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EX-32 - TF FINANCIAL CORP EXHIBIT 32. 09-30-2010 - TF FINANCIAL CORPex32.htm
EX-31.2 - TF FINANCIAL CORP EXHIBIT 31.2 09-30-2010 - TF FINANCIAL CORPex31-2.htm
EX-31.1 - TF FINANCIAL CORP EXHIBIT 31.1 09-30-2010 - TF FINANCIAL CORPex31-1.htm




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 September 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

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

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

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: November 08, 2010

Class
Outstanding
$.10 par value common stock
2,686,485 shares





CONTENTS

 
     
     
     
     
     
 
     
     
     
     
     
     
     
     
     
Exhibits
   
     
 
     
 
     
 





TF Financial Corporation and Subsidiaries

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS
(Unaudited)

   
September 30,
2010
   
December 31,
2009
 
   
(in thousands)
 
ASSETS
           
Cash and cash equivalents
  $ 6,916     $ 12,801  
Investment securities available for sale—at fair value
    50,528       40,853  
Mortgage-backed securities available for sale—at fair value
    71,500       78,198  
Mortgage-backed securities held to maturity (fair value of $3,605 and $4,033,
 respectively)
    3,268       3,733  
Loans receivable, net
    519,374       529,652  
Loans receivable held for sale
    1,078       1,082  
Federal Home Loan Bank stock—at cost
    9,896       9,896  
Accrued interest receivable
    2,659       2,777  
Premises and equipment, net
    6,788       5,523  
Goodwill
    4,324       4,324  
Bank-owned life insurance
    17,699       17,190  
Other assets
    8,553       8,061  
TOTAL ASSETS
  $ 702,583     $ 714,090  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Liabilities
               
Deposits
  $ 552,562     $ 552,716  
Borrowings from the Federal Home Loan Bank
    68,671       80,241  
Advances from borrowers for taxes and insurance
    1,485       2,231  
Accrued interest payable
    1,797       2,818  
Other liabilities
    3,395       4,210  
Total liabilities
    627,910       642,216  
                 
Stockholders’ equity
               
Preferred stock, no par value; 2,000,000 shares authorized at September 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, 2,685,448 and 2,672,603 shares outstanding at September 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
    54,078       54,009  
Unearned ESOP shares
    (1,245 )     (1,334 )
Treasury stock-at cost
    (54,064 )     (54,331 )
Retained earnings
    73,543       72,376  
Accumulated other comprehensive income
    1,832       625  
Total stockholders’ equity
    74,673       71,874  
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 702,583     $ 714,090  

The accompanying notes are an integral part of these statements



TF Financial Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

   
For the three months
ended
September 30,
   
For the nine months
ended
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
   
(in thousands, except per share data)
 
Interest income
                       
Loans, including fees
  $ 7,020     $ 7,638     $ 21,472     $ 22,951  
Mortgage-backed securities
    886       1,170       2,782       3,849  
Investment securities
    444       311       1,291       864  
Interest-bearing deposits and other
          1       2       1  
                                 
TOTAL INTEREST INCOME
    8,350       9,120       25,547       27,665  
                                 
Interest expense
                               
Deposits
    1,757       2,393       5,593       7,347  
Borrowings
    731       988       2,372       3,481  
                                 
TOTAL INTEREST EXPENSE
    2,488       3,381       7,965       10,828  
                                 
NET INTEREST INCOME
    5,862       5,739       17,582       16,837  
                                 
Provision for loan losses
    1,180       650       2,741       1,905  
                                 
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
    4,682       5,089       14,841       14,932  
                                 
Non-interest income
                               
Service fees, charges and other operating income
    404       464       1,296       1,498  
Bank-owned life insurance
    170       171       509       501  
Gain on sale of investments
                7       306  
Gain on sale of loans
    353       127       465       528  
Gain (loss) on sale of foreclosed real estate
          34       (137 )     337  
                                 
TOTAL NON-INTEREST INCOME
    927       796       2,140       3,170  
                                 
Non-interest expense
                               
Compensation and benefits
    2,269       2,601       7,636       7,917  
Occupancy and equipment
    774       756       2,256       2,174  
Professional fees
    196       195       680       651  
Marketing and advertising
    152       118       392       382  
FDIC insurance premiums
    233       182       686       714  
Other operating
    603       568       1,760       1,782  
                                 
