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TF Financial 10-Q 2006

Documents found in this filing:

  1. 10-Q
  2. Ex-31
  3. Ex-32
  4. Ex-32

 

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, 2006

- 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

Securities registered pursuant to Section 12(b) of the Act:  None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $.10 per share
(Title of Class)

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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o                    Accelerated filer o              Non-accelerated filer x

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: August 7, 2006

Class

 

Outstanding

$.10 par value common stock

 

2,870,485 shares

 

 




CONTENTS

PART I-CONSOLIDATED FINANCIAL INFORMATION

 

 

 

Item 1.

Consolidated Financial Statements

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Position and Results of Operations

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

 

 

 

 

Item 4.

Controls and Procedures

 

 

 

PART II-OTHER INFORMATION

 

 

 

Item 1.

Legal Proceedings

 

 

 

 

Item 1A.

Risk Factors

 

 

 

 

Item 2.

Unregistered Sale of Equity Securities and Use of Proceeds

 

 

 

 

Item 3.

Defaults Upon Senior Securities

 

 

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

 

 

 

 

Item 5.

Other Information

 

 

 

 

Item 6.

Exhibits

 

 

 

Signatures

 

 

 

Exhibits

 

 

 

31. Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

32. Certification pursuant of Section 906 of the Sarbanes-Oxley Act of 2002

 

 

2




TF Financial Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

 

 

Unaudited
June
30,
2006

 

Audited
December
31,
2005

 

 

 

(in thousands)

 

ASSETS

 

 

 

 

 

Cash and cash equivalents

 

$

6,013

 

$

3,821

 

Certificates of deposit in other financial institutions

 

40

 

40

 

Investment securities available for sale—at fair value

 

31,885

 

30,401

 

Investment securities held to maturity (fair value of $2,018 and $4,707 respectively)

 

2,017

 

4,690

 

Mortgage-backed securities available for sale—at fair value

 

69,019

 

83,511

 

Mortgage-backed securities held to maturity (fair value of $8,581 and $10,385, respectively)

 

8,591

 

10,177

 

Loans receivable, net (including loans held for sale of $16,763 and $68, respectively)

 

517,866

 

490,959

 

Federal Home Loan Bank stock—at cost

 

8,170

 

7,432

 

Accrued interest receivable

 

2,837

 

3,048

 

Premises and equipment, net

 

6,558

 

6,289

 

Core deposit intangible asset, net of accumulated amortization of $2,797 and $2,741, respectively

 

27

 

83

 

Goodwill

 

4,324

 

4,324

 

Other assets

 

16,787

 

16,064

 

TOTAL ASSETS

 

$

674,134

 

$

660,839

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Liabilities

 

 

 

 

 

Deposits

 

$

479,729

 

$

470,521

 

Advances from the Federal Home Loan Bank

 

123,013

 

121,260

 

Advances from borrowers for taxes and insurance

 

2,271

 

1,915

 

Accrued interest payable

 

3,021

 

2,052

 

Other liabilities

 

3,227

 

2,443

 

Total liabilities

 

611,261

 

598,191

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

Preferred stock, no par value; 2,000,000 shares authorized at June 30, 2006 and December 31, 2005, none issued

 

 

 

Common stock, $0.10 par value; 10,000,000 shares authorized, 5,290,000 shares issued, 2,695,199 and 2,714,173 shares outstanding at June 30, 2006 and December 31, 2005, respectively, net of shares in treasury 2,419,515 and 2,390,943 respectively

 

529

 

529

 

Retained earnings

 

63,232

 

61,610

 

Additional paid-in capital

 

52,422

 

53,048

 

Unearned restricted stock

 

 

(1,080

)

Unearned ESOP shares

 

(1,753

)

(1,849

)

Treasury stock—at cost

 

(48,941

)

(47,920

)

Accumulated other comprehensive loss

 

(2,616

)

(1,690

)

Total stockholders’ equity

 

62,873

 

62,648

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

674,134

 

$

660,839

 

 

The accompanying notes are an integral part of these statements

3




TF Financial Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

 

 

For the three months
ended
June 30,

 

For the six months
ended
June 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

 

 

(in thousands, except per share data)

 

Interest income

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

8,167

 

$

6,703

 

$

15,838

 

$

13,174

 

Mortgage-backed securities

 

957

 

1,292

 

1,969

 

2,595

 

Investment securities

 

489

 

364

 

901

 

677

 

Interest-bearing deposits and other

 

14

 

12

 

22

 

22

 

 

 

 

 

 

 

 

 

 

 

TOTAL INTEREST INCOME

 

9,627

 

8,371

 

18,730

 

16,468

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

 

 

 

 

 

 

 

Deposits

 

2,560

 

1,831

 

4,808

 

3,367

 

Borrowings

 

1,388

 

966

 

2,736

 

1,897

 

 

 

 

 

 

 

 

 

 

 

TOTAL INTEREST EXPENSE

 

3,948

 

2,797

 

7,544

 

5,264

 

 

 

 

 

 

 

 

 

 

 

NET INTEREST INCOME

 

5,679

 

5,574

 

11,186

 

11,204

 

Provision for loan losses

 

60

 

150

 

150

 

300

 

 

 

 

 

 

 

 

 

 

 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

 

5,619

 

5,424

 

11,036

 

10,904

 

 

 

 

 

 

 

 

 

 

 

Non-interest income

 

 

 

 

 

 

 

 

 

Service fees, charges and other operating income

 

647

 

669

 

1,319

 

1,309

 

Gain on sale of loans

 

29

 

8

 

38

 

30

 

Loss on sale of mortgage-backed securities available for sale

 

(51

)

 

(51

)

 

 

 

 

 

 

 

