-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HbSLa9u/z2x9AGNmI/qnMhLixzrTM1rQg8OoHap9kax4GY92ohaRbiSvxcnJ7E9A QaF5+kBj62LFHcCdUl/xaQ== 0000946275-97-000156.txt : 19970430 0000946275-97-000156.hdr.sgml : 19970430 ACCESSION NUMBER: 0000946275-97-000156 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: TF FINANCIAL CORP CENTRAL INDEX KEY: 0000921051 STANDARD INDUSTRIAL CLASSIFICATION: 6035 IRS NUMBER: 742705050 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-24168 FILM NUMBER: 97567015 BUSINESS ADDRESS: STREET 1: 3 PENNS TRAIL CITY: NEWTOWN STATE: PA ZIP: 18940 BUSINESS PHONE: 2155794000 MAIL ADDRESS: STREET 1: 3 PENNS TRAIL CITY: NEWTOWN STATE: PA ZIP: 18940 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------- FORM 10-K (Mark One) X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES - - ---- EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1996 ------------------------------------ - or - TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES |_| EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from _________________ to _____________________ Commission Number: 0-24168 TF FINANCIAL CORPORATION -------------------------------------------------------- (Exact name of Registrant as specified in its Charter) Delaware 74-2705050 - - ----------------------------------------------- ------------------- (State or other jurisdiction of incorporation (I.R.S. Employer or organization) Identification No.) 3 Penns Trail, Newtown, Pennsylvania 18940 - - ----------------------------------------------- -------------------- (Address of principal executive offices) Zip Code Registrant's telephone number, including area code: (215) 579-4000 --------------- Securities registered pursuant to Section 12(b) of the Act: None ------------ Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.10 per share -------------------------------------- (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] The aggregate market value of the voting stock held by non-affiliates of the Registrant, based on the (18.875) average bid price of the Registrant's Common Stock as quoted on the Nasdaq System on March 3, 1997, was $57.3 million (3,033,147 shares at $18.875 per share). As of March 11, 1997 there were outstanding 4,217,386 shares of the Registrant's Common Stock. DOCUMENTS INCORPORATED BY REFERENCE 1. Portions of the Annual Report to Stockholders for the Fiscal Year Ended December 31, 1996. (Parts I, II and IV) 2. Portions of the Proxy Statement for the 1997 Annual Meeting of Stockholders. (Part III) PART I Item 1. Business - - ----------------- BUSINESS OF THE COMPANY On July 13, 1994, the Registrant, TF Financial Corporation (the "Company") consummated its public offering for 5,290,000 shares of its common stock and acquired Third Federal Savings Bank (the "Savings Bank" or "Third Federal") as part of the Savings Bank's conversion from a mutual to a stock federally chartered savings bank. The Registrant was incorporated under Delaware law in March 1994. The Registrant is a savings and loan holding company and is subject to regulation by the Office of Thrift Supervision (the "OTS"), the Federal Deposit Insurance Corporation (the "FDIC") and the Securities and Exchange Commission (the "SEC"). Currently, the Registrant does not transact any material business other than through its subsidiaries, the Savings Bank, TF Investments Corporation and Penns Trail Development Corporation. TF Investments Corporation loaned $21.6 million, on a short-term basis, to Third Federal. Penns Trail Development Corporation was incorporated on June 15, 1995 for the purpose of land related business opportunities. At December 31, 1996, the Company had total assets of $647.9 million, total deposits of $469.1 million and stockholders' equity of $72.6 million. On August 19, 1994, the Board of Directors approved the change in the Company's fiscal year from June 30 to December 31. BUSINESS OF THE SAVINGS BANK Third Federal, originally organized in 1921 as a Pennsylvania-chartered building and loan association, converted to a federally chartered mutual savings and loan association in 1935. The Savings Bank's deposits are insured up to the maximum amount allowable by the FDIC. The Savings Bank is a community oriented savings institution offering a variety of financial services to meet the needs of the community it serves. The Savings Bank significantly expanded its operations throughout Philadelphia and Bucks Counties, Pennsylvania in June 1992 through its acquisition of Doylestown Federal Savings and Loan Association ("Doylestown"). On September 20, 1996, Third Federal acquired three branch offices, certain assets and $143 million of deposits from Cenlar Federal Savings Bank, Trenton, New Jersey ("Cenlar"). As a result of the Cenlar acquisition, Third Federal currently operates eleven branch offices in Bucks and Philadelphia counties, Pennsylvania and three branch offices in Mercer County, New Jersey. This acquisition was consistent with the Savings Bank's strategic goal of growing its market share within its market area and reaching into adjacent market areas, through low-cost, fill-in or market-extension acquisitions. The Savings Bank attracts deposits from the general public and uses such deposits, together with borrowings and other funds, primarily to invest in mortgage-backed and investment securities and to originate or purchase loans secured by first mortgages on owner - occupied, one- to four-family residences in its market area. At December 31, 1996, one- to four-family residential mortgage loans totaled $265.6 million or 85.8% of the Savings Bank's total loan portfolio. At that same date, the Savings Bank had approximately $175.8 million or 27.1% of total assets invested in mortgage-backed securities and $51.0 million or 7.9% of total assets in investment securities. To a lesser extent, the Savings Bank also originates commercial real estate and multi-family, construction and consumer loans. Market Area Third Federal operated five offices in Philadelphia County and six offices in Bucks County, Pennsylvania. These two counties cover the city of Philadelphia and the northeast suburbs of 1 Philadelphia. The population of these two counties total over 2.1 million. The Savings Bank also operates three branch offices in Mercer County, New Jersey. The population of Bucks and Mercer Counties, have experienced distinctly different economic and demographic trends over recent decades. Whereas Philadelphia County has experienced a population decline and has offered very limited lending opportunities, Bucks and Mercer Counties, with growing population, has offered Third Federal much greater lending opportunities. Competition Third Federal faces varying degrees of competition from local thrifts and credit unions at its various branch locations. Stronger competition has come from local and much larger regional banks based in and around the Philadelphia area. Commercial banks hold approximately 79% of the deposit market in Philadelphia County, 69% in Bucks County and 66% in Mercer County. Third Federal's share of the deposit market in Philadelphia, Bucks and Mercer Counties is very small, at 0.81%, 1.87% and 1.87%, respectively. Between 1980 and 1990, Bucks County's population grew approximately 13%, Mercer County by 9%, while Philadelphia County's population declined by 6%. The per capita income in Bucks County ($22,548) exceeds those of the U.S. ($18,696), the State ($18,679), Mercer County ($18,040) and Philadelphia County ($16,721). The drop in population and the lower per capita income in Philadelphia County can also be attributed to the loss of well-paying manufacturing jobs as companies transferred out of the City of Philadelphia and the State. Between 1982 and 1991, the number of employees in goods-producing industries declined over 14% while those employed in the service industries increased by approximately 20%. As of December 31, 1996, there were 47 thrift offices in Bucks County holding 22.13% of deposits, Commercial Banks had 138 offices and held 68.50% of deposits; Credit Unions had 18 offices and held 9.37% of deposits; Third Federal's six offices held 1.87% of the total share. Lending Activities General. The Savings Bank's loan portfolio composition consists primarily of conventional adjustable-rate ("ARM") and fixed-rate first mortgage loans secured by one- to four-family residences. The Savings Bank also makes commercial real estate and multi-family loans, construction loans and consumer and other loans. At December 31, 1996, the Savings Bank's mortgage loans outstanding were $290.8 million, of which $265.6 million were one- to four-family residential mortgage loans. Of the one- to four-family residential mortgage loans outstanding at that date, 28.9% were ARM's and 71.1% were fixed-rate loans. Total ARM mortgage loans in the Savings Bank's portfolio at December 31, 1996, amounted to $88.1 million or 30.2% of total mortgage loans. At that same date, commercial real estate and multi-family residential and construction loans totalled $20.4 million and $4.7 million, respectively. Consumer and other loans held by the Savings Bank totalled $21.1 million or 6.8% of total loans outstanding at December 31, 1996, of which $9.7 million or 3.1% consisted of home equity and second mortgages. At that same date commercial business loans, leases and other loans totalled $3.1 million, $3.1 million and $5.2 million, respectively. 2 The following table sets forth the composition of the Savings Bank's loan portfolio and mortgage-backed and related securities portfolios in dollar amounts and in percentages of the respective portfolios at the dates indicated.
At December 31, At June 30, ------------------------------------------------------ -------------------------------------------------- 1996 1995 1994 1994 1993 1992 ----------------- ----------------- ---------------- --------------- ----------------- --------------- Percent Percent Percent Percent Percent Percent Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total ----- -------- ------- -------- ------ -------- ------ -------- ------ -------- ------ -------- Mortgage loans: One- to four-family ....$265,618 85.16% $204,430 85.00% $ 80,862 69.70% $ 85,641 70.40% $104,577 71.52% $120,637 67.58% Commercial real e state and multi- family ............... 20,427 6.55 10,294 4.28 11,285 9.73 12,456 10.24 16,140 11.04 21,932 12.29 Construction ........... 4,720 1.51 3,604 1.50 1,534 1.32 607 0.50 542 0.37 474 0.27 -------- ------- -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ Total mortgage loan.............. 290,765 93.22 218,328 90.78 93,681 80.75 98,704 81.14 121,259 82.93 143,043 80.14 Consumer and other loans: Home equity and second mortgage ............. 9,661 3.10 10,635 4.42 11,663 10.05 11,689 9.61 10,989 7.52 9,885 5.54 Commercial business .... 3,126 1.00 2,887 1.20 3,679 3.17 4,285 3.52 5,980 4.09 16,260 9.11 Leases ................. 3,093 0.99 3,590 1.49 2,194 1.89 2,828 2.33 3,847 2.63 3,488 1.95 Other .................. 5,261 1.69 5,072 2.11 4,796 4.14 4,138 3.40 4,145 2.83 5,821 3.26 -------- ------- -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ Total consumer and other loans . 21,141 6.78 22,184 9.22 22,332 19.25 22,940 18.86 24,961 17.07 35,454 19.86 -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ Total loans ....... 311,906 100.00% 240,512 100.00% 116,013 100.00% 121,644 100.00% 146,220 100.00% 178,479 100.00% ======== ====== ======== ====== ======== ====== ======== ====== ======== ====== ======== ====== Less: Unearned discount, premium, deferred loan fees, net ....... 530 753 647 748 1,265 1,742 Allowance for loan losses................ 1,806 1,484 1,473 1,450 1,656 1,800 -------- -------- -------- -------- -------- -------- Total loans, net....$309,570 $238,275 $113,893 $119,446 $143,299 $174,955 ======== ======== ======== ======== ======== ======== Mortgage-backed securities held to maturity: FHLMC ..................$ 90,016 58.54% $ 65,834 47.76% $ 85,524 47.14% $ 68,526 44.41% $ 54,093 56.44% $ 37,902 49.63% FNMA ................... 27,547 17.92 33,150 24.05 39,713 21.89 29,201 18.93 6,831 7.13 5,480 7.18 GNMA ................... 6,043 3.93 7,644 5.55 9,358 5.16 9,653 6.26 7,480 7.81 9,517 12.46 Real estate investment mortgage conduit ..... 29,220 19.00 30,033 21.79 46,603 25.69 46,437 30.10 26,113 27.25 20,178 26.42 Collateralized mortgage obligations .......... -- -- 19 0.01 213 0.12 471 0.30 1,319 1.37 3,290 4.31 Other mortgage-backed securities ........... 932 0.61 1,161 0.84 -- -- -- -- -- -- -- -- -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ Total mortgage-backed and related securities held to maturity ...........$153,758 100.00% $137,841 100.00% $181,411 100.00% $154,288 100.00 $ 95,836 100.00% $ 76,367 100.00% ======== ====== ======== ====== ======== ====== ======== ====== ======== ====== ======== ====== Mortgage-backed securities available for sale: FHLMC ................$ 8,905 40.43% $ 15,422 52.03% $ -- --% FNMA ................. 3,240 14.71 4,010 13.53 -- -- Real estate investment mortgage conduit ............ 9,882 44.86 10,208 34.44 -- -- -------- ------ -------- ------ -------- ----- Total ..............$ 22,027 100.00% $ 29,640 100.00% $ -- --% ======== ====== ======== ====== ======== =====
3 The following table sets forth the Savings Bank's loan originations and loan and mortgage-backed and related securities purchases, sales and principal payments for the periods indicated:
Six Months Year Ended Year Ended Ended Year Ended December 31, December 31, December 31, June 30, ------------ ----------- ----------- -------- 1996 1995 1994 1994 1993 ------ ------ ------ ------ ----- (In Thousands) Total loans receivable (gross): At beginning of period ............................. $240,512 $116,013 $ 121,644 $ 146,220 $ 178,497 Mortgage loans originated: One- to four-family ............................. 64,643 41,627 811 8,982 13,503 Commercial real estate and multi-family ......... 8,488 -- -- 925 2,729 Construction .................................... 14,465 6,859 -- 1,132 948 --------- --------- --------- --------- --------- Total mortgage loans originated ............. 87,596 48,486 811 11,039 17,180 Mortgage loans purchased: One- to four-family ............................. 82,363 94,732 -- 370 -- Other non-residential ........................... 358 -- 2,000 -- -- Total mortgage loans purchased .............. 82,721 94,732 2,000 370 -- --------- --------- --------- --------- --------- Total mortgage loans originated and purchased...... 170,317 143,218 2,811 11,409 17,180 Consumer loans originated ......................... 4,473 6,611 2,849 4,204 9,675 Transfer of mortgage loans to real estate owned.... (242) (136) (103) (557) (150) Sale of loans ..................................... (19,591) -- -- (949) -- Loans securitized ................................. (28,212) -- -- -- -- Principal repayments .............................. (55,351) (25,194) (11,188) (38,683) (58,982) --------- --------- --------- --------- --------- Total loans receivable at end of period............ $ 311,906 $ 240,512 $ 116,013 $ 121,644 $ 146,220 ========= ========= ========= ========= ========= Mortgage-backed securities: Held to maturity: At beginning of period ............................ $137,841 $18,411 $154,288 $ 95,836 $ 76,367 Mortgage-backed securities purchased .............. 45,349 10,198 38,014 88,042 44,236 Mortgage-backed securities sold ................... -- -- -- -- -- Transferred to available for sale ................. -- (29,640) -- -- -- Amortization and repayments ....................... (29,432) (24,128) (10,891) (29,590) (24,767) --------- --------- --------- --------- --------- At end of period .................................. $ 153,758 $ 137,841 $ 181,411 $ 154,288 $ 95,836 ========= ========= ========= ========= ========= Available for sale: At beginning of period ............................ $ 29,640 $ -- Transferred from held to maturity ................. -- 29,640 Mortgage-backed securities purchased .............. 4,952 -- Mortgage-backed securities sold ................... (8,943) -- Amortization and repayments ....................... (3,622) -- --------- -------- At end of period .................................. $ 22,027 $ 29,640 ========= ========
4 Maturity of Loans and Mortgage-backed and Related Securities. The following table sets forth the maturity of Third Federal's loan and mortgage-backed securities at December 31, 1996. The table does not include prepayments or scheduled principal repayments. Prepayments and scheduled principal repayments on loans totalled $53.6 million, $25.2 million, $11.2 million, $38.7 million and $59.0 million, for the years ended December 31, 1996 and 1995, the six months ended December 31, 1994, and the years ended June 30, 1994 and 1993, respectively. Adjustable-rate mortgage loans are shown as maturing based on contractual maturities.
Commercial Mortgage- One- to Real Estate Backed Four- and Multi- Consumer Total Loans and Related Family Family Construction and Other Receivable Securities Total ------ -------- ------------ --------- ----------- ---------- ----- (In Thousands) Non-performing......... $ 922 $ -- $ -- $ 1,050 $ 1,972 $ - $ 1,972 Amounts Due: Within 3 months........ -- 1,165 11,008 15 12,188 365 12,553 3 months to 1 Year..... 64 551 476 2,288 3,379 7,962 11,341 After 1 year: 1 to 3 years......... 34 199 2,477 1,127 3,837 12,246 16,083 3 to 5 years......... 17,645 1,961 -- 4,293 23,899 17,153 41,052 5 to 10 years........ 45,665 12,175 -- 9,797 67,637 24,690 92,327 10 to 20 years....... 73,834 4,378 -- 2,571 80,783 63,591 144,374 Over 20 years........ 127,454 -- -- -- 127,454 49,778 177,232 Total due after one year 264,632 18,713 2,477 17,788 303,610 167,458 471,068 Total amounts due...... 265,618 20,429 13,961 21,141 321,149 175,785 496,934 Less: Allowance for loan loss 1,330 102 24 350 1,806 -- 1,806 Loans in process....... -- 2 9,241 -- 9,243 -- 9,243 Deferred loan fees..... 521 -- -- 9 530 -- 530 ------- ------- ------ ------- -------- -------- -------- Total.............. $263,767 $ 20,325 $ 4,696 $ 20,782 $ 309,570 $ 175,785 $ 485,355 ======= ======= ====== ======= ======== ======== ========
5 The following table sets forth the dollar amount of all loans due after December 31, 1997, which have predetermined interest rates and which have floating or adjustable interest rates. Fixed Floating or Rates Adjustable Rates Total ----- ---------------- ----- (In Thousands) One- to four-family ................... $187,790 $ 76,830 $264,620 Commercial real estate and multi-family 12,055 6,416 18,471 Construction .......................... -- 2,477 2,477 Consumer and other .................... 10,429 6,959 17,388 -------- -------- -------- Total ............................... $210,274 $ 92,682 $302,956 ======== ======== ======== One- to Four-Family Mortgage Loans. The Savings Bank offers first mortgage loans secured by one- to four-family residences in the Savings Bank's lending area. Typically, such residences are single-family homes that serve as the primary residence of the owner. The Savings Bank generally originates and invests in one- to four-family residential mortgage loans in amounts up to 80% of the lesser of the appraised value or selling price of the mortgaged property. Loans originated in amounts over 80% of the lesser of the appraised value or selling price of the mortgaged property, other than loans to facilitate the sale of real estate acquired through foreclosure, must be owner-occupied and private mortgage insurance must be provided on the amount in excess of 80%. Loan originations are generally obtained from existing or past customers, members of the local community, and referrals from established builders and realtors within the Savings Bank's lending area. Mortgage loans originated and held by the Savings Bank in its portfolio generally include due-on sale clauses which provide the Savings Bank with the contractual right to deem the loan immediately due and payable in the event that the borrower transfers ownership of the property without the Savings Bank's consent. At December 31, 1996, 91.3% of mortgage loans consisted of one- to four-family residential loans, of which 28.9% were ARM loans. The Savings Bank has historically not originated a large amount of ARM loans. The Savings Bank acquired $55.5 million or 96.9% of its ARM loans when it merged with Doylestown in June 1992. The Savings Bank offers a variety of ARM loans with terms of 30 years which adjust at the end of 6 months, one, three, five, seven and ten years and adjust by a maximum of 1 to 2 % per adjustment with a lifetime cap of 5 to 6% over the life of the loan. The ARM loans acquired as a result of the Doylestown merger adjust at the end of one or three years and adjust by a maximum of 2.00% per adjustment with a lifetime cap of 5.00% over the life of the loan The Savings Bank offers fixed-rate mortgage loans with terms of 10 to 30 years, which are payable monthly. The Savings Bank has continued its emphasis on fixed-rate mortgage loans with terms of 15 years or less. Interest rates charged on fixed-rate mortgage loans are competitively priced based on market conditions and the Savings Bank's cost of funds. The origination fees for fixed-rate loans were generally 3.0% at December 31, 1996. Generally, the Savings Bank's standard underwriting guideline for fixed-rate mortgage loans conform to the FHLMC and FNMA guidelines and may be sold in the secondary market. The Savings Bank has in the past sold a portion of its conforming fixed-rate mortgage loans in the secondary market to federal agencies while retaining the servicing rights on all such loans. The Savings Bank, however, is primarily a portfolio lender. As of December 31, 1996, the Savings Bank's portfolio of loans serviced for others totalled approximately $72.4 million. 6 Commercial Real Estate and Multi-Family Loans. The Savings Bank has historically originated a limited number of loans secured by commercial real estate including non-owner occupied residential multi-family dwelling units (more than four units) primarily secured by professional office buildings and apartment complexes. In June, 1992, the Savings Bank acquired by merger, the assets and liabilities of Doylestown, which included $8.9 million in commercial real estate and multi-family loans. At December 31, 1996, $20.4 million, or 6.6% of the Savings Bank's total loan portfolio was secured by commercial real estate located primarily in the Savings Bank's primary market area. The Savings Bank generally originates commercial real estate and multi-family loans up to 75% of the appraised value of the property securing the loan. Currently, it is the Savings Bank's philosophy to originate commercial real estate and multi-family loans only to borrowers known to the Savings Bank and on properties in its market area. The commercial real estate and multi-family loans in the Savings Bank's portfolio consist of fixed-rate, ARM and balloon loans which were originated at prevailing market rates for terms of up to 20 years. The Savings Bank's current policy is to originate commercial real estate and multi-family loans as ARM's that are generally amortized over a period of 15 years or as balloon loans which generally have terms of 5 to 10 years, with 20-25 year amortizations. Loans secured by commercial and multi-family real estate are generally larger and involve a greater degree of risk than one- to four-family residential mortgage loans. Of primary concern in commercial and multi-family real estate lending is the borrower's creditworthiness and the feasibility and cash flow potential of the project. Loans secured by income properties are generally larger and involve greater risks than residential mortgage loans because payments on loans secured by income properties are often dependent on successful operation or management of the properties. As a result, repayment of such loans may be subject to a greater extent than residential real estate loans to adverse conditions in the real estate market or the economy. In order to monitor cash flows on income properties, the Savings Bank requires borrowers and loan guarantors, if any, to provide annual financial statements and rent rolls on multi-family loans. At December 31, 1996, the five largest commercial real estate and multi-family loans totalled $8.4 million with no single loan larger than $2.2 million. At December 31, 1996, all such loans were current and the properties securing such loans are in the Savings Bank's market area. Construction Loans. At December 31, 1996, the Savings Bank had $4.7 million of construction loans or 1.5% of the Savings Bank's total loan portfolio. Construction financing is generally considered to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate. Risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the property's value at completion of construction or development and the estimated cost (including interest) of construction. During the construction phase, a number of factors could result in delays and cost overruns. If the estimate of construction costs proves to be inaccurate, the Savings Bank may be required to advance funds beyond the amount originally committed to permit completion of the development. If the estimate of value proves to be inaccurate, the Savings Bank may be confronted, at or prior to the maturity of the loan, with a project having a value which is insufficient to assure full repayment. Consumer and Other Loans. The Savings Bank also offers consumer and other loans in the form of home equity and second mortgage loans (referred to hereinafter collectively as "second mortgage loans"), commercial business loans, automobile loans and student loans. These loans totalled $21.1 million or 6.8% of the Savings Bank's total loan portfolio at December 31, 1996. Federal regulations permit federally chartered thrift institutions to make secured and unsecured consumer loans up to 35% of an institution's assets. In addition, a federal thrift has lending authority above the 35% category for certain consumer loans, property improvement loans, and loans secured by savings accounts. The Savings Bank originates consumer loans in order to provide a wide range of financial services to its 7 customers and because the shorter terms and normally higher interest rates on such loans help maintain a profitable spread between its average loan yield and its cost of funds. In connection with consumer loan applications, the Savings Bank verifies the borrower's income and reviews a credit bureau report. In addition, the relationship of the loan to the value of the collateral is considered. All automobile loan applications are reviewed and approved by the Savings Bank. The Savings Bank reviews the credit report of the borrower as well as the value of the unit which secures the loan. The Savings Bank intends to continue to emphasize the origination of consumer loans. Consumer loans tend to be originated at higher interest rates than conventional residential mortgage loans and for shorter terms which benefits the Savings Bank's interest rate gap management. Consumer loans, however, tend to have a higher risk of default than residential mortgage loans. At December 31, 1996, the Savings Bank had $475,040 in consumer loans delinquent more than 90 days. Federal thrift institutions are permitted to make secured or unsecured loans for commercial, corporate, business or agricultural purposes, including the issuance of letters of credit secured by real estate, business equipment, inventories, accounts receivable and cash equivalents. The aggregate amount of such loans outstanding may not exceed 10% of such institution's assets. The Savings Bank offers second mortgage loans on one- to four-family residences. At December 31, 1996, second mortgage and home equity loans totalled $9.7 million, or 3.1% of the Savings Bank's total loan portfolio. Second mortgage loans are offered as fixed-rate loans for a term not to exceed 15 years. Such loans are only made on owner-occupied one- to four-family residences and are subject to a 75% combined loan to value ratio. The underwriting standards for second mortgage loans are the same as the Savings Bank's standards applicable to one- to four-family residential loans. The Savings Bank makes commercial business loans on a secured basis and generally requires additional collateral consisting of real estate. The terms of such loans generally do not exceed five years. The majority of these loans have floating interest rates which adjust with changes in market driven indices. The Savings Bank's commercial business loans primarily consist of short-term loans for equipment, working capital, business expansion and inventory financing. The Savings Bank customarily requires a personal guaranty of payment by the principals of any borrowing entity and reviews the financial statements and income tax returns of the guarantors. At December 31, 1996, the Savings Bank had approximately $3.1 million outstanding in commercial business loans, which represented approximately 1.0% of its total loan portfolio. Loan Approval Authority and Underwriting. All loans must be approved by either two or more loan officers specifically designated by the Board of Directors or by the Board of Directors, depending on the amount and type of loan. Any two designated underwriters may approve loans on one- to four-family residences, not to exceed FHLMC and FNMA conforming single-family limits, which at December 31, 1996, was $214,600 or consumer loans up to $100,000 providing the loan meets all of the Savings Bank's underwriting guidelines for consumer loans. All other loans up to $500,000 must be approved by the Loan Committee. All loans that exceed $500,000 must be submitted to the Board of Directors for approval. One- to four-family residential mortgage loans are generally underwritten according to FHLMC and FNMA guidelines. For all loans originated by the Savings Bank, upon receipt of a completed loan application from a prospective borrower, a credit report is ordered, income and certain other information is verified and, if necessary, additional financial information is requested. An appraisal of the real estate 8 intended to secure the proposed loan is required which currently is performed by an independent appraiser designated and approved by the Savings Bank. The Savings Bank makes construction/permanent loans on individual properties. Funds advanced during the construction phase are held in a loan-in-process account and disbursed based upon various stages of completion. The independent appraiser or loan officer determines the stage of completion based upon its physical inspection of the construction. It is the Savings Bank's policy to obtain title insurance or a title opinion on all real estate first mortgage loans. Borrowers must also obtain hazard or flood insurance (for loans on property located in a flood zone) prior to closing the loan. For loans in excess of 80% of the loan to value ratio, borrowers are generally required to advance funds on a monthly basis together with each payment of principal and interest to an escrow account from which the Savings Bank makes disbursements for items such as real estate taxes and hazard insurance premiums. Loans-to-One Borrower. Current regulations limit loans-to-one borrower in an amount equal to 15% of unimpaired capital and retained income on an unsecured basis and an additional amount equal to 10% of unimpaired capital and retained income if the loan is secured by readily marketable collateral (generally, financial instruments, not real estate) or $500,000, whichever is higher. Penalties for violations of the loan-to-one borrower statutory and regulatory restrictions include cease and desist orders, the imposition of a supervisory agreement and civil money penalties. The Savings Bank's maximum loan- to-one borrower limit was approximately $8.4 million as of December 31, 1996. At December 31, 1996, the Savings Bank's five largest aggregate lending relationships had balances ranging from $2.2 to $6.3 million. At December 31, 1996, all of these loans were current. Mortgage-Backed Securities To supplement lending activities, Third Federal invests in residential mortgage-backed securities. Although the majority of such securities are held for investment, they can serve as collateral for borrowings and, through repayments, as a source of liquidity. The mortgage-backed securities portfolio as of December 31, 1996, consisted primarily of fixed-rate certificates issued by the Federal Home Loan Mortgage Corporation ("FHLMC") ($98.9 million), Government National Mortgage Association ("GNMA"), ($6.0 million) Federal National Mortgage Association ("FNMA") ($30.8 million), real estate investment mortgage conduit ("REMICs") ($39.1 million), collateralized mortgage obligations ("CMOs") ($0) and other mortgage-backed securities ($.9 million). At December 31, 1996, the carrying value of mortgage-backed securities totalled $175.8 million, or 27.1% of total assets. The market value of such securities totalled approximately $175.3 million at December 31, 1996. Mortgage-backed securities represent a participation interest in a pool of single-family or multi-family mortgages, the principal and interest payments on which are passed from the mortgage originators, through intermediaries (generally quasi-governmental agencies) that pool and repackage the participation interests in the form of securities, to investors such as the Savings Bank. Such quasi-governmental agencies, which guarantee the payment of principal and interest to investors, primarily include FHLMC, FNMA and GNMA. FHLMC issues participation certificates backed principally by conventional mortgage loans. FHLMC guarantees the timely payment of interest and the ultimate return of principal within one year. FHLMC securities are indirect obligations of the United States Government. FNMA is a private 9 corporation chartered by Congress with a mandate to establish a secondary market for conventional mortgage loans. FNMA guarantees the timely payment of principal and interest, and FNMA securities are indirect obligations of the United States Government. GNMA is a government agency within the Department of Housing and Urban Development ("HUD") which is intended to help finance government assisted housing programs. GNMA guarantees the timely payment of principal and interest, and GNMA securities are backed by the full faith and credit of the United States Government. Since FHLMC, FNMA and GNMA were established to provide support for low- and middle-income housing, there are limits to the maximum size of loans that qualify for these programs. Currently, GNMA limits its maximum loan size to $144,000 for Veterans Administration ("VA") loans and on average $137,750 for Federal Housing Authority ("FHA") loans. FNMA and FHLMC limit their loans to $214,600. To accommodate larger-sized loans, and loans that, for other reasons, do not conform to the agency programs, a number of private institutions have established their own home-loan origination and securitization programs. Mortgage-backed securities typically are issued with stated principal amounts, and the securities are backed by pools of mortgages that have loans with interest rates that are within a range and have varying maturities. The underlying pool of mortgages are primarily composed of either fixed-rate mortgages or adjustable-rate mortgage ("ARM") loans. Mortgage-backed securities are generally referred to as mortgage participation certificates or pass-through certificates. As a result, the interest rate risk characteristics of the underlying pool of mortgages, i.e., fixed-rate or adjustable-rate, as well as prepayment risk, are passed on to the certificate holder. The life of a mortgage-backed pass-through security is equal to the life of the underlying mortgages. Mortgage-backed securities issued by FHLMC, FNMA and GNMA make up a majority of the pass-through market. CMOs and REMICs are typically issued by a special-purpose entity (the "issuer"), which may be organized in a variety of legal forms, such as a trust, a corporation, or a partnership. The entity aggregates pools of pass-through securities, which are used to collateralize the mortgage related securities. Once combined, the cash flows can be divided into "tranches" or "classes" of individual securities, thereby creating more predictable average durations for each security than the underlying pass-through pools. Accordingly, under this security they structure all principal pay downs from the various mortgage pools are allocated to a mortgage-related class or classes structured to have priority until it has been paid off. Thus these securities are intended to address the reinvestment concerns associated with mortgage-backed securities pass-through, namely that (i) they tend to pay off when interest rates fall, thereby taking their relatively high coupon with them, and (ii) their expected average life may vary significantly among the different tranches. Some CMO and REMIC instruments are most like traditional debt instruments because they have stated principal amounts and traditionally defined interest-rate terms. Purchasers of certain other CMO and REMIC instruments are entitled to the excess, if any, of the issuer's cash inflows, including reinvestment earnings, over the cash outflows for debt service and administrative expenses. These mortgage related instruments may include instruments designated as residual interests, and are riskier in that they could result in the loss of a portion of the original investment. Cash flows from residual interests are very sensitive to prepayments and, thus, contain a high degree of interest-rate risk. Residual interests represent an ownership interest in the underlying collateral, subject to the first lien of the CMO and REMICs investors. The CMOs and REMICs held by the Savings Bank at December 31, 1996, consisted solely of fixed-rate notes and adjustable-rate notes with contractual maturities ranging from 1 to 27 years. The portfolio of CMOs and REMICs held within the Savings Bank's mortgage-backed securities portfolio at December 31, 1996, did not include any residual interests. Further, at December 31, 1996, the Savings 10 Bank's mortgage-backed securities portfolio did not include any "stripped" CMOs and REMICs, i.e. CMOs and REMICs that pay interest only and do not repay principal or CMOs that repay principal only and do not pay interest. The following table sets forth the carrying value of the Savings Bank's mortgage-backed securities held in portfolio at the dates indicated.
