Edgar Filing: TF FINANCIAL CORP

file10q.htm

UNITED STATES

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 March 31, 2013

- 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)

Pennsylvania		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 xNO 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  NO x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: May 14, 2013

Class	Outstanding
$.10 par value common stock	2,841,423 shares

CONTENTS

PART I-CONSOLIDATED FINANCIAL INFORMATION

Item 1.		Consolidated Financial Statements (Unaudited)	3

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations (Unaudited)	29

Item 3.		Quantitative and Qualitative Disclosures about Market Risk	35

Item 4.		Controls and Procedures	35

PART II-OTHER INFORMATION

Item 1.		Legal Proceedings	36

Item 1A.		Risk Factors	36

Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds	36

Item 3.		Defaults Upon Senior Securities	36

Item 4.		Mine Safety Disclosures	36

Item 5.		Other Information	36

Item 6.		Exhibits	36

Signatures			37

Exhibits

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

31.2	Certification of CFO pursuant of Section 302 of the Sarbanes-Oxley Act of 2002

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

The following Exhibits are being furnished as part of this report:

101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF	XBRL Taxonomy Definition Linkbase Document

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TF FINANCIAL CORPORATION AND SUBSIDIARIES

PART I-CONSOLIDATED FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS

(Unaudited)

	At
	March 31, 2013			December 31, 2012
	(in thousands)
ASSETS
Cash and cash equivalents	$	48,690		$	31,137
Investment securities
Available for sale		95,796			102,284
Held to maturity (fair value of $2,166 and $2,271 as of March 31, 2013 and December 31, 2012, respectively)		1,878			1,965
Loans receivable, net		520,856			526,720
Loans receivable, held for sale		711			706
Federal Home Loan Bank stock — at cost		4,633			5,431
Accrued interest receivable		2,455			2,460
Premises and equipment, net		6,029			6,108
Goodwill		4,324			4,324
Bank owned life insurance		19,252			19,109
Other assets		11,378			11,592
TOTAL ASSETS	$	716,002		$	711,836

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Deposits	$	571,330		$	560,315
Advances from the Federal Home Loan Bank ("FHLB")		54,151			60,656
Advances from borrowers for taxes and insurance		2,650			2,880
Accrued interest payable		884			817
Other liabilities		3,579			4,223
Total liabilities		632,594			628,891

Stockholders’ equity
Preferred stock, no par value; 2,000,000 shares authorized at March 31, 2013 and December 31, 2012, none issued		—			—
Common stock, $0.10 par value; 10,000,000 shares authorized, 5,290,000 shares issued, 2,839,931 and 2,838,493 shares outstanding at March 31, 2013 and December 31, 2012, respectively, net of shares in treasury of 2,450,069 and 2,451,507, respectively.		529			529
Additional paid-in capital		54,441			54,328
Unearned ESOP shares		(939	)		(970	)
Treasury stock — at cost		(50,866	)		(50,896	)
Retained earnings		80,070			78,984
Accumulated other comprehensive income		173			970
Total stockholders’ equity		83,408			82,945
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	716,002		$	711,836

The accompanying notes are an integral part of these statements

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TF FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	For the three months ended March 31,
	2013		2012
	(dollars in thousands, except per share data)

Interest income
Loans, including fees	$	6,066	$	6,197
Investment securities
Fully taxable		369		629
Exempt from federal taxes		418		435
Interest-bearing deposits and other		4		2
TOTAL INTEREST INCOME		6,857		7,263
Interest expense
Deposits		731		1,066
Borrowings		248		405
TOTAL INTEREST EXPENSE		979		1,471
NET INTEREST INCOME		5,878		5,792
Provision for loan losses		439		500
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		5,439		5,292
Noninterest income
Service fees, charges and other operating income		527		484
Bank owned life insurance		143		152
Gain on sale of loans		305		324
Gain on disposition of premises and equipment		420		277
TOTAL NONINTEREST INCOME		1,395		1,237
Noninterest expense
Compensation and benefits		2,817		2,874
Occupancy and equipment		697		710
Federal deposit insurance premiums		110		151
Professional fees		288		351
Merger-related costs		320		—
Marketing and advertising		39		85
Foreclosed real estate expense		224		287
Other operating		535		598
TOTAL NONINTEREST EXPENSE		5,030		5,056
INCOME BEFORE INCOME TAXES		1,804		1,473
Income tax expense		581		318
NET INCOME	$	1,223	$	1,155

Earnings per share—basic	$	0.45	$	0.42
Earnings per share—diluted	$	0.45	$	0.42
Dividends paid per share	$	0.05	$	0.05
Weighted average shares outstanding:
Basic		2,738,375		2,718,839
Diluted		2,741,889		2,722,405

The accompanying notes are an integral part of these statements

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TF FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

	For the three months ended March 31,
	2013			2012
	(in thousands)

Net income	$	1,223		$	1,155
Other comprehensive (loss) income:
Investment securities available for sale:
Unrealized holding losses		(1,273	)		(103	)
Tax effect		433			35
Net of tax amount		(840	)		(68	)
Pension plan benefit adjustment:
Related to actuarial losses		66			72
Tax effect		(23	)		(25	)
Net of tax amount		43			47
Total other comprehensive loss		(797	)		(21	)
Comprehensive income	$	426		$	1,134

The accompanying notes are an integral part of these statements

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TF FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	For the three months ended March 31,
	2013			2012
	(in thousands)
OPERATING ACTIVITIES
Net income	$	1,223		$	1,155
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization and impairment adjustment of mortgage loan servicing rights		23			54
Premiums and discounts on investment securities, net		69			57
Premiums and discounts on mortgage-backed securities, net		114			97
Deferred loan origination costs, net		67			54
Provision for loan losses		439			500
Depreciation of premises and equipment		167			203
Increase in value of bank owned life insurance		(143	)		(152	)
Stock-based compensation		174			121
Proceeds from sale of loans originated for sale		11,860			15,694
Origination of loans held for sale		(11,680	)		(15,926	)
Loss on foreclosed real estate		178			179
Gain on:
Sale of loans held for sale		(305	)		(324	)
Disposition of premises and equipment		(420	)		(277	)
Decrease in:
Accrued interest receivable		5			108
Other assets		267			81
Increase (decrease) in:
Accrued interest payable		67			254
Other liabilities		(236	)		(167	)
NET CASH PROVIDED BY OPERATING ACTIVITIES		1,869			1,711

INVESTING ACTIVITIES
Loan originations		(29,085	)		(19,210	)
Loan principal payments		34,343			20,441
Proceeds from sale of foreclosed real estate		34			3,278
Proceeds from disposition of premises and equipment		417			356
Proceeds from maturities of investment securities available for sale		1,945			—
Principal repayments on mortgage-backed securities held to maturity		87			149
Principal repayments on mortgage-backed securities available for sale		5,879			8,195
Purchase of investment securities available for sale		(2,792	)		(4,260	)
Purchase of mortgage-backed securities available for sale		—			(13,520	)
Purchase of premises and equipment		(85	)		(249	)
Redemption of FHLB stock		798			383
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES		11,541			(4,437	)

