-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MtqAPbae4uRsib9+nnK4/rPi4VzjYOB7w6ruaRsjPnSZxg4jeSrFifGOvA7P0qgz yyHV2Z6/yZppbbRl/3kGoA== 0000946275-03-000222.txt : 20030328 0000946275-03-000222.hdr.sgml : 20030328 20030328165911 ACCESSION NUMBER: 0000946275-03-000222 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TF FINANCIAL CORP CENTRAL INDEX KEY: 0000921051 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 742705050 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-24168 FILM NUMBER: 03626007 BUSINESS ADDRESS: STREET 1: 3 PENNS TRAIL CITY: NEWTOWN STATE: PA ZIP: 18940 BUSINESS PHONE: 2155794000 MAIL ADDRESS: STREET 1: 3 PENNS TRAIL CITY: NEWTOWN STATE: PA ZIP: 18940 10-K 1 f10k_033103-0084.txt FORM SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2002 ----------------- - 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 (I.R.S. Employer Identification No.) Incorporation or Organization) 3 Penns Trail, Newtown, Pennsylvania 18940 ------------------------------------ ----- (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (215) 579-4000 -------------- Securities registered pursuant to Section 12(b) of the Act: None -------- Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.10 per share -------------------------------------- (Title of Class) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Indicate by check mark whether the registrant is an accelerated filer as defined in Exchange Act Rule 12b-2. YES NO X --- --- The aggregate market value of the voting common equity held by non-affiliates of the registrant, based on the closing price of the registrant's Common Stock as quoted on the Nasdaq System on June 28, 2002 was $46.9 million. As of March 17, 2003 there were outstanding 2,728,282 shares of the registrant's Common Stock. DOCUMENTS INCORPORATED BY REFERENCE 1. Portions of the Annual Report to Stockholders for the Fiscal Year Ended December 31, 2002. (Parts I, II and IV) 2. Portions of the Proxy Statement for the 2003 Annual Meeting of Stockholders. (Part III) PART I TF FINANCIAL CORPORATION (THE "COMPANY") MAY FROM TIME TO TIME MAKE WRITTEN OR ORAL "FORWARD-LOOKING STATEMENTS", INCLUDING STATEMENTS CONTAINED IN THE COMPANY'S FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION (INCLUDING THIS ANNUAL REPORT ON FORM 10-K AND THE EXHIBITS HERETO), 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, MONETARY AND FISCAL POLICIES AND LAWS, INCLUDING INTEREST RATE POLICIES OF THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, INFLATION, INTEREST RATES, MARKET AND MONETARY FLUCTUATIONS; THE TIMELY DEVELOPMENT OF AND ACCEPTANCE OF NEW PRODUCTS AND SERVICES OF THE COMPANY AND THE PERCEIVED OVERALL VALUE OF THESE PRODUCTS AND SERVICES BY USERS, INCLUDING THE FEATURES, PRICING AND QUALITY COMPARED TO COMPETITORS' PRODUCTS AND SERVICES; THE IMPACT OF CHANGES IN FINANCIAL SERVICES' LAWS AND REGULATIONS (INCLUDING LAWS CONCERNING TAXES, BANKING, SECURITIES AND INSURANCE); TECHNOLOGICAL CHANGES; ACQUISITIONS; CHANGES IN CONSUMER SPENDING AND SAVING HABITS; AND THE SUCCESS OF THE COMPANY AT MANAGING THE RISKS INVOLVED IN THE FOREGOING. THE COMPANY CAUTIONS THAT THE FOREGOING LIST OF IMPORTANT FACTORS IS NOT EXCLUSIVE. THE COMPANY DOES NOT UNDERTAKE TO UPDATE ANY FORWARD- LOOKING STATEMENT, WHETHER WRITTEN OR ORAL, THAT MAY BE MADE FROM TIME TO TIME BY OR ON BEHALF OF THE COMPANY. Item 1. Business - ----------------- BUSINESS OF THE COMPANY On July 13, 1994, the Company consummated its public offering for 5,290,000 shares of its common stock and acquired Third Federal Savings Bank (the "Bank") as part of the Bank's mutual-to-stock conversion. The Company was incorporated under Delaware law in March 1994. The Company is a savings and loan holding company and is subject to regulation by the Office of Thrift Supervision (the "OTS"), the Federal Deposit Insurance Corporation (the "FDIC") and the Securities and Exchange Commission (the "SEC"). The Company does not transact any material business other than through its direct and indirect subsidiaries: Third Federal Savings Bank, TF Investments Corporation, Teragon Financial Corporation, Penns Trail Development Corporation and Third Delaware Corporation. At December 31, 2002, the Company had total assets of $721 million, total liabilities of $658 million and stockholders' equity of $63 million. 2 BUSINESS OF THE BANK The Bank is a federally-chartered stock savings bank, which was originally chartered in 1921 as a Pennsylvania-chartered building and loan association. The Bank's deposits are insured up to the maximum amount allowable by the FDIC. The Bank is a community oriented savings institution offering a variety of financial services to meet the needs of the communities it serves. As of December 31, 2002 the Bank operated thirteen branch offices in Bucks and Philadelphia counties, Pennsylvania and in Mercer County, New Jersey. The Bank's fourteenth branch office is located in the Northern Liberties section of Philadelphia and opened during March 2003. The Bank attracts deposits from the general public and uses such deposits, together with borrowings and other funds primarily to originate or purchase loans secured by first mortgages on owner-occupied, one- to four-family residences in its market area and to invest in mortgage-backed and investment securities. At December 31, 2002, one- to four-family residential mortgage loans totaled $228 million or 61% of the Bank's total loan portfolio. At that same date, the Bank had approximately $170 million or 24% of total assets invested in mortgage-backed securities and $42 million or 6% of total assets in investment securities. To a lesser extent, the Bank also originates commercial real estate and multi-family, construction and consumer loans. The Bank has one subsidiary, Third Delaware Corporation, which was incorporated in 1998 for the purpose of holding and managing mortgage-backed securities and investment securities for the Bank. Market Area The Bank operates six offices in Philadelphia County and five offices in Bucks County, Pennsylvania. These two counties cover the city of Philadelphia and the northeast suburbs of Philadelphia. The population of these two counties totals over 2.1 million. The Bank also operates three branch offices in Mercer County, New Jersey, which has a population of approximately 354,000. The population of Bucks and Mercer Counties has experienced distinctly different economic and demographic trends over recent decades. Whereas Philadelphia County has experienced a population decline and has offered limited opportunities, Bucks and Mercer Counties, with growing populations, have offered the Bank much greater opportunities. Competition The Bank faces varying degrees of competition from local thrifts and credit unions at its various branch locations. Stronger competition has come from local and much larger regional banks based in and around the Philadelphia area. Commercial banks hold approximately 75% of the deposit market in Philadelphia County, 65% in Bucks County and 66% in Mercer County. The Bank's share of the deposit market in Philadelphia, Bucks and Mercer Counties is very small, at .20%, 1.57% and 1.23%, respectively. Lending Activities General. The Bank's loan portfolio composition consists primarily of conventional adjustable-rate ("ARM") and fixed-rate first mortgage loans secured by one- to four-family residences. The Bank also makes commercial real estate and multi-family loans, construction loans and consumer and other loans. At December 31, 2002, the Bank's mortgage loans outstanding were $251 million, of which $228 million 3 were secured by first mortgages on one- to four-family residential property. Of the one- to four-family residential mortgage loans outstanding at that date, 27% were ARM's and 73% were fixed-rate loans. Total ARM loans in the Bank's portfolio at December 31, 2002, amounted to $145 million or 39% of total loans. At that same date, commercial real estate and multi-family residential and construction loans totaled $85 million and $12 million, respectively. Consumer and other loans held by the Bank totaled $46 million or 12% of total loans outstanding at December 31, 2002, of which $25 million or 55% consisted of home equity and second mortgages. At that same date commercial business loans, leases and other loans totaled $8 million, $2 million and $10 million, respectively. 4 The following tables set forth the composition of the Bank's loan portfolio and mortgage-backed and related securities portfolios in dollar amounts and in percentages of the respective portfolios at the dates indicated.
At December 31, ------------------------------------------------------------------------------------------------ 2002 2001 2000 1999 1998 ---------------- ---------------- ----------------- ------------------- ---------------- Percent Percent Percent Percent Percent Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total ------ -------- ------ -------- ------ -------- ------ -------- ------ -------- (Dollars in thousands) Loans: Mortgage loans................ One- to four-family.......... $227,953 61.33% $222,016 58.42% $211,065 57.89% $168,057 58.00% $152,819 62.93% Commercial real estate and multi-family................ 85,493 23.00 93,572 24.62 77,486 21.25 65,346 22.55 55,208 22.73 Construction................. 12,026 3.23 9,824 2.59 13,950 3.82 12,074 4.16 5,352 2.20 -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ Total mortgage loans.... 325,472 87.56 325,412 85.63 302,501 82.96 245,477 84.71 213,379 87.86 Consumer and other loans: Home equity and second mortgage................... 25,480 6.87 25,640 6.75 20,887 5.73 16,816 5.81 12,995 5.35 Commercial business.......... 8,005 2.15 9,285 2.44 14,630 4.01 9,339 3.22 6,666 2.74 Leases....................... 2,246 0.60 3,544 0.93 3,493 0.96 3,195 1.10 2,305 0.95 Other........................ 10,490 2.82 16,154 4.25 23,113 6.34 14,945 5.16 7,521 3.10 -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ Total consumer and other loans................. 46,221 12.44 54,623 14.37 62,123 17.04 44,295 15.29 29,487 12.14 -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ Total loans............. 371,693 100.00% 380,035 100.00% 364,624 100.00% 289,772 100.00% 242,866 100.00% -------- ====== -------- ====== -------- ====== -------- ====== -------- ====== Less: Unearned discount,( premium), deferred loan fees, net.... (446) 428 1,104 124 116 Allowance for loan losses.... 2,047 1,972 1,714 1,917 1,909 -------- -------- -------- -------- -------- Total loans, net......... $370,092 $377,635 $361,806 $287,979 $240,841 ======== ======== ======== ======== ========
5
At December 31, ------------------------------------------------------------------------------------------------ 2002 2001 2000 1999 1998 ---------------- ---------------- ----------------- ----------------- ------------------ Percent Percent Percent Percent Percent Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total ------ -------- ------ -------- ------ -------- -------- -------- ------- -------- (Dollars in thousands) Mortgage-backed securities held-to-maturity: FHLMC........................ $ 21,870 40.10% $35,000 37.50% $ 45,971 34.03% $ 52,625 32.91% $ 47,239 26.10% FNMA......................... 11,781 21.60 15,739 16.90 20,756 15.36 24,983 15.63 12,726 7.03 GNMA......................... 18,278 33.40 29,877 32.00 41,090 30.41 46,651 29.18 56,318 31.12 Real estate investment mortgage conduit........... 2,519 4.60 12,550 13.40 27,043 20.02 35,271 22.06 64,180 35.47 Other mortgage-backed securities................. 144 0.30 201 0.20 282 0.18 358 0.22 501 0.28 -------- ------ ------- ------ -------- ------ -------- ------ -------- ------ Total mortgage-backed and related securities held-to-maturity......... $ 54,592 100.00% $93,367 100.00% $135,142 100.00% $159,888 100.00% $180,964 100.00% ======== ====== ======= ====== ======== ====== ======== ====== ======== ====== Mortgage-backed securities available-for-sale: FHLMC...................... $ 699 0.60% $ 1,108 1.10% $ 1,431 1.46% $ 7,233 5.46% $ 13,214 17.55% FNMA....................... 11,878 10.30 22,459 22.50 25,679 26.23 27,963 21.10 32,178 42.74 GNMA....................... -- -- 5,515 5.50 7,561 7.72 8,338 6.29 10,284 13.66 Real estate investment mortgage conduit......... 102,666 89.10 70,681 70.90 63,243 64.59 88,981 67.15 19,609 26.05 -------- ------ ------- ------ -------- ------ -------- ------ -------- ------ Total mortgage-backed and related securities available-for-sale..... $115,243 100.00% $99,763 100.00% $ 97,914 100.00% $132,515 100.00% $ 75,285 100.00% ======== ====== ======= ====== ======== ====== ======== ====== ======== ======
6 Loan Maturity and Repricing Information. The following table sets forth certain information at December 31, 2002, regarding the dollar amount of loans maturing in the Bank's loan and mortgage- backed securities portfolios based on their maturity date. Demand loans, loans having no stated schedule of repayments and no stated maturity, overdrafts and delinquent loans maturing prior to December 31, 2003, are reported as due in one year or less. The table does not include prepayments or scheduled principal repayments.
Due 1/1/03 - Due 1/1/04 - Due After 12/31/03 12/31/07 12/31/07 -------- -------- -------- (In thousands) Available for sale: Mortgage-backed securities.................. $ 24 $ 4,693 $110,526 Held to Maturity: One-to-four family.......................... 1,296 14,035 212,622 Commercial real estate and multi-family..... 2,630 25,589 57,274 Construction................................ 12,026 -- -- Consumer and other.......................... 7,081 16,347 22,793 ------- ------- -------- Total loans receivable...................... 23,033 55,971 242,689 Mortgage-backed securities.................. 62 2,897 51,633 ------- ------- -------- Totals...................................... $23,095 $58,868 $344,322 ======= ======= ========
The following table sets forth the dollar amount of all loans and mortgage-backed securities due after December 31, 2003, which have predetermined interest rates and which have floating or adjustable interest rates. Predetermined Floating or Rates Adjustable Rate ----- --------------- (In thousands) Available for sale: Mortgage-backed securities................. $115,219 $ -- -------- -------- Totals..................................... $115,219 $ -- ======== ======== Held to Maturity: One-to-four family......................... $165,283 $ 61,374 Commercial real estate and multi-family.... 26,602 56,261 Construction............................... -- -- Consumer and other......................... 30,349 8,791 -------- -------- Total loans receivable..................... 222,234 126,426 Mortgage-backed securities................. 54,295 235 -------- -------- Totals..................................... $276,529 $126,661 ======== ======== One- to Four-Family Mortgage Loans. The Bank offers first mortgage loans secured by one- to four-family residences in the Bank's lending area. Typically, such residences are single-family homes that serve as the primary residence of the owner. The Bank generally originates and invests in one- to four-family residential mortgage loans in amounts up to 80% of the lesser of the appraised value or selling price of the mortgaged property. Loans originated in amounts over 80% of the lesser of the appraised 7 value or selling price of the mortgaged property, other than loans to facilitate the sale of real estate acquired through foreclosure, must be owner-occupied and private mortgage insurance must be provided on the amount in excess of 80%. Loan originations are generally obtained from existing or past customers, members of the local community, and referrals from established builders and realtors within the Bank's lending area. Mortgage loans originated and held by the Bank in its portfolio generally include due-on sale clauses which provide the Bank with the contractual right to deem the loan immediately due and payable in the event that the borrower transfers ownership of the property without the Bank's consent. The Bank offers a variety of ARM loans with terms of 30 years which adjust at the end of 6 months, one, three, five, seven and ten years and adjust by a maximum of 1 to 2% per adjustment with a lifetime cap of 5 to 6% over the life of the loan. The Bank offers fixed-rate mortgage loans with terms of 10 to 30 years, which are payable monthly. Interest rates charged on fixed-rate mortgage loans are competitively priced based on market conditions and the Bank's cost of funds. The origination fees for fixed-rate loans range from 0% to 3% depending on the underlying loan coupon. Generally, the Bank's standard underwriting guideline for fixed- rate mortgage loans conform to the FHLMC and FNMA guidelines and may be sold in the secondary market. While it does not presently do so, the Bank has in the past sold a portion of its conforming fixed- rate mortgage loans in the secondary market to FHLMC and FNMA while retaining the servicing rights on certain loans. The Bank, however, is primarily a portfolio lender. As of December 31, 2002, the Bank's portfolio of loans serviced for FHLMC or FNMA totaled approximately $4 million. Commercial Real Estate and Multi-Family Loans. The Bank originates loans secured by commercial real estate including non-owner occupied residential multi-family dwelling units (more than four units) primarily secured by professional office buildings and apartment complexes. The Bank generally originates commercial real estate and multi-family loans up to 75% of the appraised value of the property securing the loan. Currently, it is the Bank's philosophy to originate commercial real estate and multi- family loans only to borrowers known to the Bank and on properties in its market area. The commercial real estate and multi-family loans in the Bank's portfolio consist of fixed-rate, ARM and balloon loans which were originated at prevailing market rates for terms of up to 25 years. The Bank's current policy is to originate commercial real estate and multi-family loans as ARM's that are generally amortized over a period of 20 years or as balloon loans which generally have terms of 5 to 10 years, with 20-25 year amortization. Loans secured by commercial and multi-family real estate are generally larger and involve a greater degree of risk than one- to four-family residential mortgage loans. Of primary concern in commercial and multi-family real estate lending is the borrower's creditworthiness and the feasibility and cash flow potential of the project. Loans secured by income properties are generally larger and involve greater risks than residential mortgage loans because payments on loans secured by income properties are often dependent on successful operation or management of the properties. As a result, repayment of such loans may be subject to a greater extent than residential real estate loans to adverse conditions in the real estate market or the economy. In order to monitor cash flows on income properties, the Bank requires borrowers and loan guarantors, if any, to provide annual financial statements and rent rolls on multi-family loans. At December 31, 2002, the five largest commercial real estate and multi-family loans totaled $18.3 million with no single loan larger than $4.4 million. At December 31, 2002, all such loans were current and the properties securing such loans are in the Bank's market area. 8 Construction Loans. At December 31, 2002, the Bank had $12 million of construction loans or 3% of the Bank's total loan portfolio. Construction financing is generally considered to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate. Risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the property's value at completion of construction or development and the estimated cost (including interest) of construction. During the construction phase, a number of factors could result in delays and cost overruns. If the estimate of construction costs proves to be inaccurate, the Bank may be required to advance funds beyond the amount originally committed to permit completion of the development. If the estimate of value proves to be inaccurate, the Bank may be confronted, at or prior to the maturity of the loan, with a project having a value which is insufficient to assure full repayment. Consumer and Other Loans. The Bank also offers consumer and other loans in the form of home equity and second mortgage loans (referred to hereinafter collectively as "second mortgage loans"), commercial business loans, automobile loans and student loans. These loans totaled $46 million or 12% of the Bank's total loan portfolio at December 31, 2002. Federal regulations permit federally chartered thrift institutions to make secured and unsecured consumer loans up to 35% of an institution's assets. In addition, a federal thrift has lending authority above the 35% category for certain consumer loans, property improvement loans, and loans secured by savings accounts. The Bank originates consumer loans in order to provide a wide range of financial services to its customers and because the shorter terms and normally higher interest rates on such loans help maintain a profitable spread between its average loan yield and its cost of funds. In connection with consumer loan applications, the Bank verifies the borrower's income and reviews a credit bureau report. In addition, the relationship of the loan to the value of the collateral is considered. All automobile loan applications are reviewed and approved by the Bank. The Bank reviews the credit report of the borrower as well as the value of the unit which secures the loan. The Bank intends to continue to emphasize the origination of consumer loans. Consumer loans tend to be originated at higher interest rates than conventional residential mortgage loans and for shorter terms which benefits the Bank's interest rate risk management. Consumer loans, however, tend to have a higher risk of default than residential mortgage loans. At December 31, 2002, $245,000 or 0.7% of the Bank's consumer loans were delinquent more than 90 days. Federal thrift institutions are permitted to make secured or unsecured loans for commercial, corporate, business or agricultural purposes, including the issuance of letters of credit secured by real estate, business equipment, inventories, accounts receivable and cash equivalents. The aggregate amount of such loans outstanding may not exceed 10% of such institution's assets. The Bank offers second mortgage loans on one- to four-family residences. At December 31, 2002, second mortgage and home equity loans totaled $25 million, or 7% of the Bank's total loan portfolio. Second mortgage loans are offered as fixed-rate loans for a term not to exceed 15 years. Such loans are only made on owner-occupied one- to four-family residences and are subject to a 75% combined loan to value ratio. The underwriting standards for second mortgage loans are the same as the Bank's standards applicable to one- to four-family residential loans. The Bank makes commercial business loans on a secured basis and generally requires additional collateral consisting of real estate. The terms of such loans generally do not exceed five years. The majority of these loans have floating interest rates which adjust with changes in market driven indices. The Bank's commercial business loans primarily consist of short-term loans for equipment, working capital, 9 business expansion and inventory financing. The Bank customarily requires a personal guaranty of payment by the principals of any borrowing entity and reviews the financial statements and income tax returns of the guarantors. At December 31, 2002, the Bank had approximately $8 million outstanding in commercial business loans, which represented approximately 2% of its total loan portfolio. Prior to 2002 the Bank purchased commercial leases; however, the Bank no longer engages in this activity. These lessees are generally small medical practitioners located throughout the United States. The average lease is less than $100,000 and the servicing for such leases had been retained by the lessor/seller. During 2002 the Bank took control of the servicing due to a default by the seller/servicer. At December 31, 2002 the purchased lease portfolio totaled $2 million or 0.6% of total assets. Loan Approval Authority and Underwriting. The Board of Directors sets the authority to approve loans based on the amount, type of loan (i.e., secured or unsecured) and total exposure to the borrower. Where there are one or more existing loans to a borrower, the level of approval required is governed by the proposed total exposure including the new loan. A Lending Vice President may approve a secured loan up to $100,000 and an unsecured loan up to $25,000 individually. Each In-House Loan Committee member may approve a secured loan up to $250,000 and an unsecured loan up to $50,000, except the President's authority is two times these amounts. Any two In-House Loan Committee members may combine their secured lending authority. A majority of the In-House Loan Committee members may approve a secured loan up to $1.5 million and an unsecured loan up to $200,000. Generally, all loans over $1.5 million, or loans that cause the proposed total exposure to exceed $1.5 million, require approval by the Board Loan Committee. One- to four-family residential mortgage loans are generally underwritten according to FHLMC and FNMA guidelines. For all loans originated by the Bank, upon receipt of a completed loan application from a prospective borrower, a credit report is ordered, income and certain other information is verified and, if necessary, additional financial information is requested. An appraisal of the real estate intended to secure the proposed loan is required which currently is performed by an independent appraiser designated and approved by the Bank. The Bank makes construction/permanent loans on individual properties. Funds advanced during the construction phase are held in a loan-in-process account and disbursed based upon various stages of completion. The independent appraiser or loan officer determines the stage of completion based upon its physical inspection of the construction. It is the Bank's policy to obtain title insurance or a title opinion on all real estate first mortgage loans. Borrowers must also obtain hazard or flood insurance (for loans on property located in a flood zone) prior to closing the loan. For loans in excess of 80% of the loan to value ratio, borrowers are generally required to advance funds on a monthly basis together with each payment of principal and interest to an escrow account from which the Bank makes disbursements for items such as real estate taxes and hazard insurance premiums. Loans to One Borrower. Current regulations limit loans to one borrower in an amount equal to 15% of unimpaired capital and retained income on an unsecured basis and an additional amount equal to 10% of unimpaired capital and retained income if the loan is secured by readily marketable collateral (generally, financial instruments, not real estate) or $500,000, whichever is higher. Penalties for violations of the loan-to-one borrower statutory and regulatory restrictions include cease and desist orders, the imposition of a supervisory agreement and civil money penalties. The Bank's maximum loan-to-one borrower limit was approximately $7.6 million as of December 31, 2002. At December 31, 2002, the Bank's five largest aggregate lending relationships had balances ranging from $3.6 to $5.3 million. At December 31, 2002, all of these loans were current. 