At December 31, At June 30, ----------------------------------- --------------------- 1996 1995 1994 1994 1993 ---------- ---------- ----------- --------- --------- (In Thousands) Held for Investment: GNMA-fixed rate........... $ 6,043 $ 7,644 $ 9,358 $ 9,653 $ 7,480 -------- -------- -------- -------- ------- FHLMC ARMs................ 364 407 496 522 591 FHLMC-fixed rate.......... 89,652 65,427 85,028 68,004 53,501 FNMA-fixed rate........... 27,547 33,150 39,713 29,201 6,831 CMOs...................... -- 19 213 471 1,320 Remics.................... 29,220 30,033 46,603 46,437 26,113 Other mortgage-backed securities.............. 932 1,161 -- -- -- -------- -------- -------- -------- ------- Total mortgage-backed securities.............. $153,758 $137,841 $181,411 $154,288 $95,836 ======== ======== ======== ======== ======= Mortgage-backed Securities Available for Sale: FHLMC $ 8,905 $ 15,422 $ -- $ -- $ -- FNMA 3,240 4,010 -- -- -- Remics.................... 9,882 10,208 -- -- -- -------- -------- -------- -------- ------- Total mortgage-backed securities available for sale.............. $ 22,027 $ 29,640 $ -- $ -- $ -- ======== ======== ======== ======== =======
Mortgage-Backed Securities Maturity. The following table sets forth the maturity and the weighted average coupon ("WAC") of the Savings Bank's mortgage-backed securities portfolio at December 31, 1996. The table does not include estimated prepayments. Adjustable-rate mortgage-backed securities are shown as maturing based on contractual maturities. Contractural Contractual Available For Held to Sale Maturities Due WAC Maturities Due WAC -------------- --- -------------- ---- (Dollars In Thousands) Less than 1 year......... $ 8,327 6.08% $ -- --% 1 to 3 years............. 11,150 6.54 1,097 6.00 3 to 5 years............. 15,282 6.70 1,871 6.00 5 to 10 years............ 18,592 6.95 6,098 6.42 10 to 20 years........... 58,869 7.21 4,721 6.46 Over 20 years............ 41,538 7.03 8,240 7.25 ------- ---- ------ ------ Total mortgage-backed securities............. $153,758 6.97% $ 22,027 6.68% ======= ==== ======= ===== Non-Performing and Problem Assets Loan Collection. When a borrower fails to make a required payment on a loan, the Savings Bank takes a number of steps to have the borrower cure the delinquency and restore the loan to current status. In the case of residential mortgage loans and consumer loans, the Savings Bank generally sends the borrower a written notice of non-payment after the loan is 15 days past due. In the event payment is not then received, additional letters and phone calls are made. If the loan is still not brought current 11 and it becomes necessary for the Savings Bank to take legal action, which typically occurs after a loan is delinquent 90 days or more, the Savings Bank will commence foreclosure proceedings against any real property that secures the loan and attempt to repossess any personal property that secures a consumer loan. If a foreclosure action is instituted and the loan is not brought current, paid in full, or refinanced before the foreclosure sale, the real property securing the loan generally is sold at foreclosure. In the case of commercial real estate and multi-family loans, and construction loans, the Savings Bank generally attempts to contact the borrower by telephone after any loan payment is ten days past due and a senior loan officer reviews all collection efforts made if payment is not received after the loan is 30 days past due. Decisions as to when to commence foreclosure actions for commercial real estate and multi-family loans and construction loans are made on a case by case basis. The Savings Bank may consider loan work-out arrangements with these types of borrowers in certain circumstances. On mortgage loans or loan participations purchased by the Savings Bank, the Savings Bank receives monthly reports from its loan servicers with which it monitors the loan portfolio. Based upon servicing agreements with the servicers of the loan, the Savings Bank relies upon the servicer to contact delinquent borrowers, collect delinquent amounts and to initiate foreclosure proceedings, when necessary, all in accordance with applicable laws, regulations and the terms of the servicing agreements between the Savings Bank and its servicing agents. Delinquent Loans. Generally, the Savings Bank reserves for uncollected interest on loans past due 90 days or more. Loans also are placed on a nonaccrual status when, in the judgment of management, the probability of collection of interest is deemed to be insufficient to warrant further collection. When a loan is placed on nonaccrual status, previously accrued but unpaid interest is deducted from interest income. 12 Non-Performing Assets. The following table sets forth information regarding non-accrual loans and real estate owned by the Savings Bank at the dates indicated. The Savings Bank had no loans contractually past due 90 days or more or for which accrued interest has been recorded. At December 31, 1996, the Savings Bank had no restructured loans within the meaning of FASB Statement 15.
At December 31, At June 30, ---------------------------------- -------------- 1996 1995 1994 1994 1993 1992 ----- ----- ----- ---- ---- ---- (Dollars in Thousands) Loans accounted for on a non-accrual basis: Mortgage loans: One- to four-family ..................... $ 922 $ 999 $ 928 $1,041 $1,782 $2,000 Commercial real estate and multi-famil... -- 28 119 120 994 558 Construction loans ...................... -- -- -- -- -- 314 Consumer and other ........................ 1,050 776 639 552 685 1,464 ------ ------ ------ ------ ------ ------ Total non-accrual loans ................ $1,972 $1,803 $1,686 $1,713 $3,461 $4,336 ====== ====== ====== ====== ====== ====== Real estate owned, net .................... $ 112 $ 129 $ 139 $ 376 $1,687 $4,245 Other non-performing assets(1) ............ -- -- -- -- 609 -- ------ ------ ------ ------ ------ ------ Total non-performing assets ............... $2,084 $1,932 $1,825 $2,089 $5,757 $8,581 ====== ====== ====== ====== ====== ====== Total non-accrual to net loans ............ 0.64% 0.76% 1.48% 1.43% 2.42% 2.48% ====== ====== ====== ====== ====== ====== Total non-accrual loans to total assets.... 0.30% 0.37% 0.39% 0.39% 0.89% 1.20% ====== ====== ====== ====== ====== ====== Total non-performing assets to total assets 0.32% 0.39% 0.42% 0.48% 1.48% 2.37% ====== ====== ====== ====== ====== ======
- - ---------------- (1) Other non-performing assets consists of Third Federal's investment in an administrative building for all dates presented. Such building was sold subsequent to December 31, 1993. At December 31, 1996, the Company had no foreign loans and no loan concentrations exceeding 10% of total loans not disclosed in above the table. "Loan concentrations" are considered to exist when there are amounts loaned to a multiple number of borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. Loans recorded in the category of other real estate owned are valued at the lower of book value of loans outstanding or fair market value less cost of disposal. At December 31, 1996, the Company was not aware of any potential problem loans that are not otherwise included in the foregoing table. "Potential problem loans" are loans where information about possible credit problems of borrowers has caused management to have serious doubts about the borrowers' ability to comply with present repayment terms. Classified Assets. OTS regulations provide for a classification system for problem assets of insured institutions which covers all problem assets. Under this classification system, problem assets of insured institutions are classified as "substandard," "doubtful," or "loss." An asset is considered "substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. "Substandard" assets include those characterized by the "distinct possibility" that the insured institution will sustain "some loss" if the deficiencies are not corrected. Assets classified as "doubtful" have all of the weaknesses inherent in those classified "substandard," with the added characteristic that the weaknesses present make "collection or liquidation in full," on the basis of currently existing facts, conditions and values, "highly questionable and improbable." Assets classified as "loss" are those considered "uncollectible" and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets designated "special mention" 13 by management are assets included on the Savings Bank's internal watchlist because of potential weakness but that do not currently warrant classification in one of the aforementioned categories. When an insured institution classifies problem assets as either substandard or doubtful, it may establish general allowances for loan losses in an amount deemed prudent by management. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets as "loss," it is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge off such amount. An institution's determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the OTS, which may order the establishment of additional general or specific loss allowances. A portion of general loss allowances established to cover possible losses related to assets classified as substandard or doubtful may be included in determining an institution's regulatory capital, while specific valuation allowances for loan losses generally do not qualify as regulatory capital. The following table provides further information in regard to the Savings Bank's classified assets as of December 31, 1996. At December 31, 1996 ------------ (In Thousands) Special mention assets...... $ -- Substandard................. 2,804 Doubtful assets............. 108 Loss ....................... -- ---------- Total classified assets.. $ 2,912 ========== - - --------------------- (1) Substandard assets include approximately $816,000 of performing assets that are less than 90 days delinquent, that are classified for reasons other than delinquency. Real Estate Owned. Real estate acquired by the Savings Bank as a result of foreclosure, judgment or by deed in lieu of foreclosure is classified as real estate owned ("REO") until it is sold. When property is acquired it is recorded at the lower of fair value, minus estimated cost to sell, or cost. The Savings Bank records loans as in substance foreclosures if the borrower has little or no equity in the property based upon its documented current fair value and if the borrower has effectively abandoned control of the collateral or has continued to retain control of the collateral but because of the current financial status of the borrower it is doubtful the borrower will be able to repay the loan in the foreseeable future. In substance foreclosures are accounted for as loans until such time that title to the collateral is acquired by the Savings Bank. There may be significant other expenses incurred such as attorney and other extraordinary servicing costs involved with in substance foreclosures. Allowances for Loan Losses and Real Estate Acquired in Settlement of Loans. The Savings Bank provides valuation allowances for estimated losses from uncollectible loans and real estate acquired in settlement of loans. Management's periodic evaluation of the adequacy of the allowance for loan losses 14 is based on loss experience, known and inherent risk in the portfolio, prevailing market conditions, and management's judgment as to collectibility. The Savings Bank's determination as to the amount of its allowance for loan losses is subject to review of the federal regulatory agencies, the OTS and FDIC, which can order the establishment of additional general or specific loan loss reserves. The allowance for loan losses is increased by charges to earnings and decreased by charge-offs (net of recoveries). The Savings Bank provides valuation allowances for losses on real estate acquired in settlement of loans based on the lower of fair value, minus estimated cost to sell, or cost. The allowance for loan losses is established through a provision for loan losses based on management's evaluation of the risk inherent in its loan portfolio and the general economy. Such evaluation, which includes a review of all loans on which full collectibility may not be reasonably assured, considers among other matters, the estimated fair value of the underlying collateral, economic conditions, historical loan loss experience and other factors that warrant recognition in providing for an adequate loan loss allowance. 15 The following table sets forth information with respect to the Savings Bank's allowance for loan losses at the dates and for the periods indicated:
For the Years Ended For the Six Months For the Year Ended December 31, Ended December 31, June 30, ----------------- ------------------ ---------------- 1996 1995 1994 1994 1993 1992 ---- ---- ---- ---- ---- ---- (Dollars In Thousands) Balance at beginning of period $ 1,484 $ 1,473 $ 1,450 $ 1,656 $ 1,800 $ 1,730 Provision for loan losses ......... 330 72 30 (144) 48 1,263 Charge-offs: One- to four-family ............. -- (48) -- -- -- -- Commercial and multi-family real estate loans ............... -- -- -- (31) (380) (684) Consumer and other loans(1) ..... (8) (13) (7) (31) (300) (679) Recoveries: Commercial and multi-family real estate loans ............... -- -- -- -- 413 75 Consumer and other loans(1) ..... -- -- -- -- 75 95 ------- ------- ------- ------- ------- ------- Balance at end of year(2) ......... $ 1,806 $ 1,484 $ 1,473 $ 1,450 $ 1,656 $ 1,800 ======= ======= ======= ======= ======= ======= Ratio of net charge-offs during the period to average loans outstanding during the period.... 0.003% 0.04% 0.01% .04% .12% .57% Ratio of allowance for loan losses to non-performing loans at the end of the period... 91.58% 82.3% 87.3% 84.6% 47.8% 41.5% Ratio of allowance for loan losses to net loans receivable at the end of period ............ 0.58% 0.62% 1.3% 1.2% 1.2% 1% Ratio of allowances for loan losses and foreclosed real estate to total non-performing assets at the end of period...... 92.03% 76.8% 81.3% 69.4% 29.5% 30.8%
- - --------------- (1) Consumer and other loan charge-offs for all periods presented are almost solely comprised of commercial business loan losses. (2) Third Federal had not incurred any material charge-offs or received any material recoveries on the one-to four-family and consumer loan portfolios for any of the periods presented. 16 The following table sets forth the allocation of the Savings Bank's allowance for loan losses by loan category and the percent of loans in each category to total loans receivable, gross, at the dates indicated. The portion of the loan loss allowance allocated to each loan category does not represent the total available for future losses which may occur within the loan category since the total loan loss allowance is a valuation reserve applicable to the entire loan portfolio.
At December 31, At June 30, ----------------------------------------------------- --------------------------------------------------- 1996 1995 1994 1994 1993 1992 ---------------- ---------------- ------------------ ---------------- --------------- ----------------- Percent Percent Percent Percent Percent Percent of Loans of Loans of Loans of Loans of Loans of Loans to Total to Total to Total to Total to Total to Total Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans ------ ------- ------- -------- ------ ------- ------ ------- ------ ------ ------ ------ (Dollars in thousands) At end of period allocated to: One- to four- family........... $ 1,330 73.7% $1,042 85.1% $ 990 67.2% $ 958 70.4% $ 788 72.0% $ 793 67.5% ------- ----- ------ ---- ----- ---- ------ ---- ------ ---- ------ ---- Commercial real estate and multi-family..... 102 5.7 46 4.1 134 9.1 132 10.2 422 10.9 425 12.3 Construction...... 24 1.3 24 1.6 8 0.5 12 0.5 2 0.4 2 0.3 Consumer and other loans..... 350 19.3 372 9.2 341 23.2 348 18.9 490 17.1 580 19.9 ------- ----- ------ ---- ----- ---- ------ ---- ------ ---- ------ ---- Total allowance... $ 1,806 100.0% $1,484 100.0% $1,473 100.0% $1,450 100.0% $1,656 100.0% $1,800 100.0%
17 Analysis of the Allowance for Real Estate Owned At December 31, At June 30, ----------------------- --------------- 1996 1995 1994 1994 1993 ---- ---- ---- ---- ---- (Dollars in thousands) Total real estate owned and in judgment, net............ $116 $129 $139 $376 $1,687 ==== ==== ==== ==== ====== Allowance balances - beginning $ -- $ 11 $ -- $ 40 $ 846 Provision.................. 3 2 11 1 8 Charge-offs................ -- (13) -- (41) (814) ---- ---- ---- ---- ------ Allowance balances - ending $ 3 $ -- $ 11 $ -- $ 40 ==== ==== ==== ==== ====== Allowance for losses on real estate owned and in judgment to net real estate owned and in judgment................... 2.5% --% 7.9% --% 2.4% ==== ==== ==== ==== ====== Investment Activities The investment policy of the Savings Bank, which is established by the Board of Directors and implemented by the Asset Liability Committee, is designed primarily to provide and maintain liquidity, to generate a favorable return on investments without incurring undue interest rate and credit risk, and to complement the Savings Bank's lending activities. In establishing its investment strategies, the Savings Bank considers its business and growth plans, the economic environment, the types of securities to be held and other factors. Federally chartered savings institutions have the authority to invest in various types of assets, including U.S. Treasury obligations, securities of various federal agencies, certain certificates of deposit of insured banks and savings institutions, certain bankers acceptances, repurchase agreements, loans on federal funds, and, subject to certain limits, commercial paper and mutual funds. OTS guidelines regarding investment portfolio policy and accounting require insured institutions to categorize securities and certain other assets as held for "investment," "sale," or "trading." The Savings Bank's investment policy has policies and strategies for each type of security. The portion of the investment securities portfolio which is held with the intent to hold to maturity is accounted for on an amortized cost basis. At December 31, 1996, the Savings Bank had $38.5 million in securities held for investment consisting of interest-earning deposits due in three months or less, U.S. government and agency obligations. Securities which are categorized as available for sale are carried at the lower of historical cost or market value. At December 31, 1996, the Savings Bank had securities available for sale consisting of U.S. government and agency securities and mutual funds which had a market and book value of $12.7 million. The Savings Bank does not engage in security trading and therefore had no securities in a trading account at December 31, 1996. 18 The following table sets forth certain information regarding the amortized cost and market values of the Savings Bank's investments at the dates indicated.
At December 31, At June 30, -------------------------------------------------------------- ---------------------------------------- 1996 1995 1994 1994 1993 ------------------- ------------------- -------------------- -------------------- ------------------ Amortized Market Amortized Market Amortized Market Amortized Market Amortized Market Cost Value Cost Value Cost Value Cost Value Cost Value --------- -------- --------- --------- --------- -------- --------- -------- ---------- ------ (In Thousands) Interest-earning deposits $ 38,120 $ 38,120 $15,606 $15,606 $31,898 $31,898 $ 68,733 $ 68,733 $ 51,426 $ 51,426 ======= ======= ====== ====== ====== ====== ======= ======= ======= ======= Investment securities held to maturity: U.S. Government and agency obligations... $34,976 $34,854 $14,475 $14,739 $23,466 $22,558 $ 9,470 $ 8,957 $ 48,210 $ 48,546 State and political subdivisions.......... 3,068 3,040 3,140 3,139 3,219 3,080 3,216 3,140 3,862 3,939 Corporate Debt Securities 500 499 6,025 6,002 9,846 9,634 13,173 13,140 20,055 20,477 ------- ------- ------- ------- ------- ------- -------- -------- -------- -------- Total............... $38,544 $38,393 $23,640 $23,880 $36,531 $35,272 $ 25,859 $ 25,237 $ 72,137 $ 73,039 ======= ======= ======= ======= ======= ======= ======== ======== ======== ======== Securities available for sale(1): U.S. Government and agency obligations... $11,976 $12,015 $14,489 $14,448 $41,460 $40,466 $40,454 $39,765 $ -- $ -- Equity Securities (SLMA Stock).......... 10 139 10 98 64 50 10 59 10 77 ------- ------- ------- ------- ------- ------- -------- -------- -------- -------- Mutual funds.......... 500 498 500 498 447 486 500 492 -- -- ------- ------- ------- ------- ------- ------- -------- -------- -------- -------- Total............... $12,486 $12,652 $14,999 $15,044 $41,971 $41,002 $ 40,964 $ 40,316 $ -- $ -- ======= ======= ======= ======= ======= ======= ======== ======== ====== ======
- - ------------------- (1) Securities designated as held for sale at June 30, 1994. 19 Investment Portfolio Maturities The following table sets forth certain information regarding the carrying values, weighted average yields and maturities of the Savings Bank's investment securities portfolio, exclusive of interest-earning deposits, at December 31, 1996.
Total One Year or Less One to Five Years Five to Ten Years More than Ten Years Investment Securities(2) ------------------ ------------------ ----------------- ------------------- --------------------------- Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Market Value Yield Value Yield Value Yield Value Yield Value Yield Value ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- (Dollars in Thousands) U.S. Government Obligation............ $ 6,010 5.75% $ 4,005 6.32% $ -- --% $ -- --% $ 10,015 5.98% $ 10,015 U. S. Agency Obligations 12,113 5.41 9,235 6.31 13,767 6.97 2,000 8.33 37,115 6.37 36,993 Municipal Obligations... -- -- 3,068 5.33 -- -- -- -- 3,068 5.33 3,040 Corporate Obligations... 500 7.22 -- -- -- -- -- -- 500 7.22 499 Other Securities(1)..... 498 6.08 -- -- -- -- -- -- 498 6.08 498 ------- ------ ------- ----- -------- ----- ------- ----- ------- ------ ------- Total................. $19,121 5.58% $16,308 6.13% $ 13,767 6.97% $ 2,000 8.33% $ 51,196 6.24% $ 51,045 ====== ====== ====== ===== ======= ===== ====== ====== ====== ====== ======
- - ---------------------- (1) Other securities consists of an investment in adjustable-rate mortgage-backed securities mutual funds. Such investments do not have a stated maturity and are considered in the one year or less category based on quarterly repricing of the investment. (2) Includes $12.7 million of U.S. Government and Agency obligations and other investments which are carried as available for sale at December 31, 1996. Investment securities available for sale are carried at fair value. 20 Sources of Funds General. Deposits, borrowings, loan repayments and cash flows generated from operations are the primary sources of the Savings Bank's funds for use in lending, investing and other general purposes. Deposits. The Savings Bank offers a variety of deposit accounts having a range of interest rates and terms. The Savings Bank's deposits consist of regular savings, non-interest bearing checking, NOW checking, money market, and certificate accounts. Of the deposit accounts, $31.58 million or 6.7% consist of IRA, Keogh or SEP retirement accounts at December 31, 1996. The flow of deposits is influenced significantly by general economic conditions, changes in money market and prevailing interest rates and competition. The Savings Bank's deposits are primarily obtained from areas surrounding its offices, and the Savings Bank relies primarily on customer service and long-standing relationships with customers to attract and retain these deposits. The Savings Bank has maintained a high level of core deposits consisting of regular savings, money market, non-interest bearing checking, and NOW checking, which has contributed to a low cost-of-funds. At December 31, 1996, core deposits amounted to 56.26% of total deposits. 21 The following table sets forth the distribution of the Savings Bank's deposit accounts at the dates indicated and the weighted average nominal interest rates on each category of deposits presented. The Savings Bank does not have a significant amount of deposits from out-of state sources. Management does not believe that the use of year end balances instead of average balances resulted in any material difference in the information presented.
