10-Q 1 f10q_093001-0084.txt FORM 10Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------- FORM l0-Q (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to --------------------- ------------------------ Commission file number 0-24168 ------- TF FINANCIAL CORPORATION ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 74-2705050 ------------------------------------------------------------------------------- (State or other jurisdiction of incorporation (I.R.S. employer or organization) identification no.) 3 Penns Trail, Newtown, Pennsylvania 18940 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 215-579-4000 ------------ N/A -------------------------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report. Indicate by check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date: October 26, 2001 ---------------- Class Outstanding --------------------------- ---------------- $.10 par value common stock 2,723,538 shares TF FINANCIAL CORPORATION AND SUBSIDIARIES FORM 1O-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2001 INDEX
Page Number ------ PART I - CONSOLIDATED FINANCIAL INFORMATION Item 1. Consolidated Financial Statements 3 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Quantitative and Qualitative Disclosures about Market Risk 18 PART II- OTHER INFORMATION Item 1. Legal Proceedings 19 Item 2. Changes in Securities and Use of Proceeds 19 Item 3. Defaults Upon Senior Securities 19 Item 4. Submission of Matters to a Vote of Security Holders 19 Item 5. Other Information 19 Item 6. Exhibits and Reports on Form 8-K 19 SIGNATURES 20
2 TF FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (in thousands)
Unaudited Audited Unaudited September 30, December 31, September 30, 2001 2000 2000 ---- ---- ---- Assets Cash and cash equivalents $95,847 $10,618 $10,095 Certificates of deposit in other financial institutions 190 191 457 Investment securities available for sale - at fair value 10,760 18,865 22,742 Investment securities held to maturity (fair value of $8,870, $61,919 and 8,741 63,461 63,663 $62,428, respectively) Mortgage-backed securities available for sale - at fair value 89,195 97,914 136,322 Mortgage-backed securities held to maturity (fair value of $109,866 107,024 135,142 141,415 $133,458, and $137,933, respectively) Loans receivable, net 355,225 361,806 296,586 Federal Home Loan Bank stock - at cost 11,368 13,042 13,042 Accrued interest receivable 3,876 5,523 4,845 Goodwill and other intangible assets 5,267 5,809 5,989 Premises and equipment, net 7,700 9,410 9,301 Bank-owned life insurance 9,043 -- -- Other assets 385 1,516 2,282 -------- -------- -------- Total assets $704,621 $723,297 $706,739 ======== ======== ======== Liabilities and stockholders' equity Liabilities Deposits $416,074 $400,851 $416,962 Advances from the Federal Home Loan Bank 222,359 244,859 204,159 Other borrowings -- 14,962 23,590 Advances from borrowers for taxes and insurance 771 1,158 885 Accrued interest payable 5,208 4,670 6,565 Other liabilities 3,063 3,688 3,472 -------- -------- -------- Total liabilities 647,475 670,188 655,633 -------- -------- -------- Commitments and contingencies Stockholders' equity Preferred stock, no par value; 2,000,000 shares authorized and none issued. Common stock, $0.10 par value; 10,000,000 shares authorized, 5,290,000 issued; 2,468,197, 2,491,454, and 2,533,841 shares outstanding at September 30, 2001, December 31, 2000 and September 30, 2000, net treasury shares of 2,566,462, 2,534,088, and 2,488,662, respectively. 529 529 529 Retained earnings 54,447 51,604 50,619 Additional paid-in capital 52,244 52,161 52,139 Unearned ESOP shares (2,553) (2,644) (2,675) Shares acquired by MSBP -- (4) (21) Treasury stock - at cost (48,760) (48,173) (47,503) Accumulated other comprehensive income (loss) 1,239 (364) (1,982) -------- -------- -------- Total stockholders' equity 57,146 53,109 51,106 -------- -------- -------- Total liabilities and stockholders' equity $704,621 $723,297 $706,739 ======== ======== ======== See notes to consolidated financial statements
3 TF FINANCIAL CORPORATION AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS (in thousands, except per share data)
For the three months For the nine months ended September 30, ended September 30, ------------------- ------------------- 2001 2000 2001 2000 ---- ---- ---- ---- Interest income Loans $7,042 $5,918 $21,355 $17,325 Mortgage-backed securities 3,322 4,676 10,670 14,387 Investment securities 542 1,607 2,452 4,679 Interest bearing deposits and other 564 48 1,140 213 ------ ------ ------ ------ Total interest income 11,470 12,249 35,617 36,604 ------ ------ ------ ------ Interest expense Deposits 3,548 3,909 10,716 11,297 Advances from the Federal Home Loan Bank and other borrowings 3,105 3,385 9,761 10,528 ------ ------ ------ ------ Total interest expense 6,653 7,294 20,477 21,825 ------ ------ ------ ----- Net interest income 4,817 4,955 15,140 14,779 Provision for loan losses 124 100 373 264 ------ ------ ------ ------ Net interest income after provision for loan losses 4,693 4,855 14,767 14,515 ------ ------ ------ ------ Non-interest income Service fees, charges and other operating income 462 400 1,232 1,150 Gain on sale