EX-13.0 2 ex13.htm EXHIBIT 13 ex13.htm
 
TF Financial Corporation (the “Company”) is the parent company of 3rd Fed Bank and its subsidiaries Third Delaware Corporation and Teragon Financial Corporation (collectively, “3rd Fed” or the “Bank”) and Penns Trail Development Corporation. At December 31, 2013, total assets were $835.7 million and total stockholders’ equity was $94.9 million. The Company is a unitary savings and loan holding company which, under existing laws, generally is not restricted in the types of business activities in which it may engage, provided that 3rd Fed retains a specified amount of its assets in housing-related investments. 3rd Fed is a Pennsylvania-chartered stock savings bank headquartered in Newtown, Pennsylvania, which was originally chartered in 1921 under the name “Polish American Savings Building and Loan Association.” Deposits of 3rd Fed have been federally insured since 1935 and are currently insured up to the maximum amount allowable by the Federal Deposit Insurance Corporation (the “FDIC”). 3rd Fed is a community-oriented institution offering a variety of financial services to meet the needs of the communities that it serves. As of December 31, 2013, 3rd Fed operated branch offices in Bucks and Philadelphia counties, Pennsylvania and in Burlington, Mercer and Ocean counties, New Jersey. 3rd Fed attracts deposits ($683.9 million at December 31, 2013) from the general public and uses such deposits, together with borrowings mainly from the Federal Home Loan Bank of Pittsburgh (“FHLB”) ($49.6 million at December 31, 2013) and other funds, to originate loans secured by first mortgages and junior liens on owner-occupied, one-to four-family residences, and to originate loans secured by commercial real estate, including construction loans.
 
On July 2, 2013, the Company acquired Roebling Financial Corp, Inc. (“Roebling”), the parent company of Roebling Bank, which operated five banking locations in Burlington and Ocean Counties in New Jersey. In accounting for the transaction the assets and liabilities of Roebling were recorded on the books of the Company in accordance with accounting standard ASC 805, Business Combinations. Therefore, the statement of operations for the year ended December 31, 2013, reflects the operations associated with the Roebling acquisition from the acquisition date through December 31, 2013.

Stock Market Information
 
Since its issuance in July 1994, the Company’s common stock has been traded on the NASDAQ Global Market. The daily stock quotation for the Company is listed on the NASDAQ Global Market published in The Wall Street Journal, The Philadelphia Inquirer, and other leading newspapers under the trading symbol of “THRD.” The number of shareholders of record of common stock as of February 28, 2014, was approximately 397. This does not reflect the number of persons or entities who held stock in nominee or “street” name through various brokerage firms.
 
Dividend Policy
 
The Company has adopted a formal dividend policy. Before each dividend declaration by the Board of Directors, the Board makes the following determinations:
 
1.  
The capital of the Company is adequate for the current and projected business operations of the Company.
2.  
The liquidity of the Company after the payment of the dividend is adequate to fund the operations of the Company for a reasonable period of time into the future.
3.  
In light of the fact that the primary source of liquidity with which to pay dividends is dividend payments from the subsidiary Bank, the Board considers a number of factors specifically applicable to the Bank, such as its expected level of earnings and capital, and the possibility of regulatory restrictions. Among other limitations, 3rd Fed may not declare or pay a cash dividend on any of its stock if the effect thereof would cause 3rd Fed’s regulatory capital to be reduced below (1) the amount required for the liquidation account established in connection with 3rd Fed’s conversion from mutual to stock form, or (2) the regulatory capital requirements imposed by federal banking agencies.
 
The amount of the quarterly dividend is reviewed by the Board of Directors, may be increased or reduced as deemed appropriate by the Board, and may be suspended by the Board at any time and recommenced or discontinued at the discretion of the Board. In addition to quarterly cash dividends, the Board of Directors may periodically consider the payment of special cash dividends or stock dividends.

 
 
 
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Stock Price and Dividend History
 
The following table sets forth the high and low sales prices and cash dividends declared for the periods indicated.

   
Quoted market price
    
Dividend
declared
  
Quarter ended
  
High
    
Low
      per share  
December 31, 2013
   $ 28.46     $ 26.11     $ 0.10  
September 30, 2013
   $ 28.50     $ 25.00     $ 0.10  
June 30, 2013
   $ 25.40     $ 24.25     $ 0.05  
March 31, 2013
   $ 25.87     $ 23.82     $ 0.05  
December 31, 2012
   $ 24.84     $ 22.06     $ 0.05  
September 30, 2012
   $ 24.90     $ 22.50     $ 0.05  
June 30, 2012
   $ 26.47     $ 22.26     $ 0.05  
March 31, 2012
   $ 25.96     $ 22.30     $ 0.05  
 
 
 
 
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
 
General.  The following discussion and analysis should be read in conjunction with the Company’s consolidated financial statements and is intended to assist in understanding and evaluating the major changes in the financial position and results of operations of the Company with a primary focus on an analysis of operating results.
 
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 (“SEC”), 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; the possibility that any remaining integration of Roebling’s business and operations with the Company, may be more difficult and/or take longer than anticipated and may have unanticipated adverse results; 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.
 
The Company’s income on a consolidated basis is derived substantially from its investment in its subsidiary 3rd Fed. The earnings of 3rd Fed depend primarily on its net interest income. Net interest income is affected by the interest income that 3rd Fed receives from its loans and investments and by the interest expense that 3rd Fed incurs on its deposits, borrowings and other sources of funds. In addition, the mix of 3rd Fed’s interest-bearing assets and liabilities can have a significant effect on 3rd Fed’s net interest income; loans generally have higher yields than securities; retail deposits generally have lower interest rates than other borrowings.
 
3rd Fed also receives income from service charges and other fees and occasionally from sales of investment securities, loan sales and real estate owned. 3rd Fed incurs expenses in addition to interest expense in the form of provisions for loan losses, salaries and benefits, deposit insurance premiums, property operations and maintenance, advertising and other related business expenses.
 
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 a significant amount of accounting estimates and judgment is the determination of the allowance for loan losses. Allowances are established based on an analysis of individual loans, pools of similar loans, delinquencies, loss experience, economic conditions generally and as they may affect individual borrowers, and other factors. Individual loans are evaluated based on cash
 
 
 
 
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flows or value of the underlying collateral, and the financial strength of any guarantors. All of these evaluation factors are subject to a high degree of uncertainty. If the financial condition and collateral values of a significant amount of debtors should deteriorate more than the Company has estimated, present allowances for loan losses may be insufficient and additional provisions for loan losses may be required. In addition, a single loan may result in the loss of a substantial amount and may significantly reduce the allowance. The allowance for loan losses was $6.6 million at December 31, 2013.

Financial Condition and Changes in Financial Condition
 
Assets.  The Company’s total assets at December 31, 2013 were $835.7 million, an increase of $123.9 million, during the year which was largely due to the acquisition of Roebling.

Loans receivable, net increased by $87.4 million during 2013. The acquisition of Roebling resulted in an increase in loans receivable of $102.0 million in addition to originations of consumer and single-family residential mortgage loans totaling $67.8 million and originations of commercial loans totaling $29.8 million. Offsetting these increases were principal repayments on loans totaling $110.5 million. The Company increased the allowance for loan losses by $839,000, transferred $737,000 from loans to real estate acquired through foreclosure and amortized $178,000 of net deferred loan origination costs. Loans receivable held for sale were $349,000 at December 31, 2013. During the year, originations of loans for sale in the secondary market totaled $31.8 million and proceeds from loan sales totaled $32.6 million. Investment securities increased by $21.7 million which was mainly the result of securities acquired from Roebling totaling $37.3 million and purchases of $20.5 million. Offsetting these increases were principal repayments, maturities and sales totaling $30.4 million, a decrease in the fair value of available for sale securities of $5.5 million and net premium amortization of $719,000. Cash and cash equivalents increased during the year by $14.2 million.

Liabilities.  Total liabilities increased by $111.9 million during 2013. Deposit balances increased $123.6 million during the period. The branches acquired in the Roebling acquisition resulted in an addition of $127.8 million of deposits. Excluding deposits held at the Roebling branches, checking, money market and savings accounts increased by $25.8 million, and retail CDs decreased by $29.5 million during 2013. Advances from the FHLB decreased by $11.1 million, the result of scheduled amortization and maturities including repayment of $3.1 million of advances acquired from Roebling.
 
 Stockholders’ Equity.  Total consolidated stockholders’ equity of the Company was $94.9 million or 11.4% of total assets at December 31, 2013. During 2013, in conjunction with the Roebling acquisition, the Company issued 306,873 shares of its common stock, which increased stockholders equity by $7.7 million. Additionally, the Company issued 27,377 shares of its common stock associated with the Employee Stock Ownership Plan (“ESOP”), the 2011 Director Stock Compensation Plan and upon the exercise of stock options which combined with stock option expense, resulted in an increase to stockholders’ equity of $1.0 million. Stockholders’ equity was also increased by net income for the year of $6.6 million. Offsetting these increases were cash dividends paid of $884,000, a decrease in accumulated other comprehensive income net of tax of $2.1 million, and repurchases of 10,412 shares of common stock totaling $274,000. At December 31, 2013, there were approximately 99,000 shares available for repurchase under the previously announced share repurchase plan.
 
 
 
 
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Average Balance Sheet.  The following table sets forth information (dollars in thousands) relating to the Company’s average balance sheet and reflects the average yield on assets and average cost of liabilities for the periods indicated. The yields and costs are computed by dividing income or expense by the average balance of interest-earning assets or interest-bearing liabilities, respectively for the periods indicated.

   
For the years ended December 31,
  
   
2013
    
2012
  
   
Average
         
Average
   
Average
   
 
    
Average
 
    balance     Interest     yld/cost     balance      Interest      yld/cost  
ASSETS
                                    
Interest-earning assets:
                                    
Loans receivable, net (1)
   $ 573,373     $ 25,858       4.51 %   $ 513,178     $ 25,205       4.91 %
Mortgage-backed securities
     44,487       1,126       2.53 %     57,164       1,933       3.38 %
Investment securities (2)
     75,702       3,075       4.06 %     65,813       2,849       4.33 %
Other interest-earning assets (3)
     35,016       27       0.08 %     6,155       8       0.13 %
Total interest-earning assets
     728,578       30,086       4.13 %     642,310       29,995       4.67 %
Noninterest-earning assets
     47,531                       47,726                  
Total assets
   $ 776,109                     $ 690,036                  
LIABILITIES AND STOCKHOLDERS’ EQUITY
                                                
Interest-bearing liabilities:
                                                
Deposits
   $ 626,716       3,025       0.48 %   $ 545,677       3,532       0.65 %
Advances from the FHLB
     53,747       898       1.67 %     56,837       1,405       2.47 %
Total interest-bearing liabilities
     680,463       3,923       0.58 %     602,514       4,937       0.82 %
Noninterest-bearing liabilities
     6,788                       6,957                  
Total liabilities
     687,251                       609,471                  
Stockholders’ equity
     88,858                       80,565                  
Total liabilities and stockholders’ equity
   $ 776,109                     $ 690,036                  
Net interest income—tax equivalent basis
             26,163                       25,058          
Interest rate spread (4)—tax equivalent basis
                     3.55 %                     3.85 %
Net yield on interest-earning assets (5)—tax
 equivalent basis
               3.59 %                     3.90 %
Ratio of average interest-earning assets to
 average interest-bearing liabilities
       107.07 %                     106.60 %
Less: tax equivalent interest adjustment
             (773 )                     (775 )        
Net interest income
           $ 25,390                     $ 24,283          
Interest rate spread (4)
                     3.45 %                     3.73 %
Net yield on interest-earning assets (5)
                     3.48 %                     3.78 %
 
 (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 were $773,000 and $775,000 for the years ended December 31, 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.
 
(5)
Net yield on interest-earning assets represents net interest income as 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 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 years ended December 31,
  
   
2013 vs 2012
Increase (decrease) due to
  
   
Volume
    
Rate
    
Net
  
   
(in thousands)
  
Interest income:
                  
Loans receivable, net
   $ 2,814     $ (2,161 )   $ 653  
Mortgage-backed securities
     (378 )     (429 )     (807 )
Investment securities (1)
     409       (183 )     226  
Other interest-earning assets
     23       (4 )     19  
Total interest-earning assets
     2,868       (2,777 )     91  
Interest expense:
                        
Deposits
     475       (982 )     (507 )
Advances from the FHLB
     (73 )     (434 )     (507 )
Total interest-bearing liabilities
     402       (1,416 )     (1,014 )
Net change in net interest income
   $ 2,466     $ (1,361 )   $ 1,105  
 
(1)
Tax equivalent adjustments to interest on investment securities were $773,000 and $775,000 for the years ended December 31, 2013 and 2012, respectively. Tax equivalent interest income is based upon a marginal effective rate of 34%.
 
Comparison of Years Ended December 31, 2013 and December 31, 2012
 
Net Income.  Net income was $6.6 million for the year ended December 31, 2013 compared with net income of $5.4 million for the year ended December 31, 2012.
 
Total Interest Income.  Total interest income, on a taxable equivalent basis, increased by $91,000 between the years 2013 and 2012. Interest income from loans receivable increased by $653,000 as the result of a $60.2 million increase in the average balance of loans outstanding netted against the effect of a decrease in the average yield on loans of 40 basis points. The merger with Roebling resulted in the increase in the average balance of loans outstanding whereas 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 2013 in comparison to 2012 mainly because the yield associated with principal repayments was higher than the yield on the remaining mortgage-backed securities as well as the low yield on the mortgage-backed securities acquired from Roebling. Interest income from investment securities increased during 2013 as compared with 2012 due to the higher outstanding average balance of agency securities acquired from Roebling as well as purchases of municipal securities during 2013. Offsetting the increase in balance was the effect of lower yields on the securities acquired from Roebling.

 Total Interest Expense.  Total interest expense decreased by $1.0 million to $3.9 million during 2013 as compared with 2012. The average outstanding balance of deposits increased $81.0 million during 2013 as compared to 2012 mainly as a result of the Roebling acquisition. The average interest rate paid on the Bank’s deposits was 17 basis points lower in 2013 due to the maturity of certificates of deposit that had higher interest rates than current market rates offered on the products into which the maturing CDs were renewed or reinvested, as well as a favorable change in the deposit mix and pricing. Interest expense associated with borrowings from the FHLB decreased $507,000 in 2013 when compared to 2012. During 2013, the average outstanding borrowings decreased by $3.1 million. In addition, the

 
 
 
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cost of borrowed funds decreased 80 basis points because the weighted average rate of advances that matured in 2012 was higher than in 2013.
 
Noninterest Income.  Total noninterest income was $6.1 million for the year ended December 31, 2013 compared with $4.1 million for the year ended December 31, 2012. The Company had a purchase gain associated with the acquisition of Roebling of $1.1 million. In addition, 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. Service fees, charges and other operating income increased $577,000 mainly due to an increase in fair value adjustments to mortgage servicing rights of $319,000 between 2012 and 2013. Gain on disposition of premises and equipment included $417,000 related to an eminent domain matter affecting a parcel of Company property, a $143,000 increase over the amount recorded in 2012 related to the same matter, which is now finalized. Offsetting these increases was a decrease of $645,000 in the gain on sale of loans in the secondary market due to the lower level of residential loan sale activity.

Noninterest Expense.  Total noninterest expense increased by $3.2 million to $22.1 million for the year ended December 31, 2013 compared to 2012. Acquisition costs attributable to Roebling totaled $1.4 million during 2013 and included contract exit fees as well as technology-related costs and consultant fees incurred for the system conversion of the data from the systems used by Roebling to the Bank. Merger-related costs attributable to the acquisition of Roebling increased $630,000 in 2013 as compared to 2012. Employee compensation increased by $1.1 million in 2013, which was mainly the result of employee costs associated with staffing the five additional branches acquired from Roebling. In addition, stock option expense increased $285,000 for 2013 as compared to 2012, mainly due to the expense associated with granting 205,000 stock options during 2013. The occupancy costs increased $311,000 in 2013, largely the result of operating and maintaining the five additional branch offices acquired from Roebling.

Income Tax Expense.  The Company’s effective tax rate was 22.9% for 2013 compared to 24.3% for 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, bank owned life insurance and purchase gain associated with the Roebling acquisition, offset by merger-related costs treated as nondeductible.

Liquidity and Capital Resources
 
Liquidity.  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 $2.2 million at December 31, 2013 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 year ended December 31, 2013.
 
The Bank’s liquidity is a measure of its ability to fund loans, pay withdrawals of deposits, and other cash outflows in an efficient, cost-effective manner. The Bank’s short-term sources of liquidity include maturity, repayment and sales of assets, excess cash and cash equivalents, new deposits, brokered deposits, other borrowings, and new borrowings from the FHLB and the Federal Reserve Bank (“FRB”).
 
