SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM l0-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2004
-------------------------------------------------
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________________ to ____________________
Commission file number 000-24168
---------
TF FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 74-2705050
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(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
3 Penns Trail, Newtown, Pennsylvania 18940
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 215-579-4000
-----------------------------
N/A
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Former name, former address and former fiscal year,
if changed since last report.
Indicate by check whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer
as defined in Exchange Act Rule 12b-2. Yes No X
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date: August 6, 2004
--------------
Class Outstanding
--------------------------- ----------------
$.10 par value common stock 2,880,429 shares
TF FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 1O-Q
FOR THE QUARTER ENDED JUNE 30, 2004
INDEX
Page
Number
------
PART I - CONSOLIDATED FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements 3
Item 2. Management's Discussion and Analysis of
Financial Position and Resultsof Operations 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 21
Item 4. Controls and Procedures 21
PART II- OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Changes in Securities, Use of Proceeds, and
Issuer Repurchases of Equity Securities 23
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 25
EXHIBITS
31. Certifications pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 26
32. Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 28
2
TF FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(in thousands)
Unaudited Audited
June 30, December 31,
2004 2003
---------- ----------
Assets
Cash and cash equivalents $ 6,467 $ 8,241
Certificates of deposit in other financial institutions 38 155
Investment securities available for sale - at fair value 16,186 14,433
Investment securities held to maturity (fair value of $8,603 and $10,815, 8,351 10,389
respectively)
Mortgage-backed securities available for sale - at fair value 115,935 106,774
Mortgage-backed securities held to maturity (fair value of $18,937 and 18,209 23,630
$24,774, respectively)
Loans receivable, net 421,893 404,649
Federal Home Loan Bank stock - at cost 6,741 6,825
Accrued interest receivable 2,560 2,671
Core deposit intangible, net of accumulated amortization of $2,536 and 288 368
$2,456,
respectively
Goodwill 4,324 4,324
Premises and equipment, net 6,087 6,268
Other assets 17,589 18,025
---------- ----------
Total assets $ 624,668 $ 606,752
========== ==========
Liabilities and stockholders' equity
Liabilities
Deposits $ 467,752 $ 459,343
Advances from the Federal Home Loan Bank 93,675 86,853
Advances from borrowers for taxes and insurance 2,096 1,738
Accrued interest payable 1,819 1,908
Other liabilities 2,059 1,430
---------- ----------
Total liabilities 567,401 551,272
---------- ----------
Commitments and contingencies
Stockholders' equity
Preferred stock, no par value; 2,000,000 shares authorized
and none issued
Common stock, $ 0.10 par value; 10,000,000 shares authorized,
5,290,000 issued; 2,676,395 and 2,596,037 shares outstanding
at June 30, 2004 and December 31, 2003, net of treasury shares of
2,402,852 and 2,474,366, respectively 529 529
Retained earnings 55,040 52,626
Additional paid-in capital 51,359 51,982
Unearned ESOP shares (2,107) (2,196)
Treasury stock - at cost (46,180) (47,043)
Accumulated other comprehensive (loss) (1,374) (418)
---------- ----------
Total stockholders' equity 57,267 55,480
---------- ----------
Total liabilities and stockholders' equity $ 624,668 $ 606,752
========== ==========
See notes to consolidated financial statements.
3
TF FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
For Three Months For Six Months
Ended June 30, Ended June 30,
-------------- --------------
2004 2003 2004 2003
------ ------ ------- ------
Interest income
Loans $5,960 $5,625 $11,950 $11,676
Mortgage-backed securities 1,531 1,845 2,988 3,697
Investment securities 280 518 560 1,026
Interest bearing deposits and other 4 168 7 414
------ ------ ------- ------
Total interest income 7,775 8,156 15,505 16,813
------ ------ ------- ------
Interest expense
Deposits 1,478 1,824 2,984 3,868
Advances from the Federal Home Loan Bank and other borrowings 673 2,701 1,319 5,480
------ ------ ------- ------
Total interest expense 2,151 4,525 4,303 9,348
------ ------ ------- ------
Net interest income 5,624 3,631 11,202 7,465
Provision for loan losses 150 90 300 180
------ ------ ------- ------
Net interest income after provision for loan losses 5,474 3,541 10,902 7,285
------ ------ ------- ------
Non-interest income
Service fees, charges and other operating income 544 440 1,120 885
Bank-owned life insurance 137 129 270 262
Gain (loss) on sale of investment and mortgage-backed securities
available for sale --- 79 --- 585
------ ------ ------- ------
Total non-interest income 681 648 1,390 1,732
------ ------ ------- ------
Non-interest expense
Compensation and benefits 2,247 2,036 4,521 4,060
Occupancy and equipment 644 602 1,239 1,230
Federal deposit insurance premium 18 18 36 37
Professional fees 132 158 338 318
Amortization of core deposit intangible 40 48 80 96
Advertising 163 138 326 275
Other operating 625 599 1,246 1,322
------ ------ ------- ------
Total non-interest expense 3,869 3,599 7,786 7,338
------ ------ ------- ------
Income before income taxes 2,286 590 4,506 1,679
Income tax expense 630 154 1,241 464
------ ------ ------- ------
Net income $1,656 $436 $3,265 $1,215
====== ==== ====== ======
Basic earnings per share $0.62 $0.17 $1.23 $0.49
Diluted earnings per share $0.58 $0.16 $1.15 $0.45
Dividends paid $0.17 $0.15 $0.32 $0.30
See notes to consolidated financial statements.
