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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended December 31, 1998
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- or -
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ________________ to __________________
Commission File Number: 0-24168
TF FINANCIAL CORPORATION
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 74-2705050
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3 Penns Trail, Newtown, Pennsylvania 18940
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (215) 579-4000
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.10 per share
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(Title of Class)
Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant, based on the average bid and asked prices of the Registrant's
Common Stock as quoted on the Nasdaq System on March 19, 1999, was $36,478,038
million (2,077,337 shares at $17.56 per share).
As of March 19, 1999 there were outstanding 3,041,010 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, 1998. (Parts I, II and IV)
2. Portions of the Proxy Statement for the 1999 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 THERETO), IN ITS REPORTS TO
STOCKHOLDERS AND IN OTHER COMMUNICATIONS BY THE COMPANY, WHICH ARE MADE IN GOOD
FAITH BY THE COMPANY PURSUANT TO THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995.
THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES, SUCH
AS STATEMENTS OF THE COMPANY'S PLANS, OBJECTIVES, EXPECTATIONS, ESTIMATES AND
INTENTIONS, THAT ARE SUBJECT TO CHANGE BASED ON VARIOUS IMPORTANT FACTORS (SOME
OF WHICH ARE BEYOND THE COMPANY'S CONTROL). THE FOLLOWING FACTORS, AMONG OTHERS,
COULD CAUSE THE COMPANY'S FINANCIAL PERFORMANCE TO DIFFER MATERIALLY FROM THE
PLANS, OBJECTIVES, EXPECTATIONS, ESTIMATES AND INTENTIONS EXPRESSED IN SUCH
FORWARD-LOOKING STATEMENTS: THE STRENGTH OF THE UNITED STATES ECONOMY IN GENERAL
AND THE STRENGTH OF THE LOCAL ECONOMIES IN WHICH THE COMPANY CONDUCTS
OPERATIONS; THE EFFECTS OF, AND CHANGES IN, TRADE, MONETARY AND FISCAL POLICIES
AND LAWS, INCLUDING INTEREST RATE POLICIES OF THE BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM, INFLATION, INTEREST RATES, MARKET AND MONETARY
FLUCTUATIONS; THE TIMELY DEVELOPMENT OF AND ACCEPTANCE OF NEW PRODUCTS AND
SERVICES OF THE COMPANY AND THE PERCEIVED OVERALL VALUE OF THESE PRODUCTS AND
SERVICES BY USERS, INCLUDING THE FEATURES, PRICING AND QUALITY COMPARED TO
COMPETITORS' PRODUCTS AND SERVICES; THE WILLINGNESS OF USERS TO SUBSTITUTE
COMPETITORS' PRODUCTS AND SERVICES FOR THE COMPANY'S PRODUCTS AND SERVICES; THE
SUCCESS OF THE COMPANY IN GAINING REGULATORY APPROVAL OF ITS PRODUCTS AND
SERVICES, WHEN REQUIRED; THE IMPACT OF CHANGES IN FINANCIAL SERVICES' LAWS AND
REGULATIONS (INCLUDING LAWS CONCERNING TAXES, BANKING, SECURITIES AND
INSURANCE); TECHNOLOGICAL CHANGES, ACQUISITIONS; CHANGES IN CONSUMER SPENDING
AND SAVING HABITS; AND THE SUCCESS OF THE COMPANY AT MANAGING THE RISKS INVOLVED
IN THE FOREGOING.
THE COMPANY CAUTIONS THAT THE FOREGOING LIST OF IMPORTANT FACTORS IS
NOT EXCLUSIVE. THE COMPANY DOES NOT UNDERTAKE TO UPDATE ANY FORWARD- LOOKING
STATEMENT, WHETHER WRITTEN OR ORAL, THAT MAY BE MADE FROM TIME TO TIME BY OR ON
BEHALF OF THE COMPANY.
Item 1. Business
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BUSINESS OF THE COMPANY
On July 13, 1994, the Registrant, TF Financial Corporation (the
"Company") consummated its public offering for 5,290,000 shares of its common
stock and acquired Third Federal Savings Bank (the "Savings Bank" or "Third
Federal") as part of the Savings Bank's conversion from a mutual to a stock
federally chartered savings bank. The Registrant was incorporated under Delaware
law in March 1994.
1
The Registrant 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"). Currently, the Registrant does not transact any material business
other than through its subsidiaries, the Savings Bank, TF Investments
Corporation, Teragon Financial Corporation, Penns Trail Development Corporation
and Third Delaware Corporation. Third Delaware Corporation was incorporated in
August 1998, as a subsidiary of the Savings Bank, for the purpose of holding and
managing investment securities for the Savings Bank. At December 31, 1998, the
Company had total assets of $665.6 million, total deposits of $438.9 million and
stockholders' equity of $52.7 million.
On August 19, 1994, the Board of Directors approved the change in the
Company's fiscal year from June 30 to December 31.
BUSINESS OF THE SAVINGS BANK
Third Federal, originally organized in 1921 as a Pennsylvania-chartered
building and loan association, converted to a federally chartered mutual savings
and loan association in 1935. The Savings Bank's deposits are insured up to the
maximum amount allowable by the FDIC.
The Savings Bank is a community oriented savings institution offering a
variety of financial services to meet the needs of the community it serves. The
Savings Bank significantly expanded its operations throughout Philadelphia and
Bucks Counties, Pennsylvania in June 1992 through its acquisition of Doylestown
Federal Savings and Loan Association ("Doylestown"). On September 20, 1996,
Third Federal acquired three branch offices, certain assets and $143 million of
deposits from Cenlar Federal Savings Bank, Trenton, New Jersey ("Cenlar"). As a
result of the Cenlar acquisition, Third Federal currently operates eleven branch
offices in Bucks and Philadelphia counties, Pennsylvania and three branch
offices in Mercer County, New Jersey. This acquisition was consistent with the
Savings Bank's strategic goal of growing its market share within its market area
and reaching into adjacent market areas, through low-cost, fill-in or
market-extension acquisitions.
The Savings 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, 1998, one- to four-family residential
mortgage loans totaled $152.8 million or 62.9% of the Savings Bank's total loan
portfolio. At that same date, the Savings Bank had approximately $256.2 million
or 38.5% of total assets invested in mortgage-backed securities and $89.9
million or 13.5% of total assets in investment securities. To a lesser extent,
the Savings Bank also originates commercial real estate and multi-family,
construction and consumer loans.
Market Area
Third Federal operates five offices in Philadelphia County and six
offices in Bucks County, Pennsylvania. These two counties cover the city of
Philadelphia and the northeast suburbs of Philadelphia. The population of these
two counties totals over 2.1 million. The Savings Bank also operates three
branch offices in Mercer County, New Jersey. The population of Bucks and Mercer
Counties has experienced distinctly different economic and demographic trends
over recent decades. Whereas Philadelphia County has experienced a population
decline and has offered very limited lending opportunities, Bucks and Mercer
Counties, with growing populations, have offered Third Federal much greater
lending opportunities.
2
Competition
Third Federal faces varying degrees of competition from local thrifts
and credit unions at its various branch locations. Stronger competition has come
from local and much larger regional banks based in and around the Philadelphia
area. Commercial banks hold approximately 80% of the deposit market in
Philadelphia County, 68% in Bucks County and 66% in Mercer County. Third
Federal's share of the deposit market in Philadelphia, Bucks and Mercer Counties
is very small, at 0.83%, 2.2% and 1.87%, respectively.
Lending Activities
General. The Savings 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 Savings Bank also makes
commercial real estate and multi-family loans, construction loans and consumer
and other loans. At December 31, 1998, the Savings Bank's mortgage loans
outstanding were $213.4 million, of which $152.8 million were one- to
four-family residential mortgage loans. Of the one- to four-family residential
mortgage loans outstanding at that date, 30.4% were ARM's and 69.6% were
fixed-rate loans. Total ARM mortgage loans in the Savings Bank's portfolio at
December 31, 1998, amounted to $85.7 million or 40.15% of total mortgage loans.
At that same date, commercial real estate and multi-family residential and
construction loans totaled $55.2 million and $5.3 million, respectively.
Consumer and other loans held by the Savings Bank totaled $29.5 million
or 12.1% of total loans outstanding at December 31, 1998, of which $13.0 million
or 5.35% consisted of home equity and second mortgages. At that same date
commercial business loans, leases and other loans totaled $6.7 million, $2.3
million and $7.5 million, respectively.
