SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM l0-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2003
-------------------------------------------------
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________________ to ______________________
Commission file number 0-24168
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TF FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 74-2705050
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(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
3 Penns Trail, Newtown, Pennsylvania 18940
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 215-579-4000
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N/A
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Former name, former address and former fiscal year,
if changed since last report.
Indicate by check whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer
as defined in Exchange Act Rule 12b-2. YES NO X
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date: May 5, 2003
-----------
Class Outstanding
--------------------------- ----------------
$.10 par value common stock 2,741,296 shares
TF FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 1O-Q
FOR THE QUARTER ENDED MARCH 31, 2003
INDEX
Page
Number
------
PART I - CONSOLIDATED FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
Item 4. Controls and Procedures 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
EXHIBITS
Certifications pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 19
Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 21
2
TF FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(in thousands)
Unaudited Audited
March 31, December 31,
2003 2002
--------- -------------
Assets
Cash and cash equivalents $ 96,680 $ 100,580
Certificates of deposit in other financial institutions 223 220
Investment securities available for sale - at fair value 34,877 27,243
Investment securities held to maturity (fair value of $13,811 and $15,187, 13,214 14,563
respectively)
Mortgage-backed securities available for sale - at fair value 116,703 115,243
Mortgage-backed securities held to maturity (fair value of $45,966 and 43,620 54,592
$57,346, respectively)
Loans receivable, net 374,279 370,092
Federal Home Loan Bank stock - at cost 11,846 11,424
Accrued interest receivable 3,319 3,576
Core deposit intangible, net of accumulated amortization of
$2,319 and $2,271, respectively 505 553
Goodwill 4,324 4,324
Premises and equipment, net 6,677 6,742
Other assets 13,951 11,880
--------- ---------
Total assets $ 720,218 $ 721,032
========= =========
Liabilities and stockholders' equity
Liabilities
Deposits $ 446,766 $ 442,558
Advances from the Federal Home Loan Bank 202,359 207,359
Advances from borrowers for taxes and insurance 1,156 1,330
Accrued interest payable 3,507 2,897
Other liabilities 3,442 4,048
--------- ---------
Total liabilities 657,230 658,192
--------- ---------
Commitments and contingencies
Stockholders' equity
Preferred stock, no par value; 2,000,000 shares authorized
and none issued
Common stock, $0.10 par value; 10,000,000 shares authorized,
5,290,000 issued; 2,500,504 and 2,482,586 shares outstanding
at March 31, 2003 and December 31, 2002, net of
treasury shares of 2,552,389 and 2,567,268, respectively 529 529
Retained earnings 60,384 59,978
Additional paid-in capital 51,657 51,647
Unearned ESOP shares (2,355) (2,401)
Treasury stock - at cost (48,526) (48,809)
Accumulated other comprehensive income 1,299 1,896
--------- ---------
Total stockholders' equity 62,988 62,840
--------- ---------
Total liabilities and stockholders' equity $ 720,218 $ 721,032
========= =========
3
TF FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share data)
For Three Months
Ended March 31,
---------------
2003 2002
---- ----
Interest income
Loans $ 6,051 $ 6,731
Mortgage-backed securities 1,852 3,060
Investment securities 508 587
Interest bearing deposits and other 246 209
------- -------
Total interest income 8,657 10,587
------- -------
Interest expense
Deposits 2,044 2,830
Advances from the Federal Home Loan Bank and other borrowings 2,778 3,037
------- -------
Total interest expense 4,822 5,867
------- -------
Net interest income 3,835 4,720
Provision for loan losses 90 150
------- -------
Net interest income after provision for loan losses 3,745 4,570
------- -------
Non-interest income
Service fees, charges and other operating income 444 407
Bank-owned life insurance 134 133
Gain on sale of investment and mortgage-backed
securities available for sale 506 --
------- -------
Total non-interest income 1,084 540
------- -------
Non-interest expense
Compensation and benefits 2,023 1,928
Occupancy and equipment 628 578
Federal deposit insurance premium 19 19
Professional fees 160 80