4
TF FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the six months ended
June 30,
2004 2003
---- ----
Cash flows from operating activities
Net income $ 3,265 $ 1,215
Adjustments to reconcile net income to net cash provided by operating activities:
Mortgage loan servicing rights --- 7
Deferred loan origination fees (8) (139)
Premiums and discounts on investment securities, net 41 26
Premiums and discounts on mortgage-backed securities and loans, net 418 1,179
Amortization of core deposit intangible 80 96
Provision for loan losses 300 180
Depreciation of premises and equipment 475 502
Recognition of ESOP and MSBP expenses 274 267
Gain on sale of investment and mortgage-backed securities available for sale --- (585)
Gain on sale of real estate (1) (12)
Increase in value of bank-owned life insurance (270) (262)
(Increase) decrease in:
Accrued interest receivable 111 392
Other assets 600 (219)
Increase (decrease) in:
Accrued interest payable (89) 52
Other liabilities 1,122 59
-------- --------
Net cash provided by operating activities 6,318 2,758
-------- --------
Cash flows from investing activities
Loan originations (71,106) (55,286)
Purchases of loans (3,546) (21,927)
Loan principal payments 57,045 85,946
Proceeds from sale of mortgage-backed securities available for sale --- 15,075
Purchases of mortgage-backed securities available for sale (27,701) (65,873)
Purchase of investment securities available for sale (2,180) (91,122)
Proceeds from maturities of investment securities held to maturity 2,000 1,830
Proceeds from maturities of investment securities available for sale --- 30,000
Principal repayments from mortgage-backed securities held to maturity 5,418 18,862
Principal repayments from mortgage-backed securities available for sale 17,242 27,472
Purchase of bank-owned insurance --- (1,500)
(Purchases) and maturities of certificates of deposit in other financial
institutions, net 117 (8)
Redemptions of Federal Home Loan Bank stock, net 84 174
Proceeds from sales of real estate 32 96
Purchase of real estate held for investment 4 ---
Purchase of premises and equipment (294) (419)
-------- --------
Net cash (used) investing activities (22,885) (56,680)
-------- --------
See notes to consolidated financial statements
5
TF FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(in thousands)
For the six months ended
June 30,
--------
2004 2003
---- ----
Cash flows from financing activities
Net increase in deposits 8,409 5,581
Net decrease (increase) in advances from Federal Home Loan Bank 6,822 (15,000)
Net increase in advances from borrowers for taxes and insurance 358 183
Exercise of stock options 1,281 915
Purchase of treasury stock, net (1,226) ---
Common stock cash dividend (851) (748)
-------- --------
Net cash provided by (used in) financing activities 14,793 (9,069)
-------- --------
Net (decrease) in cash and cash equivalents (1,774) (62,991)
Cash and cash equivalents at beginning of period 8,241 100,580
-------- --------
Cash and cash equivalents at end of period $ 6,467 $ 37,589
======== ========
Supplemental disclosure of cash flow information
Cash paid for
Interest on deposits and advances $ 4,392 $ 9,296
Income taxes $ 0 $ 250
Non-cash transactions
Transfers from loans to real estate acquired through foreclosure $ 0 $ 1,857
See notes to consolidated financial statements
6
TF FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - PRINCIPLES OF CONSOLIDATION
The consolidated financial statements as of June 30, 2004 (unaudited)
and December 31, 2003 and for the six-month periods ended June 30 2004
and 2003 (unaudited) include the accounts of TF Financial Corporation
(the "Company") and its wholly owned subsidiaries Third Federal Savings
Bank (the "Bank"), TF Investments Corporation and Penns Trail
Development Corporation. The Company's business is conducted
principally through the Bank. All significant intercompany accounts and
transactions have been eliminated in consolidation.
NOTE 2 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements were
prepared in accordance with instructions for Form 10-Q and, therefore,
do not include all of the disclosures or footnotes required by
accounting principles generally accepted in the United States of
America. In the opinion of management, all adjustments, consisting of
normal recurring accruals, necessary for fair presentation of the
consolidated financial statements have been included. The results of
operations for the period ended June 30, 2004 are not necessarily
indicative of the results which may be expected for the entire fiscal
year or any other period. For further information, refer to
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended December
31, 2003.
NOTE 3 - CONTINGENCIES
The Company, from time to time, is a party to routine litigation that
arises in the normal course of business. In the opinion of management,
the resolution of this litigation, if any, would not have a material
adverse effect on the Company's consolidated financial position or
results of operations.
