-----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, O6TmCfK9I+QzNmfqcPfVxMMstbZnZRD1ygeUaOrj8SSPwpJNGsrYFXYWErpAC91h CDHQoEmAnGXsfFWnzBaTIw== 0000946275-04-000365.txt : 20040330 0000946275-04-000365.hdr.sgml : 20040330 20040330150041 ACCESSION NUMBER: 0000946275-04-000365 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040330 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: 04700318 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-123103_0084.txt FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------- FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2003 ------------------------------------------------------ - 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. [ ] 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 30, 2003, was $65.6 million (2,106,969 shares at $31.115 per share). As of March 22, 2004 there were outstanding 2,885,502 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, 2003. (Parts I, II and IV) 2. Portions of the Proxy Statement for the 2004 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, 2003, the Company had total assets of $607 million, total liabilities of $551 million and stockholders' equity of $56 million. 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, 2003 the Bank operated fourteen branch offices in Bucks and Philadelphia counties, Pennsylvania and in Mercer County, New Jersey. 2 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, 2003, one- to four-family residential mortgage loans totaled $277 million or 68% of the Bank's total loan portfolio. At that same date, the Bank had approximately $130 million or 21% of total assets invested in mortgage-backed securities and $25 million or 4% 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 offers a wide range of consumer and business products at its fourteen full service branch offices located in Bucks and Philadelphia Counties in Pennsylvania, and Mercer County in New Jersey. Five of the branch offices are located in Bucks County., the third wealthiest county in Pennsylvania. Bucks County is a growing region offering opportunity for growth for the Bank. Six branches are located in the northeast section of Philadelphia where the Bank was founded. Although Philadelphia County is experiencing population decline, the Bank's branches in this section of Philadelphia represent a deposit stronghold. The remaining three branches are in Mercer County, New Jersey which has an expanding population and represents another growth area for the Bank. Competition The Bank faces varying degrees of competition from local thrift institutions and credit unions at its various branch locations. Stronger competition has come from local and very large regional commercial banks based in and around the Philadelphia area. Commercial banks hold approximately 78% of the deposit market in Philadelphia County, 65% in Bucks County and 77% in Mercer County. The Bank's share of the deposit market in Philadelphia, Bucks and Mercer Counties is 0.7%, 1.6% and 1.2%, 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, 2003, the Bank's mortgage loans outstanding were $358 million, of which $277 million 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, 13% were ARM's and 87% were fixed-rate loans. Total ARM loans in the Bank's portfolio at December 31, 2003, amounted to $88 million or 22% of total loans. At that same date, commercial real estate and multi-family residential and construction loans totaled $74 million and $7 million, respectively. Consumer and other loans held by the Bank totaled $48 million or 12% of total loans outstanding at December 31, 2003, of which $25 million or 52% consisted of home equity and second mortgages. At that same date commercial business loans, leases and other loans totaled $15 million, $1 million and $7 million, respectively. 3 The following table sets 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, ----------------------------------------------------------------------------------------- 2003 2002 2001 2000 1999 ----------------- ----------------- ----------------- ----------------- ----------------- 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 ................. $276,849 68.22% $227,953 61.33% $222,016 58.42% $211,065 57.89% $168,057 58.00% Commercial real estate and multi-family ...................... 74,109 18.26 85,493 23.00 93,572 24.62 77,486 21.25 65,346 22.55 Construction ........................ 6,591 1.62 12,026 3.23 9,824 2.59 13,950 3.82 12,074 4.16 -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ Total mortgage loans ........... 357,549 88.10 325,472 87.56 325,412 85.63 302,501 82.96 245,477 84.71 Consumer and other loans: Home equity and second mortgage ..... 25,199 6.21 25,480 6.87 25,640 6.75 20,887 5.73 16,816 5.81 Commercial business ................. 15,185 3.74 8,005 2.15 9,285 2.44 14,630 4.01 9,339 3.22 Leases .............................. 1,371 0.34 2,246 0.60 3,544 0.93 3,493 0.96 3,195 1.10 Other ............................... 6,532 1.61 10,490 2.82 16,154 4.25 23,113 6.34 14,945 5.16 -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ Total consumer and other loans . 48,287 11.90 46,221 12.44 54,623 14.37 62,123 17.04 44,295 15.29 -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ Total loans .................... 405,836 100.00% 371,693 100.00% 380,035 100.00% 364,624 100.00% 289,772 100.00% -------- ====== -------- ====== -------- ====== -------- ====== -------- ====== Less: Unearned discount,(premium), deferred loan fees, net............ (924) (446) 428 1,104 (124) Allowance for loan losses............ 2,111 2,047 1,972 1,714 1,917 -------- -------- -------- -------- -------- Total loans, net...... $404,649 $370,092 $377,635 $361,806 $287,979 ======== ======== ======== ======== ======== Mortgage-backed securities held-to-maturity: FHLMC................................ $ 8,407 35.58% $ 21,870 40.10% $ 35,000 37.50% $ 45,971 34.03% $ 52,625 32.91% FNMA................................. 7,205 30.49 11,781 21.60 15,739 16.90 20,756 15.36 24,983 15.63 GNMA................................. 8,007 33.88 18,278 33.40 29,877 32.00 41,090 30.41 46,651 29.18 Real estate investment mortgage conduit............................. 11 0.05 2,519 4.60 12,550 13.40 27,043 20.02 35,271 22.06 Other mortgage-backed securities..... -- -- 144 0.30 201 0.20 282 0.18 358 0.22 -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ Total mortgage-backed and related securities held-to-maturity...... $ 23,630 100.00% $ 54,592 100.00% $ 93,367 100.00% $135,142 100.00% $159,888 100.00% ======== ====== ======== ====== ======== ====== ======== ====== ======== ====== Mortgage-backed securities available-for-sale: FHLMC.............................. $ 8,525 7.98% $ 699 0.60% $ 1,108 1.10% $ 1,431 1.46% $ 7,233 5.46% FNMA............................... 18,385 17.22 11,878 10.30 22,459 22.50 25,679 26.23 27,963 21.10 GNMA............................... -- -- -- -- 5,515 5.50 7,561 7.72 8,338 6.29 Real estate investment mortgage conduit........................... 79,864 74.80 102,666 89.10 70,681 70.90 63,243 64.59 88,981 67.15 -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ Total............................ $106,774 100.00% $115,243 100.00% $ 99,763 100.00% $ 97,914 100.00% $132,515 100.00% ======== ====== ======== ====== ======== ====== ======== ====== ======== ======
4 Loan Maturity and Repricing Information. The following table sets forth certain information at December 31, 2003, 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, 2004, are reported as due in one year or less. The table does not include prepayments or scheduled principal repayments.
Due 1/1/04 - Due 1/1/05 - Due After 12/31/04 12/31/08 12/31/08 ------------- ------------- ------------ (In thousands) Available for sale: Mortgage-backed securities .............. $ 48 $ 4,238 $102,488 Held to Maturity: One-to-four family ...................... $ 162 $ 3,712 $272,975 Commercial real estate and multi-family.. 1,318 16,800 55,991 Construction ............................ 4,423 2,168 -- Consumer and other ...................... 21,209 11,326 15,752 -------- -------- -------- Total loans receivable .................. 27,112 34,006 344,718 Mortgage-backed securities .............. 21 2,533 21,076 -------- -------- -------- Total.................................... $ 27,133 $ 36,539 $365,794 ======== ======== ========
The following table sets forth the dollar amount of all loans and mortgage-backed securities due after December 31, 2004, 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 ............... $106,726 $ -- -------- -------- Total..................................... $106,726 $ -- ======== ======== Held to Maturity: One-to-four family ....................... $239,324 $ 37,363 Commercial real estate and multi-family... 17,350 55,441 Construction ............................. -- 2,168 Consumer and other ....................... 16,026 11,052 -------- -------- Total loans receivable ................... 272,700 106,024 Mortgage-backed securities ............... 23,538 71 -------- -------- Total..................................... $296,238 $106,095 ======== ======== One- to Four-Family Mortgage Lending. 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 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%. 5 Loan originations are obtained from existing or past customers, members of the local community, and referrals from established builders and realtors within the Bank's lending area using direct advertising in local newspapers, branch signage and promotions, and word of mouth referrals. 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. 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, has been primarily a portfolio lender. As of December 31, 2003, the Bank's portfolio of loans serviced for FHLMC or FNMA totaled approximately $2 million. Beginning in December 2003 the Bank initiated a mortgage lending department that is separate as to its sales efforts from the consumer lending area of the Bank. In connection with this initiative, the Bank has hired a mortgage lending manager and several commissioned loan officers. The Bank will now offer, in addition to its standard portfolio loan products, other types of mortgage loans that will be originated in the name of, or sold on a servicing released basis to, third party investors. The mortgage loan officers will support the Bank's branches and customers, and additionally engage in calling efforts directed toward realtors, builders, and others that can be sources of lending business for the Bank. The Company expects to grow this line of business in the future, and may resume selling loans to FHLMC, FNMA, or others on a servicing retained basis. Commercial Real Estate and Multi-Family Lending. 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, 2003, the five largest commercial real estate and multi-family loans totaled $22.2 million with no single loan larger than $6.5 million. At December 31, 2003, all such loans were current and the properties securing such loans are in the Bank's market area. Construction Lending. At December 31, 2003, the Bank had $7 million of construction loans or 2% 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 6 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 Lending. 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 $48 million or 12% of the Bank's total loan portfolio at December 31, 2003. 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 focuses on 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, 2003, $225,000 or 0.5% of the Bank's consumer loans were delinquent more than 90 days. The Bank offers second mortgage loans on one- to four-family residences. At December 31, 2003, second mortgage and home equity loans totaled $25 million, or 6% 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. Business Lending. 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 makes commercial business loans on a secured basis. 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, 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, 2003, the Bank had approximately $15 million outstanding in commercial business loans, which represented approximately 4% 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 amount is less than $100,000. At December 31, 2003 the purchased lease portfolio totaled $1 million or 0.3% of total assets. Loan Approval Authority and Underwriting. The Board of Directors of the Bank 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. The Board has approved loan authority and limits for certain of the bank's lending personnel and senior officers, including the president of the bank. Approval authority ranges from $25,000 to $500,000 for secured loans, and $5,000 to $25,000 for unsecured loans. Members of an in-house loan committee comprising the four most senior members of management approve all loans over $500,000. Any two members may combine their lending authority. A majority of the members may approve secured loans up to $1.5 million and unsecured loans up to $200,000. All loans of $1.5 million through $5 million require the approval of a Board Loan Committee composed of 7 four members of the Board of Directors of the Bank. All loans over $5 million or loans that cause the aggregate lending relationship to exceed $5 million must be approved by the Bank's Board of Directors. 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 $7.0 million as of December 31, 2003. At December 31, 2003, the Bank's five largest aggregate lending relationships had balances ranging from $4.8 to $6.6 million. At December 31, 2003, all of these loans were current. 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, 2003, consisted of pass-through certificates issued by the Federal Home Loan Mortgage Corporation ("FHLMC") ($17 million), Government National Mortgage Association ("GNMA"), ($8 million) Federal National Mortgage Association ("FNMA") ($25 million), and real estate mortgage investment conduits formed by these same agencies ("REMICs") ($80 million.). At December 31, 2003, the amortized cost of mortgage-backed securities totaled $131 million, or 22% of total assets, and the market value of such securities totaled approximately $132 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" and "very accurately defined maturity classes" that, when purchased, offered a high probability of predictable cash flows. 8 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, --------------- 2003 2002 2001 -------- -------- -------- (In thousands) Held to maturity: GNMA-fixed rate .......................... $ 8,007 $ 18,278 $ 29,877 FHLMC ARMs ............................... 71 91 131 FHLMC-fixed rate ......................... 8,336 21,779 34,869 FNMA-fixed rate .......................... 7,205 11,781 15,739 REMICs ................................... 11 2,519 12,550 Other mortgage-backed securities ......... -- 144 201 -------- -------- -------- Total mortgage-backed securities held to maturity ..................... $ 23,630 $ 54,592 $ 93,367 ======== ======== ======== Available-for-sale: FHLMC .................................... $ 8,525 $ 699 $ 1,108 FNMA ..................................... 18,385 11,878 22,459 GNMA ..................................... -- -- 5,515 REMICs ................................... 79,864 102,666 70,681 -------- -------- -------- Total mortgage-backed securities available-for-sale ................... $106,774 $115,243 $ 99,763 ======== ======== ======== 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, 2003. 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 ..................... $ 21 9.25% $ 49 7.00% 1 to 3 years ......................... 78 7.89 3,828 4.00 3 to 5 years ......................... 2,456 7.36 410 7.16 5 to 10 years ........................ 1,428 7.13 38,116 5.71 10 to 20 years ....................... 2,283 5.66 42,932 4.74 Over 20 years ........................ 17,364 6.51 21,439 4.71 -------- ---- -------- ---- Total mortgage-backed securities ..... $ 23,630 6.56% $106,774 5.06% ======== ==== ======== ====
9 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, 2003 the Bank used third-party servicers to service $94.3 million in mortgage loans, including one servicer that serviced $73.4 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. 10
Non-performing assets At December 31, ------------------------------------------ 2003 2002 2001 2000 1999 ------ ------ ------ ------ ------ (Dollars in thousands) Loans accounted for on a non-accrual basis: Mortgage loans: One- to four-family ....................... $1,549 $1,013 $1,821 $ 869 $ 880 Commercial real estate and multi-family ... 296 1,677 1,725 180 24 Consumer and other .......................... 503 1,132 230 421 413 ------ ------ ------ ------ ------ Total non-accrual loans .................. 2,348 3,822 3,776 1,470 1,317 ------ ------ ------ ------ ------ Real estate owned, net ...................... 868 84 30 176 546 ------ ------ ------ ------ ------ Total non-performing assets ................. $3,216 $3,906 $3,806 $1,646 $1,863 ====== ====== ====== ====== ====== Total non-accrual loans to loans............. 0.58% 1.03% 0.99% 0.41% 0.45% ====== ====== ====== ====== ====== Total non-accrual loans to total assets...... 0.39% 0.53% 0.53% 0.20% 0.18% ====== ====== ====== ====== ====== Total non-performing assets to total assets.. 0.53% 0.54% 0.54% 0.23% 0.26% ====== ====== ====== ====== ======
At December 31, 2003, 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, 2003, 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. 11 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 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, 2003. At December 31, 2003 -------------------- (In thousands) Special mention assets ............. $5,662 Substandard ........................ 3,073 Doubtful assets .................... 146 Loss ............................... -- ------ Total classified assets.......... $8,881 ====== 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 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 12 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. 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, -------------------------------------------------- 2003 2002 2001 2000 1999 ---- ---- ---- ---- ---- (Dollars in thousands) Balance at beginning of period....... $ 2,047 $ 1,972 $ 1,714 $ 1,917 $ 1,909 Provision for loan losses ........... 330 988 500 410 300 Charge-offs: One- to four-family ............... (16) (13) -- -- -- Commercial and multi-family real estate loans ............... -- -- -- -- -- Consumer and other loans .......... (541) (928) (430) (634) (296) Recoveries: One- to four-family ............... -- 3 -- -- -- Commercial and multi-family real estate loans ............... -- -- -- -- -- Consumer and other loans .......... 291 25 188 21 4 ------- ------- ------- ------- ------- Balance at end of year .............. $ 2,111 $ 2,047 $ 1,972 $ 1,714 $ 1,917 ======= ======= ======= ======= ======= Ratio of net charge-offs during the period to average loans outstanding during the period...... 0.07% 0.25% 0.07% 0.20% 0.10% Ratio of allowance for loan losses to non-performing loans at the end of the period..... 89.91% 53.56% 52.22% 116.0% 145.6% Ratio of allowance for loan losses to loans receivable at the end of the period........... 0.52% 0.55% 0.52% 0.47% 0.66% Ratio of allowance for loan losses and foreclosed real estate to total non-performing assets at the end of the period.... 92.63% 52.41% 52.60% 114.8% 132.2%
13 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, ------------------------------------------------------------------------------------------------------ 2003 2002 2001 2000 1999 ------------------ ------------------ ------------------ ------------------ ------------------ Percent of Percent of Percent of Percent of Percent of Loans to Loans to Loans to Loans to Loans to Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans ------ ----------- ------ ----------- ------ ----------- ------ ----------- ------ ----------- (Dollars in thousands) At end of period allocated to: One- to four-family .. $ 277 68.2% $ 119 61.3% $ 216 58.4% $ 97 57.9% $ 242 58.0% Commercial real estate and multi-family .... 1,230 18.3 1,021 23.0 1,100 24.6 835 21.3 676 22.6 Construction ......... 109 1.6 90 3.2 74 2.6 105 3.8 172 4.2 Consumer and other loans .............. 495 11.9 817 12.5 582 14.4 677 17.0 826 15.2 ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- Total allowance ...... $2,111 100.0% $2,047 100.0% $1,972 100.0% $1,714 100.0% $1,916 100.0% ====== ===== ====== ===== ====== ===== ====== ===== ====== =====
14 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, ------------------------------------------------------------------- 2003 2002 2001 ------------------- -------------------- ------------------- Amortized Fair Amortized Fair Amortized Fair Cost Value Cost Value Cost Value --------- ------- --------- ------- --------- ------- (In thousands) Interest-earning deposits ............. $ 508 $ 508 $93,143 $93,143 $58,157 $58,157 ======= ======= ======= ======= ======= ======= Investment securities held-to-maturity: U.S. government and agency obligations ....................... $ 2,000 $ 2,011 $ 4,000 $ 4,125 $ -- $ -- State and political subdivisions .... 1,609 1,735 3,700 3,880 5,743 5,787 Corporate debt securities ........... 6,780 7,069 6,863 7,182 4,123 4,043 ------- ------- ------- ------- ------- ------- Total ............................. $10,389 $10,815 $14,563 $15,187 $ 9,866 $ 9,830 ======= ======= ======= ======= ======= ======= Securities available-for-sale: U.S. government and agency obligations ....................... $ 2,972 $ 2,947 $15,964 $16,084 $11,018 $10,929 State and political subdivisions .... 10,677 10,493 453 464 -- -- Corporate Debt Securities ........... 1,000 993 10,034 10,197 11,070 11,245 Mutual funds ........................ -- -- 500 498 500 497 ------- ------- ------- ------- ------- ------- Total ............................. $14,649 $14,433 $26,951 $27,243 $22,588 $22,671 ======= ======= ======= ======= ======= =======
15 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, 2003. Yields on tax exempt obligations have been computed on a tax equivalent basis.
