Table ofContents

 

 

 

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

** **
| **x**                                        | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**  |
|----------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|
|                                         |
| **For the period ended June 30,  2009** |
|                                         |
| **- or -**                                   |
|                                         |
| **o**                                        | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |

 

**For the transition period from                    to     **

 

**Commission file number:  0-24168**

 

**TF FINANCIAL CORPORATION**

(Exact Name of Registrant as Specified in ItsCharter)

 

| **Delaware**                                  | ** ** | **74-2705050**                       |
|-----------------------------------------------|------------|--------------------------------------|
| (State or Other Jurisdiction of Incorporation |       | (I.R.S. Employer Identification No.) |
| or Organization)                              |       |                                 |

 

| **3 Penns Trail, Newtown, Pennsylvania** | ** ** | **18940**  |
|------------------------------------------|------------|------------|
| (Address of Principal Executive Offices) |       | (Zip Code) |

 

Registrant’s telephone number, including areacode:  **(215)579-4000**

 

Indicate by check mark whether the registrant: (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days. YES x**  **NO  o

 

Indicate by check mark whether the registrant hassubmitted electronically and posted on its corporate Web site, if any, everyInteractive Data File required to be submitted and posted pursuant to Rule 405of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (orfor such shorter period that the registrant was required to submit and postsuch files).  YES o**      **NO o

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, a non-accelerated filer, or asmaller reporting company. See the definitions of “large accelerated filer,” “acceleratedfiler,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.(Check one):

 
| Large  accelerated filer o                     |   | Accelerated  filer o         |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated  filer o                       |   | Smaller  reporting company x |
| (Do not check if  a smaller reporting company) |   |                              |

 

Indicate by check mark whether the registrant isa shell company (as defined in Rule 12b-2 Exchange Act). YES o**  **NO x

 

Indicate the number of shares outstanding ofeach of the issuer’s classes of common stock as of the latest practicable date:**August 7, 2009**

 

| **Class**                   | ** ** | **Outstanding**  |
|-----------------------------|------------|------------------|
| $.10 par value common stock |       | 2,663,121 shares |

 

 

 

----

Table ofContents

 

**CONTENTS**

 
| **PART I-CONSOLIDATED  FINANCIAL INFORMATION** | ** **                                                                           | ** **                                                                                  |
|-----------------------------------------------------|--------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------|
|                                                |                                                                                 |                                                                                        |   |   |
| Item 1.                                             |                                                                                 | Consolidated Financial Statements                                                           |   | 3 |
|                                                |                                                                                 |                                                                                        |   |   |
| Item 2.                                             |                                                                                 | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   | 18 |
|                                                |                                                                                 |                                                                                        |   |   |
| Item 3.                                             |                                                                                 | Quantitative  and Qualitative Disclosures about Market Risk                                 |   | 26 |
|                                                |                                                                                 |                                                                                        |   |   |
| Item 4T.                                            |                                                                                 | Controls and Procedures                                                                     |   | 26 |
|                                                |                                                                                 |                                                                                        |   |   |
| **PART II-OTHER  INFORMATION**                 |                                                                                 |                                                                                        |
|                                                |                                                                                 |                                                                                        |   |   |
| Item 1.                                             |                                                                                 | Legal Proceedings                                                                           |   | 27 |
|                                                |                                                                                 |                                                                                        |   |   |
| Item 1A.                                            |                                                                                 | Risk Factors                                                                                |   | 27 |
|                                                |                                                                                 |                                                                                        |   |   |
| Item 2.                                             |                                                                                 | Unregistered Sales of Equity  Securities and Use of Proceeds                                |   | 27 |
|                                                |                                                                                 |                                                                                        |   |   |
| Item 3.                                             |                                                                                 | Defaults Upon Senior Securities                                                             |   | 27 |
|                                                |                                                                                 |                                                                                        |   |   |
| Item 4.                                             |                                                                                 | Submission of Matters to a Vote of  Security Holders                                        |   | 27 |
|                                                |                                                                                 |                                                                                        |   |   |
| Item 5.                                             |                                                                                 | Other Information                                                                           |   | 27 |
|                                                |                                                                                 |                                                                                        |   |   |
| Item 6.                                             |                                                                                 | Exhibits                                                                                    |   | 27 |
|                                                |                                                                                 |                                                                                        |   |   |
| **Signatures**                                      |                                                                                 | 28                                                                                          |
|                                                |                                                                                 |                                                                                        |
| **Exhibits**                                        | ** **                                                                           | ** **                                                                                  |
|                                                |                                                                                 |                                                                                        |
| 31.1                                                | Certification of  CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |                                                                                        |   |
|                                                |                                                                                 |                                                                                        |   |
| 31.2                                                | Certification of  CFO pursuant of Section 302 of the Sarbanes-Oxley Act of 2002 |                                                                                        |   |
|                                                |                                                                                 |                                                                                        |   |
| 32.                                                 | Certification  pursuant of Section 906 of the Sarbanes-Oxley Act of 2002        |                                                                                        |   |
|                                                     |                                                                                      |                                                                                             |  |  |  |

 

2

----

Table of Contents

 

**TFFinancial Corporation and Subsidiaries**

 

**CONSOLIDATEDBALANCE SHEETS**

 
| ** **                                                                                                                                                                                                                                                         | ** ** | **Unaudited  June 30,  2009** | ** ** | **Audited  December 31,  2008** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                                                                                                                                                                         | ** ** | **(in thousands)**            | ** ** |
| ASSETS                                                                                                                                                                                                                                                             |       |                               |       |                                 |       |
| Cash and cash equivalents                                                                                                                                                                                                                                          |       | $                                  | 6,262      |                                 | $          | 2,719 |   |
| Investment securities available for sale—at fair  value                                                                                                                                                                                                       |       | 32,051                             |       | 31,619                               |       |
| Mortgage-backed securities available for sale—at  fair value                                                                                                                                                                                                  |       | 97,054                             |       | 107,217                              |       |
| Mortgage-backed securities held to maturity (fair  value of $4,397 and $4,996, respectively)                                                                                                                                                                       |       | 4,117                              |       | 4,774                                |       |
| Loans receivable, net                                                                                                                                                                                                                                              |       | 541,712                            |       | 544,330                              |       |
| Loans receivable held for sale                                                                                                                                                                                                                                     |       | 961                                |       | 1,659                                |       |
| Federal Home Loan Bank stock—at cost                                                                                                                                                                                                                          |       | 9,896                              |       | 9,896                                |       |
| Accrued interest receivable                                                                                                                                                                                                                                        |       | 2,658                              |       | 2,788                                |       |
| Premises and equipment, net                                                                                                                                                                                                                                        |       | 5,398                              |       | 5,636                                |       |
| Goodwill                                                                                                                                                                                                                                                           |       | 4,324                              |       | 4,324                                |       |
| Bank-owned life insurance                                                                                                                                                                                                                                          |       | 16,844                             |       | 16,514                               |       |
| Other assets                                                                                                                                                                                                                                                       |       | 3,220                              |       | 2,232                                |       |
| TOTAL ASSETS                                                                                                                                                                                                                                                       |       | $                                  | 724,497    |                                 | $          | 733,708 |   |
|                                                                                                                                                                                                                                                               |       |                               |       |                                 |       |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                                                                                                          |       |                               |       |                                 |       |
| Liabilities                                                                                                                                                                                                                                                        |       |                               |       |                                 |       |
| Deposits                                                                                                                                                                                                                                                           |       | $                                  | 531,090    |                                 | $          | 489,850 |   |
| Borrowings from the Federal Home Loan Bank                                                                                                                                                                                                                         |       | 91,132                             |       | 158,148                              |       |
| Other short-term borrowings                                                                                                                                                                                                                                        |       | 20,000                             |       | 10,000                               |       |
| Advances from borrowers for taxes and insurance                                                                                                                                                                                                                    |       | 2,585                              |       | 2,315                                |       |
| Accrued interest payable                                                                                                                                                                                                                                           |       | 3,517                              |       | 3,066                                |       |
| Other liabilities                                                                                                                                                                                                                                                  |       | 6,501                              |       | 2,637                                |       |
| Total liabilities                                                                                                                                                                                                                                                  |       | 654,825                            |       | 666,016                              |       |
|                                                                                                                                                                                                                                                               |       |                               |       |                                 |       |
| Stockholders’ equity                                                                                                                                                                                                                                          |       |                               |       |                                 |       |
| Preferred stock, no par value; 2,000,000 shares  authorized at June 30, 2009 and December 31, 2008, none issued                                                                                                                                          |       | —                             |       | —                               |       |
| Common stock, $0.10 par value; 10,000,000 shares  authorized, 5,290,000 shares issued, 2,522,246 and 2,515,407 shares  outstanding at June 30, 2009 and December 31, 2008, respectively,  net of shares in treasury 2,626,879 and 2,627,752 respectively |       | 529                                |       | 529                                  |       |
| Additional paid-in capital                                                                                                                                                                                                                                         |       | 53,978                             |       | 53,897                               |       |
| Unearned ESOP shares                                                                                                                                                                                                                                               |       | (1,409                             | )          | (1,468                               | )          |
| Treasury stock-at cost                                                                                                                                                                                                                                             |       | (54,530                            | )          | (54,538                              | )          |
| Retained earnings                                                                                                                                                                                                                                                  |       | 71,111                             |       | 69,875                               |       |
| Accumulated other comprehensive loss                                                                                                                                                                                                                               |       | (7                                 | )          | (603                                 | )          |
| Total stockholders’ equity                                                                                                                                                                                                                                    |       | 69,672                             |       | 67,692                               |       |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                                                                                                    |       | $                                  | 724,497    |                                 | $          | 733,708 |   |
|                                                                                                                                                                                                                                                                    |            |                                    |            |                                      |            |  |  |  |  |

 

The accompanying notes are an integral partof these statements

 

3

----

Table of Contents

 

**TF FinancialCorporation and Subsidiaries**

 