At December 31, ------------------------------------------------------------------------------------------- 1996 1995 1994 ----------------------------- ---------------------------- ----------------------------- Weighted Weighted Weighted Percent Average Percent Average Percent Average of Total Nominal of Total Nominal of Total Nominal Amount Deposits Rate Amount Deposits Rate Amount Deposits Rate ------ -------- ------ ------ -------- ----- ------ -------- ------ (Dollars in Thousands) Transaction accounts: Interest-bearing checking accounts ................... $ 42,513 9.06% 0.98% $ 33,581 9.96% 1.57% $ 33,840 9.73% 1.53% Money market accounts........ 29,970 6.39 3.54 10,481 3.11 2.75 11,696 3.36 2.95 Non-interest-bearing checking accounts ............ 3,741 0.80 -- 1,573 0.47 -- 1,026 0.30 -- -------- ------- -------- ------- -------- -------- Total transaction accounts..... 76,224 16.25 45,635 13.54 46,562 13.39 Fixed-rate passbook accounts... 127,213 27.12 3.00 120,387 35.72 3.00 136,824 39.36 2.95 Adjustable-rate passbook accounts ..................... 60,452 12.89 4.88 68,247 20.25 4.74 77,198 22.21 5.11 Total ................... 187,665 40.01 234,269 69.51 260,584 74.96 -------- ------- -------- ------- -------- -------- Certificate accounts: 90-day certificates ......... 2,354 0.50 3.96 4,541 1.35 4.05 1,034 0.30 3.22 Six-month certificates....... 18,861 4.02 4.44 10,351 3.07 4.10 14,604 4.20 3.47 Seven-month certificates..... 3,555 0.76 4.93 -- -- -- -- -- -- Nine-month certificates...... 13,116 2.80 4.96 5,144 1.53 5.86 646 0.19 3.65 Ten-month certificates....... 19,341 4.12 5.29 -- -- -- -- -- -- One-year certificates........ 55,586 11.85 5.28 17,409 5.16 5.08 20,076 5.77 3.67 15-month certificates ....... 1,450 0.31 5.54 -- -- -- -- -- -- 17-month certificates ....... 8,801 1.88 5.53 7,515 2.23 5.75 -- -- -- 18-month certificates ....... 5,052 1.08 4.83 12,004 3.56 6.07 4,378 1.26 4.54 21-month certificates ....... 677 0.14 5.20 -- -- -- -- -- -- Two-year certificates........ 22,632 4.82 5.65 6,139 1.82 4.99 5,948 1.71 4.14 25-month certificates ....... 8,666 1.85 5.81 -- -- -- -- -- -- 30-month certificates ....... 8,539 1.82 5.45 7,371 2.19 4.54 8,884 2.55 3.83 Three-year certificates...... 9,628 2.05 5.55 5,442 1.61 4.55 6,236 1.79 4.52 Four year certificates....... 2,645 0.56 5.48 929 0.27 5.33 1,628 0.47 6.38 54 month certificates ....... 1,975 0.42 5.83 1,921 0.57 5.80 -- -- -- Five year certificates....... 19,356 4.13 5.35 18,274 5.42 5.66 18,812 5.41 6.07 Six-year certificates ....... 211 0.04 5.34 -- -- -- -- -- -- Seven-year certificates ..... 1 -- 7.30 -- -- -- -- -- -- Eight-year certificates ..... 99 0.02 5.80 105 0.03 5.83 236 0.07 6.37 10-year ..................... 1,398 0.30 7.85 1,050 0.31 7.88 1,422 0.41 8.12 Jumbo certificates(1) ....... 1,256 0.27 5.40 4,436 1.32 5.12 2,942 0.85 5.36 -------- ------ ---- -------- ------ ---- -------- ----- ---- Total certificate accounts 205,199 43.74 5.30 102,800 30.49 5.22 87,047 25.04 4.52 -------- ------ ---- -------- ------ ---- -------- ----- ---- Total deposits ................ $469,088 100.00% 4.08% $337,069 100.00% 3.87% $347,631 100.0 3.67% ======== ====== ==== ======== ====== ==== ======== ===== ====
22
At June 30, ---------------------------------------------------------------------------------------------- 1994 1993 1992 ------------------------------- ------------------------------ -------------------------- Weighted Weighted Weighted Percent Average Percent Average Percent Average of Total Nominal of Total Nominal of Total Nominal Amount Deposits Rate Amount Deposits Rate Amount Deposits Rate ------ -------- ---- ------ -------- ---- ------ -------- ---- (Dollars in Thousands) Transaction accounts: Interest-bearing checking accounts .................. $ 33,522 9.13% 1.47% $ 34,659 9.89% 2.30% $ 28,287 8.68% 3.15% Money market accounts........ 12,131 3.30 2.72 12,543 3.58 2.71 15,454 4.74 3.51 Non-interest-bearing checking accounts .................. 658 .18 -- 180 .05 -- 3,460 1.06 -- -------- ------ -------- ------ -------- ------ Total transaction accounts..... 46,311 12.61 -- 47,382 13.52 -- 47,201 14.48 -- Fixed-rate passbook accounts... 151,121 41.17 2.95 143,936 41.09 3.20 138,601 42.51 4.56 -------- ------ -------- ------ Adjustable-rate passbook accounts .................... 79,373 21.62 4.16 52,721 15.05 4.14 -- -- -- -------- ------ Total ................... 276,805 75.40 244,039 69.66 185,802 56.99 -- -------- ------ -------- ------ -------- ------ Certificate accounts: 90-day certificates ......... 929 .25 2.75 1,307 .36 2.71 2,092 .64 3.66 Six-month certificates....... 16,325 4.45 2.74 19,837 5.66 2.88 28,070 8.61 3.99 Nine-month certificates ..... 887 .24 2.91 1,213 .35 3.06 1,657 .51 4.45 One-year certificates........ 21,632 5.89 3.12 24,700 7.05 3.68 37,810 11.60 5.16 18-month certificates ....... 2,514 .69 3.36 2,423 .69 3.75 5,255 1.61 6.22 Two-year certificates ....... 5,033 1.37 3.67 4,987 1.42 4.78 7,727 2.37 6.81 30-month certificates ....... 9,888 2.69 3.85 12,262 3.50 5.07 15,638 4.80 6.89 Three-year certificates...... 6,867 1.87 4.73 8,991 2.57 6.37 9,249 2.84 7.03 Four year certificates....... 2,045 .56 7.26 3,381 .97 7.74 3,980 1.22 8.13 Five year certificates....... 18,972 5.17 6.26 23,760 6.78 7.74 21,214 6.50 8.01 Six-year certificates ....... 214 .06 7.46 302 .09 5.64 376 .11 7.86 Eight-year certificates...... 1,761 .48 8.11 412 .12 7.36 406 .12 7.46 10-year ..................... 51 .01 8.02 1,452 .41 8.36 1,338 .41 8.40 Jumbo certificates(1) ....... 3,210 .87 5.29 1,262 .37 3.93 5,439 1.67 5.40 -------- ------ ---- -------- ------ ---- -------- ------ ---- Total certificate accounts 90,328 24.60 4.25 106,289 30.34 4.90 140,251 43.01 5.80 -------- ------ ---- -------- ------ ---- -------- ------ ---- Total deposits ................ $367,133 100.00% 3.38% $350,328 100.00% 3.74% $326,053 100.00% 4.87% ======== ====== ==== ======== ====== ==== ======== ====== ====
23 At December 31, 1996, the Savings Bank had outstanding certificates of deposit in amounts of $100,000 or more maturing as follows: Amount ------ Maturing Period (In Thousands) - - --------------- Three months or less.......................... $ 1,070 Over three through six months................. 1,066 Over six through 12 months.................... 3,115 Over 12 months................................ 3,313 ------- Total..................................... $ 8,564 ======= The following table presents, by various rate categories, the amount of time deposits outstanding at December 31, 1996, 1995 and 1994, and June 30, 1994 and 1993, and the periods to maturity of the certificate accounts outstanding at December 31, 1996.
Period to Maturity from December 31, 1996 -------------------------------- Within One One to At December 31, At June 30, Year Three Years Thereafter 1996 1995 1994 1994 1993 ------ ----------- ----------- ------- ------ ------ ---- ---- (In Thousands) Time deposits: 2.00% to 2.99% . $ 1 $ 16 $ -- 17 $ 273 $ 5,306 $ 28,708 $ 21,144 3.00% to 3.99% . 2,803 124 -- 2,927 11,711 39,120 27,946 29,598 4.00% to 4.99% . 49,007 11,633 715 61,355 27,319 11,296 10,031 4,987 5.00% to 5.99% . 80,058 44,590 5,287 129,935 49,298 20,837 8,844 12,564 6.00% to 6.99% . 5,535 2,498 1,600 9,633 11,578 2,204 3,874 8,991 7.00% to 7.99% . 334 95 199 628 1,886 6,541 8,064 27,553 8.00% to 8.99% . 43 553 -- 596 735 1,551 -- -- 9.00% to 9.99% . 30 78 -- 108 -- 192 2,861 1,452 -------- -------- -------- -------- -------- --------- -------- -------- Total ..... $137,811 $ 59,587 $ 7,801 $205,199 $102,800 $ 87,047 $ 90,328 $106,289 ======== ======== ======== ======== ======== ========= ======== ========
24 Borrowings Deposits are the primary source of funds of the Savings Bank's lending and investment activities and for its general business purposes. The Savings Bank may obtain advances from the FHLB of Pittsburgh to supplement its supply of lendable funds. Advances from the FHLB of Pittsburgh are typically secured by a pledge of the Savings Bank's stock in the FHLB of Pittsburgh and a portion of the Savings Bank's first mortgage loans and certain other assets. The Savings Bank, if the need arises, may also access the Federal Reserve Bank discount window to supplement its supply of lendable funds and to meet deposit withdrawal requirements. The following table sets forth the maximum month-end balance period and balance, and weighted average balance of outstanding FHLB advances at the dates and for the periods indicated, together with the applicable weighted average interest rates.
At December 31, At June 30, --------------------------------- ------------- 1996 1995 1994 1994 1993 ----------- --------- ------ ---- ---- (Dollars in Thousands) FHLB advances............... $98,359 $73,359 $ -- $ 900 $3,900 ====== ====== ====== ==== ===== Weighted average interest rate 5.98% 6.07% --% 9.80% 7.98%
Six Months Ended Years Ended December 31, December 31, Year Ended June 30, ----------------------- ----------- ------------------- 1996 1995 1994 1994 1993 ---- ---- ---- ---- ---- (Dollars in Thousands) Maximum balance of FHLB advances outstanding $ 98,359 $73,359 $ -- $3,900 $4,800 ======= ====== ======= ===== ===== Weighted average balance of FHLB advances outstanding. $ 89,343 $16,171 $ -- $2,650 $4,125 ======= ====== ======= ===== ===== Weighted average interest rate of FHLB advances 5.99% 6.22% --% 7.98% 8.10% ====== ==== ======= ==== ====
Subsidiary Activity Third Federal is permitted to invest up to 2% of its assets in the capital stock of, or secured or unsecured loans to, subsidiary corporations, with an additional investment of 1% of assets when such additional investment is utilized primarily for community development purposes. Under such limitations, as of December 31, 1996, Third Federal was authorized to invest up to approximately $13.0 million in the stock of, or loans to, service corporations (based upon the 2% limitation). At December 31, 1996, the Savings Bank had no active subsidiaries. Personnel As of December 31, 1996, the Savings Bank had 139 full-time and 18 part-time employees. None of the Savings Bank's employees are represented by a collective bargaining group. The Savings Bank believes that its relationship with its employees is good. 25 Executive Officers of the Registrant Executive Officers of the Savings Bank and Company (these individuals have held their respective positions with the Company since March 1994): Carl F. Gregory is Chairman of the Savings Bank. Mr. Gregory was Chief Executive Officer of the Savings Bank and of the Company from April 1982 until December 1994. He has been with the Savings Bank since 1962 and will continue to represent Third Federal throughout the communities that the Savings Bank serves in his role as Chairman of the Savings Bank and Director of the Company. John R. Stranford has been with the Savings Bank since 1968. He presently serves as President, Chief Executive Officer, Chief Operating Officer and Director of the Savings Bank and Company. Mr. Stranford has served as Chief Operating Officer of the Savings Bank since 1984 and President of the Savings Bank since January 1994. Prior to that time he served in various capacities as an officer of the Savings Bank. William C. Niemczura has been with the Savings Bank as an officer since 1987. Prior to his current position as Senior Vice President and Chief Financial Officer, Mr. Niemczura was Asst. Vice President and Vice President-Lending. Mr. Niemczura is Senior Vice President, Treasurer and Chief Financial Officer of the Company. Elizabeth Davidson Maier is Senior Vice President and Secretary of the Savings Bank and the Company and has been with the Savings Bank since 1964. Ms. Maier has been an officer of the Savings Bank since 1974. Prior to that, Ms. Maier held various positions at the Savings Bank. The remaining information relating to Directors and Executive Officers of the Registrant is incorporated herein by reference to the Registrant's Proxy Statement for the 1997 Annual Meeting of Stockholders. REGULATION Set forth below is a brief description of all materials laws and regulations which relate to the regulation of the Savings Bank and the Company. The description does not purport to be complete and is qualified in its entirety by reference to applicable laws and regulations. Company Regulation General. The Company is a unitary savings and loan holding company subject to regulatory oversight by the OTS. As such, the Company is required to register and file reports with the OTS and is subject to regulation and examination by the OTS. In addition, the OTS has enforcement authority over the Company and its non-savings association subsidiaries, should such subsidiaries be formed, which also permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings association. This regulation and oversight is intended primarily for the protection of the depositors of the Savings Bank and not for the benefit of stockholders of the Company. The Company is also required to file certain reports with, and otherwise comply with, the rules and regulations of the OTS and the SEC. QTL Test. As a unitary savings and loan holding company, the Company generally is not subject to activity restrictions, provided the Savings Bank satisfies the QTL test. If the Company acquires control of another savings association as a separate subsidiary, it would become a multiple savings and loan 26 holding company, and the activities of the Company and any of its subsidiaries (other than the Savings Bank or any other SAIF-insured savings association) would become subject to restrictions applicable to bank holding companies unless such other associations each also qualify as a QTL and were acquired in a supervisory acquisition. Restrictions on Acquisitions. The Company must obtain approval from the OTS before acquiring control of any other SAIF-insured association. Such acquisitions are generally prohibited if they result in a multiple savings and loan holding company controlling savings associations in more than one state. However, such interstate acquisitions are permitted based on specific state authorization or in a supervisory acquisition of a failing savings association. Federal law generally provides that no "person," acting directly or indirectly or through or in concert with one or more other persons, may acquire "control," as that term is defined in OTS regulations, of a federally insured savings institution without giving at least 60 days' written notice to the OTS and providing the OTS an opportunity to disapprove the proposed acquisition. Such acquisitions of control may be disapproved if it is determined, among other things, that (i) the acquisition would substantially lessen competition; (ii) the financial condition of the acquiring person might jeopardize the financial stability of the savings institution or prejudice the interests of its depositors; or (iii) the competency, experience or integrity of the acquiring person or the proposed management personnel indicates that it would not be in the interest of the depositors or the public to permit the acquisitions of control by such person. FIRREA amended provisions of the Bank Holding Company Act of 1956 ("BHCA") to specifically authorize the Federal Reserve Board to approve an application by a bank holding company to acquire control of a savings association. FIRREA also authorized a bank holding company that controls a savings association to merge or consolidate the assets and liabilities of the savings association with, or transfer assets and liabilities to, any subsidiary bank which is a member of the BIF with the approval of the appropriate federal banking agency and the Federal Reserve Board. FDICIA further amended the BHCA to permit federal savings associations to acquire or be acquired by any insured depository institution. As a result of these provisions, there have been a number of acquisitions of savings associations by bank holding companies and other financial institutions in recent years. Federal Securities Law. Stock held by persons who are affiliates (generally officers, directors and principal stockholders) of the Company may not be resold without registration or unless sold in accordance with certain resale restrictions. If the Company meets specified current public information requirements, each affiliate of the Company is able to sell in the public market, without registration, a limited number of shares in any three-month period. Savings Bank Regulation General. As a federally chartered, SAIF-insured savings association, the Savings Bank is subject to extensive regulation by the OTS and the FDIC. Lending activities and other investments must comply with various federal statutory and regulatory requirements. The Savings Bank is also subject to certain reserve requirements promulgated by the Federal Reserve Board. The OTS, in conjunction with the FDIC, regularly examines the Savings Bank and prepares reports for the consideration of the Savings Bank's Board of Directors on any deficiencies that they find in the Savings Bank's operations. The Savings Bank's relationship with its depositors and borrowers is also regulated to a great extent by federal law, especially in such matters as the ownership of savings accounts and the form and content of the Savings Bank's mortgage documents. 27 The Savings Bank must file reports with the OTS and the FDIC concerning its activities and financial condition, in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with or acquisitions of other savings institutions. This regulation and supervision establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of the SAIF and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such regulations, whether by the OTS, the FDIC or the Congress could have a material adverse impact on the Company, the Savings Bank and their operations. The Company is also required to file certain reports with, and otherwise comply with, the rules and regulations of the OTS and the SEC. Insurance of Deposit Accounts. The Savings Bank's deposit accounts are insured by the SAIF to a maximum of $100,000 for each insured member (as defined by law and regulation). FIRREA, enacted in 1989, gave the FDIC the authority, should it initiate proceedings to terminate an institution's deposit insurance, to suspend the insurance of any such institution without tangible capital. However, if a savings association has positive capital when it includes qualifying intangible assets, the FDIC cannot suspend deposit insurance unless capital declines materially, the institution fails to enter into and remain in compliance with an approved capital plan or the institution is operating in an unsafe or unsound manner. Regardless of an institution's capital level, insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or the institution's primary regulator. The management of the Savings Bank is unaware of any practice, condition or violation that might lead to termination of its deposit insurance. The FDIC charges an annual assessment for the insurance of deposits based on the risk a particular institution poses to its deposit insurance fund. This risk classification is based on an institution's capital group and supervisory subgroup assignment. In addition, the FDIC is authorized to increase such deposit insurance rates, on a semi-annual basis, if it determines that such action is necessary to cause the balance in the SAIF to be maintained at the designated reserve ratio of 1.25% of SAIF- insured deposits. Prior to September 30, 1996, savings associations paid within a range of .23% to .31% of domestic deposits and the SAIF was substantially underfunded. By comparison, prior to September 30, 1996, members of the Bank Insurance Fund ("BIF"), predominantly commercial banks, were required to pay substantially lower, or virtually no, federal deposit insurance premiums. Effective September 30, 1996, federal law was revised to mandate a one-time special assessment on SAIF members such as the Savings Bank of approximately .657% of deposits held on March 31, 1995. The Savings Bank recorded a $2.2 million pre-tax expense for this assessment at September 30, 1996. Beginning January 1, 1997, deposit insurance assessments for SAIF members were reduced to approximately .064% of deposits on an annual basis; this rate may continue through the end of 1999. During this same period, BIF members are expected to be assessed approximately 0.13% of deposits. Thereafter, assessments for BIF and SAIF members should be the same and the SAIF and BIF may be merged. It is expected that these continuing assessments for both SAIF and BIF members will be used to repay outstanding Financing Corporation bond obligations. As a result of these changes, beginning January 1, 1997, the rate of deposit insurance assessed the Bank declined by approximately 70% from rates in effect prior to September 30, 1996. 28 Regulatory Capital Requirements. OTS capital regulations require savings institutions to meet three capital standards: (1) tangible capital equal to 1.5% of total adjusted assets, (2) a leverage ratio (core capital) equal to at least 3% of total adjusted assets and (3) a risk-based capital requirement equal to 8.0% of total risk-weighted assets. The following table sets forth the Savings Bank's compliance with its regulatory capital requirements as of December 31, 1996: Amount Percent ------ ------- (Dollars in Thousands) Tangible capital................................. $ 50,103 7.78% Tangible capital requirement..................... 9,655 1.50 ------- ----- Excess over requirement.......................... $ 40,448 6.28% ======= ===== Core Capital..................................... $ 50,103 7.78% Core Capital requirement......................... 19,310 3.00 ------- ----- Excess over requirement.......................... $ 30,793 4.78% ======= ===== Risk-based capital............................... $ 51,909 17.70% Risk-based capital requirement................... 23,468 8.00 ------- ----- Excess over requirement.......................... $ 28,441 9.70% ======= ===== Net Portfolio Value Analysis. In recent years, the Savings Bank has measured its interest rate sensitivity by computing the "gap" between the assets and liabilities which were expected to mature or reprice within certain periods, based on assumptions regarding loan prepayment and deposit decay rates formerly provided by the OTS. However, the OTS now requires the computation of amounts by which the net present value of an institution's cash flows from assets, liabilities and off-balance sheet items (the institution's net portfolio value, or "NPV") would change in the event of a range of assumed changes in market interest rates. The OTS also requires institutions with assets of $500 million or more to compute estimated changes in net interest income over a four-quarter period. These computations estimate the effect on an institution's NPV and net interest income of instantaneous and permanent 1% to 4% increases and decreases in market interest rates. At December 31, 1996, Third Federal's Board of Directors had adopted interest rate risk target limits which established maximum potential decreases in the Savings Bank's NPV of 20%, 30%, 40% and 50% in the event of 1%, 2%, 3% and 4% immediate and sustained increases in market interest rates, respectively. At that date, the target limits also provided for maximum potential decreases of 5%, 10%, 15% and 20% in the Savings Bank's NPV in the event of 1%, 2%, 3% and 4% immediate and sustained decreases in market interest rates, respectively. These target limits indicate that the Savings Bank's NPV could be adversely affected by changes in interest rates. The Savings Bank's interest rate risk target limits are reviewed by the Board of Directors at least quarterly and are regularly changed in light of market conditions and other factors. While management did not believe that Third Federal's NPV would have been subject to decreases in excess of the percentages set forth in the Savings Bank's interest rate risk target limits at 29 December 31, 1996, management cannot predict future interest rates or their effect on the Savings Bank's NPV in the future. Computations of prospective effects of hypothetical interest rate changes generally are based on numerous assumptions, including relative levels of market interest rates, prepayments and deposit run-offs and should not be relied upon as indicative of actual results. Further, the computations may not contemplate any actions the Savings Bank may undertake in response to changes in interest rates. Certain shortcomings may be inherent in the method of analysis presented in the computation of NPV. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in differing degrees to changes in market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types, such as ARMs indexed to the cost of funds may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate loans, have features which restrict changes in interest rates during the initial term and over the remaining life of the asset. In addition, the proportion of adjustable-rate loans in the Savings Bank's portfolios could decrease in future periods due to refinancing activity if market interest rates remain at or decrease below current levels. Further, in the event of a change in interest rates, prepayment and early withdrawal levels could deviate significantly from those assumed in the tables. Finally, the ability of many borrowers to service their adjustable-rate debt may decrease in the event of an interest rate increase. Based on its interest rate risk position as measured by the OTS, at December 31, 1996, the Savings Bank was not subject to any increased capital requirements. Prompt Corrective Action. The FDICIA also established a system of prompt corrective action to resolve the problems of undercapitalized institutions. Under this system, the banking regulators are required to take certain supervisory actions against undercapitalized institutions, the severity of which depends upon the institution's degree of capitalization. Under the OTS final rule implementing the prompt corrective action provisions, an institution shall be deemed to be (i) "well capitalized" if it has total risk-based capital of 10.0% or more, has a Tier I risk-based capital ratio (core or leverage capital to risk-weighted assets) of 6.0% or more, has a leverage capital of 5.0% or more and is not subject to any order or final capital directive to meet and maintain a specific capital level for any capital measure, (ii) "adequately capitalized" if it has a total risk-based capital ratio of 8.0% or more, a Tier I risked-based ratio of 4.0% or more and a leverage capital ratio of 4.0% or more (3.0% under certain circumstances) and does not meet the definition of "well capitalized," (iii) "undercapitalized" if it has a total risk-based capital ratio that is less than 8.0%, a Tier I risk-based capital ratio that is less than 4.0% or a leverage capital ratio that is less than 4.0% (3.0% in certain circumstances), (iv) "significantly undercapitalized" if it has a total risk-based capital ratio that is less than 6.0%, a Tier I risk-based capital ratio that is less than 3.0% or a leverage capital ratio that is less than 3.0% and (v) "critically undercapitalized" if it has a ratio of tangible equity to total assets that is equal to or less than 2.0%. In addition, under certain circumstances, a federal banking agency may reclassify a well capitalized institution as adequately capitalized and may require an adequately capitalized institution or an undercapitalized institution to comply with supervisory actions as if it were in the next lower category (except that the FDIC may not reclassify a significantly undercapitalized institution as critically undercapitalized). Immediately upon becoming undercapitalized, an institution shall become subject to various restrictions and could be subject to additional supervisory actions. The Savings Bank is currently a "well capitalized institution" as defined in the prompt corrective action regulations and as such is not subject to any prompt corrective action measures. Dividend and Other Capital Distribution Limitations. OTS regulations require the Savings Bank to give the OTS 30 days' advance notice of any proposed declaration of dividends to the Company, and the OTS has the authority under its supervisory powers to prohibit the payment of dividends to the 30 Company. In addition, the Savings Bank may not declare or pay a cash dividend on its capital stock if the effect thereof would be to reduce the regulatory capital of the Savings Bank below the amount required for the liquidation account to be established pursuant to the Savings Bank's Plan of Conversion. Qualified Thrift Lender Test. The Home Owners' Loan Act ("HOLA"), as amended, requires savings institutions to meet a QTL test. If the Savings Bank maintains an appropriate level of Qualified Thrift Investments (primarily residential mortgages and related investments, including certain mortgage-backed securities) ("QTIs") and otherwise qualifies as a QTL, it will continue to enjoy full borrowing privileges from the FHLB of Pittsburgh. The required percentage of QTIs is 65% of portfolio assets (defined as all assets minus intangible assets, property used by the institution in conducting its business and liquid assets equal to 10% of total assets). Certain assets are subject to a percentage limitation of 20% of portfolio assets. In addition, savings associations may include shares of stock of the FHLBs, FNMA and FHLMC as qualifying QTIs. The FDICIA also amended the method for measuring compliance with the QTL test to be on a monthly basis in nine out of every 12 months, as opposed to on a daily or weekly average of QTIs. As of December 31, 1996, the Savings Bank was in compliance with its QTL requirement with 88.0% of its assets invested in QTIs . A savings association that does not meet a QTL test must either convert to a bank charter or comply with the following restrictions on its operations: (i) the savings association may not engage in any new activity or make any new investment, directly or indirectly, unless such activity or investment is permissible for a national bank; (ii) the branching powers of the savings association shall be restricted to those of a national bank; (iii) the savings association shall not be eligible to obtain any advances from its FHLB; and (iv) payment of dividends by the savings association shall be subject to the rules regarding payment of dividends by a national bank. Upon the expiration of three years from the date the savings association ceases to be a QTL, it must cease any activity and not retain any investment not permissible for a national bank and immediately repay any outstanding FHLB advances (subject to safety and soundness considerations). Loans-to-One Borrower. Under the HOLA, as amended, savings institutions are subject to the national bank limits on loans-to-one borrower. Generally, a savings association may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of the association's unimpaired capital and surplus. An additional amount may be lent, equal to 10% of unimpaired capital and surplus, if such loan is secured by readily-marketable collateral, which is defined to include certain securities and bullion, but generally does not include real estate. The Savings Bank is in compliance with this requirement. Liquidity Requirements. All savings associations are required to maintain an average daily balance of liquid assets equal to a certain percentage of the sum of its average daily balance of net withdrawable deposit accounts and borrowings payable in one year or less. The liquidity requirement may vary from time to time (between 4% and 10%) depending upon economic conditions and savings flows of all savings associations. At the present time, the required liquid asset ratio is 5%. At December 31, 1996, the Savings Bank's liquidity ratio was 24.16%. Federal Home Loan Bank System. The Savings Bank is a member of the FHLB of Pittsburgh, which is one of 12 regional FHLBs that administer the home financing credit function of savings associations. Each FHLB serves as a reserve or central bank for its members within its assigned region. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It makes loans to members (i.e., advances) in accordance with policies and procedures established by the Board of Directors of the FHLB. 31 As a member, the Savings Bank is required to purchase and maintain stock in the FHLB of Pittsburgh in an amount equal to at least 1% of its aggregate unpaid residential mortgage loans, home purchase contracts or similar obligations at the beginning of each year. At December 31, 1996, the Savings Bank had $4.9 million in FHLB stock, which was in compliance with this requirement. Federal Reserve System. The Federal Reserve Board requires all depository institutions to maintain non-interest bearing reserves at specified levels against their transaction accounts (primarily checking, NOW and Super NOW checking accounts) and non-personal time deposits. The balances maintained to meet the reserve requirements imposed by the Federal Reserve Board may be used to satisfy the liquidity requirements that are imposed by the OTS. At December 31, 1996, the Savings Bank's total transaction accounts required a reserve level of $750,000 which was entirely offset by the Bank's vault cash on hand. Savings associations have authority to borrow from the Federal Reserve Bank "discount window," but Federal Reserve policy generally requires savings associations to exhaust all OTS sources before borrowing from the Federal Reserve System. The Savings Bank had no such borrowings at December 31, 1996. Item 2. Description of Property - - --------------------------------- The Company is located and conducts its business at 3 Penns Trail, Newtown, Pennsylvania. The Savings Bank operates from its main office and 13 branch offices located in Philadelphia and Bucks Counties, Pennsylvania and Mercer County, New Jersey. The Savings Bank also owns two lots, one of which has a building, behind its Doylestown branch office. The building is leased to a third-party and the other is used as a parking lot for employees and tenants of Third Federal. The net book value of the two lots was $117,000 at December 31, 1996. In addition, the Savings Bank owns a vacant lot at Newtown Yardley Road and Friends Lane, Newtown, Pennsylvania. This lot was purchased in 1993 for future expansion and had a net book value of $1.6 million at December 31, 1996. The following table sets forth certain information regarding the Savings Bank's properties: Leased or Leased or Location Owned Location Owned -------- --------- -------- --------- MAIN OFFICE Newtown Office 3 Penns Trail Newtown, PA 18940 Owned BRANCH OFFICES 950 Newtown Yardley Road Leased Frankford Office Newtown, Pennsylvania 18940 4625 Frankford Avenue Philadelphia, PA 19124 Owned Princeton Shopping Center 301 N. Harrison Street 2075 Pennington Road Princeton, NJ 08540 Leased Trenton, NJ 08618 Owned 32 Leased or Leased or Location Owned Location Owned -------- --------- -------- --------- Mayfair Office 1850 Route 33 Roosevelt Blvd. at Unruh Hamilton Square, NJ 08690 Owned Philadelphia, PA 19149 Owned Fishtown Office Doylestown Office York & Memphis Streets 60 North Main Street Philadelphia, PA 19125 Owned Doylestown, PA 18901 Owned Cross Keys Office Administrative Office 834 North Easton Highway 62 Walker Lane Doylestown, PA 18901 Owned Newtown, PA 18940(1) Owned Woodhaven Office Warminster Office Knights Road Center 601 Louis Drive 4014 Woodhaven Road Warminster, PA 18974 Owned Philadelphia, PA 19154 Leased Bridgesburg Office Feasterville Office Orthodox & Almond Streets Buck Hotel Complex Philadelphia, PA 19137 Owned Feasterville, PA 19053 Owned New Britain Office 100 Town Center New Britain, PA 18901 Leased - - -------------------------------------- (1) This office serves as administrative offices, check processing, training center, mail processing and storage center for the Savings Bank (2) Includes $1.6 million in excess land held for future expansion. (3) Includes $117,000 for two lots and building behind main office. Item 3. Legal Proceedings - - -------------------------- Neither the Company nor its subsidiaries are involved in any pending legal proceedings, other than routine legal matters occurring in the ordinary course of business, which in the aggregate involve amounts which are believed by management to be immaterial to the consolidated financial condition or results of operations of the Company. Item 4. Submission of Matters to a Vote of Security Holders - - ------------------------------------------------------------ None. 33 PART II Item 5. Market for Common Equity and Related Stockholder Matters - - ------------------------------------------------------------------ Information relating to the market for Registrant's common equity and related stockholder matters appears under "Stock Market Information" in the Registrant's 1996 Annual Report to Stockholders on pages 1 and 2, and is incorporated herein by reference. Item 6. Selected Financial Data - - -------------------------------- The above-captioned information appears under "Selected Financial and Other Data" in the Registrant's 1996 Annual Report to Stockholders on page 5, and is incorporated herein by reference. 34 Item 7. Management's Discussion and Analysis of Financial Conditions and Results - - ------------------------------------------------------------------------------- of Operations - - ------------- Rate/Volume Analysis The table below sets forth certain information regarding changes in interest income and interest expense of the Savings Bank for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (changes in average volume multiplied by old rate); (ii) changes in rates (changes in rate multiplied by old average volume); (iii) total changes in rate-volume. The combined effects of changes in both volume and rate, which cannot be separately identified, have been allocated proportionately to the change due to volume and the change due to rate.
