Table of Contents

 

 

 

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

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

 

| **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 area code: **(215) 579-4000**

 

Indicateby check mark whether the registrant: (1) has filed all reports requiredto be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. YES x**  **NO** **o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files). YES** **o**  **NO** **o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seethe definitions of “large accelerated filer,” “accelerated filer,” and “smallerreporting 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) |   |                              |

 

Indicateby check mark whether the registrant is a shell company (as defined inRule 12b-2 Exchange Act). YES o**  **NO x

 

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock as of the latest practicable date: **August 13, 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 | 19 |
|                                                |                                                                                        |   |
| Item  3.                                            | Quantitative and Qualitative  Disclosures about Market Risk                                 | 29 |
|                                                |                                                                                        |   |
| Item  4T.                                           | Controls and Procedures                                                                     | 30 |
|                                                |                                                                                        |   |
| **PART II-OTHER  INFORMATION**                 |                                                                                        |
|                                                |                                                                                        |   |
| Item  1.                                            | Legal Proceedings                                                                           | 31 |
|                                                |                                                                                        |   |
| Item  1A.                                           | Risk Factors                                                                                | 31 |
|                                                |                                                                                        |   |
| Item 2.                                             | Unregistered  Sales of Equity Securities and Use of Proceeds                                | 31 |
|                                                |                                                                                        |   |
| Item 3.                                             | Defaults Upon  Senior Securities                                                            | 31 |
|                                                |                                                                                        |   |
| Item  4.                                            | [Removed and Reserved]                                                                      | 31 |
|                                                |                                                                                        |   |
| Item  5.                                            | Other Information                                                                           | 31 |
|                                                |                                                                                        |   |
| Item 6.                                             | Exhibits                                                                                    | 31 |
|                                                |                                                                                        |   |
| **Signatures**                                      |                                                                                        | 32 |
|                                                |                                                                                        |   |
| **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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Table of Contents

 

**TFFinancial Corporation and Subsidiaries**

 

**ITEM 1.CONSOLIDATED FINANCIAL STATEMENTS**

 

**CONSOLIDATEDBALANCE SHEETS**

**(Unaudited)**

 
| ** **                                                                                                                                                                                                                                                                                | ** ** | **June 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                                                                                                | ** ** | **(in thousands)** | ** ** |
| ASSETS                                                                                                                                                                                                                                                                                    |       |                    |       |                        |       |
| Cash and cash equivalents                                                                                                                                                                                                                                                                 |       | $                       | 19,965     |                        | $          | 12,801 |   |
| Investment securities available for sale—at fair  value                                                                                                                                                                                                                              |       | 49,763                  |       | 40,853                      |       |
| Mortgage-backed securities available for sale—at  fair value                                                                                                                                                                                                                         |       | 78,657                  |       | 78,198                      |       |
| Mortgage-backed securities held to maturity (fair  value of $3,869 and $4,033, respectively)                                                                                                                                                                                              |       | 3,512                   |       | 3,733                       |       |
| Loans receivable, net                                                                                                                                                                                                                                                                     |       | 519,279                 |       | 529,652                     |       |
| Loans receivable held for sale                                                                                                                                                                                                                                                            |       | 919                     |       | 1,082                       |       |
| Federal Home Loan Bank stock—at cost                                                                                                                                                                                                                                                 |       | 9,896                   |       | 9,896                       |       |
| Accrued interest receivable                                                                                                                                                                                                                                                               |       | 2,893                   |       | 2,777                       |       |
| Premises and equipment, net                                                                                                                                                                                                                                                               |       | 6,342                   |       | 5,523                       |       |
| Goodwill                                                                                                                                                                                                                                                                                  |       | 4,324                   |       | 4,324                       |       |
| Bank-owned life insurance                                                                                                                                                                                                                                                                 |       | 17,528                  |       | 17,190                      |       |
| Other assets                                                                                                                                                                                                                                                                              |       | 7,690                   |       | 8,061                       |       |
| TOTAL ASSETS                                                                                                                                                                                                                                                                              |       | $                       | 720,768    |                        | $          | 714,090 |   |
|                                                                                                                                                                                                                                                                                      |       |                    |       |                        |       |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                                                                                                                                 |       |                    |       |                        |       |
| Liabilities                                                                                                                                                                                                                                                                               |       |                    |       |                        |       |
| Deposits                                                                                                                                                                                                                                                                                  |       | $                       | 559,390    |                        | $          | 552,716 |   |
| Borrowings from the Federal Home Loan Bank                                                                                                                                                                                                                                                |       | 79,929                  |       | 80,241                      |       |
| Advances from borrowers for taxes and insurance                                                                                                                                                                                                                                           |       | 2,413                   |       | 2,231                       |       |
| Accrued interest payable                                                                                                                                                                                                                                                                  |       | 2,578                   |       | 2,818                       |       |
| Other liabilities                                                                                                                                                                                                                                                                         |       | 3,137                   |       | 4,210                       |       |
| Total liabilities                                                                                                                                                                                                                                                                         |       | 647,447                 |       | 642,216                     |       |
|                                                                                                                                                                                                                                                                                      |       |                    |       |                        |       |
| Stockholders’ equity                                                                                                                                                                                                                                                                 |       |                    |       |                        |       |
| Preferred stock, no par value; 2,000,000 shares  authorized at June 30, 2010 and December 31, 2009, none issued                                                                                                                                                            |       | —                  |       | —                      |       |
| Common stock, $0.10 par value; 10,000,000 shares  authorized, 5,290,000 shares issued and, 2,557,968 and 2,539,195 shares  outstanding at June 30, 2010 and December 31, 2009,  respectively, net of shares in treasury of 2,604,552 and  2,617,397 respectively |       | 529                     |       | 529                         |       |
| Additional paid-in capital                                                                                                                                                                                                                                                                |       | 54,028                  |       | 54,009                      |       |
| Unearned ESOP shares                                                                                                                                                                                                                                                                      |       | (1,275                  | )          | (1,334                      | )          |
| Treasury stock-at cost                                                                                                                                                                                                                                                                    |       | (54,064                 | )          | (54,331                     | )          |
| Retained earnings                                                                                                                                                                                                                                                                         |       | 73,044                  |       | 72,376                      |       |
| Accumulated other comprehensive income                                                                                                                                                                                                                                                    |       | 1,059                   |       | 625                         |       |
| Total stockholders’ equity                                                                                                                                                                                                                                                           |       | 73,321                  |       | 71,874                      |       |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                                                                                                                           |       | $                       | 720,768    |                        | $          | 714,090 |   |

 

The accompanying notes are an integral part of these statements

 

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**TF Financial Corporation and Subsidiaries**

 

**CONSOLIDATED STATEMENTS OF INCOME**

**(Unaudited)**

 
| ** **                                           | ** ** | **For the three months  ended  June 30,**                | ** ** | **For the six months  ended  June 30,** | ** ** |
|------------------------------------------------------|------------|--------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                           | ** ** | **2010**                                                           | ** ** | **2009**                                                    | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                           | ** ** | **(in thousands, except per share data)** | ** ** |
| Interest income                                      |       |                                                               |       |                                                        |       |   |   |   |   |
| Loans, including fees                                |       | $                                                                  | 7,150      |                                                        | $          | 7,658 |   | $ | 14,452 |   | $ | 15,313 |   |
| Mortgage-backed securities                           |       | 929                                                                |       | 1,294                                                       |       | 1,896 |   | 2,679 |   |
| Investment securities                                |       | 442                                                                |       | 276                                                         |       | 847 |   | 553 |   |
| Interest-bearing deposits and other                  |       | 1                                                                  |       | —                                                      |       | 2 |   | — |   |
|                                                 |       |                                                               |       |                                                        |       |   |   |   |   |
| TOTAL INTEREST INCOME                                |       | 8,522                                                              |       | 9,228                                                       |       | 17,197 |   | 18,545 |   |
|                                                 |       |                                                               |       |                                                        |       |   |   |   |   |
| Interest expense                                     |       |                                                               |       |                                                        |       |   |   |   |   |
| Deposits                                             |       | 1,841                                                              |       | 2,441                                                       |       | 3,836 |   | 4,954 |   |
| Borrowings                                           |       | 793                                                                |       | 1,208                                                       |       | 1,641 |   | 2,493 |   |
|                                                 |       |                                                               |       |                                                        |       |   |   |   |   |
| TOTAL INTEREST EXPENSE                               |       | 2,634                                                              |       | 3,649                                                       |       | 5,477 |   | 7,447 |   |
|                                                 |       |                                                               |       |                                                        |       |   |   |   |   |
| NET INTEREST INCOME                                  |       | 5,888                                                              |       | 5,579                                                       |       | 11,720 |   | 11,098 |   |
|                                                 |       |                                                               |       |                                                        |       |   |   |   |   |
| Provision for loan losses                            |       | 600                                                                |       | 590                                                         |       | 1,561 |   | 1,255 |   |
|                                                 |       |                                                               |       |                                                        |       |   |   |   |   |
| NET INTEREST INCOME AFTER PROVISION FOR LOAN  LOSSES |       | 5,288                                                              |       | 4,989                                                       |       | 10,159 |   | 9,843 |   |
|                                                 |       |                                                               |       |                                                        |       |   |   |   |   |
| Non-interest income                                  |       |                                                               |       |                                                        |       |   |   |   |   |
| Service fees, charges and other operating income     |       | 363                                                                |       | 597                                                         |       | 892 |   | 1,034 |   |
| Bank-owned life insurance                            |       | 167                                                                |       | 170                                                         |       | 339 |   | 330 |   |
| Gain on sale of investments                          |       | 7                                                                  |       | 116                                                         |       | 7 |   | 306 |   |
| Gain on sale of loans                                |       | 52                                                                 |       | 253                                                         |       | 112 |   | 401 |   |
| Gain (loss) on foreclosed real estate                |       | 8                                                                  |       | 303                                                         |       | (137 | ) | 303 |   |
|                                                 |       |                                                               |       |                                                        |       |   |   |   |   |
| TOTAL NON-INTEREST INCOME                            |       | 597                                                                |       | 1,439                                                       |       | 1,213 |   | 2,374 |   |
|                                                 |       |                                                               |       |                                                        |       |   |   |   |   |
| Non-interest expense                                 |       |                                                               |       |                                                        |       |   |   |   |   |
| Employee compensation and benefits                   |       | 2,667                                                              |       | 2,645                                                       |       | 5,367 |   | 5,316 |   |
| Occupancy and equipment                              |       | 723                                                                |       | 708                                                         |       | 1,482 |   | 1,418 |   |
| Professional fees                                    |       | 256                                                                |       | 183                                                         |       | 484 |   | 456 |   |
| Marketing and advertising                            |       | 120                                                                |       | 116                                                         |       | 240 |   | 264 |   |
| FDIC insurance premiums                              |       | 259                                                                |       | 511                                                         |       | 453 |   | 532 |   |
| Other operating                                      |       | 566                                                                |       | 613                                                         |       | 1,157 |   | 1,214 |   |
|                                                 |       |                                                               |       |                                                        |       |   |   |   |   |
| TOTAL NON-INTEREST EXPENSE                           |       | 4,591                                                              |       | 4,776                                                       |       | 9,183 |   | 9,200 |   |
|                                                 |       |                                                               |       |                                                        |       |   |   |   |   |
| INCOME BEFORE INCOME TAXES                           |       | 1,294                                                              |       | 1,652                                                       |       | 2,189 |   | 3,017 |   |
|                                                 |       |                                                               |       |                                                        |       |   |   |   |   |
| Income taxes                                         |       | 327                                                                |       | 430                                                         |       | 505 |   | 775 |   |
|                                                 |       |                                                               |       |                                                        |       |   |   |   |   |
| NET INCOME                                           |       | $                                                                  | 967        |                                                        | $          | 1,222 |   | $ | 1,684 |   | $ | 2,242 |   |
|                                                 |       |                                                               |       |                                                        |       |   |   |   |   |
| Earnings per share—basic                        |       | $                                                                  | 0.38       |                                                        | $          | 0.48 |   | $ | 0.66 |   | $ | 0.89 |   |
| Earnings per share—diluted                      |       | $                                                                  | 0.38       |                                                        | $          | 0.48 |   | $ | 0.66 |   | $ | 0.89 |   |
| Dividends paid per share                             |       | $                                                                  | 0.20       |                                                        | $          | 0.20 |   | $ | 0.40 |   | $ | 0.40 |   |

