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  September 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:**November 9, 2009**

 

| **Class**                   | ** ** | **Outstanding**  |
|-----------------------------|------------|------------------|
| $.10 par value common stock |       | 2,664,982 shares |

 

 

 

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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 | 17 |
|                                                |                                                                                 |   |   |
| 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        |   |
|                                                     |                                                                                      |  |  |  |

 

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** **

**TFFinancial Corporation and Subsidiaries**

 

**ITEM 1.CONSOLIDATED FINANCIAL STATEMENTS**

 

**CONSOLIDATEDBALANCE SHEETS**

 
| ** **                                                                                                                                                                                                                                                              | ** ** | **Unaudited  September 30,  2009** | ** ** | **Audited  December 31,  2008** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                                                                                                                                                                              | ** ** | **(in thousands)**                 | ** ** |
| ASSETS                                                                                                                                                                                                                                                                  |       |                                    |       |                                 |       |
| Cash and cash equivalents                                                                                                                                                                                                                                               |       | $                                       | 4,401      |                                 | $          | 2,719 |   |
| Investment securities available for sale—at fair  value                                                                                                                                                                                                            |       | 34,452                                  |       | 31,619                               |       |
| Mortgage-backed securities available for sale—at  fair value                                                                                                                                                                                                       |       | 94,250                                  |       | 107,217                              |       |
| Mortgage-backed securities held to maturity (fair  value of $4,248 and $4,996, respectively)                                                                                                                                                                            |       | 3,938                                   |       | 4,774                                |       |
| Loans receivable, net                                                                                                                                                                                                                                                   |       | 530,953                                 |       | 544,330                              |       |
| Loans receivable held for sale                                                                                                                                                                                                                                          |       | 1,594                                   |       | 1,659                                |       |
| Federal Home Loan Bank stock—at cost                                                                                                                                                                                                                               |       | 9,896                                   |       | 9,896                                |       |
| Accrued interest receivable                                                                                                                                                                                                                                             |       | 2,619                                   |       | 2,788                                |       |
| Premises and equipment, net                                                                                                                                                                                                                                             |       | 5,358                                   |       | 5,636                                |       |
| Goodwill                                                                                                                                                                                                                                                                |       | 4,324                                   |       | 4,324                                |       |
| Bank-owned life insurance                                                                                                                                                                                                                                               |       | 17,015                                  |       | 16,514                               |       |
| Other assets                                                                                                                                                                                                                                                            |       | 3,049                                   |       | 2,232                                |       |
| TOTAL ASSETS                                                                                                                                                                                                                                                            |       | $                                       | 711,849    |                                 | $          | 733,708 |   |
|                                                                                                                                                                                                                                                                    |       |                                    |       |                                 |       |
| LIABILITIES AND STOCKHOLDERS’  EQUITY                                                                                                                                                                                                                              |       |                                    |       |                                 |       |
| Liabilities                                                                                                                                                                                                                                                             |       |                                    |       |                                 |       |
| Deposits                                                                                                                                                                                                                                                                |       | $                                       | 531,949    |                                 | $          | 489,850 |   |
| Borrowings from the Federal Home Loan Bank                                                                                                                                                                                                                              |       | 89,744                                  |       | 158,148                              |       |
| Other short-term borrowings                                                                                                                                                                                                                                             |       | 10,000                                  |       | 10,000                               |       |
| Advances from borrowers for taxes and insurance                                                                                                                                                                                                                         |       | 1,588                                   |       | 2,315                                |       |
| Accrued interest payable                                                                                                                                                                                                                                                |       | 3,264                                   |       | 3,066                                |       |
| Other liabilities                                                                                                                                                                                                                                                       |       | 3,754                                   |       | 2,637                                |       |
| Total liabilities                                                                                                                                                                                                                                                       |       | 640,299                                 |       | 666,016                              |       |
|                                                                                                                                                                                                                                                                    |       |                                    |       |                                 |       |
| Stockholders’ equity                                                                                                                                                                                                                                               |       |                                    |       |                                 |       |
| Preferred stock, no par value; 2,000,000 shares  authorized at September 30, 2009 and December 31, 2008, none  issued                                                                                                                                    |       | —                                  |       | —                               |       |
| Common stock, $0.10 par value; 10,000,000 shares  authorized, 5,290,000 shares issued, 2,525,882 and 2,515,407 shares  outstanding at September 30, 2009 and December 31, 2008,  respectively, net of shares in treasury 2,626,219 and 2,627,752 respectively |       | 529                                     |       | 529                                  |       |
| Additional paid-in capital                                                                                                                                                                                                                                              |       | 54,015                                  |       | 53,897                               |       |
| Unearned ESOP shares                                                                                                                                                                                                                                                    |       | (1,379                                  | )          | (1,468                               | )          |
| Treasury stock-at cost                                                                                                                                                                                                                                                  |       | (54,516                                 | )          | (54,538                              | )          |
| Retained earnings                                                                                                                                                                                                                                                       |       | 71,720                                  |       | 69,875                               |       |
| Accumulated other comprehensive income (loss)                                                                                                                                                                                                                           |       | 1,181                                   |       | (603                                 | )          |
| Total stockholders’ equity                                                                                                                                                                                                                                         |       | 71,550                                  |       | 67,692                               |       |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                                                                                                         |       | $                                       | 711,849    |                                 | $          | 733,708 |   |

 

The accompanying notes are an integral partof these statements

 

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**TF FinancialCorporation and Subsidiaries**

 

**CONSOLIDATEDSTATEMENTS OF INCOME**

**(Unaudited)**

 
| ** **                                                | ** ** | **For the three months  ended  September 30,** | ** ** | **For the nine months  ended  September 30,** | ** ** |
|-----------------------------------------------------------|------------|--------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                | ** ** | **2009**                                                           | ** ** | **2008**                                                          | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                | ** ** | **(in thousands, except per share data)** | ** ** |
| Interest income                                           |       |                                                               |       |                                                              |       |   |   |   |   |
| Loans, including fees                                     |       | $                                                                  | 7,638      |                                                              | $          | 8,257 |   | $ | 22,951 |   | $ | 24,595 |   |
| Mortgage-backed securities                                |       | 1,170                                                              |       | 1,079                                                             |       | 3,849 |   | 3,442 |   |
| Investment securities                                     |       | 311                                                                |       | 383                                                               |       | 864 |   | 1,161 |   |
| Interest-bearing deposits and other                       |       | 1                                                                  |       | 6                                                                 |       | 1 |   | 16 |   |
|                                                      |       |                                                               |       |                                                              |       |   |   |   |   |
| TOTAL INTEREST INCOME                                     |       | 9,120                                                              |       | 9,725                                                             |       | 27,665 |   | 29,214 |   |
|                                                      |       |                                                               |       |                                                              |       |   |   |   |   |
| Interest expense                                          |       |                                                               |       |                                                              |       |   |   |   |   |
| Deposits                                                  |       | 2,393                                                              |       | 2,772                                                             |       | 7,347 |   | 8,984 |   |
| Borrowings                                                |       | 988                                                                |       | 1,576                                                             |       | 3,481 |   | 4,779 |   |
|                                                      |       |                                                               |       |                                                              |       |   |   |   |   |
| TOTAL INTEREST EXPENSE                                    |       | 3,381                                                              |       | 4,348                                                             |       | 10,828 |   | 13,763 |   |
|                                                      |       |                                                               |       |                                                              |       |   |   |   |   |
| NET INTEREST INCOME                                       |       | 5,739                                                              |       | 5,377                                                             |       | 16,837 |   | 15,451 |   |
|                                                      |       |                                                               |       |                                                              |       |   |   |   |   |
| Provision for loan losses                                 |       | 650                                                                |       | 150                                                               |       | 1,905 |   | 490 |   |
|                                                      |       |                                                               |       |                                                              |       |   |   |   |   |
| NET INTEREST INCOME AFTER PROVISION FOR LOAN  LOSSES |       | 5,089                                                              |       | 5,227                                                             |       | 14,932 |   | 14,961 |   |
|                                                      |       |                                                               |       |                                                              |       |   |   |   |   |
| Non-interest income                                       |       |                                                               |       |                                                              |       |   |   |   |   |
| Service fees, charges and other operating income          |       | 464                                                                |       | 504                                                               |       | 1,498 |   | 1,740 |   |
| Bank-owned life insurance                                 |       | 171                                                                |       | 155                                                               |       | 501 |   | 470 |   |
| Gain on sale of investments                               |       | —                                                             |       | —                                                            |       | 306 |   | — |   |
| Gain on sale of loans                                     |       | 127                                                                |       | 40                                                                |       | 528 |   | 199 |   |
| Gain on sale of foreclosed real estate                    |       | 34                                                                 |       | —                                                            |       | 337 |   | 342 |   |
| Other income                                              |       | —                                                             |       | —                                                            |       | — |   | 197 |   |
|                                                      |       |                                                               |       |                                                              |       |   |   |   |   |
| TOTAL NON-INTEREST INCOME                                 |       | 796                                                                |       | 699                                                               |       | 3,170 |   | 2,948 |   |
|                                                      |       |                                                               |       |                                                              |       |   |   |   |   |
| Non-interest expense                                      |       |                                                               |       |                                                              |       |   |   |   |   |
| Employee compensation and benefits                        |       | 2,601                                                              |       | 2,648                                                             |       | 7,917 |   | 7,863 |   |
| Occupancy and equipment                                   |       | 756                                                                |       | 691                                                               |       | 2,174 |   | 2,159 |   |
| Professional fees                                         |       | 195                                                                |       | 142                                                               |       | 651 |   | 563 |   |
| Marketing and advertising                                 |       | 118                                                                |       | 144                                                               |       | 382 |   | 433 |   |
| FDIC insurance premiums                                   |       | 182                                                                |       | 21                                                                |       | 714 |   | 48 |   |
| Other operating                                           |       | 568                                                                |       | 568                                                               |       | 1,782 |   | 1,742 |   |
|                                                      |       |                                                               |       |                                                              |       |   |   |   |   |
| TOTAL NON-INTEREST EXPENSE                                |       | 4,420                                                              |       | 4,214                                                             |       | 13,620 |   | 12,808 |   |
|                                                      |       |                                                               |       |                                                              |       |   |   |   |   |
| INCOME BEFORE INCOME TAXES                                |       | 1,465                                                              |       | 1,712                                                             |       | 4,482 |   | 5,101 |   |
|                                                      |       |                                                               |       |                                                              |       |   |   |   |   |
| Income taxes                                              |       | 353                                                                |       | 462                                                               |       | 1,128 |   | 1,386 |   |
|                                                      |       |                                                               |       |                                                              |       |   |   |   |   |
| NET INCOME                                                |       | $                                                                  | 1,112      |                                                              | $          | 1,250 |   | $ | 3,354 |   | $ | 3,715 |   |
|                                                      |       |                                                               |       |                                                              |       |   |   |   |   |
| Earnings per share—basic                             |       | $                                                                  | 0.44       |                                                              | $          | 0.47 |   | $ | 1.33 |   | $ | 1.40 |   |
| Earnings per share—diluted                           |       | $                                                                  | 0.44       |                                                              | $          | 0.47 |   | $ | 1.33 |   | $ | 1.39 |   |
| Dividends paid per share                                  |       | $                                                                  | 0.20       |                                                              | $          | 0.20 |   | $ | 0.60 |   | $ | 0.60 |   |