 

 

 

 

TOTAL NON-INTEREST INCOME

 

625

 

677

 

1,306

 

1,339

 

 

 

 

 

 

 

 

 

 

 

Non-interest expense

 

 

 

 

 

 

 

 

 

Employee compensation and benefits

 

2,683

 

2,303

 

5,322

 

4,694

 

Occupancy and equipment

 

694

 

640

 

1,398

 

1,301

 

Federal deposit insurance premium

 

15

 

16

 

30

 

33

 

Professional fees

 

135

 

211

 

347

 

437

 

Marketing and advertising

 

175

 

186

 

352

 

362

 

Other operating

 

571

 

553

 

1,166

 

1,179

 

Amortization of core deposit intangible asset

 

28

 

34

 

56

 

68

 

 

 

 

 

 

 

 

 

 

 

TOTAL NON-INTEREST EXPENSE

 

4,301

 

3,943

 

8,671

 

8,074

 

 

 

 

 

 

 

 

 

 

 

INCOME BEFORE INCOME TAXES

 

1,943

 

2,158

 

3,671

 

4,169

 

 

 

 

 

 

 

 

 

 

 

Income taxes

 

551

 

553

 

1,024

 

1,088

 

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

$

1,392

 

$

1,605

 

$

2,647

 

$

3,081

 

 

 

 

 

 

 

 

 

 

 

Earnings per share—basic

 

$

0.52

 

$

0.59

 

$

0.98

 

$

1.12

 

Earnings per share—diluted

 

$

0.51

 

$

0.57

 

$

0.98

 

$

1.09

 

Dividends paid

 

$

0.19

 

$

0.18

 

$

0.38

 

$

0.36

 

 

The accompanying notes are an integral part of these statements

4




TF Financial Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

 

 

For the six months ended

 

 

 

June 30,

 

 

 

2006

 

2005

 

 

 

(in thousands)

 

OPERATING ACTIVITIES

 

 

 

 

 

Net income

 

$

2,647

 

$

3,081

 

Adjustments to reconcile net income to net cash provided by operating activities

 

 

 

 

 

Amortization of

 

 

 

 

 

Mortgage loan servicing rights

 

11

 

2

 

Deferred loan origination fees

 

(43

)

(31

)

Premiums and discounts on investment securities, net

 

33

 

42

 

Premiums and discounts on mortgage-backed securities, net

 

149

 

236

 

Premiums and discounts on loans, net

 

85

 

60

 

Discount on brokered deposits

 

5

 

 

Core deposit intangibles

 

56

 

68

 

Provision for loan losses

 

150

 

300

 

Depreciation of premises and equipment

 

472

 

468

 

Increase in value of bank-owned life insurance

 

(248

)

(252

)

Stock grant expense

 

181

 

 

Stock option expense

 

189

 

 

Stock-based benefit programs: ESOP

 

282

 

258

 

Tax benefit arising from stock compensation

 

102

 

110

 

Proceeds from sale of loans originated for sale

 

4,855

 

3,311

 

Origination of loans held for sale

 

(5,473

)

(3,385

)

(Gain)/loss on sale of

 

 

 

 

 

Mortgage loans available for sale

 

(38

)

(30

)

Mortgage-backed securities available for sale

 

51

 

 

Real estate acquired through foreclosure

 

(26

)

 

Loss from mortgage loan derivatives

 

13

 

 

Income associated with forward loan sales

 

(13

)

 

(Increase) decrease in

 

 

 

 

 

Accrued interest receivable

 

211

 

(90

)

Other assets

 

(641

)

(249

)

Increase (decrease) in

 

 

 

 

 

Accrued interest payable

 

969

 

346

 

Other liabilities

 

682

 

789

 

 

 

 

 

 

 

NET CASH PROVIDED BY OPERATING ACTIVITIES

 

4,661

 

5,034

 

 

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

Loan originations

 

(84,115

)

(57,895

)

Loan principal payments

 

55,153

 

35,484

 

Principal repayments on mortgage-backed securities held to maturity

 

1,583

 

2,377

 

Principal repayments on mortgage-backed securities available for sale

 

8,320

 

16,484

 

Proceeds from sale of loan participations

 

2,452

 

 

Purchases and (maturities) of certificates of deposit in other financial institutions, net

 

 

(2

)

Purchase of investment securities available for sale

 

(1,917

)

(5,985

)

Purchase of mortgage-backed securities available for sale

 

 

(8,956

)

Proceeds from maturities of investment securities held to maturity

 

2,673

 

 

Proceeds from the sale of mortgage-backed securities available for sale

 

4,971

 

 

(Purchase)/redemption of Federal Home Loan Bank stock

 

(738

)

641

 

Purchase of premises and equipment

 

(741

)

(437

)

Proceeds from the sale of real estate acquired through foreclosure

 

726

 

 

NET CASH USED IN INVESTING ACTIVITIES

 

(11,633

)

(18,289

)

 

5




 

 

 

For the six months ended

 

 

 

June 30,

 

 

 

2006

 

2005

 

 

 

(in thousands)

 

FINANCING ACTIVITIES

 

 

 

 

 

Net increase in demand deposit/NOW accounts, passbook savings accounts and certificates of deposit

 

9,203

 

19,676

 

Net decrease in short-term Federal Home Loan Bank advances from Federal Home Loan Bank

 

(4,655

)

(5,529

)

Proceeds of long-term Federal Home Loan Bank advances

 

15,535

 

11,367

 

Repayment of long-term Federal Home Loan Bank advances

 

(9,127

)

(7,455

)

Net increase in advances from borrowers for taxes and insurance

 

356

 

358

 

Treasury stock acquired

 

(1,421

)

(1,668

)