 

The accompanying notes are an integral part of these statements

 

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**TF Financial Corporation and Subsidiaries**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| ** **                                                                        | ** ** | **For the six months  ended  June 30,** | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                                                        | ** ** | **2010**                                                    | ** ** | **2009** | ** ** |
| ** **                                                                        | ** ** | **(in thousands)**                                     | ** ** |
| OPERATING ACTIVITIES                                                              |       |                                                        |       |   |   |
| Net income                                                                        |       | $                                                           | 1,684      |   | $ | 2,242 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities |       |                                                        |       |   |   |
| Amortization and impairment adjustment of mortgage  loan servicing rights         |       | 200                                                         |       | 94 |   |
| Deferred loan origination fees                                                    |       | 50                                                          |       | 54 |   |
| Premiums and discounts on investment securities,  net                             |       | 39                                                          |       | 43 |   |
| Premiums and discounts on mortgage-backed  securities, net                        |       | 19                                                          |       | (180 | ) |
| Premiums and discounts on loans, net                                              |       | 85                                                          |       | 91 |   |
| Provision for loan losses                                                         |       | 1,561                                                       |       | 1,255 |   |
| Depreciation of premises and equipment                                            |       | 421                                                         |       | 448 |   |
| Increase in value of bank-owned life insurance                                    |       | (339                                                        | )          | (330 | ) |
| Stock grant expense                                                               |       | 8                                                           |       | 8 |   |
| Stock option expense                                                              |       | 26                                                          |       | 28 |   |
| Stock-based benefit programs: ESOP                                                |       | 117                                                         |       | 108 |   |
| Proceeds from sale of loans originated for sale                                   |       | 11,518                                                      |       | 29,468 |   |
| Origination of loans held for sale                                                |       | (11,314                                                     | )          | (28,622 | ) |
| Loss (gain) on foreclosed real estate                                             |       | 137                                                         |       | (303 | ) |
| Gain on sale of:                                                                  |       |                                                        |       |   |   |
| Investments                                                                       |       | (7                                                          | )          | (306 | ) |
| Loans held for sale                                                               |       | (112                                                        | )          | (401 | ) |
| (Increase) decrease in:                                                           |       |                                                        |       |   |   |
| Accrued interest receivable                                                       |       | (116                                                        | )          | 130 |   |
| Other assets                                                                      |       | 495                                                         |       | 362 |   |
| (Decrease) increase in:                                                           |       |                                                        |       |   |   |
| Accrued interest payable                                                          |       | (240                                                        | )          | 451 |   |
| Other liabilities                                                                 |       | (1,326                                                      | )          | 3,547 |   |
| NET CASH PROVIDED BY OPERATING ACTIVITIES                                         |       | 2,906                                                       |       | 8,187 |   |
|                                                                              |       |                                                        |       |   |   |
| INVESTING ACTIVITIES                                                              |       |                                                        |       |   |   |
| Loan originations                                                                 |       | (33,311                                                     | )          | (47,635 | ) |
| Loan principal payments                                                           |       | 40,900                                                      |       | 46,688 |   |
| Proceeds from sale of foreclosed real estate                                      |       | 799                                                         |       | 1,367 |   |
| Principal repayments on mortgage-backed securities  held to maturity              |       | 220                                                         |       | 662 |   |
| Principal repayments on mortgage-backed securities  available for sale            |       | 13,610                                                      |       | 16,035 |   |
| Proceeds from sale of investment securities  available for sale                   |       | 60                                                          |       | 5,514 |   |
| Proceeds from redemption of investment securities  available for sale             |       | —                                                      |       | 755 |   |
| Purchase of investment securities available for  sale                             |       | (8,507                                                      | )          | (6,761 | ) |
| Purchase of mortgage-backed securities available  for sale                        |       | (13,995                                                     | )          | (4,556 | ) |
| Purchase of premises and equipment                                                |       | (1,240                                                      | )          | (210 | ) |
| NET CASH (USED) PROVIDED BY INVESTING ACTIVITIES                                  |       | (1,464                                                      | )          | 11,859 |   |
|                                                                                   |            |                                                             |            |  |  |  |  |

 

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| ** **                                                                                  | ** ** | **For the six months ended  June 30,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                                                                  | ** ** | **2010**                                                        | ** ** | **2009** | ** ** |
| ** **                                                                                  | ** ** | **(in thousands)**                                         | ** ** |
| FINANCING ACTIVITIES                                                                        |       |                                                            |       |   |   |
| Net increase in customer deposits                                                           |       | 6,674                                                           |       | 41,240 |   |
| Net increase in short-term borrowings from the  Federal Home Loan Bank and other borrowings |       | —                                                          |       | (22,416 | ) |
| Proceeds of long-term Federal Home Loan Bank  borrowings                                    |       | 12,884                                                          |       | — |   |
| Repayment of long-term Federal Home Loan Bank  borrowings                                   |       | (13,196                                                         | )          | (34,600 | ) |
| Net increase in advances from borrowers for taxes  and insurance                            |       | 182                                                             |       | 270 |   |
| Treasury stock acquired                                                                     |       | —                                                          |       | (101 | ) |
| Exercise of stock options                                                                   |       | 177                                                             |       | 105 |   |
| Tax benefit arising from stock compensation                                                 |       | 17                                                              |       | 5 |   |
| Common stock dividends paid                                                                 |       | (1,016                                                          | )          | (1,006 | ) |
| NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES                                            |       | 5,722                                                           |       | (16,503 | ) |
|                                                                                        |       |                                                            |       |   |   |
| NET INCREASE IN CASH AND CASH EQUIVALENTS                                                   |       | 7,164                                                           |       | 3,543 |   |
|                                                                                        |       |                                                            |       |   |   |
| Cash and cash equivalents at beginning of period                                            |       | 12,801                                                          |       | 2,719 |   |
|                                                                                        |       |                                                            |       |   |   |
| Cash and cash equivalents at end of period                                                  |       | $                                                               | 19,965     |   | $ | 6,262 |   |
|                                                                                        |       |                                                            |       |   |   |
| Supplemental disclosure of cash flow information                                            |       |                                                            |       |   |   |
| Cash paid for                                                                               |       |                                                            |       |   |   |
| Interest on deposits and borrowings                                                         |       | $                                                               | 5,717      |   | $ | 6,996 |   |
| Income taxes                                                                                |       | $                                                               | 382        |   | $ | 825 |   |
| Non-cash transactions                                                                       |       |                                                            |       |   |   |
| Capitalization of mortgage servicing rights                                                 |       | $                                                               | 92         |   | $ | 253 |   |
| Transfers from loans to foreclosed real estate                                              |       | $                                                               | 1,088      |   | $ | 2,164 |   |
| Securities available for sale purchased not  settled                                        |       | $                                                               | —     |   | $ | 3,325 |   |

 

The accompanying notes are an integral part of these statements

 

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**TF FINANCIAL CORPORATION AND SUBSIDIARIES**

**NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 1- PRINCIPLES OF CONSOLIDATION**

 

Theconsolidated financial statements as of June 30, 2010 (unaudited) andDecember 31, 2009 and for the six month periods ended June 30, 2010and 2009 (unaudited) include the accounts of TF Financial Corporation (the “Company”)and its wholly owned subsidiaries Third Federal Bank (the “Bank”), TFInvestments Corporation and Penns Trail Development Corporation. Theaccompanying consolidated balance sheet at December 31, 2009, has beenderived from the audited consolidated balance sheet but does not included allof the information and notes required by U. S. GAAP for complete financialstatements. The Company’s business is conducted principally through the Bank.All significant intercompany accounts and transactions have been eliminated inconsolidation.

 

**NOTE 2- BASIS OF PRESENTATION**

 

Theaccompanying unaudited consolidated financial statements were prepared inaccordance with instructions for Form 10-Q and, therefore, do not includeall of the disclosures or footnotes required by accounting principles generallyaccepted in the United States of America (“US GAAP”). In the opinion ofmanagement, all adjustments, consisting of normal recurring accruals, necessaryfor fair presentation of the consolidated financial statements have beenincluded. The results of operations for the period ended June 30, 2010 arenot necessarily indicative of the results which may be expected for the entirefiscal year or any other period. For further information, refer to theconsolidated financial statements and footnotes thereto included in the Company’sAnnual Report on Form 10-K for the fiscal year ended December 31,2009.

 

**NOTE 3- CONTINGENCIES**

 

TheCompany, from time to time, is a party to routine litigation that arises in thenormal course of business. In the opinion of management, the resolution of thislitigation, if any, would not have a material adverse effect on the Company’sconsolidated financial position or results of operations.

 

**NOTE 4- OTHER COMPREHENSIVE INCOME (LOSS)**

 

Comprehensiveincome (loss) is the change in equity of a business enterprise during a periodfrom transactions and other events and circumstances from non-owner sources.The components of other comprehensive income (loss) are as follows for thethree months ended:

 
| ** **                                                    | ** ** | **June 30, 2010**      | ** ** |
|---------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                    | ** ** | **Before tax  amount** | ** ** | **Tax  (expense)  benefit** | ** ** | **Net of tax  amount** | ** ** |
| ** **                                                    | ** ** | **(in thousands)**     | ** ** |
| Unrealized gains on securities                                |       |                        |       |   |   |   |   |
| Unrealized holding gains arising during period                |       | $                           | 337        |   | $ | (117 | ) | $ | 220 |   |
| Reclassification adjustment for gains realized in  net income |       | (7                          | )          | 2 |   | (5 | ) |
| Pension plan benefit adjustment related to  actuarial losses  |       | 42                          |       | (14 | ) | 28 |   |
|                                                          |       |                        |       |   |   |   |   |
| Other comprehensive income, net                               |       | $                           | 372        |   | $ | (129 | ) | $ | 243 |   |

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

 

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Thecomponents of other comprehensive income are as follows for the six monthsended:

 
| ** **                                                                           | ** ** | **June 30, 2010**      | ** ** |
|--------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                           | ** ** | **Before tax  amount** | ** ** | **Tax  (expense)  benefit** | ** ** | **Net of tax  amount** | ** ** |
| ** **                                                                           | ** ** | **(in thousands)**     | ** ** |
| Unrealized gains on securities                                                       |       |                        |       |   |   |   |   |
| Unrealized holding gains arising during period                                       |       | $                           | 594        |   | $ | (205 | ) | $ | 389 |   |
| Reclassification adjustment for gains realized in  net income                        |       | (7                          | )          | 2 |   | (5 | ) |
| Pension plan benefit adjustment related to prior  service costs and actuarial losses |       | 75                          |       | (25 | ) | 50 |   |
|                                                                                 |       |                        |       |   |   |   |   |
| Other comprehensive income, net                                                      |       | $                           | 662        |   | $ | (228 | ) | $ | 434 |   |

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

 

**NOTE 5—EARNINGS PER SHARE**

 

Thefollowing tables illustrate the reconciliation of the numerators anddenominators of the basic and diluted earnings per share computations (dollarsin thousands, except share and per share data):

 
| ** **                                                                  | ** ** | **Three months ended June 30, 2010** | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                                  | ** ** | **Income  (numerator)**                                  | ** ** | **Weighted  average  shares  (denominator)** | ** ** | **Per share  Amount** | ** ** |
| Basic earnings per share                                     | ** ** | ** **                                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income available to common stockholders                                     |       | $                                                        | 967        |   | 2,552,728 |   | $ | 0.38 |   |
| Effect of dilutive securities                                               |       |                                                     |       |   |   |   |   |
| Stock options and grants                                                    |       | —                                                   |       | — |   | — |   |
|                                                                        |       |                                                     |       |   |   |   |   |
| Diluted earnings per share                                                  |       |                                                     |       |   |   |   |   |
| Income available to common stockholders plus  effect of dilutive securities |       | $                                                        | 967        |   | 2,552,728 |   | $ | 0.38 |   |

 

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| ** **                                                                  | ** ** | **Six months ended June 30, 2010** | ** ** |
|-----------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                  | ** ** | **Income  (numerator)**                           | ** ** | **Weighted  average  shares  (denominator)** | ** ** | **Per share  Amount** | ** ** |
| Basic earnings per share                                     | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income available to common stockholders                                     |       | $                                                 | 1,684      |   | 2,547,477 |   | $ | 0.66 |   |
| Effect of dilutive securities                                               |       |                                              |       |   |   |   |   |
| Stock options and grants                                                    |       | —                                            |       | — |   | — |   |
|                                                                        |       |                                              |       |   |   |   |   |
| Diluted earnings per share                                                  |       |                                              |       |   |   |   |   |
| Income available to common stockholders plus  effect of dilutive securities |       | $                                                 | 1,684      |   | 2,547,477 |   | $ | 0.66 |   |

 

Therewere 246,135 options to purchase shares of common stock at a price range of$20.65 to $34.14 per share which were outstanding during the three and sixmonths ended June 30, 2010 that were not included in the computation ofdiluted earnings per share because the options’ exercise prices were greaterthan the average market price of the common shares.