One Year or Less One to Five Years Five to Ten Years More than Ten Years Total Investment Securities(1) ----------------- ----------------- ------------------ ------------------- ------------------------------ Amortized Average Amortized Average Amortized Average Amortized Average Amortized Average Fair Cost Yield Cost Yield Cost Yield Cost Yield Cost Yield Value ---- ----- ---- ----- ---- ----- ---- ----- ---- ----- ------- (Dollars in thousands) U.S. government agency... $ -- --% $ 4,972 4.14% $ -- --% $ -- --% $ 4,972 4.14% $ 4,957 Municipal obligations.... -- -- 1,394 9.17 611 4.05 10,281 5.41 12,286 5.77 12,229 Corporate obligations.... 1,004 4.03 6,776 4.23 -- -- -- -- 7,780 4.21 8,062 ------- ---- -------- ---- ------- ---- -------- ---- -------- ---- ------- Total.................. $ 1,004 4.03% $ 13,142 4.72% $ 611 4.05% $ 10,281 5.41% $ 25,038 4.96% $25,248 ======= ==== ======== ==== ======= ==== ======== ==== ======== ==== =======
- -------------------- (1) Includes $14.433 million of U.S. government agency and corporate obligations which are carried as available-for-sale at December 31, 2003. Investment securities available-for-sale are carried at fair value. 16 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, 2003. 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, 2003, core deposits amounted to 68% 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, -------------------------------------------------------------------------------------------- 2003 2002 2001 ---------------------------- ------------------------------ ---------------------------- Weighted Weighted Weighted Percent Average Percent of Average Percent Average of Total Nominal Total Nominal of Total Nominal Amount Deposits Rate Amount Deposits Rate Amount Deposits Rate ------ -------- -------- ------ ---------- -------- ------ -------- -------- (Dollars in thousands) Transaction Accounts Interest-bearing checking accounts ...... $ 52,647 11.46 0.47% $ 48,496 10.96 0.60% $ 46,990 11.13 0.75% Money market accounts ... 44,688 9.73 0.91 43,677 9.87 1.00 42,557 10.08 2.54 Non-interest-bearing checking accounts ...... 26,375 5.74 0.00 20,810 4.70 0.00 18,200 4.31 0.00 -------- ------ ---- -------- ------ ---- -------- ------ ---- Total transaction accounts ............ 123,710 26.93 112,983 25.53 107,747 25.52 Passbook accounts ...... 188,673 41.07 0.94 182,813 41.31 1.51 169,576 40.18 2.52 Certificates of deposit . 146,960 32.00 2.43 146,762 33.16 2.84 144,729 34.30 4.29 -------- ------ ---- -------- ------ ---- -------- ------ ---- Total deposits .......... $459,343 100.00% 1.31% $442,558 100.00% 1.73% $422,052 100.00% 2.82% ======== ====== ==== ======== ====== ==== ======== ====== ====
17 At December 31, 2003, 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........................ $ 2,806 Over three through six months............... 2,343 Over six through 12 months.................. 7,018 Over 12 months.............................. 10,038 ---------- Total................................... $ 22,205 ========== 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, --------------------------------------- 2003 2002 2001 ---- ---- ---- (Dollars in thousands) FHLB advances and other borrowings.............. $ 86,853 $ 207,359 $ 223,359 ========= ========= ========= Weighted average interest rate.................. 2.98% 5.46% 5.46%
Years Ended December 31, --------------------------------------- 2003 2002 2001 ---- ---- ---- (Dollars in thousands) Maximum balance of FHLB advances and other borrowings outstanding................. $ 207,359 $ 222,359 $ 259,821 ========= ========= ========= Weighted average balance of FHLB advances and other borrowings outstanding................................... $ 162,695 $ 218,578 $ 229,473 ========= ========= ========= Weighted average interest rate of FHLB advances and other borrowings................. 5.08% 5.46% 5.53% ==== ==== ====
18 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, 2003, the Bank was authorized to invest up to approximately $12.1 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, 2003, 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, 2003, the Bank had $118 million invested in Third Delaware Corporation. Personnel As of December 31, 2003, the Bank had 161 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 Company and the Bank: Kent C. Lufkin currently serves as President and Chief Executive Officer of the Company and the Bank and was appointed to such offices effective June 30, 2003. Mr. Lufkin joined the Bank in 2000 and formerly served as Senior Vice President and Retail Banking Officer. Prior to that, Mr. Lufkin was President and Chief Executive Officer of Roebling Bank in Roebling, New Jersey since 1996. Dennis R. Stewart has been Executive Vice President and Chief Financial Officer of the Bank and the Company since July 2003, and Senior Vice President and Chief Financial Officer of the Bank and the Company since 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. 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 in Princeton, New Jersey. Cynthia G. Mullen has been Senior Vice President and Retail Banking Officer of the Bank since July 2003. Previously she was a twenty-three year employee of Commonwealth Bank in Norristown, Pennsylvania, holding a variety of positions, including Vice President of Traditional Banking. 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 2004 Annual Meeting of Stockholders. 19 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") has promulgated new regulations pursuant to the Act and may continue to propose additional implementing or clarifying regulations as necessary in furtherance of the Act. The passage of the Act by Congress and the implementation of new regulations by the SEC subject publicly-traded companies to additional and more cumbersome reporting regulations and disclosure. Compliance with the Act and corresponding regulations may increase the Company's expenses. Company Regulation General. The Company is a unitary savings and loan holding company subject to regulatory oversight by the OTS. As such, the Company is required to register and file reports with the OTS and is subject to regulation and examination by the OTS. In addition, the OTS has enforcement authority over the Company and its non-savings association subsidiaries, should such subsidiaries be formed, which also permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings association. This regulation and oversight is intended primarily for the protection of the depositors of the 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. 20 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 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, 2003, 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. 21 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, 2003, the Bank was in compliance with its QTL requirement with 78% 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, 2003, the Bank had $6.8 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, 2003, the Bank's total transaction accounts required a reserve level of $4.7 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, 2003. 22 Item 2. Properties - ------------------- The Company is located and conducts its business at 3 Penns Trail, Newtown, Pennsylvania. At December 31, 2003, the Bank operated from its administrative offices and fourteen branch offices located in Philadelphia and Bucks Counties, Pennsylvania and Mercer County, New Jersey. The Bank also owns two parcels of land and a building behind its Doylestown branch office. The parcel with the building is available to be leased to a third-party and the other parcel 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 $761,000. 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 Leased 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. 23 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 2003 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 2003 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 2003 Annual Report to Stockholders is incorporated herein by reference. Item 7A. Quantitative and Qualitative Disclosures about Market Risk - -------------------------------------------------------------------- Asset and Liability Management Managing Interest Rate Risk. Interest rate risk is defined as the sensitivity of the 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, 2003, approximately 32% 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). 24 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, 2003, 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, 2003 are as follows: MVPE ------------------------------------------------- Change in Interest Rates (1) Amount % Change ---------------------------- ------ -------- (In Thousands) +300 Basis Points $ 43,395 -44% +200 Basis Points $ 54,954 -29% +100 Basis Points $ 66,554 -14% Flat Rates $ 77,479 0% -100 Basis Points $ 83,333 +8% - --------------------- (1) The -200 and -300 bp scenarios are not shown due to the low interest rate environment. 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 2003 Annual Report to Stockholders are incorporated herein by reference. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure - ------------------------------------------------------------------------ None. Item 9A. Controls and Procedures - --------------------------------- (a) Evaluation of disclosure controls and procedures. Based on their ----------------------------------------------------- evaluation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")), the Company's principal executive officer and principal financial officer have concluded that as of the end of the period covered by this Annual Report on Form 10-K such disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. 25 (b) Changes in internal control over financial reporting. During the last quarter of the year under report there was no change in the Company's internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 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 2004 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." The Company has adopted a Code of Ethics that applies to its principal executive officer, principal financial officer, principal accounting officer or persons performing such functions. The Code of Ethics can be obtained without charge by sending a written request to the Corporate Secretary, TF Financial Corporation, 3 Penns Trail, Newtown, Pennsylvania 18940. 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. 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 26 Set forth below is information as of December 31, 2003 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 equity exercise of outstanding compensation plans outstanding options, options, warrants (excluding securities warrants and rights and rights reflected in column (a)) ------------------- ---------- ------------------------ Equity compensation plans approved by shareholders(1)......... 560,714 $15.43 695 Equity compensation plans not approved by shareholders(2)..... 25,000 14.75 -- ------- ------ --- TOTAL............................ 585,714 $15.40 695 ======= ====== ===
- ------------ (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. 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. Principal Accounting Fees and Services - ------------------------------------------------ The information relating to this item is incorporated herein by reference to the information contained under the section captioned "Principal Accounting Firm Fees" in the Registrant's Proxy Statement. 27 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 2003 Annual Report to Stockholders are incorporated herein by reference. Independent Auditors' Report Consolidated Statements of Financial Position as of December 31, 2003 and 2002 Consolidated Statements of Earnings For the Years Ended December 31, 2003, 2002 and 2001 Consolidated Statement of Changes in Stockholders' Equity and Comprehensive Income for the Years Ended December 31, 2003, 2002 and 2001 Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, 2002 and 2001 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. (3) Exhibits (a) The following exhibits are filed as part of this report. 3.1 Certificate of Incorporation of TF Financial Corporation (1) 3.2 Bylaws of TF Financial Corporation (1) 4.0 Stock Certificate of TF Financial Corporation (1) 4.1 The Company's Rights Agreement dated November 22, 1995 (2) 10.1 Third Federal Savings and Loan Association Management Stock Bonus Plan (1) 10.2 TF Financial Corporation 1994 Stock Option Plan (1) 10.3 Third Federal Savings Bank Directors Consultation and Retirement Plan (3) 10.4 TF Financial Corporation Incentive Compensation Plan (3) 10.5 Severance Agreement with Kent C. Lufkin (4) 10.6 Severance Agreement with Floyd P. Haggar (4) 10.7 Severance Agreement with Dennis R. Stewart (5) 10.8 TF Financial Corporation 1997 Stock Option Plan (6) 10.9 Severance Agreement with Robert N. Dusek (7) 10.10 TF Financial Corporation 1996 Directors Stock Option Plan (8) 10.11 Retirement and Non-Competition Agreement with John R. Stranford 10.12 Employment Agreement with John R. Stranford 13.0 2003 Annual Report to Stockholders 21.0 Subsidiary Information 23.0 Consent of Independent Auditor 31.0 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.0 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 28 - --------------- (1) Incorporated herein by reference from the Exhibits to Form S-1, Registration Statement, File No. 33-76960. (2) Incorporated herein by reference to the Registrants Form 8-A filed with the Securities and Exchange Commission on November 22, 1995. (3) Incorporated herein by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1995. (4) Incorporated herein by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2000. (5) Incorporated herein by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1999. (6) Incorporated herein by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. (7) Incorporated herein by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2001. (8) Incorporated herein by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2002. (b) Reports on Form 8-K. On October 28, 2003 the Company filed Form 8-K wherein the Company included the press release announcing the Company's earnings for the third quarter of 2003. 29 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, 2004 By: /s/ Kent C. Lufkin ------------------------------- Kent C. Lufkin President, Chief Executive Officer (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, 2004. By: /s/ Kent C. Lufkin By: /s/ Dennis R. Stewart ---------------------------------- --------------------------------- Kent C. Lufkin Dennis R. Stewart President, Chief Executive Officer Executive Vice President, Chief (Principal Executive Officer) Financial Officer and Treasurer (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/ Dennis L. McCartney By: /s/ George A. Olsen ---------------------------------- --------------------------------- Dennis L. McCartney George A. Olsen Director Director By: /s/ Albert M. Tantala By: /s/ John R. Stranford ---------------------------------- --------------------------------- Albert M. Tantala John R. Stranford Director Director 30 EX-10 3 ex10-11.txt RETIREMENT AND NON-COMPETITION AGREEMENT Retirement and Non-Competition Agreement This Retirement and Non-Competition Agreement ("Agreement") is entered into this 30th day of June, 2003 ("Effective Date") by and between Third Federal Savings Bank ("Bank"), a federal savings bank having its principal place of business located in Newtown, Pennsylvania and John R. Stranford ("Employee"). WHEREAS, Employee has previously served the Bank as an employee and its President, Chief Executive Officer and a member of the Board of Directors; WHEREAS, the Bank recognizes the specialized knowledge and expertise of the Employee related to the business affairs of the Bank, and the subsidiaries of the Bank ("Bank Subsidiaries"); WHEREAS, Employee has advised the Bank that upon his retirement from the Bank as an officer, employee and director, he shall elect to receive his retirement benefits under the Bank's defined benefit pension plan in the form of an annuity benefit and not in the form of a lump-sum payment; WHEREAS, Employee and the Bank desire to enter into such a retirement and non-competition agreement upon the terms and conditions hereinafter contained; NOW, THEREFORE, in consideration of the covenants and terms contained in this Agreement as set forth herein and of the mutual benefits accruing to Bank and to Employee from the retirement and non-competition agreement between the parties as set forth by the terms of this Agreement, the Bank and the Employee agree as follows: 1. Resignation ----------- This Agreement shall constitute written notice from the Bank to the Employee that effective as of the Effective Date, the Employee's resignation as an officer, employee and director of the Bank and all Bank Subsidiaries (collectively, the "Companies") effective July 1, 2003 is accepted on behalf of the Bank and its Board of Directors and shall be effective as of July 1, 2003. 2. Non-Competition and Confidential Business ----------------------------------------- The Employee hereby agrees that for the period commencing on the Effective Date and ending April 30, 2006: (a) Employee will not, without the express written consent of the Companies, directly or indirectly communicate or divulge to, or use for his own benefit or for the benefit of any other person, firm, association, or corporation, any of the trade secrets, proprietary data or other confidential information communicated to or otherwise learned or acquired by the Employee from the Companies, except that Employee may disclose such matters to the extent that disclosure is required by a court or other governmental agency of competent jurisdiction. (b) Employee will not contact (with a view toward selling any product or service competitive with any product or service sold or proposed to be sold by the Companies during the three year period prior to July 1, 2003) any person, firm, association or corporation (A) to which the Companies sold any product or service, (B) which Employee solicited, contacted or otherwise dealt with on behalf of the Companies, or (C) which Employee was otherwise aware was a client of the Companies. Employee will not directly or indirectly make any such contact, either for his own benefit or for the benefit of any other person, firm, association, or corporation. (c) Employee hereby agrees that he shall not engage in providing professional services or enter into employment or other relationship as an employee, director, consultant, representative, or similar relationship to any financial services enterprise (including but not limited to a savings and loan association, bank, credit union or insurance company) whereby the Employee will have a work location within 50 miles of the home office of the 1 Bank located in Newtown, Pennsylvania, or within 30 miles of any office or branch of the Companies existing as of the Effective Date. (d) Employee hereby agrees that he shall not, on his own behalf or on behalf of others, employ, solicit, or induce, or attempt to employ, solicit or induce, any employee of the Companies, for employment with any financial services enterprise (including but not limited to a savings and loan association, bank, credit union, or insurance company), nor will the Employee directly or indirectly, on his behalf or for others, seek to influence any employee of the Companies to leave the employ of the Companies. (e) Employee will not make any public statements regarding the Companies without the prior consent of the Companies, and the Employee shall not make any statements that disparage the Companies or the business practices of the Companies. The Bank shall not knowingly or intentionally make any statements that disparage the Employee. (f) The Employee and the Companies acknowledge and agree that irreparable injury will result to the parties in the event of a breach of any of the provisions of this Section 2 (the "Designated Provisions") and that the Employee and the Companies will have no adequate remedy at law with respect thereto. Accordingly, in the event of a material breach of any Designated Provision, and in addition to any other legal or equitable remedy the Employee or the Companies may have, the Employee or the Companies shall be entitled to the entry of a preliminary and a permanent injunction (including, without limitation, specific performance by a court of competent jurisdiction located in Bucks County, Pennsylvania, or elsewhere), to restrain the violation or breach thereof by either the Employee or the Companies, and the parties shall submit to the jurisdiction of such court in any such action. (g) The Designated Provisions shall survive the termination of the Agreement. 