to four-family ..................... $1,013 $1,821 $ 869 $ 880 $ 896
Commercial real estate and multi-family . 1,677 1,725 180 24 97
Consumer and other ........................ 1,132 230 421 413 609
------ ------ ------ ------ ------
Total non-accrual loans ................ 3,822 3,776 1,470 1,317 1,602
------ ------ ------ ------ ------
Real estate owned, net .................... 84 30 176 546 308
------ ------ ------ ------ ------
Total non-performing assets ............... $3,906 $3,806 $1,646 $1,863 $1,910
====== ====== ====== ====== ======
Total non-accrual loans to loans .......... 1.03% 0.99% 0.41% 0.45% 0.65%
====== ====== ====== ====== ======
Total non-accrual loans to total assets ... 0.53% 0.53% 0.20% 0.18% 0.24%
====== ====== ====== ====== ======
Total non-performing assets to total assets 0.54% 0.54% 0.23% 0.26% 0.29%
====== ====== ====== ====== ======
At December 31, 2002, 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, 2002, 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 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
all or a portion of a problem asset 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
14
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, 2002.
At December 31, 2002
--------------------
(In thousands)
Special mention assets............... $1,359
Substandard (1)...................... 3,996
Doubtful assets...................... 468
Loss ................................ --
------
Total classified assets........... $5,823
======
- -----------------------------
(1) Substandard assets include approximately $560,000 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.
Allowances for Loan Losses. The Bank provides valuation allowances for
estimated losses from uncollectible loans. Management determines the adequacy of
the allowance on a quarterly basis to ensure that a provision for loan losses
has been charged against earnings in an amount necessary to maintain the
allowance at a level that is appropriate based on management's estimate of
probable losses. Several sources of data are used in making the evaluation as to
the appropriateness of the allowance.
The Bank's watch list contains all loans which because of past payment
history, a review of recent financial information, or other facts regarding the
credit, pose a higher than normal amount of perceived risk of collection. Once a
loan is deemed to pose other than a normal level of risk of collection, it moves
to the classified asset list as either special mention, substandard, doubtful,
or loss as required by regulatory
15
guidelines. Classified assets also include all loans over 90 days past due
according to the contractual repayment terms. These loans are automatically
considered at least substandard. All loans not on the classified asset list are
assigned a reserve factor that is based on the Corporation's actual loss
experience over the last three years, with a small factor assigned to loans
current as to their contractual payments, and an increased factor if the loan is
30 of 60 days past due. Classified loans with balances under $100,000 are
typically pooled according to their underlying collateral, and a reserve factor
assigned based on historical loss experience. Classified loans are evaluated on
an individual basis if the loan balance exceeds $100,000. In such a case, the
value of the underlying collateral, which is ordinarily real estate because of
the nature of the Corporation's predominant past lending activities, the cost of
collection and disposition, and other factors are considered and an estimated
reserve level is established. In establishing estimated reserves, current and
projected economic conditions as they may affect the borrower and the collateral
are considered. If prospects appear poor with respect to collateral disposition,
for example, because of economic factors, a lower disposition value and thus a
higher reserve level would be established. Similarly, the credit may be
guaranteed by a governmental agency, or the collateral value may greatly exceed
the loan balance such that no reserve is indicated for these loans that are
nevertheless considered classified assets because of their delinquency. If a
loan or a portion of a loan is judged to be unrecoverable, that amount is
charged off. The calculated reserve determined using the methodologies described
above is compared to the actual level of reserves; the difference reflects the
imprecision of the multitude of assumptions that are made combined with the
variability that can occur with a relatively small amount of troubled assets,
and the reserve is maintained at reasonable levels by adjusting the provision
that is charged to earnings.