NOTE 4 - OTHER COMPREHENSIVE INCOME (LOSS)
The Company's other comprehensive income (loss) consists of net
unrealized gains (losses) on investment securities and mortgage-backed
securities available for sale. Total comprehensive income (loss) for
the three-month periods ended June 30, 2004 and 2003 was ($99,000) and
$425,000, net of applicable income tax expense (benefit) of ($275,000)
and $148,000, respectively. Total comprehensive income for the
six-month periods ended June 30, 2004 and 2003 was $2,309,000 and
$607,000, net of applicable income tax expense of $748,000 and
$151,000, respectively.
7
TF FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - EARNINGS PER SHARE
Three months ended June 30, 2004
--------------------------------
Weighted
(000's) Average
Income Shares Per share
(numerator) (denominator) Amount
----------- ------------- ------
Basic earnings per share
Income available to common stockholders $ 1,656 2,672,534 $ 0.62
Effect of dilutive securities
Stock options - 166,559 (0.04)
------- --------- ------
Diluted earnings per share
Income available to common stockholders plus effect
of dilutive securities $ 1,656 2,839,093 $ 0.58
======= ========= ======
Six months ended June 30, 2004
------------------------------
Weighted
(000's) Average
Income Shares Per share
(numerator) (denominator) Amount
----------- ------------- ------
Basic earnings per share
Income available to common stockholders $3,265 2,660,871 $ 1.23
Effect of dilutive securities
Stock options - 169,012 (0.08)
------ --------- ------
Diluted earnings per share
Income available to common stockholders plus effect
of dilutive securities $3,265 2,829,883 $ 1.15
====== ========= ======
Options to purchase 31,913 shares of common stock at $34.14 per share
which were outstanding during the three and six months ended June 30,
2004 were not included in the computation of diluted earnings per share
because the options' exercise prices were greater than the average
market price of the common shares.
8
TF FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - EARNINGS PER SHARE (continued)
Three months ended June 30, 2003
--------------------------------
Weighted
(000's) Average
Income Shares Per share
(numerator) (denominator) Amount
----------- ------------- ------
Basic earnings per share
Income available to common stockholders $ 436 2,516,638 $ 0.17
Effect of dilutive securities
Stock options - 208,264 (0.01)
------ --------- ------
Diluted earnings per share
Income available to common stockholders plus effect
of dilutive securities $ 436 2,724,902 $ 0.16
====== ========= ======
Six months ended June 30, 2003
--------------------------------
Weighted
(000's) Average
Income Shares Per share
(numerator) (denominator) Amount
----------- ------------- ------
Basic earnings per share
Income available to common stockholders $1,215 2,502,600 $ 0.49
Effect of dilutive securities
Stock options - 207,467 (0.04)
------ --------- ------
Diluted earnings per share
Income available to common stockholders plus effect
of dilutive securities $1,215 2,710,067 $ 0.45
====== ========= ======
There were options to purchase 34,900 shares of common stock at a range
of $25.33 to $28.00 per share which were outstanding during the three
and six months ended June 30, 2003 that were not included in the
computation of diluted earnings per share because the options' exercise
prices were greater than the average market price of the common shares.
9
TF FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6- STOCK BASED COMPENSATION
The Company has several fixed stock option plans. The Company's
employee stock option plans are accounted for using the intrinsic value
method under APB Opinion No. 25, as permitted by SFAS No. 123. No
stock-based compensation expense is reflected in net income, as all
options granted under the plans had an exercise price equal to the
market value of the underlying common stock on the date of the grant.
Had compensation cost for the plans been determined based on the fair
value of options at the grant dates consistent with the method of SFAS
No. 123, "Accounting for Stock-Based Compensation," the Company's net
income and earnings per share would have been reduced to the pro forma
amounts indicated below (in thousands, except per share data):
Three months ended June 30, 2004 2003
---------------------------- ---- ----
Net income
As reported $1,656 $ 436
Deduct: stock-based compensation expense
determined using the fair value method, net of related
tax effects 26 11
------ ------
Pro forma $1,630 $ 425
====== ======
Basic earnings per share
As reported $ 0.62 $ 0.17
Pro forma $ 0.61 $ 0.17
Diluted earnings per share
As reported $ 0.58 $ 0.16
Pro forma $ 0.58 $ 0.16
Stock-based compensation expense included in net income is related to
stock grants in lieu of salary and the Company's employee stock
ownership plan. Such expense totaled $106,000 and $131,000 for the
three-month periods ended June 30, 2004 and 2003, respectively.
10
TF FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6- STOCK BASED COMPENSATION (continued)
Six months ended June 30, 2004 2003
-------------------------- ---- ----
Net income
As reported $3,265 $ 1,215
Deduct: stock-based compensation expense
determined using the fair value method, net of related
tax effects 51 22
------ ------
Pro forma $3,214 $1,193
====== ======
Basic earnings per share
As reported $ 1.23 $ 0.49
Pro forma $ 1.21 $ 0.48
Diluted earnings per share
As reported $ 1.15 $ 0.45
Pro forma $ 1.15 $ 0.45
Stock-based compensation expense included in net income is related to
stock grants in lieu of salary and the Company's employee stock
ownership plan. Such expense totaled $227,000 and $227,000 for the
six-month periods ended June 30, 2004 and 2003, respectively.