of premises and equipment -- -- 444 -- Gain (loss) on sale of loans and mortgage-backed securities available for sale 12 -- 7 -- ------ ------ ------ ------ Total non-interest income 474 400 1,683 1,150 ------ ------ ------ ------ Non-interest expense Compensation and benefits 1,965 1,945 5,801 5,741 Occupancy and equipment 622 638 1,847 1,881 Federal deposit insurance premium 18 21 57 64 Professional fees 128 107 445 394 Amortization of goodwill and other intangible assets 180 195 540 584 Advertising 129 186 381 524 Other operating 585 678 1,853 1,921 ------ ------ ------ ------ Total non-interest expense 3,627 3,768 10,924 11,109 ------ ------ ------ ------ Income before income taxes 1,540 1,487 5,526 4,556 Income taxes 389 417 1,429 1,400 ------ ------ ------ ------ Net income $1,151 $1,070 $4,097 $3,156 ====== ====== ====== ====== Basic earnings per share $0.47 $0.42 $1.66 $1.24 Diluted earnings per share $0.43 $0.41 $1.54 $1.20 Weighted average number of shares outstanding - basic 2,462 2,533 2,466 2,547 Weighted average number of shares outstanding - diluted 2,703 2,616 2,663 2,627 See notes to consolidated financial statements
4 TF FINANCIAL CORPORATION AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
For the nine months ended September 30, 2001 2000 ---- ---- Cash flows from operating activities Net Income $4,097 $3,156 Adjustments to reconcile net income to net cash provided by operating activities: Mortgage loan servicing rights 10 10 Deferred loan origination fees (61) (24) Premiums and discounts on investment securities, net 13 (35) Premiums and discounts on mortgage-backed securities and loans, net (152) (2) Amortization of goodwill and other intangible assets 540 581 Provision for loan losses 383 264 Depreciation of premises and equipment 649 778 Increase in bank-owned life insurance (43) -- Recognition of ESOP and MSBP expenses 178 204 Gain on sale of loans receivable (28) -- Loss on sale of mortgage backed securities available for sale 28 -- Gain on sale of investment securities available for sale (7) -- Gain on sale of premises and equipment (444) -- Gain on sale of real estate acquired through foreclosure (19) (19) (Increase) decrease in: Accrued interest receivable 1,647 113 Other assets 838 (1,054) Increase (decrease) in: Accrued interest payable 538 2,816 Other liabilities (1,451) 419 ------- ------ Net cash provided by operating activities 6,716 7,207 ------- ------ Cash flows from investing activities Loan origination and principal payments on loans, net 34,396 (2,165) Purchases of loans (29,341) (6,734) Proceeds from loan sales 1,480 -- Maturities of certificates of deposit in other financial institutions, net -- 390 Purchases of investment securities available for sale (4,057) (429) Purchases of investment securities held to maturity -- (82,081) Purchases of mortgage-backed securities available for sale (8,464) (11,079) Proceeds from sales of investment securities available for sale 507 -- Proceeds from sales of mortgage backed securities available for sale 4,309 -- Proceeds from maturities of investment securities held to maturity 51,233 85,219 Proceeds from maturities of investment securities available for sale 15,500 -- Principal repayments from mortgage-backed securities held to maturity 28,009 18,361 Principal repayments from mortgage-backed securities available for sale 14,935 8,677 Purchases and redemption of Federal Home Loan Bank Stock, net 1,674 -- Proceeds from sales of real estate acquired through foreclosure 134 318 Proceeds from sales of premises and equipment 1,784 -- Purchase of premises and equipment (119) (902) Purchase of Bank-owned life insurance (9,000) -- ------- ------ Net cash provided by (used in) investing activities 102,980 9,575 ------- ------ See notes to consolidated financial statements
5 TF FINANCIAL CORPORATION AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (in thousands)
For the nine months ended September 30, 2001 2000 ---- ---- Cash flows from financing activities Net increase in deposits 15,223 15,264 Net decrease in advances from Federal Home Loan Bank (22,500) (44,374) Net increase (decrease) in other borrowings (14,962) 7,824 Net decrease in advances from borrowers for taxes and insurance (387) (313) Exercise of stock options 256 440 Purchase of treasury stock, net (998) (1,245) Common stock cash dividend (1,099) (998) -------- ------- Net cash used in financing activities (24,467) (23,402) -------- ------- Net increase (decrease) in cash and cash equivalents 85,229 (6,620) Cash and cash equivalents at beginning of period 10,618 16,715 -------- ------- Cash and cash equivalents at end of period $95,847 $10,095 ======== ======= Supplemental disclosure of cash flow information Cash paid for Interest on deposits and advances $19,939 $19,009 Income taxes $ 1,595 $ 1,100 Non-cash transactions Transfers from loans to real estate acquired through foreclosure $ -- $ 103 See notes to consolidated financial statements