The amount of certificate accounts that are scheduled to mature during the twelve months ending December 31, 2014, is approximately $129.7 million. To the extent that these deposits do not remain at the Bank upon maturity, the Bank believes that it can replace these funds with other deposits, cash and cash equivalents, and advances from the FHLB or other borrowings. It has been the Bank’s experience that substantial portions of such maturing deposits remain at the Bank.

At December 31, 2013, the Bank had outstanding $78.5 million in commitments to originate loans or fund unused lines of credit, and letters of credit. The loan commitments will be funded during the twelve months ending December 31, 2014. The unused lines and letters of credit can be funded at any time. At December 31, 2013, the Bank had $1.7 million in optional commitments to sell loans. The Company also has obligations under lease agreements. Payments required under such lease agreements will be approximately $489,000 during the year ending December 31, 2014. The Bank endeavors to fund its operations internally but has, when deemed prudent, borrowed funds from the

 
 
 
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FHLB. As of December 31, 2013, such borrowed funds totaled $49.6 million. The amount of these borrowings that will mature during the twelve months ending December 31, 2014 is $4.3 million. At December 31, 2013, potential sources of funds to fulfill these possible liquidity needs included: a $60.0 million line of credit, which was unused, up to approximately $161.5 million of additional collateral-based borrowing capacity at the FHLB, and $18.2 million of collateral-based borrowing capacity at the FRB.
 
Capital Resources.  Under current regulations, the Bank must have core capital equal to 4% of adjusted total assets of which 1.5% must be tangible capital, and risk-based capital equal to 8% of risk-weighted assets. On December 31, 2013, the Bank met its three regulatory capital requirements.
 
Management believes that under current regulations, the Bank will continue to meet its minimum capital requirements in the foreseeable future. However, events beyond the control of the Bank, such as increased interest rates or a downturn in the economy in areas in which the Bank operates, could adversely affect future earnings and as a result, the ability of the Bank to meet its future minimum capital requirements.

Impact of Inflation and Changing Prices
 
The consolidated financial statements and related data have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) which require the measurement of financial position and operating results in terms of historical dollars, without consideration for changes in the relative purchasing power of money over time caused by inflation. Unlike industrial companies, nearly all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution’s performance than general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the price of goods and services, since such goods and services are affected by inflation. In the current interest rate environment, liquidity and the maturity structure of the Company’s assets and liabilities are critical to the maintenance of acceptable performance levels.
 
Quantitative and Qualitative Disclosures About Market Risk
 
Interest Rate Risk Management.  The Bank has established an Asset/Liability Management Committee (“ALCO”) for the purpose of monitoring and managing market risk, which is defined as the risk of loss of net interest income or economic value arising from changes in market interest rates and prices.
 
The type of market risk which most affects the Company’s financial instruments is interest rate risk, which is best quantified by simulating the hypothetical change in the economic value of the Bank that would occur under specific changes in interest rates. Substantially all of the Bank’s interest-bearing assets and liabilities are exposed to interest rate risk, and a large percentage of the Bank’s assets are longer term loans with the interest rate fixed for a significant period of time. Thus, the change in the economic value of the Bank’s net assets is a more meaningful measurement, rather than the volatility of net interest income, to use in measuring and monitoring the Bank’s interest rate risk. Change in economic value is measured using an internal model, wherein the net portfolio value (“NPV”) of the Bank’s current interest-sensitive assets and liabilities is measured at different hypothetical interest rate levels centered on the current term structure of interest rates. The Bank’s exposure to interest rate risk results from, among other things, the difference in maturities in interest-earning assets and interest-bearing liabilities. Since the Bank’s assets currently have a longer maturity than its liabilities, the Bank’s economic value could be negatively impacted during a period of rising interest rates. Alternatively, in periods of falling interest rates the Bank’s mortgage loans will repay at an increasing rate and cause the Bank to reinvest these cash flows in periods of low interest rates, also negatively affecting the Bank’s economic value. The relationship between the interest rate sensitivity of the Bank’s assets and liabilities is continually monitored by management and ALCO.
 
The Bank prices and originates loans, and prices and originates its deposits, including CDs, at market interest rates. Volumes of such loans and deposits at various maturity and repricing horizons will vary according to customer preferences as influenced by the term structure of market interest rates. The Bank utilizes its available for sale investment portfolios to generate additional interest income, to manage its liquidity, and to manage its interest rate risk. These securities provide the Bank with a cash flow stream to fund asset growth or liability maturities. In addition, if management determines that it is advisable to do so, the Bank can lengthen or shorten the average maturity of all interest-bearing assets through the selection of fixed rate or variable rate securities, respectively.

 
 
 
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The Bank utilizes advances from the FHLB in managing its interest rate risk and as a tool to augment deposits in funding asset growth. The Bank typically utilizes these funding sources to better match its fixed rate interest-bearing assets with longer maturities or repricing characteristics.
 
The nature of the Bank’s current operations is such that it is not subject to foreign currency exchange or commodity price risk. Additionally, neither the Company nor the Bank owns any trading assets. At December 31, 2013, the Bank did not have any hedging transactions in place such as interest rate swaps, caps, or floors, although these derivatives are often used by banks to manage interest rate risk.
 
The Bank has policies or procedures in place for measuring interest rate risk. These policies and procedures stipulate acceptable levels of interest rate risk. The key measurement of interest rate risk is the calculation of the sensitivity of the Bank’s economic value, or NPV which is defined as the net present value of the Bank’s existing assets, liabilities and off-balance sheet instruments. The calculated estimates of the change in NPV and the change in the ratio of NPV to the economic value of the Bank’s assets in each rate scenario (“NPV Ratio”) at December 31, 2013 are as follows:

 
               
NPV Amount
    
NPV Ratio
  
Change in Interest
Rates
  
NPV Amount
    
NPV Ratio
    
% Change
    
Policy
Limitation
    
% Change
    
Policy
Limitation
  
   
(in thousands)
                                
+400 Basis Points
   $ 115,160       16.05 %     -3 %     -40 %     -2.90 %     -5.00 %
+300 Basis Points
     123,062       16.60 %     -2 %     -30 %     -2.35 %     -5.00 %
+200 Basis Points
     133,819       17.38 %     -2 %     -25 %     -1.57 %     -6.00 %
+100 Basis Points
     146,869       18.31 %     -1 %     -15 %     -0.64 %     -7.00 %
Flat Rates
     158,249       18.95 %     — %     — %     — %     — %
-100 Basis Points
     166,703       19.23 %     — %     -15 %     0.28 %     -7.00 %
 
Management believes that the assumptions utilized in evaluating the vulnerability of the Company’s net portfolio value to changes in interest rates are reasonable; however, the interest rate sensitivity of the Bank’s assets and liabilities as well as the estimated effect of changes in interest rates on NPV could vary substantially if different assumptions are used or actual experience differs from the experience on which the assumptions were based.
 
Recent Accounting Pronouncements
 
See Note 2 in the consolidated financial statements for a discussion on this topic. 

 
 
 
9


MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
 
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorization of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
 
Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements prepared for external purposes in accordance with generally accepted accounting principles. Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
 
Under supervision and with the participation of management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control—Integrated Framework, management concluded that our internal control over financial reporting was effective as of December 31, 2013.
 
This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
 
March 26, 2014
 
 
Kent C. Lufkin
President and Chief Executive Officer
Dennis R. Stewart
Executive Vice President and Chief Financial Officer

 
 
 
10


 


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors and Stockholders
TF Financial Corporation

We have audited the accompanying consolidated balance sheets of TF Financial Corporation and subsidiaries as of December 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for the years then ended.  These consolidated financial statements are the responsibility of TF Financial Corporation’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  TF Financial Corporation is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of TF Financial Corporation’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of TF Financial Corporation and subsidiaries as of December 31, 2013 and 2012, and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.


Wexford, Pennsylvania
March 26, 2014



 

 

 

 
S.R. Snodgrass, P.C. * 2100 Corporate Drive, Suite 400 * Wexford, Pennsylvania  15090-8399 * Phone: (724) 934-0344 * Facsimile: (724) 934-0345
 
 
 
 
11
 

TF Financial Corporation and Subsidiaries
 
CONSOLIDATED BALANCE SHEETS
 
   
At December 31,
  
   
2013
    
2012
  
   
(in thousands,
except shares and per share data)
  
ASSETS
            
Cash and cash equivalents
   $ 45,310     $ 31,137  
Investment securities
                
Available for sale
     124,012       102,284  
Held to maturity (fair value of $1,680 and $2,271 as of
     December 31, 2013 and 2012, respectively)
     1,490       1,965  
Loans receivable, net
     614,168       526,720  
Loans receivable, held for sale
     349       706  
FHLB stock—at cost
     3,370       5,431  
Accrued interest receivable
     2,520       2,460  
Premises and equipment, net
     8,616       6,108  
Goodwill
     4,324       4,324  
Core deposit intangible
     503       —  
Bank owned life insurance
     18,586       19,109  
Other assets
     12,441       11,592  
TOTAL ASSETS
   $ 835,689     $ 711,836  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
                
Liabilities
                
Deposits
   $ 683,902     $ 560,315  
Advances from the FHLB
     49,605       60,656  
Advances from borrowers for taxes and insurance
     3,228       2,880  
Accrued interest payable
     671       817  
Other liabilities
     3,408       4,223  
Total liabilities
     740,814       628,891  
Stockholders’ equity
                
Preferred stock, no par value; 2,000,000 shares authorized at
     December 31, 2013 and 2012, none issued
     —       —  
Common stock, $0.10 par value; 10,000,000 shares authorized,
     5,290,000 shares issued, 3,149,239 and 2,838,493 shares
     outstanding at December 31, 2013 and 2012, respectively,
     net of shares in treasury: 2013-2,140,761; 2012-2,451,507.
     529       529  
Additional paid-in capital
     56,197       54,328  
Unearned ESOP shares
     (846 )     (970 )
Treasury stock—at cost
     (44,502 )     (50,896 )
Retained earnings
     84,675       78,984  
Accumulated other comprehensive (loss) income
     (1,178 )     970  
Total stockholders’ equity
     94,875       82,945  
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
   $ 835,689     $ 711,836  
 
The accompanying notes are an integral part of these statements.
 
 
 
 
12


TF Financial Corporation and Subsidiaries
 
CONSOLIDATED STATEMENTS OF INCOME
 
   
For the years ended December 31,
  
   
2013
    
2012
  
   
(in thousands,
except shares and per share data)
  
Interest income
            
Loans, including fees
   $ 25,858     $ 25,205  
Investment securities
                
  Fully taxable
     1,739       2,315  
  Exempt from federal taxes
     1,689       1,692  
Interest-bearing deposits and other
     27       8  
TOTAL INTEREST INCOME
     29,313       29,220  
Interest expense
                
Deposits
     3,025       3,532  
Borrowings
     898       1,405  
TOTAL INTEREST EXPENSE
     3,923       4,937  
NET INTEREST INCOME
     25,390       24,283  
Provision for loan losses
     839       2,400  
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
     24,551       21,883  
Noninterest income
                
Service fees, charges and other operating income
     2,348       1,771  
Gain on sale of investment securities
     4       85  
Earnings on bank owned life insurance
     551       603  
Bank owned life insurance death benefit proceeds
     934       —  
Gain on sale of loans
     705       1,350  
Gain on disposition of premises and equipment
     420       277  
Gain on acquisition
     1,120       —  
TOTAL NONINTEREST INCOME
     6,082       4,086  
Noninterest expense
                
Compensation and benefits
     12,053       10,982  
Occupancy and equipment
     3,106       2,795  
Federal deposit insurance premiums
     521       596  
Merger-related costs
     738       108  
Professional fees
     903       1,176  
Marketing and advertising
     356       346  
Foreclosed real estate expense
     609       811  
Core deposit intangible amortization
     50       —  
Other operating
     3,765       2,047  
TOTAL NONINTEREST EXPENSE
     22,101       18,861  
INCOME BEFORE INCOME TAXES
     8,532       7,108  
Income tax expense
     1,957       1,725  
NET INCOME
   $ 6,575     $ 5,383  
Earnings per share—basic
   $ 2.27     $ 1.97  
Earnings per share—diluted
   $ 2.27     $ 1.97  
Weighted average shares outstanding:
                
Basic
     2,899,025       2,726,133  
Diluted
     2,902,932       2,729,762  
  
The accompanying notes are an integral part of these statements.

 
 
 
13
 
 
TF Financial Corporation and Subsidiaries
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 

 
   
For the years ended
December 31,
  
   
2013
    
2012
  
   
(in thousands)
  
             
Net income
   $ 6,575     $ 5,383  
Other comprehensive (loss) income:
                
Investment securities available for sale:
                
Unrealized holding (losses) gains
     (5,495 )     321  
Tax effect
     1,869       (109 )
Reclassification adjustment for gains realized in net income
     (4 )     (85 )
Tax effect
     1       29  
Net of tax amount
     (3,629 )     156  
Pension plan benefit adjustment:
                
Related to net actuarial gain and prior service cost
     2,246       103  
Tax effect
     (765 )     (35 )
Net of tax amount
     1,481       68  
Total other comprehensive (loss) income
     (2,148 )     224  
Comprehensive income
   $ 4,427     $ 5,607  
 
The accompanying notes are an integral part of these statements.

 
 
 
14

 
TF Financial Corporation and Subsidiaries
 
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

 
Years ended December 31, 2013 and 2012
 
                                       
Accumulated
        
   
Common Stock
    
Additional
    
Unearned
                
other
        
         
Par
    
paid-in
    
ESOP
    
Treasury
    
Retained
    
comprehensive
        
    Shares    
value
    
capital
    
shares
    
stock
    
Earnings
    
(loss) income
    
Total
  
   
(in thousands, except shares and per share data)
  
Balance at December 31, 2011
     2,716,119     $ 529     $ 54,118     $ (1,097 )   $ (51,032 )   $ 74,144     $ 746     $ 77,408  
Allocation of ESOP shares
     13,104       —       190       127       —       —       —       317  
Cash dividends-common stock
     ($0.20 per share)
     —       —       —       —       —       (543 )     —       (543 )
Director compensation
     6,304       —       20       —       129       —       —       149  
Exercise of options
     315       —       —       —       7       —       —       7  
Deferred tax adjustment arising
     from stock compensation
     —       —       (27 )     —       —       —       —       (27 )
Stock option expense
     —       —       27       —       —       —       —       27  
Other comprehensive income
     —       —       —       —       —       —       224       224  
Net income for the year ended
     December 31, 2012
     —       —       —       —       —       5,383       —       5,383  
Balance at December 31, 2012
     2,735,842       529       54,328       (970 )     (50,896 )     78,984       970       82,945  
Allocation of ESOP shares
     13,092       —       216       124       —       —       —       340  
Purchase of treasury stock
     (10,412 )     —       —       —       (274 )     —       —       (274 )
Cash dividends-common stock
     ($0.30 per share)
     —       —       —       —       —       (884 )     —       (884 )
Director compensation
     5,738       —       26       —       119       —       —       145  
Exercise of options
     8,547       —       38       —       178       —       —       216  
Deferred tax adjustment arising
     from stock compensation
     —       —       (24 )     —       —       —       —       (24 )
Stock option expense
     —       —       312       —       —       —       —       312  
Acquisition of Roebling,
     net of fractional shares
     306,873       —       1,301       —       6,371       —       —       7,672  
Other comprehensive loss
     —       —       —       —       —       —       (2,148 )     (2,148 )
Net income for the year ended
     December 31, 2013
     —       —       —       —       —       6,575       —       6,575  
Balance at December 31, 2013
     3,059,680     $ 529     $ 56,197     $ (846 )   $ (44,502 )   $ 84,675     $ (1,178 )   $ 94,875  
 
The accompanying notes are an integral part of these statements. 