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

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

 

Therewere 256,893 options to purchase shares of common stock at a price range of$20.30 to $34.14 per share which were outstanding during the three and sixmonths ended June 30, 2009 that were not included in the computation ofdiluted earnings per share because the options’ exercise prices were greaterthan the average market price of the common shares.

 

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

 

The amortized cost, gross unrealized gains and losses, and fair valueof the Company’s investment securities at June 30, 2010 andDecember 31, 2009, are summarized as follows:

 
| ** **                                                      | ** ** | **June 30, 2010** | ** ** |
|-----------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                      | ** ** | **Amortized  cost**    | ** ** | **Gross  unrealized  gains** | ** ** | **Gross  unrealized  losses** | ** ** | **Fair  value** | ** ** |
| ** **                                                      | ** ** | **(in thousands)**     | ** ** |
| Investment securities available for sale                        |       |                   |       |   |   |   |   |   |   |
| US government and federal securities                            |       | $                      | 6,000      |   | $ | 89 |   | $ | — |   | $ | 6,089 |   |
| Corporate debt securities                                       |       | 3,340                  |       | 256 |   | — |   | 3,596 |   |
| State and political subdivisions                                |       | 38,648                 |       | 1,374 |   | (43 | ) | 39,979 |   |
| Equity securities                                               |       | 97                     |       | 2 |   | — |   | 99 |   |
|                                                            |       | $                      | 48,085     |   | $ | 1,721 |   | $ | (43 | ) | $ | 49,763 |   |
|                                                            |       |                   |       |   |   |   |   |   |   |
| Residential mortgage-backed securities held to  maturity        |       | $                      | 3,512      |   | $ | 357 |   | $ | — |   | $ | 3,869 |   |
|                                                            |       |                   |       |   |   |   |   |   |   |
| Residential mortgage-backed securities available  for sale |       | $                      | 76,344     |   | $ | 2,494 |   | $ | (181 | ) | $ | 78,657 |   |

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

 

The Company also holds stock in the Federal Home Loan Bank ofPittsburgh (“FHLB”) totaling $9.9 million as of June 30, 2010 andDecember 31, 2009. The Company is required to maintain a minimum amount ofFHLB stock as determined by its borrowing levels and amount of eligibleassets.  At June 30, 2010 theCompany was required to hold $6.3 million in FHLB stock.  FHLB stock can only be repurchased by theFHLB or sold to another member, and all sales must be at par. The Company holdsFHLB stock as a long term investment based on the ultimate recoverability ofthe par value. During the fourth quarter of 2008, the FHLB suspended therepurchase of stock and dividend payments which prompted the Company to giveconsideration to evaluating the potential impairment of the investment. TheCompany evaluates potential impairment of its investment in FHLB stockquarterly and considers the following:1) the magnitude and direction of thechange in the net assets of the FHLB as compared to the capital stock amountand the duration of this condition, 2) the ability of the FHLB to make paymentsrequired by law or regulation and the level of such payments in relation to theoperating performance of the FHLB, 3) the impact of regulatory changes on theFHLB and on its members, and 4) the liquidity position of the FHLB. Afterevaluating these factors the Company has concluded that the par value of itsinvestment in FHLB stock is recoverable and no impairment has been recordedduring the six months ended June 30, 2010 or year ended December 31,2009.

 

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The table below indicates the length of time individual securities havebeen in a continuous unrealized loss position at June 30, 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)** | ** ** |
| State and political subdivisions                                              |       | 6                  |       | $                             |  4,326 |                          | $          | (43             | )          | $ |  — |   | $ |  — |   | $ |  4,326 |   | $ | (43 | ) |
| Residential mortgage-backed securities issued by quasi-governmental  agencies |       | 2                  |       | 212                           |        | (1                            | )          | 2,285           |       | (73 | ) | 2,497 |   | (74 | ) |
| Residential real estate mortgage-backed securities  privately issued          |       | 2                  |       | 5,405                         |        | (107                          | )          | —          |       | — |   | 5,405 |   | (107 | ) |
|                                                                          |       |               |       |                          |        |                          |       |            |       |   |   |   |   |   |   |
| Total temporarily impaired securities                                         |       | 10                 |       | $                             |  9,943 |                          | $          | (151            | )          | $ | 2,285 |   | $ | (73 | ) | $ | 12,228 |   | $ | (224 | ) |

 

The table below indicates the length of time individual securities havebeen 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 | ) |

 

On a quarterly basis, temporarily impaired securities are evaluated todetermine whether such impairment is other-than-temporary impairment (“OTTI”).This evaluation 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.In addition, with respect to mortgage-backed securities issued by governmentand quasi-governmental agencies (i. e. Government National Mortgage Association(“GNMA”), Federal Home Loan Mortgage Corporation (“FHLMC”) and Federal NationalMortgage Association (“FNMA”)) the Company considers the ultimate payment ofprincipal and interest as an obligation of the United States Government andthus assured. With respect to mortgage-backed securities issued by privateparties, the Company studies delinquencies, loss rates, loss severity and otherinformation related to the underlying loans in order to form an opinionregarding the possibility of a cash flow shortfall. The Company also evaluatesits intent to hold, intent to sell or need to sell the securities in light ofits investment strategy, cash flow needs, interest rate risk position,prospects for the issuer and all other relevant factors.

 

With respect to investments in equity securities, if it is determinedthat the impairment for an individual security is OTTI such impairment would berecognized as a reduction to non-interest income in the consolidated statementof income. With 

 

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respect to debt securities, if it has been determined that theimpairment for an individual security is OTTI, but the Company does not intendto sell the security and concludes that it is more likely than not that it willnot be required to sell the security before recovering the carrying value,which may be maturity, the OTTI would be separated into the “credit” and “other”components. The “other” component of the OTTI would be included in othercomprehensive loss, net of the tax effect, and the “credit” component of theOTTI would be included as a reduction to non-interest income in theconsolidated statement of income. Otherwise, the OTTI impairment of debtsecurities would be recognized as a reduction to non-interest income in theconsolidated statements of income. Accordingly, the Company has performed thisevaluation and has determined that the unrealized losses at June 30, 2010and December 31, 2009, respectively are not consideredother-than-temporary and are therefore reflected in other comprehensive income.

 

At June 30, 2010, temporarily impaired securities were all debtsecurities classified as available for sale. There were no temporarily impairedequity securities. The Company did not intend to sell any of the temporarilyimpaired securities and has concluded that it will not be required to sell anyof the temporarily impaired securities. Upon an evaluation of each individualdebt security, the Company determined that the temporary impairment waspredominately caused by widening interest rate spreads over the relevantinterest rate benchmark in relation to the Company’s amortized cost, and notcaused by deterioration in credit quality. Thus, the Company considered the impairment of each security to betemporary and not OTTI.

 

**NOTE 7—LOANS RECEIVABLE**

 

Loans receivable are summarized as follows:

 
| ** **                                                    | ** ** | **June 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|---------------------------------------------------------------|------------|------------------------|------------|---------------------------------|------------|
| ** **                                                    | ** ** | **(in thousands)**     | ** ** |
| Held for investment:                                          |       |                   |       |                            |       |
| First mortgage loans                                          |       |                   |       |                            |       |
| Secured by one-to-four family residences                      |       | $                      | 269,650    |                            | $          | 271,651 |   |
| Secured by non-residential properties                         |       | 137,227                |       | 134,584                         |       |
| Construction loans                                            |       | 25,536                 |       | 29,671                          |       |
| Total first mortgage loans                                    |       | 432,413                |       | 435,906                         |       |
| Other loans                                                   |       |                   |       |                            |       |
| Commercial-business, real estate secured                      |       | 34,421                 |       | 33,514                          |       |
| Commercial-business, non-real estate secured                  |       | 874                    |       | 7,462                           |       |
| Home equity and second mortgage                               |       | 55,044                 |       | 54,811                          |       |
| Other consumer                                                |       | 2,643                  |       | 2,565                           |       |
| Total other loans                                             |       | 92,982                 |       | 98,352                          |       |
| Total loans                                                   |       | 525,395                |       | 534,258                         |       |
| Net deferred loan origination costs and  unamortized premiums |       | 633                    |       | 609                             |       |
| Less allowance for loan losses                                |       | (6,749                 | )          | (5,215                          | )          |
| Total loans receivable                                        |       | $                      | 519,279    |                            | $          | 529,652 |   |
| Held for sale:                                                |       |                   |       |                            |       |
| First mortgage loans                                          |       |                   |       |                            |       |
| Secured by one-to-four family residences                      |       | $                      | 919        |                            | $          | 1,082 |   |

 

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Activity in the allowance for loan losses is summarized as follows (inthousands):

 
| ** **                                   | ** ** | **Period**                  | ** ** | **Period**                       | ** ** |
|----------------------------------------------|------------|-----------------------------|------------|----------------------------------|------------|
| ** **                                   | ** ** | **end  June 30, 2010** | ** ** | **end  June 30, 2009** | ** ** |
|                                         |       |                        |       |                             |       |
| Balance at January 1,                   |       | $                           | 5,215      |                             | $          | 3,855 |   |
| Provision charged to income                  |       | 1,561                       |       | 1,255                            |       |
| Charge-offs:                                 |       |                        |       |                             |       |
| Secured by one-to-four family residences     |       | —                      |       | (97                              | )          |
| Secured by non-residential properties        |       | —                      |       | —                           |       |
| Construction loans                           |       | —                      |       | (48                              | )          |
| Commercial-business, non-real estate secured |       | (16                         | )          | —                           |       |
| Other consumer                               |       | (14                         | )          | (15                              | )          |
| Recoveries:                                  |       |                        |       |                             |       |
| Construction loans                           |       | —                      |       | —                           |       |
| Commercial-business, non-real estate secured |       | —                      |       | 14                               |       |
| Other consumer                               |       | 3                           |       | 6                                |       |
| Balance at end of period                     |       | $                           | 6,749      |                             | $          | 4,970 |   |

 

**NOTE 8-FAIR VALUE MEASUREMENTS**

 

Thefollowing table presents information about the Company’s assets and liabilitiesmeasured at fair valued on a recurring basis as of June 30, 2010. Fairvalue is an exit price, representing the amount that would be received to sellan asset or paid to transfer a liability in an orderly transaction betweenmarket participants. A fair value measurement hierarchy has been establishedfor inputs in valuation techniques used to measure fair value. The hierarchygives the highest priority to unadjusted quoted prices in active markets foridentical assets or liabilities (Level 1 measurements) and the lowest priorityto unobservable inputs (Level 3 measurements).

 

Thefair value hierarchy levels are summarized below:

 

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

 

·                  Level 2 inputs are inputs that are observablefor the asset or liability, either directly or indirectly.