**CONSOLIDATEDSTATEMENTS OF INCOME**

**(Unaudited)**

 
| ** **                                           | ** ** | **For the three months  ended  June 30,**      | ** ** | **For the six months  ended  June 30,** | ** ** |
|------------------------------------------------------|------------|--------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                           | ** ** | **2009**                                                           | ** ** | **2008**                                                    | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                           | ** ** | **(in thousands, except per share data)** | ** ** |
| Interest income                                      |       |                                                               |       |                                                        |       |   |   |   |   |
| Loans, including fees                                |       | $                                                                  | 7,658      |                                                        | $          | 8,155 |   | $ | 15,313 |   | $ | 16,338 |   |
| Mortgage-backed securities                           |       | 1,294                                                              |       | 1,132                                                       |       | 2,679 |   | 2,363 |   |
| Investment securities                                |       | 276                                                                |       | 365                                                         |       | 553 |   | 778 |   |
| Interest-bearing deposits  and other                 |       | —                                                             |       | 4                                                           |       | — |   | 10 |   |
|                                                 |       |                                                               |       |                                                        |       |   |   |   |   |
| TOTAL INTEREST INCOME                                |       | 9,228                                                              |       | 9,656                                                       |       | 18,545 |   | 19,489 |   |
|                                                 |       |                                                               |       |                                                        |       |   |   |   |   |
| Interest expense                                     |       |                                                               |       |                                                        |       |   |   |   |   |
| Deposits                                             |       | 2,441                                                              |       | 2,926                                                       |       | 4,954 |   | 6,212 |   |
| Borrowings                                           |       | 1,208                                                              |       | 1,571                                                       |       | 2,493 |   | 3,203 |   |
|                                                 |       |                                                               |       |                                                        |       |   |   |   |   |
| TOTAL INTEREST EXPENSE                               |       | 3,649                                                              |       | 4,497                                                       |       | 7,447 |   | 9,415 |   |
|                                                 |       |                                                               |       |                                                        |       |   |   |   |   |
| NET INTEREST INCOME                                  |       | 5,579                                                              |       | 5,159                                                       |       | 11,098 |   | 10,074 |   |
|                                                 |       |                                                               |       |                                                        |       |   |   |   |   |
| Provision for loan losses                            |       | 590                                                                |       | 340                                                         |       | 1,255 |   | 340 |   |
|                                                 |       |                                                               |       |                                                        |       |   |   |   |   |
| NET INTEREST INCOME AFTER  PROVISION FOR LOAN LOSSES |       | 4,989                                                              |       | 4,819                                                       |       | 9,843 |   | 9,734 |   |
|                                                 |       |                                                               |       |                                                        |       |   |   |   |   |
| Non-interest income                                  |       |                                                               |       |                                                        |       |   |   |   |   |
| Service fees, charges and  other operating income    |       | 597                                                                |       | 543                                                         |       | 1,034 |   | 1,236 |   |
| Bank-owned life insurance                            |       | 170                                                                |       | 156                                                         |       | 330 |   | 315 |   |
| Gain on sale of investments                          |       | 116                                                                |       | —                                                      |       | 306 |   | — |   |
| Gain on sale of loans held  for sale                 |       | 253                                                                |       | 97                                                          |       | 401 |   | 159 |   |
| Gain on sale of foreclosed  real estate              |       | 303                                                                |       | 342                                                         |       | 303 |   | 342 |   |
| Other income                                         |       | —                                                             |       | —                                                      |       | — |   | 197 |   |
|                                                 |       |                                                               |       |                                                        |       |   |   |   |   |
| TOTAL NON-INTEREST INCOME                            |       | 1,439                                                              |       | 1,138                                                       |       | 2,374 |   | 2,249 |   |
|                                                 |       |                                                               |       |                                                        |       |   |   |   |   |
| Non-interest expense                                 |       |                                                               |       |                                                        |       |   |   |   |   |
| Employee compensation and  benefits                  |       | 2,645                                                              |       | 2,677                                                       |       | 5,316 |   | 5,215 |   |
| Occupancy and equipment                              |       | 708                                                                |       | 740                                                         |       | 1,418 |   | 1,468 |   |
| Professional fees                                    |       | 183                                                                |       | 167                                                         |       | 456 |   | 421 |   |
| Marketing and advertising                            |       | 116                                                                |       | 145                                                         |       | 264 |   | 289 |   |
| FDIC insurance premiums                              |       | 511                                                                |       | 13                                                          |       | 532 |   | 27 |   |
| Other operating                                      |       | 613                                                                |       | 590                                                         |       | 1,214 |   | 1,174 |   |
|                                                 |       |                                                               |       |                                                        |       |   |   |   |   |
| TOTAL NON-INTEREST EXPENSE                           |       | 4,776                                                              |       | 4,332                                                       |       | 9,200 |   | 8,594 |   |
|                                                 |       |                                                               |       |                                                        |       |   |   |   |   |
| INCOME BEFORE INCOME TAXES                           |       | 1,652                                                              |       | 1,625                                                       |       | 3,017 |   | 3,389 |   |
|                                                 |       |                                                               |       |                                                        |       |   |   |   |   |
| Income taxes                                         |       | 430                                                                |       | 441                                                         |       | 775 |   | 924 |   |
|                                                 |       |                                                               |       |                                                        |       |   |   |   |   |
| NET INCOME                                           |       | $                                                                  | 1,222      |                                                        | $          | 1,184 |   | $ | 2,242 |   | $ | 2,465 |   |
|                                                 |       |                                                               |       |                                                        |       |   |   |   |   |
| Earnings per share—basic                        |       | $                                                                  | 0.48       |                                                        | $          | 0.45 |   | $ | 0.89 |   | $ | 0.92 |   |
| Earnings per share—diluted                      |       | $                                                                  | 0.48       |                                                        | $          | 0.44 |   | $ | 0.89 |   | $ | 0.92 |   |
| Dividends paid per share                             |       | $                                                                  | 0.20       |                                                        | $          | 0.20 |   | $ | 0.40 |   | $ | 0.40 |   |

 

The accompanying notes are an integral part of these statements

 

4

----

Table of Contents

 

**TF Financial Corporation and Subsidiaries**

 

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(Unaudited****)**

 
| ** **                                                                        | ** ** | **For the six months  ended  June 30,** | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                                                        | ** ** | **2009**                                                    | ** ** | **2008** | ** ** |
| ** **                                                                        | ** ** | **(in thousands)**                                     | ** ** |
| OPERATING ACTIVITIES                                                              |       |                                                        |       |   |   |
| Net income                                                                        |       | $                                                           | 2,242      |   | $ | 2,465 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities |       |                                                        |       |   |   |
| Amortization of                                                                   |       |                                                        |       |   |   |
| Mortgage loan servicing rights                                                    |       | 94                                                          |       | 79 |   |
| Deferred loan origination fees                                                    |       | 54                                                          |       | 19 |   |
| Premiums and discounts on investment securities,  net                             |       | 43                                                          |       | 44 |   |
| Premiums and discounts on mortgage-backed  securities, net                        |       | (180                                                        | )          | (96 | ) |
| Premiums and discounts on loans, net                                              |       | 91                                                          |       | 42 |   |
| Provision for loan losses                                                         |       | 1,255                                                       |       | 340 |   |
| Depreciation of premises and equipment                                            |       | 448                                                         |       | 484 |   |
| Increase in value of bank-owned life insurance                                    |       | (330                                                        | )          | (315 | ) |
| Stock grant expense                                                               |       | 8                                                           |       | 180 |   |
| Stock option expense                                                              |       | 28                                                          |       | 186 |   |
| Stock-based benefit programs: ESOP                                                |       | 108                                                         |       | 141 |   |
| Proceeds from sale of loans originated for sale                                   |       | 29,468                                                      |       | 10,968 |   |
| Origination of loans held for sale                                                |       | (28,622                                                     | )          | (10,269 | ) |
| Gain on sale of                                                                   |       |                                                        |       |   |   |
| Investments                                                                       |       | (306                                                        | )          | — |   |
| Loans held for sale                                                               |       | (401                                                        | )          | (159 | ) |
| Foreclosed real estate                                                            |       | (303                                                        | )          | (342 | ) |
| Decrease (increase) in                                                            |       |                                                        |       |   |   |
| Accrued interest receivable                                                       |       | 130                                                         |       | 95 |   |
| Other assets                                                                      |       | 362                                                         |       | (112 | ) |
| Increase in                                                                       |       |                                                        |       |   |   |
| Accrued interest payable                                                          |       | 451                                                         |       | 226 |   |
| Other liabilities                                                                 |       | 3,547                                                       |       | 31 |   |
| NET CASH PROVIDED BY OPERATING ACTIVITIES                                         |       | 8,187                                                       |       | 4,007 |   |
|                                                                              |       |                                                        |       |   |   |
| INVESTING ACTIVITIES                                                              |       |                                                        |       |   |   |
| Loan originations                                                                 |       | (47,635                                                     | )          | (88,249 | ) |
| Loan principal payments                                                           |       | 46,688                                                      |       | 54,471 |   |
| Principal repayments on mortgage-backed securities  held to maturity              |       | 662                                                         |       | 887 |   |
| Principal repayments on mortgage-backed securities  available for sale            |       | 16,035                                                      |       | 11,171 |   |
| Purchase of investment securities available for  sale                             |       | (6,761                                                      | )          | — |   |
| Purchase of mortgage-backed securities available  for sale                        |       | (4,556                                                      | )          | — |   |
| Proceeds from sale of investment securities  available for sale                   |       | 5,514                                                       |       | — |   |
| Proceeds from redemption of investment securities  available for sale             |       | 755                                                         |       | 1,000 |   |
| Purchase of Federal Home Loan Bank stock, net                                     |       | —                                                      |       | (510 | ) |
| Proceeds from the sale of foreclosed real estate                                  |       | 1,367                                                       |       | 1,272 |   |
| Purchase of premises and equipment                                                |       | (210                                                        | )          | (101 | ) |
| NET CASH PROVIDED BY (USED IN) INVESTING  ACTIVITIES                              |       | 11,859                                                      |       | (20,059 | ) |
|                                                                                   |            |                                                             |            |  |  |  |  |

 

5

----

Table of Contents

 
| ** **                                                                                  | ** ** | **For the six months ended  June 30,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                                                                  | ** ** | **2009**                                                        | ** ** | **2008** | ** ** |
| ** **                                                                                  | ** ** | **(in thousands)**                                         | ** ** |
| FINANCING ACTIVITIES                                                                        |       |                                                            |       |   |   |
| Net increase in customer deposits                                                           |       | 41,240                                                          |       | 14,600 |   |
| Net decrease in short-term borrowings from the  Federal Home Loan Bank and other borrowings |       | (22,416                                                         | )          | (3,090 | ) |
| Proceeds of long-term Federal Home Loan Bank  borrowings                                    |       | —                                                          |       | 14,309 |   |
| Repayment of long-term Federal Home Loan Bank  borrowings                                   |       | (34,600                                                         | )          | (9,737 | ) |
| Net increase in advances from borrowers for taxes  and insurance                            |       | 270                                                             |       | 356 |   |
| Treasury stock acquired                                                                     |       | (101                                                            | )          | (683 | ) |
| Exercise of stock options                                                                   |       | 105                                                             |       | 8 |   |
| Tax benefit arising from stock compensation                                                 |       | 5                                                               |       | 1 |   |
| Common stock dividends paid                                                                 |       | (1,006                                                          | )          | (1,065 | ) |
| NET CASH (USED IN) PROVIDED BY FINANCING  ACTIVITIES                                        |       | (16,503                                                         | )          | 14,699 |   |
|                                                                                        |       |                                                            |       |   |   |
| NET INCREASE/(DECREASE) IN CASH AND CASH  EQUIVALENTS                                       |       | 3,543                                                           |       | (1,353 | ) |
|                                                                                        |       |                                                            |       |   |   |
| Cash and cash equivalents at beginning of period                                            |       | 2,719                                                           |       | 5,680 |   |
|                                                                                        |       |                                                            |       |   |   |
| Cash and cash equivalents at end of period                                                  |       | $                                                               | 6,262      |   | $ | 4,327 |   |
|                                                                                        |       |                                                            |       |   |   |
| Supplemental disclosure of cash flow information                                            |       |                                                            |       |   |   |
| Cash paid for                                                                               |       |                                                            |       |   |   |
| Interest on deposits and borrowings                                                         |       | $                                                               | 6,996      |   | $ | 9,189 |   |
| Income taxes                                                                                |       | $                                                               | 825        |   | $ | 342 |   |
| Non-cash transactions                                                                       |       |                                                            |       |   |   |
| Capitalization of mortgage servicing rights                                                 |       | $                                                               | 253        |   | $ | 140 |   |
| Transfers from loans to foreclosed real estate                                              |       | $                                                               | 2,164      |   | $ | 1,236 |   |
| Securities available for sale purchased not  settled                                        |       | $                                                               | 3,325      |   | $ | — |   |

 

The accompanying notes are an integral partof these statements

 

6

----

Table ofContents

 

**TF FINANCIAL CORPORATION ANDSUBSIDIARIESNOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 1 -PRINCIPLES OF CONSOLIDATION**

 

The consolidated financial statements as of June 30,2009 (unaudited) and December 31, 2008 and for the three and six-monthperiods ended June 30, 2009 and 2008 (unaudited) include the accounts ofTF Financial Corporation (the “Company”) and its wholly owned subsidiariesThird Federal Bank (the “Bank”), TF Investments Corporation and Penns TrailDevelopment Corporation. The Company’s business is conducted principallythrough the Bank. All significant intercompany accounts and transactions havebeen eliminated in consolidation.

 

**NOTE 2 - BASISOF PRESENTATION**

 

The accompanying unaudited consolidatedfinancial statements were prepared in accordance with instructions for Form 10-Qand, therefore, do not include all of the disclosures or footnotes required byaccounting principles generally accepted in the United States of America (“GAAP”).In the opinion of management, all adjustments, consisting of normal recurringaccruals, necessary for fair presentation of the consolidated financialstatements have been included. The results of operations for the period ended June 30,2009 are not necessarily indicative of the results which may be expected forthe entire fiscal year or any other period. For further information, refer tothe consolidated financial statements and footnotes thereto included in theCompany’s Annual Report on Form 10-K for the fiscal year ended December 31,2008.

 

**NOTE 3 -CONTINGENCIES**

 

The Company, from time to time, is a party toroutine litigation that arises in the normal course of business. In the opinionof management, the resolution of this litigation, if any, would not have amaterial adverse effect on the Company’s consolidated financial position orresults of operations.

