CONTENTS



CORPORATE PROFILE AND RELATED INFORMATION

1MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

2MANAGEMENT'S REPORT ON INTERNAL CONTROL

10REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

11FINANCIAL STATEMENTSCONSOLIDATED BALANCE SHEETS

12CONSOLIDATED STATEMENTS OF INCOME

13CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME

14CONSOLIDATED STATEMENTS OF CASH FLOWS

15NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

17BOARD OF DIRECTORS AND EXECUTIVE OFFICERS

INSIDE BACK
COVER


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Table of Contents

CORPORATE PROFILE AND RELATED INFORMATION

TF Financial Corporation (the "Company") is the parent company of Third Federal Bank and its subsidiaries Third Delaware Corporation
and Teragon Financial Corporation (collectively, "Third Federal" or the "Bank"), TF Investments Corporation, and Penns Trail Development Corporation. At December 31, 2008, total assets were
approximately $733.7 million. The Company was formed as a Delaware corporation in March 1994 at the direction of the Bank to acquire all of the capital stock that Third Federal issued upon its
conversion from the mutual to stock form of ownership (the "Conversion") and concurrent $52.9 million initial public offering effective July 13, 1994. At December 31, 2008, total
stockholders' equity was approximately $67.7 million. The Company is a unitary savings and loan holding company which, under existing laws, generally is not restricted in the types of business
activities in which it may engage, provided that Third Federal retains a specified amount of its assets in housing-related investments. Third Federal is a federally chartered stock savings bank
headquartered in Newtown, Pennsylvania, which was originally chartered in 1921 under the name "Polish American Savings Building and Loan Association." Deposits of Third Federal have been federally
insured since 1935 and are currently insured up to the maximum amount allowable by the Federal Deposit Insurance Corporation (the "FDIC"). Third Federal is a community-oriented institution offering a
variety of financial services to meet the needs of the communities that it serves. As of December 31, 2008, Third Federal operated branch offices in Bucks and Philadelphia counties,
Pennsylvania and Mercer County, New Jersey. Third Federal attracts deposits (approximately $489.9 million at December 31, 2008) from the general public and uses such deposits, together
with borrowings mainly from the Federal Home Loan Bank of Pittsburgh (FHLB) (approximately
$158.1 million at December 31, 2008) and other funds, to originate loans secured by first mortgages and junior liens on owner-occupied, one-to-four family
residences, and to originate loans secured by commercial real estate, including construction loans.

Stock Market Information

Since its issuance in July 1994, the Company's common stock has been traded on the Nasdaq Global Market. The daily stock quotation for
the Company is listed on the Nasdaq Global Market published in The Wall Street Journal, The Philadelphia Inquirer, and other leading newspapers under the trading symbol of "THRD." The number of
shareholders of record of common stock as of March 9, 2009, was approximately 445. This does not reflect the number of persons or entities who held stock in nominee or "street" name through
various brokerage firms.

Dividend Policy

The Company's ability to pay dividends to stockholders is dependent in part upon the dividends it receives from Third Federal. Among
other limitations, Third Federal may not declare or pay a cash dividend on any of its stock if the effect thereof would cause Third Federal's regulatory capital to be reduced below (1) the
amount required for the liquidation account established in connection with Third Federal's conversion from mutual to stock form, or (2) the regulatory capital requirements imposed by the Office
of Thrift Supervision ("OTS"). It is the Company's policy to pay dividends when it is deemed prudent to do so. The Board of Directors will consider the payment of a dividend on a quarterly basis,
after giving consideration to the level of profits for the previous quarter and other relevant information.

Stock Price and Dividend History

Quoted market priceDividend paid
per shareQuarter ended

High

LowDecember 31, 2008

$
22.98

$
17.25

$
0.20September 30, 2008

$
23.32

$
20.46

$
0.20June 30, 2008

$
26.58

$
21.30

$
0.20March 31, 2008

$
25.83

$
19.40

$
0.20December 31, 2007

$
28.75

$
24.64

$
0.20September 30, 2007

$
30.25

$
25.82

$
0.20June 30, 2007

$
31.00

$
29.50

$
0.20March 31, 2007

$
30.81

$
29.50

$
0.20


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Table of Contents

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND  RESULTS OF OPERATIONS

General.The following discussion and analysis should be read in conjunction with the Company's consolidated financial statements and is
intended to
assist in understanding and evaluating the major changes in the financial position and results of operations of the Company with a primary focus on an analysis of operating results.

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,
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.

The
Company's income on a consolidated basis is derived substantially from its investment in its subsidiary Third Federal. The earnings of Third Federal depend primarily on its net
interest income. Net interest income is affected by the interest income that Third Federal receives from its loans and investments and by the interest expense that Third Federal incurs on its
deposits, borrowings and other sources of funds. In addition, the mix of Third Federal's interest-bearing assets and liabilities can have a significant effect on Third Federal's net interest income;
loans generally have higher yields than securities; retail deposits generally have lower interest rates than other borrowings.

Third
Federal also receives income from service charges and other fees and occasionally from sales of investment securities and real estate owned. Third Federal incurs expenses in
addition to interest expense in the form of salaries and benefits, deposit insurance premiums, property operations and maintenance, advertising and other related business expenses.

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.

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Table of Contents

Management
believes that the most critical accounting policy requiring the use of a significant amount of accounting estimates and judgment is the determination of the allowance for loan
losses. Allowances are established based on an analysis of individual loans, pools of similar loans, delinquencies, loss experience, economic conditions generally and as they may affect individual
borrowers, and other factors. Individual loans are evaluated based on cash flows or value of the underlying collateral, or both. All of these evaluation factors are subject to a high degree of
uncertainty. If the financial condition and collateral values of a significant amount of debtors should deteriorate more than the Company has estimated, present allowances for loan losses may be
insufficient and additional provisions for loan losses may be required. In addition, a single loan may result in the loss of a substantial amount and may significantly reduce the allowance. The
allowance for loan losses was $3.9 million at December 31, 2008.

Financial Condition and Changes in Financial Condition

Assets.The Company's total assets at December 31, 2008 were $733.7 million, an increase of $32.0 million during the
year.

The
Company's loans receivable held for investment net of allowance for loan losses at December 31, 2008 were $544.3 million, a $27.3 million or 5.3% increase since
December 31, 2007. During 2008, there were originations of $118.7 million in predominately commercial real estate loans and single-family residential first and second mortgage loans.
Offsetting these originations were $88.5 million of principal payments of existing loans in the loans receivable portfolio. Other factors which served to reduce the loan receivable balance were
the Company's addition to the allowance for loan losses of $1.5 million and the transfers from loans to real estate acquired through foreclosure of $1.2 million. Mortgage loans available
for sale at December 31, 2008 were $1.7 million, an increase of $0.7 million during the year which is the result of loan originations of $16.9 million and related sale
proceeds of $16.4 million.

Mortgage-backed
securities available for sale increased by $9.0 million during 2008 due to purchases of $28.3 million and an increase of $1.8 million in the fair
value of the securities. Offsetting this increase was the repayment of $21.2 million of the underlying mortgages comprising such securities. Mortgage-backed securities held to maturity
decreased by $1.4 million during 2008 due to principal repayment of the underlying mortgages in the securities.

Investment
securities available for sale decreased by $0.7 million during the year due to maturities of agency and corporate notes totaling $4.0 million. The remaining net
change was attributable to purchases of $2.9 million and increases of $0.4 million to the fair value of these investment securities.

Liabilities.Deposit balances increased by $17.5 million during 2008. Money market, non-interest checking and interest-bearing
checking accounts increased $10.7 million while savings decreased by $18.8 million during the period. Retail certificates of deposit increased by $25.6 million during 2008.

Advances
from the FHLB increased by $4.9 million, a result of new long term advances of $19.3 million and a $20.0 million increase of short-term
borrowings, less scheduled amortization payments of $34.4 million. It is the current intent of the Company to fund a portion of its interest-bearing assets, not funded by deposits, with longer
term advances from the FHLB, and fund its day-to-day cash needs and shorter term interest-bearing assets not otherwise funded with deposits using draws on its line of credit
with the FHLB. The Bank's line of credit at the FHLB was $60 million of which $32.4 million was drawn at December 31, 2008. In December 2008, the Bank entered into a borrowing
arrangement with the Federal Reserve Bank (FRB) for a total of $10,000,000, maturing in three months with an interest rate of 0.50%.

Stockholders' equity.Total consolidated stockholders' equity decreased by $0.2 million to $67.7 million at December 31,
2008.
The decrease is largely the result of purchases of 181,665 shares of common stock, held in treasury that reduced stockholders' equity by $3.6 million and $2.1 million in

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Table of Contents

cash
dividends paid to the Company's common stockholders. These decreases were offset by $4.2 million in net income and the net change in accumulated other comprehensive income. Accumulated
other comprehensive income increased by $1.5 million of unrealized gain due to the fair value adjustment on available for sale securities and decreased by a $1.1 million adjustment
related to the pension plan. Finally, there was a $0.3 million increase due to the allocation of 12,728 shares to participants in the Company's employee stock ownership plan, and an increase of
$0.7 million attributable to stock grants and stock options.

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

2008

2007Average
balance

Interest

Average
yld/cost

Average
balance

Interest

Average
yld/costASSETSInterest-earning assets:Loans receivable(1)

$
542,452

$
32,616


6.01
%
$
501,112

$
32,272


6.44
%Mortgage-backed securities


100,505


4,757


4.73
%

86,816


4,086


4.71
%Investment securities(2)


41,137


1,865


4.53
%

38,666


2,097


5.42
%Other interest-earning assets(3)


842


17


2.02
%

2,180


105


4.82
%Total interest-earning assets


684,936


39,255


5.73
%

628,774


38,560


6.13
%Non interest-earning assets


35,841








35,937Total assets

$
720,777







$
664,711LIABILITIES AND STOCKHOLDERS' EQUITYInterest-bearing liabilities:Deposits


483,220


11,846


2.45
%

477,299


13,687


2.87
%Advances from the FHLB and other borrowings


159,565


6,225


3.90
%

112,277


4,668


4.16
%Total interest-bearing liabilities


642,785


18,071


2.81
%

589,576


18,355


3.11
%Non interest-bearing liabilities


8,785








8,189Total liabilities


651,570








597,765Stockholders' equity


69,207








66,946Total liabilities and stockholders' equity

$
720,777







$
664,711Net interest income-tax equivalent basis




$
21,184







$
20,205Interest rate spread(4)tax equivalent basis








2.92
%







3.02
%Net yield on interest-earning assets(5)tax equivalent basis








3.09
%







3.21
%Ratio of average interest-earning assets to average interest-bearing liabilities








107
%







107
%Less: taxequivalent interest adjustment





(423
)







(432
)Net interest income




$
20,761







$
19,773Interest rate spread(4)








2.86
%







2.95
%Net yield on interest-earning assets(5)








3.03
%







3.14
%


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Table of Contents

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.

2008 vs 2007
Increase (decrease) due toVolume

Rate

NetInterest income:Loans receivable, net

$
2,564

$
(2,220
)
$
344Mortgage-backed securities


648


23


671Investment securities(1)


128


(360
)

(232
)Other interest-earning assets


(45
)

(43
)

(88
)Total interest-earning assets


3,295


(2,600
)

695Interest expense:Deposits


168


(2,009
)

(1,841
)Advances from the FHLB and other borrowings


1,860


(303
)

1,557Total interest-bearing liabilities


2,028


(2,312
)

(284
)Net change in net interest income

$
1,267

$
(288
)
$
979






Comparison of Years Ended December 31, 2008 and December 31, 2007

Net Income.Net income was $4.2 million for the year ended December 31, 2008 compared with net income of $4.8 million for
the
year ended December 31, 2007. The decrease in pre-tax net income of $0.9 million when comparing the year 2008 with 2007 is largely attributable to the provision for loan loss
of $1.5 million in 2008 while there was no provision during 2007.