 
 
 
15

 
TF Financial Corporation and Subsidiaries
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
   
For the years ended
December 31,
  
   
2013
    
2012
  
   
(in thousands)
  
OPERATING ACTIVITIES
            
Net income
   $ 6,575     $ 5,383  
Adjustments to reconcile net income to net cash
   provided by operating activities:
          
Amortization and impairment adjustment of mortgage loan
     servicing rights, net
     (13 )     358  
Premiums and discounts on investment securities, net
     276       245  
Premiums and discounts on mortgage-backed securities, net
     443       320  
Amortization of premiums on deposits
     (178 )     —  
Deferred loan origination costs, net
     178       150  
Deferred income taxes
     (75 )     1,194  
Provision for loan losses
     839       2,400  
Amortization of core deposit intangible
     50       —  
Depreciation of premises and equipment
     672       781  
Increase in value of bank owned life insurance
     (551 )     (603 )
Income from life insurance death benefit
     (934 )     —  
Stock-based compensation
     797       493  
Proceeds from sale of loans originated for sale
     32,555       53,521  
Origination of loans held for sale
     (31,840 )     (52,940 )
Gain on acquisition
     (1,120 )     —  
Loss on foreclosed real estate
     446       471  
Gain on:
                
Sale of investment securities
     (4 )     (85 )
Sale of loans
     (705 )     (1,350 )
Disposition of premises and equipment
     (420 )     (277 )
Decrease (increase) in:
                
Accrued interest receivable                                                                                                     
     316       150  
Other assets                                                                                                     
     232       (248 )
(Decrease) increase in:
                
Accrued interest payable                                                                                                     
     (152 )     (558 )
Other liabilities                                                                                                     
     584       307  
 NET CASH PROVIDED BY OPERATING ACTIVITIES
   $ 7,971     $ 9,712  

 
 
 
16

 
TF Financial Corporation and Subsidiaries
 
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
 
   
For the years ended
December 31,
  
   
2013
    
2012
  
   
(in thousands)
  
INVESTING ACTIVITIES
            
Loan originations
   $ (97,640 )   $ (132,292 )
Loan principal payments
     110,256       93,622  
Proceeds from sale of foreclosed real estate
     2,008       7,626  
Proceeds from disposition of premises and equipment
     443       356  
Proceeds from maturities of investment securities available for sale
     8,115       5,765  
Proceeds from bank owned life insurance
     2,183       —  
Principal repayments on mortgage-backed securities held to maturity
     552       622  
Principal repayments on mortgage-backed securities available for sale
     17,691       26,195  
Proceeds from sale of mortgage-backed securities available for sale
     —       3,822  
Proceeds from sale of investment  securities available for sale
     4,039       —  
Purchase of investment securities available for sale
     (17,331 )     (6,982 )
Purchase of mortgage-backed securities available for sale
     (3,194 )     (16,824 )
Purchase of premises and equipment
     (1,062 )     (409 )
Redemption of FHLB stock
     2,450       2,226  
Acquisition, net of cash acquired
     (3,173 )     —  
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES
     25,337       (16,273 )
FINANCING ACTIVITIES
                
Net (decrease) increase in customer deposits
     (3,986 )     9,027  
Proceeds of long-term FHLB borrowings
     —       39,197  
Repayment of long-term FHLB borrowings
     (14,102 )     (25,449 )
Net (decrease) increase in advances from borrowers for taxes and
     insurance
     (81 )     558  
Purchase of treasury stock
     (274 )     —  
Exercise of stock options
     216       7  
Deferred tax adjustment arising from stock compensation
     (24 )     (27 )
Common stock dividends paid
     (884 )     (543 )
NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES
     (19,135 )     22,770  
NET INCREASE IN CASH AND CASH EQUIVALENTS
     14,173       16,209  
Cash and cash equivalents at beginning of period
     31,137       14,928  
Cash and cash equivalents at end of period
   $ 45,310     $ 31,137  
Supplemental disclosure of cash flow information
                
Cash paid for:
                
Interest on deposits and borrowings
   $ 4,247     $ 5,495  
Income taxes
   $ 900     $ 475  
Noncash transactions:
                
Capitalization of mortgage servicing rights
   $ 347     $ 551  
Transfers from loans to foreclosed real estate
   $ 737     $ 3,525  
 
 
 
 
17

 
TF Financial Corporation and Subsidiaries
 
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
 
   
For the year ended
December 31,
  
   
2013
  
   
(in thousands)
  
Acquisition of Roebling
      
Noncash assets acquired:
      
Investment securities
      
Available for sale
   $ 37,260  
Held to maturity
     79  
Loans receivable
     102,026  
FHLB stock
     389  
Accrued interest receivable
     376  
Premises and equipment, net
     2,154  
Core deposit intangible
     553  
Bank owned life insurance
     175  
Other assets
     1,591  
      144,603  
Liabilities assumed:
        
Deposits
     127,750  
Advances from the FHLB
     3,051  
Advances from borrowers for taxes and insurance
     429  
Other liabilities
     1,408  
      132,638  
Net noncash assets acquired
     11,965  
Cash acquired
   $ 4,081  
 
The accompanying notes are an integral part of these statements.
 
 
 
 
18
TF Financial Corporation and Subsidiaries
 
 
December 31, 2013 and 2012
 

 
NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


TF Financial Corporation (the “Company”) is a unitary savings and loan holding company, organized under the laws of the Commonwealth of Pennsylvania, which conducts its consumer banking operations primarily through its wholly owned subsidiary, 3rd Fed Bank (“3rd Fed” or the “Bank”). 3rd Fed is a Pennsylvania-chartered stock savings bank insured by the FDIC. 3rd Fed is a community-oriented savings institution and conducts operations from its main office in Newtown, Pennsylvania, eleven full-service branch offices located in Philadelphia and Bucks counties, Pennsylvania, and seven full-service branch offices located in Burlington, Mercer and Ocean counties, New Jersey. The Bank competes with other banking and financial institutions in its primary market communities, including financial institutions with resources substantially greater than its own. Commercial banks, savings banks, savings and loan associations, credit unions and money market funds actively compete for savings and time deposits and loans. Such institutions, as well as consumer finance and insurance companies, may be considered competitors of the Bank with respect to one or more of the services it renders.
 
The Bank is subject to regulations of certain state and federal agencies and, accordingly, those regulatory authorities conduct periodic examinations. As a consequence of the extensive regulation of commercial banking activities, the Bank’s business is particularly susceptible to being affected by state and federal legislation and regulations.
 
a.           Principles of Consolidation and Basis of Presentation
 
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries: Penns Trail Development Corporation and 3rd Fed, including 3rd Fed’s wholly owned subsidiaries, Third Delaware Corporation and Teragon Financial Corporation (collectively, the “Company”). All material intercompany balances and transactions have been eliminated in consolidation.
 
The accounting policies of the Company conform to accounting principles generally accepted in the United States of America (“US GAAP”) and predominant practices within the banking industry. The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The more significant accounting policies are summarized below.
 
b.           Business Combinations

At the date of acquisition the Company records the net assets of acquired companies on the Consolidated Balance Sheet at their estimated fair value, and a gain is recognized for the excess of the estimated fair value over the purchase price of acquired net assets. The results of operations for acquired companies are included in the Company’s Consolidated Statements of Income beginning at the acquisition date. Expenses arising from acquisition activities are recorded in the Consolidated Statements of Income during the period incurred.

c.           Cash and Cash Equivalents
 
The Company considers cash, due from banks, and interest-bearing deposits in other financial institutions, with original terms to maturity of less than three months, as cash equivalents for presentation purposes in the Consolidated Balance Sheets and Cash Flows. The Company is required to maintain certain cash reserves relating to deposit liabilities. This requirement is ordinarily satisfied by cash on hand.

 
 
 
19
TF Financial Corporation and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
December 31, 2013 and 2012
 

 
NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 
d.           Investment and Mortgage-Backed Securities
 
The Company classifies its investment and mortgage-backed securities in one of three categories: held to maturity, trading, or available for sale. The Company does not presently engage in security trading activities.

Investment and mortgage-backed securities available for sale are stated at fair value, with net unrealized gains and losses excluded from income and reported in other comprehensive income (loss). See Note 18 - Fair Value Measurements and Fair Value of Financial Instruments which defines the basis for determining fair value. Realized gains and losses on the sale of securities are recognized using the specific identification method.
 
Mortgage-backed securities held to maturity are carried at cost, net of unamortized premiums and discounts, which are recognized in interest income using the interest method.
 
On a quarterly basis, temporarily impaired securities are evaluated to determine whether such impairment is other-than-temporary impairment (“OTTI”). This evaluation involves consideration of the length of time and the amount by which the fair value has been lower than amortized cost, the financial condition and credit rating of the issuer, the changes in fair value in relation to the change in market interest rates and other relevant information. In addition, with respect to mortgage-backed securities issued by government and quasi-governmental agencies (i.e. Government National Mortgage Association (“GNMA”), Federal Home Loan Mortgage Corporation (“FHLMC”) and Federal National Mortgage Association (“FNMA”)), the Company considers the ultimate payment of principal and interest as an obligation of the United States Government and thus assured. The Company also evaluates its intent to hold, intent to sell or need to sell the securities in light of its investment strategy, cash flow needs, interest rate risk position, prospects for the issuer and all other relevant factors.
 
e.           Loans Receivable, net
 
Loans receivable that management has the intent and ability to hold for the foreseeable future, or until maturity or payoff, are stated at unpaid principal balances less the allowance for loan losses, and net of deferred loan origination fees and direct origination costs as well as unamortized fair value adjustments on acquired loans. Loan origination fees, costs and adjustments on loans are amortized to income using the interest method over the remaining period to contractual maturity, adjusted for actual prepayments.
 
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 Bank 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: owner and non-owner occupied commercial, multi-family real estate, construction, commercial and industrial, one-to four-family residential, and consumer which is predominately real estate secured junior liens and home equity lines of credit as well as other consumer loans. 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.

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 qualitative factors.

 
 
 
20
TF Financial Corporation and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
December 31, 2013 and 2012
 

 
NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 
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 ASC 310-10, Accounting by Creditors for Impairment of a Loan, which governs the accounting for impaired assets and consideration of 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 impaired are generally assigned a reserve derived from the value of the underlying collateral. Loans deemed not to be impaired are assigned a reserve factor based upon the class from which they were selected.

The ALLL needed as a result of the foregoing evaluations is compared with the unadjusted amount, and an adjustment is made by means of a provision charged to expense 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, there may be an unallocated portion of the ALLL. Management adjusts the unallocated portion to an amount which management considers reasonable under the circumstances.

The Bank provides an allowance for accrued but uncollected interest when a loan becomes more than ninety days past due or is identified as impaired. The allowance is established by a charge to interest income equal to all interest previously accrued, and income is subsequently recognized only to the extent that cash payments are received until, in management’s judgment, the borrower’s ability to make periodic interest and principal payments is no longer impaired, in which case the loan is returned to accrual status.
 
f.           Loans Receivable, Held for Sale
 
Mortgage loans originated and intended for sale in the secondary market are carried at fair value on an individual basis. Any resulting gain or loss is included in other operating income.
 
g.           Troubled Debt Restructurings

Loans whose terms are modified are classified as troubled debt restructurings (“TDRs”) if the Company grants such borrowers concessions and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a TDR may include extending the maturity date of the loan, reducing the interest rate on the loan to a rate which is below market, a combination of rate adjustments and maturity extensions, or by other means including covenant modifications, forbearances or other concessions. Interest income is not accrued on loans that had been placed on nonaccrual prior to the restructuring until they have performed in accordance with their restructured terms for a period of at least six months. The Company evaluates the ALLL needed with respect to TDRs under the same policy and guidelines as all other loans, and TDRs are evaluated individually for impairment.

 
 
 
21
TF Financial Corporation and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
December 31, 2013 and 2012
 

 
NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)


h.           Transfers of Financial Assets

The Company accounts for the transfers of financial assets using the financial–components approach. This approach recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered and derecognizes liabilities when extinguished. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Mortgage servicing rights (“MSRs”) are recognized as separate assets when rights are acquired through purchase or through sale of financial assets. Under the applicable accounting guidance regarding servicing assets and liabilities, servicing rights resulting from the sale of loans originated by the Company are initially measured at fair value at the date of transfer. Fair value is based on market prices for comparable mortgage servicing rights, when available, or alternatively is based on a valuation model that calculates the present value of estimated future net servicing income. The Company subsequently recognizes mortgage servicing expense for each class of servicing assets using the amortization method. MSRs are amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Servicing assets are evaluated quarterly for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights into tranches based on predominant risk characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation allowance charged to servicing fee income for an individual tranche, to the extent that fair value is less than the amortized cost for the tranche. If the Company later determines that all or a portion of the impairment no longer exists for a particular tranche, a reduction of the allowance may be recorded as an increase to other operating income. These servicing rights are included in other assets in the Consolidated Balance Sheets and are discussed in Note 18 - Fair Value Measurements and Fair Value of Financial Instruments.

Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal, or a fixed amount per loan, and are recorded as income when earned. The amortization of loan servicing rights is recorded as a reduction of service fee income.
 
i.           Premises and Equipment
 
Land is carried at cost. Buildings and furniture, fixtures and equipment are carried at cost less accumulated depreciation. Depreciation is provided by the straight-line method over the estimated useful lives of the assets. The Company records any impairment of long-lived assets to be held and used or to be disposed of by sale. The Company had no impaired long-lived assets at December 31, 2013 and 2012.
 
j.           Foreclosed Real Estate

Real estate acquired through, or in lieu of, loan foreclosure is carried at the fair value of the property, based on an appraisal less estimated cost to sell. Revenue and expenses from operations and changes in the fair value are included in foreclosed real estate expense. Included in other assets is foreclosed real estate of $5.6 million and $7.3 million at December 31, 2013 and 2012, respectively.

k.           Goodwill
 
Goodwill does not require amortization but is subject to impairment testing. Goodwill impairment testing allows entities to first assess qualitative factors and circumstance to determine whether it is more likely than not that

 
 
 
22
TF Financial Corporation and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
December 31, 2013 and 2012
 

 
NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)


the fair value of the reporting unit is less than its carrying amount. At December 31, 2013, the Company performed an assessment of key factors and determined that impairment of goodwill was not likely.
 
l.           Core Deposit Intangible

The Company recorded a core deposit intangible of $553,000 in conjunction with the acquisition of Roebling discussed in Note 3 – Acquisition of Roebling Financial Corp, Inc.

m.           Bank Owned Life Insurance
 
The Company maintains life insurance policies on the lives of current and former executives and officers. The Company is the owner and beneficiary of the policies. The cash surrender values of the policies were approximately $18.6 million and $19.1 million at December 31, 2013 and 2012, respectively.

n.           Benefit Plans
 
The Company has established an ESOP covering eligible employees with six months of service, as defined by the ESOP. The Company records compensation expense in the amount equal to the fair value of shares committed to be released from the ESOP to employees less dividends received on the allocated shares applied to the required debt service of the plan.
 
The Company has a defined benefit pension plan covering substantially all full-time employees meeting certain requirements. The Company recognizes the overfunded or underfunded status of the defined benefit postretirement plan as an asset or liability in its Consolidated Balance Sheets and recognizes changes in that funded status, including the gains and or losses and prior service costs or credits that were not recognized as components of net periodic benefit cost, in the year in which the changes occur through accumulated other comprehensive income. The Company measures the funded status of the plan as of the date of its year-end Consolidated Balance Sheet.
 
o.           Stock-Based Compensation
 
The Company has stock benefit plans that allow the Company to grant options and stock to employees and directors and which are more fully discussed in Note 12 - Benefit Plans. The options, may have terms of up to 7 years when issued, vest over a two to five year period. The exercise price of each option equals the market price of the Company’s stock on the date of the grant. The Company measures compensation cost at the grant date based on the fair value of the award. Compensation is then recognized over the service period which is usually the vesting period. The fair value of each option grant during 2013 was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

Weighted average assumptions
      
Dividend yield
     0.81 %
Expected volatility
     16.82 %
Risk-free interest rate
     0.65 %
Fair value of options granted during the period
   $ 3.12  
Expected lives in years
     5  

There were no options granted in 2012.

 
 
 
23
TF Financial Corporation and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
December 31, 2013 and 2012
 

 
NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)


p.           Income Taxes
 
The Company accounts for income taxes under the liability method whereby deferred income taxes are recognized for the tax consequences of “temporary differences” by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The effect on deferred taxes due to change in tax rates is recognized in income in the period that includes the enactment date.
  
q.           Advertising Costs
 
The Company expenses marketing and advertising costs as incurred.
 
r.           Earnings Per Share
 
Basic earnings per share is computed by dividing income available to common shareholders by the weighted average common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock.
 
s.           Segment Reporting
 
The Company has one reportable segment, “Community Banking.” All of the Company’s activities are interrelated, and each activity is dependent and assessed based on how each of the activities of the Company supports the others. For example, commercial lending is dependent upon the ability of the Bank to fund itself with retail deposits and other borrowings and to manage interest rate and credit risk. This situation is also similar for consumer and residential mortgage lending. Accordingly, all significant operating decisions are based upon analysis of the Company as one operating segment or unit.

t.           Fair Value of Financial Instruments

Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 18 - Fair Value Measurements and Fair Value of Financial Instruments. Fair value estimates involve uncertainties and matters of significant judgment. Changes in assumptions or in market conditions could significantly affect the estimates.
 
NOTE 2 — RECENT ACCOUNTING PRONOUNCEMENTS
 
In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The amendments in this update require an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under US GAAP to be reclassified in its entirety to net income. For other amounts that are not required under US GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under US GAAP that provide additional detail about those amounts. For public entities, the amendments are effective prospectively for reporting periods beginning after December 15, 2012. The Company has provided the necessary disclosures in Note 4 – Accumulated Other Comprehensive (Loss) Income.