Amortization of core deposit intangible 48 58
Advertising 138 110
Other operating 724 647
------- -------
Total non-interest expense 3,740 3,420
------- -------
Income before income taxes 1,089 1,690
Income taxes 310 405
------- -------
Net income $ 779 $ 1,285
======= =======
Basic earnings per share $ 0.31 $ 0.52
Diluted earnings per share $ 0.29 $ 0.49
See notes to consolidated financial statements
4
TF FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the three months ended
March 31,
2003 2002
-------- --------
Cash flows from operating activities
Net Income $ 779 $ 1,285
Adjustments to reconcile net income to net cash provided by operating activities:
Mortgage loan servicing rights (3) 3
Deferred loan origination fees (104) (63)
Premiums and discounts on investment securities, net (18) 35
Premiums and discounts on mortgage-backed securities and loans, net 549 (123)
Amortization of core deposit intangible 48 58
Provision for loan losses 90 150
Depreciation of premises and equipment 257 252
Recognition of ESOP and MSBP expenses 116 67
Gain on sale of investment and mortgage-backed securities available for sale (506) --
Gain on sale of real estate (11) --
Increase in value of bank-owned life insurance (134) (133)
(Increase) decrease in:
Accrued interest receivable 257 (124)
Other assets (213) --
Increase (decrease) in:
Accrued interest payable 610 525
Other liabilities (300) (776)
-------- --------
Net cash provided by operating activities 1,417 1,156
-------- --------
Cash flows from investing activities
Loan originations (24,375) (9,975)
Purchases of loans (21,927) (14,767)
Loan principal payments 40,241 33,548
Proceeds from sale of mortgage-backed securities available for sale 12,363 --
Purchases of mortgage-backed securities available for sale (25,327) (33,770)
Purchase of investment securities held to maturity -- (6,821)
Purchase of investment securities available for sale (15,628) --
Proceeds from maturities of investment securities held to maturity 1,330 --
Proceeds from maturities of investment securities available for sale 8,000 --
Principal repayments from mortgage-backed securities held to maturity 10,959 13,265
Principal repayments from mortgage-backed securities available for sale 10,685 9,643
Purchase of certificates of deposit in other financial institutions (3) --
Purchases and redemptions of Federal Home Loan Bank stock, net (422) 250
Proceeds from sales of real estate acquired through foreclosure 95 18
Purchase of premises and equipment (192) (27)
-------- --------
Net cash used in investing activities (4,201) (8,636)
-------- --------
See notes to consolidated financial statements
5
TF FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(in thousands)
For the three months ended
March 31,
---------
2003 2002
--------- ---------
Cash flows from financing activities
Net increase in deposits 4,208 10,233
Net decrease in advances from Federal Home Loan Bank (5,000) --
Net decrease in advances from borrowers for taxes and insurance (174) (187)
Exercise of stock options 223 100
Purchase of treasury stock, net -- (270)
Common stock cash dividend (373) (370)
--------- ---------
Net cash provided by (used in) financing activities (1,116) 9,506
--------- ---------
Net (decrease) increase in cash and cash equivalents (3,900) 2,026
Cash and cash equivalents at beginning of period 100,580 69,139
--------- ---------
Cash and cash equivalents at end of period $ 96,680 $ 71,165
========= =========
Supplemental disclosure of cash flow information
Cash paid for
Interest on deposits and advances $ 4,212 $ 5,342
Income taxes $ 150 $ 700
Non-cash transactions
Transfers from loans to real estate acquired through foreclosure $ 1,805 $ 185
See notes to consolidated financial statements
6
TF FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - RESTATEMENT OF INFORMATION FOR THE PERIOD ENDED MARCH 31, 2002
On October 1, 2002 the FASB issued SFAS No. 147,"Acquisitions of
Certain Financial Institutions." Except for transactions between two
or more mutual enterprises, SFAS No. 147 removed the acquisitions of
financial institutions from the scope of both SFAS No. 72 and FASB
Interpretation No. 9 and required that those transactions be accounted
for in accordance with SFAS No. 141 and SFAS No. 142. Thus, the
requirement of SFAS No. 72 to recognize (and subsequently amortize)
any excess of the fair value of liabilities assumed over the fair
value of tangible and identifiable intangible assets acquired ("SFAS
72 goodwill") as an unidentifiable intangible no longer applied to
acquisitions within the scope of SFAS No. 147. Finally, SFAS No. 147
provided that branch acquisitions that meet the definition of a
business should be accounted for as a business combination. SFAS No.