 

·                  Level 3 inputs are unobservable and containassumptions of the 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 fairvalue hierarchy level are summarized below (dollars in thousands):

 
| **At  June 30, 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  June 30,  2010** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|-------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                   | ** ** | ** **                                                                          | ** ** | ** **                                                 | ** ** | ** **                                            | ** ** | ** **                                       | ** ** |
| **Assets**                                                                                   | ** ** | ** **                                                                          | ** ** | ** **                                                 | ** ** | ** **                                            | ** ** | ** **                                       | ** ** |
| Investment securities available for sale                                                |       |                                                                                |       |                                                       |       |                                                  |       |                                             |       |
| U.S. government and federal agencies                                                         |       | $                                                                                   | —     |                                                       | $          | 6,089                                                 |       | $                                                | —     |   | $ | 6,089 |   |
| Corporate debt securities                                                                    |       | —                                                                              |       | 3,596                                                      |       | —                                                |       | 3,596                                            |       |
| State and political subdivisions                                                             |       | —                                                                              |       | 39,979                                                     |       | —                                                |       | 39,979                                           |       |
| Equity securities                                                                            |       | 99                                                                                  |       | —                                                     |       | —                                                |       | 99                                               |       |
| Total investment securities  available for sale                                    |       | $                                                                                   | 99         |                                                       | $          | 49,664                                                |       | $                                                | —     |   | $ | 49,763 |   |
|                                                                                         |       |                                                                                |       |                                                       |       |                                                  |       |                                             |       |
| Residential mortgage-backed securities issued  by quasi-governmental agencies |       | $                                                                                   | —     |                                                       | $          | 63,221                                                |       | $                                                | —     |   | $ | 63,221 |   |
| Residential real estate mortgage - backed  securities privately issued                       |       | —                                                                              |       | 15,436                                                     |       | —                                                |       | 15,436                                           |       |
| Total mortgage-backed securities  available for sale                                    |       | $                                                                                   | —     |                                                       | $          | 78,657                                                |       | $                                                | —     |   | $ | 78,657 |   |
|                                                                                         |       |                                                                                |       |                                                       |       |                                                  |       |                                             |       |
| **Liabilities**                                                                              |       |                                                                                |       |                                                       |       |                                                  |       |                                             |       |
| Forward loan sales                                                                           |       | $                                                                                   | —     |                                                       | $          | —                                                |       | $                                                | 17         |   | $ | 17 |   |

 

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| **At December 31, 2009**                                                 | ** ** | **Quoted  Prices in  Active  Markets  for  Identical  Assets  (Level 1)** | ** ** | **Significant  Other  Observable  Inputs  (Level 2)** | ** ** | **Significant  Unobservable  Inputs  (Level 3)** | ** ** | **Balance as of  December 31, 2009** | ** ** |
|-------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------|------------|
| **Assets**                                                                    |       |                                                                           |       |                                                       |       |                                                  |       |                                      |       |
| Investment securities available for sale                                      |       |                                                                           |       |                                                       |       |                                                  |       |                                      |       |
| U. S. Government and federal agencies                                         |       | $                                                                              | —     |                                                       | $          | 2,945                                                 |       | $                                         | —     |   | $ | 2,945 |   |
| Corporate debt securities                                                     |       | —                                                                         |       | 3,517                                                      |       | —                                                |       | 3,517                                     |       |
| State and political subdivisions                                              |       | —                                                                         |       | 34,241                                                     |       | —                                                |       | 34,241                                    |       |
| Equity securities                                                             |       | 150                                                                            |       | —                                                     |       | —                                                |       | 150                                       |       |
| Total investment securities available for sale                                |       | $                                                                              | 150        |                                                       | $          | 40,703                                                |       | $                                         | —     |   | $ | 40,853 |   |
| Residential mortgage-backed securities issued by  quasi-governmental agencies |       | $                                                                              | —     |                                                       | $          | 71,151                                                |       | $                                         | —     |   | $ | 71,151 |   |
| Residential real estate mortgage-backed  securities privately issued     |       | —                                                                         |       | 7,047                                                      |       | —                                                |       | 7,047                                     |       |
| Total mortgage-backed securities available for  sale                          |       | $                                                                              | —     |                                                       | $          | 78,198                                                |       | $                                         | —     |   | $ | 78,198 |   |
| Forward loan sales                                                            |       | $                                                                              | —     |                                                       | $          | —                                                |       | $                                         | 21         |   | $ | 21 |   |

 

Activelisted equities are classified within Level 1 of the fair value hierarchy.Investment securities available for sale and mortgage-backed securitiesavailable for sale are valued primarily by a third party pricing agent. U.S.Government and federal agency and corporate debt securities are primarilypriced through a multi-dimensional relational model, a Level 2 hierarchy, whichincorporates dealer quotes and other market information including, definedsector breakdown, benchmark yields, base spread, yield to maturity, andcorporate actions.  State and politicalsubdivision securities are also valued within the Level 2 hierarchy usinginputs with a series of matrices that reflect benchmark yields, ratingsupdates, and spread adjustments. Mortgage-backed securities include FHLMC, GNMA,and FNMA certificates and privately issued real estate mortgage investmentconduits which are valued under a Level 2 hierarchy using a matrix correlationto benchmark yields, spread analysis, and prepayment speeds.

 

Thefair value of forward loan sales are determined at the time the underlying loanis identified as held for sale with changes in fair value correlated to thechange in secondary market loan pricing. The value is adjusted to reflect theCompany’s historical loan “fallout” experience which incorporates such factorsas changes in market rates, origination channels and loan purpose.

 

Thefollowing table presents additional information about assets measured at fairvalue on a recurring basis for which the Company has utilized Level 3 inputs todetermine fair value (in thousands):

 
| ** **                                       | ** ** | **Forward  loan sales** | ** ** |
|--------------------------------------------------|------------|-------------------------|------------|
| ** **                                       | ** ** | ** **              | ** ** |
| Beginning balance, January 1, 2010          |       | $                       | 21         |   |
| Total gains (losses) — realized/unrealized: |       |                    |       |
| Included in earnings                             |       | (38                     | )          |
| Included in other comprehensive income      |       | —                  |       |
| Purchases, issuances, and settlements            |       | —                  |       |
| Ending balance, June 30, 2010               |       | $                       | (17        | ) |

 

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Assetsand liabilities measured at fair value on a nonrecurring basis segregated byfair value hierarchy level are summarized below (dollars in thousands):

 
| **At June 30,  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  June 30,  2010** | ** ** |
|------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|-------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                               | ** ** | ** **                                                                          | ** ** | ** **                                                 | ** ** | ** **                                            | ** ** | ** **                                       | ** ** |
| **Assets**                               | ** ** | ** **                                                                          | ** ** | ** **                                                 | ** ** | ** **                                            | ** ** | ** **                                       | ** ** |
| Impaired loans                           |       | $                                                                                   | —     |                                                       | $          | —                                                |       | $                                                | 14,513     |   | $ | 14,513 |   |
| Real estate acquired through foreclosure |       | $                                                                                   | —     |                                                       | $          | —                                                |       | $                                                | 1,448      |   | $ | 1,448 |   |
| Mortgage servicing rights                |       | $                                                                                   | —     |                                                       | $          | 598                                                   |       | $                                                | —     |   | $ | 598 |   |

 
| **At December 31, 2009**            | ** ** | **Quoted  Prices in  Active  Markets  for  Identical  Assets  (Level 1)** | ** ** | **Significant  Other  Observable  Inputs  (Level 2)** | ** ** | **Significant  Unobservable  Inputs  (Level 3)** | ** ** | **Balance as of  December 31, 2009** | ** ** |
|------------------------------------------|------------|--------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------|------------|
| Impaired loans                           |       | $                                                                              | —     |                                                       | $          | —                                                |       | $                                         | 7,744      |   | $ | 7,744 |   |
| Real estate acquired through foreclosure |       | $                                                                              | —     |                                                       | $          | —                                                |       | $                                         | 1,279      |   | $ | 1,279 |   |
| Mortgage servicing rights                |       | $                                                                              | —     |                                                       | $          | 696                                                   |       | $                                         | —     |   | $ | 696 |   |

 

Impairedloans are evaluated and valued at the time the loan is identified as impaired,at the lower of the recorded investment in the loan or market value. Impairedloans secured by real estate totaled $14,453,000 and $7,744,000 at June 30,2010 and December 31, 2009, respectively. Real estate acquired throughforeclosure is initially valued at the lower of the recorded investment in theloan or market value at foreclosure and subsequently adjusted for furtherdecreases in market value, if necessary. Market value is determined by using the value of the collateral securingthe loans and is therefore classified as a Level 3 hierarchy.  The value of the real estate securingimpaired loans and real estate acquired through foreclosure is based on appraisalsprepared by qualified independent licensed appraisers contracted by the Companyto perform the assessment.

 

The Company initially recognizes and measures servicing assets based onthe fair value of the servicing right at the time the loan is sold. The Companyuses the amortized cost method for subsequent measurement of its servicingassets and evaluates the recorded value for impairment quarterly. The Companyretains a qualified valuation service to calculate the amortized cost and todetermine the fair value of the mortgage servicing rights. The valuationservice utilizes discounted cash flow analyses adjusted for prepayment speeds,market discount rates and conditions existing in the secondary servicingmarket. Hence, the fair value of mortgage servicing rights is deemed a Level 2hierarchy. At June 30, 2010, the amortized cost basis of the Company’smortgage servicing rights was $828,000 and the fair value of $598,000 wasincluded in other assets in the consolidated balance sheets.

 

**NOTE 9-FAIR VALUE OF FINANCIAL INSTRUMENTS**

 

Forthe Bank, as for most financial institutions, the majority of its assets andliabilities are considered financial instruments. However, many suchinstruments lack an available trading market as characterized by a willing buyerand willing seller engaging in an exchange transaction. Also, it is the Company’sgeneral practice and intent to hold its financial instruments to maturity oravailable for sale and to not engage in trading or significant salesactivities. For fair value disclosure purposes, the Company substantiallyutilized the fair value measurement criteria as explained in Note 8**-** Fair Value Measurements. Additionally, the Company usedsignificant estimations and present value calculations to prepare thisdisclosure.

 

Changesin the assumptions or methodologies used to estimate fair values may materiallyaffect the estimated amounts. In addition, there may not be reasonablecomparability between institutions due to the wide range of permittedassumptions and 

 

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methodologiesin the absence of active markets. This lack of uniformity gives rise to a highdegree of subjectivity in estimating financial instrument fair values.

 

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

 

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

 
| ** **                 | ** ** | **June 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|----------------------------|------------|------------------------|------------|----------------------------|------------|
| ** **                 | ** ** | **Fair  value**        | ** ** | **Carrying  value**        | ** ** | **Fair  value** | ** ** | **Carrying  value** | ** ** |
| ** **                 | ** ** | **(in thousands)**     | ** ** |
| Cash and cash equivalents  |       | $                      | 19,965     |                       | $          | 19,965 |   | $ | 12,801 |   | $ | 12,801 |   |
| Investment securities      |       | 49,763                 |       | 49,763                     |       | 40,853 |   | 40,853 |   |
| Mortgage-backed securities |       | 82,526                 |       | 82,169                     |       | 82,231 |   | 81,931 |   |
|                            |            |                        |            |                            |            |  |  |  |  |  |  |  |  |

 

The fair value of the loans receivable, net has been estimated usingthe present value of cash flows, discounted at the approximate current marketrates, and giving consideration to estimated prepayment risk but not adjustedfor credit risk. Fair value of loans with floating interest rates is generallypresumed to approximate the recorded carrying amounts.

 
| ** **            | ** ** | **June 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|-----------------------|------------|------------------------|------------|----------------------------|------------|
| ** **            | ** ** | **Fair  value**        | ** ** | **Carrying  value**        | ** ** | **Fair  value** | ** ** | **Carrying  value** | ** ** |
| ** **            | ** ** | **(in thousands)**     | ** ** |
| Loans receivable, net |       | $                      | 543,771    |                       | $          | 520,198 |   | $ | 539,670 |   | $ | 530,734 |   |
|                       |            |                        |            |                            |            |  |  |  |  |  |  |  |  |

 

The fair value of deposits and borrowings with stated maturities hasbeen estimated using the present value of cash flows, discounted at ratesapproximating current market rates for similar assets and liabilities. Fairvalue of deposits and borrowings with floating interest rates is generallypresumed to approximate the recorded carrying amounts.

 
| ** **                        | ** ** | **June 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|-----------------------------------|------------|------------------------|------------|----------------------------|------------|
| ** **                        | ** ** | **Fair  value**        | ** ** | **Carrying  value**        | ** ** | **Fair  value** | ** ** | **Carrying  value** | ** ** |
| ** **                        | ** ** | **(in thousands)**     | ** ** |
| Liabilities                       |       |                   |       |                       |       |   |   |   |   |
| Deposits with stated maturities   |       | $                      | 216,536    |                       | $          | 213,146 |   | $ | 228,676 |   | $ | 225,093 |   |
| Borrowings with stated maturities |       | $                      | 82,489     |                       | $          | 79,929 |   | $ | 82,947 |   | $ | 80,241 |   |

 

The fair value of deposits and borrowings with no stated maturities isgenerally presumed to approximate the carrying amount (the amount payable ondemand). Fair value deposits and borrowings with floating interest rates aregenerally presumed to approximate the recorded carrying amounts.

 
| ** **                         | ** ** | **June 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|------------------------------------|------------|------------------------|------------|----------------------------|------------|
| ** **                         | ** ** | **Fair  value**        | ** ** | **Carrying  value**        | ** ** | **Fair  value** | ** ** | **Carrying  value** | ** ** |
| ** **                         | ** ** | **(in thousands)**     | ** ** |
| Deposits with no stated maturities |       | $                      | 346,244    |                       | $          | 346,244 |   | $ | 327,623 |   | $ | 327,623 |   |
|                                    |            |                        |            |                            |            |  |  |  |  |  |  |  |  |

 

The Bank’s remaining assets and liabilities are not consideredfinancial instruments. No disclosure of the relationship value of the Bank’sdeposits is required.