3. Compensation ------------ (a) The Bank agrees to pay Employee for his commitments and agreements as contained herein, including Section 2 herein, the remuneration detailed at Schedule A, attached hereto. The Bank acknowledges that compliance by the Employee with the requirements set forth at Section 2, herein, is an essential component of this Agreement, and that such compliance is necessary for the Bank to obtain the full value of its consideration paid under this Agreement. The parties agree that Employee shall not be entitled to participate in or receive benefits under any Bank programs maintained for its employees, except as specifically agreed to in writing by the parties. Further, as of the Effective Date, Employee hereby waives any rights, claims and payments that may be due at any time thereafter, if any, in accordance with the Change in Control Severance Agreement between the Employee and the Bank, dated January 1, 2003, and such agreement shall be deemed terminated and of no further legal force and effect as of the Effective Date. (b) Nothing contained in this Agreement shall be deemed to modify or amend any previously awarded options to acquire common stock of TF Financial Corporation ("TF") held by the Employee. (c) The Employee hereby acknowledges that upon his retirement from the Bank as an officer and employee, he shall elect to receive his retirement benefits under the Bank's defined benefit pension plan in the form of an annuity benefit and not in the form of a lump-sum payment. 4. Releases -------- (a) Employee hereby knowingly and voluntarily waives and releases the Companies and TF, and officers, directors, and employees of the Companies and TF, from any and all claims or causes of action, known or unknown, arising out of or in any way relating to: 1)any wrongful discharge from the employ of the Companies, 2) any rights or claims arising out of title VII of the Civil Rights Act of 1964, as amended, 3)the Age Discrimination in Employment Act ("ADEA"), 4) the Americans with Disabilities Act, or 5)any 2 other federal, state or municipal statute or ordinance relating to discrimination in employment (the "Release"). However, Employee may pursue claims or institute legal action to enforce the provisions of this Agreement. (b) Employee further states that he has carefully read the foregoing, has had sufficient opportunity to review and deliberate the foregoing with or without counsel of Employee's own choosing, has been advised of the opportunity to consult with an attorney, knows and understands the contents of this Agreement and related Release, and signs the same as Employee's free and independent act. No inducements, representations, or agreements have been made or relied upon to make this Agreement except as stated in this Agreement. (c) Employee understands and acknowledges that the Release and waiver of claims contained herein is exchanged for a portion of the compensation described at Section 3, herein, and Schedule A, attached hereto, which compensation the Employee is not otherwise entitled to receive. (d) Employee understands that he has a period of seven (7) days from the date of executing this Agreement during which time Employee shall have the right to revoke this Agreement. Any such revocation shall be in writing and delivered to the Chief Financial Officer of the Bank. 5. The Complete Agreement ---------------------- This Agreement, and any attachments or exhibits appended hereto, shall represent the complete Agreement between the Bank and Employee concerning the subject matter hereof and supersedes all prior agreements or understandings, written or oral. No attempted modification or waiver of any of the provisions hereof shall be binding on either party unless made in writing and signed by both Employee and the Bank. 6. Notices ------- Any notice required or permitted to be given hereunder shall be in writing and shall be effective three business days after it is properly sent by registered or certified mail, if to the Bank, its Chief Financial Officer at the administrative offices of the Bank, or if to Employee to the address set forth beneath his signature to this Agreement, or to such other address as either party may from time to time designate by notice. 7. Assignability ------------- This Agreement may not be assigned by any party without the prior written consent of the other parties, except that no consent is necessary for the Companies to assign this Agreement to a corporation succeeding to substantially all the assets or business of the Companies whether by merger, consolidation, acquisition or otherwise. This Agreement shall be binding upon Employee, his heirs and permitted assigns and the Bank, its successors and permitted assigns. 8. Severability ------------ Each of the sections contained in this Agreement shall be enforceable independently of every other section in this Agreement, and the invalidity or non-enforceability of any section shall not invalidate or render non-enforceable any other section contained herein. If any section or provision in a section is found invalid or unenforceable, it is the intent of the parties that a court of competent jurisdiction shall reform the section or provisions to produce its nearest enforceable economic equivalent. 9. Arbitration ----------- Except as provided at Section 2(f) herein, any controversy or claim arising out of or relating to this Agreement or the breach thereof shall be settled by binding arbitration in accordance with the 3 Commercial Arbitration Rules of the American Arbitration Association, with such arbitration hearing to be held at the offices of the American Arbitration Association ("AAA") nearest to Newtown, Pennsylvania, and judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. Either the Employee or the Bank may file a request for such arbitration with the AAA. 10. Applicable Law -------------- It is the intention of the parties hereto that all questions and interpretations with respect to the construction and performance of this Agreement and the rights and liabilities of the parties hereto shall be determined in accordance with the laws of the Commonwealth of Pennsylvania, with respect to any matter or thing arising out of this Agreement or pursuant thereto. 4 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. Third Federal Savings Bank ("Bank") By: /s/George A. Olsen -------------------------------------------- George A. Olsen /s/John R. Stranford -------------------------------------------- John R. Stranford, Employee 5 SCHEDULE A Payment of $17,981 related to unused vacation days. Payout under Incentive Compensation Plan of $116,799.00. Continuation of Medical insurance coverage until Employee's attainment of age 65. Such coverage may not be the same as that available to employees of the Bank. Continuation of Life and AD&D coverage until Employee's attainment of age 65. The Employee hereby acknowledges that upon his retirement from the Bank as an officer and employee, he shall elect to receive his retirement benefits under the Bank's defined benefit pension plan in the form of an annuity benefit and not in the form of a lump-sum payment. ACKNOWLEDGEMENT OF SCHEDULE A: Third Federal Savings Bank ("Bank") By: /s/George A. Olsen -------------------------------------------- George A. Olsen /s/John R. Stranford -------------------------------------------- John R. Stranford, Employee 6 EX-10 4 ex10-12.txt EMPLOYMENT AGREEMENT - JOHN F. STRANFORD EMPLOYMENT AGREEMENT THIS AGREEMENT, is entered into this 1st day of July, 2003, ("Effective Date") by and between TF Financial Corporation (the "TF") and John R. Stranford (the "Executive"). WITNESSETH WHEREAS, the Executive has heretofore been employed by Third Federal Savings Bank ("Bank") as the President and Chief Executive Officer and is experienced in all phases of the business of the Bank and TF; and WHEREAS, the Executive has retired as an officer, employee and director of the Bank and continues to serve TF as a director; and WHEREAS, in order to induce the Executive to serve in the employ of the TF and in consideration of the Executive's agreeing to be an employee of the TF, the parties desire to specify the employment relationship between the TF and the Executive; NOW THEREFORE, in consideration of the premises and the mutual agreements herein contained, the parties hereby agree as follows: 1. Employment. ---------- TF hereby employs the Executive in the capacity of Senior Advisor to the President and Chairman of TF. The Executive hereby accepts said employment and agrees to render consultation and advisory services to TF as are requested by TF's President and Chairman from time to time during the term of this Agreement. The Executive shall be available for service hereunder upon receipt of not less than five (5) business days' written notice from TF. 2. Term of Employment. ------------------ The term of employment of the Executive under this Agreement shall be for the period commencing on the Effective Date and ending on April 30, 2005, or such earlier date that the Executive shall retire or otherwise cease to serve as a director of TF ("Term"). 3. Remuneration. ------------ The TF shall compensate the Executive sole during the Term of this Agreement at the rate of $1,000 per month ("Base Salary"), payable in cash not less frequently than quarterly. While an employee of TF, the Executive shall not be paid any additional compensation or fees for service as a director of TF. Except as otherwise provided by the provisions of other written 1 agreements, if any, the Executive shall not otherwise be eligible to participate in any compensation or benefit programs applicable to other employees of TF or its subsidiary companies as a result of this Agreement. Nothing in this Agreement shall impact any previously awarded stock options held by the Executive. 4. Noncompetition and Non-Disclosure. --------------------------------- During the term of the Executive's employment under this Agreement and for a period of five years following termination of the Executive's employment with TF, the Executive shall not engage in any business or activity contrary to the business affairs or interests of the TF or any subsidiaries of TF (collectively, the "Companies"), including, but not limited to the foregoing: (a) Executive will not, without the express written consent of the Companies, directly or indirectly communicate or divulge to, or use for his own benefit or for the benefit of any other person, firm, association, or corporation, any of the trade secrets, proprietary data or other confidential information communicated to or otherwise learned or acquired by the Executive from the Companies, except that Executive may disclose such matters to the extent that disclosure is required by a court or other governmental agency of competent jurisdiction. (b) Executive will not contact (with a view toward selling any product or service competitive with any product or service sold or proposed to be sold by the Companies during the three year period prior to July 1, 2003) any person, firm, association or corporation (A) to which the Companies sold any product or service, (B) which Executive solicited, contacted or otherwise dealt with on behalf of the Companies, or (C) which Executive was otherwise aware was a client of the Companies. Executive will not directly or indirectly make any such contact, either for his own benefit or for the benefit of any other person, firm, association, or corporation. (c) Executive hereby agrees that he shall not engage in providing professional services or enter into employment or other relationship as an employee, director, consultant, representative, or similar relationship to any financial services enterprise (including but not limited to a savings and loan association, bank, credit union or insurance company) whereby the Executive will have a work location within 50 miles of the home office of the Bank located in Newtown, Pennsylvania, or within 30 miles of any office or branch of the Companies existing as of the Effective Date. (d) Executive hereby agrees that he shall not, on his own behalf or on behalf of others, employ, solicit, or induce, or attempt to employ, solicit or induce, any employee of the Companies, for employment with any financial services enterprise (including but not limited to a savings and loan association, bank, credit union, or insurance company), nor will the Executive directly or indirectly, on his behalf or for others, seek to influence any employee of the Companies to leave the employ of the Companies. 2 (e) Executive will not make any public statements regarding the Companies without the prior consent of the Companies, and the Executive shall not make any statements that disparage the Companies or the business practices of the Companies. The Companies shall not knowingly or intentionally make any statements that disparage the Executive. (f) The Executive and the Companies acknowledge and agree that irreparable injury will result to the parties in the event of a breach of any of the provisions of this Section 4 (the "Designated Provisions") and that the Executive and the Companies will have no adequate remedy at law with respect thereto. Accordingly, in the event of a material breach of any Designated Provision, and in addition to any other legal or equitable remedy the Executive or the Companies may have, the Executive or the Companies shall be entitled to the entry of a preliminary and a permanent injunction (including, without limitation, specific performance by a court of competent jurisdiction located in Bucks County, Pennsylvania, or elsewhere), to restrain the violation or breach thereof by either the Executive or the Companies, and the parties shall submit to the jurisdiction of such court in any such action. (g) The Designated Provisions shall survive the termination of the Agreement. 5. Standards. --------- During the term of this Agreement, the Executive shall perform his duties in accordance with such reasonable standards expected of executives with comparable positions in comparable organizations and as may be established from time to time by the TF. The Executive shall make no public statements in his capacity as an employee of TF. The Executive shall not act in any manner contrary to the terms of his Non-Competition and Severance Agreement between the Executive and Third Federal Savings Bank, dated June __, 2003. Notwithstanding anything herein to the contrary, failure by the Executive to comply with the provisions of this Agreement, including, but not limited to this Section 5 and Section 10, hereinafter, may result in the immediate termination of the Agreement within the sole discretion of the TF, disciplinary action against the Executive taken by the TF, including but not limited to the termination of employment of the Executive for breach of the Agreement, and/or other remedies that may be available in law or in equity. 6. Governing Law. ------------- The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the Commonwealth of Pennsylvania. 7. Withholding. ----------- All payments required to be made by the TF hereunder to the Executive shall be subject to the withholding of such amounts, if any, relating to tax and other payroll deductions as the TF 3 may reasonably determine should be withheld pursuant to any applicable law or regulation. 8. Successors and Assigns. ---------------------- (a) This Agreement shall inure to the benefit of and be binding upon any corporate or other successor of the TF which shall acquire, directly or indirectly, by merger, consolidation, purchase or otherwise, all or substantially all of the assets or stock of the TF. (b) Since the TF is contracting for the unique and personal skills of the Executive, the Executive shall be precluded from assigning or delegating his rights or duties hereunder without first obtaining the written consent of the TF. 9. Amendment; Waiver. ----------------- No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing, signed by the Executive and such officer or officers of the TF authorized to sign on its behalf. No waiver by any party hereto at any time of any breach by any other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 10. Confidential Information. ------------------------ The Executive acknowledges that during his employment he will learn and have access to confidential information regarding the TF and its customers and businesses ("Confidential Information"). The Executive agrees and covenants not to disclose or use for his own benefit, or the benefit of any other person or entity, any such Confidential Information, unless or until the TF consents to such disclosure or use or such information becomes common knowledge in the industry or is otherwise legally in the public domain. The Executive shall not knowingly disclose or reveal to any unauthorized person any Confidential Information relating to the TF, or any subsidiaries or affiliates, or to any of the businesses operated by them, and the Executive confirms that such information constitutes the exclusive property of the TF. The Executive shall not otherwise knowingly act or conduct himself (a) to the material detriment of the TF or its subsidiaries, or affiliates, or (b) in a manner which is inimical or contrary to the interests of the TF. Executive acknowledges and agrees that the existence of this Agreement and its terms and conditions constitutes Confidential Information of the TF, and the Executive agrees not to disclose the Agreement or its contents without the prior written consent of the TF. The provisions of this Section shall survive the termination of the Agreement. Notwithstanding the foregoing, the TF reserves the right in its sole discretion to make disclosure of this Agreement as it deems necessary or appropriate in compliance with its regulatory reporting requirements 11. Entire Agreement. ---------------- This Agreement together with any understanding or modifications thereof as agreed to in writing by the parties, shall constitute the entire agreement between the parties hereto and shall supersede all prior understandings and commitments, whether oral or in writing. 