-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, B6jZZxStCbJyBYfCLtmIcTWEkskrPKuQhdNEI3zwH4lbmAWXS+nQuZ9+4vv3KGbp 2CQt9DjW+wRht0uumscrnA== 0000946275-99-000222.txt : 19990402 0000946275-99-000222.hdr.sgml : 19990402 ACCESSION NUMBER: 0000946275-99-000222 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TF FINANCIAL CORP CENTRAL INDEX KEY: 0000921051 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 742705050 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-24168 FILM NUMBER: 99579534 BUSINESS ADDRESS: STREET 1: 3 PENNS TRAIL CITY: NEWTOWN STATE: PA ZIP: 18940 BUSINESS PHONE: 2155794000 MAIL ADDRESS: STREET 1: 3 PENNS TRAIL CITY: NEWTOWN STATE: PA ZIP: 18940 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the fiscal year ended December 31, 1998 ------------------------------------------------------ - or - [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from ________________ to __________________ Commission File Number: 0-24168 TF FINANCIAL CORPORATION ---------------------------------------------------------- (Exact Name of Registrant as Specified in Its Charter) Delaware 74-2705050 - ---------------------------------------- ------------------------ (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) 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 X NO --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] The aggregate market value of the voting stock held by non-affiliates of the Registrant, based on the average bid and asked prices of the Registrant's Common Stock as quoted on the Nasdaq System on March 19, 1999, was $36,478,038 million (2,077,337 shares at $17.56 per share). As of March 19, 1999 there were outstanding 3,041,010 shares of the Registrant's Common Stock. DOCUMENTS INCORPORATED BY REFERENCE 1. Portions of the Annual Report to Stockholders for the Fiscal Year Ended December 31, 1998. (Parts I, II and IV) 2. Portions of the Proxy Statement for the 1999 Annual Meeting of Stockholders. (Part III) PART I TF FINANCIAL CORPORATION (THE "COMPANY") MAY FROM TIME TO TIME MAKE WRITTEN OR ORAL "FORWARD-LOOKING STATEMENTS", INCLUDING STATEMENTS CONTAINED IN THE COMPANY'S FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION (INCLUDING THIS ANNUAL REPORT ON FORM 10-K AND THE EXHIBITS THERETO), IN ITS REPORTS TO STOCKHOLDERS AND IN OTHER COMMUNICATIONS BY THE COMPANY, WHICH ARE MADE IN GOOD FAITH BY THE COMPANY PURSUANT TO THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES, SUCH AS STATEMENTS OF THE COMPANY'S PLANS, OBJECTIVES, EXPECTATIONS, ESTIMATES AND INTENTIONS, THAT ARE SUBJECT TO CHANGE BASED ON VARIOUS IMPORTANT FACTORS (SOME OF WHICH ARE BEYOND THE COMPANY'S CONTROL). THE FOLLOWING FACTORS, AMONG OTHERS, COULD CAUSE THE COMPANY'S FINANCIAL PERFORMANCE TO DIFFER MATERIALLY FROM THE PLANS, OBJECTIVES, EXPECTATIONS, ESTIMATES AND INTENTIONS EXPRESSED IN SUCH FORWARD-LOOKING STATEMENTS: THE STRENGTH OF THE UNITED STATES ECONOMY IN GENERAL AND THE STRENGTH OF THE LOCAL ECONOMIES IN WHICH THE COMPANY CONDUCTS OPERATIONS; THE EFFECTS OF, AND CHANGES IN, TRADE, MONETARY AND FISCAL POLICIES AND LAWS, INCLUDING INTEREST RATE POLICIES OF THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, INFLATION, INTEREST RATES, MARKET AND MONETARY FLUCTUATIONS; THE TIMELY DEVELOPMENT OF AND ACCEPTANCE OF NEW PRODUCTS AND SERVICES OF THE COMPANY AND THE PERCEIVED OVERALL VALUE OF THESE PRODUCTS AND SERVICES BY USERS, INCLUDING THE FEATURES, PRICING AND QUALITY COMPARED TO COMPETITORS' PRODUCTS AND SERVICES; THE WILLINGNESS OF USERS TO SUBSTITUTE COMPETITORS' PRODUCTS AND SERVICES FOR THE COMPANY'S PRODUCTS AND SERVICES; THE SUCCESS OF THE COMPANY IN GAINING REGULATORY APPROVAL OF ITS PRODUCTS AND SERVICES, WHEN REQUIRED; THE IMPACT OF CHANGES IN FINANCIAL SERVICES' LAWS AND REGULATIONS (INCLUDING LAWS CONCERNING TAXES, BANKING, SECURITIES AND INSURANCE); TECHNOLOGICAL CHANGES, ACQUISITIONS; CHANGES IN CONSUMER SPENDING AND SAVING HABITS; AND THE SUCCESS OF THE COMPANY AT MANAGING THE RISKS INVOLVED IN THE FOREGOING. THE COMPANY CAUTIONS THAT THE FOREGOING LIST OF IMPORTANT FACTORS IS NOT EXCLUSIVE. THE COMPANY DOES NOT UNDERTAKE TO UPDATE ANY FORWARD- LOOKING STATEMENT, WHETHER WRITTEN OR ORAL, THAT MAY BE MADE FROM TIME TO TIME BY OR ON BEHALF OF THE COMPANY. Item 1. Business - ----------------- BUSINESS OF THE COMPANY On July 13, 1994, the Registrant, TF Financial Corporation (the "Company") consummated its public offering for 5,290,000 shares of its common stock and acquired Third Federal Savings Bank (the "Savings Bank" or "Third Federal") as part of the Savings Bank's conversion from a mutual to a stock federally chartered savings bank. The Registrant was incorporated under Delaware law in March 1994. 1 The Registrant is a savings and loan holding company and is subject to regulation by the Office of Thrift Supervision (the "OTS"), the Federal Deposit Insurance Corporation (the "FDIC") and the Securities and Exchange Commission (the "SEC"). Currently, the Registrant does not transact any material business other than through its subsidiaries, the Savings Bank, TF Investments Corporation, Teragon Financial Corporation, Penns Trail Development Corporation and Third Delaware Corporation. Third Delaware Corporation was incorporated in August 1998, as a subsidiary of the Savings Bank, for the purpose of holding and managing investment securities for the Savings Bank. At December 31, 1998, the Company had total assets of $665.6 million, total deposits of $438.9 million and stockholders' equity of $52.7 million. On August 19, 1994, the Board of Directors approved the change in the Company's fiscal year from June 30 to December 31. BUSINESS OF THE SAVINGS BANK Third Federal, originally organized in 1921 as a Pennsylvania-chartered building and loan association, converted to a federally chartered mutual savings and loan association in 1935. The Savings Bank's deposits are insured up to the maximum amount allowable by the FDIC. The Savings Bank is a community oriented savings institution offering a variety of financial services to meet the needs of the community it serves. The Savings Bank significantly expanded its operations throughout Philadelphia and Bucks Counties, Pennsylvania in June 1992 through its acquisition of Doylestown Federal Savings and Loan Association ("Doylestown"). On September 20, 1996, Third Federal acquired three branch offices, certain assets and $143 million of deposits from Cenlar Federal Savings Bank, Trenton, New Jersey ("Cenlar"). As a result of the Cenlar acquisition, Third Federal currently operates eleven branch offices in Bucks and Philadelphia counties, Pennsylvania and three branch offices in Mercer County, New Jersey. This acquisition was consistent with the Savings Bank's strategic goal of growing its market share within its market area and reaching into adjacent market areas, through low-cost, fill-in or market-extension acquisitions. The Savings Bank attracts deposits from the general public and uses such deposits, together with borrowings and other funds primarily to originate or purchase loans secured by first mortgages on owner-occupied, one- to four-family residences in its market area and to invest in mortgage-backed and investment securities. At December 31, 1998, one- to four-family residential mortgage loans totaled $152.8 million or 62.9% of the Savings Bank's total loan portfolio. At that same date, the Savings Bank had approximately $256.2 million or 38.5% of total assets invested in mortgage-backed securities and $89.9 million or 13.5% of total assets in investment securities. To a lesser extent, the Savings Bank also originates commercial real estate and multi-family, construction and consumer loans. Market Area Third Federal operates five offices in Philadelphia County and six offices in Bucks County, Pennsylvania. These two counties cover the city of Philadelphia and the northeast suburbs of Philadelphia. The population of these two counties totals over 2.1 million. The Savings Bank also operates three branch offices in Mercer County, New Jersey. The population of Bucks and Mercer Counties has experienced distinctly different economic and demographic trends over recent decades. Whereas Philadelphia County has experienced a population decline and has offered very limited lending opportunities, Bucks and Mercer Counties, with growing populations, have offered Third Federal much greater lending opportunities. 2 Competition Third Federal faces varying degrees of competition from local thrifts and credit unions at its various branch locations. Stronger competition has come from local and much larger regional banks based in and around the Philadelphia area. Commercial banks hold approximately 80% of the deposit market in Philadelphia County, 68% in Bucks County and 66% in Mercer County. Third Federal's share of the deposit market in Philadelphia, Bucks and Mercer Counties is very small, at 0.83%, 2.2% and 1.87%, respectively. Lending Activities General. The Savings Bank's loan portfolio composition consists primarily of conventional adjustable-rate ("ARM") and fixed-rate first mortgage loans secured by one- to four-family residences. The Savings Bank also makes commercial real estate and multi-family loans, construction loans and consumer and other loans. At December 31, 1998, the Savings Bank's mortgage loans outstanding were $213.4 million, of which $152.8 million were one- to four-family residential mortgage loans. Of the one- to four-family residential mortgage loans outstanding at that date, 30.4% were ARM's and 69.6% were fixed-rate loans. Total ARM mortgage loans in the Savings Bank's portfolio at December 31, 1998, amounted to $85.7 million or 40.15% of total mortgage loans. At that same date, commercial real estate and multi-family residential and construction loans totaled $55.2 million and $5.3 million, respectively. Consumer and other loans held by the Savings Bank totaled $29.5 million or 12.1% of total loans outstanding at December 31, 1998, of which $13.0 million or 5.35% consisted of home equity and second mortgages. At that same date commercial business loans, leases and other loans totaled $6.7 million, $2.3 million and $7.5 million, respectively. 3 The following table sets forth the composition of the Savings Bank's loan portfolio and mortgage-backed and related securities portfolios in dollar amounts and in percentages of the respective portfolios at the dates indicated.
At December 31, -------------------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ------------------ ----------------- ------------------ ----------------- ----------------- Percent Percent Percent Percent Percent Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total ------ -------- ------ -------- ------ -------- ------ -------- ------ -------- (Dollars in thousands) Mortgage loans: One- to four-family.......... $152,819 62.93% $198,328 78.43% $265,618 85.16% $204,430 85.00% $ 80,862 69.70% Commercial real estate and multi-family............... 55,208 22.73 26,653 10.54 20,427 6.55 10,294 4.28 11,285 9.73 Construction................. 5,352 2.20 5,052 2.00 4,720 1.51 3,604 1.50 1,534 1.32 ------- ------ ------- ------ ------- ------ ------- ------ ------- ------ Total mortgage loans.... 213,379 87.86 230,033 90.97 290,765 93.22 218,328 90.78 93,681 80.75 Consumer and other loans: Home equity and second mortgage................... 12,995 5.35 12,147 4.80 9,661 3.10 10,635 4.42 11,663 10.05 Commercial business.......... 6,666 2.74 2,798 1.11 3,126 1.00 2,887 1.20 3,679 3.17 Leases....................... 2,305 0.95 1,671 0.66 3,093 0.99 3,590 1.49 2,194 1.89 Other........................ 7,521 3.10 6,230 2.46 5,261 1.69 5,072 2.11 4,796 4.14 ------- ------ ------- ------ ------- ------ ------- ------ ------- ------ Total consumer and other loans................. 29,487 12.14 22,846 9.03 21,141 6.78 22,184 9.22 22,332 19.25 ------- ------ ------- ------ ------- ------ ------- ------ ------- ------ Total loans............. 242,866 100.00% 252,879 100.00% 311,906 100.00% 240,512 100.00% 116,013 100.00% ======= ====== ======= ====== ======= ====== ======= ====== ======= ====== Less: Unearned discount, premium, deferred loan fees, net.... 116 139 530 753 647 Allowance for loan losses.... 1,909 2,029 1,806 1,484 1,473 ------- ------- ------- ------- ------- Total loans, net......... $240,841 $250,711 $309,570 $238,275 $113,893 ======= ======= ======= ======= ======= Mortgage-backed securities held-to-maturity: FHLMC........................ $ 47,239 26.10% $ 76,523 53.12% $ 90,016 58.54% $ 65,834 47.76% $ 85,524 47.14% FNMA......................... 12,726 7.03 22,927 15.91 27,547 17.92 33,150 24.05 39,713 21.89 GNMA......................... 56,318 31.12 7,483 5.19 6,043 3.93 7,644 5.55 9,358 5.16 Real estate investment mortgage conduit........... 64,180 35.47 36,389 25.26 29,220 19.00 30,033 21.79 46,603 25.69 Collateralized mortgage obligations................ -- -- -- 19 0.01 213 0.12 Other mortgage-backed securities................. 501 0.28 752 0.52 932 0.61 1,161 0.84 -- ------- ------ ------- ------ ------- ------ ------- ------ ------- ------ Total mortgage-backed and related securities held-to-maturity......... $180,964 100.00% $144,074 100.00% $153,758 100.00% $137,841 100.00% $181,411 100.00% ======= ====== ======= ====== ======= ====== ======= ====== ======= ====== Mortgage-backed securities available-for-sale: FHLMC...................... $ 13,214 17.55% $ 19,223 52.17% $ 8,905 40.43% $ 15,422 52.03% FNMA....................... 32,178 42.74 7,863 21.34 3,240 14.71 4,010 13.53 GNMA....................... 10,284 13.66 -- -- -- Real estate investment mortgage conduit......... 19,609 26.05 9,761 26.49 9,882 44.86 10,208 34.44 ------- ------ ------- ------ ------- ------ ------- ------ Total.................... $ 75,285 100.00% $ 36,847 100.00% $ 22,027 100.00% $ 29,640 100.00% ======= ====== ======= ====== ======= ====== ======= ======
4 The following table sets forth the Savings Bank's loan originations and loan and mortgage-backed and related securities purchases, sales and principal payments for the periods indicated:
Years Ended December 31, ------------------------------------------------ 1998 1997 1996 -------- --------- -------- (In thousands) Total loans receivable (gross): At beginning of period.................................. $252,879 $311,906 $240,512 Mortgage loans originated: One- to four-family.................................. 24,598 52,039 64,643 Commercial real estate and multi-family.............. 10,242 6,222 8,488 Construction......................................... 6,759 8,090 14,465 ------- ------- ------- Total mortgage loans originated ................. 41,599 66,351 87,596 Mortgage loans purchased: One- to four-family.................................. 14,144 14,224 82,363 Other non-residential................................ 26,564 -- 358 ------- ------- ------- Total mortgage loans purchased................... 40,708 14,224 82,721 ------- ------- ------- Total mortgage loans originated and purchased ......... 82,307 80,575 170,317 Consumer loans originated ............................. 14,265 6,643 4,473 Transfer of mortgage loans to real estate owned........ (159) (249) (242) Sale of loans.......................................... (19,496) (94,925) (19,591) Loans securitized...................................... -- -- (28,212) Principal repayments................................... (86,930) (51,071) (55,351) ------- ------- ------- Total loans receivable at end of period................ $242,866 $252,879 $311,906 ======= ======= ======= Mortgage-backed securities: Held-to-maturity: At beginning of period................................. 144,074 153,758 $137,841 Mortgage-backed securities purchased................... 140,929 18,972 45,349 Mortgage-backed securities sold........................ -- -- -- Transferred to available-for-sale...................... (42,869) -- -- Amortization and repayments............................ (61,170) (28,656) (29,432) ------- ------- ------- At end of period....................................... $180,964 $144,074 $153,758 ======= ======= ======= Available-for-sale: At beginning of period................................. 36,847 22,027 $ 29,640 Transferred from held-to-maturity...................... 42,869 -- -- Mortgage-backed securities purchased .................. 44,506 37,129 4,952 Mortgage-backed securities sold........................ (29,512) (4,153) (8,943) Amortization and repayments............................ (19,425) (18,156) (3,622) ------- ------- ------- At end of period....................................... $ 75,285 $ 36,847 $ 22,027 ======= ======= =======
5 Maturity of Loans and Mortgage-backed and Related Securities. The following table sets forth the maturity of Third Federal's loan and mortgage-backed securities at December 31, 1998. The table does not include prepayments or scheduled principal repayments. Prepayments and scheduled principal repayments on loans totaled $167.5 million for the year ended December 31, 1998. Adjustable- rate mortgage loans are shown as maturing based on contractual maturities.
Commercial Mortgage- One- to Real Estate Backed Four- and Multi- Consume Total Loans and Related Family Family Construction and Other Receivable Securities Total ------- ----------- ------------ --------- ---------- ----------- ----- (In thousands) Non-performing................... $ 896 $ 7 $ -- $ 609 $ 1,602 $ -- $ 1,602 Amounts Due: Within 3 months.................. 46 -- -- 70 116 344 460 3 months to 1 Year.............. 260 98 4,490 710 5,558 3,437 8,995 After 1 year: 1 to 3 years................... 6,725 370 6,486 5,196 18,777 10,981 29,758 3 to 5 years................... 2,927 2,431 -- 8,386 13,744 9,617 23,361 5 to 10 years.................. 14,284 44,706 -- 7,470 66,460 31,862 98,322 10 to 20 years................. 45,540 7,506 -- 6,274 59,320 29,985 89,305 Over 20 years.................. 82,141 -- -- 772 82,913 170,023 252,936 Total due after one year......... 151,617 55,013 6,486 28,098 241,214 252,468 493,682 Total amounts due................ 152,819 55,208 10,976 29,487 248,490 256,249 504,739 Less: Allowance for loan loss.......... 1,205 508 97 99 1,909 -- 1,909 Loans in process................. -- -- 5,624 -- 5,624 -- 5,624 Deferred loan fees............... 67 -- -- 49 116 -- 116 ------- ------ ------ ------ ------- ------- ------- Total........................ $151,547 $54,700 $ 5,255 $29,339 $240,841 $256,249 $497,090 ======= ====== ====== ====== ======= ======= =======
6 The following table sets forth the dollar amount of all loans due after December 31, 1999, which have predetermined interest rates and which have floating or adjustable interest rates. Floating or Fixed Adjustable Rates Rates Total -------- ------------ -------- (In thousands) One- to four-family....................... $106,209 $46,303 $152,512 Commercial real estate and multi-family... 21,515 33,595 55,110 Construction.............................. -- 6,486 6,486 Consumer and other........................ 15,797 12,910 28,707 ------- ------ ------- Total................................... $143,521 $99,294 $242,815 ======= ====== ======= One- to Four-Family Mortgage Loans. The Savings Bank offers first mortgage loans secured by one- to four-family residences in the Savings Bank's lending area. Typically, such residences are single-family homes that serve as the primary residence of the owner. The Savings Bank generally originates and invests in one- to four-family residential mortgage loans in amounts up to 80% of the lesser of the appraised value or selling price of the mortgaged property. Loans originated in amounts over 80% of the lesser of the appraised value or selling price of the mortgaged property, other than loans to facilitate the sale of real estate acquired through foreclosure, must be owner-occupied and private mortgage insurance must be provided on the amount in excess of 80%. Loan originations are generally obtained from existing or past customers, members of the local community, and referrals from established builders and realtors within the Savings Bank's lending area. Mortgage loans originated and held by the Savings Bank in its portfolio generally include due-on sale clauses which provide the Savings Bank with the contractual right to deem the loan immediately due and payable in the event that the borrower transfers ownership of the property without the Savings Bank's consent. At December 31, 1998, 62.9% of mortgage loans consisted of one- to four-family residential loans, of which 30.4% were ARM loans. The Savings Bank offers a variety of ARM loans with terms of 30 years which adjust at the end of 6 months, one, three, five, seven and ten years and adjust by a maximum of 1 to 2 % per adjustment with a lifetime cap of 5 to 6% over the life of the loan. The ARM loans acquired as a result of the Doylestown merger adjust at the end of one or three years and adjust by a maximum of 2.00% per adjustment with a lifetime cap of 5.00% over the life of the loan. The Savings Bank offers fixed-rate mortgage loans with terms of 10 to 30 years, which are payable monthly. The Savings Bank has continued its emphasis on fixed-rate mortgage loans with terms of 15 years or less. Interest rates charged on fixed-rate mortgage loans are competitively priced based on market conditions and the Savings Bank's cost of funds. The origination fees for fixed-rate loans were generally 3.0% at December 31, 1998. Generally, the Savings Bank's standard underwriting guideline for fixed-rate mortgage loans conform to the FHLMC and FNMA guidelines and may be sold in the secondary market. The Savings Bank has in the past sold a portion of its conforming fixed-rate mortgage loans in the secondary market to federal agencies while retaining the servicing rights certain loans. The Savings Bank, however, is primarily a portfolio lender. As of December 31, 1998, the Savings Bank's portfolio of loans serviced for others totaled approximately $21.2 million. 7 Commercial Real Estate and Multi-Family Loans. The Savings Bank has historically originated a limited number of loans secured by commercial real estate including non-owner occupied residential multi-family dwelling units (more than four units) primarily secured by professional office buildings and apartment complexes. The Savings Bank generally originates commercial real estate and multi-family loans up to 75% of the appraised value of the property securing the loan. Currently, it is the Savings Bank's philosophy to originate commercial real estate and multi-family loans only to borrowers known to the Savings Bank and on properties in its market area. The commercial real estate and multi-family loans in the Savings Bank's portfolio consist of fixed-rate, ARM and balloon loans which were originated at prevailing market rates for terms of up to 20 years. The Savings Bank's current policy is to originate commercial real estate and multi-family loans as ARM's that are generally amortized over a period of 15 years or as balloon loans which generally have terms of 5 to 10 years, with 20-25 year amortizations. Loans secured by commercial and multi-family real estate are generally larger and involve a greater degree of risk than one- to four-family residential mortgage loans. Of primary concern in commercial and multi-family real estate lending is the borrower's creditworthiness and the feasibility and cash flow potential of the project. Loans secured by income properties are generally larger and involve greater risks than residential mortgage loans because payments on loans secured by income properties are often dependent on successful operation or management of the properties. As a result, repayment of such loans may be subject to a greater extent than residential real estate loans to adverse conditions in the real estate market or the economy. In order to monitor cash flows on income properties, the Savings Bank requires borrowers and loan guarantors, if any, to provide annual financial statements and rent rolls on multi-family loans. At December 31, 1998, the five largest commercial real estate and multi-family loans totaled $8.3 million with no single loan larger than $2.1 million. At December 31, 1998, all such loans were current and the properties securing such loans are in the Savings Bank's market area. Construction Loans. At December 31, 1998, the Savings Bank had $5.3 million of construction loans or 2.2% of the Savings Bank's total loan portfolio. Construction financing is generally considered to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate. Risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the property's value at completion of construction or development and the estimated cost (including interest) of construction. During the construction phase, a number of factors could result in delays and cost overruns. If the estimate of construction costs proves to be inaccurate, the Savings Bank may be required to advance funds beyond the amount originally committed to permit completion of the development. If the estimate of value proves to be inaccurate, the Savings Bank may be confronted, at or prior to the maturity of the loan, with a project having a value which is insufficient to assure full repayment. Consumer and Other Loans. The Savings Bank also offers consumer and other loans in the form of home equity and second mortgage loans (referred to hereinafter collectively as "second mortgage loans"), commercial business loans, automobile loans and student loans. These loans totaled $29.5 million or 12.1% of the Savings Bank's total loan portfolio at December 31, 1998. Federal regulations permit federally chartered thrift institutions to make secured and unsecured consumer loans up to 35% of an institution's assets. In addition, a federal thrift has lending authority above the 35% category for certain consumer loans, property improvement loans, and loans secured by savings accounts. The Savings Bank originates consumer loans in order to provide a wide range of financial services to its customers and because the shorter terms and normally higher interest rates on such loans help maintain a profitable spread between its average loan yield and its cost of funds. 8 In connection with consumer loan applications, the Savings Bank verifies the borrower's income and reviews a credit bureau report. In addition, the relationship of the loan to the value of the collateral is considered. All automobile loan applications are reviewed and approved by the Savings Bank. The Savings Bank reviews the credit report of the borrower as well as the value of the unit which secures the loan. The Savings Bank intends to continue to emphasize the origination of consumer loans. Consumer loans tend to be originated at higher interest rates than conventional residential mortgage loans and for shorter terms which benefits the Savings Bank's interest rate gap management. Consumer loans, however, tend to have a higher risk of default than residential mortgage loans. At December 31, 1998, the Savings Bank had $609,000 in consumer loans delinquent more than 90 days. Federal thrift institutions are permitted to make secured or unsecured loans for commercial, corporate, business or agricultural purposes, including the issuance of letters of credit secured by real estate, business equipment, inventories, accounts receivable and cash equivalents. The aggregate amount of such loans outstanding may not exceed 10% of such institution's assets. The Savings Bank offers second mortgage loans on one- to four-family residences. At December 31, 1998, second mortgage and home equity loans totaled $13.0 million, or 5.4% of the Savings Bank's total loan portfolio. Second mortgage loans are offered as fixed-rate loans for a term not to exceed 15 years. Such loans are only made on owner-occupied one- to four-family residences and are subject to a 75% combined loan to value ratio. The underwriting standards for second mortgage loans are the same as the Savings Bank's standards applicable to one- to four-family residential loans. The Savings Bank makes commercial business loans on a secured basis and generally requires additional collateral consisting of real estate. The terms of such loans generally do not exceed five years. The majority of these loans have floating interest rates which adjust with changes in market driven indices. The Savings Bank's commercial business loans primarily consist of short-term loans for equipment, working capital, business expansion and inventory financing. The Savings Bank customarily requires a personal guaranty of payment by the principals of any borrowing entity and reviews the financial statements and income tax returns of the guarantors. At December 31, 1998, the Savings Bank had approximately $6.7 million outstanding in commercial business loans, which represented approximately 2.7% of its total loan portfolio. Loan Approval Authority and Underwriting. The Board of Directors sets the authority to approve loans based on the amount, type of loan (i.e., secured or unsecured) and total exposure to the borrower. Where there is an existing loans[s] to a borrower, the level of approval required is governed by the proposed total exposure including the new loan. A Lending Vice President may approve a secured loan up to $250,000 and an unsecured loan up to $50,000 individually. Each In-House Loan Committee member may approve a secured loan up to $500,000 and an unsecured loan up to $100,000. Any two In-House Loan Committee members may combine their secured lending authority up to $1.0 million. A majority of the In-House Loan Committee members may approve a secured loan up to $1.5 million and an unsecured loan up to $250,000. Generally, all loans over $1.5 million, or loans that cause the proposed total exposure to exceed $1.5 million, require approval by the Board Loan Committee. One- to four-family residential mortgage loans are generally underwritten according to FHLMC and FNMA guidelines. For all loans originated by the Savings Bank, upon receipt of a completed loan application from a prospective borrower, a credit report is ordered, income and certain other information is verified and, if necessary, additional financial information is requested. An appraisal of the real estate intended to secure the proposed loan is required which currently is performed by an independent appraiser designated and approved by the Savings Bank. The Savings Bank makes construction/permanent loans 9 on individual properties. Funds advanced during the construction phase are held in a loan-in-process account and disbursed based upon various stages of completion. The independent appraiser or loan officer determines the stage of completion based upon its physical inspection of the construction. It is the Savings Bank's policy to obtain title insurance or a title opinion on all real estate first mortgage loans. Borrowers must also obtain hazard or flood insurance (for loans on property located in a flood zone) prior to closing the loan. For loans in excess of 80% of the loan to value ratio, borrowers are generally required to advance funds on a monthly basis together with each payment of principal and interest to an escrow account from which the Savings Bank makes disbursements for items such as real estate taxes and hazard insurance premiums. Loans to one Borrower. Current regulations limit loans to one borrower in an amount equal to 15% of unimpaired capital and retained income on an unsecured basis and an additional amount equal to 10% of unimpaired capital and retained income if the loan is secured by readily marketable collateral (generally, financial instruments, not real estate) or $500,000, whichever is higher. Penalties for violations of the loan-to-one borrower statutory and regulatory restrictions include cease and desist orders, the imposition of a supervisory agreement and civil money penalties. The Savings Bank's maximum loan- to-one borrower limit was approximately $7.1 million as of December 31, 1998. At December 31, 1998, the Savings Bank's five largest aggregate lending relationships had balances ranging from $6.1 to $2.5 million. At December 31, 1998, 100% of these loans were current. Mortgage-Backed Securities To supplement lending activities, Third Federal invests in residential mortgage-backed securities. Although the majority of such securities are held to maturity, they can serve as collateral for borrowings and, through repayments, as a source of liquidity. The mortgage-backed securities portfolio as of December 31, 1998, consisted primarily of fixed-rate certificates issued by the Federal Home Loan Mortgage Corporation ("FHLMC") ($60.4 million), Government National Mortgage Association ("GNMA"), ($66.5 million) Federal National Mortgage Association ("FNMA") ($44.8 million), real estate mortgage investment conduits ("REMICs") ($83.8 million), and other mortgage-backed securities ($500,000). At December 31, 1998, the carrying value of mortgage-backed securities totaled $256.2 million, or 38.5% of total assets. The market value of such securities totaled approximately $257.8 million at December 31, 1998. Mortgage-backed securities represent a participation interest in a pool of single-family or multi-family mortgages, the principal and interest payments on which are passed from the mortgage originators, through intermediaries (generally quasi-governmental agencies) that pool and repackage the participation interests in the form of securities, to investors such as the Savings Bank. Such quasi-governmental agencies, which guarantee the payment of principal and interest to investors, primarily include FHLMC, FNMA and GNMA. FHLMC issues participation certificates backed principally by conventional mortgage loans. FHLMC guarantees the timely payment of interest and the ultimate return of principal within one year. FHLMC securities are indirect obligations of the United States Government. FNMA is a private corporation chartered by Congress with a mandate to establish a secondary market for conventional mortgage loans. FNMA guarantees the timely payment of principal and interest, and FNMA securities are indirect obligations of the United States Government. GNMA is a government agency within the Department of Housing and Urban Development ("HUD") which is intended to help finance government 10 assisted housing programs. GNMA guarantees the timely payment of principal and interest, and GNMA securities are backed by the full faith and credit of the United States Government. Since FHLMC, FNMA and GNMA were established to provide support for low- and middle-income housing, there are limits to the maximum size of loans that qualify for these programs. Currently, GNMA limits its maximum loan size to $240,050 for Veterans Administration ("VA") loans and on average $240,050 for Federal Housing Authority ("FHA") loans. FNMA and FHLMC limit their loans to $240,000. To accommodate larger-sized loans, and loans that, for other reasons, do not conform to the agency programs, a number of private institutions have established their own home-loan origination and securitization programs. Mortgage-backed securities typically are issued with stated principal amounts, and the securities are backed by pools of mortgages that have loans with interest rates that are within a range and have varying maturities. The underlying pool of mortgages are primarily composed of either fixed-rate mortgages or adjustable-rate mortgage ("ARM") loans. Mortgage-backed securities are generally referred to as mortgage participation certificates or pass-through certificates. As a result, the interest rate risk characteristics of the underlying pool of mortgages, i.e., fixed-rate or adjustable-rate, as well as prepayment risk, are passed on to the certificate holder. The life of a mortgage-backed pass-through security is equal to the life of the underlying mortgages. Mortgage-backed securities issued by FHLMC, FNMA and GNMA make up a majority of the pass-through market. CMOs and REMICs are typically issued by a special-purpose entity (the "issuer"), which may be organized in a variety of legal forms, such as a trust, a corporation, or a partnership. The entity aggregates pools of pass-through securities, which are used to collateralize the mortgage related securities. Once combined, the cash flows can be divided into "tranches" or "classes" of individual securities, thereby creating more predictable average durations for each security than the underlying pass-through pools. Accordingly, under this security they structure all principal pay downs from the various mortgage pools are allocated to a mortgage-related class or classes structured to have priority until it has been paid off. Thus these securities are intended to address the reinvestment concerns associated with mortgage-backed securities pass-through, namely that (i) they tend to pay off when interest rates fall, thereby taking their relatively high coupon with them, and (ii) their expected average life may vary significantly among the different tranches. Some CMO and REMIC instruments are most like traditional debt instruments because they have stated principal amounts and traditionally defined interest-rate terms. Purchasers of certain other CMO and REMIC instruments are entitled to the excess, if any, of the issuer's cash inflows, including reinvestment earnings, over the cash outflows for debt service and administrative expenses. These mortgage related instruments may include instruments designated as residual interests, and are riskier in that they could result in the loss of a portion of the original investment. Cash flows from residual interests are very sensitive to prepayments and, thus, contain a high degree of interest-rate risk. Residual interests represent an ownership interest in the underlying collateral, subject to the first lien of the CMO and REMICs investors. The CMOs and REMICs held by the Savings Bank at December 31, 1998, consisted solely of fixed-rate notes and adjustable-rate notes with contractual maturities ranging from .1 to 29.6 years. The portfolio of CMOs and REMICs held within the Savings Bank's mortgage-backed securities portfolio at December 31, 1998, did not include any residual interests. Further, at December 31, 1998, the Savings Bank's mortgage-backed securities portfolio did not include any "stripped" CMOs and REMICs, i.e. CMOs and REMICs that pay interest only and do not repay principal or CMOs that repay principal only and do not pay interest. 11 The following table sets forth the carrying value of the Savings Bank's mortgage-backed securities held in portfolio at the dates indicated.