 
 
 
24
TF Financial Corporation and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
December 31, 2013 and 2012
 

 
NOTE 2 — RECENT ACCOUNTING PRONOUNCEMENTS (Continued)


In February 2013, FASB issued ASU 2013-04, Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date. The objective of the amendments in this update is to provide guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date, except for obligations addressed within existing guidance in US GAAP. Examples of obligations within the scope of this update include debt arrangements, other contractual obligations, and settled litigation and judicial rulings. US GAAP does not include specific guidance on accounting for such obligations with joint and several liability, which has resulted in diversity in practice. Some entities record the entire amount under the joint and several liability arrangement on the basis of the concept of a liability and the guidance that must be met to extinguish a liability. Other entities record less than the total amount of the obligation, such as an amount allocated, an amount corresponding to the proceeds received, or the portion of the amount the entity agreed to pay among its co-obligors, on the basis of the guidance for contingent liabilities. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. This ASU is not expected to have a significant impact on the Company’s financial statements.

In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. This update applies to all entities that have unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. An unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date and should be made presuming disallowance of the tax position at the reporting date. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early adoption is permitted. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations. However, the Company has no unrecognized deferred tax benefits at December 31, 2013.

In January 2014, the FASB issued ASU 2014-04, Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. The amendments in this update clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amendments in this update are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. An entity can elect to adopt the amendments in this update using either a modified retrospective transition method or a prospective transition method.  The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

 
 
 
25
TF Financial Corporation and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
December 31, 2013 and 2012
 

 
NOTE 3 — ACQUISITION OF ROEBLING FINANCIAL CORP, INC.


On July 2, 2013, the Company closed on a merger transaction pursuant to which the Company acquired Roebling Financial Corp, Inc. (“Roebling”), the parent company of Roebling Bank, in a stock and cash transaction. 
 
Under the terms of the merger agreement, the Company acquired all of the outstanding shares of Roebling for a total purchase price of approximately $14.9 million.  As a result of the acquisition, the Company issued 306,873 common shares to former shareholders of Roebling. As a result of the merger, Roebling was merged with and into the Company, and Roebling Bank was merged with and into 3rd Fed.

 
 
 
26
TF Financial Corporation and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
December 31, 2013 and 2012
 

 
NOTE 3 — ACQUISITION OF ROEBLING FINANCIAL CORP, INC. (Continued)


The following table summarizes the purchase of Roebling as of July 2, 2013:

   
At July 2, 2013
  
   
(in thousands,
except shares and per share data)
  
Purchase Price Consideration in Common Stock
            
Roebling common shares settled for stock
     843,058        
Exchange Ratio
     0.364        
TF Financial Corporation shares issued
     306,873        
Value assigned to TF Financial Corporation common share
   $ 25.00        
Purchase price assigned to Roebling common
     shares exchanged for TF Financial common shares
           $ 7,672  
                 
Purchase Price Consideration - Cash for Common Stock
                
Roebling shares exchanged for cash
     843,478          
Purchase price paid to each Roebling common
     share exchanged for cash
   $ 8.60          
Purchase price assigned to Roebling common
     shares exchanged for cash
             7,254  
                 
Total Purchase Price
             14,926  
                 
Net Assets Acquired:
                
                 
Roebling shareholders’ equity
   $ 16,461          
                 
Adjustments to reflect assets acquired at fair value:
                
Investments
     2          
Loans
                
Interest rate
     932          
General credit
     (1,069 )        
Specific credit - non-amortizing
     (325 )        
Specific credit - amortizing
     (198 )        
Eliminate allowance for loan losses
     1,214          
Core deposit intangible
     553          
Owned premises
     (976 )        
Leased premises contracts
     33          
Deferred tax assets
     (276 )        
Other assets
     186          
Adjustments to reflect liabilities acquired at fair value:
                
Time deposits
     (440 )        
FHLB advances
     (51 )        
              16,046  
Purchase gain resulting from acquisition
           $ 1,120  
 
 
 
 
27
TF Financial Corporation and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
December 31, 2013 and 2012
 

 
NOTE 3 — ACQUISITION OF ROEBLING FINANCIAL CORP, INC. (Continued)
 
 
The following condensed statement reflects the values assigned to Roebling’s net assets as of the acquisition date:
 
   
At July 2, 2013
  
   
(in thousands)
  
             
Total purchase price
         $ 14,926  
               
Net assets acquired:
              
Cash
   $ 4,081          
Investment securities
     37,339          
Loans receivable
     102,026          
Premises and equipment
     2,154          
Core deposit intangible
     553          
Other assets
     2,531          
Time deposits
     (49,061 )        
Deposits other than time deposits
     (78,689 )        
Other liabilities
     (4,888 )        
              16,046  
Purchase gain on acquisition
           $ 1,120  

The acquired assets and assumed liabilities were measured at estimated fair values. Management made certain estimates and exercised judgment in accounting for the acquisition.  The following is a description of the methods used to determine fair value of significant assets and liabilities at the acquisition date:

Cash and cash equivalents — The Company acquired $4.1 million in cash and cash equivalents, which management deemed to reflect fair value based on the short term nature of the asset.

Investment Securities — The Company acquired $37.3 million in U.S. Government and federal agency and mortgage-backed securities that were recorded at fair value. Please refer to Note 18 - Fair Value Measurements and Fair Value of Financial Instruments for a discussion of methodologies used to determine fair value.

Loans — The Company acquired $102.0 million in loans receivable with and without evidence of credit quality deterioration. The loans consisted of residential mortgage loans, consumer loans which include second mortgage loans and home equity secured lines of credit, commercial real estate loans, and other consumer loans.

 
 
 
28
TF Financial Corporation and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
December 31, 2013 and 2012
 

 
NOTE 3 — ACQUISITION OF ROEBLING FINANCIAL CORP, INC. (Continued)


At the acquisition date, the Company recorded $101.2 million of loans receivable without evidence of credit quality deterioration and $797,000 of loans acquired with evidence of credit quality deterioration. The following table reflects the composition of the loans receivable acquired :

   
At July 2, 2013
  
   
Loans acquired with no credit quality deterioration
    
Loans acquired with credit quality deterioration
    
Total
  
   
(in thousands)
  
Residential
                  
Residential mortgages
   $ 54,965     $ 21     $ 54,986  
Commercial
                        
Real estate-commercial
     13,262       —       13,262  
Real estate-residential
     5,143       356       5,499  
Real estate-multi-family
     1,595       331       1,926  
Commercial and industrial loans
     308       —       308  
Consumer
                        
Home equity and second mortgage
     25,847       89       25,936  
Other consumer
     109       —       109  
Total
   $ 101,229     $ 797     $ 102,026  
 
The Company estimated the general credit risk fair value adjustment based on guidance from ASC 820-10, Fair Value Measurements which defines fair value as the price which would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. There is no active observable market for sale information on community bank loans and thus Level 3 fair value procedures were utilized, primarily the use of present value techniques incorporating assumptions which market participants would use in estimating fair values. In the absence of reliable market information, the Company used its own assumptions in an effort to determine a reasonable estimate of fair value. Loans acquired without credit quality deterioration were evaluated using a two-part general credit fair value analysis for all loan groups: 1) expected lifetime credit migration losses and 2) estimated fair value adjustment for qualitative factors. A decrease of $1.1 million was made to reflect a general credit risk fair value. Additionally, the Company recorded an increase of $932,000 to reflect the fair value of loans based on current interest rates on loans similar to those acquired.

A specific credit fair value adjustment was made as prescribed by ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. Accordingly, the Company reviewed the Roebling loan portfolio on a loan by loan basis to determine whether loans met the definition of credit impaired as set forth in ASC 310-30. Specifically: 1) Had there been credit deterioration from the loan's inception until the acquisition date and 2) Is it probable that not all of the contractual cash flows will be collected on the loan. Based on this analysis, loans with a principal balance of $1.3 million were identified as being within the scope of ASC 310-30. The Company estimated the cash flows on each loan whether from expected monthly payments or from the liquidation of the underlying collateral on collateral dependent loans. As a result, an adjustment of $325,000 was recorded to reflect the fair value of the loans. Additionally, the aggregate expected cash flows less the acquisition date fair value resulted in an accretable yield amount of $198,000.
 
 
 
 
29
TF Financial Corporation and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
December 31, 2013 and 2012
 

 
NOTE 3 — ACQUISITION OF ROEBLING FINANCIAL CORP, INC. (Continued)

 
Premises and equipment, net — The fair value of land and buildings acquired in the Roebling merger totaled $2.2 million. The fair value as of the acquisition date was determined by an independent qualified appraiser.
 
Core deposit intangible — The Company recorded a core deposit intangible of $553,000. A core deposit intangible arises from a financial institution having a deposit base comprised of stable customer relationships. These deposits are generally at interest rates or on terms that are favorable to the financial institution. Fair value of the core deposit intangible was estimated based on guidance from ASC 820-10. There is no active observable market or sales information on community bank core deposits and thus Level 3 fair value procedures were utilized, primarily the use of the income approach which is based on an analysis of the expected after tax cash flow benefits of the acquired core deposits versus the cost of utilizing an alternative source (brokered deposits) for funding. Core deposits exclude certificates of deposit, which the Company judged to be non-core deposits. The cost of core deposits incorporated estimates of the costs of maintaining and supporting the deposits such as interest, branch expenses, personnel, and data processing. This cost was compared to the alternative funding source and the resulting economic benefit was discounted over the expected life of the acquired core deposits using a long-term market-based after tax rate of return.

Core deposit intangibles are amortized over the expected useful lives. Such lives are also periodically reassessed to determine if any amortization period adjustments are required. During the year ended December 31, 2013, no such adjustments were recorded. The gross carrying amount of the core deposit intangible at December 31, 2013 was $503,000 with $50,000 accumulated amortization as of that date.

As of December 31, 2013, the remaining estimated future amortization expense for the core deposit was as follows:

   
At December 31, 2013
  
   
(in thousands)
  
2014
   $ 96  
2015
     86  
2016
     75  
2017
     65  
2018
     55  
2019
     45  
2020
     35  
2021
     25  
2022
     15  
2023
     6  
    $ 503  

Deposits — The Company assumed $127.8 million in deposits which included $49.1 million of interest-bearing time deposits ("CDs"). An increase of $440,000 was made to reflect the fair value of the CDs. This fair value adjustment is based on guidance derived from ASC 820-10 and is based on current market interest rates on CDs of the same remaining maturity as Roebling's CDs. Market rates were obtained from independent third party sources for CDs offered in New Jersey on or about the acquisition date.

Results of operations for Roebling prior to the acquisition date are not included in the Consolidated Statements of Income for the year ended December 31, 2013. The following table presents financial information

 
 
 
30
TF Financial Corporation and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
December 31, 2013 and 2012
 

 
NOTE 3 — ACQUISITION OF ROEBLING FINANCIAL CORP, INC. (Continued)


regarding the former Roebling operations included in the Consolidated Statements of Income from the date of acquisition through December 31, 2013 under the column “Actual from acquisition date through December 31, 2013”.

   
Actual from acquisition date
  
   
through December 31, 2013
  
   
(in thousands)
  
Net interest income
   $ 2,192  
Noninterest income
     210  
Net income
     291  

In addition, the following table presents unaudited pro forma information as if the acquisition of Roebling had occurred on January 1, 2012 under the “Pro Forma” columns. The table below has been prepared for comparative purposes only and is not necessarily indicative of the actual results that would have been attained had the acquisition occurred as of the beginning of the periods presented, nor is it indicative of future results. Furthermore, the unaudited pro forma information does not reflect management’s estimate of any revenue-enhancing opportunities nor anticipated cost savings as a result of the integration and consolidation of the acquisition. Merger and acquisition integration costs and amortization of fair value adjustments net of the related income tax effects are included in the amounts below, but any purchase gain has been excluded.
   
Proformas (Unaudited)
  
   
For the years ended 
December 31,
  
   
2013
    
2012
  
   
(in thousands,
except per share data)
  
Net interest income
   $ 28,855     $ 29,589  
Noninterest income
     5,365       4,621  
Net income
     5,463       5,616  
Pro forma earnings per share:
                
Basic
   $ 1.70     $ 1.85  
Diluted
   $ 1.70     $ 1.85  

 
 
 
31
TF Financial Corporation and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
December 31, 2013 and 2012
 

 
NOTE 4 — ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
 
 
The activity in accumulated other comprehensive (loss) income for the year ended December 31, 2013 is as follows:
 
   
Accumulated Other Comprehensive (Loss) Income (1), (2)
  
   
Unrealized gains
(losses) on securities available for sale
    
Defined
benefit
pension plan
    
Total
  
   
(in thousands)
  
Balance at December 31, 2012
   $ 3,805     $ (2,835 )   $ 970  
  Other comprehensive (loss) income before
     reclassifications
     (3,626 )     1,307       (2,319 )
  Amounts reclassified from accumulated other
     comprehensive (loss) income
     (3 )     174       171  
Period change
     (3,629 )     1,481       (2,148 )
Balance at December 31, 2013
   $ 176     $ (1,354 )   $ (1,178 )

(1
)
Amounts in parentheses indicate debits.
(2
)
All amounts are net of tax. Related income tax expense or benefit is calculated using a Federal income tax rate of 34%.

 
 
 
32
TF Financial Corporation and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
December 31, 2013 and 2012
 

 
NOTE 4 — ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME (Continued)
 
 
   
Amount reclassified
from accumulated
other comprehensive
income (loss)
For the year ended
December 31, (1)
  
Affected line item in the consolidated statements of income
   
2013
    
   
(in thousands)
    
         
Investment securities available for sale
        
Net securities gains reclassified into
     earnings
   $ 4  
 Gain on sale of investment securities
          Related income tax expense
     (1 )
 Income tax expense
Net effect on accumulated other
     income (loss) for the period
     3  
 Net of tax
Defined benefit pension plan (2)
          
     Amortization of net actuarial loss and
        prior service cost
     (264 )
 Compensation and benefits
          Related income tax expense
     90  
 Income tax expense
Net effect on accumulated other
     comprehensive income (loss) for the
     period
     (174 )
 Net of tax
Total reclassification for the period
   $ (171 )
 Net income
 
(1
)
Amounts in parentheses indicate debits.
(2
)
Included in the computation of net periodic pension cost. See Note 12 – Benefit Plans for additional detail.


NOTE 5 — CASH AND CASH EQUIVALENTS
 
Cash and cash equivalents consist of the following:
   
At December 31,
  
   
2013
    
2012
  
   
(in thousands)
  
Cash and due from banks
   $ 4,218     $ 4,697  
Interest-bearing deposits in other financial institutions
     41,092       26,440  
    $ 45,310     $ 31,137  
 
 
 
 
33
TF Financial Corporation and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
December 31, 2013 and 2012
 

 
NOTE 6 — INVESTMENT SECURITIES
 
 
The amortized cost, gross unrealized gains and losses, and fair value of the Company’s investment securities, are summarized as follows:
 
   
At December 31, 2013
  
         
Gross
    
Gross
        
   
Amortized
    
unrealized
    
unrealized
    
Fair
  
   
cost
    
gains
    
losses
    
value
  
   
(in thousands)
  
Available for sale
                        
U.S. Government and federal agencies
   $ 18,572     $ 4     $ (513 )   $ 18,063  
State and political subdivisions
     60,159       1,526       (1,016 )     60,669  
Residential mortgage-backed securities
     issued by quasi-governmental agencies
     45,015       540       (275 )     45,280  
Total investment securities available for sale
     123,746       2,070       (1,804 )     124,012  
                                 
Held to maturity
                                
Residential mortgage-backed securities
     issued by quasi-governmental agencies
     1,490       191       (1 )     1,680  
Total investment securities
   $ 125,236     $ 2,261     $ (1,805 )   $ 125,692  
 
   
At December 31, 2012
  
         
Gross
    
Gross
        
   
Amortized
    
unrealized
    
unrealized
    
Fair
  
   
cost
    
gains
    
losses
    
value
  
   
(in thousands)
  
Available for sale
                        
State and political subdivisions
   $ 55,254     $ 4,360     $ (4 )   $ 59,610  
Residential mortgage-backed securities
     issued by quasi-governmental agencies
     41,265       1,409       —       42,674  
Total investment securities available for sale
     96,519       5,769       (4 )     102,284  
                                 
Held to maturity
                                
Residential mortgage-backed securities
     issued by quasi-governmental agencies
     1,965       306       —       2,271  
Total investment securities
   $ 98,484     $ 6,075     $ (4 )   $ 104,555  
 
Gross realized gains were $13,000 and $112,000 for the years ended December 31, 2013 and 2012, respectively. These gains resulted from the sale proceeds of investment and mortgage-backed securities available for sale of $2.0 million and $2.7 million for the years ended December 31, 2013 and 2012, respectively. Gross realized losses were $9,000 and $27,000 for the years ended December 31, 2013 and 2012, respectively, which resulted from the sale proceeds of investment and mortgage-backed securities available for sale of $2.0 million and $1.1 million for the years ended December 31, 2013 and 2012, respectively.