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TF FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	For the three months ended March 31,
	2013			2012
	(in thousands)
FINANCING ACTIVITIES
Net increase in deposits		11,015			10,913
Proceeds of long-term FHLB borrowings		—			4,500
Repayment of long-term FHLB borrowings		(6,505	)		(4,723	)
Net decrease in advances from borrowers for taxes and insurance		(230	)		(417	)
Common stock dividends paid		(137	)		(135	)
NET CASH PROVIDED BY FINANCING ACTIVITIES		4,143			10,138
NET INCREASE IN CASH AND CASH EQUIVALENTS		17,553			7,412
Cash and cash equivalents at beginning of period		31,137			14,928
Cash and cash equivalents at end of period	$	48,690		$	22,340
Supplemental disclosure of cash flow information
Cash paid for:
Interest on deposits and borrowings	$	912		$	1,217
Income taxes	$	250		$	—
Noncash transactions:
Capitalization of mortgage servicing rights	$	120		$	160
Transfers from loans to foreclosed real estate	$	100		$	1,848

The accompanying notes are an integral part of these statements

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TF FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — PRINCIPLES OF CONSOLIDATION

The consolidated financial statements as of March 31, 2013 (unaudited) and December 31, 2012 and for the three month periods ended March 31, 2013 and 2012 (unaudited) include the accounts of TF Financial Corporation (the “Company”) and its wholly owned subsidiaries: 3rd Fed Bank (the “Bank”) and Penns Trail Development Corporation. The accompanying consolidated balance sheet at December 31, 2012, has been derived from the audited consolidated balance sheet but does not include all of the information and notes required by accounting principles generally accepted in the United States of America (“US 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 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 March 31, 2013 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, 2012.

NOTE 3 — RECENT ACCOUNTING PRONOUNCEMENTS

In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The amendments in this Update require an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under US GAAP to be reclassified in its entirety to net income. For other amounts that are not required under US GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under US GAAP that provide additional detail about those amounts. For public entities, the amendments are effective prospectively for reporting periods beginning after December 15, 2012. The Company has provided the necessary disclosures in Note 6 – Accumulated Other Comprehensive Income (Loss).

In February 2013, FASB issued ASU 2013-04, Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date. The objective of the amendments in this update is to provide guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date, except for obligations addressed within existing guidance in US GAAP. Examples of obligations within the scope of this Update include debt arrangements, other contractual obligations, and settled litigation and judicial rulings. US GAAP does not include specific guidance on accounting for such obligations with joint and several liability, which has resulted in diversity in practice. Some entities record the entire amount under the joint and several liability arrangement on the basis of the concept of a liability and the guidance that must be met to extinguish a liability. Other entities record less than the total amount of the obligation, such as an amount allocated, an amount corresponding to the proceeds received, or the portion of the amount the entity agreed to pay among its co-obligors, on the basis of the guidance for contingent liabilities. The amendments in this Update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. This ASU is not expected to have a significant impact on the Company’s financial statements.

NOTE 4 — 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.

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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):

	For the three months ended March 31, 2013
			Weighted
			average
	Income		shares		Per share
	(numerator)		(denominator)		Amount
Basic earnings per share
Income available to common stockholders	$	1,223		2,738,375	$	0.45
Effect of dilutive securities
Stock options and grants		—		3,514		—

Diluted earnings per share
Income available to common stockholders plus effect of dilutive securities	$	1,223		2,741,889	$	0.45

There were 31,963 options to purchase shares of common stock with exercise prices ranging from $25.71 to $32.51 per share which were outstanding during the three months ended March 31, 2013 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.

	For the three months ended March 31, 2012
			Weighted
			average
	Income		shares		Per share
	(numerator)		(denominator)		Amount
Basic earnings per share
Income available to common stockholders	$	1,155		2,718,839	$	0.42
Effect of dilutive securities
Stock options and grants		—		3,566		—

Diluted earnings per share
Income available to common stockholders plus effect of dilutive securities	$	1,155		2,722,405	$	0.42

There were 61,526 options to purchase shares of common stock with exercise prices ranging from $24.12 to $32.51 per share which were outstanding during the three months ended March 31, 2012 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.

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NOTE 6 — ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The activity in accumulated other comprehensive income for the three months ended March 31, 2013 and 2012 is as follows:

	Accumulated Other Comprehensive Income (1), (2)
	Unrealized gains (losses) on securities available for sale			Defined benefit pension plan			Total
	(in thousands)
Balance at December 31, 2012	$	3,805		$	(2,835	)	$	970
Other comprehensive income (loss) before reclassifications		(840	)		—			(840	)
Amounts reclassified from accumulated other comprehensive income		—			43			43
Period change		(840	)		43			(797	)
Balance at March 31, 2013	$	2,965		$	(2,792	)	$	173


Balance at December 31, 2011	$	3,649		$	(2,903	)	$	746
Other comprehensive income (loss) before reclassifications		(68	)		—			(68	)
Amounts reclassified from accumulated other comprehensive income		—			47			47
Period change		(68	)		47			(21	)
Balance at March 31, 2012	$	3,581		$	2,856		$	725

(1	)	All amounts are net of tax. Related income tax expense or benefit is calculated using a Federal income tax rate approximating 34%.
(2	)	Amounts in parenthesis indicate debits.

	Amount reclassified from accumulated other comprehensive income For the three months ended March 31, (2)						Affected line item in the consolidated statements of net income
	2013			2012
	(in thousands)
Defined benefit pension plan (1)
Amortization of net actuarial loss	$	66		$	72		Compensation and benefits
Related income tax expense		(23	)		(25	)	Income tax expense
Net effect on accumulated other comprehensive income for the period	$	43		$	47		Net income

(1	)	Included in the computation of net periodic pension cost. See Note 11 – Employee Benefit Plans for additional detail.
(2	)	Amounts in parenthesis indicate debits.

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NOTE 7 — INVESTMENT SECURITIES

The amortized cost, gross unrealized gains and losses, and fair value of the Company’s investment securities are summarized as follows:

	At March 31, 2013
			Gross		Gross
	Amortized		unrealized		unrealized			Fair
	cost		gains		losses			value
	(in thousands)
Available for sale
State and political subdivisions	$	56,032	$	3,422	$	(100	)	$	59,354
Residential mortgage-backed securities issued by quasi-governmental agencies		35,272		1,170		—			36,442
Total investment securities available for sale		91,304		4,592		(100	)		95,796

Held to maturity
Residential mortgage-backed securities issued by quasi-governmental agencies		1,878		288		—			2,166
Total investment securities	$	93,182	$	4,880	$	(100	)	$	97,962

	At December 31, 2012
			Gross		Gross
	Amortized		unrealized		unrealized			Fair
	cost		gains		losses			value
	(in thousands)
Available for sale
State and political subdivisions	$	55,254	$	4,360	$	(4	)	$	59,610
Residential mortgage-backed securities issued by quasi-governmental agencies		41,265		1,409		—			42,674
Total investment securities available for sale		96,519		5,769		(4	)		102,284

Held to maturity
Residential mortgage-backed securities issued by quasi-governmental agencies		1,965		306		—			2,271
Total investment securities	$	98,484	$	6,075	$	(4	)	$	104,555

There were no sales of investment securities during the three months ended March 31, 2013 or 2012.