3
The following table sets forth the composition of the Savings 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,
--------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------ ----------------- ------------------ ----------------- -----------------
Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(Dollars in thousands)
Mortgage loans:
One- to four-family.......... $152,819 62.93% $198,328 78.43% $265,618 85.16% $204,430 85.00% $ 80,862 69.70%
Commercial real estate and
multi-family............... 55,208 22.73 26,653 10.54 20,427 6.55 10,294 4.28 11,285 9.73
Construction................. 5,352 2.20 5,052 2.00 4,720 1.51 3,604 1.50 1,534 1.32
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total mortgage loans.... 213,379 87.86 230,033 90.97 290,765 93.22 218,328 90.78 93,681 80.75
Consumer and other loans:
Home equity and second
mortgage................... 12,995 5.35 12,147 4.80 9,661 3.10 10,635 4.42 11,663 10.05
Commercial business.......... 6,666 2.74 2,798 1.11 3,126 1.00 2,887 1.20 3,679 3.17
Leases....................... 2,305 0.95 1,671 0.66 3,093 0.99 3,590 1.49 2,194 1.89
Other........................ 7,521 3.10 6,230 2.46 5,261 1.69 5,072 2.11 4,796 4.14
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total consumer and other
loans................. 29,487 12.14 22,846 9.03 21,141 6.78 22,184 9.22 22,332 19.25
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total loans............. 242,866 100.00% 252,879 100.00% 311,906 100.00% 240,512 100.00% 116,013 100.00%
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
Less:
Unearned discount, premium,
deferred loan fees, net.... 116 139 530 753 647
Allowance for loan losses.... 1,909 2,029 1,806 1,484 1,473
------- ------- ------- ------- -------
Total loans, net......... $240,841 $250,711 $309,570 $238,275 $113,893
======= ======= ======= ======= =======
Mortgage-backed securities
held-to-maturity:
FHLMC........................ $ 47,239 26.10% $ 76,523 53.12% $ 90,016 58.54% $ 65,834 47.76% $ 85,524 47.14%
FNMA......................... 12,726 7.03 22,927 15.91 27,547 17.92 33,150 24.05 39,713 21.89
GNMA......................... 56,318 31.12 7,483 5.19 6,043 3.93 7,644 5.55 9,358 5.16
Real estate investment
mortgage conduit........... 64,180 35.47 36,389 25.26 29,220 19.00 30,033 21.79 46,603 25.69
Collateralized mortgage
obligations................ -- -- -- 19 0.01 213 0.12
Other mortgage-backed
securities................. 501 0.28 752 0.52 932 0.61 1,161 0.84 --
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total mortgage-backed and
related securities
held-to-maturity......... $180,964 100.00% $144,074 100.00% $153,758 100.00% $137,841 100.00% $181,411 100.00%
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
Mortgage-backed securities
available-for-sale:
FHLMC...................... $ 13,214 17.55% $ 19,223 52.17% $ 8,905 40.43% $ 15,422 52.03%
FNMA....................... 32,178 42.74 7,863 21.34 3,240 14.71 4,010 13.53
GNMA....................... 10,284 13.66 -- -- --
Real estate investment
mortgage conduit......... 19,609 26.05 9,761 26.49 9,882 44.86 10,208 34.44
------- ------ ------- ------ ------- ------ ------- ------
Total.................... $ 75,285 100.00% $ 36,847 100.00% $ 22,027 100.00% $ 29,640 100.00%
======= ====== ======= ====== ======= ====== ======= ======
4
The following table sets forth the Savings Bank's loan originations and
loan and mortgage-backed and related securities purchases, sales and principal
payments for the periods indicated:
Years Ended December 31,
------------------------------------------------
1998 1997 1996
-------- --------- --------
(In thousands)
Total loans receivable (gross):
At beginning of period.................................. $252,879 $311,906 $240,512
Mortgage loans originated:
One- to four-family.................................. 24,598 52,039 64,643
Commercial real estate and multi-family.............. 10,242 6,222 8,488
Construction......................................... 6,759 8,090 14,465
------- ------- -------
Total mortgage loans originated ................. 41,599 66,351 87,596
Mortgage loans purchased:
One- to four-family.................................. 14,144 14,224 82,363
Other non-residential................................ 26,564 -- 358
------- ------- -------
Total mortgage loans purchased................... 40,708 14,224 82,721
------- ------- -------
Total mortgage loans originated and purchased ......... 82,307 80,575 170,317
Consumer loans originated ............................. 14,265 6,643 4,473
Transfer of mortgage loans to real estate owned........ (159) (249) (242)
Sale of loans.......................................... (19,496) (94,925) (19,591)
Loans securitized...................................... -- -- (28,212)
Principal repayments................................... (86,930) (51,071) (55,351)
------- ------- -------
Total loans receivable at end of period................ $242,866 $252,879 $311,906
======= ======= =======
Mortgage-backed securities:
Held-to-maturity:
At beginning of period................................. 144,074 153,758 $137,841
Mortgage-backed securities purchased................... 140,929 18,972 45,349
Mortgage-backed securities sold........................ -- -- --
Transferred to available-for-sale...................... (42,869) -- --
Amortization and repayments............................ (61,170) (28,656) (29,432)
------- ------- -------
At end of period....................................... $180,964 $144,074 $153,758
======= ======= =======
Available-for-sale:
At beginning of period................................. 36,847 22,027 $ 29,640
Transferred from held-to-maturity...................... 42,869 -- --
Mortgage-backed securities purchased .................. 44,506 37,129 4,952
Mortgage-backed securities sold........................ (29,512) (4,153) (8,943)
Amortization and repayments............................ (19,425) (18,156) (3,622)
------- ------- -------
At end of period....................................... $ 75,285 $ 36,847 $ 22,027
======= ======= =======
5
Maturity of Loans and Mortgage-backed and Related Securities. The
following table sets forth the maturity of Third Federal's loan and
mortgage-backed securities at December 31, 1998. The table does not include
prepayments or scheduled principal repayments. Prepayments and scheduled
principal repayments on loans totaled $167.5 million for the year ended December
31, 1998. Adjustable- rate mortgage loans are shown as maturing based on
contractual maturities.
Commercial Mortgage-
One- to Real Estate Backed
Four- and Multi- Consume Total Loans and Related
Family Family Construction and Other Receivable Securities Total
------- ----------- ------------ --------- ---------- ----------- -----
(In thousands)
Non-performing................... $ 896 $ 7 $ -- $ 609 $ 1,602 $ -- $ 1,602
Amounts Due:
Within 3 months.................. 46 -- -- 70 116 344 460
3 months to 1 Year.............. 260 98 4,490 710 5,558 3,437 8,995
After 1 year:
1 to 3 years................... 6,725 370 6,486 5,196 18,777 10,981 29,758
3 to 5 years................... 2,927 2,431 -- 8,386 13,744 9,617 23,361
5 to 10 years.................. 14,284 44,706 -- 7,470 66,460 31,862 98,322
10 to 20 years................. 45,540 7,506 -- 6,274 59,320 29,985 89,305
Over 20 years.................. 82,141 -- -- 772 82,913 170,023 252,936
Total due after one year......... 151,617 55,013 6,486 28,098 241,214 252,468 493,682
Total amounts due................ 152,819 55,208 10,976 29,487 248,490 256,249 504,739
Less:
Allowance for loan loss.......... 1,205 508 97 99 1,909 -- 1,909
Loans in process................. -- -- 5,624 -- 5,624 -- 5,624
Deferred loan fees............... 67 -- -- 49 116 -- 116
------- ------ ------ ------ ------- ------- -------
Total........................ $151,547 $54,700 $ 5,255 $29,339 $240,841 $256,249 $497,090
======= ====== ====== ====== ======= ======= =======
6
The following table sets forth the dollar amount of all loans due after
December 31, 1999, which have predetermined interest rates and which have
floating or adjustable interest rates.
Floating or
Fixed Adjustable
Rates Rates Total
-------- ------------ --------
(In thousands)
One- to four-family....................... $106,209 $46,303 $152,512
Commercial real estate and multi-family... 21,515 33,595 55,110
Construction.............................. -- 6,486 6,486
Consumer and other........................ 15,797 12,910 28,707
------- ------ -------
Total................................... $143,521 $99,294 $242,815
======= ====== =======
One- to Four-Family Mortgage Loans. The Savings Bank offers first
mortgage loans secured by one- to four-family residences in the Savings Bank's
lending area. Typically, such residences are single-family homes that serve as
the primary residence of the owner. The Savings 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 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 Savings Bank's lending area. Mortgage loans
originated and held by the Savings Bank in its portfolio generally include
due-on sale clauses which provide the Savings 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 Savings Bank's consent.
At December 31, 1998, 62.9% of mortgage loans consisted of one- to
four-family residential loans, of which 30.4% were ARM loans.