11
TF FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7- EMPLOYEE BENEFIT PLANS
Net periodic defined benefit pension expense included the following
components:
Three months ended June 30, 2004 2003
---------------------------- ---- ----
(in thousands)
Service cost $ 57 $ 48
Interest cost 51 46
Expected return on plan assets (53) (54)
Amortization of transition (asset)/obligation 1 1
Amortization of prior service costs 16 16
Amortization of unrecognized net actual loss 8 3
---- ----
Net periodic benefit cost $ 80 $ 60
==== ====
Six months ended June 30, 2004 2003
-------------------------- ---- ----
(in thousands)
Service cost $ 115 $ 95
Interest cost 95 93
Expected return on plan assets (105) (109)
Amortization of transition (asset)/obligation 2 3
Amortization of prior service costs 31 31
Amortization of unrecognized net actual loss 12 7
----- -----
Net periodic benefit cost $ 150 $ 120
===== =====
Management expects to make no contribution to the pension plan in 2004.
The impact of the Pension Funding Equity Act which was enacted in April
2004 is currently being evaluated.
NOTE 8- RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the
current period presentation.
12
TF FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL POSITION AND RESULTS OF OPERATIONS
GENERAL
The Company may from time to time make written or oral "forward-looking
statements", including statements contained in the Company's filings with the
Securities and Exchange Commission (including this Quarterly Report on Form 10-Q
and the exhibits thereto), in its reports to stockholders and in other
communications by the Company, which are made in good faith by the Company
pursuant to the "Safe Harbor" Provisions of the Private Securities Litigation
Reform Act of 1995.
These forward-looking statements involve risks and uncertainties, such as
statements of the Company's plans, objectives, expectations, estimates and
intentions that are subject to change based on various important factors (some
of which are beyond the Company's control). The following factors, among others,
could cause the Company's financial performance to differ materially from the
plans, objectives, expectations, estimates and intentions expressed in such
forward-looking statements: the strength of the United States economy in general
and the strength of the local economies in which the Company conducts
operations; the effects of, and changes in, trade, monetary and fiscal policies
and laws, including interest rate policies of the Board of Governors of the
Federal Reserve System, inflation, interest rate, market and monetary
fluctuations; the timely development of and acceptance of new products and
services of the Company and the perceived overall value of these products and
services by users, including the features, pricing and quality compared to
competitors' products and services; the willingness of users to substitute
competitors' products and services for the Company's products and services; the
success of the Company in gaining regulatory approval of its products and
services, when required; the impact of changes in financial services' laws and
regulations (including laws concerning taxes, banking, securities and
insurance); technological changes, acquisitions; changes in consumer spending
and saving habits; and the success of the Company at managing the risks involved
in the foregoing.
The Company cautions that the foregoing list of important factors is not
exclusive. The Company does not undertake to update any forward-looking
statement, whether written or oral, that may be made from time to time by or on
behalf of the Company.
Financial Position
The Company's total assets at June 30, 2004 and December 31, 2003 were $624.7
million and $606.8 million, respectively, an increase of $17.9 million, or 3.0%,
during the six-month period. Cash and cash equivalents decreased by $1.8
million. Investment securities available for sale increased by $1.8 million, the
net effect of the purchases of $2.2 million reduced by the $0.4 million decrease
in the market value of these securities. Investment securities held to maturity
decreased by $2.0 million due to calls of such securities. Mortgage-backed
securities available for sale increased by $9.2 million as $27.7 million in
security purchases was off-set by $17.2 million of principal payments, a decline
in the market value of these securities totaling $1.0 million and premium
amortization of $0.3 million. Mortgage-backed securities held to maturity
decreased by $5.5 million as a result of principal repayments. Loans receivable
increased by $17.2 million for the six-month period. Consumer non-mortgage and
single-family residential mortgage loans of $43.7 million and commercial loans
of $27.4 million were originated during the first half of 2004. Additionally,
$3.5 million of newly originated, single-family residential mortgage loans were
purchased during the six-month period. Offsetting these increases to loans
receivable were $57.0 million of principal repayments.
13
Total liabilities increased by $16.1 million. Deposit growth during the first
six months of 2004 was $8.4 million. Non-interest bearing demand deposits grew
by $4.4 million while savings, money market, and interest-bearing checking
accounts increased by a combined $1.4 million. Certificates of deposit decreased
by $2.6 million. Advances from the Federal Home Loan Bank increased by $6.8
million due to a $10.0 million increase in long-term fixed advances and $2.9
million of short-term advances. In addition, there were $6.1 million of
long-term advance repayments.
Total consolidated stockholders' equity of the Company was $57.3 million or
9.17% of total assets at June 30, 2004. During the first six months of 2004 the
Company repurchased 38,359 shares of its common stock and issued 109,873 shares
pursuant to the exercise of stock options. As of June 30, 2004, there were
approximately 113,700 shares available for repurchase under the previously
announced share repurchase plan.