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The amortized cost and fair value of investment and mortgage-backed securities, by contractual maturity, are shown below.

	At March 31, 2013
	Available for sale				Held to maturity
	Amortized		Fair		Amortized		Fair
	cost		value		cost		value
	(in thousands)
Investment securities
Due in one year or less	$	601	$	602	$	—	$	—
Due after one year through five years		10,628		11,170		—		—
Due after five years through ten years		23,104		24,285		—		—
Due after ten years		21,699		23,297		—		—
		56,032		59,354		—		—

Mortgage-backed securities		35,272		36,442		1,878		2,166
Total investment and mortgage-backed securities	$	91,304	$	95,796	$	1,878	$	2,166

The table below indicates the length of time individual securities have been in a continuous unrealized loss position at March 31, 2013:

			Less than					12 months
	Number		12 months					or longer				Total
	of		Fair		Unrealized			Fair		Unrealized		Fair		Unrealized
Description of Securities	Securities		Value		Loss			Value		Loss		Value		Loss
	(dollars in thousands)
State and political subdivisions		5	$	4,244	$	(100	)	$	—	$	—	$	4,244	$	(100	)
Total temporarily impaired securities		5	$	4,244	$	(100	)	$	—	$	—	$	4,244	$	(100	)

The table below indicates the length of time individual securities have been in a continuous unrealized loss position at December 31, 2012:

			Less than					12 months
	Number		12 months					or longer				Total
	of		Fair		Unrealized			Fair		Unrealized		Fair		Unrealized
Description of Securities	Securities		Value		Loss			Value		Loss		Value		Loss
	(dollars in thousands)
State and political subdivisions		1	$	617	$	(4	)	$	—	$	—	$	617	$	(4	)
Total temporarily impaired securities		1	$	617	$	(4	)	$	—	$	—	$	617	$	(4	)

On a quarterly basis, temporarily impaired securities are evaluated to determine whether such impairment is an other-than-temporary impairment (“OTTI”). The Company has performed this evaluation and has determined that the unrealized losses at March 31, 2013 and December 31, 2012, respectively, are not considered other-than-temporary but are the result of changes in interest rates, and are therefore reflected in other comprehensive income.

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NOTE 8 — LOANS RECEIVABLE

Loans receivable are summarized as follows:

	At
	March 31, 2013			December 31, 2012
	(in thousands)
Held for investment:
Residential
Residential mortgages	$	320,179		$	323,665

Commercial
Real estate-commercial		108,870			104,766
Real estate-residential		21,121			21,570
Real estate-multi-family		17,814			19,118
Construction loans		11,601			16,288
Commercial and industrial loans		5,202			4,646
Total commercial loans		164,608			166,388

Consumer
Home equity and second mortgage		39,357			40,143
Other consumer		1,755			1,835
Total consumer loans		41,112			41,978

Total loans		525,899			532,031
Net deferred loan origination costs and unamortized premiums		1,619			1,611
Less allowance for loan losses		(6,662	)		(6,922	)
Total loans receivable	$	520,856		$	526,720

Held for sale:
Residential
Residential mortgages	$	711		$	706

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The following table presents the composition of the commercial loan portfolio by credit quality indicators:

	At March 31, 2013
			Special
	Pass		mention		Substandard		Doubtful		Total
	(in thousands)
Real estate-commercial	$	95,567	$	4,161	$	9,142	$	—	$	108,870
Real estate-residential		20,027		373		721		—		21,121
Real estate-multi-family		14,456		—		3,358		—		17,814
Construction loans		3,401		3,551		4,649		—		11,601
Commercial and industrial loans		5,124		78		—		—		5,202
Total	$	138,575	$	8,163	$	17,870	$	—	$	164,608

	At December 31, 2012
			Special
	Pass		mention		Substandard		Doubtful		Total
	(in thousands)
Real estate-commercial	$	91,446	$	4,192	$	9,128	$	—	$	104,766
Real estate-residential		19,244		1,018		1,308		—		21,570
Real estate-multi-family		15,751		—		3,367		—		19,118
Construction loans		7,397		4,097		4,794		—		16,288
Commercial and industrial loans		4,565		81		—		—		4,646
Total	$	138,403	$	9,388	$	18,597	$	—	$	166,388

In order to assess and monitor the credit risk associated with commercial loans, the Company employs a risk rating methodology whereby each commercial loan is initially assigned a risk grade. At least annually, all risk ratings are reviewed in light of information received such as tax returns, rent rolls, cash flow statements, appraisals, and any other information which may affect the then current risk rating, which is adjusted upward or downward as needed. At the end of each quarter the risk ratings are summarized and become a component of the evaluation of the allowance for loan losses. The Company’s risk rating definitions mirror those promulgated by banking regulators and are as follows:

Pass: A good quality loan is characterized by satisfactory liquidity; reasonable debt capacity and coverage; acceptable management in all critical positions and normal operating results for its peer group. The Company has grades 1 through 6 within the Pass category which reflect the increasing amount of attention paid to the individual loan because of, among other things, trends in debt service coverage, management weaknesses, or collateral values.

Special mention: A loan that has potential weaknesses that deserves management’s close attention. Although the loan is currently protected, if left uncorrected, potential weaknesses may result in the deterioration of the loan’s repayment prospects or in the borrower’s future credit position. Potential weaknesses include: weakening financial condition; an unrealistic repayment program; inadequate sources of funds; lack of adequate collateral; credit information; or documentation. There is currently the capacity to meet interest and principal payments, but further adverse business, financial, or economic conditions may impair the borrower’s capacity or willingness to pay interest and repay principal.

Substandard: A loan that is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged. Although no loss of principal or interest is presently apparent, there is the distinct possibility that a partial loss of interest and/or principal will be sustained if the deficiencies are not corrected. There is a current identifiable vulnerability to default and the dependence upon favorable business, financial, or economic conditions to meet timely payment of interest and repayment of principal.

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Doubtful: A loan which has all the weaknesses inherent in a substandard asset with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonable specific pending factors which may work to strengthen the asset, classification as an estimated loss is deferred until a more exact status is determined. Pending factors include: proposed merger, acquisition, liquidation, capital injection, perfecting liens on additional collateral, and refinancing plans.

Loss: Loans which are considered uncollectible and have been charged off. The Company has charged-off all loans classified as loss.

Loans classified as special mention, substandard or doubtful are monitored individually on a monthly basis. Loans which require impairment evaluation are placed on nonaccrual status and are classified as substandard or doubtful.

The following table presents the composition of the residential mortgage and consumer loan portfolios by credit quality indicators:

	At March 31, 2013
	Performing		Nonperforming		Total
	(in thousands)
Residential mortgages	$	317,937	$	2,242	$	320,179
Home equity and second mortgage		39,214		143		39,357
Other consumer		1,744		11		1,755
Total	$	358,895	$	2,396	$	361,291

	At December 31, 2012
	Performing		Nonperforming		Total
	(in thousands)
Residential mortgages	$	321,400	$	2,265	$	323,665
Home equity and second mortgage		40,000		143		40,143
Other consumer		1,827		8		1,835
Total	$	363,227	$	2,416	$	365,643

In order to assess and monitor the credit risk associated with residential mortgage loans and consumer loans which include second mortgage loans and home equity secured lines of credit, the Company relies upon the payment status of the loan. Residential mortgage and other consumer loans 90 days or more past due are placed on nonaccrual status, classified as nonperforming, and evaluated for impairment.