Total Interest Income.For the year ended December 31, 2008, total interest income, on a taxable equivalent basis, increased by
$695,000 to
$39.3 million. The average balance of loans outstanding increased $41.3 million during 2008; however, the average yield on loans decreased 43 basis points primarily as a result of the
Bank's reduction of its prime rate seven times during 2008 by 400 basis points mirroring the action taken by the Federal Open Market Committee (FOMC) when it acted to reduce the federal funds rate. At
December 31, 2008, the Company had $80.8 million in floating rate, prime-based construction, home equity and other loans. Interest income from mortgage-backed securities increased as a
result of security purchases of $28.3 million during 2008. Interest income from investment securities decreased as a result of reduced dividends received on FHLB stock despite increased
balances of FHLB stock held. The FHLB did not pay any dividends in the fourth quarter of 2008 and has suspended such payments as well as stock redemption until the FHLB deems it prudent to resume.

Total Interest Expense.Total interest expense for the year ended December 31, 2008 decreased to $18.1 million from
$18.4 million in 2007. Interest rates paid on the Bank's deposits dropped primarily because the average rate on deposits indexed to the yield on the Merrill Lynch Ready Asset Money Market Fund
decreased by 235 basis points during 2008 and therefore significantly reduced interest expense on deposits. At December 31, 2008, there were $50.6 million of deposits indexed to

5

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Table of Contents

this
fund versus $78.0 million at December 31, 2007. Interest on advances from the FHLB and other borrowings increased by $1.6 million during 2008 versus 2007 as a result of a
$47.3 million increase in the average balance of advances.

Allowance for Loan Losses.The allowance for loan losses was approximately $3.9 million at December 31, 2008 and
$2.8 million at
December 31, 2007, respectively. The provision for loan losses was $1.5 million during 2008 compared with $0 during 2007. Net loan charge-offs were $487,000 during 2008
compared to $23,000 during 2007. While management maintains the allowance for losses at a level which it considers to be adequate to provide for probable losses, there can be no assurance that further
additions will not be made to the allowance and that such losses will not exceed the estimated amounts.

Non-Interest Income.Total non-interest income was $3.9 million during 2008 compared with $3.7 million for the
same period in 2007. During 2008, a $197,000 insurance claim recovery was included which related to a 2007 expense sustained as a result of the bankruptcy of one of the Bank's loan servicing agents.
Additionally, non-interest income during 2008 included $438,000 of gain on the sale of two foreclosed real estate properties. In 2007, non-interest income included $777,000 of
non-recurring income from a fraud-related settlement.

Non-Interest Expense.Total non-interest expense increased by $529,000 to $17.4 million during 2008 compared to 2007.
Employee compensation and benefits increased $248,000 largely due to increases in incentive compensation and bonus expense. Total occupancy and equipment expense reflect a $69,000 increase in 2008;
however, this increase was net of $68,000 in cost savings which resulted from the closing of the Company's banking office on Quakerbridge Road in Mercer County, New Jersey during June 2008.
Marketing-related expenditures in 2008 increased $195,000 over 2007 when the Company curtailed marketing-related expenditures. Professional fees were $97,000 higher in 2008 versus 2007 due to legal
services rendered in conjunction with non-performing assets and fees for compliance services associated with commercial lending. Loan expenses related to satisfaction fees and appraisals
of non-performing assets increased $32,000 during 2008. Other non-interest expense during 2008 only
includes fair value adjustments related to forward loans sales and mortgage servicing rights of $154,000. Non-interest expense in 2007 included a $306,000 loss incurred by the Bank due to the related
bankruptcy of one of the Bank's loan servicing agents.

Income Tax Expense.The Company's effective tax rate was 25.7% during 2008 compared to 26.7% during 2007. These effective tax rates are
lower than
the Company's marginal tax rate of 34% largely due to the tax-exempt income associated with the Company's investments in tax-exempt municipal bonds and bank-owned
life insurance.

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, and
pay dividends
in an efficient, cost-effective manner. The Company's primary sources of funds are cash on hand and dividends from its wholly-owned Bank. The Bank's primary sources of funds are deposits,
borrowings, and scheduled amortization and prepayment of loan and mortgage-backed security principal.

The
Bank endeavors to fund its operations internally but has, when deemed prudent, borrowed funds from the FHLB. As of December 31, 2008, such borrowed funds totaled
$158.1 million. The amount of these borrowings that will mature during the twelve months ending December 31, 2009 is $45.5 million. At December 31, 2008 the Bank had a
$60.0 million line of credit, $27.6 million of which was unused, and up to approximately $137 million of additional collateral-based borrowing capacity at the FHLB. In addition,
the Bank has entered into borrowing arrangements with the FRB. At December 31, 2008, the Bank had $10.0 million in borrowings with FRB that will mature within three months.

6

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Table of Contents

The
amount of certificate accounts that are scheduled to mature during the twelve months ending December 31, 2009, is approximately $122.5 million. To the extent that these
deposits do not remain at the Bank upon maturity, the Bank believes that it can replace these funds with other deposits, excess
liquidity, and advances from the FHLB or other borrowings. It has been the Bank's experience that substantial portions of such maturing deposits remain at the Bank.

At
December 31, 2008, the Bank had outstanding commitments to originate loans or fund unused lines of credit of $70.1 million. The loan commitments will be funded during
the twelve months ending December 31, 2009. The unused lines of credit can be funded at any time. Funds required to fill these commitments will be derived primarily from current excess
liquidity, deposit inflows or loan and security repayments. At December 31, 2008, the Bank had $5.8 million in optional commitments to sell loans.

The
Company also has obligations under lease agreements. Payments required under such lease agreements will be approximately $482,000 during the year ending December 31, 2009.

Capital Resources.Under current regulations, the Bank must have core capital equal to 4% of adjusted total assets and risk-based
capital
equal to 8% of risk-weighted assets, of which 1.5% must be tangible capital, excluding goodwill and certain other intangible assets. On December 31, 2008, the Bank met its three
regulatory capital requirements.

Management
believes that under current regulations, the Bank will continue to meet its minimum capital requirements in the foreseeable future. However, events beyond the control of the
Bank, such as increased interest rates or a downturn in the economy in areas in which the Bank operates, could adversely affect future earnings and as a result, the ability of the Bank to meet its
future minimum capital requirements.

Impact of Inflation and Changing Prices

The consolidated financial statements and related data have been prepared in accordance with accounting principles generally accepted
in the United States of America which require the measurement of financial position and operating results in terms of historical dollars, without consideration for changes in the relative purchasing
power of money over time caused by inflation. Unlike industrial companies, nearly all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have
a more significant impact on a financial institution's performance than general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the price
of goods and services, since such goods and services are affected by inflation. In the current interest rate environment, liquidity and the maturity structure of the Bank's assets and liabilities are
critical to the maintenance of acceptable performance levels.

Quantitative and Qualitative Disclosures About Market Risk



The Bank has established an Asset/Liability Management Committee (ALCO) for the purpose of monitoring and managing market risk, which
is defined as the risk of loss of net interest income or economic value arising from changes in market interest rates and prices.

The
type of market risk which most affects the Company's financial instruments is interest rate risk, which is best quantified by simulating the hypothetical change in the economic value
of the Bank that would occur under specific changes in interest rates. Substantially all of the Bank's interest-bearing assets and liabilities are exposed to interest rate risk. Change in economic
value is measured using reports generated by the OTS, using input from the Bank, wherein the current net portfolio value of the Bank's interest-sensitive assets and liabilities is measured at
different hypothetical interest rate levels centered on the current term structure of interest rates. The Bank's exposure to interest rate risk results from, among other things, the difference in
maturities in interest-earning assets and interest-

7

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Table of Contents

bearing
liabilities. Since the Bank's assets currently have a longer maturity than its liabilities, the Bank's earnings could be negatively impacted during a period of rising interest rates.
Alternatively, in periods of falling interest rates the Bank's mortgage loans will repay at an increasing rate and cause the Bank to reinvest these cash flows in periods of low interest rates, also
negatively affecting the Bank's earnings. The relationship between the interest rate sensitivity of the Bank's assets and liabilities is continually monitored by management and ALCO.

The
Bank prices and originates loans, and prices and originates its deposits including CDs at market interest rates. Volumes of such loans and deposits at various maturity and repricing
horizons will vary according to customer preferences as influenced by the term structure of market interest rates. The Bank utilizes its investment and mortgage-backed security portfolios available
for sale to generate additional interest income, to manage its liquidity, and to manage its interest rate risk. These securities provide the Bank with a cash flow stream to fund asset growth or
liability maturities. In addition, if management determines that it is advisable to do so, the Bank can lengthen or shorten the average maturity of all interest- bearing assets through the selection
of fixed rate or variable rate securities, respectively.

The
Bank utilizes advances from the FHLB in managing its interest rate risk and as a tool to augment deposits in funding asset growth. The Bank typically utilizes these funding sources
to better match its fixed rate interest-bearing assets with longer maturities or repricing characteristics.

The
nature of the Bank's current operations is such that it is not subject to foreign currency exchange or commodity price risk. Additionally, neither the Company nor the Bank owns any
trading assets. At December 31, 2008, the Bank did not have any hedging transactions in place such as interest rate swaps, caps, or floors, although these derivatives are often used by banks to
manage interest rate risk.

The
Company's bank subsidiary is a savings bank regulated by the OTS and has policies or procedures in place for measuring interest rate risk. These policies and procedures stipulate
acceptable levels of interest rate risk. As part of its interest rate risk management, the Bank uses the Interest Rate Risk Exposure Report, which is generated quarterly by the OTS. This report
forecasts the interest rate sensitivity of net portfolio value ("NPV") under alternative interest rate environments. The NPV is defined as the net present value of the Bank's existing assets,
liabilities and off-balance sheet instruments. The calculated estimates of change in NPV at December 31, 2008 are as follows:

Change in Interest Rates

NPV Amount

% Change

Policy Limitation(In Thousands)+300 Basis Points

$
57,791


-24
%

-50
%+200 Basis Points

$
66,487


-13
%

-35
%+100 Basis Points

$
73,126


-4
%

-25
%+50 Basis Points

$
74,578


-2
%

-15
%Flat Rates

$
76,349


0
%

0
%-50 Basis Points

$
76,046


0
%

-10
%-100 Basis Points

$
74,598


-2
%

-20
%


Management
believes that the assumptions utilized by OTS in evaluating the vulnerability of the Company's net portfolio value to changes in interest rates are reasonable; however, the
interest rate sensitivity of the Bank's assets and liabilities as well as the estimated effect of changes in interest rates on NPV could vary substantially if different assumptions are used or actual
experience differs from the experience on which the assumptions were based. At December 31, 2008, the Bank's interest rate risk using the OTS methodologies was determined to be "minimal".

Recent Accounting Pronouncements

See Note B in the Consolidated Financial Statements for a discussion on this topic.

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Table of Contents

FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TF FINANCIAL CORPORATION AND SUBSIDIARIES
December 31, 2008 and 2007

9

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Table of Contents

MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined
in Exchange Act Rule 13a15(f). The Company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance
with authorization of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition
of the Company's assets that could have a material effect on the financial statements.

Internal
control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements
prepared for external purposes in accordance with generally accepted accounting principles. Because of inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.

Under
supervision and with the participation of management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of
our internal control over financial reporting based on the framework inInternal ControlIntegrated Frameworkissued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework inInternal ControlIntegrated Framework,management concluded that our internal control over financial reporting was effective as of December 31, 2008.

This
annual report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was
not subject to attestation by the Company's registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management's
report in this annual report.