 

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**NOTE10- STOCK BASED COMPENSATION**

 

TheCompany has stock benefit plans that allow the Company to grant options andrestricted stock to employees and directors. The awards, which have a term ofup to 10 years when issued, vest over a three to five year period. Theexercise price of each award equals the market price of the Company’s stock onthe date of the grant. At June 30, 2010, there was $111,000 of totalunrecognized compensation cost, net of estimated forfeitures, related tonon-vested awards under the Plan. That cost is expected to be recognized over aweighted average period of 19.6 months. Option activity under the Company’sstock option plan as of June 30, 2010 was 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                         |       | (12,845                    | )          | 13.76 |   |   |   |   |   |
| Options forfeited                         |       | —                     |       | — |   |   |   |   |   |
| Options expired                           |       | —                     |       | — |   |   |   |   |   |
| Outstanding at June 30, 2010         |       | 258,801                    |       | $ | 26.84 |   | 2.02 |   | $ | 79 |   |
| Options exercisable at June 30, 2010 |       | 219,207                    |       | $ | 27.79 |   | 1.49 |   | $ | 40 |   |

 

Theaggregate intrinsic value in the table above represents the total pre-taxintrinsic value (the difference between the Company’s closing stock price onthe last trading day of the second quarter and the exercise price, multipliedby the number of in-the-money options).

 

Theaggregate intrinsic value of options exercised during the six months ended June 30,2010 and 2009 was $76,000 and $16,000, respectively. Exercise of stock optionsduring the six months ended June 30, 2010 and 2009 resulted in cashreceipts of $177,000 and $105,000, respectively.

 

Stock-basedcompensation expense included in net income related to stock options was$13,000 and $14,000 for the three months ended June 30, 2010 and 2009,respectively, resulting in a tax benefit of $5,000 for each of the periods.Stock-based compensation expense included in net income related to stockoptions was $26,000 and $28,000 for the six months ended June 30, 2010 and2009, respectively, resulting in a tax benefit of $9,000 and $10,000 for eachof the periods.

 

Stock-basedcompensation expense included in net income related to stock grants was $4,000for both three month periods ended June 30, 2010 and 2009, respectively.Stock-based compensation expense included in net income related to the Company’semployee stock ownership plan totaled $49,000 and $43,000 for the three monthsended June 30, 2010 and 2009, respectively. Stock-based compensationexpense included in net income related to stock grants was $8,000 for both ofthe six month periods ended June 30, 2010 and 2009. Stock-basedcompensation expense included in net income related to the Company’s employeestock ownership plan totaled $94,000 and $83,000 for the six months ended June 30,2010 and 2009, respectively.

 

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**NOTE11- EMPLOYEE BENEFIT PLANS**

 

Netperiodic defined benefit pension cost included the following (in thousands):

 
| ** **                              | ** ** | **Three months ended  June 30,** | ** ** |
|-----------------------------------------|------------|-------------------------------------------------|------------|
| ** **                              | ** ** | **2010**                                        | ** ** | **2009** | ** ** |
|                                    |       |                                            |       |   |   |
| Components of net periodic benefit cost |       |                                            |       |   |   |
| Service cost                            |       | $                                               | 133        |   | $ | 118 |   |
| Interest cost                           |       | 74                                              |       | 62 |   |
| Expected return on plan assets          |       | (136                                            | )          | (93 | ) |
| Recognized net actuarial loss           |       | 42                                              |       | 46 |   |
|                                    |       |                                            |       |   |   |
| Net periodic benefit cost               |       | $                                               | 113        |   | $ | 133 |   |

 
| ** **                              | ** ** | **Six months ended  June 30,** | ** ** |
|-----------------------------------------|------------|-----------------------------------------------|------------|
| ** **                              | ** ** | **2010**                                      | ** ** | **2009** | ** ** |
|                                    |       |                                          |       |   |   |
| Components of net periodic benefit cost |       |                                          |       |   |   |
| Service cost                            |       | $                                             | 276        |   | $ | 236 |   |
| Interest cost                           |       | 148                                           |       | 124 |   |
| Expected return on plan assets          |       | (272                                          | )          | (185 | ) |
| Amortization of prior service cost      |       | 1                                             |       | — |   |
| Recognized net actuarial loss           |       | 74                                            |       | 91 |   |
|                                    |       |                                          |       |   |   |
| Net periodic benefit cost               |       | $                                             | 227        |   | $ | 266 |   |

 

Therewas no employer contribution for the six months ended June 30, 2010 and2009.

 

**NOTE 12— ACCOUNTING STANDARDS UPDATE**

 

In January 2010, the FASB added new requirements for disclosuresof fair value measurements. The new requirements include disclosure abouttransfers in and out of Levels 1 and 2 and separate disclosures aboutpurchases, sales, issuances and settlements relating to Level 3measurements.  The guidance includes newdisclosures and changes to clarify existing disclosure requirements. Theguidance is effective for the first reporting period (including interimperiods) beginning after December 15, 2009, except for the requirement toprovide Level 3 activity of purchases, sales, issuances, and settlements on agross basis, which will be effective for fiscal years beginning afterDecember 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 April 2010, the FASB issued guidance on the treatment for amodified loan that was acquired as part of a pool of assets.  The guidance establishes that entities shouldnot evaluate whether a modification of loans that are part of a pool meets thecriteria for a troubled debt restructuring. In addition, modified loans shouldnot be removed from the pool unless certain criteria are met.  The amendment will be effective for loansthat are part of an asset pool and are modified during financial reportingperiods that end July 15, 2010 or later. The Company does not anticipatethat the adoption of this guidance will have a significant impact on theCompany’s financial statements

 

In July, 2010 FASB issued an amendment which will require disclosuresabout the credit quality of financing receivables and the allowance for creditlosses. The amendment will improve the transparency in financial reporting bypublic and non public companies that hold financing receivables which includeloans, lease receivables and other long-term receivables. The additionaldisclosures will include aging of past due receivables, credit qualityindicators and modifications of financing receivables.  The disclosures should also includedinformation on the development of the credit loss allowance and the management ofcredit exposures. The amendment will be effective for financial reportingperiods ending after December 15, 2010. The Company does not anticipatethat the adoption of this guidance will have a significant impact on theCompany’s financial statements.

 

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**TF FINANCIAL CORPORATION AND SUBSIDIARIES**

 

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

 

**GENERAL**

 

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

 

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

 

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

 

**FinancialPosition**

 

TheCompany’s total assets at June 30, 2010 and December 31, 2009 were$720.8 million and $714.1 million, respectively, representing an increase of$6.7 million, or 0.9% during the six-month period. Investment securitiesavailable for sale increased $8.9 million due to purchases of municipal andfederal agency bonds of $8.5 million as well as a $0.5 million increase in thefair value of the securities. Cash and cash equivalents increased by $7.2million due to continued high deposit levels combined with decreases in loanbalances as discussed herein. Mortgage-backed securities available for saleincreased by $0.5 million due to purchases of $14.0 million and an increase inthe fair value of the securities of $0.1 million offset by principal repaymentsreceived of $13.6 million. Mortgage-backed securities held to maturitydecreased by $0.2 million mainly as a result of principal repayments. Loansreceivable, net decreased by $10.4 million during the first six months of 2010.Principal repayments of loans receivable totaled $40.9 million and the Companytransferred $1.1 million from loans to real estate acquired throughforeclosure. The Company increased the allowance for loan losses by $1.6million. Originations of consumer and single-family residential mortgage loanswere $25.5 million and commercial loans were $7.8 million. Loans receivableheld for sale decreased by $0.2 million, mainly the net result of $11.5 millionin proceeds from the sale of loans in the secondary market offset by loansoriginated for sale of $11.3 million.

 

Totalliabilities increased by $5.2 million during the first six months of 2010.Deposits grew by $6.7 million due to an increase in money market, interestchecking, non-interest checking and savings accounts of $18.6 million offset bya decrease in retail certificates of deposit of $11.9 million. Advances fromthe Federal Home Loan Bank decreased by $0.3 million, the net result of scheduledamortization and maturities of $13.2 million offset by a $12.9 million increasein long-term borrowings.

 

Totalconsolidated stockholders’ equity of the Company was $73.3 million or 10.2% oftotal assets at June 30, 2010. During the first six months of 2010, theCompany issued 12,845 shares of common stock as a result of stock optionexercises. At June 30, 2010, there were approximately 102,000 sharesavailable for repurchase under the previously announced share repurchase plan.

 

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**AssetQuality**

 

Non-performingloans include impaired loans and loan balances past due over 90 days forwhich the accrual of interest has been discontinued.  The following table sets forth informationregarding the Company’s asset quality: 

 
| ** **                                                                           | ** ** | **June 30,  2010** | ** ** | **December 31,  2009** | ** ** | **June 30,  2009** | ** ** |
|--------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|-------------------------|------------|
| ** **                                                                           | ** ** | **(in thousands)**      | ** ** |
|                                                                                 |       |                    |       |                        |       |                    |       |
| Non-performing loans with a related allowance                                        |       |                    |       |                        |       |                    |       |
| Construction loans                                                                   |       | $                       | 3,886      |                        | $          | 2,389                   |       | $ | 1,841 |   |
| Commercial-business, non-real estate secured                                         |       | 112                     |       | —                      |       | —                  |       |
| Non-performing loans without a related allowance                                     |       |                    |       |                        |       |                    |       |
| Secured by one-to-four family residences(1)                                          |       | 4,544                   |       | 1,120                       |       | 461                     |       |
| Secured by non-residential properties(2)                                             |       | 910                     |       | 2,506                       |       | 606                     |       |
| Construction loans                                                                   |       | 354                     |       | 2,167                       |       | —                  |       |
| Commercial-business, real estate secured                                             |       | 5,867                   |       | —                      |       | —                  |       |
| Commercial-business, non-real estate secured                                         |       | —                  |       | —                      |       | —                  |       |
| Home equity and second mortgage                                                      |       | 151                     |       | 99                          |       | 131                     |       |
| Other consumer                                                                       |       | 4                       |       | 4                           |       | —                  |       |
| Total non-performing loans                                                           |       | $                       | 15,828     |                        | $          | 8,285                   |       | $ | 3,039 |   |
| Total loans past due 90 days as to interest  or principal and accruing interest |       | $                       | —     |                        | $          | —                  |       | $ | — |   |
| Ratio of non-performing  loans to gross loans                                        |       | 3.00                    | %          | 1.55                        | %          | 0.56                    | %          |
| Ratio of non-performing  loans to total assets                                       |       | 2.20                    | %          | 1.16                        | %          | 0.42                    | %          |
| Real estate owned                                                                    |       | $                       | 1,448      |                        | $          | 1,279                   |       | $ | 1,130 |   |
| Ratio of total  non-performing assets to total assets                                |       | 2.40                    | %          | 1.34                        | %          | 0.58                    | %          |
| Ratio of allowance for loan  losses to total loans                                   |       | 1.28                    | %          | 0.91                        | %          | 0.91                    | %          |
| Ratio of allowance for loan  losses to non-performing loans                          |       | 42.64                   | %          | 62.95                       | %          | 163.54                  | %          |
|                                                                                 |       |                    |       |                        |       |                    |       |
| Loans delinquent 30-89  days(3)                                                      |       | $                       | 1,034      |                        | $          | 934                     |       | $ | 1,290 |   |

 

----

(1) Included in this category of non-performingloans at June 30, 2010 and December 31, 2010 are three trouble debtrestructurings with combined balances of $843,000 and $844,000, respectively.There were no trouble debt restructurings at June 30, 2009.

