EX-13 4 0004.txt EXHIBIT 13 EXHIBIT 13 TO OUR STOCKHOLDERS The millennium Year 2000 has been one of challenge and change. Interest rates rose throughout most of the year. Toward year-end, with the economy beginning to soften, rates began their decline. As the economy turned and technology stocks fell out of favor, banks with good core earnings began to experience an upturn. Throughout this past year, we have made great strides in our endeavor to convert from a savings bank to a full service community bank. Our loan portfolio has grown by 25.6% to $361.8 million, enabling us to increase our interest rate spread by 6.7%, while many financial institutions saw compression in their spreads. With non-performing assets to total assets of 0.23%, our asset quality continues to be very strong. Tangible book value per share increased 16.79% to $18.99 at year-end. Earnings per diluted share rose 12.5% to $1.71. This has enabled us to raise the dividend per share to $0.14 during the first quarter of 2001. Our December 31, 2000 stock price of $16.75 represents an increase in trading price during the year of 26.42%. Many new banking products were introduced throughout the year including Internet Banking and Online Bill Payment. During the first quarter of 2001, we will introduce Check Imaging. We have developed many new products that are directed toward serving the needs of the small businesses in our market area. We believe the large regional banks have neglected this segment. Management and the Board of Directors are committed to implementing the latest technology necessary to further assist us in our mission to become a full service community bank. Our mission continues to be increasing shareholder value while serving the needs of our communities. These two priorities complement each other very well. The TF Financial Board and I would like to take this opportunity to thank you for your continued support. /s/ John R. Stranford -------------------------------------- John R. Stranford President and Chief Executive Officer 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") and its subsidiary Third Delaware Corporation, TF Investments Corporation, Teragon Financial Corporation and Penns Trail Development Corporation. At December 31, 2000, total assets were approximately $723.3 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, 2000, total stockholders' equity was approximately $53.1 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." 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 expanded its operations in 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 branch offices and approximately $143 million of deposits from Cenlar Federal Savings Bank. Third Federal added a fourth branch office in Mercer County in December, 1999 with the Corporation's acquisition of Village Financial Corporation ("Village"). During the first quarter of 2000 the Corporation closed a branch facility in its home office location and simultaneously opened a larger, freestanding branch at a nearby site. As of December 31, 2000 Third Federal operated fifteen branch offices in Bucks and Philadelphia counties, Pennsylvania and Mercer County, New Jersey. Third Federal attracts deposits (approximately $400.9 million at December 31, 2000) from the general public and uses such deposits, together with borrowings mainly from the Federal Home Loan Bank of Pittsburgh (approximately $244.9 million at December 31, 2000) and other funds, primarily to originate or purchase loans secured by first mortgages on owner-occupied, one-to-four family residences, or purchase securities secured by such loans. Third Federal also originates and purchases commercial real estate and multi-family loans, construction loans and consumer loans, and purchases other investment securities. 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 number of shareholders of record of common stock as of March 19, 2001, was approximately 600. This does not reflect the number of persons or entities who held stock in nominee or "street" name through various brokerage firms. 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. Stock Price and Dividend History Dividend paid Quarter ended Quoted market price per share ------------- ------------------------ --------- High Low ------- ------- December 31, 2000 $16.750 $13.250 $0.13 September 30, 2000 $15.000 $13.438 $0.13 June 30, 2000 $14.875 $13.250 $0.13 March 31,2000 $15.750 $12.750 $0.13 December 31, 1999 $15.375 $12.500 $0.13 September 30, 1999 $19.375 $14.500 $0.12 June 30, 1999 $21.188 $15.500 $0.12 March 31,1999 $19.000 $15.875 $0.12 SELECTED FINANCIAL INFORMATION AND OTHER DATA
Financial Condition At December 31, -------------------------------------------------------------- (Dollars in thousands, except per share data) 2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- Total assets $723,297 $721,874 $665,608 $597,047 $647,853 Loans receivable, net 361,806 287,979 240,841 250,711 309,570 Mortgage-backed securities available for sale, at fair value 97,914 132,515 75,285 36,847 22,027 Mortgage-backed securities held to maturity, at cost 135,142 159,888 180,964 144,074 153,758 Securities purchased under agreements to resell --- --- --- 10,000 25,129 Investment securities available for sale, at fair value 18,865 21,930 9,042 32,037 12,652 Investment securities held to maturity, at cost 63,461 66,760 80,895 52,822 38,544 Cash and cash equivalents(l) 10,618 16,715 42,703 41,625 54,132 Deposits 400,851 401,698 438,913 450,429 469,088 Advances from the Federal Home Loan Bank and other borrowings 259,821 264,299 163,359 88,359 98,359 Retained earnings 51,604 48,760 45,762 43,176 39,750 Total stockholders' equity 53,109 48,447 52,660 50,095 72,575 Book value per common share $21.32 $18.81 $18.43 $17.36 $18.31 Tangible book value per common share $18.99 $16.26 $15.84 $14.49 $15.99
Summary of Operations At or for the year ended December 31, -------------------------------------------------------------- 2000 1999 1998(3) 1997 1996(2) -------- -------- -------- -------- -------- Interest income $48,708 $47,022 $43,579 $43,189 $38,989 Interest expense 28,921 27,974 26,195 24,080 20,797 Net interest income 19,787 19,048 17,384 19,109 18,192 Provision for loan losses 410 300 60 397 330 Non-interest income 1,432 1,589 1,535 2,327 1,794 Non-interest expense 14,404 13,529 12,722 13,583 13,745 Net income before cumulative effect of change in accounting method 4,482 4,422 3,830 4,874 3,479 Net income 4,482 4,422 4,038 4,874 3,479 Earnings per common share - basic Continuing operations $1.76 $1.60 $1.32 $1.33 $0.86 Cumulative effect of accounting changes --- --- $0.07 --- --- Earnings per common share - basic $1.76 $1.60 $1.39 $1.33 $0.86 Earnings per common share - diluted Continuing operations $1.71 $1.52 $1.20 $1.25 $0.83 Cumulative effect of accounting changes --- --- $0.06 --- --- Earnings per common share - diluted $1.71 $1.52 $1.26 $1.25 $0.83 Performance Ratios and Other Selected Data Return on average assets 0.63% 0.62% 0.58% 0.77% 0.62% Return on average equity 9.18% 8.60% 7.39% 7.39% 4.74% Average equity to average assets 6.86% 7.17% 7.74% 10.46% 12.91% Average interest rate spread 2.70% 2.54% 2.44% 2.72% 2.76% Non-performing loans to total assets 0.20% 0.18% 0.24% 0.23% 0.30% Non-performing loans to total loans 0.41% 0.45% 0.65% 0.55% 0.64% Allowance for loan losses to non-performing loans 115.97% 145.56% 119.16% 146.82% 91.60% Allowance for loan losses to total loans 0.47% 0.66% 0.78% 0.80% 0.58% Savings Bank regulatory capital Core 6.10% 5.76% 6.79% 7.16% 7.77% Tangible 6.10% 5.76% 6.79% 7.16% 7.77% Risk based 11.81% 12.83% 17.73% 17.41% 17.68% Dividend payout ratio (4) 30.41% 32.24% 38.10% 32.00% 37.35%
---------------- (1) Consists of cash, cash due from banks, interest-bearing deposits with maturities of less than three months, and federal funds sold. (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 December 31, 1998 include the cumulative effect of a change in accounting for certain investments of $208,000 (SFAS #133). (4) Payout ratio is dividends paid for the period divided by earnings per common share - diluted after cumulative effect of accounting changes. 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. This document contains statements that project the future operations of the Corporation which involve risks and uncertainties. The Corporation's actual results may differ significantly from the results discussed in these forward-looking statements. Statements concerning future performance, developments, events, expectations for growth and market forecasts, and any other guidance on future periods, constitute forward-looking statements which are subject to a number of risks and uncertainties, including interest rate fluctuations and government and regulatory actions which might cause actual results to differ materially from stated expectations or estimates. The Corporation 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 Corporation. 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 Third Federal incurs on its deposits, borrowings and other sources of funds. In addition, the mix of the Third Federal's interest bearing assets and liabilities can have a significant effect on the Third Federal's net interest income; loans generally have higher yields than securities; retail deposits generally have lower interest rates than other borrowings. Third Federal also receives income from service charges and other fees and occasionally from sales of investment securities and real estate owned. Third Federal 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. Changes to Financial Condition The Corporation's total assets at December 31, 2000 and December 31, 1999 totaled $723.3 million and $721.9 million, respectively. During the year loans receivable increased by $73.8 million or 25.6%, largely as a result of the purchase of $73 million of seasoned, single-family residential loans during the fourth quarter. This loan purchase was funded in part with the proceeds from the sale of $41.9 million in mortgage-backed securities - available for sale. The remainder of the purchase was funded with cash and cash equivalents and advances from the Federal Home Loan Bank. Investment securities and mortgage-backed securities decreased in total by $65.7 million during 2000. This decrease was the result of the purchase of $108.1 million in securities plus a $4.5 million gain in the fair value of the available for sale portfolios, off-set by the previously mentioned $41.9 million sold plus the repayment or maturity of an additional $136.4 million. Deposit balances decreased by $0.9 million; certificates of deposit decreased by $3.0 million, while the remaining or "core" deposit categories increased by $2.1 million. In addition, advances from the Federal Home Loan Bank and other borrowings (collectively, "borrowings") decreased by $4.5 million. The combined net increase in assets and decrease in deposits and borrowings was funded by a $6.1 million decrease in cash and cash equivalents. Total consolidated stockholders' equity increased $4.7 million to $53.1 million at December 31, 2000. The increase is largely the result of $4.4 million in net income plus a $2.7 million increase in accumulated other comprehensive income, less a $1.2 million increase in the cost of treasury stock. During the year the Corporation repurchased approximately 138,000 shares of its common stock in order to benefit from what management perceived to be a depressed market value of the Corporation's common stock. Average Balance Sheet The following table sets forth information (dollars in thousands) relating to the Company's average balance sheet and reflects the average yield on assets and average cost of liabilities for the periods indicated. The yields and costs are computed by dividing income or expense by the average balance of interest-earning assets or interest-bearing liabilities, respectively for the periods indicated.