TOTAL NON-INTEREST EXPENSE
    4,227       4,420       13,410       13,620  
                                 
INCOME BEFORE INCOME TAXES
    1,382       1,465       3,571       4,482  
                                 
Income taxes
    373       353       878       1,128  
                                 
NET INCOME
  $ 1,009     $ 1,112     $ 2,693     $ 3,354  
                                 
Earnings per share—basic
  $ 0.39     $ 0.44     $ 1.06     $ 1.33  
Earnings per share—diluted
  $ 0.39     $ 0.44     $ 1.06     $ 1.33  
Dividends paid per share
  $ 0.20     $ 0.20     $ 0.60     $ 0.60  

The accompanying notes are an integral part of these statements

 
TF Financial Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

   
For the nine months
ended
September 30,
 
   
2010
   
2009
 
   
(in thousands)
 
OPERATING ACTIVITIES
           
Net income
  $ 2,693     $ 3,354  
Adjustments to reconcile net income to net cash provided by operating activities
               
Amortization of:
               
Mortgage loan servicing rights                                                                                                     
    290       136  
Deferred loan origination fees                                                                                                     
    114       76  
Premiums and discounts on investment securities, net                                                                                                     
    59       61  
Premiums and discounts on mortgage-backed securities, net                                                                                                     
    63       (172 )
Premiums and discounts on loans, net                                                                                                     
    128       134  
Provision for loan losses
    2,741       1,905  
Depreciation of premises and equipment
    645       670  
Increase in value of bank-owned life insurance
    (509 )     (501 )
Stock grant expense
    12       12  
Stock option expense
    39       42  
Stock-based benefit programs: ESOP
    180       161  
Proceeds from sale of loans originated for sale
    27,326       35,088  
Origination of loans held for sale
    (27,087 )     (34,797 )
(Gain) loss on sale of:
               
Investments                                                                                                     
    (7 )     (306 )
Loans held for sale                                                                                                     
    (465 )     (528 )
Foreclosed real estate                                                                                                     
    137       (337 )
Decrease in:
               
Accrued interest receivable                                                                                                     
    118       169  
Other assets                                                                                                     
    411       467  
(Decrease) increase in:
               
Accrued interest payable                                                                                                     
    (1,021 )     198  
Other liabilities                                                                                                     
    (1,426 )     208  
NET CASH PROVIDED BY OPERATING ACTIVITIES                                                                                                  
    4,441       6,040  
                 
INVESTING ACTIVITIES
               
Loan originations
    (59,604 )     (67,343 )
Loan principal payments
    65,106       75,442  
Principal repayments on mortgage-backed securities held to maturity
    462       843  
Principal repayments on mortgage-backed securities available for sale
    20,649       25,311  
Purchase of investment securities available for sale
    (8,681 )     (7,856 )
Purchase of mortgage-backed securities available for sale
    (13,995 )     (10,608 )
Proceeds from sale of investment securities available for sale
    60       5,514  
Proceeds from redemption/maturities of investment securities available for sale
    590       755  
Proceeds from the sale of foreclosed real estate
    799       2,497  
Purchase of premises and equipment
    (1,910 )     (392 )
NET CASH PROVIDED BY INVESTING ACTIVITIES
    3,476       24,163  



   
For the nine months ended
September 30,
 
   
2010
   
2009
 
   
(in thousands)
 
FINANCING ACTIVITIES
           
Net (decrease) increase in customer deposits
    (154 )     42,099  
Net decrease in short-term borrowings from the Federal Home Loan Bank and other borrowings
          (32,416 )
Proceeds of long-term Federal Home Loan Bank borrowings
    12,884        
Repayment of long-term Federal Home Loan Bank borrowings
    (24,454 )     (35,988 )
Net decrease in advances from borrowers for taxes and insurance
    (746 )     (727 )
Treasury stock acquired
          (101 )
Exercise of stock options
    177       115  
Tax benefit arising from stock compensation
    17       6  
Common stock dividends paid
    (1,526 )     (1,509 )
NET CASH USED IN FINANCING ACTIVITIES
    (13,802 )     (28,521 )
                 
NET(DECREASE)/ INCREASE IN CASH AND CASH EQUIVALENTS
    (5,885 )     1,682  
                 
Cash and cash equivalents at beginning of period
    12,801       2,719  
                 
Cash and cash equivalents at end of period
  $ 6,916     $ 4,401  
                 
Supplemental disclosure of cash flow information
               
Cash paid for:
               
Interest on deposits and borrowings
  $ 8,986     $ 10,630  
Income taxes
  $ 1,462     $ 825  
Non-cash transactions:
               