10 Mortgage-Backed Securities To supplement lending activities, the Bank invests in residential mortgage-backed securities. Although the majority of such securities are held to maturity, they can serve as collateral for borrowings and, through repayments, as a source of liquidity. The mortgage-backed securities portfolio as of December 31, 2002, consisted of pass-through certificates issued by the Federal Home Loan Mortgage Corporation ("FHLMC") ($23 million), Government National Mortgage Association ("GNMA"), ($18 million) Federal National Mortgage Association ("FNMA") ($24 million), real estate mortgage investment conduits formed by these same agencies ("REMICs") ($105 million), and other mortgage-backed securities ($144,000). At December 31, 2002, the amortized cost of mortgage-backed securities totaled $167 million, or 23% of total assets, and the market value of such securities totaled approximately $173 million. The Bank's mortgage-backed securities are so-called "pass-throughs" which represent a participation interest in a pool of single-family or multi-family mortgages, the principal and interest payments on which are passed from the mortgage originators, through intermediaries (generally quasi- governmental agencies) that pool and repackage the participation interests in the form of securities, to investors such as the Bank. Such quasi-governmental agencies, which guarantee the payment of principal and interest to investors, primarily include FHLMC, FNMA and GNMA. The REMIC securities are composed of the same loan types as the pass through certificates, but offer differing characteristics as to their expected cash flows depending on the class of such securities purchased. The Bank's REMICs are primarily "planned amortization classes" that, when purchased, offered a high probability of predictable cash flows. 11 The following table sets forth the carrying value of the Bank's mortgage-backed securities held in portfolio at the dates indicated. At December 31, -------------------------------- 2002 2001 2000 -------- -------- -------- (In thousands) Held to maturity: GNMA-fixed rate .......................... $ 18,278 $29,877 $ 41,090 FHLMC ARMs ............................... 91 131 168 FHLMC-fixed rate ......................... 21,779 34,869 45,803 FNMA-fixed rate .......................... 11,781 15,739 20,756 REMICs ................................... 2,519 12,550 27,043 Other mortgage-backed securities ......... 144 201 282 -------- ------- -------- Total mortgage-backed securities held to maturity ..................... $ 54,592 $93,367 $135,142 ======== ======= ======== Mortgage-backed securities Available-for-sale: FHLMC .................................... $ 699 $ 1,108 $ 1,431 FNMA ..................................... 11,878 22,459 25,679 GNMA ..................................... -- 5,515 7,561 REMICs ................................... 102,666 70,681 63,243 -------- ------- -------- Total mortgage-backed securities available-for-sale ................... $115,243 $99,763 $ 97,914 ======== ======= ======== Mortgage-Backed Securities Maturity. The following table sets forth the maturity and the weighted average coupon ("WAC") of the Bank's mortgage-backed securities portfolio at December 31, 2002. The table does not include estimated prepayments. Adjustable-rate mortgage-backed securities are shown as maturing based on contractual maturities.
Contractual Contractual Held Available To Maturity -For-Sale Maturities Due WAC Maturities Due WAC -------------- --- -------------- --- (Dollars in thousands) Less than 1 year..................... $ 62 7.18% $ 24 6.38% 1 to 3 years......................... 110 9.01 538 6.83 3 to 5 years......................... 2,787 7.34 4,155 6.09 5 to 10 years........................ 4,423 7.09 45,985 5.74 10 to 20 years....................... 2,894 6.96 46,169 5.41 Over 20 years........................ 44,316 6.62 18,372 6.05 ------- ---- -------- ---- Total mortgage-backed securities..... $54,592 6.72% $115,243 5.68% ======= ==== ======== ====
12 Non-Performing and Problem Assets Loan Collection. When a borrower fails to make a required payment on a loan, the Bank takes a number of steps to have the borrower cure the delinquency and restore the loan to current status. In the case of residential mortgage loans and consumer loans, the Bank generally sends the borrower a written notice of non-payment after the loan is 15 days past due. In the event payment is not then received, additional letters and phone calls are made. If the loan is still not brought current and it becomes necessary for the Bank to take legal action, which typically occurs after a loan is delinquent more than 90 days, the Bank will commence foreclosure proceedings against any real property that secures the loan and attempt to repossess any personal property that secures a consumer loan. If a foreclosure action is instituted and the loan is not brought current, paid in full, or refinanced before the foreclosure sale, the real property securing the loan generally is sold at foreclosure. In the case of commercial real estate and multi-family loans, and construction loans, the Bank generally attempts to contact the borrower by telephone after any loan payment is ten days past due and a senior loan officer reviews all collection efforts made if payment is not received after the loan is 30 days past due. Decisions as to when to commence foreclosure actions for commercial real estate and multi- family loans and construction loans are made on a case by case basis. The Bank may consider loan work- out arrangements with these types of borrowers in certain circumstances. On mortgage loans or loan participations purchased by the Bank, the Bank receives monthly reports from its loan servicers with which it monitors the loan portfolio. Based upon servicing agreements with the servicers of the loan, the Bank relies upon the servicer to contact delinquent borrowers, collect delinquent amounts and to initiate foreclosure proceedings, when necessary, all in accordance with applicable laws, regulations and the terms of the servicing agreements between the Bank and its servicing agents. At December 31, 2002 the Bank used third-party servicers to service $149.3 million in mortgage loans, including one servicer that serviced $104.7 million. All of the Bank's third-party mortgage loan servicers are regulated financial institutions or are approved by either HUD, FNMA, or FHLMC to service loans on their behalf. Delinquent Loans. Generally, the Bank reserves for uncollected interest on loans past due more than 90 days; these loans are included in the table of nonaccrual loans below. Loans also are placed on a nonaccrual status when, in the judgment of management, the probability of collection of interest is deemed to be insufficient to warrant further collection. When a loan is placed on nonaccrual status, previously accrued but unpaid interest is deducted from interest income and the further accrual of interest ceases unless the underlying facts that prompted a nonaccrual determination are deemed to have improved significantly. Non-Performing Assets. The following table sets forth information regarding non-accrual loans and real estate owned by the Bank at the dates indicated. The Bank had no loans contractually past due more than 90 days for which accrued interest has been recorded. At December 31, 2002, the Bank had one significant lending relationship involving two loans that were impaired loans within the meaning of SFAS No. 114 and SFAS No. 118. Subsequent to December 31, 2002 these loans were foreclosed upon and the property became real estate owned by the Bank. These loans totaled $1.7 million and are collateralized by commercial real estate. The Bank expects to recover some or all of its loan balances through the liquidation of the collateral, which has been appraised at an amount in excess of $1.7 million. The Bank does not expect a material loss on the liquidation of the collateral, although the timing and ultimate recovery of any proceeds are unknown at this time. 13
Non-performing assets At December 31, ------------------------------------------------- 2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- (Dollars in thousands) Loans accounted for on a non-accrual basis: Mortgage loans: One- to four-family ..................... $1,013 $1,821 $ 869 $ 880 $ 896 Commercial real estate and multi-family . 1,677 1,725 180 24 97 Consumer and other ........................ 1,132 230 421 413 609 ------ ------ ------ ------ ------ Total non-accrual loans ................ 3,822 3,776 1,470 1,317 1,602 ------ ------ ------ ------ ------ Real estate owned, net .................... 84 30 176 546 308 ------ ------ ------ ------ ------ Total non-performing assets ............... $3,906 $3,806 $1,646 $1,863 $1,910 ====== ====== ====== ====== ====== Total non-accrual loans to loans .......... 1.03% 0.99% 0.41% 0.45% 0.65% ====== ====== ====== ====== ====== Total non-accrual loans to total assets ... 0.53% 0.53% 0.20% 0.18% 0.24% ====== ====== ====== ====== ====== Total non-performing assets to total assets 0.54% 0.54% 0.23% 0.26% 0.29% ====== ====== ====== ====== ======
At December 31, 2002, the Bank had no foreign loans and no loan concentrations exceeding 10% of total loans not disclosed in above the table. "Loan concentrations" are considered to exist when there are amounts loaned to a multiple number of borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. Loans recorded in the category of other real estate owned are valued at the lower of book value of loans outstanding or fair market value less cost of disposal. At December 31, 2002, the Bank was not aware of any potential problem loans that are not otherwise included in the foregoing table. "Potential problem loans" are loans where information about possible credit problems of borrowers has caused management to have serious doubts about the borrowers' ability to comply with present repayment terms. Classified Assets. OTS regulations provide for a classification system for problem assets of insured institutions which covers all problem assets. Under this classification system, problem assets of insured institutions are classified as "substandard," "doubtful," or "loss." An asset is considered "substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. "Substandard" assets include those characterized by the "distinct possibility" that the insured institution will sustain "some loss" if the deficiencies are not corrected. Assets classified as "doubtful" have all of the weaknesses inherent in those classified "substandard," with the added characteristic that the weaknesses present make "collection or liquidation in full," on the basis of currently existing facts, conditions and values, "highly questionable and improbable." Assets classified as "loss" are those considered "uncollectible" and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets designated "special mention" by management are assets included on the Bank's internal watchlist because of potential weakness but that do not currently warrant classification in one of the aforementioned categories. When an insured institution classifies problem assets as either substandard or doubtful, it may establish general allowances for loan losses in an amount deemed prudent by management. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies all or a portion of a problem asset as "loss," it is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or 14 to charge off such amount. An institution's determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the OTS, which may order the establishment of additional general or specific loss allowances. A portion of general loss allowances established to cover possible losses related to assets classified as substandard or doubtful may be included in determining an institution's regulatory capital, while specific valuation allowances for loan losses generally do not qualify as regulatory capital. The following table provides further information in regard to the Bank's classified assets as of December 31, 2002. At December 31, 2002 -------------------- (In thousands) Special mention assets............... $1,359 Substandard (1)...................... 3,996 Doubtful assets...................... 468 Loss ................................ -- ------ Total classified assets........... $5,823 ====== - ----------------------------- (1) Substandard assets include approximately $560,000 of performing assets that are less than 90 days delinquent, that are classified for reasons other than delinquency. Real Estate Owned. Real estate acquired by the Bank as a result of foreclosure, judgment or by deed in lieu of foreclosure is classified as real estate owned ("REO") until it is sold. When property is acquired it is recorded at the lower of fair value, minus estimated cost to sell, or cost. If the property subsequently decreases in estimated value from the initial recorded amount, the Bank will provide an additional valuation allowance, through a charge to earnings, if the decrease is judged by management to be temporary, or the Bank will write the property down, through a charge to earnings, to the new estimated value if the decrease is judged by management to be permanent. The Bank records loans as in substance foreclosures if the borrower has little or no equity in the property based upon its documented current fair value and if the borrower has effectively abandoned control of the collateral or has continued to retain control of the collateral but because of the current financial status of the borrower it is doubtful the borrower will be able to repay the loan in the foreseeable future. In substance foreclosures are accounted for as loans until such time that title to the collateral is acquired by the Bank. There may be significant other expenses incurred such as attorney and other extraordinary servicing costs involved with in substance foreclosures. Allowances for Loan Losses. The Bank provides valuation allowances for estimated losses from uncollectible loans. Management determines the adequacy of the allowance on a quarterly basis to ensure that a provision for loan losses has been charged against earnings in an amount necessary to maintain the allowance at a level that is appropriate based on management's estimate of probable losses. Several sources of data are used in making the evaluation as to the appropriateness of the allowance. The Bank's watch list contains all loans which because of past payment history, a review of recent financial information, or other facts regarding the credit, pose a higher than normal amount of perceived risk of collection. Once a loan is deemed to pose other than a normal level of risk of collection, it moves to the classified asset list as either special mention, substandard, doubtful, or loss as required by regulatory 15 guidelines. Classified assets also include all loans over 90 days past due according to the contractual repayment terms. These loans are automatically considered at least substandard. All loans not on the classified asset list are assigned a reserve factor that is based on the Corporation's actual loss experience over the last three years, with a small factor assigned to loans current as to their contractual payments, and an increased factor if the loan is 30 of 60 days past due. Classified loans with balances under $100,000 are typically pooled according to their underlying collateral, and a reserve factor assigned based on historical loss experience. Classified loans are evaluated on an individual basis if the loan balance exceeds $100,000. In such a case, the value of the underlying collateral, which is ordinarily real estate because of the nature of the Corporation's predominant past lending activities, the cost of collection and disposition, and other factors are considered and an estimated reserve level is established. In establishing estimated reserves, current and projected economic conditions as they may affect the borrower and the collateral are considered. If prospects appear poor with respect to collateral disposition, for example, because of economic factors, a lower disposition value and thus a higher reserve level would be established. Similarly, the credit may be guaranteed by a governmental agency, or the collateral value may greatly exceed the loan balance such that no reserve is indicated for these loans that are nevertheless considered classified assets because of their delinquency. If a loan or a portion of a loan is judged to be unrecoverable, that amount is charged off. The calculated reserve determined using the methodologies described above is compared to the actual level of reserves; the difference reflects the imprecision of the multitude of assumptions that are made combined with the variability that can occur with a relatively small amount of troubled assets, and the reserve is maintained at reasonable levels by adjusting the provision that is charged to earnings. 16 The following table sets forth information with respect to the Bank's allowance for loan losses at the dates and for the periods indicated:
For the Years Ended December 31, --------------------------------------------------------- 2002 2001 2000 1999 1998 ------- ------- ------- ------- ------- (Dollars in thousands) Balance at beginning of period .... $ 1,972 $ 1,714 $ 1,917 $ 1,909 $ 2,029 Provision for loan losses ......... 988 500 410 300 60 Charge-offs: One- to four-family ............. (13) -- -- -- -- Commercial and multi-family real estate loans ............. -- -- -- -- -- Consumer and other loans ........ (928) (430) (634) (296) (180) Recoveries: One- to four-family ............. 3 -- -- -- -- Commercial and multi-family real estate loans ............. -- -- -- -- -- Consumer and other loans ........ 25 188 21 4 -- ------- ------- ------- ------- ------- Balance at end of year ............ $ 2,047 $ 1,972 $ 1,714 $ 1,917 $ 1,909 ======= ======= ======= ======= ======= Ratio of net charge-offs during the period to average loans outstanding during the period ... 0.25% 0.07% 0.20% 0.10% 0.08% Ratio of allowance for loan losses to non-performing loans at the end of the period... 53.56% 52.22% 116.0% 145.6% 119.2% Ratio of allowance for loan losses to loans receivable at the end of the period ........ 0.55% 0.52% 0.47% 0.66% 0.78% Ratio of allowance for loan losses and foreclosed real estate to total non-performing assets at the end of the period.. 52.41% 52.60% 114.8% 132.2% 116.1%
17 The following table sets forth the allocation of the Bank's allowance for loan losses by loan category and the percent of loans in each category to total loans receivable, gross, at the dates indicated. The portion of the loan loss allowance allocated to each loan category does not represent the total available for future losses which may occur within the loan category since the total loan loss allowance is a valuation reserve applicable to the entire loan portfolio.
At December 31, ---------------------------------------------------------------------------------------------- 2002 2001 2000 1999 1998 ----------------- ------------------ ------------------ -------------- ------------------ Percent of Percent of Percent of Percent of Percent of Loans to Loans to Loans to Loans to Loans to Total Total Total Total Total Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- (Dollars in thousands) At end of period allocated to: One- to four-family..... $ 119 5.8% $ 216 10.9% $ 97 5.7% $ 242 12.6% $ 168 8.8% Commercial real estate and multi-family....... 1,021 49.9 1,100 55.8 835 48.7 676 35.3 905 47.4 Construction............ 90 4.4 74 3.8 105 6.1 172 9.0 111 5.8 Consumer and other loans................. 817 39.9 582 29.5 677 39.5 826 43.1 725 38.0 ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- Total allowance......... $2,047 100.0% $1,972 100.0% $1,714 100.0% $1,917 100.0% $1,909 100.0% ====== ===== ====== ===== ====== ===== ====== ===== ====== =====
18 Investment Activities The investment policy of the Bank, which is established by the Board of Directors and implemented by the Asset Liability Committee, is designed primarily to provide and maintain liquidity, to generate a favorable return on investments without incurring undue interest rate and credit risk, and to complement the Bank's lending activities. In establishing its investment strategies, the Bank considers its business and growth plans, the economic environment, the types of securities to be held and other factors. Federally chartered savings institutions have the authority to invest in various types of assets, including U.S. Treasury obligations, securities of various federal agencies, certain certificates of deposit of insured banks and savings institutions, certain bankers acceptances, repurchase agreements, loans on federal funds, and, subject to certain limits, commercial paper and mutual funds. The following table sets forth certain information regarding the amortized cost and fair values of the Bank's investments at the dates indicated.