 

The accompanying notes are an integral part of these statements

 

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**TF Financial Corporation and Subsidiaries**

 

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(Unaudited****)**

 
| ** **                                                                        | ** ** | **For the nine months  ended  September 30,** | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                                        | ** ** | **2009**                                                          | ** ** | **2008** | ** ** |
| ** **                                                                        | ** ** | **(in thousands)**                                           | ** ** |
| OPERATING ACTIVITIES                                                              |       |                                                              |       |   |   |
| Net income                                                                        |       | $                                                                 | 3,354      |   | $ | 3,715 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities |       |                                                              |       |   |   |
| Amortization of   Mortgage loan servicing rights                                  |       | 136                                                               |       | 104 |   |
| Deferred loan origination fees                                                    |       | 76                                                                |       | (1 | ) |
| Premiums and discounts on investment securities,  net                             |       | 61                                                                |       | 65 |   |
| Premiums and discounts on mortgage-backed  securities, net                        |       | (172                                                              | )          | (105 | ) |
| Premiums and discounts on loans, net                                              |       | 134                                                               |       | 61 |   |
| Provision for loan losses                                                         |       | 1,905                                                             |       | 490 |   |
| Depreciation of premises and equipment                                            |       | 670                                                               |       | 720 |   |
| Increase in value of bank-owned life insurance                                    |       | (501                                                              | )          | (470 | ) |
| Stock grant expense                                                               |       | 12                                                                |       | 271 |   |
| Stock option expense                                                              |       | 42                                                                |       | 278 |   |
| Stock-based benefit programs: ESOP                                                |       | 161                                                               |       | 206 |   |
| Proceeds from sale of loans originated for sale                                   |       | 35,088                                                            |       | 13,435 |   |
| Origination of loans held for sale                                                |       | (34,797                                                           | )          | (12,372 | ) |
| Gain on sale of                                                                   |       |                                                              |       |   |   |
| Investments                                                                       |       | (306                                                              | )          | — |   |
| Loans held for sale                                                               |       | (528                                                              | )          | (199 | ) |
| Foreclosed real estate                                                            |       | (337                                                              | )          | (342 | ) |
| Decrease (increase) in                                                            |       |                                                              |       |   |   |
| Accrued interest receivable                                                       |       | 169                                                               |       | 253 |   |
| Other assets                                                                      |       | 467                                                               |       | (101 | ) |
| Increase in                                                                       |       |                                                              |       |   |   |
| Accrued interest payable                                                          |       | 198                                                               |       | 414 |   |
| Other liabilities                                                                 |       | 208                                                               |       | 55 |   |
| NET CASH PROVIDED BY OPERATING ACTIVITIES                                         |       | 6,040                                                             |       | 6,477 |   |
|                                                                              |       |                                                              |       |   |   |
| INVESTING ACTIVITIES                                                              |       |                                                              |       |   |   |
| Loan originations                                                                 |       | (67,343                                                           | )          | (106,805 | ) |
| Loan principal payments                                                           |       | 75,442                                                            |       | 73,773 |   |
| Principal repayments on mortgage-backed securities  held to maturity              |       | 843                                                               |       | 1,243 |   |
| Principal repayments on mortgage-backed securities  available for sale            |       | 25,311                                                            |       | 16,342 |   |
| Purchase of investment securities available for  sale                             |       | (7,856                                                            | )          | (2,937 | ) |
| Purchase of mortgage-backed securities available  for sale                        |       | (10,608                                                           | )          | (5,895 | ) |
| Proceeds from sale of investment securities  available for sale                   |       | 5,514                                                             |       | — |   |
| Proceeds from redemption/maturities of investment  securities available for sale  |       | 755                                                               |       | 4,000 |   |
| Proceeds from maturity of investment securities  held to maturity                 |       | —                                                            |       | 245 |   |
| Purchase of Federal Home Loan Bank stock, net                                     |       | —                                                            |       | (708 | ) |
| Proceeds from the sale of foreclosed real estate                                  |       | 2,497                                                             |       | 1,272 |   |
| Purchase of premises and equipment                                                |       | (392                                                              | )          | (218 | ) |
| NET CASH PROVIDED BY (USED IN) INVESTING  ACTIVITIES                              |       | 24,163                                                            |       | (19,688 | ) |
|                                                                                   |            |                                                                   |            |  |  |  |  |

 

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| ** **                                                                                  | ** ** | **For the nine months ended  September 30,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                                                  | ** ** | **2009**                                                              | ** ** | **2008** | ** ** |
| ** **                                                                                  | ** ** | **(in thousands)**                                               | ** ** |
| FINANCING ACTIVITIES                                                                        |       |                                                                  |       |   |   |
| Net increase in customer deposits                                                           |       | 42,099                                                                |       | 20,141 |   |
| Net decrease in short-term borrowings from the  Federal Home Loan Bank and other borrowings |       | (32,416                                                               | )          | (4,584 | ) |
| Proceeds of long-term Federal Home Loan Bank borrowings                                     |       | —                                                                |       | 19,309 |   |
| Repayment of long-term Federal Home Loan Bank  borrowings                                   |       | (35,988                                                               | )          | (19,605 | ) |
| Net decrease in advances from borrowers for taxes  and insurance                            |       | (727                                                                  | )          | (662 | ) |
| Treasury stock acquired                                                                     |       | (101                                                                  | )          | (923 | ) |
| Exercise of stock options                                                                   |       | 115                                                                   |       | 10 |   |
| Tax benefit arising from stock compensation                                                 |       | 6                                                                     |       | — |   |
| Common stock dividends paid                                                                 |       | (1,509                                                                | )          | (1,593 | ) |
| NET CASH (USED IN) PROVIDED BY FINANCING  ACTIVITIES                                        |       | (28,521                                                               | )          | 12,093 |   |
|                                                                                        |       |                                                                  |       |   |   |
| NET INCREASE/(DECREASE) IN CASH AND CASH  EQUIVALENTS                                       |       | 1,682                                                                 |       | (1,118 | ) |
|                                                                                        |       |                                                                  |       |   |   |
| Cash and cash equivalents at beginning of period                                            |       | 2,719                                                                 |       | 5,680 |   |
|                                                                                        |       |                                                                  |       |   |   |
| Cash and cash equivalents at end of period                                                  |       | $                                                                     | 4,401      |   | $ | 4,562 |   |
|                                                                                        |       |                                                                  |       |   |   |
| Supplemental disclosure of cash flow information                                            |       |                                                                  |       |   |   |
| Cash paid for                                                                               |       |                                                                  |       |   |   |
| Interest on deposits and borrowings                                                         |       | $                                                                     | 10,630     |   | $ | 13,349 |   |
| Income taxes                                                                                |       | $                                                                     | 825        |   | $ | 1,007 |   |
| Non-cash transactions                                                                       |       |                                                                  |       |   |   |
| Capitalization of mortgage servicing rights                                                 |       | $                                                                     | 426        |   | $ | 174 |   |
| Transfers from loans to foreclosed real estate                                              |       | $                                                                     | 3,163      |   | $ | 1,236 |   |

 

The accompanying notes are an integral partof these statements

 

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** **

**TF FINANCIAL CORPORATION AND SUBSIDIARIESNOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 1 -PRINCIPLES OF CONSOLIDATION**

 

The consolidated financial statements as of September 30,2009 (unaudited) and December 31, 2008 and for the three and nine-monthperiods ended September 30, 2009 and 2008 (unaudited) include the accountsof TF Financial Corporation (the “Company”) and its wholly owned subsidiaries ThirdFederal 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 September 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**

 

