SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

ý                                 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the period ended March 31, 2005

 

- or -

 

o                                 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from               to               

 

Commission file number:  0-24168

 

TF FINANCIAL CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware		74-2705050
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)
3 Penns Trail, Newtown, Pennsylvania		18940
(Address of Principal Executive Offices)		(Zip Code)

 

Registrant’s telephone number, including area code:  (215) 579-4000

 

Securities registered pursuant to Section 12(b) of the Act:  None

 

Securities registered pursuant to Section 12(g) of the Act:

 

Common Stock, par value $.10 per share

(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 ý  NO o

 

Indicate by check mark whether the registrant is an accelerated filer as defined in Exchange Act Rule 12b-2.  YES o  NO ý

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: May 6, 2005

 

	Class		Outstanding
	$.10 par value common stock		2,952,473 shares

 

 

 

CONTENTS

 

PART I-CONSOLIDATED FINANCIAL INFORMATION
	Item1.	Consolidated Financial Statements
	Item 2.	Management’s Discussion and Analysis of Financial Position and Results of Operations
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk
	Item 4.	Controls and Procedures
	PART II-OTHER INFORMATION
	Item1.	Legal Proceedings
	Item 2.	Unregistered Sale of Equity Securities and Use of Proceeds
	Item 3.	Defaults Upon Senior Securities
	Item 4.	Submission of Matters to a Vote of Security Holders
	Item 5.	Other Information
	Item 6.	Exhibits
	Signatures
	Exhibits
	31. Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	32. Certification pursuant of Section 906 of the Sarbanes-Oxley Act of 2002

 

2

 

TF Financial Corporation and Subsidiaries

 

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

 

		Unaudited March 31, 2005			Audited December 31, 2004
		(in thousands)
ASSETS
Cash and cash equivalents		$	4,674		$	7,900
Certificates of deposit in other financial institutions		38			38
Investment securities available for sale—at fair value		20,202			17,625
Investment securities held to maturity (fair value of $7,100 and $7,188 respectively)		7,010			7,027
Mortgage-backed securities available for sale—at fair value		103,534			103,610
Mortgage-backed securities held to maturity (fair value of $14,453 and $15,546, respectively)		13,991			14,900
Loans receivable, net (including loans held for sale of $189 and $680, respectively)		454,412			442,195
Federal Home Loan Bank stock—at cost		7,711			7,460
Accrued interest receivable		2,451			2,500
Premises and equipment, net		6,045			5,963
Core deposit intangible asset, net of accumulated amortization of $2,645 and $2,611, respectively		179			213
Goodwill		4,324			4,324
Other assets		15,940			15,211
TOTAL ASSETS		$	640,511		$	628,966
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Deposits		$	454,871		$	459,903
Advances from the Federal Home Loan Bank		119,361			102,747
Advances from borrowers for taxes and insurance		1,703			1,778
Accrued interest payable		2,196			1,638
Other liabilities		1,513			1,745
Total liabilities		579,644			567,811
Stockholders’ equity
Preferred stock, no par value; 2,000,000 shares authorized at March 31, 2005 and December 31, 2004, none issued		—			—
Common stock, $0.10 par value; 10,000,000 shares authorized, 5,290,000 shares issued, 2,752,976 and 2,742,345 shares outstanding at March 31, 2005 and December 31, 2004, respectively, net of shares in treasury 2,339,537 and 2,345,746 respectively		529			529
Retained earnings		58,411			57,428
Additional paid-in capital		51,650			51,675
Unearned ESOP shares		(1,975		)	(2,019		)
Treasury stock—at cost		(46,264		)	(46,081		)
Accumulated other comprehensive loss		(1,484		)	(377		)
Total stockholders’ equity		60,867			61,155
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	640,511		$	628,966

 

The accompanying notes are an integral part of these statements

 

3

 

TF Financial Corporation and Subsidiaries

 