GRAPHIC

GRAPHICKent C. Lufkin

Dennis R. StewartPresident and Chief Executive Officer

Executive Vice President and Chief Financial Officer


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Table of Contents

GRAPHIC

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board
of Directors and
Shareholders of TF Financial Corporation

We
have audited the accompanying consolidated balance sheets of TF Financial Corporation (a Delaware Corporation) and subsidiaries (the Company) as of December 31, 2008 and 2007,
and the related consolidated statements of income, changes in stockholders' equity and comprehensive income and cash flows for the years then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal
control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of TF Financial Corporation and subsidiaries as
of December 31, 2008 and 2007, and the consolidated results of their operations and their consolidated cash flows for the two years then ended in conformity with accounting principles generally
accepted in the United States of America.

GRAPHIC

Philadelphia,
Pennsylvania
March 30, 2009

11

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Table of Contents

TF Financial Corporation and Subsidiaries        CONSOLIDATED BALANCE SHEETS

December 312008

2007(in thousands)ASSETSCash and cash equivalents

$
2,719

$
5,680Investment securities available for saleat fair value


31,619


32,363Investment securities held to maturity ($246 as of December 31, 2007)





244Mortgage-backed securities available for saleat fair value


107,217


98,178Mortgage-backed securities held to maturity (fair value of $4,996 and $6,343 as of December 31, 2008 and 2007, respectively)


4,774


6,160Loans receivable, net


544,330


517,027Loans receivable, held for sale


1,659


1,040Federal Home Loan Bank stockat cost


9,896


8,782Accrued interest receivable


2,788


3,036Premises and equipment, net


5,636


6,267Goodwill


4,324


4,324Bank owned life insurance


16,514


15,881Other assets


2,232


2,691TOTAL ASSETS

$
733,708

$
701,673LIABILITIES AND STOCKHOLDERS' EQUITYLiabilitiesDeposits

$
489,850

$
472,394Advances from the FHLB


158,148


153,221Other short-term borrowings


10,000


Advances from borrowers for taxes and insurance


2,315


2,193Accrued interest payable


3,066


3,415Other liabilities


2,637


2,607Total liabilities


666,016


633,830Stockholders' equityPreferred stock, no par value; 2,000,000 shares authorized at December 31, 2008 and 2007, none issued





Common stock, $0.10 par value; 10,000,000 shares authorized, 5,290,000 shares issued, 2,515,407 and 2,671,083 shares outstanding at December 31, 2008
and 2007, respectively, net of shares in treasury: 20082,627,752; 20072,459,440


529


529Additional paid-in capital


53,897


53,337Unearned ESOP shares


(1,468
)

(1,595
)Treasury stockat cost


(54,538
)

(51,216
)Retained earnings


69,875


67,735Accumulated other comprehensive loss


(603
)

(947
)Total stockholders' equity


67,692


67,843TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$
733,708

$
701,673


The
accompanying notes are an integral part of these statements.

12

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Table of Contents

TF Financial Corporation and Subsidiaries        CONSOLIDATED STATEMENTS OF INCOME

Year ended
December 31,2008

2007(in thousands, except
per share data)Interest incomeLoans, including fees

$
32,616

$
32,272Mortgage-backed securities


4,757


4,086Investment securities


1,442


1,665Interest-bearing deposits and other


17


105TOTAL INTEREST INCOME


38,832


38,128Interest expenseDeposits


11,846


13,687Borrowings


6,225


4,668TOTAL INTEREST EXPENSE


18,071


18,355NET INTEREST INCOME


20,761


19,773Provision for loan losses


1,500


NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES


19,261


19,773Non-interest incomeService fees, charges and other operating income


2,336


2,138Bank owned life insurance


633


607Gain on sale of real estate acquired through foreclosure


438


Gain on sale of loans


271


214Other income


197


777TOTAL NON-INTEREST INCOME


3,875


3,736Non-interest expenseEmployee compensation and benefits


10,638


10,390Occupancy and equipment


2,881


2,812Professional fees


795


698Marketing and advertising


614


419Other operating


2,503


2,583TOTAL NON-INTEREST EXPENSE


17,431


16,902INCOME BEFORE INCOME TAXES


5,705


6,607Income tax expense


1,469


1,762NET INCOME

$
4,236

$
4,845Earnings per sharebasic

$
1.61

$
1.78Earnings per sharediluted

$
1.61

$
1.78


The
accompanying notes are an integral part of these statements.

13

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Table of Contents

TF Financial Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND
COMPREHENSIVE INCOME

Years ended December 31, 2008 and 2007

(in thousands, except share data)

Common StockAccumulated
other
comprehensive
income (loss)Shares

Par
value

Additional
paid-in
capital

Unearned
ESOP
shares

Treasury
stock

Retained
Earnings

Total

Comprehensive
income (loss)Balance at December 31, 2006


2,702.845

$
529

$
52,700

$
(1,703
)
$
(48,980
)
$
65,075

$
(1,982
)
$
65,639Allocation of ESOP shares


11,912





198


108











306Purchase of treasury stock


(166,375
)










(4,745
)







(4,745
)Cash dividendscommon stock

















(2,185
)




(2,185
)Compensation expenserestricted shares








361














361Exercise of options


110,035





(417
)




2,246








1,829Income tax benefit arising from stock compensation








367














367Stock option expense.








391














391Vesting of restricted stock grant


12,666





(263
)




263








Unrealized gains on securities, net of tax




















1,180


1,180

$
1,180Adjustment to record funded status of pension




















(145
)

(145
)

(145
)Net income for the year ended December 31, 2007

















4,845





4,845


4,845Comprehensive income

























$
5,880Balance at December 31, 2007


2,671,083

$
529

$
53,337

$
(1,595
)
$
(51,216
)
$
67,735

$
(947
)
$
67,843Allocation of ESOP shares


12,636





153


127











280Purchase of treasury stock


(181,665
)










(3,600
)







(3,600
)Cash dividendscommon stock

















(2,096
)




(2,096
)Compensation expenserestricted shares








348














348Exercise of options


685





(1
)




15








14Income tax benefit arising from stock compensation








(38
)













(38
)Stock option expense








361














361Vesting of restricted stock grant


12,668





(263
)




263








Unrealized gains on securities, net of tax




















1,470


1,470

$
1,470Adjustment to record funded status of pension




















(1,126
)

(1,126
)

(1,126
)Net income for the year ended December 31, 2008

















4,236





4,236


4,236Comprehensive income

























$
4,580Balance at December 31, 2008


2,515,407

$
529

$
53,897

$
(1,468
)
$
(54,538
)
$
69,875

$
(603
)
$
67,692


The accompanying notes are an integral part of this statement

14

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Table of Contents

TF Financial Corporation and Subsidiaries        CONSOLIDATED STATEMENTS OF CASH FLOWS

Year ended December 31,2008

2007(in thousands)OPERATING ACTIVITIESNet income

$
4,236

$
4,845Adjustments to reconcile net income to net cash provided by operating activitiesAmortization ofMortgage loan servicing rights


222


61Deferred loan origination fees


32


(133
)Premiums and discounts on investment securities, net


85


89Premiums and discounts on mortgage-backed securities, net


(114
)

14Premiums and discounts on loans, net


80


120Discounts on wholesale deposits





14Deferred income taxes


(9
)

318Provision for loan losses


1,500


Depreciation of premises and equipment


950


915Increase in value of bank-owned life insurance


(633
)

(607
)Restricted shares grant expense


348


361Stock option expense


361


391Stock based benefit programs: ESOP


280


306Proceeds from sale of loans originated for sale


16,398


17,708Origination of loans held for sale


(16,936
)

(17,810
)Gain on sale ofReal estate acquired through foreclosure


(438
)

Mortgage loans available for sale


(271
)

(213
)Mortgage loans held to maturity





(1
)Income from mortgage loan derivatives


(15
)

(1
)Expense associated with forward loan sales


39


2(Increase) decrease inAccrued interest receivable


248


(6
)Other assets


(1,270
)

(738
)Increase (decrease) inAccrued interest payable


(349
)

238Other liabilities


(171
)

(242
)NET CASH PROVIDED BY OPERATING ACTIVITIES

$
4,573

$
5,631


15

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Table of Contents

TF Financial Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)



Year ended December 31,2008

2007(in thousands)INVESTING ACTIVITIESLoan originations

$
(118,691
)
$
(121,299
)Loan principal payments


88,540


85,884Principal repayments on mortgage-backed securities held to maturity


1,380


1,530Principal repayments on mortgage-backed securities available for sale


21,223


11,067Proceeds from loan sales





1,969Maturities of certificates of deposit in other financial institutions





40Purchase of investment securities available for sale


(2,938
)

(4,111
)Purchase of mortgage-backed securities available for sale


(28,319
)

(33,401
)Proceeds from maturities of investment securities held to maturity


245


435Proceeds from maturities of investment securities available for sale


4,000


6,455Purchase of FHLB stock, net


(1,114
)

(1,652
)Proceeds from sale of real estate acquired through foreclosure


1,674


Purchase of premises and equipment


(319
)

(638
)NET CASH USED BY INVESTING ACTIVITIES

$
(34,319
)
$
(53,721
)FINANCING ACTIVITIESNet increase (decrease) in deposits


17,456


(5,707
)Net increase in short-term FHLB and other borrowings


30,033


12,383Proceeds from long-term FHLB advances


19,309


64,235Repayment of long-term FHLB advances


(34,415
)

(25,098
)Net increase in advances from borrowers for taxes and insurance


122


327Treasury stock acquired


(3,600
)

(4,745
)Exercise of stock options


14


1,829Tax (benefit) expense arising from stock compensation


(38
)

367Common stock dividends paid


(2,096
)

(2,185
)NET CASH PROVIDED BY FINANCING ACTIVITIES


26,785


41,406NET DECREASE IN CASH AND CASH EQUIVALENTS


(2,961
)

(6,684
)Cash and cash equivalents at beginning of year


5,680


12,364Cash and cash equivalents at end of year

$
2,719

$
5,680Supplemental disclosure of cash flow informationCash paid forInterest on deposits and advances from FHLB and other borrowings

$
18,420

$
18,117Income taxes

$
1,107

$
1,380Capitalization of mortgage servicing rights

$
223

$
244Transfers from loans to real estate acquired through foreclosure

$
1,236





The
accompanying notes are an integral part of these statements.

16

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Table of Contents



TF Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2008 and 2007

NOTE ASUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

TF Financial Corporation (the "Company") is a unitary savings and loan holding company, organized
under the laws of the State of Delaware, which conducts its consumer banking operations primarily through its wholly owned subsidiary, Third Federal Bank (Third Federal or the Bank). Third Federal is
a federally chartered- stock savings bank insured by the Federal Deposit Insurance Corporation. Third Federal is a community-oriented savings institution and conducts operations from its main office
in Newtown, Pennsylvania, twelve full-service branch offices located in Philadelphia and Bucks Counties, Pennsylvania, and two full-service branch offices located in Mercer
County, New Jersey. The Bank competes with other banking and financial institutions in its primary market communities, including financial institutions with resources substantially greater than its
own. Commercial banks, savings banks, savings and loan associations, credit unions and money market funds actively compete for savings and time deposits and loans. Such institutions, as well as
consumer finance and insurance companies, may be considered competitors of the Bank with respect to one or more of the services it renders.

The
Bank is subject to regulations of certain state and federal agencies and, accordingly, those regulatory authorities conduct periodic examinations. As a consequence of the extensive
regulation of commercial banking activities, the Bank's business is particularly susceptible to being affected by state and federal legislation and regulations.

1.Principles of Consolidation and Basis of Presentation

The
consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries: TF Investments, Penns Trail Development Corporation and Third Federal, and
its wholly owned subsidiaries, Third Delaware Corporation and Teragon Financial Corporation, (collectively, the "Company"). All material intercompany balances and transactions have been eliminated in
consolidation.

The
accounting policies of the Company conform to accounting principles generally accepted in the United States of America (US GAAP) and predominant practices within the banking
industry. The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from
those estimates. The more significant accounting policies are summarized below.

