CONTENTS

|CORPORATE PROFILE AND RELATED INFORMATION                                             |                                                                                     | 1                
|------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------- | -----------------
|MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |                                                                                     | 3                
|REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                               |                                                                                     | 12               
|FINANCIAL STATEMENTS                                                                  |                                                                                     |                  
|                                                                                      | CONSOLIDATED BALANCE SHEETS                                                         |                  
|                                                                                      | CONSOLIDATED STATEMENTS OF INCOME                                                   |                  
|                                                                                      | CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME |                  
|                                                                                      | CONSOLIDATED STATEMENTS OF CASH FLOWS                                               |                  
|                                                                                      | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                          |                  
|BOARD OF DIRECTORS AND EXECUTIVE OFFICERS                                             |                                                                                     | INSIDE BACK COVER

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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, 2007, total assets were approximately
$701.7 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, 2007, total
stockholders' equity was approximately $67.8 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, 2007, Third Federal operated branch offices in Bucks and Philadelphia counties,
Pennsylvania and Mercer County, New Jersey. Third Federal attracts deposits (approximately $472.4 million at December 31, 2007) from the general public and uses such deposits, together
with borrowings mainly from the Federal Home Loan Bank of Pittsburgh (approximately $153.2 million at December 31, 2007) 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 3, 2008, was approximately 457. 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.

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Stock Price and Dividend History

Quoted market priceQuarter ended

Dividend paid
per shareHigh

LowDecember 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

$
0.20December 31, 2006

$
32.00

$
30.25

$
0.19September 30, 2006

$
33.00

$
27.00

$
0.19June 30, 2006

$
30.86

$
28.40

$
0.19March 31, 2006

$
30.99

$
27.90

$
0.19


2

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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

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Company.
These accounting estimates require management to make assumptions about matters that are highly uncertain at the time the accounting estimate is made.

Management
believes that the most critical accounting policy requiring the use of a significant amount of accounting estimates and judgment is the determination of the allowance for loan
losses. Allowances are established based on 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
$2,842,000 at December 31, 2007.

Financial Condition and Changes in Financial Condition

Assets.The Company's total assets at December 31, 2007 were $701.7 million, an increase of
$49.1 million during the year. This increase in total assets was mainly the combined result of the net change in various asset and liability categories discussed below.

The
Company's loans receivable held for investment at December 31, 2007 were $517.0 million, a $33.5 million or 6.9% increase since December 31, 2006. During
2007, there were originations of $121.3 million in predominately commercial real estate loans and single-family residential first and second mortgage loans. Offsetting these originations were
$85.9 million of principal payments of existing loans in the loans receivable portfolio and the sale of $2.0 million of commercial loan participations. Mortgage loans available for sale
at December 31, 2007 were $1.0 million, an increase of $0.1 million during the year which is the result of loan originations of $17.8 million and related sale proceeds of
$17.7 million.

Mortgage-backed
securities available for sale increased by $23.8 million during 2007 due to purchases of $33.4 million and an increase of $1.5 million in the fair
value of the securities. Offsetting this increase was the repayment of $11.1 million of the underlying mortgages comprising such securities. Mortgage-backed securities held to maturity
decreased by $1.5 million during 2007 due to principal repayment of the underlying mortgages in the securities.

Investment
securities available for sale decreased by $2.2 million during the year due to maturities of agency and corporate notes totaling $6.5 million and the
amortization of net premiums of $0.1 million. The remaining net change was attributable to purchases of $4.1 million and increases of $0.3 million to the fair value of these
investment securities.

The
Company's cash and cash equivalents were $5.7 million at December 31, 2007. It is the Company's current intent to keep cash and cash equivalents at a minimal level and
use its line of credit at the FHLB to fund its day-to-day cash needs.

Liabilities.Advances from the FHLB increased by $51.5 million, a result of new long term advances of
$64.2 million and a $12.4 million increase of short-term borrowings, less scheduled amortization payments of $25.1 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 $30 million of which $12.4 million
was drawn at December 31, 2007.

Deposit
balances decreased by $5.7 million during 2007. Money market accounts increased $16.4 million while non-interest checking, interest-bearing checking,
and savings decreased a combined $6.8 million during the period. Retail certificates of deposit decreased $3.6 million during the year and,

4

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when
combined with maturities of broker originated certificates of deposit that totaled $11.7 million, there was an overall decrease of $15.3 million in the certificate of deposit
balances during 2007.

Stockholders' equity.Total consolidated stockholders' equity increased by $2.2 million to $67.8 million at
December 31, 2007. The increase is largely the result of $4.8 million in net income less $2.2 million in cash dividends paid to the Company's common stockholders. Accumulated
other comprehensive loss decreased by $1.1 million as a result of a $1.2 million unrealized gain due to the fair value adjustment on available for sale securities offset by a
$0.1 million adjustment related to the pension plan. In addition there was a $1.8 million increase in stockholders' equity attributable to the exercise of stock options for 110,035
shares. The Company also purchased 166,375 shares of common stock, held in treasury, reducing stockholders' equity by $4.7 million. Finally, there was a $0.3 million increase due to the
allocation of 11,912 shares to participants in the Company's employee stock ownership plan, and an increase of $1.1 million attributable to stock grants and stock options.

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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.

|                                                                                 |  | 2007 |         | 2006 |  
|-------------------------------------------------------------------------------- |  | ---- | ------- | ---- | -
|
|ASSETS                                                                           |  |      |         |      |  
|Interest-earning assets:                                                         |  |      |         |      |  
|Loans receivable(1)                                                              |  | $    | 501,112 |      | $
|Mortgage-backed securities                                                       |  |      | 86,816  |      |  
|Investment securities(2)                                                         |  |      | 38,666  |      |  
|Other interest-earning assets(3)                                                 |  |      | 2,180   |      |  
|                                                                                 |  |      |         |      |  
|Total interest-earning assets                                                    |  |      | 628,774 |      |  
|                                                                                 |  |      |         |      |  
|Non interest-earning assets                                                      |  |      | 35,937  |      |  
|                                                                                 |  |      |         |      |  
|Total assets                                                                     |  | $    | 664,711 |      |  
|                                                                                 |  |      |         |      |  
|LIABILITIES AND STOCKHOLDERS' EQUITY                                             |  |      |         |      |  
|Interest-bearing liabilities:                                                    |  |      |         |      |  
|Deposits                                                                         |  |      | 477,299 |      |  
|Advances from the FHLB                                                           |  |      | 112,277 |      |  
|                                                                                 |  |      |         |      |  
|Total interest-bearing liabilities                                               |  |      | 589,576 |      |  
|                                                                                 |  |      |         |      |  
|Non interest-bearing liabilities                                                 |  |      | 8,189   |      |  
|                                                                                 |  |      |         |      |  
|Total liabilities                                                                |  |      | 597,765 |      |  
|Stockholders' equity                                                             |  |      | 66,946  |      |  
|                                                                                 |  |      |         |      |  
|Total liabilities and stockholders' equity                                       |  | $    | 664,711 |      |  
|                                                                                 |  |      |         |      |  
|Net interest income                                                              |  |      |         |      | $
|                                                                                 |  |      |         |      |  
|Interest rate spread(4)                                                          |  |      |         |      |  
|Net yield on interest-earning assets(5)                                          |  |      |         |      |  
|Ratio of average interest-earning assets to average interest-bearing liabilities |  |      |         |      |  

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6

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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.

2007 vs 2006
Increase (decrease) due toVolume

Rate

NetInterest income:Loans receivable, net

$
(99
)
$
29

$
(70
)Mortgage-backed securities


229


135


364Investment securities(1)


(189
)

35


(154
)Other interest-earning assets


27


(16
)

11Total interest-earning assets


(32
)

183


151Interest expense:Deposits


195


2,569


2,764Advances from the FHLB


(438
)

168


(270
)Total interest-bearing liabilities


(243
)

2,737


2,494Net change in net interest income

$
211

$
(2,554
)
$
(2,343
)




Comparison of Years Ended December 31, 2007 and December 31, 2006

Net Income.Net income was $4.8 million for the year ended December 31, 2007 compared with net income of
$5.5 million for the year ended December 31, 2006. The decrease in pre-tax net income of $1.0 million when comparing the year 2007 with 2006 is largely
attributable to a $2.5 million increase in interest expense offset by a $0.9 million increase in non-interest income and a $0.3 million decrease in
non-interest expense during the year.