The Savings Bank offers a variety of ARM loans with terms of 30 years
which adjust at the end of 6 months, one, three, five, seven and ten years and
adjust by a maximum of 1 to 2 % per adjustment with a lifetime cap of 5 to 6%
over the life of the loan. The ARM loans acquired as a result of the Doylestown
merger adjust at the end of one or three years and adjust by a maximum of 2.00%
per adjustment with a lifetime cap of 5.00% over the life of the loan.
The Savings Bank offers fixed-rate mortgage loans with terms of 10 to
30 years, which are payable monthly. The Savings Bank has continued its emphasis
on fixed-rate mortgage loans with terms of 15 years or less. Interest rates
charged on fixed-rate mortgage loans are competitively priced based on market
conditions and the Savings Bank's cost of funds. The origination fees for
fixed-rate loans were generally 3.0% at December 31, 1998. Generally, the
Savings 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. The Savings Bank has in the past sold a portion of its conforming
fixed-rate mortgage loans in the secondary market to federal agencies while
retaining the servicing rights certain loans.
The Savings Bank, however, is primarily a portfolio lender. As of
December 31, 1998, the Savings Bank's portfolio of loans serviced for others
totaled approximately $21.2 million.
7
Commercial Real Estate and Multi-Family Loans. The Savings Bank has
historically originated a limited number of loans secured by commercial real
estate including non-owner occupied residential multi-family dwelling units
(more than four units) primarily secured by professional office buildings and
apartment complexes.
The Savings 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 Savings Bank's philosophy to originate commercial
real estate and multi-family loans only to borrowers known to the Savings Bank
and on properties in its market area. The commercial real estate and
multi-family loans in the Savings Bank's portfolio consist of fixed-rate, ARM
and balloon loans which were originated at prevailing market rates for terms of
up to 20 years. The Savings 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 15 years or as balloon loans which generally have terms of 5 to 10
years, with 20-25 year amortizations.
Loans secured by commercial and multi-family real estate are generally
larger and involve a greater degree of risk than one- to four-family residential
mortgage loans. Of primary concern in commercial and multi-family real estate
lending is the borrower's creditworthiness and the feasibility and cash flow
potential of the project. Loans secured by income properties are generally
larger and involve greater risks than 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 Savings Bank requires borrowers and loan
guarantors, if any, to provide annual financial statements and rent rolls on
multi-family loans. At December 31, 1998, the five largest commercial real
estate and multi-family loans totaled $8.3 million with no single loan larger
than $2.1 million. At December 31, 1998, all such loans were current and the
properties securing such loans are in the Savings Bank's market area.
Construction Loans. At December 31, 1998, the Savings Bank had $5.3
million of construction loans or 2.2% of the Savings 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 Savings 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 Savings 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 Savings 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 $29.5 million or 12.1%
of the Savings Bank's total loan portfolio at December 31, 1998. 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
Savings 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.
8
In connection with consumer loan applications, the Savings 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 Savings Bank. The
Savings Bank reviews the credit report of the borrower as well as the value of
the unit which secures the loan.
The Savings 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 Savings Bank's interest rate gap management. Consumer loans,
however, tend to have a higher risk of default than residential mortgage loans.
At December 31, 1998, the Savings Bank had $609,000 in consumer loans 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 Savings Bank offers second mortgage loans on one- to four-family
residences. At December 31, 1998, second mortgage and home equity loans totaled
$13.0 million, or 5.4% of the Savings 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 Savings Bank's standards
applicable to one- to four-family residential loans.
The Savings 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
Savings Bank's commercial business loans primarily consist of short-term loans
for equipment, working capital, business expansion and inventory financing. The
Savings 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, 1998, the Savings Bank had
approximately $6.7 million outstanding in commercial business loans, which
represented approximately 2.7% of its total loan portfolio.
Loan Approval Authority and Underwriting. The Board of Directors sets
the authority to approve loans based on the amount, type of loan (i.e., secured
or unsecured) and total exposure to the borrower. Where there is an existing
loans[s] to a borrower, the level of approval required is governed by the
proposed total exposure including the new loan. A Lending Vice President may
approve a secured loan up to $250,000 and an unsecured loan up to $50,000
individually. Each In-House Loan Committee member may approve a secured loan up
to $500,000 and an unsecured loan up to $100,000. Any two In-House Loan
Committee members may combine their secured lending authority up to $1.0
million. A majority of the In-House Loan Committee members may approve a secured
loan up to $1.5 million and an unsecured loan up to $250,000. 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 Savings 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 Savings Bank. The Savings Bank makes construction/permanent
loans
9
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
Savings 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 Savings
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 Savings Bank's maximum
loan- to-one borrower limit was approximately $7.1 million as of December 31,
1998.
At December 31, 1998, the Savings Bank's five largest aggregate lending
relationships had balances ranging from $6.1 to $2.5 million. At December 31,
1998, 100% of these loans were current.
Mortgage-Backed Securities
To supplement lending activities, Third Federal 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, 1998,
consisted primarily of fixed-rate certificates issued by the Federal Home Loan
Mortgage Corporation ("FHLMC") ($60.4 million), Government National Mortgage
Association ("GNMA"), ($66.5 million) Federal National Mortgage Association
("FNMA") ($44.8 million), real estate mortgage investment conduits ("REMICs")
($83.8 million), and other mortgage-backed securities ($500,000).
At December 31, 1998, the carrying value of mortgage-backed securities
totaled $256.2 million, or 38.5% of total assets. The market value of such
securities totaled approximately $257.8 million at December 31, 1998.
Mortgage-backed securities represent a participation interest in a pool
of single-family or multi-family mortgages, the principal and interest payments
on which are passed from the mortgage originators, through intermediaries
(generally quasi-governmental agencies) that pool and repackage the
participation interests in the form of securities, to investors such as the
Savings Bank. Such quasi-governmental agencies, which guarantee the payment of
principal and interest to investors, primarily include FHLMC, FNMA and GNMA.
FHLMC issues participation certificates backed principally by
conventional mortgage loans. FHLMC guarantees the timely payment of interest and
the ultimate return of principal within one year. FHLMC securities are indirect
obligations of the United States Government. FNMA is a private corporation
chartered by Congress with a mandate to establish a secondary market for
conventional mortgage loans. FNMA guarantees the timely payment of principal and
interest, and FNMA securities are indirect obligations of the United States
Government. GNMA is a government agency within the Department of Housing and
Urban Development ("HUD") which is intended to help finance government
10
assisted housing programs. GNMA guarantees the timely payment of principal and
interest, and GNMA securities are backed by the full faith and credit of the
United States Government. Since FHLMC, FNMA and GNMA were established to provide
support for low- and middle-income housing, there are limits to the maximum size
of loans that qualify for these programs. Currently, GNMA limits its maximum
loan size to $240,050 for Veterans Administration ("VA") loans and on average
$240,050 for Federal Housing Authority ("FHA") loans. FNMA and FHLMC limit their
loans to $240,000. To accommodate larger-sized loans, and loans that, for other
reasons, do not conform to the agency programs, a number of private institutions
have established their own home-loan origination and securitization programs.
Mortgage-backed securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a range and have varying maturities. The
underlying pool of mortgages are primarily composed of either fixed-rate
mortgages or adjustable-rate mortgage ("ARM") loans. Mortgage-backed securities
are generally referred to as mortgage participation certificates or pass-through
certificates. As a result, the interest rate risk characteristics of the
underlying pool of mortgages, i.e., fixed-rate or adjustable-rate, as well as
prepayment risk, are passed on to the certificate holder. The life of a
mortgage-backed pass-through security is equal to the life of the underlying
mortgages. Mortgage-backed securities issued by FHLMC, FNMA and GNMA make up a
majority of the pass-through market.
CMOs and REMICs are typically issued by a special-purpose entity (the
"issuer"), which may be organized in a variety of legal forms, such as a trust,
a corporation, or a partnership. The entity aggregates pools of pass-through
securities, which are used to collateralize the mortgage related securities.
Once combined, the cash flows can be divided into "tranches" or "classes" of
individual securities, thereby creating more predictable average durations for
each security than the underlying pass-through pools. Accordingly, under this
security they structure all principal pay downs from the various mortgage pools
are allocated to a mortgage-related class or classes structured to have priority
until it has been paid off. Thus these securities are intended to address the
reinvestment concerns associated with mortgage-backed securities pass-through,
namely that (i) they tend to pay off when interest rates fall, thereby taking
their relatively high coupon with them, and (ii) their expected average life may
vary significantly among the different tranches.