2.Cash and Cash Equivalents

The
Company considers cash, due from banks, federal funds sold and interest- bearing deposits in other financial institutions, with original terms to maturity of less than three months,
as cash equivalents for presentation purposes in the consolidated statements of financial position and cash flows. The Company is required to maintain certain cash reserves relating to deposit
liabilities. This requirement is ordinarily satisfied by cash on hand.

3.Investment and Mortgage-Backed Securities

The
Company accounts for investment and mortgage-backed securities in accordance with Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." The Company classifies its investment, mortgage-backed and marketable

17

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Table of Contents

TF Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2008 and 2007

NOTE ASUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

equity
securities in one of three categories: held to maturity, trading, or available for sale. The Company does not presently engage in security trading activities.

Investment,
mortgage-backed and marketable equity securities available for sale are stated at fair value, with net unrealized gains and losses excluded from income and reported in other
comprehensive income. Decreases in fair value deemed to be other than temporary are reported as a component of income. Realized gains and losses on the sale of securities are recognized using the
specific identification method.

Investment
and mortgage-backed securities held to maturity are carried at cost, net of unamortized premiums and discounts, which are recognized in interest income using the interest
method. Decreases in fair value deemed to be other than temporary are reported as a component of income. The Company has the ability and it is management's intention to hold such assets to maturity.

4.Loans Receivable, net

Loans
receivable that management has the intent and ability to hold for the foreseeable future, or until maturity or payoff are stated at unpaid principal balances less the allowance for
loan losses, and net of deferred loan origination fees, direct origination costs and unamortized premiums and discounts associated with purchased loans. Loan origination fees and costs as well as
unamortized premiums and discounts on mortgage loans are amortized to income using the interest method over the remaining period to contractual maturity, adjusted for actual prepayments.

Management's
periodic evaluation of the adequacy of the loan loss allowance is based on the Bank's historical loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral and current economic conditions. Actual losses may be higher or lower than historical
trends, which vary. The allowance for loan losses is increased by charges to income and decreased by charge-offs (net of recoveries).

The
Bank provides an allowance for accrued but uncollected interest when a loan becomes more than ninety days past due or is identified as impaired. The allowance is established by a
charge to interest income equal to all interest previously accrued, and income is subsequently recognized only to the extent that cash payments are received until, in management's judgment, the
borrower's ability to make periodic interest and principal payments is no longer impaired, in which case the loan is returned to accrual status.

The
Company accounts for impaired loans in accordance with SFAS 114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS 118, "Accounting by Creditors
for Impairment of a LoanIncome Recognition and Disclosures." SFAS 114 requires a creditor to measure impairment based on the present value of expected future cash flows discounted
at the loan's effective interest rate, except that as a practical expedient, a creditor may measure impairment based on a loan's observable market price, or the fair value of the collateral if the
loan is collateral dependent. Regardless of the measurement method, a creditor must measure impairment based on the fair value of the collateral when the creditor determines that foreclosure is
probable.

18

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Table of Contents

TF Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2008 and 2007

NOTE ASUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

5.Loans Receivable Held-for-Sale

Mortgages
loans originated and intended for sale in the secondary market are carried at fair value on an individual basis. Any resulting unrealized gain or loss is included in other
income.

6.Transfers of Financial Assets

The
Company accounts for the transfer of financial assets in accordance with SFAS 140 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." The standard is based on consistent application of a financial-components approach that recognizes the financial and servicing assets it controls and the liabilities it has incurred,
derecognizes financial assets when control has been surrendered and derecognizes liabilities when extinguished. The standard provides consistent guidelines for distinguishing transfers of financial
assets from transfers that are secured borrowings.

7.Premises and Equipment

Land
is carried at cost. Buildings and furniture, fixtures and equipment are carried at cost less accumulated depreciation. Depreciation is provided by the straight-line
method over the estimated useful lives of the assets. The Company accounts for the impairment of long-lived assets in accordance with SFAS 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets". The standard requires recognition and measurement for the impairment of long-lived assets to be held and used or to be disposed of by sale. The
Company had no impaired long-lived assets at December 31, 2008 and 2007.

8.Goodwill and Other Intangible Assets

Goodwill
does not require amortization but is subject to annual impairment testing. The Company has tested the goodwill for impairment prior to its fiscal year ending December 31,
2008. No impairment has been recognized.

9.Bank Owned Life Insurance

The
Company purchased $12.5 million in life insurance policies on the lives of its executives and officers prior to 2006. The Company is the owner and beneficiary of the policies.
The cash surrender values of the policies were approximately $16.5 million and $15.9 million at December 31, 2008 and 2007, respectively.

10.Benefit Plans

The
Company has established an Employee Stock Ownership Plan (ESOP) covering eligible employees with six months of service, as defined by the ESOP. The Company accounts for the ESOP in
accordance with the American Institute of Certified Public Accountants' Statement of Position (SOP) 93-6, "Employers' Accounting for Employee Stock Ownership Plans."
SOP 93-6 addresses the accounting for shares of stock issued to employees by an ESOP. SOP 93-6 requires that the employer record compensation expense in the
amount equal to the fair value of shares committed to be released from the ESOP to employees less dividends received on the allocated shares applied to the required debt service of the plan.

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Table of Contents

TF Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2008 and 2007

NOTE ASUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

The
Company has a defined benefit pension plan covering substantially all full-time employees meeting certain requirements. The Company accounts for the defined benefit plan
in accordance with SFAS 87, "Employers' Accounting for Pensions" which provides guidance for the various components of pension expense recognized in the income statement and any related
employer pension assets or liabilities. The Company includes reporting disclosures required by SFAS 132R, "Employers' Disclosures about Pensions and Other Postretirement Benefits".
Additionally, the Company adopted SFAS 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plansan amendment of FASB Statements No. 87, 88, 106,
and 132(R)". SFAS 158 requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability
in its balance sheet and to recognize changes in that funded status, including the gains and or losses and prior service costs or credits that were not recognized as components of net periodic benefit
cost pursuant to SFAS 87, in the year in which the changes occur through comprehensive income. This Statement also improves financial reporting by requiring an employer to measure the funded
status of a plan as of the date of its year-end balance sheet, with limited exceptions. The Company was required to initially recognize the funded status of a defined benefit
postretirement plan and to provide the required disclosures for the year ending December 31, 2006.

11.Stock-Based Compensation

The
Company has stock benefit plans that allow the Company to grant options and stock to employees and directors and which are more fully discussed in Note J. 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. The
Company accounts for stock-based compensation in accordance with SFAS 123R, "Share-Based Payment," 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.

The
fair value of each option grant during 2008 was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

2008Weighted average assumptionsDividend yield


3.87
%Expected volatility


18.01
%Risk-free interest rate


4.23
%Fair value of options granted during the year

$
3.13Expected lives in years


5.0


There
were no options granted in 2007.

12.Income Taxes

The
Company accounts for income taxes under the liability method specified in SFAS 109, "Accounting for Income Taxes" whereby deferred income taxes are recognized for the tax
consequences of "temporary differences" by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing
assets and

20

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Table of Contents

TF Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2008 and 2007

NOTE ASUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

liabilities.
The effect on deferred taxes due to change in tax rates is recognized in income in the period that includes the enactment date.

13.Advertising Costs

The
Company expenses marketing and advertising costs as incurred.

14.Earnings Per Share

The
Company follows the provisions of SFAS 128, "Earnings Per Share." Basic earnings per share excludes dilution and is computed by dividing income available to common
shareholders by the weighted average common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts
to issue common stock were exercised and converted into common stock.

15.Comprehensive Income

The
Company follows SFAS 130, "Reporting Comprehensive Income." SFAS 130 establishes standards to provide prominent disclosure of comprehensive income items. Comprehensive
income is the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. The components of other comprehensive
income are as follows:

December 31, 2008Before tax
amount

Tax
(expense)
benefit

Net of tax
amount(in thousands)Unrealized gains on securitiesUnrealized holding gains arising during period

$
2,226

$
(756
)
$
1,470Pension plan benefit adjustment related to prior service costs and actuarial losses


(1,711
)

585


(1,126
)Other comprehensive income, net

$
515

$
(171
)

344




December 31, 2007Before tax
amount

Tax
(expense)
benefit

Net of tax
amount(in thousands)Unrealized gains on securitiesUnrealized holding gains arising during period

$
1,787

$
(607
)
$
1,180Pension plan benefit adjustment related to prior service costs and actuarial losses


(220
)

75


(145
)Other comprehensive income, net

$
1,567

$
(532
)
$
1,035


16.Segment Reporting

The
Company follows SFAS 131, "Disclosures about Segments of an Enterprise and Related Information." The Company has one reportable segment, "Community Banking." All of the
Company's

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Table of Contents

TF Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2008 and 2007

NOTE ASUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

activities
are interrelated, and each activity is dependent and assessed based on how each of the activities of the Company supports the others. For example, commercial lending is dependent upon the
ability of the Bank to fund itself with retail deposits and other borrowings and to manage interest rate and credit risk. This situation is also similar for consumer and residential mortgage lending.
Accordingly, all significant operating decisions are based upon analysis of the Company as one operating segment or unit.

NOTE BRECENT ACCOUNTING PRONOUNCEMENTS

In December 2007, the Financial Accounting Standards Board (FASB) issued Statement No. 141R (SFAS 141R), "Business Combinations". The statement applies to the fair value
measurement and recognition of assets acquired, liabilities assumed, and interests transferred as a result of business combinations. SFAS 141R expands on required disclosures to improve the
ability to evaluate the nature and financial effects of business combinations. The statement is effective for the first annual reporting period beginning on or after December 15, 2008. The
Company does not anticipate a material impact as a result of this statement on its consolidated statements.

In
December 2007, FASB issued Statement No. 160 (SFAS 160), "Noncontrolling Interests in Consolidated Financial Statements: an amendment of ARB No. 51". The
statement establishes the accounting and reporting of noncontrolling interests in a subsidiary and for the deconsolidation of a subsidiary. The statement calls for consistency with the requirements of
SFAS 141R, "Business Combinations". The statement is effective for fiscal years beginning on or after December 15, 2008 and interim period in those fiscal years. The Company does not
anticipate a material impact as a result of this statement on its consolidated statements.

In
February 2008, FASB issued FASB Staff Position (FSP) FAS 140-3, "Accounting for Transfers of Financial Assets and Repurchase Financing Transactions", which provides
guidance on accounting for a transfer of a financial asset and a repurchase financing. The FSP presumes that an initial transfer of a financial asset and a repurchase financing are considered part of
the same arrangement under SFAS 140 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". However, if certain criteria are met, the initial transfer
and repurchase shall not be evaluated as a linked transaction and therefore evaluated separately under SFAS 140. The FSP is effective for repurchase financing when the initial transfer is
entered in fiscal years beginning after November 15, 2008. The Company does not anticipate a material impact on its consolidated financial statements as a result of this statement.

In
February 2008, FASB issued FSP FAS 157-2, "Effective Date of FASB Statement No. 157", which provides a one-year deferral of the effective date
for SFAS 157 with respect to all nonfinancial assets and liabilities, except those items recognized or disclosed in the
financial statements on a recurring basis (that is at least annually). The FSP was effective upon issuance.

In
March 2008, FASB issued Statement No. 161 (SFAS 161), "Disclosures About Derivative Instruments and Hedging Activities an amendment of FASB Statement 133". The statement
requires expanded disclosures about an entity's derivative instruments and hedging activities but does not change SFAS 133's scope or accounting. This statement is effective for fiscal years
and interim periods

22

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Table of Contents

TF Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2008 and 2007

NOTE BRECENT ACCOUNTING PRONOUNCEMENTS (Continued)

beginning
after November 15, 2008 with early adoption permitted. The Company does not anticipate the adoption of this statement to have a material impact on its consolidated financial
statements.