Capitalization of mortgage servicing rights
  $ 231     $ 426  
Transfers from loans to foreclosed real estate
  $ 1,793     $ 3,163  
Securities available for sale purchased not settled
  $ 175     $  

The accompanying notes are an integral part of these statements



TF FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - PRINCIPLES OF CONSOLIDATION

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

NOTE 2 - BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements were prepared in accordance with the instructions for Form 10-Q and, therefore, do not include all of the disclosures or footnotes required by accounting principles generally accepted in the United States of America (“US GAAP”). In the opinion of management, all adjustments, consisting of normal recurring accruals, necessary for fair presentation of the consolidated financial statements have been included. The results of operations for the period ended September 30, 2010 are not necessarily indicative of the results which may be expected for the entire fiscal year or any other period. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

NOTE 3 - CONTINGENCIES

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

NOTE 4 - OTHER COMPREHENSIVE INCOME

Comprehensive income is the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. Total comprehensive income was $1.8 million and $2.3 million for the three months ended September 30, 2010 and 2009, respectively. The components of other comprehensive income are as follows for the three months ended:

   
September 30, 2010
 
   
Before tax
amount
   
Tax
(expense)
benefit
   
Net of tax
amount
 
   
(in thousands)
 
Unrealized gains on securities
                 
Unrealized holding gains arising during period
  $ 1,126     $ (381 )   $ 745  
Pension plan benefit adjustment related to actuarial losses
    42       (14 )     28  
                         
Other comprehensive income, net
  $ 1,168     $ (395 )   $ 773  

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



Total comprehensive income was $3.9 million and $5.1 million for the nine months ended September 30, 2010 and 2009, respectively. The components of other comprehensive income are as follows for the nine months ended:

   
September 30, 2010
 
   
Before tax
amount
   
Tax
(expense)
benefit
   
Net of tax
amount
 
   
(in thousands)
 
Unrealized gains on securities
                 
Unrealized holding gains arising during period
  $ 1,720     $ (586 )   $ 1,134  
Reclassification adjustment for gains realized in net income
    (7 )     2       (5 )
Pension plan benefit adjustment related to prior service costs and actuarial losses
    117       (39 )     78  
                         
Other comprehensive income, net
  $ 1,830     $ (623 )   $ 1,207  

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

NOTE 5—EARNINGS PER SHARE

The following tables illustrate the reconciliation of the numerators and denominators of the basic and diluted earnings per share computations (dollars in thousands, except share and per share data):

   
Three months ended September 30, 2010
 
   
Income
(numerator)
 
Weighted
average
shares
(denominator)
 
Per share
Amount
 
Basic earnings per share
             
Income available to common stockholders
 
$
1,009
 
2,559,466
 
$
0.39
 
Effect of dilutive securities
             
Stock options and grants
 
 
 
 
               
Diluted earnings per share
             
Income available to common stockholders plus effect of dilutive securities
 
$
1,009
 
2,559,466
 
$
0.39
 

 
 
 
 
Nine months ended September 30, 2010
 
   
Income
(numerator)
 
Weighted
average
shares
(denominator)
 
Per share
Amount
 
Basic earnings per share
             
Income available to common stockholders
 
$
2,693
 
2,551,353
 
$
1.06
 
Effect of dilutive securities
             
Stock options and grants
 
 
 
 
               
Diluted earnings per share
             
Income available to common stockholders plus effect of dilutive securities
 
$
2,693
 
2,551,353
 
$
1.06
 

There were 193,880 options to purchase shares of common stock at a price range of $25.33 to $34.14 per share which were outstanding during the three and nine months ended September 30, 2010 that were not included in the computation of diluted earnings per share because the options’ exercise prices were greater than the average market price of the common shares.

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

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

There were 256,883 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 nine months ended September 30, 2009 that were not included in the computation of diluted earnings per share because the options’ exercise prices were greater than the average market price of the common shares.