16
The following table sets forth information with respect to the Bank's
allowance for loan losses at the dates and for the periods indicated:
For the Years Ended December 31,
---------------------------------------------------------
2002 2001 2000 1999 1998
------- ------- ------- ------- -------
(Dollars in thousands)
Balance at beginning of period .... $ 1,972 $ 1,714 $ 1,917 $ 1,909 $ 2,029
Provision for loan losses ......... 988 500 410 300 60
Charge-offs:
One- to four-family ............. (13) -- -- -- --
Commercial and multi-family
real estate loans ............. -- -- -- -- --
Consumer and other loans ........ (928) (430) (634) (296) (180)
Recoveries:
One- to four-family ............. 3 -- -- -- --
Commercial and multi-family
real estate loans ............. -- -- -- -- --
Consumer and other loans ........ 25 188 21 4 --
------- ------- ------- ------- -------
Balance at end of year ............ $ 2,047 $ 1,972 $ 1,714 $ 1,917 $ 1,909
======= ======= ======= ======= =======
Ratio of net charge-offs during
the period to average loans
outstanding during the period ... 0.25% 0.07% 0.20% 0.10% 0.08%
Ratio of allowance for loan
losses to non-performing
loans at the end of the period... 53.56% 52.22% 116.0% 145.6% 119.2%
Ratio of allowance for loan
losses to loans receivable
at the end of the period ........ 0.55% 0.52% 0.47% 0.66% 0.78%
Ratio of allowance for loan
losses and foreclosed real
estate to total non-performing
assets at the end of the period.. 52.41% 52.60% 114.8% 132.2% 116.1%
17
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.
At December 31,
----------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
----------------- ------------------ ------------------ -------------- ------------------
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)
At end of period
allocated to:
One- to four-family..... $ 119 5.8% $ 216 10.9% $ 97 5.7% $ 242 12.6% $ 168 8.8%
Commercial real estate
and multi-family....... 1,021 49.9 1,100 55.8 835 48.7 676 35.3 905 47.4
Construction............ 90 4.4 74 3.8 105 6.1 172 9.0 111 5.8
Consumer and other
loans................. 817 39.9 582 29.5 677 39.5 826 43.1 725 38.0
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total allowance......... $2,047 100.0% $1,972 100.0% $1,714 100.0% $1,917 100.0% $1,909 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
18
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 fair values of the Bank's investments at the dates indicated.
At December 31,
---------------------------------------------------------------
2002 2001 2000
------------------- ------------------- -------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
-------- -------- -------- -------- -------- --------
(In thousands)
Interest-earning deposits .............. $100,580 $100,580 $ 58,157 $ 58,157 $ 1,965 $ 1,964
======== ======== ======== ======== ======== ========
Investment securities held-to- maturity:
U.S. government and agency
obligations ....................... $ 4000 $ 4,125 $ -- $ -- $ 52,499 $ 51,016
State and political
subdivisions ....................... 3,700 3,880 5,743 5,787 5,958 5,979
Corporate debt securities ............ 6,863 7,182 4,123 4,043 5,004 4,924
-------- -------- -------- -------- -------- --------
Total .............................. $ 14,563 $ 15,187 $ 9,866 $ 9,830 $ 63,461 $ 61,919
======== ======== ======== ======== ======== ========
Securities available-for-sale:
U.S. government and agency
obligations ........................ $ 15,964 $ 16,084 $ 11,018 $ 10,929 $ 12,003 $ 11,967
State and political
subdivisions ....................... 453 464 -- -- -- --
Corporate Debt Securities ............ 10,034 10,197 11,070 11,245 6,034 6,004
Mutual funds ......................... 500 498 500 497 500 494
Other .............................. -- -- -- -- 500 400
-------- -------- -------- -------- -------- --------
Total .............................. $ 26,951 $ 27,243 $ 22,588 $ 22,671 $ 19,037 $ 18,865
======== ======== ======== ======== ======== ========
19
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,
2002. Yields on tax exempt obligations have been computed on a tax equivalent
basis.