In
April 2008, FASB issued FSP FAS 142-3, "Determination of the Useful Life of Intangible Assets", which amends the list of factors an entity should consider in
developing renewal or extension assumptions used in determining the useful life of recognized intangible assets under SFAS 142, "Goodwill and Other Intangibles". The new guidance applies to
intangible assets that are acquired individually or with a group of other assets and to intangible assets acquired in both business combinations and asset acquisitions. The FSP is effective for
financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. The guidance must be applied prospectively only to intangible
assets acquired after the FSP's effective date. The Company does not anticipate a material impact on its consolidated financial statements as a result of this statement.

In
May 2008, FASB issued Statement No. 162 (SFAS 162), "The Hierarchy of Generally Accepted Accounting Principles". This statement identifies the sources of accounting
principles and the framework for selecting the accounting principles to be used in the preparation of financial statements prepared in conformity with generally accepted accounting principles (GAAP)
in the United States. The statement did not result in changes to current practices nor have a material effect on the Company.

In
September 2008 FASB issued FSP FAS 133-1 and FASB Interpretation No. 45-4 (FIN 45-4), "Disclosures about Credit Derivatives and Certain Guarantees,"
to improve disclosures about credit-indexed derivative instruments (credit derivatives) and financial guarantees. The FSP requires companies that sell credit derivatives to disclose information that
will enable financial statement users to assess the potential effect of the credit derivatives on the seller's financial position, financial performance, and cash flows. FSP
FAS 133-1 and FIN 45-4 is effective for interim and annual periods ending after November 15, 2008. The Company did not incur a material impact as a result
of this statement on its consolidated financial statements.

In
September 2008, the SEC and FASB jointly issued a press release clarifying fair value measurement practices in the current market environment. The key issues discussed in the press
release include: the
use of internal assumptions to estimate fair value when no relevant market data exists, use of market (broker) quotes to measure fair value, consideration of how transactions from distressed sales or
inactive markets impact fair value, and factors to consider in the assessment of other-than-temporary impairment.

In
October 2008 FASB issued FSP FAS 157-3, "Determining the Fair Value of A Financial Asset When the Market For the Asset is Not Active." Although the FSP
FAS 157-3 does not prescribe any new accounting treatment or disclosure, the FSP does emphasize the key considerations in determining the fair value of a financial asset in an
inactive market. The FSP stresses the following principles from SFAS 157, "Fair Value Measurements": (a) the objective of the fair value, i.e. to determine a price that would be
received to sell the asset even if there is little or no market activity, (b) treatment of distressed sales, (c) the relevance of observable data, (d) management's assumptions
about nonperformance and liquidity risk, and (e) reliance on third party service quotes. FSP 157-3 is effective upon issuance with any resulting revisions in the valuation technique
accounted for as a change in

23

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Table of Contents

TF Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2008 and 2007

NOTE BRECENT ACCOUNTING PRONOUNCEMENTS (Continued)

accounting
estimate. Adoption did not have a material effect on the Company's consolidated financial statements.

In
December 2008, FASB issued FSP FAS (132) R-1, "Employers' Disclosures about Postretirement Benefit Plan Assets" which amends SFAS 132(R), "Employers'
Disclosures about Pensions and Other Postretirement Benefits" to require more detailed disclosure about employer plan assets, including employer's investment strategies, major categories of plan
assets, concentrations of risk within plan assets, and valuation techniques used to measure the fair value of plan assets. The new disclosures are required to be included in financial statements for
fiscal years ending after December 15, 2009 with early application permitted. This FSP only requires additional disclosures, and will not affect the Company's financial position or results of
operation or cash flows.

In
January 2009, the FASB issued a FSP on Emerging Issues Task Force (EITF) 99-20-1 "Amendments to the Impairment Guidance of EITF Issue
No. 99-20". This FSP amends the impairment guidance in Issue 99-20 "Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial
Interests that Continue to Be Held by a Transferor in Securitized Financial Assets". The FSP serves to more closely align its other-than-temporary impairment guidance with
paragraph 16 of SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities", which enables greater judgment to be exercised in determining whether an
other-than-temporary impairment needs to be recorded. The impairment model previously reported in EITF 99-20 limited management's use of judgment in applying
the impairment model. This FSP is effective for interim and annual reporting periods ending after December 15, 2008 and has been applied accordingly.

NOTE CCASH AND CASH EQUIVALENTS

Cash and cash equivalents consist of the following:

December 31,2008

2007(in thousands)Cash and due from banks

$
2,663

$
5,557Interest-bearing deposits in other financial institutions


56


123$
2,719

$
5,680


24

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Table of Contents

TF Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2008 and 2007

NOTE DINVESTMENT AND MORTGAGE-BACKED SECURITIES

The amortized cost, gross unrealized gains and losses, and fair value of the Company's investment
securities at December 31, 2008 and 2007, are summarized as follows:

December 31, 2008Amortized
cost

Gross
unrealized
gains

Gross
unrealized
losses

Fair
value(in thousands)Investment securities available for saleU.S. Government and federal agencies

$
2,944

$
229

$


$
3,173Corporate debt securities


3,340





(55
)

3,285State and political subdivisions


24,532


530


(66
)

24,996Equity securities


150


15





165$
30,966

$
774

$
(121
)
$
31,619Mortgage-backed securities held to maturityFHLMC certificates

$
1,100

$
70

$


$
1,170FNMA certificates


2,141


84





2,225GNMA certificates


1,533


68





1,601$
4,774

$
222

$


$
4,996Mortgage-backed securities available for saleFHLMC certificates

$
4,414

$
90

$


$
4,504FNMA certificates


12,022


298





12,320Real estate mortgage investment conduit


89,344


1,434


(385
)

90,393$
105,780

$
1,822

$
(385
)
$
107,217




December 31, 2007Amortized
cost

Gross
unrealized
gains

Gross
unrealized
losses

Fair
value(in thousands)Investment securities held to maturityState and political subdivisions

$
244

$
2

$


$
246$
244

$
2

$


$
246Investment securities available for saleU.S. Government and federal agencies

$
2,996

$


$
(14
)
$
2,982Corporate debt securities


4,340


44


(7
)

4,377State and political subdivisions


24,628


268


(63
)

24,833Equities


150


21





171$
32,114

$
333

$
(84
)
$
32,363


25

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Table of Contents

TF Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2008 and 2007

NOTE DINVESTMENT AND MORTGAGE-BACKED SECURITIES (Continued)

December 31, 2007Amortized
cost

Gross
unrealized
gains

Gross
unrealized
losses

Fair
value(in thousands)Mortgage-backed securities held to maturityFHLMC certificates

$
1,657

$
86

$


$
1,743FNMA certificates


2,634


48


(41
)

2,641GNMA certificates


1,869


90





1,959$
6,160

$
224

$
(41
)
$
6,343Mortgage-backed securities available for saleFHLMC certificates

$
5,478

$
1

$
(45
)
$
5,434FNMA certificates


11,381


22


(220
)

11,183Real estate mortgage investment conduit


81,704


345


(488
)

81,561$
98,563

$
368

$
(753
)
$
98,178


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

December 31, 2008Available for sale

Held to maturityAmortized
cost

Fair
value

Amortized
cost

Fair
value(in thousands)Investment securitiesDue after one year through five years

$
9,289

$
9,531

$


$
Due after five years through 10 years


16,209


16,549





Due after ten years


5,318


5,374





Equity securities


150


165





30,966


31,619





Mortgage-backed securities


105,780


107,217


4,774


4,496$
136,746

$
138,836

$
4,774

$
4,496


Investment
securities having an aggregate amortized cost of approximately $3.2 million and $3.0 million were pledged to secure public deposits at December 31, 2008
and 2007, respectively.

There
were no securities held other than U.S. Government and agencies from a single issuer that represented more than 10% of stockholders' equity at year end.

26

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Table of Contents

TF Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2008 and 2007

NOTE DINVESTMENT AND MORTGAGE-BACKED SECURITIES (Continued)

The
table below indicates the length of time individual securities, both held to maturity and available for sale, have been in a continuous unrealized loss position at
December 31, 2008:

Less than
12 months

12 months
or longer

TotalDescription of Securities

Number
of
Securities

Fair
Value

Unrealized
Loss

Fair
Value

Unrealized
Loss

Fair
value

Unrealized
Loss(in thousands)Corporate debt securities


1

$
3,285

$
(55
)
$


$


$
3,285

$
(55
)State and political subdivisions


4


2,392


(18
)

1,753


(48
)

4,145


(66
)Mortgage-backed securities


1


19


(1
)

6,480


(384
)

6,499


(385
)Total temporarily impaired securities


6

$
5,696

$
(74
)
$
8,233

$
(432
)
$
13,929

$
(506
)


The
table below indicates the length of time individual securities, both held to maturity and available for sale, have been in a continuous unrealized loss position at
December 31, 2007:

Less than
12 months

12 months
or longer

TotalDescription of Securities

Number
of
Securities

Fair
Value

Unrealized
Loss

Fair
Value

Unrealized
Loss

Fair
value

Unrealized
Loss(in thousands)U.S. Government and federal agencies


1

$


$


$
2,982

$
(14
)
$
2,982

$
(14
)Corporate debt securities


1








993


(7
)

993


(7
)State and political subdivisions


9








5,763


(63
)

5,763


(63
)Mortgage-backed securities


25


1,193


(14
)

55,082


(780
)

56,275


(794
)Total temporarily impaired securities


36

$
1,193

$
(14
)
$
64,820

$
(864
)
$
66,013

$
(878
)


The
unrealized losses on investments in securities issued by the U.S. Treasury and Government agencies, U.S. Government sponsored agencies and agency mortgage- backed securities were
caused by changes in market interest rates. The contractual terms and contractual cash flows of these securities do not permit the issuer to settle at a price less than the amortized cost of the
investment. The Company has the ability and intent to hold these investments until a market price recovery or maturity. Accordingly, the Company has evaluated relevant factors and has determined that
the unrealized losses at December 31, 2008 and 2007, respectively are not considered other-than-temporary.

27

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Table of Contents

TF Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2008 and 2007

NOTE ELOANS RECEIVABLE

Loans receivable are summarized as follows:

December 31,2008

2007(in thousands)Held for investment:First mortgage loansSecured by one-to-four family residences

$
281,870

$
272,840Secured by non-residential properties


132,640


109,740Construction loans


30,633


35,507Total first mortgage loans


445,143


418,087Other loansCommercial non-real estate


43,818


46,850Home equity and second mortgage


56,233


52,013Other


2,287


2,244Total other loans


102,338


101,107Total loans


547,481


519,194Net deferred loan origination costs and unamortized premiums


704


675Less allowance for loan losses


(3,855
)

(2,842
)Total loans receivable

$
544,330

$
517,027Held for sale:First mortgage loansSecured by one-to-four family residences

$
1,659

$
1,040


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

December 31,2008

2007(in thousands)Balance at beginning of year

$
2,842

$
2,865Provision charged to income


1,500


(Charge-offs), net of recoveries


(487
)

(23
)Balance at end of year

$
3,855

$
2,842


28

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Table of Contents

TF Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2008 and 2007

NOTE ELOANS RECEIVABLE (Continued)

Non-performing
loans, which include non-accrual loans for which the accrual of interest has been discontinued and loan balances past due over 90 days that
are not on a non-accrual status but that management expects will eventually be paid in full, are summarized as follows:

December 31,2008

2007(in thousands)Impaired loans with a related allowance

$
3,017

$
Impaired loans without a related allowance

$
2,262

$
5,358Total impaired loans

$
5,279

$
5,358Allowance for impaired loans

$
530

$
Total non-accrual loans

$
5,279

$
5,358Total loans past due 90 days as to interest or principal and accruing interest

$


$



Interest
income that would have been recorded under the original terms of such loans totaled approximately $199,000 and $301,000 for the years ended December 31, 2008 and 2007. No
interest income has been recognized on non-accrual loans for any of the periods presented.