4 IN WITNESS WHEREOF, the parties have executed this Agreement on the date first hereinabove written. TF FINANCIAL CORPORATION By: /s/ Robert N. Dusek -------------------------------------- Robert N. Dusek Its Chairman July 1, 2003 ------------------------------------- /s/John R. Stranford -------------------------------------- John R. Stranford, Executive 5 EX-13 5 ex-13.txt ANNUAL REPORT TF FINANCIAL CORPORATION 2003 ANNUAL REPORT BOARD OF DIRECTORS Dennis L. McCartney John R. Stranford Robert N. Dusek (Chairman) George A. Olsen Carl F. Gregory Albert M. Tantala CONTENTS 1 To Our Stockholders 2 Corporate Profile and Related Information 3 Selected Financial Information and Other Data 5 Management's Discussion and Analysis of Financial Position and Results of Operations 15 Report of Independent Certified Public Accountants 16 Consolidated Statements of Financial Position 17 Consolidated Statements of Operations 18 Consolidated Statement of Changes in Stockholders' Equity 19 Consolidated Statements of Cash Flows 21 Notes to Consolidated Financial Statements 48 Board of Directors and Management Team 49 Office Locations TO OUR STOCKHOLDERS The past year has been one of significant developments at our Company. As you read about these events, I would like you to know that we have a renewed focus in our mission to produce a solid, sustainable stream of earnings and dividends, build value by continuing to invest a portion of earnings back into the banking franchise, and establish a reputation throughout our Company and the communities we serve so as to make our employees proud to work for us, and our customers proud to do business with us. In our view, pride creates loyalty and loyalty is the cornerstone of highly successful community banking franchises. As you likely know, there has been a change in leadership at the Company and its banking subsidiary, Third Federal Bank. As of June 30th, Jack Stranford retired after over thirty-five years of service. The Board and I thank Jack for guiding the Company through its first ten years as a public company, and he remains on TF Financial's Board of Directors. On July 1st, I was appointed President and Chief Executive Officer of TF Financial and Third Federal Bank. After 30 years in this industry, I am privileged to be able to use my varied banking background under the guidance of your Board of Directors to achieve our mission. Long-time director George Olsen assumed the position of Chairman at Third Federal Bank. Earlier in the year, directorship of the Company was strengthened with the addition of Albert Tantala and Dennis McCartney. Finally, it was with great regret that the Company accepted the resignation of Thomas Gola from the Board for health reasons. His wit and wisdom will be missed by us all. Regarding the business of the Company, the most significant event to occur during the year was the debt refinancing. After months of deliberation, the management and Board of the Company made the very difficult decision to incur a sizeable expense in order to eliminate what would have been a tremendous drag on the Company's financial performance for years. After repaying and refinancing nearly $188 million in high-cost borrowings, we emerged as a smaller and much more profitable Company, as borne out by our fourth quarter 2003 core earnings, with higher regulatory capital ratios. Shareholder and customer reaction to this event was overwhelmingly positive, and we thank them for their support and understanding. We truly believe that we have "reset the clock" as it were, and established the platform from which we intend to grow future earnings. The commitment of the Board and management to be a highly successful community bank is stronger than ever. In order to achieve this goal, we know that we need to establish a reputation as a banking organization that provides a complete array of products and services to both personal and business customers. We also know that we must deliver fast, high-quality service in order to set us apart from our competitors. So, during the year, we added to and improved our product delivery, technology and customer service, and these efforts will continue into 2004. We also expanded our product offerings for both deposit account customers and loan prospects. Perhaps most importantly, we strengthened our sales force by adding key people and new initiatives in our commercial banking and mortgage lending areas. Further enhancements are underway that will strengthen our marketing efforts, improve the training of our employees, increase our community involvement, add to our lending sales force, and further improve the quality and efficiency of our product delivery systems. Much is occurring in our markets, but these events and challenges are actually opportunities for us to achieve our mission. Mergers and acquisitions are occurring all around us, but they often displace good employees and customers looking to realign themselves with a high-quality community bank. There continues to be a substantial number of new regulatory requirements that reshape our industry. While these new laws and regulations often impose costly and complex changes, companies such as ours, with the ability to react quickly and readily adapt technology and operations, will be rewarded. While all of these events have been going on in and around the Company, shareholders in TF Financial Corporation enjoyed a 41% total return during 2003. While it may be unreasonable to expect these returns every year, we believe that, over the long run, stockholders will continue to benefit from an investment in our stock, provided that your Board and management achieve what they fully intend to achieve: building value and earnings by creating and maintaining a highly regarded, successful retail banking franchise. We thank you in advance for your continued support. /s/Kent C. Lufkin Kent C. Lufkin President and Chief Executive Officer 1 TF FINANCIAL CORPORATION & SUBSIDIARIES ================================================================================ Corporate Profile and Related Information TF Financial Corporation (the "Company") 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, 2003, total assets were approximately $606.8 million. The Company 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, 2003, total stockholders' equity was approximately $55.5 million. The Company 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. During the first quarter of 2003 the Savings Bank opened its fourteenth branch office in the Northern Liberties neighborhood in Philadelphia. As of December 31, 2003 Third Federal operated branch offices in Bucks and Philadelphia counties, Pennsylvania and Mercer County, New Jersey. Third Federal attracts deposits (approximately $459.3 million at December 31, 2003) from the general public and uses such deposits, together with borrowings mainly from the Federal Home Loan Bank of Pittsburgh (approximately $86.9 million at December 31, 2003) 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 Company's common stock has been traded on the Nasdaq National Market. The daily stock quotation for the Company 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 22, 2004, 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 Company'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 Company'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 Quarter ended Quoted market price Dividend paid High Low per share December 31, 2003 $35.27 $31.50 $0.15 September 30, 2003 $31.97 $28.01 $0.15 June 30, 2003 $32.75 $25.00 $0.15 March 31,2003 $25.95 $24.50 $0.15 December 31, 2002 $25.51 $20.33 $0.15 September 30, 2002 $23.71 $19.70 $0.15 June 30, 2002 $24.80 $22.07 $0.15 March 31, 2002 $23.50 $21.05 $0.15 2 2003 ANNUAL REPORT ================================================================================ Selected Financial Information and Other Data
At December 31, (Dollars in thousands, except per share data) Financial Position 2003 2002 2001 2000 1999 ---------------------------------------------------------- Total assets $ 606,752 $ 721,032 $ 711,204 $ 723,297 $ 721,874 Loans receivable, net 404,649 370,092 377,635 361,806 287,979 Mortgage-backed securities available for sale, at fair value 106,774 115,243 99,763 97,914 132,515 Mortgage-backed securities held to maturity, at amortized cost 23,630 54,592 93,367 135,142 159,888 Investment securities available for sale, at fair value 14,443 27,243 22,671 18,865 21,930 Investment securities held to maturity, at amortized cost 10,389 14,563 9,866 63,461 66,760 Cash and cash equivalents(1) 8,241 100,580 69,139 10,618 16,715 Deposits 459,343 442,558 422,052 400,851 401,698 Advances from the Federal Home Loan Bank and other borrowings 86,853 207,359 222,359 259,821 264,299 Retained earnings 52,626 59,978 56,370 52,061 48,905 Total stockholders' equity 55,480 62,840 57,975 53,109 48,447 Book value per common share $ 21.37 $ 25.31 $ 23.51 $ 21.32 $ 18.81 Tangible book value per common share $ 19.56 $ 23.34 $ 21.44 $ 18.99 $ 16.26 ----------------------------------------------------------
At or for the year ended December 31, Summary of Operations 2003 2002 2001 2000 1999 ---------------------------------------------------------- Interest income $ 32,377 $ 40,455 $ 46,747 $ 48,708 $ 47,022 Interest expense 15,252 22,660 26,908 28,921 27,974 Net interest income 17,125 17,795 19,839 19,787 19,048 Provision for loan losses 330 988 500 410 300 Non-interest income 2,690 3,304 3,172 1,432 1,589 Non-interest expense 28,703 13,414 14,708 14,404 13,529 Net income (loss) $ (5,834) $ 5,092 $ 5,733 $ 4,482 $ 4,422 Earnings (loss) per common share - basic $ (2.30) $ 2.06 $ 2.32 $ 1.76 $ 1.60 Earnings (loss) per common share - diluted $ (2.30) $ 1.91 $ 2.19 $ 1.72 $ 1.54 ---------------------------------------------------------- (Continued)
3 TF FINANCIAL CORPORATION & SUBSIDIARIES ================================================================================ Selected Financial Information and Other Data - Continued Performance Ratios and Other Selected Data 2003 2002 2001 2000 1999 ---------------------------------------------------- Return on average assets n. m. 0.71% 0.82% 0.63% 0.62% Return on average equity n. m. 8.47% 10.42% 9.18% 8.60% Average equity to average assets 9.01% 8.34% 7.83% 6.86% 7.17% Average interest rate spread 2.55% 2.42% 2.74% 2.70% 2.54% Non-performing loans to total assets 0.38% 0.53% 0.53% 0.20% 0.18% Non-performing loans to total loans 0.56% 1.03% 0.99% 0.41% 0.45% Allowance for loan losses to non-performing loans 92.51% 53.86% 52.22% 115.97% 145.56% Allowance for loan losses to total loans 0.52% 0.54% 0.52% 0.47% 0.66% Savings Bank regulatory capital Core 7.29% 6.85% 6.95% 6.18% 5.76% Tangible 7.29% 6.85% 6.95% 6.18% 5.76% Risk based 14.47% 15.25% 14.95% 11.97% 12.83% Dividend payout ratio(2) n. m. 31.41% 26.48% 30.23% 31.82% ----------------------------------------------------
n. m. = not meaningful (1) Consists of cash, cash due from banks, interest-bearing deposits with original maturities of less than three months, and federal funds sold. (2) Payout ratio is dividends paid for the period divided by earnings per common share. 4 2003 ANNUAL REPORT ================================================================================ Management's Discussion and Analysis of Financial Position and Results of Operations General The following discussion and analysis should be read in conjunction with the Company's consolidated financial statements and is intended to assist in understanding and evaluating the major changes in the financial position and results of operations of the Company with a primary focus on an analysis of operating results. This document contains statements that project the future operations of the Company which involve risks and uncertainties. The Company'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 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. The Company'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 Position Assets. The Company's total assets at December 31, 2003 were $606.8 million, a decrease of $114.3 million during the year. This decrease in total assets is a direct result of a debt refinancing transaction, which occurred during the third quarter of 2003. At that time, the Company completed a series of transactions (the "debt refinancing") that resulted in the repayment and refinancing of $187.4 million of Federal Home Loan Bank borrowings which carried a weighted average interest rate of 5.46%. $80 million of these borrowings were refinanced at 3.23%; the remaining $107.4 million was repaid. A prepayment fee of $13.8 million was assessed by the Federal Home Loan Bank. A portion of the funds used to repay these borrowings came from the sale of $70.2 million of investment securities available for sale and $9.5 million of mortgage-backed securities available for sale, which had been yielding a combined 1.93%. The loss on the sale of these securities was $0.4 million. Management believed that it was in the best interest of the Company's shareholders and the Bank's employees and customers to replace these high-cost borrowings in order to improve the Company's future net interest income and thus its overall financial performance. Subsequently, the Company's net interest income was $5.5 million during the fourth quarter of 2003, an increase of $1.4 million when compared with the third quarter of 2003. Management expects the higher level of net interest income to continue into 2004. [GRAPHIC OMITTED] 5 TF FINANCIAL CORPORATION & SUBSIDIARIES ================================================================================ The Company's loans receivable portfolio at December 31, 2003 was $404.6 million, a $34.6 million or 9.3% increase since December 31, 2002. During 2003 there were $165.9 million of prepayments of existing mortgages in the loans receivable portfolio; however, offsetting this reduction was the origination of $178.6 million in predominately consumer and single-family residential mortgage loans, and the purchase of $24.2 million in newly originated, single-family residential mortgage loans. Mortgage-backed securities available for sale decreased by $8.5 million during 2003. During the first six months of 2003 the Company sold $14.5 million of mortgage-backed securities available for sale, generating gains of $0.6 million. An additional $9.5 million were sold as part of the debt refinancing. Further reduction of the mortgage-backed securities available for sale portfolio occurred due to $62.2 million in repayments throughout 2003. Offsetting these reductions were the purchases of $82.4 million of such securities. The remaining net change in the portfolio was caused by $1.7 million amortization of purchase premiums and a $3.0 million reduction in the fair value of such securities. Investment securities available for sale decreased by $12.8 million during the year. During the first six months of 2003 the Company purchased $91.1 million of such securities in order to redeploy its cash and cash equivalents into interest-bearing assets with higher yields. During the third quarter of 2003 the Company sold $70.2 million of these securities as part of the debt refinancing, plus an additional $0.5 million. During the fourth quarter, the Company purchased $7.6 million in investment securities available for sale. The remaining net change in the portfolio was caused by $40.0 million in maturities and redemptions, and $0.5 million decrease in the fair value of such securities. Mortgage-backed securities held to maturity decreased by $31.0 million or 56.7% during 2003. This large decrease occurred due to the high prepayment rate of the underlying mortgages comprising the securities, which was the result of near record low mortgage rates throughout 2003, resulting in an increased number of mortgagors refinancing their mortgages into lower interest rates. The Company's cash and cash equivalents decreased $92.3 million to $8.2 million at December 31, 2003. It is the Company's intent to keep cash and cash equivalents at this minimal level and use its line of credit at the Federal Home Loan Bank to fund its day-to-day cash needs, if necessary. Liabilities. The Company's total liabilities were $551.3 million at December 31, 2003, a decrease of $106.9 million during 2003. Deposits increased by $16.8 million; certificates of deposit increased by $0.2 million, while the remaining or "core" deposit categories increased by $16.6 million. Management believes that deposit growth occurred mainly as a result of successful sales initiatives and focused advertising campaigns implemented by the Company, but also due to external factors that caused deposit growth to occur throughout the community banking industry. Advances from the Federal Home Loan Bank decreased by $120.5 million, largely the result of the debt refinancing, which caused a $107.4 million net reduction. It is the intent of the Company to fund a portion of its interest-bearing assets, not funded by deposits, with longer term advances from the Federal Home Loan Bank, and fund its day-to-day cash needs and shorter term interest-bearing assets not otherwise funded with deposits using draws on its line of credit with the Federal Home Loan Bank. At December 31, 2003 the Saving Bank's line of credit was $30 million of which $9.9 million was drawn. Stockholders' equity. Total consolidated stockholders' equity decreased $7.3 million to $55.5 million at December 31, 2003. The decrease is largely the result of a $5.8 million net loss, a $2.3 million decrease in accumulated other comprehensive income, and $1.5 million in cash dividends paid to the Company's common stockholders. Offsetting these decreases was a $2.3 million increase in stockholders' equity attributable to the exercise of stock options for 92,092 shares, and the allocation of 20,549 shares to participants in the Company's employee stock ownership plan. 6 2003 ANNUAL REPORT ================================================================================ Average Balance Sheet The following table sets forth information (dollars in thousands) relating to the Company's average balance sheet and reflects the average yield on assets and average cost of liabilities for the periods indicated. The yields and costs are computed by dividing income or expense by the average balance of interest-earning assets or interest-bearing liabilities, respectively for the periods indicated.
2003 2002 2001 -------------------------------------------------------------------------------------------- Average Average Average Average Average Average balance Interest yld/cost balance Interest yld/cost balance Interest yld/cost -------------------------------------------------------------------------------------------- ASSETS Interest-earning assets: Loans receivable(1) $378,414 23,372 6.18% $362,104 25,662 7.09% $359,928 $28,443 7.90% Mortgage-backed securities 154,721 6,725 4.35% 200,316 11,423 5.70% 212,951 13,749 6.46% Investment securities 62,747 1,806 2.88% 50,072 2,271 4.54% 51,384 3,015 5.87% Other interest- earning assets(2) 45,590 474 1.04% 74,058 1,099 1.48% 49,206 1,540 3.13% -------- ------- -------- ------- -------- ------- Total interest- earning assets 641,472 32,377 5.05% 686,550 40,455 5.89% 673,469 46,747 6.94% ------- ------- ------- Non interest- earning assets 33,839 34,494 29,202 -------- -------- -------- Total assets $675,311 $721,044 $702,671 ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY: Interest-bearing liabilities Deposits 449,925 7,044 1.57% 433,522 10,506 2.42% 409,688 14,043 3.43% Advances from the FHLB and borrowings 160,325 8,208 5.12% 219,797 12,154 5.53% 230,078 12,865 5.59% -------- ------- -------- ------- -------- ------- Total interest-bearing liabilities 610,250 15,252 2.50% 653,319 22,660 3.47% 639,766 26,908 4.20% ------- ------- ------- Non interest-bearing liabilities 4,195 7,603 7,865 -------- -------- -------- Total liabilities 614,445 660,922 647,631 Stockholders' equity 60,866 60,122 55,040 -------- -------- -------- Total liabilities and stockholders' equity $675,311 $721,044 $702,671 ======== ======== ======== Net interest income $17,125 $17,795 $19,839 ======= ======= ======= Interest rate spread(3) 2.55% 2.42% 2.74% Net yield on interest- earning assets(4) 2.67% 2.59% 2.95% Ratio of average interest- earning assets to average interest- bearing liabilities 105% 105% 105%
(1) Nonaccrual loans have been included in the appropriate average loan balance category, but interest on nonaccrual loans has not been included for purposes of determining interest income. (2) Includes interest-bearing deposits in other banks. (3) Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. (4) Net yield on interest-earning assets represents net interest income as a percentage of average interest-earning assets. 7 TF FINANCIAL CORPORATION & SUBSIDIARIES ================================================================================ 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.