At December 31, ----------------------------------------- 1998 1997 1996 --------- --------- ---------- (In thousands) Held to maturity: GNMA-fixed rate....................... $ 56,318 $ 7,483 $ 6,043 FHLMC ARMs............................ 269 281 364 FHLMC-fixed rate...................... 46,970 76,242 89,652 FNMA-fixed rate....................... 12,726 22,927 27,547 CMOs.................................. -- -- -- Remics................................ 64,180 36,389 29,220 Other mortgage-backed securities...... 501 752 932 ------- ------- ------- Total mortgage-backed securities..... $180,964 $144,074 $153,758 ======= ======= ======= Mortgage-backed securities Available-for-sale: FHLMC................................. $ 13,214 $ 19,223 $ 8,905 FNMA.................................. 32,178 7,863 3,240 GNMA.................................. 10,284 -- -- Remics................................ 19,609 9,761 9,882 ------- ------ ------- Total mortgage-backed securities available-for-sale................ $ 75,285 $ 36,847 $ 22,027 ======= ======= =======
Mortgage-Backed Securities Maturity. The following table sets forth the maturity and the weighted average coupon ("WAC") of the Savings Bank's mortgage-backed securities portfolio at December 31, 1998 The table does not include estimated prepayments. Adjustable-rate mortgage-backed securities are shown as maturing based on contractual maturities.
Contractual Contractual Held to Available-For- Maturity Sale Maturities Due WAC Maturities Due WAC -------------- --- -------------- --- (Dollars in thousands) Less than 1 year......................... $ 2,355 6.57% $ 1,426 6.0% 1 to 3 years............................. 8,431 6.45 2,550 7.0 3 to 5 years............................. 2,399 7.22 7,218 6.96 5 to 10 years............................ 23,635 7.36 8,227 6.74 10 to 20 years........................... 27,260 6.88 2,725 6.42 Over 20 years............................ 116,884 6.85 53,139 6.53 ------- ---- ------ ---- Total mortgage-backed securities......... $180,964 6.90% $75,285 6.60% ======= ==== ====== ====
Non-Performing and Problem Assets Loan Collection. When a borrower fails to make a required payment on a loan, the Savings Bank takes a number of steps to have the borrower cure the delinquency and restore the loan to current status. In the case of residential mortgage loans and consumer loans, the Savings Bank generally sends the borrower a written notice of non-payment after the loan is 15 days past due. In the event payment is not then received, additional letters and phone calls are made. If the loan is still not brought current and it becomes necessary for the Savings Bank to take legal action, which typically occurs after a loan is delinquent 90 days or more, the Savings Bank will commence foreclosure proceedings against any real 12 property that secures the loan and attempt to repossess any personal property that secures a consumer loan. If a foreclosure action is instituted and the loan is not brought current, paid in full, or refinanced before the foreclosure sale, the real property securing the loan generally is sold at foreclosure. In the case of commercial real estate and multi-family loans, and construction loans, the Savings Bank generally attempts to contact the borrower by telephone after any loan payment is ten days past due and a senior loan officer reviews all collection efforts made if payment is not received after the loan is 30 days past due. Decisions as to when to commence foreclosure actions for commercial real estate and multi-family loans and construction loans are made on a case by case basis. The Savings Bank may consider loan work-out arrangements with these types of borrowers in certain circumstances. On mortgage loans or loan participations purchased by the Savings Bank, the Savings Bank receives monthly reports from its loan servicers with which it monitors the loan portfolio. Based upon servicing agreements with the servicers of the loan, the Savings Bank relies upon the servicer to contact delinquent borrowers, collect delinquent amounts and to initiate foreclosure proceedings, when necessary, all in accordance with applicable laws, regulations and the terms of the servicing agreements between the Savings Bank and its servicing agents. Delinquent Loans. Generally, the Savings Bank reserves for uncollected interest on loans past due 90 days or more. Loans also are placed on a nonaccrual status when, in the judgment of management, the probability of collection of interest is deemed to be insufficient to warrant further collection. When a loan is placed on nonaccrual status, previously accrued but unpaid interest is deducted from interest income. Non-Performing Assets. The following table sets forth information regarding non-accrual loans and real estate owned by the Savings Bank at the dates indicated. The Savings Bank had no loans contractually past due 90 days or more or for which accrued interest has been recorded. At December 31, 1998, the Savings Bank had no restructured loans within the meaning of SFAS No. 15.
At December 31, --------------------------------------------------------------------------- 1998 1997 1996 1995 1994 -------- -------- --------- --------- --------- (Dollars in thousands) Loans accounted for on a non-accrual basis: Mortgage loans: One- to four-family........................... $ 896 $ 776 $ 922 $ 999 $ 928 Commercial real estate and multi-family....... 97 -- -- 28 119 Consumer and other.............................. 609 606 1,050 776 639 ----- ----- ----- ----- ----- Total non-accrual loans...................... $1,602 $1,382 $1,972 $1,803 $1,686 ===== ===== ===== ===== ===== Real estate owned, net.......................... $ 308 $ 351 $ 112 $ 129 $ 139 Other non-performing assets..................... -- -- -- -- -- ----- ----- ----- ----- ----- Total non-performing assets..................... $1,910 $1,733 $2,084 $1,932 $1,825 ===== ===== ===== ===== ===== Total non-accrual loans to net loans............ 0.67% 0.55% 0.64% 0.76% 1.48% ===== ===== ===== ===== ===== Total non-accrual loans to total assets......... 0.24% 0.23% 0.30% 0.37% 0.39% ===== ===== ===== ===== ===== Total non-performing assets to total assets..... 0.29% 0.29% 0.32% 0.39% 0.42% ===== ===== ===== ===== =====
13 At December 31, 1998, the Company had no foreign loans and no loan concentrations exceeding 10% of total loans not disclosed in above the table. "Loan concentrations" are considered to exist when there are amounts loaned to a multiple number of borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. Loans recorded in the category of other real estate owned are valued at the lower of book value of loans outstanding or fair market value less cost of disposal. At December 31, 1998, the Company was not aware of any potential problem loans that are not otherwise included in the foregoing table. "Potential problem loans" are loans where information about possible credit problems of borrowers has caused management to have serious doubts about the borrowers' ability to comply with present repayment terms. Classified Assets. OTS regulations provide for a classification system for problem assets of insured institutions which covers all problem assets. Under this classification system, problem assets of insured institutions are classified as "substandard," "doubtful," or "loss." An asset is considered "substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. "Substandard" assets include those characterized by the "distinct possibility" that the insured institution will sustain "some loss" if the deficiencies are not corrected. Assets classified as "doubtful" have all of the weaknesses inherent in those classified "substandard," with the added characteristic that the weaknesses present make "collection or liquidation in full," on the basis of currently existing facts, conditions and values, "highly questionable and improbable." Assets classified as "loss" are those considered "uncollectible" and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets designated "special mention"by management are assets included on the Savings Bank's internal watchlist because of potential weakness but that do not currently warrant classification in one of the aforementioned categories. When an insured institution classifies problem assets as either substandard or doubtful, it may establish general allowances for loan losses in an amount deemed prudent by management. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets as "loss," it is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge off such amount. An institution's determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the OTS, which may order the establishment of additional general or specific loss allowances. A portion of general loss allowances established to cover possible losses related to assets classified as substandard or doubtful may be included in determining an institution's regulatory capital, while specific valuation allowances for loan losses generally do not qualify as regulatory capital. 14 The following table provides further information in regard to the Savings Bank's classified assets as of December 31, 1998. At December 31, 1998 -------------- (In thousands) Special mention assets.................... $ 0 Substandard............................... 2,357 Doubtful assets........................... 0 Loss ..................................... 0 ----- Total classified assets................ $2,357 ===== - --------------------- (1) Substandard assets include approximately $447,000 of performing assets that are less than 90 days delinquent, that are classified for reasons other than delinquency. Real Estate Owned. Real estate acquired by the Savings Bank as a result of foreclosure, judgment or by deed in lieu of foreclosure is classified as real estate owned ("REO") until it is sold. When property is acquired it is recorded at the lower of fair value, minus estimated cost to sell, or cost. The Savings Bank records loans as in substance foreclosures if the borrower has little or no equity in the property based upon its documented current fair value and if the borrower has effectively abandoned control of the collateral or has continued to retain control of the collateral but because of the current financial status of the borrower it is doubtful the borrower will be able to repay the loan in the foreseeable future. In substance, foreclosures are accounted for as loans until such time that title to the collateral is acquired by the Savings Bank. There may be significant other expenses incurred such as attorney and other extraordinary servicing costs involved with in substance foreclosures. Allowances for Loan Losses and Real Estate Acquired in Settlement of Loans. The Savings Bank provides valuation allowances for estimated losses from uncollectible loans and real estate acquired in settlement of loans. Management's periodic evaluation of the adequacy of the allowance for loan losses is based on loss experience, known and inherent risk in the portfolio, prevailing market conditions, and management's judgment as to collectibility. The Savings Bank's determination as to the amount of its allowance for loan losses is subject to review of the federal regulatory agencies, the OTS and FDIC, which can order the establishment of additional general or specific loan loss reserves. The allowance for loan losses is increased by charges to earnings and decreased by charge-offs (net of recoveries). The Savings Bank provides valuation allowances for losses on real estate acquired in settlement of loans based on the lower of fair value, minus estimated cost to sell, or cost. The allowance for loan losses is established through a provision for loan losses based on management's evaluation of the risk inherent in its loan portfolio and the general economy. Such evaluation, which includes a review of all loans on which full collectibility may not be reasonably assured, considers among other matters, the estimated fair value of the underlying collateral, economic conditions, historical loan loss experience and other factors that warrant recognition in providing for an adequate loan loss allowance. 15 The following table sets forth information with respect to the Savings Bank's allowance for loan losses at the dates and for the periods indicated:
For the For the Six Months Year Ended Ended For the Years Ended December 31, December 31, June 30, ----------------------------------------------------- ------------ --------- 1998 1997 1996 1995 1994 1994 ---------- ---------- --------- ---------- ---------- --------- (Dollars in thousands) Balance at beginning of period...... $2,029 $1,806 $1,484 $1,473 $1,450 $1,656 Provision for loan losses........... 60 397 330 72 30 (144) Charge-offs: One- to four-family............... -- (1) -- (48) -- -- Commercial and multi-family real estate loans................. -- -- -- -- -- (31) Consumer and other loans(1)....... (180) (173) (8) (13) (7) (31) Recoveries: Commercial and multi-family real estate loans................. -- -- -- -- -- -- Consumer and other loans(1)....... -- -- -- -- -- -- ----- ----- ----- ----- ----- ----- Balance at end of year(2)........... $1,909 $2,029 $1,806 $1,484 $1,473 $1,450 ===== ===== ===== ===== ===== ===== Ratio of net charge-offs during the period to average loans outstanding during the period..... 0.08% 0.06% 0.003% 0.04% 0.01% 0.04% Ratio of allowance for loan losses to non-performing loans at the end of the period.... 119.16% 147.0% 91.6% 82.3% 87.3% 84.6% Ratio of allowance for loan losses to net loans receivable at the end of period.............. 0.79% 0.81% 0.58% 0.62% 1.3% 1.2% Ratio of allowance for loan losses and foreclosed real estate to total non-performing assets at the end of period....... 116.07% 137.33% 92.03% 76.8% 81.3% 69.4%
- --------------- (1) Consumer and other loan charge-offs for all periods presented are almost solely comprised of commercial business loan losses. (2) Third Federal had not incurred any material charge-offs or received any material recoveries on the one-to four-family and consumer loan portfolios for any of the periods presented. 16 The following table sets forth the allocation of the Savings Bank's allowance for loan losses by loan category and the percent of loans in each category to total loans receivable, gross, at the dates indicated. The portion of the loan loss allowance allocated to each loan category does not represent the total available for future losses which may occur within the loan category since the total loan loss allowance is a valuation reserve applicable to the entire loan portfolio.
At December 31, ------------------------------------------------------------------------------------------------------ 1998 1997 1996 1995 1994 -------------------- ------------------- ----------------- ------------------ ---------------- Percent Percent Percent Percent Percent of Loans of Loans of Loans of Loans of Loans to Total to Total to Total to Total to Total Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans ------ -------- ------ -------- ------ -------- ------ -------- ------ -------- (Dollars in thousands) At end of period allocated to: One- to four-family....... $1,205 62.9% $1,503 78.4% $1,330 73.7% $1,042 85.1% $ 990 67.2% Commercial real estate and multi-family......... 508 22.8 202 10.5 102 5.7 46 4.1 134 9.1 Construction.............. 97 2.2 37 2.0 24 1.3 24 1.6 8 0.5 Consumer and other loans............. 99 12.1 287 9.1 350 19.3 372 9.2 341 23.2 ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- Total allowance........... $1,909 100.0% $2,029 100.0% $1,806 100.0% $1,484 100.0% $1,473 100.0% ===== ===== ===== ===== ===== ===== ===== ===== ===== =====
17 Analysis of the Allowance for Real Estate Owned At December 31, ------------------------------------ 1998 1997 1996 ----------- ----------- ---------- (Dollars in thousands) Total real estate owned and in judgment............................. $308 $359 $116 === === === Allowance balances - beginning......... 8 3 -- Provision.............................. -- 5 3 Charge-offs............................ 8 -- -- --- --- --- Allowance balances - ending............ $ 0 $ 8 $ 3 === === === Allowance for losses on real estate owned and in judgment to net real estate owned and in judgment............................... 0% 2.2% 2.5% === === === Investment Activities The investment policy of the Savings Bank, which is established by the Board of Directors and implemented by the Asset Liability Committee, is designed primarily to provide and maintain liquidity, to generate a favorable return on investments without incurring undue interest rate and credit risk, and to complement the Savings Bank's lending activities. In establishing its investment strategies, the Savings Bank considers its business and growth plans, the economic environment, the types of securities to be held and other factors. Federally chartered savings institutions have the authority to invest in various types of assets, including U.S. Treasury obligations, securities of various federal agencies, certain certificates of deposit of insured banks and savings institutions, certain bankers acceptances, repurchase agreements, loans on federal funds, and, subject to certain limits, commercial paper and mutual funds. 18 The following table sets forth certain information regarding the amortized cost and market values of the Savings Bank's investments at the dates indicated.
At December 31, ------------------------------------------------------------------------------------------- 1998 1997 1996 ----------------------- ------------------------- -------------------------- Amortized Market Amortized Market Amortized Market Cost Value Cost Value Cost Value --------- -------- --------- -------- --------- --------- (In thousands) Interest-earning deposits......... $ 19,267 $ 19,267 $ 25,628 $ 25,628 $ 38,120 $ 38,120 ======= ======= ======= ======= ======= ======= Investment securities held-to- maturity: U.S. government and agency obligations................... $ 73,612 $ 73,747 $ 50,278 $ 50,433 $ 34,976 $ 34,854 State and political subdivisions.................. 4,283 4,361 2,544 2,593 3,068 3,040 Corporate debt securities....... 3,000 2,986 0 0 500 499 ------- ------- ------- ------- ------- ------- Total......................... $ 80,895 $ 81,094 $ 52,822 $ 53,026 $ 38,544 $ 38,393 ======= ======= ======= ======= ======= ======= Securities available-for-sale: U.S. government and agency obligations................... $ 8,000 $ 8,045 $ 31,254 $ 31,327 $ 11,976 $ 12,015 Corporate Debt Securities................... 500 500 -- -- -- -- Equity securities (SLMA stock).................. -- -- 10 210 10 139 Mutual funds.................... 500 497 500 500 500 498 ------- ------- ------- ------- ------- ------- Total......................... $ 9,000 $ 9,042 $ 31,764 $ 32,037 $ 12,486 $ 12,652 ======= ======= ======= ======= ======= =======
19 Investment Portfolio Maturities The following table sets forth certain information regarding the carrying values, weighted average yields and maturities of the Savings Bank's investment securities portfolio, exclusive of interest-earning deposits, at December 31, 1998.
One Year One to Five to More than Total or Less Five Years Ten Years Ten Years Investment Securities(2) ----------------- ----------------- ---------------- ---------------- ------------------------ Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Market Value Yield Value Yield Value Yield Value Yield Value Yield Value ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- (Dollars in thousands) U.S. government obligations... $ -- --% $ 5,037 6.25% $ -- --% $ -- --% $ 5,037 6.25% $ 5,130 U.S. agency obligations....... 32,829 5.04 23,544 6.15 18,247 6.22 2,000 8.33 76,620 5.75 76,662 Municipal obligations......... -- -- 425 4.50 830 4.46 3,028 5.19 4,283 4.98 4,361 Corporate obligations......... 500 2.25 3,000 5.50 -- -- -- -- 3,500 5.04 3,486 Other securities(1)........... 497 5.58 -- -- -- -- -- -- 497 5.58 497 ------ ---- ------ ---- ------ ----- ----- ------ -------- ----- ------- Total....................... $33,826 5.01% $32,006 6.08% $19,077 6.14% $5,028 6.44% $89,937 5.71% $90,136 ====== ==== ====== ==== ====== ==== ===== ==== ====== ==== ======
- ------------ (1) Other securities consists of an investment in adjustable-rate mortgage-backed securities mutual funds. Such investments do not have a stated maturity and are considered in the one year or less category based on quarterly repricing of the investment. (2) Includes $9.0 million of U.S. government and agency obligations and other investments which are carried as available-for-sale at December 31, 1998. Investment securities available-for-sale are carried at market value. 20 Sources of Funds General. Deposits, borrowings, loan repayments and cash flows generated from operations are the primary sources of the Savings Bank's funds for use in lending, investing and other general purposes. Deposits. The Savings Bank offers a variety of deposit accounts having a range of interest rates and terms. The Savings Bank's deposits consist of regular savings, non-interest bearing checking, NOW checking, money market, and certificate accounts. Of the deposit accounts, $32.3 million or 7.37% consist of IRA, Keogh or SEP retirement accounts at December 31, 1998. The flow of deposits is influenced significantly by general economic conditions, changes in money market and prevailing interest rates and competition. The Savings Bank's deposits are primarily obtained from areas surrounding its offices, and the Savings Bank relies primarily on customer service and long-standing relationships with customers to attract and retain these deposits. The Savings Bank has maintained a high level of core deposits consisting of regular savings, money market, non-interest-bearing checking, and NOW checking, which has contributed to a low cost-of-funds. At December 31, 1998, core deposits amounted to 56.87% of total deposits. 21 The following table sets forth the distribution of the Savings Bank's deposit accounts at the dates indicated and the weighted average nominal interest rates on each category of deposits presented. The Savings Bank does not have a significant amount of deposits from out-of state sources. Management does not believe that the use of year end balances instead of average balances resulted in any material difference in the information presented.
At December 31, ------------------------------------------------------------------------------------------------- 1998 1997 1996 -------------------------------- ----------------------------- ------------------------------ Weighted Weighted Weighted Percent Average Percent Average Percent Average of Total Nominal of Total Nominal of Total Nominal Amount Deposits Rate Amount Deposits Rate Amount Deposits Rate ------ -------- -------- -------- -------- -------- -------- -------- -------- (Dollars in thousands) Transaction accounts: Interest-bearing checking accounts.................. $ 44,971 10.25% 1.12% $ 40,360 9.00% 1.01% $ 42,513 9.06% 0.98% Money market accounts...... 32,556 7.42 3.37 32,777 7.28 3.32 29,970 6.39 3.54 Non-interest-bearing checking accounts........... 6,231 1.42 -- 5,037 1.12 -- 3,741 0.80 -- ------- ------ ------- ------ ------- ----- Total transaction accounts... 83,758 19.09 78,174 17.35 76,224 16.25 Fixed-rate passbook accounts. 122,213 27.84 2.50 122,952 27.30 2.50 127,213 27.12 3.00 Adjustable-rate passbook accounts.................... 43,651 9.95 4.13 51,277 11.38 4.97 60,452 12.89 4.88 ------- ------ ------- ----- ------- ------ Total.................. 165,864 37.79 174,229 38.68 187,665 40.01 ------- ------ ------- ----- ------- ------ Certificate accounts: 90-day certificates........ 1,350 0.31 3.41 1,340 0.30 3.49 2,354 0.50 3.96 Six-month certificates..... 29,257 6.66 4.03 10,743 2.38 4.04 18,861 4.02 4.44 Seven-month certificates... 203 0.05 3.92 480 0.11 4.27 3,555 0.76 4.93 Eight-month certificates... 61 0.01 5.40 33,155 7.38 5.49 -- -- -- Nine-month certificates.... 3,824 0.87 4.40 2,936 0.65 4.07 13,116 2.80 4.96 Ten-month certificates..... 11,881 2.71 5.20 3,300 0.73 4.33 19,341 4.12 5.29 One-year certificates...... 36,288 8.26 4.68 19,599 4.35 4.69 55,586 11.85 5.28 15-month certificates...... 16,365 3.73 5.63 28,433 6.31 5.70 1,450 0.31 5.54 17-month certificates...... -- -- -- 5,770 1.28 5.74 8,801 1.88 5.53 18-month certificates...... 3,966 0.90 4.80 6,807 1.51 5.50 5,052 1.08 4.83 21-month certificates...... 166 0.04 4.44 256 0.06 5.07 677 0.14 5.20 Two-year certificates...... 22,774 5.19 5.22 30,445 6.76 5.84 22,632 4.82 5.65 25-month certificates...... 7,683 1.75 5.00 12,537 2.78 5.91 8,666 1.85 5.81 30-month certificates...... 5,385 1.23 4.86 6,419 1.42 5.06 8,539 1.82 5.45 Three-year certificates.... 29,228 6.66 5.80 10,780 2.39 5.85 9,628 2.05 5.55 Four year certificates..... 2,434 0.55 5.57 2,575 0.57 5.66 2,645 0.56 5.48 54 month certificates...... 2,995 0.68 5.41 1,974 0.44 5.92 1,975 0.42 5.83 Five year certificates..... 13,722 3.13 5.58 18,341 4.07 5.49 19,356 4.13 5.35 Six-year certificates...... 210 0.05 5.48 165 0.04 5.48 211 0.04 5.34 Seven-year certificates.... -- -- -- 1 -- 7.40 1 -- 7.30 Eight-year certificates.... 91 0.02 5.92 88 0.02 5.92 99 0.02 5.80 10-year.................... 800 0.18 6.50 1,072 0.24 7.71 1,398 0.30 7.85 Jumbo certificates(1)...... 608 0.14 6.39 810 0.18 5.00 1,256 0.27 5.40 ------- ------ ---- ------- ----- ---- ------- ----- ----- Total certificate accounts 189,291 43.12 5.02 198,026 43.97 5.38 205,199 43.74 5.30 ------- ------ ---- ------- ----- ---- ------- ----- ----- Total deposits............... $438,913 100.00% 3.66% $450,429 100.00% 3.95% $469,088 100.00% 4.08% ======= ====== ==== ======= ====== ==== ======= ====== ====
(1) The $608,000 in jumbo certificates of deposit shown at December 31, 1998 does not include certificate deposits in excess of $100,000 with interest compounded on a daily basis. The jumbo certificate category includes only certificate deposits in excess of $100,000 with simple interest paid on an annual basis at a premium of .25% over posted interest rates. 22 At December 31, 1998, the Savings Bank had outstanding certificates of deposit in amounts of $100,000 or more maturing as follows: Amount -------------- Maturing Period (In thousands) --------------- Three months or less.................... $ 2,696 Over three through six months........... 2,633 Over six through 12 months.............. 3,139 Over 12 months.......................... 4,785 ------ Total............................... $13,253 ====== The following table presents, by various rate categories, the amount of time deposits outstanding at December 31, 1998, 1997 and 1996, and the periods to maturity of the certificate accounts outstanding at December 31, 1998.