Some CMO and REMIC instruments are most like traditional debt
instruments because they have stated principal amounts and traditionally defined
interest-rate terms. Purchasers of certain other CMO and REMIC instruments are
entitled to the excess, if any, of the issuer's cash inflows, including
reinvestment earnings, over the cash outflows for debt service and
administrative expenses. These mortgage related instruments may include
instruments designated as residual interests, and are riskier in that they could
result in the loss of a portion of the original investment. Cash flows from
residual interests are very sensitive to prepayments and, thus, contain a high
degree of interest-rate risk. Residual interests represent an ownership interest
in the underlying collateral, subject to the first lien of the CMO and REMICs
investors.
The CMOs and REMICs held by the Savings Bank at December 31, 1998,
consisted solely of fixed-rate notes and adjustable-rate notes with contractual
maturities ranging from .1 to 29.6 years. The portfolio of CMOs and REMICs held
within the Savings Bank's mortgage-backed securities portfolio at December 31,
1998, did not include any residual interests. Further, at December 31, 1998, the
Savings Bank's mortgage-backed securities portfolio did not include any
"stripped" CMOs and REMICs, i.e. CMOs and REMICs that pay interest only and do
not repay principal or CMOs that repay principal only and do not pay interest.
11
The following table sets forth the carrying value of the Savings Bank's
mortgage-backed securities held in portfolio at the dates indicated.
At December 31,
-----------------------------------------
1998 1997 1996
--------- --------- ----------
(In thousands)
Held to maturity:
GNMA-fixed rate....................... $ 56,318 $ 7,483 $ 6,043
FHLMC ARMs............................ 269 281 364
FHLMC-fixed rate...................... 46,970 76,242 89,652
FNMA-fixed rate....................... 12,726 22,927 27,547
CMOs.................................. -- -- --
Remics................................ 64,180 36,389 29,220
Other mortgage-backed securities...... 501 752 932
------- ------- -------
Total mortgage-backed securities..... $180,964 $144,074 $153,758
======= ======= =======
Mortgage-backed securities
Available-for-sale:
FHLMC................................. $ 13,214 $ 19,223 $ 8,905
FNMA.................................. 32,178 7,863 3,240
GNMA.................................. 10,284 -- --
Remics................................ 19,609 9,761 9,882
------- ------ -------
Total mortgage-backed securities
available-for-sale................ $ 75,285 $ 36,847 $ 22,027
======= ======= =======
Mortgage-Backed Securities Maturity. The following table sets forth the
maturity and the weighted average coupon ("WAC") of the Savings Bank's
mortgage-backed securities portfolio at December 31, 1998 The table does not
include estimated prepayments. Adjustable-rate mortgage-backed securities are
shown as maturing based on contractual maturities.
Contractual Contractual
Held to Available-For-
Maturity Sale
Maturities Due WAC Maturities Due WAC
-------------- --- -------------- ---
(Dollars in thousands)
Less than 1 year......................... $ 2,355 6.57% $ 1,426 6.0%
1 to 3 years............................. 8,431 6.45 2,550 7.0
3 to 5 years............................. 2,399 7.22 7,218 6.96
5 to 10 years............................ 23,635 7.36 8,227 6.74
10 to 20 years........................... 27,260 6.88 2,725 6.42
Over 20 years............................ 116,884 6.85 53,139 6.53
------- ---- ------ ----
Total mortgage-backed securities......... $180,964 6.90% $75,285 6.60%
======= ==== ====== ====
Non-Performing and Problem Assets
Loan Collection. When a borrower fails to make a required payment on a
loan, the Savings 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 Savings 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 Savings
Bank to take legal action, which typically occurs after a loan is delinquent 90
days or more, the Savings Bank will commence foreclosure proceedings against any
real
12
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 Savings 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 Savings Bank may consider loan work-out
arrangements with these types of borrowers in certain circumstances.
On mortgage loans or loan participations purchased by the Savings Bank,
the Savings 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 Savings 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 Savings Bank and its servicing
agents.
Delinquent Loans. Generally, the Savings Bank reserves for uncollected
interest on loans past due 90 days or more. Loans also are placed on a
nonaccrual status when, in the judgment of management, the probability of
collection of interest is deemed to be insufficient to warrant further
collection. When a loan is placed on nonaccrual status, previously accrued but
unpaid interest is deducted from interest income.
Non-Performing Assets. The following table sets forth information
regarding non-accrual loans and real estate owned by the Savings Bank at the
dates indicated. The Savings Bank had no loans contractually past due 90 days or
more or for which accrued interest has been recorded. At December 31, 1998, the
Savings Bank had no restructured loans within the meaning of SFAS No. 15.
At December 31,
---------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- --------- --------- ---------
(Dollars in thousands)
Loans accounted for on a non-accrual basis:
Mortgage loans:
One- to four-family........................... $ 896 $ 776 $ 922 $ 999 $ 928
Commercial real estate and multi-family....... 97 -- -- 28 119
Consumer and other.............................. 609 606 1,050 776 639
----- ----- ----- ----- -----
Total non-accrual loans...................... $1,602 $1,382 $1,972 $1,803 $1,686
===== ===== ===== ===== =====
Real estate owned, net.......................... $ 308 $ 351 $ 112 $ 129 $ 139
Other non-performing assets..................... -- -- -- -- --
----- ----- ----- ----- -----
Total non-performing assets..................... $1,910 $1,733 $2,084 $1,932 $1,825
===== ===== ===== ===== =====
Total non-accrual loans to net loans............ 0.67% 0.55% 0.64% 0.76% 1.48%
===== ===== ===== ===== =====
Total non-accrual loans to total assets......... 0.24% 0.23% 0.30% 0.37% 0.39%
===== ===== ===== ===== =====
Total non-performing assets to total assets..... 0.29% 0.29% 0.32% 0.39% 0.42%
===== ===== ===== ===== =====
13
At December 31, 1998, the Company 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, 1998, the Company 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 Savings Bank's
internal watchlist because of potential weakness but that do not currently
warrant classification in one of the aforementioned categories.
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
problem assets as "loss," it is required either to establish a specific
allowance for losses equal to 100% of that portion of the asset so classified or
to charge off such amount. An institution's determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by the OTS, which may order the establishment of additional
general or specific loss allowances. A portion of general loss allowances
established to cover possible losses related to assets classified as substandard
or doubtful may be included in determining an institution's regulatory capital,
while specific valuation allowances for loan losses generally do not qualify as
regulatory capital.
14
The following table provides further information in regard to the
Savings Bank's classified assets as of December 31, 1998.
At
December 31,
1998
--------------
(In thousands)
Special mention assets.................... $ 0
Substandard............................... 2,357
Doubtful assets........................... 0
Loss ..................................... 0
-----
Total classified assets................ $2,357
=====
- ---------------------
(1) Substandard assets include approximately $447,000 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 Savings 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.
The Savings 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 Savings 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 and Real Estate Acquired in Settlement of
Loans. The Savings Bank provides valuation allowances for estimated losses from
uncollectible loans and real estate acquired in settlement of loans.
Management's periodic evaluation of the adequacy of the allowance for loan
losses is based on loss experience, known and inherent risk in the portfolio,
prevailing market conditions, and management's judgment as to collectibility.
The Savings Bank's determination as to the amount of its allowance for loan
losses is subject to review of the federal regulatory agencies, the OTS and
FDIC, which can order the establishment of additional general or specific loan
loss reserves. The allowance for loan losses is increased by charges to earnings
and decreased by charge-offs (net of recoveries). The Savings Bank provides
valuation allowances for losses on real estate acquired in settlement of loans
based on the lower of fair value, minus estimated cost to sell, or cost.
The allowance for loan losses is established through a provision for
loan losses based on management's evaluation of the risk inherent in its loan
portfolio and the general economy. Such evaluation, which includes a review of
all loans on which full collectibility may not be reasonably assured, considers
among other matters, the estimated fair value of the underlying collateral,
economic conditions, historical loan loss experience and other factors that
warrant recognition in providing for an adequate loan loss allowance.
