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, 2004
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OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________________ to ____________________
Commission file number 000-24168
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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 6, 2004
-----------
Class Outstanding
--------------------------- ----------------
$.10 par value common stock 2,885,502 shares
TF FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 1O-Q
FOR THE QUARTER ENDED MARCH 31, 2004
INDEX
Page
Number
------
PART I - CONSOLIDATED FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements 3
Item 2. Management's Discussion and Analysis of
Financial Position and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
Item 4. Controls and Procedures 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities, Use of Proceeds, and
Issuer Repurchases of Equity Securities 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
EXHIBITS
31. Certifications pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 21
32. Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 23
2
TF FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(in thousands)
Unaudited Audited
March 31, December 31,
2004 2003
---- ----
Assets
Cash and cash equivalents $ 6,717 $ 8,241
Certificates of deposit in other financial institutions 38 155
Investment securities available for sale - at fair value 14,479 14,433
Investment securities held to maturity (fair value of $8,829 and $10,815, 8,370 10,389
respectively)
Mortgage-backed securities available for sale - at fair value 106,647 106,774
Mortgage-backed securities held to maturity (fair value of $22,192 and 21,112 23,630
$24,774, respectively)
Loans receivable, net 418,994 404,649
Federal Home Loan Bank stock - at cost 6,259 6,825
Accrued interest receivable 2,430 2,671
Core deposit intangible, net of accumulated amortization of $2,496
and $2,456, respectively 328 368
Goodwill 4,324 4,324
Premises and equipment, net 6,230 6,268
Other assets 17,284 18,025
-------- --------
Total assets $613,212 $606,752
======== ========
Liabilities and stockholders' equity
Liabilities
Deposits $470,918 $459,343
Advances from the Federal Home Loan Bank 78,909 86,853
Advances from borrowers for taxes and insurance 1,797 1,738
Accrued interest payable 2,305 1,908
Other liabilities 1,616 1,430
-------- --------
Total liabilities 555,545 551,272
-------- --------
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; 2,670,327 and 2,596,037 shares outstanding
at March 31, 2004 and December 31, 2003, net of
treasury shares of 2,404,498 and 2,474,366, respectively. 529 529
Retained earnings 53,841 52,626
Additional paid-in capital 51,275 51,982
Unearned ESOP shares (2,151) (2,196)
Treasury stock - at cost (46,208) (47,043)
Accumulated other comprehensive income 381 (418)
-------- --------
Total stockholders' equity 57,667 55,480
-------- --------
Total liabilities and stockholders' equity $613,212 $606,752
======== ========
See notes to consolidated financial statements
3
TF FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
For Three Months
Ended March 31,
---------------
2004 2003
---- ----
Interest income
Loans $5,990 $6,051
Mortgage-backed securities 1,457 1,852
Investment securities 280 508
Interest bearing deposits and other 3 246
------ ------
Total interest income 7,730 8,657
------ ------
Interest expense
Deposits 1,506 2,044
Advances from the Federal Home Loan Bank and other borrowings 646 2,778
------ ------
Total interest expense 2,152 4,822
------ ------
Net interest income 5,578 3,835
Provision for loan losses 150 90
------ ------
Net interest income after provision for loan losses 5,428 3,745
------ ------
Non-interest income
Service fees, charges and other operating income 576 444
Bank-owned life insurance 133 134
Gain (loss) on sale of investment and mortgage-backed securities
available for sale -- 506
------ ------
Total non-interest income 709 1,084
------ ------
Non-interest expense
Compensation and benefits 2,274 2,023
Occupancy and equipment 595 628
Federal deposit insurance premium 18 19
Professional fees 206 160
Amortization of core deposit intangible 40 48
Advertising 163 138
Other operating 621 724
------ ------
Total non-interest expense 3,917 3,740
------ ------
Income before income taxes 2,220 1,089
Income tax expense 611 310
------ ------
Net income $1,609 $ 779
====== ======
Basic earnings per share $0.61 $0.31
Diluted earnings per share $0.57 $0.29
Dividends paid $0.15 $0.15
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,
---------
2004 2003
-------- --------
Cash flows from operating activities
Net income $ 1,609 $ 779
Adjustments to reconcile net income to net cash provided by operating activities:
Mortgage loan servicing rights -- 3
Deferred loan origination fees (8) (104)
Premiums and discounts on investment securities, net 21 (18)
Premiums and discounts on mortgage-backed securities and loans, net 249 549
Amortization of core deposit intangible 40 48
Provision for loan losses 150 90
Depreciation of premises and equipment 234 257
Recognition of ESOP and MSBP expenses 144 116
Gain on sale of investment and mortgage-backed securities available for sale -- (506)
Gain on sale of real estate (1) (11)
Increase in value of bank-owned life insurance (132) (134)
(Increase) decrease in:
Accrued interest receivable 241 257
Other assets 839 (219)
Increase (decrease) in:
Accrued interest payable 397 610
Other liabilities (226) (300)
-------- --------
Net cash provided (used) by operating activities 3,557 1,417
-------- --------
Cash flows from investing activities
Loan originations (29,335) (24,375)
Purchases of loans (3,428) (21,927)
Loan principal payments 18,251 40,241
Proceeds from sale of mortgage-backed securities available for sale -- 12,363
Purchases of mortgage-backed securities available for sale (6,129) (25,327)
Purchase of investment securities available for sale -- (15,628)
Proceeds from maturities of investment securities held to maturity 2,000 1,330
Proceeds from maturities of investment securities available for sale -- 8,000
Principal repayments from mortgage-backed securities held to maturity 2,517 10,959
Principal repayments from mortgage-backed securities available for sale 7,196 10,685
(Purchases) and maturities of certificates of deposit in other financial
institutions,net 117 (3)
(Purchases) and redemptions of Federal Home Loan Bank stock, net 566 (422)
Proceeds from sales of real estate 32 95
Purchase of real estate held for investment 3 --
Purchase of premises and equipment (196) (192)
-------- --------
Net cash provided by (used in) investing activities (8,406) (4,201)
-------- --------
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,
---------
2004 2003
---- ----
Cash flows from financing activities
Net increase in deposits 11,575 4,208
Net decrease in advances from Federal Home Loan Bank (7,944) (5,000)
Net increase (decrease) in advances from borrowers for taxes and insurance 59 (174)
Exercise of stock options 1,245 223
Purchase of treasury stock, net (1,216) --
Common stock cash dividend (394) (373)
------- --------
Net cash provided by (used in) financing activities 3,325 (1,116)
------- --------
Net (decrease) increase in cash and cash equivalents (1,524) (3,900)
Cash and cash equivalents at beginning of period 8,241 100,580
------- --------
Cash and cash equivalents at end of period $ 6,717 $ 96,680
======= ========
Supplemental disclosure of cash flow information
Cash paid for
Interest on deposits and advances $1,755 $4,212
Income taxes $ 0 $ 150
Non-cash transactions
Transfers from loans to real estate acquired through foreclosure $ 0 $1,805
See notes to consolidated financial statements
6
TF FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - PRINCIPLES OF CONSOLIDATION
The consolidated financial statements as of March 31, 2004 (unaudited)
and December 31, 2003 and for the three-month periods ended March 31,
2004 and 2003 (unaudited) include the accounts of TF Financial
Corporation (the "Company") and its wholly owned subsidiaries Third
Federal Savings 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, 2004 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, 2003.
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
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, 2004 and 2003 was $2,408,000 and $182,000, net of applicable
income tax of $1,023,000 and $2,000, respectively.
7
TF FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - EARNINGS PER SHARE
Three months ended March 31, 2004
---------------------------------
Weighted
(000's) Average
Income Shares Per share
(numerator) (denominator) 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
======= ========= ======
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.
8
TF FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6- 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):
Three months ended March 31, 2004 2003
----------------------------- ---- ----
Net income
As reported $1,609 $ 779
Deduct: stock-based compensation expense
determined using the fair value method,
net of related tax effects 25 11
------ ------
Pro forma $1,584 $ 768
====== ======
Basic earnings per share
As reported $ 0.61 $ 0.31
Pro forma $ 0.60 $ 0.31
Diluted earnings per share
As reported $ 0.57 $ 0.29
Pro forma $ 0.57 $ 0.29
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 $121,000 and $96,000 for the
three-month periods ended March 31, 2004 and 2003, respectively.