At December 31, --------------------------------------------------------------- 2002 2001 2000 ------------------- ------------------- ------------------- Amortized Fair Amortized Fair Amortized Fair Cost Value Cost Value Cost Value -------- -------- -------- -------- -------- -------- (In thousands) Interest-earning deposits .............. $100,580 $100,580 $ 58,157 $ 58,157 $ 1,965 $ 1,964 ======== ======== ======== ======== ======== ======== Investment securities held-to- maturity: U.S. government and agency obligations ....................... $ 4000 $ 4,125 $ -- $ -- $ 52,499 $ 51,016 State and political subdivisions ....................... 3,700 3,880 5,743 5,787 5,958 5,979 Corporate debt securities ............ 6,863 7,182 4,123 4,043 5,004 4,924 -------- -------- -------- -------- -------- -------- Total .............................. $ 14,563 $ 15,187 $ 9,866 $ 9,830 $ 63,461 $ 61,919 ======== ======== ======== ======== ======== ======== Securities available-for-sale: U.S. government and agency obligations ........................ $ 15,964 $ 16,084 $ 11,018 $ 10,929 $ 12,003 $ 11,967 State and political subdivisions ....................... 453 464 -- -- -- -- Corporate Debt Securities ............ 10,034 10,197 11,070 11,245 6,034 6,004 Mutual funds ......................... 500 498 500 497 500 494 Other .............................. -- -- -- -- 500 400 -------- -------- -------- -------- -------- -------- Total .............................. $ 26,951 $ 27,243 $ 22,588 $ 22,671 $ 19,037 $ 18,865 ======== ======== ======== ======== ======== ========
19 Investment Portfolio Maturities The following table sets forth certain information regarding the amortized cost, weighted average yields and maturities of the Bank's investment securities portfolio, exclusive of interest-earning deposits, at December 31, 2002. Yields on tax exempt obligations have been computed on a tax equivalent basis.
More than Total One Year or Less One to Five Years Five to Ten Years Ten Years Investment Securities(2) ---------------- ----------------- ----------------- ---------------- ------------------------- Amortized Average Amortized Average Amortized Average Amortize Average Amortized Average Fair Cost Yield Cost Yield Cost Yield Cost Yield Cost Yield Value ---- ----- ---- ----- ---- ----- ---- ----- ---- ----- ----- (Dollars in thousands) U.S. government................ $ 9,964 1.24% $ -- --% $ -- --% $ -- --% $ 9,964 1.24% $ 9,969 U.S. government agency -- -- 10,000 4.31 -- -- -- -- 10,000 4.31 10,240 Municipal obligations.......... -- -- 330 4.40 2,155 8.14 1,668 8.14 4,153 6.55 4,344 Corporate obligations.......... 8,007 5.71 8,890 4.60 -- -- -- -- 16,897 5.13 17,379 Other securities(1)............ 500 2.18 -- -- -- -- -- -- 500 2.18 498 ------- ---- ------- ---- ------ ---- ------ ---- ------- ---- ------- Total........................ $18,471 3.20% $19,220 4.45% $2,155 8.14% $1,668 8.14% $41,514 3.82% $42,431 ======= ==== ======= ==== ====== ==== ====== ==== ======= ==== =======
- ---------------- (1) Other securities consists of an investment in adjustable-rate mortgage-backed securities mutual funds. Such investments do not have a stated maturity and are considered in the one year or less category based on quarterly repricing of the investment. (2) Includes $27,243 million of U.S. government and agency obligations and other investments which are carried as available-for-sale at December 31, 2002. Investment securities available-for-sale are carried at fair value. 20 Sources of Funds General. Deposits, borrowings, loan repayments and cash flows generated from operations are the primary sources of the Bank's funds for use in lending, investing and other general purposes. Deposits. The Bank offers a variety of deposit accounts having a range of interest rates and terms. The Bank's deposits consist of regular savings, non-interest bearing checking, NOW checking, money market, and certificate accounts. Of the deposit accounts, $31 million or 7% consist of IRA, Keogh or SEP retirement accounts at December 31, 2002. The flow of deposits is influenced significantly by general economic conditions, changes in money market and prevailing interest rates and competition. The Bank's deposits are primarily obtained from areas surrounding its offices, and the Bank relies primarily on customer service and long-standing relationships with customers to attract and retain these deposits. The Bank has maintained a high level of core deposits consisting of regular savings, money market, non-interest-bearing checking, and NOW checking, which has contributed to a low cost-of-funds. At December 31, 2002, core deposits amounted to 67% of total deposits. The following table sets forth the distribution of the Bank's deposit accounts at the dates indicated and the weighted average nominal interest rates on each category of deposits presented. The Bank does not have significant amount of deposits from out-of-state sources. Management does not believe that the use of year end balances instead of average balances resulted in any material difference in the information presented.
At December 31, ------------------------------------------------------------------------------------------- 2002 2001 2000 ---------------------------- --------------------------------- --------------------------- Weighted Weighted Weighted Percent Average Percent Average Percent Average of Total Nominal of Total Nominal of Total Nominal Amount Deposits Rate Amount Deposits Rate Amount Deposits Rate ------ -------- ---- ------ -------- ---- ------ -------- ---- (Dollars in thousands) Transaction Accounts Interest-bearing checking accounts.. $ 48,496 10.96% 0.60% $ 46,990 11.13% 0.75% $ 35,127 8.76% 1.02% Money market accounts............... 43,677 9.87 1.00 42,557 10.08 2.54 44,325 11.05 3.13 Non-interest-bearing checking accounts.......................... 20,810 4.70 0.00 18,200 4.31 0.00 12,096 3.02 0.00 -------- ------ ---- -------- ------ ---- -------- ------ ---- Total transaction accounts....... 112,983 25.53 107,747 25.52 91,548 22.83 Passbook accounts.................. 182,813 41.31 1.51 169,576 40.18 2.52 155,699 38.85 3.48 Certificates of deposit............. 146,762 33.16 2.84 144,729 34.30 4.29 153,604 38.32 5.32 -------- ------ ---- -------- ------ ---- -------- ------ ---- Total deposits.................. $442,558 100.00% 1.73% $422,052 100.00% 2.82% $400,851 100.00% 3.66% ======== ====== ==== ======== ====== ==== ======== ====== ====
21 At December 31, 2002, the Bank had outstanding certificates of deposit in amounts of $100,000 or more maturing as follows: Amount ------ Maturing Period (In thousands) - --------------- Three months or less................................. $ 3,004 Over three through six months........................ 3,108 Over six through 12 months........................... 3,772 Over 12 months....................................... 9,799 ------- Total............................................ $19,683 ======= Borrowings Deposits are the primary source of funds of the Bank's lending and investment activities and for its general business purposes. The Bank may obtain advances from the FHLB of Pittsburgh to supplement its supply of lendable funds. Advances from the FHLB of Pittsburgh are typically secured by a pledge of the Bank's stock in the FHLB of Pittsburgh and a portion of the Bank's first mortgage loans and certain other assets. The Bank, if the need arises, may also access the Federal Reserve Bank discount window. The following tables set forth the maximum month-end balance, period ending balance, and weighted average balance of outstanding FHLB advances at the dates and for the periods indicated, together with the applicable weighted average interest rates. At December 31, --------------------------------- 2002 2001 2000 -------- -------- -------- (Dollars in thousands) FHLB advances and other borrowings........ $207,359 $223,359 $259,821 ======== ======== ======== Weighted average interest rate............ 5.46% 5.46% 5.78% ==== ==== ==== At December 31, --------------------------------- 2002 2001 2000 -------- -------- -------- (Dollars in thousands) Maximum balance of FHLB advances and other borrowings outstanding............ $222,359 $259,821 $259,889 ======== ======== ======== Weighted average balance of FHLB advances and other borrowings outstanding............................. $218,578 $229,473 $243,656 ======== ======== ======== Weighted average interest rate of FHLB advances and other borrowings........... 5.46% 5.53% 5.68% ==== ==== ==== 22 The Bank uses convertible FHLB advances for a portion of its funding needs. These borrowings are fixed rate, fixed term advances that can be converted to LIBOR-based floating rate advances at the option of the FHLB, on each quarterly interest payment date, after an initial period. The following table sets forth information related to these convertible advances. At December 31, 2002 -------------------- (Dollars in thousands) Date first convertible Contractual Maturity Contractual (month/year) Date (month/year) Amount Interest Rate - ------------ ----------------- ------ ------------- January 2002 April 2003 $5,000 4.74% February 2002 February 2009 15,000 4.74 February 2002 February 2004 25,000 5.10 February 2002 February 2004 20,000 4.94 April 2002 April 2008 10,000 5.41 June 2002 June 2008 15,000 5.63 June 2002 June 2008 10,000 5.61 February 2003 February 2006 20,000 5.15 March 2003 March 2008 25,000 5.70 March 2003 March 2008 10,000 5.61 February 2004 February 2009 10,000 5.05 --------- ---- $ 165,000 5.29% ========= ==== Subsidiary Activity The Bank is permitted to invest up to 2% of its assets in the capital stock of, or secured or unsecured loans to, subsidiary corporations, with an additional investment of 1% of assets when such additional investment is utilized primarily for community development purposes. Under such limitations, as of December 31, 2002, the Bank was authorized to invest up to approximately $14.4 million in the stock of, or loans to, service corporations (based upon the 2% limitation). In addition, the Bank can designate a subsidiary as an operating subsidiary, in which there is no percentage of assets investment limitation, if it engages only in activities in which it would be permissible for the Bank to engage. At December 31, 2002, the Bank had one subsidiary, Third Delaware Corporation. Third Delaware Corporation is a wholly- owned operating subsidiary of the Bank and was formed in 1998 for the purpose of investing in marketable securities. At December 31, 2002, the Bank had $114 million invested in Third Delaware Corporation. Personnel As of December 31, 2002, the Bank had 158 full-time and 20 part-time employees. None of the Bank's employees are represented by a collective bargaining group. The Bank believes that its relationship with its employees is good. Executive Officers of the Registrant Executive Officers of the Bank and the Company: John R. Stranford has been with the Bank since 1968. He presently serves as Chairman of the Board of the Bank, President, Chief Executive Officer, Chief Operating Officer and Director of the 23 Bank and Company. Mr. Stranford has served as Chief Operating Officer of the Bank since 1984 , President of the Bank since January 1994, and Chairman of the Board of the Bank since April 2001. Prior to that time he served in various capacities as an officer of the Bank. Dennis R. Stewart has been Senior Vice President and Chief Financial Officer of the Bank and the Company since May 1999. Prior to that, Mr. Stewart served as Executive Vice President and Chief Financial Officer of First Coastal Bank in Virginia Beach, Virginia, where he had been employed since 1990. Elizabeth Davidson Maier is Senior Vice President and Secretary of the Bank and the Company and has been with the Bank since 1964. Ms. Maier has been an officer of the Bank since 1974. Prior to that, Ms. Maier held various positions at the Bank. Kent C. Lufkin has been with the Bank since 2000. He currently serves as Senior Vice President and Retail Banking Officer. Mr. Lufkin's's prior experience includes 4 years as Chief Executive Officer at Roebling Bank. Earl A. Pace, Jr. was Senior Vice President and Chief Information Officer of the Bank at December 31, 2002. Mr. Pace had been with the Bank since 1997. Previously, he was President and CEO of Pace Data Systems, an information technology consulting firm. Mr. Pace resigned from the Bank effective January 31, 2003. Floyd P. Haggar has been with the Bank since 1998. Mr. Haggar currently serves as Senior Vice President and Chief Lending Officer of the Bank. His prior experience includes four years as Senior Vice President and Senior Loan Officer at Carnegie Bank. The remaining information relating to Directors and Executive Officers of the Registrant is incorporated herein by reference to the Registrant's Proxy Statement for the 2003 Annual Meeting of Stockholders. REGULATION Set forth below is a brief description of all material laws and regulations which relate to the regulation of the Bank and the Company. The description does not purport to be complete and is qualified in its entirety by reference to applicable laws and regulations. On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002 (the "Act"). The Securities and Exchange Commission (the "SEC") promulgated certain regulations pursuant to the Act and will continue to propose additional implementing or clarifying regulations as necessary in furtherance of the Act. The passage of the Act and the regulations implemented by the SEC subject publicly-traded companies to additional and more cumbersome reporting regulations and disclosure. Company Regulation General. The Company is a unitary savings and loan holding company subject to regulatory oversight by the OTS. As such, the Company is required to register and file reports with the OTS and is subject to regulation and examination by the OTS. In addition, the OTS has enforcement authority over the Company and its non-savings association subsidiaries, should such subsidiaries be formed, which also permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the subsidiary 24 savings association. This regulation and oversight is intended primarily for the protection of the depositors of the Bank and not for the benefit of stockholders of the Company. The Company is also required to file certain reports with, and otherwise comply with, the rules and regulations of the OTS and the SEC. Financial Modernization. The Gramm-Leach-Bliley Act ("GLB") permits qualifying bank holding companies to become financial holding companies and thereby affiliate with securities firms and insurance companies and engage in other activities that are financial in nature. GLB defines "financial in nature" to include securities underwriting, dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and agency; merchant banking activities; and activities that the Federal Reserve Board has determined to be closely related to banking. A qualifying national bank also may engage, subject to limitations on investment, in activities that are financial in nature, other than insurance underwriting, insurance company portfolio investment, real estate development, and real estate investment, through a financial subsidiary of the bank. GLB also prohibits new unitary thrift holding companies from engaging in nonfinancial activities or from affiliating with a nonfinancial entity. As a grandfathered unitary thrift holding company, the Company has retained its authority to engage in nonfinancial activities. QTL Test. As a unitary savings and loan holding company, the Company generally is not subject to activity restrictions, provided the Bank satisfies the QTL test. If the Company acquires control of another savings association as a separate subsidiary, it would become a multiple savings and loan holding company, and the activities of the Company and any of its subsidiaries (other than the Bank or any other SAIF-insured savings association) would become subject to restrictions applicable to bank holding companies unless such other associations each also qualify as a QTL and were acquired in a supervisory acquisition. Bank Regulation General. As a federally chartered, SAIF-insured savings association, the Bank is subject to extensive regulation by the OTS and the FDIC. Lending activities and other investments must comply with various federal statutory and regulatory requirements. The Bank is also subject to certain reserve requirements promulgated by the Federal Reserve Board. The OTS, in conjunction with the FDIC, regularly examines the Bank and prepares reports for the consideration of the Bank's Board of Directors on any deficiencies that they find in the Bank's operations. The Bank's relationship with its depositors and borrowers is also regulated to a great extent by federal law, especially in such matters as the ownership of savings accounts and the form and content of the Bank's mortgage documents. The Bank must file reports with the OTS and the FDIC concerning its activities and financial condition, in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with or acquisitions of other savings institutions. This regulation and supervision establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of the SAIF and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such regulations, whether by the OTS, the FDIC or the Congress could have a material adverse impact on the Company, the Bank and their operations. The 25 Company is also required to file certain reports with, and otherwise comply with, the rules and regulations of the OTS and the SEC. Insurance of Deposit Accounts. The Bank's deposit accounts are insured by the SAIF to a maximum of $100,000 for each insured member (as defined by law and regulation). The FDIC has the authority, should it initiate proceedings to terminate an institution's deposit insurance, to suspend the insurance of any such institution without tangible capital. However, if a savings association has positive capital when it includes qualifying intangible assets, the FDIC cannot suspend deposit insurance unless capital declines materially, the institution fails to enter into and remain in compliance with an approved capital plan or the institution is operating in an unsafe or unsound manner. Regardless of an institution's capital level, insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or the institution's primary regulator. The management of the Bank is unaware of any practice, condition or violation that might lead to termination of its deposit insurance. The FDIC charges an annual assessment for the insurance of deposits based on the risk a particular institution poses to its deposit insurance fund. This risk classification is based on an institution's capital group and supervisory subgroup assignment. Regulatory Capital Requirements. OTS capital regulations require savings institutions to meet three capital standards: (1) tangible capital equal to 1.5% of total adjusted assets, (2) a leverage ratio (core capital) equal to at least 4% of total adjusted assets and (3) a risk-based capital requirement equal to 8.0% of total risk-weighted assets. In addition, the OTS prompt corrective action regulation provides that a savings institution that has a leverage capital ratio of less than 4% (3% for institutions receiving the highest examination rating) will be deemed to be "undercapitalized" and may be subject to certain restrictions. At December 31, 2002, the Bank was in compliance with all of its regulatory capital requirements. Dividend and Other Capital Distribution Limitations. The Bank may not declare or pay a cash dividend on its capital stock if the effect thereof would be to reduce the regulatory capital of the Bank below the amount required for the liquidation account established at the time of the Bank's mutual-to-stock conversion. Savings associations that would remain at least adequately capitalized following the capital distribution, and that meet other specified requirements, are not required to file a notice or application for capital distributions (such as cash dividends) declared below specified amounts. Savings associations which are eligible for expedited treatment under current OTS regulations are not required to file an application with the OTS if (i) the savings association would remain at least adequately capitalized following the capital distribution and (ii) the amount of capital distribution does not exceed an amount equal to the savings association's net income for that year to date, plus the savings association's retained net income for the previous two calendar years. Thus, only undistributed net income for the prior two years may be distributed in addition to the current year's undistributed net income without the filing of an application with the OTS. Savings associations which do not qualify for expedited treatment or which desire to make a capital distribution in excess of the specified amount, must file an application with, and obtain the approval of, the OTS prior to making the capital distribution. A savings association such as the Bank that is a subsidiary of a savings and loan holding company, and under certain other circumstances, must file a notice with OTS prior to making the capital distribution. 26 Qualified Thrift Lender Test. The Home Owners' Loan Act ("HOLA"), as amended, requires savings institutions to meet a QTL test. If the Bank maintains an appropriate level of Qualified Thrift Investments (primarily residential mortgages and related investments, including certain mortgage-backed securities) ("QTIs") and otherwise qualifies as a QTL, it will continue to enjoy full borrowing privileges from the FHLB of Pittsburgh. The required percentage of QTIs is 65% of portfolio assets (defined as all assets minus intangible assets, property used by the institution in conducting its business and liquid assets equal to 10% of total assets). Certain assets are subject to a percentage limitation of 20% of portfolio assets. In addition, savings associations may include shares of stock of the FHLBs, FNMA and FHLMC as qualifying QTIs. The FDICIA also amended the method for measuring compliance with the QTL test to be on a monthly basis in nine out of every 12 months, as opposed to on a daily or weekly average of QTIs. As of December 31, 2002, the Bank was in compliance with its QTL requirement with 81% of its assets invested in QTIs. Federal Home Loan Bank System. The Bank is a member of the FHLB of Pittsburgh, one of 12 regional FHLBs that administer the home financing credit function of savings associations. Each FHLB serves as a reserve or central bank for its members within its assigned region. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It makes loans to members (i.e., advances) in accordance with policies and procedures established by the Board of Directors of the FHLB. As a member, the Bank is required to purchase and maintain stock in the FHLB of Pittsburgh in an amount equal to at least 1% of its aggregate unpaid residential mortgage loans, home purchase contracts or similar obligations at the beginning of each year. At December 31, 2002, the Bank had $11.4 million in FHLB stock, which was in compliance with this requirement. Federal Reserve System. The Federal Reserve Board requires all depository institutions to maintain non-interest bearing reserves at specified levels against their transaction accounts (primarily checking, NOW and Super NOW checking accounts) and non-personal time deposits. The balances maintained to meet the reserve requirements imposed by the Federal Reserve Board may be used to satisfy the liquidity requirements that are imposed by the OTS. At December 31, 2002, the Bank's total transaction accounts required a reserve level of $3.8 million which was offset by the Bank's vault cash on hand and cash on deposit at the Federal Reserve Bank of Philadelphia. Savings associations have authority to borrow from the Federal Reserve Bank "discount window," but Federal Reserve policy generally requires savings associations to exhaust all OTS sources before borrowing from the Federal Reserve System. The Bank had no such borrowings at December 31, 2002. Item 2. Properties - ------------------ The Company is located and conducts its business at 3 Penns Trail, Newtown, Pennsylvania. At December 31, 2002, the Bank operated from its main office and thirteen branch offices located in Philadelphia and Bucks Counties, Pennsylvania and Mercer County, New Jersey. The Bank also owns two lots, one of which has a building, behind its Doylestown branch office. The building is leased to a third- party and the other is used as a parking lot for employees of the Bank and tenants. The net book value of the two lots was $100,000. In addition, a subsidiary of the Company, Penns Trail Development Corporation, owns investment property with a book value of $769,000. 27 The following table sets forth certain information regarding the Bank's operating properties:
Leased or Leased or Location Owned Location Owned - --------------------------- ------------- ------------------------- ------------ ADMINISTRATIVE OFFICE OPERATIONS OFFICE Newtown Office Operations Center 3 Penns Trail 62 Walker Lane Newtown, PA 18940 Owned Newtown, PA 18940(1) Owned BRANCH OFFICES Frankford Office Newtown Office 4625 Frankford Avenue 950 Newtown Yardley Road Philadelphia, PA 19124 Owned Newtown, PA 18940 Leased Ewing Office Mayfair Office 2075 Pennington Road Roosevelt Blvd. at Unruh Ewing, NJ 08618 Owned Philadelphia, PA 19149 Owned Hamilton Office Doylestown Office 1850 Route 33 60 North Main Street Hamilton Square, NJ 08690 Owned Doylestown, PA 18901 Owned Fishtown Office Feasterville Office York & Memphis Streets Buck Hotel Complex Philadelphia, PA 19125 Owned Feasterville, PA 19053 Leased Cross Keys Office Quakerbridge Office 834 North Easton Highway 590 Lawrence Square Blvd. Doylestown, PA 18901 Owned Lawrenceville, NJ 08648 Leased Bridesburg Office Woodhaven Office Orthodox & Almond Streets Knights Road Center Philadelphia, PA 19137 Owned 4014 Woodhaven Road Philadelphia, PA 19154 Leased New Britain Office Northern Liberties Office 600 Town Center 905 North 2nd Street New Britain, PA 18901 Leased Philadelphia, PA 19123 Leased