Exercise of stock options

 

298

 

565

 

Common stock dividends paid

 

(1,025

)

(989

)

NET CASH PROVIDED BY FINANCING ACTIVITIES

 

9,164

 

16,325

 

 

 

 

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

2,192

 

3,070

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

3,821

 

7,900

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

6,013

 

$

10,970

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information

 

 

 

 

 

Cash paid for

 

 

 

 

 

Interest on deposits and advances from Federal Home Loan Bank

 

$

6,575

 

$

4,918

 

Income taxes

 

$

1,015

 

$

60

 

 

The accompanying notes are an integral part of these statements

6




TF FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - PRINCIPLES OF CONSOLIDATION

The consolidated financial statements as of June 30, 2006 (unaudited) and December 31, 2005 and for the six-month periods ended June 30, 2006 and 2005 (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 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 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. 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 June 30, 2006 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 consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005.

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

The Company’s other comprehensive income consists of net unrealized losses on investment securities and mortgage-backed securities available for sale. Total comprehensive income for the three-month periods ended June 30, 2006 and 2005 was $1,161,000 and $2,546,000, net of applicable income tax expense of $432,000 and $1,037,000, respectively. Total comprehensive income for the six-month periods ended June 30, 2006 and 2005 was $1,721,000 and $2,915,000, net of applicable income tax expense of $545,000 and $1,003,000, respectively.

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 per share data):

 

 

Three months ended June 30, 2006

 

 

 

Income
(numerator)

 

Weighted average
shares
(denominator)

 

Per share
Amount

 

Basic earnings per share

 

 

 

 

 

 

 

Income available to common stockholders

 

$

1,392

 

2,695,094

 

$

0.52

 

Effect of dilutive securities

 

 

 

 

 

 

 

Stock options

 

 

19,108

 

(0.01

)

 

 

 

 

 

 

 

 

Diluted earnings per share

 

 

 

 

 

 

 

Income available to common stockholders plus effect of dilutive securities

 

$

1,392

 

2,714,202

 

$

0.51

 

 

 

 

Six months ended June 30, 2006

 

 

 

Income
(numerator)

 

Weighted average
shares
(denominator)

 

Per share
Amount

 

Basic earnings per share

 

 

 

 

 

 

 

Income available to common stockholders

 

$

2,647

 

2,696,236

 

$

0.98

 

Effect of dilutive securities

 

 

 

 

 

 

 

Stock options

 

 

17,077

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

 

 

 

 

 

 

 

Income available to common stockholders plus effect of dilutive securities

 

$

2,647

 

2,713,313

 

$

0.98

 

 

7




There were options to purchase 21,018 shares of common stock at a price of $34.14 per share which were outstanding during the six months ended June 30, 2006 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 June 30, 2005

 

 

 

Income
(numerator)

 

Weighted
average
shares
(denominator)

 

Per share
Amount

 

Basic earnings per share

 

 

 

 

 

 

 

Income available to common stockholders

 

$

1,605

 

2,744,223

 

$

0.59

 

Effect of dilutive securities

 

 

 

 

 

 

 

Stock options

 

 

74,383

 

(0.02

)

 

 

 

 

 

 

 

 

Diluted earnings per share

 

 

 

 

 

 

 

Income available to common stockholders plus effect of dilutive securities

 

$

1,605

 

2,818,606

 

$

0.57

 

 

 

 

Six months ended June 30, 2005

 

 

 

Income
(numerator)

 

Weighted
average
shares
(denominator)

 

Per share
Amount

 

Basic earnings per share

 

 

 

 

 

 

 

Income available to common stockholders

 

$

3,081

 

2,746,625

 

$

1.12

 

Effect of dilutive securities

 

 

 

 

 

 

 

Stock options

 

 

74,444

 

(0.03

)

 

 

 

 

 

 

 

 

Diluted earnings per share

 

 

 

 

 

 

 

Income available to common stockholders plus effect of dilutive securities

 

$

3,081

 

2,821,069

 

$

1.09

 

 

There were options to purchase 27,594 shares of common stock at a price of $34.14 per share which were outstanding during the the six months ended June 30, 2005 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- STOCK BASED COMPENSATION

The Company has stock benefit plans that allow the Company to grant options and stock to employees and directors. The options, which have a term of up to 10 years when issued, vest over a three to five year period. The exercise price of each option equals the market price of the Company’s stock on the date of the grant.

On January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) 123R, “Share-Based Payment,” using the modified prospective transition method. Under this transition method, compensation cost to be recognized beginning in the first quarter of 2006 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. Stock-based compensation expense included in net income related to stock options was $94,000, resulting in a tax benefit of $28,000, for the three months ended June 30, 2006. Stock-based compensation expense included in net income related to stock options was $189,000, resulting in a tax benefit of $57,000, for the six months ended June 30, 2006. Results for prior periods have not been restated. As of June 30, 2006, there was $927,000 of total unrecognized compensation cost, net of estimated forfeitures, related to non-vested options under the Plan. That cost is expected to be recognized over a weighted average period of 29.8 months

Prior to 2006, the Company disclosed pro forma compensation expense quarterly and annually by calculating the stock option grant’s fair value using the intrinsic value method under APB Opinion No. 25, “Accounting for Stock Issued to Employees”, as permitted by SFAS No. 123 “Accounting for Stock-Based Compensation,” which contains a fair value-based method for valuing stock-based compensation that entities may use, which measures compensation cost at the grant date based on the fair value of the award. Compensation is then recognized over the service period, which is usually the vesting period. No stock-based compensation expense was reflected in net income in 2005, as all options granted under the plans had an exercise price equal to the market value of the underlying common stock on the date of the grant.

