Table of Contents

** **

 

** **

**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 March 31,  2010** |
|                                          |                                                                                                     |
| **- 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 markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)during the preceding 12 months (or for such shorter period that the registrantwas required to submit and post such files). YES** **o**  **NO** **o

 

Indicate by check mark whether the registrantis a large accelerated filer, an accelerated filer, a non-accelerated filer, ora smaller 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:**May 10, 2010**

 
| **Class**                   | ** ** | **Outstanding**  |
|-----------------------------|------------|------------------|
| $.10 par value common stock |       | 2,685,448 shares |

 

 

 

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Table of Contents

** **

**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 | 16 |
|                                               |                                                                                 |   |   |
| Item 3.                                            |                                                                                 | Quantitative and Qualitative Disclosures  about Market Risk | 22 |
|                                               |                                                                                 |   |   |
| Item 4T.                                           |                                                                                 | Controls and Procedures | 22 |
|                                               |                                                                                 |   |   |
| **PART II-OTHER INFORMATION**                 |                                                                                 |
|                                               |                                                                                 |   |   |
| Item 1.                                            |                                                                                 | Legal Proceedings | 24 |
|                                               |                                                                                 |   |   |
| Item 1A.                                           |                                                                                 | Risk Factors | 24 |
|                                               |                                                                                 |   |   |
| Item 2.                                            |                                                                                 | Unregistered Sales of Equity Securities and  Use of Proceeds | 24 |
|                                               |                                                                                 |   |   |
| Item 3.                                            |                                                                                 | Defaults Upon Senior Securities | 24 |
|                                               |                                                                                 |   |   |
| Item 4.                                            |                                                                                 | Reserved | 24 |
|                                               |                                                                                 |   |   |
| Item 5.                                            |                                                                                 | Other Information | 24 |
|                                               |                                                                                 |   |   |
| Item 6.                                            |                                                                                 | Exhibits | 25 |
|                                               |                                                                                 |   |   |
| **Signatures**                                     | 26                                                                                   |
|                                               |                                                                                 |   |   |
| **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**

 

**ITEM1. CONSOLIDATED FINANCIAL STATEMENTS**

 

**CONSOLIDATEDBALANCE SHEETS**

 
| ** **                                                                                                                                                                                                                                                                         | ** ** | **Unaudited  March 31,  2010** | ** ** | **Audited  December 31,  2009** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                                                                                                                                                                                         | ** ** | **(in thousands)**             | ** ** |
| ASSETS                                                                                                                                                                                                                                                                             |       |                                |       |                                 |       |
| Cash and cash equivalents                                                                                                                                                                                                                                                          |       | $                                   | 16,339     |                                 | $          | 12,801 |   |
| Investment securities available for sale—at  fair value                                                                                                                                                                                                                       |       | 47,941                              |       | 40,853                               |       |
| Mortgage-backed securities available for  sale—at fair value                                                                                                                                                                                                                  |       | 74,790                              |       | 78,198                               |       |
| Mortgage-backed securities held to maturity  (fair value of $3,957 and $4,033, respectively)                                                                                                                                                                                       |       | 3,622                               |       | 3,733                                |       |
| Loans receivable, net                                                                                                                                                                                                                                                              |       | 524,099                             |       | 529,652                              |       |
| Loans receivable held for sale                                                                                                                                                                                                                                                     |       | 873                                 |       | 1,082                                |       |
| Federal Home Loan Bank stock—at cost                                                                                                                                                                                                                                          |       | 9,896                               |       | 9,896                                |       |
| Accrued interest receivable                                                                                                                                                                                                                                                        |       | 2,701                               |       | 2,777                                |       |
| Premises and equipment, net                                                                                                                                                                                                                                                        |       | 5,793                               |       | 5,523                                |       |
| Goodwill                                                                                                                                                                                                                                                                           |       | 4,324                               |       | 4,324                                |       |
| Bank-owned life insurance                                                                                                                                                                                                                                                          |       | 17,362                              |       | 17,190                               |       |
| Other assets                                                                                                                                                                                                                                                                       |       | 8,208                               |       | 8,061                                |       |
| TOTAL ASSETS                                                                                                                                                                                                                                                                       |       | $                                   | 715,948    |                                 | $          | 714,090 |   |
|                                                                                                                                                                                                                                                                               |       |                                |       |                                 |       |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY                                                                                                                                                                                                                                         |       |                                |       |                                 |       |
| Liabilities                                                                                                                                                                                                                                                                        |       |                                |       |                                 |       |
| Deposits                                                                                                                                                                                                                                                                           |       | $                                   | 553,425    |                                 | $          | 552,716 |   |
| Borrowings from the Federal Home Loan Bank                                                                                                                                                                                                                                         |       | 81,738                              |       | 80,241                               |       |
| Advances from borrowers for taxes and  insurance                                                                                                                                                                                                                                   |       | 1,963                               |       | 2,231                                |       |
| Accrued interest payable                                                                                                                                                                                                                                                           |       | 2,889                               |       | 2,818                                |       |
| Other liabilities                                                                                                                                                                                                                                                                  |       | 3,511                               |       | 4,210                                |       |
| Total liabilities                                                                                                                                                                                                                                                                  |       | 643,526                             |       | 642,216                              |       |
|                                                                                                                                                                                                                                                                               |       |                                |       |                                 |       |
| Stockholders’ equity                                                                                                                                                                                                                                                          |       |                                |       |                                 |       |
| Preferred stock, no par value; 2,000,000  shares authorized at March 31, 2010 and December 31, 2009,  none issued                                                                                                                                                   |       | —                              |       | —                               |       |
| Common stock, $0.10 par value; 10,000,000  shares authorized, 5,290,000 shares issued, 2,547,254 and 2,539,195 shares  outstanding at March 31, 2010 and December 31, 2009,  respectively, net of shares in treasury 2,612,302 and 2,617,397 respectively |       | 529                                 |       | 529                                  |       |
| Additional paid-in capital                                                                                                                                                                                                                                                         |       | 54,018                              |       | 54,009                               |       |
| Unearned ESOP shares                                                                                                                                                                                                                                                               |       | (1,304                              | )          | (1,334                               | )          |
| Treasury stock-at cost                                                                                                                                                                                                                                                             |       | (54,225                             | )          | (54,331                              | )          |
| Retained earnings                                                                                                                                                                                                                                                                  |       | 72,588                              |       | 72,376                               |       |
| Accumulated other comprehensive income                                                                                                                                                                                                                                             |       | 816                                 |       | 625                                  |       |
| Total stockholders’ equity                                                                                                                                                                                                                                                    |       | 72,422                              |       | 71,874                               |       |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                                                                                                                    |       | $                                   | 715,948    |                                 | $          | 714,090 |   |

 

The accompanying notes are anintegral part of these statements

 

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** **

**TF FinancialCorporation and Subsidiaries**

 

**CONSOLIDATEDSTATEMENTS OF INCOME**

**(Unaudited)**

 
| ** **                                                     | ** ** | **For the three months  ended  March 31,** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                                     | ** ** | **2010**                                                       | ** ** | **2009** | ** ** |
| ** **                                                     | ** ** | ** **                                                     | ** ** | ** ** | ** ** |
| Interest income                                                |       |                                                           |       |   |   |
| Loans, including fees                                          |       | $                                                              | 7,302      |   | $ | 7,655 |   |
| Mortgage-backed securities                                     |       | 967                                                            |       | 1,385 |   |
| Investment securities                                          |       | 405                                                            |       | 277 |   |
| Interest-bearing deposits and other                            |       | 1                                                              |       | — |   |
|                                                           |       |                                                           |       |   |   |
| TOTAL INTEREST INCOME                                          |       | 8,675                                                          |       | 9,317 |   |
|                                                           |       |                                                           |       |   |   |
| Interest expense                                               |       |                                                           |       |   |   |
| Deposits                                                       |       | 1,995                                                          |       | 2,513 |   |
| Borrowings                                                     |       | 848                                                            |       | 1,285 |   |
|                                                           |       |                                                           |       |   |   |
| TOTAL INTEREST EXPENSE                                         |       | 2,843                                                          |       | 3,798 |   |
|                                                           |       |                                                           |       |   |   |
| NET INTEREST INCOME                                            |       | 5,832                                                          |       | 5,519 |   |
|                                                           |       |                                                           |       |   |   |
| Provision for loan losses                                      |       | 961                                                            |       | 665 |   |
|                                                           |       |                                                           |       |   |   |
| NET INTEREST INCOME AFTER  PROVISION FOR LOAN LOSSES |       | 4,871                                                          |       | 4,854 |   |
|                                                           |       |                                                           |       |   |   |
| Non-interest income                                            |       |                                                           |       |   |   |
| Service fees, charges and other operating income               |       | 529                                                            |       | 437 |   |
| Bank-owned life insurance                                      |       | 172                                                            |       | 160 |   |
| Gain on sale of investments                                    |       | —                                                         |       | 190 |   |
| Gain on sale of loans                                          |       | 60                                                             |       | 148 |   |
| Loss on foreclosed real estate                                 |       | (145                                                           | )          | — |   |
|                                                           |       |                                                           |       |   |   |
| TOTAL NON-INTEREST INCOME                                      |       | 616                                                            |       | 935 |   |
|                                                           |       |                                                           |       |   |   |
| Non-interest expense                                           |       |                                                           |       |   |   |
| Employee compensation and benefits                             |       | 2,700                                                          |       | 2,671 |   |
| Occupancy and equipment                                        |       | 759                                                            |       | 710 |   |
| Professional fees                                              |       | 228                                                            |       | 273 |   |
| Marketing and advertising                                      |       | 120                                                            |       | 148 |   |
| FDIC insurance premiums                                        |       | 194                                                            |       | 21 |   |
| Other operating                                                |       | 591                                                            |       | 601 |   |
|                                                           |       |                                                           |       |   |   |
| TOTAL NON-INTEREST EXPENSE                                     |       | 4,592                                                          |       | 4,424 |   |
|                                                           |       |                                                           |       |   |   |
| INCOME BEFORE INCOME TAXES                                     |       | 895                                                            |       | 1,365 |   |
|                                                           |       |                                                           |       |   |   |
| Income taxes                                                   |       | 178                                                            |       | 345 |   |
|                                                           |       |                                                           |       |   |   |
| NET INCOME                                                     |       | $                                                              | 717        |   | $ | 1,020 |   |
|                                                           |       |                                                           |       |   |   |
| Earnings per share—basic                                  |       | $                                                              | 0.28       |   | $ | 0.41 |   |
| Earnings per share—diluted                                |       | $                                                              | 0.28       |   | $ | 0.41 |   |
| Dividends paid per share                                       |       | $                                                              | 0.20       |   | $ | 0.20 |   |