Comprehensive income is the change in equity ofa business enterprise during a period from transactions and other events andcircumstances from non-owner sources. The components of other comprehensiveincome (loss) are as follows for the three months ended:

 
|                                                         |   | **September 30,  2009** |   |
|--------------------------------------------------------------|--------|------------------------------|--------|
|                                                         |   | **Before tax  amount**  |   | **Tax  (expense)  benefit** |   | **Net of tax  amount** |   |
|                                                         |   | **(in thousands)**      |   |
| Unrealized gains on securities                               |   |                         |   |   |   |   |   |
| Unrealized holding gains arising during period               |   | $                            | 1,749  |   | $ | (590 | ) | $ | 1,159 |   |
| Pension plan benefit adjustment related to  actuarial losses |   | 46                           |   | (15 | ) | 31 |   |
|                                                         |   |                         |   |   |   |   |   |
| Other comprehensive income, net                              |   | $                            | 1,795  |   | $ | (605 | ) | $ | 1,190 |   |

 
|                                                                                 |   | **September 30,  2008** |   |
|--------------------------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                                 |   | **Before tax  amount**  |   | **Tax  (expense)  benefit** |   | **Net of tax  amount** |   |
|                                                                                 |   | **(in thousands)**      |   |
| Unrealized losses on securities                                                      |   |                         |   |   |   |   |   |
| Unrealized holding losses arising during period                                      |   | $                            | (602   | ) | $ | 203 |   | $ | (399 | ) |
| Pension plan benefit adjustment related to prior  service costs and actuarial losses |   | 28                           |   | (9 | ) | 19 |   |
|                                                                                 |   |                         |   |   |   |   |   |
| Other comprehensive loss, net                                                        |   | $                            | (574   | ) | $ | 194 |   | $ | (380 | ) |

 

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

 
|                                                         |   | **September 30, 2009** |   |
|--------------------------------------------------------------|--------|-----------------------------|--------|
|                                                         |   | **Before tax  amount** |   | **Tax  (expense)  benefit** |   | **Net of tax  amount** |   |
|                                                         |   | **(in thousands)**     |   |
| Unrealized gains on securities                               |   |                        |   |   |   |   |   |
| Unrealized holding gains arising during period               |   | $                           | 2,878  |   | $ | (979 | ) | $ | 1,899 |   |
| Reclassification adjustment for gains realized in net income |   | (306                        | )      | 104 |   | (202 | ) |
| Pension plan benefit adjustment related to actuarial losses  |   | 137                         |   | (50 | ) | 87 |   |
|                                                         |   |                        |   |   |   |   |   |
| Other comprehensive income, net                              |   | $                           | 2,709  |   | $ | (925 | ) | $ | 1,784 |   |

 
|                                                                                 |   | **September 30, 2008** |   |
|--------------------------------------------------------------------------------------|--------|-----------------------------|--------|
|                                                                                 |   | **Before tax  amount** |   | **Tax  (expense)  benefit** |   | **Net of tax  amount** |   |
|                                                                                 |   | **(in thousands)**     |   |
| Unrealized losses on securities                                                      |   |                        |   |   |   |   |   |
| Unrealized holding losses arising during period                                      |   | $                           | (680   | ) | $ | 230 |   | $ | (450 | ) |
| Pension plan benefit adjustment related to prior service costs and  actuarial losses |   | 85                          |   | (29 | ) | 56 |   |
|                                                                                 |   |                        |   |   |   |   |   |
| Other comprehensive loss,  net                                                       |   | $                           | (595   | ) | $ | 201 |   | $ | (394 | ) |

 

**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 September 30,  2009** | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
|                                                                        | ** ** | **Income  (numerator)**                                        | ** ** | **Weighted  average  shares  (denominator)** | ** ** | **Per share  Amount** | ** ** |
| Basic earnings per share                                     | ** ** | ** **                                                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income available to common stockholders                                     |       | $                                                              | 1,112      |   | 2,523,429 |   | $ | 0.44 |   |
| Effect of dilutive securities                                               |       |                                                           |       |   |   |   |   |
| Stock options and grants                                                    |       | —                                                         |       | — |   | — |   |
|                                                                        |       |                                                           |       |   |   |   |   |
| Diluted earnings per share                                                  |       |                                                           |       |   |   |   |   |
| Income available to common stockholders plus effect of dilutive  securities |       | $                                                              | 1,112      |   | 2,523,429 |   | $ | 0.44 |   |

 
|                                                                        |       | **Nine  months ended September 30, 2009** |       |
|-----------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
|                                                                        | ** ** | **Income  (numerator)**                                  | ** ** | **Weighted  average  shares  (denominator)** | ** ** | **Per share  Amount** | ** ** |
| Basic earnings per share                                     | ** ** | ** **                                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income  available to common stockholders                                    |       | $                                                        | 3,354      |   | 2,520,228 |   | $ | 1.33 |   |
| Effect  of dilutive securities                                              |       |                                                     |       |   |   |   |   |
| Stock options and grants                                                    |       | —                                                   |       | — |   | — |   |
|                                                                        |       |                                                     |       |   |   |   |   |
| Diluted  earnings per share                                                 |       |                                                     |       |   |   |   |   |
| Income  available to common stockholders plus effect of dilutive securities |       | $                                                        | 3,354      |   | 2,520,228 |   | $ | 1.33 |   |

 

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There were 256,883 options to purchase sharesof common stock with exercise prices ranging from $20.30 to $34.14 per sharewhich were outstanding during the three and nine months ended September 30,2009 that were not included in the computation of diluted earnings per sharebecause the options’ exercise prices were greater than the average market priceof the common shares.

 
|                                                                        |   | **Three months ended September 30,  2008** |   |
|-----------------------------------------------------------------------------|--------|----------------------------------------------------------------|--------|
|                                                                        |   | **Income  (numerator)**                                        |   | **Weighted  average  shares  (denominator)** |   | **Per share  Amount** |   |
| Basic earnings per share                                                    |   |                                                           |   |   |   |   |   |
| Income available to common stockholders                                     |   | $                                                              | 1,250  |   | 2,646,506 |   | $ | 0.47 |   |
| Effect of dilutive securities                                               |   |                                                           |   |   |   |   |   |
| Stock options and grants                                                    |   | —                                                         |   | 10,482 |   | — |   |
|                                                                        |   |                                                           |   |   |   |   |   |
| Diluted earnings per share                                                  |   |                                                           |   |   |   |   |   |
| Income available to common stockholders plus effect  of dilutive securities |   | $                                                              | 1,250  |   | 2,656,988 |   | $ | 0.47 |   |

 
|                                                                        |   | **Nine months ended September 30,  2008** |   |
|-----------------------------------------------------------------------------|--------|---------------------------------------------------------------|--------|
|                                                                        |   | **Income  (numerator)**                                       |   | **Weighted  average  shares  (denominator)** |   | **Per share  Amount** |   |
| Basic earnings per share                                                    |   |                                                          |   |   |   |   |   |
| Income available to common stockholders                                     |   | $                                                             | 3,715  |   | 2,659,212 |   | $ | 1.40 |   |
| Effect of dilutive securities                                               |   |                                                          |   |   |   |   |   |
| Stock options and grants                                                    |   | —                                                        |   | 3,995 |   | (0.01 | ) |
|                                                                        |   |                                                          |   |   |   |   |   |
| Diluted earnings per share                                                  |   |                                                          |   |   |   |   |   |
| Income available to common stockholders plus  effect of dilutive securities |   | $                                                             | 3,715  |   | 2,663,207 |   | $ | 1.39 |   |

 

There were 204,773 options to purchase shares ofcommon stock with exercise prices ranging from $24.71 to $34.14 per share whichwere outstanding during the three and nine months ended September 30, 2008that were not included in the computation of diluted earnings per share becausethe options’ exercise prices were greater than the average market price of thecommon shares.

 

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

 

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

 
| ** **                                                 | ** ** | **September 30, 2009** | ** ** |
|------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                 | ** ** | **Amortized  cost**         | ** ** | **Gross  unrealized  gains** | ** ** | **Gross  unrealized  losses** | ** ** | **Fair  value** | ** ** |
| ** **                                                 | ** ** | **(in thousands)**          | ** ** |
| Investment securities available for sale                   |       |                        |       |   |   |   |   |   |   |
| Corporate debt securities                                  |       | $                           | 3,340      |   | $ | 188 |   | $ | — |   | $ | 3,528 |   |
| State and political subdivisions                           |       | 29,309                      |       | 1,465 |   | — |   | 30,774 |   |
| Equity securities                                          |       | 150                         |       | — |   | — |   | 150 |   |
|                                                       |       | $                           | 32,799     |   | $ | 1,653 |   | $ | — |   | $ | 34,452 |   |
|                                                       |       |                        |       |   |   |   |   |   |   |
| Residential mortgage-backed securities held to  maturity   |       | $                           | 3,938      |   | $ | 310 |   | $ | — |   | $ | 4,248 |   |
|                                                       |       |                        |       |   |   |   |   |   |   |
| Residential mortgage-backed securities available  for sale |       | $                           | 91,241     |   | $ | 3,450 |   | $ | 441 |   | $ | 94,250 |   |

 

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| ** **                                               | ** ** | **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 |   |

 

The Company also holdsstock in the Federal Home Loan Bank of Pittsburgh (“FHLB”) totaling $9.9million as of September 30, 2009 and December 31, 2008. The Companyis required to maintain a minimum amount of FHLB stock as determined by itsborrowing levels. FHLB stock can only be repurchased by the FHLB or sold toanother member, and all sales must be at par. The Company holds FHLB stock as along term investment based on the ultimate recoverability of the par value.During the fourth quarter of 2008, the FHLB suspended the repurchase of stockand dividend payments which prompted the Company to give consideration toevaluating the potential impairment of the investment. The Company evaluatespotential impairment of its investment in FHLB stock quarterly and considersthe following :1) the significance of the decline in net assets of the FHLB ascompared to the capital stock amount and the duration of this condition, 2) theability of the FHLB to make payments required by law or regulation and thelevel of such payments in relation to the operating performance of the FHLB, 3)the impact of regulatory changes on the FHLB and on its members, and 4) theliquidity position of the FHLB. After evaluating these factors the Company hasconcluded that the par value of its investment in FHLB stock is recoverable andno impairment has been recorded during the nine months ended September 30,2009.