8




The tables below reflect the estimated impact the fair value method would have had on the Company’s net income and net income per share if SFAS 123R had been in effect for the three and six months ended June 30, 2005 (dollars in thousands except per share data):

Three months ended June 30, 2005

 

 

 

Net income

 

 

 

As reported

 

$

1,605

 

Deduct: stock-based compensation expense determined using the fair value method, net of related tax effects

 

15

 

Pro forma

 

$

1,590

 

 

 

 

 

Basic earnings per share

 

 

 

As reported

 

$

0.59

 

Deduct: stock-based compensation expense determined using the fair value method, net of related tax effects

 

0.01

 

Pro forma

 

$

0.58

 

 

 

 

 

Diluted earnings per share

 

 

 

As reported

 

$

0.57

 

Deduct: stock-based compensation expense determined using the fair value method, net of related tax effects

 

 

Pro forma

 

$

0.57

 

 

Six months ended June 30, 2005

 

 

 

Net income

 

 

 

As reported

 

$

3,081

 

Deduct: stock-based compensation expense determined using the fair value method, net of related tax effects

 

34

 

Pro forma

 

$

3,047

 

 

 

 

 

Basic earnings per share

 

 

 

As reported

 

$

1.12

 

Deduct: stock-based compensation expense determined using the fair value method, net of related tax effects

 

0.01

 

Pro forma

 

$

1.11

 

 

 

 

 

Diluted earnings per share

 

 

 

As reported

 

$

1.09

 

Deduct: stock-based compensation expense determined using the fair value method, net of related tax effects

 

 

Pro forma

 

$

1.09

 

 

Option activity under the Company’s stock option plan as of June 30, 2006 is as follows:

 

2006

 

 

 

Number
of
shares

 

Weighted
average
exercise
price per
share

 

Weighted
average
remaining
contractual
term (in
years)

 

Aggregate
intrinsic
value ($000)

 

Outstanding at beginning of year

 

384,848

 

$

23.18

 

 

 

 

 

Options granted

 

 

 

 

 

 

 

Options exercised

 

(19,832

)

15.01

 

 

 

 

 

Options forfeited

 

(8,094

)

29.66

 

 

 

 

 

Outstanding at end of quarter

 

356,922

 

$

23.49

 

3.72

 

$

1,913

 

Options exercisable at June 30, 2006

 

175,494

 

$

18.21

 

3.20

 

$

1,867

 

 

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 second quarter of 2006 and the exercise price, multiplied by the number of in-the money options).

9




Stock options outstanding were 356,922 and 244,412 at June 30, 2006 and 2005, respectively. The aggregate intrinsic value of options exercised during the six months ended ended June 30, 2006 and 2005 was $299,000 and $524,000, respectively. Exercise of stock option during the six months ended June 30, 2006 and 2005 resulted in cash receipts of $298,000 and $565,000, respectively.

Stock-based compensation expense included in net income related to stock grants was $90,000 for the three months ended June 30, 2006. Stock-based compensation expense included in net income related to the Company’s employee stock ownership plan totaled $108,000 and $96,000 for the three-month periods ended June 30, 2006 and 2005, respectively.

Stock-based compensation expense included in net income related to stock grants was $180,000 for the six months ended June 30, 2006. Stock-based compensation expense included in net income related to the Company’s employee stock ownership plan totaled $215,000 and $204,000 for the six-month periods ended June 30, 2006 and 2005, respectively.

NOTE 7- EMPLOYEE BENEFIT PLANS

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

 

Three months ended
June 30

 

 

 

2006

 

2005

 

 

 

 

 

 

 

Components of net periodic benefit cost

 

 

 

 

 

Service cost

 

$

77

 

$

78

 

Interest cost

 

52

 

53

 

Expected return on plan assets

 

(80

)

(56

)

Amortization of prior service cost

 

15

 

16

 

Recognized net actuarial (gain) loss

 

13

 

11

 

 

 

 

 

 

 

Net periodic benefit cost

 

$

77

 

$

102

 

 

 

Six months ended
June 30

 

 

 

2006

 

2005

 

 

 

 

 

 

 

Components of net periodic benefit cost

 

 

 

 

 

Service cost

 

$

154

 

$

156

 

Interest cost

 

105

 

106

 

Expected return on plan assets

 

(161

)

(103

)

Amortization of prior service cost

 

31

 

32

 

Recognized net actuarial (gain) loss

 

26

 

22

 

 

 

 

 

 

 

Net periodic benefit cost

 

$

155

 

$

213

 

 

The employer contributions made for the six months ended June 30, 2006 and 2005 were $620,000 and $1,015,000, respectively.

NOTE 8- RECLASSIFICATIONS

Certain prior period amounts have been reclassified to conform to the current period presentation.

10




TF FINANCIAL CORPORATION AND SUBSIDIARIES

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 June 30, 2006 and December 31, 2005 were $674.1 million and $660.8 million, respectively, an increase of $13.3 million, or 2.0%, during the six-month period. Cash and cash equivalents increased by $2.2 million. Investment securities available for sale increased by $1.5 million due to purchases of $1.9 million of tax free municipal bonds offset by a $0.4 million reduction in the market value of investment securities available for sale. Investment securities held to maturity decreased by $2.7 million as a result of security maturities. Mortgage-backed securities available for sale decreased by $14.5 million due to sales of $5.0 million, principal repayments of $8.3 million, as well as a decrease in the market value of these securities and amortization of net premiums totaling $1.2 million. Mortgage-backed securities held to maturity decreased by $1.6 million as a result of principal repayments.