6 TF FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - PRINCIPLES OF CONSOLIDATION The consolidated financial statements as of September 30, 2001, December 31, 2000, September 30, 2000 and for the three-month and nine-month periods ended September 30, 2001 and 2000 include the accounts of TF Financial Corporation (the "Company") and its wholly owned subsidiaries Third Federal Savings Bank (the "Savings Bank"), TF Investments Corporation, Penns Trail Development Corporation and Teragon Financial Corporation. The Company's business is conducted principally through the Savings Bank. All significant intercompany accounts and transactions have been eliminated in consolidation. NOTE 2 - BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include all of the disclosures or footnotes required by accounting principles generally accepted in the United States of America. In the opinion of management, all adjustments, consisting of normal recurring accruals, necessary for fair presentation of the consolidated financial statements have been included. The results of operations for the period ended September 30, 2001 are not necessarily indicative of the results which may be expected for the entire fiscal year or any other period. For further information, refer to consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000. NOTE 3 - CONTINGENCIES The Company, from time to time, is a party to routine litigation that arises in the normal course of business. In the opinion of management, the resolution of this litigation, if any, would not have a material adverse effect on the Company's consolidated financial condition or results of operations. NOTE 4 - OTHER COMPREHENSIVE INCOME The Company's other accumulated comprehensive income consists of net unrealized gains (losses) on investment securities and mortgage-backed securities available for sale. Total comprehensive income for the three-month periods ended September 30, 2001 and 2000 was $2,180,000 and $2,106,000, net of applicable income tax of $919,000 and $951,000, respectively. Total comprehensive income for the nine-month periods ended September 30, 2001 and 2000 was $5,700,000 and $4,260,000, net of applicable income tax of $2,255,000 and $1,969,000, respectively. NOTE 5- RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform to the current period presentation. 7 TF FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 6- RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS On June 29, 2001, the Financial Accounting Standards Board (FASB) approved for issuance Statement of Financial Accounting Standards (SFAS) 141, Business Combinations, and SFAS 142, Goodwill and Intangible Assets. Major provisions of these Statements are as follows: all business combinations initiated after June 30, 2001 must use the purchase method of accounting; the pooling of interest method of accounting is prohibited except for transactions initiated before July 1, 2001; intangible assets acquired in a business combination must recorded separately from goodwill if they arise from contractual or other legal rights or are separable from the acquired entity and can be sold, transferred, licensed, rented or exchanged, either individually or as part of a related contract, asset or liability; goodwill and intangible assets with indefinite lives are not amortized but are tested for impairment annually, except in certain circumstances, and whenever there is an impairment indicator; all acquired goodwill must be assigned to reporting units for purposes of impairment testing and segment reporting; effective January 1, 2002, goodwill will no longer be subject to amortization. Although it is still reviewing the provisions of these Statements, management's preliminary assessment is that these Statements will not have a material impact on the Company's financial position or results of operations. 8 TF FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL TF Financial Corporation may from time to time make written or oral "forward-looking statements", including statements contained in the Company's filings with the Securities and Exchange Commission (including this Quarterly Report on Form 10-Q and the exhibits thereto), in its reports to stockholders and in other communications by the Company, which are made in good faith by the Company pursuant to the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve risks and uncertainties, such as statements of the Company's plans, objectives, expectations, estimates and intentions, that are subject to change based on various important factors (some of which are beyond the Company's control). The following factors, among others, could cause the Company's financial performance to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements: the strength of the United States economy in general and the strength of the local economies in which the Company conducts operations; the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System, inflation, interest rate, market and monetary fluctuations; the timely development of and acceptance of new products and services of the Company and the perceived overall value of these products and services by users, including the features, pricing and quality compared to competitors' products and services; the willingness of users to substitute competitors' products and services for the Company's products and services; the success of the Company in gaining regulatory approval of its