Period to Maturity from December 31, 1998 ---------------------------------------- Within At December 31, One One to ------------------------------------------ Year Three Years Thereafter 1998 1997 1996 ---------- ------------ ---------- ----------- ---------- ----------- (In thousands) Time deposits: 2.00% to 2.99%.......... $ -- $ -- $ -- $ -- $ 18 $ 17 3.00% to 3.99%.......... 22,430 394 -- 22,824 16,897 2,927 4.00% to 4.99%.......... 47,736 8,922 1,075 57,733 37,455 61,355 5.00% to 5.99%.......... 59,853 27,528 6,829 94,210 136,860 129,935 6.00% to 6.99%.......... 2,666 10,790 592 14,048 5,944 9,633 7.00% to 7.99%.......... 39 95 74 208 314 628 8.00% to 8.99%.......... 221 -- -- 221 453 596 9.00% to 9.99%.......... 47 -- -- 47 85 108 ------- ------ ----- ------- ------- ------- Total.............. $132,992 $47,729 $8,570 $189,291 $198,026 $205,199 ======= ====== ===== ======= ======= =======
23 Borrowings Deposits are the primary source of funds of the Savings Bank's lending and investment activities and for its general business purposes. The Savings Bank may obtain advances from the FHLB of Pittsburgh to supplement its supply of lendable funds. Advances from the FHLB of Pittsburgh are typically secured by a pledge of the Savings Bank's stock in the FHLB of Pittsburgh and a portion of the Savings Bank's first mortgage loans and certain other assets. The Savings Bank, if the need arises, may also access the Federal Reserve Bank discount window to supplement its supply of lendable funds and to meet deposit withdrawal requirements. The following table sets forth the maximum month-end balance period and balance, and weighted average balance of outstanding FHLB advances at the dates and for the periods indicated, together with the applicable weighted average interest rates. At December 31, ---------------------------------- 1998 1997 1996 -------- -------- ------- (Dollars in thousands) FHLB advances...................... $163,359 $88,359 $98,359 ======= ====== ====== Weighted average interest rate..... 5.77% 6.03% 5.98% Years Ended December 31, --------------------------------------- 1998 1997 1996 -------- -------- -------- (Dollars in thousands) Maximum balance of FHLB advances outstanding........ $163,359 $ 98,359 $ 98,359 ======= ======= ======= Weighted average balance of FHLB advances outstanding......... $163,359 $ 97,837 $ 89,343 ======= ======= ======= Weighted average interest rate of FHLB advances.................. 5.77% 6.0% 5.99% ======= ======= ======= Subsidiary Activity Third Federal is permitted to invest up to 2% of its assets in the capital stock of, or secured or unsecured loans to, subsidiary corporations, with an additional investment of 1% of assets when such additional investment is utilized primarily for community development purposes. Under such limitations, as of December 31, 1998, Third Federal was authorized to invest up to approximately $13.4 million in the stock of, or loans to, service corporations (based upon the 2% limitation). At December 31, 1998, the Savings Bank had one active subsidiary. Personnel As of December 31, 1998, the Savings Bank had 137 full-time and 12 part-time employees. None of the Savings Bank's employees are represented by a collective bargaining group. The Savings Bank believes that its relationship with its employees is good. 24 Executive Officers of the Registrant Executive Officers of the Savings Bank and Company (these individuals have held their respective positions with the Company since March 1994): Carl F. Gregory is Chairman of the Savings Bank. Mr. Gregory was Chief Executive Officer of the Savings Bank and of the Company from April 1982 until December 1994. He has been with the Savings Bank since 1962 and will continue to represent Third Federal throughout the communities that the Savings Bank serves in his role as Chairman of the Savings Bank and Director of the Company. John R. Stranford has been with the Savings Bank since 1968. He presently serves as President, Chief Executive Officer, Chief Operating Officer and Director of the Savings Bank and Company. Mr. Stranford has served as Chief Operating Officer of the Savings Bank since 1984 and President of the Savings Bank since January 1994. Prior to that time he served in various capacities as an officer of the Savings Bank. William C. Niemczura has been with the Savings Bank as an officer since 1987. Prior to his current position as Senior Vice President and Chief Financial Officer, Mr. Niemczura was Assistant Vice President and Vice President-Lending. Mr. Niemczura is Senior Vice President, Treasurer and Chief Financial Officer of the Company. Elizabeth Davidson Maier is Senior Vice President and Secretary of the Savings Bank and the Company and has been with the Savings Bank since 1964. Ms. Maier has been an officer of the Savings Bank since 1974. Prior to that, Ms. Maier held various positions at the Savings Bank. The remaining information relating to Directors and Executive Officers of the Registrant is incorporated herein by reference to the Registrant's Proxy Statement for the 1998 Annual Meeting of Stockholders. REGULATION Set forth below is a brief description of all material laws and regulations which relate to the regulation of the Savings Bank and the Company. The description does not purport to be complete and is qualified in its entirety by reference to applicable laws and regulations. Company Regulation General. The Company is a unitary savings and loan holding company subject to regulatory oversight by the OTS. As such, the Company is required to register and file reports with the OTS and is subject to regulation and examination by the OTS. In addition, the OTS has enforcement authority over the Company and its non-savings association subsidiaries, should such subsidiaries be formed, which also permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings association. This regulation and oversight is intended primarily for the protection of the depositors of the Savings Bank and not for the benefit of stockholders of the Company. The Company is also required to file certain reports with, and otherwise comply with, the rules and regulations of the OTS and the SEC. QTL Test. As a unitary savings and loan holding company, the Company generally is not subject to activity restrictions, provided the Savings Bank satisfies the QTL test. If the Company acquires control of another savings association as a separate subsidiary, it would become a multiple savings and loan 25 holding company, and the activities of the Company and any of its subsidiaries (other than the Savings Bank or any other SAIF-insured savings association) would become subject to restrictions applicable to bank holding companies unless such other associations each also qualify as a QTL and were acquired in a supervisory acquisition. Savings Bank Regulation General. As a federally chartered, SAIF-insured savings association, the Savings Bank is subject to extensive regulation by the OTS and the FDIC. Lending activities and other investments must comply with various federal statutory and regulatory requirements. The Savings Bank is also subject to certain reserve requirements promulgated by the Federal Reserve Board. The OTS, in conjunction with the FDIC, regularly examines the Savings Bank and prepares reports for the consideration of the Savings Bank's Board of Directors on any deficiencies that they find in the Savings Bank's operations. The Savings Bank's relationship with its depositors and borrowers is also regulated to a great extent by federal law, especially in such matters as the ownership of savings accounts and the form and content of the Savings Bank's mortgage documents. The Savings Bank must file reports with the OTS and the FDIC concerning its activities and financial condition, in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with or acquisitions of other savings institutions. This regulation and supervision establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of the SAIF and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such regulations, whether by the OTS, the FDIC or the Congress could have a material adverse impact on the Company, the Savings Bank and their operations. The Company is also required to file certain reports with, and otherwise comply with, the rules and regulations of the OTS and the SEC. Insurance of Deposit Accounts. The Savings Bank's deposit accounts are insured by the SAIF to a maximum of $100,000 for each insured member (as defined by law and regulation). The FDIC has the authority, should it initiate proceedings to terminate an institution's deposit insurance, to suspend the insurance of any such institution without tangible capital. However, if a savings association has positive capital when it includes qualifying intangible assets, the FDIC cannot suspend deposit insurance unless capital declines materially, the institution fails to enter into and remain in compliance with an approved capital plan or the institution is operating in an unsafe or unsound manner. Regardless of an institution's capital level, insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or the institution's primary regulator. The management of the Savings Bank is unaware of any practice, condition or violation that might lead to termination of its deposit insurance. The FDIC charges an annual assessment for the insurance of deposits based on the risk a particular institution poses to its deposit insurance fund. This risk classification is based on an institution's capital group and supervisory subgroup assignment. 26 Regulatory Capital Requirements. OTS capital regulations require savings institutions to meet three capital standards: (1) tangible capital equal to 1.5% of total adjusted assets, (2) a leverage ratio (core capital) equal to at least 4% of total adjusted assets and (3) a risk-based capital requirement equal to 8.0% of total risk-weighted assets. In addition, the OTS prompt corrective action regulation provides that a savings institution that has a leverage capital ratio of less than 4% (3% for institutions receiving the highest examination rating) will be deemed to be "undercapitalized" and may be subject to certain restrictions. The following table sets forth the Savings Bank's compliance with its regulatory capital requirements as of December 31, 1998: Amount Percent ------ ------- (Dollars in thousands) Tangible capital............................. $45,034 6.79% Tangible capital requirement................. 9,943 1.50 ------ ----- Excess over requirement...................... $35,091 5.29% ====== ===== Core Capital................................. $45,034 6.79% Core Capital requirement..................... 26,515 4.00 ------ ----- Excess over requirement...................... $18,519 2.79% ====== ===== Risk-based capital........................... $46,943 17.73% Risk-based capital requirement............... 21,178 8.00 ------ ----- Excess over requirement...................... $25,765 9.73% ====== ===== Dividend and Other Capital Distribution Limitations. OTS regulations require the Savings Bank to give the OTS 30 days' advance notice of any proposed declaration of dividends to the Company, and the OTS has the authority under its supervisory powers to prohibit the payment of dividends to the Company. In addition, the Savings Bank may not declare or pay a cash dividend on its capital stock if the effect thereof would be to reduce the regulatory capital of the Savings Bank below the amount required for the liquidation account to be established pursuant to the Savings Bank's Plan of Conversion. In January 1999, the OTS issued an amendment to its current regulations with respect to capital distributions by savings associations. The amended regulations will be effective April 1, 1999. Under the new regulation, savings associations that would remain at least adequately capitalized following the capital distribution, and that meet other specified requirements, would not be required to file a notice or application for capital distributions (such as cash dividends) declared below specified amounts. Under the new regulation, savings associations which are eligible for expedited treatment under current OTS regulations are not required to file a notice or an application with the OTS if (i) the savings association would remain at least adequately capitalized following the capital distribution and (ii) the amount of capital distribution does not exceed an amount equal to the savings association's net income for that year to date, plus the savings association's retained net income for the previous two years. Thus, under the new regulation, only undistributed net income for the prior two years may be distributed in addition to the current year's undistributed net income without the filing of an application with the OTS. Savings associations which do not qualify for expedited treatment or which desire to make a capital distribution 27 in excess of the specified amount, must file an application with, and obtain the approval of, the OTS prior to making the capital distribution. A savings association that is a subsidiary of a savings and loan holding company, and under certain other circumstances, will be required to file a notice with OTS prior to making the capital distribution. The new OTS limitations on capital distributions are similar to the limitations imposed upon national banks. Qualified Thrift Lender Test. The Home Owners' Loan Act ("HOLA"), as amended, requires savings institutions to meet a QTL test. If the Savings Bank maintains an appropriate level of Qualified Thrift Investments (primarily residential mortgages and related investments, including certain mortgage-backed securities) ("QTIs") and otherwise qualifies as a QTL, it will continue to enjoy full borrowing privileges from the FHLB of Pittsburgh. The required percentage of QTIs is 65% of portfolio assets (defined as all assets minus intangible assets, property used by the institution in conducting its business and liquid assets equal to 10% of total assets). Certain assets are subject to a percentage limitation of 20% of portfolio assets. In addition, savings associations may include shares of stock of the FHLBs, FNMA and FHLMC as qualifying QTIs. The FDICIA also amended the method for measuring compliance with the QTL test to be on a monthly basis in nine out of every 12 months, as opposed to on a daily or weekly average of QTIs. As of December 31, 1998, the Savings Bank was in compliance with its QTL requirement with 83.0% of its assets invested in QTIs. A savings association that does not meet a QTL test must either convert to a bank charter or comply with the following restrictions on its operations: (i) the savings association may not engage in any new activity or make any new investment, directly or indirectly, unless such activity or investment is permissible for a national bank; (ii) the branching powers of the savings association shall be restricted to those of a national bank; (iii) the savings association shall not be eligible to obtain any advances from its FHLB; and (iv) payment of dividends by the savings association shall be subject to the rules regarding payment of dividends by a national bank. Upon the expiration of three years from the date the savings association ceases to be a QTL, it must cease any activity and not retain any investment not permissible for a national bank and immediately repay any outstanding FHLB advances (subject to safety and soundness considerations). Liquidity Requirements. All savings associations are required to maintain an average daily balance of liquid assets equal to a certain percentage of the sum of its average daily balance of net withdrawable deposit accounts and borrowings payable in one year or less. The liquidity requirement may vary from time to time (between 4% and 10%) depending upon economic conditions and savings flows of all savings associations. At the present time, the required liquid asset ratio is 4%. At December 31, 1998, the Savings Bank's liquidity ratio was 28.69%. Federal Home Loan Bank System. The Savings Bank is a member of the FHLB of Pittsburgh, which is one of 12 regional FHLBs that administer the home financing credit function of savings associations. Each FHLB serves as a reserve or central bank for its members within its assigned region. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It makes loans to members (i.e., advances) in accordance with policies and procedures established by the Board of Directors of the FHLB. As a member, the Savings Bank is required to purchase and maintain stock in the FHLB of Pittsburgh in an amount equal to at least 1% of its aggregate unpaid residential mortgage loans, home purchase contracts or similar obligations at the beginning of each year. At December 31, 1998, the Savings Bank had $9.2 million in FHLB stock, which was in compliance with this requirement. 28 Federal Reserve System. The Federal Reserve Board requires all depository institutions to maintain non-interest bearing reserves at specified levels against their transaction accounts (primarily checking, NOW and Super NOW checking accounts) and non-personal time deposits. The balances maintained to meet the reserve requirements imposed by the Federal Reserve Board may be used to satisfy the liquidity requirements that are imposed by the OTS. At December 31, 1998, the Savings Bank's total transaction accounts required a reserve level of $1,788,000 which was entirely offset by the Bank's vault cash on hand. Savings associations have authority to borrow from the Federal Reserve Bank "discount window," but Federal Reserve policy generally requires savings associations to exhaust all OTS sources before borrowing from the Federal Reserve System. The Savings Bank had no such borrowings at December 31, 1998. Item 2. Description of Property - --------------------------------- The Company is located and conducts its business at 3 Penns Trail, Newtown, Pennsylvania. The Savings Bank operates from its main office and 13 branch offices located in Philadelphia and Bucks Counties, Pennsylvania and Mercer County, New Jersey. The Savings Bank also owns two lots, one of which has a building, behind its Doylestown branch office. The building is leased to a third-party and the other is used as a parking lot for employees and tenants of Third Federal. The net book value of the two lots was $102,000 at December 31, 1998. In addition, the Savings Bank owns a vacant lot at Newtown Yardley Road and Friends Lane, Newtown, Pennsylvania. This lot was purchased in 1993 for future expansion and had a net book value of $1.1 million at December 31, 1998. The following table sets forth certain information regarding the Savings Bank's properties:
Leased or Leased or Location Owned Location Owned - ------------------ ------------ ------------------ -------------- MAIN OFFICE Newtown Office 3 Penns Trail Newtown, PA 18940 Owned BRANCH OFFICES Frankford Office Newtown Office 4625 Frankford Avenue 950 Newtown Yardley Road Philadelphia, PA 19124 Owned Newtown, PA 18940 Leased Princeton Office Ewing Office Princeton Shopping Center 2075 Pennington Road 301 N. Harrison Street Leased Trenton, NJ 08618 Owned Princeton, NJ 08540
29
Leased or Leased or Location Owned Location Owned ---------------- ------------ ------------------ -------------- Hamilton Office Mayfair Office 1850 Route 33 Roosevelt Blvd. at Unruh Hamilton Square, NJ 08690 Owned Philadelphia, PA 19149 Owned Fishtown Office Doylestown Office York & Memphis Streets 60 North Main Street Philadelphia, PA 19125 Owned Doylestown, PA 18901 Owned Cross Keys Office Administrative Office 834 North Easton Highway 62 Walker Lane Doylestown, PA 18901 Owned Newtown, PA 18940(1) Owned Woodhaven Office Knights Road Center Warminster Office 4014 Woodhaven Road 601 Louis Drive Philadelphia, PA 19154 Leased Warminster, PA 18974 Leased Bridgesburg Office Feasterville Office Orthodox & Almond Streets Buck Hotel Complex Philadelphia, PA 19137 Owned Feasterville, PA 19053 Leased New Britain Office 100 Town Center New Britain, PA 18901 Leased
- ------------------------ (1) This office serves as administrative offices, check processing, training center, mail processing and storage center for the Savings Bank Item 3. Legal Proceedings - -------------------------- Neither the Company nor its subsidiaries are involved in any pending legal proceedings, other than routine legal matters occurring in the ordinary course of business, which in the aggregate involve amounts which are believed by management to be immaterial to the consolidated financial condition or results of operations of the Company. Item 4. Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------ None. 30 PART II Item 5. Market for Common Equity and Related Stockholder Matters - ----------------------------------------------------------------- Information relating to the market for Registrant's common equity and related stockholder matters appears under "Stock Market Information" in the Registrant's 1998 Annual Report to Stockholders on pages 2 and 3, and is incorporated herein by reference. Item 6. Selected Financial Data - -------------------------------- The above-captioned information appears under "Selected Financial and Other Data" in the Registrant's 1998 Annual Report to Stockholders on pages 4 and 5, and is incorporated herein by reference. 31 Item 7. Management's Discussion and Analysis of Financial Conditions and Results of Operations - -------------------------------------------------------------------------------- Rate/Volume Analysis The table below sets forth certain information regarding changes in interest income and interest expense of the Savings Bank for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (changes in average volume multiplied by old rate); (ii) changes in rates (changes in rate multiplied by old average volume); (iii) total changes in rate-volume. The combined effects of changes in both volume and rate, which cannot be separately identified, have been allocated proportionately to the change due to volume and the change due to rate.
Years Ended Years Ended Years Ended ------------------------ ----------------------- ---------------------- December 31 December 31 December 31 December 31 December 31, June 30 1998 vs 1997 1997 vs 1996 1996 vs 1995 ------------------------ ----------------------- ---------------------- Increase (Decrease) Increase (Decrease) Increase (Decrease) Due to Due to Due to -------------------- -------------------- ------------------ Volume Rate Net Volume Rate Net Volume Rate Net -------- ------- -------- --------- ------- -------- --------- ------- -------- (In thousands) Interest income: Loans receivable............... (4,810) 417 (4,393) $ (510) 443 (67) $11,645 $ (30) $11,615 Mortgage-backed securities(1).. 3,483 360 3,843 1,443 31 1,474 (699) (137) (836) Investment securities(1)....... 1,053 182 1,235 2,887 68 2,955 (982) -- (982) Securities purchased under agreements to resell........... 325 70 395 -- -- -- Other interest-earning assets.. 91 (386) (295) 443 (1000) (557) (14) (424) (438) ------ ------ ------ ----- ----- ------ ------ ----- ------ Total interest-earning assets $ (183) $ 573 $ 390 $4,588 $ (388) $4,200 $ 9,950 $(591) $ 9,359 ====== ====== ====== ===== ===== ===== ====== ===== ====== Interest expense: Savings deposits............... $ 325 $(1,139) $ (814) $2,922 $ 550 $3,472 $ 1,734 $(363) $ 1,371 Borrowed money................. 2,734 195 2,929 145 (334) (189) 4,866 157 5,023 ------ ------ ------ ----- ----- ----- ------ ----- ------ Total interest bearing liabilities............... $ 3,059 (944) $ 2,115 $3,067 216 $3,283 $ 6,600 $(206) $ 6,394 ====== ====== ====== ===== ===== ====== ====== ===== ====== Net change in interest income... $(3,242) 1,517 $(1,725) $1,521 (604) $ 917 $ 3,350 $(385) $ 2,965 ====== ====== ====== ===== ===== ===== ====== ===== ======
- ------------------------ (1) Includes interest income on investment securities held-for-sale. 32 The remaining above-captioned information appears under Management's Discussion and Analysis of Financial Condition and Results of Operations in the Registrant's 1998 Annual Report to Stockholders on pages 6 through 8 and is incorporated herein by reference. Item 7A. Quantitative and Qualitative Disclosures About Market Risk - -------------------------------------------------------------------- Asset and Liability Management Managing Interest Rate Risk. Interest rate risk is defined as the sensitivity of the Company's current and future earnings as well as its capital to changes in the level of market interest rates. The Bank's exposure to interest rate risk results from, among other things, the difference in maturities in interest-earning assets and interest-bearing liabilities. Since the Bank's assets currently have a longer maturity than its liabilities, the Bank's earnings could be negatively impacted during a period of rising interest rates and conversely, positively impacted during a period of falling interest rates. The relationship between the interest rate sensitivity of the Bank's assets and liabilities is continually monitored by management. In this regard, the Bank emphasizes the origination of shorter term or adjustable rate assets for portfolio while originating longer term fixed rate assets for resale. At December 31, 1998, approximately 84.73% of the Bank's loan portfolio were comprised of loans with original maturities of less than 15 years, balloon mortgages or adjustable rate loans. Additionally, the origination level of fixed rate assets are continually monitored and if deemed appropriate, the Bank will enter into forward commitments for the sale of these assets to ensure the Bank is not exposed to undue interest rate risk. The Bank utilizes its investment and mortgage-backed security portfolio in managing its liquidity and therefore seeks securities with a stated or average estimated maturities of less than five years. These securities are readily marketable and provide the Bank with a cash flow stream to fund asset growth or liability maturities. A significant portion of the Bank's assets has been funded with CDs including jumbo CDs. Unlike other deposit products such as checking and savings accounts, CDs carry a high degree of interest rate sensitivity and therefore, their renewal will vary based on the competitiveness of the Bank's interest rates. The Bank has attempted to price its CDs to be competitive at the shorter maturities (i.e., maturities of less than one year) in order to better match the repricing characteristics of portfolio loans. At December 31, 1998, approximately 43.13% of the Bank's deposits were CDs. The Bank utilizes borrowings from the FHLB in managing its interest rate risk and as a tool to augment deposits in funding asset growth. The Bank may utilize these funding sources to better match its longer term repricing assets (i.e., between one and five years). The nature of the Bank's current operations is such that it is not subject to foreign currency exchange or commodity price risk. Additionally, neither the Company nor the Bank owns any trading assets. At December 31, 1998, the Bank did not have any hedging transactions in place such as interest rate swaps, caps, or floors. 33 GAP analysis is a useful measurement of asset and liability management. However, it is difficult to predict the effect of changing interest rates based solely on this measure. An additional analysis required by the OTS and generated quarterly is the OTS Interest Rate Exposure Report. This report forecasts changes in the Bank's market value of portfolio equity ("MVPE") under alternative interest rate environments. The MVPE is defined as the net present value of the Bank's existing assets, liabilities and off-balance sheet instruments. The calculated estimates of change in MVPE at December 31, 1998 are as follows: MVPE - -------------------------------------------------------------------------------- Amount Change in Interest Rate (In Thousands) % Change +400 Basis Points $45,844 -11.78% +300 Basis Points 48,983 -5.74% +200 Basis Points 51,579 -.74% +100 Basis Points 52,888 1.78% Flat Rate 51,965 0 - -100 Basis Points 48,612 -6.45% - -200 Basis Points 43,472 -16.34% - -300 Basis Points 38,944 -25.06% - -400 Basis Points 32,593 -37.28% Management believes that the assumptions utilized in evaluating the vulnerability of the Company's earnings and capital to changes in interest rates approximate actual experience; however, the interest rate sensitivity of the Bank's assets and liabilities as well as the estimated effect of changes in interest rates on MVPE could vary substantially if different assumptions are used or actual experience differs from the experience on which the assumptions were based. In the event the Bank should experience a mismatch in its desired GAP ranges or an excessive decline in its MVPE subsequent to an immediate and sustained change in interest rate, it has a number of options which it could utilize to remedy such mismatch. The Bank could restructure its investment portfolio through sale or purchase of securities with more favorable repricing attributes. It could also emphasize loan products with appropriate maturities or repricing attributes, or it could attract deposits or obtain borrowings with desired maturities. Item 8. Financial Statements - ----------------------------- The Consolidated Financial Statements of TF Financial Corporation and its subsidiaries are included in the Registrant's 1998 Annual Report to Stockholders on ages 20 through 62 and are incorporated herein by reference. Item 9. Change In and Disagreements with Accountants on Accounting and Financial Disclosure - -------------------------------------------------------------------------------- None. 34 PART III Item 10. Directors and Executive Officers of the Registrant - ------------------------------------------------------------ The information contained under the section captioned "Information with Respect to Nominees for Director, Directors Continuing in Office and Executive Officers -- General Information and Nominees" at pages 3 to 5 of the Registrant's definitive proxy statement for the Registrant's 1999 Annual Meeting of Stockholders (the "Proxy Statement") is incorporated herein by reference. Additional information concerning executive officers is included under "Item 1. Business -- Executive Officers of the Registrant." Item 11. Executive Compensation - -------------------------------- The information relating to executive compensation is incorporated herein by reference to the Registrant's Proxy Statement at pages 6 through 9. Item 12. Security Ownership of Certain Beneficial Owners and Management - ------------------------------------------------------------------------ The information relating to security ownership of certain beneficial owners and management is incorporated herein by reference to the Registrant's Proxy Statement at pages 2 and 3. Item 13. Certain Relationships and Related Transactions - -------------------------------------------------------- The information relating to certain relationships and related transactions is incorporated herein by reference to the Registrant's Proxy Statement at page 15. 35 PART IV Item 14. Exhibits and Reports on Form 8-K - ------------------------------------------ (a) The following documents are filed as a part of this report: (1) Financial Statements of the Company are incorporated by reference to the following indicated pages of the 1998 Annual Report to Stockholders.