 

Thetable below indicates the length of time individual securities, both held tomaturity and available for sale, have been in a continuous unrealized lossposition at September 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)** | ** ** |
| Residential mortgage-backed securities issued by  quasi-governmental agencies |       | 1                  |       | 2,497                         |       | (37                           | )          | —          |       | — |   | 2,497 |   | (37 | ) |
| Residential real estate mortgage-backed securities privately issued           |       | 4                  |       | 3,984                         |       | (75                           | )          | 2,726           |       | (329 | ) | 6,710 |   | (404 | ) |
| Total temporarily impaired securities                                         |       | 5                  |       | $                             | 6,481      |                          | $          | (112            | )          | $ | 2,726 |   | $ | (329 | ) | $ | 9,207 |   | $ | (441 | ) |
|                                                                               |            |                    |            |                               |            |                               |            |                 |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

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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)** |   |
| Corporate debt securities                                                     |       | 1                  |   | $                             | 3,285  |                          | $      | (55             | )      | $ | — |   | $ | — |   | $ | 3,285 |   | $ | (55 | ) |
| State and political subdivisions                                              |       | 4                  |   | 2,392                         |   | (18                           | )      | 1753            |   | (48 | ) | 4,145 |   | (66 | ) |
| Residential mortgage-backed securities issued by  quasi-governmental agencies |       | 1                  |   | 19                            |   | (1                            | )      | —          |   | — |   | 19 |   | (1 | ) |
| Residential real estate mortgage-backed securities  privately issued          |       | 1                  |   | —                        |   | —                        |   | 6,480           |   | (384 | ) | 6,480 |   | (384 | ) |
| Total temporarily impaired securities                                         |       | 7                  |   | $                             | 5,696  |                          | $      | (74             | )      | $ | 8,233 |   | $ | (432 | ) | $ | 13,929 |   | $ | (506 | ) |

 

The Company evaluates debt securities on a quarterly basisto determine whether other-than-temporary impairment (OTTI) exists. Thisevaluation involves consideration of the length of time and the amount by whichthe fair value has been lower than amortized cost, the financial condition andcredit rating of the issuer, the changes in fair value in relation to thechange in market interest rates and other relevant information. The Companyalso evaluates its intent to hold, intent to sell or need to sell thesecurities in light of its investment strategy, cash flow needs, interest raterisk position, prospects for the issuer and all other relevant factors.Accordingly, the Company has performed this evaluation and has determined thatthe unrealized losses at September 30, 2009 and December 31, 2008,respectively are not considered other-than-temporary and are thereforereflected in other comprehensive income.

 

**NOTE 7- FAIR VALUE MEASUREMENTS**

 

The following table presents information about the Company’sassets and liabilities measured at fair valued on a recurring basis as of September 30,2009. Fair value is an exit price, representing the amount that would bereceived to sell an asset or paid to transfer a liability in an orderlytransaction between market participants. A fair value measurement hierarchy hasbeen established for inputs in valuation techniques used to measure fair value.The hierarchy gives the highest priority to unadjusted quoted prices in activemarkets for identical assets or liabilities (Level 1 measurements) and thelowest 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 fair valuehierarchy is based on the lowest level of input that is significant to the fairvalue measurement for the instrument or security.  Assets and liabilities measured at fair valueon a recurring basis segregated by value hierarchy level are summarized below(dollars in thousands):

 
| ** **                                                                              | ** ** | **Quoted  Prices in  Active  Markets  for  Identical  Assets  (Level 1)** | ** ** | **Significant  Other  Observable  Inputs  (Level 2)** | ** ** | **Significant  Unobservable  Inputs  (Level 3)** | ** ** | **Balance as of  September 30,  2009** | ** ** |
|-----------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------|------------|
| **At September 30, 2009**                                                          | ** ** | ** **                                                                          | ** ** | ** **                                                 | ** ** | ** **                                            | ** ** | ** **                                            | ** ** |
| ** **                                                                              | ** ** | ** **                                                                          | ** ** | ** **                                                 | ** ** | ** **                                            | ** ** | ** **                                            | ** ** |
| **Assets**                                                                              | ** ** | ** **                                                                          | ** ** | ** **                                                 | ** ** | ** **                                            | ** ** | ** **                                            | ** ** |
| Investment securities available for sale                                                |       |                                                                                |       |                                                       |       |                                                  |       |                                                  |       |
| Corporate debt securities                                                               |       | $                                                                                   | —     |                                                       | $          | 3,528                                                 |       | $                                                     | —     |   | $ | 3,528 |   |
| State and political subdivisions                                                        |       | —                                                                              |       | 30,774                                                     |       | —                                                |       | 30,774                                                |       |
| Equity securities                                                                       |       | 150                                                                                 |       | —                                                     |       | —                                                |       | 150                                                   |       |
| Total investment securities available  for sale                                    |       | 150                                                                                 |       | 34,302                                                     |       | —                                                |       | 34,452                                                |       |
|                                                                                    |       |                                                                                |       |                                                       |       |                                                  |       |                                                  |       |
| Residential mortgage-backed securities issued  by quasi-governmental agencies |       | —                                                                              |       | 85,672                                                     |       | —                                                |       | 85,672                                                |       |
| Residential real estate mortgage - backed securities  privately issued                  |       | —                                                                              |       | 8,578                                                      |       | —                                                |       | 8,578                                                 |       |
| Total mortgage-backed securities  available for sale                               |       | —                                                                              |       | 94,250                                                     |       | —                                                |       | 94,250                                                |       |
|                                                                                    |       |                                                                                |       |                                                       |       |                                                  |       |                                                  |       |
| Mortgage loans available for sale                                                       |       | 1,594                                                                               |       | —                                                     |       | —                                                |       | 1,594                                                 |       |
| Impaired loans                                                                          |       | —                                                                              |       | —                                                     |       | 2,321                                                 |       | 2,321                                                 |       |
| Mortgage servicing rights                                                               |       | —                                                                              |       | 613                                                        |       | —                                                |       | 613                                                   |       |
|                                                                                    |       |                                                                                |       |                                                       |       |                                                  |       |                                                  |       |
| **Liabilities**                                                                         |       |                                                                                |       |                                                       |       |                                                  |       |                                                  |       |
| Forward loan sales                                                                      |       | —                                                                              |       | —                                                     |       | (17                                                   | )          | (17                                                   | )          |
|                                                                                         |            |                                                                                     |            |                                                            |            |                                                       |            |                                                       |            |  |  |  |  |

 

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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 the Federal Home Loan Mortgage Corporation (“FHLMC”), GovernmentNational Mortgage Association (“GNMA”), Federal National Mortgage Association (“FNMA”)and privately issued real estate mortgage investment conduits which are valuedunder a Level 2 hierarchy using a matrix 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.

 

The Company initially recognizes and measures servicing assets based onthe fair value of the servicing right at the time the loan is sold. The Companyuses the amortized cost method for subsequent measurement of its servicingassets and evaluates the recorded value for impairment quarterly. The Companyretains a qualified valuation service to calculate the amortized cost and todetermine the fair value of the mortgage servicing rights. The valuationservice utilizes discounted cash flow analyses adjusted for prepayment speeds,market discount rates and conditions existing in the secondary servicingmarket. Hence, the fair value of mortgage servicing rights is deemed a Level 2hierarchy. At September 30, 2009, the amortized cost basis of the Company’smortgage servicing rights was $729,000 and the fair value of $613,000 wasincluded in Other Assets in the consolidated balance sheet.

 

Thefair values of forward loan sales are determined at the time the underlyingloan is identified as held for sale with changes in fair value correlated tothe change in secondary market loan pricing. The value is adjusted to reflectthe Company’s historical loan “fallout” experience which incorporates suchfactors as changes in market rates, origination channels and loan purpose.

 

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Thefollowing table presents additional information about assets and (liabilities)measured at fair value on a recurring basis for which the Company has utilized Level3 inputs to determine fair value (in thousands):

 
| ** **                                       | ** ** | **Forward loan sales**     | ** ** |
|--------------------------------------------------|------------|----------------------------|------------|
| ** **                                       | ** ** | **September 30,2009** | ** ** |
| ** **                                       | ** ** | ** **                 | ** ** |
| Beginning balance                                |       | $                          | (24        | ) |
| Total gains (losses) — realized/unrealized: |       | 7                          |       |
| Included in earnings                             |       |                       |       |
| Included in other comprehensive income           |       | —                     |       |
| Purchases, issuances, and settlements            |       |                       |       |
| Ending balance                                   |       | $                          | (17        | ) |

 

**NOTE 8- FAIR VALUE OF FINANCIALINSTRUMENTS**

 

Forthe Bank, as for most financial institutions, the majority of its assets andliabilities are considered financial instruments. However, many suchinstruments 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 explained in Note 7**-**Fair ValueMeasurements. Additionally, the Company used significant estimations andpresent value calculations 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 fair value measurement guidelines as amended.

 
| ** **                 | ** ** | **September 30, 2009** | ** ** | **December 31, 2008** | ** ** |
|----------------------------|------------|-----------------------------|------------|----------------------------|------------|
| ** **                 | ** ** | **Fair  value**             | ** ** | **Carrying  value**        | ** ** | **Fair  value** | ** ** | **Carrying  value** | ** ** |
| ** **                 | ** ** | **(in thousands)**          | ** ** |
| Cash and cash equivalents  |       | $                           | 4,401      |                       | $          | 4,401 |   | $ | 2,719 |   | $ | 2,719 |   |
| Investment securities      |       | 34,452                      |       | 34,452                     |       | 31,619 |   | 31,619 |   |
| Mortgage-backed securities |       | 98,498                      |       | 98,188                     |       | 112,213 |   | 111,991 |   |
|                            |            |                             |            |                            |            |  |  |  |  |  |  |  |  |