2000 1999 1998 -------------------------------- --------------------------------- -------------------------------- Average Average Average Average Average Average Balance Interest Yld/Cost Balance Interest Yld/Cost Balance Interest Yld/Cost ------- -------- -------- ------- -------- -------- ------- -------- -------- ASSETS Interest-earning assets: Loans receivable (4) $299,770 $23,756 7.92% $285,439 $21,843 7.65% $232,924 $18,657 8.01% Mortgage-backed securities 278,434 18,449 6.63% 278,537 17,831 6.40% 251,785 16,357 6.50% Investment securities 100,274 6,180 6.16% 113,731 6,646 5.84% 115,801 6,918 5.97% Other interest-earning assets(1) 5,236 323 6.17% 14,331 702 4.90% 40,413 1,647 4.08% -------- ------- -------- ------- ------ ----- Total interest-earning assets 683,714 48,708 7.12% 692,038 47,022 6.79% 640,923 43,579 6.80% ------- ------- ------ Non interest-earning assets 28,529 25,803 22,428 -------- -------- ------ Total assets 712,243 717,841 663,351 ======== ======== ======= LIABILITIES AND STOCKHOLDERS'EQUITY: Interest-bearing liabilities Deposits 410,330 15,082 3.68% 416,514 14,645 3.52% 447,995 17,397 3.46% Advances from the FHLB and borrowings 243,656 13,839 5.68% 240,371 13,329 5.55% 152,942 8,798 5.75% -------- ------- -------- ------- ------- ----- Total interest-bearing liabilities 653,986 28,921 4.42% 656,885 27,974 4.26% 600,937 26,195 4.36% ------- ------- ------ Non interest-bearing liabilities 9,432 9,514 10,582 -------- -------- ------ Total liabilities 663,418 666,399 611,519 Stockholders' equity 48,825 51,442 51,832 -------- -------- ------ Total liabilities and stockholders' equity $712,243 $717,841 $663,351 ======== ======== ======== Net interest income $19,787 $19,048 $17,384 ======= ======= ======= Interest rate spread (2) 2.70% 2.53% 2.44% Net yield on interest-earning assets (3) 2.89% 2.75% 2.71% Ratio of average interest-earning assets to average interest bearing liabilities 105% 105% 107%
(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. Rate/Volume Analysis The following table presents, for the periods indicated, the change in interest income and interest expense (in thousands) attributed to (i) changes in volume (changes in the weighted average balance of the total interest earning asset and interest bearing liability portfolios multiplied by the prior year rate), and (ii) changes in rate (changes in rate multiplied by prior year volume). Changes attributable to the combined impact of volume and rate have been allocated proportionately based on the absolute value of changes due to volume and changes due to rate.
2000 Vs 1999 1999 Vs 1998 --------------------------------- ------------------------------- Increase (decrease) due to Increase (decrease) due to --------------------------------- ------------------------------- Volume Rate Net Volume Rate Net ------ ---- --- ------ ---- --- ------------------------------------------------------------------ Interest income: Loans receivable, net $1,123 $ 790 $1,913 $4,055 $ (869) $3,186 Mortgage-backed securities (7) 624 617 1,727 (253) 1,474 Investment securities (816) 350 (466) (123) (149) (272) Other interest-earning assets (525) 147 (378) (1,226) 281 (945) ------------------------------------------------------------------ Total interest-earning assets (225) 1,911 1,686 4,433 (990) 3,443 ------------------------------------------------------------------ Interest expense: Deposits (221) 658 437 (1,186) (1,566) (2,752) Advances from the FHLB and borrowings 188 322 510 4,848 (317) 4,531 ------------------------------------------------------------------ Total interest-bearing liabilities (33) 980 947 3,662 (1,883) 1,779 ------------------------------------------------------------------ Net change in net interest income $ (192) $931 $739 $ 771 $ 893 $1,664 ==================================================================
Comparison of Years Ended December 31, 2000 and December 31, 1999 Net Income. Net income was $4.482 million for the fiscal year ended December 31, 2000, an increase of $60,000 compared with the year ended December 31, 1999. While net income is essentially unchanged from 1999, the Corporation's basic earnings per share increased by 10% to $1.76 per share during 2000 due to the 84,706 net decrease in shares outstanding during the year. This decrease occurred as a result of the Corporation's share repurchases during 2000 which resulted in the repurchase of 138,112 shares of common stock, less 41,250 shares issued as a result of stock option exercises and less 12,156 shares allocated to employee stock ownership plan participants at year end. Total Interest Income. For the year ended December 31, 2000, total interest income increased to $48.7 million compared to $47.0 million from the year ended December 31, 1999. The $1.7 million increase in interest income was mainly the result of a $14.3 million increase in the average balance of loans receivable combined with a 27 basis point increase in the average rate paid on such loans. This rate increase is the result of the Corporation's loan origination and purchase activities during 2000, a period during which market interest rates, and thus the interest rates on new loans closed and purchased, were higher than those on the Corporation's existing portfolio. Interest income also increased due to a 23 basis point increase in the average interest rate on mortgage-backed securities. This rate increase also is the result of the Corporation's securities purchases during 2000, a period in which market interest rates on new purchases exceeded those interest rates on the Corporation's existing mortgage-backed securities. Total Interest Expense. Total interest expense increased to $28.9 million for the year ended December 31, 2000. This increase is mainly the result of higher market interest rates during the period and, consequently, higher rates paid on the Corporation's new certificates of deposit and borrowings. Allowance for Loan Losses. The allowance for loan losses was approximately $1.7 million at December 31, 2000 and $1.9 million at December 31, 1999. Non-performing loans were approximately $1.5 million at December 31, 2000 compared to $1.4 million a year earlier. Charge-off's were $613,000 during 2000 compared to $292,000 during 1999. The increase in charge-off's during 2000 is largely the result of a one-time, comprehensive review of the Corporation's student loan portfolio. At December 31, 2000 the allowance for loan losses was 116.0% of non-performing loans as compared to 145.6% of non-performing loans at December 31, 1999. While management maintains Third Federal's 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 was $1.4 million during 2000 compared with $1.6 million during 1999. During 1999 the Corporation recorded a one-time gain of $350,000 on the sale of real estate held for investment compared to no such gain during 2000. Non-interest Expense. Total non-interest expense increased by $875,000 during 2000 compared to 1999. This increase occurred mainly from $569,000 increase in employee compensation and benefits, the result of the full year effect of two new branch offices, lending, sales and support staff associated with the expansion of the Corporation's retail banking facilities throughout 1999 and early 2000. In addition, during 2000 the Corporation intentionally increased its advertising expenditures by $391,000 and decreased by $333,000 expenditures related to the use of outside professional services for special projects. Income Tax Expense. The Corporation's effective tax rate was 30.5% during 2000 compared to 35.1% during 1999. The decrease occurred as a result of certain tax reduction efforts initiated during 1998 and 1999. Comparison of Years Ended December 31, 1999 and December 31, 1998 Net Income. Net income was $4.4 million for the fiscal year ended December 31, 1999, an increase of $384,000 or 9.5% compared with the year ended December 31, 1998. The increase in earnings is mainly the result of a $1.7 million increase in net interest income, offset by an increase of $240,000 in the provision for possible loan losses, and a $807,000 increase in non-interest expenses. In addition, during 1998 the Corporation recorded $208,000 (after tax) income related to the adoption of Statement of Financial Accounting Standards No. 133, while no such income was recorded during 1999. Total Interest Income. For the year ended December 31, 1999, total interest income increased to $47.0 million compared to $43.6 million from the year ended December 31, 1998. The $3.4 million increase in interest income was mainly the result of a $52.5 increase in the average balance of loans receivable which occurred as a result of the purchase of $83.6 million of loans during the year, offset by net reductions in loans receivable of $35.6 million caused by repayments of existing loans having exceeded new loan originations. Interest income also increased due to a $26.8 million increase in the average balance of mortgage-backed securities. Offsetting these items which caused interest income to increase was the reduction caused by a $26.1 million decrease in the average balance of the Corporation's other interest-earning assets that were low yielding and short-term in nature. Also having a negative effect on the Corporation's 1999 interest income was the high level of loan prepayments early in the year, the result of relatively low market rates of interest that cause borrowers to seek to refinance their existing loans. Total Interest Expense. Total interest expense increased to $28.0 million for the year ended December 31, 1999. This increase is mainly the result of an $87.4 million increase in the average balance of FHLB advances and other borrowings. Offsetting this increase were the reductions attributable to a lower level of deposits at a lower average cost. Each of these elements was the result of a lowering of certificate of deposit balances caused by management's decision to price such deposits less aggressively. Allowance for Loan Losses. The allowance for loan losses was approximately $1.9 million at December 31, 1999 and 1998. Non-performing loans were approximately $1.4 million at December 31, 1999 compared to $1.6 million a year earlier. Charge-off's were $292,000 during 1999 compared to $180,000 during 1998. At December 31, 1999 the allowance for loan losses was 145.6% of non-performing loans as compared to 119.2% of non-performing loans at December 31, 1998. While management maintains Third Federal's 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 was $1.6 million during 1999 compared with $1.5 million during 1998. The 1999 gains included $350,000 related to the Corporation's real estate held for investment. During 1998, the Corporation recorded a total of $440,000 from the sales of loans and securities, while there were no such gains recorded during 1999. Non-interest Expense. Total non-interest expense increased by $807,000 during 1999 compared to 1998. This increase occurred mainly from $569,000 increase in employee compensation and benefits, the result of a new branch office, lending, sales and support staff associated with the expansion of the Corporation's retail banking facilities. In addition, during 1998, the Corporation ceased outsourcing its information technology needs, resulting in a shift of expenses out of data processing and into other non-interest expense categories. Income Tax Expense. The Corporation's effective tax rate was 35.1% during 1999 compared to 39.6% during 1998. The decrease occurred as a result of certain tax reduction efforts initiated during 1998. Liquidity and Capital Resources Liquidity. 