More than Total
One Year or Less One to Five Years Five to Ten Years Ten Years Investment Securities(2)
---------------- ----------------- ----------------- ---------------- -------------------------
Amortized Average Amortized Average Amortized Average Amortize Average Amortized Average Fair
Cost Yield Cost Yield Cost Yield Cost Yield Cost Yield Value
---- ----- ---- ----- ---- ----- ---- ----- ---- ----- -----
(Dollars in thousands)
U.S. government................ $ 9,964 1.24% $ -- --% $ -- --% $ -- --% $ 9,964 1.24% $ 9,969
U.S. government agency -- -- 10,000 4.31 -- -- -- -- 10,000 4.31 10,240
Municipal obligations.......... -- -- 330 4.40 2,155 8.14 1,668 8.14 4,153 6.55 4,344
Corporate obligations.......... 8,007 5.71 8,890 4.60 -- -- -- -- 16,897 5.13 17,379
Other securities(1)............ 500 2.18 -- -- -- -- -- -- 500 2.18 498
------- ---- ------- ---- ------ ---- ------ ---- ------- ---- -------
Total........................ $18,471 3.20% $19,220 4.45% $2,155 8.14% $1,668 8.14% $41,514 3.82% $42,431
======= ==== ======= ==== ====== ==== ====== ==== ======= ==== =======
- ----------------
(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 $27,243 million of U.S. government and agency obligations and
other investments which are carried as available-for-sale at December 31,
2002. Investment securities available-for-sale are carried at fair value.
20
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, $31 million or 7% consist of IRA, Keogh or
SEP retirement accounts at December 31, 2002.
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, 2002, core deposits amounted to 67% 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.
At December 31,
-------------------------------------------------------------------------------------------
2002 2001 2000
---------------------------- --------------------------------- ---------------------------
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)
Transaction Accounts
Interest-bearing checking accounts.. $ 48,496 10.96% 0.60% $ 46,990 11.13% 0.75% $ 35,127 8.76% 1.02%
Money market accounts............... 43,677 9.87 1.00 42,557 10.08 2.54 44,325 11.05 3.13
Non-interest-bearing checking
accounts.......................... 20,810 4.70 0.00 18,200 4.31 0.00 12,096 3.02 0.00
-------- ------ ---- -------- ------ ---- -------- ------ ----
Total transaction accounts....... 112,983 25.53 107,747 25.52 91,548 22.83
Passbook accounts.................. 182,813 41.31 1.51 169,576 40.18 2.52 155,699 38.85 3.48
Certificates of deposit............. 146,762 33.16 2.84 144,729 34.30 4.29 153,604 38.32 5.32
-------- ------ ---- -------- ------ ---- -------- ------ ----
Total deposits.................. $442,558 100.00% 1.73% $422,052 100.00% 2.82% $400,851 100.00% 3.66%
======== ====== ==== ======== ====== ==== ======== ====== ====
21
At December 31, 2002, 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................................. $ 3,004
Over three through six months........................ 3,108
Over six through 12 months........................... 3,772
Over 12 months....................................... 9,799
-------
Total............................................ $19,683
=======
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,
together with the applicable weighted average interest rates.
At December 31,
---------------------------------
2002 2001 2000
-------- -------- --------
(Dollars in thousands)
FHLB advances and other borrowings........ $207,359 $223,359 $259,821
======== ======== ========
Weighted average interest rate............ 5.46% 5.46% 5.78%
==== ==== ====
At December 31,
---------------------------------
2002 2001 2000
-------- -------- --------
(Dollars in thousands)
Maximum balance of FHLB advances and
other borrowings outstanding............ $222,359 $259,821 $259,889
======== ======== ========
Weighted average balance of FHLB
advances and other borrowings
outstanding............................. $218,578 $229,473 $243,656
======== ======== ========
Weighted average interest rate of FHLB
advances and other borrowings........... 5.46% 5.53% 5.68%
==== ==== ====
22
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.