Total Interest Income.For the year ended December 31, 2007, total interest income, on a taxable equivalent basis,
increased by $151,000 to $38.6 million. Net loans outstanding increased by $33.5 million due to the Company's highly successful new loan production efforts in 2007. As a result, the
Company was able to bring the 2007 average loan balances in the portfolio to comparable average loan balance levels of 2006, a year in which $16.3 million of previously purchased portfolio
loans were sold. Additionally, loan yields increased by 2 basis points to 6.46% despite of a 100 basis point decrease in the prime rate during the year. At December 31, 2007, the Company had
$79.7 million in floating rate,
prime based construction, home equity and other loans. Interest income from mortgage-backed securities increased as a result of purchases of $33.0 million that had yields higher than those
securities in the portfolio prior to the purchase.

Total Interest Expense.Total interest expense increased to $18.4 million from $15.9 million for the year ended
December 31, 2007 compared to 2006. During 2007, largely due to competitive pressure, the Company's deposit composition shifted away from low cost savings and passbook accounts toward higher
cost money market accounts and other products. Additionally, interest rates on certificates of deposit remained high despite continuously lower U.S. Treasury interest rates throughout the year.
Accordingly, the average interest rate paid on deposits rose by 55 basis points during 2007 compared with 2006, and produced a $2.8 million increase in the interest expense of deposits.
Interest

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on
advances from the Federal Home Loan Bank decreased by $0.3 million during 2007 versus 2006 as a result of a $10.4 million decrease in the average balance of advances, although total
FHLB advances increased by $51.5 million between the periods. The increases in advances during 2007 occurred late in the third and fourth quarter of 2007 largely because of the need to borrow
from the FHLB in order to fund the Company's lending activities from sources other than deposit growth.

Allowance for Loan Losses.The allowance for loan losses was approximately $2.8 million at December 31, 2007
and $2.9 million at December 31, 2006. The provision for loan losses was $0 during 2007 compared with $150,000 during 2006. Net loan charge-offs were $23,000 during 2007
compared to net recoveries of $74,000 during 2006. 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 $3.7 million during 2007 compared with
$2.8 million for the same period in 2006. The increase is mainly attributable to a $777,000 settlement award related to a lease fraud which occurred prior to 2003. The increase in the value of
the bank-owned life insurance of $104,000 during 2007 versus 2006 is due to the additional $2.0 million purchase during November of 2006. Additionally, loss on sale of mortgage-
backed securities in the second quarter of 2006 totaled $51,000 while there was no such loss in 2007.

Non-Interest Expense.Total non-interest expense decreased by $266,000 to $16.9 million during
2007 compared to 2006. Employee compensation and benefits decreased $246,000 largely due to a $221,000 reduction in management incentive compensation and bonus expense. Also, expenses associated with
the Company's retirement plans decreased $128,000 during the period as a result of Company contributions to the defined benefit plan made early in 2007 which reduced the pension expense. Costs related
to the employee stock ownership plan also decreased because the cost per share and the number of shares allocated declined. During 2007, the Bank significantly curtailed marketing-related expenditures
in an effort to reduce non-interest related expenses. This resulted in a decrease in marketing expenses of $81,000 in 2007 in contrast to 2006. Additionally, core deposit intangible
amortization expense of $83,000 is included in other non-interest in 2006; however, the asset was fully amortized in 2006 and there was no
such charge during 2007. Offsetting total decreases was a $306,000 expense related to the bankruptcy of one of the Company's loan servicing agents. On February 2, 2007, the Company's became
aware that one of its loan servicers which was servicing 43 loans for the Company totaling $15.4 million had filed for protection and reorganization under Chapter 11 of the United States
Bankruptcy Code on December 20, 2006. On March 2, 2007 the bankruptcy filing was converted to a Chapter 7 liquidation and the Company shortly thereafter obtained the servicing and
began to directly service the loans.

Income Tax Expense.The Company's effective tax rate was 26.7% during 2007 compared to 27.9% during 2006. 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 Federal Home Loan Bank. As of December 31, 2007, such borrowed funds
totaled $153.2 million. The amount of these borrowings that will mature during the twelve months ending December 31, 2008 is $28.9 million. At December 31, 2007 the Bank
had a $30 million line of credit,

8

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$17.6 million
of which was unused, and up to approximately $241.6 million of additional collateral-based borrowing capacity at the Federal Home Loan Bank.

The
amount of certificate accounts that are scheduled to mature during the twelve months ending December 31, 2008, is approximately $141.1 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, 2007, the Bank had outstanding commitments to originate loans or fund unused lines of credit of $70.7 million. The loan commitments will be funded during
the twelve months ending December 31, 2008. 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, 2007, the Bank had $2.3 million commitments to sell loans.

The
Company also has obligations under lease agreements. Payments required under such lease agreements will be approximately $435,000 during the year ending December 31, 2008.

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,
2007, 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 Office of Thrift Supervision ("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-

9

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earning
assets and interest-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.

Fundamentally,
the Bank prices and originates loans, and prices and originates its deposits including CD's 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 are readily marketable and 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, 2007, 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, 2007 are as follows:

|Change in Interest Rates |  | NPV Amount |        | % Change |     | Policy Limitation |    
|------------------------ |  | ---------- | ------ | -------- | --- | ----------------- | ---
|
|+300 Basis Points        |  | $          | 62,031 |          | -30 | %                 | -50
|+200 Basis Points        |  | $          | 71,370 |          | -19 | %                 | -35
|+100 Basis Points        |  | $          | 80,983 |          | -8  | %                 | -25
|+50 Basis Points         |  | $          | 84,724 |          | -4  | %                 | -15
|Flat Rates               |  | $          | 88,033 |          | 0   | %                 | 0  
|-50 Basis Points         |  | $          | 89,434 |          | +2  | %                 | -10
|-100 Basis Points        |  | $          | 90,846 |          | +3  | %                 | -20
|-200 Basis Points        |  | $          | 90,230 |          | +2  | %                 | -30

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, 2007, 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.

10

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FINANCIAL STATEMENTS AND REPORT OF  INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM        TF FINANCIAL CORPORATION AND SUBSIDIARIES        December 31, 2007 and 2006

11

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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, 2007 and 2006,
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, 2007 and 2006, 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.

As
discussed in Note A to the consolidated financial statements, the Company has adopted Financial Accounting Standards Board Statement (FASB) No. 123(R), Share-Based
Payment and FASB No. 158, Employer's Accounting for Defined Benefit Pension and Other Postretirement Plans, and amendment of FASB Statements No. 87, 88, 106 and 132(R) in 2006.