- --------------- (1) This office serves as the computer operations center, check processing area, training center, mail processing and storage center for the Bank. 28 Item 3. Legal Proceedings - ------------------------- Neither the Company nor its subsidiaries are involved in any pending legal proceedings, other than routine legal matters occurring in the ordinary course of business, which in the aggregate involve amounts which are believed by management to be immaterial to the consolidated financial condition or results of operations of the Company. Item 4. Submission of Matters to a Vote of Security Holders - ----------------------------------------------------------- None. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters - ----------------------------------------------------------------------------- Information relating to the market for Registrant's common equity and related stockholder matters appears under the section captioned "Stock Market Information" in the Registrant's 2002 Annual Report to Stockholders and is incorporated herein by reference. Item 6. Selected Financial Data - ------------------------------- The above-captioned information appears under the section captioned "Selected Financial and Other Data" in the Registrant's 2002 Annual Report to Stockholders and is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results - -------------------------------------------------------------------------------- of Operations ------------- The information under the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Registrant's 2002 Annual Report to Stockholders is incorporated herein by reference. Item 7A. Liquidity - ------------------ The following table illustrates, in one place, the Company's contractual obligations and commitments to make future payments as of December 31, 2002 (in 000's):
Total Less than 1 year 1-3 years 4-5 years After 5 years ----- ---------------- --------- --------- ------------- Contractual obligations: Payments due by period - ------------------------ ---------------------- FHLB advances $207,359 $27,000 $57,000 $25,000 $98,359 Time deposits 146,762 96,669 43,426 6,354 313 Operating leases 523 190 218 77 38 -------- -------- -------- ------- ------- Total contractual obligations $354,644 $123,859 $100,644 $31,431 $98,710 ======== ======== ======== ======= ======= Commitments: Amount of commitment expirations by period - ------------ --------------------------------------------------------------------- Extensions of credit $35,983 $23,766 $422 $ 13 $11,782 Letters of credit 1,548 1,379 169 -- -- Loans sold with recourse 163 -- -- -- 163 ------- ------- ---- ---- ------- Total commitments $37,694 $25,145 $591 $ 13 $11,945 ======= ======= ==== ==== =======
29 Item 7B. Quantitative and Qualitative Disclosures About Market Risk - ------------------------------------------------------------------- Asset and Liability Management Managing Interest Rate Risk. Interest rate risk is defined as the sensitivity of the Bank's current and future earnings as well as its capital to changes in the level of market interest rates. The Bank's exposure to interest rate risk results from, among other things, the difference in maturities in interest- earning assets and interest-bearing liabilities. Since the Bank's assets currently have a longer maturity than its liabilities, the Bank's earnings could be negatively impacted during a period of rising interest rates and conversely, positively impacted during a period of falling interest rates. The relationship between the interest rate sensitivity of the Bank's assets and liabilities is continually monitored by management. In this regard, the Bank emphasizes the origination of shorter term or adjustable rate assets for portfolio. The Bank utilizes its investment and mortgage-backed security portfolios to generate additional interest income and in managing its liquidity. These securities are readily marketable and provide the Bank with a cash flow stream to fund asset growth or liability maturities. A significant portion of the Bank's assets has been funded with CDs including jumbo CDs. Unlike other deposit products such as checking and savings accounts, CDs carry a high degree of interest rate sensitivity and, therefore, their renewal will vary based on the competitiveness of the Bank's interest rates. At December 31, 2002, approximately 33% of the Bank's deposits were CDs. The Bank utilizes borrowings from the FHLB in managing its interest rate risk and as a tool to augment deposits in funding asset growth. The Bank may utilize these funding sources to better match its longer term repricing assets (i.e., between one and five years). The nature of the Bank's current operations is such that it is not subject to foreign currency exchange or commodity price risk. Additionally, neither the Company nor the Bank owns any trading assets. At December 31, 2002, the Bank did not have any hedging transactions in place such as interest rate swaps, caps, or floors. As part of its interest rate risk management, the Bank uses the Interest Rate Risk Exposure Report, which is generated quarterly by the OTS. This report forecasts changes in the Bank's market value of portfolio equity ("MVPE") under alternative interest rate environments. The MVPE is defined as the net present value of the Bank's existing assets, liabilities and off-balance sheet instruments. The calculated estimates of change in MVPE at December 31, 2002 are as follows: MVPE ----------------------------------------------------------- Change in Interest Rates(1) Amount % Change --------------------------- ------ -------- (In Thousands) +300 Basis Points $54,724 -12% +200 Basis Points $60,496 -3% +100 Basis Points $64,250 +3% Flat Rates $62,379 0% -100 Basis Points $55,360 -11% - ----------------------- (1) The -200 and -300 bp scenarios are not shown due to the low interest rate environment. 30 Management believes that the assumptions utilized by OTS in evaluating the vulnerability of the Company's capital to changes in interest rates are reasonable; however, the interest rate sensitivity of the Bank's assets and liabilities as well as the estimated effect of changes in interest rates on MVPE could vary substantially if different assumptions are used or actual experience differs from the experience on which the assumptions were based. In the event the Bank should measure an excessive decline in its MVPE as the result of an immediate and sustained change in interest rate, it has a number of options which it could utilize to remedy that situation. The Bank could restructure its investment portfolio through sale or purchase of securities with more favorable repricing attributes. It could also emphasize loan products with appropriate maturities or repricing attributes, or it could attract deposits or obtain borrowings with desired maturities. Item 8. Financial Statements and Supplementary Data - --------------------------------------------------- The Consolidated Financial Statements of TF Financial Corporation and its subsidiaries included in the Registrant's 2002 Annual Report to Stockholders are incorporated herein by reference. Item 9. Changes in and Disagreements With Accountants on Accounting and - -------------------------------------------------------------------------------- Financial Disclosure -------------------- None. PART III Item 10. Directors and Executive Officers of the Registrant - ----------------------------------------------------------- The information contained under the sections captioned "Proposal 1 - Election of Directors -- General Information and Nominees" and "-- Biographical Information" and "Additional Information About Directors and Executive Officers - -- Section 16(a) Beneficial Ownership Reporting Compliance" in the Registrant's definitive proxy statement for the Registrant's 2002 Annual Meeting of Stockholders (the "Proxy Statement") is incorporated herein by reference. Additional information concerning executive officers is included under "Item 1. Business -- Executive Officers of the Registrant." Item 11. Executive Compensation - ------------------------------- The information relating to executive compensation is incorporated herein by reference to the information contained under the section captioned "Director and Executive Officer Compensation" in the Registrant's Proxy Statement. 31 Item 12. Security Ownership of Certain Beneficial Owners and Management - ----------------------------------------------------------------------- (a) Security Ownership of Certain Beneficial Owners Information required by this item is incorporated herein by reference to the Section captioned "Voting Securities and Principal Holders Thereof" in the Registrant's Proxy Statement. (b) Security Ownership of Management Information required by this item is incorporated herein by reference to the section captioned "Proposal 1 -- Election of Directors" in the Registrant's Proxy Statement. (c) Management of the Company knows of no arrangements, including any pledge by any person of securities of the Company, the operation of which may at a subsequent date result in a change in control of the registrant. (d) Securities Authorized for Issuance Under Equity Compensation Plans Set forth below is information as of December 31, 2002 with respect to compensation plans under which equity securities of the Registrant are authorized for issuance.
EQUITY COMPENSATION PLAN INFORMATION (a) (b) (c) Number of securities Number of securities Weighted-average remaining available for to be issued upon exercise price of future issuance under exercise of outstanding equity compensation outstanding options, options, warrants plans (excluding securities warrants and rights and rights reflected in column (a)) ------------------- ---------- ------------------------ Equity compensation plans approved by shareholders(1)....... 633,973 $14.08 135,027 Equity compensation plans not approved by shareholders(2)... 25,000 14.75 -- ------- ------ ------- TOTAL.......................... 658,973 $14.11 135,027 ======= ====== =======
- --------------- (1) Plans approved by stockholders include: TF Financial Corporation 1994 Stock Option Plan, TF Financial Corporation 1997 Stock Option Plan. (2) Plans not approved by stockholders include: TF Financial Corporation 1996 Directors Stock Option Plan For information regarding the material features of these plans, see Note A8 to the Consolidated Financial Statements included as part of Exhibit 13 to this report. 32 Item 13. Certain Relationships and Related Transactions - ------------------------------------------------------- The information relating to certain relationships and related transactions is incorporated herein by reference to the information contained under the section captioned "Additional Information About Directors and Executive Officers -- Certain Relationships and Related Transactions" in the Registrant's Proxy Statement. Item 14. Controls and Procedures - -------------------------------- (a) Evaluation of disclosure controls and procedures. Based on their -------------------------------------------------- evaluation as of a date within 90 days of the filing date of this Annual Report on Form 10-K, the Registrant's principal executive officer and principal financial officer have concluded that the Registrant's disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934 (the "Exchange Act")) are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. (b) Changes in internal controls. There were no significant changes in ---------------------------- the Registrant's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. PART IV Item 15. Exhibits, Financial Statements and Reports on Form 8-K - --------------------------------------------------------------- (a) The following documents are filed as a part of this report: (1) The following financial statements and the report of the independent auditor of the Company included in the Company's 2002 Annual Report to Stockholders are incorporated herein by reference. Independent Auditors' Report Consolidated Statements of Financial Position as of December 31, 2002 and 2001 Consolidated Statements of Earnings For the Years Ended December 31, 2002, 2001 and 2000 Consolidated Statement of Changes in Stockholders' Equity and Comprehensive Income for the Years Ended December 31, 2002, 2001 and 2000 Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000 Notes to Consolidated Financial Statements The remaining information appearing in the Annual Report to Stockholders is not deemed to be filed as part of this report, except as expressly provided herein. (2) All schedules are omitted because they are not required or applicable, or the required information is shown in the consolidated financial statements or the notes thereto. 33 (3) Exhibits (a) The following exhibits are filed as part of this report.
3.1 Certificate of Incorporation of TF Financial Corporation* 3.2 Bylaws of TF Financial Corporation* 4.0 Stock Certificate of TF Financial Corporation* 4.1 The Company's Rights Agreement dated November 22, 1995** 10.1 Third Federal Savings and Loan Association Management Stock Bonus Plan* 10.2 TF Financial Corporation 1994 Stock Option Plan* 10.3 Third Federal Savings Bank Directors Consultation and Retirement Plan*** 10.4 TF Financial Corporation Incentive Compensation Plan*** 10.5 Severance Agreement with John R. Stranford*** 10.6 Severance Agreement with Kent C. Lufkin**** 10.7 Severance Agreement with Floyd P. Haggar**** 10.8 Severance Agreement with Earl A. Pace, Jr.***** 10.9 Severance Agreement with Dennis R. Stewart****** 10.10 TF Financial Corporation 1997 Stock Option Plan******* 10.11 Severance Agreement with Robert N. Dusek******** 10.12 TF Financial Corporation 1996 Directors Stock Option Plan 13.0 2002 Annual Report to Stockholders 21.0 Subsidiary Information 23.0 Consent of Independent Auditor 99.0 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
- ------------------- * Incorporated herein by reference from the Exhibits to Form S-1, Registration Statement, File No. 33-76960. ** Incorporated herein by reference to the Registrants Form 8-A filed with the Securities and Exchange Commission on November 22, 1995. *** Incorporated herein by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1995. **** Incorporated herein by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2000. ***** Incorporated herein by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1998. ****** Incorporated herein by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1999. ******* Incorporated herein by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. ******** Incorporated herein by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2001. (b) Reports on Form 8-K. During the last quarter of the year ended December 31, 2002, the Registrant filed no Current Reports on Form 8-K. 34 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. TF FINANCIAL CORPORATION Dated: March 26, 2003 By: /s/ John R. Stranford ---------------------------------- John R. Stranford President, Chief Executive Officer and Director (Duly Authorized Representative) Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated as of March 26, 2003.
By: /s/ John R. Stranford By: /s/ Dennis R. Stewart ------------------------------------ ----------------------------------- John R. Stranford Dennis R. Stewart President, Chief Executive Officer Senior Vice President, Chief and Director Financial Officer and Treasurer (Principal Executive Officer) (Principal Financial and Accounting Officer) By: /s/ Carl F. Gregory By: /s/ Robert N. Dusek ------------------------------------ ----------------------------------- Carl F. Gregory Robert N. Dusek Director Chairman of the Board By: /s/ Thomas J. Gola By: /s/ George A. Olsen ------------------------------------ ----------------------------------- Thomas J. Gola George A. Olsen Director Director
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, John R. Stranford, President and Chief Executive Officer, certify that: 1. I have reviewed this annual report on Form 10-K of TF Financial Corporation (Registrant); 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this annual report; 4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and 6. The Registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 26, 2003 /s/John R. Stranford ------------------------------------------ John R. Stranford President and Chief Executive Officer (Principal Executive Officer) CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Dennis R. Stewart, Vice President and Chief Financial Officer, certify that: 1. I have reviewed this annual report on Form 10-K of TF Financial Corporation (Registrant); 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this annual report; 4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and 6. The Registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 26, 2003 /s/Dennis R. Stewart ------------------------------------------- Dennis R. Stewart Vice President and Chief Financial Officer (Principal Financial & Accounting Officer) EX-10 3 ex10-12.txt 1996 STOCK OPTION AGREEMENT STOCK OPTION AGREEMENT ---------------------- FOR STOCK OPTIONS PURSUANT TO THE TF FINANCIAL CORPORATION 1996 DIRECTORS STOCK OPTION PLAN STOCK OPTIONS for a total of shares ___________ of Common Stock, par value $.10 per share, of TF Financial Corporation (the "Company") is hereby granted to ___________ (the "Optionee") at the price determined as provided in, and in all respects subject to the terms, definitions and provisions of the 1996 Directors Stock Option Plan (the "Plan") adopted by the Company which is incorporated by reference herein, receipt of which is hereby acknowledged. Such Stock Options do not comply with Options granted under Section 422 of the Internal Revenue Code of 1986, as amended. 1. Option Price. The Option price is $14.75 for each Share, being 100% of the fair market value, as determined by the Committee, of the Common Stock on the date of grant of this Option. 2. Exercise of Option. (a) Date of Exercisability. This Option shall be exercisable immediately upon the date of grant in accordance with provisions of the Plan. Notwithstanding any provisions in this Section 2, in no event shall this Option be exercisable prior to six months following the date of grant, except in the event of the death or disability of the Optionee. (b) Method of Exercise. This Option shall be exercisable by a written notice which shall: (i) State the election to exercise the Option, the number of Shares with respect to which it is being exercised, the person in whose name the stock certificate or certificates for such Shares of Common Stock is to be registered, his address and Social Security Number (or if more than one, the names, addresses and Social Security Numbers of such persons); (ii) Contain such representations and agreements as to the holder's investment intent with respect to such shares of Common Stock as may be satisfactory to the Company's counsel; (iii) Be signed by the person or persons entitled to exercise the Option and, if the Option is being exercised by any person or persons other than the Optionee, be accompanied by proof, satisfactory to counsel for the Company, of the right of such person or persons to exercise the Option; and (iv) Be in writing and delivered in person or by certified mail to the Treasurer of the Company. Payment of the purchase price of any Shares with respect to which the Option is being exercised shall be by certified or bank cashier's or teller's check. The certificate or certificates for shares of Common Stock as to which the Option shall be exercised shall be registered in the name of the person or persons exercising the Option. (c) Restrictions on Exercise. This Option may not be exercised if the issuance of the Shares upon such exercise would constitute a violation of any applicable federal or state securities or other law or valid regulation. As a condition to the Optionee's exercise of this Option, the Company may require the person exercising this Option to make any representation and warranty to the Company as may be required by any applicable law or regulation. 3. Non-transferability of Option. This Option may not be transferred in any manner otherwise than by will or the laws of descent or distribution and may be exercised during the lifetime of the Optionee only by the Optionee. The terms of this Option shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee. 4. Term of Option. This Option may not be exercised more than ten (10) years from the date of grant of this Option, as set forth below, and may be exercised during such term only in accordance with the Plan and the terms of this Option. 5. Dividend Equivalent Rights. The Stock Options represented by this Agreement shall include the right of the Optionee to receive payment of dividend equivalent rights. Such rights shall provide that upon the payment of a cash dividend on the Common Stock, the holder of such Options shall receive payment of cash in an amount equivalent to the cash dividend payable as if such Options had been exercised and such Common Stock held as of the dividend record date. Such rights shall expire upon the expiration or exercise of such underlying Options. Such rights are non-transferable and shall attach to Options represented by this Agreement whether or not such Options are immediately exercisable. 2 6. Related Matters. Notwithstanding anything herein to the contrary, additional conditions or restrictions related to such Options may be contained in the Plan or the resolutions of the Plan Committee authorizing such grant of Options. TF Financial Corporation Date of Grant: May 21, 1996 By: /s/John R. Stranford ----------------------------- John R. Stranford, President Attest: [SEAL] 3 EX-13 4 ex-13.txt ANNUAL REPORT To our stockholders Throughout 2002 interest rates continued to decline as the Federal Reserve attempted to stimulate our weakened economic environment. Technology stocks led the decline in all major stock markets. The negative impact on household investment and retirement plans was dramatic. This led many families to seek the safety of insured deposits where the yields were low but their principal was protected from loss. Through the introduction of "seven-day-a-week" banking hours in each of our market areas and by maintaining our focus on superior customer service initiatives, we experienced a 5% gain in deposits to $442.6 million. The one bright spot for families around the country was the opportunity to refinance their mortgages at a much lower interest rate. The rate of refinancing during 2002 was unprecedented. Because our portfolio contains a large amount of mortgage-related investment securities and loans, we received a record amount of prepayments throughout 2002. We ramped up our lending operations to reinvest these funds in short-to-intermediate-term mortgages and consumer loans. Despite our best efforts, loan repayments exceeded our lending and loan purchase transactions. This left us with over $100 million in liquidity at a very low yield at December 31, 2002. We plan to continue our aggressive lending and loan purchase programs aimed primarily at the short and intermediate term to limit our interest rate risk profile. As prepayments slow, our liquidity will be reinvested at higher rates. In the first quarter of 2003, we opened our fourteenth branch in the Northern Liberties section of Philadelphia. This section of Northeast Philadelphia has experienced a substantial amount of redevelopment in recent years. Property values are rising and the improvements are expected to continue for the foreseeable future. We expect this office to be a strong loan and deposit generator. We will continue to serve our customers with the personal attention of a community bank while offering the products and services of a regional bank. We are committed to increasing profitability and shareholder value in the future. The Board of Directors and I would like to express our appreciation to our employees, shareholders and customers for your continued support and confidence. /s/John R. Stranford John R. Stranford President and Chief Executive Officer 1 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, 2002, total assets were approximately $721.0 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, 2002, total stockholders' equity was approximately $62.8 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 the branch facility in its administrative office location in Newtown and simultaneously opened a larger, freestanding branch at a nearby site. During the first quarter of 2001 the Corporation closed its branch facility in Princeton, New Jersey and transferred the deposits to its branch office in Lawrenceville, New Jersey. During December 2001 the Corporation closed the sale of $10.2 million in deposits at what had been a leased branch facility in Warminster, Pennsylvania. As of December 31, 2002 Third Federal operated thirteen branch offices in Bucks and Philadelphia counties, Pennsylvania and Mercer County, New Jersey. During the first quarter of 2003 the Savings Bank opened its fourteenth branch office in the Northern Liberties neighborhood in Philadelphia. Third Federal attracts deposits (approximately $442.6 million at December 31, 2002) from the general public and uses such deposits, together with borrowings mainly from the Federal Home Loan Bank of Pittsburgh (approximately $207.4 million at December 31, 2002) 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 17, 2003, was approximately 550. 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 Quoted market price Dividend paid Quarter ended High Low per share - ------------- ---- --- ------------- December 31, 2002 $25.510 $20.330 $0.15 September 30, 2002 $23.710 $19.700 $0.15 June 30, 2002 $24.800 $22.070 $0.15 March 31,2002 $23.500 $21.050 $0.15 December 31, 2001 $21.750 $18.880 $0.15 September 30, 2001 $23.700 $17.800 $0.15 June 30, 2001 $19.790 $16.950 $0.14 March 31, 2001 $18.063 $15.625 $0.14 2 SELECTED FINANCIAL INFORMATION AND OTHER DATA
