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THRD > SEC Filings for THRD > Form 10-Q on 14-May-2013All Recent SEC Filings

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Form 10-Q for TF FINANCIAL CORP


14-May-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)

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 hereto), in its reports to stockholders and in other communications by the Company, which are made in good faith by the Company pursuant to the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements involve risks and uncertainties, such as statements of the Company's plans, objectives, expectations, estimates and intentions that are subject to change based on various important factors (some of which are beyond the Company's control). The following factors, among others, could cause the Company's financial performance to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements: the strength of the United States economy in general and the strength of the local economies in which the Company conducts operations; the effects of, and changes in, 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 Condition

The Company's total assets at March 31, 2013 and December 31, 2012 were $716.0 million and $711.8 million, respectively, representing an increase of $4.2 million during the three-month period. Largely as a result of the repayment of loans receivable and investment securities, cash and cash equivalents increased by $17.6 million during the first three months of 2013. Loans receivable, net decreased by $5.9 million during the first quarter of 2013. Principal repayments of $34.3 million on loans were partially offset by originations of consumer and single-family residential mortgage loans totaling $16.3 million and originations of commercial loans totaling $12.7 million. The Company increased the allowance for loan losses by $439,000 and transferred $100,000 from loans to real estate acquired through foreclosure. Loans receivable held for sale remained relatively unchanged as originations of loans for sale in the secondary market totaled $11.7 million and proceeds from loan sales totaled $11.9 million. Investment securities decreased by $6.6 million due to principal repayments and maturities totaling $7.9 million, a decrease in the fair value of available for sale securities of $1.3 million and net premium amortization of $183,000, all of which were offset by security purchases of $2.8 million.

Total liabilities increased by $3.7 million during the first three months of 2013. Deposit balances increased $11.0 million during the period with checking, money market and savings accounts increasing by $12.1 million. Advances from the FHLB decreased by $6.5 million, the result of scheduled amortization and maturities. Retail certificates of deposit ("CDs") decreased $1.1 million during the first three months of 2013.

Total consolidated stockholders' equity of the Company was $83.4 million or 11.7% of total assets at March 31, 2013. At March 31, 2013, there were approximately 102,000 shares available for repurchase under the previously announced share repurchase plan.


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Asset Quality

Nonperforming assets include real estate owned, which is carried at estimated
fair value less costs to sell and nonperforming loans. Nonperforming loans
include loan balances 90 days or more past due and impaired loans for which the
accrual of interest has been discontinued. The following table sets forth
information regarding the Company's nonperforming assets:

                                                                             At
Nonperforming Assets                             March 31, 2013       December 31, 2012      March 31, 2012
                                                                   (Dollars in thousands)
Loans receivable, net:
Residential
Residential mortgages                            $         2,242     $             2,265     $         4,040
Commercial
Real estate-commercial                                       552                   1,098               2,039
Real estate-residential                                       50                      51                 838
Construction loans                                         4,649                   4,794               6,580
Commercial and industrial loans                                -                       -                   6
Consumer
Home equity and second mortgage                              143                     143                 377
Other consumer                                                11                       8                   9
Total nonperforming loans                                  7,647                   8,359              13,889
Real estate owned                                          7,170                   7,282              10,247
Total nonperforming assets                       $        14,817     $            15,641     $        24,136
Total loans 90 days or more past due as to
interest or principal and accruing interest      $             -     $                 -     $             -
Ratio of nonperforming loans to gross loans                 1.45 %                  1.56 %              2.79 %
Ratio of nonperforming loans to total assets                1.07 %                  1.17 %              2.00 %
Ratio of total nonperforming assets to total
assets                                                      2.07 %                  2.20 %              3.48 %

Nonperforming construction loans include two loans with a combined balance of $2.0 million secured by a parcel of land. The Bank has recorded a partial charge-off of $302,000 from the allowance for loan losses equal to the difference between the recorded investment and a recent appraisal. The borrower is attempting to sell the property and intends to apply the sale proceeds to the outstanding loan balance. Additionally, $43,000 of the allowance for loan losses has been allocated to this loan for potential additional costs.

Nonperforming construction loans also include a participation in a commercial construction project with a principal balance due to the Bank of $3.1 million. The Bank has recorded a partial charge-off of $198,000 from the allowance for loan losses equal to the difference between the recorded investment and a recent appraisal. Additionally, $1,500,000 of the allowance for loan losses has been allocated to this loan for a potential shortfall related to the disposition of the loan.