Years Ended Twelve Months Ended December 31 December 31 December 31, June 30 Year Ended June 30, ----------------------- --------------------- -------------------------------------------- 1996 vs 1995 1995 vs 1994 1994 vs 1993 1993 vs 1992 ----------------------- --------------------- ------------------- ------------------- Increase (Decrease) Increase (Decrease) Increase (Decrease) Increase (Decrease) Due to Due to Due to Due to ----------------------- --------------------- ------------------- ------------------- Volume Rate Net Volume Rate Net Volume Rate Net Volume Rate Net ---------- -------- ---- ------ ---- --- -------- ---------- ----- ------- ------- ----- Interest Income: (In Thousands) Loans receivable..... $1,645 $ (30) $11,615 $ 853 $ (315) $ 538 $(1,431) $(1,734) $(3,165) $(2,604) $(624) $(3,228) Mortgage-backed securities(1........ (699) (137) (836) 3,506 474 3,980 1,295 (7) 1,288 1,223 (807) 416 Investment securities(1) (982) -- (982) (401) 211 (190) 894 (436) 458 1,441 (1,025) 416 Other interest-earning assets............. (14) (424) (438) 50 736 786 (84) 139 55 591 (843) (252) ------ ------ ------ --- ----- ----- ------ ------ ------ ------ ----- ----- Total interest- earning assets... $9,950 $ (591) $ 9,359 $4,008 $1,106 $5,114 $ 674 $(2,038) $(1,364) $ 651 $(3,299)$(2,648) ===== ===== ===== ===== ===== ===== ===== ====== ====== ====== ====== ====== Interest Expense: Savings deposits..... $ 1,734 $ (363) $ 1,371 $ (724) $1,547 $ 823 $1,343 $(2,822) $(1,479) $1,473 $(5,332)$(3,859) Borrowed money....... 4,866 157 5,023 848 (57) 791 (118) 28 (90) (456) (234) (690) ------- ------ ------ ----- ------ ----- ----- ------ ------ ----- ----- ----- Total interest bearing liabilities..... $ 6,600 $ (206) $ 6,394 $ 124 $1,490 $1,614 $1,225 $(2,794) $(1,569) $1,017 $(5,566)$(4,549) ====== ====== ====== ===== ===== ===== ===== ====== ====== ===== ====== ====== Net change in interest income.............. $ 3,350 $ (385) $ 2,965 $3,884 $(384) $3,500 $ (551) $ 756 $ 205 $ (366) $ 2,267 $ 1,901 ====== ===== ====== ===== ===== ===== ===== ====== ====== ====== ====== ======
--------------------- (1) Includes intest income on investment securities held for sale. 35 The remaining above-captioned information appears under Management's Discussion and Analysis of Financial Condition and Results of Operations in the Registrant's 1996 Annual Report to Stockholders on pages 8 through 20 and is incorporated herein by reference. Item 8. Financial Statements - - ------------------------------ The Consolidated Financial Statements of TF Financial Corporation and its subsidiaries are included in the Registrant's 1996 Annual Report to Stockholders on pages 24 through 63 and are incorporated herein by reference. Item 9. Change In and Disagreements with Accountants on Accounting and Financial - - ------------------------------------------------------------------------------- Disclosure - - ---------- None. PART III Item 10. Directors and Executive Officers of the Registrant - - ------------------------------------------------------------ The information contained under the section captioned "Information with Respect to Nominee for Director, Directors Continuing in Office and Executive Officers -- Election of Directors" at pages 4 to 6 of the Registrant's definitive proxy statement for the Registrant's 1997 Annual Meeting of Stockholders (the "Proxy Statement") is incorporated herein by reference. Additional information concerning executive officers is included under "Item 1. Business -- Executive Officers of the Registrant." Item 11. Executive Compensation - - -------------------------------- The information relating to executive compensation is incorporated herein by reference to the Registrant's Proxy Statement at pages 7 through 11. Item 12. Security Ownership of Certain Beneficial Owners and Management - - ------------------------------------------------------------------------- The information relating to security ownership of certain beneficial owners and management is incorporated herein by reference to the Registrant's Proxy Statement at pages 3 and 4. Item 13. Certain Relationships and Related Transactions - - -------------------------------------------------------- The information relating to certain relationships and related transactions is incorporated herein by reference to the Registrant's Proxy Statement at page 14. 36 PART IV Item 14. Exhibits and Reports on Form 8-K - - ------------------------------------------ (a) The following documents are filed as a part of this report: (1) Financial Statements of the Company are incorporated by reference to the following indicated pages of the 1996 Annual Report to Stockholders.
PAGE Independent Auditors' Report..................................................... 23 Consolidated Statements of Financial Position as of December 31, 1996 and 1995... 24 Consolidated Statements of Earnings For the Years Ended December 31, 1996 and 1995 and the six months ended December 31, 1994 and the Year Ended June 30, 1994 ...................................................... 25 Consolidated Statement of Changes in Stockholders' Equity for the Years Ended December 31, 1996 and 1995, the six months ended December 31, 1994 and the Year Ended June 30, 1994....................................... 26 Consolidated Statements of Cash Flows for the Years Ended December 31, 1996 and 1995, the six months ended December 31, 1994 and the Year Ended June 30, 19928 Notes to Consolidated Financial Statements....................................... 30
The remaining information appearing in the Annual Report to Stockholders is not deemed to be filed as part of this report, except as expressly provided herein. (2) All schedules are omitted because they are not required or applicable, or the required information is shown in the consolidated financial statements or the notes thereto. (3) Exhibits (a) The following exhibits are filed as part of this report. 3.1 Certificate of Incorporation of TF Financial Corporation* 3.2 Bylaws of TF Financial Corporation* 4.0 Stock Certificate of TF Financial Corporation* 10.1 Form of Third Federal Savings and Loan Association Management Stock Bonus Plan* 10.2 Form of TF Financial Corporation 1994 Stock Option Plan* 10.3 Third Federal Savings Bank Directors Consultation and Retirement Plan** 10.4 TF Financial Corporation Incentive Compensation Plan** 10.5 Severance Agreement with John R. Stranford** 10.6 Severance Agreement with Francis J. Poiesz** 10.7 Severance Agreement with William C. Niemczura** 11.0 Statement re Computation of Per Share Earnings 13.0 1996 Annual Report to Stockholders 37 21.0 Subsidiary Information 23.0 Consent of Independent Auditor (b) Reports on Form 8-K. The Registrant filed the following Current Reports on Form 8-K with the SEC during the quarter ended December 31, 1996: 1) Form 8-K/A No.1, Item 2, dated September 20, 1996, filed with the SEC to report the acquisition of certain assets and the assumption of certain liabilities of three branch offices of Cenlar. 2) Form 8-K/A No. 2, Item 7, dated September 20, 1996, filed with the SEC to file the financial statements of acquired business and certain pro forma financial information with respect to the acquisition of certain assets and the assumption of certain liabilities of three branch offices of Cenlar. 3) Form 8-K Item 5, dated October 23, 1996, filed with the SEC to report the commencement of a repurchase program covering up to 5% of the Registrant's outstanding common stock. - - --------------------------- * Incorporated herein by reference from the Exhibits to Form S-1, Registration Statement, File No. 33-76960. ** Incorporated herein by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1995. 38 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. TF FINANCIAL CORPORATION Dated: March 26, 1997 By:/s/ John R. Stranford ---------------------------------- John R. Stranford President, Chief Executive Officer and Director (Duly Authorized Representative) Pursuant to the requirement of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. By: /s/ John R. Stranford By: /s/ William C. Niemczura ---------------------------------- --------------------------------- John R. Stranford William C. Niemczura President, Chief Executive Officer Senior Vice President, Chief and Director Financial Officer and Treasurer (Principal Executive Officer) (Principal Financial and Accounting Officer) Date: March 26, 1997 Date: March 26, 1997 By: /s/ Carl F. Gregory By:/s/ Robert N. Dusek ---------------------------------- ----------------------------------- Carl F. Gregory Robert N. Dusek Director Chairman of the Board Date: March 26, 1997 Date: March 26, 1997 By: /s/ Thomas J. Gola By:/s/ George A. Olsen --------------------------------- ----------------------------------- Thomas J. Gola George A. Olsen Director Director Date: March 26, 1997 Date: March 26, 1997 EX-11 2 EXHIBIT 11 EXHIBIT 11 Exhibit No. 11 Statement re: Computation of Per Share Earnings
Year Year Ended Ended December 31, 1996 December 31, 1995 ----------------- ------------------ Net income ........................................ $3,479,000 $3,871,000 Weighted average common shares outstanding ........ 4,066,615 4,600,775 Common stock equivalents due to dilutive effect of stock options ......................... 101,221 65,299 Total weighted average common shares and equivalents outstanding ......................... 4,167,836 4,666,074 Primary earnings per share ........................ $ 0.83 $ 0.83 Total weighted average common shares and equivalents outstanding ..................... 4,167,836 4,666,074 Additional dilutive shares using the higher of the end of period market value or average market value for the period when utilizing the treasury stock method regarding stock options ............ 11,788 11,341 Total outstanding shares for fully diluted earnings per share computation ........................... 4,179,624 4,677,415 Fully diluted earnings per share .................. $ 0.83 $ 0.83
EX-13 3 EXHIBIT 13 EXHIBIT 13 TF FINANCIAL CORPORATION ANNUAL REPORT DECEMBER 31, 1996 TABLE OF CONTENTS Corporate Profile and Stock Market Information............................ 3 Selected Financial Information and Other Data............................. 5 Letter to Stockholders.................................................... 7 Management's Discussion and Analysis of Financial Condition and Results of Operations........................... 8 Report of Independent Certified Public Accountants ........................................................... 23 Consolidated Statements of Financial Condition........................... 24 Consolidated Statements of Income......................................... 25 Consolidated Statement of Changes in Stockholders' Equity...................26 Consolidated Statements of Cash Flows.......................................28 Notes to Consolidated Financial Statements............................... 30 Office Locations......................................................... 64 Corporate Information............................................. Back Cover 2 TF FINANCIAL CORPORATION Corporate Profile and Related Information TF Financial Corporation (the "Corporation") is the parent company of Third Federal Savings Bank ("Third Federal" or the "Savings Bank"), TF Investments Corporation and Penns Trail Development Corporation. At December 31, 1996, total assets were approximately $647.9 million. The Corporation was formed as a Delaware corporation in March 1994 at the direction of the Savings Bank to acquire all of the capital stock that Third Federal issued upon its conversion from the mutual to stock form of ownership (the "Conversion") and concurrent $52.9 million initial public offering effective July 13, 1994. At December 31, 1996, total stockholders' equity was approximately $72.6 million. The Corporation is a unitary savings and loan holding company which, under existing laws, generally is not restricted in the types of business activities in which it may engage, provided that Third Federal retains a specified amount of its assets in housing-related investments. Third Federal is a federally-chartered stock savings bank headquartered in Newtown, Pennsylvania, which was originally chartered in 1921 under the name "Polish American Savings Building and Loan Association." Third Federal became a federally chartered mutual savings and loan association under the name "Third Federal Savings and Loan Association of Philadelphia" in 1935, and a federally chartered stock savings bank under its present name, and a wholly owned subsidiary of the company, in July 1994, in connection with its mutual-to-stock conversion. Third Federal significantly expanded its operations throughout Philadelphia and Bucks Counties, Pennsylvania, in June 1992 through its acquisition of Doylestown Federal Savings and Loan Association ("Doylestown"). In September 1996, Third Federal expanded its operations into Mercer County, New Jersey, through its acquisition of three branches, along with the related deposits, of Cenlar Federal Savings Bank. Deposits have been federally insured since 1935 and are currently insured up to the maximum amount allowable by the Federal Deposit Insurance Corporation (the "FDIC"). Third Federal is a community oriented savings institution offering a variety of financial services to meet the needs of the communities that it serves. Third Federal conducts its business from its main office in Newtown, Pennsylvania, and thirteen full service branch offices located in Philadelphia and Bucks Counties, Pennsylvania and Mercer County, New Jersey. Third Federal attracts deposits (approximately $469.1 million at December 31, 1996) from the general public and uses such deposits, together with borrowings (approximately $98.4 million at December 31, 1996) and other funds, primarily to invest in mortgage-backed and investment securities and to originate or purchase loans secured by first mortgages on owner-occupied, one-to-four family residences in its market area. To a much lesser extent, the Savings Bank also originates commercial real estate and multi-family loans, construction loans and consumer loans. Stock Market Information Since its issuance in July 1994, the Corporation's common stock has been traded on the Nasdaq National Market. The daily stock quotation for the Corporation is listed in the Nasdaq National Market published in The Wall Street Journal, The Philadelphia Inquirer, and other leading newspapers under the trading symbol of "THRD". The following table reflects the closing stock price as published by the Nasdaq National Market statistical report. Fiscal 1994 HIGH LOW ----------- ---- --- July 13, 1994 - September 30, 1994 $12.25 $11.25 October 1, 1994 - December 31, 1994 $12.00 $ 9.75 3 Fiscal 1995 HIGH LOW First Quarter $12.75 $10.13 Second Quarter $14.38 $12.38 Third Quarter $16.25 $13.25 Fourth Quarter $15.88 $14.50 Fiscal 1996 HIGH LOW First Quarter $15.38 $14.00 Second Quarter $15.13 $13.94 Third Quarter $15.13 $13.75 Fourth Quarter $16.25 $14.50 The number of shareholders of record of common stock as of the record date of March 3, 1997, was approximately 738. This does not reflect the number of persons or entities who held stock in nominee or "street" name through various brokerage firms. At March 3, 1997, there were 4,224,386 shares outstanding. Dividend Policy The Corporation's ability to pay dividends to stockholders is dependent in part upon the dividends it receives from Third Federal. Third Federal may not declare or pay a cash dividend on any of its stock if the effect thereof would cause Third Federal's regulatory capital to be reduced below (1) the amount required for the liquidation account established in connection with Third Federal's conversion from mutual to stock form, or (2) the regulatory capital requirements imposed by the Office of Thrift Supervision ("OTS"). It is the Corporation's policy to pay dividends when it is deemed prudent to do so. The Board of Directors will consider the payment of a dividend on a quarterly basis, after giving consideration to the level of profits for the previous quarter and other relevant information. The following charts show the Corporation's history of dividend payments. Dividend History [GRAPHIC OMITTED - PLOTTING POINTS BELOW] Change in Accounting Period On August 19, 1994, the Board of Directors of TF Financial Corporation approved a change in the Corporation's fiscal year end from June 30 to December 31. This change was instituted to enable the Corporation to present its financial reports on a fiscal year end that is more prevalent in the financial services industry. 6
SELECTED FINANCIAL INFORMATION AND OTHER DATA ============================================================================================= Financial Condition At December 31, At June 30, -------------- ---------- (Dollars in Thousands, except 1996 1995 1994 1994 1993 1992 per share data) ============================================================================================= Total Assets .................. $647,853 $490,358 $431,828 $436,043 $388,681 $362,169 Loans Receivable, net ......... 309,570 238,275 113,893 119,446 143,299 174,955 Mortgage-backed securities available ..................... 22,027 29,640 -- -- -- -- for sale, at fair Value Mortgage-backed securities held to maturity at cost............ 153,758 137,841 181,411 154,288 95,836 76,367 Securities purchased under .... 25,129 -- -- -- -- -- agreements to resell Investment securities available for sale, at fair value ....... 12,652 15,044 41,002 40,316 -- -- Investment securities held to maturity, at cost.............. 38,544 23,640 36,531 25,859 72,137 38,799 Cash and cash equivalents (1) . 54,132 27,032 42,376 78,466 57,948 47,044 Savings deposits .............. 469,088 337,069 347,631 367,133 350,328 326,053 Other borrowings .............. 98,359 73,359 -- 900 3,900 4,800 Retainedearnings .............. 39,750 37,529 34,746 32,139 27,673 24,803 Total stockholder's equity .... 72,575 73,332 79,972 N/A N/A N/A Book value per common share ... $ 18.31 $ 17.08 $ 16.38 N/A N/A N/A Tangible book value per common $ 15.99 $ 17.08 $ 16.38 N/A N/A N/A share
================================================================================================ Summary of Operations Year ended Six months ended (Dollars in Thousands, except December, 31 December, 31 Year ended June 30, -------------- ------------ ------------------- per share data) 1996 (2) 1995 1994 1993 1994 1993 1992 ================================================================================================ Interest income .............. $38,989 $29,630 $13,901 $12,124 $24,516 $25,88 $28,528 Interest ..................... 20,797 14,403 6,271 6,594 12,789 14,358 18,907 expense Net interest ................. 18,192 15,227 7,630 5,530 11,727 11,522 9,621 income Provision for (recovery of) .. 330 72 30 4 (144) 48 1,263 loan losses Non-interest ................. 1,794 1,161 617 1,249 1,903 1,895 2,784 income Non-interest ................. 13,745 9,975 4,601 4,690 9,452 9,644 13,024 expense Net income (loss) before cumulative effect of change in accounting method.......... 3,479 3,871 2,180 1,355 2,666 2,870 (2,769) Net income ................... 3,479 3,871 2,607 3,155 4,466 2,870 (2,769) (loss) Per share data Continuing .............. $ 0.83 $ 0.83 $ 0.45 N/A N/A N/A N/A operations Cumulative effect of accounting changes....... -- -- $ 0.08 N/A N/A N/A N/A Earnings per common share & common share equivalent $ 0.83 $ 0.83 $ 0.53 N/A N/A N/A N/A (footnotes on following page)
5
======================================================================================================================== Performance Ratios and Other Year ended Six months ended selected data December, 31 December, 31 Year ended June 30, ------------ -------------- --------------------- 1996(2) 1995 1994(3)(4) 1993(3)(4) 1994 1993 1992 ======================================================================================================================== Return on average assets....................... 0.62% 0.88 1.00% 0.68% 0.67% 0.77% -0.75% Return on average equity....................... 4.74% 4.99 5.40% 9.03% 8.59% 10.99% -9.97% Average equity to average assets............... 12.91% 17.54 18.48% 7.53% 7.65% 7.00% 7.54% Average interest rate spread................... 2.76% 2.84 3.15% 2.61% 2.86% 2.90% 2.54% Non-performing loans to total assets........... 0.30% 0.37 0.42% 0.86% 0.48% 1.48% 2.37% Non-performing loans to total loans............ 0.64% 0.76 1.48% 1.63% 1.49% 2.42% 2.48% Allowance for loan losses to non-performing loans.......................................... 91.60% 82.31 87.13% 78.22% 84.71% 47.85% 41.51% Allowance for loan losses to total loans....... 0.58% 0.62 1.29% 1.25% 1.19% 1.13% 1.01% Savings Bank regulatory capital Core ...................................... 7.77% 12.21% 13.57% 7.63% 7.37% 7.12% 6.62% Tangible .................................. 7.77% 12.21% 13.57% 7.63% 7.37% 7.12% 6.62% Risk based................................. 17.68% 27.07% 39.46% 20.40% 21.27% 17.30% 13.90%
1. Consists of cash due from banks, interest-bearing deposits, and federal funds sold with maturities of less than three months. 2. Includes a one-time special assessment to recapitalize the Savings Association Insurance Fund ("SAIF") - See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Comparison of Years Ended December 31, 1996 and December 31, 1995 - Net Income" 3. Income related ratios exclude the cumulative effect of a change in accounting for certain investments of $427,000 for the six months ended 12/31/94 (SFAS #115) and change in accounting for income taxes of $1.8 million for the six month period ended 12/31/93 and fiscal year end 6/30/94 (SFAS #109). 4. Ratios for six month periods are stated on an annualized basis. Such ratios are not necessarily indicative of the results that may be expected for the full year. 6 TF FINANCIAL CORPORATION To Our Stockholders: The attached financial statements for the year ended December 31, 1996, reflect our second full calendar year as a stock organization. Because of the change in our fiscal year end from June 30 to December 31, the twelve month comparison of results will look at December 31, 1996, December 31, 1995 and June 30, 1994. After our stock conversion in July of 1994, our efforts were concentrated on rebuilding our loan origination function. We have almost tripled loans outstanding to $310 million during this period and we are now beginning to sell some of our loan production into the secondary market. Approximately half of our loan growth was funded by maturities and sales of investments and borrowings with a duration match to the new loans. Our overall interest rate sensitivity has been further enhanced as a result of this approach. Net interest income increased by 19.7% to $18.2 million. Net Income of $3.5 million for the fiscal year ended December 31, 1996 showed a $392,000 decrease over net income of $3.9 million for the fiscal year ended December 31, 1995. The decrease in earnings for this period is primarily attributable to the one-time deposit insurance assessment totaling $2.2 million ($1.4 million after tax). The deposit insurance assessment was the result of a one-time fee assessed to members of the Savings Association Insurance Fund ("SAIF") for its recapitalization. Net income, absent of the $1.4 million after tax "SAIF" recapitalization assessment, was $4.8 million for the fiscal year ended December 31, 1996, as compared to net income of $3.9 million for the fiscal year ended December 31, 1995. This increase in net income of $.9 million to $4.8 million (absent the "SAIF" assessment), for the fiscal year ended December 31, 1996, reflects a 24.9% increase over the similar period in 1995. To further enhance our earnings per share, the Company repurchased a total of 242,025 shares of common stock at an average cost of $14.86 during the past year. The stock repurchases represent 4.6% of the common shares issued in our initial public offering. Book value per share has increased from $17.08 at December 31, 1995 to $18.31 at December 31, 1996, through the combination of increased earnings and stock repurchases. The consolidation within the banking industry has created an opportunity for the service oriented local financial institution. We are moving toward the development of new products and delivery systems to take advantage of this trend. Growth, through a deeper penetration in our current market areas, will be our major focus in 1997. Opportunities for new branch locations will be pursued where they complement our existing branch structure. We appreciate your continued confidence in the employees, management and Board of Directors. We will all continue to work to maintain that confidence by managing your institution in a safe, sound and profitable manner. Sincerely, /s/ John R. Stranford John R. Stranford President and Chief Executive Officer 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General On July 13, 1994, the Corporation completed a public offering of its common stock. Any financial information presented for periods prior to that date is only that of the Savings Bank. On August 19, 1994, the Board of Directors of the Corporation approved a change in the Corporation's fiscal year end from June 30 to December 31. The following discussion and analysis should be read in conjunction with the Corporation's consolidated financial statements and is intended to assist in understanding and evaluating the major changes in the financial condition and results of operations of the Corporation with a primary focus on an analysis of operating results. The Corporation's income on a consolidated basis is derived substantially from its investment in its subsidiary, Third Federal. The earnings of Third Federal depend primarily on its net interest income. Net interest income is affected by the interest income that Third Federal receives from its loans and investments and by the interest expense that the Savings Bank incurs on its deposits, borrowings and other sources of funds. The difference between average rates of interest earned on interest earning assets and the average rates paid on interest bearing liabilities is the "interest rate spread". When interest earning assets equal or exceed interest bearing liabilities, any positive interest rate spread will produce net interest income. During the years ended December 31, 1996, December 31, 1995, and June 30, 1994, the average net interest rate spread was 2.76%, 2.84% and 2.86% respectively. During the six months ended December 31, 1994, the average net interest rate spread was 3.15%. In addition, Third Federal receives income from service charges and other fees and occasionally from sales of investment securities and real estate owned. The Savings Bank 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. Interest Rate Sensitivity Analysis The Corporation's asset/liability strategy for 1997 is to maintain its present positive gap position (interest-earning assets subject to repricing greater than interest-bearing liabilities subject to repricing) for periods of up to three years so that the impact of a slightly rising rate environment on net interest income will not be significant to the Corporation's results of operations. Effective monitoring of these interest sensitivity gaps is the priority of the Corporation's asset/liability management committee. The following table indicates the time periods in which interest-earning assets and interest-bearing liabilities will mature or reprice in accordance with their contractual terms or assumed prepayment rates. The assumptions used in the table are included in the notes thereto. Management believes that the assumptions used to evaluate the vulnerability of the Savings Bank's operations to changes in interest rates are reasonable. The interest rate sensitivity of the Savings Bank's assets and liabilities as shown in the table below could vary substantially if differing assumptions were used or if actual experience differs from the assumptions used in the table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in differing degrees to changes in market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Further, in the event of a significant change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in the table. Finally, the ability of many borrowers to service their adjustable-rate debt may decrease in the event of an interest rate increase. 8
Gap Table 3 Months 3 Months 1 to 3 3 to 5 5 to10 10 to 20 Over 20 or Less to 1 Year Years Years Years Years Years Total ------- --------- ----- ----- ----- ----- ----- ----- Interest-earning assets: Loans receivable - net (1) $ 57,782 $61,713 $74,172 $36,948 $56,231 $19,540 $3,184 $ 309,570 ======== ======= ======= ======= ======= ======= ====== ========= Mortgage-backed securities available for sale (2)...... 1,410 3,677 5,826 3,150 4,817 2,860 287 22,027 Mortgage-backed securities held to maturity (2)........ 9,432 25,741 40,789 25,200 33,718 16,870 2,008 153,758 Investment securities available for sale......... 1,636 7,011 4,005 -- -- -- -- 12,652 Investment securities held to maturity........... 15,576 8,989 9,095 4,884 -- -- -- 38,544 Certificates of deposit-other banks (5).................. 900 2,066 100 -- -- -- -- 3,066 Other earning assets ........ 77,661 -- -- -- -- -- -- 77,661 -------- ------- ------- ------- ------- ------- ------ --------- Total interest-earning assets (4)............... $164,397 $109,197 $133,987 $70,182 $94,766 $39,270 $5,479 $617,278 ======== ======= ======= ======= ======= ======= ====== ========= Interest-bearing liabilities: (3) Non-interest bearing ........ deposits ................... $ 486 $ 1,199 $ 1,255 $ 489 $ 283 $ 29 $ -- $ 3,741 NOW and Super NOW accounts... 3,472 9,281 10,099 6,672 8,381 4,028 580 42,513 Savings accounts ............ 5,806 16,711 31,378 34,834 46,724 37,671 14,541 187,665 Money market deposit accounts 2,448 6,544 7,119 4,703 5,908 2,839 409 29,970 Certificates of deposit ..... 41,598 95,837 59,588 8,176 -- -- -- 205,199 Borrowings (5) -- 16,963 70,000 25,000 -- 3,359 -- 115,322 -------- ------- ------- ------- ------- ------- ------ --------- Total interest-bearing liabilities............. $ 53,810 $146,535 $179,439 $ 79,874 $61,296 $ 47,926 $15,530 $584,410 ======== ======= ======= ======= ======= ======= ====== ========= Interest sensitivity gap ...... $110,587 $(37,338) $(45,452) $ (9,692) $33,470 $ (8,656) $(10,05) $ 32,868 -------- ------- ------- ------- ------- ------- ------ --------- Cumulative interest sensitivity gap................ $110,587 $ 73,249 $ 18,105 $ 28,797 $ 51,575 42,919 32,868 Ratio of interest-earning assets to interest-bearing liabilities 305.51% 74.52% 74.67% 87.87% 154.60% 89.94% 35.28% 105.62% ======== ======= ======= ======= ======= ======= ====== ========= Ratio of cumulative gap to total assets................. 16.94% 11.22% 4.26% 2.77% 7.90% 6.58% 5.04% ======== ======= ======= ======= ======= ======= ====== =========
- - ------------------------ (1) Adjustable rate loans are included in the period in which interest rates are next scheduled to adjust rather than in the period in which they are due. Fixed rate loans are included in the period in which they are scheduled to be repaid and adjusted to take into account estimated prepayments based upon assumptions estimating the prepayments in the interest rate environment prevailing during the fourth calendar quarter of 1996. The table assumes prepayments and scheduled principal amortization of fixed-rate loans and mortgage-backed securities, and assumes that adjustable rate mortgage loans will reprice at contractual repricing intervals. There has been no adjustment for the impact of future commitments and loans in process. (2) Reflects estimated prepayments in the interest rate environment prevailing during the fourth quarter of 1996. (3) Certificates of deposit are included in the period in which they are scheduled to mature. Passbook and statement savings accounts are assumed to decay at a rate of 12%, 10% and 10% for the first three years, respectively, and 12% per year thereafter. Passbook, statement savings, NOW, and MMDA accounts are generally subject to immediate withdrawal, however, management considers a portion of these accounts to be core deposits having significantly longer effective maturities based upon the Savings Bank's historical retention of such deposits in changing interest rate environments and the presentation of run off of such deposits based upon the financial industry's experience. (4) Earning assets do not include Third Federal's investment of $4.9 million in stock of the Federal Home Loan Bank of Pittsburgh ("FHLB") Although this asset is interest earning, the Savings Bank's ability to reprice or sell this asset is limited by the regulations governing membership in the FHLB system. (5) Gap Table reflects the assets and liabilities of the savings bank only. 10 Average Balance Sheets The following tables sets forth information relating to the Corporation's average balance sheets 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 monthly average balance of interest-earning assets or interest-bearing liabilities, respectively, for the periods indicated, however, management does not believe the use of month-end balances has caused any material difference on the information presented.