NOTE 6—INVESTMENT AND MORTGAGE-BACKED SECURITIES

The amortized cost, gross unrealized gains and losses, and fair value of the Company’s investment securities at September 30, 2010 and December 31, 2009, are summarized as follows:

   
September 30, 2010
 
   
Amortized
cost
   
Gross
unrealized
gains
   
Gross
unrealized
losses
   
Fair
value
 
   
(in thousands)
 
Investment securities available for sale
                       
U.S. Government and federal agencies
  $ 6,000     $ 98     $     $ 6,098  
Corporate debt securities
    3,340       241             3,581  
State and political subdivisions
    38,212       2,623       (84 )     40,751  
Equity securities
    97       1             98  
    $ 47,649     $ 2,963     $ (84 )   $ 50,528  
                                 
Residential mortgage-backed securities issued by quasi-governmental agencies
  $ 54,766     $ 2,135     $     $ 56,901  
Residential mortgage-backed securities privately issued
    14,496       147       (44 )     14,599  
Residential mortgage-backed securities available for sale
  $ 69,262     $ 2,282     $ (44 )   $ 71,500  
                                 
Residential mortgage-backed securities held to maturity
  $ 3,268     $ 337     $     $ 3,605  
                                 

   
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 issued by quasi-governmental agencies
  $ 68,707     $ 2,483     $ (39 )   $ 71,151  
Residential mortgage-backed securities privately issued
    7,270             (223 )     7,047  
Residential mortgage-backed securities available for sale
  $ 75,977     $ 2,483     $ (262 )   $ 78,198  
                                 
Residential mortgage-backed securities held to maturity
  $ 3,733     $ 300     $     $ 4,033  
                                 

Gross realized gains were $7,000 for the nine months ended September 30, 2010. These gains resulted from the sale of investment equity securities of $53,000. Gross realized gains were $306,000 for the nine months ended September 30, 2009. These gains resulted from the sale of investment securities of $5.1 million.
 



The Company also holds stock in the Federal Home Loan Bank of Pittsburgh (“FHLB”) totaling $9.9 million as of September 30, 2010 and December 31, 2009. The Company is required to maintain a minimum amount of FHLB stock as determined by its borrowing levels and amount of eligible assets.  At September 30, 2010 the Company was required to hold $4.6 million in FHLB stock.  FHLB stock can only be repurchased by the FHLB or sold to another member, and all sales must be at par. The Company holds FHLB stock as a long term investment based on the ultimate recoverability of the par value. During the fourth quarter of 2008, the FHLB suspended the repurchase of stock and dividend payments which prompted the Company to give consideration to evaluating the potential impairment of the investment. The Company evaluates potential impairment of its investment in FHLB stock quarterly and considers the following:1) the magnitude and direction of the change in the net assets of the FHLB as compared to the capital stock amount and the duration of this condition, 2) the ability of the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB, 3) the impact of regulatory changes on the FHLB and on its members, and 4) the liquidity position of the FHLB. After evaluating these factors the Company has concluded that the par value of its investment in FHLB stock is recoverable and no impairment has been recorded at September 30, 2010 or December 31, 2009.

The table below indicates the length of time individual securities have been in a continuous unrealized loss position at September 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
    2     $ 1,096     $ (84 )   $     $     $ 1,096     $ (84 )
Residential mortgage-backed
securities privately
issued
    2       5,136       (44 )                 5,136       (44 )
                                                         
Total temporarily impaired securities
    4     $ 6,232     $ (128 )   $     $     $ 6,232     $ (128 )


The table below indicates the length of time individual securities have been in a continuous unrealized loss position at December 31, 2009:

   
Number
   
Less than
12 months
   
12 months
or longer
   
Total
 
Description of Securities
 
of
Securities
   
Fair
Value
   
Unrealized
Loss
   
Fair
Value
   
Unrealized
Loss
   
Fair
value
   
Unrealized
Loss
 
   
(in thousands)
 
U.S. Government  and federal agencies
    1     $ 2,945     $ (55 )   $     $     $ 2,945     $ (55 )
State and political subdivisions
    6       4,086       (109 )                 4,086       (109 )
Residential mortgage-backed securities issued by quasi-governmental agencies
    2       4,352       (39 )                 4,352       (39 )
Residential 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 to determine whether such impairment is other-than-temporary impairment (“OTTI”). This evaluation involves consideration of the length of time and the amount by which the fair value has been lower than amortized cost, the financial condition and credit rating of the issuer, the changes in fair value in relation to the change in market interest rates and other relevant information. In addition, with respect to mortgage-backed securities issued by government and quasi-governmental agencies (i. e. Government National Mortgage Association (“GNMA”), Federal Home Loan Mortgage Corporation (“FHLMC”) and Federal National Mortgage Association (“FNMA”)) the Company considers the ultimate payment of principal and interest as an obligation of the United States Government and thus assured. With respect to mortgage-backed securities issued by private parties, the Company studies delinquencies, loss rates, loss severity and other information related to the underlying loans in order to form an opinion regarding the possibility of a cash flow shortfall. The Company also evaluates its intent to hold, intent to sell or need to sell the securities in light of its investment strategy, cash flow needs, interest rate risk position, prospects for the issuer and all other relevant factors.