(2) Included in this category of non-performingloans at June 30, 2010 and December 31, 2010 is one trouble debtrestructuring with a loan balance of $560,000. There were no trouble debtrestructurings at June 30, 2009.

(3) Loans delinquent 30-89 days are performingassets and continue to accrue interest.

 

Non-performingloans included a construction loan with a balance of $2.4 million, secured by alargely completed and partially occupied commercial office building, and thepersonal guarantee of the borrowers.  At June 30,2010, this loan was impaired and the Bank had allocated to this loan $666,000of the allowance for loan losses, equal to the difference between the loanbalance plus other acquisition costs and the fair value based upon a recentappraisal less estimated costs to sell. The Bank has initiated foreclosure proceedings.

 

Non-performingloans also included a construction loan with a balance of $1.5 million securedby two contiguous parcels of commercial real estate and a contestedfirst-position lien on the guarantor’s personal residence.  At June 30, 2010, this loan was impairedand the Bank had allocated to this loan $592,000 of the allowance for loanlosses, equal to the difference between the loan balance plus other acquisitioncosts and the fair value based upon a recent appraisal less estimated costs tosell. The Bank is in the midst of foreclosure proceedings and the borrower hasfiled for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code.

 

Non-performingloans included two loans with a combined balance of $5.9 million to a singleborrower, secured by undeveloped commercial real estate and personal guaranteesof several individuals.  The Bank hasinitiated foreclosure proceedings.  Arecent appraisal of the property indicated the appraised value plus otheracquisitions costs less estimated costs to sell are in excess of the loanbalances.

 

Not included in non-performing loans were sixloans to a single borrower, with a combined balance of $4.4 million, secured bythree separate parcels of commercial property each completed and available forsale or lease, a parcel of vacant land approved for townhome development, twoseparately deeded commercial parking spaces, and an owner-occupied singlefamily residence.  Subsequent to June 30,2010 the borrower requested a meeting with the Bank, at which time the borrowerindicated that they would be unable to continue making all of the principal andinterest payments on some or all of these loans.  The Bank is working with the borrower inorder to resolve this matter.

 

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With respect to each of theremaining non-performing loans, all of which are real estate secured, the Bankis taking appropriate steps to resolve the individual situations.

 

Foreclosedproperty at June 30, 2010 comprised four parcels of real estate with a combinedcarrying value of $1.4 million whereas foreclosed property at June 30, 2009consisted of three parcels of real estate with a combined carrying value of $1.3million. Foreclosed real estate is included in other assets in the consolidatedbalance sheet.

 

**Allowancefor Loan Losses**

 

TheBank provides valuation allowances for estimated losses from uncollectibleloans. The allowance is increased by provisions charged to expense and reducedby net charge-offs. On a quarterly basis, the Company prepares anallowance for loan losses (ALLL) analysis. In the analysis, the loan portfoliois segmented into groups of homogeneous loans that share similar riskcharacteristics: 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 further scrutiny as potentiallyimpaired loans.

 

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

 

Qualitativefactors are based upon: (1) changes in lending policies and procedures,including but not limited to changes in underwriting standards and collection,charge-off, and recovery practices not considered elsewhere in estimatingcredit losses; (2) changes in international, national, regional, and localeconomic and business conditions and developments that affect the collectabilityof the portfolio, including the condition of various market segments;(3) changes in the nature and volume of the portfolio and in the terms ofloans; (4) changes in the experience, ability, and depth of lendingmanagement and other relevant staff; (5) changes in the volume andseverity of past due loans, the volume of nonaccrual loans, and the volume andseverity of adversely classified or graded loans; (6) changes in thequality of the loan review system; (7) changes in the value of underlyingcollateral for collateral dependent loans; (8) the existence and effect ofany concentration of credit, and changes in the level of such concentrations;and (9) the effect of other external factors such as competition and legaland regulatory requirements on the level of estimated credit losses in theexisting loan portfolio.

 

Potentiallyimpaired loans selected for individual evaluation are reviewed in accordancewith US GAAP which governs the accounting for impaired assets, andconsideration of regulatory guidance regarding treatment of troubled,collateral dependent loans. Each potentially impaired loan is evaluated usingall available information such as recent appraisals, whether the loan iscurrently on accrual or non-accrual status, discounted cash flow analyses,guarantor financial strength, the value of additional collateral, and the loan’sand borrower’s past performance to determine whether in management’s bestjudgment it is probable that the Bank will be unable to collect all contractualinterest and principal in accordance with the loan’s terms. Loans deemedimpaired are generally assigned a reserve derived from the value of theunderlying collateral. Loans deemed not to be impaired are assigned a reservefactor based upon the segment from which they were selected.

 

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

 

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Thefollowing table sets forth the allocation of the loan loss allowance by loancategory for the periods indicated:

 
| ** **                                   | ** ** | **June 30,  2010** | ** ** | **December 31,  2009** | ** ** | **June 30,  2009** | ** ** |
|----------------------------------------------|------------|--------------------|------------|-----------------------------|------------|--------------------|------------|
| ** **                                   | ** ** | **(in thousands)** | ** ** |
| Impaired loans:                              |       |               |       |                        |       |               |       |
| Construction loans                           |       | $                  | 1,259      |                        | $          | 540                |       | $ | 840 |   |
| Commercial-business, non-real estate secured |       | 56                 |       | —                      |       | —             |       |
| Total                                        |       | 1,315              |       | 540                         |       | 840                |       |
| Unimpaired loans:                            |       |               |       |                        |       |               |       |
| Secured by one-to-four family residences     |       | 1,037              |       | 962                         |       | 1,404              |       |
| Secured by non-residential properties        |       | 1,751              |       | 1,275                       |       | 1,048              |       |
| Construction loans                           |       | 960                |       | 1,126                       |       | 587                |       |
| Commercial-business, real estate secured     |       | 669                |       | 757                         |       | 325                |       |
| Commercial-business, non-real estate secured |       | 16                 |       | 168                         |       | 9                  |       |
| Home equity and second mortgage              |       | 321                |       | 303                         |       | 302                |       |
| Other consumer                               |       | 15                 |       | 14                          |       | 15                 |       |
| Total                                        |       | 4,769              |       | 4,605                       |       | 3,690              |       |
| Unallocated                                  |       | 665                |       | 70                          |       | 440                |       |
|                                         |       |               |       |                        |       |               |       |
| Allowance for loan loss                      |       | $                  | 6,749      |                        | $          | 5,215              |       | $ | 4,970 |   |

 

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**RESULTSOF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2010 AND 2009**

 

**NetIncome**. The Company recorded net income of $967,000, or $0.38 per dilutedshare, for the three months ended June 30, 2010 as compared to net income of$1.2 million, or $0.48 per diluted share, for the three months ended June 30,2009.

 

**Average Balance Sheet**

 

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

 
| ** **                                                                        | ** ** | **Three Months Ended June 30,** | ** **    |
|-----------------------------------------------------------------------------------|------------|---------------------------------|---------------|
| ** **                                                                        | ** ** | **2010**                        | ** **    | **2009** | ** ** |
| ** **                                                                        | ** ** | **Average  balance**            | ** **    | **Interest** | ** ** | **Average  yld/cost** | ** ** | **Average  balance** | ** ** | **Interest** | ** ** | **Average  yld/cost** | ** ** |
| **ASSETS**                                                                        |       |                            |          |   |   |   |   |   |   |   |   |   |   |
| **Interest-earning assets:**                                                      |       |                            |          |   |   |   |   |   |   |   |   |   |   |
| Loans receivable(1)                                                               |       | $                               |  522,289 |   | $ |  7,150 |   | 5.49 | % | $ |  542,569 |   | $ |  7,658 |   | 5.66 | % |
| Mortgage-backed securities                                                        |       | 80,735                          |          | 929 |   | 4.62 | % | 104,491 |   | 1,294 |   | 4.97 | % |
| Investment securities(2)                                                          |       | 58,446                          |          | 582 |   | 3.99 | % | 38,060 |   | 379 |   | 3.99 | % |
| Other interest-earning assets(3)                                                  |       | 13,451                          |          | 1 |   | 0.03 | % | 2,011 |   | — | * | 0.00 | % |
| Total interest-earning assets                                                     |       | 674,921                         |          | 8,662 |   | 5.15 | % | 687,131 |   | 9,331 |   | 5.45 | % |
| Non interest-earning assets                                                       |       | 42,210                          |          |   |   |   |   | 38,517 |   |   |   |   |   |
| Total assets                                                                      |       | $                               |  717,131 |   |   |   |   |   | $ |  725,648 |   |   |   |   |   |
| **LIABILITIES AND  STOCKHOLDERS’ EQUITY**                               |       |                            |          |   |   |   |   |   |   |   |   |   |   |
| **Interest-bearing liabilities:**                                                 |       |                            |          |   |   |   |   |   |   |   |   |   |   |
| Deposits                                                                          |       | $                               |  557,128 |   | 1,841 |   | 1.33 | % | $ |  518,374 |   | 2,441 |   | 1.89 | % |
| Borrowings from the FHLB and other borrowings                                     |       | 78,469                          |          | 793 |   | 4.05 | % | 128,620 |   | 1,208 |   | 3.77 | % |
| Total interest-bearing liabilities                                                |       | 635,597                         |          | 2,634 |   | 1.66 | % | 646,994 |   | 3,649 |   | 2.26 | % |
| Non interest-bearing liabilities                                                  |       | 8,373                           |          |   |   |   |   | 9,302 |   |   |   |   |   |
| Total liabilities                                                                 |       | 643,970                         |          |   |   |   |   | 656,296 |   |   |   |   |   |
| Stockholders’ equity                                                         |       | 73,161                          |          |   |   |   |   | 69,352 |   |   |   |   |   |
| Total liabilities and stockholders’ equity                                   |       | $                               | 717,131       |   |   |   |   |   | $ | 725,648 |   |   |   |   |   |
| Net interest income—tax equivalent basis                                     |       |                            |          | 6,028 |   |   |   |   |   | 5,682 |   |   |   |
| Interest rate spread(4)-tax equivalent basis                                      |       |                            |          |   |   | 3.49 | % |   |   |   |   | 3.19 | % |
| Net yield on interest-earning assets(5)—tax equivalent  basis                |       |                            |          |   |   | 3.58 | % |   |   |   |   | 3.32 | % |
| Ratio of average interest-earning assets to  average interest-bearing liabilities |       |                            |          |   |   | 106.19 | % |   |   |   |   | 106.20 | % |
| Less: tax—equivalent interest adjustment                                     |       |                            |          | (140 | ) |   |   |   |   | (103 | ) |   |   |
| Net interest income                                                               |       |                            |          | $ |  5,888 |   |   |   |   |   | $ | 5,579 |   |   |   |
| Interest rate spread(4)                                                           |       |                            |          |   |   | 3.40 | % |   |   |   |   | 3.12 | % |
| Net yield on interest-earning assets(5)                                           |       |                            |          |   |   | 3.50 | % |   |   |   |   | 3.26 | % |