PAGE ---- Independent Auditors' Report.......................................................... 19 Consolidated Statements of Financial Position as of December 31, 1998 and 1997........ 20 Consolidated Statements of Earnings For the Years Ended December 31, 1998, 1997 and 1996.................................................... 21 Consolidated Statement of Changes in Stockholders' Equity and Comprehensive Income for the Years Ended December 31, 1998, 1997 and 1996........................... 22 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996.................................................... 24 Notes to Consolidated Financial Statements............................................ 26
The remaining information appearing in the Annual Report to Stockholders is not deemed to be filed as part of this report, except as expressly provided herein. (2) All schedules are omitted because they are not required or applicable, or the required information is shown in the consolidated financial statements or the notes thereto. (3) Exhibits (a) The following exhibits are filed as part of this report. 3.1 Certificate of Incorporation of TF Financial Corporation* 3.2 Bylaws of TF Financial Corporation* 4.0 Stock Certificate of TF Financial Corporation* 4.1 The Company's Rights Agreement dated November 22, 1995** 10.1 Third Federal Savings and Loan Association Management Stock Bonus Plan* 10.2 TF Financial Corporation 1994 Stock Option Plan* 10.3 Third Federal Savings Bank Directors Consultation and Retirement Plan*** 10.4 TF Financial Corporation Incentive Compensation Plan*** 10.5 Severance Agreement with John R. Stranford*** 10.6 Severance Agreement with Thomas J. Sposito II**** 10.7 Severance Agreement with William C. Niemczura*** 10.8 Severance Agreement with Earl A. Pace, Jr. 10.9 TF Financial Corporation 1997 Stock Option Plan**** 11.0 Statement re Computation of Per Share Earnings 13.0 1998 Annual Report to Stockholders 21.0 Subsidiary Information 36 23.0 Consent of Independent Auditor 27.0 Financial Data Schedule (b) Reports on Form 8-K. None. - ------------------------ * Incorporated herein by reference from the Exhibits to Form S-1, Registration Statement, File No. 33-76960. ** Incorporated herein by reference to the Registrants Form 8-A filed with the Securities and Exchange Commission on November 22, 1995. *** Incorporated herein by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1995. **** Incorporated herein by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. 37 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. TF FINANCIAL CORPORATION Dated: March 24, 1999 By: /s/ John R. Stranford -------------------------------- John R. Stranford President, Chief Executive Officer and Director (Duly Authorized Representative) Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. By: /s/ John R. Stranford By: /s/ William C. Niemczura ----------------------------------- ------------------------------- John R. Stranford William C. Niemczura President, Chief Executive Officer Senior Vice President, Chief and Director Financial Officer and Treasurer (Principal Executive Officer) (Principal Financial and Accounting Officer) Date: March 24, 1999 Date: March 24, 1999 By: /s/ Carl F. Gregory By: /s/ Robert N. Dusek ----------------------------------- ------------------------------- Carl F. Gregory Robert N. Dusek Director Chairman of the Board Date: March 24, 1999 Date: March 24, 1999 By: /s/ Thomas J. Gola By: /s/ George A. Olsen ----------------------------------- ------------------------------- Thomas J. Gola George A. Olsen Director Director Date: March 24, 1999 Date: March 24, 1999 EX-10.8 2 EXHIBIT 10.8 CHANGE IN CONTROL SEVERANCE AGREEMENT ------------------------------------- As Amended on December 31, 1998 THIS CHANGE IN CONTROL SEVERANCE AGREEMENT ("Agreement") entered into this 1 st day of January, 1998 ("Effective Date"), by and between Third Federal Savings Bank (the "Savings Bank") and Earl A. Pace, Jr. (the "Employee"). WHEREAS, the Employee is currently employed by the Savings Bank as a Senior Vice President and Information Technology Systems Manager and is experienced in all phases of the business of the Savings Bank; and WHEREAS, the parties desire by this writing to set forth the rights and responsibilities of the Savings Bank and Employee if the Savings Bank should undergo a change in control (as defined hereinafter in the Agreement) after the Effective Date. NOW, THEREFORE, it is AGREED as follows: 1. Employment. The Employee is employed in the capacity as a Senior Vice President and Information Technology Systems Manager of the Savings Bank. The Employee shall render such administrative and management services to the Savings Bank and TF Financial Corporation ("Parent") as are currently rendered and as are customarily performed by persons situated in a similar executive capacity. The Employee's other duties shall be such as the Board of Directors for the Savings Bank (the "Board of Directors" or "Board") may from time to time reasonably direct, including normal duties as an officer of the Savings Bank. 2. Term of Agreement. The term of this Agreement shall be for the period commencing on the Effective Date and ending twenty-four (24) months thereafter. Additionally, on, or before, each annual anniversary date from the Effective Date, the term of this Agreement may be extended for an additional one year period beyond the then effective expiration date upon a determination and resolution of the Board of Directors that the performance of the Employee has met the requirements and standards of the Board, and that the term of such Agreement shall be extended. Notwithstanding anything herein to the contrary, the expiration date of this Agreement shall be as of December 31, 2000, except as may be extended beyond that date by future action of the Board within its sole discretion in accordance with this Agreement. 3. Termination of Employment in Connection with or Subsequent to a Change in Control. (a) Notwithstanding any provision herein to the contrary, in the event of the involuntary termination of Employee's employment under this Agreement, absent Just Cause, in connection with, or 1 within twenty-four (24) months after, any Change in Control of the Bank or Parent, Employee shall be paid an amount equal to two (2) times the prior three (3) calendar year (or lesser period if not employed for such 3 year period) average compensation paid to the Employee by the Bank (whether said amounts were received or deferred by the Employee) and the costs associated with maintaining coverage under the Bank's medical and dental insurance reimbursement plans similar to that in effect on the date of termination of employment for a period of one year thereafter. Said sum shall be paid, at the option of Employee, either in one (1) lump sum within thirty (30) days of such termination discounted to the present value of such payment using as the discount rate the "prime rate" as published in the Wall Street Journal Eastern Edition as of the date of such payment minus 100 basis points, or in periodic payments over the next 24 months, and such payments shall be in lieu of any other future payments which the Employee would be otherwise entitled to receive. Notwithstanding the forgoing, all sums payable hereunder shall be reduced in such manner and to such extent so that no such payments made hereunder when aggregated with all other payments to be made to the Employee by the Bank or the Parent shall be deemed an "excess parachute payment" in accordance with Section 280G of the Internal Revenue Codes of 1986, as amended (the "Code") and be subject to the excise tax provided at Section 4999(a) of the Code. The term "Change in Control" shall mean: (i) the execution of an agreement for the sale of all, or a material portion, of the assets of the Bank or the Parent; (ii) the execution of an agreement for a merger or recapitalization of the Bank or the Parent or any merger or recapitalization whereby the Bank or the Parent is not the surviving entity; (iii) a change in control of the Bank or the Parent, as otherwise defined or determined by the Office of Thrift Supervision or regulations promulgated by it; or (iv) the acquisition, directly or indirectly, of the beneficial ownership (within the meaning of that term as it is used in Section 13(d) of the Securities Exchange Act of 1934 and the rules and regulations promulgated thereunder) of twenty-five percent (25%) or more of the outstanding voting securities of the Bank or the Parent by any person, trust, entity or group. The term "person" means an individual other than the Employee, or a corporation, partnership, trust, association, joint venture, pool, syndicate, sole proprietorship, unincorporated organization or any other form of entity not specifically listed herein. (b) Notwithstanding any other provision of this Agreement to the contrary except as provided at Sections 4(b), 4(c), 4(d), 4(e) and 5, Employee may voluntary terminate his employment under this Agreement within twenty-four (24) months following a Change in Control of the Bank or Parent, and Employee shall thereupon be entitled to receive the payment and benefits described in Section 3(a) of this Agreement, upon the occurrence, or within ninety (90) days thereafter, of any of the following events, which have not been consented to in advance by the Employee in writing: (i) if 2 Employee would be required to move his personal residence or perform his principal executive functions more than fifty (50) miles from the Employee's primary office as of the signing of this Agreement; (ii) if in the organizational structure of the Bank or Parent, Employee would be required to report to a person or persons deemed to be at a management level below the management level to which Employee was reporting to prior to the Change in Control; (iii) if the Bank or Parent should fail to maintain the Employee's base compensation in effect as of the date of the Change in Control and existing employee benefits plans, including material fringe benefit, stock option and retirement plans, except to the extent that such reduction in benefit programs is part of an overall adjustment in benefits for all employees of the Bank or Parent and does not disproportionately adversely impact the Employee; (iv) if Employee would be assigned duties and responsibilities other than those normally associated with his position as referenced at Section 1, herein, for a period of more than six months; or (v) if Employee's responsibilities or authority have in any way been materially diminished or reduced for a period of more than six months. 4. Other Changes in Employment Status. (a) Except as provided for at Section 3, herein, the Board of Directors may terminate the Employee's employment at any time, but any termination by the Board of Directors other than termination for Just Cause, shall not prejudice the Employee's right to compensation or other benefits under the Agreement. The Employee shall have no right to receive compensation or other benefits for any period after termination for Just Cause. Termination for "Just Cause" shall include termination because of the Employee's personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or final cease- and-desist order, or material breach of any provision of the Agreement. (b) If the Employee is removed and/or permanently prohibited from participating in the conduct of the Savings Bank's affairs by an order issued under Sections 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act ("FDIA") (12 U.S.C. 1818(e)(4) and (g)(1)), all obligations of the Savings Bank under this Agreement shall terminate, as of the effective date of the order, but the vested rights of the parties shall not be affected. (c) If the Savings Bank is in default (as defined in Section 3(x)(1) of FDIA) all obligations under this Agreement shall terminate as of the date of default, but this paragraph shall not affect any vested rights of the contracting parties. 3 (d) All obligations under this Agreement shall be terminated, except to the extent determined that continuation of this Agreement is necessary for the continued operation of the Savings Bank: (i) by the Director of the Office of Thrift Supervision ("Director of OTS"), or his or her designee, at the time that the Federal Deposit Insurance Corporation ("FDIC") or the Resolution Trust Corporation enters into an agreement to provide assistance to or on behalf of the Savings Bank under the authority contained in Section 13(c) of FDIA; or (ii) by the Director of the OTS, or his or her designee, at the time that the Director of the OTS, or his or her designee approves a supervisory merger to resolve problems related to operation of the Savings Bank or when the Savings Bank is determined by the Director of the OTS to be in an unsafe or unsound condition. Any rights of the parties that have already vested, however, shall not be affected by such action. (e) Notwithstanding anything herein to the contrary, any payments made to the Employee pursuant to the Agreement, or otherwise, shall be subject to and conditioned upon compliance with 12 USC ss.1828(k) and any regulations promulgated thereunder. 5. Suspension of Employment . If the Employee is suspended and/or temporarily prohibited from participating in the conduct of the Savings Bank's affairs by a notice served under Section 8(e)(3) or (g)(1) of the FDIA (12 U.S.C. 1818(e)(3) and (g)(1)), the Savings Bank's obligations under the Agreement shall be suspended as of the date of service, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Savings Bank shall, (i) pay the Employee all or part of the compensation withheld while its contract obligations were suspended and (ii) reinstate any of its obligations which were suspended. 6. Successors and Assigns. (a) This Agreement shall inure to the benefit of and be binding upon any corporate or other successor of the Savings Bank which shall acquire, directly or indirectly, by merger, consolidation, purchase or otherwise, all or substantially all of the assets or stock of the Savings Bank. (b) The Employee shall be precluded from assigning or delegating his rights or duties hereunder without first obtaining the written consent of the Savings Bank. 7. Amendments. No amendments or additions to this Agreement shall be binding upon the parties hereto unless made in writing and signed by both parties, except as herein otherwise specifically provided. 8. Applicable Law. This agreement shall be governed by all respects whether as to validity, construction, capacity, performance or otherwise, by the laws of the Commonwealth of 4 Pennsylvania, except to the extent that Federal law shall be deemed to apply. 9. Severability. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. 10. Arbitration. Any controversy or claim arising out of or relating to this Agreement, or the breach thereof, shall be settled by arbitration in accordance with the rules then in effect of the district office of the American Arbitration Association ("AAA") nearest to the home office of the Savings Bank, and judgment upon the award rendered may be entered in any court having jurisdiction thereof, except to the extent that the parties may otherwise reach a mutual settlement of such issue. The Savings Bank shall incur the cost of all fees and expenses associated with filing a request for arbitration with the AAA, whether such filing is made on behalf of the Savings Bank or the Employee, and the costs and administrative fees associated with employing the arbitrator and related administrative expenses assessed by the AAA. Each party shall be responsible for any fees incurred on its own behalf with respect to other expenses, including attorneys' fees, arising from such dispute, proceedings or actions. 11. Confidentiality. (a) Employee agrees that, at all times hereafter, he will keep all confidential and proprietary business and marketing strategies of Savings Bank and any and all other information which he learned regarding the Savings Bank during the course of his employment by Savings Bank, in strictest confidence and will not disclose any part or aspect thereof to anyone for any reason unless required by law to do so. (b) All marketing and business materials, existing or prospective customer lists or statements, seminar materials, drawings, designs, books, cards, records, accounts, audio visual reports, slides, files, notes, memoranda, and other papers, and any software, computer programs, or data base information or any other information obtained from Savings Bank or connected with or arising from any affairs of Savings Bank or his employment hereunder (the "Records"), in the charge or possession or knowledge of Employee shall be and remain the exclusive property of Savings Bank and shall not be used, transferred or disclosed in any way by Employee except in the ordinary performance of Employee's duties for Savings Bank while an employee of Savings Bank. Upon the termination of Employee's employment, any and all Records of whatever kind and in whatever form maintained, as well as all copies and reproductions thereof in the possession or control of Employee shall be turned over and delivered by Employee to Savings Bank without any hesitancy or delay. 5 12. Entire Agreement. This Agreement together with any understanding or modifications thereof as agreed to in writing by the parties, shall constitute the entire agreement between the parties hereto. IN WITNESS WHEREOF, the parties have executed this Agreement on the day and date first hereinabove written. THIRD FEDERAL SAVINGS BANK ATTEST: By: /s/John R. Stranford ---------------------------- -------------------------------------- John R. Stranford President and CEO WITNESS: /s/Elizabeth Davidson Maier - ----------------------------------- Elizabeth Davidson Maier Secretary WITNESS: /s/Anne Marie Schickling /s/Earl A. Pace, Jr. - ----------------------------------- ---------------------------------------- Anne Marie Schickling Earl A. Pace, Jr. Employee EX-11 3 EXHIBIT 11 Exhibit No. 11 Statement re: Computation of Per Share Earnings
Year Year Ended Ended December 31, 1998 December 31, 1997 ------------------ ----------------- Net income............................................ $ 4,038,000 $ 4,874,000 Weighted average common shares outstanding............ 2,894,651 3,656,924 Basic Earnings per share.............................. $ 1.39 $ 1.33 Weighted average common shares outstanding............ 2,894,651 3,656,924 Effect of dilution securities stock options........... 300,844 251,667 Total weighted average common shares outstanding for diluted earnings per share computation.............. 3,195,495 3,908,591 Diluted earnings per share............................ $ 1.26 $ 1.25
EX-13 4 EXHIBIT 13 TF FINANCIAL CORPORATION To Our Shareholders: In 1998, your company completed the restructuring of its team and systems necessary to take us into the next century as a full service community bank. We are very pleased to announce that Floyd Haggar joined our team as Senior Vice President and Chief Lending Officer. Floyd brings experience in commercial lending for over 20 years in our local marketplace. With his staff now in place, we are seeing a substantial increase in our earning assets. Our commercial loan portfolio grew by 87% for the year as a result of these efforts. Total assets have increased 11.5% from $597.0 million at December 31, 1997 to $665.6 million at the end of 1998. During the same period, our book value per share increased 6.2% from $17.36 at December 31, 1997 to $18.43 at December 31, 1998. Earnings per share rose 4.5% from $1.33 for 1997 to $1.39 for 1998. Our increased earnings have contributed to our steady improvement to Return on Equity. Return on Equity increased 5.4% from 7.39% in 1997 to 7.79% in 1998. During this past year, we installed our new client-server computer system. This new system, which has been tested extensively for Year 2000 compliance, has enabled us to better serve both our consumer and commercial clientele. In addition, a Year 2000 Steering Committee was established to deal with the challenges of the millennium change to both our in-house systems as well as the systems of our vendors and customers. In October 1998, the Board approved the repurchase of 5% of the Company's outstanding stock. With the depressed trading value of recent months, this should have the effect of enhancing stockholder value. Management and the Board of Directors believe that together with our employees, we have the ability to face the challenges of increased competition. We are committed to further increasing earnings growth and maximizing shareholder value while maintaining our traditions of community banking. We appreciate the opportunity to continue to serve you. Sincerely, /s/John R. Stranford - -------------------------- John R. Stranford President and Chief Executive Officer TF FINANCIAL CORPORATION ANNUAL REPORT DECEMBER 31, 1998 - -------------------------------------------------------------------------------- TABLE OF CONTENTS - -------------------------------------------------------------------------------- Letter to Stockholders...................................... Front Cover Corporate Profile and Stock Market Information........................ 2 Selected Financial Information and Other Data......................... 4 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 6 Report of Independent Certified Public Accountants ....................................................... 19 Consolidated Statements of Financial Position........................ 20 Consolidated Statements of Earnings.................................... 21 Consolidated Statement of Changes in Stockholders' Equity and Comprehensive Income.......................................22 Consolidated Statements of Cash Flows...................................24 Notes to Consolidated Financial Statements........................... 26 Office Locations..................................................... 64 Corporate Information......................................... Back Cover Corporate Profile and Related Information TF Financial Corporation (the "Corporation") is the parent company of Third Federal Savings Bank ("Third Federal" or the "Savings Bank"), TF Investments Corporation, Teragon Financial Corporation and Penns Trail Development Corporation. At December 31, 1998, total assets were approximately $665.6 million. The Corporation was formed as a Delaware corporation in March 1994 at the direction of the Savings Bank to acquire all of the capital stock that Third Federal issued upon its conversion from the mutual to stock form of ownership (the "Conversion") and concurrent $52.9 million initial public offering effective July 13, 1994. At December 31, 1998, total stockholders' equity was approximately $52.7 million. The Corporation is a unitary savings and loan holding company which, under existing laws, generally is not restricted in the types of business activities in which it may engage, provided that Third Federal retains a specified amount of its assets in housing-related investments. Third Federal is a federally-chartered stock savings bank headquartered in Newtown, Pennsylvania, which was originally chartered in 1921 under the name "Polish American Savings Building and Loan Association." Third Federal became a federally chartered mutual savings and loan association under the name "Third Federal Savings and Loan Association of Philadelphia" in 1935, and a federally chartered stock savings bank under its present name, and a wholly owned subsidiary of the Corporation, in July 1994, in connection with its mutual-to-stock conversion. Third Federal significantly expanded its operations throughout Philadelphia and Bucks Counties, Pennsylvania, in June 1992 through its acquisition of Doylestown Federal Savings and Loan Association ("Doylestown"). In September 1996, Third Federal expanded its operations into Mercer County, New Jersey, through its acquisition of three branches, along with the related deposits, of Cenlar Federal Savings Bank. Deposits of Third Federal have been federally insured since 1935 and are currently insured up to the maximum amount allowable by the Federal Deposit Insurance Corporation (the "FDIC"). Third Federal is a community oriented savings institution offering a variety of financial services to meet the needs of the communities that it serves. Third Federal conducts its business from its main office in Newtown, Pennsylvania, and thirteen full service branch offices located in Philadelphia and Bucks Counties, Pennsylvania and Mercer County, New Jersey. Third Federal attracts deposits (approximately $438.9 million at December 31, 1998) from the general public and uses such deposits, together with borrowings (approximately $163.4 million at December 31, 1998) and other funds, primarily to invest in mortgage-backed and investment securities and to originate or purchase loans secured by first mortgages on owner-occupied, one-to-four family residences. To a lesser extent, the Savings Bank also originates and purchases commercial real estate and multi-family loans, construction loans and consumer loans. Stock Market Information Since its issuance in July 1994, the Corporation's common stock has been traded on the Nasdaq National Market. The daily stock quotation for the Corporation is listed in the Nasdaq National Market published in The Wall Street Journal, The Philadelphia Inquirer, and other leading newspapers under the trading symbol of "THRD". The following table reflects the closing stock price as published by the Nasdaq National Market statistical report for the past two fiscal years. Fiscal 1998 HIGH LOW ----------- ---- --- First Quarter $29.50 $24.75 Second Quarter $30.00 $24.25 Third Quarter $26.50 $17.38 Fourth Quarter $20.38 $16.13 2 Fiscal 1997 HIGH LOW ----------- ---- --- First Quarter $19.25 $16.50 Second Quarter $19.63 $13.63 Third Quarter $25.69 $19.13 Fourth Quarter $30.00 $23.25 The number of shareholders of record of common stock as of March 22, 1999, was approximately 673. This does not reflect the number of persons or entities who held stock in nominee or "street" name through various brokerage firms. At March 22, 1999, there were 3,041,010 shares of the common stock of the Corporation outstanding. Dividend Policy The Corporation's ability to pay dividends to stockholders is dependent in part upon the dividends it receives from Third Federal. Among other limitations, Third Federal may not declare or pay a cash dividend on any of its stock if the effect thereof would cause Third Federal's regulatory capital to be reduced below (1) the amount required for the liquidation account established in connection with Third Federal's conversion from mutual to stock form, or (2) the regulatory capital requirements imposed by the Office of Thrift Supervision ("OTS"). It is the Corporation's policy to pay dividends when it is deemed prudent to do so. The Board of Directors will consider the payment of a dividend on a quarterly basis, after giving consideration to the level of profits for the previous quarter and other relevant information. The following charts show the Corporation's history of dividend payments. Dividend History HISTORY ----------------------------------------------------------------- Financial Declaration Dividend Amount Period Ended Date (per share) ------------ ----------- --------------- June 30, 1994 None $0.00 December 31, 1994 January 25, 1995 $0.05 June 30, 1995 July 26, 1995 $0.07 March 31, 1996 April 24, 1996 $0.08 December 31, 1996 January 22, 1997 $0.10 December 31, 1997 January 22, 1998 $0.12 December 31, 1998 January 22, 1999 $0.12 Change in Accounting Period On August 19, 1994, the Board of Directors of TF Financial Corporation approved a change in the Corporation's fiscal year end from June 30 to December 31. This change was instituted to enable the Corporation to present its financial reports on a fiscal year end that is more prevalent in the financial services industry. 3 SELECTED FINANCIAL INFORMATION AND OTHER DATA
- -------------------------------------------------------------------------------------------------------- At December 31, Financial Condition --------------- (Dollars in Thousands, except per share data) 1998 1997 1996 1995 1994 - -------------------------------------------------------------------------------------------------------- Total Assets .................................. $665,609 $597,047 $647,853 $490,358 $431,828 Loans Receivable, Net ......................... 240,841 250,711 309,570 238,275 113,893 Mortgage-backed Securities available for sale, at fair value ..................... 75,285 36,847 22,027 29,640 -- Mortgage-backed securities held to maturity at cost ..................................... 180,964 144,074 153,758 137,841 181,411 Securities purchased under agreements to resell -- 10,000 25,129 -- -- Investment securities available for sale, at fair value ..................... 9,042 32,037 12,652 15,044 41,002 Investment securities held to maturity, at cost......................................... 80,895 52,822 38,544 23,640 36,531 Cash and cash equivalents(1) .................. 42,703 41,625 54,132 27,032 42,376 Savings deposits .............................. 438,913 450,429 469,088 337,069 347,631 Other borrowings .............................. 163,359 88,359 98,359 73,359 -- Retained earnings ............................. 45,762 43,176 39,750 37,529 34,746 Total stockholders' equity .................... 52,660 50,095 72,575 73,332 79,972 Book value per common share ................... $ 18.43 $ 17.36 $ 18.31 $ 17.08 $ 16.38 Tangible book value per common share .......... $ 15.84 $ 14.49 $ 15.99 $ 17.08 $ 16.38
- ---------------------------------------------------------------------------------------------------------------------- Year ended Six months ended Year ended ------------ ---------------- ---------- Summary of Operations December 31, December 31, June 30, (Dollars in Thousands, except per ------------ ------------ ---------- Share data) 1998 (3) 1997 1996 (2) 1995 1994 (4) 1994 - ---------------------------------------------------------------------------------------------------------------------- Interest income ................................ $43,579 $43,189 $38,989 $29,630 $13,901 $24,516 Interest expense ............................... 26,195 24,080 20,797 14,403 6,271 12,789 Net interest income ............................ 17,384 19,109 18,192 15,227 7,630 11,727 Provision for loan losses ...................... 60 397 330 72 30 (144) Non-interest income ............................ 1,579 2,327 1,794 1,161 617 1,903 Non-interest expense ........................... 12,766 13,583 13,745 9,975 4,601 9,452 Net income before cumulative effect of change in accounting method ............... 3,830 4,874 3,479 3,871 2,180 2,666 Net income ..................................... 4,038 4,874 3,479 3,871 2,607 4,466 Earnings per common share - basic Continuing operations ....................... $ 1.32 $ 1.33 $ 0.86 $ 0.84 $ 0.45 N/A Cumulative effect of accounting changes ..... $ 0.07 -- -- -- $ 0.08 N/A Earnings per common share - basic ........... $ 1.39 $ 1.33 $ 0.86 $ 0.84 $ 0.53 N/A Earnings per common share - assuming dilution Continuing operations ....................... $ 1.20 $ 1.25 $ 0.83 -- $ 0.45 N/A Cumulative effect of accounting changes ..... $ 0.06 -- -- -- $ 0.08 N/A Earnings per common share - assuming dilution $ 1.26 $ 1.25 $ 0.83 $ 0.83 $ 0.53 N/A
4
- ---------------------------------------------------------------------------------------------------------------------- Performance Ratios and Other Year ended Six months ended Year ended Selected data December, 31 December, 31 June, 30 ------------ ------------ ---------- 1998(3) 1997 1996(2) 1995 1994(4)(5) 1994 - ---------------------------------------------------------------------------------------------------------------------- Return on average assets .................. 0.61% 0.77% 0.62% 0.88% 1.00% 0.67% Return on average equity .................. 7.79% 7.39% 4.74% 4.99% 5.40% 8.59% Average equity to average assets .......... 7.81% 10.46% 12.91% 17.54% 18.48% 7.65% Average interest rate spread .............. 2.44% 2.72% 2.76% 2.84% 3.15% 2.86% Non-performing loans to total assets ...... 0.25% 0.23% 0.30% 0.37% 0.42% 0.48% Non-performing loans to total loans ....... 0.66% 0.55% 0.64% 0.76% 1.48% 1.49% Allowance for loan losses to non-performing loans ................................... 119.16% 146.82% 91.60% 82.31% 87.13% 84.71% Allowance for loan losses to total loans .. 0.79% 0.80% 0.58% 0.62% 1.29% 1.19% Savings Bank regulatory capital Core .................................. 6.79% 7.16% 7.77% 12.21% 13.57% 7.37% Tangible .............................. 6.79% 7.16% 7.77% 12.21% 13.57% 7.37% Risk based ............................ 17.73% 17.41% 17.68% 27.07% 39.46% 21.27% Dividend payout ratio (6) 38.10% 32.00% 37.35% 28.92% N/A N/A
1. Consists of cash, cash due from banks, interest-bearing deposits, and federal funds sold with maturities of less than three months. 2. Includes a $1.4 million after tax one-time special assessment to recapitalize the Savings Association Insurance Fund ("SAIF"). 3. Income and income related ratios for the year ended 12/31/1998 include the cumulative effect of a change in accounting for certain investments of $208,000 (SFAS #133). 4. Income related ratios exclude the one-time cumulative effect of a change in accounting for certain investments of $427,000 for the six months ended 12/31/94 (SFAS #115) and change in accounting for income taxes of $1.8 million for the fiscal year end 6/30/94 (SFAS #109). 5. Ratios for six month periods are stated on an annualized basis. Such ratios are not necessarily indicative of the results that may be expected for the full year. 6. Payout ratio is dividends paid for the period divided by earnings per common share assuming dilution after cumulative effect of accounting changes. 5 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General The following discussion and analysis should be read in conjunction with the Corporation's consolidated financial statements and is intended to assist in understanding and evaluating the major changes in the financial condition and results of operations of the Corporation with a primary focus on an analysis of operating results. Certain forward-looking statements contained herein are subject to risks and uncertainties. The Corporation's actual results may differ materially from those set forth in such forward-looking statements. Reference is made to the Corporation's reports filed with the Securities and Exchange Commission for a discussion of factors that may cause such differences to occur. The Corporation's income on a consolidated basis is derived substantially from its investment in its subsidiary, Third Federal. The earnings of Third Federal depend primarily on its net interest income. Net interest income is affected by the interest income that Third Federal receives from its loans and investments and by the interest expense that the Savings Bank incurs on its deposits, borrowings and other sources of funds. The difference between average rate of interest earned on interest earning assets and the average rate paid on interest bearing liabilities is the "interest rate spread". When interest earning assets equal or exceed interest bearing liabilities, any positive interest rate spread will produce net interest income. During the years ended December 31, 1998, December 31, 1997, and December 31, 1996, the average net interest rate spread was 2.44%, 2.72% and 2.76% respectively. In addition, Third Federal receives income from service charges and other fees and occasionally from sales of investment securities and real estate owned. The Savings Bank incurs expenses in addition to interest expense in the form of salaries and benefits, deposit insurance premiums, property operations and maintenance, advertising and other related business expenses. Interest Rate Sensitivity Analysis The Corporation's asset/liability strategy for 1999 is to maintain its present positive gap position (interest-earning assets subject to repricing greater than interest-bearing liabilities subject to repricing) for periods of up to five years so that the impact of a slightly rising rate environment on net interest income will not be significant to the Corporation's results of operations. Effective monitoring of these interest sensitivity gaps is the priority of the Corporation's asset/liability management committee. The following table indicates the time periods in which interest-earning assets and interest-bearing liabilities will mature or reprice in accordance with their contractual terms or assumed prepayment rates. The assumptions used in the table are included in the notes thereto. Management believes that the assumptions used to evaluate the vulnerability of the Savings Bank's operations to changes in interest rates are reasonable. The interest rate sensitivity of the Savings Bank's assets and liabilities as shown in the table below could vary substantially if differing assumptions were used or if actual experience differs from the assumptions used in the table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in differing degrees to changes in market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Further, in the event of a significant change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in the table. Finally, the ability of many borrowers to service their adjustable-rate debt may decrease in the event of an interest rate increase. 6 Gap Table -- As of December 31, 1998
3 Months 3 Months 1 to 3 3 to 5 5 to 10 10 to 20 Over 20 or Less to 1 Year Years Years Years Years Years Total ------- --------- ----- ----- ----- ----- ----- ----- Interest-earning assets: Loans receivable - net (1)....... $51,655 $69,215 $57,838 $28,769 $30,753 $2,489 $122 $240,841 Mortgage-backed securities available for sale (2) ............ 5,426 12,311 21,619 13,087 15,792 7,050 0 75,285 Mortgage-backed securities held to maturity (2).................... 13,042 29,595 51,969 31,461 35,972 16,947 1,978 180,964 Investment securities available for sale........................... 5,007 4,035 0 0 0 0 0 9,042 Investment securities held to maturity........................ 50,170 9,223 8,142 10,645 2,715 0 0 80,895 Certificates of deposit-other Bank........................... 972 1,208 58 0 0 0 0 2,238 Other earning assets............. 43,466 2,293 6,112 0 0 0 0 51,871 ------- ------- ------- ------ ------ ------ ----- ------- Total interest-earning assets...... $169,738 $127,880 $145,738 $83,962 $85,232 $26,486 $2,100 $641,136 ======= ======= ======= ====== ====== ====== ===== =======
Interest-bearing liabilities: (3) Non-interest bearing deposits.... $ 795 $ 1,985 $ 1,934 $ 925 $ 535 $ 56 $ 1 $ 6,231 NOW and Super NOW accounts....... 3,378 10,132 10,637 7,067 8,877 4,266 614 44,971 Savings accounts................. 4,971 14,913 27,879 30,753 41,252 33,258 12,838 165,864 Money market deposit accounts.... 3,015 9,045 10,856 4,763 3,733 1,017 127 32,556 Certificates of deposit 90,910 42,822 47,832 5,282 2,128 317 0 189,291 Borrowings ...................... 10,000 15,000 30,000 20,000 85,000 3,359 0 163,359 ------ ------ ------ ------ ------ ------ ------ ------- Total interest-bearing Liabilities ................ $113,069 $93,897 $129,138 $ 68,790 $141,525 $ 42,273 $ 13,580 $602,272 ======= ====== ======= ======= ======= ====== ======= ======= Interest sensitivity gap........... $ 56,669 $33,983 $16,600 $15,172 $(56,293) $(15,787) $(11,480) $ 38,864 ------- ------ ------ ------ ------- ------- ------- ------- Cumulative interest sensitivity Gap.............................. $ 56,669 $90,652 $107,252 $122,424 $ 66,131 $ 50,344 $ 38,864 $ 38,864 ======= ====== ======= ======= ======= ======= ======= ======= Ratio of interest-earning assets To interest-bearing liabilities... 150.12% 136.19% 112.85% 122.06% 60.22% 62.65% 15.46% 106.45% ======= ====== ======= ======= ======= ======= ======= ======= Ratio of cumulative gap to Total assets...................... 8.51% 13.62% 16.11% 18.39% 9.94% 7.56% 5.84% 5.84% ======= ====== ======= ======= ======= ======= ======= =======
- ---------------------------------- (1) Adjustable rate loans are included in the period in which interest rates are next scheduled to adjust rather than in the period in which they are due. Fixed rate loans are included in the period in which they are scheduled to be repaid and adjusted to take into account estimated prepayments based upon assumptions estimating the prepayments in the interest rate environment prevailing during the fourth calendar quarter of 1998. The table assumes prepayments and scheduled principal amortization of fixed-rate loans and mortgage-backed securities, and assumes that adjustable rate mortgage loans will reprice at contractual repricing intervals. There has been no adjustment for the impact of future commitments and loans in process. (2) Reflects estimated prepayments in the interest rate environment prevailing during the fourth quarter of 1998 (3) Certificates of deposit are included in the period in which they are scheduled to mature. Passbook and statement savings accounts are assumed to decay at a rate of 12%, 10% and 10% for the first three years, respectively, and 12% per year thereafter. Passbook, statement savings, NOW, and MMDA accounts are generally subject to immediate withdrawal, however, management considers a portion of these accounts to be core deposits having significantly longer effective maturities based upon the Savings Bank's historical retention of such deposits in changing interest rate environments and the presentation of run off of such deposits based upon the financial industry's experience. 7 Average Balance Sheet The following tables sets forth information relating to the Corporation's average balance sheets 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 monthly average balance of interest-earning assets or interest-bearing liabilities, respectively, for the periods indicated, however, management does not believe the use of month-end balances has caused any material difference in the information presented.