Year Ended December 31, Year ended December 31, Year Ended June 30, 1996 1995 1994 ------------------------------- -------------------------------- ------------------------------ Average Average Average Average Average Average Balance Interest Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost ------- -------- ---------- ------- -------- ---------- ------- -------- ---------- (Dollars in Thousands) Assets: Interest-earning assets: Loans receivable ..............$298,800 $23,117 7.74% $149,741 $11,501 7.68% $138,375 $ 10,963 7.92% Mortgage-backed securities..... 162,973 11,040 6.77% 173,301 11,877 6.85% 121,937 7,897 6.48% Investment securities ......... 44,598 2,728 6.12% 64,844 3,870 5.97% 82,544 4,060 4.92% Securities purchased under agreements to resell (4) .... 3,761 160 4.25% -- -- -- -- -- -- Other interest-earning assets(1)................... 43,024 1,944 4.52% 43,271 2,382 5.50% 42,015 1,596 3.80% -------- ------- ---- -------- -------- ---- -------- --------- ---- Total interest-earning assets......................$553,156 $38,989 7.05% $431,157 $ 29,630 6.87% $384,871 $ 24,516 6.37% ======== ======= ======== ======== ======== ========= Non interest-earning assets .....$ 14,714 $ 10,901 $ 20,777 -------- -------- -------- Total assets ...............$576,870 $442,058 $405,648 Liabilities and Stockholders' Equity: Interest-bearing liabilities: Savings deposits ............$382,511 $14,739 3.85% $337,699 $ 13,368 3.96% $362,204 $ 12,545 3.46% Borrowings .................. 102,526 6,058 5.91% 19,870 1,035 5.21% 2,650 244 9.21% -------- ------- ---- -------- -------- ---- -------- --------- ---- Total interest-bearing..... liabilities...............$485,037 $20,797 4.29 $357,699 $ 14,403 4.03% $364,854 $ 12,789 3.51% Non interest-bearing ............$ 9,498 $ 6,528 $ 9,757 liabilities Total liabilities ......... 494,535 364,097 374,611 Stockholders' equity ............ 73,335 77,961 31,037 -------- -------- -------- Total liabilities and stockholders' equity.....$567,870 $442,058 $405,648 ======== ======== ======== Net interest income ............. $ 18,192 $ 15,227 $ 11,727 ======== ======== ======== Interest rate spread (2) ........ 2.76% 2.84% 2.86% Net yield on interest earning assets......................... 3.29% 3.53% 3.05% Ratio of interest-earning assets to average interest bearing liabilities............ 114% 121% 105%
(1) Includes interest-bearing deposits in other banks. (2) Interest-rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. (3) Net yield on interest-earning assets represents net interest income as a percentage of average interest-earning assets. (4) Ratios have been annualized where applicable. Average Balance Sheets (continued)
At December 31. Six Months Ended December ---------------------------- ------------------------------------------------------------------ 1994(4) 1994(4) 1993(4) Average Average Average Average Average Average Balance Interest Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost ------- -------- ---------- ------- -------- ---------- ------- -------- ---------- (Dollars in Thousands) Assets: Interest earning assets: Loans receivable................. $119,967 $10,124 8.44% $115,597 $ 4,921 8.51% $138,794 $5,760 8.30% Mortgage-backed securities....... 157,974 10,064 6.37% 179,363 5,678 6.33% 107,638 3,511 6.52% Investment securities............ 77,182 4,155 5.38% 76,911 2,117 5.51% 78,117 2,022 5.18% Other interest-earning assets(1). 53,548 1,950 3.64% 41,451 1,185 5.72% 63,058 831 2.64% ------ ----- ---- ------ ----- ---- ------ --- ---- Total interest-earning assets.. $408,671 $26,293 6.43% $413,322 $13,901 6.73% $387,607 $12,124 6.24% ======== ======= ==== ======== ======= ==== ======== ======= ==== Non interest-earning assets........ $ 15,374 $ 23,629 $10,855 -------- -------- ------- Total assets................... $424,045 $436,951 $398,462 ======== ======== ======== Liabilities and Stockholders' Equity: Interest-bearing liabilities: Savings deposits............... $358,300 $12,386 3.46% $350,368 $ 6,271 3.58% $356,356 $6,430 3.61% Borrowings..................... 700 80 11.42% -- -- -- 6,544 164 5.01% -- Total interest-bearing $359,000 $12,466 3.47% $350,368 $ 6,271 3.58% $362,900 $6,594 3.63% ======== ======= ==== ======== ======= ==== ======== ====== ==== liabilities........................ Non interest-bearing liabilities... $8,813 $ 5,847 $ 5,543 Total liabilities............ 367,813 356,215 368,443 Stockholders' equity............... 56,232 80,736 30,019 ------ ------ ------ Total liabilities and $424,045 $436,951 $398,462 ======== ======== ======== stockholders' equity............... Net interest income................ $13,827 $ 7,630 $ 5,530 Interest rate spread (2)........... 2.96% 3.15% 2.61% Net yield on interest-earning 3.38% 3.69% 2.85% assets (3)......................... Ratio of interest-earning assets to average interest-bearing........ 114% 118% 107%
- - ---------------------------------------- (1) Includes interest-bearing deposits in other banks. (2) Interest-rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. (3) Net yield on interest-earning assets represents net interest income as a percentage of average interest-earning assets. (4) Ratios have been annualized where applicable. 11 Changes to Financial Condition The Corporation's total assets at December 31, 1996 and December 31, 1995 totaled $647.9 million and $490.4 million, respectively, an increase of $157.5 million or 32.1%. This increase was primarily as a result of the $27.1 million or 100.3% increase in cash and cash equivalents, the $71.3 million or 29.9.% increase in loans receivable, the $12.5 million or 32.3% increase in investment securities, the $8.3 million or 5.0% increase in mortgage-backed securities and the $25.1 million increase in securities purchased under agreements to resell for the fiscal year ended December 31, 1996. This asset growth was primarily funded by the increase in total savings deposits at December 31, 1996 of $132.0 million or 39.2% to $469.1 million as compared to savings deposits of $337.1 million as of December 31, 1995, coupled with the $25.0 million increase in Federal Home Loan Bank advances. The increase in deposits was primarily the result of the acquisition of $137.6 million in deposit balances. The acquisition of the $137.6 million in deposit balances on September 20, 1996 resulted in the receipt of $126.5 million in cash which funded the increases in cash and cash equivalents, securities purchased under agreements to resell, investment securities, loans receivable and mortgage-backed securities. The deposit acquisition also contributed to the increase in assets for the period with the addition of $9.5 million in goodwill/core deposit intangible. Total consolidated stockholders' equity of the Corporation decreased $757,000 to $72.6 million at December 31, 1996 from $73.3 million at December 31, 1995. The 1.0% decrease is primarily attributed to the repurchase of 242,000 shares of the Corporation's outstanding common stock in the open market, at a total cost of $3.6 million coupled with the payment of $942,000 in dividends to shareholders, partially offset by the addition of $3.5 million of net income for the period. The decrease in total consolidated stockholders' equity coupled with the increase of $157.5 million in total assets resulted in a decrease in consolidated stockholders' equity as a percentage of total assets to 11.2% at December 30, 1996 from 15.0 % at December 31, 1995. Total assets amounted to $490.4 million at December 31, 1995, an increase of $58.6 million, or 13.6% from December 31, 1994. A major component of the asset increase during this period was the $94.7 million of purchased mortgage loans that were financed by $73.4 million in advances from the Federal Home Loan Bank of Pittsburgh and the Savings Bank's liquidity. During this same comparable period, savings deposits decreased by $10.6 million or 3.0% to $337.1 million at December 31, 1995. The decrease in deposits was primarily due to deposit withdrawals resulting from management's decision to price deposits more conservatively. Comparison of Years Ended December 31, 1996 and December 31, 1995 Net Income. Net Income of $3.5 million for the fiscal year ended December 31, 1996 showed a $392,000 decrease over net income of $3.9 million for the fiscal year ended December 31, 1995. The decrease in earnings for this period is primarily attributable to the one-time deposit insurance assessment totaling $2.2 million ($1.4 million after tax), partially offset by an increase in earnings in conjunction with gains associated with the sale of real estate and mortgage-backed securities. The deposit insurance assessment was the result of a one-time fee assessed to members of the Savings Association Insurance Fund ("SAIF") for its recapitalization. Net income, absent the $1.4 million after tax "SAIF" recapitalization assessment, was $4.8 million for the fiscal year ended December 31, 1996, as compared to net income of $3.9 million for the fiscal year ended December 31, 1995. This increase in net income of $.9 million to $4.8 million (absent the "SAIF" assessment), for the fiscal year ended December 31, 1996, reflects a 24.9% increase over the similar period in 1995. Net interest income before provisions for loan losses was $18.2 million for the fiscal year ended December 31, 1996 as compared to $15.2 million for the same period in 1995, an increase of $3.0 million, or 19.5%. For these same periods, total interest expense was $20.8 million and $14.4 million, respectively, an increase of $6.4 million, or 44.4%. Non-interest income was $1.8 million and $1.2 million, respectively for these same periods, an increase of 54.5%. The increase in non-interest income was attributed to the gains associated with the sale of the real estate and mortgage-backed securities along with a $207,000 increase in other operating income. Operating expense 12 (non-interest expense) was $13.7 million and $10.0 million for the fiscal year ending December 31, 1996 and December 31, 1995, respectively. The increase in operating expense was primarily attributable to the $2.2 million "SAIF" assessment along with the costs associated with the acquisition of the $137.6 million in deposit balances, and related branch offices of Cenlar Federal Savings Bank of Trenton, New Jersey. Total Interest Income. For the fiscal year ended December 31, 1996, total interest income increased to $39.0 million from $29.6 million for the fiscal year ended December 31, 1995. This increase of $9.4 million, or 31.6%, is due primarily to the increase in income on loans receivable to $23.1 million at December 31, 1996 from $11.5 million at December 31, 1995, this increase of $11.6 million, or 101.0%, was somewhat offset by the decrease in income on mortgage-backed securities, investment securities and other interest earning assets. During the same time periods the average balance of loans receivable increased by $149.1 million to $298.8 million from $149.7 million, with the average yield increasing to 7.74% from 7.68%. Interest on mortgage-backed securities decreased $836,000, or (7.0%), from December 31, 1995 to December 31, 1996. The average yield on mortgage-backed securities decreased to 6.77% from 6.85%, while the average balance of mortgage-backed securities decreased by $10.3 million when comparing these two periods. Interest on investment securities declined by $1.1 million or, 29.5%, for the fiscal year ended December 31, 1996 as compared to the similar period in 1995 as a result of the decrease in the average balance to $44.6 million from $64.8 million for the same periods. Interest on securities purchased under agreements to resell increased to $160,000 for the fiscal year ended December 31, 1996 from $0 for the fiscal year ended December 31, 1995, primarily as the result in the increase in the average balance to $3.8 million from $0 for the same periods. Interest on other interest earning assets declined by $438,000, or 18.4%, for the fiscal year ended December 31, 1996 compared to the similar period ended December 31, 1995 primarily as a result of a decrease in the average yield to 4.52% at December 31, 1996 from 5.50% at December 31, 1995. The increases in the average balances of loans receivable and the decreases in the average balances of mortgage-backed securities and investment securities are a result of management's decision to increase the origination and purchase of mortgage loans. Total Interest Expense. Total interest expense increased to $20.8 million for the fiscal year ended December 31, 1996 from $14.4 million for the fiscal year period ended December 31, 1995. This increase of $6.4 million, or 44.4%, in total interest expense is a result of the increase in the average balance of Federal Home Loan Bank advances to $102.5 million from $19.9 million for the fiscal years ended December 31, 1996 and 1995, respectively, coupled with the increase in the average balance of savings deposits by $44.8 million, or 13.3%, for the same periods. The increase in savings deposits was primarily result of the acquisition of $137.6 million in deposit balances. The average balance of total interest-bearing liabilities increased to $485.0 million during the fiscal years ended December 31, 1996 from $357.6 million during the fiscal year ended December 31, 1995 as a result of the increase in Federal Home Loan Bank borrowings and the acquisition of deposit balances. The increase in borrowings was utilized primarily to fund the origination or purchase of mortgage loans. Net Interest Income. Net interest income for the fiscal year ended December 31, 1996 increased by $3.0 million or 19.5% to $18.2 million from $15.2 million for the same period in 1995. This increase is primarily due to the increase in interest-earning assets partially offset by the increase to interest-bearing liabilities. The average balances of interest-earning assets increased to $553.2 million for the fiscal year ended December 31, 1996 from $431.2 million, or 28.3%, for the comparable period in 1995. During these same periods, the average balances on interest-bearing liabilities increased to $485.0 million from $357.6 million, or 35.6%. The cost of interest-bearing liabilities increased from 4.03% to 4.29% while the yield on interest-earning assets increased from 6.87% to 7.05% for the fiscal year periods ended December 31, 1995 and 1996 respectively. 13 Allowance for Loan Losses. The allowance for loan losses increased $322,000, or 21.7% to $1.8 at December 31, 1996 from $1.5 million at December 31, 1995, as a result of increased lending activity during the period. Such totals correlate to non-performing loans of $2.0 million at December 31, 1996 and $1.8 million at December 31, 1995. The increase in the allowance for loan losses resulted from the addition of $330,000 to the provision for loan losses and the deduction of $8,000 of net charge offs for losses on loans. The provision for losses on loans is the method by which the allowance for losses is adjusted during the period. At December 31, 1996, the allowance for loan losses was 91.6% of non-performing loans as compared to 82.3% of non-performing loans at December 31, 1995. While management maintains its allowance for losses at a level which it considers to be adequate to provide for potential losses, there can be no assurance that further additions will not be made to the allowance and that such losses will not exceed the estimated amounts. Non-Interest Income. Total non-interest income increased to $1.8 million for the fiscal year period ended December 31, 1996 from $1.2 million, or 54.5%, for the similar period in 1995. This increase can be attributed to the increase in the gain on the sale of real estate acquired through foreclosure of $33,000 and an increase in the gain on the sale of mortgage-backed securities totaling $314,000. The remainder of the increase can be attributed to an increase of $207,000 in service fee income, which was a result of increased loan servicing activity during the period, coupled with a $79,000 gain on the sale of loans. Non-Interest Expense. Total non-interest expense increased to $13.7 million for the fiscal years ended December 31, 1996 as compared to $10.0 million for the similar period in 1995. This increase of $3.7 million, or 37.8%, is primarily attributable to the increase in federal deposit insurance premiums of $2.1 million, a $749,000 increase in employee compensation and benefits, the $62,000 increase in professional fees, the $429,000 increase in other operating costs and the increase of $244,000 in amortization of intangibles. The increase in federal deposit insurance premium, was due to the "SAIF" assessment previously discussed. The increases in compensation and benefit costs were primarily a result of increased staffing necessary to support the acquisition of the three branch offices associated with the acquisition of the $137.6 million of deposit balances, coupled with salary increases resulting from annual performance reviews. Benefit costs were also increased due to the increases in costs associated with Employee Stock Ownership Plans utilizing Corporation stock (portions of the costs of benefit plans utilizing Corporation stock change as the market value of the stock changes). The increase in other operating expenses are primarily due to increases in the costs associated with current lending activities, coupled with the costs associated with the continued operation of the three branch offices purchased from Cenlar Federal Savings Bank. The increase in amortization of intangibles was the result of the acquisition of the $137.6 million in deposit balances. Income Tax Expense. For the fiscal year period ended December 31, 1996, income taxes decreased to $2.4 million from $2.5 million for the fiscal years ended Fiscal year. This decrease of $38,000 is primarily attributed to the decrease in net income before taxes to $5.9 million from $6.3 million for the fiscal year periods ended December 31, 1996 and 1995, respectively, primarily as a result of the SAIF assessment previously mentioned. Comparison of Years Ended December 31, 1995 and June 30, 1994 Net Income. The Corporation recorded net income of $3.9 million for the fiscal year ended December 31, 1995 ("December 1995"), as compared to net income of $4.5 million for the fiscal year ended June 30, 1994 ("June 1994"). Included in June 1994's income was a $1.8 million one time positive adjustment to income resulting from the adoption of Statement of Financial Accounting Standards (SFAS) No. 109 "Accounting for Income Taxes". Excluding this accounting change from the June 1994 period, earnings from continuing operations for the year ended December 31, 1995 of $3.9 million increased by $1.2 million (45.2%) compared to the $2.7 million in earnings from continuing operations for the year ended June 30, 1994. Total Interest Income. Total interest income increased by $5.1 million or 20.9% to $29.6 million for December 1995, 14 from $24.5 million for June 1994. This increase was primarily attributable to the $46.3 million increase in the average balance of total interest-earning assets to $431.2 million for December 1995 from $384.9 million for June 1994 aided by an increase in the average yield on total interest-earning assets of 50 basis points (100 basis points equals 1%) or 7.8% from 6.37% for June 1994 compared to 6.87% for December 1995. Interest on loans receivable increased $0.5 million, or 4.9%, from $11.0 million in June 1994 to $11.5 million for December 1995 primarily attributable to the increase in the average balances of loans receivable offset partially by the 24 basis point decline in the average yield on loans receivable. The average balance of loans receivable increased $11.4 million, or 8.2% to $149.7 million for December 1995 compared to $138.4 million for June 1994. The average yield on loans receivable declined to 7.68% for December 1995 compared to 7.92% for June 1994 primarily as a result of the lower rates of interest available in the markets for mortgage loan products. Interest on mortgage-backed securities increased by $4.0 million, or 50.4%, to $11.9 million for December 1995 from $7.9 million for June 1994 mainly as a result of the increase in the average balance of mortgage-backed securities aided by an increase in the average yield on mortgage-backed securities. The average balance on mortgage-backed securities increased to $173.3 million for December 1995 from $121.9 million for June 1994 while the average yield on these securities increased from 6.48% for June 1994 to 6.85% for December 1995. The increase in mortgage-backed securities is due mainly to management's decision to invest the proceeds of the stock conversion primarily into mortgage-backed securities. The increase in interest yield on these securities was due primarily to the relatively higher rates of interest being available in the markets during the latter half of 1994. Income from other interest-earning assets increased $0.8 million offset in part by the decline of $0.2 million in interest earned on investment securities for the periods being compared. Other interest-earning assets increased on average by $1.3 million, or 3.0% to $43.3 million for December 1995 from $42.0 for June 1994 while the average yield on these assets (primarily overnight loans of Fed Funds) increased from 3.8% to 5.5% for these periods. The primary reason for the increases in average yields was the availability of higher market rates of interest on short term investments during the latter half of 1994 and the first half of 1995. Management's policy during the latter portion of 1994 was to increase investments in mortgage backed securities and investment securities in anticipation of increased loan demand in 1995. Total Interest Expense. Total interest expense increased to $14.4 million for December 1995 from $12.8 million for June 1994 while the average balance of total interest-bearing liabilities decreased to $357.6 million for December 1995 from $364.9 million for June 1994. The increase in total interest expense is attributable to the increases in the average cost of savings deposits as well as the increased average balance of borrowed money. The decreased average amount of savings deposits was accompanied by an increase in the average cost of deposits from 3.46% in June 1994 to 3.96% in December 1995. Management believes that the primary reason for the reductions in deposits was the maturity and withdrawal of certificates of deposit and the reinvestment of such deposits in alternative investment products with potentially higher rates of return. The cost of borrowed money increased as a result of an increase in the average amounts of borrowed money of $17.2 million of Federal Home Loan Bank advances during 1995 that had an average cost of 5.21%. Net Interest Income. Net interest income increased $3.5 million or 29.8% for December 1995 over the similar period ending June 1994. This increase was primarily the result of total interest income increasing more rapidly than total interest expense as the Corporation's interest-earning assets repriced faster than its interest-bearing liabilities during the rising interest rate environment. Allowance For Loan Losses. Third Federal's allowance for loan losses was $1.5 million at December 31, 1995, and June 30, 1994. Such totals correlate to non-performing loans of $1.8 million at December 31, 1994 and $1.7 million at June 30, 1994. The provision for losses on loans is the method by which the allowance for losses is adjusted during the period. The provision for losses on loans was $72,000 for the year ended December 31, 1995 as compared to ($144,000) for the year ended June 30, 1994. As a result of the 1995 provision, Third Federal's allowance for loan losses constituted 82.3% of non-performing loans at December 31, 1995 as compared to 84.7% of non-performing loans at June 30, 1994. The decreased percentage of the allowance/non-performing loan ratio is primarily attributable to the increase in non-performing loans. Management policy is to review the overall allowance on a periodic basis and 15 to maintain the allowance at a level deemed appropriate based on an analysis of the loan portfolio and non-performing loans. Non-interest Income. Total non-interest income decreased to $1.2 million for December 1995 compared to $1.9 million for June 1994. This decrease is partially attributable to the $386,000 recovery of taxes as a result of the invalidation of Philadelphia's mortgage transfer tax recorded in the year ended June 30, 1994 which was not present in December 1995, and $533,000 in gains on sale of real estate owned which decreased to $82,000 for December 1995. Gains on sale of real estate owned or held for sale in June 1994 were primarily attributed to the sale of assets acquired through the merger with Doylestown and will not be recurring. Non-interest Expense. Total non-interest expense (operating expenses) increased $425,000 or 4.5% from $9.5 million in June 1994 to $9.9 million in December 1995. The major cause of this increase was the $545,000 (12.0%) increase in employee compensation and benefits due to normal salary increases, the hiring of additional personnel and the increased costs of stock based benefit programs, as well as the $107,000 increase in professional fees resulting from the Corporation becoming a public company. These increases were offset in part by a $236,000 reduction in other operating costs comprised mainly of reductions of insurance and surety bond costs and miscellaneous operating costs. Income Tax Expense. Income taxes increased by $912,000 or 55.1%, to $2.6 million for the year ended December 31, 1995, from $1.7 million for the year ended June 30, 1994. The primary reason for the increase was the $2.1 million increase in net income before income taxes and cumulative effects of changes in accounting. The Corporation has adopted the Financial Accounting Standards Board SFAS No. 109 "Accounting for Income Taxes". This required accounting method change resulted in a one-time cumulative effect of $1.8 million in the operations for the period ended June 30, 1994. The Corporation's effective tax rate was 39.9% for the year ended December 31, 1995 compared to 38.3% for the year ended June 30, 1994. Comparison of Six Month Periods Ended December 31, 1994 and 1993 Net Income. The Corporation recorded net income of $2.6 million for the six month period ended December 31, 1994 ("December 1994"), as compared to net income of $3.2 million for the six month period ended December 31, 1993 ("December 1993"). Included in December 1994's income was a $0.4 million one time positive adjustment to income resulting from the adoption of Statement of Financial Accounting Standards (SFAS) No. 115 "Accounting for Certain Investments in Debt and Equity Securities". Included in December 1993's income was a $1.8 million one-time positive adjustment resulting from a change in the method for accounting for income taxes due to the adoption of SFAS No. 109. Excluding these accounting changes from both periods, earnings from continuing operations for the six month period ended December 31, 1994 of $2.2 million increased by $0.8 million compared to $1.4 million earnings from continuing operations for the six month period ended December 31, 1993. Total Interest Income. Total interest income increased by $1.8 million or 14.7% to $13.9 million for December 1994, from $12.1 million for December 1993. This increase was primarily attributed to the $71.7 million increase in the average balance of mortgage-backed securities to $179.4 million for December 1994 from $107.6 million for December 1993 offset somewhat by a decrease in the average yield on these securities of 19 basis points (100 basis points equals 1%) or 