147 was effective October 1, 2002, although earlier application was
permitted. The Company has elected to apply SFAS No. 147 as of January
1, 2002. In accordance with the provisions of SFAS No. 147 interim
financial statements of the Company issued after January 1, 2002 have
been restated to remove amortization expense associated with SFAS No.
72 goodwill. Such expense totaled $82,000, net of a tax benefit of
$29,000 for the three months ended March 31, 2002.
NOTE 2 - PRINCIPLES OF CONSOLIDATION
The consolidated financial statements as of March 31, 2003 (unaudited)
and December 31, 2002 and for the three-month periods ended March 31,
2003 and 2002 (unaudited) include the accounts of TF Financial
Corporation (the "Company") and its wholly owned subsidiaries Third
Federal Savings Bank (the "Bank"), TF Investments Corporation, Penns
Trail Development Corporation and Teragon Financial Corporation. The
Company's business is conducted principally through the Bank. All
significant intercompany accounts and transactions have been
eliminated in consolidation.
NOTE 3 - 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, 2003 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, 2002.
NOTE 4 - CONTINGENCIES
The Company, from time to time, is a party to routine litigation that
arises in the normal course of business. In the opinion of management,
the resolution of this litigation, if any, would not have a material
adverse effect on the Company's consolidated financial condition or
results of operations.
NOTE 5 - OTHER COMPREHENSIVE INCOME
The Company's other comprehensive income consists of net unrealized
gains on investment securities and mortgage-backed securities
available for sale. Total comprehensive income for the three-month
periods ended March 31, 2003 and 2002 was $182,000 and $802,000, net
of applicable income tax of $2,000 and $156,000, respectively.
7
TF FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - EARNINGS PER SHARE
Three months ended March 31, 2003
---------------------------------
Weighted
(000's) average
Income shares Per share
(numerator) (denominator) Amount
----------- ------------- ------
Basic earnings per share
Income available to common stockholders $ 779 2,488,406 $ 0.31
=========
Effect of dilutive securities
Stock options - 206,662 (0.02)
----- --------- ----------
Diluted earnings per share
Income available to common stockholders plus
effect of dilutive securities $ 779 2,695,068 $ 0.29
===== ========= =========
There were options to purchase 34,900 shares of common stock at a range
of $25.33 to $28.00 per share which were outstanding during the three
month period ended March 31, 2003 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.
Three months ended March 31, 2002
---------------------------------
Weighted
(000's) average
Income shares Per share
(numerator) (denominator) Amount
----------- ------------- ------
Basic earnings per share
Income available to common stockholders $ 1,285 2,462,822 $ 0.52
========
Effect of dilutive securities
Stock options - 182,265 (0.03)
----- --------- --------
Diluted earnings per share
Income available to common stockholders plus
effect of dilutive securities $ 1,285 2,645,087 $ 0.49
======= ========= ========
There were options to purchase 5,000 shares of common stock at $28.00
per share which were outstanding during the three month period ended
March 31, 2002 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.
8
TF FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7- STOCK BASED COMPENSATION
The Company has several 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):
Quarter ended March 31, 2003 2002
------------------------ ---- ----
Net income
As reported $ 779 $ 1,285
Deduct: stock-based compensation expense
determined using the fair value method,
net of related tax effects 11 17
------ -------
Pro forma $ 768 $ 1,268
====== =======
Basic earnings per share
As reported $ 0.31 $ 0.52
Pro forma $ 0.31 $ 0.52
Diluted earnings per share
As reported $ 0.29 $ 0.49
Pro forma $ 0.29 $ 0.48
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 $58,000 and $48,000 for the three
month periods ended March 31, 2003 and 2002, 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 CONDITION 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 Condition
The Company's total assets at March 31, 2003 and December 31, 2002 were $720.2
million and $721.0 million, respectively, a decrease of $0.8 million, or 0.1%,
during the three-month period. Cash and cash equivalents decreased by $3.9
million. Investment securities available for sale increased by $7.6 million, the
net effect of the purchase of $15.6 million less the calls and maturities of
$8.0 million of such securities. Investment securities held to maturity
decreased by $1.3 million due to calls and maturities of such securities.