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 sources 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. As of December 31, 2000, such borrowed funds totaled $244.9 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 was in compliance with all of its liquidity requirements at December 31, 2000. The amount of certificate accounts that are scheduled to mature during the twelve months ending December 31, 2001, is approximately $126.2 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, 2000, the Savings Bank had outstanding commitments to originate loans or fund unused lines of credit of $42.5 million. Funds required to fill these commitments will be derived primarily from current excess liquidity, deposit inflows or loan and security repayments. At December 31, 2000, the Savings Bank had no outstanding commitments to sell loans. Capital. 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, 2000, the Savings Bank met its three regulatory capital requirements. Management believes that under current regulations, the Savings Bank will continue to meet its minimum capital requirements in the foreseeable future. However, 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. ASSET AND LIABILITY MANAGEMENT The Savings Bank has established an Asset/Liability Management Committee (ALCO) for the purpose of monitoring and managing market risk, which is defined as the risk of loss of net interest income or economic value arising from changes in market rates and prices. The type of market risk which most affects the Corporation's financial instruments is interest rate risk, which is best quantified by measuring the change in net interest income that would occur under specific changes in interest rates. Substantially all of the Savings Bank's interest bearing assets and liabilities are exposed to interest rate risk. Loss of economic value is measured using reports generated by the OTS wherein the current market value of portfolio equity, or economic value, is measured at different hypothetical interest rate levels centered on the current term structure of interest rates. Gap reports are used to measure the amount of, and expected change during a one-year forward period, the net amount of assets and liabilities repricing, pre-paying and maturing during future periods. Because the Corporation's bank subsidiary is a savings bank and is regulated by the OTS, it has policies or procedures in place for measuring interest rate risk. These policies and procedures stipulate acceptable levels of interest rate risk. Interest Rate Risk Measurements. In order to measure interest rate risk internally, the Corporation uses computer programs which enable it to simulate the changes that will occur to the Savings Bank's net interest income ("NII") over several interest rate scenarios which are developed by "shocking" market interest rates (i.e. moving them immediately and permanently) up and down in 100 basis point increments from their current levels, and by "ramping" interest rates in such a manner as to adversely affect the Savings Bank's simulated net interest income. In addition to the level of interest rates, the most critical assumption regarding the estimated amount of the Savings Bank's NII is the expected prepayment speed of the Savings Bank's 1-4 family residential loans, and related mortgage backed securities, the book value of which comprises approximately 61% of the Corporation's total assets. For this prepayment speed assumption the Corporation uses median expected prepayment speeds which are obtained from a reliable third party source. The Corporation also incorporates into its simulations the effects of the interest rate caps and interest rate floors that are part of the majority of the Savings Bank's variable rate loans. The Corporation uses its business planning forecast as the basis for its NII simulations. Therefore, planned business activities are incorporated into the measurement horizon. Such activities include assumptions about substantial new loan and deposit volumes, the pricing of loan and deposit products, and other assumptions about future activities that may or may not be realized. In order to quantify the Corporation's NII exposure, the Corporation focuses on the simulation of net interest income in the "shocked up 200 basis points" scenario. The Corporation also uses the results of the OTS model's forecast of market value of portfolio equity under different interest rate scenarios. In addition, the Corporation prepares current period and one-year forward "gap" reports in order to show potential mis-matches of repricing or cash flows from the Corporation's current and projected interest rate sensitive assets and liabilities. ALCO evaluates the simulation results, the OTS model results and the "gap" reports and makes adjustments to the Savings Bank's planned activities if in its view there is a need to do so. At December 31, 2000, the change in net interest income over a one-year horizon using simulation methodologies was a $600,000 or a 3.1% decrease in expected net interest income. The market value of portfolio equity decreased by $16.4 million in the "up 200 basis points" interest rate scenario, and the Corporation estimated its one-year negative gap (i.e. liabilities repricing/maturing in excess of assets repricing/maturing) to be $57.3 million. However, these measurements are highly subjective in nature and are not intended to be a forecast interest income or economic value under any rate scenario for the year 2001 or for any other period. Impact of Inflation and Changing Prices The consolidated financial statements and related data have been prepared in accordance with accounting principles generally accepted in the United States of America 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. Impact of Future Accounting Pronouncements Future accounting pronouncements being presently discussed have not been formulated in detail sufficient to enable the Corporation to assess their impact on the future financial condition or results of operations of the Corporation. 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, 2000 and 1999, and the related consolidated statements of earnings, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 2000. 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 auditing standards generally accepted in the United States of America. 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 following consolidated financial statements present fairly, in all material respects, the consolidated financial position of TF Financial Corporation and Subsidiaries as of December 31, 2000 and 1999, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. /s/Grant Thornton LLP Philadelphia, Pennsylvania January 25, 2001 TF Financial Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
December 31, ASSETS 2000 1999 ------------ ------------ (in thousands) Cash and cash equivalents $ 10,618 $ 16,715 Certificates of deposit in other financial institutions 191 847 Investment securities available for sale - at fair value 18,865 21,930 Investment securities held to maturity (fair value of $61,919 and $64,538 as of December 31, 2000 and 1999, respectively) 63,461 66,760 Mortgage-backed securities available for sale - at fair value 97,914 132,515 Mortgage-backed securities held to maturity (fair value of $133,458 and $154,188 as of December 31, 2000 and 1999, respectively) 135,142 159,888 Loans receivable, net 361,806 287,979 Federal Home Loan Bank stock - at cost 13,042 13,042 Accrued interest receivable 5,523 4,958 Premises and equipment, net 9,410 9,177 Goodwill and other intangible assets, net 5,809 6,570 Other assets 1,516 1,493 --------- --------- TOTAL ASSETS $ 723,297 $ 721,874 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Deposits $ 400,851 $401,698 Advances from the Federal Home Loan Bank 244,859 248,533 Other borrowings 14,962 15,766 Advances from borrowers for taxes and insurance 1,158 1,198 Accrued interest payable 4,670 3,749 Other liabilities 3,688 2,483 --------- --------- Total liabilities 670,188 673,427 --------- --------- Stockholders' equity Preferred stock, no par value; 2,000,000 shares authorized at December 31, 2000 and 1999, none issued - - Common stock, $0.10 par value; 10,000,000 shares authorized, 5,290,000 shares issued, 2,491,454 and 2,576,160 shares outstanding at December 31, 2000 and 1999, respectively, net of shares in treasury: 2000 - 2,534,088; 1999 - 2,437,226 529 529 Retained earnings 51,604 48,760 Additional paid-in capital 52,161 52,076 Unearned ESOP shares (2,644) (2,766) Shares acquired by MSBP (4) (71) Treasury stock - at cost (48,173) (46,996) Accumulated other comprehensive loss (364) (3,085) --------- --------- Total stockholders' equity 53,109 48,447 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 723,297 $ 721,874 ========= =========
The accompanying notes are an integral part of these statements. 4 TF Financial Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF EARNINGS Year ended December 31,
2000 1999 1998 ------------ ------------ ------------ (in thousands, except per share data) Interest income Loans, including fees $ 23,756 $ 21,843 $ 18,657 Mortgage-backed securities 18,449 17,831 16,357 Investment securities 6,180 6,646 6,918 Interest-bearing deposits and other 323 702 1,647 --------- --------- --------- TOTAL INTEREST INCOME 48,708 47,022 43,579 --------- --------- --------- Interest expense Deposits 15,082 14,645 17,397 Borrowings 13,839 13,329 8,798 --------- --------- --------- TOTAL INTEREST EXPENSE 28,921 27,974 26,195 --------- --------- --------- NET INTEREST INCOME 19,787 19,048 17,384 Provision for possible loan losses 410 300 60 --------- --------- --------- NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE LOAN LOSSES 19,377 18,748 17,324 --------- --------- --------- Non-interest income Gain on sale of real estate held for investment - 350 - Gain on sale of investment and mortgage-backed securities 46 - 349 Gain on sale of loans 33 - 91 Service fees, charges and other operating income 1,353 1,239 1,095 --------- --------- --------- TOTAL NON-INTEREST INCOME 1,432 1,589 1,535 --------- --------- --------- Non-interest expense Employee compensation and benefits 7,339 6,770 6,201 Occupancy and equipment 2,392 2,055 1,854 Federal deposit insurance premium 85 258 275 Data processing 14 19 459 Professional fees 385 718 554 Advertising 711 320 333 Other operating 2,717 2,568 2,161 Amortization of goodwill and other intangible assets 761 821 885 --------- --------- --------- TOTAL NON-INTEREST EXPENSE 14,404 13,529 12,722 --------- --------- --------- INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE 6,405 6,808 6,137 Income taxes 1,923 2,386 2,307 --------- --------- --------- INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 4,482 4,422 3,830 Cumulative effect of accounting change - - 208 --------- --------- --------- NET INCOME $ 4,482 $ 4,422 $ 4,038 ========= ========= ========= Earnings per share - basic $ 1.76 $ 1.60 $ 1.39 ========= ========= ========= Earnings per share - diluted $ 1.71 $ 1.52 $ 1.26 ========= ========= =========