Loans receivable increased by $26.9 million during the first six months of 2006. Consumer and single-family residential mortgage loans of $41.6 million and commercial loans of $42.5 million were originated during the first six months of 2006. Principal repayments of loans receivable were $55.2 million and proceeds from sales of loan participations totaled $2.5 million in the first half of 2006. Additionally, the Company during June 2006 entered into an agreement to sell $16.0 million of previously purchased loans and, accordingly has reclassified these loans receivable as loans held for sale. Loans originated for sale during this period totaled $5.5 million, and there were $4.9 million in proceeds from the sale of these loans in the secondary market during this period. In June 2006, the Company sold for $0.7 million the sole parcel of foreclosed real estate owned at December 31, 2005.

11




Total liabilities increased by $13.1 million. Deposit balances increased by $9.2 million during the first six months of 2006. Savings, money market, interest-bearing, and non-interest bearing checking accounts decreased by a combined $31.8 million. Retail certificates of deposit increased by $29.3 million and broker originated deposits received during the second quarter of 2006 totaled $11.7 million. Advances from the Federal Home Loan Bank increased by $1.8 million due to a $15.5 million increase in long-term fixed rate advances, less scheduled amortization payments of $9.1 million and repayments of $4.6 million of short term advances.

Total consolidated stockholders’ equity of the Company was $62.9 million or 9.3% of total assets at June 30, 2006. During the first six months of 2006 the Company repurchased 48,404 shares of its common stock and issued 19,832 shares pursuant to the exercise of stock options. As of June 30, 2006, there were approximately 76,000 shares available for repurchase under the previously announced share repurchase plan.

Asset Quality

During the first six months of 2006 and 2005, the Company’s provision for loan losses was $150,000 and $300,000, respectively. Management of the Company believes that there has not been any significant deterioration in its asset quality during the first six months of 2006.

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

 

June 30,

 

December 31,

 

June 30,

 

 

 

2006

 

2005

 

2005

 

 

 

 

 

 

 

 

 

Non-performing loans

 

$

1,314

 

$

1,588

 

$

724

 

Ratio of non-performing loans to gross loans

 

0.25

%

0.32

%

0.16

%

Ratio of non-performing loans to total assets

 

0.19

%

0.24

%

0.11

%

Foreclosed property

 

$

 

$

700

 

$

700

 

Foreclosed property to total assets

 

%

0.11

%

0.11

%

Ratio of total non-performing assets to total assets

 

0.19

%

0.35

%

0.22

%

Ratio of allowance for loan losses to total loans

 

0.54

%

0.54

%

0.53

%

Ratio of allowance for loan losses to non-performing loans

 

212.18

%

166.31

%

172.75

%

 

Management maintains an allowance for loan losses at levels that are believed to be adequate; however, there can be no assurances that further additions will not be necessary or that losses inherent in the existing loan portfolio will not exceed the allowance. The following table sets forth the activity in the allowance for loan losses during the periods indicated (in thousands):

 

2006

 

2005

 

Beginning balance, January 1,

 

$

2,641

 

$

2,307

 

Provision

 

150

 

300

 

Less: charge-off’s (recoveries), net

 

3

 

147

 

Ending balance, June 30,

 

2,788

 

2,460

 

 

12




RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2006 AND 2005

Net Income. The Company recorded net income of $1,392,000, or $0.51 per diluted share, for the three months ended June 30, 2006 as compared to net income of $1,605,000, or $0.57 per diluted share, for the three months ended June 30, 2005.

Average Balance Sheet

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

 

 

June 30,

 

 

 

2006

 

2005

 

 

 

Average
balance

 

Interest

 

Average
yld/cost

 

Average
balance

 

Interest

 

Average
yld/cost

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans receivable(1)

 

$

512,542

 

$

8,167

 

6.39

%

$

457,289

 

$

6,703

 

5.88

%

Mortgage-backed securities

 

82,311

 

957

 

4.66

%

112,939

 

1,292

 

4.59

%

Investment securities(2)

 

41,703

 

583

 

5.61

%

35,635

 

441

 

4.96

%

Other interest-earning assets(3)

 

999

 

14

 

5.62

%

2,368

 

12

 

2.03

%

Total interest-earning assets

 

637,555

 

9,721

 

6.12

%

608,231

 

8,448

 

5.57

%

Non interest-earning assets

 

35,757

 

 

 

 

 

36,599

 

 

 

 

 

Total assets

 

$

673,312

 

 

 

 

 

$

644,830

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

467,570

 

2,560

 

2.20

%

$

466,679

 

1,831

 

1.57

%

Advances from the FHLB

 

135,399

 

1,388

 

4.11

%

111,734

 

966

 

3.47

%

Total interest-bearing liabilities

 

602,969

 

3,948

 

2.63

%

578,413

 

2,797

 

1.94

%

Non interest-bearing liabilities

 

7,963

 

 

 

 

 

6,331

 

 

 

 

 

Total liabilities

 

610,932

 

 

 

 

 

584,744

 

 

 

 

 

Stockholders’ equity

 

62,380

 

 

 

 

 

60,086

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

673,312

 

 

 

 

 

$

644,830

 

 

 

 

 

Net interest income

 

 

 

$

5,773

 

 

 

 

 

$

5,651

 

 

 

Interest rate spread(4)

 

 

 

 

 

3.49

%

 

 

 

 

3.63

%

Net yield on interest-earning assets(5)

 

 

 

 

 

3.63

%

 

 

 

 

3.73

%

Ratio of average interest-earning assets to average interest- bearing liabilities

 

 

 

 

 

1.06

%

 

 

 

 

1.05

%

 


(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 $94,000 and $77,000 for the quarters ended June 30, 2006 and 2005, 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.