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

		For the three months ended March 31, (in thousands, except per share data)
		2005			2004
Interest income
Loans, including fees		$	6,471		$	5,990
Mortgage-backed securities		1,303			1,457
Investment securities		313			280
Interest-bearing deposits and other		10			3
TOTAL INTEREST INCOME		8,097			7,730
Interest expense
Deposits		1,536			1,506
Borrowings		931			646
TOTAL INTEREST EXPENSE		2,467			2,152
NET INTEREST INCOME		5,630			5,578
Provision for loan losses		150			150
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		5,480			5,428
Non-interest income
Service fees, charges and other operating income		640			709
Gain on sale of loans		22			—
TOTAL NON-INTEREST INCOME		662			709
Non-interest expense
Employee compensation and benefits		2,391			2,274
Occupancy and equipment		661			595
Federal deposit insurance premium		17			18
Professional fees		226			206
Marketing and advertising		176			163
Other operating		626			621
Amortization of core deposit intangible asset		34			40
TOTAL NON-INTEREST EXPENSE		4,131			3,917
INCOME BEFORE INCOME TAXES		2,011			2,220
Income taxes		535			611
NET INCOME		$	1,476		$	1,609
Earnings per share—basic		$	0.54		$	0.61
Earnings per share—diluted		$	0.52		$	0.57
Dividends paid		$	0.18		$	0.15

 

The accompanying notes are an integral part of these statements

 

4

 

TF Financial Corporation and Subsidiaries

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		For the three months ended March 31,
		2005			2004
		(in thousands)
OPERATING ACTIVITIES
Net income		$	1,476		$	1,609
Adjustments to reconcile net income to net cash provided by operating activities
Amortization of
Mortgage loan servicing rights		1			—
Deferred loan origination fees		(29		)	(8		)
Premiums and discounts on investment securities, net		19			21
Premiums and discounts on mortgage-backed securities, net		151			224
Premiums and discounts on loans, net		32			25
Core deposit intangibles		34			40
Provision for loan losses		150			150
Depreciation of premises and equipment		235			234
Increase in value of bank-owned life insurance		(122		)	(132		)
Stock-based benefit programs		137			144
Gain on sale of
Real estate acquired through foreclosure		—			(1		)
Mortgage loans available for sale		(22		)	—
(Increase) decrease in
Accrued interest receivable		49			241
Other assets		(292		)	842
Increase (decrease) in
Accrued interest payable		558			397
Other liabilities		20			(226		)
NET CASH PROVIDED BY OPERATING ACTIVITIES		2,397			3,560
INVESTING ACTIVITIES
Loan originations		(36,531		)	(29,335		)
Purchases of loans		—			(3,428		)
Loan principal payments		20,873			18,251
Principal repayments on mortgage-backed securities held to maturity		903			2,517
Principal repayments on mortgage-backed securities available for sale		7,616			7,196
Proceeds from loan sales		3,311			—
Purchases and maturities of certificates of deposit in other financial institutions, net		—			117
Purchase of investment securities available for sale		(2,984		)	—
Purchase of mortgage-backed securities available for sale		(8,956		)	(6,129		)
Proceeds from maturities of investment securities held to maturity		—			2,000
(Purchase) redemption of Federal Home Loan Bank stock		(251		)	566
Proceeds from sale of real estate		—			32
Purchase of premises and equipment		(317		)	(196		)
NET CASH USED IN INVESTING ACTIVITIES		(16,336		)	(8,409		)

 

5

 

		For the three months ended March 31,
		2005			2004
		(in thousands)
FINANCING ACTIVITIES
Net increase (decrease) in demand deposit/NOW accounts, passbook savings accounts and certificates of deposit		(5,032		)	11,575
Net increase (decrease) in advances from Federal Home Loan Bank		16,614			(7,944		)
Net increase (decrease) in advances from borrowers for taxes and insurance		(75		)	59
Treasury stock acquired		(823		)	(1,216		)
Exercise of stock options		521			1,245
Common stock dividends paid		(492		)	(394		)
NET CASH PROVIDED BY FINANCING ACTIVITIES		10,713			3,325
NET DECREASE IN CASH AND CASH EQUIVALENTS		(3,226		)	(1,524		)
Cash and cash equivalents at beginning of period		7,900			8,241
Cash and cash equivalents at end of period		$	4,674		$	6,717
Supplemental disclosure of cash flow information
Cash paid for
Interest on deposits and advances from Federal Home Loan Bank		$	1,909		$	1,755
Income taxes		$	—		$	—
Non-cash transactions
Transfers from loans to real estate acquired through foreclosure		$	—		$	—