Asset Quality
During the first six months of 2004, the Company's provision for loan losses was
$300,000 compared to $180,000 during the same period in 2003. The increase in
the provision is consistent with the corresponding increase in balance of loans
receivable. As of June 30, 2004, the Company owned one parcel of foreclosed real
estate. This parcel has been recorded as real estate owned at the lower of the
recorded investment in the loan or estimated fair value in the amount of $0.8
million and is included in other assets in the statement of financial position
at June 30, 2004. Management of the Company believes that there has not been any
significant deterioration in its asset quality during the period.
The following table sets forth information regarding the Company's asset
quality (dollars in thousands):
June 30, December 31, June 30,
-------- ------------ --------
2004 2003 2003
--------- --------- ---------
Non-performing loans $2,054 $2,282 $2,231
Ratio of non-performing loans to gross loans 0.48% 0.56% 0.62%
Ratio of non-performing loans to total assets 0.33% 0.38% 0.31%
Foreclosed property $ 837 $ 868 $1,857
Foreclosed property to total assets 0.13% 0.14% 0.26%
Ratio of total non-performing assets to total assets 0.46% 0.52% 0.57%
Management maintains an allowance for loan losses at levels that are believed to
be adequate; however, there can be no assurances that further additions will not
be necessary or that losses inherent in the existing loan portfolio will not
exceed the allowance. The following table sets forth the activity in the
allowance for loan losses during the periods indicated (in thousands):
2004 2003
---- ----
Beginning balance, January 1, $2,111 $2,047
Provision 300 180
Less: charge-off's, net 207 304
------ ------
Ending balance, June 30, $2,204 $1,923
====== ======
14
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2004 AND 2003
Net Income. The Company recorded net income of $1,656,000, or $0.58 per diluted
share, for the three months ended June 30, 2004 as compared to net income of
$436,000, or $0.16 per diluted share, for the three months ended June 30, 2003.
Average Balance Sheet
The following table sets forth information relating to the Company's average
balance sheet and reflects the average yield on assets and average cost of
liabilities for the periods indicated. Yield and cost are computed by dividing
income or expense by the average daily balance of interest-earning assets or
interest-bearing liabilities, respectively, for the periods indicated.
Three months ended June 30,
2004 2003
-------------------------------- -----------------------------------
Average Average Average Average
Balance Interest Yld/Cost Balance Interest Yld/Cost
------- -------- -------- ------- -------- --------
(dollars in thousands)
Assets:
Interest-earning assets:
Loans receivable (1)....................... $418,545 $5,960 5.73% $363,906 $5,625 6.20%
Mortgage-backed securities................. 132,144 1,531 4.66% 172,259 1,845 4.30%
Investment securities(2)................... 30,111 334 4.46% 76,608 555 2.91%
Other interest-earning assets(3)........... 1,648 4 0.98% 64,376 168 1.05%
-------- ------ -------- ------
Total interest-earning assets............ 582,448 7,829 5.41% 677,149 8,193 4.85%
------ ------
Non interest-earning assets.................... 35,974 35,748
-------- --------
Total assets............................. $618,422 $712,897
======== ========
Liabilities and stockholders' equity:
Interest-bearing liabilities
Deposits................................... $471,402 1,478 1.26% $446,212 1,824 1.64%
Advances from the FHLB and other
Borrowings...................... 82,984 673 3.26% 197,249 2,701 5.49%
-------- ------ -------- ------
Total interest-bearing liabilities....... 554,386 2,151 1.56% 643,461 4,525 2.82%
------ ------
Non interest-bearing liabilities............... 5,801 6,266
-------- --------
Total liabilities........................ 560,187 649,727
Stockholders' equity........................... 58,235 63,170
-------- --------
Total liabilities and stockholders' equity.. $618,422 $712,897
======== ========
Net interest income............................ $5,678 $3,668
====== ======
Interest rate spread (4)....................... 3.85% 2.03%
Net yield on interest-earning assets (5)....... 3.92% 2.17%
Ratio of average interest-earning assets to
average interest bearing liabilities........... 105% 105%
(1) Nonaccrual loans have been included in the appropriate average loan balance
category, but interest on nonaccrual loans has not been included for
purposes of determining interest income.
(2) Tax equivalent adjustments to interest on investment securities for the
quarter ended June 30, 2004 and 2003 were $54,000 and $37,000 respectively.
Tax equivalent interest income is based upon an effective tax rate of 34%.
(3) Includes interest-bearing deposits in other banks.
(4) Interest-rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(5) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
15
Rate/Volume Analysis
The following table presents, for the periods indicated, the change in interest
income and interest expense (in thousands) attributed to (i) changes in volume
(changes in the weighted average balance of the total interest earning asset and
interest bearing liability portfolios multiplied by the prior year rate), and
(ii) changes in rate (changes in rate multiplied by prior year volume). Changes
attributable to the combined impact of volume and rate have been allocated
proportionately based on the absolute value of changes due to volume and changes
due to rate.