 

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.

 
|                              |   | **September 30, 2009** |    | **December 31, 2008** |   |
|-----------------------------------|--------|-----------------------------|---------|----------------------------|--------|
|                              |   | **Fair  value**             |    | **Carrying  value**        |   | **Fair  value** |   | **Carrying  value** |   |
|                              |   | **(in thousands)**          |    |
| Liabilities                       |   |                        |    |                       |   |   |   |   |   |
| Deposits with stated maturities   |   | $                           | 221,819 |                       | $      | 217,480 |   | $ | 211,392 |   | $ | 205,872 |   |
| Borrowings with stated maturities |   | 103,044                     |    | 99,744                     |   | 171,541 |   | 168,148 |   |
|                                   |        |                             |         |                            |        |  |  |  |  |  |  |  |  |

 

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

 
| ** **                         | ** ** | **September 30, 2009** | ** ** | **December 31, 2008** | ** ** |
|------------------------------------|------------|-----------------------------|------------|----------------------------|------------|
| ** **                         | ** ** | **Fair  value**             | ** ** | **Carrying  value**        | ** ** | **Fair  value** | ** ** | **Carrying  value** | ** ** |
| ** **                         | ** ** | **(in thousands)**          | ** ** |
| Deposits with no stated maturities |       | $                           | 314,469    |                       | $          | 314,469 |   | $ | 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.

 
| ** **            | ** ** | **September 30, 2009** | ** ** | **December 31, 2008** | ** ** |
|-----------------------|------------|-----------------------------|------------|----------------------------|------------|
| ** **            | ** ** | **Fair  value**             | ** ** | **Carrying  value**        | ** ** | **Fair  value** | ** ** | **Carrying  value** | ** ** |
| ** **            | ** ** | **(in thousands)**          | ** ** |
| Loans receivable, net |       | $                           | 544,504    |                       | $          | 532,547 |   | $ | 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.

 

**NOTE 9- STOCK BASED COMPENSATION**

 

The Company has stock benefitplans that allow the Company to grant options and restricted stock to employeesand directors. The awards, which have a term of up to 10 years whenissued, vest over a three to five year period. The exercise price of each awardequals the market price of the Company’s stock on the date of the grant. At September 30,2009, there was $155,000 of total unrecognized compensation cost, net ofestimated forfeitures, related to non-vested awards under the Plan. That costis expected to be recognized over a weighted average period of 22.6 months.Option activity under the Company’s stock option plan as of September 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                    |       | $ | 25.76 |   |   |   |   |   |
| Options granted                                |       | —                     |       | — |   |   |   |   |   |
| Options exercised                              |       | (5,910                     | )          | 19.31 |   |   |   |   |   |
| Options forfeited                              |       | (235                       | )          | 32.46 |   |   |   |   |   |
| Options expired                                |       | —                     |       | — |   |   |   |   |   |
| Outstanding at September 30, 2009         |       | 281,191                    |       | $ | 25.79 |   | 2.58 |   | $ | 124 |   |
| Options exercisable at September 30, 2009 |       | 230,574                    |       | $ | 26.66 |   | 1.91 |   | $ | 124 |   |

 

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 third quarter andthe exercise price, multiplied by the number of in-the-money options).

 

The aggregate intrinsic value of options exercisedduring the nine months ended September 30, 2009 and 2008 was $17,500 and$2,200, respectively. Exercise of stock options during the nine months ended September 30,2009 and 2008 resulted in cash receipts of $115,000 and $9,700, respectively.

 

Stock-based compensation expense included in netincome related to stock options was $14,000 and $92,000 for the three monthsended September 30, 2009 and 2008 respectively, resulting in a tax benefitof $5,000 and $28,000, respectively. Stock-based compensation expense includedin net income related to stock options was $42,000 and $278,000 for the nine monthsended September 30, 2009 and 2008 respectively, resulting in a tax benefitof $14,000 and $86,000, respectively.

 

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Stock-based compensation expense included innet income related to stock grants was $4,000 and $90,000 for the three monthsended September 30, 2009 and 2008, respectively. Stock-based compensationexpense included in net income related to the Company’s employee stockownership plan totaled $41,000 and $48,000 for the three months ended September 30,2009 and 2008, respectively. Stock-based compensation expense included in netincome related to stock grants was $12,000 and $271,000 for the nine monthsended September 30, 2009 and 2008, respectively. Stock-based compensationexpense included in net income related to the Company’s employee stockownership plan totaled $124,000 and $157,000 for the nine months ended September 30,2009 and 2008, respectively.

 

**NOTE 10-EMPLOYEE BENEFIT PLANS**

 

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

 
| ** **                              | ** ** | **Three months ended  September 30,** | ** ** |
|-----------------------------------------|------------|------------------------------------------------------|------------|
| ** **                              | ** ** | **2009**                                             | ** ** | **2008** | ** ** |
|                                    |       |                                                 |       |   |   |
| Components of net periodic benefit cost |       |                                                 |       |   |   |
| Service cost                            |       | $                                                    | 118        |   | $ | 98 |   |
| Interest cost                           |       | 62                                                   |       | 62 |   |
| Expected return on plan assets          |       | (93                                                  | )          | (106 | ) |
| Amortization of prior service cost      |       | —                                               |       | 8 |   |
| Recognized net actuarial loss           |       | 46                                                   |       | 20 |   |
|                                    |       |                                                 |       |   |   |
| Net periodic benefit cost               |       | $                                                    | 133        |   | $ | 82 |   |

 
| ** **                              | ** ** | **Nine months ended  September 30,** | ** ** |
|-----------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                              | ** ** | **2009**                                            | ** ** | **2008** | ** ** |
|                                    |       |                                                |       |   |   |
| Components of net periodic benefit cost |       |                                                |       |   |   |
| Service cost                            |       | $                                                   | 354        |   | $ | 293 |   |
| Interest cost                           |       | 186                                                 |       | 185 |   |
| Expected return on plan assets          |       | (278                                                | )          | (316 | ) |
| Amortization of prior service cost      |       | —                                              |       | 23 |   |
| Recognized net actuarial loss           |       | 137                                                 |       | 62 |   |
|                                    |       |                                                |       |   |   |
| Net periodic benefit cost               |       | $                                                   | 399        |   | $ | 247 |   |

 

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

 

**NOTE 11-SUBSEQUENT EVENTS**

 

The Company has evaluated subsequent events through the date thefinancial statements were issued, or November 16, 2009. The Company is notaware of any subsequent events which would require recognition or disclosure inthe financial statements.

 

**NOTE 12 —ACCOUNTING STANDARDS UPDATE**

 

In December 2008, the Financial Accounting Standards Board (FASB)amended existing guidance for an employer’s disclosures about plan assets of adefined benefit or other post retirement plan. The amended guidance requiresmore detailed disclosure about employer plan assets, including employer’sinvestment strategies, major categories of plan assets, concentrations of riskwithin plan assets, and valuation techniques used to measure the fair value ofplan assets. The new disclosures are required to be included in financialstatements for fiscal years ending after December 15, 2009 with earlyapplication permitted. The amended guidance only requires additionaldisclosures about the Company’s pension and other post retirement plan assets,the adoption will not affect the Company’s financial position or results ofoperation. The Company intends to include the additional disclosures effective December 31,2009.

 

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InApril 2009, FASB issued an amendment which provided additional fair value measurement guidance on (a) determiningwhen the volume and level of activity for the asset or liability hassignificantly decreased; (b) identifying circumstances in which atransaction is not orderly; and (c) understanding the fair valueimplications of both (a) and (b). The original objectives emphasized inthe FASB Accounting Standards Codification (ASC) regarding fair valuemeasurements have not changed. The Company adopted the guidance in applyingfair value measurements as of June 30, 2009 which was the effectivedate. The adoption did not have a material impact on the Company’s financialcondition and results of operation.  Theadditional disclosures have been included in Note 7**-**Fair ValueMeasurements.

 

InApril 2009, FASB issued amended guidance forother-than-temporary impairment (OTTI) of debt securities to make the standardsmore operational and to improve the presentation and disclosure of OTTI in thefinancial statements. The Company adopted the amended OTTI guidance as of June 30,2009 which was the effective date. The adoption did not have amaterial impact on the Company’s financial condition and results of operation.The required disclosures have been included in Note 6**-**Investment and Mortgage-backed Securities.

 

In April 2009, FASB issued anamendment which required disclosures about fair value of financial instrumentsfor interim reporting periods as well as for annual financial statements ofpublicly traded companies. The Company has included the requireddisclosures in Note 8**-**Fair Value of FinancialInstruments.

 

In May 2009, FASB issued guidance and disclosureguidance on management’s assessment of subsequent events. The new standardclarifies that management must evaluate, as of each reporting period, events ortransactions that occur after the balance sheet date and “through the date thefinancial statements are issued or are available to be issued.” The Companyadopted the guidance as of June 30, 2009 which was the effective date. TheCompany evaluated its September 30, 2009 financial statements forsubsequent events through November 16, 2009 the date the financialstatements were available to be issued. As discussed in Note 11**-**Subsequent Events, the Company is not aware of anysubsequent events which would require recognition or disclosure in thefinancial statements.

 

In June 2009, FASB issued an amendment to theaccounting and disclosure requirements for transfers of financial assets. Theamendment eliminates the concept of a qualifying special-purpose entity,changes the requirements for derecognizing financial assets and requiresenhanced disclosures to provide financial statement users with greaterinformation about an entity’s continued involvement and risks associated withthe transfers of financial assets. The amendment is effective for financialstatement transfers occurring after the beginning of an entity’s first fiscalyear that begins after November 15, 2009 (thus, calendar-year-endcompanies must adopt it on January 1, 2010). The Company does notanticipate a material impact on its consolidated financial statements as aresult of this amendment.