 

The accompanying notes are an integral part of these statements

 

6

 

TF FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 - PRINCIPLES OF CONSOLIDATION

The consolidated financial statements as of March 31, 2005 (unaudited) and December 31, 2004 and for the three-month periods ended March 31, 2005 and 2004 (unaudited) include the accounts of TF Financial Corporation (the “Company”) and its wholly owned subsidiaries Third Federal Bank (the “Bank”), TF Investments Corporation and Penns Trail Development Corporation. The Company’s business is conducted principally through the Bank. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

NOTE 2 - BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include all of the disclosures or footnotes required by accounting principles generally accepted in the United States of America. In the opinion of management, all adjustments, consisting of normal recurring accruals, necessary for fair presentation of the consolidated financial statements have been included.  The results of operations for the period ended March 31, 2005 are not necessarily indicative of the results which may be expected for the entire fiscal year or any other period. For further information, refer to consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004.

 

NOTE 3 – CONTINGENCIES

The Company, from time to time, is a party to routine litigation that arises in the normal course of business. In the opinion of management, the resolution of this litigation, if any, would not have a material adverse effect on the Company’s consolidated financial position or results of operations.

 

NOTE 4 - OTHER COMPREHENSIVE INCOME (LOSS)

The Company’s other comprehensive income (loss) consists of net unrealized gains (losses) on investment securities and mortgage-backed securities available for sale. Total comprehensive income for the three-month periods ended March 31, 2005 and 2004 was $369,000 and $2,408,000, net of applicable income tax expense(benefit) of $(34,000) and $1,023,000, respectively.

 

NOTE 5—EARNINGS PER SHARE

The following tables illustrate the reconciliation of the numerators and denominators of the basic and diluted earnings per share computations (dollars in thousands, except per share data):

 

		Three months ended March 31, 2005
		Income (numerator)			Weighted average shares (denominator)		Per share Amount
Basic earnings per share
Income available to common stockholders		$	1,476		2,749,053		$	0.54
Effect of dilutive securities
Stock options		—			74,507		(0.02		)
Diluted earnings per share
Income available to common stockholders plus effect of dilutive securities		$	1,476		2,823,560		$	0.52

 

There were options to purchase 28,714 shares of common stock at a price of $34.14 per share which were outstanding during the first quarter of 2005 that were not included in the computation of diluted earnings per share because the options’ exercise prices were greater than the average market price of the common shares.

 

7

 

		Three months ended March 31, 2004
		Income (numerator)			Weighted average shares (denominator)		Per share Amount
Basic earnings per share
Income available to common stockholders		$	1,609		2,649,208		$	0.61
Effect of dilutive securities
Stock options		—			171,464		(0.04		)
Diluted earnings per share
Income available to common stockholders plus effect of dilutive securities		$	1,609		2,820,672		$	0.57

 

There were options to purchase 32,248 shares of common stock at a price of $34.14 per share which were outstanding during the first quarter of 2004 that were not included in the computation of diluted earnings per share because the options’ exercise prices were greater than the average market price of the common shares.

 

NOTE 6- STOCK BASED COMPENSATION

The Company has two fixed stock option plans. The Company’s employee stock option plans are accounted for using the intrinsic value method under APB Opinion No. 25, as permitted by SFAS No. 123. No stock-based compensation expense is reflected in net income, as all options granted under the plans had an exercise price equal to the market value of the underlying common stock on the date of the grant.