GRAPHIC

Philadelphia,
Pennsylvania
March 21, 2008

12

---





TF Financial Corporation and Subsidiaries        CONSOLIDATED BALANCE SHEETS

|                                                                                                                             |                                                                                                                                                                                                                                      | December 31                                |        
|---------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------ | -------
|
|
|ASSETS                                                                                                                       |                                                                                                                                                                                                                                      |                                            |        
|Cash and cash equivalents                                                                                                    |                                                                                                                                                                                                                                      | $                                          | 5,680  
|Certificates of deposit in other financial institutions                                                                      |                                                                                                                                                                                                                                      |                                            |       
|Investment securities available for saleat fair value                                                                       |                                                                                                                                                                                                                                      |                                            | 32,363 
|Investment securities held to maturity (fair value of $246 and $681 as of December 31, 2007 and 2006, respectively)          |                                                                                                                                                                                                                                      |                                            | 244    
|Mortgage-backed securities available for saleat fair value                                                                  |                                                                                                                                                                                                                                      |                                            | 98,178 
|Mortgage-backed securities held to maturity (fair value of $6,343 and $7,788 as of December 31, 2007 and 2006, respectively) |                                                                                                                                                                                                                                      |                                            | 6,160  
|Loans receivable, net                                                                                                        |                                                                                                                                                                                                                                      |                                            | 517,027
|Loans receivable, held for sale                                                                                              |                                                                                                                                                                                                                                      |                                            | 1,040  
|Federal Home Loan Bank stockat cost                                                                                         |                                                                                                                                                                                                                                      |                                            | 8,782  
|Accrued interest receivable                                                                                                  |                                                                                                                                                                                                                                      |                                            | 3,036  
|Premises and equipment, net                                                                                                  |                                                                                                                                                                                                                                      |                                            | 6,267  
|Goodwill                                                                                                                     |                                                                                                                                                                                                                                      |                                            | 4,324  
|Bank owned life insurance                                                                                                    |                                                                                                                                                                                                                                      |                                            | 15,881 
|Other assets                                                                                                                 |                                                                                                                                                                                                                                      |                                            | 2,691  
|                                                                                                                             |                                                                                                                                                                                                                                      |                                            |        
|                                                                                                                             |                                                                                                                                                                                                                                      | TOTAL ASSETS                               |        
|                                                                                                                             |                                                                                                                                                                                                                                      |                                            |        
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                         |                                                                                                                                                                                                                                      |                                            |        
|Liabilities                                                                                                                  |                                                                                                                                                                                                                                      |                                            |        
|                                                                                                                             | Deposits                                                                                                                                                                                                                             |                                            | $      
|                                                                                                                             | Advances from the Federal Home Loan Bank                                                                                                                                                                                             |                                            |        
|                                                                                                                             | Advances from borrowers for taxes and insurance                                                                                                                                                                                      |                                            |        
|                                                                                                                             | Accrued interest payable                                                                                                                                                                                                             |                                            |        
|                                                                                                                             | Other liabilities                                                                                                                                                                                                                    |                                            |        
|                                                                                                                             |                                                                                                                                                                                                                                      |                                            |        
|                                                                                                                             |                                                                                                                                                                                                                                      | Total liabilities                          |        
|                                                                                                                             |                                                                                                                                                                                                                                      |                                            |        
|Stockholders' equity                                                                                                         |                                                                                                                                                                                                                                      |                                            |        
|                                                                                                                             | Preferred stock, no par value; 2,000,000 shares authorized at December 31, 2007 and 2006, none issued                                                                                                                                |                                            |        
|                                                                                                                             | Common stock, $0.10 par value; 10,000,000 shares authorized, 5,290,000 shares issued, 2,671,083 and 2,702,845 shares outstanding at December 31, 2007 and 2006, respectively, net shares in treasury: 20072,459,440;
20062,415,766 |                                            |        
|                                                                                                                             | Additional paid-in capital                                                                                                                                                                                                           |                                            |        
|                                                                                                                             | Unearned ESOP shares                                                                                                                                                                                                                 |                                            |        
|                                                                                                                             | Treasury stockat cost                                                                                                                                                                                                               |                                            |        
|                                                                                                                             | Retained earnings                                                                                                                                                                                                                    |                                            |        
|                                                                                                                             | Accumulated other comprehensive loss                                                                                                                                                                                                 |                                            |        
|                                                                                                                             |                                                                                                                                                                                                                                      |                                            |        
|                                                                                                                             |                                                                                                                                                                                                                                      | Total stockholders' equity                 |        
|                                                                                                                             |                                                                                                                                                                                                                                      |                                            |        
|                                                                                                                             |                                                                                                                                                                                                                                      | TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY |        
|                                                                                                                             |                                                                                                                                                                                                                                      |                                            |        

The
accompanying notes are an integral part of these statements.

13

---





TF Financial Corporation and Subsidiaries        CONSOLIDATED STATEMENTS OF INCOME

|                           |                                                  | Year ended December 31,                             |      
|-------------------------- | ------------------------------------------------ | --------------------------------------------------- | -----
|
|
|Interest income            |                                                  |                                                     |      
|                           | Loans, including fees                            |                                                     | $    
|                           | Mortgage-backed securities                       |                                                     |      
|                           | Investment securities                            |                                                     |      
|                           | Interest-bearing deposits and other              |                                                     |      
|                           |                                                  |                                                     |      
|                           |                                                  | TOTAL INTEREST INCOME                               |      
|                           |                                                  |                                                     |      
|Interest expense           |                                                  |                                                     |      
|                           | Deposits                                         |                                                     |      
|                           | Borrowings                                       |                                                     |      
|                           |                                                  |                                                     |      
|                           |                                                  | TOTAL INTEREST EXPENSE                              |      
|                           |                                                  |                                                     |      
|                           |                                                  | NET INTEREST INCOME                                 |      
|Provision for loan losses  |                                                  |                                                     |     
|                           |                                                  |                                                     |      
|                           |                                                  | NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES |      
|                           |                                                  |                                                     |      
|Non-interest income        |                                                  |                                                     |      
|                           | Service fees, charges and other operating income |                                                     |      
|                           | Bank owned life insurance                        |                                                     |      
|                           | Gain on sale of real estate                      |                                                     |      
|                           | Loss on sale of mortgage-backed securities       |                                                     |      
|                           | Gain on sale of loans                            |                                                     |      
|                           | Other income                                     |                                                     |      
|                           |                                                  |                                                     |      
|                           |                                                  | TOTAL NON-INTEREST INCOME                           |      
|                           |                                                  |                                                     |      
|Non-interest expense       |                                                  |                                                     |      
|                           | Employee compensation and benefits               |                                                     |      
|                           | Occupancy and equipment                          |                                                     |      
|                           | Professional fees                                |                                                     |      
|                           | Marketing and advertising                        |                                                     |      
|                           | Other operating                                  |                                                     |      
|                           | Amortization of core deposit intangible asset    |                                                     |      
|                           |                                                  |                                                     |      
|                           |                                                  | TOTAL NON-INTEREST EXPENSE                          |      
|                           |                                                  |                                                     |      
|                           |                                                  | INCOME BEFORE INCOME TAXES                          |      
|Income tax expense         |                                                  |                                                     | 1,762
|                           |                                                  |                                                     |      
|                           |                                                  | NET INCOME                                          |      
|                           |                                                  |                                                     |      
|Earnings per sharebasic   |                                                  | $                                                   | 1.78 
|                           |                                                  |                                                     |      
|Earnings per sharediluted |                                                  | $                                                   | 1.78 
|                           |                                                  |                                                     |      

The
accompanying notes are an integral part of these statements.

14

---





TF Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY AND
COMPREHENSIVE INCOME
Years ended December 31, 2007 and 2006
(in thousands, except share data)