Financial Condition At December 31, --------------- (Dollars in thousands, except per share data) 2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- Total assets $721,032 $711,204 $723,297 $721,874 $665,608 Loans receivable, net 370,092 377,635 361,806 287,979 240,841 Mortgage-backed securities available for sale, at fair value 115,243 99,763 97,914 132,515 75,285 Mortgage-backed securities held to maturity, at amortized cost 54,592 93,367 135,142 159,888 180,964 Securities purchased under agreements to resell - - - - - Investment securities available for sale, at fair value 27,243 22,671 18,865 21,930 9,042 Investment securities held to maturity, at amortized cost 14,563 9,866 63,461 66,760 80,895 Cash and cash equivalents(l) 100,580 69,139 10,618 16,715 42,703 Deposits 442,558 422,052 400,851 401,698 438,913 Advances from the Federal Home Loan Bank and other borrowings 207,359 222,359 259,821 264,299 163,359 Retained earnings 59,978 56,370 52,061 48,905 45,842 Total stockholders' equity 62,840 57,975 53,109 48,447 52,660 Book value per common share $25.31 $23.51 $21.32 $18.81 $18.43 Tangible book value per common share $23.34 $21.44 $18.99 $16.26 $15.84
Summary of Operations At or for the year ended December 31, ------------------------------------- 2002 2001 2000 1999 1998(2) ---- ---- ---- ---- ------- Interest income $40,455 $46,747 $48,708 $47,022 $43,579 Interest expense 22,660 26,908 28,921 27,974 26,195 Net interest income 17,795 19,839 19,787 19,048 17,384 Provision for loan losses 988 500 410 300 60 Non-interest income 3,304 3,172 1,432 1,589 1,535 Non-interest expense 13,414 14,708 14,404 13,529 12,722 Net income before cumulative effect of change in accounting method 5,092 5,733 4,482 4,422 3,830 Net income 5,092 5,733 4,482 4,422 4,038 Earnings per common share - basic Continuing operations $2.06 $2.32 $1.76 $1.60 $1.32 Cumulative effect of accounting change - - - - $0.07 Earnings per common share - basic $2.06 $2.32 $1.76 $1.60 $1.39 Earnings per common share - diluted Continuing operations $1.91 $2.19 $1.72 $1.54 $1.23 Cumulative effect of accounting change - - - - $0.07 Earnings per common share - diluted $1.91 $2.19 $1.72 $1.54 $1.30 Performance Ratios and Other Selected Data Return on average assets 0.71% 0.82% 0.63% 0.62% 0.58% Return on average equity 8.47% 10.42% 9.18% 8.60% 7.39% Average equity to average assets 8.34% 7.83% 6.86% 7.17% 7.74% Average interest rate spread 2.42% 2.74% 2.70% 2.54% 2.44% Non-performing loans to total assets 0.53% 0.53% 0.20% 0.18% 0.24% Non-performing loans to total loans 1.03% 0.99% 0.41% 0.45% 0.65% Allowance for loan losses to non-performing loans 53.86% 52.22% 115.97% 145.56% 119.16% Allowance for loan losses to total loans 0.55% 0.52% 0.47% 0.66% 0.78% Savings Bank regulatory capital Core 6.85% 6.95% 6.18% 5.76% 6.79% Tangible 6.85% 6.95% 6.18% 5.76% 6.79% Risk based 15.25% 14.95% 11.97% 12.83% 17.73% Dividend payout ratio (3) 31.41% 26.48% 30.23% 31.82% 36.92%
(1) Consists of cash, cash due from banks, interest-bearing deposits with maturities of less than three months, and federal funds sold. (2) 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). (3) Payout ratio is dividends paid for the period divided by earnings per common share - diluted after cumulative effect of accounting change. 3 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 Third Federal incurs on its deposits, borrowings and other sources of funds. In addition, the mix of Third Federal's interest bearing assets and liabilities can have a significant effect on 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 Assets. The Corporation's total assets at December 31, 2002 were $721.0 million, an increase of $9.8 million during the year. The increase was mainly the combined result of the net change in various asset categories as described more fully below. Loans receivable, net, decreased by $7.5 million or 2.0%. During the year, market interest rates were relatively low compared to the interest rates many borrowers were paying the Savings Bank on loans held in the Savings Bank's loan portfolio causing a large number of borrowers with the higher interest rates on their loans to refinance them. Many of these loans were refinanced elsewhere. While the Savings Bank originated $80.9 million in loans, repayments of existing loans totaled $147.3 million. Consequently, the Savings Bank subsidized its own loan originations with approximately $74.6 million 4 of loan purchases. Purchased loans generally have lower yields than otherwise equivalent originated loans. Investment securities available for sale increased by $4.6 million, net, and mortgage-backed securities available for sale increased by $15.5 million, net during 2002. The Corporation purchased $103.2 million of these securities during the year, $38.4 million were sold generating gains of $1.2 million, and $44.7 million matured or were otherwise repaid. The securities sales were undertaken in order to realize the gains that had accumulated due to decreasing market interest rates. The securities purchased were generally short-term in nature with less than a four year average life in order to lessen the Corporation's interest rate risk as compared to the purchase of longer average life securities even though the longer securities generally have higher yields. Mortgage-backed securities held to maturity decreased by $38.8 million or 41.5% during 2002. This decrease occurred due to the increased prepayment of the underlying mortgages comprising the securities, which was the result of near record low mortgage rates throughout the year, resulting in an increased number of mortgagors refinancing their mortgages into lower interest rates. As a result of the net decrease in the Corporation's mortgage-related assets, growth in deposits, and the inability to repay long-term borrowings from the Federal Home Loan Bank without incurring substantial prepayment penalties, the Corporation's cash and cash equivalents grew by $31.4 million and totaled $100.6 million or 14% of total assets at December 31, 2002. Liabilities. The Corporation's total liabilities were $658.2 million at December 31, 2002, an increase of $5.0 million during 2002. Deposits increased by $20.5 million; certificates of deposit increased by $2.0 million, while the remaining or "core" deposit categories increased by $18.5 million. Management believes that deposit growth occurred mainly as a result of successful sales initiatives and focused advertising campaigns implemented by the Corporation, but also due to external factors that were causing deposit growth to occur throughout the community banking industry. Advances from the Federal Home Loan Bank decreased by $15.0 million. Throughout the year the Corporation used excess cash from loan and security repayments, and deposit increases to repay maturing borrowings. Stockholders' equity. Total consolidated stockholders' equity increased $4.9 million to $62.8 million at December 31, 2002. The increase is largely the result of $5.1 million in net income, plus a $1.1 million increase in accumulated other comprehensive income, less $1.5 million in cash dividends paid to the Corporation's common stockholders. In addition, during the year the Corporation repurchased approximately 16,900 shares of its common stock at an average price of $22.26 per share. 5 Average Balance Sheet The following table sets forth information (dollars in thousands) relating to the Corporation'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.
2002 2001 2000 ---- ---- ---- 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) $362,104 $25,662 7.09% $359,928 $28,443 7.90% $299,770 $23,756 7.92% Mortgage-backed securities 200,316 11,423 5.70% 212,951 13,749 6.46% 278,434 18,449 6.63% Investment securities 50,072 2,271 4.54% 51,384 3,015 5.87% 100,274 6,180 6.16% Other interest-earning assets(1) 74,058 1,099 1.48% 49,206 1,540 3.13% 5,236 323 6.17% -------- ------- -------- ------ -------- ------ Total interest-earning assets 686,550 40,455 5.89% 673,469 46,747 6.94% 683,714 48,708 7.12% ------- ------ ------ Non interest-earning assets 34,494 29,202 28,529 -------- -------- -------- Total assets $721,044 $702,671 $712,243 ======== ======== ======== LIABILITIES AND STOCKHOLDERS'EQUITY Interest-bearing liabilities: Deposits $433,522 10,506 2.42% $409,688 14,043 3.43% $410,330 15,082 3.68% Advances from the FHLB and borrowings 219,797 12,154 5.53% 230,078 12,865 5.59% 243,656 13,839 5.68% -------- ------- -------- ------ -------- ------ Total interest-bearing liabilities 653,319 22,660 3.47% 639,766 26,908 4.20% 653,986 28,921 4.42% ------- ------ ------ Non interest-bearing liabilities 7,603 7,865 9,432 -------- -------- -------- Total liabilities 660,922 647,631 663,418 Stockholders' equity 60,122 55,040 48,825 -------- -------- -------- Total liabilities and stockholders' equity $721,044 $702,671 $712,243 ======== ======== ======== Net interest income $17,795 $19,839 $19,787 ======= ======= ======= Interest rate spread (2) 2.42% 2.74% 2.70% Net yield on interest-earning assets (3) 2.59% 2.95% 2.89% Ratio of average interest-earning assets to average interest bearing liabilities 105% 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. 6 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.
2002 vs 2001 2001 vs 2000 ------------ ------------ Increase (decrease) due to Increase (decrease) due to ---------------------------------------------------------------- Volume Rate Net Volume Rate Net ---------------------------------------------------------------- Interest income: Loans receivable, net $ 171 $(2,952) $(2,781) $ 4,740 $ (53) $ 4,687 Mortgage-backed securities (784) (1,542) (2,326) (4,229) (471) (4,700) Investment securities (75) (669) (744) (2,884) (281) (3,165) Other interest-earning assets 577 (1,018) (441) 1,450 (233) 1,217 -------------------------------------------------------------- Total interest-earning assets (111) (6,181) (6,292) (923) (1,038) (1,961) -------------------------------------------------------------- Interest expense: Deposits 777 (4,314) (3,537) (23) (1,016) (1,039) Advances from the FHLB and borrowings (570) (141) (711) (761) (213) (974) -------------------------------------------------------------- Total interest-bearing liabilities 207 (4,455) (4,248) (784) (1,229) (2,013) -------------------------------------------------------------- Net change in net interest income $ (318) $(1,726) $(2,044) $ (139) $ 191 $ 52 ==============================================================
7 Comparison of Years Ended December 31, 2002 and December 31, 2001 Net Income. Net income was $5.092 million for the fiscal year ended December 31, 2002, a decrease of $641,000 or 11.2% compared with the year ended December 31, 2001. The Corporation's pre-tax income decreased by $1.1 million during 2002 compared with 2001: net interest income decreased by $2.0 million; provisions for possible loan losses increased by $488,000; non-interest income increased by $132,000 and non-interest expenses decreased by $1.3 million. The Corporation's diluted earnings per share were $1.91 during 2002, a 12.8% decrease from $2.19 diluted earnings per share reported during 2001. The percentage decrease in diluted earnings per share is slightly larger than the percentage decrease in net income because a rising common stock price combined with outstanding stock options created an additional 26,700 dilutive shares. Total Interest Income. For the year ended December 31, 2002, total interest income decreased to $40.4 million compared to $46.7 million for the year ended December 31, 2001. The $6.3 million decrease in interest income was mainly the result of the repayment of $147.3 million in higher yielding loans receivable, net of the origination and purchase of $140.9 million in loans at substantially lower yields. In addition, the Corporation's adjustable rate loans continued to adjust downward, also due to the continued decrease in market interest rates. As a result, the overall yield on the Corporation's loan portfolio decreased by 81 basis points during 2002. A similar result of low market interest rates combined with high loan prepayments caused the average yield on the Corporation's mortgage-backed securities portfolios to decrease by 76 basis points. At December 31, 2002 prepayments of mortgage-related earning assets were still high. Thus, the Corporation's interest income could be adversely affected during 2003 barring an increase in longer term market interest rates and resulting relief from high loan prepayments. These mortgage-related loan repayments caused an average of $74.1 million to be maintained in cash and cash equivalents during 2002, earning an average interest rate of 1.48%, which is substantially less than these funds were earning while invested in loans and mortgage-backed securities. At year-end 2002, cash and cash equivalents totaled $100.6 million and was earning the federal funds rate minus 25 basis points or approximately 1.00%. Thus, the Corporation's earnings during 2003 will be significantly affected by the general level of market interest rates and the timing of its reinvestment of cash and cash equivalents into other interest-bearing assets, or the use of the cash and cash equivalents to reduce interest-bearing liabilities. Total Interest Expense. Total interest expense decreased to $22.7 million from $26.9 million for the year ended December 31, 2002 compared to 2001. This decrease is the result of lower market interest rates during the period and, consequently, lower rates paid on the Corporation's new certificates of deposit; in addition, the Corporation lowered the interest rates paid on several of its other deposit products in order to keep them in line with short-term market interest rates. Allowance for Loan Losses. The allowance for loan losses was approximately $2.047 million at December 31, 2002 and $1.972 million at December 31, 2001. The provision for loan losses was $988,000 during 2002 compared with $500,000 during 2001. Charge-offs were $913,000 8 during 2002 compared to $242,000 during 2001. Charge-offs during 2002 included approximately $625,000 during the second quarter attributable to a default by the servicer of the Corporation's purchased lease portfolio. The Corporation now services these leases itself. While management maintains Third Federal's allowance for losses at a level which it considers to be adequate to provide for probable 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 $3.3 million during 2002 compared with $3.2 million during 2001. During 2002 the Corporation sold approximately $37.2 million mortgage-backed and investment securities available for sale and realized gains of $1.2 million. During 2001 the Corporation recorded a one-time gain of $1.1 million related to the sale of $10.8 million in deposits and the related closure of its Warminster, Pennsylvania branch office. In addition, during 2001 the Corporation recorded a $444,000 non-recurring gain on the sale of $1.3 million of land that had been held as a potential site for an administrative facility. Finally, Third Federal purchased $9 million in bank-owned life insurance in September 2001. This asset produced an increase in its cash surrender value, which is included in other operating income, of $520,000 during 2002 compared with $174,000 during 2001. Non-interest Expense. Total non-interest expense decreased by $1.3 million during 2002 compared to 2001. This decrease occurred from a $426,000 decrease in employee compensation and benefits, and occupancy and equipment expenses that, in turn, is largely related to the sale of a branch office at the end of 2001. In addition, during 2002 the Corporation decreased by $236,000 other operating expenses, $110,000 of which related to bank service charges because the Corporation ceased drawing checks on and using a third-party bank for its corporate and customer item processing activities, and rather used its own personnel and technology. Finally, the Corporation's amortization of goodwill and other intangible assets decreased by $488,000 upon the required adoption of Statement of Financial Accounting Standards No. 147 as of January 1, 2002. Income Tax Expense. The Corporation's effective tax rate was 24.0% during 2002 compared to 26.5% during 2001. The decrease occurred as a result of certain tax reduction efforts initiated during 2001 and 2000, including the effect of a full year of income during 2002 related to bank-owned life insurance. 9 Comparison of Years Ended December 31, 2001 and December 31, 2000 Net Income. Net income was $5.733 million for the fiscal year ended December 31, 2001, an increase of $1.251 million or 27.9% compared with the year ended December 31, 2000. In addition, the Corporation's basic earnings per share increased by 31.8% to $2.32 per share during 2001, exceeding the percentage growth in net income by 14%, due to the 25,468 net decrease in shares outstanding during the year. This decrease occurred as the combined result of the Corporation's share repurchases during 2001, which resulted in the repurchase of 60,900 shares of common stock, less 23,276 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, 2001, total interest income decreased to $46.7 million compared to $48.7 million from the year ended December 31, 2000. The $2.0 million decrease in interest income was mainly the result of a $65.5 million decrease in the average balance of mortgage-backed securities and a $48.9 million decrease in the average balance of investment securities. These decreases were mainly the direct result of lower market interest rates during 2001 compared to 2000, causing an acceleration of prepayments of the Corporation's mortgage-backed securities and the early redemption or "call" of the callable bonds in the Corporation's investment securities portfolios. The Corporation was able to reinvest a portion of these proceeds into loans receivable that on average increased by $60.1 million during 2001. However, an average of $49.2 million was maintained in cash and cash equivalents, earning an average interest rate of 3.13%, which is substantially less than these funds were earning while invested in mortgage-backed securities or investment securities. At year-end 2001, cash and cash equivalents totaled $69.1 million and was earning the federal funds rate minus 25 basis points or approximately 1.50%. Thus, the Corporation's earnings during 2002 will be significantly affected by the general level of market interest rates and the timing of its reinvestment of cash and cash equivalents into other interest-bearing assets, or the use of the cash and cash equivalents to reduce interest-bearing liabilities. Total Interest Expense. Total interest expense decreased to $26.9 million from $28.9 million for the year ended December 31, 2001 compared to 2000. This decrease is mainly the result of lower market interest rates during the period and, consequently, lower rates paid on the Corporation's new certificates of deposit. In addition, the Corporation lowered the interest rates paid on several of its other deposit products in order to keep them in line with short-term market interest rates, mainly the federal funds rate. During 2001 the Federal Reserve Board lowered the federal funds rate eleven times by a total of 475 basis points. The Corporation reacted to this situation by lowering certain administered deposit account rates by 25 to 75 basis points during the fourth quarter of 2001. Allowance for Loan Losses. The allowance for loan losses was approximately $2.0 million at December 31, 2001 and $1.7 million at December 31, 2000. The provision for loan losses was $500,000 during 2001 compared with $410,000 during 2000. Charge-offs were $242,000 during 2001 compared to $613,000 during 2000. In addition, the allowance for loan losses was 0.52% of gross loans receivable at 10 December 2001 compared with 0.47% at December 31, 2000 while gross loans receivable grew by approximately $16.1 million. Thus, the growth in the allowance for loan losses is consistent with the growth in the loan portfolio and the level of actual charge-offs. While management maintains Third Federal's allowance for losses at a level which it considers to be adequate to provide for probable 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 $3.2 million during 2001 compared with $1.4 million during 2000. Several items had an impact on the $1.8 million increase in non-interest income. The Corporation recorded a one-time gain of $1.1 million related to the sale of $10.8 million in deposits and the related closure of its Warminster, Pennsylvania branch office. In addition, the Corporation recorded a $444,000 non-recurring gain on the sale of $1.3 million of land that had been held as a potential site for an administrative facility. Finally, Third Federal purchased $9 million in bank-owned life insurance on approximately September 1, 2001. This asset produced an increase in its cash surrender value of $174,000 during 2001, which income is included in other operating income. Non-interest Expense. Total non-interest expense increased by $304,000 during 2001 compared to 2000. This increase occurred mainly from a $489,000 or 6.6% increase in employee compensation and benefits. In addition, during 2001 the Corporation decreased its advertising expenditures by $204,000 and decreased by $122,000 other operating expenses, mainly those related to bank service charges because the Corporation ceased using a third-party bank for its item processing activities and rather used its own personnel and technology. Income Tax Expense. The Corporation's effective tax rate was 26.5% during 2001 compared to 30.0% during 2000. The decrease occurred as a result of certain tax reduction efforts initiated during 2001 and 2000. 11 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. Loan prepayments, maturing investments and mortgage-backed security prepayments are greatly influenced by general interest rates, economic conditions and competition. 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, 2002, such borrowed funds totaled $207.4 million. The amount of these borrowings that will mature during the twelve months ending December 31, 2003 is $27 million. At December 31, 2002 the Savings Bank had a $20 million unused line of credit and up to approximately $191 million of additional collateral-based borrowing capacity at the Federal Home Loan Bank. The amount of certificate accounts that are scheduled to mature during the twelve months ending December 31, 2003, is approximately $96.7 million. To the extent that these deposits do not remain at the Savings Bank upon maturity, the Savings Bank believes that it can replace these funds with deposits, excess liquidity, Federal Home Loan Bank 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, 2002, the Savings Bank had outstanding commitments to originate loans or fund unused lines of credit of $37.5 million. The loan commitments will be funded during the twelve months ending December 31, 2003. The unused lines of credit can be funded at any time. Funds required to fill these commitments will be derived primarily from current excess liquidity, deposit inflows or loan and security repayments. At December 31, 2002, the Savings Bank had no outstanding commitments to sell loans. The Corporation also has obligations under lease agreements. Payments required under such lease agreements will be approximately $190,000 during the year ending December 31, 2003. 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, 2002, 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. 12 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 interest 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 59% 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 at December 31, 2002, the Corporation focused on the simulation of net interest income in the "ramped up 200 basis points" and "shocked down 50 basis points" scenarios. The Corporation also used the results of the most recently available OTS model's forecast of market value of portfolio equity under different 13 interest rate scenarios. In addition, the Corporation prepared 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 evaluated the simulation results, the OTS model results and the "gap" reports and will make adjustments to the Savings Bank's planned activities if in its view there is a need to do so. At December 31, 2002, the most adverse change in net interest income over the two-year horizon commencing January 1, 2003 using the "ramped up 200 basis points" and "shocked down 50 basis points" simulation methodologies was a $2.0 million or a 4% decrease in expected net interest income. The Corporation estimated its one-year positive gap (i.e. assets repricing/maturing in excess of liabilities repricing/maturing) to be $71.0 million in the "ramped up 200 basis points" scenario, and $185.1 million in the "shocked down 50 basis points" scenario, compared to $148.4 million under the "rates unchanged" interest rate scenario. Essentially, the Corporation's net interest income is highly sensitive to the movement of short-term interest rates because of the large amount of cash and cash equivalents on hand at December 31, 2002, and highly sensitive to the movement of long-term interest rates because of the resulting effect on the prepayment speeds of the Corporation's mortgage-related earning assets. However, these measurements are highly subjective in nature and are not intended to be a forecast of net interest income under any rate scenario for the year 2003 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. 