2.9% from 6.33% for December 1994 compared to 6.52% for December 1993. Interest on mortgage-backed securities increased by $2.2 million, or 61.7%, to $5.7 million for December 1994 from $3.5 million for December 1993. The increase in mortgage-backed securities is due mainly to management's decision to invest the proceeds of the stock conversion primarily into short term mortgage-backed securities. The decrease in interest yield on these securities was due primarily to the prepayment of higher yielding securities and the investing of funds into shorter term, lower yielding securities. The increased yield on mortgage-backed securities was partially offset by decreases of $0.8 million in interest on loans receivable caused primarily by the decline in the average balances outstanding. Management's 16 policy during the latter portion of 1994 was to increase holdings of both mortgage-backed securities and investment securities to offset reductions in loan production. Total Interest Expense. Total interest expense decreased to $6.3 million for December 1994 from $6.6 million for December 1993. The average balance of total interest-bearing liabilities decreased to $350.4 million for December 1994 from $362.9 million for December 1993. The decreased size of deposits was accompanied by a reduction in the average cost of deposits from 3.61% in December 1993 to 3.58% in December 1994. Management believes that the primary reason for the reductions in deposits and costs was the maturity and withdrawal of certificates of deposit and the reinvestment of such deposits in alternative investment products with potentially higher rates of return. The cost of borrowed money decreased as a result of the repayment of $3.9 million of Federal Home Loan Bank advances during 1994 that were outstanding in December 1993 and had an average cost of 8.0%. Net Interest Income. Net interest income increased $2.1 million or 38.0% for December 1994 over the similar period ending December 1993. This increase was the result of total interest income rising more rapidly than total interest expense as the Corporation's interest-earning assets repriced faster than its interest-bearing liabilities during the rising interest rate environment. Allowance For Loan Losses. The Savings Bank's allowance for loan losses was $1.5 million at December 31, 1994, and June 30, 1994. Such totals correlate to non-performing loans of $1.7 million at December 31, 1994 and June 30, 1994. The provision for losses on loans is the method by which the allowance for losses is adjusted during the period. The provision for losses on loans was $30,000 for December 1994 as compared to $4,000 for June 1994. As a result of the 1994 provision, Third Federal's allowance for loan losses constituted 88.2% of non-performing loans at December 31, 1994 as compared to 84.7% of non-performing loans at June 30, 1994. The increased percentage of the allowance/non-performing loan ratio is primarily attributable to a reduction in non-performing loans, the additional provision, and management's periodic review of the overall level of the allowance. Non-interest Income. Total non-interest income decreased to $0.6 million for December 1994 compared to $1.2 million for December 1993. This decrease is partially attributable to the $386,000 recovery of taxes as a result of the invalidation of Philadelphia's mortgage transfer tax recorded in the six months ended December 31, 1993 which was not present in December 1994. Even though gains on sale of real estate owned or held for sale increased by $152,000 for December 1994, these gains were primarily offset by the $204,000 decline in service fees and charges. Non-interest Expense. Total non-interest expense (operating expenses) decreased $89,000 or 1.9% from $4.7 million in December 1993 to $ 4.6 million in December 1994. The major cause of this decrease was the $135,000 reduction in advertising costs due to a reduction in advertising for loan and deposit products and an $111,000 decrease in other operating costs due to overall improvements in operating efficiencies. These decreases more than offset increases of $78,000 in compensation due to increased costs of maintaining qualified personnel $26,000 in deposit insurance premiums, and $137,000 in professional fees. Income Tax Expense. Income taxes increased by $706,000 or 96.7%, to $1.4 million for the six month period ended December 31, 1994, from $0.7 million for the six month period ended December 31, 1993. The primary reason for the increase was the $1.5 million increase in net income before income taxes and cumulative effects of changes in accounting. The Corporation has adopted the Financial Accounting Standards Board SFAS No. 109 "Accounting for Income Taxes". This required accounting method change resulted in a one-time cumulative effect of $1.8 million in the operations for the period ended June 30, 1994. The Corporation's effective tax rate was 39.7% for the six month period ended December 31, 1994 compared to 35.0% for the six month period ended December 31, 1993. 17 Liquidity and Capital Resources Under current regulations, the Savings Bank must have core capital equal to 3% of 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. The OTS has proposed amending its regulations in such a manner that would increase the core capital requirements for most thrift institutions from 3% to 4% or 5%, depending upon the institutions financial condition and other factors. Although the final form of the regulation cannot be foreseen, if adopted as proposed, the Savings Bank would expect its core capital requirements to increase to at least 4%. On December 31, 1996, the Savings Bank exceeded with its three regulatory capital requirements as follows: Amount Percent ------ ------- Tangible capital............................... $50,103 7.78% Tangible capital requirement................... 9,655 1.50% ------- ----- Excess over requirement........................ $40,448 6.28% ======= ===== Core Capital................................... $50,103 7.78% Core Capital requirement....................... 19,310 3.00% ------- ----- Excess over requirement........................ $30,793 4.78% ======= ==== Risk based capital............................. $51,909 17.70% Risk based capital requirement................. 23,468 8.00% ------- ----- Excess over requirement........................ $28,441 9.70% ======= ==== Management believes that under current regulations, the Savings Bank will continue to meet its minimum capital requirements in the foreseeable future. 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. 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 source of funds are deposits, borrowings, and scheduled amortization and prepayment of loan and mortgage-backed security principal. During the past several years, the Savings Bank has used such funds primarily to fund maturing time deposits, pay savings withdrawals, fund lending commitments, purchase new investments, repurchase its common stock, and increase the Savings Bank's along with the Corporation's liquidity. The Savings Bank is currently able to fund its operations internally but has, when deemed prudent, borrowed funds from the Federal Home Loan Bank of Pittsburgh. As of December 31, 1996, such borrowed funds total $98.4 million. Loan prepayments, maturing investments and mortgage-backed security prepayments are greatly influenced by general interest rates, economic conditions and competition. The Savings Bank is required under federal regulations to maintain certain specified levels of "liquid investments", which include certain United States government obligations and other approved investments. Current regulations require the Savings Bank to maintain liquid assets of not less than 5% of its net withdrawable accounts plus 18 short term borrowings. Short term liquid assets must consist of not less than 1% of such accounts and borrowings, which amount is also included within the 5% requirement. These levels may be changed from time to time by the regulators to reflect current economic conditions. The Savings Bank has generally maintained liquidity far in excess of regulatory requirements. The Savings Bank's regulatory liquidity was 24.16%, 12.48% and 22.93% at December 31, 1996, 1995 and 1994, respectively, and its short term liquidity was 19.8%, 7.0% and 15.18%, at such dates, respectively. The amount of certificate accounts which are scheduled to mature during the twelve months ending December 31, 1997, is approximately $137.8 million. To the extent that these deposits do not remain at the Savings Bank upon maturity, the Savings Bank believes that it can replace these funds with deposits, excess liquidity, FHLB advances or other borrowings. It has been the Savings Bank's experience that a substantial portion of such maturing deposits remain at the Savings Bank. At December 31, 1996, the Savings Bank had outstanding commitments to originate loans of $24.9 million. Also outstanding at December 31, 1996 were commitments to purchase $2.9 million of loans from correspondents along with commitments to purchase $2.0 million of investment securities. Funds required to fill these commitments are derived primarily from current excess liquidity, deposit inflows or loan and security repayments. At December 31, 1996, the Savings Bank had outstanding commitments to sell loans of $4.7 million. Impact of Inflation and Changing Prices The consolidated financial statements and related data have been prepared in accordance with generally accepted accounting principles 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. 19 FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS TF FINANCIAL CORPORATION AND SUBSIDIARIES December 31, 1996 and 1995 20 C O N T E N T S Page ---- REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 3 FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF FINANCIAL POSITION 4 CONSOLIDATED STATEMENTS OF EARNINGS 5 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY 6 CONSOLIDATED STATEMENTS OF CASH FLOWS 8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10 21 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, 1996 and 1995, and the related consolidated statements of earnings, changes in stockholders' equity and cash flows for the years ended December 31, 1996 and 1995, the six-month period ended December 31, 1994 and the year ended June 30, 1994. 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 generally accepted auditing standards. 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 our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of TF Financial Corporation and Subsidiaries as of December 31, 1996 and 1995, and the consolidated results of their operations and their consolidated cash flows for the years ended December 31, 1996 and 1995, the six-month period ended December 31, 1994 and the year ended June 30, 1994 in conformity with generally accepted accounting principles. As described in the notes to the consolidated financial statements, the Corporation changed its method of accounting for certain investments in debt and equity securities for the six-month period ended December 31, 1994 and income taxes for the year ended June 30, 1994. Philadelphia, Pennsylvania January 22, 1997 22 TF Financial Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF FINANCIAL POSITION December 31,
1996 1995 -------- -------- (in thousands) ASSETS Cash and cash equivalents $ 54,132 $ 27,032 Certificates of deposit in other financial institutions 4,220 4,221 Securities purchased under agreements to resell 25,129 -- Investment securities available for sale - at market value 12,652 15,044 Investment securities held to maturity (market value of $38,393 and $23,880 as of December 31, 1996 and 1995, respectively) 38,544 23,640 Mortgage-backed securities available for sale - at market value 22,027 29,640 Mortgage-backed securities held to maturity (market value of $153,269 and $139,260 as of December 31, 1996 and 1995, respectively) 153,758 137,841 Loans receivable, net 309,570 238,275 Federal Home Loan Bank stock - at cost 4,918 3,668 Accrued interest receivable 4,247 3,430 Premises and equipment, net 8,002 6,555 Goodwill and other intangible assets 9,232 -- Other assets 1,422 1,012 --------- --------- TOTAL ASSETS $ 647,853 $ 490,358 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Deposits $ 469,088 $ 337,069 Advances from the Federal Home Loan Bank 98,359 73,359 Advances from borrowers for taxes and insurance 2,364 1,980 Accrued interest payable 2,030 1,763 Other liabilities 3,437 2,855 --------- --------- Total liabilities 575,278 417,026 --------- --------- Stockholders' equity Preferred stock, no par value; 2,000,000 shares authorized at December 31, 1996 and 1995, none issued -- -- Common stock, $0.10 par value; 10,000,000 shares authorized, 5,290,000 shares issued, 3,962,544 and 4,164,942 shares outstanding at December 31, 1996 and 1995, respectively, net of shares in treasury: 1996 - 1,008,614; 1995 - 766,589 529 529 Retained earnings 39,750 37,529 Additional paid-in capital 51,645 51,475 Unearned ESOP shares (3,188) (3,491) Shares acquired by MSBP (1,322) (1,731) Treasury stock - at cost (14,712) (11,116) Net unrealized (loss) gain on securities available for sale, net of tax (127) 137 --------- --------- Total stockholders' equity 72,575 73,332 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 647,853 $ 490,358 --------- ---------
The accompanying notes are an integral part of these statements. 23 TF Financial Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF EARNINGS
Six-month period ended Year ended December 31, December 31, June 30, ----------------------- 1996 1995 1994 1994 ---- ---- ---- ----- (in thousands) Interest income Loans, including fees $23,116 $ 11,501 $ 4,921 $ 10,963 Mortgage-backed securities 11,041 11,877 5,678 7,897 Investment securities 2,728 3,870 2,117 4,060 Interest-bearing deposits and other 2,104 2,382 1,185 1,596 ------- -------- -------- -------- TOTAL INTEREST INCOME 38,989 29,630 13,901 24,516 ------- -------- -------- -------- Interest expense Deposits 14,739 13,368 6,271 12,545 Borrowings 6,058 1,035 -- 244 ------- -------- -------- -------- TOTAL INTEREST EXPENSE 20,797 14,403 6,271 12,789 ------- -------- -------- -------- NET INTEREST INCOME 18,192 15,227 7,630 11,727 Provision for (recoveries of) loan losses 330 72 30 (144) ------- -------- -------- -------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 17,862 15,155 7,600 11,871 ------- -------- -------- -------- Non-interest income Gain on sale of real estate acquired through foreclosure 115 82 152 533 Gain (loss) on sale of investment securities 330 16 14 (244) Gain on sale of real estate held for sale -- -- -- 532 Gain on sale of loans 79 -- -- -- Unrealized loss on valuation of investments held for sale- -- -- (648) Service fees, charges and other operating income 1,270 1,063 451 1,730 ------- -------- -------- -------- TOTAL NON-INTEREST INCOME 1,794 1,161 617 1,903 ------- -------- -------- -------- Non-interest expense Employee compensation and benefits 5,828 5,079 2,334 4,534 Occupancy and equipment 1,432 1,357 634 1,317 Federal deposit insurance premium 2,929 791 421 810 Data processing 505 448 216 469 Professional fees 508 446 269 339 Advertising 292 276 42 268 Other operating 2,007 1,578 685 1,715 Amortization of goodwill and other intangible assets 244 -- -- -- ------- -------- -------- -------- TOTAL NON-INTEREST EXPENSE 13,745 9,975 4,601 9,452 ------- -------- -------- -------- INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGES 5,911 6,341 3,616 4,322 Income taxes 2,432 2,470 1,436 1,656 ------- -------- -------- -------- INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGES 3,479 3,871 2,180 2,666 Cumulative effect of accounting changes -- -- 427 1,800 ------- -------- -------- -------- NET INCOME $ 3,479 $ 3,871 $ 2,607 $ 4,466 ======= ======== ======== ======== Earnings per share Continuing operations $ 0.83 $ 0.83 $ 0.45 $ -- Cumulative effect of accounting changes -- -- 0.08 -- ------- -------- -------- -------- Primary earnings per share $ 0.83 $ 0.83 $ 0.53 $ -- ======= ======== ======== ========
The accompanying notes are an integral part of these statements. 24 TF Financial Corporation and Subsidiaries CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY Years ended December 31, 1996 and 1995, six-month period ended December 31, 1994 and year ended June 30, 1994
Net unrealized Common Stock gain (loss) on ------------ securities Additional Unearned Shares available Par paid-in ESOP acquired by Treasury Retained for sale, net Shares value capital shares MSBP stock earnings of tax Total ------ ------ ---------- ------- ----------- -------- -------- ----------- ------- (dollars in thousands) Balance at July 1, 1993 $ - $ - $ - $ - $ - $ - $27,673 $ - $27,673 Net income for the year ended June 30, 1994 - - - - - - 4,466 - 4,466 Balance at June 30, 1994 - - - - - - 32,139 - 32,139 Shares issued upon conversion to stock form of ownership $5,290,000 529 51,202 - - - - - 51,731 Cumulative effect of change in accounting method for investment securities on July 1, 1994 - - - - - - - (427) (427) Common stock acquired by ESOP (423,200) - - (4,232) - - - - (4,232) Allocation of ESOP shares 42,320 - 32 423 - - - - 455 Shares acquired by MSBP (211,600) - - - (2,135) - - - (2,135) Shares awarded by MSBP 178,292 - - - - - - - - Amortization of MSBP expense - - - - 45 - - - 45 Net unrealized loss on securities available for sale - - - - - - - (211) (211) Net income for the six-month period ended December 31, 1994 - - - - - - 2,607 - 2,607 -------- ------- ------ ------ ------- ---- ------- ----- ------- Balance at December 31, 1994 4,875,812 529 51,234 (3,809) (2,090) - 34,746 (638) 79,972
(Continued) 25 TF Financial Corporation and Subsidiaries CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY Years ended December 31, 1996 and 1995, six-month period ended December 31, 1994 and year ended June 30, 1994
Net unrealized Common Stock gain (loss) on ------------ securities Additional Unearned Shares available Par paid-in ESOP acquired by Treasury Retained for sale, net Shares value capital shares MSBP stock earnings of tax Total ------ ------ ---------- ------- ----------- -------- -------- ----------- ------- (dollars in thousands) Allocation of ESOP shares $ 31,719 $ - $ 117 $ 318 $ - $ - $ - $ - $ 435 Shares awarded by MSBP 24,000 - - - - - - - - Amortization of MSBP expense - - 124 - 359 - - - 483 Purchase of treasury stock (765,500) - - - - (11,100) - - (11,100) Treasury stock acquired from ESOP (1,089) - - - - (16) - - (16) Cash dividends on common stock - - - - - - (1,088) - (1,088) Net unrealized gain on securities available for sale - - - - - - - 775 775 Net income for the year ended December 31, 1995 - - - - - - 3,871 - 3,871 --------- ------ --------- -------- -------- ------- ------- -------- -------- Balance at December 31, 1995 4,164,942 529 51,475 (3,491) (1,731) (11,116) 37,529 137 73,332 Allocation of ESOP shares 30,319 - 147 303 - - - - 450 Shares awarded by MSBP 9,308 - - - - - - - - Amortization of MSBP expense - - 23 - 409 - - - 432 Purchase of treasury stock (242,025) - - - - (3,596) - - (3,596) Cash dividends on common stock - - - - - - (1,258) - (1,258) Net unrealized gain on securities available for sale - - - - - - - (264) (264) Net income for the year ended December 31, 1996 - - - - - - 3,479 - 3,479 --------- ------ --------- -------- -------- ------- ------- -------- -------- Balance at December 31, 1996 3,962,544 $ 529 $ 51,645 $ (3,188) $(1,322) $(14,712) $ 39,750 $ (127) $ 72,575 ========= ====== ========= ======== ======== ======= ======= ======== ========
The accompanying notes are an integral part of this statement. 26 TF Financial Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS
Six-month Year ended December 31, period ended Year ended ---------------------- December 31, June 30, 1996 1995 1994 1994 --------- --------- ------------- ---------- (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 3,479 $ 3,871 $ 2,607 $4,466 Adjustments to reconcile net income to net cash provided by operating activities Amortization of Purchased loan servicing rights 21 -- -- 524 Deferred loan origination fees (197) (117) (106) (230) Premiums and discounts on investment securities, net (69) (31) (29) 304 Premiums and discounts on mortgage-backed securities and loans, net 139 166 132 (291) Goodwill and other intangibles 244 -- -- -- Deferred income taxes 84 140 434 -- Provision for loan losses and provision for losses on real estate 333 74 41 (143) Depreciation of premises and equipment 560 509 258 557 Stock-based benefit programs 882 919 358 -- (Gain) loss on sale of Investment securities (330) (16) (14) 244 Real estate held for sale -- -- -- (532) Real estate acquired through foreclosure (115) (82) (152) (533) Mortgage loans (79) -- -- -- Unrealized loss on investments held for sale -- -- -- 648 (Increase) decrease in Accrued interest receivable (817) (7) (51) (143) Other assets (748) (238) 1,135 (731) Increase (decrease) in Accrued interest payable 267 980 (187) (274) Other liabilities 723 697 (917) (1,103) ------- ------- -------- ------ NET CASH PROVIDED BY OPERATING ACTIVITIES 4,377 6,865 3,509 2,763 ------- ------- -------- ------ CASH FLOWS FROM INVESTING ACTIVITIES Loan originations and principal payments on loans, net (38,475) (37,289) 5,358 37,233 Principal repayments on mortgage-backed securities held to maturity 28,450 24,171 13,438 29,590 Principal repayments on mortgage-backed securities available for sale 3,050 -- -- -- Purchases of loans (83,704) (87,165) -- -- Proceeds from loan sales 22,648 -- -- -- Purchases and maturities of certificates of deposit in other financial institutions, net 1 (214) (310) 1,096 Purchases of investment and mortgage-backed securities held to maturity (49,069) (18,445) (54,310) (145,039) Purchase of investment securities and mortgage-backed securities available for sale (22,917) -- (7,955) --
(continued) 27 TF Financial Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Six-month period ended Year ended Year ended December 31, December 31, June 30, ---------------------- 1996 1995 1994 1994 ---- ---- ---- ---- (in thousands) Purchase and maturities of securities purchased under agreement to resell $ (25,129) $ -- $ -- $ -- Proceeds from maturities of investment securities held to maturity 17,551 20,987 2,861 29,756 Proceeds from maturities of investment securities available for sale 20,500 23,000 7,000 -- Proceeds from the sale of investment securities available and held for sale 9,279 4,014 -- 18,749 (Purchase) redemption of Federal Home Loan Bank stock (1,250) (1,968) -- 111 Development of real estate acquired through foreclosure -- -- -- (4) Proceeds from sales of real estate acquired through foreclosure 722 221 489 3,585 --------- --------- -------- ------- Purchase of premises and equipment (2,007) (370) (216) (1,541) Premium paid for deposit liabilities (9,476) -- -- -- NET CASH USED IN INVESTING ACTIVITIES (129,826) (73,058) (33,645) (26,518) --------- --------- -------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in demand deposit/NOW accounts, passbook savings accounts and certificates of deposit 132,019 (10,562) (19,502) 16,805 Net increase (decrease) in advances from Federal Home Loan Bank 25,000 73,359 (900) (3,000) Net increase (decrease) in advances from borrowers for taxes and insurance 384 256 (3) (445) Proceeds from issuance of common stock, net -- -- 16,586 30,913 Common stock acquired by MSBP -- -- (2,135) -- Treasury stock acquired (3,596) (11,116) -- -- Common stock dividends paid (1,258) (1,088) -- -- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 152,549 50,849 (5,954) 44,273 --------- --------- -------- ------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 27,100 (15,344) (36,090) 20,518 Cash and cash equivalents at beginning of period 27,032 42,376 78,466 57,948 --------- --------- -------- ------- Cash and cash equivalents at end of period $ 54,132 $ 27,032 $ 42,376 $78,466 ========= ========= ======== ======= Supplemental disclosure of cash flow information Cash paid for Interest on deposits and advances $ 20,530 $ 3,423 $ 6,459 $13,064 Income taxes $ 2,235 $ 1,943 $ 1,203 $ 978 Non-cash transactions Transfers from loans to real estate acquired through foreclosure $ 327 $ 127 $ 110 $ 597 Transfer of investment and mortgage-backed securities to available for sale $ -- $ 29,640 $ -- $40,316 Securitization of mortgage loans held for investment $ 27,854 $ -- $ -- $ --