 

The accompanying notes are an integral partof these statements

 

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** **

**TF Financial Corporation and Subsidiaries**

 

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| ** **                                                                        | ** ** | **For the three months  ended  March 31,** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                                                        | ** ** | **2010**                                                       | ** ** | **2009** | ** ** |
| ** **                                                                        | ** ** | **(in thousands)**                                        | ** ** |
| OPERATING ACTIVITIES                                                              |       |                                                           |       |   |   |
| Net income                                                                        |       | $                                                              | 717        |   | $ | 1,020 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities |       |                                                           |       |   |   |
| Amortization and impairment adjustment of  mortgage loan servicing rights         |       | (3                                                             | )          | 81 |   |
| Deferred loan origination fees                                                    |       | 51                                                             |       | 11 |   |
| Premiums and discounts on investment  securities, net                             |       | 19                                                             |       | 22 |   |
| Premiums and discounts on mortgage-backed  securities, net                        |       | (2                                                             | )          | (95 | ) |
| Premiums and discounts on loans, net                                              |       | 43                                                             |       | 49 |   |
| Provision for loan losses                                                         |       | 961                                                            |       | 665 |   |
| Loss on foreclosed real estate                                                    |       | 145                                                            |       | — |   |
| Depreciation of premises and equipment                                            |       | 212                                                            |       | 222 |   |
| Increase in value of bank-owned life  insurance                                   |       | (172                                                           | )          | (160 | ) |
| Stock grant expense                                                               |       | 4                                                              |       | 4 |   |
| Stock option expense                                                              |       | 13                                                             |       | 14 |   |
| Stock-based benefit programs: ESOP                                                |       | 56                                                             |       | 53 |   |
| Proceeds from sale of loans originated for  sale                                  |       | 6,327                                                          |       | 12,505 |   |
| Origination of loans held for sale                                                |       | (6,114                                                         | )          | (12,296 | ) |
| Gain on sale of:                                                                  |       |                                                           |       |   |   |
| Investments                                                                       |       | —                                                         |       | (190 | ) |
| Loans held for sale                                                               |       | (60                                                            | )          | (148 | ) |
| Decrease (increase) in:                                                           |       |                                                           |       |   |   |
| Accrued interest receivable                                                       |       | 76                                                             |       | 148 |   |
| Other assets                                                                      |       | (225                                                           | )          | 183 |   |
| Increase (decrease) in:                                                           |       |                                                           |       |   |   |
| Accrued interest payable                                                          |       | 71                                                             |       | 542 |   |
| Other liabilities                                                                 |       | (773                                                           | )          | 293 |   |
| NET CASH PROVIDED BY OPERATING ACTIVITIES                                         |       | 1,346                                                          |       | 2,923 |   |
|                                                                              |       |                                                           |       |   |   |
| INVESTING ACTIVITIES                                                              |       |                                                           |       |   |   |
| Loan originations                                                                 |       | (16,357                                                        | )          | (22,963 | ) |
| Loan principal payments                                                           |       | 20,855                                                         |       | 23,372 |   |
| Principal repayments on mortgage-backed  securities held to maturity              |       | 110                                                            |       | 205 |   |
| Principal repayments on mortgage-backed  securities available for sale            |       | 6,503                                                          |       | 7,201 |   |
| Proceeds from sale of investment securities  available for sale                   |       | —                                                         |       | 3,135 |   |
| Purchase of investment securities available  for sale                             |       | (6,972                                                         | )          | — |   |
| Purchase of mortgage-backed securities  available for sale                        |       | (2,970                                                         | )          | — |   |
| Purchase of premises and equipment                                                |       | (482                                                           | )          | (83 | ) |
| NET CASH PROVIDED BY INVESTING ACTIVITIES                                         |       | 687                                                            |       | 10,867 |   |
|                                                                                   |            |                                                                |            |  |  |  |  |

 

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| ** **                                                                                  | ** ** | **For the three months ended  March 31,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                                  | ** ** | **2010**                                                           | ** ** | **2009** | ** ** |
| ** **                                                                                  | ** ** | **(in thousands)**                                            | ** ** |
| FINANCING ACTIVITIES                                                                        |       |                                                               |       |   |   |
| Net increase in customer deposits                                                           |       | 709                                                                |       | 14,665 |   |
| Net decrease in short-term borrowings from  the Federal Home Loan Bank and other borrowings |       | —                                                             |       | (13,619 | ) |
| Proceeds of long-term Federal Home Loan  Bank borrowings                                    |       | 8,000                                                              |       | — |   |
| Repayment of long-term Federal Home Loan  Bank borrowings                                   |       | (6,503                                                             | )          | (12,953 | ) |
| Net decrease in advances from borrowers for  taxes and insurance                            |       | (268                                                               | )          | (203 | ) |
| Treasury stock acquired                                                                     |       | —                                                             |       | (101 | ) |
| Exercise of stock options                                                                   |       | 72                                                                 |       | 101 |   |
| Common stock dividends paid                                                                 |       | (505                                                               | )          | (503 | ) |
| NET CASH PROVIDED BY (USED IN) FINANCING  ACTIVITIES                                        |       | 1,505                                                              |       | (12,613 | ) |
|                                                                                        |       |                                                               |       |   |   |
| NET INCREASE IN CASH AND CASH EQUIVALENTS                                                   |       | 3,538                                                              |       | 1,177 |   |
|                                                                                        |       |                                                               |       |   |   |
| Cash and cash equivalents at beginning of  period                                           |       | 12,801                                                             |       | 2,719 |   |
|                                                                                        |       |                                                               |       |   |   |
| Cash and cash equivalents at end of period                                                  |       | $                                                                  | 16,339     |   | $ | 3,896 |   |
|                                                                                        |       |                                                               |       |   |   |
| Supplemental disclosure of cash flow  information                                           |       |                                                               |       |   |   |
| Cash paid for                                                                               |       |                                                               |       |   |   |
| Interest on deposits and borrowings                                                         |       | $                                                                  | 2,772      |   | $ | 3,256 |   |
| Income taxes                                                                                |       | $                                                                  | 30         |   | $ | 55 |   |
| Non-cash transactions                                                                       |       |                                                               |       |   |   |
| Capitalization of mortgage servicing rights                                                 |       | $                                                                  | 55         |   | $ | 121 |   |
| Transfers from loans to foreclosed real  estate                                             |       | $                                                                  | —     |   | $ | 2,164 |   |

 

The accompanying notes are anintegral part of 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 March 31,2010 (unaudited) and December 31, 2009 and for the three month periodsended March 31, 2010 and 2009 (unaudited) include the accounts of TFFinancial 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 (“USGAAP”). In the opinion of management, all adjustments, consisting of normalrecurring accruals, necessary for fair presentation of the consolidatedfinancial statements have been included. The results of operations for theperiod ended March 31, 2010 are not necessarily indicative of the resultswhich may be expected for the entire fiscal year or any other period. Forfurther information, refer to the consolidated financial statements andfootnotes thereto included in the Company’s Annual Report on Form 10-K forthe fiscal year ended December 31, 2009.

 

**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 are as follows for the three months ended:

 
| ** **                                                   | ** ** | **March 31,  2010**    | ** ** |
|--------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                   | ** ** | **Before tax  amount** | ** ** | **Tax  (expense)** | ** ** | **Net of tax  amount** | ** ** |
| ** **                                                   | ** ** | **(in thousands)**     | ** ** |
| Unrealized gains on securities                               |       |                        |       |   |   |   |   |
| Unrealized holding gains arising during  period              |       | $                           | 257        |   | $ | (88 | ) | $ | 169 |   |
| Pension plan benefit adjustment related to  actuarial losses |       | 33                          |       | (11 | ) | 22 |   |
|                                                         |       |                        |       |   |   |   |   |
| Other comprehensive income, net                              |       | $                           | 290        |   | $ | (99 | ) | $ | 191 |   |

 
| ** **                                                                                     | ** ** | **March 31,  2009**    | ** ** |
|------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                     | ** ** | **Before tax  amount** | ** ** | **Tax  (expense)  benefit** | ** ** | **Net of tax  amount** | ** ** |
| ** **                                                                                     | ** ** | **(in thousands)**     | ** ** |
| Unrealized gains on securities                                                                 |       |                        |       |   |   |   |   |
| Unrealized holding gains arising during  period                                                |       | $                           | 1,090      |   | $ | (372 | ) | $ | 718 |   |
| Reclassification adjustment for gains  realized in net income                                  |       | (190                        | )          | 65 |   | (125 | ) |
| Pension plan benefit adjustment related to  prior service costs and actuarial losses |       | 46                          |       | (18 | ) | 28 |   |
|                                                                                           |       |                        |       |   |   |   |   |
| Other comprehensive income, net                                                                |       | $                           | 946        |   | $ | (325 | ) | $ | 621 |   |