 

Had compensation cost for the plans been determined based on the fair value of options at the grant dates consistent with the method of SFAS No. 123, “Accounting for Stock-Based Compensation,” the Company’s net income and earnings per share would have been reduced to the pro forma amounts indicated below (in thousands, except per share data):

 

		Three months ended March 31
		2005			2004
Net income
As reported		$	1,476		$	1,609
Deduct: stock-based compensation expense determined using the fair value method, net of related tax effects		19			25
Pro forma		$	1,457		$	1,584
Basic earnings per share
As reported		$	0.54		$	.061
Deduct: stock-based compensation expense determined using the fair value method, net of related tax effects		0.01			0.01
Pro forma		$	0.53		$	0.60
Diluted earnings per share
As reported		$	0.52		$	0.57
Deduct: stock-based compensation expense determined using the fair value method, net of related tax effects		—			—
Pro forma		$	0.52		$	0.57

 

8

 

Stock-based compensation expense included in net income is related to stock grants in lieu of salary and the Company’s employee stock ownership plan. Such expense totaled $108,000 and $121,000 for the three-month periods ended March 31, 2005 and 2004, respectively.

 

On April 27, 2005, the Company’s shareholders approved the 2005 Stock-Based Incentive Plan (the “2005” Plan) which provides for grants of stock options an/or restricted stock aggregating up to 240,000 shares of the Company’s common stock, with a maximum of 40,000 shares of restricted stock. No grants may be issued from the 2005 Plan prior to June 1, 2005.

 

NOTE 7- EMPLOYEE BENEFIT PLANS

Net periodic defined benefit pension cost included the following (in thousands):

 

		Three months ended March 31
		2005			2004
Components of net periodic benefit cost
Service cost		$	78		$	58
Interest cost		53			44
Expected return on plan assets		(47		)	(52		)
Amortization of prior service cost		16			16
Amortization of transition obligation (asset)		—			1
Recognized net actuarial (gain) loss		11			4
Net periodic benefit cost		$	111		$	71

 

The employer contribution made for the three months ended March 31, 2005 and 2004 was $341,000 and $0, respectively.

 

NOTE 8- RECLASSIFICATIONS

Certain prior year amounts have been reclassified to conform to the current period presentation.

 

9

 

TF FINANCIAL CORPORATION AND SUBSIDIARIES

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL POSITION AND RESULTS OF OPERATIONS

 

GENERAL

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 Quarterly Report on Form 10-Q and the exhibits thereto), in its reports to stockholders and in other communications by the Company, which are made in good faith by the Company pursuant to the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995.

 

These forward-looking statements involve risks and uncertainties, such as statements of the Company’s plans, objectives, expectations, estimates and intentions that are subject to change based on various important factors (some of which are beyond the Company’s control).  The following factors, among others, could cause the Company’s financial performance to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements: the strength of the United States economy in general and the strength of the local economies in which the Company conducts operations; the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System, inflation, interest rate, market and monetary fluctuations; the timely development of and acceptance of new products and services of the Company and the perceived overall value of these products and services by users, including the features, pricing and quality compared to competitors’ products and services; the willingness of users to substitute competitors’ products and services for the Company’s products and services; the success of the Company in gaining regulatory approval of its products and services, when required; the impact of changes in financial services’ laws and regulations (including laws concerning taxes, banking, securities and insurance); technological changes, acquisitions; changes in consumer spending and saving habits; and the success of the Company at managing the risks involved in the foregoing.

 

The Company cautions that the foregoing list of important factors is not exclusive.  The Company does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company.

 

Financial Position

 

The Company’s total assets at March 31, 2005 and December 31, 2004 were $640.5 million and $629.0 million, respectively, an increase of $11.5 million, or 1.8%, during the three-month period. Cash and cash equivalents decreased by $3.2 million. Investment securities available for sale increased by $2.6 million due to purchases of $3.0 million of tax free municipal bonds and a $0.4 million reduction in the market value of investment securities available for sale. Investment securities held to maturity decreased by $0.2 million due to amortization of net premiums on the securities. Mortgage-backed securities available for sale decreased by $0.1 million as $9.0 million of security purchases was off-set by $7.6 million in principal pay-downs received as well as a decrease in the market value of these securities totaling $1.3 million. Mortgage-backed securities held to maturity decreased by $0.9 million as a result of principal repayments. Loans receivable increased by $12.2 million for the first quarter of 2005. Consumer and single-family residential mortgage loans of $21.6 million and commercial loans of $14.9 million were originated during the first quarter of 2005. Proceeds from the sale of loans in the secondary market were $3.3 million during the three-month period. In addition, principal repayments of loans receivable were $20.9 million in the first quarter of 2005.