products and services, when required; the impact of changes in financial services' laws and regulations (including laws concerning taxes, banking, securities and insurance); technological changes, acquisitions; changes in consumer spending and saving habits; and the success of the Company at managing the risks involved in the foregoing. The Company cautions that the foregoing list of important factors is not exclusive. The Company does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company. Financial Condition The Company's total assets at September 30, 2001 and December 31, 2000 totaled $704.6 million and $723.3 million, respectively, a decrease of $18.7 million, or 2.3%, during the nine-month period. The decrease is mainly the result of a $66.7 million gross decrease in investment securities due to the maturity or exercise of the call feature associated with these securities. In addition, there was a $6.6 million decrease in loans receivable, net, a $36.8 million decrease in mortgage-backed securities, partly due to the sale of $4.3 million of such securities, and a $1.7 million decrease in premises and equipment due to the sale of vacant land that had originally been purchased by the Company during 1993 as a possible administrative location. Offsetting these decreases was a $85.2 million increase in cash and cash equivalents, and a $9 million increase in bank-owned life insurance. Total liabilities decreased by $22.7 million during the first nine months of 2001 primarily as a result of the use of deposit growth, which totaled $15.2 million, and excess cash and cash equivalents to repay a total of $37.5 million in maturing advances from the Federal Home Loan Bank and other borrowings. 9 Total consolidated stockholders' equity of the Company was $57.1 million or 8.11% of assets at September 30, 2001, compared to $53.1 million or 7.34% of assets at December 31, 2000, and $51.1 million or 7.23% of assets at September 30, 2000. During the first nine months of 2001, the net increase in retained earnings, which is net income less dividends paid, plus the increase in accumulated other comprehensive income, was partially offset by the net cost of treasury shares purchased. During January of 2000 management announced that the Company's board of directors had authorized the purchase of up to 142,638 shares of the Company's stock in the open market. As of September 30, 2001, there were approximately 22,000 shares available for repurchase under this plan, and the Company will continue to repurchase shares as share availability and market conditions permit. 10 Asset Quality Non-performing loans at September 30, 2001 increased due to two loans to one borrower totaling $1.671 million, which are secured by commercial real estate that had been appraised at $2.5 million during the fourth quarter of 1999. These loans became non-performing during the third quarter of 2001 when they became past due more than 90 days. The Bank is presently working to recover its loan balances or restore these loans to performing status, or, alternatively, to foreclose on these properties. While management of the Bank presently believes that it is adequately secured by the value of the collateral securing these loans, there can be no assurances that the ultimate resolution of this situation will not result in a charge to the Bank's allowance for loan losses or earnings, or both. The following table sets forth information regarding the Company's asset quality (dollars in thousands):
September 30, December 31, September 30, ------------- ------------ ------------- 2001 2000 2000 ---- ---- ---- Non-performing loans $3,145 $1,478 $1,303 Ratio of non-performing loans to gross loans 0.96% 0.41% 0.44% Ratio of non-performing loans to total assets 0.48% 0.20% 0.18% Foreclosed property $51 $176 $247 Foreclosed property to total assets 0.01% 0.02% 0.03% Ratio of total non-performing assets to total assets 0.49% 0.23% 0.22%
Management maintains an allowance for loan losses at levels that are believed to be adequate; however, there can be no assurances that further additions will not be necessary or that losses inherent in the existing loan portfolios will not exceed the allowance. The following table sets forth the activity in the allowance for loan losses during the periods indicated (in thousands): 2001 2000 ---- ---- Beginning balance, January 1, $1,714 $1,917 Provision 373 264 Less: charge-off's (recoveries), net 167 284 ------- ------ Ending balance, September 30, $1,920 $1,897 ======= ====== 11 RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 Net Income. The Company recorded net income of $1,151,000, or $0.43 per diluted share, for the three months ended September 30, 2001 as compared to $1,070,000, or $0.41 per diluted share, for the three months ended September 30, 2000. Average Balance Sheet The following table sets forth information relating to the Company's average balance sheet and reflects the average yield on assets and average cost of liabilities for the periods indicated. The yields and costs are computed by dividing income or expense by the average balance of interest-earning assets or interest-bearing liabilities, respectively for the periods indicated.