14 Critical Accounting Policies Certain critical accounting policies of the Corporation require the use of significant judgment and accounting estimates in the preparation of the consolidated financial statements and related data of the Corporation. These accounting estimates require management to make assumptions about matters that are highly uncertain at the time the accounting estimate is made. Management believes that the most critical accounting policy requiring the use of accounting estimates and judgment is the determination of the allowance for loan losses. If the financial condition of a significant amount of debtors should deteriorate more than the Corporation has estimated, present reserves for loan losses may be insufficient and additional provisions for loan losses may be required. The allowance for loan losses was $2,047,000 at December 31, 2002. Recent Accounting Pronouncements In August 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 143, "Accounting for Asset Retirement Obligations." This Statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS 143 requires an enterprise to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of a tangible long-lived asset. SFAS 143 also requires the enterprise to record the contra to the initial obligation as an increase to the carrying amount of the related long-lived asset (i.e., the associated asset retirement costs) and to depreciate that cost over the remaining useful life of the asset. The liability is adjusted at the end of each period to reflect the passage of time (i.e., accretion expense) and changes in the estimated future cash flows underlying the initial fair value measurement. Enterprises are required to adopt SFAS 143 for fiscal years beginning after June 15, 2002. Management does not expect the adoption of SFAS 143 to have a material effect on the Corporation's financial position, results of operations, or cash flows. In October 2001, the FASB issued SFAS 144 "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 144 supersedes SFAS 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and certain provisions of APB Opinion No. 30 "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS 144 establishes standards for long-lived assets to be disposed of, and redefines the valuation and presentation of discontinued operations. SFAS 144 is effective for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. The adoption of SFAS 144 did not have a material effect on the Corporation's financial position, results of operations, or cash flows. In April 2002, the FASB issued SFAS 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS 145 eliminates extraordinary accounting treatment for reporting gain or loss on debt extinguishment, and amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The provisions of SFAS 145 related to the 15 rescission of FASB Statement No. 4 are applicable in fiscal years beginning after May 15, 2002. Management does not expect the adoption of these provisions of SFAS 145 to have a material effect on the Corporation's financial position, results of operations, or cash flows. The provisions related to FASB Statement No. 13 are effective for transactions occurring after May 15, 2002, and all other provisions are effective for financial statements issued on or after May 15, 2002; however, early application is encouraged. Debt extinguishments reported as extraordinary items prior to scheduled or early adoption of SFAS 145 would be reclassified in most cases following adoption. The adoption of these provisions of SFAS 145 did not have a material effect on the Corporation's financial position, results of operations, or cash flows. In June 2002, the FASB issued SFAS 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS 146 requires recording costs associated with exit or disposal activities at their fair values when a liability has been incurred. Under previous guidance, certain exit costs were accrued upon management's commitment to an exit plan, which is generally before an actual liability has been incurred. The requirements of SFAS 146 are effective prospectively for exit or disposal activities initiated after December 31, 2002; however, early application is encouraged. Management does not expect the adoption of SFAS 146 to have a material effect on the Corporation's financial position, results of operations, or cash flows. In November 2002, the FASB issued FASB Interpretation 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" (FIN 45). FIN 45 requires that upon issuance of a guarantee, a guarantor must recognize a liability for the fair value of an obligation assumed under a guarantee. FIN 45 also requires additional disclosures by a guarantor in its interim and annual financial statements about the obligations associated with guarantees issued. The recognition provisions of FIN 45 are effective for any guarantees issued or modified after December 31, 2002. Management is currently evaluating the effects of the recognition provisions of FIN 45; however, it does not expect that the adoption of these provisions will have a material effect on the Corporation's financial position, results of operations, or cash flows. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of the disclosure requirements of FIN 45 did not have a material effect on the Corporation's financial position, results of operations, or cash flows. In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based Compensation- Transition and Disclosure," which provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosure in both annual and interim financial statements about the method of accounting for stock-based compensation and the effect of the method used on reported results. Finally, SFAS 148 amends APB Opinion 28, "Interim Financial Reporting," to require disclosure about those effects in interim financial information. SFAS 148 is effective for fiscal and interim periods ending after December 15, 2002. The adoption of SFAS 148 did not have a material effect on the Corporation's financial position, results of operations, or cash flows. 16 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, 2002 and 2001, 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, 2002. 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, 2002 and 2001, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note A6 to the consolidated financial statements, the Corporation adopted Statement of Financial Standards No. 147, "Acquisitions of Certain Financial Institutions," effective January 1, 2002. /s/Grant Thornton LLP Philadelphia, Pennsylvania January 23, 2003 17 CONSOLIDATED STATEMENTS OF FINANCIAL POSITION December 31
2002 2001 ---- ---- (in thousands) ASSETS Cash and cash equivalents $ 100,580 $ 69,139 Certificates of deposit in other financial institutions 220 194 Investment securities available for sale - at fair value 27,243 22,671 Investment securities held to maturity (fair value of $15,187 and $9,830 as of December 31, 2002 and 2001, respectively) 14,563 9,866 Mortgage-backed securities available for sale - at fair value 115,243 99,763 Mortgage-backed securities held to maturity (fair value of $57,346 and $94,735 as of December 31, 2002 and 2001, respectively) 54,592 93,367 Loans receivable, net 370,092 377,635 Federal Home Loan Bank stock - at cost 11,424 11,368 Accrued interest receivable 3,576 4,154 Premises and equipment, net 6,742 7,484 Core deposit intangible asset, net of accumulated amortization of $2,271 and $2,049 as of December 31, 2002 and 2001, respectively 553 775 Goodwill, net of accumulated amortization of $2,328 4,324 4,324 Other assets 11,880 10,464 --------- --------- TOTAL ASSETS $ 721,032 $ 711,204 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Deposits $ 442,558 $ 422,052 Advances from the Federal Home Loan Bank 207,359 222,359 Advances from borrowers for taxes and insurance 1,330 1,241 Accrued interest payable 2,897 3,762 Other liabilities 4,048 3,815 --------- --------- Total liabilities 658,192 653,229 --------- --------- Stockholders' equity Preferred stock, no par value; 2,000,000 shares authorized at December 31, 2002 and 2001, none issued - - Common stock, $0.10 par value; 10,000,000 shares authorized, 5,290,000 shares issued, 2,482,586 and 2,465,986 shares outstanding at December 31, 2002 and 2001, respectively, net of shares in treasury: 2002 - 2,567,268; 2001 - 2,571,712 529 529 Retained earnings 59,978 56,370 Additional paid-in capital 51,647 51,652 Unearned ESOP shares (2,401) (2,523) Treasury stock - at cost (48,809) (48,838) Accumulated other comprehensive income 1,896 785 --------- --------- Total stockholders' equity 62,840 57,975 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 721,032 $ 711,204 ========= =========
The accompanying notes are an integral part of these statements 18 CONSOLIDATED STATEMENTS OF EARNINGS Year ended December 31,
2002 2001 2000 ---- ---- ---- (in thousands, except per share data) Interest income Loans, including fees $ 25,662 $ 28,443 $ 23,756 Mortgage-backed securities 11,423 13,749 18,449 Investment securities 2,271 3,015 6,180 Interest-bearing deposits and other 1,099 1,540 323 -------- -------- -------- TOTAL INTEREST INCOME 40,455 46,747 48,708 -------- -------- -------- Interest expense Deposits 10,506 14,043 15,082 Borrowings 12,154 12,865 13,839 -------- -------- -------- TOTAL INTEREST EXPENSE 22,660 26,908 28,921 -------- -------- -------- NET INTEREST INCOME 17,795 19,839 19,787 -------- -------- -------- Provision for possible loan losses 988 500 410 NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE LOAN LOSSES 16,807 19,339 19,377 -------- -------- -------- Non-interest income Service fees, charges and other operating income 2,114 1,734 1,353 Gain on sale of deposits - 1,092 - Gain on sale of real estate held for investment - 444 - Gain (loss) on sale of investment and mortgage-backed securities 1,190 (126) 46 Gain on sale of loans - 28 33 -------- -------- -------- TOTAL NON-INTEREST INCOME 3,304 3,172 1,432 -------- -------- -------- Non-interest expense Employee compensation and benefits 7,629 7,865 7,376 Occupancy and equipment 2,303 2,493 2,392 Federal deposit insurance premium 75 75 85 Professional fees 408 486 385 Advertising 441 507 711 Other operating 2,336 2,572 2,694 Amortization of core deposit intangible asset 222 266 317 Amortization of goodwill - 444 444 -------- -------- -------- TOTAL NON-INTEREST EXPENSE 13,414 14,708 14,404 -------- -------- -------- INCOME BEFORE INCOME TAXES 6,697 7,803 6,405 Income taxes 1,605 2,070 1,923 -------- -------- -------- NET INCOME $ 5,092 $ 5,733 $ 4,482 ======== ======== ======== Earnings per share - basic $ 2.06 $ 2.32 $ 1.76 ======== ======== ======== Earnings per share - diluted $ 1.91 $ 2.19 $ 1.72 ======== ======== ========
The accompanying notes are an integral part of these statements. 19 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY Years ended December 31, 2002, 2001 and 2000 (in thousands, except share data)
Accumu- lated Common Stock Compre- ------------- Additional Unearned Shares hensive Compre- Par paid-in ESOP acquired by Treasury Retained income hensive Shares value capital shares MSBP stock earnings (loss) Total income ------ ----- ------- ------ ---- ----- -------- ------- ----- ------ Balance at January 1, 2000 2,576,160 $529 $51,931 $(2,766) $ (71) $(46,996) $ 48,905 $(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 - common stock - - - - - - (1,326) - (1,326) Exercise of options 41,250 - (312) - - 795 - - 483 Other comprehensive income, net of 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 $51,704 $(2,644) $ (4) $(48,173) $52,061 $ (364) $53,109 ========= ==== ======= ======= ===== ======== ======== ======= ======= Allocation of ESOP shares 12,156 $ - $ 112 $ 121 $ - $ - $ - $ - $ 233 Amortization of MSBP expense - - 3 - 4 - - - 7 Purchase of treasury stock (60,900) - - - - (1,110) - - (1,110) Cash dividends - common stock - - - - - - (1,424) - (1,424) Exercise of options 23,276 - (167) - - 445 - - 278 Other comprehensive income, net of taxes - - - - - - - 1,149 1,149 $ 1,149 Net income for the year ended December 31, 2001 - - - - - - 5,733 - 5,733 5,733 ---------- ---- ------- ------- ----- -------- -------- ------- ------- ------- Comprehensive income $ 6,882 ======= Balance at December 31, 2001 2,465,986 $529 $51,652 $(2,523) $ - $(48,838) $ 56,370 $ 785 $57,975 ========== ==== ======= ======= ===== ======== ======== ======= =======
(Continued) 20 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY - CONTINUED Years ended December 31, 2002, 2001 and 2000 (in thousands, except share data)
Accumu- lated Common Stock Compre- ------------- Additional Unearned Shares hensive Compre- Par paid-in ESOP acquired by Treasury Retained income hensive Shares value capital shares MSBP stock earnings (loss) Total income ------ ----- ------- ------ ---- ----- -------- ------- ----- ------ Balance at December 31, 2001 2,465,986 $529 $51,652 $(2,523) $ - $(48,838) $56,370 $ 785 $57,975 ========= ==== ======= ======= ==== ======== ======= ====== ======= Allocation of ESOP shares 12,156 $ - $ 151 $ 122 $ - $ - $ - $ - $ 273 Amortization of MSBP expense - - - - - - - - - Purchase of treasury stock (16,894) - - - - (376) - - (376) Cash dividends - common stock - - - - - - (1,484) - (1,484) Exercise of options 21,338 - (156) - - 405 - - 249 Other comprehensive income, net of taxes - - - - - - - 1,111 1,111 $ 1,111 Net income for the year ended December 31, 2002 - - - - - - 5,092 - 5,092 5,092 --------- ---- ------- ------- ----- -------- ------- ------ ------- ------- Comprehensive income $ 6,203 ======= Balance at December 31, 2002 2,482,586 $529 $51,647 $(2,401) $ - $(48,809) $59,978 $1,896 $62,840 ========= ==== ======= ======= ===== ======== ======= ====== =======
The accompanying notes are an integral part of this statement. 21 CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended December 31,
2002 2001 2000 ---- ---- ---- (in thousands) OPERATING ACTIVITIES Net income $ 5,092 $ 5,733 $ 4,482 Adjustments to reconcile net income to net cash provided by operating activities Amortization of Mortgage loan servicing rights 14 14 13 Deferred loan origination fees (201) (387) (119) Premiums and discounts on investment securities, net 108 36 65 Premiums and discounts on mortgage-backed securities and loans, net 758 (72) (544) Goodwill and other intangibles 222 710 761 Deferred income taxes (19) (172) (122) Provision for loan losses and provision for losses on real estate 988 510 459 Depreciation of premises and equipment 1,014 1,092 1,040 Increase in value of bank-owned life insurance (520) (174) - Stock-based benefit programs 273 240 274 (Gain) loss on sale of Investment and mortgage-backed securities (1,190) 126 (46) Real estate acquired through foreclosure (60) (27) (48) Property, equipment and real estate held for investment - (444) - Mortgage loans - (28) (33) Deposits - (1,092) - (Increase) decrease in Accrued interest receivable 578 1,369 (565) Other assets (89) 248 (283) Increase (decrease) in Accrued interest payable (865) (908) 921 Other liabilities (318) (470) (122) --------- -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 5,785 6,304 6,133 --------- -------- -------- INVESTING ACTIVITIES Loan originations (80,943) (48,526) (74,555) Purchases of loans (59,926) (74,647) (72,990) Loan principal payments 147,296 106,019 71,724 Principal repayments on mortgage-backed securities held to maturity 41,499 41,456 24,827 Principal repayments on mortgage-backed securities available for sale 39,005 22,415 11,925 Proceeds from loan sales - 1,480 1,669 Purchases and maturities of certificates of deposit in other financial institutions, net (26) (3) 656 Purchases of investment and mortgage-backed securities held to maturity (9,650) - (96,595) Purchase of investment securities and mortgage-backed securities available for sale (103,201) (47,364) (11,508)
(Continued) 22 CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED Year ended December 31,
2002 2001 2000 --------- --------- --------- (in thousands) Purchase of bank-owned life insurance $ - $ (9,000) $ - Proceeds from maturities of investment securities held to maturity 2,060 51,233 99,726 Proceeds from maturities of investment securities available for sale 8,000 18,501 - Proceeds from the sale of investment and mortgage-backed securities available for sale 38,380 4,890 41,892 (Purchase) redemption of Federal Home Loan Bank stock (56) 1,674 - (Purchase) sale of property, equipment and real estate held for investment (769) 1,635 - Proceeds from sales of real estate acquired through foreclosure 275 163 452 Purchase of premises and equipment (272) (357) (1,273) --------- --------- --------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 21,672 69,569 (4,050) --------- --------- --------- FINANCING ACTIVITIES Net increase (decrease) in demand deposit/NOW accounts, passbook savings accounts and certificates of deposit 20,506 31,989 (847) Funding of sale of deposits - (9,706) - Net decrease in advances from Federal Home Loan Bank (15,000) (22,500) (3,674) Net decrease in securities sold under agreements to repurchase - (14,962) (804) Net increase (decrease) in advances from borrowers for taxes and insurance 88 83 (40) Treasury stock acquired (376) (1,110) (1,972) Exercise of stock options 249 278 483 Common stock dividends paid (1,484) (1,424) (1,326) --------- --------- --------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 3,984 (17,352) (8,180) --------- --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 31,441 58,521 (6,097) Cash and cash equivalents at beginning of year 69,139 10,618 16,715 --------- --------- --------- Cash and cash equivalents at end of year $ 100,580 $ 69,139 $ 10,618 ========= ========= ========= Supplemental disclosure of cash flow information Cash paid for Interest on deposits and advances from Federal Home Loan Bank $ 23,525 $ 27,816 $ 28,122 Income taxes $ 2,050 $ 2,495 $ 1,675 Non-cash transactions Transfers from loans to real estate acquired through foreclosure $ - $ - $ 127
The accompanying notes are an integral part of these statements. 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2002 and 2001 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES TF Financial Corporation (the Corporation) 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 subsidiary, Third Federal Savings Bank (Third Federal or the Bank). 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, ten full-service branch offices located in Philadelphia and Bucks counties, Pennsylvania, and three full-service branch offices located in Mercer County, New Jersey. The Bank competes with other banking and financial institutions in its primary market communities, including financial institutions with resources substantially greater than its own. Commercial banks, savings banks, savings and loan associations, credit unions and money market funds actively compete for savings and time deposits and loans. Such institutions, as well as consumer finance and insurance companies, may be considered competitors of the Bank with respect to one or more of the services it renders. The Bank is subject to regulations of certain state and federal agencies and, accordingly, 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 Corporation 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) 24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2002 and 2001 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. The Corporation accounts for derivatives under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" as amended in June, 1999 by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133," and in June, 2000, by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," (collectively SFAS No. 133). SFAS No. 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 No. 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 change 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. SFAS 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 Corporation did not hold any derivative financial instruments as defined by SFAS No. 119 at December 31, 2002, 2001 or 2000. 4. Loans Receivable ---------------- Loans receivable are stated at unpaid principal balances less the allowance for loan losses and net deferred loan origination fees and unamortized premiums. Loan origination fees and unamortized premiums on mortgage loans are amortized to income using the interest method over the remaining period to contractual maturity, adjusted for actual prepayments. Management's periodic evaluation of the adequacy of the loan loss allowance is based on the Bank's historical loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral and current economic conditions. Actual losses may be higher or lower than historical trends, which vary. The allowance for loan losses is increased by charges to income and decreased by charge-offs (net of recoveries). (Continued) 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2002 and 2001 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. When necessary an allowance for loan 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. (Continued) 26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2002 and 2001 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 6. Goodwill and Other Intangible Assets ------------------------------------ In 1996 the Bank acquired three Mercer County, New Jersey offices and related deposits of Cenlar Federal Savings Bank. The Bank assumed $137.6 million in deposits in exchange for $126.5 million in cash. As a result of the acquisition, the Bank recorded core deposit intangible of $2.8 million and goodwill of $6.7 million. The core deposit intangible acquired is being amortized on an accelerated basis over 10 years. The goodwill acquired from the acquisition was recorded as an unidentifiable intangible asset under SFAS No. 72, "Accounting for Certain Acquisitions of Banking or Thrift Institutions." On January 1, 2002, the Corporation adopted Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations," SFAS No. 142, "Goodwill and Intangible Assets," and SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The adoption of these statements did not have a material impact on the financial condition or results of operations of the Corporation. On October 1, 2002 the FASB issued SFAS No. 147,"Acquisitions of Certain Financial Institutions." Except for transactions between two or more mutual enterprises, SFAS No. 147 removes the acquisitions of financial institutions from the scope of both SFAS No. 72 and FASB Interpretation No. 9 and requires that those transactions be accounted for in accordance with SFAS No. 141 and SFAS No. 142. Thus, the requirement of SFAS No. 72 to recognize (and subsequently amortize) any excess of the fair value of liabilities assumed over the fair value of tangible and identifiable intangible assets acquired ("SFAS 72 goodwill") as an unidentifiable intangible no longer applies to acquisitions within the scope of SFAS No. 147. In addition, SFAS No. 147 amends SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," to include within its scope long-term customer relationship intangible assets of financial institutions such as depositor-relationship intangible assets. Consequently, those intangible assets are subject to undiscounted cash flow recoverability tests and impairment loss recognition and measurement provisions. Finally, SFAS No. 147 provides that branch acquisitions that meet the definition of a business should be accounted for as a business combination. SFAS No. 147 was effective October 1, 2002, although earlier application was permitted. The Corporation has elected to apply SFAS No. 147 as of January 1, 2002. The Corporation had $4,324,000 of SFAS 72 goodwill and $553,000 of core deposit intangible assets at December 31, 2001 remaining from the 1996 branch acquisition that management of the Corporation has concluded was a business combination in accordance with SFAS No. 147. In addition, the Corporation has tested the goodwill and core deposit intangible assets for impairment prior to its fiscal year ending December 31, 2002. No impairment has been recognized. (Continued) 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2002 and 2001 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 7. Transfers of Financial Assets ----------------------------- The Corporation accounts for the transfer of financial assets in accordance with SFAS No. 140 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." The 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 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. (Continued) 28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2002 and 2001 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued The Corporation has several fixed stock option plans that 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. 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 plans are accounted for using the intrinsic value method under APB Opinion No. 25. No stock-based compensation expense is reflected in net income, as all options granted under the plans had an exercise price equal to the market value of the underlying common stock on the date of the grant. Had compensation cost for the plans been determined based on the fair value of options at the grant dates consistent with the method of SFAS No. 123, "Accounting for Stock-Based Compensation," the Corporation's net income and earnings per share would have been reduced to the pro forma amounts indicated below. Information for the years ended December 31, 2001 and 2000 has been revised to more accurately account for forfeitures.