15
The following table sets forth information with respect to the Savings
Bank's allowance for loan losses at the dates and for the periods indicated:
For the For the
Six Months Year
Ended Ended
For the Years Ended December 31, December 31, June 30,
----------------------------------------------------- ------------ ---------
1998 1997 1996 1995 1994 1994
---------- ---------- --------- ---------- ---------- ---------
(Dollars in thousands)
Balance at beginning of period...... $2,029 $1,806 $1,484 $1,473 $1,450 $1,656
Provision for loan losses........... 60 397 330 72 30 (144)
Charge-offs:
One- to four-family............... -- (1) -- (48) -- --
Commercial and multi-family
real estate loans................. -- -- -- -- -- (31)
Consumer and other loans(1)....... (180) (173) (8) (13) (7) (31)
Recoveries:
Commercial and multi-family
real estate loans................. -- -- -- -- -- --
Consumer and other loans(1)....... -- -- -- -- -- --
----- ----- ----- ----- ----- -----
Balance at end of year(2)........... $1,909 $2,029 $1,806 $1,484 $1,473 $1,450
===== ===== ===== ===== ===== =====
Ratio of net charge-offs during
the period to average loans
outstanding during the period..... 0.08% 0.06% 0.003% 0.04% 0.01% 0.04%
Ratio of allowance for loan
losses to non-performing
loans at the end of the period.... 119.16% 147.0% 91.6% 82.3% 87.3% 84.6%
Ratio of allowance for loan
losses to net loans receivable
at the end of period.............. 0.79% 0.81% 0.58% 0.62% 1.3% 1.2%
Ratio of allowance for loan
losses and foreclosed real
estate to total non-performing
assets at the end of period....... 116.07% 137.33% 92.03% 76.8% 81.3% 69.4%
- ---------------
(1) Consumer and other loan charge-offs for all periods presented are
almost solely comprised of commercial business loan losses.
(2) Third Federal had not incurred any material charge-offs or received any
material recoveries on the one-to four-family and consumer loan
portfolios for any of the periods presented.
16
The following table sets forth the allocation of the Savings 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,
------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------------- ------------------- ----------------- ------------------ ----------------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(Dollars in thousands)
At end of period
allocated to:
One- to four-family....... $1,205 62.9% $1,503 78.4% $1,330 73.7% $1,042 85.1% $ 990 67.2%
Commercial real estate
and multi-family......... 508 22.8 202 10.5 102 5.7 46 4.1 134 9.1
Construction.............. 97 2.2 37 2.0 24 1.3 24 1.6 8 0.5
Consumer and
other loans............. 99 12.1 287 9.1 350 19.3 372 9.2 341 23.2
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total allowance........... $1,909 100.0% $2,029 100.0% $1,806 100.0% $1,484 100.0% $1,473 100.0%
===== ===== ===== ===== ===== ===== ===== ===== ===== =====
17
Analysis of the Allowance for Real Estate Owned
At December 31,
------------------------------------
1998 1997 1996
----------- ----------- ----------
(Dollars in thousands)
Total real estate owned and in
judgment............................. $308 $359 $116
=== === ===
Allowance balances - beginning......... 8 3 --
Provision.............................. -- 5 3
Charge-offs............................ 8 -- --
--- --- ---
Allowance balances - ending............ $ 0 $ 8 $ 3
=== === ===
Allowance for losses on real
estate owned and in judgment
to net real estate owned and in
judgment............................... 0% 2.2% 2.5%
=== === ===
Investment Activities
The investment policy of the Savings 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 Savings Bank's lending activities. In establishing its investment
strategies, the Savings 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.
18
The following table sets forth certain information regarding the
amortized cost and market values of the Savings Bank's investments at the dates
indicated.
At December 31,
-------------------------------------------------------------------------------------------
1998 1997 1996
----------------------- ------------------------- --------------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
--------- -------- --------- -------- --------- ---------
(In thousands)
Interest-earning deposits......... $ 19,267 $ 19,267 $ 25,628 $ 25,628 $ 38,120 $ 38,120
======= ======= ======= ======= ======= =======
Investment securities held-to- maturity:
U.S. government and agency
obligations................... $ 73,612 $ 73,747 $ 50,278 $ 50,433 $ 34,976 $ 34,854
State and political
subdivisions.................. 4,283 4,361 2,544 2,593 3,068 3,040
Corporate debt securities....... 3,000 2,986 0 0 500 499
------- ------- ------- ------- ------- -------
Total......................... $ 80,895 $ 81,094 $ 52,822 $ 53,026 $ 38,544 $ 38,393
======= ======= ======= ======= ======= =======
Securities available-for-sale:
U.S. government and agency
obligations................... $ 8,000 $ 8,045 $ 31,254 $ 31,327 $ 11,976 $ 12,015
Corporate Debt
Securities................... 500 500 -- -- -- --
Equity securities
(SLMA stock).................. -- -- 10 210 10 139
Mutual funds.................... 500 497 500 500 500 498
------- ------- ------- ------- ------- -------
Total......................... $ 9,000 $ 9,042 $ 31,764 $ 32,037 $ 12,486 $ 12,652
======= ======= ======= ======= ======= =======
19
Investment Portfolio Maturities
The following table sets forth certain information regarding the
carrying values, weighted average yields and maturities of the Savings Bank's
investment securities portfolio, exclusive of interest-earning deposits, at
December 31, 1998.
One Year One to Five to More than Total
or Less Five Years Ten Years Ten Years Investment Securities(2)
----------------- ----------------- ---------------- ---------------- ------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Market
Value Yield Value Yield Value Yield Value Yield Value Yield Value
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
(Dollars in thousands)
U.S. government obligations... $ -- --% $ 5,037 6.25% $ -- --% $ -- --% $ 5,037 6.25% $ 5,130
U.S. agency obligations....... 32,829 5.04 23,544 6.15 18,247 6.22 2,000 8.33 76,620 5.75 76,662
Municipal obligations......... -- -- 425 4.50 830 4.46 3,028 5.19 4,283 4.98 4,361
Corporate obligations......... 500 2.25 3,000 5.50 -- -- -- -- 3,500 5.04 3,486
Other securities(1)........... 497 5.58 -- -- -- -- -- -- 497 5.58 497
------ ---- ------ ---- ------ ----- ----- ------ -------- ----- -------
Total....................... $33,826 5.01% $32,006 6.08% $19,077 6.14% $5,028 6.44% $89,937 5.71% $90,136
====== ==== ====== ==== ====== ==== ===== ==== ====== ==== ======
- ------------
(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 $9.0 million of U.S. government and agency obligations and
other investments which are carried as available-for-sale at December
31, 1998. Investment securities available-for-sale are carried at
market value.
20
Sources of Funds
General. Deposits, borrowings, loan repayments and cash flows generated
from operations are the primary sources of the Savings Bank's funds for use in
lending, investing and other general purposes.
Deposits. The Savings Bank offers a variety of deposit accounts having
a range of interest rates and terms. The Savings Bank's deposits consist of
regular savings, non-interest bearing checking, NOW checking, money market, and
certificate accounts. Of the deposit accounts, $32.3 million or 7.37% consist of
IRA, Keogh or SEP retirement accounts at December 31, 1998.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates and
competition. The Savings Bank's deposits are primarily obtained from areas
surrounding its offices, and the Savings Bank relies primarily on customer
service and long-standing relationships with customers to attract and retain
these deposits. The Savings 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,
1998, core deposits amounted to 56.87% of total deposits.