|                                                                   |  | Common Stock |   |   |     |  |   |        |   |   |        |   |   |        |   |   |         |   |  
|------------------------------------------------------------------ |  | ------------ | - | - | --- |  | - | ------ | - | - | ------ | - | - | ------ | - | - | ------- | - | -
|
|
|Balance at December 31, 2005                                       |  | 2,714,173    |   | $ | 529 |  | $ | 53,048 |   |   | (1,080 | ) | $ | (1,849 | ) | $ | (47,920 | ) | $
|Allocation of ESOP shares                                          |  | 13,495       |   |   |    |  |   | 228    |   |   |       |   |   | 146    |   |   |        |   |  
|Purchase of treasury stock                                         |  | (58,904      | ) |   |    |  |   |       |   |   |       |   |   |       |   |   | (1,749  | ) |  
|Cash dividendscommon stock                                        |  |             |   |   |    |  |   |       |   |   |       |   |   |       |   |   |        |   |  
|Restricted stock grant                                             |  |             |   |   |    |  |   | (1,080 | ) |   | 1,080  |   |   |       |   |   |        |   |  
|Compensation expenseRestricted shares                             |  |             |   |   |    |  |   | 361    |   |   |       |   |   |       |   |   |        |   |  
|Exercise of options                                                |  | 21,415       |   |   |    |  |   | (108   | ) |   |       |   |   |       |   |   | 433     |   |  
|Income tax benefit arising from stock compensation                 |  |             |   |   |    |  |   | 121    |   |   |       |   |   |       |   |   |        |   |  
|Stock option expense.                                              |  |             |   |   |    |  |   | 386    |   |   |       |   |   |       |   |   |        |   |  
|Vesting of stock grant                                             |  | 12,666       |   |   |     |  |   | (256   | ) |   |       |   |   |       |   |   | 256     |   |  
|Unrealized gains on securities, net of tax                         |  |             |   |   |    |  |   |       |   |   |       |   |   |       |   |   |        |   |  
|Adjustment to record funded status of pension (net of tax of $367) |  |             |   |   |    |  |   |       |   |   |       |   |   |       |   |   |        |   |  
|Net income for the year ended December 31, 2006                    |  |             |   |   |    |  |   |       |   |   |       |   |   |       |   |   |        |   |  
|                                                                   |  |              |   |   |     |  |   |        |   |   |        |   |   |        |   |   |         |   |  
|Comprehensive income                                               |  |              |   |   |     |  |   |        |   |   |        |   |   |        |   |   |         |   |  
|                                                                   |  |              |   |   |     |  |   |        |   |   |        |   |   |        |   |   |         |   |  
|Balance at December 31, 2006                                       |  | 2,702.845    |   | $ | 529 |  | $ | 52,700 |   | $ |       |   | $ | (1,703 | ) | $ | (48,980 | ) | $
|Allocation of ESOP shares                                          |  | 11,912       |   |   |    |  |   | 198    |   |   |       |   |   | 108    |   |   |        |   |  
|Purchase of treasury stock                                         |  | (166,375     | ) |   |    |  |   |       |   |   |       |   |   |       |   |   | (4,745  | ) |  
|Cash dividendscommon stock                                        |  |             |   |   |    |  |   |       |   |   |       |   |   |       |   |   |        |   |  
|Compensation expenserestricted shares                             |  |             |   |   |    |  |   | 361    |   |   |       |   |   |       |   |   |        |   |  
|Exercise of options                                                |  | 110,035      |   |   |    |  |   | (417   | ) |   |       |   |   |       |   |   | 2,246   |   |  
|Income tax benefit arising from stock compensation                 |  |             |   |   |    |  |   | 367    |   |   |       |   |   |       |   |   |        |   |  
|Stock option expense                                               |  |             |   |   |    |  |   | 391    |   |   |       |   |   |       |   |   |        |   |  
|Vesting of stock grant                                             |  | 12,666       |   |   |    |  |   | (263   | ) |   |       |   |   |       |   |   | 263     |   |  
|Unrealized gains on securities, net of tax                         |  |             |   |   |    |  |   |       |   |   |       |   |   |       |   |   |        |   |  
|Adjustment to record funded status of pension (net of tax of $75)  |  |             |   |   |    |  |   |       |   |   |       |   |   |       |   |   |        |   |  
|Net income for the year ended December 31, 2007                    |  |             |   |   |    |  |   |       |   |   |       |   |   |       |   |   |        |   |  
|                                                                   |  |              |   |   |     |  |   |        |   |   |        |   |   |        |   |   |         |   |  
|Comprehensive income                                               |  |              |   |   |     |  |   |        |   |   |        |   |   |        |   |   |         |   |  
|                                                                   |  |              |   |   |     |  |   |        |   |   |        |   |   |        |   |   |         |   |  
|Balance at December 31, 2007                                       |  | 2,671,083    |   | $ | 529 |  | $ | 53,337 |   | $ |       |   | $ | (1,595 | ) | $ | (51,216 | ) | $
|                                                                   |  |              |   |   |     |  |   |        |   |   |        |   |   |        |   |   |         |   |  

The accompanying notes are an integral part of this statement

15

---





TF Financial Corporation and Subsidiaries        CONSOLIDATED STATEMENTS OF CASH FLOWS

|                     |                                                             | Year ended December 31,                                           |                                                          
|-------------------- | ----------------------------------------------------------- | ----------------------------------------------------------------- | ---------------------------------------------------------
|
|
|OPERATING ACTIVITIES |                                                             |                                                                   |                                                          
|                     | Net income                                                  |                                                                   | $                                                        
|                     | Adjustments to reconcile net income to net cash provided by |                                                                   |                                                          
|                     |                                                             | operating activities                                              |                                                          
|                     |                                                             | Amortization of                                                   |                                                          
|                     |                                                             |                                                                   | Mortgage loan servicing rights                           
|                     |                                                             |                                                                   | Deferred loan origination fees                           
|                     |                                                             |                                                                   | Premiums and discounts on investment securities, net     
|                     |                                                             |                                                                   | Premiums and discounts on mortgage-backed securities, net
|                     |                                                             |                                                                   | Premiums and discounts on loans, net                     
|                     |                                                             |                                                                   | Core deposit intangibles                                 
|                     |                                                             |                                                                   | Discounts on wholesale deposits                          
|                     |                                                             | Deferred income taxes                                             |                                                          
|                     |                                                             | Provision for loan losses and provision for losses on real estate |                                                          
|                     |                                                             | Depreciation of premises and equipment                            |                                                          
|                     |                                                             | Increase in value of bank-owned life insurance                    |                                                          
|                     |                                                             | Stock grant expense                                               |                                                          
|                     |                                                             | Stock option expense                                              |                                                          
|                     |                                                             | Stock based benefit programs: ESOP                                |                                                          
|                     |                                                             | Proceeds from sale of loans originated for sale                   |                                                          
|                     |                                                             | Origination of loans held for sale                                |                                                          
|                     |                                                             | (Gain) loss on sale of                                            |                                                          
|                     |                                                             |                                                                   | Investment and mortgage-backed securities                
|                     |                                                             |                                                                   | Real estate acquired through foreclosure                 
|                     |                                                             |                                                                   | Mortgage loans available for sale                        
|                     |                                                             |                                                                   | Mortgage loans held to maturity                          
|                     |                                                             |                                                                   | (Income) expense from mortgage loan derivatives          
|                     |                                                             |                                                                   | Expense (income) associated with forward loan sales      
|                     |                                                             | (Increase) decrease in                                            |                                                          
|                     |                                                             |                                                                   | Accrued interest receivable                              
|                     |                                                             |                                                                   | Other assets                                             
|                     |                                                             | Increase (decrease) in                                            |                                                          
|                     |                                                             |                                                                   | Accrued interest payable                                 
|                     |                                                             |                                                                   | Other liabilities                                        
|                     |                                                             |                                                                   |                                                          
|                     |                                                             |                                                                   |                                                          
|                     |                                                             |                                                                   |                                                          

16

---



TF Financial Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

Year ended December 31,2007

2006(in thousands)INVESTING ACTIVITIESLoan originations

$
(121,299
)
$
(125,660
)Loan principal payments


85,884


109,589Principal repayments on mortgage-backed securities held to maturity


1,530


2,472Principal repayments on mortgage-backed securities available for sale


11,067


14,263Proceeds from loan sales


1,969


23,512Maturities of certificates of deposit in other financial institutions, net


40


Purchase of investment securities available for sale


(4,111
)

(3,795
)Purchase of mortgage-backed securities available for sale


(33,401
)

(10,120
)Purchase of bank-owned life insurance





(2,000
)Proceeds from maturities of investment securities held to maturity


435


4,018Proceeds from maturities of investment securities available for sale


6,455


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





4,971(Purchase) redemption of Federal Home Loan Bank stock


(1,652
)

302Proceeds from sale of real estate





729Purchase of premises and equipment


(638
)

(1,209
)NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES

$
(53,721
)
$
17,072FINANCING ACTIVITIESNet (decrease) increase in deposits


(5,707
)

7,546Net increase (decrease) in short-term Federal Home Loan Bank advances


12,383


(16,190
)Proceeds from long-term Federal Home Loan Bank advances


64,235


15,535Repayment of long-term Federal Home Loan Bank advances


(25,098
)

(18,904
)Net increase (decrease) in advances from borrowers for taxes and insurance


327


(49
)Treasury stock acquired


(4,745
)

(1,749
)Exercise of stock options


1,829


325Tax benefit arising from stock compensation


367


121Common stock dividends paid


(2,185
)

(2,049
)NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES


41,406


(15,414
)NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS


(6,684
)

8,543Cash and cash equivalents at beginning of year


12,364


3,821Cash and cash equivalents at end of year

$
5,680

$
12,364Supplemental disclosure of cash flow informationCash paid forInterest on deposits and advances from Federal Home Loan Bank

$
18,117

$
14,971Income taxes

$
1,380

$
1,645Capitalization of mortgage servicing rights

$
244

$
191


The
accompanying notes are an integral part of these statements.

17

---





TF Financial Corporation and Subsidiaries        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        December 31, 2007 and 2006

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 that conducts operations from its main office in Newtown, Pennsylvania, twelve full-service
branch offices located in Philadelphia and Bucks Counties, Pennsylvania, and three 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.

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.

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.

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

18

---



TF Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2007 and 2006

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.

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, and unearned income. 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.