Mortgage-backed securities available for sale increased by $1.5 million as $25.3
million in purchases of such securities more than off-set the $0.7 million
decrease in unrealized gains plus the sale of $12.4 million and the principal
paydowns of $10.7 million received from these securities. Mortgage-backed
securities held to maturity decreased by $11.0 million due to the high rate of
prepayments of the mortgages underlying these pass-through securities.
Similarly, high prepayments of existing mortgages in the loans receivable
portfolio caused a decrease of $40.2 million in loans receivable. Offsetting
this reduction in existing loans receivable was the origination of $24.4 million
in predominately consumer and single-family residential mortgage loans, and the
purchase of $21.9 million in newly originated, single-family residential
mortgage loans.
10
Total liabilities decreased by $1.0 million. Deposit growth during the first
quarter of 2003 was $4.2 million. Non-interest bearing demand deposits grew by
$1.9 million while savings, money market, and interest-bearing checking accounts
increased by a combined $3.9 million. Certificates of deposit decreased by $1.6
million. Advances from the Federal Home Loan Bank decreased by $5.0 million due
to the scheduled maturity of an advance.
Total consolidated stockholders' equity of the Company was $63.0 million or
8.75% of assets at March 31, 2003. During the first quarter of 2003 the Company
did not repurchase any shares of its common stock and issued 13,866 shares
pursuant to the exercise of stock options. As of March 31, 2003, there were
approximately 114,000 shares available for repurchase under the previously
announced share repurchase plan, and the Company will continue to repurchase
shares as share availability and market conditions permit.
Asset Quality
During the first quarter of 2003 the Company completed foreclosure proceedings
on two related parcels of commercial real estate with a combined loan balance of
$1.7 million. These loans were non-performing loans at December 31, 2002. These
parcels have been recorded as real estate owned at the lower of the loan
balances or estimated fair value in the amount of $1.7 million and are included
in other assets in the statement of financial condition at March 31, 2003.
Management of the Company believes that there has not been any significant
deterioration in its asset quality during the first quarter of 2003.
The following table sets forth information regarding the Company's asset
quality (dollars in thousands):
March 31, December 31, March 31,
--------- ------------ ---------
2003 2002 2002
---- ---- ----
Non-performing loans $2,395 $3,822 $3,904
Ratio of non-performing loans to gross loans 0.64% 1.03% 1.05%
Ratio of non-performing loans to total assets 0.33% 0.53% 0.54%
Foreclosed property $1,805 $84 $198
Foreclosed property to total assets 0.25% 0.01% 0.03%
Ratio of total non-performing assets to total assets 0.58% 0.54% 0.57%
Management maintains an allowance for loan and lease losses at levels that are
believed to be adequate; however, there can be no assurances that further
additions will not be necessary or that losses inherent in the existing loan and
lease portfolios will not exceed the allowance. The following table sets forth
the activity in the allowance for loan and lease losses during the periods
indicated (in thousands):
2003 2002
------ ------
Beginning balance, January 1, $2,047 $1,972
Provision 90 150
Less: charge-off's (recoveries), net 79 66
------ ------
Ending balance, March 31, $2,058 $2,056
====== ======
11
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
Net Income. The Company recorded net income of $779,000, or $0.29 per diluted
share, for the three months ended March 31, 2003 as compared to $1,285,000, or
$0.49 per diluted share, for the three months ended March 31, 2002.