Three months ended September 30, -------------------------------- 2001 2000 ----------------------------------- ---------------------------------- Average Average Average Average Balance Interest Yld/Cost Balance Interest Yld/Cost ------- -------- -------- ------- -------- -------- (dollars in thousands) Assets: Interest-earning assets: Loans receivable (4)....................... $361,960 $7,042 7.72% $296,873 $5,918 7.93% Mortgage-backed securities................. 205,605 3,322 6.41% 282,986 4,676 6.57% Investment securities...................... 34,769 542 6.18% 102,280 1,607 6.25% Other interest-earning assets(1)........... 66,116 564 3.38% 2,810 48 6.80% -------- ------ -------- ------ Total interest-earning assets............ 668,450 11,470 6.81% 684,949 12,249 7.11% ------ ------ Non interest-earning assets.................... 28,862 27,351 -------- -------- Total assets............................. 697,312 712,300 ======== ======== Liabilities and stockholders' equity: Interest-bearing liabilities Deposits................................... 411,985 3,548 3.42% 417,960 3,909 3.72% Advances from the FHLB and other borrowings............................... 222,368 3,105 5.54% 235,682 3,385 5.71% -------- ------ -------- ------ Total interest-bearing liabilities....... 634,353 6,653 4.16% 653,642 7,294 4.44% ------ ------ Non interest-bearing liabilities............... 7,414 9,935 -------- -------- Total liabilities........................ 641,767 663,577 Stockholders' equity........................... 55,545 48,723 -------- -------- Total liabilities and stockholders' equity.. $697,312 $712,300 ======== ======== Net interest income............................ $4,817 $4,955 ====== ====== Interest rate spread (2)....................... 2.65% 2.68% Net yield on interest-earning assets (3)....... 2.86% 2.88% Ratio of average interest-earning assets to average interest bearing liabilities..... 105% 105%
(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. 12 Rate/Volume Analysis The following table presents, for the periods indicated, the change in interest income and interest expense (in thousands) attributed to (i) changes in volume (changes in the weighted average balance of the total interest earning asset and interest bearing liability portfolios multiplied by the prior year rate), and (ii) changes in rate (changes in rate multiplied by prior year volume). Changes attributable to the combined impact of volume and rate have been allocated proportionately based on the absolute value of changes due to volume and changes due to rate.
Three months ended September 30, 2001 vs. 2000 ------------------------------------------------------ Increase (decrease) due to ------------------------------------------------------ Volume Rate Net ------------------------------------------------------ Interest income: Loans receivable, net $2,121 $(997) $1,124 Mortgage-backed securities (1,243) (111) (1,354) Investment securities (1,048) (17) (1,065) Other interest-earning assets 693 (177) 516 ------------------------------------------------------ Total interest-earning assets 523 (1,302) (779) ====================================================== Interest expense: Deposits (54) (307) (361) Advances from the FHLB and other borrowings (183) (97) (280) ------------------------------------------------------ Total interest-bearing liabilities (237) (404) (641) ====================================================== Net change in net interest income $760 $(898) $(138) ======================================================
Total interest income. Total interest income decreased by $779,000 or 6.4% to $11.5 million for the three months ended September 30, 2001 compared with the third quarter of 2000. Average earning assets decreased by $16.5 million during the same periods. However, because of the change in the mix of the Company's interest-earning assets the Company's interest income experienced a positive $523,000 volume-based improvement. During the third quarter of 2001, loans receivable, which carried higher yields than other earning assets, were 54.1% of total interest-earning assets compared to 43.3% during the third quarter of 2000. The increase in loans is the direct result of the Company's successful efforts to increase its purchases of seasoned, single-family residential loans. Offsetting the volume-based interest income increase was a $1,302,000 