The
Bank has no concentration of loans to borrowers engaged in similar activities that exceeded 10% of loans at December 31, 2008 and 2007. In the ordinary course of business, the
Bank has granted loans to certain executive officers, directors and their related interests. Related party loans are made on substantially the same terms as those prevailing at the time for comparable
transactions with unrelated persons and do not involve more than the normal risk of collectability. The aggregate dollar amount of these loans was approximately $125,000 and $178,000 at
December 31, 2008 and 2007, respectively. New loans to related parties of $7,000 were made during 2008. For the year ended December 31, 2008, principal repayments of $60,000 of related
party loans were received.

NOTE FLOAN SERVICING

Mortgage loans serviced for others are not included in the accompanying consolidated statements of financial position. The unpaid principal balances of these loans are summarized as
follows:

December 31,2008

2007(in thousands)Mortgage loan servicing portfoliosFHLMC

$
486

$
632FNMA


48,877


37,396Other investors


16,262


12,231$
65,625

$
50,259


Custodial
balances maintained in connection with the foregoing loan servicing totaled approximately $1,191,000 and $390,000 at December 31, 2008 and 2007 respectively. Net
servicing

29

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Table of Contents

TF Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2008 and 2007

NOTE FLOAN SERVICING (Continued)

revenue
on mortgage loans serviced for others was $13,000 and $30,000 for the years ended December 31, 2008 and 2007 respectively.

Mortgage
servicing rights are accounted for in accordance with SFAS 156, "Accounting for Servicing of Financial Assets an amendment of FASB Statement No. 140". The Company
initially recognizes and measures servicing assets based on the relative fair value of the servicing right at the time the loan is sold. The Company uses the amortization method for subsequent
measurement of its servicing assets and evaluates the recorded value for impairment. Mortgage servicing rights of $450,000 and $460,000 were reported as a component of other assets at
December 31, 2008 and 2007, respectively.

NOTE GPREMISES AND EQUIPMENT

Premises and equipment are summarized as follows:

December 31,Estimated
useful lives2008

2007(in thousands)Buildings

30 years

$
6,488

$
6,462Leasehold improvements

5  10 years


1,984


1,974Furniture, fixtures and equipment

3  7 years


10,668


10,56919,140


19,005Less accumulated depreciation




15,196


14,4303,944


4,575Land




1,692


1,692$
5,636

$
6,267


NOTE HDEPOSITS

Deposits are summarized as follows:

December 31,Deposit type

2008

2007(in thousands)Demand

$
36,871

$
35,904NOW


46,907


46,543Money market


88,609


79,267Passbook savings


111,591


130,423Total demand, transaction and passbook deposits


283,978


292,137Certificates of deposit


205,872


180,257$
489,850

$
472,394


The
aggregate amount of certificates of deposit with a minimum denomination of $100,000 was approximately $46.7 million and $38.8 million at December 31, 2008 and
2007, respectively.

30

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Table of Contents

TF Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2008 and 2007

At December 31, 2008, scheduled maturities of certificates of deposit are as follows:

Year ending December 31,2009

2010

2011

2012

2013

Thereafter

Total(in thousands)$
122,466

$
36,736

$
28,688

$
16,307

$
1,217

$
458

$
205,872


Related
party deposits are on substantially the same terms as are comparable transactions with unrelated persons. The aggregate dollar amount of these deposits was approximately
$5.6 million and $2.2 million at December 31, 2008 and 2007, respectively.

NOTE IADVANCES FROM THE FEDERAL HOME LOAN BANK AND OTHER BORROWINGS

Advances from the Federal Home Loan Bank consist of the following:

December 31,2008

2007Principal payments due during

Amount

Weighted
average rate

Amount

Weighted
average rate(in thousands)



(in thousands)2008

$




%

28,851


4.00
%2009


45,494


3.99
%

44,495


4.01
%2010


29,879


4.49
%

28,845


4.53
%2011


19,461


4.18
%

18,392


4.23
%2012


55,089


2.89
%

30,950


4.29
%2013


7,542


3.66
%

1,497


4.58
%2014


683


3.66
%

191


4.26
%$
158,148


3.71
%
$
153,221


4.19
%


The
advances are collateralized by Federal Home Loan Bank stock and certain first mortgage loans and mortgage-backed securities totaling approximately $493.0 million. Total unused
lines of credit at the Federal Home Loan Bank were $27.6 million at December 31, 2008. The remaining advances from the Federal Home Loan Bank are fixed rate, fixed term.

Other
short-term borrowings at December 31, 2008 include advances from the Federal Reserve Bank totaling $10.0 million maturing in three months with an interest
rate of 0.50% and collateralized by investment securities of approximately $24.0 million.

NOTE JBENEFIT PLANS

1.Defined Contribution Plan

The
Bank maintains a 401(k) profit-sharing plan for eligible employees. Participants may contribute up to 15% of pretax eligible compensation. The Bank makes matching discretionary
contributions equal to 75% of the initial $1,000 deferral. Contributions to the 401(k) plan totaled $70,000 and $62,000 in 2008 and 2007 respectively.

31

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Table of Contents

TF Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2008 and 2007

NOTE JBENEFIT PLANS (Continued)

2.Defined Benefit Plan

The
Bank has a non-contributory defined benefit pension plan covering substantially all full-time employees meeting certain eligibility requirements. The benefits
are based on each employee's years of service and an average earnings formula. An employee becomes fully vested upon completion of five years of qualifying service. It is the policy of the Bank to
fund the maximum amount allowable under the individual aggregate cost method to the extent deductible under existing federal income tax regulations.

The
following tables set forth the projected benefit obligation, the fair value of assets of the plan and funded status of the defined benefit pension plan as reflected in the
consolidated statements of financial position:

December 31,2008

2007(in thousands)Reconciliation of Projected Benefit ObligationBenefit obligation at beginning of year

$
3,593

$
3,560Service cost


391


336Interest cost


247


211Actuarial loss


321


44Benefits paid


(206
)

(558
)Benefits obligation at end of year

$
4,346

$
3,593Reconciliation of Fair Value of AssetsFair value of plan assets at beginning of year

$
4,526

$
3,860Actual return on plan assets


(1,081
)

117Employer contribution


1,398


1,107Benefits paid


(206
)

(558
)Fair value of plan assets at end of year

$
4,637

$
4,526Prepaid benefit cost at end of year

$
291

$
933


The
amount recognized in accumulated other comprehensive income at December 31, 2008 was $1,711,000 which included a $1,741,000 adjustment to the funded status of the plan less
amortization of prior service cost of approximately $30,000. The amount recognized in accumulated other comprehensive income at December 31, 2007 was $220,000 which included an adjustment of
$280,000 to record the funded status of the plan less amortization of prior service cost of $60,000. During 2009, the amounts expected to be amortized from accumulated other comprehensive income
include $59,000 of net actuarial loss and $31,000 of prior service cost.

The
accumulated benefit obligation at December 31, 2008 and 2007 was $3,647,000 and $3,003,000, respectively.

32

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Table of Contents

TF Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2008 and 2007

NOTE JBENEFIT PLANS (Continued)

Employer
contributions and benefits paid in the above table include only those amounts contributed directly to, or paid directly from, Plan assets. The expected employer contribution for
2009 is $350,000.

December 31,2008

2007Weighted-average assumptions used to determine benefit obligations:Discount rate


5.75
%

5.75
%Rate of compensation increase


4.00
%

4.00
%




December 31,2008

2007(in thousands)Components of net periodic benefit cost:Service cost

$
391

$
336Interest cost


247


211Expected return on plan assets


(421
)

(399
)Amortization of prior service cost


30


63Amortization of transition obligation (asset)





Recognized net actuarial loss


82


46Net periodic benefit cost

$
329

$
257




December 31,2008

2007Weighted-average assumptions used to determine net benefit costs:Discount rate


5.75
%

5.75
%Expected return on plan assets


9.00


9.00Rate of compensation increase


4.00


4.00


The
expected rate of return was determined by applying the average rates of return over the past ten years on the assets in which the Plan is currently invested.

Estimated
future benefits payments are as follows:

(in thousands)2008

20072009

$
59

$
362010


59


582011


60


582012


103


592013


108


1052014  2018


978


1,142


33

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Table of Contents

TF Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2008 and 2007

NOTE JBENEFIT PLANS (Continued)

The
Plan's weighted-average asset allocations by asset category is as follows:

Percentage of Plan Assets
at December 31,2008

2007Asset CategoryEquity securities


44
%

52
%Debt securities


26
%

24
%Other


30
%

24
%Total


100
%

100
%


Trustees
of the Plan are responsible for defining and implementing the investment objectives and policies for the Plan's assets. Assets are invested in accordance with sound investment
practices that emphasize long-term investment fundamentals that closely match the demographics of the plan's participants. The Plan's goal is to earn long-term returns that match or exceed the benefit
obligations of the Plan through a well-diversified portfolio structure. The Plan's return objectives and risk parameters are managed through a diversified mix of assets. The asset mix and investment
strategy are reviewed on a quarterly basis and rebalanced when necessary. The asset allocation for the Plan is targeted at 55% equity securities and 45% debt and other securities.

3.Employee Stock Ownership Plan (ESOP)

The
Company has an internally leveraged ESOP for eligible employees who have completed six months of service with the Company or its subsidiaries. The ESOP borrowed $4.2 million
from the Company in 1996 to purchase 423,200 newly issued shares of common stock. The Company makes discretionary contributions to the ESOP in order to service the ESOP's debt. Any dividends received
by the ESOP will be used to pay debt service. The ESOP shares are pledged as collateral for its debt. As the debt is repaid, shares are released from collateral based on the proportion of debt service
paid in the year and allocated to qualifying employees. The Company reports compensation expense in the amount equal to the fair value of shares committed to be released from the ESOP to employees
less dividends received on the allocated shares in the plan used for debt service. The allocated shares are included in outstanding shares for earnings per share computations. ESOP compensation
expense was $212,000 and $247,000 in 2008 and 2007, respectively.

2008

2007Allocated shares


170,000


167,000Unreleased shares


147,000


160,000Total ESOP shares


317,000


327,000Fair value of unreleased shares (in thousands)

$
2,837

$
3,942


34

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Table of Contents

TF Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2008 and 2007

NOTE JBENEFIT PLANS (Continued)

4.Stock-Based Compensation Plans

A
summary of the status of the Company's stock option plans as of December 31, 2008 and 2007, and changes for each of the years in the two-year period then ended is as
follows:

2008

2007Number
of
shares

Weighted
average
exercise
price per
share

Number
of
shares

Weighted
average
exercise
price per
shareOutstanding at beginning of year


252,576

$
26.56


365,734

$
23.62Options granted


42,617

$
20.65




$
Options exercised


(685
)
$
18.72


(110,035
)
$
16.62Options forfeited


(1,797
)
$
29.37


(3,123
)
$
31.93Options expired


(5,375
)
$
27.37




$
Outstanding at end of year


287,336

$
25.67


252,576

$
26.56Options exercisable


234,539

$
26.50


183,475

$
25.82


The
following table summarizes information about stock options outstanding at December 31, 2008:

Options outstanding

Options exercisableRange of exercise prices

Number
outstanding at
December 31,
2008

Weighted average
remaining
contractual
life (years)

Weighted
average
exercise
price

Number
exercisable at
December 31,
2008

Weighted
average
exercise
price$13.25  19.88


25,268


1.23

$
13.69


25,268

$
13.69$19.89  29.84


244,810


3.37


26.31


192,013


27.49$29.85  34.14


17,258


4.96


34.14


17,258


34.14287,336


3.27

$
25.67


234,539

$
26.50


The
following table reflects information on the aggregate intrinsic value of options as well as cash receipts from option exercises:

December 31,2008

2007(in thousands)Aggregate value ofOptions outstanding

$
142

$
349Options exercisable

$
142

$
349Options exercised

$
3

$
1,481Cash receipts from options exercised

$
14

$
1,829


The
aggregate intrinsic value represents the total pre-tax intrinsic value (the difference between the Company's closing stock price on the last trading day of the year and
the exercise price, multiplied

35

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Table of Contents

TF Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2008 and 2007

NOTE JBENEFIT PLANS (Continued)

by
the number of exercisable in-the-money options). The Company has a policy of issuing shares from treasury to satisfy share option exercises.

