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

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Form 10-Q for TF FINANCIAL CORP


14-Aug-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 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 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; failure to realize the anticipated benefits as a result of our acquisition of Roebling and Roebling Bank; 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 June 30, 2013 and December 31, 2012 were $714.8 million and $711.8 million, respectively, representing an increase of $3.0 million during the six-month period. Largely as a result of the repayment of loans receivable and investment securities, cash and cash equivalents increased by $13.8 million during the first six months of 2013. Loans receivable, net decreased by $3.7 million during the first six months of 2013. Principal repayments of $59.1 million on loans were partially offset by originations of consumer and single-family residential mortgage loans totaling $39.9 million and originations of commercial loans totaling $16.7 million. The Company increased the allowance for loan losses by $839,000 and transferred $257,000 from loans to real estate acquired through foreclosure. Loans receivable held for sale increased $803,000 as originations of loans for sale in the secondary market totaled $21.6 million and proceeds from loan sales totaled $21.1 million. Investment securities decreased by $5.4 million due to principal repayments and maturities totaling $13.8 million, a decrease in the fair value of available for sale securities of $4.1 million and net premium amortization of $352,000, all of which were offset by security purchases of $12.8 million.

Total liabilities increased by $2.4 million during the first six months of 2013. Deposit balances increased $11.1 million during the period with checking, money market and savings accounts increasing by $17.2 million. Retail certificates of deposit ("CDs") decreased $6.1 million during the first six months of 2013. Advances from the FHLB decreased by $8.1 million, the result of scheduled amortization and maturities.

Total consolidated stockholders' equity of the Company was $83.5 million or 11.9% of total assets at June 30, 2013. At June 30, 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:

                                                      June 30,                               June 30,
Nonperforming Assets                                    2013         December 31, 2012         2012
                                                                  (Dollars in thousands)
Loans receivable, net:
Residential
Residential mortgages                                $    1,931     $             2,265     $    3,731
Commercial
Real estate-commercial                                      552                   1,098          1,425
Real estate-residential                                     392                      51            840
Construction loans                                        2,944                   4,794          6,154
Commercial and industrial loans                               9                       -              -
Consumer
Home equity and second mortgage                             143                     143            416
Other consumer                                                2                       8              -
Total nonperforming loans                                 5,973                   8,359         12,566
Real estate owned                                         6,177                   7,282          6,625
Total nonperforming assets                           $   12,150     $            15,641     $   19,191
Total loans 90 days or more past due as to
interest or principal and accruing interest          $        -     $                 -     $        -
Ratio of nonperforming loans to gross loans                1.30 %                  1.56 %         2.42 %
Ratio of nonperforming loans to total assets               0.84 %                  1.17 %         1.83 %
Ratio of total nonperforming assets to total
assets                                                     1.70 %                  2.20 %         2.80 %

Nonperforming construction loans include a participation in a commercial construction project with a principal balance due 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, $2,000,000 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 June 30, 2013 consisted of twenty-one parcels of real estate with a combined carrying value of $6.2 million. During the first six months of 2013, the Bank foreclosed on three mortgage loans secured by residential property valued at $257,000 which resulted in a charge to the allowance of $147,000. Also, the Bank sold two properties acquired through foreclosure with an aggregate book value of $982,000. 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 by junior liens and home equity lines of credit. Each segment is assigned reserve factors based on quantitative and qualitative measurements. In addition, the Bank


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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.