 

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**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 March 31,  2010** | ** ** |
|---------------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                                                                            | ** ** | **Income  (numerator)**                                    | ** ** | **Weighted  average  shares  (denominator)** | ** ** | **Per share  Amount** | ** ** |
| Basic earnings per share                                               | ** ** | ** **                                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income available to common stockholders                                               |       | $                                                          | 717        |   | 2,542,168 |   | $ | 0.28 |   |
| Effect of dilutive securities                                                         |       |                                                       |       |   |   |   |   |
| Stock options and grants                                                              |       | —                                                     |       | — |   | — |   |
|                                                                                  |       |                                                       |       |   |   |   |   |
| Diluted earnings per share                                                            |       |                                                       |       |   |   |   |   |
| Income available to common stockholders  plus effect of dilutive securities |       | $                                                          | 717        |   | 2,542,168 |   | $ | 0.28 |   |

 

There were 256,833 options to purchase sharesof common stock with exercise prices ranging from $20.30 to $34.14 per sharewhich were outstanding during the three months ended March 31, 2010 thatwere not included in the computation of diluted earnings per share because theoptions’ exercise prices were greater than the average market price of thecommon shares.

 
| ** **                                                                            | ** ** | **Three months ended March 31,  2009** | ** ** |
|---------------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                                                                            | ** ** | **Income  (numerator)**                                    | ** ** | **Weighted  average  shares  (denominator)** | ** ** | **Per share  Amount** | ** ** |
| Basic earnings per share                                                              |       |                                                       |       |   |   |   |   |
| Income available to common stockholders                                               |       | $                                                          | 1,020      |   | 2,516,962 |   | $ | 0.41 |   |
| Effect of dilutive securities                                                         |       |                                                       |       |   |   |   |   |
| Stock options and grants                                                              |       | —                                                     |       | — |   | — |   |
|                                                                                  |       |                                                       |       |   |   |   |   |
| Diluted earnings per share                                                            |       |                                                       |       |   |   |   |   |
| Income available to common stockholders  plus effect of dilutive securities |       | $                                                          | 1,020      |   | 2,516,962 |   | $ | 0.41 |   |

 

There were 256,893 options to purchase shares ofcommon stock with exercise prices ranging from $20.30 to $34.14 per share whichwere outstanding during the three months ended March 31, 2009 that werenot included in the computation of diluted earnings per share because theoptions’ exercise prices were greater than the average market price of thecommon shares.

 

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**NOTE 6—INVESTMENT AND MORTGAGE-BACKEDSECURITIES**

 

The amortized cost, gross unrealized gainsand losses, and fair value of the Company’s investment securities at March 31,2010 and December 31, 2009, are summarized as follows:

 
| ** **                                                      | ** ** | **March 31, 2010** | ** ** |
|-----------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                      | ** ** | **Amortized  cost**     | ** ** | **Gross  unrealized  gains** | ** ** | **Gross  unrealized  losses** | ** ** | **Fair  value** | ** ** |
| ** **                                                      | ** ** | **(in thousands)**      | ** ** |
| Investment securities available for sale                        |       |                    |       |   |   |   |   |   |   |
| Corporate debt securities                                       |       | $                       | 3,340      |   | $ | 208 |   | $ | — |   | $ | 3,548 |   |
| US government and federal securities                            |       | 6,000                   |       | — |   | (43 | ) | 5,957 |   |
| State and political subdivisions                                |       | 37,133                  |       | 1,209 |   | (56 | ) | 38,286 |   |
| Equity securities                                               |       | 150                     |       | — |   | — |   | 150 |   |
|                                                            |       | $                       | 46,623     |   | $ | 1,417 |   | $ | (99 | ) | $ | 47,941 |   |
|                                                            |       |                    |       |   |   |   |   |   |   |
| Residential mortgage-backed securities held  to maturity        |       | $                       | 3,622      |   | $ | 335 |   | $ | — |   | $ | 3,957 |   |
|                                                            |       |                    |       |   |   |   |   |   |   |
| Residential mortgage-backed securities  available for sale |       | $                       | 72,447     |   | $ | 2,500 |   | $ | (157 | ) | $ | 74,790 |   |

 
| ** **                                               | ** ** | **December 31, 2009** | ** ** |
|----------------------------------------------------------|------------|----------------------------|------------|
| ** **                                               | ** ** | **Amortized  cost**        | ** ** | **Gross  unrealized  gains** | ** ** | **Gross  unrealized  losses** | ** ** | **Fair  value** | ** ** |
| ** **                                               | ** ** | **(in thousands)**         | ** ** |
| Investment securities available for sale                 |       |                       |       |   |   |   |   |   |   |
| U.S. Government and federal agencies                     |       | $                          | 3,000      |   | $ | — |   | $ | (55 | ) | $ | 2,945 |   |
| Corporate debt securities                                |       | 3,340                      |       | 177 |   | — |   | 3,517 |   |
| State and political subdivisions                         |       | 33,180                     |       | 1,170 |   | (109 | ) | 34,241 |   |
| Equity securities                                        |       | 150                        |       | — |   | — |   | 150 |   |
|                                                     |       | $                          | 39,670     |   | $ | 1,347 |   | $ | (164 | ) | $ | 40,853 |   |
|                                                     |       |                       |       |   |   |   |   |   |   |
| Residential mortgage-backed securities held  to maturity |       | $                          | 3,733      |   | $ | 300 |   | $ | — |   | $ | 4,033 |   |
|                                                     |       |                       |       |   |   |   |   |   |   |
| Residential mortgage-backed securities held  to maturity |       | $                          | 75,977     |   | $ | 2,483 |   | $ | (262 | ) | $ | 78,198 |   |

 

TheCompany also holds stock in the Federal Home Loan Bank of Pittsburgh (“FHLB”)totaling $9.9 million as of March 31, 2010 and December 31, 2009. TheCompany is required to maintain a minimum amount of FHLB stock as determined byits borrowing 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 magnitude and direction of the change in the  net assets of the FHLB as compared to thecapital stock amount and the duration of this condition, 2) the ability of theFHLB to make payments required by law or regulation and the level of suchpayments in relation to the operating performance of the FHLB, 3) the impact ofregulatory changes on the FHLB and on its members, and 4) the liquidityposition of the FHLB. After evaluating these factors the Company has concludedthat the par value of its investment in FHLB stock is recoverable and noimpairment has been recorded during the three months ended March 31, 2010or year ended December 31, 2009.

 

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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 March 31, 2010:

 
| ** **                                                                              | ** ** | **Number**         | ** ** | **Less than  12 months** | ** ** | **12 months  or longer** | ** ** | **Total**       | ** ** |
|-----------------------------------------------------------------------------------------|------------|--------------------|------------|-------------------------------|------------|-------------------------------|------------|-----------------|------------|
| **Description of Securities**                                                           | ** ** | **of  Securities** | ** ** | **Fair  Value**               | ** ** | **Unrealized  Loss**          | ** ** | **Fair  Value** | ** ** | **Unrealized  Loss** | ** ** | **Fair  value** | ** ** | **Unrealized  Loss** | ** ** |
| ** **                                                                              | ** ** | **(in thousands)** | ** ** |
| U.S. Government and federal agencies                                                    |       | 2                  |       | $                             | 5,957      |                          | $          | (43             | )          | $ | — |   | $ | — |   | $ | 5,957 |   | $ | (43 | ) |
| State and political subdivisions                                                        |       | 8                  |       | 5,381                         |       | (56                           | )          | —          |       | — |   | 5,381 |   | (56 | ) |
| Residential mortgage-backed securities  issued by quasi-governmental agencies |       | 1                  |       | 2,419                         |       | (23                           | )          | —          |       | — |   | 2,419 |   | (23 | ) |
| Residential real estate  mortgage-backed securities privately issued          |       | 4                  |       | 5,333                         |       | (100                          | )          | 1,442           |       | (34 | ) | 6,775 |   | (134 | ) |
|                                                                                    |       |               |       |                          |       |                          |       |            |       |   |   |   |   |   |   |
| Total temporarily impaired securities                                              |       | 15                 |       | $                             | 19,090     |                          | $          | (222            | )          | $ | 1,442 |   | $ | (34 | ) | $ | 20,532 |   | $ | (256 | ) |

 

The tablebelow indicates the length of time individual securities, both held to maturityand available for sale, have been in a continuous unrealized loss position at December 31,2009:

 
| ** **                                                                    | ** ** | **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)** | ** ** |
| U.S.  Government and federal agencies                                         |       | 1                   |       | $                             | 2,945      |                          | $          | (55             | )          | $ | — |   | $ | — |   | $ | 2,945 |   | $ | (55 | ) |
| State and  political subdivisions                                             |       | 6                   |       | 4,086                         |       | (109                          | )          | —          |       | — |   | 4,086 |   | (109 | ) |
| Residential  mortgage-backed securities issued by quasi-governmental agencies |       | 2                   |       | 4,352                         |       | (39                           | )          | —          |       | — |   | 4,352 |   | (39 | ) |
| Residential  real estate mortgage-backed securities privately issued          |       | 4                   |       | 5,536                         |       | (160                          | )          | 1,511           |       | (63 | ) | 7,047 |   | (223 | ) |
| Total temporarily impaired securities                                         |       | 13                  |       | $                             | 16,919     |                          | $          | (363            | )          | $ | 1,511 |   | $ | (63 | ) | $ | 18,430 |   | $ | (426 | ) |

 

Ona quarterly basis, investment and mortgage-backed securities are evaluated todetermine the presence of other-than-temporary impairment (“OTTI”). Thisevaluation involves consideration of the length of time and the amount, bywhich the fair value has been lower than amortized cost, the financialcondition and credit rating of the issuer, the changes in fair value inrelation to the change in market interest rates and other relevant information.The Company also evaluates its intent to hold, intent to sell or need to sellthe securities in light of its investment strategy, cash flow needs, interestrate risk position, prospects for the issuer and all other relevant factors. Withrespect to investments in debt securities, if the Company does not intend tosell the security and concludes that it is more likely than not will not berequired to sell the security before recovering the carrying value, which maybe maturity, the OTTI charge is separated into the “credit” and “other”components. The “other” component of the OTTI is included in othercomprehensive loss, net of the tax effect, and the”credit” component of theOTTI is included as a reduction to non-interest income in the consolidatedstatement of income. OTTI impairment of equity securities is recognized as areduction to non-interest income in the consolidated statements of income.

