**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

** **
| **ý** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|------------|----------------------------------------------------------------------------------------------|

** **

**For the period ended March 31, 2006**

 

**- or -**

 
| **o** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|-----------------------------------------------------------------------------------------------|

 

**For thetransition period from                                    to                                    **

 

**Commission file number:  0-24168**

 

**TF FINANCIAL CORPORATION**

(Exact Name of Registrant as Specified in Its Charter)

 

| **Delaware**                                  | ** ** | **74-2705050**                       |
|-----------------------------------------------|------------|--------------------------------------|
| (State or Other Jurisdiction of Incorporation |       | (I.R.S. Employer Identification No.) |
| or Organization)                              |       |                                 |
|                                          |       |                                 |
| **3 Penns Trail, Newtown, Pennsylvania**      | ** ** | **18940**                            |
| (Address of Principal Executive Offices)      |       | (Zip Code)                           |

 

Registrant’stelephone number, including area code:  **(215) 579-4000**

 

Securitiesregistered pursuant to Section 12(b) of the Act:  **None**

 

Securitiesregistered pursuant to Section 12(g) of the Act:

 

**Common Stock, par value $.10 per share**

(Title of Class)

 

Indicateby check mark whether the registrant: (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. YES ý**  **NO o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Checkone):

 

Large accelerated filer o                    Accelerated filer o              Non-acceleratedfiler ý

 

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

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock as of thelatest practicable date: May 5, 2006

 
| **Class**                    | ** ** | **Outstanding**   |
|------------------------------|------------|-------------------|
| $.10 par value common  stock |       | 2,871,289  shares |

 

 

----

 

**CONTENTS**

 
| **PART I-CONSOLIDATED FINANCIAL INFORMATION**                                 | ** **                                                                                 |
|-------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------|
|                                                                          |                                                                                       |
| Item 1.                                                                       | Consolidated  Financial Statements                                                         |   |
|                                                                          |                                                                                       |   |
| Item 2.                                                                       | Management’s  Discussion and Analysis of Financial Position and Results of Operations |   |
|                                                                          |                                                                                       |   |
| Item 3.                                                                       | Quantitative and  Qualitative Disclosures about Market Risk                                |   |
|                                                                          |                                                                                       |   |
| Item 4.                                                                       | Controls and Procedures                                                                    |   |
|                                                                          |                                                                                       |
| **PART  II-OTHER INFORMATION**                                                |                                                                                       |
|                                                                          |                                                                                       |
| Item 1.                                                                       | Legal Proceedings                                                                          |   |
|                                                                          |                                                                                       |   |
| Item 1A.                                                                      | Risk Factors                                                                               |   |
|                                                                          |                                                                                       |   |
| Item 2.                                                                       | Unregistered Sale  of Equity Securities and Use of Proceeds                                |   |
|                                                                          |                                                                                       |   |
| Item 3.                                                                       | Defaults Upon  Senior Securities                                                           |   |
|                                                                          |                                                                                       |   |
| Item 4.                                                                       | Submission of  Matters to a Vote of Security Holders                                       |   |
|                                                                          |                                                                                       |   |
| Item 5.                                                                       | Other Information                                                                          |   |
|                                                                          |                                                                                       |   |
| Item 6.                                                                       | Exhibits                                                                                   |   |
|                                                                          |                                                                                       |
| **Signatures**                                                                |                                                                                       |
|                                                                          |                                                                                       |
| **Exhibits**                                                                  | ** **                                                                                 |
|                                                                          |                                                                                       |
| 31. Certifications  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |                                                                                       |
|                                                                          |                                                                                       |
| 32. Certification pursuant  of Section 906 of the Sarbanes-Oxley Act of 2002  |                                                                                       |

 

2

----

 

**TFFinancial Corporation and Subsidiaries**

 