9
TF FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7- EMPLOYEE BENEFIT PLANS
Net periodic defined benefit pension expense included the following
components:
Three months ended March 31, 2004 2003
----------------------------- ---- ----
Service cost $ 57,936 $ 47,686
Interest cost 44,429 46,257
Expected return on plan assets (51,884) (54,318)
Amortization of transition (asset)/obligation 1,002 1,337
Amortization of prior service costs 15,634 15,634
Amortization of unrecognized net actual loss 3,720 3,274
-------- --------
Net periodic benefit cost $ 70,837 $ 59,870
======== ========
Management expects to make no contribution to the pension plan in 2004.
The impact of the Pension Funding Equity Act which was enacted in April 2004 is
currently being evaluated.
NOTE 8- RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the
current period presentation.
10
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, 2004 and December 31, 2003 were $613.2
million and $606.8 million, respectively, an increase of $6.4 million, or 1.1%,
during the three-month period. Cash and cash equivalents decreased by $1.5
million. Investment securities available for sale increased by $0.05 million due
to the increase in the market value of these securities. Investment securities
held to maturity decreased by $2.0 million due to calls of such securities.
Mortgage-backed securities available for sale decreased by $0.1 million as $7.2
million in principal pay-downs received was off-set by $6.1 million of security
purchases as well as an increase in the market value of these securities
totaling $1.2 million. Mortgage-backed securities held to maturity decreased by
$2.5 million as a result of principal repayments. Loans receivable increased by
$14.3 million for the three-month period. Consumer and single-family residential
mortgage loans of $16.0 million and commercial loans of $13.3 million account
for loan originations during the first quarter of 2004. Additionally, $3.4
million of newly originated, single-family residential mortgage loans were
purchased during the three-month period. Offsetting these increases to loans
receivable were $18.3 million of principal repayments.
11
Total liabilities increased by $4.3 million. Deposit growth during the first
three months of 2004 was $11.6 million. Non-interest bearing demand deposits
grew by $1.7 million while savings, money market, and interest-bearing checking
accounts increased by a combined $2.3 million. Certificates of deposit decreased
by $7.6 million. Advances from the Federal Home Loan Bank decreased by $7.9
million due to $3.0 million of scheduled loan amortization payments and
repayments of $4.9 million of short-term advances, using funds generated by
deposit growth, which replaced the Company's need for funding from the Federal
Home Loan Bank.
Total consolidated stockholders' equity of the Company was $57.7 million or
9.40% of total assets at March 31, 2004. During the first quarter of 2004 the
Company repurchased 38,000 shares of its common stock and issued 107,868 shares
pursuant to the exercise of stock options. As of March 31, 2004, there were
approximately 114,000 shares available for repurchase under the previously
announced share repurchase plan.
Asset Quality
During the first quarter of 2004, the Company's provision for loan and lease
loss was $150,000 compared to $90,000 during the first quarter of 2003. The
increase in the provision is consistent with the corresponding increase in
balance of loans receivable. 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. As of March 31, 2004 the
Company continued to own one of the parcels. 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 $0.8 million and is included in other
assets in the statement of financial position at March 31, 2004. 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, December 31, March 31,
--------- ------------ ---------
2004 2003 2003
---- ---- ----
Non-performing loans $2,710 $2,282 $3,275
Ratio of non-performing loans to gross loans 0.64% 0.56% 0.93%
Ratio of non-performing loans to total assets 0.44% 0.38% 0.45%
Foreclosed property $837 $868 $84
Foreclosed property to total assets 0.14% 0.14% 0.01%
Ratio of total non-performing assets to total assets 0.58% 0.52% 0.46%
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):
2004 2003
---- ----
Beginning balance, January 1, $2,111 $2,047
Provision 150 90
Less: charge-off's (recoveries), net 39 79
------ ------
Ending balance, March 31, $2,222 $2,058
====== ======
12
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
Net Income. The Company recorded a net income of $1,609,000, or $0.57 per
diluted share, for the three months ended March 31, 2004 as compared to net
income of $779,000, or $0.29 per diluted share, for the three months ended March
31, 2003.
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, for the periods indicated.