 

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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 $140,000 and  $103,000 for the quarter ended June 30, 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                                                                                                                                                                                                       |

 

**Rate/VolumeAnalysis**

 

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

 
| ** **                                    | ** ** | **Three months ended June 30**                         | ** ** |
|-----------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                    | ** ** | **2010 vs 2009  Increase (decrease) due to** | ** ** |
| ** **                                    | ** ** | **Volume**                                                            | ** ** | **Rate** | ** ** | **Net** | ** ** |
| **Interest income:**                          |       |                                                                  |       |   |   |   |   |
| Loans receivable, net                         |       | $                                                                     |  (281 | ) | $ |  (227 | ) | $ |  (508 | ) |
| Mortgage-backed securities                    |       | (278                                                                  | )          | (87 | ) | (365 | ) |
| Investment securities (1)                     |       | 203                                                                   |       | — |   | 203 |   |
| Other interest-earning assets                 |       | —                                                                |       | 1 |   | 1 |   |
| Total interest-earning assets                 |       | (356                                                                  | )          | (313 | ) | (669 | ) |
| **Interest expense:**                         |       |                                                                  |       |   |   |   |   |
| Deposits                                      |       | 1,050                                                                 |       | (1,650 | ) | (600 | ) |
| Borrowings from the FHLB and other borrowings |       | (964                                                                  | )          | 549 |   | (415 | ) |
|                                          |       |                                                                  |       |   |   |   |   |
| Total interest-bearing liabilities            |       | 86                                                                    |       | (1,101 | ) | (1,015 | ) |
| Net change in net interest income             |       | $                                                                     |  (442 | ) | $ |  788 |   | $ |  346 |   |

 

----

| (1) |   | Tax  equivalent adjustments to interest on investment securities were $140,000 and  $103,000 for the quarters ended June 30, 2010 and 2009, respectively. Tax equivalent  interest income is based upon a marginal effective tax rate of 34%. |
|-----|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**TotalInterest Income**. Total interest income, on a taxable equivalentbasis, decreased by $669,000 or 7.2% to $8.7 million for the quarter ended June30, 2010 compared with the second quarter of 2009. Interest income from loansreceivable decreased by $508,000, the result of a $20.3 million decrease in theaverage balance of loans outstanding plus a decrease in the average yield onloans of 17 basis points. The decrease in the yield was caused by an increasein non-performing loans between the periods which reduced interest income fromloans by $293,000. Interest income from mortgage-backed securities was lower inthe second quarter of 2010 in comparison to the same period of 2009 mainlybecause principal repayments of $30.4 million exceeded purchases of $20.0million during the intervening period. Mortgage-backed securities purchasedduring the second quarter of 2010 totaled $11.0 million. Interest income frominvestment securities was higher as a result of purchases of $16.5 million ofinvestments during the intervening period.

 

**TotalInterest Expense.**Total interest expense decreased by $1.0 million to$2.6 million during the three-month period ended June 30, 2010 as compared withthe second quarter of 2009. Although the average balance of deposits increasedby $38.8 million between the two quarters, the interest rates paid on the Bank’sdeposits were 56 basis points lower in 2010 due to the maturity of certificatesof deposit with higher interest rates than current market rates offered on theproducts into which the maturing CDs were renewed or reinvested. In addition,the Bank lowered the interest rates paid on certain non-CD products. Interestexpense associated with borrowings from the Federal Home Loan Bank and theFederal Reserve Bank decreased $415,000 between the second quarter of 2010 and2009. During the intervening period, the Bank reduced its average outstandingborrowings by $50.2 million, mainly by reducing low cost short-term advances.Thus, the remaining fixed rate, term advances outstanding during the secondquarter 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 second quarter of 2009.

 

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**Non-interestincome**. Total non-interest income was $597,000 for the second quarter of 2010compared with $1.4 million for the same period in 2009. During the secondquarter of 2009, gain on sale of foreclosed real estate totaled $303,000 andgain on the sale of investment securities was $116,000 while there was only a gainof $7,000 from security sales in 2010. During 2010, the gain on sale of loansheld for sale decreased by $201,000 as residential loan sales activity waslower in the second quarter of 2010. Income from mortgage servicing decreased $176,000 in the second quarterof 2010 mainly due to a $165,000 non-cash charge for impairment of mortgageservicing rights. Additionally, overdraft fees were $40,000 lower during thesecond quarter of 2010, due to increased consumer awareness and recentlegislation which is drawing attention to such fees.

 

**Non-interestexpense.**Total non-interest expense decreased by $185,000 to$4.6 million for the three months ended June 30, 2010 compared to the sameperiod in 2009. FDIC insurance premiums decreased by $252,000 between the twoquarters. FDIC premium expense in 2009 included a special assessment of$330,000; whereas the FDIC insurance premium in the second quarter of 2010reflects an increased deposit base and an increased assessment rate. Otheroperating expense decreased $47,000 due to a renegotiated ATM contract thatreduced the expense by $50,000 in the second quarter of 2010. Professional feesincreased between the two periods as a result of an increase in legal costs of$120,000 which were associated with non-performing loans and foreclosuresduring the second quarter of 2010. Audit and tax expenses were lower by$38,000. Employee compensation and benefits increased between quarters due torising insurance premiums of employer- provided medical benefits that totaled$49,000.

 

**Incometax expense.**The Company’s effective tax rate was 25.3% for thequarter ended June 30, 2010 compared to 26.0% for the quarter ended June 30,2009. These effective tax rates are lower than the Company’s marginal tax rateof 34% largely due to the tax-exempt income associated with the Company’sinvestments in tax-exempt municipal bonds and bank-owned life insurance. Incometax expense includes federal as well as state income tax which increased$62,000 as a state tax loss carry-forward credit expired.

 

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**RESULTSOF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009**

 

**NetIncome**. The Company recorded net income of $1.7 million, or $0.66 per dilutedshare, for the six months ended June 30, 2010 as compared to net income of $2.2million, or $0.89 per diluted share, for the six months ended June 30, 2009.

 

**Average Balance Sheet**

 

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

 
| ** **                                                                        | ** ** | **Six Months Ended June 30,** | ** **    |
|-----------------------------------------------------------------------------------|------------|-------------------------------|---------------|
| ** **                                                                        | ** ** | **2010**                      | ** **    | **2009** | ** ** |
| ** **                                                                        | ** ** | **Average  balance**          | ** **    | **Interest** | ** ** | **Average  yld/cost** | ** ** | **Average  balance** | ** ** | **Interest** | ** ** | **Average  yld/cost** | ** ** |
| **ASSETS**                                                                        |       |                          |          |   |   |   |   |   |   |   |   |   |   |
| **Interest-earning assets:**                                                      |       |                          |          |   |   |   |   |   |   |   |   |   |   |
| Loans receivable(1)                                                               |       | $                             |  526,032 |   | $ |  14,452 |   | 5.56 | % | $ |  543,826 |   | $ |  15,313 |   | 5.69 | % |
| Mortgage-backed securities                                                        |       | 81,284                        |          | 1,896 |   | 4.72 | % | 106,921 |   | 2,679 |   | 5.07 | % |
| Investment securities(2)                                                          |       | 55,878                        |          | 1,123 |   | 4.06 | % | 38,755 |   | 759 |   | 3.96 | % |
| Other interest-earning assets(3)                                                  |       | 10,108                        |          | 2 |   | 0.04 | % | 1,260 |   | — | * | 0.00 | % |
| Total interest-earning assets                                                     |       | 673,302                       |          | 17,473 |   | 5.25 | % | 690,762 |   | 18,751 |   | 5.49 | % |
| Non interest-earning assets                                                       |       | 41,711                        |          |   |   |   |   | 36,754 |   |   |   |   |   |
| Total assets                                                                      |       | $                             |  715,013 |   |   |   |   |   | $ |  727,516 |   |   |   |   |   |
| **LIABILITIES AND  STOCKHOLDERS’ EQUITY**                               |       |                          |          |   |   |   |   |   |   |   |   |   |   |
| **Interest-bearing liabilities:**                                                 |       |                          |          |   |   |   |   |   |   |   |   |   |   |
| Deposits                                                                          |       | $                             |  553,214 |   | 3,836 |   | 1.40 | % | $ |  506,677 |   | 4,954 |   | 1.98 | % |
| Borrowings from the FHLB and other borrowings                                     |       | 80,491                        |          | 1,641 |   | 4.12 | % | 143,193 |   | 2,493 |   | 3.52 | % |
| Total interest-bearing liabilities                                                |       | 633,705                       |          | 5,477 |   | 1.75 | % | 649,870 |   | 7,447 |   | 2.32 | % |
| Non interest-bearing liabilities                                                  |       | 8,493                         |          |   |   |   |   | 8,882 |   |   |   |   |   |
| Total liabilities                                                                 |       | 642,198                       |          |   |   |   |   | 658,752 |   |   |   |   |   |
| Stockholders’ equity                                                         |       | 72,815                        |          |   |   |   |   | 68,764 |   |   |   |   |   |
| Total liabilities and stockholders’ equity                                   |       | $                             |  715,013 |   |   |   |   |   | $ |  727,516 |   |   |   |   |   |
| Net interest income—tax equivalent basis                                     |       |                          |          | 11,996 |   |   |   |   |   | 11,304 |   |   |   |
| Interest rate spread(4)-tax equivalent basis                                      |       |                          |          |   |   | 3.50 | % |   |   |   |   | 3.17 | % |
| Net yield on interest-earning  assets(5)—tax equivalent basis           |       |                          |          |   |   | 3.60 | % |   |   |   |   | 3.31 | % |
| Ratio of average interest-earning assets to  average interest-bearing liabilities |       |                          |          |   |   | 106.25 | % |   |   |   |   | 106.29 | % |
| Less: tax—equivalent interest adjustment                                     |       |                          |          | (276 | ) |   |   |   |   | (206 | ) |   |   |
| Net interest income                                                               |       |                          |          | $ |  11,720 |   |   |   |   |   | $ |  11,098 |   |   |   |
| Interest rate spread(4)                                                           |       |                          |          |   |   | 3.42 | % |   |   |   |   | 3.11 | % |
| Net yield on interest-earning assets(5)                                           |       |                          |          |   |   | 3.52 | % |   |   |   |   | 3.25 | % |

 

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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 $276,000 and  $206,000 for the six months ended June 30, 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                                                                                                                                                                                                          |

 

**Rate/VolumeAnalysis**

 

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

 
| ** **                                    | ** ** | **Six months ended June 30**                           | ** ** |
|-----------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                    | ** ** | **2010 vs 2009  Increase (decrease) due to** | ** ** |
| ** **                                    | ** ** | **Volume**                                                            | ** ** | **Rate** | ** ** | **Net** | ** ** |
| **Interest income:**                          |       |                                                                  |       |   |   |   |   |
| Loans receivable, net                         |       | $                                                                     |  (494 | ) | $ |  (367 | ) | $ |  (861 | ) |
| Mortgage-backed securities                    |       | (608                                                                  | )          | (175 | ) | (783 | ) |
| Investment securities (1)                     |       | 344                                                                   |       | 20 |   | 364 |   |
| Other interest-earning assets                 |       | —                                                                |       | 2 |   | 2 |   |
| Total interest-earning assets                 |       | (758                                                                  | )          | (520 | ) | (1,278 | ) |
| **Interest expense:**                         |       |                                                                  |       |   |   |   |   |
| Deposits                                      |       | 1,130                                                                 |       | (2,248 | ) | (1,118 | ) |
| Borrowings from the FHLB and other borrowings |       | (1,853                                                                | )          | 1,001 |   | (852 | ) |
|                                          |       |                                                                  |       |   |   |   |   |
| Total interest-bearing liabilities            |       | (723                                                                  | )          | (1,247 | ) | (1,970 | ) |
| Net change in net interest income             |       | $                                                                     |  (35  | ) | $ |  727 |   | $ |  692 |   |

 

----

| (1) |   | Tax  equivalent adjustments to interest on investment securities were $276,000 and  $206,000 for the six months ended June 30, 2010 and 2009, respectively. Tax  equivalent interest income is based upon a marginal effective tax rate of  34%. |
|-----|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**TotalInterest Income**. Total interest income, on a taxable equivalentbasis, decreased by $1,278,000 or 6.8% to $17.5 million for the six monthsended June 30, 2010 compared with the first six months of 2009. Interest incomefrom loans receivable decreased by $861,000, the result of a $17.8 milliondecrease in the average balance of loans outstanding, plus a decrease in theyield on loans of 13 basis points. The decrease in the yield was caused by anincrease in non-performing loans which reduced interest income from loans by$349,000 between the periods. Interest income from mortgage-backed securitieswas lower during 2010 mainly because repayments of $30.4 million exceededpurchases of $20.0 million during the intervening period. Interest income frominvestment securities was higher as a result of purchases of $16.5 million ofinvestments during the intervening period.