 

10

 

Total liabilities increased by $11.8 million. Deposit balances declined by $5.0 million during the first three months of 2005. Non-interest bearing demand deposits grew by $1.7 million while savings, money market, and interest-bearing checking accounts decreased by a combined $8.7 million. Certificates of deposit increased by $2.0 million. Advances from the Federal Home Loan Bank increased by $16.6 million due to an $11.3 million increase in long-term fixed rate advances and $8.9 million of short-term advances, less scheduled amortization payments of $3.6 million. These borrowings were mainly used to fund loan portfolio growth and deposit outflows that occurred during the quarter.

 

Total consolidated stockholders’ equity of the Company was $60.9 million or 9.50% of total assets at March 31, 2005. During the first quarter of 2005 the Company repurchased 26,237 shares of its common stock and issued 32,446 shares pursuant to the exercise of stock options. As of March 31, 2005, there were approximately 101,000 shares available for repurchase under the previously announced share repurchase plan.

 

Asset Quality

 

During the first quarter of 2005 and 2004, the Company’s provision for loan losses was $150,000.  As of March 31, 2005, the Company owned one parcel of foreclosed real estate. This parcel has been recorded as real estate owned at the lower of the recorded investment in the loan or estimated fair value in the amount of $0.7 million and is included in other assets in the statement of financial position at March 31, 2005. Management of the Company believes that there has not been any significant deterioration in its asset quality during such period.

 

The following table sets forth information regarding the Company’s asset quality (dollars in thousands):

 

		March 31, 2005			December 31, 2004			March 31, 2004
Non-performing loans		$	727		$	960		$	2,710
Ratio of non-performing loans to gross loans		0.16		%	0.22		%	0.64		%
Ratio of non-performing loans to total assets		0.11		%	0.15		%	0.44		%
Foreclosed property		$	700		$	700		$	837
Foreclosed property to total assets		0.11		%	0.11		%	0.14		%
Ratio of total non-performing assets to total assets		0.22		%	0.26		%	0.58		%

 

Management maintains an allowance for loan losses at levels that are believed to be adequate; however, there can be no assurances that further additions will not be necessary or that losses inherent in the existing loan portfolio will not exceed the allowance.  The following table sets forth the activity in the allowance for loan losses during the periods indicated (in thousands):

 

		2005			2004
Beginning balance, January 1,		$	2,307		$	2,111
Provision		150			150
Less: charge-off’s (recoveries), net		236			39
Ending balance, March 31,		$	2,221		$	2,222

 

11

 

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004

 

Net Income.  The Company recorded a net income of $1,476,000, or $0.52 per diluted share, for the three months ended March 31, 2005 as compared to net income of $1,609,000, or $0.57 per diluted share, for the three months ended March 31, 2004.

 

Average Balance Sheet

 

The following table sets forth information relating to the Company’s average balance sheet and reflects the average yield on assets and average cost of liabilities for the periods indicated. Yield and cost are computed by dividing income or expense by the average daily balance of interest-earning assets or interest-bearing liabilities, respectively, at-or for the three month periods indicated.

 

		March 31,
		2005								2004
		Average balance			Interest			Average yld/cost		Average balance			Interest			Average yld/cost
ASSETS
Interest-earning assets:
Loans receivable(1)		$	446,618		$	6,471		5.88	%	$	410,976		$	5,990		5.86	%
Mortgage-backed securities		118,816			1,303			4.45	%	130,658			1,457			4.49	%
Investment securities(2)		32,861			379			4.68	%	30,453			328			4.33	%
Other interest-earning assets(3)		1,135			10			3.57	%	1,570			3			0.77	%
Total interest-earning assets		599,430			8,163			5.52	%	573,657			7,778			5.45	%
Non interest-earning assets		33,211								35,513
Total assets		$	632,641							$	609,170
LIABILITIES AND STOCKHOLDERS’ EQUITY:
Interest-bearing liabilities
Deposits		455,316			1,536			1.37	%	464,744			1,506			1.30	%
Advances from the FHLB		111,888			931			3.37	%	83,314			646			3.12	%
Total interest-bearing liabilities		567,204			2,467			1.76	%	548,058			2,152			1.58	%
Non interest-bearing liabilities		5,155								5,233
Total liabilities		572,359								553,291
Stockholders’ equity		60,282								55,879
Total liabilities and stockholders’ equity		$	632,641							$	609,170
Net interest income					$	5,696							$	5,626
Interest rate spread(4)								3.76	%							3.87	%
Net yield on interest-earning assets(5)								3.85	%							3.94	%
Ratio of average interest-earning assets to average interest- bearing liabilities								106	%							105	%