The accompanying notes are an integral part of these statements. 28 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 and 1995 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES TF Financial Corporation (the Corporation) is a unitary savings and loan holding company, organized under the laws of the State of Delaware, which conducts its consumer banking operations primarily through its wholly-owned subsidiaries, Third Federal Savings Bank (Third Federal or the Bank) and TF Investments Corporation. Third Federal is a federally chartered stock savings bank insured by the Federal Deposit Insurance Corporation. Third Federal is a community-oriented savings institution which conducts operations from its main office in Newtown, Pennsylvania, ten full-service branch offices located in Philadelphia and Bucks counties, Pennsylvania, and three full-service branch offices located in Mercer County, New Jersey. The Bank competes with other banking and financial institutions in its primary market communities, including financial institutions with resources substantially greater than its own. Commercial banks, savings banks, savings and loan associations, credit unions and money market funds actively compete for savings and time deposits and loans. Such institutions, as well as consumer finance and insurance companies, may be considered competitors of the Bank with respect to one or more of the services it renders. During 1994, the Board of Directors of Third Federal Savings and Loan Association (the Association) adopted a plan of conversion (the Plan or the Conversion) whereby the Association converted to a federally chartered stock savings bank known as Third Federal Savings Bank whereby the Bank issued all of its outstanding stock to a newly formed holding company, TF Financial Corporation (the Corporation). The conversion to the stock form of ownership was completed on July 13, 1994, culminating in the issuance of 5,290,000 shares of common stock of the Corporation to the public. The consolidated financial statements for the periods prior to July 1994 are those of the Association prior to conversion. The Bank is subject to regulations of certain state and federal agencies and, accordingly, they are periodically examined by those regulatory authorities. As a consequence of the extensive regulation of commercial banking activities, the Bank's business is particularly susceptible to being affected by state and federal legislation and regulations. 1. Principles of Consolidation and Basis of Presentation ----------------------------------------------------- The consolidated financial statements include the accounts of TF Financial Corporation and its wholly-owned subsidiaries: Third Federal Savings Bank, TF Investments Corporation (TF Investments) and Penns Trail Development Corporation. All material intercompany balances and transactions have been eliminated in consolidation. The accounting policies of the Corporation and its subsidiaries conform to generally accepted accounting principles. The preparation of financial statements in conformity with generally accepted accounting principles 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. (Continued) 29 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1996 and 1995 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 2. Acquisitions ------------ On September 20, 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 added a core deposit intangible of $2.9 million and goodwill of $6.6 million. The core deposit intangible acquired is being amortized on an accelerated basis over 10 years. The goodwill acquired is being amortized on a straight-line basis over 15 years. 3. Cash and Cash Equivalents ------------------------- The Corporation considers cash, due from banks, federal funds sold and interest-bearing deposits in other financial institutions, with original terms to maturity of less than three months, as cash equivalents for presentation purposes in the consolidated statements of financial position and cash flows. 4. Investment and Mortgage-Backed Securities Available for Sale ------------------------------------------------------------ The Corporation adopted Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities," in 1994. This statement requires the Bank to classify its investment, mortgage-backed and marketable equity securities in one of three categories: held to maturity, trading or available for sale. The Corporation does not 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 as a separate component of stockholders' equity, net of income taxes. Realized gains and losses on the sale of securities are recognized using the specific identification method. The cumulative effect of the change in accounting for certain investments in debt and equity securities of $427,000, net of income taxes, is reflected in the consolidated statement of earnings for the six-month period ended December 31, 1994. 5. Investment and Mortgage-Backed Securities Held to Maturity ---------------------------------------------------------- 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 over the period to maturity. Mortgage-backed securities are stated at the principal amount outstanding (cost), adjusted for amortization of premiums and accretion of fees and discounts using the interest method. The Corporation has the ability and it is management's intention to hold such assets to maturity. (Continued) 30 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1996 and 1995 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 6. Loans Receivable ---------------- Loans receivable are stated at unpaid principal balances less the allowance for loan losses and net deferred loan origination fees and discounts. Loan origination fees and discounts 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). Uncollectible interest on loans that are contractually past due is charged off, or an allowance is established based on management's periodic evaluation. 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 back to normal, in which case the loan is returned to accrual status. On January 1, 1995, the Corporation adopted 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." The adoption of SFAS No. 114, as amended, had no material effect on the Corporation's consolidated financial position or results of operations. 7. Real Estate Acquired through Foreclosure ---------------------------------------- Real estate acquired through foreclosure is initially recorded at the lower of the loan's unpaid principal balance (cost) or the fair value at the date of foreclosure less estimated selling expenses. Costs relating to development and improvement of property are capitalized, whereas costs relating to the holding of property are expensed. Valuations are periodically performed by management and a loss provision is established by a charge to operations if the carrying value of a property exceeds its estimated fair value. 8. 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. On January 1, 1996, the Corporation adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," which provides guidance on when to recognize and how to measure impairment losses of long-lived assets and certain identifiable intangibles and how to value long-lived assets to be disposed of. The adoption of SFAS No. 121 did not have a material impact on the Corporation's consolidated financial position or results of operations. (Continued) 31 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1996 and 1995 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 9. Mortgage Servicing Rights ------------------------- On January 1, 1996, the Corporation adopted SFAS No. 122, "Accounting for Mortgage Servicing Rights," which requires that a mortgage banking enterprise recognize as separate assets rights to service mortgage loans for others, however those servicing rights are acquired. In circumstances where mortgage loans are originated, separate asset rights to service mortgage loans are only recorded when the enterprise intends to sell such loans. The adoption of SFAS No. 122 did not have a material impact on the Corporation's consolidated financial position or results of operations. The Financial Accounting Standards Board (FASB) issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," as amended by SFAS No. 127, which provides accounting guidance on transfers of financial assets, servicing of financial assets, and extinguishments of liabilities. This statement is effective for transfers of financial assets, servicing of financial assets, and extinguishments of liabilities occurring after December 31, 1996. Adoption of this new statement is not expected to have a material impact on the Corporation's consolidated financial position or results of operations. 10. Benefit Plans ------------- The Corporation has established an Employee Stock Ownership Plan (ESOP) covering eligible employees with one year of service, as defined by the ESOP. In November 1993, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 93-6, "Employers' Accounting for Employee Stock Ownership Plans." SOP 93-6 addresses the accounting for shares of stock issued to employees by an ESOP. SOP 93-6 requires that the employer record compensation expense in the amount equal to the fair value of shares committed to be released from the ESOP to employees. In addition, the Corporation established a Management Stock Bonus Plan (MSBP) for key directors and personnel. On January 1, 1996, the Corporation adopted SFAS No. 123, "Accounting for Stock-Based Compensation," which contains a fair value-based method for valuing stock-based compensation that entities may use, which measures compensation cost at the grant date based on the fair value of the award. Compensation is then recognized over the service period, which is usually the vesting period. Alternatively, the standard permits entities to continue accounting for employee stock options and similar instruments under Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees." Entities that continue to account for stock options using APB Opinion No. 25 are required to make pro forma disclosures of net income and earnings per share, as if the fair value-based method of accounting defined in SFAS No. 123 had been applied. The Corporation's employee stock option plan is accounted for under APB Opinion No. 25. (Continued) 32 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1996 and 1995 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 11. Income Taxes ------------ The Corporation adopted, effective July 1, 1993, SFAS No. 109, "Accounting for Income Taxes," which requires a change from the deferred method to the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. Under SFAS No. 109, the effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. The cumulative effect of the change in accounting method of $1.8 million was reported in the consolidated statement of earnings for the year ended June 30, 1994. 12. Advertising Costs ----------------- The Corporation expenses advertising costs as incurred. 13. Earnings Per Share ------------------ Primary earnings per share is computed by dividing net income by the weighted average number of common shares outstanding, including common stock equivalents (stock options), during the period (4,193,987, 4,638,000 and 4,881,295 shares at December 31, 1996, 1995 and 1994, respectively). Fully diluted earnings per share is not materially different from primary earnings per share. Common shares outstanding gives effect to issued shares, less unallocated shares held by the ESOP, and the remaining common shares reserved for issuance under the MSBP. The provisions of APB Opinion No. 15, "Earnings Per Share," are not applicable for the year ended June 30, 1994, as the Bank converted to the stock form of ownership in July 1994. 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, ----------------------------------- 1996 1995 1994 ---------- ------------ ---------- (in thousands) Cash and due from banks $ 14,737 $ 9,926 $ 9,308 Interest-bearing deposits in other financial institutions 38,120 15,606 31,898 Federal funds sold 1,275 1,500 1,170 --------- --------- --------- $ 54,132 $27,032 $42,376 ======== ======== ======== 33 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1996 and 1995 NOTE C - SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL The Bank enters into purchases of mortgage-backed securities under agreements to resell substantially identical securities. Securities purchased under agreements to resell at December 31, 1996 consist of mortgage-backed securities. The amounts advanced under these agreements represent short-term loans and are reflected as a receivable in the consolidated statement of financial position. The securities underlying the agreements are book-entry securities. During the year, the securities were delivered by appropriate entry into a third-party custodian's account designated by the Bank under a written custodial agreement that explicitly recognizes the Bank's interest in the securities. At December 31, 1996, these agreements matured within 30 days and substantially all agreements to resell securities purchased were outstanding with one dealer. Securities purchased under agreements to resell averaged $3.8 million during 1996, and the maximum amounts outstanding at any month-end during 1996 was $25.1 million. NOTE D - INVESTMENT AND MORTGAGE-BACKED SECURITIES The amortized cost, gross unrealized gains and losses, and estimated market value of the Corporation's investment and mortgage-backed securities at December 31, 1996 and 1995 are summarized as follows:
December 31, 1996 ----------------------------------------------- Gross Gross Estimated Amortized unrealized unrealized market cost gains losses value ---------- ---------- ---------- ---------- (in thousands) Investment securities held to maturity U.S. Government and federal agencies $ 34,976 $ 57 $ (179) $ 34,854 State and political subdivisions 3,068 3 (31) 3,040 Corporate debt securities 500 -- (1) 499 --------- --------- --------- --------- 38,544 60 (211) 38,393 Mortgage-backed securities held to maturity 153,758 1,136 (1,625) 153,269 --------- --------- --------- --------- $ 192,302 $ 1,196 $ (1,836) $ 191,662 ========= ========= ========= ========= Investment securities available for sale U.S. Government and federal agencies $ 11,976 $ 40 $ (1) $ 12,015 Equity securities (SLMA stock) 10 129 -- 139 Mutual funds 500 -- (2) 498 --------- 12,486 169 (3) 12,652 Mortgage-backed securities available for sale 22,401 75 (449) 22,027 --------- --------- --------- --------- $ 34,887 $ 244 $ (452) $ 34,679 ========= ========= ========= =========
(Continued) 34 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1996 and 1995 NOTE D - INVESTMENT AND MORTGAGE-BACKED SECURITIES - Continued
December 31, 1995 ----------------------------------------------- Gross Gross Estimated Amortized unrealized unrealized market cost gains losses value ---------- ---------- ---------- --------- (in thousands) Investment securities held to maturity U.S. Government and federal agencies $ 14,475 $ 313 $ (49) $ 14,739 State and political subdivisions 3,140 21 (22) 3,139 Corporate debt securities 6,025 15 (38) 6,002 --------- --------- --------- --------- 23,640 349 (109) 23,880 Mortgage-backed securities held to maturity 137,841 2,201 (782) 139,260 --------- --------- --------- --------- $ 161,481 $ 2,550 $ (891) $ 163,140 ========= ========= ========= ========= Investment securities available for sale U.S. Government and federal agencies$ $ 14,489 $ -- $ (41) $ 14,448 Equity securities (SLMA stock) 10 88 -- 98 Mutual funds 500 -- (2) 498 --------- --------- --------- 14,999 88 (43) 15,044 Mortgage-backed securities available for sale 29,477 416 (253) 29,640 --------- --------- --------- --------- $ 44,476 $ 504 $ (296) $ 44,684 ========= ========= ========= =========
Net realized gains (losses) were $330,000 for the year ended December 31, 1996, $16,000 for the year ended December 31, 1995, $14,000 for the six-month period ended December 31, 1994, and ($244,000) for the year ended June 30, 1994. These gains (losses) resulted from the sale of mortgage-backed securities of $9.3 million for the year ended December 31, 1996, the sale of investment securities of $4 million for the year ended December 31, 1995, the maturity of securities of $3 million for the six-month period ended December 31, 1994, and the sale of securities of $18.7 million for the year ended June 30, 1994. (Continued) 35 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1996 and 1995 NOTE D - INVESTMENT AND MORTGAGE-BACKED SECURITIES - Continued The carrying value and estimated market value of investment and mortgage-backed securities, by contractual maturity, are shown below.
December 31, 1996 -------------------------------------------- Held to maturity Available for sale -------------------- --------------------- Estimated Estimated Carrying market Carrying market value value value value ---------- --------- -------- --------- (in thousands) Investment securities Due in one year or less $ 10,474 $ 10,474 $ 8,647 $ 8,647 Due after one year through five years 12,303 12,209 4,005 4,005 Due after five years through 10 years 13,767 13,724 -- -- Due after 10 years 2,000 1,986 -- -- -------- -------- -------- -------- 38,544 38,393 12,652 12,652 Mortgage-backed securities 153,758 153,269 22,027 22,027 -------- -------- -------- -------- $192,302 $191,662 $ 34,679 $ 34,679 ======== ======== ======== ========
The amortized cost, gross unrealized gains and losses, and estimated market value of mortgage-backed securities, by issuer, are summarized as follows:
December 31, 1996 ---------------------------------------------- Gross Gross Estimated Amortized unrealized unrealized market cost gains losses value ---------- ---------- ----------- ---------- (in thousands) Mortgage-backed securities held to maturity FHLMC certificates $ 90,016 $ 697 $ (698) $ 90,015 FNMA certificates 27,547 198 (261) 27,484 GNMA certificates 6,043 205 -- 6,248 Real estate mortgage investment conduit 29,220 34 (643) 28,611 Other mortgage-backed securities 932 2 (23) 911 --------- --------- -------- --------- $ 153,758 $ 1,136 $ (1,625) $ 153,269 ========= ========= ========= ========== Mortgage-backed securities available for sale FHLMC certificates $ 8,956 $ 52 $ (103) $ 8,905 FNMA certificates 3,314 23 (97) 3,240 Real estate mortgage investment conduit 10,131 -- (249) 9,882 --------- -------- -------- --------- $ 22,401 $ 75 $ (449) $ 22,027 ========= ======== ========= =========
(Continued) 36 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1996 and 1995 NOTE D - INVESTMENT AND MORTGAGE-BACKED SECURITIES - Continued
December 31, 1995 ----------------------------------------------- Gross Gross Estimated Amortized unrealized unrealized market cost gains losses value ----------------------------------------------- (in thousands) Mortgage-backed securities held to maturity FHLMC certificates $ 65,834 $ 1,225 $ (80) $ 66,979 FNMA certificates 33,150 522 (138) 33,534 GNMA certificates 7,644 353 -- 7,997 Real estate mortgage investment conduit 30,033 95 (534) 29,594 Collateralized mortgage obligations 19 -- -- 19 Other mortgage-backed securities 1,161 6 (30) 1,137 --------- --------- --------- --------- $ 137,841 $ 2,201 $ (782) $ 139,260 ========= ========= ========= ========= Mortgage-backed securities available for sale FHLMC certificates $ 15,081 $ 373 $ (32) $ 15,422 FNMA certificates 4,012 42 (44) 4,010 Real estate mortgage investment conduit 10,384 1 (177) 10,208 --------- --------- --------- --------- $ 29,477 $ 416 $ (253) $ 29,640 ========= ========= ========= =========
Investment securities having an aggregate amortized cost of approximately $1 million were pledged to secure public deposits at December 31, 1996 and 1995. There were no securities held other than U.S. Government and agencies from a single issuer that represented more than 10% of stockholders' equity. On November 15, 1995, the FASB issued a Special Report entitled "A Guide to Implementation of Statement No. 115 on Accounting for Certain Investments in Debt and Equity Securities." This guide allows enterprises to reassess the appropriateness of the classification of all securities held. A one-time reassessment can be made on one day between November 15, 1995 and December 31, 1995. Reclassifications from the held-to-maturity category that result from this one-time reassessment will not call into question the intent of an enterprise to hold other debt securities to maturity in the future. Based on this Special Report, on December 26, 1995, management reclassified certain mortgage-backed securities from the held-to-maturity category to the available-for-sale category. The transfer was made to satisfy asset/liability management objectives and provide an additional source of liquidity to originate and purchase loans in 1996. The transfer was made at fair value and resulted in an estimated net unrealized gain of approximately $163,000 and an increase in retained earnings of approximately $107,000, net of income taxes, based on current market values. 37 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1996 and 1995 NOTE E - LOANS RECEIVABLE Loans receivable are summarized as follows: December 31, ------------------- 1996 1995 -------- -------- (in thousands) First mortgage loans (principally conventional) Secured by one-to-four family residences $265,618 $204,430 Secured by other non-residential properties 20,427 10,294 Construction loans 4,720 3,604 --------- --------- 290,765 218,328 Less Net deferred loan origination fees 885 882 Net unearned discount (unamortized premium) (364) (138) --------- --------- 521 744 Total first mortgage loans 290,244 217,584 --------- --------- Consumer and other loans Commercial 3,126 2,887 Home equity and second mortgage 9,661 10,635 Leases 3,093 3,590 Other 5,261 5,072 --------- --------- 21,141 22,184 Less unearned discount 9 9 ---------- --------- Total consumer and other loans 21,132 22,175 Less allowance for loan losses 1,806 1,484 --------- --------- Total loans receivable $309,570 $238,275 ========= ========= Activity in the allowance for loan losses is summarized as follows: December 31, ----------------------------- June 30, 1996 1995 1994 1994 -------- ------- -------- ------- (in thousands) Balance at beginning of period $ 1,484 $ 1,473 $ 1,450 $ 1,656 Provision charged to income 330 72 30 (144) Charge-offs (8) (61) (7) (62) ------- ------- ------- ------- Balance at end of period $ 1,806 $ 1,484 $ 1,473 $ 1,450 ======= ======= ======= ======= (Continued) 38 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1996 and 1995 NOTE E - LOANS RECEIVABLE - Continued Non-performing loans, which include non-accrual loans for which the accrual of interest has been discontinued and loan balances past due 90 days or more that are not on a non-accrual status but that management expects will eventually be paid in full, totalled approximately $2 million and $1.8 million at December 31, 1996 and 1995, respectively. Of such amounts, approximately $900,000 and $1 million at December 31, 1996 and 1995, respectively, are residential mortgage loans secured by one-to-four family residences for which management has experienced insignificant charge-offs. Interest income that would have been recorded under the original terms of such loans totalled approximately $30,000 for the year ended December 31, 1996, $49,000 for the year ended December 31, 1995, $67,000 for the six-month period ended December 31, 1994, and $134,000 for the year ended June 30, 1994. No interest income has been recognized on non-accrual loans for any of the periods presented. On January 1, 1995, the Bank adopted 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 has identified 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 to the extent necessary to eliminate any doubt as to the ultimate collectibility of principal either in whole or in part. Loan impairment is measured by estimating the expected future cash flows and discounting them at the respective effective interest rate or by valuing the underlying collateral. An allowance for credit losses has been established for all loans identified as impaired. The recorded investment in impaired loans and the valuation for credit losses are as follows: December 31, --------------------- 1996 1995 ---------- --------- (in thousands) Principal amount of impaired loans $ 601 $ 265 Accrued interest - - Deferred loan costs - - --------- --------- 601 265 Less valuation allowance 128 40 --------- --------- $ 473 $ 225 ========= ========= (Continued) 39 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1996 and 1995 NOTE E - LOANS RECEIVABLE - Continued The average recorded investment in impaired loans during the years ended December 31, 1996 and 1995 was $433,000 and $271,000, respectively. Total cash collected on impaired loans during the year ended December 31, 1996 was $300,000, of which $253,000 was credited to the principal balance outstanding on such loans and $47,000 was recognized as interest income. Interest that would have been accrued on impaired loans during the year was $46,000. Total cash collected on impaired loans during the year ended December 31, 1995 was $20,000, of which $12,000 was credited to the principal balance outstanding on such loans and $8,000 was recognized as interest income. Interest that would have been accrued on impaired loans during the year was $25,000. Interest income recognized during the year was $8,000. The Bank has no concentration of loans to borrowers engaged in similar activities which exceeded 10% of total loans at December 31, 1996 and 1995. 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 $511,000 and $541,000 at December 31, 1996 and 1995, respectively. For the year ended December 31, 1996, loans of approximately $41,000 were disbursed to officers and directors, while principal repayments of approximately $71,000 were received. NOTE F - LOAN SERVICING Mortgage loans serviced for others are not included in the accompanying consolidated statements of financial position. The unpaid principal balances of these loans are summarized as follows: December 31, --------------------- 1996 1995 --------- ----------- (in thousands) Mortgage loan servicing portfolios FHLMC $ 66,521 $ 25,440 Other investors 5,861 1,506 --------- --------- $ 72,382 $ 26,946 ======== ======== Custodial balances maintained in connection with the foregoing loan servicing totalled approximately $1,490,000 and $547,000 at December 31, 1996 and 1995, respectively. The net servicing revenue on mortgage loans serviced for others is immaterial for all periods presented. 40 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1996 and 1995 NOTE G - PREMISES AND EQUIPMENT Premises and equipment are summarized as follows: December 31, Estimated ---------------- useful lives 1996 1995 ------------ ---- ----- (in thousands) Buildings 30 $ 5,715 $ 4,863 Leasehold improvements 5 333 237 Furniture, fixtures and equipme 3-7 4,436 4,064 --------- --------- 10,484 9,164 Less accumulated depreciation (5,741) (5,363) --------- --------- 4,743 3,801 Land 3,259 2,754 --------- --------- $ 8,002 $ 6,555 ========= ========= NOTE H - DEPOSITS Deposits are summarized as follows: December 31, Deposit type and weighted average ---------------- interest rate 1996 1995 --------------------------------- ---- ---- (in thousands) Demand December 31, 1996 0.00% $ 3,741 December 31, 1995 0.00% $ 1,573 NOW December 31, 1996 0.98% 42,513 December 31, 1995 1.57% 33,581 Money Market December 31, 1996 3.54% 29,970 December 31, 1995 2.75% 10,481 Passbook Savings - Fixed Rate December 31, 1996 3.00% 127,213 December 31, 1995 3.00% 120,387 Passbook Savings - Adjustable Rate December 31, 1996 4.88% 60,452 December 31, 1995 4.74% 68,247 -------- -------- Total demand, transaction and passbook deposits 263,889 234,269 (Continued) 41 (Continued) TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1996 and 1995 NOTE H - DEPOSITS - Continued December 31, Deposit type and weighted average ---------------------- interest rate 1996 1995 --------------------------------- ------ ---------- (in thousands) Certificates of Deposit December 31, 1996 5.30% $205,199 December 31, 1995 5.22% $102,800 ------- --------- $469,088 $337,069 The aggregate amount of certificates of deposit with a minimum denomination of $100,000 was approximately $8.6 million and $4.4 million at December 31, 1996 and 1995, respectively. Interest expense on deposits for the periods indicated below is summarized as follows: December 31, June 30, ------------------------------ ----------- 1996 1995 1994 1994 ------- -------- -------- ----------- (in thousands) Money market $ 508 $ 312 $ 168 $ 337 Passbook savings 6,264 7,110 3,393 7,387 NOW 397 520 253 656 Certificates of deposit 7,570 5,426 2,457 4,165 --------- --------- --------- --------- $ 14,739 $ 13,368 $ 6,271 $ 12,545 ======== ======== ========= ======== At December 31, 1996, scheduled maturities of certificates of deposit are as follows:
Year ending December 31, ------------------------------------------------------------------ 1997 1998 1999 2000 2001 Thereafter Total -------- ------- ------- ------ ------ ---------- -------- Amount $137,811 $44,153 $15,434 $5,908 $1,552 $ 341 $205,199 ======= ======= ======= ======= ======= ========= ======= Weighted average interest rate 5.12% 5.49% 5.57% 5.76% 5.56% 5.93% ==== ==== ==== ==== ==== ====
23 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1996 and 1995 NOTE I - ADVANCES FROM THE FEDERAL HOME LOAN BANK Advances from the Federal Home Loan Bank consist of the following: December 31, --------------------------------------------------- 1996 1995 ------------------------- ------------------------ Weighted Weighted Due date Amount average rate Amount average rate -------- -------- ------------ -------- ------------- (in thousands) 1997 $ 10,000 5.57% $ 5,000 5.57% 1998 30,000 5.85 10,000 5.57 1999 30,000 6.05 25,000 5.97 2000 25,000 6.13 15,000 6.29 2001 - - 15,000 6.39 2010 3,359 6.70 3,359 6.70 --------- ----- --------- ----- $ 98,359 5.98 $ 73,359 6.07% ======== ==== ======== ===== 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 $32 million and $45 million at December 31, 1996 and 1995, respectively. NOTE J - BENEFIT PLANS 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. Additionally, the Bank maintains a profit-sharing plan for eligible employees. Profit-sharing contributions are at the discretion of the Board of Directors. The contributions to the profit-sharing plan were $187,000 for the year ended June 30, 1994. There were no profit-sharing plan contributions for the years ended December 31, 1996 and 1995 or for the six-month period ended December 31, 1994. (Continued) 43 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1996 and 1995 NOTE J - BENEFIT PLANS - Continued The following table sets forth the pension plan's funded status and amounts recognized in the consolidated statements of financial position at the dates indicated.