 
 
 
34
TF Financial Corporation and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
December 31, 2013 and 2012
 

 
NOTE 6 — INVESTMENT SECURITIES (Continued)
 
 
The amortized cost and fair value of investment securities by contractual maturity and mortgage-backed securities are shown below.
 
   
At December 31, 2013
  
   
Available for sale
    
Held to maturity
  
   
Amortized
    
Fair
    
Amortized
    
Fair
  
   
cost
    
value
    
cost
    
value
  
   
(in thousands)
  
Investment securities
                        
Due in one year or less
   $ 1,645     $ 1,666     $ —     $ —  
Due after one year through five years
     16,666       16,961       —       —  
Due after five years through ten years
     39,508       39,004       —       —  
Due after ten years
     20,912       21,101       —       —  
      78,731       78,732       —       —  
                                 
Mortgage-backed  securities
     45,015       45,280       1,490       1,680  
Total investment securities
   $ 123,746     $ 124,012     $ 1,490     $ 1,680  
 
Investment securities having an aggregate amortized cost of approximately $14.8 million and $7.0 million were pledged to secure public deposits at December 31, 2013 and 2012, respectively.
 
There were no securities held other than U.S. Government and agencies from a single issuer that represented more than 10% of stockholders’ equity at year end.
 
The Company also holds stock in the FHLB totaling $3.4 million and $5.4 million as of December 31, 2013 and 2012, respectively. The Company is required to maintain a minimum amount of FHLB stock as determined by its borrowing levels and amount of eligible assets. At December 31, 2013 the Company was required to hold $3.4 million in FHLB stock. FHLB stock can only be repurchased by the FHLB or sold to another member, and all sales must be at par. The Company holds FHLB stock as a long term investment based on the ultimate recoverability of the par value. The Company evaluates potential impairment of its investment in FHLB stock quarterly and considers the following: 1) the magnitude and direction of the change in the net assets of the FHLB as compared to the capital stock amount and the duration of this condition, 2) the ability of the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB, 3) the impact of regulatory changes on the FHLB and on its members and 4) the liquidity position of the FHLB. Redemptions of FHLB stock totaled $2.5 million and $2.2 million for the years ended December 31, 2013 and 2012, respectively. After evaluating these factors the Company has concluded that the par value of its investment in FHLB stock is recoverable and no impairment has been recorded during the years ended December 31, 2013 and 2012.

 
 
 
35
TF Financial Corporation and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
December 31, 2013 and 2012
 

 
NOTE 6 — INVESTMENT SECURITIES (Continued)
 
 
The table below indicates the length of time individual securities, both held to maturity and available for sale, have been in a continuous unrealized loss position at December 31, 2013:

         
Less than
    
12 months
        
     Number      12 months      or longer      Total  
     of    
Fair 
    
Unrealized
   
Fair 
    
Unrealized
   
Fair
    
Unrealized
 
Description of Securities    Securities      Value      Loss      Value      Loss      Value      Loss  
   
(dollars in thousands)
  
U.S. Government and federal
   agencies
     13     $ 17,028     $ (513 )   $ —     $ —     $ 17,028     $ (513 )
State and political
   subdivisions
     24       19,646       (1,016 )     —       —       19,646       (1,016 )
Residential mortgage-backed
   securities issued by quasi-
   governmental agencies
     65       24,508       (276 )     —       —       24,508       (276 )
Total temporarily impaired
   securities
     102     $ 61,182     $ (1,805 )   $ —     $ —     $ 61,182     $ (1,805 )
        
The table below indicates the length of time individual securities, both held to maturity and available for sale, have been in a continuous unrealized loss position at December 31, 2013:
 
         
Less than
    
12 months
    
 
  
     Number      12 months      or longer      Total  
     of    
Fair 
    
Unrealized
   
Fair 
    
Unrealized
   
Fair 
    
Unrealized
 
Description of Securities    Securities      Value      Loss      Value      Loss     Value      Loss  
   
(dollars in thousands)
  
State and political
   subdivisions
     1     $ 617     $ (4 )   $ —     $ —     $ 617     $ (4 )
Total temporarily impaired
   securities
     1     $ 617     $ (4 )   $ —     $ —     $ 617     $ (4 )
 
The Company evaluates debt securities on a quarterly basis to determine whether OTTI exists. Unrealized losses primarily relate to interest rate fluctuations and not credit concerns. The Company does not intend to sell these securities and it is not more likely than not that it will be required to sell these securities. Accordingly, unrealized losses at December 31, 2013 and 2012 are not considered other-than-temporary and are therefore reflected in other comprehensive income (loss).

 
 
 
36
TF Financial Corporation and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
December 31, 2013 and 2012
 

 
NOTE 7 — LOANS RECEIVABLE


Loans receivable are summarized as follows:
   
At December 31,
  
   
2013
    
2012
  
   
(in thousands)
  
Held for investment:
            
Residential
            
Residential mortgages
   $ 371,961     $ 323,665  
                 
Commercial
                
Real estate-commercial
     129,345       104,766  
Real estate-residential
     20,005       21,570  
Real estate-multi-family
     16,623       19,118  
Construction loans
     8,773       16,288  
Commercial and industrial loans
     6,849       4,646  
Total commercial loans
     181,595       166,388  
                 
Consumer
                
Home equity and second mortgage
     64,202       40,143  
Other consumer
     1,697       1,835  
Total consumer loans
     65,899       41,978  
                 
Total loans
     619,455       532,031  
Net deferred loan origination costs and unamortized premiums
     1,288       1,611  
Less allowance for loan losses
     (6,575 )     (6,922 )
Total loans receivable
   $ 614,168     $ 526,720  
                 
Held for sale:
                
Residential
                
Residential mortgages
   $ 349     $ 706  
 
 
 
 
37
TF Financial Corporation and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
December 31, 2013 and 2012
 

 
NOTE 7 — LOANS RECEIVABLE (Continued)
 
 
The following tables present by credit quality indicator the composition of the commercial loan portfolio:

Commercial credit exposure-credit risk profile by internally assigned grade

   
At December 31, 2013
  
         
Special
                    
    Pass      mention      Substandard      Doubtful      Total  
   
(in thousands)
  
Real estate-commercial
   $ 113,260     $ 7,142     $ 8,943     $ —     $ 129,345  
Real estate-residential
     17,182       487       2,336       —       20,005  
Real estate-multi-family
     13,114       —       3,509       —       16,623  
Construction loans
     5,596       —       3,177       —       8,773  
Commercial and industrial loans
     6,817       32       —       —       6,849  
  Total
   $ 155,969     $ 7,661     $ 17,965     $ —     $ 181,595  
 
   
At December 31, 2012
  
         
Special
                    
    Pass     mention     Substandard     Doubtful     Total  
   
(in thousands)
  
Real estate-commercial
   $ 91,446     $ 4,192     $ 9,128     $ —     $ 104,766  
Real estate-residential
     19,244       1,018       1,308       —       21,570  
Real estate-multi-family
     15,751       —       3,367       —       19,118  
Construction loans
     7,397       4,097       4,794       —       16,288  
Commercial and industrial loans
     4,565       81       —       —       4,646  
  Total
   $ 138,403     $ 9,388     $ 18,597     $ —     $ 166,388  

In order to assess and monitor the credit risk associated with commercial loans, the Company employs a risk rating methodology whereby each commercial loan is initially assigned a risk grade. At least annually, all risk ratings are reviewed in light of information received such as tax returns, rent rolls, cash flow statements, appraisals, and any other information which may affect the then-current risk rating, which may be adjusted upward or downward as a result of this review. At the end of each quarter, the risk ratings are summarized and become a component of the evaluation of the allowance for loan losses. The Company’s risk rating definitions mirror those promulgated by banking regulators and are as follows:
 
Pass: A good quality loan characterized by satisfactory liquidity; reasonable debt capacity and coverage; acceptable management in all critical positions and normal operating results for its peer group. The Company has grades 1 through 6 within the Pass category which reflect the increasing amount of attention paid to the individual loan because of, among other things, trends in debt service coverage, management weaknesses, or collateral values.
 
Special mention: A loan that has potential weaknesses that deserves management’s close attention. Although the loan is currently protected, if left uncorrected, potential weaknesses may result in deterioration of the loan’s repayment prospects or in the Company’s future credit position. Potential weaknesses include: weakening financial condition; an unrealistic repayment program; inadequate sources of funds; lack of adequate collateral; or credit

 
 
 
38
TF Financial Corporation and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
December 31, 2013 and 2012
 

 
NOTE 7 — LOANS RECEIVABLE (Continued)


information, or documentation. There is currently the capacity to meet interest and principal payments, but further adverse business, financial, or economic conditions may impair the borrower’s capacity or willingness to pay interest and repay principal.
 
Substandard: A loan that is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged. Although no loss of principal or interest is presently apparent, there is the distinct possibility that a partial loss of interest and/or principal will be sustained if the deficiencies are not corrected. There is a current identifiable vulnerability to default and the dependence upon favorable business, financial, or economic conditions to meet timely payment of interest and repayment of principal.
 
Doubtful: A loan which has all the weaknesses inherent in a substandard asset with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonable specific pending factors which may work to strengthen the asset, classification as an estimated loss if deferred until a more exact status is determined. Pending factors include: proposed merger, acquisition, liquidation, capital injection, perfecting liens on additional collateral, and refinancing plans.
 
Loss: Loans which are considered uncollectible and should be charged off. The Company has charged-off all loans classified as loss.
 
Loans classified as special mention, substandard or doubtful are monitored individually on a monthly basis. Loans which require impairment evaluation are placed on nonaccrual status and are classified as substandard or doubtful.

 
 
 
39
TF Financial Corporation and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
December 31, 2013 and 2012
 

 
NOTE 7 — LOANS RECEIVABLE (Continued)
 
 
The following tables present by credit quality indicator the composition of the residential mortgage and consumer loan portfolios:

Mortgage and consumer credit exposure-credit risk profile by payment activity

   
At December 31, 2013
  
   
Performing
    
Nonperforming
    
Total
  
   
(in thousands)
  
Residential mortgages
   $ 368,967     $ 2,994     $ 371,961  
Home equity and second mortgage
     63,902       300       64,202  
Other consumer
     1,697       —       1,697  
  Total
   $ 434,566     $ 3,294     $ 437,860  
 
   
At December 31, 2012
  
   
Performing
    
Nonperforming
    
Total
  
   
(in thousands)
  
Residential mortgages
   $ 321,400     $ 2,265     $ 323,665  
Home equity and second mortgage
     40,000       143       40,143  
Other consumer
     1,827       8       1,835  
  Total
   $ 363,227     $ 2,416     $ 365,643  

In order to assess and monitor the credit risk associated with residential mortgage loans and consumer loans, which include second mortgage loans and home equity secured lines of credit, the Company relies upon the payment status of the loan. Residential mortgage and other consumer loans 90 days or more past due are placed on nonaccrual status and evaluated for impairment on a pooled basis with the exception of loans with balances in excess of $1.0 million and loans that have been modified as TDRs. An individual impairment analysis is performed using a recent appraisal or current sales contract for TDRs as well as nonperforming mortgage and consumer loans with balances in excess of $1.0 million.

 
 
 
40
TF Financial Corporation and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
December 31, 2013 and 2012
 

 
NOTE 7 — LOANS RECEIVABLE (Continued)

 
The following table presents by class nonperforming loans including impaired loans and loan balances past due over 90 days for which the accrual of interest has been discontinued:  

   
At December 31,
  
   
2013
    
2012
  
   
(in thousands)
  
Residential
            
Residential mortgages
   $ 2,994     $ 2,265  
Commercial
                
Real estate-commercial
     774       1,098  
Real estate-residential
     896       51  
Real estate-multi-family
     191       —  
Construction loans
     3,177       4,794  
Commercial and industrial loans
     —       —  
Consumer
                
Home equity and second mortgage
     300       143  
Other consumer
     —       8  
Total nonperforming loans
   $ 8,332     $ 8,359  
 
Additional interest income that would have been recorded under the original terms of the loan agreements amounted to $301,000 and $413,000 for the years ended December 31, 2013 and 2012, respectively.
 
 
41
TF Financial Corporation and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
December 31, 2013 and 2012
 

 
NOTE 7 — LOANS RECEIVABLE (Continued)
 
 
The following tables present by class loans individually evaluated for impairment:

   
At December 31, 2013
  
   
Recorded investment
    
Unpaid principal balance
  
Related
allowance
    
Average recorded investment
    
Interest income recognized
  
With an allowance recorded:
  
(in thousands)
  
Residential
                              
Residential mortgages
   $ 1,135     $ 1,135     $ 128     $ 1,620     $ —  
Commercial
                                        
Real estate-commercial
     —       —       —       109       —  
Real estate-residential
     712       712       77       211       —  
Construction loans
     3,177       3,375       2,021       3,701       —  
      5,024       5,222       2,226       5,641       —  
With no allowance recorded:
                                        
Residential
                                        
Residential mortgages
     1,184       1,184       —       241       —  
Commercial
                                        
Real estate-commercial
     774       774       —       607       —  
Real estate-residential
     184       321       —       108       —  
Real estate-multi-family
     191       372       —       77       —  
Consumer
                                        
Home equity and second mortgage
     47       81       —       7       —  
      2,380       2,732       —       1,040       —  
Total
   $ 7,404     $ 7,954     $ 2,226     $ 6,681     $ —  

 
 
 
42
TF Financial Corporation and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
December 31, 2013 and 2012
 

 
NOTE 7 — LOANS RECEIVABLE (Continued)


   
At December 31, 2012
  
   
Recorded investment
    
Unpaid principal balance
    
Related
allowance
    
Average recorded investment
    
Interest income recognized
  
With an allowance recorded:
  
(in thousands)
  
Residential
                              
Residential mortgages
   $ 2,137     $ 2,214     $ 218     $ 2,061     $ —  
Commercial
                                        
Real estate-commercial
     546       1,497       296       697       —  
Real estate-residential
     51       51       4       298       —  
Construction loans
     4,737       5,137       1,029       3,604       —  
Commercial and industrial loans
     —       —       —       2       —  
      7,471       8,899       1,547       6,662       —  
With no allowance recorded:
                                        
Residential
                                        
Residential mortgages
     —       —       —       698       —  
Commercial
                                        
Real estate-commercial
     552       552       —       1,012       —  
Real estate-residential
     —       —       —       216       —  
Construction loans
     57       116       —       1,932       —  
      609       668       —       3,858       —  
Total
   $ 8,080     $ 9,567     $ 1,547     $ 10,520     $ —  

 
 
 
43
TF Financial Corporation and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
December 31, 2013 and 2012
 

 
NOTE 7 — LOANS RECEIVABLE (Continued)
 
 
The following tables present by class the contractual aging of delinquent loans:

   
At December 31, 2013
  
   
Current
    
30-59
Days
past due
    
60-89
Days
past due
    
Loans
past due
90 days
or more
    
Total
past due
    
Total
loans
    
Recorded investment
over 90 days and accruing interest
  
   
(in thousands)
  
Residential
                                          
Residential mortgages
   $ 369,271     $ 111     $ —     $ 2,579     $ 2,690     $ 371,961     $ —  
Commercial
                                                        
Real estate-commercial
     127,786       785       —       774       1,559       129,345       —  
Real estate-residential
     18,589       180       340       896       1,416       20,005       —  
Real estate-multi-family
     16,432       —       —       191       191       16,623       —  
Construction loans
     5,596       —       —       3,177       3,177       8,773       —  
Commercial and industrial loans
     6,849       —       —       —       —       6,849       —  
Consumer
                                                        
Home equity and second mortgage
     63,543       355       4       300       659       64,202       —  
Other consumer
     1,686       7       4       —       11       1,697       —  
Total
   $ 609,752     $ 1,438     $ 348     $ 7,917     $ 9,703     $ 619,455     $ —  
 
   
At December 31, 2012
  
   
Current
    
30-59
Days
past due
    
60-89
Days
past due
    
Loans
past due
90 days
or more
    
Total
past due
    
Total
loans
    
Recorded investment
over 90 days and accruing interest
  
   
(in thousands)
  
Residential
                                          
Residential mortgages
   $ 319,982     $ 1,161     $ 329     $ 2,193     $ 3,683     $ 323,665     $ —  
Commercial
                                                        
Real estate-commercial
     102,868       800       —       1,098       1,898       104,766       —  
Real estate-residential
     21,488       31       —       51       82       21,570       —  
Real estate-multi-family
     19,118       —       —       —       —       19,118       —  
Construction loans
     11,494       —       —       4,794       4,794       16,288       —  
Commercial and industrial loans
     4,646       —       —       —       —       4,646       —  
Consumer
                                                        
Home equity and second mortgage
     39,842       34       124       143       301       40,143       —  
Other consumer
     1,824       —       3       8       11       1,835       —  
Total
   $ 521,262     $ 2,026     $ 456     $ 8,287     $ 10,769     $ 532,031     $ —  
 
 
44
TF Financial Corporation and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
December 31, 2013 and 2012
 

 
NOTE 7 — LOANS RECEIVABLE (Continued)
 
 
Activity in the allowance for loan losses is summarized as follows:
   
Balance
January 1,
2013
    
Provision
    
Charge-offs
    
Recoveries
    
Balance
December 31,
2013
  
   
(in thousands)
  
Residential
                              
Residential mortgages
   $ 1,849     $ 326     $ (465 )   $ 12     $ 1,722  
Commercial
                                        
Real estate-commercial
     1,754       (99 )     (435 )     —       1,220  
Real estate-residential
     608       (81 )     (90 )     —       437  
Real estate-multi-family
     245       (109 )     —       —       136  
Construction loans
     1,697       647       (150 )     14       2,208  
Commercial and industrial loans
     119       (21 )     (10 )     9       97  
Consumer
                                        
Home equity and second mortgage
     251       13       (58 )     8       214  
Other consumer
     11       60       (27 )     6       50  
Unallocated
     388       103       —       —       491  
Total
   $ 6,922     $ 839     $ (1,235 )   $ 49     $ 6,575  
 
   
Balance
January 1,
2012
    
Provision
    
Charge-offs
    
Recoveries
    
Balance
December 31,
2012
  
   
(in thousands)
  
Residential
                              
Residential mortgages
   $ 2,194     $ 367     $ (768 )   $ 56     $ 1,849  
Commercial
                                        
Real estate-commercial
     2,352       353       (951 )     —       1,754  
Real estate-residential
     369       726       (487 )     —       608  
Real estate-multi-family
     350       (105 )     —       —       245  
Construction loans
     1,830       1,049       (1,182 )     —       1,697  
Commercial and industrial loans
     138       115       (156 )     22       119  
Consumer
                                        
Home equity and second mortgage
     448       (104 )     (93 )     —       251  
Other consumer
     22       8       (23 )     4       11  
Unallocated
     397       (9 )     —       —       388  
Total
   $ 8,100     $ 2,400     $ (3,660 )   $ 82     $ 6,922  

 
 
 
45
TF Financial Corporation and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
December 31, 2013 and 2012
 

 
NOTE 7 — LOANS RECEIVABLE (Continued)

 
The following tables present by class the ending balance of the allowance for loan losses and ending loan balance based on the impairment method as of December 31, 2013. Acquired loans were recorded at fair value on their purchase date without a carryover of the related allowance for loan losses.