 

**NOTE 4 - OTHERCOMPREHENSIVE INCOME**

 

The Company follows SFAS No. 130, “ReportingComprehensive Income.” SFAS 130 establishes standards to provide prominentdisclosure of comprehensive income items. Comprehensive income is the change inequity of a business enterprise during a period from transactions and otherevents and circumstances from non-owner sources. The components of othercomprehensive loss are as follows for the three months ended:

 
| ** **                                                    | ** ** | **June 30,  2009**     | ** ** |
|---------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                    | ** ** | **Before tax  amount** | ** ** | **Tax  (expense)  benefit** | ** ** | **Net of tax  amount** | ** ** |
| ** **                                                    | ** ** | **(in thousands)**     | ** ** |
| Unrealized gains on securities                                |       |                        |       |   |   |   |   |
| Unrealized holding gains arising during period                |       | $                           | 38         |   | $ | (16 | ) | $ | 22 |   |
| Reclassification adjustment for gains realized in  net income |       | (116                        | )          | 39 |   | (77 | ) |
| Pension plan benefit adjustment related to  actuarial losses  |       | 46                          |       | (16 | ) | 30 |   |
|                                                          |       |                        |       |   |   |   |   |
| Other comprehensive loss, net                                 |       | $                           | (32        | ) | $ | 7 |   | $ | (25 | ) |

 
| ** **                                                                           | ** ** | **June 30,  2008**     | ** ** |
|--------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                           | ** ** | **Before tax  amount** | ** ** | **Tax  (expense)  benefit** | ** ** | **Net of tax  amount** | ** ** |
| ** **                                                                           | ** ** | **(in thousands)**     | ** ** |
| Unrealized losses on securities                                                      |       |                        |       |   |   |   |   |
| Unrealized holding losses arising during period                                      |       | $                           | (1,768     | ) | $ | 603 |   | $ | (1,165 | ) |
| Pension plan benefit adjustment related to prior  service costs and actuarial losses |       |                        | 34         |   |   | (12 | ) |   | 22 |   |
|                                                                                 |       |                        |       |   |   |   |   |
| Other comprehensive loss, net                                                        |       | $                           | (1,734     | ) | $ | 591 |   | $ | (1,143 | ) |

 

7

----

Table of Contents

 

The components of othercomprehensive income (loss) are as follows for the six months ended:

 
| ** **                                                   | ** ** | **June 30, 2009**      | ** **  |
|--------------------------------------------------------------|------------|-----------------------------|-------------|
| ** **                                                   | ** ** | **Before tax  amount** | ** **  | **Tax  (expense)  benefit** | ** ** | **Net of tax  amount** | ** ** |
| ** **                                                   | ** ** | **(in thousands)**     | ** **  |
| Unrealized gains on securities                               |       |                        |        |   |   |   |   |
| Unrealized holding gains arising during period               |       | $                           |  1,128 |   | $ | (388 | ) | $ | 740 |   |
| Reclassification adjustment for gains realized in net income |       | (306                        | )           | 104 |   | (202 | ) |
| Pension plan benefit adjustment related to actuarial losses  |       | 91                          |        | (33 | ) | 58 |   |
|                                                         |       |                        |        |   |   |   |   |
| Other comprehensive income, net                              |       | $                           | 913         |   | $ | (317 | ) | $ | 596 |   |

 
| ** **                                                                           | ** ** | **June 30, 2008**      | ** ** |
|--------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                           | ** ** | **Before tax  amount** | ** ** | **Tax  (expense)  benefit** | ** ** | **Net of tax  amount** | ** ** |
| ** **                                                                           | ** ** | **(in thousands)**     | ** ** |
| Unrealized losses on securities                                                      |       |                        |       |   |   |   |   |
| Unrealized holding losses arising during period                                      |       | $                           | (77        | ) | $ | 26 |   | $ | (51 | ) |
| Pension plan benefit adjustment related to prior service costs and  actuarial losses |       |                        | 55         |   |   | (18 | ) |   | 37 |   |
|                                                                                 |       |                        |       |   |   |   |   |
| Other comprehensive loss,  net                                                       |       | $                           | (22        | ) | $ | 8 |   | $ | (14 | ) |

 

**NOTE 5—EARNINGS PER SHARE**

 

The following tablesillustrate the reconciliation of the numerators and denominators of the basicand diluted earnings per share computations (dollars in thousands, except shareand per share data):

 
| ** **                                                                  | ** ** | **Three months ended June 30,  2009** | ** ** |
|-----------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                                  | ** ** | **Income  (numerator)**                                   | ** ** | **Weighted  average  shares  (denominator)** | ** ** | **Per share  Amount** | ** ** |
| Basic earnings per share                                     | ** ** | ** **                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income available to common stockholders                                     |       | $                                                         | 1,222      |   | 2,520,222 |   | $ | 0.48 |   |
| Effect of dilutive securities                                               |       |                                                      |       |   |   |   |   |
| Stock options and grants                                                    |       | —                                                    |       | — |   | — |   |
|                                                                        |       |                                                      |       |   |   |   |   |
| Diluted earnings per share                                                  |       |                                                      |       |   |   |   |   |
| Income available to common stockholders plus effect of dilutive  securities |       | $                                                         | 1,222      |   | 2,520,222 |   | $ | 0.48 |   |

 
| ** **                                                                  | ** ** | **Six months ended June 30, 2009** | ** ** |
|-----------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                  | ** ** | **Income  (numerator)**                           | ** ** | **Weighted  average  shares  (denominator)** | ** ** | **Per share  Amount** | ** ** |
| Basic earnings per share                                     | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income  available to common stockholders                                    |       | $                                                 | 2,242      |   | 2,518,601 |   | $ | 0.89 |   |
| Effect  of dilutive securities                                              |       |                                              |       |   |   |   |   |
| Stock  options and grants                                                   |       | —                                            |       | — |   | — |   |
|                                                                        |       |                                              |       |   |   |   |   |
| Diluted  earnings per share                                                 |       |                                              |       |   |   |   |   |
| Income  available to common stockholders plus effect of dilutive securities |       | $                                                 | 2,242      |   | 2,518,601 |   | $ | 0.89 |   |

 

8

----

Tableof Contents

 

There were 256,893 options to purchase sharesof common stock at a price range of $20.30 to $34.14 per share which wereoutstanding during the three and six months ended June 30, 2009 that werenot included in the computation of diluted earnings per share because theoptions’ exercise prices were greater than the average market price of thecommon shares.

 
| ** **                                                                  | ** ** | **Three months ended June 30,  2008** | ** ** |
|-----------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                                  | ** ** | **Income  (numerator)**                                   | ** ** | **Weighted  average  shares  (denominator)** | ** ** | **Per share  Amount** | ** ** |
| Basic earnings per share                                                    |       |                                                      |       |   |   |   |   |
| Income available to common stockholders                                     |       | $                                                         | 1,184      |   | 2,660,757 |   | $ | 0.45 |   |
| Effect of dilutive securities                                               |       |                                                      |       |   |   |   |   |
| Stock options and grants                                                    |       | —                                                    |       | 1,431 |   | (0.01 | ) |
|                                                                        |       |                                                      |       |   |   |   |   |
| Diluted earnings per share                                                  |       |                                                      |       |   |   |   |   |
| Income available to common stockholders plus  effect of dilutive securities |       | $                                                         | 1,184      |   | 2,662,188 |   | $ | 0.44 |   |

 
| ** **                                                                  | ** ** | **Six months ended June 30,  2008** |       |
|-----------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                  | ** ** | **Income  (numerator)**                                 | ** ** | **Weighted  average  shares  (denominator)** | ** ** | **Per share  Amount** |   |
| Basic earnings per share                                                    |       |                                                    |       |   |   |   |   |
| Income available to common stockholders                                     |       | $                                                       | 2,465      |   | 2,665,635 |   | $ | 0.92 |   |
| Effect of dilutive securities                                               |       |                                                    |       |   |   |   |   |
| Stock options and grants                                                    |       | —                                                  |       | 716 |   | — |   |
|                                                                        |       |                                                    |       |   |   |   |   |
| Diluted earnings per share                                                  |       |                                                    |       |   |   |   |   |
| Income available to common stockholders plus  effect of dilutive securities |       | $                                                       | 2,465      |   | 2,666,351 |   | $ | 0.92 |   |

 

There were 204,773 options to purchase shares ofcommon stock at a price range of $24.71 to $34.14 per share which wereoutstanding during the three and six months ended June 30, 2008 that werenot included in the computation of diluted earnings per share because theoptions’ exercise prices were greater than the average market price of thecommon shares.

 

9

----

Table of Contents

 

**NOTE 6—INVESTMENT AND MORTGAGE-BACKED SECURITIES**

 

The amortized cost, gross unrealized gains and losses, and fair valueof the Company’s investment securities at June 30, 2009 and December 31,2008, are summarized as follows:

 
| ** **                                                 | ** ** | **June 30, 2009** | ** ** |
|------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                 | ** ** | **Amortized  cost**    | ** ** | **Gross  unrealized  gains** | ** ** | **Gross  unrealized  losses** | ** ** | **Fair  value** | ** ** |
| ** **                                                 | ** ** | **(in thousands)**     | ** ** |
| Investment securities available for sale                   |       |                   |       |   |   |   |   |   |   |
| Corporate debt securities                                  |       | $                      | 3,340      |   | $ | 35 |   | $ | — |   | $ | 3,375 |   |
| State and political subdivisions                           |       | 28,230                 |       | 472 |   | (170 | ) | 28,532 |   |
| Equity securities                                          |       | 150                    |       | — |   | (6 | ) | 144 |   |
|                                                       |       | $                      | 31,720     |   | $ | 507 |   | $ | (176 | ) | $ | 32,051 |   |
|                                                       |       |                   |       |   |   |   |   |   |   |
| Residential mortgage-backed securities held to  maturity   |       | $                      | 4,117      |   | $ | 280 |   | $ | — |   | $ | 4,397 |   |
|                                                       |       |                   |       |   |   |   |   |   |   |
| Residential mortgage-backed securities available  for sale |       | $                      | 94,473     |   | $ | 2,934 |   | $ | (353 | ) | $ | 97,054 |   |

 
| ** **                                               | ** ** | **December 31, 2008** | ** ** |
|----------------------------------------------------------|------------|----------------------------|------------|
| ** **                                               | ** ** | **Amortized  cost**        | ** ** | **Gross  unrealized  gains** | ** ** | **Gross  unrealized  losses** | ** ** | **Fair  value** | ** ** |
| ** **                                               | ** ** | **(in thousands)**         | ** ** |
| Investment securities available for sale                 |       |                       |       |   |   |   |   |   |   |
| U.S. Government and federal agencies                     |       | $                          | 2,944      |   | $ | 229 |   | $ | — |   | $ | 3,173 |   |
| Corporate debt securities                                |       | 3,340                      |       | — |   | (55 | ) | 3,285 |   |
| State and political subdivisions                         |       | 24,532                     |       | 530 |   | (66 | ) | 24,996 |   |
| Equity securities                                        |       | 150                        |       | 15 |   | — |   | 165 |   |
|                                                     |       | $                          | 30,966     |   | $ | 774 |   | $ | (121 | ) | $ | 31,619 |   |
|                                                     |       |                       |       |   |   |   |   |   |   |
| Residential mortgage-backed securities held to  maturity |       | $                          | 4,774      |   | $ | 222 |   | $ | — |   | $ | 4,996 |   |
|                                                     |       |                       |       |   |   |   |   |   |   |
| Residential mortgage-backed securities held to  maturity |       | $                          | 105,780    |   | $ | 1,822 |   | $ | (385 | ) | $ | 107,217 |   |

 

Thetable below indicates the length of time individual securities, both held tomaturity and available for sale, have been in a continuous unrealized lossposition at June 30, 2009:

 
| ** **                                                                    | ** ** | **Number**         | ** ** | **Less than  12 months** | ** ** | **12 months  or longer** | ** ** | **Total**       | ** ** |
|-------------------------------------------------------------------------------|------------|--------------------|------------|-------------------------------|------------|-------------------------------|------------|-----------------|------------|
| **Description of Securities**                                                 | ** ** | **of  Securities** | ** ** | **Fair  Value**               | ** ** | **Unrealized  Loss**          | ** ** | **Fair  Value** | ** ** | **Unrealized  Loss** | ** ** | **Fair  value** | ** ** | **Unrealized  Loss** | ** ** |
| ** **                                                                    | ** ** | **(in thousands)** | ** ** |
| Equity securities                                                             |       | 1                  |       | $                             | 144        |                          | $          | (6              | )          | $ | — |   | $ | — |   | $ | 144 |   | $ | (6 | ) |
| State and political subdivisions                                              |       | 12                 |       | 6,650                         |       | (139                          | )          | 2,601           |       | (31 | ) | 9,251 |   | (170 | ) |
| Residential mortgage-backed securities issued by  quasi-governmental agencies |       | 2                  |       | 4,488                         |       | (47                           | )          | —          |       | — |   | 4,488 |   | (47 | ) |
| Residential real estate mortgage-backed securities privately issued           |       | 2                  |       | —                        |       | —                        |       | 2,949           |       | (306 | ) | 2,949 |   | (306 | ) |
| Total temporarily impaired securities                                         |       | 17                 |       | $                             | 11,282     |                          | $          | (192            | )          | $ | 5,550 |   | $ | (337 | ) | $ | 16,832 |   | $ | (529 | ) |