The accompanying notes are an integral part of these statements. 5 TF Financial Corporation and Subsidiaries CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY Years ended December 31, 2000, 1999 and 1998 (in thousands, except share data)
Accumu lated Common stock Addi- other ----------------------- tional Unearned Shares compre- Compre- Par paid-in ESOP acquired by Treasury Retained hensive hensive Shares value capital shares MSBP stock earnings (loss) Total income --------- -------- ------- ------- ------- -------- -------- ------- ------- ----------- Balance at January 1, 1998 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 expense - - 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 loss, 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 Allocation of ESOP shares 12,156 - 86 122 - - - - 208 Amortization of MSBP expense - - 33 - 397 - - - 430 Purchase of treasury stock (303,578) - - - - (4,800) - - (4,800) Cash dividends on common stock - - - - - - (1,359) - (1,359) Exercise of options 9,650 - - - - 190 (65) - 125 Other comprehensive loss, net of taxes - - - - - - - (3,239) (3,239) (3,239) Net income for the year ended December 31, 1999 - - - - - - 4,422 - 4,422 4,422 --------- --------- ------- ------- ------ -------- -------- ------- ------- ------- Comprehensive income $ 1,183 ======= Balance at December 31, 1999 2,576,160 529 52,076 (2,766) (71) (46,996) 48,760 (3,085) 48,447
(Continued) TF Financial Corporation and Subsidiaries CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY - CONTINUED Years ended December 31, 2000, 1999 and 1998 (in thousands, except share data)
Accumu lated Common stock Addi- other ----------------------- tional Unearned Shares compre- Compre- Par paid-in ESOP acquired by Treasury Retained hensive hensive Shares value capital shares MSBP stock earnings (loss) Total income --------- -------- ------- ------- ------- -------- -------- ------- ------- --------- Balance at December 31, 1999 2,576,160 $ 529 $52,076 $(2,766) $ (71) $(46,996) $48,760 $(3,085) $48,447 Allocation of ESOP shares 12,156 - 52 122 - - - - 174 Amortization of MSBP expense - - 33 - 67 - - - 100 Purchase of treasury stock (138,112) - - - - (1,972) - - (1,972) Cash dividends on common stock - - - - - - (1,326) - (1,326) Exercise of stock options 41,250 - - - - 795 (312) - 483 Other comprehensive income, net of reclassification adjustments and taxes - - - - - - - 2,721 2,721 $2,721 Net income for the year ended December 31, 2000 - - - - - - 4,482 - 4,482 4,482 --------- -------- ------- ------- ----- -------- ------- ------- ------- ------ Comprehensive income $7,203 ====== Balance at December 31, 2000 2,491,454 $ 529 $52,161 $(2,644) $ (4) $(48,173) $51,604 $ (364) $53,109 ========= ============= ======= ======= ===== ======== ======= ======= =======
The accompanying notes are an integral part of this statement. 7 TF Financial Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended December 31,
2000 1999 1998 ------------ ------------ ------------ (in thousands) OPERATING ACTIVITIES Net income $ 4,482 $ 4,422 $ 4,038 Adjustments to reconcile net income to net cash provided by operating activities Amortization of Mortgage loan servicing rights 13 14 16 Deferred loan origination fees (119) (75) (118) Premiums and discounts on investment securities, net 65 36 100 Premiums and discounts on mortgage-backed securities and loans, net (544) 607 705 Goodwill and other intangibles 761 821 677 Deferred income taxes (122) 99 (135) Provision for loan losses and provision for losses on real estate 459 306 60 Depreciation of premises and equipment 1,040 903 847 Stock-based benefit programs 274 637 748 Gain on sale of Investment securities (46) - (681) Real estate acquired through foreclosure (48) (5) (44) Sale of real estate held for investment - (350) - Mortgage loans (33) - (91) (Increase) decrease in Accrued interest receivable (565) (400) (601) Other assets (283) (210) 30 Increase (decrease) in Accrued interest payable 921 (417) 1,696 Other liabilities (122) (2,822) 1,338 ------------ --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 6,133 3,566 8,585 ----------- --------- --------- INVESTING ACTIVITIES Loan originations and principal payments on loans, net (2,831) 35,634 30,983 Principal repayments on mortgage-backed securities held to maturity 24,827 56,448 60,899 Principal repayments on mortgage-backed securities available for sale 11,925 20,258 19,292 Purchases of loans (72,990) (83,643) (40,708) Proceeds from loan sales 1,669 - 19,496 Purchases and maturities of certificates of deposit in other financial institutions, net 656 1,391 499 Purchases of investment and mortgage-backed securities held to maturity (96,595) (189,650) (293,959) Purchase of investment securities and mortgage-backed securities available for sale (11,508) (108,882) (251,164)
(Continued) 8 TF Financial Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED Year ended December 31,
2000 1999 1998 ------------ ------------ ------------ (in thousands) Purchase and maturities of securities purchased under agreement to resell, net $ - $ - $ 10,000 Proceeds from maturities of investment securities held to maturity 99,726 174,104 123,842 Proceeds from maturities of investment securities available for sale - 6,000 223,376 Proceeds from the sale of investment and mortgage-backed securities available for sale 41,892 3,145 37,373 Purchase of Federal Home Loan Bank stock - (3,874) (4,250) Sale (purchase) of real estate held for investment - 2,698 (2,348) Proceeds from sales of real estate acquired through foreclosure 452 195 246 Purchase of premises and equipment (1,273) (1,063) (1,975) -------- --------- -------- NET CASH USED IN INVESTING ACTIVITIES (4,050) (87,239) (68,398) -------- --------- -------- FINANCING ACTIVITIES Net decrease in demand deposit/NOW accounts, passbook savings accounts and certificates of deposit (847) (37,215) (11,516) Net increase (decrease) in advances from Federal Home Loan Bank (3,674) 85,174 75,000 Net increase (decrease) in securities sold under agreements to repurchase (804) 15,766 - Net decrease in advances from borrowers for taxes and insurance (40) (6) (387) Treasury stock acquired (1,972) (4,800) (941) Exercise of stock options 483 125 122 Common stock dividends paid (1,326) (1,359) (1,387) -------- --------- -------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (8,180) 57,685 60,891 -------- --------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (6,097) (25,988) 1,078 Cash and cash equivalents at beginning of year 16,715 42,703 41,625 -------- --------- -------- Cash and cash equivalents at end of year $ 10,618 $ 16,715 $ 42,703 ======== ========= ======== Supplemental disclosure of cash flow information Cash paid for Interest on deposits and advances $ 28,122 $ 28,391 $ 24,498 Income taxes $ 1,675 $ 1,940 $ 2,651 Non-cash transactions Transfers from loans to real estate acquired through foreclosure $ 127 $ 434 $ 159
The accompanying notes are an integral part of these statements. 9 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 and 1999 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 that conducts operations from its main office in Newtown, Pennsylvania, eleven full-service branch offices located in Philadelphia and Bucks counties, Pennsylvania, and four 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, those regulatory authorities periodically examine it. 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, and its wholly owned subsidiary, Third Delaware Corporation, TF Investments, Teragon Financial Corporation 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 accounting principles generally accepted in the United States of America (US GAAP) and predominant practices within the banking industry. The preparation of financial statements in conformity with US GAAP 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. 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. The Corporation classifies 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 presently engage in security trading activities. (Continued) 10 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2000 and 1999 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 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. The Corporation has the ability and it is management's intention to hold such assets to maturity. In June 1998, the SFAS No. 133, ("SFAS 133") "Accounting for Derivative Instruments and Hedging Activities" as amended in June, 1999 by SFAS 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133," and in June, 2000, by SFAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," (collectively SFAS 133). SFAS 133 requires that entities recognize all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. Under SFAS 133 an entity may designate a derivative as a hedge of exposure to either changes in: (a) fair value of a recognized asset or liability or firm commitment, (b) cash flows of a recognized or forecasted transaction, or (c) foreign currencies of a net investment in foreign operations, firm commitments, available-for-sale securities or a forecasted transaction. Depending upon the effectiveness of the hedge and/or the transaction being hedged, any changes in the fair value of the derivative instrument is either recognized in earnings in the current year, deferred to future periods, or recognized in other comprehensive income. Changes in the fair value of all derivative instruments not recognized as hedge accounting are recognized in current year earnings. 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. Statement of Financial Accounting Standards No. 119 "Disclosure About Derivative Financial Instruments and Fair Value of Financial Instruments" ("SFAS 119") requires disclosures about financial instruments, which are defined as futures, forwards, swap and option contracts and other financial instruments with similar characteristics. On balance sheet receivables and payables are excluded from this definition. The Company did not hold any derivative financial instruments as defined by SFAS 119 at December 31, 2000, 1999 or 1998. 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-off's (net of recoveries). 11 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2000 and 1999 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued The Bank provides an allowance for accrued but uncollected interest when the loan becomes more than ninety days past due or is identified as impaired. 