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The following table presents by class nonperforming loans including impaired loans and loan balances 90 days or more past due for which the accrual of interest has been discontinued:

	At
	March 31, 2013		December 31, 2012
	(in thousands)
Residential
Residential mortgages	$	2,242	$	2,265
Commercial
Real estate-commercial		552		1,098
Real estate-residential		50		51
Construction loans		4,649		4,794
Commercial and industrial loans		—		—
Consumer
Home equity and second mortgage		143		143
Other consumer		11		8
Total nonperforming loans	$	7,647	$	8,359
Total loans past due 90 days as to interest or principal and accruing interest	$	—	$	—

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The following tables present loans individually evaluated for impairment by class:

	At March 31, 2013
	Recorded investment		Unpaid principal balance		Related allowance		Average recorded investment		Interest income recognized
	(in thousands)
With an allowance recorded:
Residential
Residential mortgages	$	2,114	$	2,184	$	217	$	2,124	$	—
Commercial
Real estate-commercial		—		—		—		273		—
Construction loans		4,649		5,137		1,543		4,721		—
		6,763		7,321		1,760		7,118		—
With no allowance recorded:
Commercial
Real estate-commercial		552		552		—		552		—
Real estate-residential		50		50		—		75
		602		602		—		627		—
Total	$	7,365	$	7,923	$	1,760	$	7,745	$	—

	At December 31, 2012
	Recorded investment		Unpaid principal balance		Related allowance		Average recorded investment		Interest income recognized
	(in thousands)
With an allowance recorded:
Residential
Residential mortgages	$	2,137	$	2,214	$	218	$	2,061	$	—
Commercial
Real estate-commercial		546		1,497		296		697		—
Real estate-residential		51		51		4		298
Construction loans		4,737		5,137		1,029		3,604		—
Commercial and industrial loans		—		—		—		2		—
		7,471		8,899		1,547		6,662		—
With no allowance recorded:
Residential
Residential mortgages		—		—		—		698		—
Commercial
Real estate-commercial		552		552		—		1,012		—
Real estate-residential		—		—		—		216
Construction loans		57		116		—		1,932		—
		609		668		—		3,858		—
Total	$	8,080	$	9,567	$	1,547	$	10,520	$	—

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The following tables present the contractual aging of delinquent loans by class:

	At March 31, 2013
	Current		30-59 Days past due		60-89 Days past due		Loans past due 90 days or more		Total past due		Total loans		Recorded investment over 90 days and accruing interest
	(in thousands)
Residential
Residential mortgages	$	317,044	$	963	$	—	$	2,172	$	3,135	$	320,179	$	—
Commercial
Real estate-commercial		108,318		—		—		552		552		108,870		—
Real estate-residential		20,698		373		—		50		423		21,121		—
Real estate-multi-family		17,814		—		—		—		—		17,814		—
Construction loans		6,952		—		—		4,649		4,649		11,601		—
Commercial and industrial loans		5,193		—		9		—		9		5,202		—
Consumer
Home equity and second mortgage		39,115		94		5		143		242		39,357		—
Other consumer		1,741		2		1		11		14		1,755		—
Total	$	516,875	$	1,432	$	15	$	7,577	$	9,024	$	525,899	$	—

	At December 31, 2012
	Current		30-59 Days past due		60-89 Days past due		Loans past due 90 days or more		Total past due		Total loans		Recorded investment over 90 days and accruing interest
	(in thousands)
Residential
Residential mortgages	$	319,982	$	1,161	$	329	$	2,193	$	3,683	$	323,665	$	—
Commercial
Real estate-commercial		102,868		800		—		1,098		1,898		104,766		—
Real estate-residential		21,488		31		—		51		82		21,570		—
Real estate-multi-family		19,118		—		—		—		—		19,118		—
Construction loans		11,494		—		—		4,794		4,794		16,288		—
Commercial and industrial loans		4,646		—		—		—		—		4,646		—
Consumer
Home equity and second mortgage		39,842		34		124		143		301		40,143		—
Other consumer		1,824		—		3		8		11		1,835		—
Total	$	521,262	$	2,026	$	456	$	8,287	$	10,769	$	532,031	$	—

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Activity in the allowance for loan losses for the three months ended March 31, 2013 and 2012 is summarized as follows:

	Balance January 1, 2013		Provision			Charge-offs			Recoveries		Balance March 31, 2013
	(in thousands)
Residential
Residential mortgages	$	1,849	$	49		$	(98	)	$	—	$	1,800
Commercial
Real estate-commercial		1,754		(8	)		(435	)		—		1,311
Real estate-residential		608		52			(59	)		—		601
Real estate-multi-family		245		(8	)		—			—		237
Construction loans		1,697		297			(111	)		11		1,894
Commercial and industrial loans		119		3			—			3		125
Consumer
Home equity and second mortgage		251		(33	)		(15	)		8		211
Other consumer		11		3			(3	)		—		11
Unallocated		388		84			—			—		472
Total	$	6,922	$	439		$	(721	)	$	22	$	6,662

	Balance January 1, 2012		Provision			Charge-offs			Recoveries		Balance March 31, 2012
	(in thousands)
Residential
Residential mortgages	$	2,194	$	151		$	(399	)	$	7	$	1,953
Commercial
Real estate-commercial		2,819		(362	)		(623	)		—		1,834
Real estate-residential		464		190			—			—		654
Real estate-multi-family		358		(8	)		—			—		350
Construction loans		1,260		519			(608	)		—		1,171
Commercial and industrial loans		138		(97	)		—			5		46
Consumer
Home equity and second mortgage		448		(139	)		—			—		309
Other consumer		22		(13	)		(2	)		1		8
Unallocated		397		259			—			—		656
Total	$	8,100	$	500		$	(1,632	)	$	13	$	6,981

Despite the above allocation, the allowance for credit losses is general in nature and is available to absorb losses from any portfolio segment.

Loans receivable include certain loans that have been modified as troubled debt restructurings (“TDRs”), where economic concessions have been granted to borrowers experiencing financial difficulties. The objective for granting the concessions is to maximize the recovery of the investment in the loan and may include reductions in the interest rate, payment extensions, forgiveness of interest or principal, forbearance or other actions. TDRs are classified as nonperforming at the time of restructuring and typically return to performing status after considering the borrower’s positive repayment performance for a reasonable period of time, usually six months.

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Loans modified in a TDR are evaluated individually for impairment based on the present value of expected cash flows or the fair value of the underlying collateral less selling costs for collateral dependent loans. If the value of the modified loan is less than the recorded investment in the loan, impairment is recognized through an increase by an additional provision to the allowance for loan losses. In periods subsequent to modification, TDRs are evaluated for possible additional impairment.