The
Company accounts for loans acquired in a transfer in accordance with the American Institute of Certified Public Accountants' Statement of Position No. 03-3,
"Accounting for Certain Loans or

19

---



TF Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2007 and 2006

NOTE ASUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Debt
Securities Acquired in a Transfer" (SOP 03-3). SOP 03-3 requires that acquired impaired loans for which it is probable that the investor will be unable to
collect all contractually required payments receivable be recorded at the present value of amounts expected to be received and prohibits carrying over or creation of valuation allowances in the
initial accounting for these loans.

Mortgages
loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or estimated fair value. Any resulting unrealized losses are included
in other income. The fair value of the Bank's loans held as available for sale was in excess of cost at December 31, 2007 and 2006.

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.

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 No. 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, 2007 and 2006.

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,
2007. No impairment has been recognized.

Core
deposit intangible asset is the result of the Company's 1996 acquisition of certain branches and deposits of Cenlar Federal Savings Bank. The core deposit intangible acquired was
amortized over 10 years and became fully amortized during September 30, 2006.

The
Company purchased $10.5 million in life insurance policies on the lives of its executives and officers prior to 2006 and an additional $2.0 million in November 2006.
The Company is the owner and beneficiary of the policies. The cash surrender values of the policies were approximately $15.9 million and $15.3 million at December 31, 2007 and
2006, respectively.

20

---



TF Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2007 and 2006

NOTE ASUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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 in excess of the required debt service of the plan.

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. Additionally, the Company includes reporting disclosures required by SFAS 132R, "Employers' Disclosures about Pensions and Other Postretirement
Benefits". 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 statement of financial position 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 statement of financial position, 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 as of the end of the fiscal year ending after December 15, 2006.

The
Company has stock benefit plans that allow the Company to grant options and stock to employees and directors. The options, which have a term of up to 10 years when issued,
vest over a three to five year period. The exercise price of each option equals the market price of the Company's stock on the date of the grant. The fair value of each option grant was estimated on
the date of the grant using the Black-Scholes option-pricing model.

On
January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") 123R, "Share-Based Payment," using the modified prospective
transition method. Under this transition method, compensation cost to be recognized beginning in the first quarter of 2006 included: (a) compensation cost for all share-based payments granted
prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, and (b) compensation cost
for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R.

21

---



TF Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2007 and 2006

NOTE ASUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

The
Company expenses marketing and advertising costs as incurred.

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.

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, 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


|
|

December 31, 2006Before tax
amount

Tax
(expense)
benefit

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

$
586

$
(198
)
$
388Reclassification adjustment for losses realized


51


(18
)

33Other comprehensive income, net

$
637

$
(216
)
$
421


22

---



TF Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2007 and 2006

NOTE ASUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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 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.

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

NOTE BRECENT ACCOUNTING PRONOUNCEMENTS

In September 2006, the Financial Accounting Standards Board (FASB) Issued Statement No. 157 (SFAS 157), "Fair Value Measurements" which is effective
for fiscal years beginning after November 15, 2007 and for interim periods within those years. This statement defines fair value, establishes a framework for measuring fair value and expands
the related disclosure requirements. In February 2008, FASB issued FASB Staff Position (FSP) FAS 157-2 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
Company will adopt SFAS 157 effective January 1, 2008 which will result in increased disclosures regarding fair value measurement.

In
September 2006, the Emerging Issues Task Force (EITF) finalized Issue No. 06-5, "Accounting for Purchases of Life InsuranceDetermining the Amount That
Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4 (Accounting for Purchases of Life Insurance)". This issue requires that a policyholder consider contractual
terms of a life insurance policy in determining the amount that could be realized under the insurance contract. It also requires that if the contract provides for a greater surrender value if all
individual policies in a group are surrendered at the same time, that the surrender value be determined based on the assumption that policies will be surrendered on an individual basis. Lastly, the
issue discusses whether the cash surrender value should be discounted when the policyholder is contractually limited in its ability to surrender a policy. This issue is effective for fiscal years
beginning after December 15, 2006. Application of this issue did not have a material impact on the Company's consolidated financial statements.

The
Company adopted the provisions of FASB Interpretation No. 48 (FIN 48), "Accounting for Uncertainty in Income Taxes", on January 1, 2007. Previously, the Company
had accounted for tax contingencies in accordance with SFAS 5, "Accounting for Contingencies". As required by FIN 48, which clarifies SFAS 109, "Accounting for Income Taxes", the
Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax
positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than
50 percent likelihood of being realized upon ultimate settlement with the

23

---



TF Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2007 and 2006

NOTE BRECENT ACCOUNTING PRONOUNCEMENTS (Continued)

relevant
tax authority. The Company is subject to income taxes in the U.S. federal jurisdiction, and the states of Pennsylvania and New Jersey. Tax regulations within each jurisdiction are subject to
the interpretation of the related tax laws and regulations and require significant judgment to apply. The Company applied Interpretation 48 to all tax positions for which the statute of limitations
remained open. The adoption of FIN 48 did not have a material impact on the results of operations or financial condition of the Company.

In
February 2007, FASB issued Statement No. 159 (SFAS 159), "The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement
No. 115". The statement permits entities to choose to measure many financial instruments at fair value. SFAS 159 provides an opportunity to mitigate volatility in reporting earnings
caused by measuring related assets and liabilities differently, without having to apply complex hedge accounting provisions. This statement is effective as of the beginning of an entity's first fiscal
year that begins after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to
apply the provisions of SFAS 157, "Fair Value Measurements". Although the Company has decided against early adoption, the Company is currently evaluating whether it will adopt SFAS 159
and elect to carry any assets or liabilities at fair value.

In
December 2007, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) 109 "Written Loan Commitments Recorded at Fair Value Through Earnings", which superseded
SAB 105 "Loan Commitments Accounted for as Derivative Instruments", which requires a company to include expected net future cash flows related to the associated servicing of the loan in the
measurement of its written loan commitments that are accounted for at fair value through earnings. SAB 109 emphasizes the SEC's view that internally developed intangible assets should not be
included in the fair value of a derivative loan commitment accounted through earnings. The guidance should be applied prospectively to commitments accounted for at fair value that are issued or
modified in fiscal quarters beginning after December 15, 2007. The Company does not anticipate a material impact as a result of this guidance on its consolidated statements.

In
December 2007, FASB issued Statement No. 141R (SFAS 141R), "Business Combinations". The statement will change how a reporting enterprise accounts for the acquisition of
a business. Underlying SFAS 141R is the fundamental principle that an acquirer should measure almost all assets acquired and liabilities assumed at fair value as of the acquisition date. It is
effective for acquisitions occurring in fiscal periods beginning 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 will change the accounting for, and the financial presentation of, noncontrolling equity interests in a consolidated subsidiary. SFAS 160 requires entities to apply the presentation
and disclosure requirements retrospectively (e.g. by reclassifying noncontrolling interests to appear in equity) to comparative financial statements, if presented. It 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.

24

---



TF Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2007 and 2006

NOTE CCASH AND CASH EQUIVALENTS

Cash and cash equivalents consist of the following:

December 31,2007

2006(in thousands)Cash and due from banks

$
5,557

$
5,544Interest-bearing deposits in other financial institutions


123


6,820$
5,680

$
12,364


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, 2007 and 2006, are summarized
as follows:

|                                              |                                         | December 31, 2007
|--------------------------------------------- | --------------------------------------- | -----------------
|
|
|Investment securities held to maturity        |                                         |                  
|                                              | State and political subdivisions        |                  
|                                              |                                         |                  
|                                              |                                         | $                
|                                              |                                         |                  
|Investment securities available for sale      |                                         |                  
|                                              | U.S. Government and federal agencies    |                  
|                                              | Corporate debt securities               |                  
|                                              | State and political subdivisions        |                  
|                                              | Equities                                |                  
|                                              |                                         |                  
|                                              |                                         | $                
|                                              |                                         |                  
|Mortgage-backed securities held to maturity   |                                         |                  
|                                              | FHLMC certificates                      |                  
|                                              | FNMA certificates                       |                  
|                                              | GNMA certificates                       |                  
|                                              |                                         |                  
|                                              |                                         | $                
|                                              |                                         |                  
|Mortgage-backed securities available for sale |                                         |                  
|                                              | FHLMC certificates                      |                  
|                                              | FNMA certificates                       |                  
|                                              | Real estate mortgage investment conduit |                  
|                                              |                                         |                  
|                                              |                                         | $                
|                                              |                                         |                  