Year Ended December 31, Year Ended December 31, Year ended December 31, 1998 1997 1996 ----------------------- ----------------------- ----------------------- Average Average Average Average Yield/ Average Yield/ Average Yield/ Balance Interest Cost Balance Interest Cost Balance Interest Cost ------- -------- ------- ------- -------- ------- ------- -------- ------- Assets: Interest-earning assets: Loans receivable (4).................... $232,924 $18,657 8.01% $293,023 $23,050 7.87% $298,800 $23,116 7.74% Mortgage-backed securities.............. 251,785 16,357 6.50% 185,391 12,514 6.75% 162,973 11,041 6.77% Investment securities................... 115,801 6,918 5.97% 90,708 5,683 6.27% 48,359 2,888 5.97% Other interest-earning assets(1)........ 40,413 1,647 4.08% 42,457 1,942 4.57% 43,024 1,944 4.52% ------ ----- ------ ----- - ------ ----- Total interest-earning assets......... $640,923 $43,579 6.80% $611,579 $43,189 7.06% $553,156 $38,989 7.05% ======== ======= ======== ======= ======= ====== Non interest-earning assets............... 22,428 18,987 $ 14,714 ------ ------ ------- Total assets.......................... $663,351 $630,566 $567,870 ======== ======== ======= Liabilities and Stockholders' Equity: Interest-bearing liabilities: Savings deposits...................... 447,995 $17,397 3.88% 456,345 $18,211 3.99% $382,511 $14,739 3.85% Borrowings............................ 152,942 8,798 5.75% 97,942 5,869 5.99% 102,526 6,058 5.91% ------- ----- ------ ----- -- ------- ----- Total interest-bearing liabilities.. $600,937 $26,195 4.36% $554,287 $24,080 4.34% $485,037 $20,797 4.29% ======== ======= ======== ======= ======= ====== Non interest-bearing liabilities.......... 10,582 10,293 9,498 Total liabilities................... 611,519 564,580 494,535 Stockholders' equity...................... 51,832 65,986 73,335 ------ ------- ------- Total liabilities and Stockholders' equity............................ $663,351 $630,566 $567,870 ======== ======== ======= Net interest income....................... $17,384 $19,109 $18,192 ======= ======= ====== Interest rate spread (2).................. 2.44% 2.72% 2.76% Net yield on interest-earning assets (3).. 2.71% 3.12% 3.29% Ratio of interest-earning assets to Average interest bearing liabilities.... 107% 110% 114%
(1) Includes interest-bearing deposits in other banks. (2) Interest-rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. (3) Net yield on interest-earning assets represents net interest income as a percentage of average interest-earning assets. (4) 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. 8 Changes to Financial Condition The Corporation's total assets at December 31, 1998 and December 31, 1997 totaled $665.6 million and $597.0 million, respectively, an increase of $68.6 million or 11.5%. This increase was primarily as a result of the $75.3 million or 41.6% increase in mortgaged-backed securities, the $5.1 million or 6.0% increase in investment securities, the $4.3 million or 86.4% increase in Federal Home Loan Bank stock, partially offset by the $10.0 million or 100% decrease in securities purchased under agreements to resell and the $9.9 million or 3.9% decrease in loans receivable, net. This net increase in assets was funded by the increase in advances from the Federal Home Loan Bank of $75.0 million or 84.9%, the $2.6 million or 6% increase in retained earnings, partially offset by the $11.5 million or 2.6% decrease in total savings deposits. The increase in mortgage-backed securities was directly funded by the increase in advances from the Federal Home Loan Bank. The decrease in savings deposits was primarily the result of management's decision to price deposits less aggressively. Total consolidated stockholders' equity of the Corporation increased $2.6 million to $52.7 million at December 31, 1998 from $50.1 million at December 31, 1997. The 5.1% increase is primarily attributed to the addition of $4.0 million of net income offset by the $1.4 million payment of dividends to shareholders. The increase in total consolidated stockholders' equity coupled with the increase of $68.6 million in total assets resulted in a decrease in consolidated stockholders' equity as a percentage of total assets to 7.9% at December 31, 1998 from 8.4 % at December 31, 1997. Comparison of Years Ended December 31, 1998 and December 31, 1997 Net Income. Net Income of $4.0 million for the fiscal year ended December 31, 1998 decreased $836,000, or 17.2%, over net income of $4.9 million for the fiscal year ended December 31, 1997. The decrease in earnings is primarily due to the $1.7 million, or 9.0%, decrease in net interest income, the $748,000, or 32.1%, decrease in non-interest income, partially offset by the $817,000 decrease in non-interest expense, the $275,000 decrease in income tax expense and the $208,000 cumulative effect of accounting changes. Net interest income before provision for loan losses was $17.4 million for the fiscal year ended December 31, 1998 as compared to $19.1 million for the same period in 1997, a decrease of $1.7 million, or 9.0%. Total interest income increased $390,000 or 0.9% to $43.6 million at December 31, 1998, from $43.2 million at December 31, 1997. For these same periods, total interest expense was $26.2 million and $24.1 million, respectively, an increase of $2.1 million, or 8.8%. Non-interest income was $1.6 million and $2.3 million, respectively, for these same periods, a decrease of $748,000, or 32.1%. The decrease in non-interest income was primarily attributed to the decrease in gain on sale of servicing rights, the decrease in the gain on sale of loans, the decrease in the gain on sale of investment securities, the decrease in service charges and other operating income partially offset by the increase in gain on sale of real estate acquired through foreclosure. Operating expense (non-interest expense) was $12.8 million and $13.6 million for the fiscal years ended December 31, 1998 and December 31, 1997, respectively. The decrease in operating expense was attributable to the decrease in employee compensation and benefits, the decrease in occupancy and equipment and data processing expenses. Total Interest Income. For the fiscal year ended December 31, 1998, total interest income increased to $43.6 million from $43.2 million compared to the fiscal year ended December 31, 1997. This increase of $390,000, or 0.9%, is due primarily to the $3.8 million, or 30.7%, increase in income on mortgage-backed securities. This increase was also due to the $1.2 million, or 21.7%, increase in interest income on investment securities offset by the $295,000, or 15.2% decrease in interest on other interest bearing deposits and the $4.4 million, or 19.1% decrease in interest income on loans. The average balance of mortgage-backed securities increased $66.4 million to $251.8 million from $185.4 million while the average yield on mortgage-backed securities decreased to 6.50% from 6.75% when comparing these same periods. The increase in total interest income attributed to investment and mortgage-backed securities and other interest earning assets of $4.8 million was offset by the decrease 9 in income on loans. During the same time periods the average balance of investment securities increased by $25.1 million to $115.8 million from $90.7 million, with the average yield decreasing to 5.97% from 6.27%. Interest on loans declined by $4.4 million, or 19.1%, for the fiscal year ended December 31, 1998, as compared to the similar period in 1997 as a result of the decrease in the average balance to $232.9 million from $293.0 million. Interest on securities purchased under agreements to resell decreased to $198,000 for the fiscal year ended December 31, 1998 from $555,000 for the fiscal year ended December 31, 1997, primarily as the result of the decrease in the average balance to $3.6 million from $9.7 million for the same periods. Interest on other interest earning assets increased by $295,000 or 15.2%, to $1.6 million from $1.9 million for the fiscal year ended December 31, 1998 compared to the similar period ended December 31, 1997. This decrease is the result of the $2.0 million decrease in the average balance to $40.4 million from $32.7 million coupled with the decrease in the average yield to 4.08% from 4.57% for those same periods. The increase in the average balances of mortgage-backed securities were funded primarily with advances from the Federal Home Loan Bank and cash flow from repayments. Total interest expense. Total interest expense increased to $26.2 million for the fiscal year ended December 31, 1998 from $24.1 million for the fiscal year ended December 31, 1997. This increase of $2.1 million, or 8.8%, in total interest expense is a result of the increase in the average balance of Federal Home Loan Bank advances to $152.9 million from $97.9 million for the fiscal years ended December 31, 1998 and 1997, respectively, which was partially offset by the decrease in the average rate paid on advances to 5.75% from 5.99% for those same periods. The increase in total interest expense was also partially offset by the $814,000 decrease in interest expense on savings deposits for the fiscal year ended December 31, 1998. The average balance of savings deposits decreased $8.4 million to $448.0 million for the fiscal year ended December 31, 1998 from $456.3 million for the same period in 1997 while the average rate paid decreased to 3.88% from 3.99%. The average balance of interest-bearing liabilities increased to $600.9 million during the fiscal year ended December 31, 1998 from $554.3 million during the fiscal year ended December 31, 1997 primarily as a result of the increase in Federal Home Loan advances. The increase in Federal Home Loan Bank advances was used primarily to fund the purchase of mortgage-backed securities. Net Interest Income. Net interest income for the fiscal year ended December 31, 1998 decreased by $1.7 million, or 9.0%, to $17.4 million from $19.1 million for the same period in 1997. This decrease is primarily due to the increase in interest-bearing liabilities partially offset by the increase in interest-earning assets. The average balances of interest-bearing liabilities increased $46.7 million or 8.4% to $600.9 million for the fiscal year ended December 31, 1998 from $554.3 million for the comparable period in 1997. During these same periods, the average balances on interest-earning assets increased $29.3 million or 4.8% to $640.9 million from $611.6 million. The average rate paid on interest-bearing liabilities increased from 4.34% to 4.36% while the yield on interest-earning assets decreased from 7.06% to 6.80% for the fiscal year periods ended December 31, 1997 and 1998 respectively. Allowance for Loan Losses. The allowance for loan losses decreased $120,000, or 5.9% to $1.9 million at December 31, 1998 from $2.0 million at December 31, 1997. Non-performing loans increased to $1.6 million at December 31, 1998 from $1.4 million at December 31, 1997. The decrease in the allowance for loan losses resulted from the deduction of $180,000 of net charge-offs for losses partially offset by the addition of $60,000 to the provision for loan losses. The provision for losses on loans is the method by which the allowance for losses on loans is adjusted during the period. At December 31, 1998, the allowance for loan losses was 119.2% of non-performing loans as compared to 146.8% of non-performing loans at December 31, 1997. While management maintains its allowance for losses at a level which it considers to be adequate to provide for potential losses, there can be no assurance that further additions will not be made to the allowance and that such losses 10 will not exceed the estimated amounts. Non-Interest Income. Total non-interest income decreased $748,000, or 32.1%, to $1.6 million for the fiscal year ended December 31, 1998 from $2.3 million for the similar period in 1997. This decrease can be attributed to the $330,000 decrease in the gain on the sale of loan servicing rights, the $58,000 decrease in gain on the sale of investment securities, the $296,000 decrease in gain on sale of loans and the decrease in other operating income of $108,000, partially offset by the increase in gain on sale of real estate acquired through foreclosure of $44,000. Non-interest Expense. Total non-interest expense decreased to $12.8 million for the fiscal year ended December 31, 1998 when compared to $13.6 million for the similar period in 1997. This decrease of $817,000, or 6.0%, is primarily attributable to the $244,000 decrease in employee compensation and benefits, the $208,000 decrease in data processing and the $125,000 decrease in other operating expense. This decrease was also attributed to a lesser extent to the $98,000 decrease in occupancy and equipment expense and the $72,000 decrease in amortization of goodwill and other intangible assets. The decrease in non-interest expense is, in part, the result of management's implementation of certain cost cutting measures during the fiscal year ended December 31, 1998. Income Tax Expense. For the fiscal year ended December 31, 1998, income taxes decreased to $2.3 million from $2.6 million for the same period in 1997. This decrease of $275,000 is primarily attributed to the decrease in income before taxes to $6.1 million from $7.5 million for the fiscal year periods ended December 31, 1998 and 1997, respectively. Comparison of Years Ended December 31, 1997 and December 31, 1996 Net Income. Net Income of $4.9 million for the fiscal year ended December 31, 1997 increased $1.4 million, or 40.1%, over net income of $3.5 million for the fiscal year ended December 31, 1996. The increase in earnings is primarily due to the $917,000, or 5.0%, increase in net interest income, the $533,000, or 29.7%, increase in non-interest income and the $162,000 decrease in non-interest expense, partially offset by the $150,000 increase in income tax expense. Net interest income before provision for loan losses was $19.1 million for the fiscal year ended December 31, 1997 as compared to $18.2 million for the same period in 1996, an increase of $917,000, or 5.0%. Total interest income increased $4.2 million or 10.8% to $43.2 million from $39.0 million from December 31, 1996 to December 31, 1997 respectively. For these same periods, total interest expense was $24.1 million and $20.8 million, respectively, an increase of $3.3 million, or 15.8%. Non-interest income was $2.3 million and $1.8 million, respectively for these same periods, an increase of $533,000, or 29.7%. The increase in non-interest income was attributed to the gains on sale of investment securities, mortgage loans and loan servicing rights. Operating expense (non-interest expense) was $13.6 million and $13.7 million for the fiscal years ended December 31, 1997 and December 31, 1996, respectively. The decrease in operating expense was attributable to the decrease in federal deposit insurance premiums and the absence of the one-time "SAIF" assessment of $2.6 million offset by an increase in the costs associated with the operation of the branch offices acquired from Cenlar Federal Savings Bank. Total Interest Income. For the fiscal year ended December 31, 1997, total interest income increased to $43.2 million from $39.0 million for the fiscal year ended December 31, 1996. This increase of $4.2 million, or 10.8%, is due primarily to the $3.0 million, or 108.3%, increase in income on investment securities to $5.7 million for the fiscal year ended December 31, 1997 from $2.7 million for the same period in 1996. This increase was also due to the $1.5 million, or 13.3%, increase in interest income on mortgage-backed securities to $12.5 million for the fiscal year ended December 31, 1997 from $11.0 million for the same period in 1996. The average balance of mortgage-backed securities increased $22.4 million to $185.4 million from $163.0 million while the average yield on mortgage-backed securities decreased to 6.75% from 6.77% when comparing these same periods. 11 The increase in total interest income attributed to investment and mortgage-backed securities, $4.5 million, was partially offset by the decrease in income on loans and other interest earning assets. During the same time periods the average balance of investment securities increased by $46.1 million to $90.7 million from $44.6 million, with the average yield increasing to 6.27% from 6.12%. Interest on loans declined by $66,000, or .3%, for the fiscal year ended December 31, 1997 as compared to the similar period in 1996 as a result of the decrease in the average balance to $293.0 million from $298.8 million. Interest on securities purchased under agreements to resell increased to $555,000 for the fiscal year ended December 31, 1997 from $160,000 for the fiscal year ended December 31, 1996, primarily as the result in the increase in the average balance to $9.7 million from $3.8 million for the same periods. Interest on other interest earning assets declined by $557,000 or 28.7%, to $1.4 million from $1.9 million for the fiscal year ended December 31, 1997 compared to the similar period ended December 31, 1996, primarily as a result of a decrease in the average yield to 4.24% from 4.52% coupled with the decrease in the average balance of other interest earning assets to $32.7 million from $43.0 million for those same periods. The increases in the average balances of mortgage-backed and investment securities are a result of the reinvestment of the cash proceeds received from the acquisition of the $137.6 million in deposit balances from Cenlar Savings Bank on September 20, 1996. Total interest expense. Total interest expense increased to $24.1 million for the fiscal year ended December 31, 1997 from $20.8 million for the fiscal year ended December 31, 1996. This increase of $3.3 million, or 15.8%, in total interest expense is a result of the increase in the average balance of savings deposits to $456.3 million from $382.5 million for the fiscal years ended December 31, 1997 and 1996, respectively, together with the increase in the average rate paid to 3.99% from 3.85% for those same periods. The increase in average savings deposits was primarily the result of the acquisition of $137.6 million in deposit balances during 1996. The increase in total interest expense was partially offset by the $189,000 decrease in interest expense on Federal Home Loan Bank advances for the fiscal year ended December 31, 1997. The average balance of Federal Home Loan Bank advances decreased $4.6 million to $97.9 million for the fiscal year ended December 31, 1997 from $102.5 million for the same period in 1996 while the average rate paid increased to 5.99% from 5.91%. The average balance of total interest-bearing liabilities increased to $554.3 million during the fiscal year ended December 31, 1997 from $485.0 million during the fiscal year ended December 31, 1996 primarily as a result of the acquisition of $137.6 million in deposit balances. The increase in average balances of savings deposits was utilized primarily to fund the purchase of investment and mortgage-backed securities. Net Interest Income. Net interest income for the fiscal year ended December 31, 1997 increased by $917,000, or 5%, to $19.1 million from $18.2 million for the same period in 1996. This increase is primarily due to the increase in interest-earning assets partially offset by the increase to interest-bearing liabilities. The average balances of interest-earning assets increased $58.4 million or 10.6% to $611.6 million for the fiscal year ended December 31, 1997 from $553.2 million for the comparable period in 1996. During these same periods, the average balances on interest-bearing liabilities increased $69.3 million or 14.3% to $554.3 million from $485.0 million. The average rate paid on interest-bearing liabilities increased from 4.29% to 4.34% while the yield on interest-earning assets increased from 7.05% to 7.06% for the fiscal year periods ended December 31, 1996 and 1997 respectively. Allowance for Loan Losses. The allowance for loan losses increased $223,000, or 12.3% to $2.0 million at December 31, 1997 from $1.8 million at December 31, 1996. Such totals correlate to non-performing loans of $1.4 million at December 31, 1997 and $2.0 million at December 31, 1996. The increase in the allowance for loan losses resulted from the addition of $397,000 to the provision for loan losses and the deduction of $174,000 of net charge offs for losses on loans. The provision for losses on loans is the method by which the allowance for losses is adjusted during the period. At December 31, 1997, the allowance for loan losses was 146.8% of non-performing loans as compared 12 to 91.6% of non-performing loans at December 31, 1996. While management maintains its allowance for losses at a level which it considers to be adequate to provide for potential losses, there can be no assurance that further additions will not be made to the allowance and that such losses will not exceed the estimated amounts. Non-Interest Income. Total non-interest income increased $533,000, or 29.7%, to $2.3 million for the fiscal year ended December 31, 1997 from $1.8 million for the similar period in 1996. This increase can be attributed to the gain on the sale of loan servicing rights of $330,000, the increase in the gain on the sale of investment securities of $77,000, the increase in the gain on the sale of loans of $308,000, partially offset by the decrease in other operating income of $67,000 in 1997, and the absence of the gain on the sale real estate acquired through foreclosure of $115,000 in 1996. Non-interest Expense. Total non-interest expense decreased to $13.6 million for the fiscal year ended December 31, 1997 as compared to $13.7 million for the similar period in 1996. This decrease of $162,000, or 1.2%, is primarily attributable to the decrease in federal deposit insurance premiums of $2.6 million offset by a $617,000 increase in employee compensation and benefits, the $520,000 increase in occupancy and equipment, the $713,000 increase in amortization of intangibles, and the $323,000 increase in other operating expense. The decrease in federal deposit insurance premiums was primarily due to the absence of the "SAIF" assessment previously discussed. The increases in compensation and benefit costs were primarily a result of increased staffing necessary to support the operation of the three branch offices associated with the acquisition of the $137.6 million of deposit balances, coupled with salary increases resulting from annual performance reviews. The increase in occupancy and equipment expenses are due to the continued operation of the three branch offices purchased from Cenlar Federal Savings Bank. The increase in amortization of intangibles was the result of the acquisition of the $137.6 million in deposit balances. The increase in other operating expenses are primarily due to costs associated with the acquisition of the three branch offices purchased from Cenlar Federal Savings Bank. Income Tax Expense. For the fiscal year ended December 31, 1997, income taxes increased to $2.6 million from $2.4 million for the same period in 1996. This increase of $150,000 is primarily attributed to the increase in net income before taxes to $7.5 million from $5.9 million for the fiscal year periods ended December 31, 1997 and 1996, respectively, while partially offset by the reversal of certain deferred tax liabilities. Liquidity and Capital Resources Under current regulations, the Savings Bank must have core capital equal to 4% of adjusted total assets and risk-based capital equal to 8% of risk-weighted assets, of which 1.5% must be tangible capital, excluding goodwill and certain other intangible assets. On December 31, 1998, the Savings Bank exceeded its three regulatory capital requirements as follows: Amount Percent ------ ------- Tangible capital $45,034 6.79% Tangible capital requirement 9,943 1.50% ----- ----- Excess over requirement $35,091 5.29% ======= ===== Core capital......................... $45,034 6.79% Core capital requirement............. 26,515 4.00% ------ ----- Excess over requirement.............. $18,519 2.79% ======= ===== Risk based capital................... $46,943 17.73% Risk based capital requirement....... 21,178 8.00% ------ ------ Excess over requirement.............. $25,765 9.73% ======= ===== 13 Management believes that under current regulations, the Savings Bank will continue to meet its minimum capital requirements in the foreseeable future. Events beyond the control of the Savings Bank, such as increased interest rates or a downturn in the economy in areas in which the Savings Bank operates, could adversely affect future earnings and as a result, the ability of the Savings Bank to meet its future minimum capital requirements. The Savings Bank'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 Savings Bank's primary source of funds are deposits, borrowings, and scheduled amortization and prepayment of loan and mortgage-backed security principal. During the past several years, the Savings Bank has used such funds primarily to fund maturing time deposits, pay savings withdrawals, fund lending commitments, purchase new investments, repurchase its common stock, and increase the Savings Bank's, along with the Corporation's, liquidity. The Savings Bank is currently able to fund its operations internally but has, when deemed prudent, borrowed funds from the Federal Home Loan Bank of Pittsburgh. As of December 31, 1998, such borrowed funds total $163.4 million. Loan prepayments, maturing investments and mortgage-backed security prepayments are greatly influenced by general interest rates, economic conditions and competition. The Savings Bank is required under federal regulations to maintain certain specified levels of "liquid investments", which include certain United States government obligations and other approved investments. Current regulations require the Savings Bank to maintain liquid assets of not less than 4% of its net withdrawable accounts plus short term borrowings. Short term liquid assets must consist of not less than 1% of such accounts and borrowings, which amount is also included within the 4% requirement. These levels may be changed from time to time by the regulators to reflect current economic conditions. The Savings Bank has generally maintained liquidity far in excess of regulatory requirements. The Savings Bank's regulatory liquidity was 28.69%, 21.01% and 24.16% at December 31, 1998, 1997 and 1996, respectively, and its short term liquidity was 19.9%, 11.3%, and 19.8%, at such dates, respectively. The amount of certificate accounts which are scheduled to mature during the twelve months ending December 31, 1999, is approximately $133.7 million. To the extent that these deposits do not remain at the Savings Bank upon maturity, the Savings Bank believes that it can replace these funds with deposits, excess liquidity, FHLB advances or other borrowings. It has been the Savings Bank's experience that substantial portions of such maturing deposits remain at the Savings Bank. At December 31, 1998, the Savings Bank had outstanding commitments to originate loans of $12.2 million. Also outstanding at December 31, 1998 were commitments to fund unused lines of credit and undisbursed balances of construction loans of $21.7 million. Funds required to fill these commitments are derived primarily from current excess liquidity, deposit inflows or loan and security repayments. At December 31, 1998, the Savings Bank had no outstanding commitments to sell loans. 14 Impact of Inflation and Changing Prices The consolidated financial statements and related data have been prepared in accordance with generally accepted accounting principles which require the measurement of financial position and operating results in terms of historical dollars, without consideration for changes in the relative purchasing power of money over time caused by inflation. Unlike industrial companies, nearly all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution's performance than general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the price of goods and services, since such goods and services are affected by inflation. In the current interest rate environment, liquidity and the maturity structure of the Savings Bank's assets and liabilities are critical to the maintenance of acceptable performance levels. Year 2000 Issue Readiness Efforts In 1998, a comprehensive project plan ("Plan") to address the Year 2000 problem and related issues as those relate to the Corporation's operations was developed, approved by the Board of Directors and implemented. The Corporation's Year 2000 effort is proceeding in accordance with the written Plan. Progress reports are provided to the Board at least monthly. The Year 2000 issue is the result of potential problems with software and computer systems or any equipment with computer chips that store the year portion of the date as just two-digits. Systems using this two-digit approach may not be able to determine whether 00 represents the year 2000 or 1900. The problem, if not corrected, will make those systems fail altogether or, even worse, allow them to generate incorrect calculations causing a disruption of normal computer and related operations. The Corporation's Plan is divided into four broad areas of concern: hardware, software, service providers and customers. Year 2000 issues being addressed in each of these areas include both information related technology and non-information related technology. A project team that consists of key members of The Corporation's technology staff, representatives of functional business units and senior management was developed. From the assessment, The Corporation identified and prioritized those systems deemed to be mission critical or those that have a significant impact on normal operations. Formal communications with those providers of data processing capabilities and other external counter parties were initiated in 1997 and 1998 to assess the Year 2000 readiness of their products and services. Thus far, responses indicate that most of the significant providers are currently following plans developed to address processing of transactions beginning January 1, 2000. Costs The total cost to The Corporation of these Year 2000 compliance activities has not been and is not anticipated to be material to its financial position or results of operations in any given year. In total, The Corporation estimates that its costs, excluding personnel expenses, for Year 2000 remediation and testing of its computer systems amounted to less than $25,000 for the twelve month period ending December 31, 1998. At September 31, 1998, there are no material, incomplete tasks pursuant to the Corporation's Plan. 15 Risk Assessment Based upon current information related to the progress of its major vendors and service providers, management has determined that the Year 2000 issue will not pose significant operational problems for its computer systems. The determination is based on the ability of those vendors and service providers to renovate, in a timely manner, the products and services on which The Corporation's systems rely. However, The Corporation can give no assurances that the systems of these suppliers will be timely renovated. The Corporation is exposed to operational disruptions from external entities that have direct or indirect business relationships with the Corporation, such as telecommunication service providers, customers, vendors, payment system providers and others. Despite the best efforts of management to address these issues, the vast number of external business relationships makes it impossible to assure that a failure to achieve compliance by one or more of these entities would not have a material adverse impact on the operations the Corporation. Contingency Plan Realizing that some disruption may occur despite its best efforts, The Corporation is in the process of developing contingency plans for each critical system in the event that one or more of those systems fail. While this is an ongoing process, The Corporation expects to have the contingency plan substantially completed by July 31, 1999. 16 FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS TF FINANCIAL CORPORATION AND SUBSIDIARIES December 31, 1998 and 1997 CONTENTS Page ---- REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 19 FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF FINANCIAL POSITION 20 CONSOLIDATED STATEMENTS OF EARNINGS 21 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME 22 CONSOLIDATED STATEMENTS OF CASH FLOWS 24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 26 Report of Independent Certified Public Accountants -------------------------------------------------- Board of Directors TF Financial Corporation We have audited the accompanying consolidated statements of financial position of TF Financial Corporation and Subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of earnings, changes in stockholders' equity and comprehensive income and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of TF Financial Corporation and Subsidiaries as of December 31, 1998 and 1997, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/Grant Thornton LLP - --------------------------- GRANT THORNTON LLP Philadelphia, Pennsylvania January 15, 1999 19 TF Financial Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF FINANCIAL POSITION December 31,