 

Accordingly, the Company has performed this evaluation andhas determined that the unrealized losses at March 31, 2010 and December 31,2009, respectively are not considered other-than-temporary and are thereforereflected in other comprehensive income.

 

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**NOTE 7—LOANS RECEIVABLE**

 

Loans receivable are summarized as follows:

 
| ** **                                                    | ** ** | **March 31, 2010** | ** ** | **December 31, 2009** | ** ** |
|---------------------------------------------------------------|------------|-------------------------|------------|----------------------------|------------|
| ** **                                                    | ** ** | **(in thousands)**      | ** ** |
| Held for investment:                                          |       |                    |       |                       |       |
| First mortgage loans                                          |       |                    |       |                       |       |
| Secured by one-to-four family residences                      |       | $                       | 269,152    |                       | $          | 271,651 |   |
| Secured by non-residential properties                         |       | 134,281                 |       | 134,584                    |       |
| Construction loans                                            |       | 28,977                  |       | 29,671                     |       |
| Total first mortgage loans                                    |       | 432,410                 |       | 435,906                    |       |
| Other loans                                                   |       |                    |       |                       |       |
| Commercial-business, real estate secured                      |       | 34,224                  |       | 33,514                     |       |
| Commercial-business, non-real estate  secured                 |       | 6,388                   |       | 7,462                      |       |
| Home equity and second mortgage                               |       | 53,946                  |       | 54,811                     |       |
| Other consumer                                                |       | 2,708                   |       | 2,565                      |       |
| Total other loans                                             |       | 97,266                  |       | 98,352                     |       |
| Total loans                                                   |       | 529,676                 |       | 534,258                    |       |
| Net deferred loan origination costs and unamortized  premiums |       | 588                     |       | 609                        |       |
| Less allowance for loan losses                                |       | (6,165                  | )          | (5,215                     | )          |
| Total loans receivable                                        |       | $                       | 524,099    |                       | $          | 529,652 |   |
| Held for sale:                                                |       |                    |       |                       |       |
| First mortgage loans                                          |       |                    |       |                       |       |
| Secured by one-to-four family residences                      |       | $                       | 873        |                       | $          | 1,082 |   |

 

Activity in the allowance for loan losses issummarized as follows:

 
| ** **                                    | ** ** | **Quarter**                  | ** ** | **Quarter**                       | ** ** |
|-----------------------------------------------|------------|------------------------------|------------|-----------------------------------|------------|
| ** **                                    | ** ** | **end  March 31, 2010** | ** ** | **end  March 31, 2009** | ** ** |
|                                          |       |                         |       |                              |       |
| Balance  at beginning of period               |       | $                            | 5,215      |                              | $          | 3,855 |   |
| Provision charged to income                   |       | 961                          |       | 665                               |       |
| Charge-offs:                                  |       |                         |       |                              |       |
| Secured by one-to-four family residences      |       | —                       |       | (46                               | )          |
| Secured by non-residential properties         |       | —                       |       | —                            |       |
| Construction loans                            |       | —                       |       | (48                               | )          |
| Commercial-business, non-real estate  secured |       | (7                           | )          | —                            |       |
| Other consumer                                |       | (6                           | )          | (12                               | )          |
| Recoveries:                                   |       |                         |       |                              |       |
| Construction loans                            |       | —                       |       | —                            |       |
| Commercial-business, non-real estate  secured |       | —                       |       | 7                                 |       |
| Other consumer                                |       | 2                            |       | 4                                 |       |
| Balance at end of period                      |       | $                            | 6,165      |                              | $          | 4,425 |   |

 

**NOTE 8- FAIR VALUE MEASUREMENTS**

 

The following table presents information about the Company’sassets and liabilities measured at fair valued on a recurring basis as of March 31,2010. 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:

 

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·                  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.

 

Determinationof the appropriate level within the fair value hierarchy is based on the lowestlevel of input that is significant to the fair value measurement for theinstrument or security.  Assets andliabilities measured at fair value on a recurring basis segregated by fair valuehierarchy level are summarized below (dollars in thousands):

 
| **At  March 31, 2010**                                                                  | ** ** | **Quoted  Prices in  Active  Markets  for  Identical  Assets  (Level 1)** | ** ** | **Significant  Other  Observable  Inputs  (Level 2)** | ** ** | **Significant  Unobservable  Inputs  (Level 3)** | ** ** | **Balance as of  March 31,  2010** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|-------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                   | ** ** | ** **                                                                          | ** ** | ** **                                                 | ** ** | ** **                                            | ** ** | ** **                                        | ** ** |
| **Assets**                                                                                   | ** ** | ** **                                                                          | ** ** | ** **                                                 | ** ** | ** **                                            | ** ** | ** **                                        | ** ** |
| Investment  securities available for sale                                               |       |                                                                                |       |                                                       |       |                                                  |       |                                              |       |
| U.S.  government and federal agencies                                                        |       | $                                                                                   | —     |                                                       | $          | 5,957                                                 |       | $                                                 | —     |   | $ | 5,957 |   |
| Corporate  debt securities                                                                   |       | —                                                                              |       | 3,548                                                      |       | —                                                |       | 3,548                                             |       |
| State and  political subdivisions                                                            |       | —                                                                              |       | 38,286                                                     |       | —                                                |       | 38,286                                            |       |
| Equity  securities                                                                           |       | 150                                                                                 |       | —                                                     |       | —                                                |       | 150                                               |       |
| Total investment securities  available for sale                                    |       | $                                                                                   | 150        |                                                       | $          | 47,791                                                |       | $                                                 | —     |   | $ | 47,941 |   |
|                                                                                         |       |                                                                                |       |                                                       |       |                                                  |       |                                              |       |
| Residential mortgage-backed securities issued  by quasi-governmental agencies |       | $                                                                                   | —     |                                                       | $          | 68,015                                                |       | $                                                 | —     |   | $ | 68,015 |   |
| Residential real estate mortgage - backed  securities privately issued                       |       | —                                                                              |       | 6,775                                                      |       | —                                                |       | 6,775                                             |       |
| Total mortgage-backed securities  available for sale                                    |       | $                                                                                   | —     |                                                       | $          | 74,790                                                |       | $                                                 | —     |   | $ | 74,790 |   |
|                                                                                         |       |                                                                                |       |                                                       |       |                                                  |       |                                              |       |
| Impaired loans                                                                               |       | $                                                                                   | —     |                                                       | $          | —                                                |       | $                                                 | 12,936     |   | $ | 12,936 |   |
| Real estate owned                                                                            |       | $                                                                                   | —     |                                                       | $          | —                                                |       | $                                                 | 1,150      |   | $ | 1,150 |   |
| Mortgage servicing rights                                                                    |       | $                                                                                   | —     |                                                       | $          | 755                                                   |       | $                                                 | —     |   | $ | 755 |   |
| Forward loan sales                                                                           |       | $                                                                                   | —     |                                                       | $          | —                                                |       | $                                                 | 4          |   | $ | 4 |   |

 

Active listed equities are classified within Level 1 of the fair valuehierarchy. Investment securities available for sale and mortgage-backedsecurities available for sale are valued primarily by a third party pricingagent. U.S. Government and federal agency and corporate debt securities areprimarily priced through a multi-dimensional relational model, a Level 2hierarchy, which incorporates dealer quotes and other market informationincluding, defined sector breakdown, benchmark yields, base spread, yield tomaturity, and corporate actions.  Stateand political subdivision securities are also valued within the Level 2hierarchy using inputs with a series of matrices that reflect benchmark yields,ratings updates, and spread adjustments. Mortgage-backed securities include theFederal Home Loan Mortgage Corporation (“FHLMC”), Government National MortgageAssociation (“GNMA”), Federal National Mortgage Association (“FNMA”) andprivately 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.

 

Impaired loans are evaluated and valued at the time the loan isidentified as impaired, at the lower of the recorded investment in the loan ormarket value. The loans identified as impaired are real estate secured. Realestate acquired through foreclosure is initially valued at the lower of therecorded investment in the loan or market value at foreclosure and subsequentlyadjusted for further decreases in market value, if necessary.  Market value is determined by using the valueof the collateral securing the loans and is therefore classified as a Level 3hierarchy.  The value of the real estatesecuring impaired loans and real 

 

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estate acquired through foreclosure is based on appraisals prepared byqualified independent licensed appraisers contracted by the Company to performthe assessment.

 

The Company initially recognizes and measuresservicing assets based on the fair value of the servicing right at the time theloan is sold. The Company uses the amortized cost method for subsequentmeasurement of its servicing assets and evaluates the recorded value for impairmentquarterly. The Company retains a qualified valuation service to calculate theamortized cost and to determine the fair value of the mortgage servicingrights. The valuation service utilizes discounted cash flow analyses adjustedfor prepayment speeds, market discount rates and conditions existing in thesecondary servicing market. Hence, the fair value of mortgage servicing rightsis deemed a Level 2 hierarchy. At March 31, 2010, the amortized cost basisof the Company’s mortgage servicing rights was $821,000 and the fair value of$755,000 was included in Other Assets in the consolidated balance sheet.