 

13




Rate/Volume Analysis

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

 

 

Three months ended June 30,

 

 

 

2006 vs. 2005
Increase (decrease) due to

 

 

 

Volume

 

Rate

 

Net

 

Interest income:

 

 

 

 

 

 

 

Loans receivable, net

 

$

851

 

$

613

 

$

1,464

 

Mortgage-backed securities

 

(476

)

141

 

(335

)

Investment securities (1)

 

81

 

61

 

142

 

Other interest-earning assets

 

(41

)

43

 

2

 

Total interest-earning assets

 

415

 

858

 

1,273

 

Interest expense:

 

 

 

 

 

 

 

Deposits

 

4

 

725

 

729

 

Advances from the FHLB

 

225

 

197

 

422

 

Total interest-bearing liabilities

 

229

 

922

 

1,151

 

Net change in net interest income

 

$

186

 

$

(64

)

$

122

 

 


(1)

Tax equivalent adjustments to interest on investment securities were $94,000 and $77,000 for the quarters ended June 30, 2006 and 2005, respectively. Tax equivalent interest income is based upon a marginal effective tax rate of 34%.

 

Total Interest Income. Total interest income, on a taxable equivalent basis, increased by $1.3 million or 15.1% to $9.7 million for the quarter ended June 30, 2006 compared with the second quarter of 2005 primarily because of a $55.3 million increase in average loans outstanding combined with an increase of 51 basis points on the average yield on these loans. The yield on both existing loans and new loans added to the portfolio increased during the intervening period in part due to eight, 25 basis point increases in the Bank’s prime rate during the period June 30, 2005 through June 30, 2006 corresponding to identical increases in the federal funds interest rate of the Federal Reserve Bank. At June 30, 2006, the Bank had approximately $78.7 million in loans that are indexed to the prime rate primarily consisting of construction loans and commercial and consumer lines of credit. Interest income from mortgage-backed securities was lower in the second quarter of 2006 in comparison to the same period of 2005 due to the reduction of balances maintained in mortgage-backed securities.

Total Interest Expense. Total interest expense increased by $1.2 million to $3.9 million during the three-month period ended June 30, 2006 as compared with the second quarter of 2005. During 2005 and the first half of 2006, the Bank raised the interest rates paid on many of its deposit products due to the competitive pricing environment in the Bank’s deposit market. In addition, the Company had during the second quarter of 2006 but not during the second quarter of 2005, $31.7 million of deposits that have interest rates tied to the change in the federal funds rate. As a result, the average rate paid on deposits increased by 63 basis points. Interest on advances from the Federal Home Loan Bank increased by $0.4 million during the second quarter of 2006 versus the second quarter of 2005 as a result of a $23.7 million increase in the average balance of borrowings as well as an increase of 64 basis points in the cost of these funds due, generally, to the amortization of lower cost advances and the higher cost of new advances.

Non-interest income. Total non-interest income was $625,000 for the three-month period ended June 30, 2006 compared with $677,000 for the same period in 2005. Loan prepayment penalties and other loan fees collected during the second quarter of 2006 were lower by $99,000 as compared with the same quarter in 2005. In contrast, overdraft fees collected on deposit accounts increased $19,000 between the two periods. Loss on the sale of mortgage-backed securities in the second quarter of 2006 was $51,000 while there was no such sale in the second quarter of 2005. Gain on the sale of property acquired through foreclosure was $26,000 during the second quarter of 2006. Additionally, the Company recognized $25,000 of non-interest income related to real estate held for development during the second quarter of 2006. Net gain on the sale of loans totaled $29,000 during the second quarter of 2006 while the gain during the second quarter of 2005 totaled $8,000.

Non-interest expense. Total non-interest expense increased by $358,000 to $4.3 million for the three months ended June 30, 2006 compared to the same period in 2005. Stock-based compensation expense related to stock grants and the recognition of option expense associated with the new accounting standard SFAS 123R, “Share-Based Payment” amounted to $185,000 for the second quarter of 2006 while there was no such expense for the second quarter of 2005. In addition, compensation and other benefit expenses were higher by $195,000 due to staffing related to the Girard Avenue branch which opened in June 2005 as well as staffing and annual salary increases. Office and occupancy costs increased $54,000 between the two quarters mainly as a result of office and occupancy costs associated with the Girard Avenue branch. Professional fees incurred during the second quarter of 2006 decreased over fees incurred during the second quarter of 2005 as technology-related initiatives were completed during 2005.

14




RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2006 AND 2005

Net Income. The Company recorded net income of $2,647,000, or $0.98 per diluted share, for the six months ended June 30, 2006 as compared to net income of $3,081,000, or $1.09 per diluted share, for the six months ended June 30, 2005.

Average Balance Sheet

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

 

 

June 30,

 

 

 

2006

 

2005

 

 

 

Average
balance

 

Interest

 

Average
yld/cost

 

Average
balance

 

Interest

 

Average
yld/cost

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans receivable(1)

 

$

505,475

 

$

15,838

 

6.32

%

$

451,983

 

$

13,174

 

5.88

%

Mortgage-backed securities

 

86,868

 

1,969

 

4.57

%

115,861

 

2,595

 

4.52

%

Investment securities(2)

 

41,670

 

1,089

 

5.27

%

34,256

 

820

 

4.83

%

Other interest-earning assets(3)

 

697

 

22

 

6.37

%

1,755

 

22

 

2.53

%

Total interest-earning assets

 

634,710

 

18,918

 

6.01

%

603,855

 

16,611

 

5.55

%

Non interest-earning assets

 

34,790

 

 

 

 

 

34,870

 

 

 

 

 

Total assets

 

$

669,500

 

 

 

 

 

$

638,725

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

464,156

 

4,808

 

2.09

%

$

461,028

 