21
The following table sets forth the distribution of the Savings Bank's
deposit accounts at the dates indicated and the weighted average nominal
interest rates on each category of deposits presented. The Savings Bank does not
have a 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,
-------------------------------------------------------------------------------------------------
1998 1997 1996
-------------------------------- ----------------------------- ------------------------------
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.................. $ 44,971 10.25% 1.12% $ 40,360 9.00% 1.01% $ 42,513 9.06% 0.98%
Money market accounts...... 32,556 7.42 3.37 32,777 7.28 3.32 29,970 6.39 3.54
Non-interest-bearing
checking accounts........... 6,231 1.42 -- 5,037 1.12 -- 3,741 0.80 --
------- ------ ------- ------ ------- -----
Total transaction accounts... 83,758 19.09 78,174 17.35 76,224 16.25
Fixed-rate passbook accounts. 122,213 27.84 2.50 122,952 27.30 2.50 127,213 27.12 3.00
Adjustable-rate passbook
accounts.................... 43,651 9.95 4.13 51,277 11.38 4.97 60,452 12.89 4.88
------- ------ ------- ----- ------- ------
Total.................. 165,864 37.79 174,229 38.68 187,665 40.01
------- ------ ------- ----- ------- ------
Certificate accounts:
90-day certificates........ 1,350 0.31 3.41 1,340 0.30 3.49 2,354 0.50 3.96
Six-month certificates..... 29,257 6.66 4.03 10,743 2.38 4.04 18,861 4.02 4.44
Seven-month certificates... 203 0.05 3.92 480 0.11 4.27 3,555 0.76 4.93
Eight-month certificates... 61 0.01 5.40 33,155 7.38 5.49 -- -- --
Nine-month certificates.... 3,824 0.87 4.40 2,936 0.65 4.07 13,116 2.80 4.96
Ten-month certificates..... 11,881 2.71 5.20 3,300 0.73 4.33 19,341 4.12 5.29
One-year certificates...... 36,288 8.26 4.68 19,599 4.35 4.69 55,586 11.85 5.28
15-month certificates...... 16,365 3.73 5.63 28,433 6.31 5.70 1,450 0.31 5.54
17-month certificates...... -- -- -- 5,770 1.28 5.74 8,801 1.88 5.53
18-month certificates...... 3,966 0.90 4.80 6,807 1.51 5.50 5,052 1.08 4.83
21-month certificates...... 166 0.04 4.44 256 0.06 5.07 677 0.14 5.20
Two-year certificates...... 22,774 5.19 5.22 30,445 6.76 5.84 22,632 4.82 5.65
25-month certificates...... 7,683 1.75 5.00 12,537 2.78 5.91 8,666 1.85 5.81
30-month certificates...... 5,385 1.23 4.86 6,419 1.42 5.06 8,539 1.82 5.45
Three-year certificates.... 29,228 6.66 5.80 10,780 2.39 5.85 9,628 2.05 5.55
Four year certificates..... 2,434 0.55 5.57 2,575 0.57 5.66 2,645 0.56 5.48
54 month certificates...... 2,995 0.68 5.41 1,974 0.44 5.92 1,975 0.42 5.83
Five year certificates..... 13,722 3.13 5.58 18,341 4.07 5.49 19,356 4.13 5.35
Six-year certificates...... 210 0.05 5.48 165 0.04 5.48 211 0.04 5.34
Seven-year certificates.... -- -- -- 1 -- 7.40 1 -- 7.30
Eight-year certificates.... 91 0.02 5.92 88 0.02 5.92 99 0.02 5.80
10-year.................... 800 0.18 6.50 1,072 0.24 7.71 1,398 0.30 7.85
Jumbo certificates(1)...... 608 0.14 6.39 810 0.18 5.00 1,256 0.27 5.40
------- ------ ---- ------- ----- ---- ------- ----- -----
Total certificate accounts 189,291 43.12 5.02 198,026 43.97 5.38 205,199 43.74 5.30
------- ------ ---- ------- ----- ---- ------- ----- -----
Total deposits............... $438,913 100.00% 3.66% $450,429 100.00% 3.95% $469,088 100.00% 4.08%
======= ====== ==== ======= ====== ==== ======= ====== ====
(1) The $608,000 in jumbo certificates of deposit shown at December 31, 1998
does not include certificate deposits in excess of $100,000 with interest
compounded on a daily basis. The jumbo certificate category includes only
certificate deposits in excess of $100,000 with simple interest paid on an
annual basis at a premium of .25% over posted interest rates.
22
At December 31, 1998, the Savings 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.................... $ 2,696
Over three through six months........... 2,633
Over six through 12 months.............. 3,139
Over 12 months.......................... 4,785
------
Total............................... $13,253
======
The following table presents, by various rate categories, the amount of
time deposits outstanding at December 31, 1998, 1997 and 1996, and the periods
to maturity of the certificate accounts outstanding at December 31, 1998.
Period to Maturity from
December 31, 1998
----------------------------------------
Within At December 31,
One One to ------------------------------------------
Year Three Years Thereafter 1998 1997 1996
---------- ------------ ---------- ----------- ---------- -----------
(In thousands)
Time deposits:
2.00% to 2.99%.......... $ -- $ -- $ -- $ -- $ 18 $ 17
3.00% to 3.99%.......... 22,430 394 -- 22,824 16,897 2,927
4.00% to 4.99%.......... 47,736 8,922 1,075 57,733 37,455 61,355
5.00% to 5.99%.......... 59,853 27,528 6,829 94,210 136,860 129,935
6.00% to 6.99%.......... 2,666 10,790 592 14,048 5,944 9,633
7.00% to 7.99%.......... 39 95 74 208 314 628
8.00% to 8.99%.......... 221 -- -- 221 453 596
9.00% to 9.99%.......... 47 -- -- 47 85 108
------- ------ ----- ------- ------- -------
Total.............. $132,992 $47,729 $8,570 $189,291 $198,026 $205,199
======= ====== ===== ======= ======= =======
23
Borrowings
Deposits are the primary source of funds of the Savings Bank's lending
and investment activities and for its general business purposes. The Savings
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 Savings Bank's stock in the FHLB of Pittsburgh and a portion of
the Savings Bank's first mortgage loans and certain other assets. The Savings
Bank, if the need arises, may also access the Federal Reserve Bank discount
window to supplement its supply of lendable funds and to meet deposit withdrawal
requirements. The following table sets forth the maximum month-end balance
period and 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,
----------------------------------
1998 1997 1996
-------- -------- -------
(Dollars in thousands)
FHLB advances...................... $163,359 $88,359 $98,359
======= ====== ======
Weighted average interest rate..... 5.77% 6.03% 5.98%
Years Ended December 31,
---------------------------------------
1998 1997 1996
-------- -------- --------
(Dollars in thousands)
Maximum balance of
FHLB advances outstanding........ $163,359 $ 98,359 $ 98,359
======= ======= =======
Weighted average balance of
FHLB advances outstanding......... $163,359 $ 97,837 $ 89,343
======= ======= =======
Weighted average interest rate
of FHLB advances.................. 5.77% 6.0% 5.99%
======= ======= =======
Subsidiary Activity
Third Federal 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, 1998, Third Federal was authorized to invest up to
approximately $13.4 million in the stock of, or loans to, service corporations
(based upon the 2% limitation). At December 31, 1998, the Savings Bank had one
active subsidiary.
Personnel
As of December 31, 1998, the Savings Bank had 137 full-time and 12
part-time employees. None of the Savings Bank's employees are represented by a
collective bargaining group. The Savings Bank believes that its relationship
with its employees is good.
24
Executive Officers of the Registrant
Executive Officers of the Savings Bank and Company (these individuals
have held their respective positions with the Company since March 1994):
Carl F. Gregory is Chairman of the Savings Bank. Mr. Gregory was Chief
Executive Officer of the Savings Bank and of the Company from April 1982 until
December 1994. He has been with the Savings Bank since 1962 and will continue to
represent Third Federal throughout the communities that the Savings Bank serves
in his role as Chairman of the Savings Bank and Director of the Company.
John R. Stranford has been with the Savings Bank since 1968. He
presently serves as President, Chief Executive Officer, Chief Operating Officer
and Director of the Savings Bank and Company. Mr. Stranford has served as Chief
Operating Officer of the Savings Bank since 1984 and President of the Savings
Bank since January 1994. Prior to that time he served in various capacities as
an officer of the Savings Bank.
William C. Niemczura has been with the Savings Bank as an officer since
1987. Prior to his current position as Senior Vice President and Chief Financial
Officer, Mr. Niemczura was Assistant Vice President and Vice President-Lending.
Mr. Niemczura is Senior Vice President, Treasurer and Chief Financial Officer of
the Company.
Elizabeth Davidson Maier is Senior Vice President and Secretary of the
Savings Bank and the Company and has been with the Savings Bank since 1964. Ms.
Maier has been an officer of the Savings Bank since 1974. Prior to that, Ms.
Maier held various positions at the Savings 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 1998 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 Savings 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.
Company Regulation
General. The Company is a unitary savings and loan holding company
subject to regulatory oversight by the OTS. As such, the Company is required to
register and file reports with the OTS and is subject to regulation and
examination by the OTS. In addition, the OTS has enforcement authority over the
Company and its non-savings association subsidiaries, should such subsidiaries
be formed, which also permits the OTS to restrict or prohibit activities that
are determined to be a serious risk to the subsidiary savings association. This
regulation and oversight is intended primarily for the protection of the
depositors of the Savings Bank and not for the benefit of stockholders of the
Company. The Company is also required to file certain reports with, and
otherwise comply with, the rules and regulations of the OTS and the SEC.
QTL Test. As a unitary savings and loan holding company, the Company
generally is not subject to activity restrictions, provided the Savings 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
25
holding company, and the activities of the Company and any of its subsidiaries
(other than the Savings 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.
Savings Bank Regulation
General. As a federally chartered, SAIF-insured savings association,
the Savings 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 Savings Bank is also subject to
certain reserve requirements promulgated by the Federal Reserve Board.
The OTS, in conjunction with the FDIC, regularly examines the Savings
Bank and prepares reports for the consideration of the Savings Bank's Board of
Directors on any deficiencies that they find in the Savings Bank's operations.
The Savings 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 Savings Bank's
mortgage documents.
The Savings 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 Savings Bank
and their operations. The Company is also required to file certain reports with,
and otherwise comply with, the rules and regulations of the OTS and the SEC.