 

10

----

Table ofContents

 

The table below indicates the length of time individual securities,both held to maturity and available for sale, have been in a continuousunrealized loss position at December 31, 2008:

 
| ** **                                                                    | ** ** | **Number**         | ** ** | **Less than  12 months** | ** ** | **12 months  or longer** | ** ** | **Total**       | ** ** |
|-------------------------------------------------------------------------------|------------|--------------------|------------|-------------------------------|------------|-------------------------------|------------|-----------------|------------|
| **Description of Securities**                                                 | ** ** | **of  Securities** | ** ** | **Fair  Value**               | ** ** | **Unrealized  Loss**          | ** ** | **Fair  Value** | ** ** | **Unrealized  Loss** | ** ** | **Fair  value** | ** ** | **Unrealized  Loss** | ** ** |
| ** **                                                                    | ** ** | **(in thousands)** | ** ** |
| U.S. Government and federal agencies                                          |       | 1                  |       | $                             | —     |                          | $          | —          |       | $ | 2,982 |   | $ | (14 | ) | $ | 2,982 |   | $ | (14 | ) |
| Corporate debt securities                                                     |       | 1                  |       | —                        |       | —                        |       | 993             |       | (7 | ) | 993 |   | (7 | ) |
| State and political subdivisions                                              |       | 9                  |       | —                        |       | —                        |       | 5,763           |       | (63 | ) | 5,763 |   | (63 | ) |
| Residential mortgage-backed securities issued by  quasi-governmental agencies |       | 23                 |       | 1,193                         |       | (14                           | )          | 51,780          |       | (431 | ) | 52,973 |   | (445 | ) |
| Residential real estate mortgage -backed  securities privately issued         |       | 2                  |       | —                        |       | —                        |       | 3,302           |       | (349 | ) | 3,302 |   | (349 | ) |
| Total temporarily impaired securities                                         |       | 36                 |       | $                             | 1,193      |                          | $          | (14             | )          | $ | 64,820 |   | $ | (864 | ) | $ | 66,013 |   | $ | (878 | ) |

 

The Company evaluates debt securities on an ongoing basisto determine whether other —than— temporary impairment (OTTI) exists. FSP FAS115-2 and FAS 124-2 require that OTTI be segregated into two components: theamount related to credit loss and the amount related to all other factors. Theamount related to the credit loss must be recognized in earnings, while theother component must be recognized in other comprehensive income net of tax.The Company identified debt securities with fair values below amortized costand has determined that the unrealized losses were caused by changes in marketinterest rates and not deemed credit-related losses. The Company has theability and intent to hold these securities until a market price recovery ormaturity and there is no intent or requirement to sell the securities prior torecovery of the amortized cost basis. The contractual terms and contractualcash flows of these securities do not permit the issuer to settle at a priceless than the amortized cost. Accordingly, the Company has evaluated relevantfactors and has determined that the unrealized losses at June 30, 2009 andDecember 31, 2008, respectively are not considered other-than-temporaryand are therefore reflected in other comprehensive income.

 

**NOTE 7- FAIR VALUE MEASUREMENTS**

 

On January 1, 2008, the Company adopted FinancialAccounting Standards Board (FASB) Statement No. 157 (SFAS 157), “FairValue Measurements”. SFAS 157 defines fair value, establishes a framework formeasuring fair value and expands the related disclosure requirements. SFAS 157clarifies that fair value is an exit price, representing the amount that wouldbe received to sell an asset or paid to transfer a liability in an orderlytransaction between market participants. SFAS 157 establishes a fair valuemeasurement hierarchy for inputs in valuation techniques used to measure fairvalue. The hierarchy gives the highest priority to unadjusted quoted prices inactive markets for identical assets or liabilities (Level 1 measurements) andthe lowest priority to unobservable inputs (Level 3 measurements).

 

The fair value hierarchy levels are summarized below:

 

·                  Level 1 inputs are quoted prices (unadjusted) in activemarkets for identical assets or liabilities.

 

·                  Level 2 inputs are inputs that are observable for the assetor liability, either directly or indirectly.

 

·                  Level 3 inputs are unobservable and contain assumptions ofthe party fair valuing the asset or liability.

 

Determination of the appropriate level within the fairvalue hierarchy is based on the lowest level of input that is significant tothe fair value measurement for the instrument or security.  Assets and liabilities measured at fair valueon a recurring basis segregated by value hierarchy level are summarized below (dollarsin thousands):

 

11

----

Table of Contents

 
| ** **                                                                    | ** ** | **Quoted  Prices in  Active  Markets  for  Identical  Assets  (Level 1)** | ** ** | **Significant  Other  Observable  Inputs  (Level 2)** | ** ** | **Significant  Unobservable  Inputs  (Level 3)** | ** ** | **Balance as of  June 30,  2009** | ** ** |
|-------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|-------------------------------------------------------|------------|--------------------------------------------------|------------|
| **At June 30, 2009**                                                     | ** ** | ** **                                                                          | ** ** | ** **                                                 | ** ** | ** **                                            | ** ** | ** **                                       | ** ** |
| ** **                                                                    | ** ** | ** **                                                                          | ** ** | ** **                                                 | ** ** | ** **                                            | ** ** | ** **                                       | ** ** |
| **Assets**                                                                    | ** ** | ** **                                                                          | ** ** | ** **                                                 | ** ** | ** **                                            | ** ** | ** **                                       | ** ** |
| Investment securities available for sale                                      |       |                                                                                |       |                                                       |       |                                                  |       |                                             |       |
| Corporate debt securities                                                     |       | $                                                                                   | —     |                                                       | $          | 3,375                                                 |       | $                                                | —     |   | $ | 3,375 |   |
| State and political subdivisions                                              |       | —                                                                              |       | 28,532                                                     |       | —                                                |       | 28,532                                           |       |
| Equity securities                                                             |       | 144                                                                                 |       | —                                                     |       | —                                                |       | 144                                              |       |
| Total investment securities available for sale                                |       | 144                                                                                 |       | 31,907                                                     |       | —                                                |       | 32,051                                           |       |
|                                                                          |       |                                                                                |       |                                                       |       |                                                  |       |                                             |       |
| Residential mortgage-backed securities issued by  quasi-governmental agencies |       | —                                                                              |       | 94,105                                                     |       | —                                                |       | 94,105                                           |       |
| Residential real estate mortgage -backed  securities privately issued         |       | —                                                                              |       | 2,949                                                      |       | —                                                |       | 2,949                                            |       |
| Total mortgage-backed securities available for  sale                          |       | —                                                                              |       | 97,054                                                     |       | —                                                |       | 97,054                                           |       |
|                                                                          |       |                                                                                |       |                                                       |       |                                                  |       |                                             |       |
| Mortgage loans available for sale                                             |       | 961                                                                                 |       | —                                                     |       | —                                                |       | 961                                              |       |
| Impaired loans                                                                |       | —                                                                              |       | —                                                     |       | 3,039                                                 |       | 3,039                                            |       |
| Mortgage servicing rights                                                     |       | —                                                                              |       | 606                                                        |       | —                                                |       | 606                                              |       |
| Derivative loan commitments                                                   |       | —                                                                              |       | —                                                     |       | 13                                                    |       | 13                                               |       |
|                                                                               |            |                                                                                     |            |                                                            |            |                                                       |            |                                                  |            |  |  |  |  |

 

Investmentsecurities available for sale and mortgage-backed securities available for saleare valued primarily by a third party pricing agent. Active listed equities areclassified within Level 1 of the fair value hierarchy. Corporate debtsecurities are primarily priced through a multi-dimensional relational model, aLevel 2 hierarchy, which incorporates dealer quotes and other marketinformation including, defined sector breakdown, benchmark yields, base spread,yield to maturity, and corporate actions. State and political subdivision securities are also valued within theLevel 2 hierarchy using inputs with a series of matrices that reflect benchmarkyields, ratings updates, and spread adjustments. Mortgage-backed securitiesinclude GNMA, FNMA and FHLMC certificates and privately issued real estatemortgage investment conduits which are valued under a Level 2 hierarchy using amatrix correlation to benchmark yields, spread analysis, and prepayment speeds.

 

Impairedloans are evaluated and valued at the time the loan is identified as impaired,at the lower of the recorded investment in the loan or market value. The loansidentified as impaired are real estate secured. Market value is determined by using the value of the collateral securingthe loans and is therefore classified as a Level 3 hierarchy.  The value of the real estate is determined byqualified independent licensed appraisers contracted by the Company to performthe assessment.  Impaired loans arereviewed and evaluated on a quarterly basis for additional impairment andadjusted accordingly, based upon the pertinent conditions.

 

Mortgage servicing rights are accounted for in accordance withSFAS 156, “Accounting for Servicing of Financial Assets an amendment ofFASB Statement No. 140”. The Company initially recognizes and measuresservicing assets based on the fair value of the servicing right at the time theloan is sold. The Company uses the amortized cost method for subsequentmeasurement of its servicing assets and evaluates the recorded value forimpairment quarterly. The company retains a qualified valuation service tocalculate the amortized cost and to determine the fair value of the mortgageservicing rights. The valuation service utilizes discounted cash flow analysesadjusted for prepayment speeds, market discount rates and conditions existingin the secondary servicing market. Hence, the fair value of mortgage servicingrights is deemed a Level 2 hierarchy. At June 30, 2009, the amortized costbasis of the Company’s mortgage servicing rights was $735,000 and the fairvalue of $606,000 was included in Other Assets in the consolidated balancesheet.

 

12

----

Table of Contents

 

Thefair values of derivative loan commitments are determined at the time theunderlying loan is identified as held for sale with changes in fair valuecorrelated to the change in secondary market loan pricing. The value isadjusted to reflect the Company’s historical loan “fallout” experience whichincorporates such factors as changes in market rates, origination channels andloan purpose.

 

Thefollowing table presents additional information about assets and (liabilities)measured at fair value on a recurring basis for which the Company has utilizedLevel 3 inputs to determine fair value (in thousands):

 
| ** **                                      | ** ** | **Derivative loan commitments** | ** ** |
|-------------------------------------------------|------------|---------------------------------|------------|
| ** **                                      | ** ** | **June 30,2009**           | ** ** |
| ** **                                      | ** ** | ** **                      | ** ** |
| Beginning balance                               |       | $                               | (24        | ) |
| Total gains (losses) —realized/unrealized: |       |                            |       |
| Included in earnings                            |       | 37                              |       |
| Included in other comprehensive income          |       | —                          |       |
| Purchases, issuances, and settlements           |       | —                          |       |
| Ending balance                                  |       | $                               | 13         |   |

 

**NOTE 8- FAIR VALUE OF FINANCIALINSTRUMENTS**

 

SFASNo. 107, “Disclosures about Fair Value of Financial Instruments,” requiresall entities to disclose the estimated fair value of their assets andliabilities considered to be financial instruments. For the Bank, as for mostfinancial institutions, the majority of its assets and liabilities areconsidered financial instruments as defined in SFAS 107. However, manysuch instruments lack an available trading market as characterized by a willingbuyer and willing seller engaging in an exchange transaction. Also, it is theCompany’s general practice and intent to hold its financial instruments tomaturity or available for sale and to not engage in trading or significantsales activities. For fair value disclosure purposes, the Company substantiallyutilized the fair value measurement criteria as required under SFAS 157explained in Note 7**-**Fair Value Measurements.Additionally, the Company used significant estimations and present valuecalculations to prepare this disclosure.

 

Changesin the assumptions or methodologies used to estimate fair values may materiallyaffect the estimated amounts. In addition, there may not be reasonablecomparability between institutions due to the wide range of permittedassumptions and methodologies in the absence of active markets. This lack ofuniformity gives rise to a high degree of subjectivity in estimating financialinstrument fair values.