 
With respect to investments in equity securities, if it is determined that the impairment for an individual security is OTTI such impairment would be recognized as a reduction to non-interest income in the consolidated statement of income. With respect to debt securities, if it has been determined that the impairment for an individual security is OTTI, but the Company does not intend to sell the security and concludes that it is more likely than not that it will not 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 other comprehensive loss, net of the tax effect, and the “credit” component of the OTTI would be included as a reduction to non-interest income in the consolidated statement of income. Otherwise, the OTTI impairment of debt securities would be recognized as a reduction to non-interest income in the consolidated statements of income. Accordingly, the Company has performed this evaluation and has determined that the unrealized losses at September 30, 2010 and December 31, 2009, respectively are not considered other-than-temporary and are therefore reflected in other comprehensive income.

At September 30, 2010, temporarily impaired securities were all debt securities classified as available for sale. There were no temporarily impaired equity securities. The Company did not intend to sell any of the temporarily impaired securities and has concluded that it will not be required to sell any of the temporarily impaired securities. Upon an evaluation of each individual debt security, the Company determined that the temporary impairment was predominately caused by widening interest rate spreads over the relevant interest rate benchmark in relation to the Company’s amortized cost, and not caused by deterioration in credit quality.  Thus, the Company considered the impairment of each security to be temporary and not OTTI.

NOTE 7—LOANS RECEIVABLE

Loans receivable are summarized as follows:

   
September 30, 2010
   
December 31, 2009
 
   
(in thousands)
 
Held for investment:
           
First mortgage loans
           
Secured by one-to-four family residences
  $ 270,603     $ 271,651  
Secured by non-residential properties and/or non—owner occupied residential properties
    137,919       134,584  
Construction loans
    23,308       29,671  
Total first mortgage loans
    431,830       435,906  
Other loans
               
Commercial-business, real estate secured
    33,007       33,514  
Commercial-business, non-real estate secured
    5,541       7,462  
Home equity and second mortgage
    53,407       54,811  
Other consumer
    2,532       2,565  
Total other loans
    94,487       98,352  
Total loans
    526,317       534,258  
Net deferred loan origination costs and unamortized premiums
    663       609  
Less allowance for loan losses
    (7,606 )     (5,215 )
Total loans receivable
  $ 519,374     $ 529,652  
Held for sale:
               
First mortgage loans
               
Secured by one-to-four family residences
  $ 1,078     $ 1,082  



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

   
For the nine months ended
September 30,
 
   
2010
   
2009
 
             
Balance at January 1,
  $ 5,215     $ 3,855  
Provision charged to income
    2,741       1,905  
Charge-offs:
               
Secured by one-to-four family residences
    (10 )     (97 )
Secured by non-residential properties and/or non—owner occupied residential properties
    (174 )     (278 )
Construction loans
          (1,092 )
Commercial-business, non-real estate secured
    (146 )      
Home equity and second mortgage
          (6 )
Other consumer
    (28 )     (27 )
Recoveries:
               
Commercial-business, non-real estate secured
          22  
Other consumer
    8       10  
Balance at September 30,
  $ 7,606     $ 4,292  


NOTE 8- FAIR VALUE MEASUREMENTS

The following table presents information about the Company’s assets and liabilities measured at fair valued on a recurring basis as of September 30, 2010. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement hierarchy has been established for inputs in valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).

The fair value hierarchy levels are summarized below:

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

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

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



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

At September 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
September 30,
2010
 
                         
Assets
                       
Investment securities available for sale
                       
U.S. Government and federal agencies
  $     $ 6,098     $     $ 6,098  
Corporate debt securities
          3,581             3,581  
State and political subdivisions
          40,751             40,751  
Equity securities
    98                   98  
Total investment securities available for 
sale
  $ 98     $ 50,430     $     $ 50,528  
                                 
Residential mortgage-backed securities issued by quasi-governmental agencies
  $     $ 56,901     $     $ 56,901  
Residential real estate mortgage - backed securities privately issued
          14,599             14,599  
Total mortgage-backed securities available for sale
  $     $ 71,500     $     $ 71,500  
                                 
 
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  


Active listed equities are classified within Level 1 of the fair value hierarchy. Investment securities available for sale and mortgage-backed securities available for sale are valued primarily by a third party pricing agent. U.S. Government and federal agency and corporate debt securities are primarily priced through a multi-dimensional relational model, a Level 2 hierarchy, which incorporates dealer quotes and other market information including, defined sector breakdown, benchmark yields, base spread, yield to maturity, and corporate actions.  State and political subdivision securities are also valued within the Level 2 hierarchy using inputs with a series of matrices that reflect benchmark yields, ratings updates, and spread adjustments. Mortgage-backed securities include FHLMC, GNMA, and FNMA certificates and privately issued real estate mortgage investment conduits which are valued under a Level 2 hierarchy using a matrix correlation to benchmark yields, spread analysis, and prepayment speeds.