 

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

 

The following table presents additional information about assetsmeasured at fair value on a recurring basis for which the Company has utilizedLevel 3 inputs to determine fair value (in thousands):

 
| ** **                                       | ** ** | **Forward  loan sales** | ** ** | **Real estate  owned** | ** ** |
|--------------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                                       | ** ** | ** **              | ** ** | ** **             | ** ** |
| Beginning balance, January 1, 2010          |       | $                       | 21         |                   | $          | 1,279 |   |
| Total gains (losses) — realized/unrealized: |       |                    |       |                   |       |
| Included in earnings                             |       | (17                     | )          | (145                   | )          |
| Included in other comprehensive income      |       | —                  |       | —                 |       |
| Purchases, issuances, and settlements            |       | —                  |       | 16                     |       |
| Ending balance, March 31,2010               |       | $                       | 4          |                   | $          | 1,150 |   |

 

**NOTE 9- FAIR VALUE OF FINANCIALINSTRUMENTS**

 

For the Bank, as for most financial institutions, the majority of itsassets and liabilities 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 8**-** Fair Value Measurements. Additionally,the Company used significant estimations and present value calculations toprepare this disclosure.

 

Changes in the assumptions or methodologies used to estimate fairvalues may materially affect the estimated amounts. In addition, there may notbe reasonable comparability between institutions due to the wide range ofpermitted assumptions and methodologies in the absence of active markets. Thislack of uniformity gives rise to a high degree of subjectivity in estimatingfinancial instrument fair values.

 

Fair values have been estimated using data which management consideredthe best available, as generally provided by estimation methodologies deemedsuitable for the pertinent category of financial instrument. The estimationmethodologies, resulting fair values and recorded carrying amounts are asfollows:

 

The fair value of cash and cash equivalents equals historical bookvalue. The fair value of investment and mortgage backed securities is describedand presented under fair value measurement guidelines as amended.

 
| ** **                 | ** ** | **March 31, 2010** | ** ** | **December 31, 2009** | ** ** |
|----------------------------|------------|-------------------------|------------|----------------------------|------------|
| ** **                 | ** ** | **Fair  value**         | ** ** | **Carrying  value**        | ** ** | **Fair  value** | ** ** | **Carrying  value** | ** ** |
| ** **                 | ** ** | **(in thousands)**      | ** ** |
| Cash and cash equivalents  |       | $                       | 16,339     |                       | $          | 16,339 |   | $ | 12,801 |   | $ | 12,801 |   |
| Investment securities      |       | 47,941                  |       | 47,941                     |       | 40,853 |   | 40,853 |   |
| Mortgage-backed securities |       | 78,747                  |       | 78,412                     |       | 82,231 |   | 81,931 |   |
|                            |            |                         |            |                            |            |  |  |  |  |  |  |  |  |

 

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The fair valueof the loans receivable, net has been estimated using the present value of cashflows, discounted at the approximate current market rates, and givingconsideration to estimated prepayment risk. Fair value of loans with floatinginterest rates is generally presumed to approximate the recorded carryingamounts.

 
| ** **            | ** ** | **March 31, 2010** | ** ** | **December 31, 2009** | ** ** |
|-----------------------|------------|-------------------------|------------|----------------------------|------------|
| ** **            | ** ** | **Fair  value**         | ** ** | **Carrying  value**        | ** ** | **Fair  value** | ** ** | **Carrying  value** | ** ** |
| ** **            | ** ** | **(in thousands)**      | ** ** |
| Loans receivable, net |       | $                       | 539,337    |                       | $          | 524,972 |   | $ | 539,670 |   | $ | 530,734 |   |
|                       |            |                         |            |                            |            |  |  |  |  |  |  |  |  |

 

The fair valueof deposits and borrowings with stated maturities has been estimated using thepresent value of cash flows, discounted at rates approximating current marketrates for similar assets and liabilities. Fair value of deposits and borrowingswith floating interest rates is generally presumed to approximate the recordedcarrying amounts.

 
| ** **                        | ** ** | **March 31, 2010** | ** ** | **December 31, 2009** | ** ** |
|-----------------------------------|------------|-------------------------|------------|----------------------------|------------|
| ** **                        | ** ** | **Fair  value**         | ** ** | **Carrying  value**        | ** ** | **Fair  value** | ** ** | **Carrying  value** | ** ** |
| ** **                        | ** ** | **(in thousands)**      | ** ** |
| Liabilities                       |       |                    |       |                       |       |   |   |   |   |
| Deposits with stated maturities   |       | $                       | 221,107    |                       | $          | 217,938 |   | $ | 228,676 |   | $ | 225,093 |   |
| Borrowings with stated maturities |       | $                       | 84,136     |                       | $          | 81,738 |   | $ | 82,947 |   | $ | 80,241 |   |

 

The fair valueof deposits and borrowings with no stated maturities is generally presumed toapproximate the carrying amount (the amount payable on demand). Fair valuedeposits and borrowings with floating interest rates are generally presumed toapproximate the recorded carrying amounts.

 
| ** **                         | ** ** | **March 31, 2010** | ** ** | **December 31, 2009** | ** ** |
|------------------------------------|------------|-------------------------|------------|----------------------------|------------|
| ** **                         | ** ** | **Fair  value**         | ** ** | **Carrying  value**        | ** ** | **Fair  value** | ** ** | **Carrying  value** | ** ** |
| ** **                         | ** ** | **(in thousands)**      | ** ** |
| Deposits with no stated maturities |       | $                       | 335,487    |                       | $          | 335,487 |   | $ | 327,623 |   | $ | 327,623 |   |
|                                    |            |                         |            |                            |            |  |  |  |  |  |  |  |  |

 

 

The Bank’sremaining assets and liabilities are not considered financial instruments. Nodisclosure of the relationship value of the Bank’s deposits is required.

 

**NOTE 10- 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 March 31,2010, there was $125,800 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 21.6 months.Option activity under the Company’s stock option plan as of March 31, 2010was as follows:

 
| ** **                                 | ** ** | **2010**                   | ** ** |
|--------------------------------------------|------------|----------------------------|------------|
| ** **                                 | ** ** | **Number  of shares** | ** ** | **Weighted  average  exercise  price per  share** | ** ** | **Weighted  average  remaining  contractual  term (in  years)** | ** ** | **Aggregate  intrinsic  value ($ 000)** | ** ** |
| Outstanding at January 1, 2010        |       | 271,646                    |       | $ | 26.23 |   |   |   |   |   |
| Options granted                            |       | —                     |       | — |   |   |   |   |   |
| Options exercised                          |       | (5,095                     | )          | 14.01 |   |   |   |   |   |
| Options forfeited                          |       | —                     |       | — |   |   |   |   |   |
| Options expired                            |       | —                     |       | — |   |   |   |   |   |
| Outstanding at March 31, 2010         |       | 266,551                    |       | $ | 26.46 |   | 2.21 |   | $ | 50 |   |
| Options exercisable at March 31, 2010 |       | 226,957                    |       | $ | 27.31 |   | 1.69 |   | $ | 50 |   |

 

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

 

The aggregate intrinsic value of options exercisedduring the three months ended March 31, 2010 and 2009 was $27,000 and$14,000, respectively. Exercise of stock options during the three months ended March 31,2010 and 2009 resulted in cash receipts of $72,000 and $101,000, respectively.

 

Stock-based compensation expense included in net incomerelated to stock options was $13,000 and $14,000 for the three months ended March 31,2010 and 2009 respectively, resulting in a tax benefit of $5,000 for each ofthe periods.

 

Stock-based compensationexpense included in net income related to stock grants was $4,000 for boththree month periods ended March 31, 2010 and 2009. Stock-basedcompensation expense included in net income related to the Company’s employeestock ownership plan totaled $45,000 and $40,000 for the three months ended March 31,2010 and 2009, respectively.

 

**NOTE 11-EMPLOYEE BENEFIT PLANS**

 

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

 
| ** **                              | ** ** | **Three months ended  March 31,** | ** ** |
|-----------------------------------------|------------|--------------------------------------------------|------------|
| ** **                              | ** ** | **2010**                                         | ** ** | **2009** | ** ** |
|                                    |       |                                             |       |   |   |
| Components of net periodic benefit cost |       |                                             |       |   |   |
| Service cost                            |       | $                                                | 142        |   | $ | 118 |   |
| Interest cost                           |       | 74                                               |       | 62 |   |
| Expected return on plan assets          |       | (136                                             | )          | (93 | ) |
| Recognized net actuarial loss           |       | 33                                               |       | 46 |   |
|                                    |       |                                             |       |   |   |
| Net periodic benefit cost               |       | $                                                | 113        |   | $ | 133 |   |

 

There was no employercontribution for the three months ended March 31, 2010 and 2009.

 

 

**NOTE 12-SUBSEQUENT EVENTS**

 

The Company has evaluated subsequent eventsthrough the date the financial statements were issued. The Company is not awareof any subsequent events which would require recognition or disclosure in thefinancial statements.

 

**NOTE 13 —ACCOUNTING STANDARDS UPDATE**

 

In January 2010, the FASB added new requirements for disclosures offair value measurements. The new requirements include disclosure abouttransfers in and out of Levels 1 and 2 and separate disclosures about purchases,sales, issuances and settlements relating to Level 3 measurements.  The guidance includes new disclosures andchanges to clarify existing disclosure requirements. The guidance iseffective for the first reporting period (including interim periods) beginningafter December 15, 2009, except for the requirement to provide Level 3activity of purchases, sales, issuances, and settlements on a gross basis,which will be effective for fiscal years beginning after December 15,2010, and for interim periods within those years.   Early adoption is permitted. The requiredadditional disclosures are contained in Note 8-Fair Value Measurements.