 

**TotalInterest Expense.**Total interest expense decreased by $1,970,000 to$5.5 million during the six-month period ended June 30, 2010 as compared withthe same period in 2009. Although the average balance of deposits increased by$46.5 million between the two periods, the interest rates paid on the Bank’sdeposits were 58 basis points lower in 2010 due to the maturity of certificatesof deposit with higher interest rates than current market rates offered on theproducts into which the maturing CDs were renewed or reinvested. In addition,the Bank lowered the interest rates paid on certain non-CD products.  Interest expense associated with borrowingsfrom the Federal Home Loan Bank and the Federal Reserve Bank decreased $852,000between the six-months of 2010 and 2009. During the intervening period, the Bankreduced its average outstanding borrowings by $62.7 million, mainly by reducinglow cost short-term advances. Thus, the remaining fixed rate, term advancesoutstanding during the six months of 2010 have a higher rate than those thatwere combined with the short-term borrowings available through the FederalReserve Bank and Federal Home Loan Bank accessed in 2009.

 

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**Non-interestincome**. Total non-interest income was $1.2 million for the first six monthsof 2010 compared with $2.4 million for the same period in 2009. Gain on sale offoreclosed real estate totaled $303,000 in 2009 as compared to a loss fromforeclosed real estate was $137,000 in 2010. Gain on the sale of investmentsecurities was $306,000 during the first six months of 2009 while there wasonly a gain of $7,000 from security sales in 2010.  During 2010, the gain on sale of loans heldfor sale decreased by $289,000 as residential loan sales activity was lower inthe first six months of 2010.  Incomefrom mortgage servicing decreased $76,000 in 2010 mainly due to a $138,000non-cash charge for impairment of mortgage servicing rights. Additionally, overdraftfees were $54,000 lower during 2010, due to increased consumer awareness andrecent legislation which is drawing attention to such fees.

 

**Non-interestexpense.**Total non-interest expense decreased by $17,000 to$9.2 million for the six months ended June 30, 2010 compared to the same periodin 2009. FDIC insurance premiums decreased by $79,000 as 2009 included aspecial assessment of $330,000; whereas the FDIC insurance premium in 2010reflects an increased deposit base and an increased assessment rate. Otheroperating expense decreased $57,000 due to a renegotiated ATM contract thatreduced the expense by $58,000 in 2010. Also, robbery and deposit- relatedlosses of $50,000 were included in other operating expense in 2009 and therewere no such losses in 2010. Partially, offsetting the decrease in otheroperating expense were increased costs of $33,000 associated with maintenanceof real estate acquired through foreclosure. Occupancy and equipment costsincreased $64,000 mainly due to higher costs associated with the Company’sbanking software and increased snow removal costs in 2010. Professional feesincreased between the two periods as legal costs associated with non-performingloans and foreclosures during 2010 increased $131,000.  In contrast, the Company’s professional feesrelated to audit and tax services decreased $81,000 in 2010. Employeecompensation and benefits increased between the periods; the result of risinginsurance premiums of employer- provided medical benefits of $62,000. Costsassociated with the Company’s defined benefit plan were $49,000 lower in 2010.

 

**Incometax expense.**The Company’s effective tax rate was 23.1% for thesix months ended June 30, 2010 compared to 25.7% for the same period in 2009.These effective tax rates are lower than the Company’s marginal tax rate of 34%largely due to the tax-exempt income associated with the Company’s investmentsin tax-exempt municipal bonds and bank-owned life insurance. Income tax expenseincludes federal as well as state income tax which increased $102,000 as astate tax loss carry-forward credit expired.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

**Liquidity**

 

TheBank’s liquidity is a measure of its ability to fund loans, pay withdrawals ofdeposits, and other cash outflows in an efficient, cost-effective manner. TheBank’ short-term sources of liquidity include maturity, repayment and sales ofassets, excess cash and cash equivalents, new deposits, broker deposits, otherborrowings, and new borrowings from the Federal Home Loan Bank and the FederalReserve Bank. There has been no material adverse change during the six-monthperiod ended June 30, 2010 in the ability of the Bank’s and its subsidiaries tofund their operations.

 

AtJune 30, 2010, the Bank’s had commitments outstanding under letters of creditof $1.1 million, commitments to originate loans of $20.4 million, andcommitments to fund undisbursed balances of closed loans and unused lines ofcredit of $48.3 million. At June 30, 2010, the Bank had $6.0 million inoutstanding commitments to sell loans. There has been no material change duringthe six months ended June 30, 2010 in any of the Bank’s other contractualobligations or commitments to make future payments.

 

TheCompany’s primary sources of liquidity are dividends from the Bank, principaland interest payments received from the Employee Stock Ownership Plan, and taxbenefits arising from the use of the Company’s tax deductions by other membersof its consolidated group pursuant to a tax sharing agreement. The Company isdependent upon these sources and cash on hand which totaled approximately $1.9million at June 30, 2010 in order to funds its operations and pay the dividendto its shareholders. There has been no material adverse change in the abilityof the Company to fund its operations during the six-month period ended June30, 2010.

 

**CapitalRequirements**

 

TheBank was in compliance with all of its capital requirements as of June 30,2010.

 

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**CRITICALACCOUNTING POLICIES**

 

Certaincritical accounting policies of the Company require the use of significantjudgment and accounting estimates in the preparation of the consolidatedfinancial statements and related data of the Company. These accountingestimates require management to make assumptions about matters that are highlyuncertain at the time the accounting estimate is made. Management believes thatthe most critical accounting policy requiring the use of accounting estimatesand judgment is the determination of the allowance for loan losses. If thefinancial position of a significant amount of debtors should deteriorate morethan the Company has estimated, the present allowance for loan losses may beinsufficient and additional provisions for loan losses may be required. Theallowance for loan losses was approximately $6.7 million at June 30, 2010.

 

**RECENT LEGISLATION**

 

OnJuly 21, 2010, the President signed into law the Dodd-Frank Wall Street Reformand Consumer Protection Act (the “Dodd-Frank Act”) which will significantlychange the current bank regulatory structure and affect the lending,investment, trading and operating activities of financial institutions andtheir holding companies.  The Dodd-Frank Act will eliminate ourcurrent primary federal regulator, the Office of ThriftSupervision.  The Dodd-Frank Act also authorizes the Board ofGovernors of the Federal Reserve System to supervise and regulate all savingsand loan holding companies like the Company, in addition to bank holdingcompanies which it currently regulates.  As a result, the FederalReserve Board’s current regulations applicable to bank holding companies,including holding company capital requirements, will apply to savings and loanholding companies like the Company.  These capital requirements aresubstantially similar to the capital requirements currently applicable to theBank.  The Dodd-Frank Act also requires the Federal Reserve Board toset minimum capital levels for bank holding companies that are as stringent asthose required for the insured depository subsidiaries, and the components ofTier 1 capital would be restricted to capital instruments that are currentlyconsidered to be Tier 1 capital for insured depositoryinstitutions.  Bank holding companies with assets of less than $500million are exempt from these capital requirements.  Under theDodd-Frank Act, the proceeds of trust preferred securities are excluded fromTier 1 capital unless such securities were issued prior to May 19, 2010 by bankor savings and loan holding companies with less than $15 billion ofassets.  The legislation also establishes a floor for capital ofinsured depository institutions that cannot be lower than the standards ineffect today, and directs the federal banking regulators to implement newleverage and capital requirements within 18 months that take into accountoff-balance sheet activities and other risks, including risks relating tosecuritized products and derivatives.

 

TheDodd-Frank Act also creates a new Consumer Financial Protection Bureau withbroad powers to supervise and enforce consumer protection laws.  TheConsumer Financial Protection Bureau has broad rule-making authority for a widerange of consumer protection laws that apply to all banks and savings institutionssuch as the Bank, including the authority to prohibit “unfair, deceptive orabusive” acts and practices.  The Consumer Financial ProtectionBureau has examination and enforcement authority over all banks and savingsinstitutions with more than $10 billion in assets.  Banks and savingsinstitutions with $10 billion or less in assets will be examined by theirapplicable bank regulators.  The new legislation also weakens thefederal preemption available for national banks and federal savingsassociations, and gives state attorneys general the ability to enforceapplicable federal consumer protection laws.

 

Thelegislation also broadens the base for Federal Deposit Insurance Corporationinsurance assessments.  Assessments will now be based on the averageconsolidated total assets less tangible equity capital of a financialinstitution.  The Dodd-Frank Act also permanently increases themaximum amount of deposit insurance for banks, savings institutions and creditunions to $250,000 per depositor, retroactive to January 1, 2009, andnon-interest bearing transaction accounts have unlimited deposit insurancethrough December 31, 2013.  Lastly, the Dodd-Frank Act will increasestockholder influence over boards of directors by requiring companies to givestockholders a non-binding vote on executive compensation and so-called “goldenparachute” payments, and authorizing the Securities and Exchange Commission topromulgate rules that would allow stockholders to nominate their own candidatesusing a company’s proxy materials.  The legislation also directs theFederal Reserve Board to promulgate rules prohibiting excessive compensationpaid to bank holding company executives, regardless of whether the company ispublicly traded or not.

 

**ITEM 3. QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

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

 

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**ITEM 4T. CONTROLS AND PROCEDURES**

 

**Evaluationof Disclosure Controls and Procedures**

 

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

 

**Changesin Internal Controls over Financial Reporting**

 

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

 

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**TF FINANCIAL CORPORATION 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.**  | ** ** | **[REMOVED AND RESERVED]**                                                                                                                                                                                                                                                                                                                         |
|         |       |                                                                                                                                                                                                                                                                                                                                               |
| **ITEM 5.**  | ** ** | **OTHER INFORMATION**                                                                                                                                                                                                                                                                                                                              |
| ** **   | ** ** | ** **                                                                                                                                                                                                                                                                                                                                         |
|         |       | None.                                                                                                                                                                                                                                                                                                                                              |
|         |       |                                                                                                                                                                                                                                                                                                                                               |
| **ITEM 6.**  | ** ** | **EXHIBITS**                                                                                                                                                                                                                                                                                                                                       |
|         |       |                                                                                                                                                                                                                                                                                                                                               |
|         |       | (a)                                                                                                                                                                                                                                                                                                                                      | Exhibits |
|         |       |                                                                                                                                                                                                                                                                                                                                               | 31.1  | Certification  of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|         |       |                                                                                                                                                                                                                                                                                                                                               | 31.2 | Certification  of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|         |       |                                                                                                                                                                                                                                                                                                                                               | 32. | Certification  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

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**TF FINANCIAL CORPORATION**

 

**SIGNATURES**

 

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

 
| Date:  | August  13, 2010 |   | /s/  Kent C. Lufkin                                   |
|--------|------------------|--------|-------------------------------------------------------|
|   |             |   | Kent  C. Lufkin                                       |
|   |             |   | President  and CEO                                    |
|   |             |   | (Principal  Executive Officer)                        |
|   |             |   |                                                  |
|   |             |   |                                                  |
| Date:  | August  13, 2010 |   | /s/  Dennis R. Stewart                                |
|   |             |   | Dennis  R. Stewart                                    |
|   |             |   | Executive  Vice President and Chief Financial Officer |
|   |             |   | (Principal  Financial & Accounting Officer)  |

 

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