2003 vs 2002 2002 vs 2001 Increase (decrease) due to Increase (decrease) due to ------------------------------------------------------------------- Volume Rate Net Volume Rate Net ------------------------------------------------------------------- Interest income: Loans receivable, net $ 1,117 $(3,407) $(2,290) $ 171 $(2,952) $(2,781) Mortgage-backed securities (2,298) (2,400) (4,698) (784) (1,542) (2,326) Investment securities 489 (954) (465) (75) (669) (744) Other interest-earning assets (351) (274) (625) 577 (1,018) (441) ------------------------------------------------------------------- Total interest-earning assets (1,043) (7,035) (8,078) (111) (6,181) (6,292) ------------------------------------------------------------------- Interest expense: Deposits 384 (3,846) (3,462) 777 (4,314) (3,537) Advances from the FHLB and borrowings (3,097) (849) (3,946) (570) (141) (711) ------------------------------------------------------------------- Total interest-bearing liabilities (2,713) (4,695) (7,408) 207 (4,455) (4,248) ------------------------------------------------------------------- Net change in net interest income $ 1,670 $(2,340) $ (670) $ (318) $(1,726) $(2,044) ===================================================================
Comparison of Years Ended December 31, 2003 and December 31, 2002 Net Income. Net loss was $5.8 million for the fiscal year ended December 31, 2003. Net income was $5.1 million for the year ended December 31, 2002. The difference in net income of $10.1 million when comparing the year 2003 with 2002 is largely attributable to the debt refinancing, which produced a net loss for 2003 of $9.3 million after considering the income tax benefit associated with the transaction. Pre-tax loss was $9.2 million for 2003. After adjusting for the $14.2 million pre-tax cost of the debt refinancing, pre-tax income was $5.0 million compared to pre-tax income of $6.7 million during 2002. This $1.7 million difference is mainly attributable to a $1.5 million increase in non-interest expense, after adjusting for the $13.8 million debt repayment fee, as described more fully below. Total Interest Income. For the year ended December 31, 2003, total interest income decreased to $32.4 million compared to $40.5 million for the year ended December 31, 2002. The $8.1 million decrease in interest income was mainly the result of the repayment of $165.9 million in higher yielding loans receivable, which were replaced and supplemented by the origination and purchase of $202.8 million in loans at substantially lower yields. In addition, the Company'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 Company's loan portfolio decreased by 91 basis points during 2003. A similar result of low market interest rates combined with high loan prepayments caused the average yield on the Company's mortgage-backed securities portfolios to decrease by 135 basis points. At December 31, 2003 the rate of prepayment of mortgage-related earning assets had decreased. Mortgage-related loan repayments during 2003 caused an average of $45.6 million to be maintained in cash and cash equivalents during 2003, earning an average interest rate of 1.04%, which is substantially less than these funds were earning while invested in loans and mortgage-backed securities. However, by year end 2003 the Company's cash and cash equivalents had been reduced to $8.2 million from $100.6 million at December 31, 2002 largely as a result of the debt refinancing, but also due to the Company's increased lending activities, particularly during the second half of 2003. Total Interest Expense. Total interest expense decreased to $15.3 million from $22.7 million for the year ended December 31, 2003 compared to 2002. $3.5 million of this decrease is primarily the result of lower market interest rates during the period and, consequently, lower rates paid on the Company's new certificates of deposit; in addition, the Company 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. In addition, the interest paid on Federal Home Loan Bank advances decreased by $3.9 million during 2003 compared with 2002, largely because of the debt refinancing transaction. 8 2003 ANNUAL REPORT ================================================================================ Allowance for Loan Losses. The allowance for loan losses was approximately $2.1 million at December 31, 2003 and $2.0 million at December 31, 2002. The provision for loan losses was $330,000 during 2003 compared with $988,000 during 2002. Charge-offs were $266,000 during 2003 compared to $913,000 during 2002. Charge-offs during 2002 included approximately $625,000 during the second quarter attributable to a default by the servicer of the Company's purchased lease portfolio. 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 $2.7 million during 2003 compared with $3.3 million during 2002. During the first six months of 2003 the Company sold $14.5 million in mortgage-backed securities and recorded gains of $0.6 million. The debt refinancing during the third quarter of 2003 produced a loss on sale of securities of $0.4 million. During 2002 the Company sold approximately $37.2 million mortgage-backed and investment securities available for sale and realized gains of $1.2 million. Service fees and other operating income increased by $0.3 million largely due to the introduction of new deposit account services during the year. However, fee income also includes $0.2 million of loan prepayment fees, largely attributable to large commercial loans, which, because of the nature of the fee, are non-recurring in nature. Gain on sale of real estate of $0.1 million resulted from the sale of operating property during 2003 while there were no such gains during 2002. Non-Interest Expense. Total non-interest expense, excluding the $13.8 million debt prepayment fee, increased by $1.5 million during 2003 compared to 2002. Employee compensation and benefits increased by $557,000 during 2003 compared to 2002: expense related to the employee stock ownership plan increased by $326,000 due to an increase in the shares allocated to plan participants and an increase in the per share cost associated with these allocations; the expense of the Company's defined benefit plan increased by $126,000; and, finally, there was a $66,000 one-time expense associated with the retirement of the Bank's president at June 30, 2003. The remaining increase in compensation is due to the cost of staffing a new branch, opened during the first quarter of 2003, and normal salary increases. Professional fees increased by $201,000 during 2003 due to increased legal expense, in part related to the retirement of the Bank's president and appointment of new senior officers at the Bank, and in part due to the evaluation and adoption of various policies and procedures required by the Sarbanes-Oxley Act of 2002. Also, during the second half of 2003 the Company engaged an outside firm to completely review and then provide on-going assistance with the Bank's regulatory compliance requirements. Other operating expenses increased by $511,000 during 2003. Loan expenses increased by $219,000 due to increased loan production. Other miscellaneous expenses include $113,000 attributable to estimated and realized losses on foreclosed real estate, and $110,000 attributable to various deposit item, robbery, and reconciling item losses that occurred throughout the year. Income Tax Expense. The Company's effective tax rate was 36.7% during 2003 compared to 24.0% during 2002. The apparent increase in the effective tax rate during 2003 is due to the pre-tax loss for the year, produced by the debt refinancing, which produces a tax benefit at a 34% rate, further increased by the elimination of net non-taxable income from the pre-tax loss. The Company expects the effective tax rate to return to a rate below the marginal effective rate of 34% during 2004. Comparison of Years Ended December 31, 2002 and December 31, 2001 Net Income. Net income was $5.1 million for the fiscal year ended December 31, 2002, a decrease of $0.6 or 11.2% compared with the year ended December 31, 2001. The Company'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 Company'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 Company'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 Company'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 Company's mortgage-backed securities portfolios to decrease by 76 basis points. 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%. 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 Company's new certificates of deposit; in addition, the Company 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. 9 TF FINANCIAL CORPORATION & SUBSIDIARIES ================================================================================ 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 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 Company's purchased lease portfolio. Non-Interest Income. Total non-interest income was $3.3 million during 2002 compared with $3.2 million during 2001. During 2002 the Company sold approximately $37.2 million mortgage-backed and investment securities available for sale and realized gains of $1.2 million. During 2001 the Company 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 Company 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 Company decreased by $236,000 other operating expenses, $110,000 of which related to bank service charges because the Company 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 Company'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 Company'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. 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 Company'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, 2003, such borrowed funds totaled $86.9 million. The amount of these borrowings that will mature during the twelve months ending December 31, 2004 is $22.3 million. At December 31, 2003 the Savings Bank had a $30 million line of credit, $20.1 million of which was unused, and up to approximately $299 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, 2004, is approximately $100.5 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, 2003, the Savings Bank had outstanding commitments to originate loans or fund unused lines of credit of $76.0 million. The loan commitments will be funded during the twelve months ending December 31, 2004. 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. Approximately $39 million of these unused lines are not expected to be funded. At December 31, 2003, the Savings Bank had no outstanding commitments to sell loans. The Company also has obligations under lease agreements. Payments required under such lease agreements will be approximately $215,000 during the year ending December 31, 2004. 10 2003 ANNUAL REPORT ================================================================================ The following table combines the Company's contractual obligations and commitments to make future payments as of December 31, 2003.
(in thousands) Total Less than 1 year 1-3 years 4-5 years After 5 years ---------------------------------------------------------------- Contractual obligations: Payments due by period FHLB advances $ 86,853 $ 22,268 $ 25,993 $ 27,725 $10,867 Time deposits 146,960 100,450 34,097 12,081 332 Operating leases 643,232 214,902 255,960 172,370 -- -------- -------- -------- -------- ------- Total contractual obligations $877,045 $337,620 $316,050 $212,176 $11,199 ======== ======== ======== ======== ======= Commitments: Amount of commitment expirations by period Extensions of credit $74,716 $28,593 $24,231 $39 $21,853 Letters of credit 1,276 1,156 120 -- -- Loans sold with recourse 113 -- -- -- 113 ------- ------- ------- --- ------- Total commitments $76,105 $29,749 $24,351 $39 $21,966 ======= ======= ======= === =======
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, 2003, the Savings Bank met its three regulatory capital requirements. Management believes that under current regulations, the Savings Bank will continue to meet its minimum capital requirements in the foreseeable future. However, events beyond the control of the Savings Bank, such as increased interest rates or a downturn in the economy in areas in which the Savings Bank operates, could adversely affect future earnings and as a result, the ability of the Savings Bank to meet its future minimum capital requirements. Asset and Liability Management The Savings Bank has established an Asset/Liability Management Committee (ALCO) for the purpose of monitoring and managing market risk, which is defined as the risk of loss of net interest income or economic value arising from changes in market interest rates and prices. The type of market risk which most affects the Company'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 Company'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 Company 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 NII. 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 67% of the Company's total assets. For this prepayment speed assumption the Company uses median expected prepayment speeds which are obtained from a reliable third party source. The Company 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 Company 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 Company's NII exposure at December 31, 2003, the Company focused on the simulation of net interest income in the "ramped up 200 basis points" and "shocked down 50 basis points" scenarios. The Company also used the results of the most recently available OTS model's forecast of market value of portfolio equity under different interest rate scenarios. In addition, the Company prepared current period and one-year forward "gap" reports in order to show potential mis-matches of repricing or cash flows from the Company'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. 11 TF FINANCIAL CORPORATION & SUBSIDIARIES ================================================================================ At December 31, 2003, the most adverse change in net interest income over the two-year horizon commencing January 1, 2004 using the "ramped up 200 basis points" and "shocked down 50 basis points" simulation methodologies was a $5.8 million or a 14% decrease in expected net interest income. The Company estimated its one-year gap (i.e. assets repricing/maturing in excess of liabilities repricing/maturing is a positive gap) to be negative $69.2 million in the "ramped up 200 basis points" scenario, and positive $63.7 million in the "shocked down 50 basis points" scenario, compared to a positive $9.5 million under the "rates unchanged" interest rate scenario. Essentially, the Company's net interest income is highly sensitive to the movement of long-term interest rates because of the resulting effect on the prepayment speeds of the Company's mortgage-related earning assets. In addition, the Company's deposits are highly insensitive to the downward movement in short term market rates due to the perceived inability of the Company to move core deposit rates much lower from where they are at December 31, 2003. 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 years 2004, 2005 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. Critical Accounting Policies Certain critical accounting policies of the Company require the use of significant judgment and accounting estimates in the preparation of the consolidated financial statements and related data of the Company. These accounting estimates require management to make assumptions about matters that are highly uncertain at the time the accounting estimate is made. Management believes that the most critical accounting policy requiring the use of accounting estimates and judgment is the determination of the allowance for loan losses. If the financial position of a significant amount of debtors should deteriorate more than the Company has estimated, present reserves for loan losses may be insufficient and additional provisions for loan losses may be required. The allowance for loan losses was $2,111,000 at December 31, 2003. Recent Accounting Pronouncements The Company adopted FIN 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others," on January 1, 2003. FIN 45 requires a guarantor entity, at the inception of a guarantee covered by the measurement provisions of the interpretation, to record a liability for the fair value of the obligation undertaken in issuing the guarantee. The Company issues financial and performance letters of credit. Financial letters of credit require the Company to make payment if the customer's financial condition deteriorates, as defined in the agreements. Performance letters of credit require the Company to make payments if the customer fails to perform identified non-financial contractual obligations. FIN 45 applies prospectively to guarantees the Company issues or modifies subsequent to December 31, 2002. The Company defines the initial fair value of these letters of credit as the fee received from the customer. The maximum potential undiscounted amount of future payments on these letters of credit as of December 31, 2003 is $1.3 million and they expire through 2005. The amounts due under these letters of credit would be reduced by any proceeds that the Company would be able to obtain in liquidating the collateral for these loans. The adoption of FIN 45 did not have a material impact on the Company's consolidated financial position or results of operations. In January 2003, the FASB issued FASB Interpretation 46 (FIN 46), "Consolidation of Variable Interest Entities." FIN 46 clarifies the application of Accounting Research Bulletin 51, "Consolidated Financial Statements," for certain entities that do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties or in which equity investors do not have the characteristics of controlling financial interest ("variable interest entities"). Variable interest entities within the scope of FIN 46 will be required to be consolidated by their primary beneficiary. The primary beneficiary of a variable interest is determined to be the party that absorbs a majority of the entity's expected losses, receives a majority of its expected returns, or both. FIN 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains and interest after that date. Subsequent to the issuance of FIN 46, the FASB issued a revised interpretation, FIN 46(R), the provisions of which must be applied to certain variable interest entities by March 31, 2004. The Company does not anticipate a material impact from the adoption of FIN 46, which will occur in the first quarter of 2004. 12 2003 ANNUAL REPORT ================================================================================ On April 30, 2003 the Financial Accounting Standards Board (FASB) issued Statement No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." The Statement amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under Statement 133. The new guidance amends Statement 133 for decisions made: as part of the Derivatives Implementation Group process that effectively required amendments to Statement 133, in connection with other FASB projects dealing with financial instruments, and regarding implementation issues raised in relation to the application of the definition of a derivative, particularly regarding the meaning of an "underlying" and the characteristics of a derivative that contains financing components. This Statement clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative as discussed in Statement 133. In addition, it clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. Statement 149 amends certain other existing pronouncements. This Statement is effective for contracts entered into or modified after June 30, 2003, except as stated below and for hedging relationships designated after June 30, 2003. The guidance should be applied prospectively. The provisions of this Statement that relate to Statement 133 Implementation Issues that have been effective for fiscal quarters that began prior to June 15, 2003, should continue to be applied in accordance with their respective effective dates. In addition, certain provisions relating to forward purchases or sales of when-issued securities or other securities that do not yet exist, should be applied to existing contracts as well as new contracts entered into after June 30, 2003. The adoption of SFAS No. 149 did not have a material effect on the Company's financial position or results of operations. On May 15, 2003 the Financial Accounting Standards Board (FASB) issued Statement No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." The Statement improves the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity. The new Statement requires that those instruments be classified as liabilities in statements of financial position. Statement 150 affects three types of freestanding financial instruments: (1) mandatorily redeemable shares, which the issuing company is obligated to buy back in exchange for cash or other assets; (2) instruments that do or may require the issuer to buy back some of its shares in exchange for cash or other assets, including put options and forward purchase contracts; and (3) obligations that can be settled with shares, the monetary value of which is fixed, tied solely or predominantly to a variable such as a market index, or varies inversely with the value of the issuer's shares. Statement 150 does not apply to features embedded in a financial instrument that is not a derivative in its entirety. Most of the guidance in Statement 150 is effective for all financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of Statement 150 did not have a material effect on the Company's consolidated financial position, results of operations or cash flows. In October 2003, the AICPA issued SOP 03-3, "Accounting for Loans or Certain Debt Securities Acquired in a Transfer." This statement addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor's initial investment in loans or debt securities ("loans") acquired in a transfer as a result of credit quality deterioration. The statement requires recognition of the excess of all cash flows expected at acquisition over the investor's initial investment in the loan as interest income on a level-yield basis over the life of the loan as the accretable yield. The loan's contractual required payments receivable in excess of the amount of its cash flows expected at acquisition (nonaccretable difference) should not be recognized as an adjustment to yield, a loss accrual or a valuation allowance for credit risk. This statement is effective for loans acquired in fiscal years beginning after December 31, 2004. Early adoption is permitted. The adoption of SOP 03-3 is not expected to have a material effect on the Company's consolidated financial position, results of operations or cash flows. In December 2003, the FASB issued SFAS 132 (revised 2003) in response to requests by users of financial statements for more transparent disclosure of pension plan assets, obligations, benefit payments, contributions, and net benefit cost. In light of certain similarities between defined benefit pension arrangements and arrangements for other post-retirement benefits, SFAS 132 requires similar disclosures for both. This Statement replaces the original SFAS 132 and revises employers' disclosures about pension plans and other post-retirement benefit plans to require more information about the economic resources and obligations of such plans. SFAS 132 (revised 2003) amends the disclosure requirements of SFAS 87, SFAS 88, and SFAS 106, however, the measurement and recognition guidance is not affected. SFAS 132 (revised 2003) is effective for financial statements of public companies for the fiscal years ending after December 15, 2003, except estimated future benefit payment disclosures and disclosures of certain information about foreign plans are not required until fiscal years ending after June 15, 2004. The interim-period disclosures are effective for interim-period financial reports beginning after December 15, 2003. Disclosures for earlier annual periods presented for comparative purposes are required to be restated for the percentages of each major category of plan assets held, the accumulated benefit obligation, and plan assumptions. The disclosures for earlier interim periods presented for comparative purposes need to be restated for the components of net benefit cost. The adoption of the relevant provisions of SFAS 132 (revised 2003) and the expected adoption of the remaining provisions did not and is not expected to have a material impact on the Company's financial position or results of operations. In June 2003, the Accounting Standards Executive Committee (AcSEC) issued a proposed SOP, "Allowance for Credit Losses," to provide guidance on how creditors should determine the allowance for credit losses related to all loans in accordance with SFAS 5, SFAS 114, and FIN 14. The proposed guidance would apply to all creditors of loans (except for governmental entities) and not just financial institutions. AcSEC began its deliberations and will continue to deliberate the proposed SOP in 2004. Based on informal discussions with the FASB in early 2004, AcSEC decided to revise the scope of the proposed SOP to provide guidance related to disclosures only. The Bank adopted EITF 03-1, "The Meaning of Other than Temporary Impairment and Its Application to Certain Investments," as of December 31, 2003. EITF 03-1 includes certain disclosures regarding quantitative and qualitative disclosures for investment securities accounted for under FAS 115, "Accounting for Certain Investments in Debt and Equity Securities," that are impaired at the balance sheet date, but for which an other-than-temporary impairment has not been recognized. The disclosures under EITF 03-4 are required for financial statements for years ending after December 15, 2003 and are included in the Company's consolidated financial statements. 13 [THIS PAGE INTENTIONALLY LEFT BLANK 14 2003 ANNUAL REPORT ================================================================================ Accountants and Management Consultants The US Member Firm of Grant Thornton [LOGO] Grant Thornton International GRANT THONRTON LLP 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, 2003 and 2002, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 2003. 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, 2003 and 2002, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 2003, 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, 2004 Suite 3100 Two Commerce Square 2001 Market Street Philadelphia, PA 19103-7080 Tel: 215 561-4200 Fax: 215 561-1066 15 TF FINANCIAL CORPORATION & SUBSIDIARIES ================================================================================ CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