2002 2001 2000 --------- --------- --------- Net income As reported $ 5,092 $ 5,733 $ 4,482 Deduct: stock-based compensation expense determined using the fair value method, net of related tax effects 58 64 52 --------- --------- --------- Pro forma $ 5,034 $ 5,669 $ 4,430 ========= ========= ========= Basic earnings per share As reported $ 2.06 $ 2.32 $ 1.76 Deduct: stock-based compensation expense determined using the fair value method, net of related tax effects 0.02 0.02 0.02 --------- --------- --------- Pro forma $ 2.04 $ 2.30 $ 1.74 ========= ========= ========= Diluted earnings per share As reported $ 1.91 $ 2.19 $ 1.72 Deduct: stock-based compensation expense determined using the fair value method, net of related tax effects 0.01 0.01 0.00 --------- --------- --------- Pro forma $ 1.90 $ 2.18 $ 1.72 ========= ========= ========= Weighted average fair value of options granted during the year $ 6.60 $ 5.49 $ 3.48
(Continued) 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2002 and 2001 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 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 2002, 2001 and 2000, respectively: a dividend yield of 2.78%, 3.23%, and 4.32%; expected volatility of 29%, 30%, and 30%, risk-free interest rate of 2.78%, 5.02%, and 6.16%, and expected lives of six years for all options. 9. Income Taxes ------------ The Corporation accounts for income taxes under the liability method specified in SFAS No. 109, "Accounting for Income Taxes" whereby 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. 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." 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) 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2002 and 2001 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 12. Comprehensive Income -------------------- The Corporation follows SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 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 2002, 2001 and 2000 was $6,203,000, $6,882,000, and $7,203,000, respectively. The components of other comprehensive income are as follows:
December 31, 2002 ----------------- Tax Before tax (expense) Net of tax amount benefit amount ------ ------- ------ (in thousands) Unrealized gains on securities Unrealized holding gains arising during period $ 2,872 $ (976) $ 1,896 Reclassification adjustment for gains realized in net income (1,190) 405 (785) -------- ------ ------- Other comprehensive income, net $ 1,682 $ (571) $ 1,111 ======== ====== =======
December 31, 2001 ----------------- Tax Before tax (expense) Net of tax amount benefit amount ------ ------- ------ (in thousands) Unrealized gains on securities Unrealized holding gains arising during period $ 1,615 $ (549) $ 1,066 Reclassification adjustment for losses realized in net income 126 (43) 83 ------- ------ ------- Other comprehensive income, net $ 1,741 $ (592) $ 1,149 ======= ====== =======
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 ======= ======== =======
(Continued) 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2002 and 2001 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 13. Segment Reporting ----------------- The Corporation follows SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 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, ------------------- 2002 2001 -------- -------- (in thousands) Cash and due from banks $ 6,657 $ 11,176 Interest-bearing deposits in other financial institutions 93,823 57,863 Federal funds sold 100 100 -------- -------- $100,580 $ 69,139 ======== ======== 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2002 and 2001 NOTE C - SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL The Bank has entered into purchases of securities under agreements to resell substantially identical securities. However, there were no securities purchased under agreements to resell during the years ended December 31, 2002 or 2001. 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, 2002 and 2001, are summarized as follows:
December 31, 2002 ----------------- Gross Gross Amortized unrealized unrealized Fair cost gains losses value --------- --------- ------- --------- (in thousands) Investment securities held to maturity State and political subdivisions $ 3,700 $ 180 $ - $ 3,880 U.S. Government and federal agencies 4,000 125 - 4,125 Corporate debt securities 6,863 319 - 7,182 --------- --------- ------- --------- 14,563 624 - 15,187 Mortgage-backed securities held to maturity 54,592 2,754 - 57,346 --------- --------- ------- --------- $ 69,155 $ 3,378 $ - $ 72,533 ========= ========= ======= ========= Investment securities available for sale U.S. Government and federal agencies $ 15,964 $ 120 $ - $ 16,084 Corporate debt securities 10,034 163 - 10,197 State and political subdivisions 453 11 - 464 Mutual funds 500 - (2) 498 --------- --------- ------- --------- 26,951 294 (2) 27,243 Mortgage-backed securities available for sale 112,663 2,634 (54) 115,243 --------- --------- ------- --------- $ 139,614 $ 2,928 $ (56) $ 142,486 ========= ========= ======= =========
(Continued) 33 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2002 and 2001 NOTE D - INVESTMENT AND MORTGAGE-BACKED SECURITIES - Continued
December 31, 2001 ----------------- Gross Gross Amortized unrealized unrealized Fair cost gains losses value --------- --------- --------- --------- (in thousands) Investment securities held to maturity State and political subdivisions $ 5,743 $ 44 $ - $ 5,787 Corporate debt securities 4,123 - (80) 4,043 --------- --------- --------- --------- 9,866 44 (80) 9,830 Mortgage-backed securities held to maturity 93,367 1,449 (81) 94,735 --------- --------- --------- --------- $ 103,233 $ 1,493 $ (161) $ 104,565 ========= ========= ========= ========= Investment securities available for sale U.S. Government and federal agencies $ 11,018 $ 10 $ (99) $ 10,929 Corporate debt securities 11,070 202 (27) 11,245 Mutual funds 500 - (3) 497 --------- --------- --------- --------- 22,588 212 (129) 22,671 Mortgage-backed securities available for sale 98,656 1,491 (384) 99,763 --------- --------- --------- --------- $ 121,244 $ 1,703 $ (513) $ 122,434 ========= ========= ========= =========
Gross realized gains were $1,190,000, $7,000, and $151,000 for the years ended December 31, 2002, 2001 and 2000, respectively. These gains resulted from the sale of investment and mortgage-backed securities of $37.2 million, $507,000, and $18.9 million for the years ended December 31, 2002, 2001 and 2000, respectively. Gross realized losses were $0, $133,000, and $105,000 for the years ended December 31, 2002, 2001 and 2000, respectively. These losses resulted from the sale of investment and mortgage-backed securities of $0 million, $4.4 million, and $23.0 million for the years ended December 31, 2002, 2001 and 2000, respectively. (Continued) 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2002 and 2001 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, 2002 ----------------- Available for sale Held to maturity ------------------ ---------------- Amortized Fair Amortized Fair cost value cost value ---- ----- ---- ----- (in thousands) Investment securities Due in one year or less $ 18,471 $ 18,518 $ - $ - Due after one year through five years 8,027 8,261 11,193 11,640 Due after five years through 10 years - - 2,155 2,326 Due after 10 years 453 464 1,215 1,121 -------- -------- -------- -------- 26,951 27,243 14,563 15,187 Mortgage-backed securities 112,663 115,243 54,592 57,346 -------- -------- -------- -------- $139,614 $142,486 $ 69,155 $ 72,533 ======== ======== ======== ========
The amortized cost, gross unrealized gains and losses, and estimated market value of mortgage-backed securities, by issuer, are summarized as follows:
December 31, 2002 ----------------- Gross Gross Amortized unrealized unrealized Fair cost gains losses Value --------- --------- ------- --------- (in thousands) Mortgage-backed securities held to maturity FHLMC certificates $ 21,870 $ 1,399 $ - $ 23,269 FNMA certificates 11,781 480 - 12,261 GNMA certificates 18,278 852 - 19,130 Real estate mortgage investment conduit 2,519 23 - 2,542 Other mortgage-backed securities 144 - - 144 --------- --------- ------- --------- $ 54,592 $ 2,754 $ - $ 57,346 ========= ========= ======= ========= Mortgage-backed securities available for sale FHLMC certificates $ 663 $ 36 - $ 699 FNMA certificates 11,385 493 - 11,878 GNMA certificates - - - - Real estate mortgage investment conduit 100,615 2,105 (54) 102,666 --------- --------- ------- --------- $ 112,663 $ 2,634 $ (54) $ 115,243 ========= ========= ======= =========
(Continued) 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2002 and 2001 NOTE D - INVESTMENT AND MORTGAGE-BACKED SECURITIES - Continued
December 31, 2001 ----------------- Gross Gross Amortized unrealized unrealized Fair cost gains losses Value --------- --------- ------- --------- (in thousands) Mortgage-backed securities held to maturity FHLMC certificates $ 35,000 $ 789 $ (36) $ 35,754 FNMA certificates 15,739 168 (35) 15,871 GNMA certificates 29,877 274 - 30,151 Real estate mortgage investment conduit 12,550 218 (3) 12,765 Other mortgage-backed securities 201 - (7) 194 -------- -------- -------- -------- $ 93,367 $ 1,449 $ (81) $ 94,735 ======== ======== ======== ======== Mortgage-backed securities available for sale FHLMC certificates $ 1,077 $ 31 - $ 1,108 FNMA certificates 22,415 74 (30) 22,459 GNMA certificates 5,462 53 - 5,515 Real estate mortgage investment conduit 69,702 1,333 (354) 70,681 -------- -------- -------- -------- $ 98,656 $ 1,491 $ (384) $ 99,763 ======== ======== ======== ========
Investment securities having an aggregate amortized cost of approximately $5.0 and $4.0 million were pledged to secure public deposits at December 31, 2002 and 2001, 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. 36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2002 and 2001 NOTE E - LOANS RECEIVABLE Loans receivable are summarized as follows:
December 31, ------------ 2002 2001 ---- ---- (in thousands) First mortgage loans (principally conventional) Secured by one-to-four family residences $ 227,953 $ 222,016 Secured by other non-residential properties 85,493 93,572 Construction loans 12,026 9,824 --------- --------- 325,472 325,412 Net deferred loan origination cost (fees) and unamortized premiums 377 (633) --------- --------- Total first mortgage loans 325,849 324,779 --------- --------- Consumer and other loans Commercial 8,005 9,285 Home equity and second mortgage 25,480 25,640 Leases 2,246 3,544 Other 10,490 16,154 --------- --------- 46,221 54,623 --------- --------- Unearned premiums 69 205 --------- --------- Total consumer and other loans 46,290 54,828 --------- --------- Less allowance for loan losses (2,047) (1,972) --------- --------- Total loans receivable $ 370,092 $ 377,635 ========= =========
Activity in the allowance for loan losses is summarized as follows: December 31, ------------ 2002 2001 2000 ------- ------- ------- (in thousands) Balance at beginning of year $ 1,972 $ 1,714 $ 1,917 Provision charged to income 988 500 410 Charge-offs, net (913) (242) (613) ------- ------- ------- Balance at end of year $ 2,047 $ 1,972 $ 1,714 ======= ======= ======= 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 $3.8 million and $3.8 million at December 31, 2002 and 2001, respectively. Interest income that would have been recorded under the original terms of such loans totaled approximately $307,000, $284,000, and $112,000 for the years ended December 31, 2002, 2001 and 2000, respectively. No interest income has been recognized on non-accrual loans for any of the periods presented. (Continued) 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2002 and 2001 NOTE E - LOANS RECEIVABLE - Continued The Bank has no concentration of loans to borrowers engaged in similar activities that exceeded 10% of loans at December 31, 2002 and 2001. 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 $1,112,000, and $1,039,000 at December 31, 2002 and 2001, respectively. For the year ended December 31, 2002, principal repayments of approximately $27,000 were received and $100,000 was 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, 2002 2001 ------- ------- (in thousands) Mortgage loan servicing portfolios FHLMC $ 3,758 $ 6,789 Other investors 8,203 7,068 ------- ------- $11,961 $13,857 ======= ======= Custodial balances maintained in connection with the foregoing loan servicing totaled approximately $149,000, and $287,000 at December 31, 2002 and 2001, respectively. The net servicing revenue on mortgage loans serviced for others is immaterial for all periods presented. NOTE G - PREMISES AND EQUIPMENT Premises and equipment are summarized as follows: December 31, Estimated --------------------- useful lives 2002 2001 ------------ ------- ------- (in thousands) Buildings 30 years $ 6,483 $ 6,454 Leasehold improvements 5 years 1,264 1,264 Furniture, fixtures and equipment 3-7 years 8,390 8,147 ------- ------- 16,137 15,865 Less accumulated depreciation 11,238 10,224 ------- ------- 4,899 5,641 Land 1,843 1,843 ------- ------- $ 6,742 $ 7,484 ======= ======= 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2002 and 2001 NOTE H - GOODWILL AND CORE DEPOSIT INTANGIBLE ASSET A reconciliation of net income and earnings per share to amounts excluding goodwill amortization for years prior to 2002 is as follows:
(000s in thousands except per share amounts) 2002 2001 2000 ------ ------ ------ Reported net income $5,092 $5,733 $4,482 Add back: goodwill amortization, net of related tax benefit - 293 293 ------ ------ ------ Adjusted net income $5,092 $6,026 $4,775 ====== ====== ====== Basic earnings per share Reported net income $ 2.06 $ 2.32 $ 1.76 Add back: goodwill amortization, net of related tax benefit - 0.12 0.12 ------ ------ ------ Adjusted net income $ 2.06 $ 2.44 $ 1.88 ====== ====== ====== Diluted earnings per share Reported net income $ 1.87 $ 2.15 $ 1.71 Add back: goodwill amortization, net of related tax benefit - 0.11 0.11 ------ ------ ------ Adjusted net income $ 1.87 $ 2.26 $ 1.82 ====== ====== ======
Core deposit intangible amortization for each of the five years subsequent to December 31, 2002 is estimated to be as follows: Year ending December 31, ------------------------ 2003 $185,000 2004 154,500 2005 129,250 2006 83,989 -------- $552,739 ======== 39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2002 and 2001 NOTE I - DEPOSITS Deposits are summarized as follows: December 31, Deposit type 2002 2001 - ------------ -------- -------- (in thousands) Demand $20,810 $18,200 NOW 48,496 46,990 Money Market 43,677 42,557 Passbook savings 182,813 169,576 -------- -------- Total demand, transaction and passbook deposits 295,796 277,323 Certificates of deposit 146,762 144,729 -------- -------- $442,558 $422,052 ======== ======== The aggregate amount of certificates of deposit with a minimum denomination of $100,000 was approximately $19.7 million and $17.3 million at December 31, 2002 and 2001, respectively. At December 31, 2002, scheduled maturities of certificates of deposit are as follows: Year ending December 31, - -------------------------------------------------------------------------------- 2003 2004 2005 2006 2007 Thereafter Total ---- ---- ---- ---- ---- ---------- ----- (in thousands) $96,669 $27,193 $16,233 $1,471 $4,883 $ 313 $146,762 ======= ======= ======= ====== ====== ====== ======== 40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2002 and 2001 NOTE J - ADVANCES FROM THE FEDERAL HOME LOAN BANK AND OTHER BORROWINGS Advances from the Federal Home Loan Bank consist of the following: December 31, ------------ 2002 2001 ---- ---- Contractual Weighted Weighted maturity date Amount average rate Amount average rate - ------------- ------ ------------ ------ ------------ (in thousands) 2002 $ - - % $15,000 5.52% 2003 27,000 5.70 27,000 5.70 2004 52,000 5.23 52,000 5.23 2005 5,000 6.58 5,000 6.58 2006 25,000 5.44 25,000 5.44 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 -------- ---- -------- ---- $207,359 5.46% $222,359 5.46% ======== ==== ======== ==== 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 $20 million at December 31, 2002. NOTE K - 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 $52,000, $48,000, and $48,000 in 2002, 2001 and 2000, respectively. (Continued) 41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2002 and 2001 NOTE K - 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, ------------------ 2002 2001 ------- ------- (in thousands) Change in benefit obligation Benefit obligation at beginning of year $ 1,991 $ 3,017 Service cost 172 114 Interest cost 163 194 Plan amendments 42 - Actuarial loss (405) (96) Benefits paid (161) (1,238) ------- ------- Benefits obligation at end of year $ 2,612 $ 1,991 ======= ======= Change in plan assets Fair value of plan assets at beginning of year $ 2,323 $ 2,713 Actual return on plan assets 114 391 Employer contribution 450 457 Benefits paid (161) (1,238) ------- ------- Fair value of plan assets at end of year $ 2,725 $ 2,323 ======= ======= Funded status Unfunded accumulated benefits $ 114 $ 331 Unrecognized transition obligation 9 15 Unrecognized net actuarial loss (gain) 325 (245) Unrecognized prior service cost 344 364 ------- ------- Prepaid benefit cost $ 792 $ 465 ======= ======= (Continued) 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2002 and 2001 NOTE K - BENEFIT PLANS - Continued 2002 2001 2000 ---- ---- ---- Weighted-average assumptions as of December 31 Discount rate 6.75% 7.00% 7.50% 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 $ 172 $ 114 $ 68 Interest cost 163 194 210 Expected return on plan assets (185) (231) (204) Amortization of prior service cost 67 58 65 ----- ----- ----- Net periodic benefit cost $ 217 $ 135 $ 139 ===== ===== ===== 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. 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. ESOP compensation expense was $197,000, $162,000, and $112,000 in 2002, 2001 and 2000, respectively. 2002 2001 ---------- ---------- Allocated shares 133,200 126,600 Unreleased shares 240,100 252,300 ---------- ---------- Total ESOP shares 373,300 378,900 ========== ========== Fair value of unreleased shares $5,933,900 $5,323,500 ========== ========== (Continued) 43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2002 and 2001 NOTE K - BENEFIT PLANS - Continued 2. Stock Option Plans ------------------ A summary of the status of the Corporation's fixed stock option plans as of December 31, 2002, and changes for each of the years in the three-year period then ended is as follows:
2002 2001 2000 ---- ---- ---- Weighted Weighted Weighted average average Average Number exercise Number exercise Number Exercise of price per of price per of price per shares share shares share shares share ------ ----- ------ ----- ----- ----- Outstanding at beginning of year 652,443 $13.52 659,759 $13.23 698,185 $13.27 Options granted 32,150 24.77 24,275 20.30 45,930 13.82 Options exercised (21,338) 11.66 (23,276) 11.81 (41,250) 11.72 Options forfeited (4,282) 15.93 (8,315) 15.03 (43,106) 15.62 ------- ------- ------- Outstanding at end of year 658,973 $14.11 652,443 $13.52 659,759 $13.23 ======= ======= =======
The following table summarizes information about stock options outstanding at December 31, 2002:
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 2002 life (years) price 2002 price ------ ---- ------------ ----- ---- ----- $11.50-14.13 393,770 2.15 years $11.64 377,570 $11.56 $14.50-18.00 195,343 4.14 years 15.97 187,410 16.02 $19.00-28.00 69,860 8.69 years 22.88 15,182 22.17
44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2002 and 2001 NOTE L - INCOME TAXES The components of income tax expense are summarized as follows:
Year ended December 31, 2002 2001 2000 ---- ---- ---- (in thousands) Federal Current $ 1,623 $ 2,257 $ 1,875 Charge in lieu of income tax relating to stock compensation - 3 170 Deferred (19) (172) (122) ------- ------- ------- 1,604 2,088 1,923 State and local - current 1 (18) - ------- ------- ------- Income tax provision $ 1,605 $ 2,070 $ 1,923 ======= ======= =======
The Corporation's effective income tax rate was different than the statutory federal income tax rate as follows: Year ended December 31, ----------------------- 2002 2001 2000 ---- ---- ---- Statutory federal income tax 34.0% 34.0% 34.0% Increase (decrease) resulting from Tax-exempt income (8.3) (5.3) (6.7) State tax, net of federal benefit 0.0 0.0 0.0 Other (1.7) (2.2) 2.7 ---- ---- ---- 24.0% 26.5% 30.0% ==== ==== ==== (Continued) 45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2002 and 2001 NOTE L - INCOME TAXES - Continued Deferred taxes are included in the accompanying consolidated statements of financial position at December 31, 2002 and 2001, 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, 2002 and 2001. The Corporation's net deferred tax asset (liability) at December 31, 2002 and 2001, was composed of the following: December 31, ------------ 2002 2001 ---- ---- (in thousands) Deferred tax assets Deferred loan origination fees $ 12 $ 35 Deferred compensation 330 351 Allowance for loan losses, net 746 586 Amortization 221 361 ------- ------- 1,309 1,333 ------- ------- Deferred tax liabilities Accrued pension expense 492 534 Unrealized gain on securities available for sale 976 405 Other 32 33 ------- ------- 1,500 972 ------- ------- Deferred tax (liability) asset $ (191) $ 361 ======= ======= 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. 46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2002 and 2001 NOTE M - 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, 2002. As of December 31, 2002, management believes that the Bank met all capital adequacy requirements to which it was subject.