Foreclosed property at March 31, 2013 consisted of twenty-one parcels of real estate with a combined carrying value of $7.2 million. During the first quarter of 2013, the Bank foreclosed on two mortgage loans secured by residential property valued at $100,000 which resulted in a charge to the allowance of $87,000. Also, the Bank sold one property acquired through foreclosure with an aggregate book value of $32,000. All foreclosed properties are listed or are in the process of being listed with real estate agents for sale in a timely manner. Foreclosed real estate is included in other assets in the Consolidated Balance Sheet.

Allowance for Loan Losses

The Bank provides valuation allowances for estimated losses from uncollectible loans. The allowance is increased by provisions charged to expense and reduced by net charge-offs. On a quarterly basis, the Company prepares an allowance for loan losses (ALLL) analysis. In the analysis, the loan portfolio is segmented into groups of homogeneous loans that share similar risk characteristics:
commercial loans secured by nonresidential or non-owner occupied residential real estate, construction, commercial and industrial loans, single-family residential, and consumer which is predominately real estate secured junior liens and home equity lines of credit. Each segment is assigned reserve factors based on quantitative and qualitative measurements. In addition, the Bank reviews its internally classified loans, its loans classified for regulatory purposes, delinquent loans, and other relevant information in order to isolate loans for further scrutiny as potentially impaired loans.


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Quantitative factors include an actual expected loss factor based on historical loss experience over a relevant look-back period. Quantitative factors also include the Bank's actual risk ratings for the commercial loan segments as determined in accordance with loan review and loan grading policies and procedures, and additional factors as determined by management to be representative of additional risk due to the loan's geographic location, type, and other attributes. These quantitative factors are adjusted if necessary, up or down, based on actual experience and an evaluation of the qualitative factors.

Qualitative factors are based upon: (1) changes in lending policies and procedures, including but not limited to changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses; (2) changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments; (3) changes in the nature and volume of the portfolio and in the terms of loans; (4) changes in the experience, ability, and depth of lending management and other relevant staff; (5) changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or graded loans; (6) changes in the quality of the loan review system; (7) changes in the value of underlying collateral for collateral dependent loans; (8) the existence and effect of any concentration of credit, and changes in the level of such concentrations; and (9) the effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the existing loan portfolio.

Potentially impaired loans selected for individual evaluation are reviewed in accordance with US GAAP which governs the accounting for impaired assets, as well as regulatory guidance regarding treatment of troubled, collateral-dependent loans. Each potentially impaired loan is evaluated using all available information such as recent appraisals, whether the loan is currently on accrual or nonaccrual status, discounted cash flow analyses, guarantor financial strength, the value of additional collateral, and the loan's and borrower's past performance to determine whether in management's best judgment it is probable that the Bank will be unable to collect all contractual interest and principal in accordance with the loan's terms. Loans deemed not to be impaired are assigned a reserve factor based upon the segment from which they were selected.

Loans deemed impaired are evaluated to determine the estimated fair value of the collateral, and a portion of the ALLL will be allocated to the deficiency. Troubled collateral-dependent real estate secured loans are valued using the appraised value of the collateral, and a portion of the ALLL will be allocated to these loans based on the difference between the loan amount and the appraised value. If such amounts are judged by management to be permanent, they will be charged-off. In addition, if foreclosure is probable, a portion of the ALLL will be allocated to the estimated additional costs to acquire and the estimated costs to sell. Upon completion of the foreclosure process, these amounts will be charged-off.

The ALLL needed as a result of the foregoing evaluation is compared with the unadjusted amount, and an adjustment is made by means of a provision to the allowance for loan losses. Recognizing the inherently imprecise nature of the loss estimates and the large number of assumptions needed in order to perform the analysis, the required reserve may be less than the actual level of reserves at the end of any evaluation period, and thus there may be an unallocated portion of the ALLL. Management adjusts the unallocated portion to an amount which management considers reasonable under the circumstances.


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RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012

Net Income. The Company recorded net income of $1,223,000, or $0.45 per diluted share, for the three months ended March 31, 2013 as compared to net income of $1,155,000, or $0.42 per diluted share, for the three months ended March 31, 2012.

Average Balance Sheet

The following table sets forth information (dollars in thousands) relating to
the Company's average balance sheet and reflects the average yield on assets and
average cost of liabilities for the periods indicated. Yields and costs are
computed by dividing income or expense by the average daily balance of
interest-earning assets or interest-bearing liabilities, respectively, for the
three-month periods indicated.