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

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

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

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

At September 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
September 30,
2010
 
                         
Assets
                       
Impaired loans
  $     $     $ 19,608     $ 19,608  
Real estate acquired through
 foreclosure
  $     $     $ 2,153     $ 2,153  
Mortgage servicing rights
  $     $ 637     $     $ 637  

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
                       
Impaired loans
  $     $     $ 7,744     $ 7,744  
Real estate acquired through foreclosure
  $     $     $ 1,279     $ 1,279  
Mortgage servicing rights
  $     $ 696     $     $ 696  

Impaired loans are evaluated and valued at the time the loan is identified as impaired, at the lower of the recorded investment in the loan or fair value. Impaired loans secured by real estate totaled $19.6 million and $7.7 million at September 30, 2010 and December 31, 2009, respectively. Real estate acquired through foreclosure is initially valued at the lower of the recorded investment in the loan or fair value at foreclosure and subsequently adjusted for further decreases in market value, if necessary.  Fair value is determined by using the value of the collateral securing the loans and is therefore classified as a Level 3 hierarchy.  The value of the real estate securing impaired loans and real estate acquired through foreclosure is based on appraisals prepared by qualified independent licensed appraisers contracted by the Company to perform the assessment.

 
The Company initially recognizes and measures servicing assets based on the fair value of the servicing right at the time the loan is sold. The Company uses the amortized cost method for subsequent measurement of its servicing assets and evaluates the recorded value for impairment quarterly. The Company retains a qualified valuation service to calculate the amortized cost and to determine the fair value of the mortgage servicing rights. The valuation service utilizes discounted cash flow analyses adjusted for prepayment speeds, market discount rates and conditions existing in the secondary servicing market. Hence, the fair value of mortgage servicing rights is deemed a Level 2 hierarchy. At September 30, 2010, the amortized cost basis of the Company’s mortgage servicing rights was $925,000 and the fair value of $637,000 was included in other assets in the consolidated balance sheets.

NOTE 9- FAIR VALUE OF FINANCIAL INSTRUMENTS

For the Bank, as for most financial institutions, the majority of its assets and liabilities are considered financial instruments. However, many such instruments lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction. Also, it is the Company’s general practice and intent to hold its financial instruments to maturity or available for sale and to not engage in trading or significant sales activities. For fair value disclosure purposes, the Company substantially utilized the fair value measurement criteria as explained in Note 8- Fair Value Measurements. Additionally, the Company used significant estimations and present value calculations to prepare this disclosure.

Changes in the assumptions or methodologies used to estimate fair values may materially affect the estimated amounts. In addition, there may not be reasonable comparability between institutions due to the wide range of permitted assumptions and methodologies in the absence of active markets. This lack of uniformity gives rise to a high degree of subjectivity in estimating financial instrument fair values.

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

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

   
September 30, 2010
   
December 31, 2009
 
   
Fair
value
   
Carrying
value
   
Fair
value
   
Carrying
value
 
   
(in thousands)
 
Cash and cash equivalents
  $ 6,916     $ 6,916     $ 12,801     $ 12,801  
Investment securities
    50,528       50,528       40,853       40,853  
Mortgage-backed securities
    75,105       74,768       82,231       81,931  

The fair value of the loans receivable, net has been estimated using the present value of cash flows, discounted at the approximate current market rates, and giving consideration to estimated prepayment risk but not adjusted for credit risk. Loans receivable, net also includes loans receivable held for sale.