The following table presents loans classified as TDRs segregated by class for the period indicated:

	For the three months ended March 31, 2012
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post Modification Outstanding Recorded Investment
Residential	(dollars in thousands)
Residential mortgage		1	$	852	$	825
Total		1	$	852	$	825

During the first quarter of 2012, a TDR totaling $167,000 which had been previously identified as in default of its modified terms was repaid and a $40,000 loss was charged to the allowance for loan losses.

There were no TDRs during the three months ended March 31, 2013.

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The following tables present the ending balance of the allowance for loan losses and ending loan balance by portfolio and by class based on impairment method as of March 31, 2013:

	Evaluated for impairment
Allowance	Individually		Collectively		Total
	(in thousands)
Residential
Residential mortgages	$	217	$	1,583	$	1,800
Commercial
Real estate-commercial		—		1,311		1,311
Real estate-residential		—		601		601
Real estate-multi-family		—		237		237
Construction loans		1,543		351		1,894
Commercial and industrial loans		—		125		125
Consumer
Home equity and second mortgage		—		211		211
Other consumer		—		11		11
Unallocated		—		472		472
Total	$	1,760	$	4,902	$	6,662

	Evaluated for impairment
Loan balance	Individually		Collectively		Total
	(in thousands)
Residential
Residential mortgages	$	2,114	$	318,065	$	320,179
Commercial
Real estate-commercial		552		108,318		108,870
Real estate-residential		50		21,071		21,121
Real estate-multi-family		—		17,814		17,814
Construction loans		4,649		6,952		11,601
Commercial and industrial loans		—		5,202		5,202
Consumer
Home equity and second mortgage		—		39,357		39,357
Other consumer		—		1,755		1,755
Total	$	7,365	$	518,534	$	525,899

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The following tables present the ending balance of the allowance for loan losses and ending loan balance by portfolio and by class based on impairment method as of December 31, 2012:

	Evaluated for impairment
Allowance	Individually		Collectively		Total
	(in thousands)
Residential
Residential mortgages	$	218	$	1,631	$	1,849
Commercial
Real estate-commercial		296		1,458		1,754
Real estate-residential		4		604		608
Real estate-multi-family		—		245		245
Construction loans		1,029		668		1,697
Commercial and industrial loans		—		119		119
Consumer
Home equity and second mortgage		—		251		251
Other consumer		—		11		11
Unallocated		—		388		388
Total	$	1,547	$	5,375	$	6,922

	Evaluated for impairment
Loan balance	Individually		Collectively		Total
	(in thousands)
Residential
Residential mortgages	$	2,137	$	321,528	$	323,665
Commercial
Real estate-commercial		1,098		103,668		104,766
Real estate-residential		51		21,519		21,570
Real estate-multi-family		—		19,118		19,118
Construction loans		4,794		11,494		16,288
Commercial and industrial loans		—		4,646		4,646
Consumer
Home equity and second mortgage		—		40,143		40,143
Other consumer		—		1,835		1,835
Total	$	8,080	$	523,951	$	532,031

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NOTE 9 — FAIR VALUE MEASUREMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS

The following tables present information about the Company’s financial instruments measured at fair value as of March 31, 2013 and December 31, 2012. 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). 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.

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 assessing the fair value of the asset or liability.

Assets measured at fair value on a recurring basis, segregated by fair value hierarchy level are summarized below:

							Balance as of
	Fair value hierarchy levels						March 31,
	Level 1		Level 2		Level 3		2013
	(in thousands)
Assets
Investment securities available for sale
State and political subdivisions	$	—	$	59,534	$	—	$	59,534
Residential mortgage-backed securities issued by quasi-governmental agencies		—		36,442		—		36,442
Total investment securities available for sale	$	—	$	95,976	$	—	$	95,976

Loans receivable, held for sale	$	—	$	711	$	—	$	711

							Balance as of
	Fair value hierarchy levels						December 31,
	Level 1		Level 2		Level 3		2012
	(in thousands)
Assets
Investment securities available for sale
State and political subdivisions	$	—	$	59,610	$	—	$	59,610
Residential mortgage-backed securities issued by quasi-governmental agencies		—		42,674		—		42,674
Total investment securities available for sale	$	—	$	102,284	$	—	$	102,284

Loans receivable, held for sale	$	—	$	706	$	—	$	706

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Investment securities available for sale and mortgage-backed securities available for sale are valued primarily by a third party pricing agent. State and political subdivision securities are 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 Government National Mortgage Association (“GNMA”), Federal Home Loan Mortgage Corporation (“FHLMC”) and Federal National Mortgage Association (“FNMA”) certificates which are valued under a Level 2 hierarchy using a matrix correlation to benchmark yields, spread analysis, and prepayment speeds.

Values for loans held for sale utilize active pricing quotes which exist in the secondary market and are therefore deemed a Level 2 hierarchy.

Assets measured at fair value on a nonrecurring basis segregated by fair value hierarchy level at March 31, 2013 are summarized below:

							Balance as of
	Fair value hierarchy levels						March 31,
	Level 1		Level 2		Level 3		2013
	(in thousands)

Impaired loans	$	—	$	—	$	5,605	$	5,605
Real estate acquired through foreclosure		—		—		7,170		7,170
Mortgage servicing rights		—		1,053		—		1,053

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Bank has utilized Level 3 inputs to determine fair value at March 31, 2013:

	Fair value		Valuation	Unobservable	Range of
Description	estimate		technique	Input	inputs
	(in thousands)

Impaired loans	$	5,605	Appraisal of collateral (1)	Discount rate to reflect current market conditions and ultimate recoverability		5%-15	%
Real estate acquired through foreclosure		7,170	Appraisal of collateral (1)	Discount rate to reflect current market conditions and liquidation expenses		5%-20	%

)

Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.

The fair value of impaired loans and real estate acquired through foreclosure is generally determined through independent appraisals of the underlying collateral, which generally include level 3 inputs which are not identifiable. The range and weighted average of liquidation expenses are presented as a percent of the appraised value.

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Assets measured at fair value on a nonrecurring basis segregated by fair value hierarchy level at December 31, 2012 are summarized below:

							Balance as of
	Fair value hierarchy levels						December 31,
	Level 1		Level 2		Level 3		2012
	(in thousands)

Impaired loans	$	—	$	—	$	6,533	$	6,533
Real estate acquired through foreclosure		—		—		7,282		7,282
Mortgage servicing rights		—		956		—		956

	Fair value		Valuation	Unobservable	Range of
Description	estimate		technique	Input	inputs
	(in thousands)

Impaired loans	$	6,533	Appraisal of collateral (1)	Discount rate to reflect current market conditions and ultimate recoverability		5%-15	%
Real estate acquired through foreclosure		7,282	Appraisal of collateral (1)	Discount rate to reflect current market conditions and liquidation expenses		5%-20	%

)

Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.

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. The amortized cost basis of the Company’s mortgage servicing rights was $1.3 million at March 31, 2013 and December 31, 2012. The fair value of the mortgage servicing rights was $1,053,000 and $956,000 at March 31, 2013 and December 31, 2012, respectively, and was included in other assets in the consolidated balance sheets.