                                                    Three Months Ended March 31,
                                          2013                                        2012
                          Average                      Average        Average                      Average
                          balance       Interest       yld/cost       balance       Interest       yld/cost
ASSETS
Interest-earning
assets:
Loans receivable (1)     $ 525,275     $    6,066           4.68 %   $ 493,396     $    6,197           5.05 %
Mortgage-backed
securities                  41,988            273           2.64 %      61,971            539           3.50 %
Investment securities
(2)                         65,131            711           4.43 %      67,035            712           4.27 %
Other interest-earning
assets (3)                  28,877              4           0.06 %      13,619              2           0.06 %
Total interest-earning
assets                     661,271          7,054           4.33 %     636,021          7,450           4.71 %
Noninterest-earning
assets                      46,572                                      50,557
Total assets             $ 707,843                                   $ 686,578
LIABILITIES AND
    STOCKHOLDERS' EQUITY
Interest-bearing
liabilities:
Deposits                 $ 560,750            731           0.53 %   $ 554,523          1,066           0.77 %
Borrowings from the
FHLB                        56,114            248           1.79 %      47,387            405           3.44 %
Total interest-bearing
liabilities                616,864            979           0.64 %     601,910          1,471           0.98 %
Noninterest-bearing
liabilities                  7,216                                       6,523
Total liabilities          624,080                                     608,433
Stockholders' equity        83,763                                      78,145
Total liabilities and
stockholders' equity     $ 707,843                                   $ 686,578
Net interest
income-tax equivalent
basis                                       6,075                                       5,979
Interest rate spread
(4)-tax equivalent
basis                                                       3.69 %                                      3.73 %
Net yield on interest-earning
assets (5)-tax
    equivalent basis                                        3.73 %                                      3.78 %
Ratio of average interest-earning
assets to
    average interest-bearing
liabilities                                               107.20 %                                    105.67 %
Less: tax equivalent
interest adjustments                         (197 )                                      (187 )
Net interest income                    $    5,878                                  $    5,792
Interest rate spread
(4)                                                         3.56 %                                      3.61 %
Net yield on
interest-earning
assets (5)                                                  3.60 %                                      3.66 %

Nonperforming loans have been included in the appropriate average loan (1 ) balance category, but interest on nonperforming loans has not been included for purposes of determining interest income.
Tax equivalent adjustments to interest on investment securities were $197,000 and $187,000 for the quarters ended March 31, 2013 and 2012, (2 ) respectively. Tax equivalent interest income is based upon a marginal effective tax rate of 34%.
(3 ) Includes interest-bearing deposits in other banks.
Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of (4 ) interest-bearing liabilities.
Net yield on interest-earning assets represents net interest income as (5 ) a percentage of average interest-earning assets.


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Rate/Volume Analysis

The following table presents, for the periods indicated, the change in interest income and interest expense (dollars 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.

                                         For the three months ended March 31
                                                     2013 vs 2012
                                              Increase (decrease) due to
                                       Volume              Rate             Net
Interest income:
Loans receivable, net                $     1,646       $      (1,777 )     $ (131 )
Mortgage-backed securities                  (151 )              (115 )       (266 )
Investment securities (1)                    (92 )                91           (1 )
Other interest-earning assets                  2                   -            2
Total interest-earning assets              1,405              (1,801 )       (396 )
Interest expense:
Deposits                                      82                (417 )       (335 )
Borrowings from the FHLB                     390                (547 )       (157 )

Total interest-bearing liabilities           472                (964 )       (492 )
Net change in net interest income    $       933       $        (837 )     $   96

Tax equivalent adjustments to interest on investment securities were $197,000 and $187,000 for the quarters ended March 31, 2013 (1 ) and 2012, respectively. Tax equivalent interest income is based upon a marginal effective tax rate of 34%.

Total Interest Income. Total interest income, on a taxable equivalent basis, decreased by $396,000, or 5.3%, to $7.1 million for the quarter ended March 31, 2013 compared with the first quarter of 2012. Interest income from loans receivable decreased by $131,000, the result of a decrease in the average yield on loans of 37 basis points netted against the effect of a $31.9 million increase in the average balance of loans outstanding. The decrease in the yield was caused by the combined effects of a large number of higher rate loans being prepaid, and new loans added to the portfolio with a lower yield than the existing portfolio loans that had matured or refinanced. Interest income from mortgage-backed securities was lower in the 2013 quarter in comparison to the same period of 2012 mainly because the yield associated with principal repayments and sales which occurred during the intervening period was higher than the yield on remaining mortgage-backed securities.