   
September 30, 2010
   
December 31, 2009
 
   
Fair
value
   
Carrying
value
   
Fair
value
   
Carrying
value
 
   
(in thousands)
 
Loans receivable, net
  $ 550,932     $ 520,452     $ 539,670     $ 530,734  



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

   
September 30, 2010
   
December 31, 2009
 
   
Fair
value
   
Carrying
value
   
Fair
value
   
Carrying
value
 
   
(in thousands)
 
Liabilities
                       
Deposits with stated maturities
  $ 215,747     $ 212,087     $ 228,676     $ 225,093  
Borrowings with stated maturities
  $ 71,266     $ 68,671     $ 82,947     $ 80,241  

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

   
September 30, 2010
   
December 31, 2009
 
   
Fair
value
   
Carrying
value
   
Fair
value
   
Carrying
value
 
   
(in thousands)
 
Deposits with no stated maturities
  $ 340,475     $ 340,475     $ 327,623     $ 327,623  

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

NOTE 10- STOCK BASED COMPENSATION

The Company has stock benefit plans that allow the Company to grant options and restricted stock to employees and directors. The awards, which have a term of up to 10 years when issued, vest over a three to five year period. The exercise price of each award equals the market price of the Company’s stock on the date of the grant. At September 30, 2010, there was $97,000 of total unrecognized compensation cost, net of estimated forfeitures, related to non-vested awards under the Plan. That cost is expected to be recognized over a weighted average period of 17.2 months. Option activity under the Company’s stock option plan as of September 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
(6,865
)
27.83
       
Options expired
(3,383
)
28.25
       
Outstanding at September 30, 2010
248,553
 
$
26.80
1.83
 
$
16
 
Options exercisable at September 30, 2010
210,859
 
$
27.76
1.30
 
$
16
 

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the third quarter and the exercise price, multiplied by the number of in-the-money options).

The aggregate intrinsic value of options exercised during the nine months ended September 30, 2010 and 2009 was $76,000 and $17,500, respectively. Exercise of stock options during the nine months ended September 30, 2010 and 2009 resulted in cash receipts of $177,000 and $115,000, respectively.

Stock-based compensation expense included in net income related to stock options was $13,000 and $14,000 for the three months ended September 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 stock options was $39,000 and $42,000 for the nine months ended September 30, 2010 and 2009, respectively, resulting in a tax benefit of $13,000 and $14,000 for each of the periods.

Stock-based compensation expense included in net income related to stock grants was $4,000 for both three month periods ended September 30, 2010 and 2009, respectively. Stock-based compensation expense included in net income related to the Company’s employee stock ownership plan totaled $51,000 and $41,000 for the three months ended September 30, 2010 and 2009, respectively. Stock-based compensation expense included in net income related to stock grants was $12,000 for both of the nine month periods ended September 30, 2010 and 2009. Stock-based compensation expense included in net income related to the Company’s employee stock ownership plan totaled $145,000 and $124,000 for the nine months ended September 30, 2010 and 2009, respectively.

 
NOTE 11- EMPLOYEE BENEFIT PLANS

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

   
Three months ended
September 30,
 
   
2010
   
2009
 
             
Components of net periodic benefit cost
           
Service cost
  $ 138     $ 118  
Interest cost
    74       62  
Expected return on plan assets
    (141 )     (93 )
Amortization of prior service cost
    1        
Recognized net actuarial loss
    41       46  
                 
Net periodic benefit cost
  $ 113     $ 133  

   
Nine months ended
September 30,
 
   
2010
   
2009
 
             
Components of net periodic benefit cost
           
Service cost
  $ 415     $ 354  
Interest cost
    222       186  
Expected return on plan assets
    (414 )     (278 )
Amortization of prior service cost
    2        
Recognized net actuarial loss
    115       137  
                 
Net periodic benefit cost
  $ 340     $ 399  

There was no employer contribution for the nine months ended September 30, 2010 and 2009.

NOTE 12 — ACCOUNTING STANDARDS UPDATE

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

In April 2010, the FASB issued guidance on the treatment for a modified loan that was acquired as part of a pool of assets.  The guidance establishes that entities should not evaluate whether a modification of loans that are part of a pool meets the criteria for a troubled debt restructuring. In addition, modified loans should not be removed from the pool unless certain criteria are met.  The amendment will be effective for loans that are part of an asset pool and are modified during financial reporting periods that end July 15, 2010 or later. The Company does not anticipate that the adoption of this guidance will have a significant impact on the Company’s financial statements.

 
In July, 2010 FASB issued an amendment which will require disclosures about the credit quality of financing receivables and the allowance for credit losses. The amendment will improve the transparency in financial reporting by public and non public companies that hold financing receivables which include loans, lease receivables and other long-term receivables. The additional disclosures will include aging of past due receivables, credit quality indicators and modifications of financing receivables.  The disclosures should also included information on the development of the credit loss allowance and the management of credit exposures. The amendment will be effective for financial reporting periods ending after December 15, 2010. The Company does not anticipate that the adoption of this guidance will have a significant impact on the Company’s financial statements.