Three months ended
June 30,
2004 vs. 2003
-----------------------------
Increase (decrease)
due to
-----------------------------
Volume Rate Net
-----------------------------
Interest income:
Loans receivable, net $ 2,504 $(2,169) $ 335
Mortgage-backed securities (1,149) 835 (314)
Investment securities (1,384) 1,163 (221)
Other interest-earning assets (153) (11) (164)
-----------------------------
Total interest-earning assets (182) (182) (364)
=============================
Interest expense:
Deposits 596 (942) (346)
Advances from the FHLB and other borrowings (1,192) (836) (2,028)
-----------------------------
Total interest-bearing liabilitie (596) (1,778) (2,374)
=============================
Net change in net interest income $ 414 $ 1,596 $ 2,010
=============================
Total Interest Income. Total interest income, on a taxable equivalent basis,
decreased by $0.4 million or 4.4% to $7.8 million for the quarter ended June 30,
2004 compared with the same quarter of 2003 primarily because of low market
interest rates which resulted in a significant amount of loan prepayments during
the intervening period. Increased loan originations at the Bank contributed to
loan income in a manner that largely offset the impact caused by the low market
interest rates. Interest income from mortgage-backed securities, investment
securities and other interest-earning assets was lower in the second quarter of
2004 in comparison to the same period of 2003. This decrease is consistent with
the reduction in the balances maintained in these types of interest-earning
assets.
Total Interest Expense. Total interest expense decreased by $2.4 million to $2.2
million during the three-month period ended June 30, 2004 as compared with the
related quarter of 2003. The increase in the average balance of deposits was
more than offset by lower market interest rates during the period and the lower
rates paid on the Bank's renewing certificates of deposit that had been
originated when market interest rates were higher. The repayment and refinancing
of the Federal Home Loan Bank Advances that occurred at the end of the third
quarter of 2003 also contributed to the overall reduction of interest expense.
16
Non-interest income. Total non-interest income was $681,000 for the three-month
period ended June 30, 2004 compared with $648,000 for the same period in 2003.
Retail banking fees increased by $104,000 as a result of a $79,000 increase in
overdraft and uncollected fees. Also, the collection of mortgage brokerage fees
and a growth in other loan fees contributed to the increase during the period.
Net gains on sales of mortgage-backed securities available for sale during the
second quarter of 2003 totaled $79,000 while, conversely, there were no such
sales during the same period in 2004.
Non-interest expense. Total non-interest expense increased by $270,000 to $3.9
million for the three months ended June 30, 2004 in contrast to the same period
in 2003. Compensation and benefit expenses were higher by $211,000 due to
increases in salary and compensation costs of the Company. Occupancy and
equipment costs rose $42,000 largely due increases in the costs associated
office and equipment maintenance. Additionally, other operating expenses
increased $26,000 between the two quarters as a result of the increase in loan
originations for the quarter.
17
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003
Net Income. The Company recorded net income of $3,265,000, or $1.15 per diluted
share, for the six months ended June 30, 2004 as compared to net income of
$1,215,000, or $0.45 per diluted share, for the six months ended June 30, 2003.
Average Balance Sheet
The following table sets forth information relating to the Company's average
balance sheet and reflects the average yield on assets and average cost of
liabilities for the periods indicated. Yield and cost are computed by dividing
income or expense by the average daily balance of interest-earning assets or
interest-bearing liabilities, respectively, for the periods indicated.
Six months ended June 30,
-------------------------
2004 2003
-------------------------------- ----------------------------------
Average Average Average Average
Balance Interest Yld/Cost Balance Interest Yld/Cost
------- -------- -------- ------- -------- --------
(dollars in thousands)
Assets:
Interest-earning assets:
Loans receivable (1)....................... $414,761 $11,950 5.79% $365,226 $11,676 6.45%
Mortgage-backed securities................. 131,400 2,988 4.57% 167,985 3,697 4.44%
Investment securities (2).................. 30,282 663 4.40% 66,670 1,093 3.31%
Other interest-earning assets(3)........... 1,609 7 0.87% 79,297 414 1.05%
-------- ------- -------- -------
Total interest-earning assets............ 578,052 15,608 5.43% 679,178 16,880 5.01%
------- -------
Non interest-earning assets.................... 36,133 35,356
-------- --------
Total assets............................. $614,185 $714,534
======== ========
Liabilities and stockholders' equity:
Interest-bearing liabilities
Deposits................................... $468,073 2,984 1.28% $444,459 3,868 1.75%
Advances from the FHLB and other
Borrowings...................... 83,149 1,319 3.19% 200,619 5,480 5.51%
-------- ------- -------- -------
Total interest-bearing liabilities....... 551,222 4,303 1.57% 645,078 9,348 2.92%
------- -------
Non interest-bearing liabilities............... 5,517 6,344
-------- --------
Total liabilities........................ 556,739 651,422
Stockholders' equity........................... 57,446 63,112
-------- --------
Total liabilities and stockholders' equity.. $614,185 $714,534
======== ========
Net interest income............................ $11,305 $7,532
======= ======
Interest rate spread (4)....................... 3.86% 2.09%
Net yield on interest-earning assets (5)....... 3.93% 2.24%
Ratio of average interest-earning assets to
average interest bearing liabilities........... 105% 105%
(1) Nonaccrual loans have been included in the appropriate average loan balance
category, but interest on nonaccrual loans has not been included for
purposes of determining interest income.