 

(1)   Nonaccrual loans have been included in the appropriate average loan balance category, but interest on nonaccrual loans has not been included for purposes of determining interest income.

(2)   Tax equivalent adjustments to interest on investment securities were $66,000 and $48,000 for the quarters ended March 31, 2005 and 2004, respectively. Tax equivalent interest income is based upon a marginal effective tax rate of 34%.

(3)   Includes interest-bearing deposits in other banks.

(4)   Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.

(5)   Net yield on interest-earning assets represents net interest income as a percentage of average interest-earning assets.

 

12

 

Rate/Volume Analysis

 

The following table presents, for the periods indicated, the change in interest income and interest expense (in thousands) attributed to (i) changes in volume (changes in the weighted average balance of the total interest earning asset and interest bearing liability portfolios multiplied by the prior year rate), and (ii) changes in rate (changes in rate multiplied by prior year volume). Changes attributable to the combined impact of volume and rate have been allocated proportionately based on the absolute value of changes due to volume and changes due to rate.

 

		Three months ended March 31,
		2005 vs 2004 Increase (decrease) due to
		Volume			Rate			Net
Interest income:
Loans receivable, net		$	468		$	13		$	481
Mortgage-backed securities		(141		)	(13		)	(154		)
Investment securities (1)		25			26			51
Other interest-earning assets		(6		)	13			7
Total interest-earning assets		346			39			385
Interest expense:
Deposits		(166		)	196			30
Advances from the FHLB		230			55			285
Total interest-bearing liabilities		64			251			315
Net change in net interest income		$	282		$	(212	)	$	70

 

(1)          Tax equivalent adjustments to interest on investment securities were $66,000 and $48,000 for the quarters ended March 31, 2005 and 2004, respectively. Tax equivalent interest income is based upon a marginal effective tax rate of 34%.

 

Total Interest Income.  Total interest income, on a taxable equivalent basis, increased by $0.4 million or 5.0% to $8.2 million for the quarter ended March 31, 2005 compared with the first quarter of 2004 primarily because of a $35.6 million increase in average loans outstanding. Interest income from mortgage-backed securities was lower in the first three months of 2005 in comparison to the same period of 2004. This decrease is consistent with the reduction of balances maintained in mortgage-backed securities.

 

Total Interest Expense.  Total interest expense increased by $0.3 million to $2.5 million during the three-month period ended March 31, 2005 as compared with the first quarter of 2004. The decrease in the average balance of deposits was more than offset by an increase in interest rates on Bank’s savings and passbook accounts in order to remain in line with short-term market interest rates and the Bank’s competitors.  Increases in the advances from the Federal Home Loan Bank during 2004 and the first quarter of 2005 is the primary cause for the increase in interest expense between the two quarters.

 

Non-interest income.  Total non-interest income was $662,000 for the three-month period ended March 31, 2005 compared with $709,000 for the same period in 2004.  The decrease was due to a reduction of $48,000 in loan prepayment fees and mortgage brokered fees collected in the first quarter of 2005 versus the same quarter of 2004. Retail banking fees were $29,000 less between the two periods due to a decrease in demand deposit account fees. In contrast, during the first quarter of 2005 net gain on the sale of loans totaled $22,000 while there was no such gains during the first three months of 2004.

 

Non-interest expense.  Total non-interest expense increased by $214,000 to $4.1 million for the three months ended March 31, 2005 compared to the same period in 2004.  Compensation and benefit expenses were higher by $117,000 mainly due to additional staffing as well as salary increases. Office and occupancy costs rose $66,000 between the two quarters due to $20,000 of greater office maintenance costs, $14,000 of additional space leased during the second quarter of 2004 for deposit services support, annual rent increases, and additional security guard services. Professional expenses of the Company were $20,000 higher mainly because of IT compliance and audit work.