   
Evaluated for impairment
        
Allowance for loan losses
  
Loans
acquired
without
credit deterioration
    
Loans
acquired
with credit deterioration
    
Individually
    
Collectively
    
Total
  
   
(in thousands)
  
Residential
                              
Residential mortgages
   $ —     $ —     $ 128     $ 1,594     $ 1,722  
Commercial
                                        
Real estate-commercial
     —       —       —       1,220       1,220  
Real estate-residential
     —       —       77       360       437  
Real estate-multi-family
     —       —       —       136       136  
Construction loans
     —       —       2,021       187       2,208  
Commercial and industrial loans
     —       —       —       97       97  
Consumer
                                        
Home equity and second mortgage
     —       —       —       214       214  
Other consumer
     —       —       —       50       50  
Unallocated
     —       —       —       491       491  
Total
   $ —     $ —     $ 2,226     $ 4,349     $ 6,575  

 
 
 
46
TF Financial Corporation and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
December 31, 2013 and 2012
 

 
NOTE 7 — LOANS RECEIVABLE (Continued)

 
   
Evaluated for impairment
        
Loans receivable
  
Loans
acquired
without
credit deterioration
    
Loans
acquired
with credit deterioration
    
Individually
    
Collectively
    
Total
  
   
(in thousands)
  
Residential
                              
Residential mortgages
   $ 50,985     $ 22     $ 2,297     $ 318,657     $ 371,961  
Commercial
                                        
Real estate-commercial
     12,787       —       774       115,784       129,345  
Real estate-residential
     4,913       184       712       14,196       20,005  
Real estate-multi-family
     1,116       191       —       15,316       16,623  
Construction loans
     —       —       3,177       5,596       8,773  
Commercial and industrial loans
     279       —       —       6,570       6,849  
Consumer
                                        
Home equity and second mortgage
     24,806       47       —       39,349       64,202  
Other consumer
     126       —       —       1,571       1,697  
Total
   $ 95,012     $ 444     $ 6,960     $ 517,039     $ 619,455  
 
 
47
TF Financial Corporation and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
December 31, 2013 and 2012
 

 
NOTE 7 — LOANS RECEIVABLE (Continued)
 
 
The following tables present by class the ending balance of the allowance for loan losses and ending loan balance based on impairment method as of December 31, 2012:

   
Evaluated for impairment
        
Allowance for loan losses
  
Individually
    
Collectively
    
Total
  
   
(in thousands)
  
Residential
                  
Residential mortgages
   $ 218     $ 1,631     $ 1,849  
Commercial
                        
Real estate-commercial
     296       1,458       1,754  
Real estate-residential
     4       604       608  
Real estate-multi-family
     —       245       245  
Construction loans
     1,029       668       1,697  
Commercial and industrial loans
     —       119       119  
Consumer
                        
Home equity and second mortgage
     —       251       251  
Other consumer
     —       11       11  
Unallocated
     —       388       388  
Total
   $ 1,547     $ 5,375     $ 6,922  
 
   
Evaluated for impairment
        
Loans receivable
  
Individually
    
Collectively
    
Total
  
   
(in thousands)
  
Residential
                  
Residential mortgages
   $ 2,137     $ 321,528     $ 323,665  
Commercial
                        
Real estate-commercial
     1,098       103,668       104,766  
Real estate-residential
     51       21,519       21,570  
Real estate-multi-family
     —       19,118       19,118  
Construction loans
     4,794       11,494       16,288  
Commercial and industrial loans
     —       4,646       4,646  
Consumer
                        
Home equity and second mortgage
     —       40,143       40,143  
Other consumer
     —       1,835       1,835  
Total
   $ 8,080     $ 523,951     $ 532,031  

 
 
 
48
TF Financial Corporation and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
December 31, 2013 and 2012
 

 
NOTE 7 — LOANS RECEIVABLE (Continued)
 
 
The following table presents by class loans classified as TDRs segregated for the periods indicated:

   
For the year ended
December 31, 2013
    
For the year ended
December 31, 2012
  
   
Number
of
Contracts
  
Pre-
Modification Outstanding Recorded Investment
  
Post
Modification Outstanding Recorded Investment
  
Number
of
 Contracts
  
Pre-
Modification Outstanding Recorded Investment
  
Post
Modification Outstanding Recorded Investment
Residential
  
(dollars in thousands)
  
Residential mortgage
     0     $ —     $ —       2     $ 950     $ 923  
Total
     0     $ —     $ —       2     $ 950     $ 923  
 
The following table presents loans classified as TDRs that subsequently defaulted:

   
For the year ended
December 31, 2013
  
   
Number of Contracts
  
Recorded Investment
  
Residential
  
(in thousands)
  
Residential mortgage
     1     $ 337  
Total
     1     $ 337  

There were no TDRs modified during 2012 that subsequently defaulted. However, a TDR identified in 2011 was in default of its modified terms and was subsequently discharged in a short sale during 2012 with a $40,000 loss charged to the allowance for loan losses.

The carrying value of the loans acquired and accounted for in accordance with ASC 310-30 was determined by projecting discounted contractual cash flows. The table below presents the components of the purchase accounting adjustments related to the purchased impaired loans acquired in the Roebling acquisition as of July 2, 2013:

   
At July 2, 2013
  
   
(in thousands)
  
Unpaid principal balance
   $ 1,320  
Interest
     638  
Contractual cash flows
     1,958  
Non-accretable discount
     (963 )
Expected cash flows
     995  
Accretable discount
     (198 )
Estimated fair value
   $ 797  

 
 
 
49
TF Financial Corporation and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
December 31, 2013 and 2012
 

 
NOTE 7 — LOANS RECEIVABLE (Continued)
 
 
Changes in the amortizable yield for purchased credit-impaired loans were as follows for the year ended December 31, 2013:
 
   
At December 31, 2013
  
   
(in thousands)
  
Balance at beginning of period
   $ —  
Acquisition of impaired loans
     198  
Accretion
     (44 )
Balance at end of period
   $ 154  

The following table presents additional information regarding loans acquired and accounted for in accordance with ASC 310-30:

 
At July 2, 2013
    
At December 31, 2013
 
Acquired Loans with
  
Acquired Loans with
 
Specific Evidence of
  
Specific Evidence of
 
Deterioration in Credit
  
Deterioration in Credit
 
Quality (ASC 310-30)
  
Quality (ASC 310-30)
 
(in thousands)
  
Outstanding balance
 $                                   1,958
   $
1,508
  
Carrying amount
                                         797
    
                                         444
  

There has been no allowance for loan losses recorded for acquired loans with or without specific evidence of deterioration in credit quality as of December 31, 2013.

The Bank had no concentration of loans to borrowers engaged in similar activities that exceeded 10% of loans at December 31, 2013 and 2012. In the ordinary course of business, the Bank has granted loans to certain executive officers, directors and their related interests. Related party loans are made on substantially the same terms as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than the normal risk of collectability. The aggregate dollar amount of these loans was approximately $210,000 and $125,000 at December 31, 2013 and 2012, respectively. Acquired loans to related parties totaled $188,000 during 2013. For the year ended December 31, 2013, principal repayments of $103,000 of related party loans were received. Unused lines of credit available were $360,000 at December 31, 2013 and 2012.

 
 
 
50
TF Financial Corporation and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
December 31, 2013 and 2012
 

 
NOTE 8 — LOAN SERVICING
 
 
Mortgage loans serviced for others are not included in the accompanying Consolidated Balance Sheets. The unpaid principal balances of these loans are summarized as follows:

   
At December 31,
  
   
2013
    
2012
  
   
(in thousands)
  
Mortgage loan servicing portfolios
            
FHLMC
   $ 154     $ 235  
FNMA
     150,670       127,677  
Other investors
     10,717       8,294  
    $ 161,541     $ 136,206  

Custodial balances maintained in connection with the foregoing loan servicing totaled approximately $1.7 million and $2.8 million and are included as deposits at December 31, 2013 and 2012, respectively. Net servicing revenue/(loss) on mortgage loans serviced for others was $338,000 and $(66,000) for the years ended December 31, 2013 and 2012, respectively.
 
NOTE 9 — PREMISES AND EQUIPMENT
 
Premises and equipment are summarized as follows:

  Estimated  
At December 31,
  
  useful lives  
2013
    
2012
  
     
(in thousands)
  
               
Buildings
30 years
   $ 9,559     $ 7,614  
Leasehold improvements
5-10 years
     3,216       3,243  
Furniture, fixtures and equipment
3-7 years
     7,320       7,292  
        20,095       18,149  
Less accumulated depreciation
       13,788       13,640  
        6,307       4,509  
Land
       2,309       1,599  
      $ 8,616     $ 6,108  

The Company recognized depreciation expense of $672,000 and $781,000 for the years ended December 31, 2013 and 2012, respectively.

 
 
 
51
TF Financial Corporation and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
December 31, 2013 and 2012
 

 
NOTE 10 — DEPOSITS
 
 
Deposits are summarized as follows:

   
At December 31,
  
   
2013
    
2012
  
   
(in thousands)
  
Deposit Type
            
             
Noninterest-bearing checking
   $ 68,133     $ 52,433  
Interest-bearing checking
     114,184       76,370  
Money market
     180,215       153,827  
Passbook savings
     130,878       106,268  
Total checking and passbook deposits
     493,410       388,898  
Certificates of deposit
     190,492       171,417  
    $ 683,902     $ 560,315  

The aggregate amount of certificates of deposit with a minimum denomination of $100,000 was approximately $47.9 million and $50.7 million at December 31, 2013 and 2012, respectively.
 
At December 31, 2013, scheduled maturities of certificates of deposit by year are as follows:
 
Maturity year
  
2014
    
2015
    
2016
    
2017
    
2018
    
Thereafter
    
Total
  
(in thousands)
  
$ 129,723     $ 35,829     $ 11,901     $ 7,172     $ 5,737     $ 130     $ 190,492  

Related party deposits are on substantially the same terms as are comparable transactions with unrelated persons. Related parties include certain executive officers, directors and their related interests. The aggregate dollar amount of these deposits was approximately $5.3 million and $5.0 million at December 31, 2013 and 2012, respectively.

 
 
 
52
TF Financial Corporation and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
December 31, 2013 and 2012
 

 
NOTE 11 — ADVANCES FROM THE FHLB
 
 
Advances from the FHLB consist of the following:
 
   
At December 31,
  
   
2013
    
2012
  
Principal payments due during
        
Weighted
          
Weighted
  
   
Amount
    
average rate
    
Amount
    
average rate
  
   
(in thousands)
  
                         
2013
   $ —       — %   $ 11,051       3.18 %
2014
     4,287       2.40 %     4,287       2.40 %
2015
     3,669       2.16 %     3,669       2.16 %
2016
     10,887       1.38 %     10,887       1.38 %
2017
     14,895       1.12 %     14,895       1.12 %
2018
     1,330       1.87 %     1,330       1.87 %
Thereafter
     14,537       1.83 %     14,537       1.83 %
    $ 49,605       1.59 %   $ 60,656       1.88 %

The advances are collateralized by certain first mortgage loans totaling approximately $353.5 million and the FHLB stock owned by the Bank which allow for a maximum borrowing capacity of $271.1 million. Total unused lines of credit at the FHLB were $60.0 million at December 31, 2013. All of the advances from the FHLB are fixed rate, fixed term.

NOTE 12 — BENEFIT PLANS
 
a.           Defined Contribution Plan
 
The Bank maintains a 401(k) profit-sharing plan for eligible employees. Participants may contribute up to 50% of pretax eligible compensation. The Bank makes matching discretionary contributions equal to 75% of the initial $1,000 deferral. Matching contributions to the 401(k) plan totaled $75,000 and $78,000 for the years ended December 31, 2013 and 2012, respectively.
 
b.           Defined Benefit Plan
 
The Bank has a noncontributory defined benefit pension plan covering substantially all full-time employees meeting certain eligibility requirements. The benefits are based on each employee’s years of service and an average earnings formula. An employee becomes fully vested upon completion of five years of qualifying service.
 
 
 
 
53
TF Financial Corporation and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
December 31, 2013 and 2012
 

 
NOTE 12 — BENEFIT PLANS (Continued)
 
 
The following tables set forth the projected benefit obligation, the fair value of assets of the plan and funded status of the defined benefit pension plan as reflected in the Consolidated Balance Sheets:

 
   
At December 31,
  
   
2013
    
2012
  
   
(in thousands)
  
Reconciliation of projected benefit obligation
            
Benefit obligation at beginning of year
   $ 8,940     $ 8,045  
Service cost
     823       736  
Interest cost
     355       360  
Actuarial (gain) loss
     (1,116 )     339  
Amendments
     —       —  
Benefits paid
     (769 )     (540 )
Benefit obligation at end of year
   $ 8,233     $ 8,940  
                 
Reconciliation of fair value of assets
                
Fair value of plan assets at beginning of year
   $ 9,767     $ 8,006  
Actual return on plan assets
     1,593       801  
Employer contribution
     654       1,500  
Benefits paid
     (769 )     (540 )
Fair value of plan assets at end of year
   $ 11,245     $ 9,767  
Funded status at end of year
   $ 3,012     $ 827  

The accumulated benefit obligation at December 31, 2013 and 2012 was $7.1 million and $8.1 million, respectively.

Employer contributions and benefits paid in the above table include only those amounts contributed directly to, or paid directly from, plan assets. No employer contribution is anticipated for 2014.

The following table sets forth the amounts recognized in accumulated other comprehensive income (loss) for the years ended:
 
   
 At December 31,
  
   
2013
    
2012
  
   
(in thousands)
  
             
Net loss
   $ (2,028 )   $ (4,270 )
Prior service cost
     (23 )     (27 )
Total
   $ (2,051 )   $ (4,297 )

The net gain recognized in accumulated other comprehensive income (loss) as an adjustment to the funded status of the plan was $2.2 million and $103,000 at December 31, 2013 and 2012, respectively. The amounts expected to be amortized from accumulated other comprehensive income in 2014 is $76,000 of net actuarial gain and prior service cost.