 

Fairvalues have been estimated using data which management considered the bestavailable, as generally provided by estimation methodologies deemed suitablefor the pertinent category of financial instrument. The estimationmethodologies, resulting fair values and recorded carrying amounts are asfollows:

 

Thefair value of cash and cash equivalents equals historical book value. The fairvalue of investment and mortgage backed securities is described and presentedunder SFAS 157 guidelines as amended.

 
| ** **                 | ** ** | **June 30, 2009** | ** ** | **December 31, 2008** | ** ** |
|----------------------------|------------|------------------------|------------|----------------------------|------------|
| ** **                 | ** ** | **Fair  value**        | ** ** | **Carrying  value**        | ** ** | **Fair  value** | ** ** | **Carrying  value** | ** ** |
| ** **                 | ** ** | **(in thousands)**     | ** ** |
| Cash and cash equivalents  |       | $                      | 6,262      |                       | $          | 6,262 |   | $ | 2,719 |   | $ | 2,719 |   |
| Investment securities      |       | 32,051                 |       | 32,051                     |       | 31,619 |   | 31,619 |   |
| Mortgage-backed securities |       | 101,451                |       | 101,171                    |       | 112,213 |   | 111,991 |   |
|                            |            |                        |            |                            |            |  |  |  |  |  |  |  |  |

 

13

----

Table of Contents

 

Thefair value of financial instruments with stated maturities has been estimatedusing the present value of cash flows, discounted at rates approximatingcurrent market rates for similar assets and liabilities.

 
| ** **                        | ** ** | **June 30, 2009** | ** ** | **December 31, 2008** | ** ** |
|-----------------------------------|------------|------------------------|------------|----------------------------|------------|
| ** **                        | ** ** | **Fair  value**        | ** ** | **Carrying  value**        | ** ** | **Fair  value** | ** ** | **Carrying  value** | ** ** |
| ** **                        | ** ** | **(in thousands)**     | ** ** |
| Liabilities                       |       |                   |       |                       |       |   |   |   |   |
| Deposits with stated maturities   |       | $                      | 219,885    |                       | $          | 215,871 |   | $ | 211,392 |   | $ | 205,872 |   |
| Borrowings with stated maturities |       | 113,995                |       | 111,132                    |       | 171,541 |   | 168,148 |   |
|                                   |            |                        |            |                            |            |  |  |  |  |  |  |  |  |

 

The fair value of financial instrument liabilities with no statedmaturities is generally presumed to approximate the carrying amount (the amountpayable on demand).

 
| ** **                         | ** ** | **June 30, 2009** | ** ** | **December 31, 2008** | ** ** |
|------------------------------------|------------|------------------------|------------|----------------------------|------------|
| ** **                         | ** ** | **Fair  value**        | ** ** | **Carrying  value**        | ** ** | **Fair  value** | ** ** | **Carrying  value** | ** ** |
| ** **                         | ** ** | **(in thousands)**     | ** ** |
| Deposits with no stated maturities |       | $                      | 315,219    |                       | $          | 315,219 |   | $ | 283,978 |   | $ | 283,978 |   |
|                                    |            |                        |            |                            |            |  |  |  |  |  |  |  |  |

 

The fair value of the loans receivable, net has been estimated usingthe present value of cash flows, discounted at the approximate current marketrates, and giving consideration to estimated prepayment risk.

 
| ** **            | ** ** | **June 30, 2009** | ** ** | **December 31, 2008** | ** ** |
|-----------------------|------------|------------------------|------------|----------------------------|------------|
| ** **            | ** ** | **Fair  value**        | ** ** | **Carrying  value**        | ** ** | **Fair  value** | ** ** | **Carrying  value** | ** ** |
| ** **            | ** ** | **(in thousands)**     | ** ** |
| Loans receivable, net |       | $                      | 551,311    |                       | $          | 542,673 |   | $ | 559,491 |   | $ | 545,989 |   |
|                       |            |                        |            |                            |            |  |  |  |  |  |  |  |  |

 

Fair value of loans anddeposits with floating interest rates is generally presumed to approximate therecorded carrying amounts.

 

The Bank’s remaining assetsand liabilities are not considered financial instruments. No disclosure of therelationship value of the Bank’s deposits is required by SFAS 107.

 

**NOTE 9- STOCKBASED COMPENSATION**

 

The Company has stock benefit plans that allow theCompany to grant options and restricted stock to employees and directors. Theawards, which have a term of up to 10 years when issued, vest over a threeto five year period. The exercise price of each award equals the market priceof the Company’s stock on the date of the grant. At June 30, 2009, therewas $169,691 of total unrecognized compensation cost, net of estimatedforfeitures, related to non-vested awards under the Plan. That cost is expectedto be recognized over a weighted average period of 24.6 months. Option activityunder the Company’s stock option plan as of June 30, 2009 is as follows:

 
| ** **                                | ** ** | **2009**                   | ** ** |
|-------------------------------------------|------------|----------------------------|------------|
| ** **                                | ** ** | **Number  of shares** | ** ** | **Weighted  average  exercise  price per  share** | ** ** | **Weighted  average  remaining  contractual  term (in  years)** | ** ** | **Aggregate  intrinsic  value ($ 000)** | ** ** |
| Outstanding at January 1, 2009       |       | 287,336                    |       | $ | 25.67 |   |   |   |   |   |
| Options granted                           |       | —                     |       | — |   |   |   |   |   |
| Options exercised                         |       | (5,250                     | )          | 19.87 |   |   |   |   |   |
| Options forfeited                         |       | (175                       | )          | 31.88 |   |   |   |   |   |
| Options expired                           |       | —                     |       | — |   |   |   |   |   |
| Outstanding at June 30, 2009         |       | 281,911                    |       | $ | 25.76 |   | 2.83 |   | $ | 101 |   |
| Options exercisable at June 30, 2009 |       | 229,114                    |       | $ | 26.63 |   | 2.14 |   | $ | 101 |   |

 

14

----

Table of Contents

 

The aggregate intrinsic value in the table aboverepresents the total pre-tax intrinsic value (the difference between theCompany’s closing stock price on the last trading day of the second quarter andthe exercise price, multiplied by the number of in-the-money options).

 

The aggregate intrinsic value of options exercised duringthe six months ended June 30, 2009 and 2008 was $16,000 and $2,000,respectively. Exercise of stock options during the six months ended June 30,2009 and 2008 resulted in cash receipts of $104,000 and $7,500, respectively.

 

Stock-based compensation expense included in netincome related to stock options was $14,000 and $92,000 for the three monthsended June 30, 2009 and 2008 respectively, resulting in a tax benefit of$5,000 and $31,000, respectively. Stock-based compensation expense included innet income related to stock options was $28,000 and $186,000 for the six monthsended June 30, 2009 and 2008 respectively, resulting in a tax benefit of$10,000 and $63,000, respectively.

 

Stock-based compensation expense included innet income related to stock grants was $4,000 and $90,000 for the three monthsended June 30, 2009 and 2008, respectively. Stock-based compensationexpense included in net income related to the Company’s employee stockownership plan totaled $43,000 and $54,000 for the three months ended June 30,2009 and 2008, respectively. Stock-based compensation expense included in netincome related to stock grants was $8,000 and $180,000 for the six months endedJune 30, 2009 and 2008, respectively. Stock-based compensation expenseincluded in net income related to the Company’s employee stock ownership plantotaled $83,000 and $109,000 for the six months ended June 30, 2009 and2008, respectively.

 

**NOTE 10-EMPLOYEE BENEFIT PLANS**

 

Net periodic defined benefit pension costincluded the following (in thousands):

 
| ** **                              | ** ** | **Three months ended  June 30,** | ** ** |
|-----------------------------------------|------------|-------------------------------------------------|------------|
| ** **                              | ** ** | **2009**                                        | ** ** | **2008** | ** ** |
|                                    |       |                                            |       |   |   |
| Components of net periodic benefit cost |       |                                            |       |   |   |
| Service cost                            |       | $                                               | 118        |   | $ | 98 |   |
| Interest cost                           |       | 62                                              |       | 62 |   |
| Expected return on plan assets          |       | (93                                             | )          | (105 | ) |
| Amortization of prior service cost      |       | —                                          |       | 8 |   |
| Recognized net actuarial loss           |       | 46                                              |       | 26 |   |
|                                    |       |                                            |       |   |   |
| Net periodic benefit cost               |       | $                                               | 133        |   | $ | 89 |   |

 
| ** **                              | ** ** | **Six months ended  June 30,** | ** ** |
|-----------------------------------------|------------|-----------------------------------------------|------------|
| ** **                              | ** ** | **2009**                                      | ** ** | **2008** | ** ** |
|                                    |       |                                          |       |   |   |
| Components of net periodic benefit cost |       |                                          |       |   |   |
| Service cost                            |       | $                                             | 236        |   | $ | 196 |   |
| Interest cost                           |       | 124                                           |       | 123 |   |
| Expected return on plan assets          |       | (185                                          | )          | (210 | ) |
| Amortization of prior service cost      |       | —                                        |       | 15 |   |
| Recognized net actuarial loss           |       | 91                                            |       | 40 |   |
|                                    |       |                                          |       |   |   |
| Net periodic benefit cost               |       | $                                             | 266        |   | $ | 164 |   |

 

The employer contributionfor the six months ended June 30, 2009 and 2008 was $0 and $218,000,respectively.

 

15

----

Tableof Contents

 

**NOTE 11-SUBSEQUENT EVENTS**

 

On August 3, 2009, the Company acquired a non-residential realestate property and a single family dwelling through foreclosure. The realestate was the collateral for mortgage loans receivable of the Company totaling$1.9 million at June 30, 2009.  These loans were non-performing at June 30,2009 with specific valuation allowances totaling $840,000. The Company does notanticipate any additional loss as a result of the foreclosure.

 

**NOTE 12 -NEW ACCOUNTING PRONOUNCEMENTS**

 

In December 2008, FASB issued FASB Staff Position (FSP) FAS132 R-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets”which amends SFAS 132(R), “Employers’ Disclosures about Pensions and OtherPostretirement Benefits” to require more detailed disclosure about employerplan assets, including employer’s investment strategies, major categories ofplan assets, concentrations of risk within plan assets, and valuationtechniques used to measure the fair value of plan assets. The new disclosuresare required to be included in financial statements for fiscal years endingafter December 15, 2009 with early application permitted. This FSP onlyrequires additional disclosures, and will not affect the Company’s financialposition or results of operation or cash flows. The Company intends to adoptFSP FAS 132 R-1 effective December 31, 2009.

 

InApril 2009, FASB issued (FSP) FAS 157-4, “Determining Fair Value When theVolume and Level of Activity for the Asset or Liability Have SignificantlyDecreased and Identifying Transactions That Are Not Orderly”. FAS 157-4provides additional guidance on (a) determining when the volume and levelof activity for the asset or liability has significantly decreased; (b) identifyingcircumstances in which a transaction is not orderly; and (c) understandingthe fair value implications of both (a) and (b). The objectives emphasizedin SFAS 157, “Fair Value Measurements” have not changed. The Company hasadopted FSP FAS 157-4 as of June 30, 2009. The adoption did not have amaterial impact on the Company’s financial condition and results ofoperation.  The additional disclosuresrelated to FSP FAS 157-4 have been included in Note 7**-**Fair ValueMeasurements.

 

InApril 2009, FASB issued (FSP) FAS 115-2 andFAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairment”.This FSP amends the other-than-temporary impairment guidance for debtsecurities to make the guidance more operational and to improve thepresentation and disclosure of other-than-temporary impairments in thefinancial statements. The Company has adopted FAS 115-2 and FAS 124-2 as ofJune 30, 2009. The adoption did not have a material impact on the Company’sfinancial condition and results of operation. The required disclosures havebeen included in Note 6**-**Investmentand Mortgage-backed Securities.

 

In April 2009, FASB issued (FSP) FAS107-1 and APB 28-1, “Interim Disclosures about Fair Value Instruments”. ThisFSP requires disclosures about fair value of financial instruments for interimreporting periods as well as in annual financial statements of publicly tradedcompanies. The Company has adopted FAS 107-1 and APB 28-1as of June 30,2009 and the required disclosures have been included in Note 8**-**Fair Value ofFinancial Instruments.

 

In May 2009, FASB issued Statement No. 165(SFAS 165), “Subsequent Events”. The statement provides guidance onmanagement’s assessment of subsequent events. The new standard clarifies thatmanagement must evaluate, as of each reporting period, events or transactionsthat occur after the balance sheet date and “through the date the financialstatements are issued or are available to be issued.” The Company adopted SFAS165 as of June 30, 2009 which was the effective date. The Companyevaluated its June 30, 2009 financial statements for subsequent eventsthrough August 14, 2009 the date the financial statements were availableto be issued.  Other than disclosure ofthe foreclosure of real estate discussed in Note 11**-**SubsequentEvents, the Company is not aware of any subsequent events which would requirerecognition or disclosure in the financial statements.