At December 31, 2002
--------------------
(Dollars in thousands)
Date first convertible Contractual Maturity Contractual
(month/year) Date (month/year) Amount Interest Rate
- ------------ ----------------- ------ -------------
January 2002 April 2003 $5,000 4.74%
February 2002 February 2009 15,000 4.74
February 2002 February 2004 25,000 5.10
February 2002 February 2004 20,000 4.94
April 2002 April 2008 10,000 5.41
June 2002 June 2008 15,000 5.63
June 2002 June 2008 10,000 5.61
February 2003 February 2006 20,000 5.15
March 2003 March 2008 25,000 5.70
March 2003 March 2008 10,000 5.61
February 2004 February 2009 10,000 5.05
--------- ----
$ 165,000 5.29%
========= ====
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, 2002, 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 operating
subsidiary, in which there is no percentage of assets investment limitation, if
it engages only in activities in which it would be permissible for the Bank to
engage. At December 31, 2002, 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, 2002, the Bank had $114 million invested in Third
Delaware Corporation.
Personnel
As of December 31, 2002, the Bank had 158 full-time and 20 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:
John R. Stranford has been with the Bank since 1968. He presently
serves as Chairman of the Board of the Bank, President, Chief Executive Officer,
Chief Operating Officer and Director of the
23
Bank and Company. Mr. Stranford has served as Chief Operating Officer of the
Bank since 1984 , President of the Bank since January 1994, and Chairman of the
Board of the Bank since April 2001. 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.
Kent C. Lufkin has been with the Bank since 2000. He currently serves
as Senior Vice President and Retail Banking Officer. Mr. Lufkin's's prior
experience includes 4 years as Chief Executive Officer at Roebling Bank.
Earl A. Pace, Jr. was Senior Vice President and Chief Information
Officer of the Bank at December 31, 2002. Mr. Pace had been with the Bank since
1997. Previously, he was President and CEO of Pace Data Systems, an information
technology consulting firm. Mr. Pace resigned from the Bank effective January
31, 2003.
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 2003 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 July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act
of 2002 (the "Act"). The Securities and Exchange Commission (the "SEC")
promulgated certain regulations pursuant to the Act and will continue to propose
additional implementing or clarifying regulations as necessary in furtherance of
the Act. The passage of the Act and the regulations implemented by the SEC
subject publicly-traded companies to additional and more cumbersome reporting
regulations and disclosure.
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
24
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.
Financial Modernization. The Gramm-Leach-Bliley Act ("GLB") permits
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. GLB 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.
GLB 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 has retained its
authority to engage in nonfinancial activities.
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.
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
25
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.
At December 31, 2002, 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 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 calendar 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 such as
the Bank 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.
26
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, 2002, the Bank was in compliance with
its QTL requirement with 81% of its assets invested in QTIs.
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, 2002, the Bank had $11.4 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, 2002, the Bank's total transaction accounts required a reserve level of $3.8
million which was offset by the Bank's vault cash on hand and cash on deposit at
the Federal Reserve Bank of Philadelphia.
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, 2002.
Item 2. Properties
- ------------------
The Company is located and conducts its business at 3 Penns Trail,
Newtown, Pennsylvania. At December 31, 2002, the Bank operated from its main
office and thirteen 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 of
the Bank and tenants. The net book value of the two lots was $100,000. In
addition, a subsidiary of the Company, Penns Trail Development Corporation, owns
investment property with a book value of $769,000.
27
The following table sets forth certain information regarding the Bank's
operating properties:
Leased or Leased or
Location Owned Location Owned
- --------------------------- ------------- ------------------------- ------------