In addition to financial instruments recorded at fair value in the Company’s financial statements, disclosure of the estimated fair value of all of an entity’s assets and liabilities considered to be financial instruments is also required. 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 established fair value measurement hierarchy.

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 entities 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.

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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 recorded carrying amounts and fair values segregated by fair value hierarchy level at March 31, 2013 and December 31, 2012 are summarized below:

					At March 31, 2013
	Carrying		Fair		Fair value hierarchy levels
	value		value		Level 1		Level 2		Level 3
Assets	(in thousands)
Cash and cash equivalents	$	48,690	$	48,690	$	48,690	$	—	$	—
Investment securities		59,354		59,354		—		59,354		—
Mortgage-backed securities		38,320		38,608		—		38,608		—
Loans receivable		521,567		534,486		—		711		533,775

Liabilities
Deposits with stated maturities	$	170,355	$	173,625	$	—	$	—	$	173,625
Deposits with no stated maturities		400,975		400,975		400,975		—		—
Borrowings with no stated maturities		54,151		54,262		—		—		54,262

					At December 31, 2012
	Carrying		Fair		Fair value hierarchy levels
	value		value		Level 1		Level 2		Level 3
Assets	(in thousands)
Cash and cash equivalents	$	31,137	$	31,137	$	31,137	$	—	$	—
Investment securities		59,610		59,610		—		59,610		—
Mortgage-backed securities		44,639		44,945		—		44,945		—
Loans receivable		527,426		539,665		—		706		538,959

Liabilities
Deposits with stated maturities	$	171,417	$	175,025	$	—	$	—	$	175,025
Deposits with no stated maturities		388,898		388,898		388,898		—		—
Borrowings with no stated maturities		60,656		60,939		—		—		60,939

The fair value of cash and cash equivalents equals the carrying amount. The fair value of investment and mortgage-backed securities is described and presented under fair value measurement guidelines as discussed earlier.

The fair value of loans receivable 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 also includes loans receivable held for sale.

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.

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

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

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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 two 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. The fair value of each option grant during the first quarter of 2013 was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

Weighted average assumptions
Dividend yield		0.83	%
Expected volatility		17.24	%
Risk-free interest rate		0.67	%
Fair value of options granted during the period	$	3.13
Expected lives in years		5

There were no stock options granted during the three months ended March 31, 2012.

At March 31, 2013, there was $591,000 of total unrecognized compensation cost, net of estimated forfeitures, related to non-vested awards under the Company’s stock option plan. That cost is expected to be recognized over a weighted average period of 16 months. Option activity under the Company’s stock option plan for the quarter ended March 31, 2013 was as follows:

	At March 31, 2013
	Number of shares			Weighted average exercise price per share		Weighted average remaining contractual term (in years)		Aggregate intrinsic value ($000)
Outstanding at January 1, 2013		89,279		$	24.08
Options granted		200,000			24.21
Options exercised		—			—
Options forfeited		—			—
Options expired		(14,279	)		24.26
Outstanding at March 31, 2013		275,000		$	24.16		3.29	$	403
Options exercisable at March 31, 2013		67,129		$	24.56		1.82	$	172

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

There were no exercises of stock options for the three months ended March 31, 2013 or 2012.

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The Company issues stock of the Company as payment for director fees as permitted by the 2011 Director Stock Compensation Plan, the cost associated with these grants is included as a component of stock-based compensation. The following tables provide information regarding the Company’s stock-based compensation expense:

	For the three months ended March 31,
	2013		2012
	(in thousands)
Stock-based compensation expense
Director fees	$	34	$	37
Stock option expense		59		7
Employee Stock Ownership Plan ("ESOP") expense		73		69
Total stock-based compensation expense	$	166	$	113

The Bank reports ESOP expense in an amount equal to the fair value of shares released from the ESOP to employees less dividends received on the allocated shares in the plan used for debt service. Dividends on allocated shares used to reduce ESOP expense totaled $8,000 for the three months ended March 31, 2013 and 2012. Stock-based compensation expense related to stock options resulted in a tax benefit of $18,000 and $2,000 for the three months ended March 31, 2013 and 2012, respectively.

NOTE 11 — EMPLOYEE BENEFIT PLANS

Net periodic defined benefit pension cost included the following:

	For the three months ended March 31,
	2013			2012
	(in thousands)
Components of net periodic benefit cost
Service cost	$	206		$	184
Interest cost		89			90
Expected return on plan assets		(182	)		(162	)
Recognized net actuarial loss		66			72
Net periodic benefit cost	$	179		$	184

There were no employer contributions for the three months ended March 31, 2013 and 2012.

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TF FINANCIAL CORPORATION AND SUBSIDIARIES

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

(Unaudited)

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 hereto), 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 Condition

The Company’s total assets at March 31, 2013 and December 31, 2012 were $716.0 million and $711.8 million, respectively, representing an increase of $4.2 million during the three-month period. Largely as a result of the repayment of loans receivable and investment securities, cash and cash equivalents increased by $17.6 million during the first three months of 2013. Loans receivable, net decreased by $5.9 million during the first quarter of 2013. Principal repayments of $34.3 million on loans were partially offset by originations of consumer and single-family residential mortgage loans totaling $16.3 million and originations of commercial loans totaling $12.7 million. The Company increased the allowance for loan losses by $439,000 and transferred $100,000 from loans to real estate acquired through foreclosure. Loans receivable held for sale remained relatively unchanged as originations of loans for sale in the secondary market totaled $11.7 million and proceeds from loan sales totaled $11.9 million. Investment securities decreased by $6.6 million due to principal repayments and maturities totaling $7.9 million, a decrease in the fair value of available for sale securities of $1.3 million and net premium amortization of $183,000, all of which were offset by security purchases of $2.8 million.

Total liabilities increased by $3.7 million during the first three months of 2013. Deposit balances increased $11.0 million during the period with checking, money market and savings accounts increasing by $12.1 million. Advances from the FHLB decreased by $6.5 million, the result of scheduled amortization and maturities. Retail certificates of deposit (“CDs”) decreased $1.1 million during the first three months of 2013.

Total consolidated stockholders’ equity of the Company was $83.4 million or 11.7% of total assets at March 31, 2013. At March 31, 2013, there were approximately 102,000 shares available for repurchase under the previously announced share repurchase plan.

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Asset Quality

Nonperforming assets include real estate owned, which is carried at estimated fair value less costs to sell and nonperforming loans. Nonperforming loans include loan balances 90 days or more past due and impaired loans for which the accrual of interest has been discontinued. The following table sets forth information regarding the Company’s nonperforming assets:

	At
Nonperforming Assets	March 31, 2013			December 31, 2012			March 31, 2012
	(Dollars in thousands)
Loans receivable, net:
Residential
Residential mortgages	$	2,242		$	2,265		$	4,040
Commercial
Real estate-commercial		552			1,098			2,039
Real estate-residential		50			51			838
Construction loans		4,649			4,794			6,580
Commercial and industrial loans		—			—			6
Consumer
Home equity and second mortgage		143			143			377
Other consumer		11			8			9
Total nonperforming loans		7,647			8,359			13,889
Real estate owned		7,170			7,282			10,247
Total nonperforming assets	$	14,817		$	15,641		$	24,136
Total loans 90 days or more past due as to interest or principal and accruing interest	$	—		$	—		$	—
Ratio of nonperforming loans to gross loans		1.45	%		1.56	%		2.79	%
Ratio of nonperforming loans to total assets		1.07	%		1.17	%		2.00	%
Ratio of total nonperforming assets to total assets		2.07	%		2.20	%		3.48	%

Nonperforming construction loans include two loans with a combined balance of $2.0 million secured by a parcel of land. The Bank has recorded a partial charge-off of $302,000 from the allowance for loan losses equal to the difference between the recorded investment and a recent appraisal. The borrower is attempting to sell the property and intends to apply the sale proceeds to the outstanding loan balance. Additionally, $43,000 of the allowance for loan losses has been allocated to this loan for potential additional costs.