Regulatory capital ------------------ December 31, 2002 ----------------- Tangible Core Risk-based Capital Percent Capital Percent Capital Percent ------- ------- ------- ------- ------- ------- Capital under generally accepted accounting principles $55,712 7.80% $55,712 7.80% $55,712 16.66% Unrealized gain on certain available-for-sale securities (1,896) (0.27) (1,896) (0.27) (1,896) (0.57) Goodwill and other intangible assets (4,877) (0.68) (4,877) (0.68) (4,877) (1.46) Additional capital items General valuation allowances - limited - - - - 2,047 0.62 ------- ----- ------- ----- ------- ----- Regulatory capital computed 48,939 6.85 48,939 6.85 50,983 15.25 Minimum capital requirement 10,712 1.50 28,565 4.00 26,746 8.00 ------- ----- ------- ----- ------- ----- Regulatory capital - excess $38,227 5.35% $20,374 2.85% $24,237 7.25% ======= ===== ======= ===== ======= =====
(Continued) 47 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2002 and 2001 NOTE M- REGULATORY MATTERS - Continued
Regulatory capital ------------------ December 31, 2001 ----------------- Tangible Core Risk-based Capital Percent Capital Percent Capital Percent ------- ------- ------- ------- ------- ------- Capital under generally accepted accounting principles $55,074 7.78% $55,074 7.78% $55,074 16.10% Unrealized loss on certain available-for-sale securities (785) (0.11) (785) (0.11) (785) (0.23) Goodwill and other intangible assets (5,099) (0.72) (5,099) (0.72) (5,099) (1.50) Additional capital items General valuation allowances - limited - - - - 1,972 0.58 --------- ----- --------- ----- --------- ----- Regulatory capital computed 49,190 6.95 49,190 6.95 51,162 14.95 Minimum capital requirement 10,618 1.50 28,313 4.00 27,374 8.00 --------- ----- --------- ----- --------- ----- Regulatory capital - excess $ 38,572 5.45% $ 20,877 2.95% $ 23,788 6.95% ========= ===== ========= ===== ========= =====
At December 31, 2002, 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. 48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2002 and 2001 NOTE N - 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, ------------ 2002 2001 ---- ---- (in thousands) Commitments to extend credit $35,983 $28,799 Standby letters of credit 1,548 2,338 Loans sold with recourse 163 175 --------- --------- $ 37,694 $ 31,312 ========= ========= 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. 49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2002 and 2001 NOTE O - COMMITMENTS AND CONTINGENCIES The Bank had no commitments to sell mortgage loans to investors at December 31, 2002 and 2001. 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 $279,000, $316,000, and $343,000 for the years ended December 31, 2002, 2001 and 2000, 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, ------------------------ 2003 $190,001 2004 139,364 2005 78,285 2006 38,475 2007 38,475 Thereafter 38,475 -------- $523,075 ======== The Corporation has 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 until terminated or not renewed by the Corporation or key executives. Upon a change in control, the Corporation shall make a lump-sum payment or continue to pay the key executives' salaries per the agreements, and reimburse the executive for certain benefits for one year. The maximum contingent liability under the agreements at December 31, 2002 was approximately $2,439,000. From time to time, the Corporation and its subsidiaries are parties to routine litigation that 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 P - 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. 50 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2002 and 2001 NOTE Q- 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, ------------ 2002 2001 ---- ---- Fair Carrying Fair Carrying value value value value ----- ----- ----- ----- (in thousands) Cash and cash equivalents $100,580 $100,580 $ 69,139 $ 69,139 Investment securities 42,431 41,806 32,501 32,537 Mortgage-backed securities 172,589 169,835 194,498 193,130 (Continued) 51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2002 and 2001 NOTE Q - 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, ------------ 2002 2001 ---- ---- Fair Carrying Fair Carrying value value value value ----- ----- ----- ----- (in thousands) Assets Interest-bearing deposits with banks $ 220 $ 220 $ 194 $ 194 Liabilities Deposits with stated maturities 149,033 146,762 146,227 144,729 Borrowings with stated maturities Short-term (due within 6 months) 15,125 15,000 - - Long-term 210,613 192,359 231,648 222,359
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, ------------ 2002 2001 ---- ---- Fair Carrying Fair Carrying value Value value value ----- ----- ----- ----- (in thousands) Deposits with no stated maturities $295,796 $295,796 $277,323 $277,323 ======== ======== ======== ======== 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, ------------ 2002 2001 ---- ---- Fair Carrying Fair Carrying value value value value ----- ----- ----- ----- (in thousands) Net loans $382,796 $370,092 $386,302 $377,635 ======== ======== ======== ======== (Continued) 52 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2002 and 2001 NOTE Q - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued The fair value of commitments to extend credit is estimated based on the amount of unamortized deferred loan commitment fees. The fair value of letters of credit is based on the amount of unearned fees plus the estimated cost to terminate the letters of credit. Fair values of unrecognized financial instruments including commitments to extend credit and the fair value of letters of credit are considered immaterial. 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 R - SERVICE FEES, CHARGES AND OTHER OPERATING INCOME AND OTHER OPERATING EXPENSE Year ended December 31, ----------------------- 2002 2001 2000 ---- ---- ---- (in thousands) Service fees, charges and other operating income Loan servicing fees $ 338 $ 241 $ 329 Late charge income 99 105 126 Deposit service charges 750 835 548 Bank-owned life insurance value increase 520 174 - Other income 407 379 350 ------ ------ ------ $2,114 $1,734 $1,353 ====== ====== ====== Other operating expense Insurance and surety bond $ 146 $ 128 $ 120 Office supplies 192 249 202 Loan expense 272 359 342 Loan servicing fees 127 223 258 Postage 299 261 140 Telephone 262 286 242 Service charges on bank accounts 95 205 423 Supervisory examination fees 148 141 138 Other expenses 795 720 829 ------ ------ ------ $2,336 $2,572 $2,694 ====== ====== ====== NOTE S - 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) 53 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2002 and 2001 NOTE S - 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 T - 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). Diluted earnings per share calculations for the years ended December 31, 2001 and 2000 have been revised to more accurately account for the tax benefit associated with the exercise of non-qualified stock options. As originally reported, diluted earnings per share for the years ended December 31, 2001 and 2000 were $2.15 and $1.71, respectively.
Year ended December 31, 2002 ---------------------------- Weighted average Income shares Per share (numerator) (denominator) Amount ----------- ------------- ------ Basic earnings per share Income available to common stockholders $ 5,092 2,473,044 $ 2.06 Effect of dilutive securities Stock options - 175,144 (0.15) ------- --------- ------- Diluted earnings per share Income available to common stockholders plus effect of dilutive securities $ 5,092 2,648,188 $ 1.91 ======= ========= =======
There were options to purchase 27,150 shares of common stock at a range of $25.35 to $28.00 per share which were outstanding during 2002 that were not included in the computation of diluted earnings per share because the options' exercise prices were greater than the average market price of the common shares. (Continued) 54 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2002 and 2001 NOTE T - EARNINGS PER SHARE - Continued
Year ended December 31, 2001 ---------------------------- Weighted average Income shares Per share (numerator) (denominator) Amount ----------- ------------- ------ Basic earnings per share Income available to common stockholders $ 5,733 2,466,149 $ 2.32 Effect of dilutive securities Stock options - 148,412 (0.13) ------- --------- ------- Diluted earnings per share Income available to common stockholders plus effect of dilutive securities $ 5,733 2,614,561 $ 2.19 ======= ========= =======
There were options to purchase 10,000 shares of common stock at a range of $20.88 to $28.00 per share which were outstanding during 2001 that were not included in the computation of diluted earnings per share because the options' exercise prices were greater than the average market price of the common shares.
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 - 58,895 (0.04) ------- --------- ------- Diluted earnings per share Income available to common stockholders plus effect of dilutive securities $ 4,482 2,599,137 $ 1.72 ======= ========= =======
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 that were not included in the computation of diluted earnings per share because the options' exercise prices were greater than the average market price of the common shares. 55 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2002 and 2001 NOTE U - SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATE (UNAUDITED)
Three months ended ------------------ Dec. 31, Sept. 30, June 30, March 31, 2002 2002 2002 2002 ------ ------- ------- ------- (in thousands, except per share data) Total interest income $9,377 $10,038 $10,453 $10,587 Total interest expense 5,390 5,625 5,778 5,867 Net interest income 3,987 4,413 4,675 4,720 Provision for possible loan losses 150 150 538 150 ------ ------- ------- ------- Net interest income after provision 3,837 4,263 4,137 4,570 Other income 1,316 982 466 540 Other expenses 3,255 3,433 3,306 3,420 ------ ------- ------- ------- Income before income taxes 1,898 1,812 1,297 1,690 Income taxes 460 438 302 405 ------ ------- ------- ------- Net income $1,438 $ 1,374 $ 995 $ 1,285 ====== ======= ======= ======= Earnings per share - basic $ 0.58 $ 0.55 $ 0.40 $ 0.52 Earnings per share - assuming dilution $ 0.54 $ 0.52 $ 0.37 $ 0.49
(Continued) 56 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2002 and 2001 NOTE U - SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED) - Continued
Three months ended ------------------ Dec. 31, Sept. 30, June 30, March 31, 2001 2001 2001 2001 ------- ------- ------- ------- (in thousands, except per share data) Total interest income $11,130 $11,470 $11,817 $12,330 Total interest expense 6,431 6,653 6,733 7,091 Net interest income 4,699 4,817 5,084 5,239 Provision for possible loan losses 127 124 124 125 ------- ------- ------- ------- Net interest income after provision 4,572 4,693 4,960 5,114 Other income 1,489 474 809 400 Other expenses 3,784 3,627 3,486 3,811 ------- ------- ------- ------- Income before income taxes 2,277 1,540 2,283 1,703 Income taxes 641 389 595 445 ------- ------- ------- ------- Net income $ 1,636 $ 1,151 $ 1,688 $ 1,258 ======= ======= ======= ======= Earnings per share - basic $ 0.66 $ 0.47 $ 0.69 $ 0.51 Earnings per share - assuming dilution $ 0.62 $ 0.44 $ 0.65 $ 0.49
57 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2002 and 2001 NOTE V - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY Condensed financial information for TF Financial Corporation (parent company only) follows: BALANCE SHEET December 31, ------------ 2002 2001 ------- ------- (in thousands) ASSETS Cash $ 5,683 $ 2,458 Certificates of deposit - other institutions 220 194 Investment securities available-for-sale - - Investment in Third Federal 53,311 52,551 Investment in TF Investments 2,282 2,261 Investment in Teragon 9 10 Investment in Penns Trail Development 1,045 275 Other assets 315 226 ------- ------- Total assets $62,865 $57,975 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Total liabilities $ 25 $ - Stockholders' equity 62,840 57,975 ------- ------- Total liabilities and stockholders' equity $62,865 $57,975 ======= ======= STATEMENT OF EARNINGS Year ended December 31, ----------------------- 2002 2001 2000 ---- ---- ---- (in thousands) INCOME Equity in earnings of subsidiaries $5,269 $5,825 $4,573 Interest and dividend income 110 108 140 Other - 29 - ------ ------ ------ Total income 5,379 5,962 4,713 EXPENSES Other 287 229 231 ------ ------ ------ Total expenses 287 229 231 ------ ------ ------ NET INCOME $5,092 $5,733 $4,482 ====== ====== ====== (Continued) 58 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2002 and 2001 NOTE V - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY - Continued STATEMENT OF CASH FLOWS
Year ended December 31, 2002 2001 2000 ------- ------- ------- (in thousands) Cash flows from operating activities Net income $ 5,092 $ 5,733 $ 4,482 Adjustments to reconcile net income to net cash provided by (used in) operating activities Equity in earnings of subsidiaries (5,269) (5,825) (4,573) Gain on sale of investment securities - (7) - Net change in assets and liabilities (64) (97) (56) ------- ------- ------- Net cash used in operating activities (241) (196) (147) ------- ------- ------- Cash flows from investing activities Capital distribution from subsidiaries 5,853 2,053 2,938 Capital contribution to subsidiary (750) - - Sale of investment securities available for sale - 507 - Purchase and maturities of certificates of deposit in other financial institutions, net (26) (4) (9) ------- ------- ------- Net cash provided by investing activities 5,077 2,556 2,929 ------- ------- ------- Cash flows from financing activities Cash dividends paid to stockholders (1,484) (1,424) (1,326) Treasury stock acquired (376) (1,110) (1,972) Exercise of stock options 249 278 483 ------- ------- ------- Net cash used in financing activities (1,611) (2,256) (2,815) ------- ------- ------- NET INCREASE (DECREASE) IN CASH 3,225 104 (33) ------- ------- ------- Cash at beginning of year 2,458 2,354 2,387 ------- ------- ------- Cash at end of year $ 5,683 $ 2,458 $ 2,354 ======= ======= ======= Supplemental disclosure of cash flow information Cash paid during the year for income taxes $ - $ - $ - ======= ======= =======
59 EX-21 5 ex-21.txt SUBSIDIARIES OF THE REGISTRANT SUBSIDIARIES OF THE REGISTRANT Parent - ------ TF Financial Corporation Percentage Jurisdiction of Subsidiaries Owned Incorporation - ------------ ----- ------------- Third Federal Savings Bank (a) 100% United States TF Investments Corporation (a) 100% Delaware Teragon Financial Corporation (a) 100% Pennsylvania Penns Trail Development Corporation (a) 100% Delaware Third Delaware Corporation (a)(b) 100% Delaware - --------------- (a) The operations of this subsidiary are included in the consolidated financial statements contained in the 2002 Annual Report to Stockholders incorporated herein by reference. (b) Third Delaware Corporation is a wholly-owned subsidiary of Third Federal Savings Bank. EX-23 6 ex-23.txt CONSENT OF INDEPENDENT AUDITOR CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our report dated January 23, 2003, accompanying the consolidated financial statements incorporated by reference or included in the Annual Report of TF Financial Corporation and Subsidiaries on Form 10-K for the year ended December 31, 2002. We hereby consent to the incorporation by reference of said report in the Registration Statements of TF Financial Corporation and Subsidiaries on Form S-8 (File No. 33-87176, effective December 7, 1994, File No. 333- 09235, effective July 31, 1996 and File No. 333-27085, effective May 14, 1997). /s/ Grant Thornton LLP Philadelphia, Pennsylvania March 26, 2003 EX-99 7 ex-99.txt CERTIFICATION CERTIFICATION PURSUANT TO 18 U.S.C. ss. 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report on Form 10-K for the year ended December 31, 2002 (the "Report") of TF Financial Corporation (the "Company") as filed with the Securities and Exchange Commission, we, John R. Stranford, President and Chief Executive Officer, and Dennis R. Stewart, Senior Vice President and Chief Financial Officer (Principal Accounting Officer), hereby certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/John R. Stranford /s/Dennis R. Stewart - ------------------------------------- -------------------------------- John R. Stranford Dennis R. Stewart President and Chief Executive Officer Senior Vice President and Chief Financial Officer March 26, 2003 -----END PRIVACY-ENHANCED MESSAGE-----