 

In February 2010, FASB amended the subsequent events disclosure guidance. The amendmentincludes a definition of a Securities and Exchange Commission (“SEC”) filer, requires an SEC filer to evaluatesubsequent events through the date the financial statements are issued, andremoves the requirement for an SEC filer to disclose the date through whichsubsequent events have been evaluated. The amendment was effective uponissuance and is included in Note 12**-**SubsequentEvents.

 

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**TF FINANCIALCORPORATION AND SUBSIDIARIES**

 

**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTSOF OPERATIONS**

 

**GENERAL**

 

The Company may from time to time make written or oral “forward-lookingstatements”, including statements contained in the Company’s filings with theSecurities and Exchange Commission (including this Quarterly Report on Form 10-Qand the exhibits thereto), in its reports to stockholders and in othercommunications by the Company, which are made in good faith by the Companypursuant to the “Safe Harbor” Provisions of the Private Securities LitigationReform Act of 1995.

 

These forward-looking statements involve risks and uncertainties, suchas statements of the Company’s plans, objectives, expectations, estimates and intentionsthat are subject to change based on various important factors (some of whichare beyond the Company’s control). The following factors, among others, couldcause the 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 monetaryfluctuations; the timely development of and acceptance of new products and servicesof the Company and the perceived overall value of these products and servicesby users, including the features, pricing and quality compared to competitors’products and services; the willingness of users to substitute competitors’products and services for the Company’s products and services; the success 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.

 

The Company cautions that the foregoing list of important factors isnot exclusive. The Company does not undertake to update any forward-lookingstatement, whether written or oral, that may be made from time to time by or onbehalf of the Company.

 

**Financial Position**

 

The Company’s total assets at March 31, 2010 and December 31,2009 were $715.9 million and $714.1 million, respectively, representing anincrease of $1.9 million, or 0.3% during the three-month period. Investmentsecurities available for sale increased $7.1 million due to purchases ofmunicipal and federal agency bonds of $7.0 million as well as a $0.1 millionincrease in the fair value of the securities. Cash and cash equivalentsincreased by $3.5 million due to continued high deposit levels combined withdecreases in mortgage-backed securities and loans as discussed herein.Mortgage-backed securities available for sale decreased by $3.4 million due toprincipal repayments received of $6.5 million, offset by purchases of $3.0million, and an increase in the fair value of the securities of $0.1 million. Mortgage-backedsecurities held to maturity decreased by $0.1 million mainly as a result ofprincipal repayments. Loans receivable, net decreased by $5.6 million duringthe first three months of 2010. Principal repayments of loans receivabletotaled $20.9 million and were offset by originations of consumer andsingle-family residential mortgage loans of $12.3 million and commercial loansof $4.0 million. The Company increased the allowance for loan losses by $1.0million. Loans receivable held for sale decreased by $0.2 million, mainly thenet result of loans originated for sale of $6.1 million, less $6.3 million inproceeds from the sale of loans in the secondary market.

 

Total liabilities increased by $1.3 million during the first threemonths of 2010. Advances from the Federal Home Loan Bank increased by $1.5million, the net result of an $8.0 million increase in long-term borrowingsoffset by scheduled amortization and maturities of $6.5 million. Deposits grewby $0.7 million due to an increase in money market, non-interestchecking and savings accounts of $8.9 million less a decrease in interest checking accounts of $1.0 millionand a decrease in retailcertificates of deposit of $7.2 million.

 

Total consolidated stockholder’s equity of the Company was $72.4million or 10.1% of total assets at March 31, 2010. During the first threemonths of 2010, the Company issued 5,095 shares of common stock as a result ofstock option exercises. At March 31, 2010, there were approximately102,000 shares available for repurchase under the previously announced sharerepurchase plan.

 

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**AssetQuality**

 

The following table sets forth information regarding the Company’sasset quality (dollars in thousands): Non-performing loans include impairedloans and loan balances past due over 90 days for which the accrual ofinterest has been discontinued.

 
| ** **                                                                           | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** | **March 31,  2009** | ** ** |
|--------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|--------------------------|------------|
| ** **                                                                           | ** ** | **(in thousands)**       | ** ** |
|                                                                                 |       |                     |       |                        |       |                     |       |
| Non-performing loans with a related  allowance                                       |       |                     |       |                        |       |                     |       |
| Construction  loans                                                                  |       | $                        | 3,886      |                        | $          | 2,389                    |       | $ | 1,841 |   |
| Commercial-business, non-real estate  secured                                        |       | 56                       |       | —                      |       | —                   |       |
| Non-performing loans without a related  allowance                                    |       |                     |       |                        |       |                     |       |
| Secured by one-to-four family residences(1)                                          |       | 1,088                    |       | 1.120                       |       | 461                      |       |
| Secured by non-residential properties(2)                                             |       | 2,506                    |       | 2,506                       |       | 1,008                    |       |
| Construction loans                                                                   |       | 668                      |       | 2,167                       |       | —                   |       |
| Commercial-business, real estate secured                                             |       | 5,867                    |       | —                      |       | —                   |       |
| Commercial-business, non-real estate  secured                                        |       | —                   |       | —                      |       | —                   |       |
| Home equity and second mortgage                                                      |       | 99                       |       | 99                          |       | 176                      |       |
| Other consumer                                                                       |       | 4                        |       | 4                           |       | —                   |       |
| Total non-performing loans                                                           |       | $                        | 14,174     |                        | $          | 8,285                    |       | $ | 3,486 |   |
| Total loans past due 90 days as to  interest or principal and accruing interest |       | $                        | —     |                        | $          | —                   |       | $ | — |   |
| Ratio of non-performing  loans to gross loans                                        |       | 2.67                     | %          | 1.55                        | %          | 0.64                     | %          |
| Ratio of  non-performing loans to total assets                                       |       | 1.98                     | %          | 1.16                        | %          | 0.48                     | %          |
| Real estate  owned                                                                   |       | $                        | 1,150      |                        | $          | 1,279                    |       | $ | 2,164 |   |
| Ratio of total  non-performing assets to total assets                                |       | 2.14                     | %          | 1.34                        | %          | 0.78                     | %          |
| Ratio of  allowance for loan losses to total loans                                   |       | 1.16                     | %          | 0.97                        | %          | 0.81                     | %          |
| Ratio of  allowance for loan losses to non-performing loans                          |       | 43.5                     | %          | 63.0                        | %          | 126.94                   | %          |
|                                                                                 |       |                     |       |                        |       |                     |       |
| Loans  delinquent 30-89 days(3)                                                      |       | $                        | 1,207      |                        | $          | 934                      |       | $ | 5,016 |   |

 

----

(1) Included in this category of non-performingloans at March 31, 2010 and December 31, 2010 are three trouble debtrestructuring with combined balances of $843,000 and $844,000, respectively.There were no trouble debt restructurings at March 31, 2009.

(2) Included in this category of non-performingloans at March 31, 2010 and December 31, 2010 is one trouble debtrestructuring with a loan balance of $560,000. There were no trouble debtrestructurings at March 31, 2009.

(3) Loans delinquent 30-89 days areperforming assets and continue to accrue interest.

 

Non-performing assets included a construction loan with a balance of$2.4 million, secured by a largely completed and partially occupied commercialoffice building, and the personal guarantee of the borrowers.  At March 31, 2010, this loan wasimpaired and the Bank had allocated $637,000 of the allowance for loan lossesequal to the difference between the loan balance plus other acquisition costs,and the fair value based upon a recent appraisal.  The Bank has initiated foreclosure proceedings.

 

Non-performing assets also included a construction loan with a balanceof $1.5 million secured by two contiguous parcels of commercial real estate anda contested first-position lien on the guarantor’s personal residence.  At March 31, 2010, this loan wasimpaired and the Bank had allocated $592,000 of the allowance for loan lossesequal to the difference between the loan balance plus other acquisition costs,and the fair value based upon a recent appraisal. The Bank is in the midst offoreclosure proceedings and the borrower has filed for bankruptcy protectionunder Chapter 11 of the U.S. Bankruptcy Code.

 

Non-performing assets included two loans with a combined balance of$5.9 million to a single borrower, secured by undeveloped commercial real estateand personal guarantees of several individuals. The borrower has informed the Bank that it will not be able to continueto make the loan payments in full. The Bank has placed these loans onnon-accrual status and is negotiating with the borrower in order to resolve thematter.  A recent appraisal of theproperty indicated an appraised value in excess of the loan balances.

 

Not included in non-performing assets at March 31, 2010 are fourloans with a combined balance of $2.4 million to a single borrower, secured by35 residential rental properties located in the greater Philadelphia area, andthe personal guarantees of the borrowers. The borrower has experiencedfinancial difficulties and informed the Bank that it will not be able tocontinue to make the loan payments in full at the present time. Only one loanwith a balance of $706,000 was 89 days delinquent at March 31, 2010.However subsequent to quarter end, the Bank has placed these loans onnon-accrual status and is negotiating with the borrower in order to resolve thematter.

 

With respect to each of the remaining non-performingloans, all of which are real estate secured, the Bank is taking appropriatesteps to resolve the individual situations.

 

Foreclosedproperty at March 31, 2010 comprised three parcels of real estate with acombined carrying value of $1,150,000 that are included in other assets in theconsolidated balance sheet. The Bank has accepted offers to purchase twoof the properties, which would result in estimated net proceeds of $1,067,000.  The Bank established a valuation allowance of$145,000 against the assets by means of a charge to earnings during the firstquarter of 2010.

 

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**Allowance for Loan Losses**

 

The Bank provides valuation allowances for estimated losses fromuncollectible loans. The allowance is increased by provisions charged toexpense and reduced by net charge-offs. On a quarterly basis the Companyprepares an allowance for loan losses (ALLL) analysis. In the analysis, theloan portfolio is segmented into groups of homogeneous loans that share similarrisk characteristics: 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.