25

---



TF Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2007 and 2006

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

|
|

|                                              |                                         | December 31, 2006
|--------------------------------------------- | --------------------------------------- | -----------------
|
|
|Investment securities held to maturity        |                                         |                  
|                                              | State and political subdivisions        |                  
|                                              |                                         |                  
|                                              |                                         | $                
|                                              |                                         |                  
|Investment securities available for sale      |                                         |                  
|                                              | U.S. Government and federal agencies    |                  
|                                              | Corporate debt securities               |                  
|                                              | State and political subdivisions        |                  
|                                              | Equities                                |                  
|                                              |                                         |                  
|                                              |                                         | $                
|                                              |                                         |                  
|Mortgage-backed securities held to maturity   |                                         |                  
|                                              | FHLMC certificates                      |                  
|                                              | FNMA certificates                       |                  
|                                              | GNMA certificates                       |                  
|                                              |                                         |                  
|                                              |                                         | $                
|                                              |                                         |                  
|Mortgage-backed securities available for sale |                                         |                  
|                                              | FHLMC certificates                      |                  
|                                              | FNMA certificates                       |                  
|                                              | Real estate mortgage investment conduit |                  
|                                              |                                         |                  
|                                              |                                         | $                
|                                              |                                         |                  

There
were no sales of securities during the year 2007. Gross realized losses were $51,000 for the year ended December 31, 2006. These losses resulted from the sale of
mortgage-backed securities of $5.0 million during the year ended December 31, 2006.

26

---



TF Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2007 and 2006

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

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

|                           |                                       | December 31, 2007
|-------------------------- | ------------------------------------- | -----------------
|
|
|
|Investment securities      |                                       |                  
|                           | Due in one year or less               |                  
|                           | Due after one year through five years |                  
|                           | Due after five years through 10 years |                  
|                           | Due after 10 years                    |                  
|                           |                                       |                  
|                           |                                       |                  
|Mortgage-backed securities |                                       |                  
|                           |                                       |                  
|                           |                                       | $                
|                           |                                       |                  

Investment
securities having an aggregate amortized cost of approximately $3.0 million were pledged to secure public deposits at December 31, 2007 and 2006.

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.

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 |   | Total |  
|------------------------------------- |  | -- |  | ------------------- | ----- | ------------------- | - | ----- | -
|
|
|U.S. Government and federal agencies  |  | 1  |  | $                   |      |                     | $ |      |  
|Corporate debt securities             |  | 1  |  |                     |      |                     |   |      |  
|State and political subdivisions      |  | 9  |  |                     |      |                     |   |      |  
|Mortgage-backed securities            |  | 25 |  |                     | 1,193 |                     |   | (14   | )
|                                      |  |    |  |                     |       |                     |   |       |  
|Total temporarily impaired securities |  | 36 |  | $                   | 1,193 |                     | $ | (14   | )
|                                      |  |    |  |                     |       |                     |   |       |  

27

---



TF Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2007 and 2006

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, 2006:

|                                      |  |    |  | Less than 12 months |       | 12 months or longer |   | Total |  
|------------------------------------- |  | -- |  | ------------------- | ----- | ------------------- | - | ----- | -
|
|
|U.S. Government and federal agencies  |  | 2  |  | $                   |      |                     | $ |      |  
|Corporate debt securities             |  | 3  |  |                     |      |                     |   |      |  
|State and political subdivisions      |  | 19 |  |                     | 976   |                     |   | (4    | )
|Mortgage-backed securities            |  | 38 |  |                     | 7,298 |                     |   | (53   | )
|                                      |  |    |  |                     |       |                     |   |       |  
|Total temporarily impaired securities |  | 62 |  | $                   | 8,274 |                     | $ | (57   | )
|                                      |  |    |  |                     |       |                     |   |       |  

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, 2007 and 2006, respectively are not considered other-than-temporary.

28

---



TF Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2007 and 2006

NOTE ELOANS RECEIVABLE

Loans receivable are summarized as follows:

December 31,2007

2006(in thousands)Held for investment:First mortgage loansSecured by one-to-four residences

$
272,840

$
266,789Secured by other non-residential properties


109,740


93,607Construction loans


35,507


34,944Total first mortgage loans


418,087


395,340Other loansCommercial non-real estate


46,850


40,458Home equity and second mortgage


52,013


46,864Other


2,244


3,242Total other loans


101,107


90,564Total loans


519,194


485,904Net deferred loan origination costs and unamortized premiums


675


531Less allowance for loan losses


(2,842
)

(2,865
)Total loans receivable

$
517,027

$
483,570Held for sale:First mortgage loansSecured by one-to-four family residences

$
1,040

$
969


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

December 31,2007

2006(in thousands)Balance at beginning of year

$
2,865

$
2,641Provision charged to income





150(Charge-offs), net of recoveries


(23
)

74Balance at end of year

$
2,842

$
2,865


29

---



TF Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2007 and 2006

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 31,2007

2006(in thousands)Impaired loans with a related allowance

$


$
Impaired loans without a related allowance

$
5,358

$
Total impaired loans

$
5,358

$
Allowance for impaired loans

$


$
Total non-accrual loans

$
5,358

$
2,110Total 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 $301,000 and $130,000 for the years ended December 31, 2007 and 2006. 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, 2007 and 2006. 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 collectibility. The aggregate dollar amount of these loans was approximately $178,000 and $252,000 at
December 31, 2007 and 2006, respectively. New loans to related parties of $105,000 were made during 2007. For the year ended December 31, 2007, principal repayments of approximately
$179,000 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 31,2007

2006(in thousands)Mortgage loan servicing portfoliosFHLMC

$
632

$
903FNMA


37,396


21,918Other investors


12,231


10,841$
50,259

$
33,662


Custodial
balances maintained in connection with the foregoing loan servicing totaled approximately $390,000 and $238,000 at December 31, 2007 and 2006 respectively. Net servicing

30

---



TF Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2007 and 2006

NOTE FLOAN SERVICING (Continued)

revenue
on mortgage loans serviced for other was $30,000 and $19,000 for the years ended December 31, 2007 and 2006 respectively. Mortgage servicing rights of $460,000 and $279,000 are reported
as a component of other assets at December 31, 2007 and 2006.

NOTE GPREMISES AND EQUIPMENT

Premises and equipment are summarized as follows:

December 31,Estimated
useful lives2007

2006(in thousands)Buildings

30 years

$
6,462

$
6,207Leasehold improvements

5-10 years


1,974


1,932Furniture, fixtures and equipment

3-7 years


10,569


10,25719,005


18,396Less accumulated depreciation




14,430


13,5444,575


4,852Land




1,692


1,692$
6,267

$
6,544


NOTE HDEPOSITS

Deposits are summarized as follows:

December 31,Deposit type2007

2006(in thousands)Demand

$
35,904

$
36,991NOW


46,543


51,272Money market


79,267


62,914Passbook savings


130,423


131,359Total demand, transaction and passbook deposits


292,137


282,536Certificates of deposit


180,257


195,551$
472,394

$
478,087


The
aggregate amount of certificates of deposit with a minimum denomination of $100,000 was approximately $38.8 million and $42.4 million at December 31, 2007 and
2006, respectively. The Bank had broker-originated certificates of deposit $11.7 million at December 31, 2006.

31

---



TF Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2007 and 2006

NOTE HDEPOSITS (Continued)

At
December 31, 2007, scheduled maturities of certificates of deposit are as follows:

Year ending December 31,2008

2009

2010

2011

2012

Thereafter

Total(in thousands)$
141,130

$
31,084

$
5,322

$
1,323

$
970

$
428

$
180,257


Related
party deposits are on substantially the same terms as for comparable transactions with unrelated persons. The aggregate dollar amount of these deposits was approximately
$2.2 million and $2.5 million at December 31, 2007 and 2006, respectively.

NOTE IADVANCES FROM THE FEDERAL HOME LOAN BANK

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

December 31,2007

2006Principal payments due during

Amount

Weighted
average rate

Amount

Weighted
average rate(in thousands)



(in thousands)2007

$



%

25,122

3.92
%2008


28,851

4.00
%

23,144

3.76
%2009


44,495

4.01
%

34,566

3.84
%2010


28,845

4.53
%

13,074

4.41
%2011


18,392

4.23
%

2,776

4.17
%2012


30,950

4.29
%

2,004

4.22
%Thereafter


1,688

4.54
%

1,015

4.26
%$
153,221

4.19
%
$
101,701

3.93
%


The
advances are collateralized by Federal Home Loan Bank stock and certain first mortgage loans and mortgage-backed securities. Total unused lines of credit at the Federal Home Loan
Bank were $17.6 million at December 31, 2007. The advances from the Federal Home Loan Bank are fixed rate, fixed term.