 

In June 2009, the FASB amended the existing accounting anddisclosure guidance that applies to variable interest entities (VIE). As a resultan entity will need to reconsider previous conclusions to define whether anentity is a VIE and whether the enterprise is the VIE’s primary beneficiary aswell as appropriate financial statement disclosures.  The guidance is effective as of the beginningof the first fiscal year that begins after November 15, 2009. Earlyadoption is prohibited. The Company does not anticipate a material impact onits consolidated financial statements as a result of this amendment.

 

In June 2009, FASB issued the Accounting StandardsCodification and the Hierarchy of Generally Accepted Accounting Principles. TheFASB Accounting Standards Codification tm will become the source of authoritative U.S.GAAP recognized by the FASB to be applied by nongovernmental entities and iseffective for financial statements issued for interim and annual periods endingafter September 15, 2009. The adoption did not result in changes tocurrent practices nor have a material effect on the consolidated statements ofthe Company.

 

In August 2009, the FASB issued an amendment to existingaccounting and disclosure guidance for fair value measurements of liabilities.The amendment provides clarification that in circumstances in which a quotedprice in an active market for the identical liability is not available, anentity is required to measure fair value using one or more techniques. Theamendment also clarifies that when estimating a fair value of a liability, anentity is not required to include a separate input or adjustment to otherinputs relating to the existence of a restriction that prevents the transfer ofthe liability. The amendment is effective for the first reporting periodbeginning after issuance. The Company will adopt the amendment during thequarter ended December 31, 2009 and does not anticipate a material impacton its consolidated financial statements as a result of this amendment.

 

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**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 arebeyond the Company’s control). The following factors, among others, could causethe Company’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 monetary fluctuations;the timely development of and acceptance of new products and services of theCompany and the perceived overall value of these products and services byusers, including the features, pricing and quality compared to competitors’products and services; the willingness of users to substitute competitors’products and services for the Company’s products and services; the success ofthe Company in gaining regulatory approval of its products and services, whenrequired; the impact of changes in financial services’ laws and regulations(including laws concerning taxes, banking, securities and insurance);technological changes, acquisitions; changes in consumer spending and savinghabits; and the success of the Company at managing the risks involved in theforegoing.

 

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 September 30, 2009 and December 31, 2008were $711.8 million and $733.7 million, respectively, a decrease of $21.9million, or 3.0% during the nine-month period. Mortgage-backed securitiesavailable for sale decreased by $13.0 million due to principal repaymentsreceived of $25.3 million, offset by purchases of $10.6 million, an increase inthe fair value of the securities of $1.6 million and net discount accretion of$0.1 million.  Mortgage-backed securitiesheld to maturity decreased by $0.8 million mainly as a result of principalrepayments. Loans receivable, net decreased by $13.4 million during the firstnine months of 2009. Principal repayments of loans receivable totaled $75.4million which were offset by originations of consumer and single-familyresidential mortgage loans of $48.4 million and commercial loans of $18.9million. The Company increased the allowance for loan losses by $1.9 millionand also transferred $3.2 million from loans to real estate acquired throughforeclosure. Loans receivable held for sale decreased by $0.1 million, mainlythe net result of loans originated for sale during the first nine months of2009 of $34.8 million, less $35.1 million in proceeds from the sale of loans inthe secondary market.

 

Investmentsecurities available for sale increased $2.8 million due to purchases ofmunicipal bonds of $7.9 million which offset sales and security redemptions of$6.0 million, as well as an increase of $0.9 million due to increased marketvalue and net discount accretion.

 

Totalliabilities decreased by $25.7 million during the first nine months of 2009.Advances from the Federal Home Loan Bank decreased by $68.4 million in thefirst nine months of 2009, the result of a $32.4 million decrease in short-termborrowings and scheduled amortization and maturities of $36.0 million.

 

Depositsgrew by $42.1 million due to an increase of $11.6 million in retail certificates of deposit and anincrease in money market, interest and non-interest checkingaccounts of $44.3 million less a decrease in savings accounts of $13.8 million.

 

Totalconsolidated stockholder’s equity of the Company was $71.6 million or 10.0% oftotal assets at September 30, 2009. During the first nine months of 2009,the Company issued 1,533 shares of common stock as a result of stock optionexercises. At September 30, 2009, there were approximately 102,000 sharesavailable for repurchase under the previously announced share repurchase plan.

 

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**Asset Quality**

 

During 2009, the Company completed foreclosure proceedings on fiveparcels 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 $1.2 million.  Three propertieswith a carrying value of $2.1 million were sold and the Company realized a gainof $0.3 million from the disposition of the properties. The two remainingproperties with a carrying value of $1.0 million are included in other assetsin the consolidated balance sheet at September 30, 2009. In addition,during the third quarter of 2009, a commercial loan was deemed an in substanceforeclosure which resulted in an additional charge to the allowance of $0.3million, and the Company collected the remaining loan balance. During the firstnine months of 2009 and 2008, the Company’s provision for loan losses was $1.9million and $0.5 million, 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):

 
| ** **                                                            | ** ** | **September 30,** | ** ** | **December 31,** | ** ** | **September 30,** | ** ** |
|-----------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                                                            | ** ** | **2009**               | ** ** | **2008**              | ** ** | **2008**               | ** ** |
| ** **                                                            | ** ** | ** **             | ** ** | ** **            | ** ** | ** **             | ** ** |
| Loans delinquent 30-89 days                                           |       | $                      | 87         |                  | $          | 285                    |       | $ | 603 |   |
| Loans delinquent 90 days or  more and other non performing loans |       | 3,098                  |       | 5,279                 |       | 2,615                  |       |
| Ratio of non-performing  loans to gross loans                         |       | 0.58                   | %          | 0.96                  | %          | 0.47                   | %          |
| Ratio of non-performing  loans to total assets                        |       | 0.44                   | %          | 0.72                  | %          | 0.36                   | %          |
| Real estate owned                                                     |       | 999                    |       | —                |       | 306                    |       |
| Ratio of total  non-performing assets to total assets                 |       | 0.58                   | %          | 0.72                  | %          | 0.41                   | %          |
| Ratio of allowance for loan  losses to total loans                    |       | 0.80                   | %          | 0.70                  | %          | 0.54                   | %          |
| Ratio of allowance for loan  losses to non-performing loans           |       | 138.5                  | %          | 73.0                  | %          | 114.6                  | %          |
|                                                                       |            |                        |            |                       |            |                        |            |  |  |  |

 

**Allowancefor Loan Losses**

TheBank provides valuation allowances for estimated losses from uncollectibleloans. The allowance is increased by provisions charged to expense and reducedby net charge-offs. On a quarterly basis the Company prepares an allowancefor loan losses (ALLL) analysis with the loan portfolio segmented into broadrisk types: commercial real estate, commercial construction, commercialbusiness, single family residential, and consumer which is predominately realestate secured junior liens and home equity lines of credit. Each segment isassigned reserve factors based on quantitative and qualitative measurements. Inaddition, the Bank reviews it’s internally classified loans, its loansclassified for regulatory purposes, delinquent loans, and other relevantinformation in order to isolate loans for analysis as potentially impairedloans.

 

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

 

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

 

Potentially impairedloans selected for individual evaluation are reviewed in accordance with GAAPwhich govern the accounting for impaired assets, and regulatory accountingprinciples which govern the accounting for troubled, collateral dependentloans. Each potentially impaired loan is evaluated using all availableinformation such as recent appraisals, discounted cash flow analyses, guarantorfinancial strength, the value of additional collateral, and the loan’s and borrower’spast performance to determine whether in management’s best judgment it isprobable that the Bank will be unable to collect all contractual interest andprincipal in accordance 

 

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with the loan’s terms.Loans deemed impaired are generally assigned a reserve derived from the valueof the underlying collateral. Loans deemed not to be impaired are assigned a reservefactor based upon the pool from which they were selected.

 

TheALLL needed as a result of the foregoing evaluations is compared with theunadjusted amount, and an adjustment is made by means of a provision charged toexpense for loan losses. Recognizing the inherently imprecise nature of theloss estimates and the large number of assumptions needed in order to performthe analysis, the required reserve may be less than the actual level ofreserves at the end of any evaluation period, and thus there is an unallocatedportion of the ALLL. Management adjusts the unallocated portion to an amountwhich management considers reasonable under the circumstances.

 

The following table sets forth the activityin the allowance for loan losses during the periods indicated (in thousands):

 
| ** **                          | ** ** | **2009** | ** ** | **2008** | ** ** |
|-------------------------------------|------------|----------|------------|----------|------------|
| Beginning balance,  January 1, |       | $        | 3,855      |     | $          | 2,842 |   |
| Provision                           |       | 1,905    |       | 490      |       |
| Less: charge-off’s, net        |       | (1,468   | )          | (336     | )          |
| Ending balance,  September 30, |       | $        | 4,292      |     | $          | 2,996 |   |

 

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**RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2009 AND2008**

 

**Net Income**. The Company recorded net income of $1,112,000, or$0.44 per diluted share, for the three months ended September 30, 2009 ascompared to net income of $1,250,000, or $0.47 per diluted share, for the threemonths ended September 30, 2008.

