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