Average Balance Sheet
The following table sets forth information relating to the Company's average
balance sheet and reflects the average yield on assets and average cost of
liabilities for the periods indicated. The yields and costs are computed by
dividing income or expense by the average daily balance of interest-earning
assets or interest-bearing liabilities, respectively, for the periods indicated.
Three Months Ended March,
-------------------------
2003 2002
---------------------------------- ----------------------------------
Average Average Average Average
Balance Interest Yld/Cost Balance Interest Yld/Cost
------- -------- -------- ------- -------- --------
(dollars in thousands)
Assets:
Interest-earning assets:
Loans receivable (1)........................ $366,561 $6,051 6.69% $372,490 $ 6,731 7.33%
Mortgage-backed securities.................. 163,663 1,852 4.59% 201,866 3,060 6.15%
Investment securities....................... 56,620 508 3.64% 47,792 587 4.98%
Other interest-earning assets(2)............ 94,384 246 1.06% 53,966 209 1.57%
-------- ------ -------- -------
Total interest-earning assets............. 681,228 8,657 5.15% 676,114 10,587 6.35%
------ -------
Non interest-earning assets..................... 34,960 35,298
-------- --------
Total assets.............................. $716,188 $711,412
======== ========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Deposits.................................... $442,687 2,044 1.87% $423,239 2,830 2.71%
Advances from the FHLB and other
Borrowings................................ 204,026 2,778 5.52% 222,359 3,037 5.54%
-------- ------ ------- -------
Total interest-bearing liabilities........ 646,713 4,822 3.02% 645,598 5,867 3.69%
------ -------
Non interest-bearing liabilities................ 6,422 7,806
-------- --------
Total liabilities......................... 653,135 653,404
Stockholders' equity............................ 63,053 58,008
-------- --------
Total liabilities and stockholders' equity... $716,188 $711,412
======== ========
Net interest income............................. $3,835 $ 4,720
====== =======
Interest rate spread (3)........................ 2.13% 2.66%
Net yield on interest-earning assets (4)........ 2.28% 2.83%
Ratio of average interest-earning assets to
average interest bearing liabilities............ 105% 105%
(1) Nonaccrual loans have been included in the appropriate average loan balance
category, but interest on nonaccrual loans has not been included for
purposes of determining interest income.
(2) Includes interest-bearing deposits in other banks.
(3) Interest-rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(4) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
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,
2003 vs. 2002
--------------------------------
Increase (decrease)
due to
--------------------------------
Volume Rate Net
--------------------------------
Interest income:
Loans receivable, net $ (106) $ (574) $ (680)
Mortgage-backed securities (516) (692) (1,208)
Investment securities 490 (569) (79)
Other interest-earning assets 412 (375) 37
------- ------- -------
Total interest-earning assets 280 (2,210) (1,930)
======= ======= =======
Interest expense:
Deposits 817 (1,603) (786)
Advances from the FHLB and other borrowings (250) (9) (259)
------- ------- -------
Total interest-bearing liabilities 567 (1,612) (1,045)
======= ======= =======
Net change in net interest income $ (287) $ (598) $ (885)
======= ======= =======
Total Interest Income. Total interest income decreased by $1.9 million or 18.2%
to $8.7 million for the three months ended March 31, 2003 compared with the
first quarter of 2002 primarily because of the consequences of record low market
interest rates. As a result, during the past year the Bank's callable investment
securities were called, higher coupon mortgage-related securities were paid down
at an accelerated rate, and loans were refinanced by borrowers at lower rates,
or away from the Bank, resulting in large paydowns of higher yielding loans. In
addition, the interest rates on the Bank's adjustable rate loans adjusted
downward. Furthermore, the Company's cash and cash equivalents were
significantly higher during the 2003 period, while the rate earned on these
assets, the federal funds rate minus 25 basis points, was substantially lower
during the 2003 period. At March 31, 2003, cash and cash equivalents totaled
$96.7 million.
Total Interest Expense. Total interest expense decreased by $1.0 million to $4.8
million for the three-month period ended March 31, 2003. The increase in the
average balance of deposits was more than offset by lower market interest rates
during the period and the lower rates paid on the Bank's renewing certificates
of deposit that had been originated when market interest rates were higher. In
addition, the Bank lowered the interest rates paid on several of its other
deposit products in order to keep them in line with short term market interest
rates and the Bank's competitors.