Three months ended March 31,
----------------------------
2004 2003
-------------------------------- -------------------------------
Average Average Average Average
Balance Interest Yld/Cost Balance Interest Yld/Cost
------- -------- -------- ------- -------- --------
(dollars in thousands)
Assets:
Interest-earning assets:
Loans receivable (1)....................... $410,976 $5,990 5.85% $366,561 $6,051 6.69%
Mortgage-backed securities................. 130,658 1,457 4.47% 163,663 1,852 4.59%
Investment securities...................... 30,453 280 3.69% 56,620 508 3.64%
Other interest-earning assets(2)........... 1,570 3 0.77% 94,384 246 1.06%
-------- ------ -------- ------
Total interest-earning assets............ 573,657 7,730 5.42% 681,228 8,657 5.15%
------ ------
Non interest-earning assets.................... 35,513 34,960
-------- --------
Total assets............................. $609,170 $716,188
======== ========
Liabilities and stockholders' equity:
Interest-bearing liabilities
Deposits................................... $464,744 1,506 1.30% $442,687 2,044 1.87%
Advances from the FHLB and other
Borrowings...................... 83,314 646 3.11% 204,026 2,778 5.52%
-------- ------ -------- ------
Total interest-bearing liabilities....... 548,058 2,152 1.58% 646,713 4,822 3.02%
------ ------
Non interest-bearing liabilities............... 5,233 6,422
-------- --------
Total liabilities........................ 553,291 653,135
Stockholders' equity........................... 55,879 63,053
-------- --------
Total liabilities and stockholders' equity.. $609,170 $716,188
======== ========
Net interest income............................ $5,578 $3,835
====== ======
Interest rate spread (3)....................... 3.84% 2.13%
Net yield on interest-earning assets (4)....... 3.91% 2.28%
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.
13
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,
2004 vs. 2003
---------------------------------
Increase (decrease)
due to
---------------------------------
Volume Rate Net
---------------------------------
Interest income:
Loans receivable, net $ 3,011 $(3,072) (61)
Mortgage-backed securities (351) (44) (395)
Investment securities (276) 48 (228)
Other interest-earning assets (190) (53) (243)
------- ------- -------
Total interest-earning assets 2,194 (3,121) (927)
===== ====== ====
Interest expense:
Deposits 635 (1,173) (538)
Advances from the FHLB and other borrowings (1,227) (905) (2,132)
------- ------- -------
Total interest-bearing liabilities (592) (2,078) (2,670)
==== ====== ======
Net change in net interest income $ 2,786 $(1,043) $ 1,743
======= ======= =======
Total Interest Income. Total interest income decreased by $0.9 million or 10.7%
to $7.7 million for the quarter ended March 31, 2004 compared with the first
quarter of 2003 primarily because of low market interest rates which resulted in
a significant amount of loan prepayments during the intervening period.
Increased loan originations at the Bank contributed to loan income in a manner
that largely offset the impact caused by the low market interest rates. Interest
income from mortgage-backed securities, investment securities and other
interest-earning assets was lower in the first three months of 2004 in
comparison to the same period of 2003. This decrease is consistent with the
reduction in the balances maintained in these types of interest-earning assets.
Total Interest Expense. Total interest expense decreased by $2.7 million to $2.1
million during the three-month period ended March 31, 2004 as compared with the
first quarter of 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.
The repayment and refinancing of the Federal Home Loan Bank Advances that
occurred at the end of the third quarter of 2003 also contributed to the overall
reduction of interest expense.
14
Non-interest income. Total non-interest income was $709,000 for the three-month
period ended March 31, 2004 compared with $1,084,000 for the same period in
2003. The decrease was primarily due to $506,000 in net gains on sales of
mortgage-backed securities available for sale during the first quarter of 2003
while, conversely, there were no such sales during the same period in 2004.
Retail banking fees were $131,000 greater over the period as a result of a
$76,000 increase in overdraft and uncollected fees. Also, the collection of
mortgage brokered fees and a growth in other loan fees contributed to the
increase during the period.
Non-interest expense. Total non-interest expense increased by $177,000 to $3.9
million for the three months ended March 31, 2004 compared to the same time in
2003. Compensation and benefit expenses were higher by $251,000 due to increases
in salary and compensation costs of the Company. Professional expenses of the
Company were $46,000 higher mainly because of compliance and audit work that was
outsourced. In contrast, other operating expenses decreased $103,000 between the
two quarters mostly due to a $55,000 decline in loan expenses related to
single-family residential mortgage loans.
15
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, 2004 in the ability of the Company and its subsidiaries to fund their
operations.
At March 31, 2004, the Company had commitments outstanding under letters of
credit of $1 million, commitments to originate loans of $21.9 million, and
commitments to fund undisbursed balances of closed loans and unused lines of
credit of $51.5 million. There has been no material change during the three
months ended March 31, 2004 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,
2004.