December 31 ---------------------- ASSETS 2003 2002 ---------------------- (in thousands) Cash and cash equivalents $ 8,241 $ 100,580 Certificates of deposit in other financial institutions 155 220 Investment securities available for sale - at fair value 14,433 27,243 Investment securities held to maturity (fair value of $10,815 and $15,187 as of December 31, 2003 and 2002, respectively) 10,389 14,563 Mortgage-backed securities available for sale - at fair value 106,774 115,243 Mortgage-backed securities held to maturity (fair value of $24,774 and $57,346 as of December 31, 2003 and 2002, respectively) 23,630 54,592 Loans receivable, net 404,649 370,092 Federal Home Loan Bank stock - at cost 6,825 11,424 Accrued interest receivable 2,671 3,576 Premises and equipment, net 6,268 6,742 Core deposit intangible asset, net of accumulated amortization of $2,456 and $2,271 as of December 31, 2003 and 2002, respectively 368 553 Goodwill, net of accumulated amortization of $2,328 4,324 4,324 Other assets 18,025 11,880 ---------------------- TOTAL ASSETS $ 606,752 $ 721,032 ====================== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Deposits $ 459,343 $ 442,558 Advances from the Federal Home Loan Bank 86,853 207,359 Advances from borrowers for taxes and insurance 1,738 1,330 Accrued interest payable 1,908 2,897 Other liabilities 1,430 4,048 ---------------------- Total liabilities 551,272 658,192 ---------------------- Stockholders' equity Preferred stock, no par value; 2,000,000 shares authorized at December 31, 2003 and 2002, none issued -- -- Common stock, $0.10 par value; 10,000,000 shares authorized, 5,290,000 shares issued, 2,596,037 and 2,482,586 shares outstanding at December 31, 2003 and 2002, respectively, net of shares in treasury: 2003 - 2,474,366; 2002 - 2,567,268 529 529 Retained earnings 52,626 59,978 Additional paid-in capital 51,982 51,647 Unearned ESOP shares (2,196) (2,401) Treasury stock - at cost (47,043) (48,809) Accumulated other comprehensive income (418) 1,896 ---------------------- Total stockholders' equity 55,480 62,840 ---------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 606,752 $ 721,032 ======================
The accompanying notes are an integral part of these statements 16 2003 ANNUAL REPORT ================================================================================ CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31, ---------------------------------- 2003 2002 2001 ---------------------------------- (in thousands, except per share data) Interest income Loans, including fees $ 23,372 $ 25,662 $ 28,443 Mortgage-backed securities 6,725 11,423 13,749 Investment securities 1,806 2,271 3,015 Interest-bearing deposits and other 474 1,099 1,540 ---------------------------------- TOTAL INTEREST INCOME 32,377 40,455 46,747 ---------------------------------- Interest expense Deposits 7,044 10,506 14,043 Borrowings 8,208 12,154 12,865 ---------------------------------- TOTAL INTEREST EXPENSE 15,252 22,660 26,908 ---------------------------------- NET INTEREST INCOME 17,125 17,795 19,839 ---------------------------------- Provision for possible loan losses 330 988 500 NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE LOAN LOSSES 16,795 16,807 19,339 ---------------------------------- Non-interest income Service fees, charges and other operating income 2,372 2,114 1,734 Gain on sale of deposits -- -- 1,092 Gain on sale of real estate 110 -- 444 Gain (loss) on sale of investment and mortgage-backed securities 208 1,190 (126) Gain on sale of loans -- -- 28 ---------------------------------- TOTAL NON-INTEREST INCOME 2,690 3,304 3,172 ---------------------------------- Non-interest expense Employee compensation and benefits 8,186 7,629 7,865 Occupancy and equipment 2,488 2,303 2,493 Federal deposit insurance premium 72 75 75 Professional fees 609 408 486 Advertising 551 441 507 Other operating 2,847 2,336 2,572 Amortization of core deposit intangible asset 185 222 266 Amortization of goodwill -- -- 444 Debt prepayment fee 13,765 -- -- ---------------------------------- TOTAL NON-INTEREST EXPENSE 28,703 13,414 14,708 ---------------------------------- INCOME (LOSS) BEFORE INCOME TAXES (9,218) 6,697 7,803 Income taxes (benefit) (3,384) 1,605 2,070 ---------------------------------- NET INCOME (LOSS) $ (5,834) $ 5,092 $ 5,733 ================================== Earnings (loss) per share - basic $ (2.30) $ 2.06 $ 2.32 ================================== Earnings (loss) per share - diluted $ (2.30) $ 1.91 $ 2.19 ==================================
The accompanying notes are an integral part of these statements. 17 TF FINANCIAL CORPORATION & SUBSIDIARIES ================================================================================ CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 2003, 2002 and 2001 ---------------------------------------------------------------------------------------------------------- (in thousands, except share data) Accumulated Other Common stock Additional Unearned Shares Comprehensive 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, 2001 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 ---------------------------------------------------------------------------------------------------------- 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 ---------------------------------------------------------------------------------------------------------- Allocation of ESOP shares 20,549 -- 401 205 -- -- -- -- 606 Cash dividends - common stock -- -- -- -- -- -- (1,518) -- (1,518) Exercise of options 92,902 -- (618) -- -- 1,766 -- -- 1,148 Income tax benefit arising from stock compensation -- -- 552 -- -- -- -- -- 552 Other comprehensive income (loss), net of taxes -- -- -- -- -- -- -- (2,314) (2,314) $(2,314) Net income (loss) for the year ended December 31, 2003 -- - - -- -- -- -- (5,834) -- (5,834) (5,834) ---------------------------------------------------------------------------------------------------------- Comprehensive income (loss) $(8,148) ---------------------------------------------------------------------------------------------------------- Balance at December 31, 2003 2,596,037 $529 $51,982 $(2,196) $ -- $(47,043) $52,626 $ (418) $55,480 ----------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of this statement. 18 2003 ANNUAL REPORT ================================================================================ CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31, ----------------------------------- 2003 2002 2001 ----------------------------------- (in thousands) OPERATING ACTIVITIES Net income (loss) $ (5,834) $ 5,092 $ 5,733 Adjustments to reconcile net income to net cash provided by operating activities Amortization of Mortgage loan servicing rights 11 14 14 Deferred loan origination fees (259) (201) (387) Premiums and discounts on investment securities, net 170 108 36 Premiums and discounts on mortgage-backed securities and loans, net 1,941 758 (72) Goodwill and other intangibles 185 222 710 Deferred income taxes 596 (19) (172) Provision for loan losses and provision for losses on real estate 443 988 510 Depreciation of premises and equipment 1,041 1,014 1,092 Increase in value of bank-owned life insurance (553) (520) (174) Stock-based benefit programs 606 273 240 Tax benefit arising from stock compensation 552 -- -- (Gain) loss on sale of Investment and mortgage-backed securities (208) (1,190) 126 Real estate acquired through foreclosure (23) (60) (27) Property, equipment and real estate held for investment -- -- (444) Real estate (110) -- -- Loans receivable -- -- (28) Deposits -- -- (1,092) (Increase) decrease in Accrued interest receivable 905 578 1,369 Other assets (3,924) (89) 248 Increase (decrease) in Accrued interest payable (989) (865) (908) Other liabilities (1,427) (318) (470) ----------------------------------- NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (6,877) 5,785 6,304 ----------------------------------- INVESTING ACTIVITIES Loan originations (178,578) (80,943) (48,526) Purchases of loans (24,176) (59,926) (74,647) Loan principal payments 165,855 147,296 106,019 Principal repayments on mortgage-backed securities held to maturity 31,013 41,499 41,456 Principal repayments on mortgage-backed securities available for sale 62,169 39,005 22,415 Proceeds from loan sales -- -- 1,480 Purchases and maturities of certificates of deposit in other financial institutions, net 65 (26) (3) (Continued) 19
TF FINANCIAL CORPORATION & SUBSIDIARIES ================================================================================ CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
Year ended December 31, ------------------------------------ 2003 2002 2001 ------------------------------------ (in thousands) Purchases of investment and mortgage-backed securities held to maturity $ -- $ (9,650) $ -- Purchase of investment securities and mortgage-backed securities available for sale (181,058) (103,201) (47,364) Purchase of bank-owned life insurance (1,500) -- (9,000) Proceeds from maturities of investment securities held to maturity 4,105 2,060 51,233 Proceeds from maturities of investment securities available for sale 40,000 8,000 18,501 Proceeds from the sale of investment and mortgage-backed securities available for sale 95,193 38,380 4,890 (Purchase) redemption of Federal Home Loan Bank stock 4,599 (56) 1,674 (Purchase) sale of property, equipment and real estate held for investment 8 (769) 1,635 Proceeds from sale of real estate 1,277 275 163 Purchase of premises and equipment (751) (272) (357) ------------------------------------ NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 18,221 21,672 69,569 ------------------------------------ FINANCING ACTIVITIES Net increase (decrease) in demand deposit/NOW accounts, passbook savings accounts and certificates of deposit 16,785 20,506 31,989 Funding of sale of deposits -- -- (9,706) Net decrease in advances from Federal Home Loan Bank (120,506) (15,000) (22,500) Net decrease in securities sold under agreements to repurchase -- -- (14,962) Net increase (decrease) in advances from borrowers for taxes and insurance 408 89 83 Treasury stock acquired -- (376) (1,110) Exercise of stock options 1,148 249 278 Common stock dividends paid (1,518) (1,484) (1,424) ------------------------------------ NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (103,683) 3,984 (17,352) ------------------------------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (92,339) 31,441 58,521 Cash and cash equivalents at beginning of year 100,580 69,139 10,618 ------------------------------------ Cash and cash equivalents at end of year $ 8,241 $ 100,580 $ 69,139 ==================================== Supplemental disclosure of cash flow information Cash paid for Interest on deposits and advances from Federal Home Loan Bank $ 16,241 $ 23,525 $ 27,816 Income taxes $ 250 $ 2,050 $ 2,495 Non-cash transactions Transfers from loans to real estate acquired through foreclosure $ 1,857 $ -- $ --
The accompanying notes are an integral part of these statements. 20 2003 ANNUAL REPORT ================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003 and 2002 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES TF Financial Corporation (the "Company") 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, eleven 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 the Company and its wholly owned subsidiaries: TF Investments, Teragon Financial Corporation, Penns Trail Development Corporation and Third Federal, and its wholly owned subsidiary, Third Delaware Corporation (collectively, the "Company"). All material intercompany balances and transactions have been eliminated in consolidation. The accounting policies of the Company 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 Company 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 Company 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 Company classifies its investment, mortgage-backed and marketable equity securities in one of three categories: held to maturity, trading, or available for sale. The Company does not presently engage in security trading activities. Investment, mortgage-backed and marketable equity securities available for sale are stated at fair value, with net unrealized gains and losses excluded from income and reported in other comprehensive income. Realized gains and losses on the sale of securities are recognized using the specific identification method. The Bank adopted EITF 03-1, "The Meaning of Other than Temporary Impairment and Its Application to Certain Investments," as of December 31, 2003. EITF 03-1 includes certain disclosures regarding quantitative and qualitative disclosures for investment securities accounted for under FAS 115, "Accounting for Certain Investments in Debt and Equity Securities," that are impaired at the balance sheet date, but for which an other-than-temporary impairment has not been recognized. The disclosures under EITF 03-1 are required for financial statements for years ending after December 15, 2003 and are included in these financial statements 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 Company has the ability and it is management's intention to hold such assets to maturity. The Company adopted the provisions of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133), as amended, as of January 1, 2001. The statement requires the Company to recognize all derivative instruments at fair value as either assets or liabilities. Financial derivative instruments are reported at fair value in other assets or other liabilities. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship. Continued 21 TF FINANCIAL CORPORATION & SUBSIDIARIES ================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued December 31, 2003 and 2002 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 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). 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 Company accounts for impaired 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. The Company adopted FIN 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others," on January 1, 2003. FIN 45 requires a guarantor entity, at the inception of a guarantee covered by the measurement provisions of the interpretation, to record a liability for the fair value of the obligation undertaken in issuing the guarantee. The Bank issues financial and performance letters of credit. Financial letters of credit require the Bank to make payment if the customer's financial condition deteriorates, as defined in the agreements. Performance letters of credit require the Bank to make payments if the customer fails to perform identified non-financial contractual obligations. FIN 45 applied prospectively to guarantees the Bank issued or modified subsequent to December 31, 2002. In October 2003, The AICPA issued SOP 03-3, "Accounting for Loans or Certain Debt Securities Acquired in a Transfer." This statement addresses accounting for differences between contractual cash flows and cash flow expected to be collected from an investor's initial investment in loans or debt securities ("loans") acquired in a transfer as a result of credit quality deterioration. The statement requires recognition of the excess of all cash flows expected at acquisition over the investor's initial investment in the loan as interest income on a level-yield basis over the life of the loan as the accretable yield. The loan's contractual required payments receivable in excess of the amount of its cash flows expected at acquisition (nonaccretable difference) should not be recognized as an adjustment to yield, a loss accrual or a valuation allowance for credit risk. This statement is effective for loans acquired in fiscal years beginning after December 31, 2004. Early adoption is permitted. The adoption of SOP 03-3 is not expected to have a material effect on the Company's consolidated financial position, results of operations, or cash flows 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 22 2003 ANNUAL REPORT ================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued December 31, 2003 and 2002 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 Company 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 Company. 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 Company elected to apply SFAS No. 147 as of January 1, 2002. The Company 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 Company concluded was a business combination in accordance with SFAS No. 147. In addition, the Company has tested the goodwill and core deposit intangible assets for impairment prior to its fiscal year ending December 31, 2003. No impairment has been recognized. 7. Transfers of Financial Assets The Company 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 Company has established an Employee Stock Ownership Plan (ESOP) covering eligible employees with six months of service, as defined by the ESOP. The Company 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. The Company has several fixed stock option plans that allow the Company 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 Company's stock on the date of grant. The Company 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 Company'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. Continued 23 TF FINANCIAL CORPORATION & SUBSIDIARIES ================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued December 31, 2003 and 2002 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Had compensation cost for the plans been determined based on the fair value of options at the grant dates consistent with the method of SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below.
2003 2002 2001 ----------------------------- Net income (loss) (in thousands) As reported $ (5,834) $ 5,092 $ 5,733 Deduct: stock-based compensation expense determined using the fair value method, net of related tax effects 53 58 64 ----------------------------- Pro forma $ (5,887) $ 5,034 $ 5,669 ============================= Basic earnings (loss) per share As reported $ (2.30) $ 2.06 $ 2.32 Deduct: stock-based compensation expense determined using the fair value method, net of related tax effects 0.02 0.02 0.02 ----------------------------- Pro forma $ (2.32) $ 2.04 $ 2.30 ============================= Diluted earnings (loss) per share As reported $ (2.30) $ 1.91 $ 2.19 Deduct: stock-based compensation expense determined using the fair value method, net of related tax effects 0.03 0.01 0.01 ----------------------------- Pro forma $ (2.33) $ 1.90 $ 2.18 ============================= Weighted average fair value of options granted during the year $ 9.50 $ 6.60 $ 5.49
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 2003, 2002 and 2001, respectively: a dividend yield of 2.09%, 2.78%, and 3.23%; expected volatility of 32%, 29%, and 30%; risk-free interest rate of 3.40%, 2.78%; and 5.02%; and expected lives of six years for all options. 9. Income Taxes The Company 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 Company expenses advertising costs as incurred. 11. Earnings Per Share The Company 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 24 2003 ANNUAL REPORT ================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued December 31, 2003 and 2002 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 12. Comprehensive Income The Company 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 Company's other comprehensive income consists of net unrealized gains and losses on investment securities available for sale. Comprehensive income (loss) for 2003, 2002 and 2001 was $(8,148,000), $6,203,000, and $6,882,000, respectively. The components of other comprehensive income are as follows:
December 31, 2003 ----------------------------------- Before tax Tax (expense) Net of tax amount benefit amount ----------------------------------- (in thousands) Unrealized losses on securities Unrealized holding (losses) arising during period $(3,297) $ 1,120 $(2,177) Reclassification adjustment for gains realized in net income (208) 71 (137) ----------------------------------- Other comprehensive income (loss), net $(3,505) $ 1,191 $(2,314) ===================================
December 31, 2002 ----------------------------------- Before tax 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 ----------------------------------- Before tax 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 ===================================
Continued 25 TF FINANCIAL CORPORATION & SUBSIDIARIES ================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued December 31, 2003 and 2002 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 13. Segment Reporting The Company 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 Company has one reportable segment, "Community Banking." All of the Company's activities are interrelated, and each activity is dependent and assessed based on how each of the activities of the Company 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 Company 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, ------------------- 2003 2002 ------------------- (in thousands) Cash and due from banks $7,888 $6,657 Interest-bearing deposits in other financial institutions 353 93,823 Federal funds sold -- 100 ------------------- $8,241 $100,580 =================== 26 2003 ANNUAL REPORT ================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued December 31, 2003 and 2002 NOTE C - INVESTMENT AND MORTGAGE-BACKED SECURITIES The amortized cost, gross unrealized gains and losses, and fair value of the Company's investment and mortgage-backed securities at December 31, 2003 and 2002, are summarized as follows:
December 31, 2003 ----------------------------------------------- Gross Gross Amortized unrealized unrealized Fair cost gains losses value ----------------------------------------------- (in thousands) Investment securities held to maturity State and political subdivisions $ 1,609 $ 126 $ -- $ 1,735 U.S. Government and federal agencies 2,000 11 -- 2,011 Corporate debt securities 6,780 289 -- 7,069 ----------------------------------------------- 10,389 426 -- 10,815 Mortgage-backed securities held to maturity 23,630 1,195 (51) 24,774 ----------------------------------------------- $ 34,019 $ 1,621 $ (51) $ 35,589 =============================================== Investment securities available for sale U.S. Government and federal agencies $ 2,972 $ -- $ (25) $ 2,947 Corporate debt securities 1,000 -- (7) 993 State and political subdivisions 10,677 34 (218) 10,493 ----------------------------------------------- 14,649 34 (250) 14,433 Mortgage-backed securities available for sale 107,192 541 (959) 106,774 ----------------------------------------------- $ 121,841 $ 575 $ (1,209) $ 121,207 ===============================================
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) 27 TF FINANCIAL CORPORATION & SUBSIDIARIES ================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued December 31, 2003 and 2002 NOTE C - INVESTMENT AND MORTGAGE-BACKED SECURITIES - Continued Gross realized gains were $725,000, $1,190,000, and $7,000 for the years ended December 31, 2003, 2002 and 2001, respectively. These gains resulted from the sale of investment and mortgage-backed securities of $22.6 million, $37.2 million, and $507,000 for the years ended December 31, 2003, 2002 and 2001, respectively. Gross realized losses were $517,000, $0, and $133,000 for the years ended December 31, 2003, 2002 and 2001, respectively. These losses resulted from the sale of investment and mortgage-backed securities of $72.4 million, $0 million, and $4.4 million for the years ended December 31, 2003, 2002 and 2001, respectively. The amortized cost and fair value of investment and mortgage-backed securities, by contractual maturity, are shown below.