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 no longer impaired, 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. 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 identifies 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. 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. 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. 6. Goodwill and Other Intangible Assets ------------------------------------ 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. Amortization expense for 2000, 1999 and 1998 was $761,000, $819,000 and $677,000, respectively. The Corporation accounts for impairment of assets in accordance with 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. No impaired assets existed at December 31, 2000 and 1999. (Continued) 12 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2000 and 1999 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 7. Transfers of Financial Assets ----------------------------- The Corporation accounted for the transfer of financial assets in accordance with 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. In September 2000, the Financial Accounting Standards Board issued SFAS No. 140 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," replacing SFAS No. 125. This new statement revises the standard for accounting and reporting for transfers and servicing of financial assets and extinguishments of liabilities. The new standard is based on consistent application of a financial-components approach that recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered and derecognizes liabilities when extinguished. The standard provides consistent guidelines for distinguishing transfers of financial assets from transfers that are secured borrowings. SFAS 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. However, for recognition and reclassification of collateral and for disclosures relating to securitizations transactions and collateral this statement is effective for fiscal years ending after December 15, 2000 with earlier application not allowed and is to be applied prospectively. Management does not expect this new standard to have a material impact upon the Company's consolidated financial statements. 8. Benefit Plans ------------- The Corporation has established an Employee Stock Ownership Plan (ESOP) covering eligible employees with six months 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 directors and key personnel. (Continued) 13 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2000 and 1999 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued The Corporation accounts for stock-based compensation in accordance with 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. The corporation follows 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. 9. 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. 10. Advertising Costs ----------------- The Corporation expenses advertising costs as incurred. 11. Earnings Per Share ------------------ The Corporation follows 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. (Continued) 14 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2000 and 1999 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 12. 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. The Corporation's other comprehensive income consists of net unrealized gains and losses on investment securities available for sale. Comprehensive income for 2000, 1999 and 1998 was $7,203,000, $1,183,000, and $4,023,000, respectively. The components of other comprehensive income (loss) are as follows:
December 31, 2000 ----------------------------------------------- Tax Before tax (expense) Net of tax amount benefit amount ----------- ------------- ----------- (in thousands) Unrealized gains on securities Unrealized holding gains arising during period $ 4,165 $ (1,414) $ 2,751 Reclassification adjustment for gains realized in net income (46) 16 (30) --------- ---------- -------- Other comprehensive income, net $ 4,119 $ (1,398) $ 2,721 ======== ========== ========
December 31, 1999 ----------------------------------------------- Tax Before tax (expense) Net of tax amount benefit amount ----------- ------------- ----------- (in thousands) Unrealized losses on securities Unrealized holding losses arising during period $ (4,927) $ 1,688 $ (3,239) --------- --------- --------- Other comprehensive loss, net $ (4,927) $ 1,688 $ (3,239) ========= ========= =========
December 31, 1998 ----------------------------------------------- Tax Before tax (expense) Net of tax amount benefit amount ----------- ------------- ----------- (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) 15 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2000 and 1999 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 13. Segment Reporting ------------------ On January 1, 1998, the Corporation adopted SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. SFAS 131 established standards for the way public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in subsequent interim financial reports issued to shareholders. It also establishes standards for related disclosure about products and services, geographic areas, and major customers. The statement requires that a public business enterprise report financial and descriptive information about its reportable operating segments. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and assess performance. The statement also requires that public enterprises report a measure of segment profit or loss, certain specific revenue and expense items and segment assets. It also requires that information be reported about revenues derived from the enterprises' products or services, or about the countries in which the enterprises earn revenues and holds assets, and about major customers, regardless of whether that information is used in making operating decisions. The Corporation has one reportable segment, "Community Banking." All of the Corporation's activities are interrelated, and each activity is dependent and assessed based on how each of the activities of the Corporation supports the others. For example, commercial lending is dependent upon the ability of the Bank to fund itself with retail deposits and other borrowings and to manage interest rate and credit risk. This situation is also similar for consumer and residential mortgage lending. Accordingly, all significant operating decisions are based upon analysis of the Corporation as one operating segment or unit. 14. 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, ------------------------------- 2000 1999 ------------ ------------- (in thousands) Cash and due from banks $ 8,744 $ 11,578 Interest-bearing deposits in other financial institutions 1,774 5,037 Federal funds sold 100 100 ---------- --------- $ 10,618 $ 16,715 ========== =========
(Continued) 16 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2000 and 1999 NOTE C - SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL The Bank enters into purchases of securities under agreements to resell substantially identical securities. There were no outstanding securities purchased under agreements to resell at December 31, 2000 or 1999. 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. Securities purchased under agreements to resell averaged $0 and $1.4 million during 2000 and 1999, respectively, and the maximum amounts outstanding at any month-end during 2000 and 1999 were $0 and $10.3 million, respectively. NOTE D - INVESTMENT AND MORTGAGE-BACKED SECURITIES The amortized cost, gross unrealized gains and losses, and fair value of the Corporation's investment and mortgage-backed securities at December 31, 2000 and 1999, are summarized as follows: December 31, 2000 ---------------------------------------------------------------- Gross Gross Amortized unrealized unrealized Fair cost gains losses value --------------- ------------- ------------ ----------- (in thousands) Investment securities held to maturity U.S. Government and federal agencies $ 52,499 $ 11 $ (1,494) $ 51,016 State and political subdivisions 5,958 133 (112) 5,979 Corporate debt securities 5,004 - (80) 4,924 ---------- ------------ -------------- ------------ 63,461 144 (1,686) 61,919 Mortgage-backed securities held to maturity 135,142 339 (2,023) 133,458 ---------- ------------ -------------- ------------ $ 198,603 $ 483 $ (3,709) $ 195,377 ========== ============ ============== ============ Investment securities available for sale U.S. Government and federal agencies $ 12,003 $ - $ (36) $ 11,967 Corporate debt securities 6,034 - (30) 6,004 Mutual funds 500 - (6) 494 Other 500 - (100) 400 ---------- ------------ -------------- ------------ 19,037 - (172) 18,865 Mortgage-backed securities available for sale 98,298 173 (557) 97,914 ---------- ------------ -------------- ------------ $ 117,335 $ 173 $ (729) $ 116,779 ========== ============ ============== ============
(Continued) 17 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2000 and 1999 NOTE D - INVESTMENT AND MORTGAGE-BACKED SECURITIES - Continued
December 31, 1999 -------------------------------------------------------------- Gross Gross Amortized unrealized unrealized Fair cost gains losses value ---------- ------------- ------------ ----------- (in thousands) Investment securities held to maturity U.S. Government and federal agencies $ 57,455 $ 12 $ (1,967) $ 55,500 State and political subdivisions 4,284 22 (138) 4,168 Corporate debt securities 5,021 - (151) 4,870 --------- ---------- ---------- --------- 66,760 34 (2,256) 64,538 Mortgage-backed securities held to maturity 159,888 159 (5,859) 154,188 --------- ---------- ---------- --------- $ 226,648 $ 193 $ (8,115) $ 218,726 ========= ========== ========== ========= Investment securities available for sale U.S. Government and federal agencies $ 11,994 $ - $ (436) $ 11,558 State and political subdivisions 3,783 - (87) 3,696 Corporate debt securities 6,053 - (220) 5,833 Mutual funds 500 - (7) 493 Other 500 - (150) 350 ---------- ---------- ---------- --------- 22,830 - (900) 21,930 Mortgage-backed securities available for sale 136,291 16 (3,792) 132,515 ---------- ---------- ---------- --------- $ 159,121 $ 16 $ (4,692) $ 154,445 ========== ========== ========== =========
Gross realized gains were $151,000, $-0- and $379,000 for the years ended December 31, 2000, 1999 and 1998, respectively. These gains resulted from the sale of investment and mortgage-backed securities of $18.9 million, $3.1 million and $31.5 million for the years ended December 31, 2000, 1999 and 1998, respectively. Gross realized losses were $105,000, $-0- and $30,000 for the years ended December 31, 2000, 1999 and 1998, respectively. These losses resulted from the sale of investment and mortgage-backed securities of $23.0 million, $-0- and $5.9 million for the years ended December 31, 2000, 1999 and 1998, respectively. (Continued) 18 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2000 and 1999 NOTE D - INVESTMENT AND MORTGAGE-BACKED SECURITIES - Continued The amortized cost and fair value of investment and mortgage-backed securities, by contractual maturity, are shown below.