NOTE JBENEFIT PLANS

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 $62,000 and $65,000 in 2007 and 2006 respectively.

32

---



TF Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2007 and 2006

NOTE JBENEFIT PLANS (Continued)

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 31,2007

2006(in thousands)Reconciliation of Projected Benefit ObligationBenefit obligation at beginning of year

$
3,560

$
3,621Service cost


336


308Interest cost


211


211Plan amendments





Actuarial loss (gain)


44


(82
)Benefits paid


(558
)

(498
)Benefits obligation at end of year

$
3,593

$
3,560Reconciliation of Fair Value of AssetsFair value of plan assets at beginning of year

$
3,860

$
3,174Actual return on plan assets


117


364Employer contribution


1,107


820Benefits paid


(558
)

(498
)Fair value of plan assets at end of year

$
4,526

$
3,860Prepaid benefit cost at end of year

$
933

$
300


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. The amount recognized in accumulated other comprehensive income at December 31, 2006 was $1,080,000 which included a net actuarial loss of
$987,000 and prior service cost of $93,000. During 2008, 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, 2007 and 2006 was $3,003,000 and $3,036,000 respectively.

33

---



TF Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2007 and 2006

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 2008 is $218,000.

December 31,2007

2006Weighted-average assumptions used to determine benefit obligations, end of yearDiscount rate

5.75
%
5.75
%Rate of compensation increase

4.00

4.00


December 31,2007

2006(in thousands)Components of net periodic benefit costService cost

$
336

$
308Interest cost


211


211Expected return on plan assets


(399
)

(324
)Amortization of prior service cost


63


63Amortization of transition obligation (asset)





Recognized net actuarial loss


46


51Net periodic benefit cost

$
257

$
309


|
|

December 31,2007

2006Weighted-average assumptions used to determine net benefit costs as of December 31Discount 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 which the Plan is currently invested.

Estimated
future benefits payments are as follows:

(in thousands)2008

$
362009


582010


582011


592012


1052013-2017


1,142


34

---



TF Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2007 and 2006

NOTE JBENEFIT PLANS (Continued)

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

Percentage of Plan Assets
at December 31,2007

2006Asset CategoryEquity securities

52
%
59
%Debt securities

24
%
21
%Other

24
%
20
%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 60% equity securities and 40% debt
and other securities.

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. As shares are released from collateral, the Company reports compensation expense equal to the current market price of the shares, and the
allocated shares are included in outstanding shares for earnings per share computations. ESOP compensation expense was $247,000 and $332,000 in 2007 and 2006 respectively.

2007

2006Allocated shares


167,000


169,000Unreleased shares


160,000


171,000Total ESOP shares


327,000


340,000Fair value of unreleased shares (in thousands)

$
3,942

$
5,301


35

---



TF Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2007 and 2006

NOTE JBENEFIT PLANS (Continued)

A
summary of the status of the Company's stock option plans as of December 31, 2007 and 2006, and changes for each of the years in the two-year period then ended is as
follows:

2007

2006Number
of
shares

Weighted
average
exercise
price per
share

Number
of
shares

Weighted
average
exercise
price per
shareOutstanding at beginning of year

365,734

$
23.62

384,848

$
23.18Options granted






11,000


27.20Options exercised

(110,035
)

16.62

(21,415
)

15.25Options forfeited

(3,123
)

31.93

(8,699
)

29.72Options expired









Outstanding at end of year

252,576

$
26.56

365,734

$
23.62


The
following table summarizes information about stock options outstanding at December 31, 2007:

|             |  | Options outstanding |  | Options exercisable
|------------ |  | ------------------- |  | -------------------
|
|$13.25-19.88 |  | 26,017              |  | 2.21               
|$19.89-29.84 |  | 208,371             |  | 3.57               
|$29.85-34.14 |  | 18,188              |  | 5.97               
|             |  |                     |  |                    
|             |  | 252,576             |  | 3.60               
|             |  |                     |  |                    

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

December 31,2007

2006(in thousands)Aggregate value of:Options outstanding

$
349

$
2,641Options exercisable

$
349

$
2,340Options exercised

$
1,481

$
320Cash receipts from options exercised

$
1,829

$
325


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 2007 and the
exercise price, multiplied by the number of exercisable in-the-money options). The Company has a policy of issuing shares from treasury to satisfy share option exercises.

36

---



TF Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2007 and 2006

NOTE JBENEFIT PLANS (Continued)

Stock-based
compensation expense included in net income related to stock options was $391,000 and $386,000, resulting in a tax benefit of $120,000 and $116,000, for the year ended
December 31, 2007 and 2006 respectively. There was $418,000 and $810,000 of total unrecognized compensation cost, net of estimated forfeitures, related to non-vested options under
the Plan at December 31, 2007 and 2006, respectively. That cost is expected to be recognized over a weighted average period of 14.4 months and 26.8 months at December 31,
2007 and 2006, respectively.

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

2007

2006Number
of
shares

Weighted
average
exercise
price per
share

Number
of
shares

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

25,334

$
28.48

39,000

$
28.48Restricted stock grant









Vesting of restricted stock

(12,666
)
$
28.48

(12,666
)
$
28.48Forfeitures of restricted stock






(1,000
)
$
28.48Total non-vested restricted stock at December 31

12,668

$
28.48

25,334

$
28.48


Stock-based
compensation expense related to stock grants was $361,000 for each the years ended December 31, 2007 and 2006. The expected compensation expense for 2008 is $346,000.

NOTE KINCOME TAXES

The components of income tax expense are summarized as follows:

Year ended
December 31,2007

2006(in thousands)FederalCurrent

$
1,071

$
1,687Charge in lieu of income tax relating to stock compensation


367


121Deferred


318


3271,756


2,135State and localcurrent


6


1Income tax provision

$
1,762

$
2,136


37

---



TF Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2007 and 2006

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 31,2007

2006Statutory federal income tax

34.0
%
34.0
%(Decrease) increase resulting fromTax-exempt income

(8.2
)
(6.4
)State tax, net of federal benefit

(0.0
)
(0.0
)Other

0.9

0.326.7
%
27.9
%


Deferred
taxes are included in the accompanying consolidated statements of financial position at December 31, 2007 and 2006, 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, 2007 and 2006. The Company's net deferred tax (liability)/asset at December 31, 2007 and 2006, was comprised of the following:

December 31,2007

2006(in thousands)Deferred tax assetsDeferred compensation

$
131

$
202Allowance for loan losses, net


966


974Unrealized loss on securities available for sale


46


653Stock compensation


241


121Adjustment to record funded status of pension


442


367Other


25


411,851


2,358Deferred tax liabilitiesAccrued pension expense


827


843Prepaid expenses


44


44Deferred loan costs


656


492Amortization of goodwill


665


450Other


373


3932,565


2,222Net deferred tax (liability)/asset

$
(714
)
$
136


38

---



TF Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2007 and 2006

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 2004. The expirations of the
statutes of limitations related to the various state income tax returns that the Corporation and its subsidiaries file, vary by state, and are expected to expire over the term of 2008 through 2012.

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.