 
 
 
54
TF Financial Corporation and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
December 31, 2013 and 2012
 

 
NOTE 12 — BENEFIT PLANS (Continued)
 
 
   
At December 31,
  
   
2013
    
2012
  
             
Weighted-average assumptions used to determine benefit obligations:
            
Discount rate
     5.00 %     4.00 %
Rate of compensation increase
     3.00 %     3.00 %
 
 
 
   
For the years ended
December 31,
  
   
2013
    
2012
  
   
(in thousands)
  
Components of net periodic benefit cost
            
Service cost
   $ 823     $ 736  
Interest cost
     355       360  
Expected return on plan assets
     (728 )     (644 )
Amortization of prior service cost
     2       2  
Recognized net actuarial loss
     262       283  
Net periodic benefit cost
   $ 714     $ 737  
 
 
 
For the years ended
December 31,
 
2013
  
2012
       
Weighted-average assumptions used to determine net benefit costs:
      
Discount rate
4.00%
  
4.50%
Expected return on plan assets
7.50%
  
8.00%
Rate of compensation increase
3.00%
  
4.00%

The long-term expected rate of return used for the plan year 2013 was determined by analyzing average rates of return over a number of prior periods on the assets in which the plan is currently invested.
 
Estimated future benefits payments are as follows:

Year ending December 31,
  
Amount
  
   
(in thousands)
  
2014
   $ 202  
2015
     234  
2016
     277  
2017
     282  
2018
     319  
2019-2023
     2,058  

The financial statements of the Company’s defined benefit pension plan are prepared in conformity with US GAAP. Investments of the plan are stated at fair value. Purchases and sales of securities are recorded on a trade

 
 
 
55
TF Financial Corporation and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
December 31, 2013 and 2012
 

 
NOTE 12 — BENEFIT PLANS (Continued)


date basis. Interest income is recorded on an accrual basis. Dividends are recorded on the ex-dividend date. Fair value of plan assets is determined using the fair value hierarchy discussed in Note 18 - Fair Value Measurements and Fair Value of Financial Instruments. The fair value hierarchy requires the plan to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value and provides three levels of inputs that may be used to measure fair value.
 
The following table sets forth by level, within the fair value hierarchy, the plan’s financial assets at fair value as of December 31, 2013:
 
                     
Balance as of
  
   
Fair value hierarchy levels
    
December 31,
  
   
Level 1
    
Level 2
    
Level 3
    
2013
  
   
(in thousands)
  
Assets
                        
Collective investment trust funds
   $ —     $ 11,245     $ —     $ 11,245  
Total plan assets at fair value
   $ —     $ 11,245     $ —     $ 11,245  


The following table sets forth by level, within the fair value hierarchy, the plan’s financial assets at fair value as of December 31, 2012:
 
                     
Balance as of
  
   
Fair value hierarchy levels
    
December 31,
  
   
Level 1
    
Level 2
    
Level 3
    
2012
  
   
(in thousands)
  
Assets
                        
Collective investment trust funds
   $ —     $ 9,767     $ —     $ 9,767  
Total plan assets at fair value
   $ —     $ 9,767     $ —     $ 9,767  

Collective investment trust funds are valued by the trustee. The trustee follows written procedures for establishing unit values on a periodic basis which incorporate observable market data; however the collective investment trust fund itself is not traded on an established market and therefore is categorized as a Level 2 hierarchy.

The plan’s weighted-average asset allocations by asset category are as follows:

 
Percentage of plan assets
at December 31,
 
2013
    
2012
  
Asset Category
          
Collective investment trust funds
    100.00
%
  
    100.00
%
Total
    100.00
%
  
    100.00
%
 
Trustees of the plan are responsible for defining and implementing the investment objectives and policies for the plan’s assets. Assets are invested in accordance with sound investment practices that emphasize long-term investment fundamentals that closely match the demographics of the plan’s participants. The plan’s goal is to earn long-term returns that match or exceed the benefit obligations of the plan, giving consideration to the timing of expected future benefit payments, through a well-diversified portfolio structure. The plan’s return objectives and risk

 
 
 
56
TF Financial Corporation and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
December 31, 2013 and 2012
 

 
NOTE 12 — BENEFIT PLANS (Continued)


parameters are managed through a diversified mix of assets and targeted allocation percentage ranges. The asset mix and investment strategy are reviewed on a quarterly basis and rebalanced based on the actual percentage in comparison to the targeted range.
 
c.           ESOP
 
The Company has an internally leveraged ESOP for eligible employees who have completed six months of service with the Company or its subsidiaries. The ESOP borrowed $4.2 million from the Company in 1996 to purchase 423,200 newly issued shares of common stock. Any dividends received by the ESOP will be used to pay debt service. The Company makes discretionary contributions to the ESOP in order to service the ESOP’s debt if necessary. The ESOP shares are pledged as collateral for its debt. As the debt is repaid, shares are released from collateral based on the proportion of debt service paid in the year and allocated to qualifying employees. The Company reports compensation expense in the amount equal to the fair value of shares allocated from the ESOP to employees less dividends received on the allocated shares in the plan used for debt service. The allocated shares are included in outstanding shares for earnings per share computations. ESOP compensation expense included in stock-based compensation totaled $284,000 and $286,000 for the years ended December 31, 2013 and 2012, respectively.

   
At December 31,
  
   
2013
    
2012
  
             
Allocated shares
     187,000       184,000  
Unreleased shares
     90,000       103,000  
Total ESOP shares
     277,000       287,000  
Fair value of unreleased shares (in thousands)
   $ 2,534     $ 2,446  

 d.           Stock-Based Compensation Plans
 
A summary of the status of the Company’s stock option plans as of December 31, 2013 and 2012, and changes for each of the years then ended, is as follows:

   
2013
    
2012
  
   
Number
of
shares
    
Weighted average
exercise
price per
share
    
Number
of
shares
    
Weighted average
exercise
price per
share
  
                         
Outstanding at beginning of year
     89,279     $ 24.08       109,765     $ 24.41  
Options granted
     205,000       24.28       —       —  
Options exercised
     (8,547 )     25.24       (315 )     19.67  
Options forfeited
     (4,271 )     27.10       (1,904 )     28.59  
Options expired
     (27,317 )     28.19       (18,267 )     25.68  
Outstanding at end of year
     254,144       23.71       89,279       24.08  
Options exercisable
     50,644     $ 21.41       80,652     $ 24.55  

 
 
 
57
TF Financial Corporation and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
December 31, 2013 and 2012
 

 
NOTE 12 — BENEFIT PLANS (Continued)

 
The following table summarizes information about stock options outstanding at December 31, 2013:

     
Options outstanding
    
Options exercisable
  
Range of exercise prices
    
Number
    
Weighted
average
remaining
contractual
life (years)
  
Weighted
average
exercise
price
    
Number
    
Weighted
average
exercise
price
  
$ 19.67 - 26.90       254,144       2.81     $ 23.71       50,644     $ 21.41  
 
The following table reflects information on the aggregate intrinsic value of options as well as cash receipts from option exercises:

   
For the years ended
December 31,
  
   
2013
    
2012
  
   
(in thousands)
  
Aggregate intrinsic value of
            
Options outstanding
   $ 1,132     $ 179  
Options exercisable
     342       144  
Options exercised
     5       1  
Cash receipts
     216       7  

The aggregate intrinsic value represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the year and the exercise price, multiplied by the number of exercisable in-the-money options). The Company has a policy of issuing shares from treasury to satisfy share option exercises.
 
Stock-based compensation expense related to stock options resulted in a tax benefit of $94,000 and $9,000, for the years ended December 31, 2013 and 2012, respectively. There was $340,000 of total unrecognized compensation cost, net of estimated forfeitures, related to non-vested options under the stock option plans at December 31, 2013. That cost is expected to be recognized over a weighted average period of 7 months at December 31, 2013.

The following table provides information regarding the Company’s stock-based compensation expense associated with stock options and grants:

   
For the years ended
December 31,
  
   
2013
    
2012
  
   
(in thousands)
  
Stock-based compensation expense
            
Director fees
   $ 145     $ 149  
Stock option expense
     312       27  
Total stock-based compensation expense
   $ 457     $ 176  

 
 
 
58
TF Financial Corporation and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
December 31, 2013 and 2012
 

 
NOTE 13 — INCOME TAXES
 
 
The components of income tax expense are summarized as follows:
 
   
For the years ended December 31,
  
   
2013
    
2012
  
   
(in thousands)
  
Federal
            
Current
   $ 1,822     $ 524  
Deferred
     (75 )     1,194  
      1,747       1,718  
State and local – current
     210       7  
Income tax provision
   $ 1,957     $ 1,725  
 
The Company’s effective income tax rate was different than the statutory federal income tax rate as follows:
 
 
For the years ended December 31,
  
 
2013
    
2012
  
           
Statutory federal income tax
               34.0
%
  
               34.0
%
(Decrease) increase resulting from
          
Tax-exempt income
               (8.1)
    
             (10.3)
  
State tax, net of federal benefit
                 1.6
    
                 0.1
  
Other
               (4.6)
    
                 0.5
  
 
               22.9
%
  
               24.3
%

Deferred taxes are included as other liabilities in the accompanying Consolidated Balance Sheets at December 31, 2013 and 2012, for the estimated future tax effects of differences between the financial statement and federal income tax bases of assets and liabilities according to the provisions of currently enacted tax laws. No valuation allowance was established at December 31, 2013 and 2012, in view of the Company’s ability to carry back to taxes paid in previous years and certain tax strategies, coupled with the anticipated future taxable income as evidenced by the Company’s earnings potential.

 
 
 
59
TF Financial Corporation and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
December 31, 2013 and 2012
 

 
NOTE 13 — INCOME TAXES (Continued)

 
The Company’s net deferred tax liability was as follows:
 
   
At December 31,
  
   
2013
    
2012
  
   
(in thousands)
  
Deferred tax assets
            
Deferred compensation
   $ 484     $ 138  
Allowance for loan losses, net
     2,236       2,353  
Stock compensation
     147       78  
Adjustment to record funded status of pension plan
     697       1,462  
Nonaccrual interest
     209       333  
Adjustment for real estate acquired thru foreclosure
     —       20  
Acquisition related
     355       —  
Net operating loss carryforward acquired
     327       —  
Other
     18       5  
    $ 4,473     $ 4,389  
                 
Deferred tax liabilities
                
Accrued pension expense
   $ 1,721     $ 1,704  
Unrealized gain on securities available for sale
     90       1,960  
Prepaid expenses
     51       151  
Deferred loan costs
     1,123       1,172  
Amortization of goodwill
     1,470       1,470  
Fixed assets
     580       296  
      5,035       6,753  
Net deferred tax liability
   $ (562 )   $ (2,364 )

The Company files consolidated income tax returns on the basis of a calendar year. The Company is subject to income taxes in the U.S. federal jurisdiction, and various state and local jurisdictions, with the majority of activity occurring in Pennsylvania. The statute of limitations for the federal return has expired on years prior to 2010. The expirations of the statutes of limitations related to the various state income tax returns that the Company and its subsidiaries file, vary by state, and are expected to expire over the term of 2014 through 2018. There are no material uncertain tax positions at December 31, 2013.
 
The Bank is not required to recapture approximately $5.7 million of its tax bad debt reserve, attributable to bad debt deductions taken by it prior to 1988, as long as the Bank continues to operate as a bank under federal tax law and does not use the reserve for any other purpose. The Bank has not recorded any deferred tax liability on this portion of its tax bad debt reserve. The tax that would be paid were the Bank ultimately required to recapture that portion of the reserve would amount to approximately $1.9 million.

 
 
 
60
TF Financial Corporation and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
December 31, 2013 and 2012
 

 
NOTE 14 — REGULATORY MATTERS
 
 
The Bank is subject to various regulatory capital requirements administered by the FDIC and the Pennsylvania Department of Banking. Failure to meet minimum capital requirements can initiate certain mandatory, and possible additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items, as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

The Bank’s actual capital amounts and ratios are presented in the following table:
   
Actual
    
For capital adequacy
purposes
    
To be well capitalized
under prompt
corrective action
provision
  
   
Amount
    
Ratio
    
Amount
    
Ratio
    
Amount
    
Ratio
  
                                     
At December 31, 2013
                                    
Tangible capital (to tangible assets)
   $ 86,550       10.35 %   $ 12,544       1.50 %   $ —       N/A  
Core capital (to adjusted  tangible assets)
     86,550       10.35 %     33,450       4.00 %     41,812       5.00 %
Tier 1 capital (to risk weighted assets)
     86,550       16.23 %     21,334       4.00 %     32,001       6.00 %
Total Risk
     93,125       17.46 %     42,668       8.00 %     53,336       10.00 %
                                                 
At December 31, 2012
                                                
Tangible capital (to tangible assets)
     73,612       10.45 %     10,562       1.50 %     —       N/A  
Core capital (to adjusted  tangible assets)
     73,612       10.45 %     28,164       4.00 %     35,206       5.00 %
Tier 1 capital (to risk weighted assets)
     73,612       16.63 %     17,703       4.00 %     26,555       6.00 %
Total Risk
     79,161       17.89 %     35,407       8.00 %     44,259       10.00 %
 
At December 31, 2013 and 2012, the Bank exceeded all regulatory requirements for classification as a “well-capitalized” institution. A “well-capitalized” institution must have risk-based capital of 10% and core capital of 5%. There are no conditions or events that have occurred that management believes have changed the Bank’s classification as a “well-capitalized” institution.
 
The Bank maintains a liquidation account for the benefit of eligible savings account holders who maintained deposit accounts in the Bank at the time the Bank converted to a stock form of ownership and who continue as depositors. The Bank may not declare or pay a cash dividend on or repurchase any of its common shares if the effect thereof would cause the Bank’s stockholders’ equity to be reduced below either the amount required for the liquidation account or the regulatory capital requirements for insured institutions.

 
 
 
61
TF Financial Corporation and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
December 31, 2013 and 2012
 

 
NOTE 15 — FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
 
 
The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments are primarily commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the Consolidated Balance Sheets when they become receivable or payable. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Consolidated Balance Sheets. The contract or notional amounts of those instruments reflect the extent of the Bank’s involvement in particular classes of financial instruments.
 
The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.
 
Unless noted otherwise, the Company requires collateral to support financial instruments with credit risk.
 
Financial instruments, the contract amounts of which represent credit risk, are as follows:

   
At December 31,
  
   
2013
    
2012
  
   
(in thousands)
  
             
Commitments to extend credit
   $ 77,663     $ 74,571  
Standby letters of credit
     856       780  
Loans sold with recourse
     -       50  
    $ 78,519     $ 75,401  

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if it is deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the borrower. Collateral held generally includes residential or commercial real estate.
 
Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
 
NOTE 16 — COMMITMENTS AND CONTINGENCIES
 
The Bank had optional commitments of $1.7 million and $7.5 million to sell mortgage loans to investors at December 31, 2013 and 2012, respectively.
 
The Bank leases branch facilities and office space for periods ranging up to ten years. These leases are classified as operating leases and contain options to renew for additional periods. Rental expense was approximately $594,000 and $554,000 for the years ended December 31, 2013 and 2012, respectively.

 
 
 
62
TF Financial Corporation and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
December 31, 2013 and 2012
 

 
NOTE 16 — COMMITMENTS AND CONTINGENCIES (Continued)

 
The minimum annual rental commitments of the Bank under all noncancelable leases with terms of one year or more at December 31, 2013 are as follows:

Year ending December 31,
  
2013
  
   
(in thousands)
  
2014
   $ 489  
2015
     399  
2016
     329  
2017
     294  
2018
     294  
Thereafter
     888  
Total
   $ 2,693  

The Company has agreements with certain key executives that provide severance pay benefits if there is a change in control of the Company. The agreements will continue in effect until terminated or not renewed by the Company or key executives. In the event that the employment of certain executives is not continued following a change in control, the Company will make a lump-sum payment and reimburse the executives for certain benefits for one year. The contingent liability under the agreements at December 31, 2013 was approximately $2.2 million.
 
From time to time, the Company and its subsidiaries are parties to routine litigation that arises in the normal course of business. In the opinion of management, the resolution of these lawsuits would not have a material adverse effect on the Company’s consolidated financial position or results of operations.
 
NOTE 17 — SIGNIFICANT CONCENTRATIONS OF CREDIT RISK
 
The Bank is principally engaged in originating and investing in one-to four-family residential real estate and commercial real estate loans in eastern Pennsylvania and New Jersey. The Bank offers both fixed and adjustable rates of interest on these loans that have amortization terms ranging to 30 years. The loans are generally originated or purchased on the basis of an 80% or less loan-to-value ratio, which has historically provided the Bank with more than adequate collateral coverage in the event of default. Nevertheless, the Bank, as with any lending institution, is subject to the risk that real estate values in the primary lending area will deteriorate, thereby potentially impairing underlying collateral values. However, management believes that weakened residential and commercial real estate values have been taken into consideration and that the loan loss allowances have been provided for in amounts commensurate with its current perception of the foregoing risks in the portfolio.

 
 
 
63
TF Financial Corporation and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
December 31, 2013 and 2012
 

 
NOTE 18 — FAIR VALUE MEASUREMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS


The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring basis as of December 31, 2013 and 2012. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement hierarchy has been established for inputs in valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).
 
The fair value hierarchy levels are summarized below:

·           Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.
·           Level 2 inputs are inputs that are observable for the asset or liability, either directly or indirectly.
·           Level 3 inputs are unobservable and contain assumptions of the party fair valuing the asset or liability.