 

In June 2009, FASB issued Statement No. 166(SFAS 166), “Accounting for Transfers of Financial Assets—an amendment ofFASB Statement No. 140”. The statement amends the derecognition guidancein Statement 140 as well as seeks to remedy issues that entities face inapplying Statement 140. The statement is effective for financial statementtransfers occurring after the beginning of an entity’s first fiscal year thatbegins after November 15, 2009 (thus, calendar-year-end companies mustadopt it on January 1, 2010). The Company does not anticipate a materialimpact on its consolidated financial statements as a result of this statement.

 

In June 2009, FASB issued Statement No. 167(SFAS 167), “Amendments to FASB Interpretation No. 46R”. Thestatement amends the consolidation guidance that applies to variable interestentities (VIE). Accordingly, an 

 

16

----

Table of Contents

 

enterprise will need to reconsider previous Interpretation 46conclusions to define whether an entity is a VIE and whether the enterprise isthe VIE’s primary beneficiary as well as appropriate financial statementdisclosures.  SFAS 167 is effectiveas of the beginning of the first fiscal year that begins after November 15,2009. Early adoption is prohibited. The Company does not anticipate a materialimpact on its consolidated financial statements as a result of this statement.

 

In June 2009, FASB issued Statement No. 168(SFAS 168), “The FASB Accounting Standards Codification and the Hierarchyof Generally Accepted Accounting Principles—a replacement of FASB StatementNo.162”. The FASB Accounting Standards Codification tm will becomethe source of authoritative U.S. GAAP recognized by the FASB to be applied bynongovernmental entities. The statement is effective for financial statementsissued for interim and annual periods ending after September 15, 2009. TheCompany does not anticipate the statement to result in changes to currentpractices nor have a material effect on the consolidated statements of theCompany.

 

17

----

Table of Contents

 

**TF FINANCIAL CORPORATION ANDSUBSIDIARIES**

 

**ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL POSITION AND RESULTS OF OPERATIONS**

 

**GENERAL**

 

TheCompany may from time to time make written or oral “forward-looking statements”,including statements contained in the Company’s filings with the Securities andExchange Commission (including this Quarterly Report on Form 10-Q and theexhibits thereto), in its reports to stockholders and in other communicationsby the Company, which are made in good faith by the Company pursuant to the “SafeHarbor” Provisions of the Private Securities Litigation Reform Act of 1995.

 

Theseforward-looking statements involve risks and uncertainties, such as statementsof the Company’s plans, objectives, expectations, estimates and intentions thatare subject to change based on various important factors (some of which are beyondthe Company’s control). The following factors, among others, could cause theCompany’s financial performance to differ materially from the plans,objectives, expectations, estimates and intentions expressed in suchforward-looking statements: the strength of the United States economy ingeneral and the strength of the local economies in which the Company conductsoperations; the effects of, and changes in, trade, monetary and fiscal policiesand laws, including interest rate policies of the Board of Governors of theFederal Reserve System, inflation, interest rate, market and monetaryfluctuations; the timely development of and acceptance of new products andservices of the Company and the perceived overall value of these products andservices by users, including the features, pricing and quality compared tocompetitors’ products and services; the willingness of users to substitutecompetitors’ products and services for the Company’s products and services; thesuccess of the Company in gaining regulatory approval of its products andservices, when required; the impact of changes in financial services’ laws andregulations (including laws concerning taxes, banking, securities andinsurance); technological changes, acquisitions; changes in consumer spendingand saving habits; and the success of the Company at managing the risksinvolved in the foregoing.

 

TheCompany cautions that the foregoing list of important factors is not exclusive.The Company does not undertake to update any forward-looking statement, whetherwritten or oral, that may be made from time to time by or on behalf of theCompany.

 

**Financial Position**

 

TheCompany’s total assets at June 30, 2009 and December 31, 2008 were$724.5 million and $733.7 million, respectively, a decrease of $9.2 million, or1.3% during the six-month period. Mortgage-backed securities available for saledecreased by $10.2 million due to principal repayments received of $16.0million, offset by purchases of $4.6 million, an increase in the fair value ofthe securities of $1.1 million and net discount accretion of $0.1million.  Mortgage-backed securities held to maturitydecreased by $0.7 million mainly as a result of principal repayments. Loansreceivable, net decreased by $3.3 million during the first six months of 2009.Principal repayments of loans receivable totaled $46.7 million which wereoffset by originations of consumer and single-family residential mortgage loansof $36.2 million and commercial loans of $11.4 million. The Company increasedthe allowance for loan losses by $1.3 million and also transferred $2.2 millionfrom loans to real estate acquired through foreclosure. Loans receivable heldfor sale decreased by $0.7 million, mainly the net result of loans originatedfor sale during the first six months of 2009 of $28.6 million, less $29.5million in proceeds from the sale of loans in the secondary market.

 

Cashand cash equivalents increased $3.5 million and these funds were appliedtowards investment purchases settling in July. Investment securities availablefor sale increased $0.4 million due to purchases of municipal bonds of $6.8million which offset sales and security redemptions of $6.0 million as well as$0.4 million of market value decline and premium amortization.

 

Totalliabilities decreased by $11.2 million during the first six months of 2009.Advances from the Federal Home Loan Bank decreased by $67.0 million in thefirst six months of 2009, the result of a $32.4 million decrease in short-termborrowings and scheduled amortization payments of $34.6 million. Othershort-term borrowings with the Federal Reserve Bank increased by $10.0 millionduring the first six months of 2009.

 

Depositsgrew by $41.2 million due to an increase of $10.0 million in retail certificates of deposit and anincrease in money market, interest and non-interest checkingaccounts of $38.4 million less a decrease in savings accounts of $7.2 million.

 

18

----

Table of Contents

 

Totalconsolidated stockholder’s equity of the Company was $69.7 million or 9.6% oftotal assets at June 30, 2009. During the first six months of 2009, theCompany issued 873 shares of common stock as a result of stock optionexercises. At June 30, 2009, there were approximately 102,000 sharesavailable for repurchase under the previously announced share repurchase plan.

 

**Asset Quality**

 

During 2009, the Company completed foreclosure proceedings on threeparcels of real estate. These loans were non-performing at December 31,2008. As a result of these foreclosures, the Bank recorded a charge-off in theamount of $94,000. Two properties with a carrying value of $1.0 million weresold and the Company realized a gain of $303,000 from the disposition of theproperties. The remaining property with a carrying value of $1.1 million isincluded in other assets in the consolidated balance sheet at June 30,2009. Subsequent to June 30, 2009 the Company sold the property andrealized net proceeds of approximately $1.2 million. During the first sixmonths of 2009 and 2008, the Company’s provision for loan losses was $1,255,000and $340,000, respectively. With respect to each of the remainingnon-performing loans, all of which are real estate secured, the Bank is takingappropriate steps to resolve the individual situations.

 

Thefollowing table sets forth information regarding the Company’s asset quality(dollars in thousands):

 
| ** **                                                       | ** ** | **June 30,** | ** ** | **December 31,** | ** ** | **June 30,** | ** ** |
|------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                                                       | ** ** | **2009**          | ** ** | **2008**              | ** ** | **2008**          | ** ** |
| ** **                                                       | ** ** | ** **        | ** ** | ** **            | ** ** | ** **        | ** ** |
| Loans delinquent 30-89 days                                      |       | $                 | 1,297      |                  | $          | 891               |       | $ | 1,066 |   |
| Loans delinquent 90 days or  more and other non performing loans |       |              | 3,039      |                  |       | 5,279             |       |   | 2,368 |   |
| Ratio of non-performing  loans to gross loans                    |       | 0.55              | %          | 0.96                  | %          | 0.43              | %          |
| Ratio of non-performing  loans to total assets                   |       | 0.42              | %          | 0.72                  | %          | 0.33              | %          |
| Foreclosed real estate                                           |       | 1,130             |       | —                |       | 306               |       |
| Ratio of total  non-performing assets to total assets            |       | 0.58              | %          | 0.72                  | %          | 0.37              | %          |
| Ratio of allowance for loan  losses to total loans               |       | 0.91              | %          | 0.70                  | %          | 0.52              | %          |
| Ratio of allowance for loan  losses to non-performing loans      |       | 163.54            | %          | 73.03                 | %          | 120.14            | %          |
|                                                                  |            |                   |            |                       |            |                   |            |  |  |  |  |  |  |

 

Managementmaintains an allowance for loan losses at levels that are believed to beadequate; however, there can be no assurances that further additions will notbe necessary or that losses inherent in the existing loan portfolio will notexceed the allowance. The following table sets forth the activity in theallowance for loan losses during the periods indicated (in thousands):

 
| ** **                         | ** ** | **2009** | ** ** | **2008** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|
| Beginning balance, January 1, |       | $        | 3,855      |     | $          | 2,842 |   |
| Provision                          |       | 1,255    |       | 340      |       |
| Less: charge-off’s, net       |       | 140      |       | 337      |       |
| Ending balance, June 30,      |       | $        | 4,970      |     | $          | 2,845 |   |
|                                    |            |          |            |          |            |  |  |  |

 

**RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2009 AND 2008**

 

**Net Income**. The Company recorded net income of $1,222,000, or$0.48 per diluted share, for the three months ended June 30, 2009 ascompared to net income of $1,184,000, or $0.44 per diluted share, for the threemonths ended June 30, 2008.

 

19

----

Table of Contents

 

### **Average Balance Sheet**

###  

Thefollowing table sets forth information (dollars in thousands) relating to theCompany’s average balance sheet and reflects the average yield on assets andaverage cost of liabilities for the periods indicated. Yield and cost arecomputed by dividing income or expense by the average daily balance ofinterest-earning assets or interest-bearing liabilities, respectively, for thethree-month periods indicated.

 
| ** **                                                                        | ** ** | **June 30,**    | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                        | ** ** | **2009**             | ** ** | **2008** | ** ** |
| ** **                                                                        | ** ** | **Average  balance** | ** ** | **Interest** | ** ** | **Average  yld/cost** | ** ** | **Average  balance** | ** ** | **Interest** | ** ** | **Average  yld/cost** | ** ** |
| **ASSETS**                                                                        |       |                 |       |   |   |   |   |   |   |   |   |   |   |
| **Interest-earning assets:**                                                      |       |                 |       |   |   |   |   |   |   |   |   |   |   |
| Loans receivable(1)                                                               |       | $                    | 542,569    |   | $ | 7,658 |   | 5.66 | % | $ | 545,958 |   | $ | 8,155 |   | 6.01 | % |
| Mortgage-backed securities                                                        |       | 104,491              |       | 1,294 |   | 4.97 | % | 97,397 |   | 1,132 |   | 4.67 | % |
| Investment securities(2)                                                          |       | 38,060               |       | 379 |   | 3.99 | % | 41,915 |   | 471 |   | 4.52 | % |
| Other interest-earning  assets(3)                                                 |       | 2,011                |       | — | * | — | % | 665 |   | 4 |   | 2.42 | % |
| Total interest-earning  assets                                                    |       | 687,131              |       | 9,331 |   | 5.45 | % | 685,935 |   | 9,762 |   | 5.72 | % |
| Non interest-earning  assets                                                      |       | 38,517               |       |   |   |   |   | 36,265 |   |   |   |   |   |
| Total assets                                                                      |       | $                    | 725,648    |   |   |   |   |   | $ | 722,200 |   |   |   |   |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                    |       |                 |       |   |   |   |   |   |   |   |   |   |   |
| **Interest-bearing liabilities:**                                                 |       |                 |       |   |   |   |   |   |   |   |   |   |   |
| Deposits                                                                          |       | 518,374              |       | 2,441 |   | 1.89 | % | 486,394 |   | 2,926 |   | 2.42 | % |
| Borrowings from the FHLB  and other borrowings                                    |       | 128,620              |       | 1,208 |   | 3.77 | % | 155,675 |   | 1,571 |   | 4.06 | % |
| Total interest-bearing  liabilities                                               |       | 646,994              |       | 3,649 |   | 2.26 | % | 642,069 |   | 4,497 |   | 2.82 | % |
| Non interest-bearing  liabilities                                                 |       | 9,302                |       |   |   |   |   | 9,934 |   |   |   |   |   |
| Total liabilities                                                                 |       | 656,296              |       |   |   |   |   | 652,003 |   |   |   |   |   |
| Stockholders’ equity                                                         |       | 69,352               |       |   |   |   |   | 70,197 |   |   |   |   |   |
| Total liabilities and  stockholders’ equity                                  |       | $                    | 725,648    |   |   |   |   |   | $ | 722,200 |   |   |   |   |   |
| Net interest income—tax  equivalent basis                                    |       |                 |       | $ | 5,682 |   |   |   |   |   | $ | 5,265 |   |   |   |
| Interest rate  spread(4)-tax equivalent basis                                     |       |                 |       |   |   | 3.19 | % |   |   |   |   | 2.90 | % |
| Net yield on  interest-earning assets(5) —tax equivalent basis          |       |                 |       |   |   | 3.32 | % |   |   |   |   | 3.09 | % |
| Ratio of average  interest-earning assets to average interest-bearing liabilities |       |                 |       |   |   | 106.20 | % |   |   |   |   | 106.83 | % |
| Less: tax—equivalent  interest adjustment                                    |       |                 |       | (103 | ) |   |   |   |   | (106 | ) |   |   |
| Net interest income                                                               |       |                 |       | $ | 5,579 |   |   |   |   |   | $ | 5,159 |   |   |   |
| Interest rate spread(4)                                                           |       |                 |       |   |   | 3.12 | % |   |   |   |   | 2.84 | % |
| Net yield on  interest-earning assets(5)                                          |       |                 |       |   |   | 3.26 | % |   |   |   |   | 3.02 | % |