Stock-based
compensation expense included in net income related to stock options was $361,000 and $391,000, resulting in a tax benefit of $114,000 and $120,000, for the year ended
December 31, 2008 and 2007 respectively. There was $283,000 and $418,000 of total unrecognized compensation cost, net of estimated forfeitures, related to non-vested options under
the Plan at December 31, 2008 and 2007, respectively. That cost is expected to be recognized over a weighted average period of 30.6 months and 14.4 months at December 31,
2008 and 2007, respectively.

The
table below summarizes the changes in non-vested restricted stock during the past year:

2008

2007Number
of
shares

Weighted
average
exercise
price per
share

Number
of
shares

Weighted
average
exercise
price per
shareTotal non-vested restricted stock at December 31


12,668

$
28.48


25,334

$
28.48Restricted stock grant


2,000

$
20.65





Vesting of restricted stock


(12,668
)
$
28.48


(12,666
)
$
28.48Forfeitures of restricted stock











Total non-vested restricted stock at December 31


2,000

$
20.65


12,668

$
28.48


Stock-based
compensation expense related to stock grants was $348,000 and $361,000 for the years ended December 31, 2008 and 2007, respectively. The expected compensation expense
for 2009 is $15,000.

NOTE KINCOME TAXES

The components of income tax expense are summarized as follows:

Year ended
December 31,2008

2007(in thousands)FederalCurrent

$
1,472

$
1,071Charge in lieu of income tax relating to stock compensation


1


367Deferred


(9
)

3181,464


1,756State and localcurrent


5


6Income tax provision

$
1,469

$
1,762


36

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Table of Contents

TF Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2008 and 2007

NOTE KINCOME TAXES (Continued)

The
Company's effective income tax rate was different than the statutory federal income tax rate as follows:

Year ended
December 31,2008

2007Statutory federal income tax


34.0
%

34.0
%(Decrease) increase resulting fromTax-exempt income


(9.5
)

(8.2
)State tax, net of federal benefit


(0.1
)

(0.0
)Other


1.3


0.925.7
%

26.7
%


Deferred
taxes are included as other liabilities in the accompanying consolidated statements of financial position at December 31, 2008 and 2007, for the estimated future tax
effects of differences between the financial statement and federal income tax bases of assets and liabilities according to the provisions of currently enacted tax laws. No valuation allowance was
recorded against deferred tax assets at December 31, 2008 and 2007. The Company's net deferred tax liability at December 31, 2008 and 2007, was comprised of the following:

December 31,2008

2007(in thousands)Deferred tax assetsDeferred compensation

$
157

$
131Allowance for loan losses, net


1,311


966Unrealized loss on securities available for sale





46Stock compensation


350


241Adjustment to record funded status of pension plan


1,027


442Non accrual interest


193


Other


19


253,057


1,851Deferred tax liabilitiesAccrued pension expense


1,116


827Unrealized gain on securities available for sale


710


Prepaid expenses


114


44Deferred loan costs


768


656Amortization of goodwill


879


665Other


346


3733,933


2,565Net deferred tax liability

$
(876
)
$
(714
)


37

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Table of Contents

TF Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2008 and 2007

NOTE KINCOME TAXES (Continued)

The
Company files consolidated income tax returns on the basis of a calendar year. The Company is subject to income taxes in the U.S. federal jurisdiction, and various state and local
jurisdictions, the majority of activity residing in Pennsylvania. The statue of limitations for the federal return has expired on years prior to 2005. The expirations of the statutes of limitations
related to the various state income tax returns that the Company and its subsidiaries file, vary by state, and are expected to expire over the term of 2009 through 2013. There are no material
uncertain tax positions at December 31, 2008 in accordance with the provisions of FIN 48," Accounting for Uncertainty in Income Taxes".

The
Bank is not required to recapture approximately $5.7 million of its tax bad debt reserve, attributable to bad debt deductions taken by it prior to 1988, as long as the Bank
continues to operate as a bank under federal tax law and does not use the reserve for any other purpose. In accordance with SFAS 109, the Bank has not recorded any deferred tax liability on
this portion of its tax bad debt reserve. The tax that would be paid were the Bank ultimately required to recapture that portion of the reserve would amount to approximately $1.9 million.

NOTE LREGULATORY MATTERS

The Bank is subject to minimum regulatory capital standards promulgated by the OTS. Failure to meet minimum capital requirements can initiate certain mandatoryand possible
additional discretionaryactions by regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting practices. The Company's capital amounts and classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors. Such minimum capital standards generally require the maintenance of regulatory capital sufficient to meet each of three tests, hereinafter
described as the tangible capital requirement, the core capital requirement and the risk-based capital requirement. The tangible capital requirement provides for minimum tangible capital
(defined as stockholders' equity less all intangible assets) equal to 1.5% of adjusted total assets. The core capital requirement provides for minimum core capital (tangible capital plus certain forms
of supervisory goodwill and other qualifying intangible assets) equal to 4% of adjusted total assets. The risk-based capital requirement provides for minimum core capital (tangible capital
plus certain forms of supervisory
goodwill and other qualifying intangible assets) adjusted for the general valuation allowances equal to 8% of total assets classified in one of four risk-weighted categories.

38

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Table of Contents

TF Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2008 and 2007

NOTE LREGULATORY MATTERS (Continued)

As
of December 31, 2008, management believes that the Bank met all capital adequacy requirements to which it was subject.

Regulatory capital
December 31, 2008Tangible

Core

Risk-basedCapital

Percent

Capital

Percent

Capital

Percent(in thousands)Capital under generally accepted accounting principles

$
64,647


8.84
%
$
64,647


8.84
%
$
64,647


15.27
%Unrealized gain on certain available-for-sale securities


(1,369
)

(0.18
)%

(1,369
)

(0.18
)%

(1,369
)

(0.33
)%Adjustment to record funded status of pension


1,983


0.27
%

1,983


0.27
%

1,983


0.47
%Goodwill and other intangible assets


(4,324
)

(0.59
)%

(4,324
)

(0.59
)%

(4,324
)

(1.02
)%Additional capital itemsGeneral valuation allowanceslimited














3,325


0.79
%Regulatory capital computed


60,937


8.34
%

60,937


8.34
%

64,262


15.18
%Minimum capital requirement


10,964


1.50
%

29,237


4.00
%

33,868


8.00
%Regulatory capitalexcess

$
49,973


6.84
%
$
31,700


4.34
%
$
30,394


7.18
%




Regulatory capital
December 31, 2007Tangible

Core

Risk-basedCapital

Percent

Capital

Percent

Capital

Percent(in thousands)Capital under generally accepted accounting principles

$
64,960


9.29
%
$
64,960


9.29
%
$
64,960


16.35
%Unrealized loss on certain available-for-sale securities


103


0.01
%

103


0.01
%

103


0.03
%Adjustment to record funded status of pension


858


0.12
%

858


0.12
%

858


0.22
%Goodwill and other intangible assets


(4,324
)

(0.61
)%

(4,324
)

(0.61
)%

(4,324
)

(1.09
)%Additional capital itemsGeneral valuation allowanceslimited














2,495


0.62
%Regulatory capital computed


61,597


8.81
%

61,597


8.81
%

64,092


16.13
%Minimum capital requirement


10,492


1.50
%

27,980


4.00
%

31,787


8.00
%Regulatory capitalexcess

$
51,105


7.31
%
$
33,617


4.81
%
$
32,305


8.13
%


At
December 31, 2008, the Bank met all regulatory requirements for classification as a "well-capitalized" institution. A "well-capitalized" institution
must have risk-based capital of 10% and core capital of 5%. The Bank's capital exceeded the minimum required amounts for classification as a "well-capitalized" institution.
There are no conditions or events that have occurred that management believes have changed the Bank's classification as a "well-capitalized" institution.

The
Bank maintains a liquidation account for the benefit of eligible savings account holders who maintained deposit accounts in the Bank after the Bank converted to a stock form of
ownership. The

39

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Table of Contents

TF Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2008 and 2007

NOTE LREGULATORY MATTERS (Continued)

Bank
may not declare or pay a cash dividend on or repurchase any of its common shares if the effect thereof would cause the Bank's stockholders' equity to be reduced below either the amount required
for the liquidation account or the regulatory capital requirements for insured institutions.

NOTE MFINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial
instruments are primarily commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the consolidated financial statements when they become receivable or
payable. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statements of financial position. The contract
or notional amounts of those instruments reflect the extent of the Bank's involvement in particular classes of financial instruments.

The
Company's exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of
credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-
sheet instruments.

Unless
noted otherwise, the Company requires collateral to support financial instruments with credit risk.

Financial
instruments, the contract amounts of which represent credit risk, are as follows:

December 31,2008

2007(in thousands)Commitments to extend credit

$
68,675

$
69,063Standby letters of credit


1,397


1,566Loans sold with recourse


64


68$
70,136

$
70,697


Commitments
to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained, if it is deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the borrower. Collateral held generally includes residential or
commercial real estate.

Standby
letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan facilities to customers.

NOTE NCOMMITMENTS AND CONTINGENCIES

The Bank had optional commitments of $5,807,000 and $2,314,000 to sell mortgage loans to investors at December 31, 2008 and 2007, respectively.

40

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Table of Contents

TF Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2008 and 2007

NOTE NCOMMITMENTS AND CONTINGENCIES (Continued)

The
Bank leases branch facilities and office space for periods ranging up to ten years. These leases are classified as operating leases and contain options to renew for additional
periods. Rental expense was approximately $534,000 and $517,000 for the years ended December 31, 2008 and 2007 respectively.

The
minimum annual rental commitments of the Bank under all non-cancelable leases with terms of one year or more are as follows:

Year ending December 31,

(in thousands)2009

$
4822010


3682011


3282012


2732013


254Thereafter


876$
2,581


The
Company has agreements with certain key executives that provide severance pay benefits if there is a change in control of the Company. The agreements will continue in effect until
terminated or not renewed by the Company or key executives. Upon a change in control, the Company shall make a lump-sum payment or continue to pay the key executives' salaries per the
agreements, and reimburse the executive for certain benefits for one year. The contingent liability under the agreements at December 31, 2008 was approximately $3.2 million.

From
time to time, the Company and its subsidiaries are parties to routine litigation that arises in the normal course of business. In the opinion of management, the resolution of these
lawsuits would not have a material adverse effect on the Company's consolidated financial position or results of operations.

NOTE OSIGNIFICANT CONCENTRATIONS OF CREDIT RISK

The Bank is principally engaged in originating and investing in one-to-four family residential real estate and commercial real estate loans in eastern
Pennsylvania and New Jersey. The Bank offers both fixed and adjustable rates of interest on these loans that have amortization terms ranging to 30 years. The loans are generally originated or
purchased on the basis of an 80% or less loan-to-value ratio, which has historically provided the Bank with more than adequate collateral coverage in the event of default.
Nevertheless, the Bank, as with any lending institution, is subject to the risk that residential real estate values in the primary lending area will deteriorate, thereby potentially impairing
underlying collateral values. However, management believes that weakened residential and commercial real estate values have been taken into consideration and that the loan loss allowances have been
provided for in amounts commensurate with its current perception of the foregoing risks in the portfolio.