ASSETS 1998 1997 --------- --------- (in thousands) Cash and cash equivalents $ 42,703 $ 41,625 Certificates of deposit in other financial institutions 2,238 2,737 Securities purchased under agreements to resell - 10,000 Investment securities available for sale - at market value 9,042 32,037 Investment securities held to maturity (market value of $81,094 and $53,026 as of December 31, 1998 and 1997, respectively) 80,895 52,822 Mortgage-backed securities available for sale - at market value 75,285 36,847 Mortgage-backed securities held to maturity (market value of $182,560 and $145,723 as of December 31, 1998 and 1997, respectively) 180,964 144,074 Loans receivable, net 240,841 250,711 Federal Home Loan Bank stock - at cost 9,168 4,918 Accrued interest receivable 4,558 3,957 Premises and equipment, net 9,017 7,889 Goodwill and other intangible assets 7,389 8,274 Real estate held for investment 2,348 - Other assets 1,160 1,156 ------- ------- TOTAL ASSETS $665,608 $597,047 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Deposits $438,913 $450,429 Advances from the Federal Home Loan Bank 163,359 88,359 Advances from borrowers for taxes and insurance 1,204 1,591 Accrued interest payable 4,166 2,470 Other liabilities 5,306 4,103 ------- ------ Total liabilities 612,948 546,952 ------- ------- Stockholders' equity Preferred stock, no par value; 2,000,000 shares authorized at December 31, 1998 and 1997, none issued - - Common stock, $0.10 par value; 10,000,000 shares authorized, 5,290,000 shares issued, 2,857,932 and 2,886,251 shares outstanding at December 31, 1998 and 1997, respectively, net of shares in treasury: 1998 - 2,143,319; 1997 - 2,102,767 529 529 Retained earnings 45,762 43,176 Additional paid-in capital 51,957 51,775 Unearned ESOP shares (2,888) (3,010) Shares acquired by MSBP (468) (895) Treasury stock - at cost (42,386) (41,649) Accumulated other comprehensive income 154 169 -------- -------- Total stockholders' equity 52,660 50,095 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $665,608 $597,047 ======= =======
The accompanying notes are an integral part of these statements. 20 TF Financial Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF EARNINGS Year ended December 31,
1998 1997 1996 ---------- ---------- ---------- (in thousands, except per share data) Interest income Loans, including fees $ 18,657 $ 23,050 $ 23,116 Mortgage-backed securities 16,357 12,514 11,041 Investment securities 6,918 5,683 2,728 Interest-bearing deposits and other 1,647 1,942 2,104 -------- -------- -------- TOTAL INTEREST INCOME 43,579 43,189 38,989 -------- -------- -------- Interest expense Deposits 17,397 18,211 14,739 Borrowings 8,798 5,869 6,058 -------- -------- -------- TOTAL INTEREST EXPENSE 26,195 24,080 20,797 -------- -------- -------- NET INTEREST INCOME 17,384 19,109 18,192 Provision for possible loan losses 60 397 330 -------- -------- -------- NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE LOAN LOSSES 17,324 18,712 17,862 -------- -------- -------- Non-interest income Gain on sale of real estate acquired through foreclosure 44 - 115 Gain on sale of investment and mortgage-backed securities 349 407 330 Gain on sale of loans 91 387 79 Gain on sale of loan servicing rights - 330 - Service fees, charges and other operating income 1,095 1,203 1,270 -------- -------- -------- TOTAL NON-INTEREST INCOME 1,579 2,327 1,794 -------- -------- -------- Non-interest expense Employee compensation and benefits 6,201 6,445 5,828 Occupancy and equipment 1,854 1,952 1,432 Federal deposit insurance premium 275 299 2,929 Data processing 459 667 505 Professional fees 554 579 508 Advertising 333 354 292 Other operating 2,205 2,330 2,007 Amortization of goodwill and other intangible assets 885 957 244 -------- -------- -------- TOTAL NON-INTEREST EXPENSE 12,766 13,583 13,745 -------- -------- -------- INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE 6,137 7,456 5,911 Income taxes 2,307 2,582 2,432 -------- -------- -------- INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 3,830 4,874 3,479 Cumulative effect of accounting change 208 - - -------- -------- -------- NET INCOME $ 4,038 $ 4,874 $ 3,479 ======== ======== ======== Earnings per common share - basic $ 1.39 $ 1.33 $ 0.86 Earnings per common share - assuming dilution $ 1.26 $ 1.25 $ 0.83
The accompanying notes are an integral part of these statements. 21 TF Financial Corporation and Subsidiaries CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME Years ended December 31, 1998, 1997 and 1996
Accumulated Common stock other ---------------- Additional Unearned Shares Compre- Compre- Par paid-in ESOP acquired by Treasury Retained hensive hensive Shares value capital shares MSBP stock earnings income Total income ------ ----- ------- ------ ---- ----- -------- ------ ----- ------ (dollars in thousands) Balance at January 1, 1996 4,164,942 $529 $51,475 (3,491) (1,731) $(11,116) $37,529 $ 137 $ 73,332 Allocation of ESOP shares 30,319 - 147 303 - - - - 450 Shares awarded by MSBP 9,308 - - - - - - - - Amortization of MSBP expense - - 23 - 409 - - - 432 Purchase of treasury stock (242,025) - - - - (3,596) - - (3,596) Cash dividends on common stock - - - - - - (1,258) - (1,258) Other comprehensive income, net of reclassification adjustments and taxes - - - - - - - (264) (264) $ (264) Net income for the year ended December 31, 1996 - - - - - - 3,479 - 3,479 3,479 --------- --- ------ ------- ------- -------- ------ ----- ------ ----- Comprehensive income $3,215 ===== Balance at December 31, 1996 3,962,544 529 51,645 (3,188) (1,322) (14,712) 39,750 (127) 72,575 Allocation of ESOP shares 17,860 - 173 178 - - - - 351 Amortization of MSBP expense - - 31 - 427 - - - 458 Purchase of treasury stock (1,100,068) - (74) - - (27,027) - - (27,101) Cash dividends on common stock - - - - - - (1,433) - (1,433) Exercise of stock options 5,915 - - - - 90 (15) - 75 Other comprehensive income, net of reclassification adjustments and taxes - - - - - - - 296 296 296 Net income for the year ended December 31, 1997 - - - - - - 4,874 - 4,874 4,874 --------- --- ------ ------- ------- -------- ------ ----- ------ ----- Comprehensive income $5,170 ===== Balance at December 31, 1997 2,886,251 529 51,775 (3,010) (895) (41,649) 43,176 169 50,095
(Continued) 22 TF Financial Corporation and Subsidiaries CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME - CONTINUED Years ended December 31, 1998, 1997 and 1996
Accumulated Common stock other ------------------ Additional Unearned Shares Compre- Compre- Par paid-in ESOP acquired Treasury Retained hensive hensive Shares value capital shares by MSBP stock earnings income Total income ------ ----- ------- ------ -------- ----- -------- ------ ----- ------ (dollars in thousands) Balance at December 31, 1997 $2,886,251 $529 $51,775 $(3,010) $(895) $(41,649) $43,176 $169 $ 50,095 Allocation of ESOP shares 12,233 - 166 122 - - - - 288 Amortization of MSBP - - 33 - 427 - - - 460 Purchase of treasury stock (50,000) - (17) - - (924) - - (941) Cash dividends - common stock - - - - - - (1,387) - (1,387) Exercise of options 9,448 - - - - 187 (65) - 122 Other comprehensive income, net of reclassification adjustments and taxes (15) (15) $ (15) Net income for the year ended December 31, 1998 - - - - - - 4,038 - 4,038 4,038 --------- --- ------ ------- ----- -------- ------ --- ------ ----- Comprehensive income $4,023 ===== Balance at December 31, 1998 $2,857,932 $529 $51,957 $(2,888) $(468) $(42,386) $45,762 $154 $52,660 ========= === ====== ===== === ====== ====== === ======
The accompanying notes are an integral part of this statement. 23 TF Financial Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended December 31,
1998 1997 1996 ------------ ------------ ------------ (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 4,038 $ 4,874 $ 3,479 Adjustments to reconcile net income to net cash provided by operating activities Amortization of Mortgage loan servicing rights 16 68 21 Deferred loan origination fees (118) (156) (197) Premiums and discounts on investment securities, net 100 63 (69) Premiums and discounts on mortgage-backed securities and loans, net 705 208 139 Goodwill and other intangibles 677 957 244 Deferred income taxes (135) (233) (84) Provision for loan losses and provision for losses on real estate 60 402 333 Depreciation of premises and equipment 847 708 560 Stock-based benefit programs 748 809 882 Gain on sale of Investment securities (681) (407) (330) Real estate acquired through foreclosure (44) - (115) Mortgage loans (91) (387) (79) Loan servicing rights - (330) - (Increase) decrease in Accrued interest receivable (601) 290 (817) Other assets 30 (56) (580) Increase in Accrued interest payable 1,696 440 267 Other liabilities 1,338 477 723 --------- --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 8,585 7,727 4,377 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Loan originations and principal payments on loans, net 30,983 (22,672) (38,475) Principal repayments on mortgage-backed securities held to maturity 60,899 33,732 28,450 Principal repayments on mortgage-backed securities available for sale 19,292 2,746 3,050 Purchases of loans (40,708) (13,927) (83,704) Proceeds from loan sales 19,496 95,261 22,648 Purchases and maturities of certificates of deposit in other financial institutions, net 499 1,483 1 Purchases of investment and mortgage-backed securities held to maturity (293,959) (125,219) (49,069) Purchase of investment securities and mortgage-backed securities available for sale (251,164) (140,694) (22,917)
(Continued) 24 TF Financial Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED Year ended December 31,
1998 1997 1996 ------------ ------------ ------------ (in thousands) Purchase and maturities of securities purchased under agreement to resell, net $ 10,000 $ 15,129 $ (25,129) Proceeds from maturities of investment securities held to maturity 123,842 83,007 17,551 Proceeds from maturities of investment securities available for sale 223,376 86,225 20,500 Proceeds from the sale of investment and mortgage-backed securities available for sale 37,373 22,126 9,279 Proceeds from the sale of loan servicing rights - 981 - Purchase of Federal Home Loan Bank stock (4,250) - (1,250) Purchase of real estate held for investment (2,348) - - Proceeds from sales of real estate acquired through foreclosure 246 - 722 Purchase of premises and equipment (1,975) (595) (2,007) Premium paid for deposit liabilities - - (9,476) -------- -------- -------- NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (68,398) 37,583 (129,826) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Net (decrease) increase in demand deposit/NOW accounts, passbook savings accounts and certificates of deposit (11,516) (18,659) 132,019 Net increase (decrease) in advances from Federal Home Loan Bank 75,000 (10,000) 25,000 Net (decrease) increase in advances from borrowers for taxes and insurance (387) (773) 384 Treasury stock acquired (941) (27,027) (3,596) Exercise of stock options 122 75 - Common stock dividends paid (1,387) (1,433) (1,258) -------- -------- -------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 60,891 (57,817) 152,549 -------- -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,078 (12,507) 27,100 Cash and cash equivalents at beginning of year 41,625 54,132 27,032 -------- -------- --------- Cash and cash equivalents at end of year $ 42,703 $ 41,625 $ 54,132 ======== ======== ========= Supplemental disclosure of cash flow information Cash paid for Interest on deposits and advances $ 24,498 $ 23,640 $ 20,530 Income taxes $ 2,651 $ 2,436 $ 2,235 Non-cash transactions Transfers from loans to real estate acquired through foreclosure $ 159 $ 231 $ 327 Securitization of mortgage loans held for investment $ - $ - $ 27,854
The accompanying notes are an integral part of these statements. 25 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998 and 1997 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES TF Financial Corporation (TF Financial) is a unitary savings and loan holding company, organized under the laws of the State of Delaware, which conducts its consumer banking operations primarily through its wholly owned subsidiaries, Third Federal Savings Bank (Third Federal or the Bank) and TF Investments Corporation (TF Investments). Third Federal is a federally chartered-stock savings bank insured by the Federal Deposit Insurance Corporation. Third Federal is a community-oriented savings institution which conducts operations from its main office in Newtown, Pennsylvania, ten full-service branch offices located in Philadelphia and Bucks counties, Pennsylvania, and three full-service branch offices located in Mercer County, New Jersey. The Bank competes with other banking and financial institutions in its primary market communities, including financial institutions with resources substantially greater than its own. Commercial banks, savings banks, savings and loan associations, credit unions and money market funds actively compete for savings and time deposits and loans. Such institutions, as well as consumer finance and insurance companies, may be considered competitors of the Bank with respect to one or more of the services it renders. The Bank is subject to regulations of certain state and federal agencies and, accordingly, it is periodically examined by those regulatory authorities. As a consequence of the extensive regulation of commercial banking activities, the Bank's business is particularly susceptible to being affected by state and federal legislation and regulations. 1. Principles of Consolidation and Basis of Presentation ----------------------------------------------------- The consolidated financial statements include the accounts of TF Financial and its wholly owned subsidiaries: Third Federal, TF Investments, Teragon, Inc., and Penns Trail Development Corporation (collectively, the Corporation). All material intercompany balances and transactions have been eliminated in consolidation. The accounting policies of the Corporation conform to generally accepted accounting principles and predominant practices within the banking industry. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The more significant accounting policies are summarized below. 2. Cash and Cash Equivalents ------------------------- The Corporation considers cash, due from banks, federal funds sold and interest-bearing deposits in other financial institutions, with original terms to maturity of less than three months, as cash equivalents for presentation purposes in the consolidated statements of financial position and cash flows. (Continued) 26 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1998 and 1997 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 3. Investment and Mortgage-Backed Securities ----------------------------------------- The Corporation accounts for investment and mortgage-backed securities in accordance with Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities. This statement requires the Bank to classify its investment, mortgage-backed and marketable equity securities in one of three categories: held to maturity, trading, or available for sale. The Corporation does not engage in security trading activities. Investment, mortgage-backed and marketable equity securities available for sale are stated at fair value, with net unrealized gains and losses excluded from income and reported in other comprehensive income. Realized gains and losses on the sale of securities are recognized using the specific identification method. Investment and mortgage-backed securities held to maturity are carried at cost, net of unamortized premiums and discounts, which are recognized in interest income using the interest method over the period to maturity. The Corporation has the ability and it is management's intention to hold such assets to maturity. 4. Loans Receivable ---------------- Loans receivable are stated at unpaid principal balances less the allowance for loan losses and net deferred loan origination fees and unamortized premiums. Loan origination fees and unamortized premiums on mortgage loans are amortized to income using the interest method over the remaining period to contractual maturity, adjusted for actual prepayments. Management's periodic evaluation of the adequacy of the loan loss allowance is based on the Bank's historical loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral and current economic conditions. Actual losses may be higher or lower than historical trends, which vary. The allowance for loan losses is increased by charges to income and decreased by charge-offs (net of recoveries). Uncollectible interest on loans that are contractually past due is charged off, or an allowance is established based on management's periodic evaluation. The allowance is established by a charge to interest income equal to all interest previously accrued, and income is subsequently recognized only to the extent that cash payments are received until, in management's judgment, the borrower's ability to make periodic interest and principal payments is back to normal, in which case the loan is returned to accrual status. The Corporation accounts for loans in accordance with SFAS No. 114, Accounting by Creditors for Impairment of a Loan, as amended by SFAS No. 118, Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures. (Continued) 27 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1998 and 1997 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 5. Premises and Equipment ---------------------- Land is carried at cost. Buildings and furniture, fixtures and equipment are carried at cost less accumulated depreciation. Depreciation is provided by the straight-line method over the estimated useful lives of the assets. On January 1, 1996, the Corporation adopted SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, which provides guidance on when to recognize and how to measure impairment losses of long-lived assets and certain identifiable intangibles, and how to value long-lived assets to be disposed of. The adoption of SFAS No. 121 did not have a material impact on the Corporation's consolidated financial position or results of operations. 6. Goodwill and Other Intangible Assets ------------------------------------ On September 20, 1996, the Bank acquired three Mercer County, New Jersey offices and related deposits of Cenlar Federal Savings Bank. The Bank assumed $137.6 million in deposits in exchange for $126.5 million in cash. As a result of the acquisition, the Bank recorded core deposit intangible of $2.9 million and goodwill of $6.6 million. The core deposit intangible acquired is being amortized on an accelerated basis over 10 years. The goodwill acquired is being amortized on a straight-line basis over 15 years. 7. Real Estate Held for Investment ------------------------------- Real estate held for investment is carried at the lower of cost or market value. 8. Transfers of Financial Assets ----------------------------- On January 1, 1997, the Corporation adopted SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, as amended by SFAS No. 127, Deferral of the Effective Date of Certain Provisions of SFAS No. 125. SFAS No. 125 applies a control-oriented, financial components approach to financial asset transfer transactions whereby the Corporation: (1) recognizes the financial and servicing assets it controls and the liabilities it has incurred; (2) derecognizes financial assets when control has been surrendered; and (3) derecognizes liabilities once they are extinguished. Under SFAS No. 125, control is considered to have been surrendered only if: (i) the transferred assets have been isolated from the transferor and its creditors, even in bankruptcy or other receivership; (ii) the transferee has the right to pledge or exchange the transferred assets or is a qualifying special-purpose entity, and the holders of beneficial interests in that entity have the right to pledge or exchange those interests; and (iii) the transferor does not maintain effective control over the transferred assets through an agreement which both entitles and obligates it to repurchase or redeem those assets prior to maturity, or through an agreement which entitles it to repurchase or redeem those assets if they were not readily obtainable elsewhere. If any of these conditions are not met, the Corporation accounts for the transfer as a secured borrowing. The adoption of this statement did not have a material impact on the Corporation's consolidated financial position or results of operations. (Continued) 28 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1998 and 1997 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 9. Benefit Plans ------------- The Corporation has established an Employee Stock Ownership Plan (ESOP) covering eligible employees with one year of service, as defined by the ESOP. The Corporation accounts for the ESOP in accordance with the American Institute of Certified Public Accountants' Statement of Position (SOP) 93-6, Employers' Accounting for Employee Stock Ownership Plans. SOP 93-6 addresses the accounting for shares of stock issued to employees by an ESOP. SOP 93-6 requires that the employer record compensation expense in the amount equal to the fair value of shares committed to be released from the ESOP to employees. In addition, the Corporation established a Management Stock Bonus Plan (MSBP) for key directors and personnel. On January 1, 1996, the Corporation adopted SFAS No. 123, Accounting for Stock-Based Compensation, which contains a fair value-based method for valuing stock-based compensation that entities may use, which measures compensation cost at the grant date based on the fair value of the award. Compensation is then recognized over the service period, which is usually the vesting period. Alternatively, the standard permits entities to continue accounting for employee stock options and similar instruments under Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. Entities that continue to account for stock options using APB Opinion No. 25 are required to make pro forma disclosures of net income and earnings per share, as if the fair value-based method of accounting defined in SFAS No. 123 had been applied. The Corporation's employee stock option plan is accounted for under APB Opinion No. 25. On January 1, 1998, the corporation adopted SFAS No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits. SFAS No. 132 revises employers' disclosures about pension and other postretirement benefit plans. It eliminates certain disclosures and requires additional information about changes in the benefit obligation and the fair values of plan assets. The financial statement disclosures have been revised to reflect the provisions of SFAS No. 132. 10. Income Taxes ------------ The Corporation accounts for income taxes under the liability method specified in SFAS No. 109, Accounting for Income Taxes. Under SFAS No. 109, deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. Under SFAS No. 109, the effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. 11. Advertising Costs ----------------- The Corporation expenses advertising costs as incurred. (Continued) 29 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1998 and 1997 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 12. Earnings Per Share ------------------ On December 15, 1997, the Corporation adopted the provisions of SFAS No. 128, Earnings Per Share. SFAS No. 128 eliminates primary and fully diluted earnings per share and requires presentation of basic and diluted earnings per share in conjunction with the disclosure of the methodology used in computing such earnings per share. Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the weighted average common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock. Prior periods' earnings per share calculations have been restated to reflect the adoption of SFAS No. 128. 13. Comprehensive Income -------------------- On January 1, 1998, the Corporation adopted SFAS No. 130, Reporting Comprehensive Income. SFAS 130 establishes standards to provide prominent disclosure of comprehensive income items. Comprehensive income is the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. Other comprehensive income consists of net unrealized gains and losses on investment securities available for sale. Comprehensive income for 1998, 1997 and 1996 was $4,023,000, $5,170,000 and $3,215,000, respectively. The components of other comprehensive income are as follows:
December 31, 1998 ---------------------------------------------- Tax Before tax (expense) Net of tax amount benefit amount ---------- -------- ---------- (dollars in thousands) Unrealized gains on securities Unrealized holding gains arising during period $ 324 $ (126) $ 198 Reclassification adjustment for gains realized in net income (349) 136 (213) -------- --------- --------- Other comprehensive income, net $ (25) $ 10 $ (15) ======== ========= =========
(Continued) 30 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1998 and 1997 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
December 31, 1997 ---------------------------------------------- Tax Before tax (expense) Net of tax amount benefit amount ---------- -------- ---------- (dollars in thousands) Unrealized gains on securities Unrealized holding gains arising during period $ 892 $ (348) $ 544 Reclassification adjustment for gains realized in net income (407) 159 (248) -------- --------- --------- Other comprehensive income, net $ 485 $ (189) $ 296 ======== ========= =========
December 31, 1996 ---------------------------------------------- Tax Before tax (expense) Net of tax amount benefit amount ---------- -------- ---------- (dollars in thousands) Unrealized gains on securities Unrealized holding gains arising during period $ (103) $ 40 $ (63) Reclassification adjustment for gains realized in net income (330) 129 (201) -------- --------- --------- Other comprehensive income, net $ (433) $ 169 $ (264) ======== ========= =========
14. New Financial Accounting Standards ---------------------------------- On January 1, 1998, the Corporation adopted SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. SFAS No. 131 redefines how operating segments are determined and requires disclosures of certain financial and descriptive information about a company's operating segments. Management has determined that under current conditions, the Corporation will report one business segment. (Continued) 31 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1998 and 1997 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activity. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments imbedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge. The accounting for changes in the fair value of a derivative instrument (gains and losses) depends on the intended use of the derivative and resulting designation. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Earlier application is permitted only as of the beginning of any fiscal quarter. On October 1, 1998, the Corporation adopted SFAS No. 133. Concurrent with the adoption, the Corporation transferred $23,198,000 of mortgage-backed securities from the held to maturity category to the available for sale category and recorded $349,000, net of taxes, of unrealized holding gains in other comprehensive income. The Corporation also transferred $19,671,000 of mortgage-backed securities to the trading category and reported a cumulative effect adjustment of $208,000, net of taxes, resulting from the accounting change. 15. Reclassifications ----------------- Certain prior year amounts have been reclassified to conform to the current period presentation. NOTE B - CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of the following: December 31, ----------------------------------- 1998 1997 1996 ---------- ---------- ---------- (in thousands) Cash and due from banks $ 25,509 $ 14,222 $ 14,737 Interest-bearing deposits in other financial institutions 16,444 25,628 38,120 Federal funds sold 750 1,775 1,275 ---------- --------- --------- $ 42,703 $ 41,625 $ 54,132 ======== ======== ======== 32 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1998 and 1997 NOTE C - SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL The Bank enters into purchases of securities under agreements to resell substantially identical securities. Securities purchased under agreements to resell at December 31, 1997, consist of mortgage-backed securities. The amounts advanced under these agreements represent short-term loans and are reflected as a receivable in the consolidated statements of financial position. The securities underlying the agreements are book-entry securities. During the period, the securities were delivered by appropriate entry into a third-party custodian's account designated by the Bank under a written custodial agreement that explicitly recognizes the Bank's interest in the securities. At December 31, 1997, these agreements matured within 30 days and substantially all agreements to resell securities purchased were outstanding with one dealer. Securities purchased under agreements to resell averaged $3.6 million and $9.7 million during 1998 and 1997, respectively, and the maximum amounts outstanding at any month-end during 1998 and 1997, was $10 million and $25.3 million, respectively. NOTE D - INVESTMENT AND MORTGAGE-BACKED SECURITIES The amortized cost, gross unrealized gains and losses, and estimated market value of the Corporation's investment and mortgage-backed securities at December 31, 1998 and 1997, are summarized as follows:
December 31, 1998 ---------------------------------------------------------------- Gross Gross Estimated Amortized unrealized unrealized market cost gains losses value --------- ---------- ---------- --------- (in thousands) Investment securities held to maturity U.S. Government and federal agencies $ 73,612 $ 197 $ (62) $ 73,747 State and political subdivisions 4,283 78 - 4,361 Corporate debt securities 3,000 - (14) 2,986 ------- ------ ------- ------- 80,895 275 (76) 81,094 Mortgage-backed securities held to maturity 180,964 1,937 (341) 182,560 ------- ------ ------- ------- $261,859 $ 2,212 $ (417) $263,654 ======= ====== ======= ======= Investment securities available for sale U.S. Government and federal agencies $ 8,000 $ 45 $ - 8,045 Mutual funds 500 - (3) 497 Other 500 - - 500 ------- ------ ------- ------- 9,000 45 (3) 9,042 Mortgage-backed securities available for sale 75,075 316 (106) 75,285 ------- ------ ------- -------- $ 84,075 $ 361 $ (109) $ 84,327 ======= ====== ======= ========
(Continued) 33 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1998 and 1997 NOTE D - INVESTMENT AND MORTGAGE-BACKED SECURITIES - Continued
December 31, 1997 ---------------------------------------------------------------- Gross Gross Estimated Amortized unrealized unrealized market cost gains losses value --------- ---------- ---------- --------- (in thousands) Investment securities held to maturity U.S. Government and federal agencies $ 50,278 $ 190 $ (35) $ 50,433 State and political subdivisions 2,544 49 - 2,593 ------- ------ ------- ------- 52,822 239 (35) 53,026 Mortgage-backed securities held to maturity 144,074 2,096 (447) 145,723 ------- ------ ------- ------- $196,896 $ 2,335 $ (482) $198,749 ======= ====== ======= ======= Investment securities available for sale U.S. Government and federal agencies $ 31,254 $ 75 $ (2) $ 31,327 Equity securities (SLMA stock) 10 200 - 210 Mutual funds 500 - - 500 ------- ------ ------- ------- 31,764 275 (2) 32,037 Mortgage-backed securities available for sale 36,843 182 (178) 36,847 ------- ------ ------- ------- $ 68,607 $ 457 $ (180) $ 68,884 ======= ====== ======= =======
Gross realized gains were $349,000, $407,000 and $330,000 for the years ended December 31, 1998, 1997 and 1996, respectively. These gains resulted from the sale of investment and mortgage-backed securities of $37.4 million, $22.1 million and $9.3 million for the years ended December 31, 1998, 1997 and 1996, respectively. 34 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1998 and 1997 NOTE D - INVESTMENT AND MORTGAGE-BACKED SECURITIES - Continued The amortized cost and estimated market value of investment and mortgage-backed securities, by contractual maturity, are shown below.