Non-interest income. Total non-interest income was $1,084,000 for the
three-month period ended March 31, 2003 compared with $540,000 for the same
period in 2002. The increase is primarily due to $506,000 in gains on sales of
mortgage-backed securities available for sale during the first quarter of 2003
while there were no such sales during the 2002 period.
13
Non-interest expense. Total non-interest expense increased by $320,000 to $3.7
million for the three months ended March 31, 2003 compared to the same period in
2002. Compensation and benefits expense was higher during the 2003 period due to
a $93,000 one-time reduction in pension expense during the first quarter of 2002
caused by participants who had very high balances leaving the plan. Occupancy
and equipment expense increased in part because maintenance expenses were
unusually high during the first quarter of 2003 due to inclement weather. In
addition, the Bank opened a new branch office during January of 2003.
Professional fees were higher during the first quarter of 2003 compared to the
year earlier period mainly due to the timing of the payment of costs associated
with fiscal year end audit and legal services. Other expenses were $77,000
higher during the first quarter of 2003 compared with the first quarter of 2002
due in large part to a $49,000 increase in loan origination costs due to the
increased volume of the Company's loan originations and the Company's strategy
of absorbing much of the cost, ordinarily paid by the borrower, to originate
certain loan products.
14
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, 2003 in the ability of the Company and its subsidiaries to fund their
operations.
At March 31, 2003, the Company had commitments outstanding under letters of
credit of $0.9 million, commitments to originate loans of $18.5 million, and
commitments to fund undisbursed balances of closed loans and unused lines of
credit of $29.9 million. There has been no material change during the quarter
ended March 31, 2003 in any of the Company's other contractual obligations or
commitments to make future payments.
Capital Requirements
The Bank is in compliance with all of its capital requirements as of March 31,
2003.
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, 2003.
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Chief Executive Officer and the Chief Financial Officer (the "Certifying
Officers") have evaluated the effectiveness of the Company's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
report and have concluded that such controls and procedures ensured that
material information was made known to them, particularly during the period in
which this report was being prepared.
Internal Controls
The Certifying Officers have concluded that there were no significant
deficiencies in the design or operation of internal controls which could
adversely affect the Company's ability to record, process, summarize and report
financial data; nor have there been any significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
15
NEW ACCOUNTING PRONOUNCEMENTS
In January 2003 the FASB issued FIN Number 46, "Consolidation of Variable
Interest Entities." This Interpretation of ARB No. 51, "Consolidated Financial
Statements," was issued to address perceived weaknesses in accounting for
entities commonly known as special-purpose or off-balance-sheet entities, but
the guidance applies to a larger population of entities. FIN 46 provides
guidance for identifying the party with a controlling financial interest
resulting from arrangements or financial interests rather than from voting
interests. FIN 46 defines the term "variable interest entity" (VIE) and is based
on the premise that if a business enterprise has a controlling financial
interest in a VIE, the assets, liabilities, and results of the activities of the
VIE should be included in the consolidated financial statements of the business
enterprise. An enterprise that consolidates a VIE is the primary beneficiary of
the VIE. The primary beneficiary is the party whose variable interest(s) absorbs
a majority of the entity's expected losses, receives a majority of its expected
residual returns, or both. FIN 46 requires the primary beneficiary of a VIE, as
well as other enterprises that hold a significant variable interest in a VIE, to
provide certain financial statement disclosures. Some disclosures are required
in all financial statements issued after January 31, 2003 if it is reasonably
possible that an enterprise will consolidate or disclose information about a VIE
when FIN 46 becomes effective. FIN 46 applies immediately to VIEs created after
January 31, 2003 and to VIEs in which an enterprise obtains an interest after
that date. For variable interests in VIEs created before February 1, 2003, FIN
46 applies to public enterprises no later than the beginning of the first
interim or annual period beginning after June 15, 2003. The adoption of the
provisions of FIN 46 by the Company has not and will not have a material impact
on the Company's financial condition or results of operations.