**CONSOLIDATEDSTATEMENTS OF FINANCIAL POSITION**

 
| ** **                                                                                                                                                                                                                                                     | ** ** | **Unaudited  March  31,  2006** | ** ** | **Audited  December  31,  2005** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                                                                                                                                                                     | ** ** | **(in thousands)**         | ** ** |
| ASSETS                                                                                                                                                                                                                                                         |       |                            |       |                             |       |
| Cash and cash equivalents                                                                                                                                                                                                                                      |       | $                               | 4,415      |                             | $          | 3,821 |   |
| Certificates of deposit in other financial  institutions                                                                                                                                                                                                       |       | 40                              |       | 40                               |       |
| Investment securities available for sale—at  fair value                                                                                                                                                                                                   |       | 31,071                          |       | 30,401                           |       |
| Investment securities held to maturity  (fair value of $2,024 and $4,707 respectively)                                                                                                                                                                         |       | 2,016                           |       | 4,690                            |       |
| Mortgage-backed securities available for  sale—at fair value                                                                                                                                                                                              |       | 78,732                          |       | 83,511                           |       |
| Mortgage-backed securities held to maturity  (fair value of $9,537 and $10,385, respectively)                                                                                                                                                                  |       | 9,444                           |       | 10,177                           |       |
| Loans receivable, net (including loans held  for sale of $518 and $68, respectively)                                                                                                                                                                           |       | 508,526                         |       | 490,959                          |       |
| Federal Home Loan Bank stock—at cost                                                                                                                                                                                                                      |       | 8,238                           |       | 7,432                            |       |
| Accrued interest receivable                                                                                                                                                                                                                                    |       | 2,628                           |       | 3,048                            |       |
| Premises and equipment, net                                                                                                                                                                                                                                    |       | 6,239                           |       | 6,289                            |       |
| Core deposit intangible asset, net of  accumulated amortization of $2,769 and $2,741, respectively                                                                                                                                                             |       | 55                              |       | 83                               |       |
| Goodwill                                                                                                                                                                                                                                                       |       | 4,324                           |       | 4,324                            |       |
| Other assets                                                                                                                                                                                                                                                   |       | 17,252                          |       | 16,064                           |       |
| TOTAL ASSETS                                                                                                                                                                                                                                                   |       | $                               | 672,980    |                             | $          | 660,839 |   |
|                                                                                                                                                                                                                                                           |       |                            |       |                             |       |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY                                                                                                                                                                                                                     |       |                            |       |                             |       |
| Liabilities                                                                                                                                                                                                                                                    |       |                            |       |                             |       |
| Deposits                                                                                                                                                                                                                                                       |       | $                               | 464,258    |                             | $          | 470,521 |   |
| Advances from the Federal Home Loan Bank                                                                                                                                                                                                                       |       | 139,620                         |       | 121,260                          |       |
| Advances from borrowers for taxes and  insurance                                                                                                                                                                                                               |       | 1,849                           |       | 1,915                            |       |
| Accrued interest payable                                                                                                                                                                                                                                       |       | 2,812                           |       | 2,052                            |       |
| Other liabilities                                                                                                                                                                                                                                              |       | 2,394                           |       | 2,443                            |       |
| Total liabilities                                                                                                                                                                                                                                              |       | 610,933                         |       | 598,191                          |       |
|                                                                                                                                                                                                                                                           |       |                            |       |                             |       |
| Stockholders’ equity                                                                                                                                                                                                                                      |       |                            |       |                             |       |
| Preferred stock, no par value; 2,000,000  shares authorized at March 31, 2006 and December 31, 2005, none issued                                                                                                                                          |       | —                          |       | —                           |       |
| Common stock, $0.10 par value; 10,000,000  shares authorized, 5,290,000 shares issued, 2,689,679 and 2,714,173 shares  outstanding at March 31, 2006 and December 31, 2005, respectively, net  of shares in treasury 2,420,237 and 2,390,943 respectively |       | 529                             |       | 529                              |       |
| Retained earnings                                                                                                                                                                                                                                              |       | 62,350                          |       | 61,610                           |       |
| Additional paid-in capital                                                                                                                                                                                                                                     |       | 52,207                          |       | 53,048                           |       |
| Unearned restricted stock                                                                                                                                                                                                                                      |       | —                          |       | (1,080                           | )          |
| Unearned ESOP shares                                                                                                                                                                                                                                           |       | (1,801                          | )          | (1,849                           | )          |
| Treasury stock—at cost                                                                                                                                                                                                                                    |       | (48,853                         | )          | (47,920                          | )          |
| Accumulated other comprehensive loss                                                                                                                                                                                                                           |       | (2,385                          | )          | (1,690                           | )          |
| Total stockholders’ equity                                                                                                                                                                                                                                |       | 62,047                          |       | 62,648                           |       |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                                                                                                |       | $                               | 672,980    |                             | $          | 660,839 |   |