Nonperforming construction loans also include a participation in a commercial construction project with a principal balance due to the Bank of $3.1 million. The Bank has recorded a partial charge-off of $198,000 from the allowance for loan losses equal to the difference between the recorded investment and a recent appraisal. Additionally, $1,500,000 of the allowance for loan losses has been allocated to this loan for a potential shortfall related to the disposition of the loan.

Foreclosed property at March 31, 2013 consisted of twenty-one parcels of real estate with a combined carrying value of $7.2 million. During the first quarter of 2013, the Bank foreclosed on two mortgage loans secured by residential property valued at $100,000 which resulted in a charge to the allowance of $87,000. Also, the Bank sold one property acquired through foreclosure with an aggregate book value of $32,000. All foreclosed properties are listed or are in the process of being listed with real estate agents for sale in a timely manner. Foreclosed real estate is included in other assets in the Consolidated Balance Sheet.

Allowance for Loan Losses

The Bank provides valuation allowances for estimated losses from uncollectible loans. The allowance is increased by provisions charged to expense and reduced by net charge-offs. On a quarterly basis, the Company prepares an allowance for loan losses (ALLL) analysis. In the analysis, the loan portfolio is segmented into groups of homogeneous loans that share similar risk characteristics: commercial loans secured by nonresidential or non-owner occupied residential real estate, construction, commercial and industrial loans, single-family residential, and consumer which is predominately real estate secured junior liens and home equity lines of credit. Each segment is assigned reserve factors based on quantitative and qualitative measurements. In addition, the Bank reviews its internally classified loans, its loans classified for regulatory purposes, delinquent loans, and other relevant information in order to isolate loans for further scrutiny as potentially impaired loans.

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

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

Potentially impaired loans selected for individual evaluation are reviewed in accordance with US GAAP which governs the accounting for impaired assets, as well as regulatory guidance regarding treatment of troubled, collateral-dependent loans. Each potentially impaired loan is evaluated using all available information such as recent appraisals, whether the loan is currently on accrual or nonaccrual status, discounted cash flow analyses, guarantor financial strength, the value of additional collateral, and the loan’s and borrower’s past performance to determine whether in management’s best judgment it is probable that the Bank will be unable to collect all contractual interest and principal in accordance with the loan’s terms. Loans deemed not to be impaired are assigned a reserve factor based upon the segment from which they were selected.

Loans deemed impaired are evaluated to determine the estimated fair value of the collateral, and a portion of the ALLL will be allocated to the deficiency. Troubled collateral-dependent real estate secured loans are valued using the appraised value of the collateral, and a portion of the ALLL will be allocated to these loans based on the difference between the loan amount and the appraised value. If such amounts are judged by management to be permanent, they will be charged-off. In addition, if foreclosure is probable, a portion of the ALLL will be allocated to the estimated additional costs to acquire and the estimated costs to sell. Upon completion of the foreclosure process, these amounts will be charged-off.

The ALLL needed as a result of the foregoing evaluation is compared with the unadjusted amount, and an adjustment is made by means of a provision to the allowance for loan losses. Recognizing the inherently imprecise nature of the loss estimates and the large number of assumptions needed in order to perform the analysis, the required reserve may be less than the actual level of reserves at the end of any evaluation period, and thus there may be an unallocated portion of the ALLL. Management adjusts the unallocated portion to an amount which management considers reasonable under the circumstances.

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RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012

Net Income. The Company recorded net income of $1,223,000, or $0.45 per diluted share, for the three months ended March 31, 2013 as compared to net income of $1,155,000, or $0.42 per diluted share, for the three months ended March 31, 2012.

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. Yields and costs are computed by dividing income or expense by the average daily balance of interest-earning assets or interest-bearing liabilities, respectively, for the three-month periods indicated.

	Three Months Ended March 31,
	2013								2012
	Average balance		Interest			Average yld/cost			Average balance		Interest			Average yld/cost
ASSETS
Interest-earning assets:
Loans receivable (1)	$	525,275	$	6,066			4.68	%	$	493,396	$	6,197			5.05	%
Mortgage-backed securities		41,988		273			2.64	%		61,971		539			3.50	%
Investment securities (2)		65,131		711			4.43	%		67,035		712			4.27	%
Other interest-earning assets (3)		28,877		4			0.06	%		13,619		2			0.06	%
Total interest-earning assets		661,271		7,054			4.33	%		636,021		7,450			4.71	%
Noninterest-earning assets		46,572								50,557
Total assets	$	707,843							$	686,578
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
Deposits	$	560,750		731			0.53	%	$	554,523		1,066			0.77	%
Borrowings from the FHLB		56,114		248			1.79	%		47,387		405			3.44	%
Total interest-bearing liabilities		616,864		979			0.64	%		601,910		1,471			0.98	%
Noninterest-bearing liabilities		7,216								6,523
Total liabilities		624,080								608,433
Stockholders’ equity		83,763								78,145
Total liabilities and stockholders’ equity	$	707,843							$	686,578
Net interest income—tax equivalent basis				6,075								5,979
Interest rate spread (4)—tax equivalent basis							3.69	%							3.73	%
Net yield on interest-earning assets (5)—tax equivalent basis							3.73	%							3.78	%
Ratio of average interest-earning assets to average interest-bearing liabilities							107.20	%							105.67	%
Less: tax equivalent interest adjustments				(197	)							(187	)
Net interest income			$	5,878							$	5,792
Interest rate spread (4)							3.56	%							3.61	%
Net yield on interest-earning assets (5)							3.60	%							3.66	%

(1	)	Nonperforming loans have been included in the appropriate average loan balance category, but interest on nonperforming loans has not been included for purposes of determining interest income.
(2	)	Tax equivalent adjustments to interest on investment securities were $197,000 and $187,000 for the quarters ended March 31, 2013 and 2012, respectively. Tax equivalent interest income is based upon a marginal effective tax rate of 34%.
(3	)	Includes interest-bearing deposits in other banks.
(4	)	Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.
(5	)	Net yield on interest-earning assets represents net interest income as a percentage of average interest-earning assets.

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Rate/Volume Analysis

The following table presents, for the periods indicated, the change in interest income and interest expense (dollars 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.