Insurance of Deposit Accounts. The Savings 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 Savings 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.
26
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.
The following table sets forth the Savings Bank's compliance with its
regulatory capital requirements as of December 31, 1998:
Amount Percent
------ -------
(Dollars in thousands)
Tangible capital............................. $45,034 6.79%
Tangible capital requirement................. 9,943 1.50
------ -----
Excess over requirement...................... $35,091 5.29%
====== =====
Core Capital................................. $45,034 6.79%
Core Capital requirement..................... 26,515 4.00
------ -----
Excess over requirement...................... $18,519 2.79%
====== =====
Risk-based capital........................... $46,943 17.73%
Risk-based capital requirement............... 21,178 8.00
------ -----
Excess over requirement...................... $25,765 9.73%
====== =====
Dividend and Other Capital Distribution Limitations. OTS regulations
require the Savings Bank to give the OTS 30 days' advance notice of any proposed
declaration of dividends to the Company, and the OTS has the authority under its
supervisory powers to prohibit the payment of dividends to the Company. In
addition, the Savings 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
Savings Bank below the amount required for the liquidation account to be
established pursuant to the Savings Bank's Plan of Conversion.
In January 1999, the OTS issued an amendment to its current regulations
with respect to capital distributions by savings associations. The amended
regulations will be effective April 1, 1999. Under the new regulation, savings
associations that would remain at least adequately capitalized following the
capital distribution, and that meet other specified requirements, would not be
required to file a notice or application for capital distributions (such as cash
dividends) declared below specified amounts. Under the new regulation, savings
associations which are eligible for expedited treatment under current OTS
regulations are not required to file a notice or an application with the OTS if
(i) the savings association would remain at least adequately capitalized
following the capital distribution and (ii) the amount of capital distribution
does not exceed an amount equal to the savings association's net income for that
year to date, plus the savings association's retained net income for the
previous two years. Thus, under the new regulation, 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
27
in excess of the specified amount, must file an application with, and obtain the
approval of, the OTS prior to making the capital distribution. A savings
association that is a subsidiary of a savings and loan holding company, and
under certain other circumstances, will be required to file a notice with OTS
prior to making the capital distribution. The new OTS limitations on capital
distributions are similar to the limitations imposed upon national banks.
Qualified Thrift Lender Test. The Home Owners' Loan Act ("HOLA"), as
amended, requires savings institutions to meet a QTL test. If the Savings 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, 1998, the Savings Bank was in
compliance with its QTL requirement with 83.0% of its assets invested in QTIs.
A savings association that does not meet a QTL test must either convert
to a bank charter or comply with the following restrictions on its operations:
(i) the savings association may not engage in any new activity or make any new
investment, directly or indirectly, unless such activity or investment is
permissible for a national bank; (ii) the branching powers of the savings
association shall be restricted to those of a national bank; (iii) the savings
association shall not be eligible to obtain any advances from its FHLB; and (iv)
payment of dividends by the savings association shall be subject to the rules
regarding payment of dividends by a national bank. Upon the expiration of three
years from the date the savings association ceases to be a QTL, it must cease
any activity and not retain any investment not permissible for a national bank
and immediately repay any outstanding FHLB advances (subject to safety and
soundness considerations).
Liquidity Requirements. All savings associations are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings associations. At the present time, the required liquid
asset ratio is 4%. At December 31, 1998, the Savings Bank's liquidity ratio was
28.69%.
Federal Home Loan Bank System. The Savings Bank is a member of the FHLB
of Pittsburgh, which is 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 Savings 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, 1998, the Savings
Bank had $9.2 million in FHLB stock, which was in compliance with this
requirement.
28
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, 1998, the Savings Bank's total transaction accounts required a reserve level
of $1,788,000 which was entirely offset by the Bank's vault cash on hand.
Savings associations have authority to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve policy generally requires savings
associations to exhaust all OTS sources before borrowing from the Federal
Reserve System. The Savings Bank had no such borrowings at December 31, 1998.
Item 2. Description of Property
- ---------------------------------
The Company is located and conducts its business at 3 Penns Trail,
Newtown, Pennsylvania. The Savings Bank operates from its main office and 13
branch offices located in Philadelphia and Bucks Counties, Pennsylvania and
Mercer County, New Jersey. The Savings Bank also owns two lots, one of which has
a building, behind its Doylestown branch office. The building is leased to a
third-party and the other is used as a parking lot for employees and tenants of
Third Federal. The net book value of the two lots was $102,000 at December 31,
1998. In addition, the Savings Bank owns a vacant lot at Newtown Yardley Road
and Friends Lane, Newtown, Pennsylvania. This lot was purchased in 1993 for
future expansion and had a net book value of $1.1 million at December 31, 1998.
The following table sets forth certain information regarding the
Savings Bank's properties:
Leased or Leased or
Location Owned Location Owned
- ------------------ ------------ ------------------ --------------
MAIN OFFICE
Newtown Office
3 Penns Trail
Newtown, PA 18940 Owned
BRANCH OFFICES
Frankford Office Newtown Office
4625 Frankford Avenue 950 Newtown Yardley Road
Philadelphia, PA 19124 Owned Newtown, PA 18940 Leased
Princeton Office Ewing Office
Princeton Shopping Center 2075 Pennington Road
301 N. Harrison Street Leased Trenton, NJ 08618 Owned
Princeton, NJ 08540
29
Leased or Leased or
Location Owned Location Owned
---------------- ------------ ------------------ --------------
Hamilton Office Mayfair Office
1850 Route 33 Roosevelt Blvd. at Unruh
Hamilton Square, NJ 08690 Owned Philadelphia, PA 19149 Owned
Fishtown Office Doylestown Office
York & Memphis Streets 60 North Main Street
Philadelphia, PA 19125 Owned Doylestown, PA 18901 Owned
Cross Keys Office Administrative Office
834 North Easton Highway 62 Walker Lane
Doylestown, PA 18901 Owned Newtown, PA 18940(1) Owned
Woodhaven Office
Knights Road Center Warminster Office
4014 Woodhaven Road 601 Louis Drive
Philadelphia, PA 19154 Leased Warminster, PA 18974 Leased
Bridgesburg Office Feasterville Office
Orthodox & Almond Streets Buck Hotel Complex
Philadelphia, PA 19137 Owned Feasterville, PA 19053 Leased
New Britain Office
100 Town Center
New Britain, PA 18901 Leased
- ------------------------
(1) This office serves as administrative offices, check processing,
training center, mail processing and storage center for the Savings
Bank
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.
30
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
- -----------------------------------------------------------------
Information relating to the market for Registrant's common equity and
related stockholder matters appears under "Stock Market Information" in the
Registrant's 1998 Annual Report to Stockholders on pages 2 and 3, and is
incorporated herein by reference.
Item 6. Selected Financial Data
- --------------------------------
The above-captioned information appears under "Selected Financial and
Other Data" in the Registrant's 1998 Annual Report to Stockholders on pages 4
and 5, and is incorporated herein by reference.
31
Item 7. Management's Discussion and Analysis of Financial Conditions and Results
of Operations
- --------------------------------------------------------------------------------
Rate/Volume Analysis
The table below sets forth certain information regarding changes in
interest income and interest expense of the Savings Bank for the periods
indicated. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to (i) changes in
volume (changes in average volume multiplied by old rate); (ii) changes in rates
(changes in rate multiplied by old average volume); (iii) total changes in
rate-volume. The combined effects of changes in both volume and rate, which
cannot be separately identified, have been allocated proportionately to the
change due to volume and the change due to rate.