ADMINISTRATIVE 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
Ewing Office Mayfair Office
2075 Pennington Road Roosevelt Blvd. at Unruh
Ewing, NJ 08618 Owned Philadelphia, PA 19149 Owned
Hamilton Office Doylestown Office
1850 Route 33 60 North Main Street
Hamilton Square, NJ 08690 Owned Doylestown, PA 18901 Owned
Fishtown Office Feasterville Office
York & Memphis Streets Buck Hotel Complex
Philadelphia, PA 19125 Owned Feasterville, PA 19053 Leased
Cross Keys Office Quakerbridge Office
834 North Easton Highway 590 Lawrence Square Blvd.
Doylestown, PA 18901 Owned Lawrenceville, NJ 08648 Leased
Bridesburg Office Woodhaven Office
Orthodox & Almond Streets Knights Road Center
Philadelphia, PA 19137 Owned 4014 Woodhaven Road
Philadelphia, PA 19154 Leased
New Britain Office Northern Liberties Office
600 Town Center 905 North 2nd Street
New Britain, PA 18901 Leased Philadelphia, PA 19123 Leased
- ---------------
(1) This office serves as the computer operations center, check processing
area, training center, mail processing and storage center for the Bank.
28
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 the section captioned "Stock Market
Information" in the Registrant's 2002 Annual Report to Stockholders and is
incorporated herein by reference.
Item 6. Selected Financial Data
- -------------------------------
The above-captioned information appears under the section captioned
"Selected Financial and Other Data" in the Registrant's 2002 Annual Report to
Stockholders and is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
-------------
The information under the section captioned "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in the
Registrant's 2002 Annual Report to Stockholders is incorporated herein by
reference.
Item 7A. Liquidity
- ------------------
The following table illustrates, in one place, the Company's contractual
obligations and commitments to make future payments as of December 31, 2002 (in
000's):
Total Less than 1 year 1-3 years 4-5 years After 5 years
----- ---------------- --------- --------- -------------
Contractual obligations: Payments due by period
- ------------------------ ----------------------
FHLB advances $207,359 $27,000 $57,000 $25,000 $98,359
Time deposits 146,762 96,669 43,426 6,354 313
Operating leases 523 190 218 77 38
-------- -------- -------- ------- -------
Total contractual obligations $354,644 $123,859 $100,644 $31,431 $98,710
======== ======== ======== ======= =======
Commitments: Amount of commitment expirations by period
- ------------ ---------------------------------------------------------------------
Extensions of credit $35,983 $23,766 $422 $ 13 $11,782
Letters of credit 1,548 1,379 169 -- --
Loans sold with recourse 163 -- -- -- 163
------- ------- ---- ---- -------
Total commitments $37,694 $25,145 $591 $ 13 $11,945
======= ======= ==== ==== =======
29
Item 7B. 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.
The Bank utilizes its investment and mortgage-backed security
portfolios to generate additional interest income and in managing its liquidity.
These securities are readily marketable and provide the Bank with a cash flow
stream to fund asset growth or liability maturities.
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. At December 31, 2002, approximately 33% 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, 2002,
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,
2002 are as follows:
MVPE
-----------------------------------------------------------
Change in Interest Rates(1) Amount % Change
--------------------------- ------ --------
(In Thousands)
+300 Basis Points $54,724 -12%
+200 Basis Points $60,496 -3%
+100 Basis Points $64,250 +3%
Flat Rates $62,379 0%
-100 Basis Points $55,360 -11%
- -----------------------
(1) The -200 and -300 bp scenarios are not shown due to the low interest rate
environment.
30
Management believes that the assumptions utilized by OTS in evaluating
the vulnerability of the Company's capital to changes in interest rates are
reasonable; 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.
Item 8. Financial Statements and Supplementary Data
- ---------------------------------------------------
The Consolidated Financial Statements of TF Financial Corporation and
its subsidiaries included in the Registrant's 2002 Annual Report to Stockholders
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" and "Additional Information About Directors and Executive Officers
- -- Section 16(a) Beneficial Ownership Reporting Compliance" in the Registrant's
definitive proxy statement for the Registrant's 2002 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" in the Registrant's Proxy
Statement.
31
Item 12. Security Ownership of Certain Beneficial Owners and Management
- -----------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the Section captioned "Voting Securities and
Principal Holders Thereof" in the Registrant's Proxy
Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by
reference to the section captioned "Proposal 1 -- Election of
Directors" in the Registrant's Proxy Statement.