 

Quantitative factors include an actual expected losses factor based onhistorical loss experience over a relevant look-back period. Quantitativefactors also include the Bank’s actual risk ratings for the commercial loansegments as determined in accordance with loan review and loan grading policiesand procedures, and additional factors as determined by management to berepresentative of additional risk due to the loan’s geographic location, type,and other attributes. These quantitative factors are adjusted if necessary, upor down, based on actual experience and an evaluation of the qualitativefactors.

 

Qualitative factors are based upon: (1) changes in lendingpolicies and procedures, including but not limited to changes in underwritingstandards and collection, charge-off, and recovery practices not consideredelsewhere in estimating credit losses; (2) changes in international,national, regional, and local economic and business conditions and developmentsthat affect the collectability of the portfolio, including the condition ofvarious market segments; (3) changes in the nature and volume of theportfolio and in the terms of loans; (4) changes in the experience,ability, and depth of lending management and other relevant staff; (5) changesin the volume and severity of past due loans, the volume of nonaccrual loans,and the volume and severity of adversely classified or graded loans; (6) changesin the quality of the loan review system; (7) changes in the value ofunderlying collateral for 

 

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collateral dependent loans; (8) the existence and effect of anyconcentration of credit, and changes in the level of such concentrations; and (9) theeffect of other external factors such as competition and legal and regulatoryrequirements on the level of estimated credit losses in the existing loanportfolio.

 

Potentially impairedloans selected for individual evaluation are reviewed in accordance with USGAAP which governs the accounting for impaired assets, and consideration ofregulatory guidance regarding treatment of troubled, collateral dependentloans. Each potentially impaired loan is evaluated using all availableinformation such as recent appraisals, whether the loan is currently on accrualor non-accrual status, discounted cash flow analyses, guarantor financialstrength, the value of additional collateral, and the loan’s and borrower’spast performance to determine whether in management’s best judgment it is probablethat the Bank will be unable to collect all contractual interest and principalin accordance with the loan’s terms. Loans deemed impaired are generallyassigned a reserve derived from the value of the underlying collateral. Loansdeemed not to be impaired are assigned a reserve factor based upon the segmentfrom which they were selected.

 

The ALLL needed as a result of the foregoing evaluations is comparedwith the unadjusted amount, and an adjustment is made by means of a provisioncharged to expense for loan losses. Recognizing the inherently imprecise natureof the loss estimates and the large number of assumptions needed in order toperform the analysis, the required reserve may be less than the actual level ofreserves at the end of any evaluation period, and thus there may be anunallocated portion of the ALLL. Management adjusts the unallocated portion toan amount which management considers reasonable under the circumstances.

 

The following table sets forth the allocation of the loan loss allowanceby loan category for the periods indicated (in thousands):

 
| ** **                                    | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** | **March 31,  2009** | ** ** |
|-----------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|--------------------------|------------|
| ** **                                    | ** ** | **(in thousands)**       | ** ** |
| Impaired loans:                               |       |                     |       |                        |       |                     |       |
| Construction loans                            |       | $                        | 1,229      |                        | $          | 540                      |       | $ | 340 |   |
| Commercial-business, non-real estate  secured |       | 9                        |       | —                      |       | —                   |       |
| Total                                         |       | 1,238                    |       | 540                         |       | 340                      |       |
| Unimpaired loans:                             |       |                     |       |                        |       |                     |       |
| Secured by one-to-four family residences      |       | 990                      |       | 962                         |       | 1,467                    |       |
| Secured by non-residential properties         |       | 1,857                    |       | 1,275                       |       | 978                      |       |
| Construction loans                            |       | 959                      |       | 1,196                       |       | 992                      |       |
| Commercial-business, real estate secured      |       | 718                      |       | 757                         |       | 306                      |       |
| Commercial-business, non-real estate  secured |       | 116                      |       | 168                         |       | 20                       |       |
| Home equity and second mortgage               |       | 215                      |       | 303                         |       | 282                      |       |
| Other consumer                                |       | 17                       |       | 14                          |       | 14                       |       |
| Total                                         |       | 4,872                    |       | 4,675                       |       | 4,059                    |       |
| Unallocated                                   |       | 55                       |       | —                      |       | 26                       |       |
|                                          |       |                     |       |                        |       |                     |       |
| Allowance for loan loss                       |       | $                        | 6,165      |                        | $          | 5,215                    |       | $ | 4,425 |   |

 

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**RESULTS OF OPERATIONS FOR THE THREE MONTHSENDED MARCH 31, 2010 AND 2009**

 

**Net Income**. TheCompany recorded net income of $717,000, or $0.28 per diluted share, for thethree months ended March 31, 2010 as compared to net income of $1,020,000,or $0.41 per diluted share, for the three months ended March 31, 2009.

 

### **Average Balance Sheet**

###  

The following table sets forth information (dollars in thousands)relating to the Company’s average balance sheet and reflects the average yieldon assets and average cost of liabilities for the periods indicated. Yield andcost are computed by dividing income or expense by the average daily balance ofinterest-earning assets or interest-bearing liabilities, respectively, for thethree-month periods indicated.

 
| ** **                                                                        | ** ** | **March 31,**   | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                        | ** ** | **2010**             | ** ** | **2009** | ** ** |
| ** **                                                                        | ** ** | **Average  balance** | ** ** | **Interest** | ** ** | **Average  yld/cost** | ** ** | **Average  balance** | ** ** | **Interest** | ** ** | **Average  yld/cost** | ** ** |
| **ASSETS**                                                                        |       |                 |       |   |   |   |   |   |   |   |   |   |   |
| **Interest-earning assets:**                                                      |       |                 |       |   |   |   |   |   |   |   |   |   |   |
| Loans receivable(1)                                                               |       | $                    | 529,817    |   | $ | 7,302 |   | 5.59 | % | $ | 545,097 |   | $ | 7,655 |   | 5.70 | % |
| Mortgage-backed securities                                                        |       | 81,839               |       | 967 |   | 4.79 | % | 109,377 |   | 1,385 |   | 5.14 | % |
| Investment securities(2)                                                          |       | 53,282               |       | 541 |   | 4.12 | % | 39,458 |   | 379 |   | 3.90 | % |
| Other interest-earning assets(3)                                                  |       | 6,728                |       | 1 |   | 0.06 | % | 501 |   | — | * | — | % |
| Total interest-earning assets                                                     |       | 671,666              |       | 8,811 |   | 5.32 | % | 694,433 |   | 9,419 |   | 5.50 | % |
| Non interest-earning assets                                                       |       | 41,204               |       |   |   |   |   | 34,984 |   |   |   |   |   |
| Total assets                                                                      |       | $                    | 712,870    |   |   |   |   |   | $ | 729,417 |   |   |   |   |   |
| **LIABILITIES AND  STOCKHOLDERS’ EQUITY**                               |       |                 |       |   |   |   |   |   |   |   |   |   |   |
| **Interest-bearing liabilities:**                                                 |       |                 |       |   |   |   |   |   |   |   |   |   |   |
| Deposits                                                                          |       | 549,257              |       | 1,995 |   | 1.47 | % | 494,969 |   | 2,513 |   | 2.06 | % |
| Borrowings from the FHLB and other borrowings                                     |       | 82,536               |       | 848 |   | 4.17 | % | 157,928 |   | 1,285 |   | 3.30 | % |
| Total interest-bearing liabilities                                                |       | 631,793              |       | 2,843 |   | 1.82 | % | 652,897 |   | 3,798 |   | 2.36 | % |
| Non interest-bearing liabilities                                                  |       | 8,611                |       |   |   |   |   | 8,471 |   |   |   |   |   |
| Total liabilities                                                                 |       | 640,404              |       |   |   |   |   | 661,368 |   |   |   |   |   |
| Stockholders’ equity                                                         |       | 72,466               |       |   |   |   |   | 68,049 |   |   |   |   |   |
| Total liabilities and stockholders’  equity                                  |       | $                    | 712,870    |   |   |   |   |   | $ | 729,417 |   |   |   |   |   |
| Net interest income—tax equivalent  basis                                    |       |                 |       | $ | 5,968 |   |   |   |   |   | $ | 5,621 |   |   |   |
| Interest rate spread(4)-tax equivalent  basis                                     |       |                 |       |   |   | 3.50 | % |   |   |   |   | 3.14 | % |
| Net yield on interest-earning assets(5)  —tax equivalent basis          |       |                 |       |   |   | 3.60 | % |   |   |   |   | 3.28 | % |
| Ratio of average interest-earning  assets to average interest-bearing liabilities |       |                 |       |   |   | 106.31 | % |   |   |   |   | 106.36 | % |
| Less: tax—equivalent interest  adjustment                                    |       |                 |       | (136 | ) |   |   |   |   | (102 | ) |   |   |
| Net interest income                                                               |       |                 |       | $ | 5,832 |   |   |   |   |   | $ | 5,519 |   |   |   |
| Interest rate spread(4)                                                           |       |                 |       |   |   | 3.41 | % |   |   |   |   | 3.08 | % |
| Net yield on interest-earning assets(5)                                           |       |                 |       |   |   | 3.52 | % |   |   |   |   | 3.23 | % |

 

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| (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  $136,000 and $102,000 for the quarter ended March 31, 2010 and 2009,  respectively. Tax equivalent interest income is based upon a marginal  effective tax rate of 34%. |
| (3) |   | Includes interest-bearing deposits in other banks.                                                                                                                                                                                                 |
| (4) |   | Interest rate spread represents the difference between the average  yield on interest-earning assets and the average cost of interest-bearing  liabilities.                                                                                        |
| (5) |   | Net yield on interest-earning assets represents net interest income as  a percentage of average interest-earning assets.                                                                                                                           |
| *   |   | Is less than $500 for period indicated                                                                                                                                                                                                             |