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, 2004.
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.
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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 $2,222,000 at March 31, 2004.
NEW ACCOUNTING PRONOUNCEMENTS
On March 31, 2004, the Financial Accounting Standards Board (FASB) issued a
proposed Statement, "Share-Based Payment an Amendment of FASB Statements No. 123
and APB No. 95", that addresses the accounting for share-based payment
transaction in which an enterprise receives employee services in exchange for
(a) equity instruments of the enterprise or (b) liabilities that are based on
the fair value of the enterprise's equity instruments or that may be settled by
the issuance of such equity instruments. Under the FASB's proposal, all forms of
share-based payments to employees, including stock options, would be treated the
same as other forms of compensation by recognizing the related cost in the
income statement. The expense of the award would generally be measured at fair
value at the grant date. 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. The proposed Statement would eliminate
the ability to account for share-based compensation transactions using APB
Opinion No. 25, "Accounting for Stock Issued to Employees." The Company is
currently evaluating this proposed statement and its effects on its results of
operations.
In March 2004 the Securities and Exchange Commission staff released Staff
Accounting Bulletin (SAB) 105, "Loan Commitments Accounted for as Derivative
Instruments." SAB 105 requires that a lender should not consider the expected
cash flows related to loan servicing or include any internally developed
intangible assets in determining the fair value of loan commitments accounted
for as derivatives. Companies will be required to adopt SAB 105 effective for
commitments entered into after March 31, 2004. The requirements of SAB 105 will
apply to the Company's mortgage interest rate lock commitments related to loans
held for sale. At March 31, 2004, the Company did not have such commitments
subject to the provisions of SAB 105. The Company anticipates that the
implementation of SAB 105 will not have a material impact on the effect on the
Company's financial position or results of operations.
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TF FINANCIAL CORPORATION AND SUBSIDIARIES
PART II
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS
AND ISSUER PURCHASES OF EQUITY SECURITIES
The following table provides information on repurchases by the Company
of its common stock in each month of the quarter ended March 31, 2004:
Total Number of Maximum Number of
Total Shares Purchased as Shares that may yet
Number of Part of Publicly be Purchased Under
Shares Average Price Announced Plan of the Plans or
Period Purchased Paid per Share Program Programs
------ --------- -------------- ------- --------
January 1, 2004
through -- -- -- 114,082
January 31, 2004
February 1, 2004
through -- -- -- 114,082
February 29, 2004
March 1
Through 38,000 $32.00 -- 114,082
March 31, 2004
The total number of shares repurchased during the quarter was directly
related to the exercise of 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 28, 2004. There were outstanding and entitled to vote at the
Meeting 2,885,502 shares of Common Stock of the Company. There were present at
the meeting or by proxy the holders of 2,611,478 shares of Common Stock
representing 90.51% 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, 2004 fiscal year. Proposal 3, 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
George A. Olsen FOR: 2,314,744 PERCENT FOR: 88.64%
WITHHELD: 296,734 PERCENT WITHHELD: 11.36%
Dennis L. McCartney FOR: 2,316,547 PERCENT FOR: 88.71%
WITHHELD: 294,931 PERCENT WITHHELD: 11.29%
Proposal 2
Ratification of the appointment of Grant Thornton, LLP
as independent auditor for the Company for the
December 31, 2004 fiscal year. FOR: 2,550,903 PERCENT FOR: 97.68%
AGAINST: 21,005 PERCENT AGAINST: 0.80%
ABSTAIN: 39,570 PERCENT ABSTAIN 1.52%
Proposal 3
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: 850,328 PERCENT FOR: 40.67%
AGAINST: 1,228,798 PERCENT AGAINST: 58.77%
ABSTAIN: 11,860 PERCENT ABSTAIN 0.56%
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31. Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2003.
32. Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2003.
(b) Reports on Form 8-K
On April 22, 2004 the Company filed a Form 8-K wherein the
Company included the press release announcing the Company's
earnings for the first quarter of 2004.
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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/ Kent C. Lufkin
------------------------------------------
Date: May 14, 2004 Kent C. Lufkin
President and CEO
(Principal Executive Officer)
/s/ Dennis R. Stewart
------------------------------------------
Date: May 14, 2004 Dennis R. Stewart
Executive Vice President and
Chief Financial Officer
(Principal Financial & Accounting Officer)
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