December 31, 2000 ------------------------------------------------------------------- Held to maturity Available for sale -------------------------------- -------------------------------- Amortized Fair Amortized Fair cost value cost value --------------- -------------- -------------- -------------- (in thousands) Investment securities Due in one year or less $ 5,004 $ 4,924 $ 1,003 $ 897 Due after one year through five years 45,329 44,044 16,034 15,969 Due after five years through 10 years 10,859 10,736 2,000 1,999 Due after 10 years 2,269 2,215 - - ---------- --------- ---------- ----------- 63,461 61,919 19,037 18,865 Mortgage-backed securities 135,142 133,458 98,298 97,914 ---------- --------- ---------- ----------- $ 198,603 $ 195,377 $ 117,335 $ 116,779 ========== ========= ========== ==========
The amortized cost, gross unrealized gains and losses, and estimated market value of mortgage-backed securities, by issuer, are summarized as follows:
December 31, 2000 ------------------------------------------------------------------ Gross Gross Amortized unrealized unrealized Fair cost gains losses value --------------- ------------- ------------ ------------- (in thousands) Mortgage-backed securities held to maturity FHLMC certificates $ 45,971 $ 251 $ (420) $ 45,802 FNMA certificates 20,756 26 (378) 20,404 GNMA certificates 41,090 48 (620) 40,518 Real estate mortgage investment conduit 27,043 14 (603) 26,454 Other mortgage-backed securities 282 - (2) 280 ---------- -------- ----------- ---------- $ 135,142 $ 339 $ (2,023) $ 133,458 ========== ======== =========== ========== Mortgage-backed securities available for sale FHLMC certificates $ 1,419 $ 17 $ (5) $ 1,431 FNMA certificates 26,097 16 (434) 25,679 GNMA certificates 7,593 - (32) 7,561 Real estate mortgage investment conduit 63,189 140 (86) 63,243 ---------- -------- ---------- ---------- $ 98,298 $ 173 $ (557) $ 97,914 ========== ======== =========== ==========
(Continued) 19 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2000 and 1999 NOTE D - INVESTMENT AND MORTGAGE-BACKED SECURITIES - Continued
December 31, 1999 ------------------------------------------------------------------ Gross Gross Amortized unrealized unrealized Fair cost gains losses value --------------- ------------- ------------ ------------- (in thousands) Mortgage-backed securities held to maturity FHLMC certificates $ 52,625 $ 94 $ (1,742) $ 50,977 FNMA certificates 24,983 28 (1,066) 23,945 GNMA certificates 46,651 37 (2,011) 44,677 Real estate mortgage investment conduit 35,271 - (1,036) 34,235 Other mortgage-backed securities 358 - (4) 354 ---------- ------------ ---------- ---------- $ 159,888 $ 159 $ (5,859) $ 154,188 ========== ============ ========== ========== Mortgage-backed securities available for sale FHLMC certificates $ 7,331 $ 5 $ (103) $ 7,233 FNMA certificates 29,780 10 (1,827) 27,963 GNMA certificates 8,759 - (421) 8,338 Real estate mortgage investment conduit 90,421 1 (1,441) 88,981 ---------- ------------ --------- ---------- $ 136,291 $ 16 $ (3,792) $ 132,515 ========== ============ ========= ==========
Investment securities having an aggregate amortized cost of approximately $21.0 million and $5.0 million were pledged to secure public deposits at December 31, 2000 and 1999, 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, ------------------------------- 2000 1999 ------------ ------------- (in thousands) First mortgage loans (principally conventional) Secured by one-to-four family residences $ 211,065 $ 168,057 Secured by other non-residential properties 77,486 65,346 Construction loans 13,950 12,074 ---------- ---------- 302,501 245,477 Less net deferred loan origination fees and unamortized premiums (1,430) (99) ---------- ----------- Total first mortgage loans $ 301,071 $ 245,378 ========== ==========
(Continued) 20 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2000 and 1999 NOTE E - LOANS RECEIVABLE - Continued
December 31, ------------------------------- 2000 1999 ------------ ------------- (in thousands) Consumer and other loans Commercial $ 14,630 $ 9,339 Home equity and second mortgage 20,887 16,816 Leases 3,493 3,195 Other 23,006 14,945 ---------- ---------- 62,016 44,295 Unearned premiums 433 223 ---------- ---------- Total consumer and other loans 62,449 44,518 Less allowance for loan losses (1,714) (1,917) ---------- ---------- Total loans receivable $ 361,806 $ 287,979 ========== ==========
Activity in the allowance for loan losses is summarized as follows:
December 31, ---------------------------------------------- 2000 1999 1998 ------------ ------------ ----------- (in thousands) Balance at beginning of year $ 1,917 $ 1,909 $ 2,029 Provision charged to income 410 300 60 Charge-off's, net (613) (292) (180) ---------- ---------- ---------- Balance at end of year $ 1,714 $ 1,917 $ 1,909 ========= ========== ==========
Non-performing loans, which include non-accrual loans for which the accrual of interest has been discontinued and loan balances past due over 90 days that are not on a non-accrual status but that management expects will eventually be paid in full, totaled approximately $1.5 million and $1.4 million at December 31, 2000, and 1999, respectively. Interest income that would have been recorded under the original terms of such loans totaled approximately $112,000, $70,000 and $43,000 for the years ended December 31, 2000, 1999 and 1998, respectively. No interest income has been recognized on non-accrual loans for any of the periods presented. (Continued) 21 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2000 and 1999 NOTE E - LOANS RECEIVABLE - Continued The Bank has no concentration of loans to borrowers engaged in similar activities which exceeded 10% of loans at December 31, 2000 and 1999. 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 $1,290,000 and $402,000 at December 31, 2000 and 1999, respectively. For the year ended December 31, 2000, principal repayments of approximately $27,000 were received and funds of $915,000 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, ----------------------------- 2000 1999 ------------ ----------- (in thousands) Mortgage loan servicing portfolios FHLMC $ 9,209 $ 11,944 Other investors 4,894 3,933 ---------- --------- $ 14,103 $ 15,877 ========== ======== Custodial balances maintained in connection with the foregoing loan servicing totaled approximately $240,000 and $437,000 at December 31, 2000 and 1999, respectively. The net servicing revenue on mortgage loans serviced for others is immaterial for all periods presented. (Continued) 22 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2000 and 1999 NOTE G - PREMISES AND EQUIPMENT Premises and equipment are summarized as follows:
December 31, Estimated ---------------------------------- useful lives 2000 1999 ------------ ------------ ------------ (in thousands) Buildings 30 years $ 5,747 $ 5,723 Leasehold improvements 5 years 1,263 1,004 Furniture, fixtures and equipment 3-7 years 7,849 7,077 ----------- ---------- 14,859 13,804 Less accumulated depreciation 9,166 8,128 ----------- ---------- 5,693 5,676 Land 3,717 3,501 ----------- ---------- $ 9,410 $ 9,177 ========== ==========
NOTE H - DEPOSITS Deposits are summarized as follows:
December 31, ------------------------------ Deposit type 2000 1999 ------------------------------------------------- ------------ ------------ (in thousands) Demand $ 12,096 $ 7,025 NOW 35,127 37,926 Money Market 44,325 40,799 Passbook savings 155,699 159,370 ------- ---------- Total demand, transaction and passbook deposits 247,247 245,120 Certificates of deposit 153,604 156,578 ---------- ---------- $ 400,851 $ 401,698 ========== ==========
The aggregate amount of certificates of deposit with a minimum denomination of $100,000 was approximately $17.5 million and $12.2 million at December 31, 2000 and 1999, respectively. At December 31, 2000, scheduled maturities of certificates of deposit are as follows: Year ending December 31, ------------------------------------------------------------------------ 2001 2002 2003 2004 2005 Thereafter Total -------- -------- -------- -------- -------- ---------- --------- (in thousands) $126,205 $ 16,421 $ 7,514 $ 1,576 $ 1,559 $ 329 $ 153,604 ======== ======== ======== ======== ======== --======== ========= (Continued) 23 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2000 and 1999 NOTE I - ADVANCES FROM THE FEDERAL HOME LOAN BANK AND OTHER BORROWINGS Advances from the Federal Home Loan Bank consist of the following: December 31, ------------------------------------------------------- 2000 1999 --------------------------- ------------------------- Contractual Weighted Weighted maturity date Amount average rate Amount average rate ------------- ---------- ------------ -------- ------------ (in thousands) 2000 $ - -% $ 35,174 5.53% 2001 47,500 6.75 5,000 6.52 2002 5,000 6.05 10,000 4.85 2003 12,000 6.18 20,000 5.60 2004 52,000 5.23 45,000 5.03 2005 5,000 6.58 15,000 5.35 2006 25,000 5.44 20,000 5.15 2008 70,000 5.62 70,000 5.62 2009 25,000 4.86 25,000 4.86 2010 3,359 6.70 3,359 6.70 ---------- -------- $ 244,859 5.73 $248,533 5.37 ========== ======== 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 $13.5 million at December 31, 2000. Other borrowings comprise repurchase agreements entered into with a primary broker-dealer. These agreements totaled $15.0 million and $15.8 million, matured within one year at each year end, were at interest rates of 6.61% and 5.49%, and were collateralized by investment and mortgage-backed securities of $20.8 and $19.1 million as of December 31, 2000 and 1999, respectively. NOTE J - BENEFIT PLANS The Bank maintains a 401(k) profit-sharing plan for eligible employees. Participants may contribute up to 15% of pretax eligible compensation. The Bank makes discretionary matching contributions equal to 100% of the first $600 deferred. Contributions to the 401(k) plan totaled $48,000, $40,000 and $43,000 in 2000, 1999 and 1998, respectively. (Continued) 24 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2000 and 1999 NOTE J - BENEFIT PLANS - Continued 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, -------------------- 2000 1999 ------- ------- (in thousands) Change in benefit obligation Benefit obligation at beginning of year $ 2,898 $ 3,132 Service cost 68 46 Interest cost 210 203 Actuarial gain (loss) (81) (394) Benefits paid (78) (89) ------- ------- Benefits obligation at end of year $ 3,017 $ 2,898 ======= ======= Change in plan assets Fair value of plan assets at beginning of year $ 2,382 $ 1,961 Actual return on plan assets 61 41 Employer contribution 348 469 Benefits paid (78) (89) ------- ------- Fair value of plan assets at end of year $ 2,713 $ 2,382 ======= ======= Funded status Unfunded accumulated benefits $ (304) $ (516) Unrecognized transition obligation 20 25 Unrecognized net actuarial loss (gain) 3 (59) Unrecognized prior service cost 424 305 ------- ------- Prepaid (accrued) benefit cost $ 143 $ (245) ======= ======= (Continued) 25 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2000 and 1999 NOTE J - BENEFIT PLANS - Continued