TF FINANCIAL CORPORATION AND SUBSIDIARIES

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

GENERAL

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

These forward-looking statements involve risks and uncertainties, such as statements of the Company’s plans, objectives, expectations, estimates and intentions that are subject to change based on various important factors (some of which are beyond the Company’s control). The following factors, among others, could cause the Company’s financial performance to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements: the strength of the United States economy in general and the strength of the local economies in which the Company conducts operations; the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System, inflation, interest rate, market and monetary fluctuations; the timely development of and acceptance of new products and services of the Company and the perceived overall value of these products and services by users, including the features, pricing and quality compared to competitors’ products and services; the willingness of users to substitute competitors’ products and services for the Company’s products and services; the success of the Company in gaining regulatory approval of its products and services, when required; the impact of changes in financial services’ laws and regulations (including laws concerning taxes, banking, securities and insurance); technological changes, acquisitions; changes in consumer spending and saving habits; and the success of the Company at managing the risks involved in the foregoing.

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

Financial Position

The Company’s total assets at September 30, 2010 and December 31, 2009 were $702.6 million and $714.1 million, respectively, representing a decrease of $11.5 million, or 1.6% during the nine-month period. Loans receivable, net decreased by $10.3 million during the first nine months of 2010. Principal repayments of loans receivable totaled $65.1 million which were offset by originations of consumer and single-family residential mortgage loans totaling $51.8 million and of commercial loans totaling $14.5 million. During this period, the Company increased the allowance for loan losses by $2.7 million and transferred $1.8 million from loans to real estate acquired through foreclosure. Loans receivable held for sale remained steady as proceeds of $27.3 million from the sale of loans in the secondary market were offset by loans originated for sale of $27.1 million. Mortgage-backed securities available for sale decreased by $6.7 million due to principal repayments received of $20.6 million offset by purchases of $14.0 million. Mortgage-backed securities held to maturity decreased by $0.5 million mainly as a result of principal repayments. Investment securities available for sale increased $9.7 million due to purchases of municipal and federal agency bonds of $8.7 million as well as a $1.7 million increase in the fair value of the securities, offset by maturities and sales of $0.6 million. As a result of the Company’s cash-related activities, cash and cash equivalents decreased by $5.9 million during 2010.

Total liabilities decreased by $14.3 million during the first nine months of 2010. Advances from the Federal Home Loan Bank decreased by $11.6 million, the net result of scheduled amortization and maturities of $24.5 million offset by a $12.9 million increase in long-term borrowings. Total deposit balances remained level during the period; money market, non-interest checking and savings accounts increased $12.9 million whereas retail certificates of deposit decreased of $13.0 million.

Total consolidated stockholders’ equity of the Company was $74.7 million or 10.6% of total assets at September 30, 2010. During the first nine months of 2010, the Company issued 12,845 shares of common stock as a result of stock option exercises. At September 30, 2010, there were approximately 102,000 shares available for repurchase under the previously announced share repurchase plan.

 
Asset Quality

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

   
September 30,
2010
   
December 31,
2009
   
September 30,
2009
   
   
(in thousands)
   
                     
Non-performing loans with a related allowance
                   
Secured by non-residential properties and/or non—owner occupied residential properties
  $ 940     $     $    
Construction loans
    3,887       2,389          
Commercial-business, real estate secured
    2,605                
Commercial-business, non-real estate secured
    44                
Non-performing loans without a related allowance
                         
Secured by one-to-four family residences(1)
    1,470       1,120       651    
Secured by non-residential properties and/or non—owner occupied residential properties (2)
    3,299       2,506       823    
Construction loans
    354       2,167       1,497    
Commercial-business, real estate secured
    7,862                
Home equity and second mortgage
    1,084       99       127    
Other consumer
          4          
Total non-performing loans
  $ 21,545     $ 8,285     $ 3,098    
Total loans past due 90 days as to interest or principal and accruing interest
  $     $     $    
Ratio of non-performing loans to gross loans
    4.08 %     1.55 %     0.58  
%
Ratio of non-performing loans to total assets
    3.07 %     1.16 %     0.44  
%
Real estate owned
  $ 2,153     $ 1,279     $ 999    
Ratio of total non-performing assets to total assets
    3.37 %     1.34 %     0.58  
%
Ratio of allowance for loan losses to total loans
    1.44 %     0.97 %     0..80  
%
Ratio of allowance for loan losses to non-performing loans
    35.30 %     62.95 %     138.54  
%