December 31, 2003 ------------------------------------------ Available for sale Held to maturity ------------------------------------------ Amortized Fair Amortized Fair cost value cost value ------------------------------------------ (in thousands) Investment securities Due in one year or less $ -- $ -- $ 1,004 $ 1,017 Due after one year through five years 3,971 3,939 9,170 9,576 Due after five years through 10 years 611 613 -- -- Due after 10 years 10,067 9,881 215 222 ----------------------------------------- 14,649 14,433 10,389 10,815 Mortgage-backed securities 107,192 106,774 23,630 24,774 ----------------------------------------- $121,841 $121,207 $ 34,019 $ 35,589 =========================================
The amortized cost, gross unrealized gains and losses, and estimated market value of mortgage-backed securities, by issuer, are summarized as follows:
December 31, 2003 ----------------------------------------------- Gross Gross Amortized unrealized unrealized Fair cost gains losses value ----------------------------------------------- (in thousands) Mortgage-backed securities held to maturity FHLMC certificates $ 8,407 $ 544 $ -- $ 8,951 FNMA certificates 7,205 211 (50) 7,366 GNMA certificates 8,007 440 -- 8,447 Real estate mortgage investment conduit 11 -- (1) 10 Other mortgage-backed securities -- -- -- -- ----------------------------------------------- $ 23,630 $ 1,195 $ (51) $ 24,774 =============================================== Mortgage-backed securities available for sale FHLMC certificates $ 8,523 $ 23 $ (21) $ 8,525 FNMA certificates 18,522 14 (151) 18,385 GNMA certificates -- -- -- -- Real estate mortgage investment conduit 80,147 504 (787) 79,864 ----------------------------------------------- $ 107,192 $ 541 $ (959) $ 106,774 ===============================================
(Continued) 28 2003 ANNUAL REPORT ================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued December 31, 2003 and 2002 NOTE C - INVESTMENT AND MORTGAGE-BACKED SECURITIES - Continued
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 ===============================================
Investment securities having an aggregate amortized cost of approximately $3.0 and $5.0 million were pledged to secure public deposits at December 31, 2003 and 2002, 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. The table below indicates the length of time individual securities, both held-to-maturity and available-for-sale, have been in a continuous unrealized loss position at December 31, 2003:
Less than 12 months 12 months or longer Total - ---------------------------------------------------------------------------------------------------------------- Description of Number of Fair Unrealized Fair Unrealized Fair Unrealized Securities securities value loss value loss value loss - ---------------------------------------------------------------------------------------------------------------- (in thousands) Agency 1 $ 2,947 $ (25) $ -- $ -- $ 2,947 $ (25) Corporate 1 993 (7) -- -- 993 (7) Municipals 9 7,582 (218) -- -- 7,582 (218) MBS 21 59,778 (1,004) 56 (6) 59,834 (1,010) - ---------------------------------------------------------------------------------------------------------------- Total temporarily impaired investments 32 $ 71,300 $ (1,254) $ 56 $ (6) $ 71,356 $ (1,260) ================================================================================================================
Management has concluded that the unrealized losses above are temporary in nature since they are primarily related to market interest rates and are not related to the underlying credit quality of the issuers. Additionally, the Company has the intent and ability to hold these investments for the time necessary to recover the amortized cost. 29 TF FINANCIAL CORPORATION & SUBSIDIARIES ================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued December 31, 2003 and 2002 NOTE D - LOANS RECEIVABLE Loans receivable are summarized as follows: December 31, ---------------------- 2003 2002 ---------------------- (in thousands) First mortgage loans (principally conventional) Secured by one-to-four family residences $ 276,849 $ 227,953 Secured by other non-residential properties 74,109 85,493 Construction loans 6,591 12,026 ---------------------- 357,549 325,472 Net deferred loan origination cost (fees) and unamortized premiums 903 377 ---------------------- Total first mortgage loans 358,452 325,849 ---------------------- Consumer and other loans Commercial 15,185 8,005 Home equity and second mortgage 25,199 25,480 Leases 1,371 2,246 Other 6,532 10,490 ---------------------- 48,287 46,221 Unamortized premiums 21 69 ---------------------- Total consumer and other loans 48,308 46,290 ---------------------- Less allowance for loan losses (2,111) (2,047) ---------------------- Total loans receivable $ 404,649 $ 370,092 ====================== Activity in the allowance for loan losses is summarized as follows: December 31, --------------------------------------- 2003 2002 2001 --------------------------------------- (in thousands) Balance at beginning of year $ 2,047 $ 1,972 $ 1,714 Provision charged to income 330 988 500 Charge-offs, net (266) (913) (242) --------------------------------------- Balance at end of year $ 2,111 $ 2,047 $ 1,972 ======================================= 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 $2.3 million and $3.8 million at December 31, 2003 and 2002, respectively. Interest income that would have been recorded under the original terms of such loans totaled approximately $171,000, $307,000, and $284,000 for the years ended December 31, 2003, 2002 and 2001, respectively. No interest income has been recognized on non-accrual loans for any of the periods presented. The Bank has no concentration of loans to borrowers engaged in similar activities that exceeded 10% of loans at December 31, 2003 and 2002. 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 $1,291,000, and $987,000 at December 31, 2003 and 2002, respectively. For the year ended December 31, 2003, principal repayments of approximately $37,000 were received and $24,000 was disbursed to executive officers, directors or their related interests. 30 2003 ANNUAL REPORT ================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued December 31, 2003 and 2002 NOTE E - 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, ------------------- 2003 2002 ------------------- (in thousands) Mortgage loan servicing portfolios FHLMC $2,018 $3,758 Other investors 5,367 8,203 ------------------- $7,385 $11,961 =================== Custodial balances maintained in connection with the foregoing loan servicing totaled approximately $80,000, and $149,000 at December 31, 2003 and 2002, respectively. The net servicing revenue on mortgage loans serviced for others is immaterial for all periods presented. NOTE F - PREMISES AND EQUIPMENT Premises and equipment are summarized as follows: December 31, Estimated ----------------------- useful lives 2003 2002 --------------------------------------- (in thousands) Buildings 30 years $6,046 $ 6,483 Leasehold improvements 5 years 1,266 1,264 Furniture, fixtures and equipment 3-7 years 8,932 8,390 --------------------- 16,244 16,137 Less accumulated depreciation 11,668 11,238 --------------------- 4,576 4,899 Land 1,692 1,843 --------------------- $ 6,268 $ 6,742 ===================== 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued December 31, 2003 and 2002 NOTE G - GOODWILL AND CORE DEPOSIT INTANGIBLE ASSET A reconciliation of net income and earnings per share to amounts excluding goodwill amortization is as follows:
2003 2002 2001 ---------------------------------- (in thousands except per share amounts) Reported net income (loss) $ (5,834) $ 5,092 $ 5,733 Add back: goodwill amortization, net of related tax benefit -- -- 293 ---------------------------------- Adjusted net income (loss) $ (5,834) $ 5,092 $ 6,026 ================================== Basic earnings (loss) per share Reported net income (loss) $ (2.30) $ 2.06 $ 2.32 Add back: goodwill amortization, net of related tax benefit -- -- 0.12 ---------------------------------- Adjusted net income (loss) $ (2.30) $ 2.06 $ 2.44 ================================== Diluted earnings (loss) per share Reported net income (loss) $ (2.30) $ 1.91 $ 2.19 Add back: goodwill amortization, net of related tax benefit -- -- 0.11 ---------------------------------- Adjusted net income (loss) $ (2.30) $ 1.91 $ 2.30 ==================================
Core deposit intangible amortization for each of the three years subsequent to December 31, 2003 is estimated to be as follows: Year ending December 31, ------------------------- (in thousands) 2004 $155 2005 129 2006 84 ------------------------- $368 ========================= NOTE H - DEPOSITS Deposits are summarized as follows: December 31, ------------------- 2003 2002 ------------------- (in thousands) Deposit type Demand $ 26,375 $ 20,810 NOW 52,647 48,496 Money Market 44,688 43,677 Passbook savings 188,673 182,813 ------------------- Total demand, transaction and passbook deposits 312,383 295,796 Certificates of deposit 146,960 146,762 ------------------- $459,343 $442,558 =================== Continued 32 2003 ANNUAL REPORT ================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued December 31, 2003 and 2002 NOTE H - DEPOSITS - Continued The aggregate amount of certificates of deposit with a minimum denomination of $100,000 was approximately $22.2 million and $19.7 million at December 31, 2003 and 2002, respectively. At December 31, 2003, scheduled maturities of certificates of deposit are as follows: Year ending December 31, - ------------------------------------------------------------------------------- 2004 2005 2006 2007 2008 Thereafter Total - ------------------------------------------------------------------------------- (in thousands) $100,450 $29,827 $4,270 $6,131 $5,950 $ 332 $146,960 =============================================================================== NOTE I - ADVANCES FROM THE FEDERAL HOME LOAN BANK AND OTHER BORROWINGS Advances from the Federal Home Loan Bank consist of the following: December 31, ------------------------------------------------------ 2003 2002 -------------------------------------------------- Weighted Weighted Amount average rate Amount average rate -------------------------------------------------- (in thousands) Principal payments due during 2003 $ -- --% $ 27,000 5.70% 2004 22,268 2.38 52,000 5.23 2005 12,787 3.23 5,000 6.58 2006 13,206 3.23 25,000 5.44 2007 13,639 3.23 -- -- Thereafter 24,953 3.23 98,359 5.46 ------------------------------------------------ $86,853 3.01% $207,359 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, 2003. NOTE J - BENEFIT PLANS The Bank maintains a 401(k) profit-sharing plan for eligible employees. Participants may contribute up to 15% of pre-tax eligible compensation. The Bank makes matching discretionary contributions equal to 75% of the initial $1,000 deferral. Contributions to the 401(k) plan totaled $58,000, $52,000, and $48,000 in 2003, 2002 and 2001, respectively. 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. Continued 33 TF FINANCIAL CORPORATION & SUBSIDIARIES ================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued December 31, 2003 and 2002 NOTE J - BENEFIT PLANS - Continued The following tables sets forth the projected benefit obligation, funded status of the defined benefit pension plan and the amounts reflected in the consolidated statements of financial position, and fair value of assets of the plan. December 31, ------------------ 2003 2002 ------------------ (in thousands) Reconciliation of Projected Benefit Obligation Benefit obligation at beginning of year $ 2,612 $ 1,991 Service cost 191 172 Interest cost 185 163 Plan amendments -- 42 Actuarial (gain) loss 388 405 Benefits paid (348) (161) ------------------ Benefits obligation at end of year $ 3,028 $ 2,612 ================== Reconciliation of Fair Value of Assets Fair value of plan assets at beginning of year $ 2,726 $ 2,323 Actual return on plan assets 390 114 Employer contribution -- 450 Benefits paid (348) (161) ------------------ Fair value of plan assets at end of year $ 2,768 $ 2,726 ================== Reconciliation of Funded Status Funded status $ (260) $ 114 Unrecognized transition obligation 4 9 Unrecognized net actuarial loss (gain) 527 325 Unrecognized prior service cost 281 344 ------------------ Prepaid (accrued) benefit cost at end of year $ 552 $ 792 ================== The accumulated benefit obligation at December 31, 2003 and 2002 was $2,511,000 and $2,155,000 respectively. Employer contributions and benefits paid in the above table include only those amounts contributed directly to, or paid directly from, plan assets. The expected employer contribution for 2004 is $0. 2003 2002 ------------------ Weighted-average assumptions used to determine benefit obligations, end of year Discount rate 6.25% 6.75% Rate of compensation increase 4.00 4.00 Expected long-term return of plan assets 8.00 8.00 Continued 34 2003 ANNUAL REPORT ================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued December 31, 2003 and 2002 NOTE J - BENEFIT PLANS - Continued
2003 2002 2001 ------------------------- Components of net periodic benefit cost Service cost $ 191 $ 172 $ 114 Interest cost 185 163 194 Expected return on plan assets (217) (185) (231) Amortization of prior service cost 63 63 58 Amortization of transition obligation (asset) 4 4 -- Recognized net actuarial (gain) loss 13 -- -- ------------------------- Net periodic benefit cost $ 239 $ 217 $ 135 =========================
2003 2002 2001 ------------------------- Weighted-average assumptions used to determine net costs as of December 31 Discount rate 6.25% 6.75% 7.00% Expected return on plan assets 8.00 8.00 8.00 Rate of compensation increase 4.00 4.00 4.00
The long-term rate of return on assets was developed through analysis of historical market returns, current market conditions and the fund's past experience. Estimates of future market returns by asset category are lower than actual long-term historical returns in order to reflect current market conditions. Estimated future benefits payments are as follows: (in thousands) -------------------------------- 2004 $ 300 2005 309 2006 335 2007 186 2008 215 2009-2013 1,255 Continued 35 TF FINANCIAL CORPORATION & SUBSIDIARIES ================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued December 31, 2003 and 2002 NOTE J - BENEFIT PLANS - Continued The asset allocation for the Bank's pension plans at the end of 2003 and 2002, and the target allocation for 2004, by asset category, follows. The fair value of plan assets for these plans is $2.8 million and $2.8 million at the end of 2003 and 2002 respectively. Percentage of plan assets at year end ------------------------------------- 2004 2003 2002 Asset Category Equity securities 40% 41% 31% Fixed income securities 30% 14% 20% Cash 30% 45% 49% ------------------------------------- Total 100% 100% 100% ===================================== The Bank's pension plan assets are managed by the Trustees of the Retirement Plan of the Bank. Assets are rebalanced at the end of each quarter. The Bank's investment strategy with respect to pension assets is to maximize return while protecting principal. The Trustees have the flexibility to adjust the asset allocation and move funds to the asset class that offers the most opportunity for investment returns. The Company also maintains the following benefit plans: 1. Employee Stock Ownership Plan The Company established an internally leveraged ESOP for eligible employees who have completed six months of service with the Company or its subsidiaries. The ESOP borrowed $4.2 million from the Company to purchase 423,200 newly issued shares of common stock. The Company 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 Company accounts for its ESOP in accordance with SOP 93-6. As shares are released from collateral, the Company 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 $523,000, $197,000, and $162,000 in 2003, 2002 and 2001, respectively. 2003 2002 --------------------------- Allocated shares 144,600 133,200 Unreleased shares 218,400 240,100 --------------------------- Total ESOP shares 363,000 373,300 --------------------------- Fair value of unreleased shares $7,472,100 $5,933,900 =========================== Continued 36 2003 ANNUAL REPORT ================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued December 31, 2003 and 2002 NOTE J - BENEFIT PLANS - Continued 2. Stock Option Plans A summary of the status of the Company's fixed stock option plans as of December 31, 2003, and changes for each of the years in the three-year period then ended is as follows:
2003 2002 2001 ----------------------------------------------------------------------------- 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 658,973 $14.11 652,443 $13.52 659,759 $13.23 Options granted 40,248 32.42 32,150 24.77 24,275 20.30 Options exercised (92,902) 12.34 (21,338) 11.66 (23,276) 11.81 Options forfeited (20,605) 21.09 (4,282) 15.93 (8,315) 15.03 ------- ------- ------- Outstanding at end of year 585,714 $15.40 658,973 $14.11 652,443 $13.52 ======= ======= =======
The following table summarizes information about stock options outstanding at December 31, 2003:
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 2003 life (years) price 2003 price - ---------------------------------------------------------------------------------------------------- $10.83 - 14.30 313,508 1.16 years $11.64 304,908 $11.59 $14.31 - 18.00 180,957 3.11 years 15.98 176,761 16.01 $18.01 - 34.14 91,249 8.53 years 27.17 23,296 22.75
NOTE K - INCOME TAXES The components of income tax expense are summarized as follows:
Year ended December 31, ----------------------------- 2003 2002 2001 ----------------------------- (in thousands) Federal Current $(4,364) $ 1,623 $ 2,257 Charge in lieu of income tax relating to stock compensation 379 -- 3 Deferred 596 (19) (172) ----------------------------- (3,389) 1,604 2,088 State and local - current 5 1 (18) ----------------------------- Income tax provision (benefit) $(3,384) $ 1,605 $ 2,070 =============================
Continued 37 TF FINANCIAL CORPORATION & SUBSIDIARIES ================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued December 31, 2003 and 2002 NOTE K - INCOME TAXES - Continued The Company's effective income tax rate was different than the statutory federal income tax rate as follows: Year ended December 31, ---------------------------------- 2003 2002 2001 ---------------------------------- (in thousands) Statutory federal income tax (benefit) (34.0)% 34.0% 34.0% Increase (decrease) resulting from Tax-exempt income (2.6) (8.3) (5.3) State tax, net of federal benefit (0.0) 0.0 0.0 Other (0.1) (1.7) (2.2) ----------------------------------- (36.7)% 24.0% 26.5% =================================== Deferred taxes are included in the accompanying consolidated statements of financial position at December 31, 2003 and 2002, 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, 2003 and 2002. The Company's net deferred tax asset (liability) at December 31, 2003 and 2002, was composed of the following: December 31, ---------------- 2003 2002 ---------------- (in thousands) Deferred tax assets Deferred loan origination fees $ -- $ 12 Deferred compensation 230 330 Allowance for loan losses, net 650 746 Amortization 70 221 Unrealized loss on securities AFS 215 -- Other 3 -- ---------------- 1,168 1,309 Deferred tax liabilities Accrued pension expense 492 492 Unrealized gain on securities available for sale -- 976 Other 272 32 ---------------- 764 1,500 ---------------- Deferred tax (liability) asset $ 404 $ (191) ================ The Company 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. 38 2003 ANNUAL REPORT ================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued December 31, 2003 and 2002 NOTE L - REGULATORY MATTERS The Bank is subject to minimum regulatory capital standards promulgated by the Office of Thrift Supervision (OTS). Failure to meet minimum capital requirements can initiate certain mandatory - and possible additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Company'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 Company'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, 2003. As of December 31, 2003, management believes that the Bank met all capital adequacy requirements to which it was subject.