	For the three months ended March 31
	2013 vs 2012 Increase (decrease) due to
	Volume			Rate			Net
Interest income:
Loans receivable, net	$	1,646		$	(1,777	)	$	(131	)
Mortgage-backed securities		(151	)		(115	)		(266	)
Investment securities (1)		(92	)		91			(1	)
Other interest-earning assets		2			—			2
Total interest-earning assets		1,405			(1,801	)		(396	)
Interest expense:
Deposits		82			(417	)		(335	)
Borrowings from the FHLB		390			(547	)		(157	)

Total interest-bearing liabilities		472			(964	)		(492	)
Net change in net interest income	$	933		$	(837	)	$	96

)

Tax equivalent adjustments to interest on investment securities were $197,000 and $187,000 for the quarters ended March 31, 2013 and 2012, respectively. Tax equivalent interest income is based upon a marginal effective tax rate of 34%.

Total Interest Income. Total interest income, on a taxable equivalent basis, decreased by $396,000, or 5.3%, to $7.1 million for the quarter ended March 31, 2013 compared with the first quarter of 2012. Interest income from loans receivable decreased by $131,000, the result of a decrease in the average yield on loans of 37 basis points netted against the effect of a $31.9 million increase in the average balance of loans outstanding. The decrease in the yield was caused by the combined effects of a large number of higher rate loans being prepaid, and new loans added to the portfolio with a lower yield than the existing portfolio loans that had matured or refinanced. Interest income from mortgage-backed securities was lower in the 2013 quarter in comparison to the same period of 2012 mainly because the yield associated with principal repayments and sales which occurred during the intervening period was higher than the yield on remaining mortgage-backed securities.

Total Interest Expense. Total interest expense decreased by $492,000 to $1.0 million during the three-month period ended March 31, 2013 as compared with the same period in 2012. The average interest rate paid on the Bank’s deposits was 24 basis points lower in 2013 due to the maturity of certificates of deposit with higher interest rates than current market rates offered on the products into which the maturing CDs were renewed or reinvested, and a favorable change in the deposit mix and pricing. Interest expense associated with borrowings from the FHLB decreased $157,000 between the first quarter of 2013 compared to the same quarter of 2012. During the intervening period, the Bank increased its average outstanding borrowings by $8.7 million, which included an increase in long-term advances with rates lower than the maturing advances, which resulted in a decrease in the cost of borrowed funds of 165 basis points.

Noninterest income. Total noninterest income was $1.4 million for the first quarter of 2013 compared with $1.2 million for the same period in 2012. The increase was mainly the result of a $417,000 gain related to an eminent domain matter affecting a parcel of Company property, a $153,000 increase over the amount recorded in 2012 related to the same matter, which is now finalized.

Noninterest expense. Total noninterest expense decreased by $26,000 to $5.0 million for the three months ended March 31, 2013 compared to the same period in 2012. Foreclosed real estate expense decreased $63,000 in first quarter of 2013 mainly due to a decrease in the holding costs of real estate acquired through foreclosure that resulted from the disposition of such properties during the intervening period. Employee compensation decreased by $57,000, mainly the result of a decrease in the costs of employer provided health care plans. In contrast, non-merger related professional fees decreased $63,000 between the two periods as a result of professional services incurred during the 2012 period to enhance commercial lending policies. FDIC insurance premiums decreased by $41,000 between the two quarters due to a reduction in the premium rate assessment associated with improvement in nonperforming assets. Offsetting these decreases was an increase in merger-related costs of $320,000 attributable to the announced acquisition of Roebling Financial Corp, Inc.

Income tax expense. The Company’s effective tax rate was 32.2% for the quarter ended March 31, 2013 compared to 21.6% for the quarter ended March 31, 2012. These effective tax rates differ from the Company’s marginal tax rate of 34% largely due to merger-related costs treated as nondeductible offset by tax-exempt income associated with the Company’s investments in tax-exempt municipal bonds and bank owned life insurance.

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LIQUIDITY AND CAPITAL RESOURCES

Liquidity

The Bank’s liquidity is a measure of its ability to fund loans, and pay withdrawals of deposits, and other cash outflows in an efficient, cost-effective manner. The Bank’s short-term sources of liquidity include maturities, repayment and sales of assets, excess cash and cash equivalents, new deposits, brokered deposits, other borrowings, and new borrowings from the Federal Home Loan Bank and the Federal Reserve Bank. There has been no material adverse change during the three-month period ended March 31, 2013 in the ability of the Bank and its subsidiaries to fund their operations.

At March 31, 2013, the Bank had commitments outstanding under letters of credit of $930,000, commitments to originate loans of $35.5 million, and commitments to fund undisbursed balances of closed loans and unused lines of credit of $42.3 million. At March 31, 2013, the Bank had $8.0 million in outstanding commitments to sell loans. There has been no material change during the three months ended March 31, 2013 in any of the Bank’s other contractual obligations or commitments to make future payments.

The Company’s primary sources of liquidity are dividends from the Bank, principal and interest payments received from a loan made to the Bank’s ESOP, and tax benefits arising from the use of the Company’s tax deductions by other members of its consolidated group pursuant to a tax sharing agreement. The Company is dependent upon these sources and cash on hand which totaled approximately $1.9 million at March 31, 2013 in order to fund its operations and pay the dividend to its shareholders. There has been no material adverse change in the ability of the Company to fund its operations during the three-month period ended March 31, 2013.

Capital Requirements

The Bank was in compliance with all of its capital requirements as of March 31, 2013.

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 number of debtors or the value of the collateral securing the loans should deteriorate more than the Company has estimated, the present allowance for loan losses may be insufficient and additional provisions for loan losses may be required. The allowance for loan losses was approximately $6.7 million at March 31, 2013.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Based on their evaluation of the Company’s disclosure controls and procedures (as defined in Rules 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 to ensure that information required to be disclosed by the Company in the reports it files and submits pursuant to the rules and forms of the SEC is accumulated and communicated to the Company’s management including the principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures.

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.

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TF FINANCIAL CORPORATION AND SUBSIDIARIES

PART II-OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS

	Neither the Company nor its subsidiaries are involved in any pending legal proceedings, other than routine legal matters occurring in the ordinary course of business that in the aggregate involve amounts which are believed by management to be immaterial to the consolidated financial condition or results of operations of the Company.

ITEM 1A.	RISK FACTORS

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

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

	None.

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES

	Not applicable.

ITEM 4.	MINE SAFETY DISCLOSURES Not applicable

ITEM 5.	OTHER INFORMATION

	None.

ITEM 6.	EXHIBITS

	(a)	Exhibits
		31.1	Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
		31.2	Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
		32.	Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

		101.INS	XBRL Instance Document
		101.SCH	XBRL Taxonomy Extension Schema Document
		101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
		101.LAB	XBRL Taxonomy Extension Label Linkbase Document
		101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document
		101.DEF	XBRL Taxonomy Definition Linkbase Document

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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.

Date:	May 14, 2013	/s/ Kent C. Lufkin
		Kent C. Lufkin
		President and CEO
		(Principal Executive Officer)


Date:	May 14, 2013	/s/ Dennis R. Stewart
		Dennis R. Stewart
		Executive Vice President and Chief Financial Officer
		(Principal Financial & Accounting Officer)