Total Interest Expense. Total interest expense decreased by $492,000 to $1.0 million during the three-month period ended March 31, 2013 as compared with the same period in 2012. The average interest rate paid on the Bank's deposits was 24 basis points lower in 2013 due to the maturity of certificates of deposit with higher interest rates than current market rates offered on the products into which the maturing CDs were renewed or reinvested, and a favorable change in the deposit mix and pricing. Interest expense associated with borrowings from the FHLB decreased $157,000 between the first quarter of 2013 compared to the same quarter of 2012. During the intervening period, the Bank increased its average outstanding borrowings by $8.7 million, which included an increase in long-term advances with rates lower than the maturing advances, which resulted in a decrease in the cost of borrowed funds of 165 basis points.

Noninterest income. Total noninterest income was $1.4 million for the first quarter of 2013 compared with $1.2 million for the same period in 2012. The increase was mainly the result of a $417,000 gain related to an eminent domain matter affecting a parcel of Company property, a $153,000 increase over the amount recorded in 2012 related to the same matter, which is now finalized.

Noninterest expense. Total noninterest expense decreased by $26,000 to $5.0 million for the three months ended March 31, 2013 compared to the same period in 2012. Foreclosed real estate expense decreased $63,000 in first quarter of 2013 mainly due to a decrease in the holding costs of real estate acquired through foreclosure that resulted from the disposition of such properties during the intervening period. Employee compensation decreased by $57,000, mainly the result of a decrease in the costs of employer provided health care plans. In contrast, non-merger related professional fees decreased $63,000 between the two periods as a result of professional services incurred during the 2012 period to enhance commercial lending policies. FDIC insurance premiums decreased by $41,000 between the two quarters due to a reduction in the premium rate assessment associated with improvement in nonperforming assets. Offsetting these decreases was an increase in merger-related costs of $320,000 attributable to the announced acquisition of Roebling Financial Corp, Inc.

Income tax expense. The Company's effective tax rate was 32.2% for the quarter ended March 31, 2013 compared to 21.6% for the quarter ended March 31, 2012. These effective tax rates differ from the Company's marginal tax rate of 34% largely due to merger-related costs treated as nondeductible offset by tax-exempt income associated with the Company's investments in tax-exempt municipal bonds and bank owned life insurance.


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LIQUIDITY AND CAPITAL RESOURCES

Liquidity

The Bank's liquidity is a measure of its ability to fund loans, and pay withdrawals of deposits, and other cash outflows in an efficient, cost-effective manner. The Bank's short-term sources of liquidity include maturities, repayment and sales of assets, excess cash and cash equivalents, new deposits, brokered deposits, other borrowings, and new borrowings from the Federal Home Loan Bank and the Federal Reserve Bank. There has been no material adverse change during the three-month period ended March 31, 2013 in the ability of the Bank and its subsidiaries to fund their operations.

At March 31, 2013, the Bank had commitments outstanding under letters of credit of $930,000, commitments to originate loans of $35.5 million, and commitments to fund undisbursed balances of closed loans and unused lines of credit of $42.3 million. At March 31, 2013, the Bank had $8.0 million in outstanding commitments to sell loans. There has been no material change during the three months ended March 31, 2013 in any of the Bank's other contractual obligations or commitments to make future payments.

The Company's primary sources of liquidity are dividends from the Bank, principal and interest payments received from a loan made to the Bank's ESOP, and tax benefits arising from the use of the Company's tax deductions by other members of its consolidated group pursuant to a tax sharing agreement. The Company is dependent upon these sources and cash on hand which totaled approximately $1.9 million at March 31, 2013 in order to fund its operations and pay the dividend to its shareholders. There has been no material adverse change in the ability of the Company to fund its operations during the three-month period ended March 31, 2013.

Capital Requirements

The Bank was in compliance with all of its capital requirements as of March 31, 2013.

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 number of debtors or the value of the collateral securing the loans should deteriorate more than the Company has estimated, the present allowance for loan losses may be insufficient and additional provisions for loan losses may be required. The allowance for loan losses was approximately $6.7 million at March 31, 2013.


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