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 JUNE 30, 2013 AND 2012

Net Income. The Company recorded net income of $1.8 million, or $0.66 per diluted share, for the three months ended June 30, 2013 as compared to net income of $1.2 million, or $0.46 per diluted share, for the three months ended June 30, 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 June 30,
                                          2013                                        2012
                          Average                      Average        Average                      Average
                          balance       Interest       yld/cost       balance       Interest       yld/cost
ASSETS
Interest-earning
assets:
Loans receivable(1)      $ 524,728     $    5,963           4.56 %   $ 501,757     $    6,231           4.99 %
Mortgage-backed
securities                  37,523            246           2.63 %      61,580            564           3.68 %
Investment
securities(2)               68,211            713           4.19 %      68,181            731           4.31 %
Other interest-earning
assets(3)                   39,111             14           1.14 %       3,074              -              - %*
Total interest-earning
assets                     669,573          6,936           4.15 %     634,592          7,526           4.77 %
Noninterest-earning
assets                      45,938                                      48,329
Total assets             $ 715,511                                   $ 682,921
LIABILITIES AND
   STOCKHOLDERS' EQUITY
Interest-bearing
liabilities:
Deposits                 $ 570,271     $      712           0.50 %   $ 550,040     $      926           0.68 %
Borrowings from the
FHLB                        53,303            226           1.70 %      46,785            351           3.02 %
Total interest-bearing
liabilities                623,574            938           0.60 %     596,825          1,277           0.86 %
Noninterest-bearing
liabilities                  7,508                                       6,486
Total liabilities          631,082                                     603,311
Stockholders' equity        84,429                                      79,610
Total liabilities and
stockholders' equity     $ 715,511                                   $ 682,921
Net interest
income-tax equivalent
basis                                       5,998                                       6,249
Interest rate
spread(4)-tax
equivalent basis                                            3.55 %                                      3.91 %
Net yield on interest-earning
assets(5)-tax
   equivalent basis                                         3.59 %                                      3.96 %
Ratio of average interest-earning
assets to
   average interest-bearing
liabilities                                               106.33 %                                    106.33 %
Less: tax-equivalent
interest adjustments                         (192 )                                      (198 )
Net interest income                    $    5,806                                  $    6,051
Interest rate
spread(4)                                                   3.44 %                                      3.78 %
Net yield on
interest-earning
assets(5)                                                   3.48 %                                      3.84 %

(1 ) Nonperforming loans have been included in the appropriate average loan balance category, but interest on nonperforming loans has not been included for purposes of determining interest income.
(2 ) Tax equivalent adjustments to interest on investment securities were $192,000 and $198,000 for the quarters ended June 30, 2013 and 2012, respectively. Tax equivalent interest income is based upon a marginal 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.
Net yield on interest-earning assets represents net interest income as (5 ) a percentage of average interest-earning assets.
* Is less than $500 for period indicated.


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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 June 30,
                                                         2013 vs 2012
                                                  Increase (decrease) due to
                                           Volume              Rate             Net
    Interest income:
    Loans receivable, net                $     1,414       $      (1,682 )     $ (268 )
    Mortgage-backed securities                  (184 )              (134 )       (318 )
    Investment securities (1)                      2                 (20 )        (18 )
    Other interest-earning assets                  -                  14           14
    Total interest-earning assets              1,232              (1,822 )       (590 )
    Interest expense:
    Deposits                                     214                (428 )       (214 )
    Borrowings from the FHLB                     268                (393 )       (125 )

    Total interest-bearing liabilities           482                (821 )       (339 )
    Net change in net interest income    $       750       $      (1,001 )     $ (251 )




       (1 )        Tax equivalent adjustments to interest on investment securities
                   were $192,000 and $198,000 for the quarters ended June 30, 2013
                   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 $590,000, or 7.8%, to $6.9 million for the quarter ended June 30, 2013 compared with the second quarter of 2012. Interest income from loans receivable decreased by $268,000, the result of a decrease in the average yield on loans of 43 basis points netted against the effect of a $23.0 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 lower yields than the existing portfolio loans that had matured or refinanced. Interest income from mortgage-backed securities was lower in the quarter ended June 30, 2013 in comparison to the same period in 2012 mainly because the yield associated with principal repayments and sales which occurred during the intervening period was higher than the yield on the remaining mortgage-backed securities.

Total Interest Expense. Total interest expense decreased by $339,000 to $938,000 during the three-month period ended June 30, 2013 as compared with the same period in 2012. The average interest rate paid on the Bank's deposits was 18 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 $125,000 between the second quarter of 2013 compared to the same quarter of 2012. During the intervening period, the Bank increased its average outstanding borrowings by $6.5 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 132 basis points.