 

13

 

LIQUIDITY AND CAPITAL RESOURCES

 

Liquidity

 

The Company’s liquidity is a measure of its ability to fund loans, pay withdrawals of deposits, and other cash outflows in an efficient, cost-effective manner.  The Company’s short-term sources of liquidity include maturity, repayment and sales of assets, excess cash and cash equivalents, new deposits, broker deposits, other borrowings, and new advances from the Federal Home Loan Bank. There has been no material adverse change during three-month period ended March 31, 2005 in the ability of the Company and its subsidiaries to fund their operations.

 

At March 31, 2005, the Company had commitments outstanding under letters of credit of $1.3 million, commitments to originate loans of $41.6 million, and commitments to fund undisbursed balances of closed loans and unused lines of credit of $57.2 million.  There has been no material change during the three months ended March 31, 2005 in any of the Company’s other contractual obligations or commitments to make future payments.

 

Capital Requirements

 

The Bank was in compliance with all of its capital requirements as of March 31, 2005.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Asset and Liability Management

 

The Company’s market risk exposure is predominately caused by interest rate risk, which is defined as the sensitivity of the Company’s current and future earnings, the values of its assets and liabilities, and the value of its capital to changes in the level of market interest rates.  Management of the Company believes that there has not been a material adverse change in market risk during the three months ended March 31, 2005.

 

CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Based on their evaluation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)), the Company’s principal executive officer and principal financial officer have concluded that as of the end of the period covered by this Quarterly Report on Form 10-Q such disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

 

Changes in Internal Controls over Financial Reporting

 

During the quarter under report, there was no change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

14

 

CRITICAL ACCOUNTING POLICIES

 

Certain critical accounting policies of the Company require the use of significant judgment and accounting estimates in the preparation of the consolidated financial statements and related data of the Company. These accounting estimates require management to make assumptions about matters that are highly uncertain at the time the accounting estimate is made. Management believes that the most critical accounting policy requiring the use of accounting estimates and judgment is the determination of the allowance for loan losses. If the financial position of a significant amount of debtors should deteriorate more than the Company has estimated, present reserves for loan losses may be insufficient and additional provisions for loan losses may be required. The allowance for loan losses was $2,221,000 at March 31, 2005.

 

NEW ACCOUNTING PRONOUNCEMENTS

 

On December 16, 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 123(R) (SFAS 123 R), “Share-Based Payment. This statement establishes standards for the accounting for transactions in which the entity exchanges its equity instruments in exchange for goods and services and addresses transactions in which an entity incurs liabilities in exchange for goods and services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. SFAS123(R) focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. Under SFAS123(R), all forms of share-based payments to employees, including employee stock options, will be treated the same as other forms of compensation by recognizing the related cost in the income statement.    The expense of the award will generally be measured at fair value at the grant date. The grant-date fair value of employee share options and similar instruments will be estimated using option pricing models. Current accounting guidance requires that the expense relating to so-called fixed plan employee stock options only be disclosed in the footnotes to the financial statements. In April 2005, the Securities and Exchange Commission adopted a new rule amending Regulation S-X to amend the date for compliance with SFAS123(R). Under SFAS123(R), registrants would have been required to apply the provisions of SFAS123(R) as of the first interim of annual reporting period that begins after June 15, 2005 or after December 15, 2005 for small business issuers. The Commission’s new rule allows registrants to implement SFAS123(R) at the beginning of their next fiscal year that begins after June 15, 2005 or after December 15, 2005 for small business issuers.

 

In March 2005 the FASB issued Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations” (FIN 47). FIN 47 requires an entity to recognize a liability for the fair value of a legal obligation to perform asset-retirement activities that are conditional on a future event if the amount can be reasonably estimated. The Interpretation provides guidance to evaluate whether fair value is reasonably estimable.  FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. FIN 47 is not expected to have a material impact on the Company’s financial position or results of operations.