rate-based decrease in interest income, primarily the direct result of generally lower market interest rates and the lowering by the Federal Reserve Board of the fed funds rate during 2001 by 400 basis points. A lower fed funds rate resulted in a lowering of the prime rate, and thus the interest income earned on the Company's prime rate-based loans. In addition, the Corporation's cash and cash equivalents earn approximately the federal funds rate of 2.50% at September 30, 2001. Total Interest Expense. Total interest expense decreased to $6.7 million for the three-month period ended September 30, 2001 from $7.3 million for the same period in 2000 primarily due to generally lower market interest rates which resulted in a lowering of the Company's deposit interest expense. In addition, decreased advances from the Federal Home Loan Bank and other borrowings resulted in an overall decrease in average interest-bearing liabilities. Non-interest income. Total non-interest income was $474,000 for the three-month period ended September 30, 2001 compared with $400,000 for the same period in 2000. The increase is due to a $62,000 increase in service fees. 13 Non-interest expense. Total non-interest expense decreased by $141,000 to $3.6 million for the three months ended September 30, 2001 compared to the same period in 2000. Operating expenses decreased in part due to the consolidation of one branch during the first quarter of 2001, thus enabling the Company to avoid the personnel, occupancy, and other costs associated with operating that branch. In addition, the Company spent less for its marketing and sales personnel, and reduced its expenditures for direct advertising. 14 RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 Net Income. The Company recorded net income of $4,097,000, or $1.54 per diluted share, for the nine months ended September 30, 2001 as compared to $3,156,000, or $1.20 per diluted share, for the nine months ended September 30, 2000. Average Balance Sheet The following table sets forth information relating to the Company's average balance sheet and reflects the average yield on assets and average cost of liabilities for the periods indicated. The yields and costs are computed by dividing income or expense by the average balance of interest-earning assets or interest-bearing liabilities, respectively for the periods indicated.
Nine months ended September 30, 2001 2000 ------------------------------------ --------------------------------- Average Average Average Average Balance Interest Yld/Cost Balance Interest Yld/Cost ------- -------- -------- ------- -------- -------- (dollars in thousands) Assets: Interest-earning assets: Loans receivable (4)....................... $360,781 $21,355 7.91% $293,647 $17,325 7.88% Mortgage-backed securities................. 218,401 10,670 6.53% 288,866 14,387 6.65% Investment securities...................... 54,614 2,452 6.00% 101,202 4,679 6.18% Other interest-earning assets(1)........... 39,088 1,140 3.90% 4,724 213 6.02% -------- ------- -------- ------- Total interest-earning assets............ 672,884 35,617 7.08% 688,439 36,604 7.10% ------- ------- Non interest-earning assets.................... 27,432 29,150 -------- -------- Total assets............................. 700,316 717,589 ======== ======== Liabilities and stockholders' equity: Interest-bearing liabilities Deposits................................... 405,332 10,716 3.53% 412,351 11,297 3.66% Advances from the FHLB and other borrowings............................... 232,679 9,761 5.61% 247,887 10,528 5.67% -------- ------- -------- ------- Total interest-bearing liabilities....... 638,011 20,477 4.29% 660,238 21,825 4.42% ------- ------- Non interest-bearing liabilities............... 7,986 9,197 -------- -------- Total liabilities.......................... 645,997 669,435 Stockholders' equity........................... 54,319 48,154 -------- -------- Total liabilities and stockholders' equity.... $700,316 $717,589 ======== ======== Net interest income............................ $15,140 $14,779 ======= ======= Interest rate spread (2)....................... 2.79% 2.69% Net yield on interest-earning assets (3)....... 3.01% 2.87% Ratio of average interest-earning assets to average interest bearing liabilities..... 105% 104%
(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. 15 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.