Noninterest Income. Total noninterest income was $1.9 million for the second quarter of 2013 compared with $739,000 for the same period in 2012. Income from the benefits paid on the bank owned life insurance policies was $934,000 during the second quarter of 2013 due to the death of two insured individuals. Fair value adjustments to mortgage servicing rights increased loan servicing income by $271,000 from the second quarter of 2012 to the same quarter of 2013.


Noninterest Expense. Total noninterest expense increased by $483,000 to $5.1 million for the three months ended June 30, 2013 compared to the same period in 2012. Merger-related costs attributable to the announced acquisition of Roebling totaled $295,000 during the second quarter of 2013. Employee compensation increased by $145,000 in 2013, mainly the result of stock option expense for option grants in 2013. Foreclosed real estate expense decreased $105,000 in the quarter ended June 30, 2013 as compared to the same period in 2012 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

Income Tax Expense. The Company's effective tax rate was 19.0% for the quarter ended June 30, 2013 compared to 23.9% for the quarter ended June 30, 2012. These effective tax rates are lower than the Company's marginal tax rate of 34% largely due to the tax-exempt income associated with the Company's investments in tax-exempt municipal bonds and bank owned life insurance offset by merger-related costs treated as nondeductible.


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RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2013 AND 2012

Net Income. The Company recorded net income of $3.0 million, or $1.10 per diluted share, for the six months ended June 30, 2013 as compared to net income of $2.4 million, or $0.88 per diluted share, for the six months ended June 30, 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
six-month periods indicated.
                                                       Six Months Ended June 30,
                                          2013                                          2012
                         Average                        Average        Average                        Average
                         balance        Interest       yld/cost        balance        Interest       yld/cost
ASSETS
Interest-earning
assets:
Loans receivable(1)     $  525,000     $   12,029            4.62 %   $  497,576     $   12,428            5.02 %
Mortgage-backed
securities                  39,744            519            2.63 %       61,776          1,103            3.59 %
Investment
securities(2)               66,680          1,421            4.30 %       67,608          1,455            4.33 %
Other
interest-earning
assets(3)                   34,022             18            0.11 %        8,347              2            0.05 %
Total
interest-earning
assets                     665,446         13,987            4.24 %      635,307         14,988            4.74 %
Noninterest-earning
assets                      46,252                                        49,443
Total assets            $  711,698                                    $  684,750
LIABILITIES AND
   STOCKHOLDERS' EQUITY
Interest-bearing
liabilities:
Deposits                $  565,536     $    1,443            0.51 %   $  552,282     $    1,992            0.73 %
Borrowings from the
FHLB                        54,701            474            1.75 %       47,086            756            3.23 %
Total
interest-bearing
liabilities                620,237          1,917            0.62 %      599,368          2,748            0.92 %
Noninterest-bearing
liabilities                  7,363                                         6,504
Total liabilities          627,600                                       605,872
Stockholders' equity        84,098                                        78,878
Total liabilities and
stockholders' equity    $  711,698                                    $  684,750
Net interest
income-tax equivalent
basis                                      12,070                                        12,240
Interest rate
spread(4)-tax
equivalent basis                                             3.62 %                                        3.82 %
Net yield on interest-earning
assets(5)-tax
   equivalent basis                                          3.66 %                                        3.87 %
Ratio of average interest-earning
assets to
   average interest-bearing
liabilities                                                107.29 %                                      106.00 %
Less: tax-equivalent
interest adjustments                         (386 )                                        (397 )
Net interest income                    $   11,684                                    $   11,843
Interest rate
spread(4)                                                    3.50 %                                        3.70 %
Net yield on
interest-earning
assets(5)                                                    3.54 %                                        3.75 %

(1 ) Nonperforming loans have been included in the appropriate average loan balance category, but interest on nonperforming loans has not been included for purposes of determining interest income.
(2 ) Tax equivalent adjustments to interest on investment securities were $386,000 and $397,000 for the six months ended June 30, 2013 and 2012, respectively. Tax equivalent interest income is based upon a marginal effective tax rate of 34%.
(3 ) Includes interest-bearing deposits in other banks. . . .

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