December 31, ---------------------- 1996 1995 -------- --------- (in thousands) Actuarial present value of benefit obligations Accumulated benefit obligation Vested $ 1,796 $ 2,453 Non-vested 137 267 ---------- ---------- $ 1,933 $ 2,720 ========= ========= Projected benefit obligation for service rendered to date $ (3,004) $ (3,594) Plan assets at fair value (primarily listed stocks, cash and short-term investments) 1,338 2,069 --------- --------- Projected benefit obligation in excess of plan assets (1,666) (1,525) Unrecognized net gain from past experience different from that assumed and effects of changes in assumptions 542 440 Unrecognized net obligation being recognized over 15 years 41 47 Adjustment to recognize minimum liability - (125) Prior service cost not yet recognized in net periodic pension cost 466 512 ---------- --------- Accrued pension cost $ (617 $ (651) ========== =========
The net pension cost included the following components:
Six-month period ended Year ended Year ended December 31, December 31, June 30, ---------------------- 1996 1995 1994 1994 ----------- ---------- ------ ------ (in thousands) Service cost - benefits earned during the period $ 173 $ 159 $ 98 $ 255 Interest cost on projected benefit obligation 196 202 100 220 Actual return on plan assets (59) (193) (100) (197) Net amortization and deferral (28) 92 28 130 ----- ----- ----- ----- Net pension costs $ 282 $ 260 $ 126 $ 408 ===== ===== ===== =====
(Continued) 44 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1996 and 1995 NOTE J - BENEFIT PLANS - Continued Assumptions used to develop the net periodic pension cost were as follows:
Six-month period ended Year ended Year ended December 31, December 31, June 30, 1996 1995 1994 1994 ---- ---- ---- ---- (in thousands) Discount rate 6.00% 6.00% 6.75% 6.75% Expected long-term rate of return on assets 8.00 8.50 8.50 8.50 Rate of increase in compensation levels 6.00 6.00 6.00 6.00
In conjunction with and subsequent to the Conversion, the Corporation adopted the following benefit plans: 1. Employee Stock Ownership Plan ----------------------------- In 1994, the Corporation established an internally leveraged ESOP for eligible employees who have completed six months of service with the Corporation or its subsidiaries. In July 1994, the ESOP borrowed $4.2 million from the Corporation to purchase 423,200 newly issued shares of common stock. The Corporation makes discretionary contributions to the ESOP in order to service the ESOP's debt. Any dividends received by the ESOP will be used to pay debt service. The ESOP shares initially were pledged as collateral for its debt. As the debt is repaid, shares are released from collateral and allocated to qualifying employees based on the proportion of debt service paid in the year. The Corporation accounts for its ESOP in accordance with SOP 93-6. Accordingly, the debt of the ESOP is recorded as debt and the shares pledged as collateral are reported as unearned ESOP shares in the consolidated statements of financial position. As shares are released from collateral, the Corporation reports compensation expense equal to the current market price of the shares, and the allocated shares are included in outstanding shares for earnings per share computations. Dividends on allocated ESOP shares will be recorded as a reduction of retained earnings; dividends on unallocated ESOP shares will be recorded as a reduction of debt and accrued interest. ESOP compensation expense was $450,000, $435,000 and $358,000 in 1996, 1995 and 1994, respectively. The ESOP shares as of December 31, 1996 were as follows: Allocated shares 104,358 Unreleased shares 318,842 Total ESOP shares 423,200 Fair value of unreleased shares $5,181,182 (Continued) 45 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1996 and 1995 NOTE J - BENEFIT PLANS - Continued 2. Management Stock Bonus Plan --------------------------- The Board of Directors also adopted a MSBP which was approved by the Corporation's stockholders on October 13, 1994. The MSBP provides that up to 211,600 shares of common stock may be granted, at the discretion of the Board, to key directors and officers at no cost to the individuals. The Corporation granted 178,292 shares on November 18, 1994 and 24,000 shares on December 18, 1995 and 9,308 shares on December 15, 1996 in the form of restricted stock payable over five years from the date of grant. The recipients of the restricted stock are entitled to all voting and other stockholder rights, except that the shares, while restricted, may not be sold, pledged or otherwise disposed of and are required to be held in escrow. In the event the recipient terminates association with the Corporation for reasons other than death, disability or change in control, the recipient forfeits all rights to the allocated shares under restriction which are cancelled and revert to the Corporation for reissuance under the plan. Shares acquired by MSBP of $2.1 million were recorded at the date of award based on the market value of shares acquired by the Corporation. Shares acquired by the MSBP, which are shown as a separate component of stockholders' equity, are being amortized to expense over the five-year vesting period; $432,000, $483,000 and $45,000 was amortized to expense in 1996, 1995 and 1994, respectively. At December 31, 1996, there were no shares reserved for future grants under the plan. 3. Stock Option Plans ------------------ The Corporation has fixed stock option plans accounted for under APB Opinion 25 and related interpretations. The plans allow the Corporation to grant options to employees and directors for up to 554,000 shares of common stock. The options, which have a term of 10 years when issued, vest either immediately or over a three-year period. The exercise price of each option equals the market price of the Corporation's stock on the date of grant. Accordingly, no compensation cost has been recognized for the plans. Had compensation cost for the plans been determined based on the fair value of the options at the grant dates consistent with the method of SFAS No. 123, "Accounting for Stock-Based Compensation," the Corporation's net income and earnings per share would have been reduced to the pro forma amounts indicated below. 1996 1995 ---------- ----------- Net income As reported $ 3,479 $ 3,871 Pro forma $ 3,365 $ 3,871 Primary earnings per share As reported $ 0.83 $ 0.83 Pro forma $ 0.80 $ 0.83 The fair value of each option grant is estimated on the date of grant using the Black-Scholes options-pricing model with the following weighted-average assumptions used for grants in 1996 and 1995, respectively: dividend yield of 0% and expected volatility of 12.1% for all years; risk-free interest rates of 6.4% and 5.7%; and expected lives of five years. (Continued) 46 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1996 and 1995 NOTE J - BENEFIT PLANS - Continued A summary of the status of the Corporation's fixed stock option plans as of December 31, 1996, 1995 and 1994, and changes during the periods ending on those dates is presented below:
1996 1995 1994 ------------------- ----------------------- ------------------------- Weighted Weighted Weighted average average average exercise exercise exercise Shares price Shares price Shares price ------ ------- ------- ----------- ------- --------- Outstanding at beginning of year 514,480 $ 11.82 460,480 $ 11.50 -- $ -- Granted 41,103 $ 11.82 15.09 $ 14.83 460,480 $ 11.50 Exercised (1,667) $ 15.09 11.50 $ 11.50 -- -- Forfeited (2,083) $ 11.50 11.50 $ 11.50 -- -- -------- ------- ------ --------- ------- --------- Outstanding at end of year 551,833 $ 12.06 514,480 $ 11.82 460,480 $ 11.50 Options exercisable at year-end 501,730 306,820 Weighted average fair value of options granted during the year $ 4.34 $ 3.83
The following information applies to options outstanding at December 31, 1996: Number outstanding 551,833 Range of exercise prices $10.83-$15.88 Weighted average exercise price $12.06 Weighted average remaining contractual life 8 years Total compensation cost recognized for stock-based employee compensation awards was approximately $28,000 and $16,000 for 1996 and 1995, respectively. NOTE K - INCOME TAXES As previously discussed in note A11, the Bank adopted SFAS No. 109 as of July 1, 1993. The cumulative effect of the change in accounting method increased net income by approximately $1.8 million and is reported separately in the consolidated statement of earnings for the period ended June 30, 1994. Prior years' financial statements have not been restated to apply the provisions of SFAS No. 109. SFAS No. 109 had no effect on the income tax provision for the year ended June 30, 1994, exclusive of such cumulative effect adjustment. (Continued) 47 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1996 and 1995 NOTE K - INCOME TAXES - Continued The components of income tax expense before extraordinary credit are summarized as follows:
Six-month period ended Year ended Year ended December 31, December 31, June 30, 1996 1995 1994 1994 ---------- -------- ---------- ----- (in thousands) Federal Current $ 2,173 $ 2,033 $ 841 $ 473 Deferred (84) 140 434 683 -------- -------- -------- --------- 2,089 2,173 1,275 1,156 -------- -------- -------- --------- State and local Current 343 297 161 276 Deferred - - - 224 --------- --------- ---------- -------- 343 297 161 500 --------- --------- ---------- -------- Income tax provision before extraordinary credit $ 2,432 $ 2,470 $ 1,436 $ 1,656 ======== ======== ======== ========
The Corporation's effective income tax rate was different than the statutory federal income tax rate as follows:
Six-month period ended Year ended Year ended December 31, December 31, June 30, 1996 1995 1994 1994 ---- ----- ----- ---- (in thousands) Statutory federal income tax 34.0% 34.0% 34.0% 34.0% Increase (decrease) resulting from Tax-exempt income (2.7) (1.6) (1.2) (2.3) Bad debt deduction -- -- -- (0.9) State tax, net of federal benefit 3.8 3.0 2.9 7.6 Other 5.9 3.5 4.0 (0.1) ---- ---- ---- ---- 41.0% 38.9% 39.7% 38.3% ==== ==== ==== ====
(Continued) 48 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1996 and 1995 NOTE K - INCOME TAXES - Continued Deferred taxes are included in the accompanying consolidated statements of financial position at December 31, 1996 and 1995 for the estimated future tax effects of differences between the financial statement and federal income tax bases of assets and liabilities given the provisions of currently enacted tax laws. No valuation allowance was recorded against deferred tax assets at December 31, 1996 and 1995. The Corporation's net deferred tax asset at December 31, 1996 and 1995 was comprised of the following:
December 31, ----------------------- 1996 1995 ---------- ------------ (in thousands) Deferred tax assets Deferred loan origination fees $ 154 $ 178 Deferred compensation 112 2 Accrued pension expense 68 68 ---------- ---------- 334 248 Deferred tax liabilities Allowance for loan losses, net 148 146 Unrealized gain on securities available for sale 43 70 ---------- ---------- 191 216 Deferred tax asset $ 143 $ 32 ========= =========
The Corporation files its income tax returns on the basis of a fiscal tax year ending June 30. The Bank is allowed a special bad debt deduction based on a percentage of taxable income (presently 8%) or on specified experience formulas, subject to certain limitations based upon aggregate loan balances at the end of the year. The Bank used the percentage-of-taxable income method in fiscal tax year 1994 and anticipates using the same method for its fiscal tax year 1995. If the amounts deducted are used for purposes other than for loan losses, such as in a distribution in liquidation or otherwise, or if the Bank would cease to be a qualified thrift lender under the tax law, the amounts deducted would be subject to federal income tax at the then current corporate tax rate. Prior to July 1, 1994, no deferred taxes were recorded for the excess of the cumulative percentage of income bad debt deductions in excess of the loan loss allowance provided for financial statement purposes. Effective with the adoption of SFAS No. 109, however, the Bank is required to record, and has recorded, a deferred tax asset related to the allowance for loan losses reported for financial reporting purposes, and a deferred tax liability for percentage of income bad debt deductions after December 31, 1987. In accordance with SFAS No. 109, the Bank has not recorded a deferred tax liability of approximately $1.9 million related to approximately $5.7 million of cumulative percentage of income bad debt deductions prior to December 31, 1987. (Continued) 49 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1996 and 1995 NOTE K - INCOME TAXES - Continued Deferred tax expense (benefit) results from temporary or timing differences in the recognition of revenue and expense for tax and financial reporting purposes. The sources and effect of these temporary and timing differences are as follows:
Six-month period ended Year ended Year ended December 31, December 31, June 30, 1996 1995 1994 1994 ---- ---- ---- ---- (in thousands) Recognition of previously deferred tax benefits $ -- $ -- $ -- $ 620 Loan losses (2) 147 254 300 Deferred compensation 110 (2) 165 (99) Deferred loan origination fees (24) 24 12 24 Depreciation -- (29) -- -- Pension expense -- -- -- (68) Unrealized securities losses -- -- 3 (220) Allowance on real estate held for sale -- -- -- 350 ----- ----- $ 84 $ 140 $ 434 $ 907 ===== ===== ===== =====
NOTE L - REGULATORY MATTERS The Bank is subject to minimum regulatory capital standards promulgated by the Office of Thrift Supervision (OTS). Failure to meet minimum capital requirements can initiate certain mandatory - and possible additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Corporation's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation must meet specific capital guidelines that involve quantitative measures of the Corporation's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Corporation's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Such minimum capital standards generally require the maintenance of regulatory capital sufficient to meet each of three tests, hereinafter described as the tangible capital requirement, the core capital requirement and the risk-based capital requirement. The tangible capital requirement provides for minimum tangible capital (defined as stockholders' equity less all intangible assets) equal to 1.5% of adjusted total assets. The core capital requirement provides for minimum core capital (tangible capital plus certain forms of supervisory goodwill and other qualifying intangible assets) equal to 3% of adjusted total assets. An OTS proposal, if adopted in present form, would increase the core capital requirement to a range of 4% - 5% of adjusted total assets for substantially all savings associations. An OTS regulation affecting all savings institutions, which was adopted in 1995, imposes an addition to the risk-based capital requirement based on an institution's sensitivity to interest rate risk. There was no material change to the Bank's excess regulatory capital position as a result of these changes in the regulatory capital requirement. The risk-based capital requirement currently provides for the maintenance of core capital plus general loss allowances equal to 8% of risk-weighted assets. In computing risk-weighted assets, the Bank multiplies the value of each asset on its statement of financial position by a defined risk-weighting factor (e.g., one-to-four family residential loans carry a risk-weighted factor of 50%). (Continued) 50 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1996 and 1995 NOTE L - REGULATORY MATTERS - Continued As of December 31, 1996, management believes that the Bank met all capital adequacy requirements to which it was subject to.
Regulatory capital ------------------------------------------------------------------------- Tangible Core Risk-based capital Percent capital Percent capital Percent --------- ------- ------- ------- ---------- -------- Capital under generally accepted accounting principles Corporation $ 72,575 11.36% $72,575 11.36% $ 72,575 24.71% Bank 59,208 9.20 59,208 9.20 59,208 20.18 Unrealized loss on certain available-for-sale securities Corporation 127 0.02 127 0.02 127 0.04 Bank 127 0.01 127 0.01 127 0.04 Goodwill and other intangible assets Corporation (9,232) (1.44) (9,232) (1.44) (9,232) (3.14) Bank (9,232) (1.43) (9,232) (1.44) (9,232) (3.14) Additional capital items General valuation allowances - limited Corporation -- -- -- -- 1,806 0.62 Bank -- -- -- -- 1,806 0.62 -------- ----- ------- ----- -------- ----- Regulatory capital computed Corporation 63,470 9.94 63,470 9.94 65,276 22.23 Bank 50,103 7.78 50,103 7.78 51,909 17.70 Minimum capital requirement Corporation 9,581 1.50 19,162 3.00 23,492 8.00 Bank 9,655 1.50 19,310 3.00 23,468 8.00 -------- ---------- -------- -------- -------- ----- Regulatory capital - excess Corporation $ 53,889 8.44% $44,308 6.94% $41,784 14.23% ======== ==== ======= ==== ======= ===== Bank $ 40,448 6.28% $30,793 4.78% $28,441 9.70% ======== ==== ======= ==== ======= ====
(Continued) 51 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1996 and 1995 NOTE L - REGULATORY MATTERS - Continued At December 31, 1996, 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 by $22.6 million and $17.9 million, respectively. There are no conditions or events which have occurred that management believes have changed the Bank's category. On September 30, 1996, the President signed into law the Deposit Insurance Funds Act of 1996 to recapitalize the Savings Association Insurance Fund (SAIF) administered by the Federal Deposit Insurance Corporation (FDIC) and to provide for the repayment of Financial Institution Collateral Obligation (FICO) bonds issued by the United States Treasury Department. Pursuant to this law, the FDIC levied a one-time special assessment of SAIF deposits equal to $0.657 per $100 of the SAIF-assessable deposit base as of March 31, 1995. Based on the Bank's deposits as of March 31, 1995, the Bank paid a special assessment of $2.2 million to recapitalize the SAIF. This expense was accrued for in the third quarter of 1996. During 1997, 1998 and 1999, the Bank Insurance Funds (BIF) will pay $322 million of FICO debt service, and SAIF will pay $458 million. During 1997, 1998 and 1999, the average regular annual deposit insurance assessment is estimated at $0.0129 per $100 of deposits for BIF deposits and $0.0644 per $100 of deposits for SAIF deposits. Individual institution assessments will continue to vary according to their capital and management ratings. As always, the FIDC will be able to raise the assessments as necessary to maintain the funds at their target capital ratios provided by law. After 1999, BIF and SAIF will share the FICO cost equally. Under current estimates, BIF and SAIF assessment bases would each be assessed at the rate of approximately $0.024 per $100 of deposits. NOTE M - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK The Corporation is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, standby letters of credit, interest rate caps and floors written. Such financial instruments are recorded in the consolidated financial statements when they become payable. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statements of financial position. The contract or notional amounts of those instruments reflect the extent of the Bank's involvement in particular classes of financial instruments. The Corporation's exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. Unless noted otherwise, the Corporation requires collateral to support financial instruments with credit risk. (Continued) 52 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1996 and 1995 NOTE M - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK - Continued Financial instruments, the contract or notional amounts of which represent credit risk, are as follows: December 31, ---------------- 1996 1995 ---- ---- (in thousands) Commitments to extend credit $ 24,858 $ 19,496 Commitments to purchase loans 2,852 30,737 Standby letters of credit 819 491 Loans sold with recourse 587 846 -------- -------- $ 29,116 $ 51,570 ======== ======== Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Corporation evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if it is deemed necessary by the Corporation upon extension of credit, is based on management's credit evaluation of the counterparty. 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. NOTE N - COMMITMENTS AND CONTINGENCIES The Bank leases branch facilities for periods ranging up to seven years. These leases are classified as operating leases and contain options to renew for additional periods. Rental expense was approximately $229,000, $193,000 and $95,000 for the years ended December 31, 1996, 1995 and 1994, respectively, and $188,000 for the year ended June 30, 1994. The minimum annual rental commitments of the Bank under all non-cancellable leases with terms of one year or more are as follows: Year ending December 31, 1997 $ 198 1998 125 1999 48 2000 32 2001 - ----- $ 403 (Continued) 53 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1996 and 1995 NOTE N - COMMITMENTS AND CONTINGENCIES - Continued The Bank has a five-year contract with a third-party computer processing center which expires in 1997 with an annual commitment of approximately $500,000. The Corporation has employment agreements with certain key executives that provide severance pay benefits if there is a change in control of the Corporation. The agreements will continue in effect on a year-to-year basis until terminated or not renewed by the Corporation or key executives. Upon a change in control, the Corporation shall continue to pay the key executives' salary per the agreements and certain benefits for one year. The maximum contingent liability under the agreements at December 31, 1996 was $1,227,000. From time to time, the Corporation and its subsidiaries are parties to routine litigation, which arises in the normal course of business. In the opinion of management, the resolution of these lawsuits would not have a material adverse effect on the consolidated financial position or results of operations. NOTE O - SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK The Bank is principally engaged in originating and investing in one-to-four family residential real estate loans in eastern Pennsylvania and New Jersey. The Bank offers both fixed and adjustable rates of interest on these loans which have amortization terms ranging to 30 years. The loans are generally originated on the basis of an 80% loan-to-value ratio, which has historically provided the Bank with more than adequate collateral coverage in the event of default. Nevertheless, the Bank, as with any lending institution, is subject to the risk that residential real estate values in the primary lending area will deteriorate, thereby potentially impairing collateral values in the primary lending area. However, management believes that residential real estate values are presently stable in its primary lending area and that loan loss allowances have been provided for in amounts commensurate with its current perception of the foregoing risks in the portfolio. NOTE P - FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires all entities to disclose the estimated fair value of their assets and liabilities considered to be financial instruments. For the Bank, as for most financial institutions, the majority of its assets and liabilities are considered financial instruments as defined in SFAS No. 107. However, many such instruments lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction. Also, it is the Corporation's general practice and intent to hold its financial instruments to maturity and to not engage in trading or significant sales activities. Therefore, the Corporation and the Bank had to use significant estimations and present value calculations to prepare this disclosure. Changes in the assumptions or methodologies used to estimate fair values may materially affect the estimated amounts. Also, management is concerned that there may not be reasonable comparability between institutions due to the wide range of permitted assumptions and methodologies in the absence of active markets. This lack of uniformity gives rise to a high degree of subjectivity in estimating financial instrument fair values. (Continued) 54 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1996 and 1995 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, -------------------------------------------------------------- 1996 1995 1994 ------------------- ------------------- -------------------- Estimated Estimated Estimated fair Carrying fair Carrying fair Carrying value value value value value value --------- -------- ---------- -------- --------- -------- (in thousands) Cash and cash equivalents $ 54,132 $ 54,132 $ 27,032 $ 27,032 $ 42,376 $42,376 Investment securities 51,045 51,196 38,924 38,684 76,274 77,533 Mortgage-backed securities 175,296 175,785 168,900 167,481 171,880 181,411 Securities sold under agreements to repurchase 25,129 25,129 -- -- -- --
Fair value of financial instruments with stated maturities has been estimated using present value cash flow, discounted at a rate approximating current market for similar assets and liabilities.
December 31, --------------------------------------------------------------- 1996 1995 1994 -------------------- ------------------- -------------------- Estimated Estimated Estimated fair Carrying fair Carrying fair Carrying value value value value value value --------- --------- ---------- ------- --------- --------- (in thousands) Assets Interest-bearing deposits with banks $ 4,221 $ 4,220 $ 4,231 $ 4,221 $ 3,977 $ 4,007 Liabilities Deposits with stated maturities 204,744 205,199 102,083 102,800 87,854 87,047 Borrowings with stated maturities Short-term 10,038 10,000 5,003 5,000 -- -- Long-term 89,422 88,359 67,648 68,359 -- --
(Continued) 55 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1996 and 1995 NOTE P - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued Fair value of financial instrument liabilities with no stated maturities has been estimated to equal the carrying amount (the amount payable on demand).
December 31, ----------------------------------------------------------------------- 1996 1995 1994 ------------------- ----------------------- ----------------------- Estimated Estimated Estimated fair Carrying fair Carrying fair Carrying value value value value value value --------- -------- ---------- ---------- --------- ---------- (in thousands) Deposits with no stated maturities $263,889 $263,889 $234,269 $234,269 $260,584 $260,584 ======== ======== ======== ======== ======== ======== The fair value of the net loan portfolio has been estimated using present value 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, ------------------------------------------------------------------- 1996 1995 1994 -------------------- --------------------- -------------------- Estimated Estimated Estimated fair Carrying fair Carrying fair Carrying value value value value value value --------- --------- --------- --------- --------- ---------- (in thousands) Net loans $307,942 $309,570 $242,154 $238,275 $111,700 $113,893 ======= ======= ======= ======= ======= =======
There is no material difference between the carrying amount and the estimated fair value of off-balance-sheet items totalling approximately $29.1 million, $51.6 million and $6.1 million at December 31, 1996, 1995 and 1994, respectively, which are primarily comprised of floating rate loan commitments priced to market at funding. The Bank's remaining assets and liabilities are not considered financial instruments. No disclosure of the relationship value of the Bank's deposits is required by SFAS No. 107. NOTE Q - CONVERSION TO STOCK FORM OF OWNERSHIP On July 13, 1994, the Association pursuant to a plan of conversion (the Plan), completed its conversion from a federally chartered mutual savings and loan association to a federally chartered stock savings bank via the issuance of common stock. Pursuant to the Plan, the Bank transferred all of its newly issued shares to a newly organized holding company, TF Financial Corporation, and the Corporation sold 5.3 million shares of common stock at $10 per share which, after giving effect to offering expenses of $1.2 million, resulted in net cash proceeds of $51.7 million. (Continued) 56 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1996 and 1995 NOTE Q - CONVERSION TO STOCK FORM OF OWNERSHIP - Continued In the event of a complete liquidation (and only in such event), each eligible savings account holder will be entitled to receive a liquidation distribution from the liquidation account in the amount of the then current adjusted balance of deposit accounts held before any liquidation distribution may be made with respect to the common shares. Except for the repurchase of stock and payment of dividends by the Bank, the existence of the liquidation account will not restrict the use or further application of such retained earnings. At the date of the conversion, the Bank established a liquidation account in an amount equal to retained earnings reflected in the statements of financial position used in the conversion offering circular. The liquidation account will be maintained for the benefit of eligible savings account holders who maintained deposit accounts in the Bank after conversion. 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 R - SERVICE FEES, CHARGES AND OTHER OPERATING INCOME AND OTHER OPERATING EXPENSE
Six-month period ended Year ended Year ended December 31, December 31, June 30, 1996 1995 1994 1994 ---------- ----------- ------------ ---------- (in thousands) Service fees, charges and other operating income Loan servicing fees $ 577 $ 395 $ 95 $ 382 Late charge income 98 83 39 97 Deposit service charges 439 435 236 499 Recovery of local taxes - - - 386 Other income 156 150 81 366 -------- -------- --------- -------- $ 1,270 $ 1,063 $ 451 $ 1,730 ======= ======= ======== ======= Other operating expense Employee education $ 22 $ 35 $ 11 $ 25 Insurance and surety bond 129 129 89 199 Office supplies 272 218 108 169 Postage 207 173 80 184 Telephone 103 77 38 79 Service charges on bank accounts 83 82 31 122 Supervisory examination fees 112 103 49 89 Other expenses 1,079 761 279 848 ------- --------- -------- -------- $ 2,007 $ 1,578 $ 685 $ 1,715 ======= ======== ======== ========
57 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1996 and 1995 NOTE S - SHAREHOLDER RIGHTS PLAN The Corporation adopted a Shareholder Rights Plan (the Rights Plan) to protect shareholders from attempts to acquire control of the Corporation at an inadequate price. Under the Rights Plan, the Corporation distributed a dividend of one Preferred Share Purchase Right (a Right) for each share of outstanding common stock. The rights are currently not exercisable and will expire on November 22, 2005, unless the expiration date is extended or unless the Rights are earlier redeemed by the Corporation. After the Rights become exercisable, under certain circumstances, the Rights (other than rights held by a 15% beneficial owner or an "acquiring person") will entitle the holders to purchase one one-hundredth of a share of a new series of junior participating preferred stock at an exercise price of $45 or purchase either the Corporation's common shares or the common shares of the potential acquirer at a substantially reduced price. The Corporation is entitled to redeem the Rights at $0.01 per Right prior to the acquisition by a person or group of beneficial ownership of 15% or more of the Corporation's common stock. Following the acquisition by a person or group of beneficial ownership of 15% or more of the Corporation's common stock and prior to an acquisition of 50% or more, the Board of Directors may exchange the Rights (other than Rights owned by such person or group), in whole or in part, at an exchange ratio of one share of common stock (or one one-hundredth of a share of the new series of junior participating preferred stock) per Right. The Rights Plan was not adopted in response to any specific effort to acquire control of the Corporation. The issuance of rights has no dilutive effect, did not affect the Corporation's reported earnings per share, and was not taxable to the Corporation or its shareholders. 58 TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1996 and 1995 NOTE T - SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED)
Three months ended --------------------------------------- Dec. 31, Sept. 30, June 30, March 31, 1996 1996 1996 1996 -------- --------- ------- ---------- Total interest income $11,205 $ 9,711 $ 9,083 $ 8,990 Total interest expense 6,368 5,109 4,738 4,582 ------ ------ ------ ------ Net interest income 4,837 4,602 4,345 4,408 Provision for possible loan losses 120 120 60 30 ------ ------ Net interest income after provision 4,717 4,482 4,285 4,378 Other income 504 296 303 691 Other expenses 3,253 5,089 2,657 2,746 ------ ------ ------ ------ Income before income tax provision 1,968 (311) 1,931 2,323 Income tax provision 776 (102) 829 929 ------ ------ ------ ------ Net income $ 1,192 $ (209) $ 1,102 $ 1,394 ====== ====== ====== ====== Earnings per share (1) $ 0.29 $(0.05) $ 0.26 $ 0.32
Three months ended ------------------------------------ Dec. 31, Sept. 30, June 30, March 31, 1995 1995 1995 1995 ---- ----- ------- ------ Total interest income $ 8,019 $ 7,425 $ 7,093 $ 7,093 Total interest expense 4,122 3,657 3,422 3,202 ------ ------ ------ ------- Net interest income 3,897 3,768 3,671 3,891 Provision for possible loan losses 21 21 15 15 ------ ------ ------ ------ Net interest income after provision 3,876 3,747 3,656 3,876 Other income 311 352 252 246 Other expenses 2,507 2,556 2,410 2,404 ------ ------ ------ ------ Income before income tax provision 1,680 1,543 1,498 1,718 Income tax provision 666 594 599 709 ------ ------ ------ ------ Net income $1,014 $ 949 899 $ 1,009 ====== ====== ====== ====== Earnings per share (1) $ 0.23 $ 0.20 $ 0.19 $ 0.21
(1) Per share data presented represents both primary and fully diluted share computations. TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1996 and 1995 NOTE U - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY Condensed financial information for TF Financial Corporation (parent company only) follows: BALANCE SHEET
December 31, 1996 1995 (in thousands) ASSETS Cash $ 70 $ 199 Certificates of deposit - other institutions 154 150 Investment in Third Federal 59,208 55,500 Investment in TF Investments 27,580 26,224 Other assets 12 6 ------------------------ Total assets $ 87,024 $ 82,079 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Loan payable to TF Investments $ 9,740 $ 8,718 Payable to Third Federal and other liabilities 4,709 29 --------- ---------- Total liabilities 14,449 8,747 Stockholders' equity 72,575 73,332 -------- -------- Total liabilities and stockholders' equity $ 87,024 $ 82,079 ======== ========
60 (Continued) TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1996 and 1995 NOTE U - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY - Continued STATEMENT OF EARNINGS
Six-month period ended Year ended December 31, December 31, ------------------------- 1996 1995 1994 --------- ---------- ----------- 1994 (in thousands) INCOME Dividend income from subsidiaries $ - $ 4,220 $ - Interest income 10 6 - --------- --------- ---------- Total income 10 4,226 - --------- --------- ---------- EXPENSES Interest 722 118 - Other 257 257 56 ---------- -------- ----------- Total expenses 979 375 56 --------- ---------- --------- (Loss) income before income taxes and undistributed earnings of subsidiaries (969) 3,851 (56) Income taxes - - - --------------------- ---------- (Loss) income before undistributed earnings of subsidiaries (969) 3,851 (56) Undistributed earnings of subsidiaries 4,448 20 2,663 --------- ---------- ------- NET INCOME $ 3,479 $ 3,871 $ 2,607 ========= ========= =======
61 (Continued) TF Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1996 and 1995 NOTE U - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY - Continued STATEMENT OF CASH FLOWS
Six-month period ended Year ended December 31, December 31, ------------------------------- 1996 1995 1994 --------- --------- --------------- (in thousands) Cash flows from operating activities Net income $ 3,479 $ 3,871 $ 2,607 Adjustments to reconcile net income to net cash provided by operating activities Undistributed earnings from subsidiaries (4,448) (20) (2,663) Net change in assets and liabilities 4,676 (20) 41 Net cash provided by operating activities 3,707 3,831 (15) -------- Cash flows from investing activities Capital contributions to subsidiaries -- -- (47,479) Purchase and maturities of certificates of deposit in other financial institutions, net (4) (151) -- -------- -------- -------- Net cash used in investing activities (4) (151) -------- -------- -------- Cash flows from financing activities Net proceeds from issuance of common stock after considering benefit plans -- -- 47,499 Cash dividends paid to stockholders (1,258) (1,088) -- Net increase in borrowings from TF Investments 1,022 8,718 -- Treasury stock acquired (3,596) (11,116) -- -------- -------- -------- Net cash (used in) provided by financing activities (3,832) (3,486) 47,499 -------- -------- -------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (129) 194 5 Cash and cash equivalents at beginning of period 199 5 -- -------- Cash and cash equivalents at end of period $ 70 $ 199 $ 5 ======== ======== ======== Supplemental disclosures Cash paid during the year for income taxes $ 80 $ 32 $ - ======== ======== ========
62 EX-21 4 EXHIBIT 21 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT Parent TF Financial Corporation Percentage State of Subsidiaries Owned Incorporation - - ------------- ---------- ------------- Third Federal Savings Bank (a) 100% United States TF Investments Corporation (a) 100% Delaware Penns Trail Development Corporation (a) 100% Delaware - - ----------------- (a) The operations of this subsidiary are included in the consolidated financial statements contained in the 1996 Annual Report to Stockholders incorporated herein by reference. EX-23 5 EXHIBIT 23 EXHIBIT 23 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our report dated January 22, 1997, accompanying the consolidated financial statements incorporated by reference or included in the Annual Report of TF Financial Corporation and Subsidiaries on Form 10-K for the year ended December 31, 1996. We hereby consent to the incorporation by reference of said report in the Registration Statements of TF Financial Corproation and Subsidiaires on Forms S-8 (File No. 33-87176, effective December 7, 1994), and File No. 33-09235, effective July 31, 1996). /s/ Grant Thornton LLP Philadelphia, Pennsylvania March 26, 1997 EX-27 6 FDS 10-K
9 1,000 YEAR DEC-31-1996 DEC-31-1996 54,132 4,220 25,129 0 34,679 191,662 192,302 311,376 1,806 647,853 469,088 0 7,831 98,359 0 0 529 72,046 647,853 23,116 13,769 2,104 38,989 14,739 20,797 18,192 330 330 13,745 5,911 5,911 0 0 3,479 .83 .83 3.29 0 1,972 0 0 1,484 8 0 1,806 1,806 0 1,806
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