 

----

| (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 $103,000 and $106,000  for the quarter ended June 30, 2009 and 2008, 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.                                                                                                                          |
| *   |   | Is less than $500 for period indicated.                                                                                                                                                                                                            |

 

20

----

Table ofContents

 

**Rate/Volume Analysis**

 

Thefollowing table presents, for the periods indicated, the change in interestincome and interest expense (in thousands) attributed to (i) changes involume (changes in the weighted average balance of the total interest earningasset and interest bearing liability portfolios multiplied by the prior yearrate), and (ii) changes in rate (changes in rate multiplied by prior yearvolume). Changes attributable to the combined impact of volume and rate havebeen allocated proportionately based on the absolute value of changes due tovolume and changes due to rate.

 
| ** **                                     | ** ** | **Three months ended June 30**                    | ** ** |
|------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                     | ** ** | **2009 vs 2008  Increase (decrease) due to** | ** ** |
| ** **                                     | ** ** | **Volume**                                                            | ** ** | **Rate** | ** ** | **Net** | ** ** |
| **Interest income:**                           |       |                                                                  |       |   |   |   |   |
| Loans receivable, net                          |       | $                                                                     | (48        | ) | $ | (449 | ) | $ | (497 | ) |
| Mortgage-backed securities                     |       | 87                                                                    |       | 75 |   | 162 |   |
| Investment securities (1)                      |       | (41                                                                   | )          | (51 | ) | (92 | ) |
| Other interest-earning assets                  |       | 19                                                                    |       | (23 | ) | (4 | ) |
| Total interest-earning assets                  |       | 17                                                                    |       | (448 | ) | (431 | ) |
| **Interest expense:**                          |       |                                                                  |       |   |   |   |   |
| Deposits                                       |       | 1,079                                                                 |       | (1,564 | ) | (485 | ) |
| Borrowings from the FHLB and other  borrowings |       | (257                                                                  | )          | (106 | ) | (363 | ) |
| Total interest-bearing liabilities             |       | 822                                                                   |       | (1,670 | ) | (848 | ) |
| Net change in net interest income              |       | $                                                                     | (805       | ) | $ | 1,222 |   | $ | 417 |   |

 

----

| (1) | Tax  equivalent adjustments to interest on investment securities were $103,000 and  $106,000 for the quarters ended June 30, 2009 and 2008, respectively.  Tax equivalent interest income is based upon a marginal effective tax rate of  34%. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**Total Interest Income**. Total interest income, ona taxable equivalent basis, decreased by $431,000 or 4.4% to $9.3 million forthe quarter ended June 30, 2009 compared with the second quarter of 2008.Interest income from loans receivable decreased by $497,000, the result of adecrease in the average balance of loans outstanding of $3.4 million, plus adecrease in the yield on loans of 35 basis points primarily as a result of theCompany’s reduction of its prime rate three times during the last quarter of2008 by a combined 175 basis points mirroring the action taken by the FederalOpen Markets Committee (FOMC) when it acted to reduce the fed funds rate.Interest income from investment securities decreased as a result of thedecrease of $56,000 in dividends paid on the Company’s $9.9 million requiredholdings of FHLB stock. The FHLB had paid dividends on the stock for the secondquarter of 2008 but suspended dividend payments until further notice during thefourth quarter of 2008. Interest income from mortgage-backed securities washigher in the second quarter of 2009 in comparison to the same period of 2008due to purchases of $32.9 million of securities which exceeded principalrepayments of $26.1 million during the intervening period.

 

**TotalInterest Expense.**Totalinterest expense decreased by $848,000 to $3.6 million during the three-monthperiod ended June 30, 2009 as compared with the second quarter of 2008.The average balance of deposits increased by $32.0 million between the twoquarters, and interest rates paid on the Bank’s deposits were 53 basis pointslower in 2009.

 

Interest expenseassociated with borrowings from the Federal Home Loan Bank and the FederalReserve Bank decreased $363,000 between the second quarters of 2009 and 2008.During the intervening period, the Bank reduced its average outstandingborrowings by $27.1 million and replaced maturing higher cost advances with lowcost short-term advances.

 

**Non-interest income**. Total non-interest incomewas $1.4 million for the second quarter of 2009 compared with $1.1 million forthe same period in 2008. The second quarter of 2009 included a gain on the sale of an investmentsecurity of $116,000 while there was no such gain in the same quarter of 2008.Also, during 2009, the gain on sale of loans held for sale increased by$156,000 as a result of the high level of residential loan refinancing activitywhich occurred in the second quarter of 2009.

 

21

----

Table of Contents

 

**Non-interest expense.**Total non-interest expenseincreased by $444,000 to $4.8 million for the three months ended June 30,2009 compared to the same period in 2008. FDIC insurance premiums increased by$498,000 between the two quarters due to a special assessment imposed by theFDIC of $330,000 in addition to an increase in the regular FDIC insurancepremium as a result of increased deposits, an increased assessment rate and theexhaustion of a credit the Company has been entitled to apply against thequarterly billed insurance premium. Compensation expense associated with stockoptions and grants decreased $164,000 during the quarter as a result ofsubstantial completion of the vesting period used for expense recognition in2008. Offsetting this reduction was an increase in employee compensation of$79,000, the combined result of annual salary increases and decreasedcommercial loan originations which lowered the deferral of in-housecompensation costs. Also, costs associated with employee benefit plansincreased $60,000 between the two quarters. The decrease in occupancy andequipment costs is due to the closing of the branch office on Quakerbridge Roadin Mercer County during the second quarter of 2008.

 

**Income tax expense.**The Company’s effective taxrate was 26.0% for the quarter ended June 30, 2009 compared to 27.1% forthe quarter ended June 30, 2008. These effective tax rates are lower thanthe Company’s marginal tax rate of 34% largely due to the tax-exempt incomeassociated with the Company’s investments in tax-exempt municipal bonds andbank-owned life insurance.

 

**RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2009 AND 2008**

 

**Net Income**. The Company recorded net income of $2,242,000, or$0.89 per diluted share, for the six months ended June 30, 2009 ascompared to net income of $2,465,000, or $0.92 per diluted share, for the sixmonths ended June 30, 2008.

 

22

----

Table of Contents

 

### **Average Balance Sheet**

###  

Thefollowing table sets forth information (dollars in thousands) relating to theCompany’s average balance sheet and reflects the average yield on assets andaverage cost of liabilities for the periods indicated. Yield and cost arecomputed by dividing income or expense by the average daily balance ofinterest-earning assets or interest-bearing liabilities, respectively, for thesix-month periods indicated.

 
| ** **                                                                        | ** ** | **June 30,**    | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                        | ** ** | **2009**             | ** ** | **2008** | ** ** |
| ** **                                                                        | ** ** | **Average  balance** | ** ** | **Interest** | ** ** | **Average  yld/cost** | ** ** | **Average  balance** | ** ** | **Interest** | ** ** | **Average  yld/cost** | ** ** |
| **ASSETS**                                                                        |       |                 |       |   |   |   |   |   |   |   |   |   |   |
| **Interest-earning assets:**                                                      |       |                 |       |   |   |   |   |   |   |   |   |   |   |
| Loans receivable(1)                                                               |       | $                    | 543,826    |   | $ | 15,313 |   | 5.69 | % | $ | 537,411 |   | $ | 16,338 |   | 6.11 | % |
| Mortgage-backed securities                                                        |       | 106,921              |       | 2,679 |   | 5.07 | % | 99,810 |   | 2,363 |   | 4.76 | % |
| Investment securities(2)                                                          |       | 38,755               |       | 759 |   | 3.96 | % | 41,850 |   | 990 |   | 4.76 | % |
| Other interest-earning  assets(3)                                                 |       | 1,260                |       | — | * | — | % | 818 |   | 10 |   | 2.46 | % |
| Total interest-earning  assets                                                    |       | 690,762              |       | 18,751 |   | 5.49 | % | 679,889 |   | 19,701 |   | 5.83 | % |
| Non interest-earning  assets                                                      |       | 36,754               |       |   |   |   |   | 35,344 |   |   |   |   |   |
| Total assets                                                                      |       | $                    | 727,516    |   |   |   |   |   | $ | 715,233 |   |   |   |   |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                    |       |                 |       |   |   |   |   |   |   |   |   |   |   |
| **Interest-bearing liabilities:**                                                 |       |                 |       |   |   |   |   |   |   |   |   |   |   |
| Deposits                                                                          |       | 506,677              |       | 4,954 |   | 1.98 | % | 479,497 |   | 6,212 |   | 2.61 | % |
| Borrowings from the FHLB  and other borrowings                                    |       | 143,193              |       | 2,493 |   | 3.52 | % | 157,363 |   | 3,203 |   | 4.09 | % |
| Total interest-bearing  liabilities                                               |       | 649,870              |       | 7,447 |   | 2.32 | % | 636,860 |   | 9,415 |   | 2.97 | % |
| Non interest-bearing  liabilities                                                 |       | 8,882                |       |   |   |   |   | 9,285 |   |   |   |   |   |
| Total liabilities                                                                 |       | 658,752              |       |   |   |   |   | 646,145 |   |   |   |   |   |
| Stockholders’ equity                                                         |       | 68,764               |       |   |   |   |   | 69,088 |   |   |   |   |   |
| Total liabilities and  stockholders’ equity                                  |       | $                    | 727,516    |   |   |   |   |   | $ | 715,233 |   |   |   |   |   |
| Net interest income—tax equivalent  basis                                    |       |                 |       | $ | 11,304 |   |   |   |   |   | $ | 10,286 |   |   |   |
| Interest rate  spread(4)-tax equivalent basis                                     |       |                 |       |   |   | 3.17 | % |   |   |   |   | 2.86 | % |
| Net yield on  interest-earning assets(5) —tax equivalent basis          |       |                 |       |   |   | 3.31 | % |   |   |   |   | 3.05 | % |
| Ratio of average  interest-earning assets to average interest-bearing liabilities |       |                 |       |   |   | 106.29 | % |   |   |   |   | 106.76 | % |
| Less: tax—equivalent  interest adjustment                                    |       |                 |       | (206 | ) |   |   |   |   | (212 | ) |   |   |
| Net interest income                                                               |       |                 |       | $ | 11,098 |   |   |   |   |   | $ | 10,074 |   |   |   |
| Interest rate spread(4)                                                           |       |                 |       |   |   | 3.11 | % |   |   |   |   | 2.79 | % |
| Net yield on  interest-earning assets(5)                                          |       |                 |       |   |   | 3.25 | % |   |   |   |   | 2.98 | % |

 

----

| (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 $206,000 and  $212,000 for the six months ended June 30, 2009 and 2008, 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.                                                                                                                             |
| *   | Is  less than $500 for period indicated.                                                                                                                                                                                                              |

 

23

----

Table ofContents

 

**Rate/Volume Analysis**

 

Thefollowing table presents, for the periods indicated, the change in interestincome and interest expense (in thousands) attributed to (i) changes involume (changes in the weighted average balance of the total interest earningasset and interest bearing liability portfolios multiplied by the prior yearrate), and (ii) changes in rate (changes in rate multiplied by prior yearvolume). Changes attributable to the combined impact of volume and rate havebeen allocated proportionately based on the absolute value of changes due tovolume and changes due to rate.