2000 1999 1998 ------------ ------------ ------------ Weighted-average assumptions as of December 31 Discount rate 7.50% 6.50% 7.25% Expected return on plan assets 8.00 8.00 8.00 Rate of compensation increase 4.00 4.00 4.00 Components of net periodic benefit cost Service cost $ 68 $ 47 $ 62 Interest cost 210 203 201 Expected return on plan assets (204) (176) (157) Amortization of prior service cost 65 65 52 -------- --------- --------- Net periodic benefit cost $ 139 $ 139 $ 158 ======== ========= =========
The Corporation also maintains the following benefit plans: 1. Employee Stock Ownership Plan ----------------------------- 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 $112,000, $151,000 and $288,000 in 2000, 1999 and 1998, respectively. 2000 1999 ---------- ---------- Allocated shares 124,700 122,000 Unreleased shares 264,400 276,600 ---------- ---------- Total ESOP shares 389,100 398,600 ========== ========== Fair value of unreleased shares $4,428,700 $3,665,000 ========== ========== (Continued) 26 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2000 and 1999 NOTE J - BENEFIT PLANS - Continued 2. Management Stock Bonus Plan --------------------------- The Board of Directors also adopted a MSBP that 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 directors and key 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, 1998, 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; $100,000, $430,000 and $460,000 was amortized to expense in 2000, 1999 and 1998, respectively. At December 31, 2000, 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. 2000 1999 1998 --------- ---------- ---------- Net income As reported $ 4,482 $ 4,422 $ 4,038 Pro forma $ 4,306 $ 4,243 $ 3,885 Basic earnings per share As reported $ 1.76 $ 1.60 $ 1.39 Pro forma $ 1.70 $ 1.53 $ 1.34 Diluted earnings per share As reported $ 1.71 $ 1.52 $ 1.26 Pro forma $ 1.65 $ 1.46 $ 1.21 (Continued) 27 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2000 and 1999 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 2000, 1999 and 1998, respectively: a dividend yield of 3.20%, 3.73% and 0%; expected volatility of 30%, 30% and 34%, risk-free interest rate of 6.20%, 5.87% and 5.25%, and expected lives of six, six and five years for all options. A summary of the status of the Corporation's fixed stock option plans as of December 31, 2000, and changes for each of the years in the three-year period then ended was as follows:
2000 1999 1998 --------------------- -------------------- ---------------------- Weighted Weighted Weighted average average average Number exercise Number exercise Number exercise of price per of price per of price per shares share share shares shares share --------- ---------- -------- ----------- ----------- Outstanding at beginning of year 697,867 $13.26 696,019 $13.24 695,875 $13.08 Options granted 45,930 13.82 17,515 16.31 13,325 22.46 Options exercised (41,250) 11.72 (9,650) 13.00 (10,486) 12.85 Options forfeited (42,737) 15.62 (6,017) 20.24 (2,695) 15.78 --------- ------- ------- Outstanding at end of year 659,810 $13.22 697,867 $13.26 696,019 $13.24 ========= ======= ======= Weighted average fair value of options granted during year $ 3.73 $ 4.57 $ 8.72
The following table summarizes information about stock options outstanding at December 31, 2000:
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 2000 price life (years) 2000 price -------------------- -------------- ------------ -------------- --------------- ---------- $11.50-14.125 437,346 4.16 years 11.64 407,846 $ 11.50 $14.50-18.00 207,139 6.24 years 15.89 134,011 15.84 $19.00-28.00 15,325 7.75 years 22.33 5,436 22.56
(Continued) 28 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2000 and 1999 NOTE J - BENEFIT PLANS - Continued Total compensation cost recognized for stock-based employee compensation awards was approximately $110,000, $117,000 and $116,000 for 2000, 1999 and 1998, respectively. NOTE K - INCOME TAXES The components of income tax expense are summarized as follows: Year ended December 31, ---------------------------- 2000 1999 1998 ------- ------- ------- (in thousands) Federal Current $ 1,875 $ 2,254 $ 2,162 Change in lieu of income tax relating to stock compensation 170 - - Deferred (122) 99 (152) ------- ------- ------- 1,923 2,353 2,010 State and local - current - 33 297 ------- ------- ------- Continuing operations 2,386 2,307 Cumulative effect of accounting change - - 125 ------- ------- ------- Income tax provision $ 1,923 $ 2,386 $ 2,432 ======= ======= ======= The Corporation's effective income tax rate was different than the statutory federal income tax rate as follows: Year ended December 31, ------------------------------- 2000 1999 1998 ------ ------ ------ Statutory federal income tax 34.0% 34.0% 34.0% Increase (decrease) resulting from Tax-exempt income (6.7) (5.1) (3.6) State tax, net of federal benefit 0.0 0.3 3.1 Other 3.2 5.9 6.1 ------ ------ ------ 30.5% 35.1% 39.6% ====== ====== ====== (Continued) 29 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2000 and 1999 NOTE K - INCOME TAXES - Continued Deferred taxes are included in the accompanying consolidated statements of financial position at December 31, 2000 and 1999, 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, 2000 and 1999. The Corporation's net deferred tax asset at December 31, 2000 and 1999, was composed of the following: December 31, ----------------- 2000 1999 ------ ------ (in thousands) Deferred tax assets Deferred loan origination fees $ 59 $ 83 Deferred compensation 288 288 Allowance for loan losses, net 494 202 Amortization 334 290 Unrealized loss on securities available for sale 192 1,590 Other 1 - ------ ------ 1,368 2,453 ------ ------ Deferred tax liabilities Accrued pension expense 582 391 ------ ------ 582 391 ------ ------ Deferred tax asset $ 786 $2,062 ====== ====== The Corporation files its income tax returns on the basis of a fiscal tax year ending June 30. 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 six-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. 30 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2000 and 1999 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, 2000. As of December 31, 2000, management believes that the Bank met all capital adequacy requirements to which it was subject.
Regulatory capital ------------------------------------------------------------------------ December 31, 2000 ------------------------------------------------------------------------ Tangible Core Risk-based capital Percent capital Percent capital Percent ------- ------- -------- -------- ---------- --------- (dollars in thousands) Capital under generally accepted accounting principles $49,976 6.95% $49,976 6.95% $49,976 12.96% Unrealized (loss) on certain available-for-sale securities (309) (0.04) (309) (0.04) (309) (0.08) Goodwill and other intangible assets (5,809) (0.81) (5,809) (0.81) (5,809) (1.51) Additional capital items General valuation allowances - limited - - - - 1,714 0.44 ------- ----- ------- ----- ------- ----- Regulatory capital computed 43,858 6.10 43,858 6.10 45,572 11.81 Minimum capital requirement 10,792 1.50 28,778 4.00 30,836 8.00 ------- ----- ------- ----- ------- ----- Regulatory capital - excess $33,066 4.60% $15,080 2.10% $14,736 3.81% ======= ===== ======= ===== ======= =====
(Continued) 31 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2000 and 1999 NOTE L - REGULATORY MATTERS - Continued
Regulatory capital ------------------------------------------------------------------------ December 31, 2000 ------------------------------------------------------------------------ Tangible Core Risk-based capital Percent capital Percent capital Percent ------- ------- -------- -------- ---------- --------- (dollars in thousands) Capital under generally accepted accounting principles $45,246 6.26% $45,246 6.26% $45,246 13.33% Unrealized (loss) on certain available-for-sale securities 2,987 0.41 2,987 0.41 2,987 0.88 Goodwill and other intangible assets (6,570) (0.91) (6,570) (0.91) (6,570) (1.94) Additional capital items General valuation allowances - limited - - - - 1,917 0.56 ------- ----- ------- ----- ------- ----- Regulatory capital computed 41,663 5.76 41,663 5.76 43,580 12.83 Minimum capital requirement 10,843 1.50 28,916 4.00 27,156 8.00 ------- ----- ------- ----- ------- ----- Regulatory capital - excess $30,820 4.26% $12,747 1.76% $16,424 4.83% ======= ===== ======= ===== ======= =====
At December 31, 2000, 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. There are no conditions or events that have occurred that management believes have changed the Bank's classification as a "well-capitalized" institution. 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. (Continued) 32 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2000 and 1999 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. These financial instruments are primarily commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the consolidated financial statements when they become receivable or 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. 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 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 amounts of which represent credit risk, are as follows: December 31, ------------------------------ 2000 1999 ------------ ------------ (in thousands) Commitments to extend credit $ 42,455 $ 54,778 Standby letters of credit 3,656 3,687 Loans sold with recourse 268 278 ---------- ---------- $ 46,379 $ 58,743 ========== ========== 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 borrower. 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. 33 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2000 and 1999 NOTE N - COMMITMENTS AND CONTINGENCIES The Bank had no commitments to sell mortgage loans to investors at December 31, 2000 and 1999. 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 $343,000, $298,000 and $315,000 for the years ended December 31, 2000, 1999 and 1998, respectively. The minimum annual rental commitments of the Bank under all non-cancelable leases with terms of one year or more are as follows: Year ending December 31, ------------------------ 2001 $ 268,555 2002 142,540 2003 130,495 2004 109,255 2005 67,967 Thereafter 115,425 ---------- $ 834,237 ========== The Bank has a contract with a third-party computer processor 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, 2000, was approximately $2,003,000. 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 that 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. 34 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2000 and 1999 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, ------------------------------------------------ 2000 1999 ----------------------- ----------------------- Fair Carrying Fair Carrying value value value value ---------- ---------- --------- ---------- (in thousands) Cash and cash equivalents $ 10,618 $ 10,618 $ 16,715 $ 16,715 Investment securities 80,784 82,326 86,468 88,690 Mortgage-backed securities 231,372 233,056 286,703 292,403