 

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**Rate/Volume Analysis**

 

The following table presents, for the periods indicated, the change ininterest income and interest expense (in thousands) attributed to (i) changesin volume (changes in the weighted average balance of the total interestearning asset and interest bearing liability portfolios multiplied by the prioryear rate), and (ii) changes in rate (changes in rate multiplied by prioryear volume). Changes attributable to the combined impact of volume and ratehave been allocated proportionately based on the absolute value of changes dueto volume and changes due to rate.

 
| ** **                                    | ** ** | **Three months ended March**                           | ** ** |
|-----------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                    | ** ** | **2010 vs 2009  Increase (decrease) due to** | ** ** |
| ** **                                    | ** ** | **Volume**                                                            | ** ** | **Rate** | ** ** | **Net** | ** ** |
| **Interest  income:**                         |       |                                                                  |       |   |   |   |   |
| Loans receivable, net                         |       | $                                                                     | (212       | ) | $ | (141 | ) | $ | (353 | ) |
| Mortgage-backed securities                    |       | (330                                                                  | )          | (88 | ) | (418 | ) |
| Investment securities (1)                     |       | 139                                                                   |       | 23 |   | 162 |   |
| Other interest-earning assets                 |       | —                                                                |       | 1 |   | 1 |   |
| Total interest-earning assets                 |       | (403                                                                  | )          | (205 | ) | (608 | ) |
| **Interest  expense:**                        |       |                                                                  |       |   |   |   |   |
| Deposits                                      |       | 1,470                                                                 |       | (1,988 | ) | (518 | ) |
| Borrowings from the FHLB and other borrowings |       | (2,048                                                                | )          | 1,611 |   | (437 | ) |
|                                          |       |                                                                  |       |   |   |   |   |
| Total interest-bearing liabilities            |       | (578                                                                  | )          | (377 | ) | (955 | ) |
| Net change in net interest income             |       | $                                                                     | 175        |   | $ | 172 |   | $ | 347 |   |

 

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| (1) |   | Tax equivalent adjustments to interest on investment securities were  $136,000 and $102,000 for the quarters ended March 31, 2010 and 2009,  respectively. Tax equivalent interest income is based upon a marginal  effective tax rate of 34%. |
|-----|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**Total Interest Income**.Total interest income, on a taxable equivalent basis, decreased by $608,000 or6.5% to $8.8 million for the quarter ended March 31, 2010 compared withthe first quarter of 2009. Interest income from loans receivable decreased by$353,000, the result of a decrease in the average balance of loans outstandingof $15.3 million, plus a decrease in the yield on loans of 11 basis points. Thedecrease in the yield was the result of the prepayment of higher yieldingloans, and, an increase in non performing loans between the periods whichreduced interest income in loans by $56,000. Also, new loans added to theportfolio during the intervening period have been at market interest rateswhich were lower than the overall portfolio rates. Interest income frommortgage-backed securities was lower in the first quarter of 2010 in comparisonto the same period of 2009 mainly because of principal repayments of $32.4million in excess of purchases of $13.6 million during the intervening period.Interest income from investment securities was higher as a result of purchasesof $21.7 million in excess of $2.9 million in sales and maturities ofinvestments during the intervening period.

 

**Total Interest Expense.**Total interest expense decreased by $955,000 to $2.8 million during thethree-month period ended March 31, 2010 as compared with the first quarterof 2009. Although the average balance of deposits increased by $54.3 millionbetween the two quarters, the interest rates paid on the Bank’s deposits were59 basis points lower in 2010. Interestexpense associated with borrowings from the Federal Home Loan Bank and theFederal Reserve Bank decreased $437,000 between the first quarter of 2010 and2009. During the intervening period, the Bank reduced its average outstandingborrowings by $75.4 million, mainly by reducing low cost short-term advances.Thus, the remaining fixed rate, term advances outstanding during the firstquarter of 2010 have a higher rate than those that were combined with theshort-term borrowings available through the Federal Reserve Bank and FederalHome Loan Bank accessed in the first quarter of 2009.

 

**Non-interestincome**. Total non-interest income was $616,000 for thefirst quarter of 2010 compared with $935,000 for the same period in 2009. Gain on sale of investment securities duringthe first quarter of 2009 was $190,000 while there was no such gain during thefirst quarter of 2010. Also, losses on foreclosed real estate totaled $145,000in 2010 and there were no such losses in 2009.

During 2010, the gain on sale of loans heldfor sale decreased by $88,000 as residential loan sales activity was lower inthe first quarter of 2010.  Incomeassociated with the servicing of mortgages sold increased by $56,000 in thefirst quarter of 2010 as the amortization of servicing rights declined and thevaluation allowance was adjusted to reflect an increase in fair value duringthis period.

 

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**Non-interest expense.**Totalnon-interest expense increased by $168,000 to $4.6 million for the three monthsended March 31, 2010 compared to the same period in 2009. FDIC insurancepremiums increased by $173,000 between the two quarters due to increaseddeposit base, an increased assessment rate and the exhaustion of a credit the Companyhas been entitled to apply against the quarterly billed insurance premium.Occupancy and equipment costs increased $49,000 mainly due to higher costsassociated with the Company’s banking software and increased snow removal costsin the first quarter of 2010. Other operating expense included an increase inloan expense of $67,000 as appraisals, inspections and other loan costsincreased. Offsetting the increase between the quarters was robbery and depositrelated losses of $50,000 included in other operating expense in 2009 as therewere no such losses in 2010.

 

**Income tax expense.**TheCompany’s effective tax rate was 19.9% for the quarter ended March 31,2010 compared to 25.3% for the quarter ended March 31, 2009. Theseeffective tax rates are lower than the Company’s marginal tax rate of 34%largely due to the tax-exempt income associated with the Company’s investmentsin tax-exempt municipal bonds and bank-owned life insurance.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

**Liquidity**

 

The Company’s liquidity is a measure of its ability tofund loans, pay withdrawals of deposits, and other cash outflows in anefficient, cost-effective manner. The Company’s short-term sources of liquidityinclude maturity, repayment and sales of assets, excess cash and cash equivalents,new deposits, broker deposits, other borrowings, and new borrowings from theFederal Home Loan Bank and the Federal Reserve Bank. There has been no materialadverse change during the three-month period ended March 31, 2010 in theability of the Company and its subsidiaries to fund their operations.

 

At March 31, 2010, the Company had commitmentsoutstanding under letters of credit of $1.2 million, commitments to originateloans of $12.6 million, and commitments to fund undisbursed balances of closed loansand unused lines of credit of $48.9 million. At March 31, 2010, theBank had $2.4 million in outstanding commitments to sell loans. There has been no material change duringthe three months ended March 31, 2010 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 March 31, 2010.

 

**CRITICAL ACCOUNTING POLICIES**

 

Certain critical accounting policies of the Company require the use ofsignificant judgment and accounting estimates in the preparation of theconsolidated financial statements and related data of the Company. Theseaccounting estimates require management to make assumptions about matters thatare highly uncertain at the time the accounting estimate is made. Managementbelieves that the most critical accounting policy requiring the use ofaccounting estimates and judgment is the determination of the allowance forloan losses. If the financial position of a significant amount of debtorsshould deteriorate more than the Company has estimated, the present allowancefor loan losses may be insufficient and additional provisions for loan lossesmay be required. The allowance for loan losses was approximately $6.2 million atMarch 31, 2010.

 

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

######  

As a “smaller reporting company” as defined by Item 10 of RegulationS-K, the Company is not required to provide the information required by thisitem.

 

**ITEM 4T.CONTROLS AND PROCEDURES**

 

**Evaluationof Disclosure Controls and Procedures**

 

Based on their evaluation of the Company’s disclosure controls andprocedures (as defined in Rules 13a-15(e) under the SecuritiesExchange Act of 1934 (the “Exchange Act”)), the Company’s principal executiveofficer and principal financial officer have concluded that as of the end ofthe period covered by this Quarterly Report on Form 10-Q such disclosurecontrols and procedures are effective to ensure that information required to bedisclosed by the Company 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 

 

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and principal financial officer, as appropriate, to allow timelydecisions regarding required disclosures.

 

**Changes in Internal Controls over FinancialReporting**

 

During the quarter under report, there was no change in the Company’sinternal control over financial reporting that has materially affected, or isreasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

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**TFFINANCIAL CORPORATION AND SUBSIDIARIES**

 

**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.**  | ** ** | **RESERVED**                                                                                                                                                                                                                                                                                                                                       |
|         |       |                                                                                                                                                                                                                                                                                                                                               |
| **ITEM 5.**  | ** ** | **OTHER  INFORMATION**                                                                                                                                                                                                                                                                                                                             |
| ** **   | ** ** | ** **                                                                                                                                                                                                                                                                                                                                         |
|         |       | None.                                                                                                                                                                                                                                                                                                                                              |

 

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|        |       |            |
|-------------|------------|-----------------|
| **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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**TFFINANCIAL CORPORATION**

 

**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the Registrant has duly caused this Report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
| Date:  | May 17, 2010 |   | /s/ Kent C. Lufkin                                   |
|--------|-------------------|--------|------------------------------------------------------|
|   |              |   | Kent C. Lufkin                                       |
|   |              |   | President and CEO                                    |
|   |              |   | (Principal Executive Officer)                        |
|   |              |   |                                                 |
|   |              |   |                                                 |
| Date:  | May 17, 2010 |   | /s/ Dennis R. Stewart                                |
|   |              |   | Dennis R. Stewart                                    |
|   |              |   | Executive Vice President and Chief Financial Officer |
|   |              |   | (Principal Financial & Accounting Officer)  |

 

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