Determination of the appropriate level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement for the instrument or security. Assets and liabilities measured at fair value on a recurring basis segregated by fair value hierarchy level are summarized below:
 
                     
Balance as of
  
   
Fair value hierarchy levels
    
December 31,
  
   
Level 1
    
Level 2
    
Level 3
    
2013
  
   
(in thousands)
  
Assets
                        
Investment securities available for sale
                        
U.S. Government and federal agencies
   $ —     $ 18,063     $ —     $ 18,063  
State and political subdivisions
     —       60,669       —       60,669  
Residential mortgage-backed
     securities issued by quasi-governmental agencies
     —       45,280       —       45,280  
Total investment securities available for sale
   $ —     $ 124,012     $ —     $ 124,012  
                                 
Loans receivable, held for sale
   $ —     $ 349     $ —     $ 349  
 
                     
Balance as of
  
   
Fair value hierarchy levels
    
December 31,
  
   
Level 1
    
Level 2
    
Level 3
    
2012
  
   
(in thousands)
  
Assets
                        
Investment securities available for sale
                        
State and political subdivisions
   $ —     $ 59,610     $ —     $ 59,610  
Residential mortgage-backed
     securities issued by quasi-governmental agencies
     —       42,674       —       42,674  
Total investment securities available for sale
   $ —     $ 102,284     $ —     $ 102,284  
                                 
Loans receivable, held for sale
   $ —     $ 706     $ —     $ 706  
 
 
64
TF Financial Corporation and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
December 31, 2013 and 2012
 

 
NOTE 18 — FAIR VALUE MEASUREMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
 
 
Investment and mortgage-backed securities available for sale are valued primarily by a third party pricing agent. U.S. Government and federal agency securities are primarily priced through a multidimensional relational model, a Level 2 hierarchy, which incorporates dealer quotes and other market information including, defined sector breakdown, benchmark yields, base spread, yield to maturity, and corporate actions. State and political subdivision securities are also valued within the Level 2 hierarchy using inputs with a series of matrices that reflect benchmark yields, ratings updates, and spread adjustments. Mortgage-backed securities include GNMA, FHLMC, and FNMA certificates and privately issued real estate mortgage investment conduits which are valued under a Level 2 hierarchy using a matrix correlation to benchmark yields, spread analysis, and prepayment speeds.

Values for loans held for sale utilize active pricing quotes which exist in the secondary market and are therefore deemed a Level 2 hierarchy.

Assets and liabilities measured at fair value on a nonrecurring basis segregated by fair value hierarchy level at December 31, 2013 are summarized below:
 
                     
Balance as of
  
   
Fair value hierarchy levels
    
December 31,
  
   
Level 1
    
Level 2
    
Level 3
    
2013
  
   
(in thousands)
  
Impaired loans
   $ —     $ —     $ 5,178     $ 5,178  
Real estate acquired through foreclosure
     —       —       5,601       5,601  
Mortgage servicing rights
     —       1,472       —       1,472  

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Bank has utilized Level 3 inputs to determine fair value at December 31, 2013:

   
Fair value
  
Valuation
Unobservable
  
Range of
  
Description
  
estimate
  
technique
Input
  
inputs
  
 
(in thousands)
            
                 
Impaired loans
   $ 5,178  
 Appraisal of collateral (1)
 Discount rate to reflect current market conditions and ultimate recoverability
     5%-15 %
Real estate acquired through foreclosure
     5,601  
 Appraisal of collateral (1)
 Discount rate to reflect current market conditions and liquidation expenses
     5%-20 %
 
(1)  
Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.

 
 
 
65
TF Financial Corporation and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
December 31, 2013 and 2012
 

 
NOTE 18 — FAIR VALUE MEASUREMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
 

Assets and liabilities measured at fair value on a nonrecurring basis segregated by fair value hierarchy level at December 31, 2012 are summarized below:

                     
Balance as of
  
   
Fair value hierarchy levels
    
December 31,
  
   
Level 1
    
Level 2
    
Level 3
    
2012
  
   
(in thousands)
  
Impaired loans
   $ —     $ —     $ 6,533     $ 6,533  
Real estate acquired through foreclosure
     —       —       7,282       7,282  
Mortgage servicing rights
     —       956       —       956  

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Bank has utilized Level 3 inputs to determine fair value at December 31, 2012:

   
Fair value
  
Valuation
Unobservable
  
Range of
  
Description
  
estimate
  
technique
Input
  
inputs
  
 
(in thousands)
            
                 
Impaired loans
   $ 6,533  
 Appraisal of collateral (1)
 Discount rate to reflect current market conditions and ultimate recoverability
     5%-15 %
Real estate acquired through foreclosure
     7,282  
 Appraisal of collateral (1)
 Discount rate to reflect current market conditions and liquidation expenses
     5%-20 %
 
(1)  
Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.

The fair value of impaired loans is generally determined through independent appraisals of the underlying collateral, which generally include Level 3 inputs that are not identifiable. Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. Impaired loans are evaluated and valued while the loan is identified as impaired, at the lower of the recorded investment in the loan or fair value. The range and weighted average of liquidation expenses are presented as a percent of the appraised value. The significant unobservable inputs used in the fair value measurements of the Company’s impaired loans using discounted cash flow valuation technique include temporary changes in payment amounts and the probability of default. Significant increases (decreases) in payment amounts would result in significantly higher (lower) fair value measurements.  
 
 
 
 
66
TF Financial Corporation and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
December 31, 2013 and 2012
 

 
NOTE 18 — FAIR VALUE MEASUREMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
 

Real estate acquired through foreclosure is initially valued at the lower of the recorded investment in the loan or fair value at foreclosure and subsequently adjusted for further decreases in market value, if necessary. Fair value is determined by using the value of the real estate acquired through foreclosure based on appraisals prepared by qualified independent licensed appraisers contracted by the Company to perform the assessment and is therefore classified as a Level 3 hierarchy. 

The Company retains a qualified valuation service to calculate the amortized cost and to determine the fair value of the mortgage servicing rights. The valuation service utilizes discounted cash flow analyses adjusted for prepayment speeds, market discount rates and conditions existing in the secondary servicing market. Hence, the fair value of mortgage servicing rights is deemed a Level 2 hierarchy. The amortized cost basis of the Company’s mortgage servicing rights was $1.5 million and $1.3 million at December 31, 2013 and 2012, respectively. The fair value of the mortgage servicing rights was $1.5 million and $956,000 at December 31, 2013 and 2012, respectively.
 
In addition to financial instruments recorded at fair value in the Company’s financial statements, disclosure of the estimated fair value of all of an entity’s assets and liabilities considered to be financial instruments is also required. For the Bank, as for most financial institutions, the majority of its assets and liabilities are considered financial instruments. However, many such instruments lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction. Also, it is the Company’s general practice and intent to hold its financial instruments to maturity and to not engage in trading or significant sales activities. For fair value disclosure purposes, the Company substantially utilized the established fair value measurement hierarchy.
 
Changes in the assumptions or methodologies used to estimate fair values may materially affect the estimated amounts. In addition, there may not be reasonable comparability between institutions due to the wide range of permitted assumptions and methodologies in the absence of active markets. This lack of uniformity gives rise to a high degree of subjectivity in estimating financial instrument fair values.
 
Fair values have been estimated using data which management considered the best available, as generally provided by estimation methodologies deemed suitable for the pertinent category of financial instrument. The recorded carrying amounts and fair values segregated by fair value hierarchy level at December 31, 2013 are summarized below:
 
   
Carrying
    
Fair
    
Fair value hierarchy levels
  
   
value
    
value
    
Level 1
    
Level 2
    
Level 3
  
Assets
  
(in thousands)
  
Cash and cash equivalents
   $ 45,310     $ 45,310     $ 45,310     $ —     $ —  
Investment securities
     78,732       78,732       —       78,732       —  
Mortgage-backed securities
     46,770       46,960       —       46,960       —  
Loans receivable, net
     614,517       614,246       —       349       613,897  
                                         
Liabilities
                                        
Deposits with stated maturities
   $ 190,492     $ 193,258     $ —     $ —     $ 193,258  
Deposits with no stated maturities
     493,410       493,410       493,410       —       —  
Borrowings with stated maturities
     49,605       48,426       —       —       48,426  

 
 
 
67
TF Financial Corporation and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
December 31, 2013 and 2012
 

 
NOTE 18 — FAIR VALUE MEASUREMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
 

The recorded carrying amounts and fair values at December 31, 2012 are summarized below:

   
Carrying
    
Fair
    
Fair value hierarchy levels
  
   
value
    
value
    
Level 1
    
Level 2
    
Level 3
  
Assets
  
(in thousands)
  
Cash and cash equivalents
   $ 31,137     $ 31,137     $ 31,137     $ —     $ —  
Investment securities
     59,610       59,610       —       59,610       —  
Mortgage-backed securities
     44,639       44,945       —       44,945       —  
Loans receivable, net
     527,426       539,665       —       706       538,959  
                                         
Liabilities
                                        
Deposits with stated maturities
   $ 171,417     $ 175,025     $ —     $ —     $ 175,025  
Deposits with no stated maturities
     388,898       388,898       388,898       —       —  
Borrowings with stated maturities
     60,656       60,939       —       —       60,939  

The fair value of cash and cash equivalents equals historical book value. The fair value of investment and mortgage-backed securities is described and presented under fair value measurement guidelines as discussed earlier.

The fair value of loans receivable has been estimated using the present value of cash flows, discounted at the approximate current market rates, and giving consideration to estimated prepayment risk. Loans receivable also includes loans receivable held for sale.

The fair value of deposits and borrowings with stated maturities has been estimated using the present value of cash flows, discounted at rates approximating current market rates for similar liabilities. Fair value of deposits and borrowings with floating interest rates is generally presumed to approximate the recorded carrying amounts.

The fair value of deposits with no stated maturities is generally presumed to approximate the carrying amount (the amount payable on demand). The fair value of deposits with floating interest rates is generally presumed to approximate the recorded carrying amounts.

The Bank’s remaining assets and liabilities are not considered financial instruments. No disclosure of the relationship value of the Bank’s depositors or customers is required.

 
 
 
68
TF Financial Corporation and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
December 31, 2013 and 2012
 

 
NOTE 19 — SERVICE FEES, CHARGES AND OTHER OPERATING INCOME AND OTHER OPERATING EXPENSE
 
 
   
For the years ended December 31,
  
   
2013
    
2012
  
   
(in thousands)
  
Service fees, charges and other operating income
            
Loan servicing fees, net
   $ 481     $ 139  
Late charge income
     124       117  
Deposit service charges
     820       581  
Debit card income
     623       539  
Other income
     300       395  
    $ 2,348     $ 1,771  
                 
Other operating expense
                
Insurance and surety bond
   $ 193     $ 178  
Office supplies
     219       184  
Loan expense
     309       228  
Debit card and ATM expense
     307       272  
Postage
     260       246  
Telephone
     312       288  
Supervisory examination fees
     65       73  
Conversion costs
     1,417       —  
Other expenses
     683       578  
    $ 3,765     $ 2,047  
 
 
 
 
69
TF Financial Corporation and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
December 31, 2013 and 2012
 

 
NOTE 20 — EARNINGS PER SHARE
 
 
The following tables set forth the reconciliation of the numerators and denominators of the basic and diluted earnings per share computations:

   
For the years ended December 31, 2013
  
         
Weighted
        
         
average
        
   
Income
    
shares
    
Per share
  
   
(numerator)
    
(denominator)
    
Amount
  
   
(dollars in thousands, except share data)
  
Basic earnings per share
                  
     Income available to common stockholders
   $ 6,575       2,899,025     $ 2.27  
Effect of dilutive securities
                        
     Stock compensation plans
     —       3,907       —  
                         
Diluted earnings per share
                        
    Income available to common stockholders plus effect of
     dilutive securities
   $ 6,575       2,902,932     $ 2.27  

There were options to purchase 22,466 shares of common stock with exercise prices ranging from $25.71 to $32.51 per share which were outstanding during 2013 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.

   
For the years ended December 31, 2012
  
         
Weighted
        
         
average
        
   
Income
    
shares
    
Per share
  
   
(numerator)
    
(denominator)
    
Amount
  
   
(dollars in thousands, except share data)
  
Basic earnings per share
                  
     Income available to common stockholders
   $ 5,383       2,726,133     $ 1.97  
Effect of dilutive securities
                        
     Stock compensation plans
     —       3,629       —  
                         
Diluted earnings per share
                        
    Income available to common stockholders plus effect of
     dilutive securities
   $ 5,383       2,729,762     $ 1.97  

There were options to purchase 42,462 shares of common stock with exercise prices ranging from $23.53 to $32.51 per share which were outstanding during 2012 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.
 
 
70
TF Financial Corporation and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
December 31, 2013 and 2012
 

 
NOTE 21 — CONDENSED FINANCIAL INFORMATION – PARENT COMPANY ONLY
 
 
Condensed financial information for TF Financial Corporation (parent company only) follows:
 
BALANCE SHEETS

   
At December 31,
  
   
2013
    
2012
  
   
(in thousands)
  
ASSETS
            
Cash
   $ 2,220     $ 2,031  
Investment in 3rd Fed
     89,501       78,032  
Investment in Penns Trail Development
     1,065       1,077  
Notes receivable ESOP
     1,161       1,208  
Other assets
     964       723  
Total assets
   $ 94,911     $ 83,071  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
                
Total liabilities
   $ 36     $ 126  
Stockholders’ equity
     94,875       82,945  
Total liabilities and stockholders’ equity
   $ 94,911     $ 83,071  
 
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
 
   
For the years ended
December 31,
  
   
2013
    
2012
  
   
(in thousands)
  
INCOME
            
Equity in earnings of subsidiaries
   $ 7,929     $ 5,963  
Interest and dividend income
     18       22  
Total income
     7,947       5,985  
EXPENSES
                
Other
     1,372       602  
Total expenses
     1,372       602  
NET INCOME
     6,575       5,383  
Total other comprehensive (loss) income (1)
     (2,148 )     224  
Total comprehensive income
   $ 4,427     $ 5,607  
 
(1)
See Consolidated Statements of Comprehensive Income for other comprehensive income detail.
 
 
71
TF Financial Corporation and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
December 31, 2013 and 2012
 

 
NOTE 21 — CONDENSED FINANCIAL INFORMATION – PARENT COMPANY ONLY (Continued)
 

STATEMENTS OF CASH FLOWS

   
For the years ended
December 31,
  
   
2013
    
2012
  
   
(in thousands)
  
Cash flows from operating activities
            
Net income
   $ 6,575     $ 5,383  
Adjustments to reconcile net income to net cash used in operating activities
                
Stock compensation plans
     457       176  
Equity in earnings of subsidiaries
     (7,929 )     (5,963 )
Net change in assets and liabilities
     (180 )     (16 )
Net cash used in operating activities
     (1,077 )     (420 )
                 
Cash flows from investing activities
                
Capital distribution from subsidiaries
     7,800       1,600  
Acquisition net of cash acquired
     (5,568 )     —  
Net cash provided by investing activities
     2,232       1,600  
                 
Cash flows from financing activities
                
Common stock dividends paid
     (884 )     (543 )
Treasury stock acquired
     (274 )     —  
Exercise of stock options
     216       7  
Deferred tax adjustment arising from stock compensation
     (24 )     (27 )
Net cash used in financing activities
     (966 )     (563 )
NET INCREASE IN CASH
     189       617  
Cash at beginning of year
     2,031       1,414  
Cash at end of year
   $ 2,220     $ 2,031  

 
 
 
72
 
BOARD OF DIRECTORS AND EXECUTIVE OFFICERS
  
TF Financial Corporation

Board of Directors

Robert N. Dusek

Chairman of TF Financial Corporation

President of Direction Associates, Inc.

Carl F. Gregory

Chairman Emeritus and Retired President/CEO of 3rd Fed Bank

H. Donald Perkins, Jr.

Managing Partner and Founding Member of Zon Capital Partners

Dennis Pollack

Chairman of Presilient, LLC

Joseph F. Slabinski, III
 
President/Owner of Slabinski-Sucharski Funeral Homes, Inc.
 
Kenneth A. Swanstrom 

Retired Chairman/CEO of PennEngineering

Albert M. Tantala, Sr.`

Chairman of 3rd Fed Bank

President of Tantala Associates

James B. Wood                                

Vice Chairman of 3rd Fed Bank

Senior Vice President/Chief Strategy Officer of The Clemens Family Corporation

Kent C. Lufkin
 
President/CEO of TF Financial Corporation and 3rd Fed Bank
 
Executive Officers
 
Kent C. Lufkin
President and Chief Executive Officer
 
Elizabeth A. Kaspern
Executive Vice President and Chief Retail Banking Officer

Dennis R. Stewart
Executive Vice President and Chief Financial Officer
 
Lorraine A. Wolf
Corporate Secretary
 
 
 73