 

15

 

TF FINANCIAL CORPORATION AND SUBSIDIARIES

 

PART II

 

ITEM 1.                                                                                                LEGAL PROCEEDINGS

Not applicable.

 

ITEM 2.                                                                                                UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS

 

The following table provides information on repurchases by the Company of its common stock in each month for the three months ended March 31, 2005:

 

Month		Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plan of Program		Maximum Number of Shares that may yet be Purchased Under the Plans or Programs
January 1, 2005 - January 31, 2005		—		—		—		101,123
February 1, 2005 - February 28, 2005		—		—		—		101,123
March 1, 2005 - March 31, 2005		26,237		31.35		—		101,123

 

The total number of shares repurchased during the quarter comprises 26,237 shares repurchased in conjunction with the exercise of 18,000 stock options.  The repurchase poses no modification to the rights of stockholders.  Furthermore, there has been no change in the ability of the Company to pay dividends or any material change in the working capital of the Company.  The stock repurchase did not alter the previously approved stock repurchase plan of the Company.

 

ITEM 3.                             DEFAULTS UPON SENIOR SECURITIES

Not applicable.

 

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ITEM 4.                                                                                                SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Annual Meeting of Stockholders (the “Meeting”) of the Company was held on April 27, 2005. There were outstanding and entitled to vote at the Meeting 2,950,463 shares of Common Stock of the Company. There were present at the meeting or by proxy the holders of 2,627,869 shares of Common Stock representing 89.07% of the total eligible votes to be cast. Proposal 1 was to elect two directors of the Company. Proposal 2 was to ratify the appointment of the independent auditor for the December 31, 2005 fiscal year. Proposal 3 was for the approval and adoption of the Company’s 2005 Stock-Based Incentive Plan. Proposal 4, a shareholder submitted proposal, was to take the necessary steps to remove any provisions in the Company’s Certificate of Incorporation and Bylaws that segregate the Board of Directors into separate classes with staggered terms of office. The result of the voting at the Meeting is as follows (percentages in terms of votes cast):

 

Proposal 1

John R. Stranford		FOR:		2,168,334		PERCENT FOR:		82.51	%
		WITHHELD:		459,535		PERCENT WITHHELD:		17.49	%
Albert M.Tantala, Sr.		FOR:		2,196,139		PERCENT FOR:		83.57	%
		WITHHELD:		431,730		PERCENT WITHHELD:		16.43	%

 

Proposal 2

Ratification of the appointment of Grant Thornton, LLP as independent auditor for the Company for the December 31, 2005 fiscal year.

 

		FOR:		2,614,341		PERCENT FOR:		99.49	%
		AGAINST:		9,939		PERCENT AGAINST:		0.38	%
		ABSTAIN:		3,589		PERCENT ABSTAIN		0.13	%

 

Proposal 3

Approval and adoption of the Company’s 2005 Stock-Based Incentive Plan.

 

		FOR:		1,469,409		PERCENT FOR:		65.83	%
		AGAINST:		733,216		PERCENT AGAINST:		32.85	%
		ABSTAIN:		29,584		PERCENT ABSTAIN		1.32	%

 

Proposal 4

To remove provisions from the Company’s Certificate of Incorporation and Bylaws that segregate the Board of Directors into separate classed with staggered terms of office.

 

		FOR:		879,962		PERCENT FOR:		39.42	%
		AGAINST:		1,315,064		PERCENT AGAINST:		58.91	%
		ABSTAIN:		37,183		PERCENT ABSTAIN		1.67	%

 

ITEM 5.                            OTHER INFORMATION

None

 

17

 

ITEM 6.                            EXHIBITS AND REPORTS ON FORM 8-K

(a)          Exhibits

31.         Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

32.         Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

18

 

TF FINANCIAL CORPORATION

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

			/s/ Kent C. Lufkin
Date:	May 13, 2005		Kent C. Lufkin
			President and CEO
			(Principal Executive Officer)
			/s/ Dennis R. Stewart
Date:	May 13, 2005		Dennis R. Stewart
			Executive Vice President and
			Chief Financial Officer
			(Principal Financial & Accounting Officer)

 

19