39

---



TF Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2007 and 2006

NOTE LREGULATORY MATTERS (Continued)

As
of December 31, 2007, management believes that the Bank met all capital adequacy requirements to which it was subject.

|                                                         |                                      | Regulatory capital
December 31, 2007 |       
|-------------------------------------------------------- | ------------------------------------ | ------------------------------------ | ------
|
|
|
|Capital under generally accepted accounting principles   |                                      | $                                    | 64,960
|Unrealized loss on certain available-for-sale securities |                                      |                                      | 103   
|Adjustment to record funded status of pension            |                                      |                                      | 858   
|Goodwill and other intangible assets                     |                                      |                                      | (4,324
|Additional capital items                                 |                                      |                                      |       
|                                                         | General valuation allowanceslimited |                                      |       
|                                                         |                                      |                                      |       
|Regulatory capital computed                              |                                      |                                      | 61,597
|Minimum capital requirement                              |                                      |                                      | 10,492
|                                                         |                                      |                                      |       
|Regulatory capitalexcess                                |                                      | $                                    | 51,105
|                                                         |                                      |                                      |       

|
|

|                                                         |                                      | Regulatory capital
December 31, 2006 |       
|-------------------------------------------------------- | ------------------------------------ | ------------------------------------ | ------
|
|
|
|Capital under generally accepted accounting principles   |                                      | $                                    | 60,593
|Unrealized loss on certain available-for-sale securities |                                      |                                      | 1,304 
|Adjustment to record funded status of pension            |                                      |                                      | 713   
|Goodwill and other intangible assets                     |                                      |                                      | (4,324
|Additional capital items                                 |                                      |                                      |       
|                                                         | General valuation allowanceslimited |                                      |       
|                                                         |                                      |                                      |       
|Regulatory capital computed                              |                                      |                                      | 58,286
|Minimum capital requirement                              |                                      |                                      | 9,779 
|                                                         |                                      |                                      |       
|Regulatory capitalexcess                                |                                      | $                                    | 48,507
|                                                         |                                      |                                      |       

At
December 31, 2007, 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.

40

---



TF Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2007 and 2006

NOTE LREGULATORY MATTERS (Continued)

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 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 31,2007

2006(in thousands)Commitments to extend credit

$
69,063

$
85,199Standby letters of credit


1,566


2,151Loans sold with recourse


68


71$
70,697

$
87,421


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.

41

---



TF Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2007 and 2006

NOTE NCOMMITMENTS AND CONTINGENCIES

The Bank had optional commitments of $2,314,000 and $2,910,000 to sell mortgage loans to investors at December 31, 2007 and 2006, respectively.

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 $517,000 and $481,000 for the years ended December 31, 2007 and 2006 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)2008

$
4352009


3322010


2072011


1672012


112Thereafter


290$
1,543


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, 2007 was approximately $2.8 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 residential and commercial real estate values are presently stable in its primary lending area and that loan loss
allowances have been provided for in amounts commensurate with its current perception of the foregoing risks in the portfolio.

42

---





TF Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2007 and 2006

NOTE PFAIR VALUE OF FINANCIAL INSTRUMENTS

SFAS No. 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
No. 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. Therefore, the Company and the Bank use
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:

Fair
value of loans and deposits with floating interest rates is generally presumed to approximate the recorded carrying amounts.

Fair
value of financial instruments actively traded in a secondary market has been estimated using quoted market prices.

December 31,2007

2006Fair
value

Carrying value

Fair
value

Carrying value(in thousands)Cash and cash equivalents

$
5,680

$
5,680

$
12,364

$
12,364Investment securities


32,609


32,607


35,205


35,201Mortgage-backed securities


104,521


104,338


82,126


82,035


43

---



TF Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2007 and 2006

NOTE P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 31,2007

2006Fair
value

Carrying value

Fair
Value

Carrying value(in thousands)AssetsCertificates of deposit

$


$


$
40

$
40LiabilitiesDeposits with stated maturities


180,651


180,257


194,441


195,551Borrowings with stated maturities


154,302


153,221


99,179


101,701


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 31,2007

2006Fair
value

Carrying Value

Fair
value

Carrying value(in thousands)Deposits with no stated maturities

$
292,137

$
292,137

$
282,536

$
282,536


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 31,2007

2006Fair
value

Carrying value

Fair
value

Carrying value(in thousands)Net loans

$
520,079

$
518,067

$
480,660

$
484,539


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.

44

---



TF Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2007 and 2006

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

|                                                 |                              | Year ended December 31,
|------------------------------------------------ | ---------------------------- | -----------------------
|
|
|Service fees, charges and other operating income |                              |                        
|                                                 | Loan servicing fees          |                        
|                                                 | Late charge income           |                        
|                                                 | Deposit service charges      |                        
|                                                 | Debit card income            |                        
|                                                 | Other income                 |                        
|                                                 |                              |                        
|                                                 |                              | $                      
|                                                 |                              |                        
|Other operating expense                          |                              |                        
|                                                 | Insurance and surety bond    |                        
|                                                 | Office supplies              |                        
|                                                 | Loan expense                 |                        
|                                                 | MAC expense                  |                        
|                                                 | Postage                      |                        
|                                                 | Telephone                    |                        
|                                                 | Supervisory examination fees |                        
|                                                 | Other expenses               |                        
|                                                 |                              |                        
|                                                 |                              | $                      
|                                                 |                              |                        

45

---



TF Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2007 and 2006

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, 2007
|----------------------------- | -------------------------------------------------------------------------- | ----------------------------
|
|Basic earnings per share      |                                                                            |                             
|                              | Income available to common stockholders                                    |                             
|Effect of dilutive securities |                                                                            |                             
|                              | Stock compensation plans                                                   |                             
|                              |                                                                            |                             
|Diluted earnings per share    |                                                                            |                             
|                              | Income available to common stockholders plus effect of dilutive securities |                             
|                              |                                                                            |                             

There
were options to purchase 181,188 shares of common stock at a price at a 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.

|                              |                                                                            | Year ended December 31, 2006 |  
|----------------------------- | -------------------------------------------------------------------------- | ---------------------------- | -
|
|Basic earnings per share      |                                                                            |                              |  
|                              | Income available to common stockholders                                    |                              | $
|Effect of dilutive securities |                                                                            |                              |  
|                              | Stock compensation plans                                                   |                              |  
|                              |                                                                            |                              |  
|Diluted earnings per share    |                                                                            |                              |  
|                              | Income available to common stockholders plus effect of dilutive securities |                              | $
|                              |                                                                            |                              |  

There
were options to purchase 20,638 shares of common stock at a price of $34.14 per share which were outstanding during 2006 that were not included in the computation of diluted
earnings per share because the options' exercise prices were greater than the average market price of the common shares.

46

---



TF Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2007 and 2006

NOTE SCONDENSED FINANCIAL INFORMATIONPARENT COMPANY ONLY

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

BALANCE SHEETS

December 31,2007

2006(in thousands)ASSETSCash

$
1,087

$
2,959Certificates of depositother institutions





40Investment in Third Federal


63,364


58,995Investment in TF Investments


2,544


2,463Investment in Penns Trail Development


1,063


1,007Investment securities available for sale


171


203Other assets


49


12Total assets

$
68,278

$
65,679LIABILITIES AND STOCKHOLDERS' EQUITYTotal liabilities

$
435

$
40Stockholders' equity


67,843


65,639Total liabilities and stockholders' equity

$
68,278

$
65,679


STATEMENTS OF INCOME

Year ended December 31,2007

2006(in thousands)INCOMEEquity in earnings of subsidiaries

$
5,637

$
6,448Interest and dividend income


52


54Total income


5,689


6,502EXPENSESOther


844


988Total expenses


844


988NET INCOME

$
4,845

$
5,514


47

---



TF Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2007 and 2006

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

STATEMENTS OF CASH FLOWS

Year ended December 31,2007

2006(in thousands)Cash flows from operating activitiesNet income

$
4,845

$
5,514Adjustments to reconcile net income to net cash provided by (used in) operating activitiesStock compensation plans


752


747Equity in earnings of subsidiaries


(5,637
)

(6,448
)Net change in assets and liabilities


359


199Net cash provided by operating activities


319


12Cash flows from investing activitiesCapital distribution from subsidiaries


2,870


3,118Maturities of certificates of deposit in other financial institutions, net


40


Purchases of investment of securities available for sale





(150
)Net cash provided by investing activities


2,910


2,968Cash flows from financing activitiesCash dividends paid to stockholders


(2,185
)

(2,049
)Treasury stock acquired


(4,745
)

(1,749
)Exercise of stock options


1,829


325Net cash used in financing activities


(5,101
)

(3,473
)NET DECREASE IN CASH


(1,872
)

(493
)Cash at beginning of year


2,959


3,452Cash at end of year

$
1,087

$
2,959Supplemental disclosure of cash flow informationCash paid during the year for income taxes

$


$



48

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BOARD OF DIRECTORS AND EXECUTIVE OFFICERS

TF Financial Corporation

Board of Directors

Robert N. Dusek
Chairman of the Board

Carl
F. Gregory

Dennis
L. McCartney

George
A. Olsen

John
R. Stranford

Albert
M. Tantala, Sr.

Kent
C. Lufkin

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

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