(2) Tax equivalent adjustments to interest on investment securities for the six
months ended June 30, 2004 and 2003 were $103,000 and $67,000 respectively.
Tax equivalent interest income is based upon an effective tax rate of 34%.
(3) Includes interest-bearing deposits in other banks.
(4) Interest-rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(5) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
18
Rate/Volume Analysis
The following table presents, for the periods indicated, the change in interest
income and interest expense (in thousands) attributed to (i) changes in volume
(changes in the weighted average balance of the total interest earning asset and
interest bearing liability portfolios multiplied by the prior year rate), and
(ii) changes in rate (changes in rate multiplied by prior year volume). Changes
attributable to the combined impact of volume and rate have been allocated
proportionately based on the absolute value of changes due to volume and changes
due to rate.
Six months ended
June 30,
2004 vs. 2003
-----------------------------
Increase (decrease)
due to
-----------------------------
Volume Rate Net
-----------------------------
Interest income:
Loans receivable, net $ 2,887 $(2,613) $ 274
Mortgage-backed securities (1,020) 311 (709)
Investment securities (1,177) 747 (430)
Other interest-earning assets (347) (60) (407)
------------------------------
Total interest-earning assets 343 (1,615) (1,272)
==============================
Interest expense:
Deposits 547 (1,431) (884)
Advances from the FHLB and other borrowings (2,421) (1,740) (4,161)
------------------------------
Total interest-bearing liabilities (1,874) (3,171) (5,045)
==============================
Net change in net interest income $ 2,217 $ 1,556 $ 3,773
==============================
Total Interest Income. Total interest income, on a taxable equivalent basis,
decreased by $1.3 million or 7.5% to $15.6 million for the six months ended June
30, 2004 compared with the first half of 2003 primarily because of low market
interest rates which resulted in a significant amount of loan prepayments during
the intervening period. Increased loan originations at the Bank contributed to
loan income in a manner that largely offset the impact caused by the low market
interest rates. Interest income from mortgage-backed securities, investment
securities and other interest-earning assets was lower during the first six
months of 2004 in comparison to the same period of 2003. This decrease is
consistent with the reduction in the balances maintained in these types of
interest-earning assets.
Total Interest Expense. Total interest expense decreased by $5.0 million to $4.3
million during the six-month period ended June 30, 2004 as compared with the
first half of 2003. The increase in the average balance of deposits was more
than offset by lower market interest rates during the period and the lower rates
paid on the Bank's renewing certificates of deposit that had been originated
when market interest rates were higher. The repayment and refinancing of the
Federal Home Loan Bank Advances that occurred at the end of the third quarter of
2003 also contributed to the overall reduction of interest expense.
19
Non-interest income. Total non-interest income was $1,390,000 for the six-month
period ended June 30, 2004 in contrast with $1,732,000 for the same period in
2003. The decrease was primarily due to $585,000 in net gains on sales of
mortgage-backed securities available for sale during 2003 while, conversely,
there were no such sales during the same period in 2004. Retail banking fees
were $235,000 greater over the period as a result of a $154,000 increase in
overdraft and uncollected fees. Also, the collection of mortgage brokerage fees
and a growth in other loan fees contributed to the increase during the period.
Non-interest expense. Total non-interest expense increased by $448,000 to $7.8
million for the six months ended June 30, 2004 compared to the same period in
2003. Compensation and benefit expenses were higher by $461,000 due to increases
in salary and compensation costs of the Company. In contrast, other operating
expenses decreased $76,000 between the two periods mostly as a result of various
deposit item and reconciling losses of $94,000 which were expensed during 2003.
20
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
The Company's liquidity is a measure of its ability to fund loans, pay
withdrawals of deposits, and other cash outflows in an efficient, cost-effective
manner. The Company's short-term sources of liquidity include maturity,
repayment and sales of assets, excess cash and cash equivalents, new deposits,
broker deposits, other borrowings, and new advances from the Federal Home Loan
Bank. There has been no material adverse change during the six-month period
ended June 30, 2004 in the ability of the Company and its subsidiaries to fund
their operations.
At June 30, 2004, the Company had commitments outstanding under letters of
credit of $1.4 million, commitments to originate loans of $12.0 million, and
commitments to fund undisbursed balances of closed loans and unused lines of
credit of $49.8 million. There has been no material change during the six months
ended June 30, 2004 in any of the Company's other contractual obligations or
commitments to make future payments.