On April 30, 2003 the Financial Accounting Standards Board (FASB) issued
Statement No. 149, Amendment of Statement 133 on Derivative Instruments and
Hedging Activities. The Statement amends and clarifies accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under Statement 133. The new guidance
amends Statement 133 for decisions made: as part of the Derivatives
Implementation Group process that effectively required amendments to Statement
133, in connection with other Board projects dealing with financial instruments,
and regarding implementation issues raised in relation to the application of the
definition of a derivative, particularly regarding the meaning of an
"underlying" and the characteristics of a derivative that contains financing
components. This Statement clarifies under what circumstances a contract with an
initial net investment meets the characteristic of a derivative as discussed in
Statement 133. In addition, it clarifies when a derivative contains a financing
component that warrants special reporting in the statement of cash flows.
Statement 149 amends certain other existing pronouncements. This Statement is
effective for contracts entered into or modified after June 30, 2003, except as
stated below and for hedging relationships designated after June 30, 2003. The
guidance should be applied prospectively. The provisions of this Statement that
relate to Statement 133 Implementation Issues that have been effective for
fiscal quarters that began prior to June 15, 2003, should continue to be applied
in accordance with their respective effective dates. In addition, certain
provisions relating to forward purchases or sales of when-issued securities or
other securities that do not yet exist, should be applied to existing contracts
as well as new contracts entered into after June 30, 2003. The Company is
presently evaluating this new standard but does not expect the adoptionof SFAS
No. 149 to have a material effect on the Company's financial condition or
results of operations.
16
TF FINANCIAL CORPORATION AND SUBSIDIARIES
PART II
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders (the "Meeting") of the Company was held on
April 23, 2003. There were outstanding and entitled to vote at the Meeting
2,728,145 shares of Common Stock of the Company. There were present at the
meeting or by proxy the holders of 2,385,508 shares of Common Stock representing
87.44% 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, 2003 fiscal year. The result of the
voting at the Meeting is as follows (percentages in terms of votes cast):
Proposal 1
Carl F. Gregory FOR: 2,370,334 PERCENT FOR: 99.37%
Robert N. Dusek FOR: 2,360,013 PERCENT FOR: 98.93%
Proposal 2
Ratification of the appointment of
Grant Thornton, LLP as independent
auditor for the Company for the
December 31, 2003 fiscal year FOR: 2,371,798 PERCENT FOR: 99.43%
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Certification pursuant to 18 U.S.C.ss.1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
On April 24, 2003 the Company filed a Form 8-K wherein the
Company included the press release announcing the Company's
earnings for the first quarter of 2003.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TF FINANCIAL CORPORATION
/s/ John R. Stranford
---------------------
Date: May 9, 2003 John R. Stranford
----------------------- President and CEO
(Principal Executive Officer)
/s/ Dennis R. Stewart
---------------------
Date: May 9, 2003 Dennis R. Stewart
---------------------- Senior Vice President and
Chief Financial Officer
(Principal Financial & Accounting Officer)
18
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, John R. Stranford, President and Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of TF Financial
Corporation (Registrant);
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the Registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the Registrant's auditors and the audit committee of
Registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the Registrant's ability to record, process,
summarize and report financial data and have identified for the Registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal controls; and
6. The Registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ John R. Stranford
---------------------
Date: May 9, 2003 John R. Stranford
---------------------- President and Chief Executive Officer
(Principal Executive Officer)
19
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Dennis R. Stewart, Senior Vice President and Chief Financial Officer, certify
that:
1. I have reviewed this quarterly report on Form 10-Q of TF Financial
Corporation (Registrant);
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the Registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the Registrant's auditors and the audit committee of
Registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the Registrant's ability to record, process,
summarize and report financial data and have identified for the Registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal controls; and
6. The Registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ Dennis R. Stewart
---------------------
Date: May 9, 2003 Dennis R. Stewart
---------------------- Senior Vice President and
Chief Financial Officer
(Principal Financial & Accounting Officer)
20