Nine months ended September 30, 2001 vs. 2000 ------------------------------------------------------ Increase (decrease) due to ------------------------------------------------------ Volume Rate Net ------------------------------------------------------ Interest income: Loans receivable, net $3,956 $74 $4,030 Mortgage-backed securities (3,465) (252) (3,717) Investment securities (2,096) (131) (2,227) Other interest-earning assets 1,075 (148) 927 ------------------------------------------------------ Total interest-earning assets (530) (457) (987) ====================================================== Interest expense: Deposits (193) (388) (581) Advances from the FHLB and other borrowings (652) (115) (767) ------------------------------------------------------ Total interest-bearing liabilities (845) (503) (1,348) ====================================================== Net change in net interest income $315 $46 $361 ======================================================
Total Interest Income. Total interest income decreased by $987,000 or 2.7% to $35.6 million for the nine months ended September 30, 2001 compared with the first nine months of 2000. Average earning assets decreased by $15.6 million during the same periods. However, there was a substantial change in the mix of the Company's interest-earning assets. During the first nine months of 2001, loans receivable, which carried higher yields than other earning assets, were 53.6% of total interest-earning assets compared to 42.7% during the first nine months of 2000. The increase in loans is the direct result of the Company's successful efforts to increase its purchases of seasoned, single-family residential loans. Total Interest Expense. Total interest expense decreased to $20.5 million for the nine-month period ended September 30, 2001 from $21.8 million for the same period in 2000 primarily due to decreased advances from the Federal Home Loan Bank and other borrowings, which resulted in an overall decrease in average interest-bearing liabilities. In addition, generally lower market interest rates resulted in a lowering of the Company's deposit interest expense, and the Company's average deposits decreased by $7.0 million due mainly to lower balances in certificates of deposit. Non-interest income. Total non-interest income was $1,683,000 for the nine-month period ended September 30, 2001 compared with $1,150,000 for the same period in 2000. The increase is mainly due to a $444,000 gain on the sale of vacant land that the Company had purchased during 1993 for potential use as an administrative location. Non-interest expense. Total non-interest expense decreased by $185,000 to $10.9 million for the nine months ended September 30, 2001 compared to the same period in 2000. Operating expenses decreased in part due to the consolidation of one branch during the first quarter of 2001, thus enabling the Company to 16 avoid the personnel, occupancy, and other costs associated with operating that branch. In addition, the Company reduced its expenditures for direct advertising by $143,000 during the first nine months of 2001 compared with the same period in 2000. 17 LIQUIDITY AND CAPITAL RESOURCES Liquidity The Company's liquidity is a measure of its ability to fund loans, pay withdrawals of deposits, and other cash outflows in an efficient, cost-effective manner. The Company's short-term sources of liquidity include maturity, repayment and sales of assets, excess cash and cash equivalents, new deposits, broker deposits, other borrowings, and new advances from the Federal Home Loan Bank. There has been no material adverse change during nine-month period ended September 30, 2001 in the ability of the Company and its subsidiaries to fund their operations. At September 30, 2001, the Company had commitments outstanding under letters of credit of $1.6 million, commitments to originate loans of $13.1 million, and commitments to fund undisbursed balances of closed loans and unused lines of credit of $25.7 million. Capital Requirements The Savings Bank is in compliance with all of its capital requirements as of September 30, 2001. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Asset and Liability Management The Company's market risk exposure is predominately caused by interest rate risk, which is defined as the sensitivity of the Company's current and future earnings, the values of its assets and liabilities, and the value of its capital to changes in the level of market interest rates. Management of the Company believes that there has not been a material adverse change in market risk during the nine months ended September 30, 2001. 18 TF FINANCIAL CORPORATION AND SUBSIDIARIES PART II ITEM 1. LEGAL PROCEEDINGS Not applicable. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable ITEM 5. OTHER INFORMATION On October 22, 2001 TF Financial Corporation announced that its subsidiary Third Federal Savings Bank had entered into a definitive purchase and assumption agreement with First County Bank, Doylestown, Pennsylvania for the sale of Third Federal's Warminster, Pennsylvania branch office. The transaction is expected to close in 2001 and is subject to banking regulatory approval. At September 30, 2001 the deposits at Third Federal's Warminster branch totaled approximately $12.9 million. No loans are to be sold as part of this transaction. The branch is a leased location and the lease is scheduled to expire at December 31, 2001. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 99--Press Release dated October 26, 2001 (b) Reports on Form 8-K None 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. TF FINANCIAL CORPORATION /s/ John R. Stranford ---------------------------- Date: October 26, 2001 John R. Stranford -------------------------------- President and CEO (Principal Executive Officer) /s/ Dennis R. Stewart ---------------------------- Date: October 26, 2001 Dennis R. Stewart ------------------------------- Senior Vice President and Chief Financial Officer (Principal Financial & Accounting Officer) 20