 

### **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.

 
| ** **                                                                        | ** ** | **September 30,** | ** ** |
|-----------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                        | ** ** | **2009**               | ** ** | **2008** | ** ** |
| ** **                                                                        | ** ** | **Average  balance**   | ** ** | **Interest** | ** ** | **Average  yld/cost** | ** ** | **Average  balance** | ** ** | **Interest** | ** ** | **Average  yld/cost** | ** ** |
| **ASSETS**                                                                        |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| **Interest-earning assets:**                                                      |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Loans receivable(1)                                                               |       | $                      | 535,358    |   | $ | 7,638 |   | 5.66 | % | $ | 547,748 |   | $ | 8,257 |   | 6.00 | % |
| Mortgage-backed securities                                                        |       | 100,482                |       | 1,170 |   | 4.62 | % | 93,100 |   | 1,079 |   | 4.61 | % |
| Investment securities(2)                                                          |       | 41,849                 |       | 430 |   | 4.08 | % | 40,862 |   | 489 |   | 4.76 | % |
| Other interest-earning assets(3)                                                  |       | 2,027                  |       | 1 |   | 0.20 | % | 1,102 |   | 6 |   | 2.17 | % |
| Total interest-earning assets                                                     |       | 679,716                |       | 9,239 |   | 5.39 | % | 682,812 |   | 9,831 |   | 5.73 | % |
| Non interest-earning assets                                                       |       | 37,463                 |       |   |   |   |   | 36,301 |   |   |   |   |   |
| Total assets                                                                      |       | $                      | 717,179    |   |   |   |   |   | $ | 719,113 |   |   |   |   |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                    |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| **Interest-bearing liabilities:**                                                 |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Deposits                                                                          |       | 530,064                |       | 2,393 |   | 1.79 | % | 482,521 |   | 2,772 |   | 2.29 | % |
| Borrowings from the FHLB and other borrowings                                     |       | 107,746                |       | 988 |   | 3.64 | % | 158,385 |   | 1,576 |   | 3.96 | % |
| Total interest-bearing liabilities                                                |       | 637,810                |       | 3,381 |   | 2.10 | % | 640,906 |   | 4,348 |   | 2.70 | % |
| Non interest-bearing liabilities                                                  |       | 9,065                  |       |   |   |   |   | 8,552 |   |   |   |   |   |
| Total liabilities                                                                 |       | 646,875                |       |   |   |   |   | 649,458 |   |   |   |   |   |
| Stockholders’ equity                                                         |       | 70,304                 |       |   |   |   |   | 69,655 |   |   |   |   |   |
| Total liabilities and stockholders’ equity                                   |       | $                      | 717,179    |   |   |   |   |   | $ | 719,113 |   |   |   |   |   |
| Net interest income—tax equivalent basis                                     |       |                   |       | $ | 5,858 |   |   |   |   |   | $ | 5,483 |   |   |   |
| Interest rate spread(4)-tax equivalent basis                                      |       |                   |       |   |   | 3.29 | % |   |   |   |   | 3.03 | % |
| Net yield on interest-earning assets(5) —tax  equivalent basis          |       |                   |       |   |   | 3.42 | % |   |   |   |   | 3.19 | % |
| Ratio of average interest-earning assets to  average interest-bearing liabilities |       |                   |       |   |   | 107 | % |   |   |   |   | 107 | % |
| Less: tax—equivalent interest adjustment                                     |       |                   |       | (119 | ) |   |   |   |   | (106 | ) |   |   |
| Net interest income                                                               |       |                   |       | $ | 5,739 |   |   |   |   |   | $ | 5,377 |   |   |   |
| Interest rate spread(4)                                                           |       |                   |       |   |   | 3.22 | % |   |   |   |   | 2.97 | % |
| Net yield on interest-earning assets(5)                                           |       |                   |       |   |   | 3.35 | % |   |   |   |   | 3.13 | % |

 

----

| (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  $119,000 and $106,000 for the quarter ended September 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.                                                                                                                               |

 

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**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 September**                       | ** ** |
|------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                     | ** ** | **2009 vs 2008  Increase (decrease) due to** | ** ** |
| ** **                                     | ** ** | **Volume**                                                            | ** ** | **Rate** | ** ** | **Net** | ** ** |
| **Interest income:**                           |       |                                                                  |       |   |   |   |   |
| Loans receivable, net                          |       | $                                                                     | (178       | ) | $ | (441 | ) | $ | (619 | ) |
| Mortgage-backed securities                     |       | 89                                                                    |       | 2 |   | 91 |   |
| Investment securities (1)                      |       | 72                                                                    |       | (130 | ) | (58 | ) |
| Other interest-earning assets                  |       | 19                                                                    |       | (25 | ) | (6 | ) |
| Total interest-earning assets                  |       | 2                                                                     |       | (594 | ) | (592 | ) |
| **Interest expense:**                          |       |                                                                  |       |   |   |   |   |
| Deposits                                       |       | 1,374                                                                 |       | (1,753 | ) | (379 | ) |
| Borrowings from the FHLB and other  borrowings |       | (469                                                                  | )          | (119 | ) | (588 | ) |
|                                           |       |                                                                  |       |   |   |   |   |
| Total interest-bearing liabilities             |       | 905                                                                   |       | (1,872 | ) | (967 | ) |
| Net change in net interest income              |       | $                                                                     | (903       | ) | $ | 1,278 |   | $ | 375 |   |

 

----

| (1) |   | Tax equivalent adjustments to interest on investment securities were  $119,000 and $106,000 for the quarters ended September 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 $592,000 or 6.0% to $9.2 million forthe quarter ended September 30, 2009 compared with the third quarter of2008. Interest income from loans receivable decreased by $619,000, the resultof a decrease in the average balance of loans outstanding of $12.4 million,plus a decrease in the yield on loans of 34 basis points primarily as a resultof the Company’s reduction of its prime rate three times during the lastquarter of 2008 by a combined 175 basis points mirroring the action taken bythe Federal Open Markets Committee (FOMC) when it acted to reduce the fed fundsrate. 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 through thethird quarter of 2008 but suspended dividend payments until further noticeduring the fourth quarter of 2008. Interest income from mortgage-backedsecurities was higher in the third quarter of 2009 in comparison to the sameperiod of 2008 due to purchases of $33.0 million of securities which exceededprincipal repayments of $26.1 million during the intervening period.

 

**TotalInterest Expense.**Totalinterest expense decreased by $967,000 to $3.4 million during the three-monthperiod ended September 30, 2009 as compared with the third quarter of2008. The average balance of deposits increased by $47.5 million between thetwo quarters, and interest rates paid on the Bank’s deposits were 50 basispoints lower in 2009.Interest expense associated with borrowings from the Federal Home LoanBank and the Federal Reserve Bank decreased $588,000 between the third quarterof 2009 and 2008. During the intervening period, the Bank reduced its averageoutstanding borrowings by $50.6 million and replaced maturing higher costadvances with low cost short-term advances.

 

**Non-interest income**. Total non-interest incomewas $0.8 million for the third quarter of 2009 compared with $0.7 million forthe same period in 2008. During 2009, the gain on sale of loans held for sale increased by$87,000 as a result of the high level of residential loan sales activity whichoccurred in the third quarter of 2009. Also, gain on sale of foreclosed realestate during the third quarter of 2009 was $34,000 while there was no suchgain during the third quarter of 2008.

 

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**Non-interest expense.**Total non-interest expenseincreased by $206,000 to $4.4 million for the three months ended September 30,2009 compared to the same period in 2008. FDIC insurance premiums increased by$161,000 between the two quarters due to increased deposits, an increasedassessment rate and the exhaustion of a credit the Company has been entitled toapply against the quarterly billed insurance premium. Occupancy and equipmentexpenses increased during the third quarter including costs associated with themaintenance on new software products used by the Bank. Compensation expense associatedwith stock options and grants decreased $164,000 during the quarter as a resultof substantial completion of the vesting period used for expense recognition in2008. Offsetting this reduction was an increase in employee compensation of$50,000, 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 $67,000 between the two quarters as a result of an increase in theperiodic benefit cost of the defined benefit plan and a premium increase in theemployer provided health insurance.

 

**Income tax expense.**The Company’s effective taxrate was 24.1% for the quarter ended September 30, 2009 compared to 26.9%for the quarter ended September 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.

 

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**RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND2008**

 

**Net Income**. The Company recorded net income of $3,354,000, or$1.33 per diluted share, for the nine months ended September 30, 2009 ascompared to net income of $3,715,000, or $1.39 per diluted share, for the ninemonths ended September 30, 2008.

 