Capital Requirements
The Bank was in compliance with all of its capital requirements as of June 30,
2004.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Asset and Liability Management
The Company's market risk exposure is predominately caused by interest rate
risk, which is defined as the sensitivity of the Company's current and future
earnings, the values of its assets and liabilities, and the value of its capital
to changes in the level of market interest rates. Management of the Company
believes that there has not been a material adverse change in market risk during
the six months ended June 30, 2004.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Based on their evaluation of the Company's disclosure controls and procedures
(as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the
"Exchange Act")), the Company's principal executive officer and principal
financial officer have concluded that as of the end of the period covered by
this Quarterly Report on Form 10-Q such disclosure controls and procedures are
effective to ensure that information required to be disclosed by the Company in
reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms.
Changes in Internal Controls over Financial Reporting
During the quarter under report, there was no change in the Company's internal
control over financial reporting that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting.
21
CRITICAL ACCOUNTING POLICIES
Certain critical accounting policies of the Company require the use of
significant judgment and accounting estimates in the preparation of the
consolidated financial statements and related data of the Company. These
accounting estimates require management to make assumptions about matters that
are highly uncertain at the time the accounting estimate is made. Management
believes that the most critical accounting policy requiring the use of
accounting estimates and judgment is the determination of the allowance for loan
losses. If the financial position of a significant amount of debtors should
deteriorate more than the Company has estimated, present reserves for loan
losses may be insufficient and additional provisions for loan losses may be
required. The allowance for loan losses was $2,204,000 at June 30, 2004.
NEW ACCOUNTING PRONOUNCEMENTS
On March 31, 2004, the Financial Accounting Standards Board (FASB) issued a
proposed Statement, "Share-Based Payment an Amendment of FASB Statements No. 123
and APB No. 95", that addresses the accounting for share-based payment
transaction in which an enterprise receives employee services in exchange for
(a) equity instruments of the enterprise or (b) liabilities that are based on
the fair value of the enterprise's equity instruments or that may be settled by
the issuance of such equity instruments. Under the FASB's proposal, all forms of
share-based payments to employees, including stock options, would be treated the
same as other forms of compensation by recognizing the related cost in the
income statement. The expense of the award would generally be measured at fair
value at the grant date. Current accounting guidance requires that the expense
relating to so-called fixed plan employee stock options only be disclosed in the
footnotes to the financial statements. The proposed Statement would eliminate
the ability to account for share-based compensation transactions using APB
Opinion No. 25, "Accounting for Stock Issued to Employees." The Company is
currently evaluating this proposed statement and its effects on its results of
operations.
In March 2004 the Securities and Exchange Commission staff released Staff
Accounting Bulletin (SAB) 105, "Loan Commitments Accounted for as Derivative
Instruments." SAB 105 requires that a lender should not consider the expected
cash flows related to loan servicing or include any internally developed
intangible assets in determining the fair value of loan commitments accounted
for as derivatives. Companies will be required to adopt SAB 105 effective for
commitments entered into after June 30, 2004. The requirements of SAB 105 will
apply to the Company's mortgage interest rate lock commitments related to loans
held for sale. At June 30, 2004, the Company did not have such commitments
subject to the provisions of SAB 105. The Company anticipates that the
application of SAB 105 will not have a material impact on the effect on the
Company's financial position or results of operations.
22
TF FINANCIAL CORPORATION AND SUBSIDIARIES
PART II
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
The following table provides information on repurchases by the Company
of its common stock in each month for the six months ended June 30,
2004:
Total Number of Maximum Number
Shares Purchased of Shares that may
Total Number as Part of Publicly yet be Purchased
of Shares Average Price Announced Plan of Under the Plans or
Period Purchased Paid per Share Program Programs
------ -------------- ------- --------
January 1, 2004
through
January 31, 2004 --- --- --- 114,082
February 1, 2004
through
February 29, 2004 --- --- --- 114,082
March 1
Through
March 31, 2004 38,000 $32.00 --- 114,082
April 1, 2004
through
April 30, 2004 --- --- --- 114,082
May 1, 2004
through
May 31, 2004 --- --- --- 114,082
June 1
Through
June 30, 2004 359 $28.63 359 113,723
The total number of shares repurchased during the quarter was directly
related to the exercise of stock options. The repurchase poses no modification
to the rights of stockholders. Furthermore, there has been no change in the
ability of the Company to pay dividends or any material change in the working
capital of the Company. The stock repurchase did not alter the previously
approved stock repurchase plan of the Company.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31. Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2003.
32. Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2003.
(b) Reports on Form 8-K
On July 23, 2004 the Company filed a Form 8-K wherein the Company
included the press release announcing the Company's earnings for
the second quarter of 2004.
24
TF FINANCIAL CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: August 13, 2004 /s/ Kent C. Lufkin
---------------------------------------------
Kent C. Lufkin
President and CEO
(Principal Executive Officer)
Date: August 13, 2004 /s/ Dennis R. Stewart
---------------------------------------------
Dennis R. Stewart
Executive Vice President and
Chief Financial Officer
(Principal Financial & Accounting Officer)
25