(c) Management of the Company knows of no arrangements, including
any pledge by any person of securities of the Company, the
operation of which may at a subsequent date result in a change
in control of the registrant.
(d) Securities Authorized for Issuance Under Equity Compensation
Plans
Set forth below is information as of December 31, 2002 with respect to
compensation plans under which equity securities of the Registrant are
authorized for issuance.
EQUITY COMPENSATION PLAN INFORMATION
(a) (b) (c)
Number of securities
Number of securities Weighted-average remaining available for
to be issued upon exercise price of future issuance under
exercise of outstanding equity compensation
outstanding options, options, warrants plans (excluding securities
warrants and rights and rights reflected in column (a))
------------------- ---------- ------------------------
Equity compensation plans
approved by shareholders(1)....... 633,973 $14.08 135,027
Equity compensation plans
not approved by shareholders(2)... 25,000 14.75 --
------- ------ -------
TOTAL.......................... 658,973 $14.11 135,027
======= ====== =======
- ---------------
(1) Plans approved by stockholders include: TF Financial Corporation 1994 Stock
Option Plan, TF Financial Corporation 1997 Stock Option Plan.
(2) Plans not approved by stockholders include: TF Financial Corporation 1996
Directors Stock Option Plan For information regarding the material features
of these plans, see Note A8 to the Consolidated Financial Statements
included as part of Exhibit 13 to this report.
32
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" in the
Registrant's Proxy Statement.
Item 14. Controls and Procedures
- --------------------------------
(a) Evaluation of disclosure controls and procedures. Based on their
--------------------------------------------------
evaluation as of a date within 90 days of the filing date of this Annual Report
on Form 10-K, the Registrant's principal executive officer and principal
financial officer have concluded that the Registrant's disclosure controls and
procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934 (the "Exchange Act")) are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms.
(b) Changes in internal controls. There were no significant changes in
----------------------------
the Registrant's internal controls or in other factors that could significantly
affect these controls subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
PART IV
Item 15. 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 2002 Annual Report
to Stockholders are incorporated herein by reference.
Independent Auditors' Report
Consolidated Statements of Financial Position as of December 31, 2002
and 2001
Consolidated Statements of Earnings For the Years Ended December 31,
2002, 2001 and 2000
Consolidated Statement of Changes in Stockholders' Equity and
Comprehensive Income for the Years Ended December 31, 2002, 2001 and
2000
Consolidated Statements of Cash Flows for the Years Ended December 31,
2002, 2001 and 2000
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.
33
(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 Kent C. Lufkin****
10.7 Severance Agreement with Floyd P. Haggar****
10.8 Severance Agreement with Earl A. Pace, Jr.*****
10.9 Severance Agreement with Dennis R. Stewart******
10.10 TF Financial Corporation 1997 Stock Option Plan*******
10.11 Severance Agreement with Robert N. Dusek********
10.12 TF Financial Corporation 1996 Directors Stock Option Plan
13.0 2002 Annual Report to Stockholders
21.0 Subsidiary Information
23.0 Consent of Independent Auditor
99.0 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
- -------------------
* 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, 2000.
***** Incorporated herein by reference to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1998.
****** Incorporated herein by reference to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1999.
******* 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, 2001.
(b) Reports on Form 8-K.
During the last quarter of the year ended December 31, 2002,
the Registrant filed no Current Reports on Form 8-K.
34
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 26, 2003 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 26, 2003.
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
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 annual report on Form 10-K of TF Financial Corporation
(Registrant);
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual 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
annual 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.
Date: March 26, 2003 /s/John R. Stranford
------------------------------------------
John R. Stranford
President and Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Dennis R. Stewart, Vice President and Chief Financial Officer, certify
that:
1. I have reviewed this annual report on Form 10-K of TF Financial Corporation
(Registrant);
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual 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
annual 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.
Date: March 26, 2003 /s/Dennis R. Stewart
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Dennis R. Stewart
Vice President and Chief Financial Officer
(Principal Financial & Accounting Officer)