Regulatory capital December 31, 2003 --------------------------------------------------------------------- Tangible Core Risk-based Capital Percent Capital Percent Capital Percent --------------------------------------------------------------------- Capital under generally accepted accounting principles $ 48,241 8.00% $ 48,241 8.00% $ 48,241 15.15% Unrealized gain on certain available-for-sale securities 418 0.07 418 0.07 418 0.13 Goodwill and other intangible assets (4,692) (0.78) (4,692) (0.78) (4,692) (1.47) Additional capital items General valuation allowances - limited -- -- -- -- 2,111 0.66 --------------------------------------------------------------------- Regulatory capital computed 43,967 7.29 43,967 7.29 46,078 14.47 Minimum capital requirement 9,047 1.50 24,127 4.00 25,483 8.00 --------------------------------------------------------------------- Regulatory capital - excess $ 34,920 5.79% $ 19,840 3.29% $ 20,595 6.47% ====================================================================
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 loss 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 50,986 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% $ 24,240 7.25% ====================================================================
Continued 39 TF FINANCIAL CORPORATION & SUBSIDIARIES ================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued December 31, 2003 and 2002 NOTE L - REGULATORY MATTERS - Continued At December 31, 2003, 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. NOTE M - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK The Company 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 Company'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 Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. Unless noted otherwise, the Company requires collateral to support financial instruments with credit risk. Financial instruments, the contract amounts of which represent credit risk, are as follows: December 31, ---------------------------------- 2003 2002 ---------------------------------- (in thousands) Commitments to extend credit $74,716 $35,983 Standby letters of credit 1,276 1,548 Loans sold with recourse 113 163 ---------------------------------- $76,105 $37,694 ================================== 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 Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if it is deemed necessary by the Company 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. 40 2003 ANNUAL REPORT ================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued December 31, 2003 and 2002 NOTE N - COMMITMENTS AND CONTINGENCIES The Bank had no commitments to sell mortgage loans to investors at December 31, 2003 and 2002. The Bank leases branch facilities and office space 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 $304,000, $279,000, and $316,000, for the years ended December 31, 2003, 2002 and 2001, 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, ------------------------- 2004 $214,902 2005 143,817 2006 112,143 2007 113,645 2008 58,725 Thereafter -- ------------------------- $643,232 ========================= The Company has agreements with certain key executives that provide severance pay benefits if there is a change in control of the Company. The agreements will continue in effect until terminated or not renewed by the Company or key executives. Upon a change in control, the Company 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, 2003 was approximately $994,900. From time-to-time, the Company 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 Company's consolidated financial position or results of operations. NOTE O - SIGNIFICANT CONCENTRATIONS OF CREDIT RISK The Bank is principally engaged in originating and investing in one-to-four family residential and commercial real estate loans in eastern Pennsylvania and New Jersey. The Bank offers both fixed and adjustable rates of interest on these loans that have amortization terms ranging to 30 years. The loans are generally originated or purchased on the basis of an 80% loan-to-value ratio, which has historically provided the Bank with more than adequate collateral coverage in the event of default. Nevertheless, the Bank, as with any lending institution, is subject to the risk that residential real estate values in the primary lending areas will deteriorate, thereby potentially impairing collateral values in the primary lending areas. However, management believes that residential and commercial real estate values are presently stable in its primary lending areas and that loan loss allowances have been provided for in amounts commensurate with its current perception of the foregoing risks in the portfolio. NOTE P - FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires all entities to disclose the estimated fair value of their assets and liabilities considered to be financial instruments. For the Bank, as for most financial institutions, the majority of its assets and liabilities are considered financial instruments as defined in SFAS No. 107. However, many such instruments lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction. Also, it is the Company'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 Company 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. Continued 41 TF FINANCIAL CORPORATION & SUBSIDIARIES ================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued December 31, 2003 and 2002 NOTE P - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued 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, ------------------------------------------------- 2003 2002 ------------------------------------------------- Fair Carrying Fair Carrying value value value value ------------------------------------------------- (in thousands) Cash and cash equivalents $ 8,241 $ 8,241 $100,580 $100,580 Investment securities 25,248 24,822 42,430 41,806 Mortgage-backed securities 131,548 130,404 172,589 169,835
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, -------------------------------------------- 2003 2002 -------------------------------------------- Fair Carrying Fair Carrying value value value value -------------------------------------------- (in thousands) Assets Interest-bearing deposits with banks $ 155 $ 155 $ 220 $ 220 Liabilities Deposits with stated maturities 147,937 146,960 149,033 146,762 Borrowings with stated maturities 86,618 86,853 225,738 207,359
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, -------------------------------------------- 2003 2002 -------------------------------------------- Fair Carrying Fair Carrying value value value value -------------------------------------------- (in thousands) Deposits with no stated maturities $312,383 $312,383 $295,796 $295,796 =========================================
Continued 42 2003 ANNUAL REPORT ================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued December 31, 2003 and 2002 NOTE P - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued 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, -------------------------------------------- 2003 2002 -------------------------------------------- Fair Carrying Fair Carrying value value value value -------------------------------------------- (in thousands) Net loans $412,741 $404,649 $382,796 $370,092 =========================================
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 not material. The Bank's remaining assets and liabilities are not considered financial instruments. No disclosure of the relationship value of the Bank's deposits is required by SFAS No. 107. NOTE Q - SERVICE FEES, CHARGES AND OTHER OPERATING INCOME AND OTHER OPERATING EXPENSE Year ended December 31, ------------------------ 2003 2002 2001 ------------------------ (in thousands) Service fees, charges and other operating income Loan servicing fees $ 358 $ 338 $ 241 Late charge income 100 99 105 Deposit service charges 923 750 835 Bank-owned life insurance value increase 553 520 174 Other income 438 407 379 ------------------------ $2,372 $2,114 $1,734 ======================== Other operating expense Insurance and surety bond $ 180 $ 146 $ 128 Office supplies 234 192 249 Loan expense 491 272 359 Loan servicing fees 32 127 223 Postage 299 299 261 Telephone 283 262 286 Service charges on bank accounts 85 95 205 Supervisory examination fees 147 148 141 Other expenses 1,096 795 720 ------------------------ $2,847 $2,336 $2,572 ======================== 43 TF FINANCIAL CORPORATION & SUBSIDIARIES ================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued December 31, 2003 and 2002 NOTE R - SHAREHOLDER RIGHTS PLAN The Company adopted a Shareholder Rights Plan (the Rights Plan) to protect shareholders from attempts to acquire control of the Company at an inadequate price. Under the Rights Plan, the Company 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 Company earlier redeems the Rights. 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 Company's common shares or the common shares of the potential acquirer at a substantially reduced price. The Company 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 Company's common stock. Following the acquisition by a person or group of beneficial ownership of 15% or more of the Company'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 Company. The issuance of rights has no dilutive effect, did not affect the Company's reported earnings per share, and was not taxable to the Company or its shareholders. NOTE S - EARNINGS PER SHARE The following tables illustrate the reconciliation of the numerators and denominators of the basic and diluted earnings per share computations (dollars in thousands, except per share data):
Year ended December 31, 2003 ----------------------------------------- Weighted average Income shares Per share (numerator) (denominator) amount ----------------------------------------- Basic earnings (loss) per share Income (loss) available to common stockholders $(5,834) 2,541,677 $(2.30) Effect of dilutive securities Stock options -- -- -- ----------------------------------------- Diluted earnings (loss) per share Income available to common stockholders plus effect of dilutive securities $(5,834) 2,541,677 $(2.30) =========================================
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 44 2003 ANNUAL REPORT ================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued December 31, 2003 and 2002 NOTE S - 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. NOTE T - SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATE (UNAUDITED)
Three months ended --------------------------------------------- Dec. 31, Sept. 30, June 30, March 31, 2003 2003 2003 2003 --------------------------------------------- (in thousands, except per share data) Total interest income $7,729 $7,835 $8,156 $8,657 Total interest expense 2,188 3,716 4,525 4,823 Net interest income 5,541 4,119 3,631 3,834 Provision for possible loan losses 60 90 90 90 --------------------------------------------- Net interest income after provision 5,481 4,029 3,541 3,744 Other income 636 322 648 1,084 Other expenses 3,887 17,478 3,599 3,739 --------------------------------------------- Income before income taxes 2,230 (13,127) 590 1,089 Income taxes 714 (4,562) 154 310 --------------------------------------------- Net income (loss) $1,516 $(8,565) $ 436 $ 779 ============================================= Earnings (loss) per share - basic $ 0.59 $ (3.33) $ 0.17 $ 0.31 Earnings (loss) per share - assuming dilution $ 0.54 $ (3.33) $ 0.16 $ 0.29
Continued 45 TF FINANCIAL CORPORATION & SUBSIDIARIES ================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued December 31, 2003 and 2002 NOTE T - SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATE (UNAUDITED) - Continued
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
NOTE U - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY Condensed financial information for TF Financial Corporation (parent company only) follows: December 31, ---------------------- 2003 2002 ---------------------- (in thousands) BALANCE SHEET ASSETS Cash $ 4,953 $ 5,683 Certificates of deposit - other institutions 155 220 Investment in Third Federal 46,597 53,311 Investment in TF Investments 2,321 2,282 Investment in Teragon 7 9 Investment in Penns Trail Development 1,010 1,045 Other assets 488 315 ---------------------- Total assets $55,531 $62,865 ====================== LIABILITIES AND STOCKHOLDERS' EQUITY Total liabilities $ 51 $ 25 Stockholders' equity 55,480 62,840 ---------------------- Total liabilities and stockholders' equity $55,531 $62,865 ====================== Continued 46 2003 ANNUAL REPORT ================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued December 31, 2003 and 2002 NOTE U - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY - Continued STATEMENT OF OPERATIONS Year ended December 31, ---------------------------- 2003 2002 2001 ---------------------------- (in thousands) INCOME Equity in earnings of subsidiaries $(5,556) $ 5,269 $ 5,825 Interest and dividend income 99 110 108 Other -- -- 29 ---------------------------- Total income (loss) (5,457) 5,379 5,962 ---------------------------- EXPENSES Other 377 287 229 ---------------------------- Total expenses 377 287 229 ---------------------------- NET INCOME (LOSS) $(5,834) $ 5,092 $ 5,733 ============================
Year ended December 31, ----------------------------- 2003 2002 2001 ----------------------------- (in thousands) STATEMENT OF CASH FLOWS Cash flows from operating activities Net income (loss) $(5,834) $ 5,092 $ 5,733 Adjustments to reconcile net income to net cash provided by (used in) operating activities Equity in (earnings) loss of subsidiaries 5,556 (5,269) (5,825) (Gain) on sale of investment securities -- -- (7) Net change in assets and liabilities (147) (64) (97) ----------------------------- Net cash used in operating activities (425) (241) (196) ----------------------------- Cash flows from investing activities Capital distribution from subsidiaries -- 5,853 2,053 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 65 (26) (4) ----------------------------- Net cash provided by investing activities 65 5,077 2,556 ----------------------------- Cash flows from financing activities Cash dividends paid to stockholders (1,518) (1,484) (1,424) Treasury stock acquired -- (376) (1,110) Exercise of stock options 1,148 249 278 ----------------------------- Net cash used in financing activities (370) (1,611) (2,256) ----------------------------- NET INCREASE (DECREASE) IN CASH (730) 3,225 104 Cash at beginning of year 5,683 2,458 2,354 ----------------------------- Cash at end of year $ 4,953 $ 5,683 $ 2,458 ============================= Supplemental disclosure of cash flow information Cash paid during the year for income taxes $ -- $ -- $ -- =============================
47 BOARD OF DIRECTORS AND MANAGEMENT TEAM
================================================================================================ TF FINANCIAL CORPORATION - ------------------------------------------------------------------------------------------------ Board of Directors Executive Officers Robert N. Dusek Kent C. Lufkin Chairman of the Board President and Chief Executive Officer Carl F. Gregory Dennis R. Stewart Executive Vice President and Chief Financial Officer Dennis L. McCartney Elizabeth Davidson Maier George A. Olsen Senior Vice President and Corporate Secretary John R. Stranford Albert M. Tantala THIRD FEDERAL SAVINGS BANK - ------------------------------------------------------------------------------------------------ Board of Directors Executive Officers George A. Olsen Kent C. Lufkin Chairman of the Board President and Chief Executive Officer Carl F. Gregory Dennis R. Stewart Chairman Emeritus Executive Vice President and Chief Financial Officer Robert N. Dusek Floyd P. Haggar Senior Vice President and Chief Lending Officer William J. Happ, Jr. Cynthia G. Mullen Kent C. Lufkin Senior Vice President and Retail Banking Officer Dennis L. McCartney Elizabeth Davidson Maier Senior Vice President Kenneth A. Swanstrom Lorraine A. Wolf Albert M. Tantala Corporate Secretary Independent Auditors Special Counsel Transfer Agent and Registrar Grant Thornton LLP Malizia Spidi & Fisch, P.C. Computershare Investor Services Two Commerce Square 1100 New York Avenue, NW 350 Indiana Street 2001 Market Street Suite 340 West Suite 800 Philadelphia, PA 19103-7080 Washington, DC 20005 Golden, CO 80401
48 THIRD FEDERAL SAVINGS BANK LOCATIONS Corporate Office Operations 3 Penns Trail 215.579.4600 Newtown, PA 18940-3433 www.thirdfedbank.com 215.579.4000 e-mail: service@thirdfedbank.com
PENNSYLVANIA BRANCHES Bucks County Feasterville Office New Britain Office Cross Keys Office Buck Hotel Complex 600 Town Center 834 North Easton Highway Feasterville, PA 19053-2209 New Britain, PA 18901-5199 Doylestown, PA 18901-1007 215.364.7096 215.345.5800 215.348.5566 Newtown Office Doylestown Office Route 332 and Campus Drive 60 North Main Street Newtown, PA 18940-4018 Doylestown, PA 18901-3730 215.968.4444 215.348.9021 Philadelphia County Frankford Office Fishtown Office Mayfair Office 4625 Frankford Avenue York & Memphis Streets Roosevelt Blvd. at Unruh Philadelphia, PA 19124-5889 Philadelphia, PA 19125-3029 Philadelphia, PA 19149-2494 215.289.1400 215.423.2314 215.332.7650 Bridesburg Office Woodhaven Office Northern Liberties Office Orthodox & Almond Streets Knights Road Center 905 North 2nd Street Philadelphia, PA 19137-1626 Knights & Woodhaven Roads Philadelphia, PA 19123-4226 215.743.6673 Philadelphia, PA 19154-2810 215.922.0217 215.824.0151 NEW JERSEY BRANCHES Mercer Couty Ewing Office Quakerbridge Road Office Hamilton Square Office 2075 Pennington Road Village Square Plaza 1850 Route 33 Ewing, NJ 08618-1003 Lawrenceville, NJ 08648-2674 Hamilton Square, NJ 08690-1712 609.883.7033 609.689.1010 609.890.1333
EX-21 6 ex-21_0084.txt SUBSIDIARIES EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT Parent - ------ TF Financial Corporation Percentage Jurisdiction of Subsidiaries Owned Incorporation - ------------ ---------- ------------- Third Federal Savings Bank (a) 100% United States TF 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 2003 Annual Report to Stockholders incorporated herein by reference. (b) Third Delaware Corporation is a wholly-owned subsidiary of Third Federal Savings Bank. EX-23 7 ex-23_0084.txt CONSENT CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our report dated January 23, 2004, 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, 2003. 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, 2004 EX-31 8 ex-31_0084.txt CERTIFICATION Exhibit 31.0 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Kent C. Lufkin, 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 Rule 13a-15(e)) for the Registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the Registrant's internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) that occurred during the Registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and to the audit committee of the issuer's board of directors (or persons performing similar functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting. /s/ Kent C. Lufkin -------------------------------------- Date: March 26, 2004 Kent C. Lufkin President and Chief Executive Officer (Principal Executive Officer) Exhibit 31.0 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Dennis R. Stewart, Executive 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 Rule 13a-15(e)) for the Registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the Registrant's internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) that occurred during the Registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and to the audit committee of the issuer's board of directors (or persons performing similar functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting. /s/ Dennis R. Stewart ----------------------------------------- Date: March 26, 2004 Dennis R. Stewart Executive Vice President and Chief Financial Officer (Principal Financial & Accounting Officer EX-32 9 ex-32_0084.txt CERTIFICATION EXHIBIT 32.0 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, 2003 (the "Report") of TF Financial Corporation (the "Company") as filed with the Securities and Exchange Commission, we, Kent C. Lufkin, President and Chief Executive Officer, and Dennis R. Stewart, Executive 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/ Kent C. Lufkin /s/ Dennis R. Stewart - ------------------------------------- -------------------------------------- Kent C. Lufkin Dennis R. Stewart President and Chief Executive Officer Executive Vice President and Chief Financial Officer March 26, 2004 -----END PRIVACY-ENHANCED MESSAGE-----