(Continued) 35 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2000 and 1999 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, ------------------------------------------------ 2000 1999 ----------------------- ----------------------- Estimated Estimated Fair Carrying Fair Carrying value value value value ---------- ---------- --------- ---------- (in thousands) Assets Interest-bearing deposits with banks $ 190 $ 191 $ 845 $ 847 Liabilities Deposits with stated maturities 153,296 153,604 155,952 156,578 Borrowings with stated maturities Short-term (due within 6 months) 62,486 62,462 40,937 40,940 Long-term 198,493 197,359 216,737 223,359
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, ------------------------------------------------ 2000 1999 ----------------------- ----------------------- Estimated Estimated Fair Carrying Fair Carrying value value value value ---------- ---------- --------- ---------- (in thousands) Deposits with no stated maturities $ 247,247 $ 247,247 $ 245,120 $ 245,120 ========== ========= ========== ==========
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, ------------------------------------------------ 2000 1999 ----------------------- ----------------------- Estimated Estimated Fair Carrying Fair Carrying value value value value ---------- ---------- --------- ---------- (in thousands) Net loans $ 367,667 $ 361,806 $ 285,800 $ 287,979 ========= ========= ========= =========
(Continued) 36 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2000 and 1999 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 totaling approximately $46.4 million and $58.7 million at December 31, 2000 and 1999, 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, ------------------------ 2000 1999 1998 ------ ------ ------ (in thousands) Service fees, charges and other operating income Loan servicing fees $ 329 $ 358 $ 317 Late charge income 126 74 85 Deposit service charges 548 548 435 Other income 350 259 258 ------ ------ ------ $1,353 $1,239 $1,095 ====== ====== ====== Other operating expense Employee education $ 37 $ 36 $ 34 Insurance and surety bond 120 127 142 Office supplies 202 202 233 Loan expense 342 238 207 Loan servicing fees 258 284 140 Postage 140 137 163 Telephone 242 187 173 Service charges on bank accounts 423 385 280 Supervisory examination fees 138 139 140 Other expenses 815 833 649 ------ ------ ------ $2,717 $2,568 $2,161 ====== ====== ====== 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 Corporation earlier redeems the Rights. (Continued) 37 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2000 and 1999 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 tables illustrate the reconciliation of the numerators and denominators of the basic and diluted earnings per share computations (dollars in thousands, except per share data):
Year ended December 31, 2000 ----------------------------------------------- Weighted average Income shares Per share (numerator) (denominator) amount ----------- ------------- ------------ Basic earnings per share Income available to common stockholders $ 4,482 2,540,242 $ 1.76 ======== Effect of dilutive securities Stock options - 82,657 --------- ----------- Diluted earnings per share Income available to common stockholders plus effect of dilutive securities $ 4,482 2,622,899 $ 1.71 ========= ========= ========
There were options to purchase 207,929 shares of common stock at a range of $14.75 to $28.00 per share which were outstanding during 2000 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. (Continued) 38 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2000 and 1999 NOTE S - EARNINGS PER SHARE - Continued
Year ended December 31, 1999 ------------------------------------------------ Weighted average Income shares Per share (numerator) (denominator) amount ----------- ------------- ------------ Basic earnings per share Income available to common stockholders $ 4,422 2,759,690 $ 1.60 ========= Effect of dilutive securities Stock options - 158,666 ---------- --------- Diluted earnings per share Income available to common stockholders plus effect of dilutive securities $ 4,422 2,918,356 $ 1.52 ========== ========= =========
There were options to purchase 246,109 shares of common stock at a range of $14.50 to $28.00 per share which were outstanding during 1999 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.
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 ========== ========= =======
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. 39 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2000 and 1999 NOTE T - SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATE (UNAUDITED)
Three months ended ---------------------------------------- Dec. 31, Sept. 30, June 30, March 31, 2000 2000 2000 2000 ------- ------- ------- ------- (in thousands, except per share data) Total interest income $12,103 $12,249 $12,326 $12,029 Total interest expense 7,096 7,294 7,352 7,179 ------- ------- ------- ------- Net interest income 5,007 4,955 4,974 4,850 Provision for possible loan losses 145 100 120 44 ------- ------- ------- ------- Net interest income after provision 4,862 4,855 4,854 4,806 Other income 369 367 349 347 Other expenses 3,382 3,735 3,690 3,597 ------- ------- ------- ------- Income before income taxes 1,849 1,487 1,513 1,556 Income taxes 523 417 456 527 ------- ------- ------- ------- Net income $ 1,326 $ 1,070 $ 1,057 $ 1,029 ======= ======= ======= ======= Earnings per share - basic $ 0.53 $ 0.42 $ 0.42 $ 0.40 Earnings per share - assuming dilution $ 0.51 $ 0.41 $ 0.40 $ 0.39
(Continued) 40 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2000 and 1999 NOTE T - SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED) - Continued
Three months ened ---------------------------------------- Dec. 31, Sept. 30, June 30, March 31, 1999 1999 1999 1999 ------- ------- ------- --------- (in thousands, except per share data) Total interest income $12,103 $11,882 $11,944 $11,093 Total interest expense 7,169 7,028 7,145 6,632 ------- ------- ------- ------- Net interest income 4,934 4,854 4,799 4,461 Provision for possible loan losses 120 90 60 30 ------- ------- ------- ------- Net interest income after provision 4,814 4,764 4,739 4,431 Other income 670 298 297 324 Other expenses 3,419 3,456 3,434 3,220 ------- ------- ------- ------- Income before income taxes 2,065 1,606 1,602 1,535 Income taxes 707 551 577 551 ------- ------- ------- ------- Net income $ 1,358 $ 1,055 $ 1,025 $ 984 ======= ======= ======= ======= Earnings per share - basic $ 0.50 $ 0.38 $ 0.37 $ 0.35 Earnings per share - assuming dilution $ 0.49 $ 0.36 $ 0.35 $ 0.33
41 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2000 and 1999 NOTE U - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY Condensed financial information for TF Financial Corporation (parent company only) follows: BALANCE SHEET
December 31 , ---------------------------- 2000 1999 ------------ ------------ (in thousands) ASSETS Cash $ 2,354 $ 2,387 Certificates of deposit - other institutions 190 181 Investment securities available-for-sale 400 350 Investment in Third Federal 47,328 42,409 Investment in TF Investments 2,245 2,564 Investment in Teragon 14 19 Investment in Penns Trail Development 404 412 Other assets 174 125 ---------- -------- Total assets $ 53,109 $ 48,447 ========== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Total liabilities $ - $ - Stockholders' equity 53,109 48,447 ---------- -------- Total liabilities and stockholders' equity $ 53,109 $ 48,447 ========== =========
STATEMENT OF EARNINGS
Year ended December 31, ---------------------------------------------- 2000 1999 1998 ----------- ------------ ------------ (in thousands) INCOME Equity in earnings of subsidiaries $ 4,573 $ 4,528 $ 4,203 Interest and dividend income 140 125 13 --------- ---------- ---------- Total income 4,713 4,653 4,216 --------- ---------- =--------- EXPENSES Interest - - 8 Other 231 231 170 --------- ---------- ---------- Total expenses 231 231 178 --------- ---------- ---------- NET INCOME $ 4,482 $ 4,422 $ 4,038 ========= ========== ==========
(Continued) 42 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2000 and 1999 NOTE U - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY - Continued STATEMENT OF CASH FLOWS
Year ended December 31, ----------------------------- 2000 1999 1998 ------- ------- ------- (in thousands) Cash flows from operating activities Net income $ 4,482 $ 4,422 $ 4,038 Adjustments to reconcile net income to net cash provided by (used in) operating activities Equity in earnings of subsidiaries (4,573) (4,528) (4,203) Net change in assets and liabilities (56) (954) 841 ------- ------- ------- Net cash provided by (used in) operating activities (147) (1,060) 676 ------- ------- ------- Cash flows from investing activities Capital distribution from subsidiaries 2,938 8,500 2,998 Purchase of investment securities available for sale - - (501) Purchase and maturities of certificates of deposit in other financial institutions, net (9) (9) (1) ------- ------- ------- Net cash provided by investing activities 2,929 8,491 2,496 ------- ------- ------- Cash flows from financing activities Cash dividends paid to stockholders (1,326) (1,359) (1,387) Net (decrease) increase in borrowings from TF Investments - - (103) Treasury stock acquired (1,972) (4,800) (941) Exercise of stock options 483 125 122 ------- ------- ------- Net cash used in financing activities (2,815) (6,034) (2,309) ------- ------- ------- NET INCREASE IN CASH (33) 1,397 863 Cash at beginning of year 2,387 990 127 ------- ------- ------- Cash at end of year $ 2,354 $ 2,387 $ 990 ======= ======= ======= Supplemental disclosure of cash flow information Cash paid during the year for income taxes $ - $ - $ 63 ======= ======= =======
43