 
| ** **                                     | ** ** | **Six months ended June 30,**                     | ** ** |
|------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                     | ** ** | **2009 vs 2008  Increase (decrease) due to** | ** ** |
| ** **                                     | ** ** | **Volume**                                                            | ** ** | **Rate** | ** ** | **Net** | ** ** |
| **Interest income:**                           |       |                                                                  |       |   |   |   |   |
| Loans receivable, net                          |       | $                                                                     | 516        |   | $ | (1,541 | ) | $ | (1,025 | ) |
| Mortgage-backed securities                     |       | 166                                                                   |       | 150 |   | 316 |   |
| Investment securities (1)                      |       | (71                                                                   | )          | (160 | ) | (231 | ) |
| Other interest-earning assets                  |       | 11                                                                    |       | (21 | ) | (10 | ) |
| Total interest-earning assets                  |       | 622                                                                   |       | (1,572 | ) | (950 | ) |
| **Interest expense:**                          |       |                                                                  |       |   |   |   |   |
| Deposits                                       |       | 907                                                                   |       | (2,165 | ) | (1,258 | ) |
| Borrowings from the FHLB and other  borrowings |       | (278                                                                  | )          | (432 | ) | (710 | ) |
| Total interest-bearing liabilities             |       | 629                                                                   |       | (2,597 | ) | (1,968 | ) |
| Net change in net interest income              |       | $                                                                     | (7         | ) | $ | 1,025 |   | $ | 1,018 |   |

 

----

| (1) | Tax  equivalent adjustments to interest on investment securities were $206,000 and  $212,000 for the six months ended June 30, 2009 and 2008, respectively.  Tax equivalent interest income is based upon a marginal effective tax rate of  34%. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**Total Interest Income**. Total interest income, ona taxable equivalent basis, decreased by $950,000 or 4.8% to $18.8 million forthe six months ended June 30, 2009 compared with the first six months of2008. Interest income from loans receivable decreased by $1.0 million, theresult of a decrease in the average yield on loans of 42 basis points primarilyas a result of the Company’s reduction of its prime rate three times during thelast quarter of 2008 by a combined 175 basis points mirroring the action takenby the Federal Open Markets Committee (FOMC) when it acted to reduce the fed fundsrate. However the average balance of loans receivable increased $6.4 millionduring the intervening period.  Interestincome from investment securities decreased as a result of the decrease of$151,000 in dividends paid on the Company’s $9.9 million required holdings ofFHLB stock. The dividends had been paid through September 30, 2008 butwere suspended indefinitely during the fourth quarter of 2008. Interest incomefrom mortgage-backed securities was higher in the first two quarters of 2009 incomparison to the same period of 2008 due to purchases of $32.9 million ofsecurities which exceeded principal repayments of $26.1 million during theintervening period.

 

**TotalInterest Expense.**Totalinterest expense decreased by $2.0 million to $7.4 million during the six-monthperiod ended June 30, 2009 as compared with the first half of 2008 Therewas a $27.2 million increase in average outstanding deposit balances during thesix months ended June 30, 2009, and the average interest rates paid on theBank’s deposits were 57 basis points lower in 2009.Interest expense associated with borrowings decreased$0.7 million between the first six months of 2009 and 2008. During theintervening period, the Bank decreased its average borrowings outstanding by$14.2 million from the FHLB and also replaced maturing high cost advances withlow-cost short-term advances.

 

**Non-interest income**. Total non-interest incomewas $2.4 million for the first six months of 2009 compared with $2.2 millionfor the same period in 2008. Gain on the sale of investment securities totaled $306,000 in 2009 while there was no such gain in 2008.Also, during 2009, the gain on sale of loans held for sale increased by$242,000 as a result of the high level of residential loan refinancing activitywhich occurred in the first six months of 2009. Offsetting these increases wasthe increase in amortization of mortgage servicing rights in first six monthsof 2009 which reduced loan servicing income between the periods by $30,000.Overdraft fees earned in first six months of 2009 were $86,000 lower than thesame period in 2008. Other operating income during 2008 included$100,000 of non-recurring income recognized due to forfeited options topurchase the Company’s real estate held for development. Additionally, other income for the firstsix months of 2008 was a $197,000 insurance claim recovery.

 

24

----

Table ofContents

 

**Non-interest expense.**Total non-interest expenseincreased by $606,000 to $9.2 million for the six months ended June 30,2009 compared to the same period in 2008. Employee compensation increased by$296,000, the combined result of annual salary increases and decreasedcommercial loan originations which lowered the deferral of in-housecompensation costs. Also, costs associated with employee benefit plans increasedby $147,000 between the two periods. Offsetting these increases was a decrease in compensation expenseassociated with stock options and grants of $330,000 as a result of substantialcompletion of the vesting period used for expense recognition in 2008. FDICinsurance premiums increased by $505,000 in the first six months of 2009 due toa special assessment imposed by the FDIC of $330,000 in addition to an increasein the regular FDIC insurance premium as a result of increased deposits, anincreased assessment rate and the exhaustion of a credit the Company has beenentitled to apply against the quarterly billed insurance premium. Otheroperating expense during the first six months of 2009 included an increase inrobbery and deposit related losses of $50,000. The $50,000 decrease inoccupancy and equipment costs is due to the closing of the branch office onQuakerbridge Road in Mercer County during the second quarter of 2008.

 

**Income tax expense.**The Company’s effective taxrate was 25.7% for the six months ended June 30, 2009 compared to 27.3%for the six months ended June 30, 2008. These effective tax rates arelower than the Company’s marginal tax rate of 34% largely due to the tax-exemptincome associated with the Company’s investments in tax-exempt municipal bondsand bank-owned life insurance.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

**Liquidity**

 

The Company’s liquidity is a measure of its ability tofund loans, pay withdrawals of deposits, and other cash outflows in anefficient, cost-effective manner. The Company’s short-term sources of liquidityinclude maturity, repayment and sales of assets, excess cash and cashequivalents, new deposits, broker deposits, other borrowings, and newborrowings from the Federal Home Loan Bank and the Federal Reserve Bank. There hasbeen no material adverse change during the three-month period ended June 30,2009 in the ability of the Company and its subsidiaries to fund theiroperations.

 

At June 30, 2009, the Company had commitmentsoutstanding under letters of credit of $1.4 million, commitments to originateloans of $9.9 million, and commitments to fund undisbursed balances of closedloans and unused lines of credit of $49.1 million. At June 30, 2009, theBank had $2.4 million outstanding commitments to sell loans. There has been no material change duringthe three months ended June 30, 2009 in any of the Company’s othercontractual obligations or commitments to make future payments.

 

**Capital Requirements**

 

The Bank was in compliance with all of its capitalrequirements as of June 30, 2009.

 

**CRITICAL ACCOUNTING POLICIES**

 

Certaincritical accounting policies of the Company require the use of significantjudgment and accounting estimates in the preparation of the consolidatedfinancial statements and related data of the Company. These accountingestimates require management to make assumptions about matters that are highlyuncertain at the time the accounting estimate is made. Management believes thatthe most critical accounting policy requiring the use of accounting estimatesand judgment is the determination of the allowance for loan losses. If thefinancial position of a significant amount of debtors should deteriorate morethan the Company has estimated, present reserves for loan losses may beinsufficient and additional provisions for loan losses may be required. Theallowance for loan losses was approximately $5.0 million at June 30, 2009.

 

25

----

Table of Contents

 

###### **ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK**

######  

Asa “smaller reporting company” as defined by Item 10 of Regulation S-K, theCompany is not required to provide the information required by this item.

 

**ITEM 4T. CONTROLS AND PROCEDURES**

 

**Evaluation of Disclosure Controls and Procedures**

 

Basedon their evaluation of the Company’s disclosure controls and procedures (asdefined in Rule 13a-15(e) under the Securities Exchange Act of 1934(the “Exchange Act”)), the Company’s principal executive officer and principalfinancial officer have concluded that as of the end of the period covered bythis Quarterly Report on Form 10-Q such disclosure controls and proceduresare effective to ensure that information required to be disclosed by the Companyin the reports it files and submits pursuant to the rules and forms of theSEC is accumulated and communicated to the Company’s management including theprincipal executive officer and principal financial officer, as appropriate, toallow timely decisions regarding required disclosures.

 

**Changes in Internal Controls over Financial Reporting**

 

Duringthe quarter under report, there was no change in the Company’s internal controlover financial reporting that has materially affected, or is reasonably likelyto materially affect, the Company’s internal control over financial reporting

 

26

----

Table of Contents

 

**TF FINANCIAL CORPORATION ANDSUBSIDIARIES**

 

**PART II**

 
| **ITEM 1.**  | ** ** | **LEGAL PROCEEDINGS**                                                                                                                                                                                                                                                                                                                              |
|--------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **   | ** ** | ** **                                                                                                                                                                                                                                                                                                                                         |
|         |       | Neither the Company nor its subsidiaries are involved in any pending  legal proceedings, other than routine legal matters occurring in the ordinary  course of business that in the aggregate involve amounts which are believed  by management to be immaterial to the consolidated financial condition or  results of operations of the Company. |
| ** **   | ** ** | ** **                                                                                                                                                                                                                                                                                                                                         |
| **ITEM 1A**. |       | **RISK****FACTORS**                                                                                                                                                                                                                                                                                                                                |
|         |       |                                                                                                                                                                                                                                                                                                                                               |
|         |       | As  a “smaller reporting company” as defined by Item 10 of Regulation S-K, the  Company is not required to provide the information required by this item.                                                                                                                                                                                |
|         |       |                                                                                                                                                                                                                                                                                                                                               |
| **ITEM 2.**  | ** ** | **UNREGISTERED SALE OF EQUITY SECURITIES AND USE  OF PROCEEDS**                                                                                                                                                                                                                                                                                    |
|         |       |                                                                                                                                                                                                                                                                                                                                               |
|         |       | None.                                                                                                                                                                                                                                                                                                                                              |
|         |       |                                                                                                                                                                                                                                                                                                                                               |
| **ITEM 3.**  |       | **DEFAULTS UPON SENIOR SECURITIES**                                                                                                                                                                                                                                                                                                                |
|         |       |                                                                                                                                                                                                                                                                                                                                               |
|         |       | Not applicable.                                                                                                                                                                                                                                                                                                                                    |
|         |       |                                                                                                                                                                                                                                                                                                                                               |
| **ITEM 4.**  |       | **SUBMISSION OF MATTERS TO A VOTE  OF SECURITY HOLDERS**                                                                                                                                                                                                                                                                                           |
|         |       | None.                                                                                                                                                                                                                                                                                                                                              |
|         |       |                                                                                                                                                                                                                                                                                                                                               |
| **ITEM 5.**  |       | **OTHER INFORMATION**                                                                                                                                                                                                                                                                                                                              |
|         | ** ** |
|         |       | None.                                                                                                                                                                                                                                                                                                                                              |
|         |       |                                                                                                                                                                                                                                                                                                                                               |
| **ITEM 6.**  |       | **EXHIBITS**                                                                                                                                                                                                                                                                                                                                       |
|         |       |                                                                                                                                                                                                                                                                                                                                               |
|         |       | (a)                                                                                                                                                                                                                                                                                                                                                | Exhibits |
|         |       |                                                                                                                                                                                                                                                                                                                                               | 31.1 | Certification of CEO pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002. |
|         |       |                                                                                                                                                                                                                                                                                                                                               | 31.2 | Certification of CFO pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002. |
|         |       |                                                                                                                                                                                                                                                                                                                                               | 32. | Certification pursuant to Section 906 of the Sarbanes-Oxley Act  of 2002. |

 

27

----

Table of Contents

 

**TF FINANCIAL CORPORATION**

 

**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this Report to be signed on its behalf by the undersigned,thereunto duly authorized.

 
| Date:  | August 14,  2009 |   | /s/  Kent C. Lufkin                                   |
|--------|-----------------------|--------|-------------------------------------------------------|
|   |                  |   | Kent C. Lufkin                                        |
|   |                  |   | President and CEO                                     |
|   |                  |   | (Principal  Executive Officer)                        |
|   |                  |   |                                                  |
|   |                  |   |                                                  |
| Date:  | August 14, 2009  |   | /s/ Dennis R.  Stewart                                |
|   |                  |   | Dennis R.  Stewart                                    |
|   |                  |   | Executive Vice  President and Chief Financial Officer |
|   |                  |   | (Principal  Financial & Accounting Officer)  |

 

28

----