Years Ended Years Ended Years Ended
------------------------ ----------------------- ----------------------
December 31 December 31 December 31 December 31 December 31, June 30
1998 vs 1997 1997 vs 1996 1996 vs 1995
------------------------ ----------------------- ----------------------
Increase (Decrease) Increase (Decrease) Increase (Decrease)
Due to Due to Due to
-------------------- -------------------- ------------------
Volume Rate Net Volume Rate Net Volume Rate Net
-------- ------- -------- --------- ------- -------- --------- ------- --------
(In thousands)
Interest income:
Loans receivable............... (4,810) 417 (4,393) $ (510) 443 (67) $11,645 $ (30) $11,615
Mortgage-backed securities(1).. 3,483 360 3,843 1,443 31 1,474 (699) (137) (836)
Investment securities(1)....... 1,053 182 1,235 2,887 68 2,955 (982) -- (982)
Securities purchased under
agreements to resell........... 325 70 395 -- -- --
Other interest-earning assets.. 91 (386) (295) 443 (1000) (557) (14) (424) (438)
------ ------ ------ ----- ----- ------ ------ ----- ------
Total interest-earning assets $ (183) $ 573 $ 390 $4,588 $ (388) $4,200 $ 9,950 $(591) $ 9,359
====== ====== ====== ===== ===== ===== ====== ===== ======
Interest expense:
Savings deposits............... $ 325 $(1,139) $ (814) $2,922 $ 550 $3,472 $ 1,734 $(363) $ 1,371
Borrowed money................. 2,734 195 2,929 145 (334) (189) 4,866 157 5,023
------ ------ ------ ----- ----- ----- ------ ----- ------
Total interest bearing
liabilities............... $ 3,059 (944) $ 2,115 $3,067 216 $3,283 $ 6,600 $(206) $ 6,394
====== ====== ====== ===== ===== ====== ====== ===== ======
Net change in interest income... $(3,242) 1,517 $(1,725) $1,521 (604) $ 917 $ 3,350 $(385) $ 2,965
====== ====== ====== ===== ===== ===== ====== ===== ======
- ------------------------
(1) Includes interest income on investment securities held-for-sale.
32
The remaining above-captioned information appears under Management's
Discussion and Analysis of Financial Condition and Results of Operations in the
Registrant's 1998 Annual Report to Stockholders on pages 6 through 8 and is
incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
- --------------------------------------------------------------------
Asset and Liability Management
Managing Interest Rate Risk. Interest rate risk is defined as the
sensitivity of the Company's current and future earnings as well as its capital
to changes in the level of market interest rates. The Bank's exposure to
interest rate risk results from, among other things, the difference in
maturities in interest-earning assets and interest-bearing liabilities. Since
the Bank's assets currently have a longer maturity than its liabilities, the
Bank's earnings could be negatively impacted during a period of rising interest
rates and conversely, positively impacted during a period of falling interest
rates. The relationship between the interest rate sensitivity of the Bank's
assets and liabilities is continually monitored by management. In this regard,
the Bank emphasizes the origination of shorter term or adjustable rate assets
for portfolio while originating longer term fixed rate assets for resale. At
December 31, 1998, approximately 84.73% of the Bank's loan portfolio were
comprised of loans with original maturities of less than 15 years, balloon
mortgages or adjustable rate loans. Additionally, the origination level of fixed
rate assets are continually monitored and if deemed appropriate, the Bank will
enter into forward commitments for the sale of these assets to ensure the Bank
is not exposed to undue interest rate risk.
The Bank utilizes its investment and mortgage-backed security portfolio
in managing its liquidity and therefore seeks securities with a stated or
average estimated maturities of less than five years. These securities are
readily marketable and provide the Bank with a cash flow stream to fund asset
growth or liability maturities.
A significant portion of the Bank's assets has been funded with CDs
including jumbo CDs. Unlike other deposit products such as checking and savings
accounts, CDs carry a high degree of interest rate sensitivity and therefore,
their renewal will vary based on the competitiveness of the Bank's interest
rates. The Bank has attempted to price its CDs to be competitive at the shorter
maturities (i.e., maturities of less than one year) in order to better match the
repricing characteristics of portfolio loans. At December 31, 1998,
approximately 43.13% 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, 1998,
the Bank did not have any hedging transactions in place such as interest rate
swaps, caps, or floors.
33
GAP analysis is a useful measurement of asset and liability management.
However, it is difficult to predict the effect of changing interest rates based
solely on this measure. An additional analysis required by the OTS and generated
quarterly is the OTS Interest Rate Exposure Report. 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, 1998 are
as follows:
MVPE
- --------------------------------------------------------------------------------
Amount
Change in Interest Rate (In Thousands) % Change
+400 Basis Points $45,844 -11.78%
+300 Basis Points 48,983 -5.74%
+200 Basis Points 51,579 -.74%
+100 Basis Points 52,888 1.78%
Flat Rate 51,965 0
- -100 Basis Points 48,612 -6.45%
- -200 Basis Points 43,472 -16.34%
- -300 Basis Points 38,944 -25.06%
- -400 Basis Points 32,593 -37.28%
Management believes that the assumptions utilized in evaluating the
vulnerability of the Company's earnings and capital to changes in interest rates
approximate actual experience; however, the interest rate sensitivity of the
Bank's assets and liabilities as well as the estimated effect of changes in
interest rates on MVPE could vary substantially if different assumptions are
used or actual experience differs from the experience on which the assumptions
were based.
In the event the Bank should experience a mismatch in its desired GAP
ranges or an excessive decline in its MVPE subsequent to an immediate and
sustained change in interest rate, it has a number of options which it could
utilize to remedy such mismatch. 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
- -----------------------------
The Consolidated Financial Statements of TF Financial Corporation and
its subsidiaries are included in the Registrant's 1998 Annual Report to
Stockholders on ages 20 through 62 and are incorporated herein by reference.
Item 9. Change In and Disagreements with Accountants on Accounting and Financial
Disclosure
- --------------------------------------------------------------------------------
None.
34
PART III
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
The information contained under the section captioned "Information with
Respect to Nominees for Director, Directors Continuing in Office and Executive
Officers -- General Information and Nominees" at pages 3 to 5 of the
Registrant's definitive proxy statement for the Registrant's 1999 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 Registrant's Proxy Statement at pages 6 through 9.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
The information relating to security ownership of certain beneficial
owners and management is incorporated herein by reference to the Registrant's
Proxy Statement at pages 2 and 3.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information relating to certain relationships and related
transactions is incorporated herein by reference to the Registrant's Proxy
Statement at page 15.
35
PART IV
Item 14. Exhibits and Reports on Form 8-K
- ------------------------------------------
(a) The following documents are filed as a part of this report:
(1) Financial Statements of the Company are incorporated by reference
to the following indicated pages of the 1998 Annual Report to Stockholders.
PAGE
----
Independent Auditors' Report.......................................................... 19
Consolidated Statements of Financial Position as of December 31, 1998 and 1997........ 20
Consolidated Statements of Earnings For the Years Ended
December 31, 1998, 1997 and 1996.................................................... 21
Consolidated Statement of Changes in Stockholders' Equity and Comprehensive
Income for the Years Ended December 31, 1998, 1997 and 1996........................... 22
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996.................................................... 24
Notes to Consolidated Financial Statements............................................ 26
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.
(3) Exhibits
(a) The following exhibits are filed as part of this report.
3.1 Certificate of Incorporation of TF Financial Corporation*
3.2 Bylaws of TF Financial Corporation*
4.0 Stock Certificate of TF Financial Corporation*
4.1 The Company's Rights Agreement dated November 22, 1995**
10.1 Third Federal Savings and Loan Association Management Stock
Bonus Plan*
10.2 TF Financial Corporation 1994 Stock Option Plan*
10.3 Third Federal Savings Bank Directors Consultation and
Retirement Plan***
10.4 TF Financial Corporation Incentive Compensation Plan***
10.5 Severance Agreement with John R. Stranford***
10.6 Severance Agreement with Thomas J. Sposito II****
10.7 Severance Agreement with William C. Niemczura***
10.8 Severance Agreement with Earl A. Pace, Jr.
10.9 TF Financial Corporation 1997 Stock Option Plan****
11.0 Statement re Computation of Per Share Earnings
13.0 1998 Annual Report to Stockholders
21.0 Subsidiary Information
36
23.0 Consent of Independent Auditor
27.0 Financial Data Schedule
(b) Reports on Form 8-K.
None.
- ------------------------
* Incorporated herein by reference from the Exhibits to Form S-1,
Registration Statement, File No. 33-76960.
** Incorporated herein by reference to the Registrants Form 8-A filed with
the Securities and Exchange Commission on November 22, 1995.
*** Incorporated herein by reference to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1995.
**** Incorporated herein by reference to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997.
37
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 24, 1999 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,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/ John R. Stranford By: /s/ William C. Niemczura
----------------------------------- -------------------------------
John R. Stranford William C. Niemczura
President, Chief Executive Officer Senior Vice President, Chief
and Director Financial Officer and Treasurer
(Principal Executive Officer) (Principal Financial and
Accounting Officer)
Date: March 24, 1999 Date: March 24, 1999
By: /s/ Carl F. Gregory By: /s/ Robert N. Dusek
----------------------------------- -------------------------------
Carl F. Gregory Robert N. Dusek
Director Chairman of the Board
Date: March 24, 1999 Date: March 24, 1999
By: /s/ Thomas J. Gola By: /s/ George A. Olsen
----------------------------------- -------------------------------
Thomas J. Gola George A. Olsen
Director Director
Date: March 24, 1999 Date: March 24, 1999