December 31, 1998 ---------------------------------------------------------------- Held to maturity Available for sale ---------------------------- ----------------------------- Estimated Estimated Amortized market Amortized market cost value cost value --------- ---------- ---------- --------- (in thousands) Investment securities Due in one year or less $ 32,829 $ 32,781 $ 1,000 $ 997 Due after one year through five years 23,961 24,085 8,000 8,045 Due after five years through 10 years 19,077 19,106 - - Due after 10 years 5,028 5,122 - - ------- ------- ------- ------- 80,895 81,094 9,000 9,042 Mortgage-backed securities 180,964 182,560 75,075 75,285 ------- ------- ------- ------- $261,859 $263,654 $ 84,075 $ 84,327 ======= ======= ======= =======
(Continued) 35 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1998 and 1997 NOTE D - INVESTMENT AND MORTGAGE-BACKED SECURITIES - Continued The amortized cost, gross unrealized gains and losses, and estimated market value of mortgage-backed securities, by issuer, are summarized as follows:
December 31, 1998 ---------------------------------------------------------------- Gross Gross Estimated Amortized unrealized unrealized market cost gains losses value --------- ---------- ---------- --------- (in thousands) Mortgage-backed securities held to maturity FHLMC certificates $ 47,239 $ 1,172 $ (7) $ 48,404 FNMA certificates 12,726 143 (13) 12,856 GNMA certificates 56,318 474 - 56,792 Real estate mortgage investment conduit 64,180 148 (312) 64,016 Other mortgage-backed securities 501 - (9) 492 ------- --------- ---------- ------- $180,964 $ 1,937 $ (341) $182,560 ======= ========= ========== ======= Mortgage-backed securities available for sale FHLMC certificates $ 13,110 $ 106 $ (2) $ 13,214 FNMA certificates 32,119 81 (22) 32,178 GNMA certificates 10,194 90 - 10,284 Real estate mortgage investment conduit 19,652 39 (82) 19,609 ------- --------- ---------- ------- $ 75,075 $ 316 $ (106) $ 75,285 ======= ========= ========== =======
December 31, 1997 ---------------------------------------------------------------- Gross Gross Estimated Amortized unrealized unrealized market cost gains losses value --------- ---------- ---------- --------- (in thousands) Mortgage-backed securities held to maturity FHLMC certificates $ 76,523 $ 1,508 $ (44) $ 77,987 FNMA certificates 22,927 340 (71) 23,196 GNMA certificates 7,483 213 - 7,696 Real estate mortgage investment conduit 36,389 35 (319) 36,105 Other mortgage-backed securities 752 - (13) 739 ------- -------- ------- ------- $144,074 $ 2,096 $ (447) $145,723 ======= ======== ======= =======
(Continued) 36 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1998 and 1997 NOTE D - INVESTMENT AND MORTGAGE-BACKED SECURITIES - Continued
December 31, 1997 ---------------------------------------------------------------- Gross Gross Estimated Amortized unrealized unrealized market cost gains losses value --------- ---------- ---------- --------- (in thousands) Mortgage-backed securities available for sale FHLMC certificates $ 19,099 $ 142 $ (18) $ 19,223 FNMA certificates 7,851 36 (24) 7,863 Real estate mortgage investment conduit 9,893 4 (136) 9,761 ------- ---------- --------- -------- $ 36,843 $ 182 $ (178) $ 36,847 ======== ========== ========= ========
Investment securities having an aggregate amortized cost of approximately $5.0 million and $7.0 million were pledged to secure public deposits at December 31, 1998 and 1997, respectively. There were no securities held other than U.S. Government and agencies from a single issuer that represented more than 10% of stockholders' equity. NOTE E - LOANS RECEIVABLE Loans receivable are summarized as follows:
December 31, ------------------------- 1998 1997 -------- -------- (in thousands) First mortgage loans (principally conventional) Secured by one-to-four family residences $152,819 $198,328 Secured by other non-residential properties 55,208 26,653 Construction loans 5,352 5,052 ------- ------- 213,379 230,033 Less net deferred loan origination fees and unamortized premiums 67 133 ------- ------- Total first mortgage loans $213,312 $229,900 ------- -------
(Continued) 37 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1998 and 1997 NOTE E - LOANS RECEIVABLE - Continued
December 31, ------------------------- 1998 1997 -------- -------- (in thousands) Consumer and other loans Commercial $ 6,666 $ 2,798 Home equity and second mortgage 12,995 12,147 Leases 2,305 1,671 Other 7,521 6,230 ------- ------- 29,487 22,846 Less unearned discount 49 6 ------- ------- Total consumer and other loans 29,438 22,840 Less allowance for loan losses 1,909 2,029 ------- ------- Total loans receivable $240,841 $250,711 ======= =======
Activity in the allowance for loan losses is summarized as follows:
December 31, ------------------------------------------------ 1998 1997 1996 ------------ ------------ ------------- (in thousands) Balance at beginning of year $ 2,029 $ 1,806 $ 1,484 Provision charged to income 60 397 330 Charge-offs, net (180) (174) (8) --------- --------- --------- Balance at end of year $ 1,909 $ 2,029 $ 1,806 ========= ========= =========
Non-performing loans, which include non-accrual loans for which the accrual of interest has been discontinued and loan balances past due 90 days or more that are not on a non-accrual status but that management expects will eventually be paid in full, totalled approximately $1.6 million and $1.4 million at December 31, 1998, and 1997, respectively. Of such amounts, approximately $900,000 and $800,000 at December 31, 1998 and 1997, are residential mortgage loans secured by one-to-four family residences for which management has experienced insignificant charge-offs. Interest income that would have been recorded under the original terms of such loans totalled approximately $43,000, $19,000 and $30,000 for the years ended December 31, 1998, 1997 and 1996, respectively. No interest income has been recognized on non-accrual loans for any of the periods presented. (Continued) 38 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1998 and 1997 NOTE E - LOANS RECEIVABLE - Continued The Corporation accounts for loans in accordance with SFAS No. 114, as amended by SFAS No. 118. SFAS No. 114 requires that a creditor measure impairment based on the present value of expected future cash flows discounted at the loan's effective interest rate, except that as a practical expedient, a creditor may measure impairment based on a loan's observable market price, or the fair value of the collateral if the loan is collateral dependent. Regardless of the measurement method, a creditor must measure impairment based on the fair value of the collateral when the creditor determines that foreclosure is probable. SFAS No. 118 allows creditors to use existing methods for recognizing interest income on impaired loans. The Bank has identified a loan as impaired when it is probable that interest and principal will not be collected according to the contractual terms of the loan agreement. The accrual of interest is discontinued on such loans and cash payments received are applied to reduce principal to the extent necessary to eliminate any doubt as to the ultimate collectibility of principal either in whole or in part. Loan impairment is measured by estimating the expected future cash flows and discounting them at the respective effective interest rate or by valuing the underlying collateral. An allowance for credit losses has been established for all loans identified as impaired. As of December 31, 1998 and 1997, the recorded investment in impaired loans was immaterial. The Bank has no concentration of loans to borrowers engaged in similar activities which exceeded 10% of loans at December 31, 1998 and 1997. In the ordinary course of business, the Bank has granted loans to certain executive officers, directors and their related interests. Related party loans are made on substantially the same terms as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than the normal risk of collectibility. The aggregate dollar amount of these loans was approximately $385,000 and $401,000 at December 31, 1998 and 1997, respectively. For the year ended December 31, 1998, principal repayments of approximately $16,000 were received and no funds were disbursed to executive officers, directors or their related interests. NOTE F - LOAN SERVICING Mortgage loans serviced for others are not included in the accompanying consolidated statements of financial position. The unpaid principal balances of these loans are summarized as follows: December 31, --------------------------- 1998 1997 --------- -------- (in thousands) Mortgage loan servicing portfolios FHLMC $ 15,116 $ 18,775 Other investors 6,103 7,630 -------- -------- $ 21,219 $ 26,405 ======== ======== (Continued) 39 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1998 and 1997 NOTE F - LOAN SERVICING - Continued Custodial balances maintained in connection with the foregoing loan servicing totalled approximately $408,000 and $523,000 at December 31, 1998 and 1997, respectively. The net servicing revenue on mortgage loans serviced for others is immaterial for all periods presented. NOTE G - PREMISES AND EQUIPMENT Premises and equipment are summarized as follows:
December 31, Estimated ---------------------- useful lives 1998 1997 ------------ ---- ---- (in thousands) Buildings 30 $ 5,906 $ 5,790 Leasehold improvements 5 709 322 Furniture, fixtures and equipment 3-7 6,436 4,955 --------- --------- 13,051 11,067 Less accumulated depreciation 7,293 6,437 --------- --------- 5,758 4,630 Land 3,259 3,259 --------- --------- $ 9,017 $ 7,889 ========= =========
NOTE H - DEPOSITS Deposits are summarized as follows:
December 31, ---------------------- 1998 1997 ---- ---- (in thousands) Demand $ 6,231 $ 5,037 NOW 44,971 40,360 Money Market 32,556 32,777 Passbook savings - fixed rate 122,213 122,952 Passbook savings - adjustable rate 43,651 51,277 -------- -------- Total demand, transaction and passbook deposits 249,622 252,403 Certificates of deposit 189,291 198,026 ------- ------- $438,913 $450,429 ======= =======
(Continued) 40 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1998 and 1997 NOTE H - DEPOSITS - Continued The aggregate amount of certificates of deposit with a minimum denomination of $100,000 was approximately $13.3 million and $9.4 million at December 31, 1998 and 1997, respectively. At December 31, 1998, scheduled maturities of certificates of deposit are as follows:
Year ending December 31, -------------------------------------------------------------------------------------------------------------- 1999 2000 2001 2002 2003 Thereafter Total ----------- ------------ ------------ ------------ ------------ ---------- ------------ (in thousands) $133,732 $ 23,582 $ 24,250 $ 3,282 $ 4,128 $ 317 $189,291 ======= ======== ======== ========= ========= ========= =======
NOTE I - ADVANCES FROM THE FEDERAL HOME LOAN BANK Advances from the Federal Home Loan Bank consist of the following:
December 31, -------------------------------------------------------------------- 1998 1997 ----------------------------- ---------------------------- Weighted Weighted Due date Amount average rate Amount average rate -------- ------ ------------ ------ ------------ (in thousands) 1998 $ - - % $ 30,000 5.85% 1999 30,000 6.05 30,000 6.05 2000 25,000 6.13 25,000 6.13 2003 20,000 5.60 - - 2005 15,000 5.37 - - 2008 70,000 5.61 - - 2010 3,359 6.70 3,359 6.70 ------- -------- $163,359 5.77 $ 88,359 6.03 ======= ========
The advances are collateralized by Federal Home Loan Bank stock and certain first mortgage loans and mortgage-backed securities. Unused lines of credit at the Federal Home Loan Bank were $30 million at December 31, 1998. 41 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1998 and 1997 NOTE J - BENEFIT PLANS The Bank maintains a 401(k) profit-sharing plan for eligible employees. Contributions to the plan are at the discretion of the Board of Directors. There were no profit-sharing plan contributions for the years ended December 31, 1998, 1997 and 1996. The Bank has a non-contributory defined benefit pension plan covering substantially all full-time employees meeting certain eligibility requirements. The benefits are based on each employee's years of service and an average earnings formula. An employee becomes fully vested upon completion of five years of qualifying service. It is the policy of the Bank to fund the maximum amount allowable under the individual aggregate cost method to the extent deductible under existing federal income tax regulations. The following table sets forth the pension plan's funded status and amounts recognized in the consolidated statements of financial position at the dates indicated.
December 31, ------------------------------ 1998 1997 ----------- ----------- (in thousands) Change in benefit obligation Benefit obligation at beginning of year $ 2,609 $ 3,004 Service cost 62 157 Interest cost 201 160 Actual gain 250 (670) Increase due to plan amendments 171 - Benefits paid (161) (42) ---------- --------- Benefits obligation at end of year $ 3,132 $ 2,609 ========= ========= Change in plan assets Fair value of plan assets at beginning of year $ 1,762 $ 1,338 Actual return on plan assets (50) 244 Employer contribution 410 222 Benefits paid (161) (42) --------- --------- Fair value of plan assets at end of year $ 1,961 $ 1,762 ========= ========= Funded status Unrecognized transaction asset $ (1,171) $ (847) Unrecognized net actuarial loss 31 36 Unrecognized prior service cost 543 419 Prepaid (accrued) benefit cost 201 (256) --------- --------- $ (396) $ (648) ========= =========
(Continued) 42 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1998 and 1997 NOTE J - BENEFIT PLANS - Continued
1998 1997 1996 ------------ ------------ ------------ Weighted-average assumptions as of December 31 Discount rate 7.25% 6.00% 6.00% Expected return on plan assets 8.00 8.00 8.00 Rate of compensation increase 4.00 6.00 6.00 Components of net periodic benefit cost Service cost $ 62 $ 157 $ 173 Interest cost 201 160 196 Expected return on plan assets (157) (116) (143) Amortization of prior service cost 52 52 56 ---------- ---------- --------- Net periodic benefit cost $ 158 $ 253 $ 282 ========== ========== =========
The Corporation also maintains the following benefit plans: 1. Employee Stock Ownership Plan ----------------------------- In 1994, the Corporation established an internally leveraged ESOP for eligible employees who have completed six months of service with the Corporation or its subsidiaries. The ESOP borrowed $4.2 million from the Corporation to purchase 423,200 newly issued shares of common stock. The Corporation makes discretionary contributions to the ESOP in order to service the ESOP's debt. Any dividends received by the ESOP will be used to pay debt service. The ESOP shares initially were pledged as collateral for its debt. As the debt is repaid, shares are released from collateral and allocated to qualifying employees based on the proportion of debt service paid in the year. The Corporation accounts for its ESOP in accordance with SOP 93-6. Accordingly, the debt of the ESOP is recorded as debt and the shares pledged as collateral are reported as unearned ESOP shares in the consolidated statements of financial position. As shares are released from collateral, the Corporation reports compensation expense equal to the current market price of the shares, and the allocated shares are included in outstanding shares for earnings per share computations. Dividends on allocated ESOP shares are recorded as a reduction of retained earnings; dividends on unallocated ESOP shares are recorded as a reduction of debt and accrued interest. ESOP compensation expense was $288,000, $351,000 and $450,000 in 1998, 1997 and 1996, respectively. Allocated shares 119,500 Unreleased shares 288,800 --------- Total ESOP shares 408,300 ========= Fair value of unreleased shares $4,981,800 ========= (Continued) 43 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1998 and 1997 NOTE J - BENEFIT PLANS - Continued 2. Management Stock Bonus Plan --------------------------- The Board of Directors also adopted a MSBP which was approved by the Corporation's stockholders on October 13, 1994. The MSBP provides that up to 211,600 shares of common stock may be granted, at the discretion of the Board, to key directors and officers at no cost to the individuals. The Corporation granted 178,292 shares on November 18, 1994, 24,000 shares on December 18, 1995, and 9,308 shares on December 15, 1997, in the form of restricted stock payable over five years from the date of grant. The recipients of the restricted stock are entitled to all voting and other stockholder rights, except that the shares, while restricted, may not be sold, pledged or otherwise disposed of and are required to be held in escrow. In the event the recipient terminates association with the Corporation for reasons other than death, disability or change in control, the recipient forfeits all rights to the allocated shares under restriction which are cancelled and revert to the Corporation for reissuance under the plan. Shares acquired by MSBP of $2.1 million were recorded at the date of award based on the market value of shares acquired by the Corporation. Shares acquired by the MSBP, which are shown as a separate component of stockholders' equity, are being amortized to expense over the five-year vesting period; $460,000, $458,000 and $432,000 was amortized to expense in 1998, 1997 and 1996, respectively. At December 31, 1998, there were no shares reserved for future grants under the plan. 3. Stock Option Plans ------------------ The Corporation has fixed stock option plans accounted for under APB Opinion No. 25 and related interpretations. The plans allow the Corporation to grant options to employees and directors for up to 794,000 shares of common stock. The options, which have a term of 10 years when issued, vest either immediately or over a three to five year period. The exercise price of each option equals the market price of the Corporation's stock on the date of 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 Corporation's net income and earnings per share would have been reduced to the pro forma amounts indicated below. 1998 1997 1996 -------- -------- -------- Net income As reported $ 4,038 $ 4,874 $ 3,479 Pro forma $ 3,885 $ 4,726 $ 3,365 Basic earnings per share As reported $ 1.39 $ 1.33 $ 0.86 Pro forma $ 1.34 $ 1.29 $ 0.83 Diluted earnings per share As reported $ 1.26 $ 1.25 $ 0.83 Pro forma $ 1.21 $ 1.21 $ 0.80 (Continued) 44 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1998 and 1997 NOTE J - BENEFIT PLANS - Continued These pro forma amounts may not be representative of future disclosures because they do not take into effect the pro forma compensation expense related to grants before 1995. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 1998, 1997 and 1996, respectively: no dividend yield for all years; expected volatility of 34%, 21% and 12.1%, risk-free interest rate of 5.25%, 6.4% and 6.4%; and expected lives of five years for all options. A summary of the status of the Corporation's fixed stock option plans as of December 31, 1998, and changes for each of the years in the three-year period then ended was as follows:
1998 1997 1996 --------------------- -------------------- ---------------------- Weighted Weighted Weighted average average average Number exercise Number exercise Number exercise of price per of price per of price per shares share shares share shares share ---------- -------- ------- --------- ------ --------- Outstanding at beginning of year 695,875 $13.08 551,833 $12.06 514,480 $11.82 Options granted 13,325 22.46 170,155 16.62 41,103 15.09 Options exercised (10,486) 12.85 (5,915) 11.50 (1,667) 11.50 Options forfeited (2,695) 15.78 (20,198) 16.50 (2,083) 11.50 ------- ------- ------- Outstanding at end of year 696,019 $13.24 695,875 $13.08 551,833 $12.06 ======= ======= ======= Options exercisable at year-end 524,813 478,919 461,285 ======= ======= ======= Weighted average fair value of options granted during year $ 8.72 $ 5.42 $ 4.34
The following table summarizes information about stock options outstanding at December 31, 1998:
Options outstanding Options exercisable --------------------------------------------- --------------------------- Weighted Number average Weighted Number Weighted outstanding at remaining average exercisable at average Range of exercise December 31, contractual exercise December 31, exercise prices 1998 life (years) price 1998 price ---------------- -------------- ----------- ---------- -------------- --------- $11.50 to $17.25 675,154 6.8 years $12.97 522,482 $12.14 $18.00 to $19.25 15,615 9.2 years 18.73 2,248 18.32 $26.00 to $27.88 5,250 9.5 years 27.79 83 26.00
(Continued) 45 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1998 and 1997 NOTE J - BENEFIT PLANS - Continued Total compensation cost recognized for stock-based employee compensation awards was approximately $116,000, $99,000 and $28,000 for 1998, 1997 and 1996, respectively. NOTE K - INCOME TAXES The components of income tax expense are summarized as follows:
Year ended December 31, ---------------------------------------------- 1998 1997 1996 ---- ---- ---- (in thousands) Federal Current $ 2,162 $ 2,420 $ 2,173 Deferred (152) (233) (84) --------- --------- --------- 2,010 2,187 2,089 State and local - current 297 395 343 --------- --------- --------- Continuing operations 2,307 2,582 2,432 Cumulative effect of accounting change 125 - - --------- --------- --------- Income tax provision $ 2,432 $ 2,582 $ 2,432 ========= ========= =========
The Corporation's effective income tax rate was different than the statutory federal income tax rate as follows: Year ended December 31, --------------------------- 1998 1997 1996 ---- ---- ---- (in thousands) Statutory federal income tax 34.0% 34.0% 34.0% Increase (decrease) resulting from Tax-exempt income (3.6) (1.8) (2.7) State tax, net of federal benefit 3.1 3.5 3.8 Other 6.1 (1.1) 5.9 ------ ------ ------ 39.6% 34.6% 41.0% ====== ====== ====== (Continued) 46 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1998 and 1997 NOTE K - INCOME TAXES - Continued Deferred taxes are included in the accompanying consolidated statements of financial position at December 31, 1998 and 1997, for the estimated future tax effects of differences between the financial statement and federal income tax bases of assets and liabilities according to the provisions of currently enacted tax laws. No valuation allowance was recorded against deferred tax assets at December 31, 1998 and 1997. The Corporation's net deferred tax asset at December 31, 1998 and 1997, was comprised of the following: December 31, ----------------------- 1998 1997 ---------- --------- (in thousands) Deferred tax assets Deferred loan origination fees $ 107 $ 130 Deferred compensation 176 135 Allowance for loan losses, net 79 68 Amortization 226 123 Other 3 - --------- -------- 591 456 --------- -------- Deferred tax liabilities Accrued pension expense 20 37 Unrealized gain on securities available for sale 98 108 --------- -------- 118 145 --------- -------- Deferred tax asset $ 473 $ 311 ========= ======== The Corporation files its income tax returns on the basis of a fiscal tax year ending June 30. Prior to 1996, the Bank was permitted to deduct a percentage of its taxable income as an addition to a bad debt reserve for tax purposes regardless of the Bank's charge-off experience. This special deduction was repealed for taxable years following 1995. The Bank is now required to compute its bad debt deductions for tax purposes using the specific charge-off method. Moreover, the Bank is required, beginning in 1998, to recapture approximately $2.4 million of its total tax bad debt reserve of approximately $8.1 million into taxable income over a four-year period. Deferred tax liabilities have been accrued in respect of the amount of the reserve to be recaptured. The Bank is not required to recapture approximately $5.7 million of its tax bad debt reserve, attributable to bad debt deductions taken by it prior to 1988, as long as the Bank continues to operate as a bank under federal tax law and does not use the reserve for any other purpose. In accordance with SFAS No. 109, the Bank has not recorded any deferred tax liability on this portion of its tax bad debt reserve. The tax that would be paid were the Bank ultimately required to recapture that portion of the reserve, would amount to approximately $1.9 million. (Continued) 47 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1998 and 1997 NOTE K - INCOME TAXES - Continued Deferred tax expense (benefit) results from temporary or timing differences in the recognition of revenue and expense for tax and financial reporting purposes. The sources and effect of these temporary and timing differences are as follows:
Year ended December 31, -------------------------------------------- 1998 1997 1996 -------- --------- ---------- (in thousands) Recognition of deferred tax expenses (benefits) Loan losses $ (118) $ (111) $ 2 Deferred compensation (40) (24) (110) Deferred loan origination fees 24 24 24 Amortization (103) (122) - Pension 88 - - Reserves (3) - - ------ ------ ------ $ (152) $ (233) $ (84) ====== ====== ======
NOTE L - REGULATORY MATTERS The Bank is subject to minimum regulatory capital standards promulgated by the Office of Thrift Supervision (OTS). Failure to meet minimum capital requirements can initiate certain mandatory - and possible additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Corporation's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Corporation's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Such minimum capital standards generally require the maintenance of regulatory capital sufficient to meet each of three tests, hereinafter described as the tangible capital requirement, the core capital requirement and the risk-based capital requirement. The tangible capital requirement provides for minimum tangible capital (defined as stockholders' equity less all intangible assets) equal to 1.5% of adjusted total assets. The core capital requirement provides for minimum core capital (tangible capital plus certain forms of supervisory goodwill and other qualifying intangible assets) equal to 4% of adjusted total assets at December 31, 1998. (Continued) 48 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1998 and 1997 NOTE L - REGULATORY MATTERS - Continued As of December 31, 1998, management believes that the Bank met all capital adequacy requirements to which it was subject.