NOTE PFAIR VALUE MEASUREMENT AND FAIR VALUE OF FINANCIAL INSTRUMENTS

On January 1, 2008, the Company adopted SFAS 157, "Fair Value Measurements". SFAS 157 defines fair value, establishes a framework for measuring fair value and
expands the related disclosure

41

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Table of Contents

TF Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2008 and 2007

NOTE PFAIR VALUE MEASUREMENT AND FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

requirements.
SFAS 157 clarifies that 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. SFAS 157 establishes a fair value measurement hierarchy for inputs in valuation techniques used to measure fair value. The hierarchy gives the highest priority to
unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements).

The
fair value hierarchy levels are summarized below:



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

Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Balance as of
December 31, 2008AssetsInvestment securities available for sale

$
150

$
31,469

$


$
31,619Mortgage-backed securities available for sale





107,217





107,217Mortgage loans available for sale


1,659








1,659Derivative loan commitments








18


18LiabilitiesForward loan sales








42


42


Investment
securities available for sale and mortgage-backed securities available for sale are valued primarily by a third party pricing agent. Active listed equities are generally
classified within Level 1 of the fair value hierarchy. Government-sponsored agency debt securities and corporate bonds are primarily priced through a multi-dimensional relational model, a
level 2 hierarchy, which incorporates dealer quotes and other market information including, defined sector breakdown, benchmark yields, base spread, yield to maturity, and corporate actions.
Municipal securities are also measured 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 FNMA and FHLMC certificates and real estate mortgage investment conduits and are valued under a level 2 hierarchy using a matrix correlation to benchmark
yields, spread analysis, and prepayment speeds.

42

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Table of Contents

TF Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2008 and 2007

NOTE PFAIR VALUE MEASUREMENT AND FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

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

Derivative loan
commitmentsBeginning balance December 31, 2007

$
3Total gainsrealized/unrealized:Included in earnings


15Included in other comprehensive income


Purchases, issuances, and settlements


Ending balance, December 31, 2008

$
18




Forward loan
salesBeginning balance December 31, 2007

$
3Total lossesrealized/unrealized:Included in earnings


39Included in other comprehensive income


Purchases, issuances, and settlements


Ending balance December 31, 2008

$
42


The
Company also measures certain other financial assets at fair value on a non-recurring basis. Adjustments may result from application of
lower-of-cost-or-fair-value accounting. The following table sets forth the Company's financial assets subject to fair value adjustments
(impairment) on a nonrecurring basis as they are valued at the lower of cost or market. Assets are classified in their entirety based on the lowest level of input that is significant to the fair value
measurement:

Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Balance as of
December 31, 2008AssetsImpaired loans, net

$


$


$
4,749

$
4,749Federal Home Loan Bank Stock








9,896


9,896


Impaired
loans totaled $5.3 million with a specific reserve of $0.5 million at December 31, 2008. Impaired loans are evaluated and valued at the time the loan is
identified as impaired, at the lower of the recorded investment in the loan or market value. The loans identified as impaired are real estate secured. Market value is determined by using the value of
the collateral securing the loans and is therefore classified as a level 3 hierarchy. The value of the real estate is determined by qualified independent licensed appraisers contracted by the
Company to perform the assessment. The appraised

43

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Table of Contents

TF Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2008 and 2007

NOTE PFAIR VALUE MEASUREMENT AND FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

value
is then discounted based upon management's experience, which includes estimated disposal costs, understanding of the customer and the customer's business as well as economic conditions. Impaired
loans are reviewed and evaluated on a quarterly basis for additional impairment and adjusted accordingly, based upon the pertinent conditions.

The
Company's stock ownership in the Federal Home Loan Bank of Pittsburgh is carried at cost. FHLB stock is a restricted investment security and is considered long term in nature. There
is no trading market for the stock which is subject to redemption by the issuer at par, and the return is not solely tied to dividends earned as stock ownership is a requirement to membership in the
organization which provides products and funding for the Company. The value of the stock represents the carrying value as well as fair value on the books of the Company at December 31, 2008.

SFAS.
107, "Disclosures about Fair Value of Financial Instruments," requires all entities to disclose the estimated fair value of their assets and liabilities considered to be financial
instruments. For the Bank, as for most financial institutions, the majority of its assets and liabilities are considered financial
instruments as defined in SFAS 107. However, many such instruments lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction.
Also, it is the Company's general practice and intent to hold its financial instruments to maturity or available for sale and to not engage in trading or significant sales activities. For fair value
disclosure purposes, the Company substantially utilized the fair value measurement criteria as required under SFAS 157 explained above. Additionally, the Company used significant estimations
and present value calculations to prepare this disclosure.

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

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

The
fair value of cash and cash equivalents equals historical book value. The fair value of investment and mortgage backed securities for 2008 is described and presented above under
SFAS 157 guidelines.

December 31,2008

2007Fair
value

Carrying
value

Fair
value

Carrying
value(in thousands)Cash and cash equivalents

$
2,719

$
2,719

$
5,680

$
5,680Investment securities

$
31,619

$
30,966

$
32,609

$
32,607Mortgage-backed securities

$
112,213

$
110,554

$
104,521

$
104,338


44

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Table of Contents

TF Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2008 and 2007

NOTE PFAIR VALUE MEASUREMENT AND FAIR VALUE OF FINANCIAL INSTRUMENTS
(Continued)

The fair value of financial instruments with stated maturities has been estimated using the present value of cash flows, discounted at rates approximating current market rates for
similar assets and liabilities.

December 31,2008

2007Fair
value

Carrying
value

Fair
value

Carrying
value(in thousands)LiabilitiesDeposits with stated maturities

$
211,392

$
205,872

$
180,651

$
180,257Borrowings with stated maturities

$
171,541

$
168,148

$
154,302

$
153,221


The
fair value of financial instrument liabilities with no stated maturities is generally presumed to approximate the carrying amount (the amount payable on demand).

December 31,2008

2007Fair
value

Carrying
value

Fair
value

Carrying
value(in thousands)Deposits with no stated maturities

$
283,978

$
283,978

$
292,137

$
292,137


The
fair value of the net loan portfolio has been estimated using the present value of cash flows, discounted at the approximate current market rates, and giving
consideration to estimated prepayment risk and credit loss factors.

December 31,2008

2007Fair
value

Carrying
value

Fair
value

Carrying
value(in thousands)Net loans

$
559,491

$
545,989

$
520,079

$
518,067


Fair
value of loans and deposits with floating interest rates is generally presumed to approximate the recorded carrying amounts. The fair value of commitments to extend
credit is estimated based on the amount of unamortized deferred loan commitment fees. The fair value of letters of credit is based on the amount of unearned fees plus the estimated cost to terminate
the letters of credit. Fair values of unrecognized financial instruments including commitments to extend credit and the fair value of letters of credit are immaterial.

The
Bank's remaining assets and liabilities are not considered financial instruments. No disclosure of the relationship value of the Bank's deposits is required by SFAS 107.

45

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Table of Contents

TF Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2008 and 2007

NOTE QSERVICE FEES, CHARGES AND OTHER OPERATING INCOME AND OTHER OPERATING EXPENSE

Year ended
December 31,2008

2007(in thousands)Service fees, charges and other operating incomeLoan servicing fees

$
215

$
168Late charge income


97


101Deposit service charges


1,136


1,118Debit card income


340


307Other income


548


444$
2,336

$
2,138Other operating expenseInsurance and surety bond

$
205

$
214Office supplies


177


181Loan expense


221


188Debit card and ATM expense


300


320Postage


252


262Telephone


274


273Supervisory examination fees


162


150Other expenses


912


995$
2,503

$
2,583


NOTE REARNINGS PER SHARE

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

Year ended December 31, 2008Income
(numerator)

Weighted
average shares
(denominator)

Per share
AmountBasic earnings per shareIncome available to common stockholders

$
4,236


2,632,707

$
1.61Effect of dilutive securitiesStock compensation plans





3,826


Diluted earnings per shareIncome available to common stockholders plus effect of dilutive securities

$
4,236


2,636,533

$
1.61


There
were options to purchase 262,068 shares of common stock at a price at a range of $20.30 to $34.14 per share which were outstanding during 2008 that were not
included in the computation of

46

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Table of Contents

TF Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2008 and 2007

NOTE REARNINGS PER SHARE (Continued)

diluted
earnings per share because the options' exercise prices were greater than the average market price of the common shares.

Year ended December 31, 2007Income
(numerator)

Weighted
average shares
(denominator)

Per share
AmountBasic earnings per shareIncome available to common stockholders

$
4,845


2,728,204

$
1.78Effect of dilutive securitiesStock compensation plans





1,590


Diluted earnings per shareIncome available to common stockholders plus effect of dilutive securities

$
4,845


2,729,794

$
1.78


There
were options to purchase 181,188 shares of common stock at a price range of $28.00 to $34.14 per share which were outstanding during 2007 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 SCONDENSED FINANCIAL INFORMATIONPARENT COMPANY ONLY

Condensed financial information for TF Financial Corporation (parent company only) follows:

BALANCE SHEETS

December 31,2008

2007(in thousands)ASSETSCash

$
1,164

$
1,087Investment in Third Federal


63,180


63,364Investment in TF Investments


1,924


2,544Investment in Penns Trail Development


1,119


1,063Investment securities available for sale


165


171Other assets


173


49Total assets

$
67,725

$
68,278LIABILITIES AND STOCKHOLDERS' EQUITYTotal liabilities

$
33

$
435Stockholders' equity


67,692


67,843Total liabilities and stockholders' equity

$
67,725

$
68,278


47

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Table of Contents

TF Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2008 and 2007

NOTE SCONDENSED FINANCIAL INFORMATIONPARENT COMPANY ONLY (Continued)

STATEMENTS OF INCOME

December 31,2008

2007(in thousands)INCOMEEquity in earnings of subsidiaries

$
5,004

$
5,637Interest and dividend income


81


52Total income


5,085


5,689EXPENSESOther


849


844Total expenses


849


844NET INCOME

$
4,236

$
4,845


STATEMENTS OF CASH FLOWS

Year ended
December 31,2008

2007(in thousands)Cash flows from operating activitiesNet income

$
4,236

$
4,845Adjustments to reconcile net income to net cash
provided by (used in) operating activitiesStock compensation plans


628


752Equity in earnings of subsidiaries


(5,004
)

(5,637
)Net change in assets and liabilities


(481
)

359Net cash (used) provided by operating activities


(621
)

319Cash flows from investing activitiesCapital distribution from subsidiaries


6,380


2,870Maturities of certificates of deposit in other financial institutions, net





40Net cash provided by investing activities


6,380


2,910Cash flows from financing activitiesCash dividends paid to stockholders


(2,096
)

(2,185
)Treasury stock acquired


(3,600
)

(4,745
)Exercise of stock options


14


1,829Net cash used in financing activities


(5,682
)

(5,101
)NET INCREASE (DECREASE) IN CASH


77


(1,872
)Cash at beginning of year


1,087


2,959Cash at end of year

$
1,164

$
1,087Supplemental disclosure of cash flow informationCash paid during the year for income taxes

$


$



48

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Table of Contents

BOARD OF DIRECTORS AND EXECUTIVE OFFICERS

TF Financial Corporation

Board of Directors

Robert N. Dusek

Chairman of the TF Financial Corporation

President of Direction Associates, Inc.

Carl F.
Gregory

Chairman Emeritus and Retired President/CEO of Third Federal Bank

Dennis L.
McCartney

Retired General Manager-East of the United States Steel Corporation

George A.
Olsen

Chairman of Third Federal Bank

Retired President/CEO of Kingsbury, Inc.

John R.
Stranford

Retired President/CEO of TF Financial Corporation and Third Federal Bank

Albert M.
Tantala, Sr.

President of Tantala Associates

Kent C.
Lufkin

President/CEO of TF Financial Corporation and Third Federal Bank

Executive Officers

Kent C. Lufkin

President
and Chief Executive Officer

Dennis R.
Stewart

Executive
Vice President and Chief Financial Officer

Lorraine A.
Wolf
Corporate Secretary

---