3,367

 

1.47

%

Advances from the FHLB

 

135,656

 

2,736

 

4.07

%

111,810

 

1,897

 

3.42

%

Total interest-bearing liabilities

 

599,812

 

7,544

 

2.54

%

572,838

 

5,264

 

1.85

%

Non interest-bearing liabilities

 

7,256

 

 

 

 

 

5,703

 

 

 

 

 

Total liabilities

 

607,068

 

 

 

 

 

578,541

 

 

 

 

 

Stockholders’ equity

 

62,432

 

 

 

 

 

60,184

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

669,500

 

 

 

 

 

$

638,725

 

 

 

 

 

Net interest income

 

 

 

$

11,374

 

 

 

 

 

$

11,347

 

 

 

Interest rate spread(4)

 

 

 

 

 

3.47

%

 

 

 

 

3.69

%

Net yield on interest-earning assets(5)

 

 

 

 

 

3.61

%

 

 

 

 

3.80

%

Ratio of average interest-earning assets to average interest- bearing liabilities

 

 

 

 

 

106

%

 

 

 

 

105

%

 


(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 $188,000 and $143,000 for the six months ended June 30, 2006 and 2005, 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.

 

15




Rate/Volume Analysis

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

 

 

Six months ended June 30,

 

 

 

2006 vs. 2005
Increase (decrease) due to

 

 

 

Volume

 

Rate

 

Net

 

Interest income:

 

 

 

 

 

 

 

Loans receivable, net

 

$

1,631

 

$

1,033

 

$

2,664

 

Mortgage-backed securities

 

(717

)

91

 

(626

)

Investment securities (1)

 

189

 

80

 

269

 

Other interest-earning assets

 

(38

)

38

 

 

Total interest-earning assets

 

1,065

 

1,242

 

2,307

 

Interest expense:

 

 

 

 

 

 

 

Deposits

 

23

 

1,418

 

1,441

 

Advances from the FHLB

 

445

 

394

 

839

 

Total interest-bearing liabilities

 

468

 

1,812

 

2,280

 

Net change in net interest income

 

$

597

 

$

(570

)

$

27

 

 


(1)

Tax equivalent adjustments to interest on investment securities were $188,000 and $143,000 for the six months ended June 30, 2006 and 2005, respectively. Tax equivalent interest income is based upon a marginal effective tax rate of 34%.

 

Total Interest Income. Total interest income, on a taxable equivalent basis, increased by $2.3 million or 13.9% to $18.9 million for the six months ended June 30, 2006 compared with the first half of 2005 primarily because of a $53.5 million increase in average loans outstanding combined with an increase of 44 basis points on the average yield on these loans. The yield on both existing loans and new loans added to the portfolio increased during the intervening period in part due to eight, 25 basis point increases in the Bank’s prime rate during the period June 30, 2005 through June 30, 2006 corresponding to identical increases in the federal funds interest rate of the Federal Reserve Bank.  At June 30, 2006, the Bank had approximately $78.7 million in loans that are indexed to the prime rate primarily consisting of construction loans and commercial and consumer lines of credit. Interest income from mortgage-backed securities was lower in the first six months of 2006 in comparison to the same period of 2005 due to the reduction of balances maintained in mortgage-backed securities.

Total Interest Expense. Total interest expense increased by $2.3 million to $7.5 million during the six-month period ended June 30, 2006 as compared with the first half of 2005. During 2005 and the first half of 2006, the Bank raised the interest rates paid on many of its deposit products due to the competitive pricing environment in the Bank’s deposit market. In addition, the Company had during 2006 but not during 2005, $31.7 million of deposits that have interest rates tied to the change in the federal funds rate.  As a result, the average rate paid on deposits increased by 62 basis points. Interest on advances from the Federal Home Loan Bank increased by $0.8 million during the first six months of 2006 versus the first six months of 2005 as a result of a $23.8 million increase in the average balance of borrowings as well as an increase of 65 basis points in the cost of these funds due, generally, to the amortization of lower cost advances and the higher cost of new advances.

Non-interest income. Total non-interest income was $1,306,000 for the six-month period ended June 30, 2006 compared with $1,339,000 for the same period in 2005. Loss on the sale of mortgage-backed securities was $51,000 during the first six months of 2006 while there was no such sale during 2005. Loan prepayment and other loan-related charges decreased $108,000 in the first half of 2006 versus the first half of 2005. Overdraft deposit fees increased $52,000 during the same period. Gain on the sale of property acquired through foreclosure was $26,000 during 2006 while there was no such disposition in 2005. Additionally, the Company recognized $25,000 of non-interest income related to real estate held for development during the second quarter of 2006.

Non-interest expense. Total non-interest expense increased by $597,000 to $8.7 million for the six months ended June 30, 2006 compared to the same period in 2005. Stock-based compensation expense related to stock grants and the recognition of option expense associated with the new accounting standard SFAS 123R, “Share-Based Payment” amounted to $370,000 for the first half of 2006 while there was no such expense for the first half of 2005. In addition, compensation and other benefit expenses were higher by $258,000 due to staffing related to the Girard Avenue branch which opened in June 2005 as well as annual salary and other staffing increases. Office and occupancy costs increased $97,000 between the two periods mainly as a result of office and occupancy costs associated with the Girard Avenue branch. Professional fees incurred during the first six months of 2006 decreased over fees incurred during the same period of 2005 as technology-related initiatives were completed during 2005.

16




LIQUIDITY AND CAPITAL RESOURCES

Liquidity

The Company’s liquidity is a measure of its ability to fund loans, pay withdrawals of deposits, and other cash outflows in an efficient, cost-effective manner. The Company’s short-term sources of liquidity include maturity, repayment and sales of assets, excess cash and cash equivalents, new deposits, broker deposits, other borrowings, and new advances from the Federal Home Loan Bank. There has been no material adverse change during the six-month period ended June 30, 2006 in the ability of the Company and its subsidiaries to fund their operations.