Regulatory capital ---------------------------------------------------------------------- December 31, 1998 ---------------------------------------------------------------------- Tangible Core Risk-based capital Percent capital Percent capital Percent -------- ------- ------- ------- ---------- ------- Capital under generally accepted accounting principles Corporation $ 52,660 8.00% $ 52,660 8.00% $ 52,660 19.68% Bank 52,577 7.93 52,577 7.93 52,577 19.86 Unrealized gain on certain available-for-sale securities Corporation (154) (0.02) (154) (0.02) (154) (0.06) Bank (154) (0.02) (154) (0.02) (154) (0.06) Goodwill and other intangible assets Corporation (7,389) (1.12) (7,389) (1.12) (7,389) (2.76) Bank (7,389) (1.12) (7,389) (1.12) (7,389) (2.79) Additional capital items General valuation allowances-limited Corporation - - - - 1,909 0.72 Bank - - - - 1,909 0.72 ------- ------ ------- ------ ------- ------ Regulatory capital computed Corporation 45,117 6.86 45,117 6.86 47,026 17.58 Bank 45,034 6.79 45,034 6.79 46,943 17.73 Minimum capital requirement Corporation 9,871 1.50 26,323 4.00 21,405 8.00 Bank 9,943 1.50 26,515 4.00 21,178 8.00 ------- ------ ------- ------ ------- ------ Regulatory capital - excess Corporation $ 35,246 5.36% $ 18,794 2.86% $ 25,621 9.58% ======= ====== ======= ====== ======= ====== Bank $ 35,091 5.29% $ 18,519 2.79% $ 25,765 9.73% ======= ====== ======= ====== ======= ======
(Continued) 49 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1998 and 1997 NOTE L - REGULATORY MATTERS - Continued
Regulatory capital ---------------------------------------------------------------------- December 31, 1997 ---------------------------------------------------------------------- Tangible Core Risk-based capital Percent capital Percent capital Percent -------- ------- ------- ------- ------- ------- Capital under generally accepted accounting principles Corporation $ 50,095 8.51% $ 50,095 8.51% $ 50,095 19.56% Bank 50,987 8.58 50,987 8.58 50,987 19.91 Unrealized gain on certain available-for-sale securities Corporation (169) (0.03) (169) (0.03) (169) (0.06) Bank (169) (0.03) (169) (0.03) (169) (0.06) Goodwill and other intangible assets Corporation (8,274) (1.41) (8,274) (1.41) (8,274) (3.23) Bank (8,274) (1.39) (8,274) (1.39) (8,274) (3.23) Additional capital items General valuation allowances-limited Corporation - - - - 2,029 0.79 Bank - - - - 2,029 0.79 ------- ----- ------- ----- ------- ----- Regulatory capital computed Corporation 41,652 7.07 41,652 7.07 43,681 17.06 Bank 42,544 7.16 42,544 7.16 44,573 17.41 Minimum capital requirement Corporation 8,831 1.50 17,662 3.00 20,491 8.00 Bank 8,902 1.50 17,804 3.00 20,487 8.00 ------- ----- ------- ----- ------- ----- Regulatory capital - excess Corporation $ 32,821 5.57% $ 23,990 4.07% $ 23,190 9.06% ======= ===== ======= ===== ======= ===== Bank $ 33,642 5.66% $ 24,740 4.16% $ 24,086 9.41% ======= ===== ======= ===== ======= =====
(Continued) 50 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1998 and 1997 NOTE L - REGULATORY MATTERS - Continued At December 31, 1998, the Bank met all regulatory requirements for classification as a "well-capitalized" institution. A "well-capitalized" institution must have risk-based capital of 10% and core capital of 5%. The Bank's capital exceeded the minimum required amounts for classification as a "well-capitalized" institution by $20 million and $12 million, respectively. There are no conditions or events which have occurred that management believes have changed the Bank's classification as a "well-capitalized" institution. On September 30, 1996, the President signed into law the Deposit Insurance Funds Act of 1996 to recapitalize the Savings Association Insurance Fund (SAIF) administered by the Federal Deposit Insurance Corporation (FDIC) and to provide for the repayment of Financial Institution Collateral Obligation (FICO) bonds issued by the United States Treasury Department. Pursuant to this law, the FDIC levied a one-time special assessment of SAIF deposits equal to $0.657 per $100 of the SAIF-assessable deposit base as of March 31, 1995. Based on the Bank's deposits as of March 31, 1995, the Bank paid a special assessment of $2.2 million to recapitalize the SAIF. This expense was accrued for in the third quarter of 1996. During 1999, the Bank Insurance Funds (BIF) will pay $322 million of FICO debt service, and SAIF will pay $458 million. During 1999, the average regular annual deposit insurance assessment is estimated at $0.0129 per $100 of deposits for BIF deposits and $0.0644 per $100 of deposits for SAIF deposits. Individual institution assessments will continue to vary according to their capital and management ratings. As always, the FDIC will be able to raise the assessments as necessary to maintain the funds at their target capital ratios provided by law. After 1999, BIF and SAIF will share the FICO cost equally. Under current estimates, BIF and SAIF assessment bases would each be assessed at the rate of approximately $0.024 per $100 of deposits. The Bank maintains a liquidation account for the benefit of eligible savings account holders who maintained deposit accounts in the Bank after the Bank converted to a stock form of ownership. The Bank may not declare or pay a cash dividend on or repurchase any of its common shares if the effect thereof would cause the Bank's stockholders' equity to be reduced below either the amount required for the liquidation account or the regulatory capital requirements for insured institutions. NOTE M - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK The Corporation is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, standby letters of credit, interest rate caps and floors written. Such financial instruments are recorded in the consolidated financial statements when they become payable. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statements of financial position. The contract or notional amounts of those instruments reflect the extent of the Bank's involvement in particular classes of financial instruments. (Continued) 51 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1998 and 1997 NOTE M - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK - Continued The Corporation's exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. Unless noted otherwise, the Corporation requires collateral to support financial instruments with credit risk. Financial instruments, the contract or notional amounts of which represent credit risk, are as follows: December 31, ---------------------------- 1998 1997 ---------- ---------- (in thousands) Commitments to extend credit $ 30,341 $ 22,720 Commitments to purchase loans - 304 Standby letters of credit 3,604 787 Loans sold with recourse 364 572 -------- -------- $ 34,309 $ 24,383 ======== ======== Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Corporation evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if it is deemed necessary by the Corporation upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral held generally includes residential and some commercial property. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Typically, the Bank issues letters of credit to other financial institutions and generally does not require collateral for standby letters of credit. NOTE N - COMMITMENTS AND CONTINGENCIES The Bank had no commitments to sell mortgage loans to investors at December 31, 1998 compared to $6.9 million outstanding at December 31, 1997. The Bank leases branch facilities for periods ranging up to seven years. These leases are classified as operating leases and contain options to renew for additional periods. Rental expense was approximately $315,000, $296,000 and $229,000 for the years ended December 31, 1998, 1997 and 1996, respectively. (Continued) 52 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1998 and 1997 NOTE N - COMMITMENTS AND CONTINGENCIES - Continued The minimum annual rental commitments of the Bank under all non-cancellable leases with terms of one year or more are as follows: Year ending December 31, 1999 $ 280 2000 159 2001 124 ----- $ 563 ===== The Bank has a contract with a third-party computer processing center which expires in 2002 with an annual commitment of approximately $109,000. The Corporation has employment agreements with certain key executives that provide severance pay benefits if there is a change in control of the Corporation. The agreements will continue in effect on a year-to-year basis until terminated or not renewed by the Corporation or key executives. Upon a change in control, the Corporation shall continue to pay the key executives' salary per the agreements and certain benefits for one year. The maximum contingent liability under the agreements at December 31, 1998, was approximately $1,956,000. From time to time, the Corporation and its subsidiaries are parties to routine litigation, which arises in the normal course of business. In the opinion of management, the resolution of these lawsuits would not have a material adverse effect on the Corporation's consolidated financial position or results of operations. NOTE O - SIGNIFICANT CONCENTRATIONS OF CREDIT RISK The Bank is principally engaged in originating and investing in one-to-four family residential and commercial real estate loans in eastern Pennsylvania and New Jersey. The Bank offers both fixed and adjustable rates of interest on these loans which have amortization terms ranging to 30 years. The loans are generally originated or purchased on the basis of an 80% loan-to-value ratio, which has historically provided the Bank with more than adequate collateral coverage in the event of default. Nevertheless, the Bank, as with any lending institution, is subject to the risk that residential real estate values in the primary lending area will deteriorate, thereby potentially impairing collateral values in the primary lending area. However, management believes that residential and commercial real estate values are presently stable in its primary lending area and that loan loss allowances have been provided for in amounts commensurate with its current perception of the foregoing risks in the portfolio. 53 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1998 and 1997 NOTE P - FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS No. 107, Disclosures about Fair Value of Financial Instruments, requires all entities to disclose the estimated fair value of their assets and liabilities considered to be financial instruments. For the Bank, as for most financial institutions, the majority of its assets and liabilities are considered financial instruments as defined in SFAS No. 107. However, many such instruments lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction. Also, it is the Corporation's general practice and intent to hold its financial instruments to maturity or available for sale and to not engage in trading or significant sales activities. Therefore, the Corporation and the Bank had to use significant estimations and present value calculations to prepare this disclosure. Changes in the assumptions or methodologies used to estimate fair values may materially affect the estimated amounts. Also, management is concerned that there may not be reasonable comparability between institutions due to the wide range of permitted assumptions and methodologies in the absence of active markets. This lack of uniformity gives rise to a high degree of subjectivity in estimating financial instrument fair values. Fair values have been estimated using data which management considered the best available, as generally provided by estimation methodologies deemed suitable for the pertinent category of financial instrument. The estimation methodologies, resulting fair values and recorded carrying amounts are as follows: Fair value of loans and deposits with floating interest rates is generally presumed to approximate the recorded carrying amounts. Fair value of financial instruments actively traded in a secondary market has been estimated using quoted market prices.
December 31, --------------------------------------------------------------- 1998 1997 -------------------------- ----------------------------- Estimated Estimated fair Carrying fair Carrying value value value value --------- -------- --------- -------- (in thousands) Cash and cash equivalents $ 42,703 $ 42,703 $ 41,625 $ 41,625 Investment securities 90,136 89,937 85,063 84,859 Mortgage-backed securities 257,845 256,249 182,570 180,921 Securities purchased under agreements to resell - - 10,000 10,000
(Continued) 54 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1998 and 1997 NOTE P - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued The fair value of financial instruments with stated maturities has been estimated using the present value of cash flows, discounted at rates approximating current market rates for similar assets and liabilities.
December 31, -------------------------------------------------------------- 1998 1997 -------------------------- ---------------------------- Estimated Estimated fair Carrying fair Carrying value value value value --------- -------- --------- -------- (in thousands) Assets Interest-bearing deposits with banks $ 2,244 $ 2,238 $ 2,740 $ 2,737 Liabilities Deposits with stated maturities 187,816 189,291 197,345 198,026 Borrowings with stated maturities Short-term (due within 6 months) 14,978 15,000 5,000 5,000 Long-term 145,303 148,359 83,178 83,359
The fair value of financial instrument liabilities with no stated maturities is generally presumed to approximate the carrying amount (the amount payable on demand).
December 31, -------------------------------------------------------------- 1998 1997 -------------------------- ---------------------------- Estimated Estimated fair Carrying fair Carrying value value value value --------- -------- --------- -------- (in thousands) Deposits with no stated maturities $ 249,622 $ 249,622 $ 252,403 $ 252,403 ======= ======= ======= =======
The fair value of the net loan portfolio has been estimated using the present value of cash flows, discounted at the approximate current market rates adjusted for non-interest operating costs, and giving consideration to estimated prepayment risk and credit loss factors.
December 31, -------------------------------------------------------------- 1998 1997 -------------------------- ---------------------------- Estimated Estimated fair Carrying fair Carrying value value value value --------- -------- --------- -------- (in thousands) Net loans $ 245,375 $ 240,841 $ 254,568 $ 250,711 ======= ======= ======= =======
(Continued) 55 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1998 and 1997 NOTE P - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued There is no material difference between the carrying amount and the estimated fair value of off-balance-sheet items totalling approximately $34.3 million and $24.4 million at December 31, 1998 and 1997, respectively, which are primarily comprised of floating rate loan commitments priced to market at funding. The Bank's remaining assets and liabilities are not considered financial instruments. No disclosure of the relationship value of the Bank's deposits is required by SFAS No. 107. NOTE Q - SERVICE FEES, CHARGES AND OTHER OPERATING INCOME AND OTHER OPERATING EXPENSE
Year ended December 31, ----------------------- 1998 1997 1996 ---- ---- ---- (in thousands) Service fees, charges and other operating income Loan servicing fees $ 317 $ 512 $ 577 Late charge income 85 92 98 Deposit service charges 435 471 439 Other income 258 128 156 --------- --------- --------- $ 1,095 $ 1,203 $ 1,270 ========= ========= ========= Other operating expense Employee education $ 34 $ 49 $ 22 Insurance and surety bond 142 149 129 Office supplies 233 318 272 Postage 163 218 207 Telephone 173 130 103 Service charges on bank accounts 280 111 83 Supervisory examination fees 140 144 112 Other expenses 1,040 1,211 1,079 --------- --------- --------- $ 2,205 $ 2,330 $ 2,007 ========= ========= =========
NOTE R - SHAREHOLDER RIGHTS PLAN The Corporation adopted a Shareholder Rights Plan (the Rights Plan) to protect shareholders from attempts to acquire control of the Corporation at an inadequate price. Under the Rights Plan, the Corporation distributed a dividend of one Preferred Share Purchase Right (a Right) for each share of outstanding common stock. The rights are currently not exercisable and will expire on November 22, 2005, unless the expiration date is extended or unless the Rights are earlier redeemed by the Corporation. (Continued) 56 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1998 and 1997 NOTE R - SHAREHOLDER RIGHTS PLAN - Continued After the Rights become exercisable, under certain circumstances, the Rights (other than rights held by a 15% beneficial owner or an "acquiring person") will entitle the holders to purchase one one-hundredth of a share of a new series of junior participating preferred stock at an exercise price of $45 or purchase either the Corporation's common shares or the common shares of the potential acquirer at a substantially reduced price. The Corporation is entitled to redeem the Rights at $0.01 per Right prior to the acquisition by a person or group of beneficial ownership of 15% or more of the Corporation's common stock. Following the acquisition by a person or group of beneficial ownership of 15% or more of the Corporation's common stock and prior to an acquisition of 50% or more, the Board of Directors may exchange the Rights (other than Rights owned by such person or group), in whole or in part, at an exchange ratio of one share of common stock (or one one-hundredth of a share of the new series of junior participating preferred stock) per Right. The Rights Plan was not adopted in response to any specific effort to acquire control of the Corporation. The issuance of rights has no dilutive effect, did not affect the Corporation's reported earnings per share, and was not taxable to the Corporation or its shareholders. NOTE S - EARNINGS PER SHARE The following table illustrates the reconciliation of the numerators and denominators of the basic and diluted earnings per share computations.
Year ended December 31, 1998 --------------------------------------------- Weighted average Income shares Per share (numerator) (denominator) amount --------- ----------- --------- Basic earnings per share Income before cumulative effect of accounting change $ 3,830 $ 1.32 Cumulative effect of accounting change 208 0.07 --------- ------ Income available to common stockholders $ 4,038 2,894,651 $ 1.39 ========= ====== Effect of dilutive securities Stock options 300,844 --------- Diluted earnings per share Income before cumulative effect of accounting change $ 3,830 $ 1.20 Cumulative effect of accounting change 208 0.06 --------- ------ Income available to common stockholders plus effect of dilutive securities $ 4,038 3,195,495 $ 1.26 ========= ========= ======
(Continued) 57 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1998 and 1997 NOTE S - EARNINGS PER SHARE - Continued There were options to purchase 5,250 shares of common stock at a range of $26.00 to $28.00 per share which were outstanding during 1998 which 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. The options, which expire through December 31, 2008, were still outstanding at December 31, 1998.
Year ended December 31, 1997 -------------------------------------------------- Weighted average Income shares Per share (numerator) (denominator) amount --------- ----------- --------- Net income $ 4,874,000 ========== Basic earnings per share Income available to common stockholders $ 4,874,000 3,656,924 $ 1.33 ====== Effect of dilutive securities Stock options - 251,667 ---------- ---------- Diluted earnings per share Income available to common stockholders plus effect of dilutive securities $ 4,874,000 3,908,591 $ 1.25 ========== ========== ======
Year ended December 31, 1996 -------------------------------------------------- Weighted average Income shares Per share (numerator) (denominator) amount --------- ----------- --------- Net income $ 3,479,000 ========== Basic earnings per share Income available to common stockholders $ 3,479,000 4,066,615 $ 0.86 ====== Effect of dilutive securities Stock options - 127,372 ---------- --------- Diluted earnings per share Income available to common stockholders plus effect of dilutive securities $ 3,479,000 4,193,987 $ 0.83 ========== ========= ======
(Continued) 58 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1998 and 1997 NOTE S - EARNINGS PER SHARE - Continued There were options to purchase 13,103 shares of common stock at $15.88 per share which were outstanding during 1996 which were not included in the computation of diluted earnings per share because the options' exercise price was greater than the average market price of the common shares. The options, which expire on December 18, 2006, were still outstanding at December 31, 1996. NOTE T - SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATE (UNAUDITED)
Three months ended --------------------------------------------------------------- Dec. 31, Sept. 30, June 30, March 31, 1998 1998 1998 1998 -------- --------- -------- --------- (in thousands, except per share data) Total interest income $ 11,061 $ 11,379 $ 10,998 $ 10,141 Total interest expense 6,851 7,092 6,590 5,662 Net interest income 4,210 4,287 4,408 4,479 Provision for possible loan losses 15 15 15 15 -------- -------- -------- -------- Net interest income after provision 4,195 4,272 4,393 4,464 Other income 135 338 686 420 Other expenses 2,730 3,208 3,453 3,375 -------- -------- -------- -------- Income before income taxes and cumulative effect of accounting change 1,600 1,402 1,626 1,509 Income taxes 620 534 637 516 -------- -------- -------- -------- Income before cumulative effect of accounting change 980 868 989 993 Cumulative effect of accounting change 208 - - - -------- -------- -------- -------- Net income $ 1,188 $ 868 $ 989 $ 993 ======== ======== ======== ========
(Continued) 59 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1998 and 1997 NOTE T - SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED) - Continued
Three months ended --------------------------------------------------------------- Dec. 31, Sept. 30, June 30, March 31, 1998 1998 1998 1998 -------- --------- -------- --------- (in thousands, except per share data) Earnings per common share before cumulative effect of accounting change Basic $ 0.34 $ 0.30 $ 0.34 $ 0.34 Diluted $ 0.32 $ 0.27 $ 0.30 $ 0.31 Cumulative effect of accounting change Basic 0.07 - - - Diluted 0.06 - - - Earnings per common share Basic $ 0.41 $ 0.30 $ 0.34 $ 0.34 Diluted $ 0.38 $ 0.27 $ 0.30 $ 0.31
Three months ended --------------------------------------------------------------- Dec. 31, Sept. 30, June 30, March 31, 1998 1998 1998 1998 -------- --------- -------- --------- (in thousands, except per share data) Total interest income $ 9,990 $ 10,918 $ 11,106 $ 11,175 Total interest expense 5,845 5,985 6,136 6,114 --------- --------- --------- --------- Net interest income 4,145 4,933 4,970 5,061 Provision for possible loan losses 15 202 75 105 --------- --------- --------- --------- Net interest income after provision 4,130 4,731 4,895 4,956 Other income 504 945 488 390 Other expenses 3,351 3,506 3,318 3,408 --------- --------- --------- --------- Income before income taxes 1,283 2,170 2,065 1,938 Income taxes 205 803 800 774 --------- --------- --------- --------- Net income $ 1,078 $ 1,367 $ 1,265 $ 1,164 ========= ========= ========= ========= Earnings per common share - basic $ 0.34 $ 0.36 $ 0.33 $ 0.30 Earnings per common share - assuming dilution $ 0.30 $ 0.34 $ 0.32 $ 0.29
60 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1998 and 1997 NOTE U - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY Condensed financial information for TF Financial Corporation (parent company only) follows: BALANCE SHEET December 31, --------------------- 1998 1997 ---- ---- (in thousands) ASSETS Cash $ 990 $ 127 Certificates of deposit - other institutions 172 171 Investment securities available-for-sale 500 - Investment in Third Federal 49,221 47,081 Investment in TF Investments 2,439 2,832 Investment in Teragon 219 28 Other assets 14 8 ------ ------ Total assets $53,555 $50,247 ====== ====== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Loan payable to TF Investments $ - $ 103 Payable to Third Federal and other liabilities 895 49 ------ ------ Total liabilities 895 152 Stockholders' equity 52,660 50,095 ------ ------ Total liabilities and stockholders' equity $53,555 $50,247 ====== ====== (Continued) 61 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1998 and 1997 NOTE U - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY - Continued STATEMENT OF EARNINGS
Year ended December 31, ---------------------------------------------- 1998 1997 1996 ---------- ----------- ----------- (in thousands) INCOME Dividend income from subsidiaries $ 3,198 $ 1,276 $ - Interest income 13 10 10 --------- --------- --------- Total income 3,211 1,286 10 --------- --------- --------- EXPENSES Interest 8 256 722 Other 170 226 257 --------- --------- --------- Total expenses 178 482 979 --------- --------- --------- Income (loss) before undistributed earnings of subsidiaries 3,033 804 (969) Undistributed earnings of subsidiaries 1,005 4,070 4,448 --------- --------- --------- NET INCOME $ 4,038 $ 4,874 $ 3,479 ========= ========= =========
(Continued) 62 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1998 and 1997 NOTE U - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY - Continued STATEMENT OF CASH FLOWS
Year ended December 31, -------------------------------------------- 1998 1997 1996 -------- --------- -------- (in thousands) Cash flows from operating activities Net income $ 4,038 $ 4,874 $ 3,479 Adjustments to reconcile net income to net cash provided by (used in) operating activities Undistributed earnings from subsidiaries (1,005) (4,070) (4,448) Net change in assets and liabilities 857 (4,733) 4,676 ------ ------- ------- Net cash provided by (used in) operating activities 3,890 (3,929) 3,707 ------ ------- ------- Cash flows from investing activities Capital distribution (to) from subsidiaries (217) 42,025 - Purchase of investment securities available for sale (500) - - Purchase and maturities of certificates of deposit in other financial institutions, net (1) (17) (4) ------ ------- ------- Net cash (used in) provided by investing activities (718) 42,008 (4) ------ ------- ------- Cash flows from financing activities Cash dividends paid to stockholders (1,387) (1,433) (1,258) Net (decrease) increase in borrowings from TF Investments (103) (9,637) 1,022 Treasury stock acquired (941) (27,027) (3,596) Exercise of stock options 122 75 - ------- ------- ------- Net cash used in financing activities (2,309) (38,022) (3,832) ------- ------- ------- NET INCREASE (DECREASE) IN CASH 863 57 (129) Cash at beginning of year 127 70 199 ------- ------- ------- Cash at end of year $ 990 $ 127 $ 70 ======= ======= ======= Supplemental disclosure of cash flow information Cash paid during the year for income taxes $ 36 $ 63 $ 80 ======= ======= =======
63 THIRD FEDERAL SAVINGS BANK OFFICE LOCATIONS CORPORATE OFFICE 3 Penns Trail Newtown, PA 18940-3433 (215) 579-4000 OPERATIONS (215) 579-4600 BUCKS COUNTY, PENNSYLVANIA BRANCHES
Newtown Office Feasterville Office Doylestown Office 3 Penns Trail Buck Hotel Complex 60 North Main St. Newtown, PA 18940-3433 Feasterville, PA 19053-2209 Doylestown, PA 18901-3730 (215) 579-4607 (215) 364-7096 (215) 348-9021 Newtown Office New Britain Office Cross Keys Office 950 Newtown-Yardley Road 600 Town Center 834 North Easton Highway Newtown, PA 18940-4018 New Britain, PA 18901-5199 Doylestown, PA 18901-1007 (215) 968-4444 (215) 345-5800 (215) 348-5566 Warminster Office 601 Louis Drive Warminster, PA 18974-2843 (215) 672-7900
PHILADELPHIA COUNTY, PENNSYLVANIA BRANCHES
Frankford Office Mayfair Office Bridesburg Office 4625 Frankford Ave. Roosevelt Blvd. at Unruh Orthodox & Almond Sts. Philadelphia, PA 19124-5889 Philadelphia, PA 19149-2494 Philadelphia, PA 19137-1626 (215) 289-1400 (215) 332-7650 (215) 743-6673 Fishtown Office Woodhaven Office York & Memphis Sts. Knights Road Center Philadelphia, PA 19125-3029 Knights & Woodhaven Rds. (215) 423-2314 Philadelphia, PA 19154-2810 (215) 824-0151
MERCER COUNTY, NEW JERSEY BRANCHES
Ewing Office Princeton Office Hamilton Square Office 2075 Pennington Road Princeton Shopping Center 1850 Route 33 Trenton, NJ 08618-1003 301 N. Harrison St. Hamilton Square, NJ 08690-1712 (609) 883-7033 Princeton, NJ 08540-3512 (609) 890-1333 (609) 683-4488
64 TF Financial Corporation Board of Directors Carl F. Gregory Robert N. Dusek John R. Stranford Thomas J. Gola Chairman of the Board George A. Olsen
Executive Officers William C. Niemczura John R. Stranford Elizabeth Davidson Maier Senior Vice President President and Chief Senior Vice President and and Treasurer Executive Officer Corporate Secretary
Third Federal Savings Bank Board of Directors John R. Stranford Carl F. Gregory Thomas J. Gola Robert N. Dusek Chairman of the Board William H. Yerkes, III George A. Olsen William J. Happ, Jr. Albert M. Tantala
Executive Officers William C. Niemczura John R. Stranford Elizabeth Davidson Maier Senior Vice President and President and Chief Senior Vice President and Chief Financial Officer Executive Officer Corporate Secretary Thomas J. Sposito, II Earl A. Pace, Jr. Floyd P. Haggar Senior Vice President and Senior Vice President Senior Vice President and Retail Banking Officer Chief Information Officer Chief Lending Officer Independent Auditors Special Counsel Transfer Agent and Registrar Grant Thornton, LLP Malizia, Spidi, Sloane & Fisch, P.C. American Securities Transfer & Two Commerce Square One Franklin Square Trust, Inc. 2001 Market Street 1301 K Street, N.W., Ste. 700 East 938 Quail Street, Suite 101 Philadelphia, PA 19103-7080 Washington, DC 20005 Lakewood, CO 80215-5513
EX-21 5 EXHIBIT 21 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT Parent TF Financial Corporation Percentage Jurisdiction of Subsidiaries Owned Incorporation - ------------ ---------- --------------- Third Federal Savings Bank (a) 100% United States TF Investment Corporation (a) 100% Delaware Teragon Financial Corporation 100% Pennsylvania Penns Trail Development Corporation (a) 100% Delaware Third Delaware Corporation (a)(b) 100% Delaware - --------------- (a) The operations of this subsidiary are included in the consolidated financial statements contained in the 1998 Annual Report to Stockholders incorporated herein by reference. (b) Third Delaware Corporation is a wholly-owned subsidiary of Third Federal Savings Bank. EX-23.0 6 EXHIBIT 23.0 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our report dated January 15, 1999, accompanying the consolidated financial statements and schedules incorporated by reference or included in the Annual Report of TF Financial Corporation and Subsidiaries on Form 10-K for the year ended December 31, 1998. We hereby consent to the incorporation by reference of said report in the Registration Statements of TF Financial Corporation and Subsidiaries on Form S-8 (File No. 33-87176, effective December 7, 1994, File No. 333-09235, effective July 31, 1996 and File No. 333-27085, effective May 14, 1997). /s/Grant Thornton LLP - --------------------------- GRANT THORNTON LLP Philadelphia, Pennsylvania March 26, 1999 EX-27 7 FDS
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL INFORMATION. 1000 12-MOS DEC-31-1998 DEC-31-1998 42,703 2,238 0 0 84,327 346,186 347,981 242,866 1,909 665,608 438,913 30,000 10,676 133,359 0 0 529 52,131 665,608 18,657 23,275 1,647 43,579 17,397 8,798 17,384 60 349 12,766 6,137 3,830 0 208 4,038 1.39 1.26 2.71 1,602 1,602 0 0 2,029 180 0 1,909 1,909 0 1,909
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