### **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 thenine-month periods indicated.

 
| ** **                                                                             | ** ** | **September 30,** | ** ** |
|----------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                             | ** ** | **2009**               | ** ** | **2008** | ** ** |
| ** **                                                                             | ** ** | **Average  balance**   | ** ** | **Interest** | ** ** | **Average  yld/cost** | ** ** | **Average  balance** | ** ** | **Interest** | ** ** | **Average  yld/cost** | ** ** |
| **ASSETS**                                                                             |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| **Interest-earning assets:**                                                           |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Loans receivable(1)                                                                    |       | $                      | 540,972    |   | $ | 22,951 |   | 5.69 | % | $ | 540,882 |   | $ | 24,595 |   | 6.07 | % |
| Mortgage-backed securities                                                             |       | 104,752                |       | 3,849 |   | 4.93 | % | 97,558 |   | 3,442 |   | 4.71 | % |
| Investment securities(2)                                                               |       | 39,798                 |       | 1,189 |   | 4.01 | % | 41,518 |   | 1,481 |   | 4.76 | % |
| Other interest-earning assets(3)                                                       |       | 1,519                  |       | 1 |   | 0.09 | % | 913 |   | 16 |   | 2.34 | % |
| Total interest-earning assets                                                          |       | 687,041                |       | 27,990 |   | 5.46 | % | 680,871 |   | 29,534 |   | 5.79 | % |
| Non interest-earning assets                                                            |       | 37,092                 |       |   |   |   |   | 35,584 |   |   |   |   |   |
| Total assets                                                                           |       | $                      | 724,133    |   |   |   |   |   | $ | 716,455 |   |   |   |   |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                         |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| **Interest-bearing liabilities:**                                                      |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Deposits                                                                               |       | 514,614                |       | 7,347 |   | 1.91 | % | 480,512 |   | 8,984 |   | 2.50 | % |
| Borrowings from the FHLB and other borrowings                                          |       | 131,248                |       | 3,481 |   | 3.56 | % | 157,706 |   | 4,779 |   | 4.05 | % |
| Total interest-bearing liabilities                                                     |       | 645,862                |       | 10,828 |   | 2.25 | % | 638,218 |   | 13,763 |   | 2.88 | % |
| Non interest-bearing liabilities                                                       |       | 9,033                  |       |   |   |   |   | 8,958 |   |   |   |   |   |
| Total liabilities                                                                      |       | 654,895                |       |   |   |   |   | 647,176 |   |   |   |   |   |
| Stockholders’ equity                                                              |       | 69,238                 |       |   |   |   |   | 69,279 |   |   |   |   |   |
| Total liabilities and stockholders’ equity                                        |       | $                      | 724,133    |   |   |   |   |   | $ | 716,455 |   |   |   |   |   |
| Net interest income—tax equivalent basis                                          |       |                   |       | $ | 17,162 |   |   |   |   |   | $ | 15,771 |   |   |   |
| Interest rate spread(4)-tax equivalent basis                                           |       |                   |       |   |   | 3.21 | % |   |   |   |   | 2.91 | % |
| Net yield on interest-earning assets(5) — tax equivalent  basis                   |       |                   |       |   |   | 3.35 | % |   |   |   |   | 3.09 | % |
| Ratio of average interest-earning assets  to average interest-bearing liabilities |       |                   |       |   |   | 106 | % |   |   |   |   | 107 | % |
| Less: tax—equivalent interest adjustment                                          |       |                   |       | (325 | ) |   |   |   |   | (320 | ) |   |   |
| Net interest income                                                                    |       |                   |       | $ | 16,837 |   |   |   |   |   | $ | 15,451 |   |   |   |
| Interest rate spread(4)                                                                |       |                   |       |   |   | 3.15 | % |   |   |   |   | 2.85 | % |
| Net yield on interest-earning assets(5)                                                |       |                   |       |   |   | 3.29 | % |   |   |   |   | 3.03 | % |

 

----

| (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  $325,000 and $320,000 for the nine months ended September 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.                                                                                                                                   |

 

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**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.

 
| ** **                                     | ** ** | **Nine months ended September 30,**               | ** ** |
|------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                     | ** ** | **2009 vs 2008  Increase (decrease) due to** | ** ** |
| ** **                                     | ** ** | **Volume**                                                            | ** ** | **Rate** | ** ** | **Net** | ** ** |
| **Interest income:**                           |       |                                                                  |       |   |   |   |   |
| Loans receivable, net                          |       | $                                                                     | 7          |   | $ | (1,651 | ) | $ | (1,644 | ) |
| Mortgage-backed securities                     |       | 252                                                                   |       | 155 |   | 407 |   |
| Investment securities (1)                      |       | (60                                                                   | )          | (232 | ) | (292 | ) |
| Other interest-earning assets                  |       | 11                                                                    |       | (26 | ) | (15 | ) |
| Total interest-earning assets                  |       | 210                                                                   |       | (1,754 | ) | (1,544 | ) |
| **Interest expense:**                          |       |                                                                  |       |   |   |   |   |
| Deposits                                       |       | 925                                                                   |       | (2,562 | ) | (1,637 | ) |
| Borrowings from the FHLB and other  borrowings |       | (753                                                                  | )          | (545 | ) | (1,298 | ) |
| Total interest-bearing liabilities             |       | 172                                                                   |       | (3,107 | ) | (2,935 | ) |
| Net change in net interest income              |       | $                                                                     | 38         |   | $ | 1,353 |   | $ | 1,391 |   |

 

----

| (1) |   | Tax equivalent adjustments to interest on investment securities were  $325,000 and $320,000 for the nine months ended September 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 $1.5 million or 5.2% to $28.0 millionfor the nine months ended September 30, 2009 compared with the first ninemonths of 2008. Interest income from loans receivable decreased by $1.6million, the result of a decrease in the average yield on loans of 38 basispoints primarily as a result of the Company’s reduction of its prime rate threetimes during the last quarter of 2008 by a combined 175 basis points mirroringthe action taken by the Federal Open Markets Committee (FOMC) when it acted toreduce the fed funds rate. Interest income from investment securities decreasedas a result of the decrease of $202,000 in dividends paid on the Company’s $9.9million required holdings of FHLB stock. Dividends had been paid through September 30,2008 but were suspended indefinitely during the fourth quarter of 2008.Interest income from mortgage-backed securities was higher in the first ninemonths of 2009 in comparison to the same period of 2008 due to purchases of$33.0 million of securities which exceeded principal repayments of $31.2million during the intervening period.

 

**TotalInterest Expense.**Totalinterest expense decreased by $2.9 million to $10.8 million during thenine-month period ended September 30, 2009 as compared with the first ninemonths of 2008. There was a $34.1 million increase in average outstandingdeposit balances during the nine months ended September 30, 2009, and theaverage interest rates paid on the Bank’s deposits were 59 basis points lowerin 2009.Interestexpense associated with borrowings decreased $1.3 million between the firstnine months of 2009 and the same period in 2008. During the intervening period,the Bank decreased its average borrowings outstanding by $26.5 million from theFHLB and also replaced maturing high cost advances with low-cost short-termadvances.

 

**Non-interest income**. Totalnon-interest income was $3.2 million for the first nine months of 2009 comparedwith $2.9 million for the same period in 2008. Gain on the sale of investment securities totaled$306,000 in 2009 whilethere was no such gain in 2008. Also, during 2009, the gain on sale of loansheld for sale increased by $329,000 as a result of the high level ofresidential loan sales activity which occurred in the first nine months of2009. Offsetting these increases was the increase in amortization of mortgageservicing rights in first nine months of 2009 which reduced loan servicingincome between the periods by $46,000. Overdraft fees earned in first nine monthsof 2009 were $109,000 lower than the same period in 2008. Otheroperating income during 2008 included $100,000 of non-recurring incomerecognized due to forfeited options to purchase the Company’s real estate heldfor development.Additionally, other income for the first nine months of 2008 was a $197,000insurance claim recovery.

 

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**Non-interest expense.**Total non-interest expenseincreased by $812,000 to $13.6 million for the nine months ended September 30,2009 compared to the same period in 2008. Employee compensation increased by$346,000, the combined result of annual salary increases and decreased commercialloan originations which lowered the deferral of in-house compensation costs.Also, costs associated with employee benefit plans increased by $214,000between the two periods as a result of an increase in the periodic benefit costof the defined benefit plan and a premium increase in the employer providedhealth insurance.  Offsetting theseincreases was a decrease in compensation expense associated with stock optionsand grants of $495,000 as a result of substantial completion of the vestingperiod used for expense recognition in 2008. FDIC insurance premiums increasedby $666,000 in the first nine months of 2009 due to a special assessmentimposed by the FDIC of $330,000 in addition to an increase in the regular FDICinsurance premium as a result of increased deposits, an increased assessmentrate and the exhaustion of a credit the Company has been entitled to applyagainst the quarterly billed insurance premium. Other operating expense duringthe first nine months of 2009 included an increase in robbery and depositrelated losses of $50,000. Occupancy and equipment expenses increased due tocosts associated with the maintenance on new software products used by theBank. This increase was offset by the reduction of $70,000 in occupancy andequipment costs associated with the branch office on Quakerbridge Road inMercer County closed during the second quarter of 2008.

 

**Income tax expense.**The Company’s effective taxrate was 25.2% for the nine months ended September 30, 2009 compared to27.2% for the nine months ended September 30, 2008. These effective taxrates are lower than the Company’s marginal tax rate of 34% largely due to thetax-exempt income associated with the Company’s investments in tax-exemptmunicipal bonds and bank-owned life insurance.

 

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**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. Therehas been no material adverse change during the three-month period ended September 30,2009 in the ability of the Company and its subsidiaries to fund their operations.

 

At September 30, 2009, the Company hadcommitments outstanding under letters of credit of $1.2 million, commitments tooriginate loans of $23.9 million, and commitments to fund undisbursed balancesof closed loans and unused lines of credit of $51.3 million. At September 30,2009, the Bank had $5.4 million in outstanding commitments to sell loans. There has been no material change duringthe three months ended September 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 September 30, 2009.

 

**CRITICAL ACCOUNTING POLICIES**

 

Certaincritical accounting policies of the Company require the use of significant judgmentand accounting estimates in the preparation of the consolidated financialstatements and related data of the Company. These accounting estimates requiremanagement to make assumptions about matters that are highly uncertain at thetime the accounting estimate is made. Management believes that the mostcritical accounting policy requiring the use of accounting estimates andjudgment 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 $4.3 million at September 30,2009.

 

###### **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 ANDPROCEDURES**

 

**Evaluation of Disclosure Controlsand 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 theCompany in the reports it files and submits pursuant to the rules andforms of the SEC is accumulated and communicated to the Company’s managementincluding the principal executive officer and principal financial officer, asappropriate, to allow 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

 

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**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.                                                                                                                                                                                                                                                |

 

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**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:  | November 16, 2009 |   | /s/ Kent C. Lufkin                                    |
|--------|------------------------|--------|-------------------------------------------------------|
|   |                   |   | Kent  C. Lufkin                                       |
|   |                   |   | President  and CEO                                    |
|   |                   |   | (Principal  Executive Officer)                        |
|   |                   |   |                                                  |
|   |                   |   |                                                  |
| Date:  | November 16, 2009 |   | /s/ Dennis R.  Stewart                                |
|   |                   |   | Dennis R.  Stewart                                    |
|   |                   |   | Executive Vice  President and Chief Financial Officer |
|   |                   |   | (Principal Financial &  Accounting Officer)  |

 

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