At June 30, 2006, the Company had commitments outstanding under letters of credit of $1.8 million, commitments to originate loans of $29.9 million, and commitments to fund undisbursed balances of closed loans and unused lines of credit of $62.7 million. At June 30, 2006, the Bank had $18.8 million outstanding commitments to sell loans and commitments to purchase investment securities of $0.5 million. There has been no material change during the six months ended June 30, 2006 in any of the Company’s other contractual obligations or commitments to make future payments.

Capital Requirements

The Bank was in compliance with all of its capital requirements as of June 30, 2006.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Asset and Liability Management

The Company’s market risk exposure is predominately caused by interest rate risk, which is defined as the sensitivity of the Company’s current and future earnings, the values of its assets and liabilities, and the value of its capital to changes in the level of market interest rates. Management of the Company believes that there has not been a material adverse change in market risk during the six months ended June 30, 2006.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Based on their evaluation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)), the Company’s principal executive officer and principal financial officer have concluded that as of the end of the period covered by this Quarterly Report on Form 10-Q such disclosure controls and procedures are effective.

Changes in Internal Controls over Financial Reporting

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

17




CRITICAL ACCOUNTING POLICIES

Certain critical accounting policies of the Company require the use of significant judgment and accounting estimates in the preparation of the consolidated financial statements and related data of the Company. These accounting estimates require management to make assumptions about matters that are highly uncertain at the time the accounting estimate is made. Management believes that the most critical accounting policy requiring the use of accounting estimates and judgment is the determination of the allowance for loan losses. If the financial position of a significant amount of debtors should deteriorate more than the Company has estimated, present reserves for loan losses may be insufficient and additional provisions for loan losses may be required. The allowance for loan losses was $2,788,000 at June 30, 2006.

NEW ACCOUNTING PRONOUNCEMENTS

In March 2006, the Financial Accounting Standards Board (FASB) issued Statement No. 156 (SFAS 156), “Accounting for Servicing of Financial Assets”. SFAS 156 amends SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS 156 permits, but does not require, an entity to choose either the amortization method or the fair value measurement method for measuring each class of separately recognized servicing assets and servicing liabilities. SFAS 156 is effective for fiscal years beginning after September 15, 2006 and is not expected to have a material impact on the Company’s consolidated financial statements.

In July 2006, FASB issued FASB Interpretation (FIN) 48, “Accounting for Uncertainty in Income Taxes: an interpretation of FASB Statement No. 109, “Accounting for Income Taxes”. FIN 48 clarifies FASB 109, to indicate a criterion that an individual tax position would have to meet for some or all of the benefit of that position to be recognized in an entity’s financial statements. In applying FIN 48, an entity is required to evaluate a tax position using a two-step process. First, the entity should evaluate the position for recognition. An entity should recognize the financial statement benefit of a tax position if it determines that it is more likely than not that the position will be sustained on examination. The term “more likely than not” means “a likelihood of more than 50 percent.” In assessing whether the more-likely-than-not criterion is met, the entity should assume that the tax position will be reviewed by the applicable taxing authority. Additionally, if past administrative practices and precedents of the taxing authority are widely understood, those practices and precedents should be considered in an entity’s assessment of the more-likely-than-not criterion. The second step is measurement: a tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. FIN 48 is effective for fiscal years beginning after December 15, 2006 and is currently under evaluation by the Company to determine the impact on the Company’s consolidated financial statements.

18




TF FINANCIAL CORPORATION AND SUBSIDIARIES

PART II

ITEM 1.

LEGAL PROCEEDINGS

 

 

 

Not applicable.

 

 

ITEM 1A.

RISK FACTORS

 

 

 

Management does not believe there have been any material changes to the Risk Factors previously disclosed under Item 1A. on the Company’s Form 10-K for the year ended December 31, 2005.

 

 

ITEM 2.

UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS

 

 

 

The following table provides information on repurchases by the Company of its common stock in each month for the three months ended June 30, 2006:

 

Month

 

Total Number of
Shares Purchased

 

Average Price
Paid per Share

 

Total Number of
Shares Purchased
as
Part of Publicly
Announced Plan of
Program

 

Maximum Number
of
Shares that may yet
be Purchased
Under
the Plans or
Programs

 

 

 

 

 

 

 

 

 

 

 

April 1, 2006 - April 30, 2006

 

 

$

 

 

81,273

 

 

 

 

 

 

 

 

 

 

 

May 1, 2006 - May 31, 2006

 

5,504

 

$

30.24

 

 

81,273

 

 

 

 

 

 

 

 

 

 

 

June 1, 2006 - June 30, 2006

 

5,500

 

$

28.72

 

5,500

 

75,773

 

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

 

 

 

Not applicable.

 

 

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

None

 

 

ITEM 5.

OTHER INFORMATION

 

None

 

 

ITEM 6.

EXHIBITS

 

(a) Exhibits

 

 

31.

Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

32.

Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

19




TF FINANCIAL CORPORATION

SIGNATURES

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

 

/s/ Kent C. Lufkin

 

Date:

August 11, 2006

 

Kent C. Lufkin

 

 

President and CEO

 

 

(Principal Executive Officer)

 

 

 

 

 

 

 

 

/s/ Dennis R. Stewart

 

Date:

August 11, 2006

 

Dennis R. Stewart

 

 

Executive Vice President and

 

 

Chief Financial Officer

 

 

(Principal Financial & Accounting Officer)

 

20



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