 

Theaccompanying notes are an integral part of these statements

 

3

----

 

**TF FinancialCorporation and Subsidiaries**

 

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(Unaudited)**

 
| ** **                                           | ** ** | **For the three months ended** | ** ** |
|------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                           | ** ** | **March 31,**                                 | ** ** |
| ** **                                           | ** ** | **(in  thousands, except   per share data**)       |       |
| ** **                                           | ** ** | **2006**                                           | ** ** | **2005** | ** ** |
| Interest income                                      |       |                                               |       |   |   |
| Loans, including fees                                |       | $                                                  | 7,671      |   | $ | 6,471 |   |
| Mortgage-backed securities                           |       | 1,012                                              |       | 1,303 |   |
| Investment securities                                |       | 412                                                |       | 313 |   |
| Interest-bearing deposits and other                  |       | 8                                                  |       | 10 |   |
|                                                 |       |                                               |       |   |   |
| TOTAL INTEREST INCOME                                |       | 9,103                                              |       | 8,097 |   |
|                                                 |       |                                               |       |   |   |
| Interest expense                                     |       |                                               |       |   |   |
| Deposits                                             |       | 2,248                                              |       | 1,536 |   |
| Borrowings                                           |       | 1,348                                              |       | 931 |   |
|                                                 |       |                                               |       |   |   |
| TOTAL INTEREST EXPENSE                               |       | 3,596                                              |       | 2,467 |   |
|                                                 |       |                                               |       |   |   |
| NET INTEREST INCOME                                  |       | 5,507                                              |       | 5,630 |   |
| Provision for loan losses                            |       | 90                                                 |       | 150 |   |
|                                                 |       |                                               |       |   |   |
| NET INTEREST INCOME AFTER PROVISION FOR  LOAN LOSSES |       | 5,417                                              |       | 5,480 |   |
|                                                 |       |                                               |       |   |   |
| Non-interest income                                  |       |                                               |       |   |   |
| Service fees, charges and other operating  income    |       | 672                                                |       | 640 |   |
| Gain on sale of loans                                |       | 9                                                  |       | 22 |   |
|                                                 |       |                                               |       |   |   |
| TOTAL NON-INTEREST INCOME                            |       | 681                                                |       | 662 |   |
|                                                 |       |                                               |       |   |   |
| Non-interest expense                                 |       |                                               |       |   |   |
| Compensation and benefits                            |       | 2,639                                              |       | 2,391 |   |
| Occupancy and equipment                              |       | 704                                                |       | 661 |   |
| Federal deposit insurance premium                    |       | 15                                                 |       | 17 |   |
| Professional fees                                    |       | 212                                                |       | 226 |   |
| Marketing and advertising                            |       | 177                                                |       | 176 |   |
| Other operating                                      |       | 595                                                |       | 626 |   |
| Amortization of core deposit intangible  asset       |       | 28                                                 |       | 34 |   |
|                                                 |       |                                               |       |   |   |
| TOTAL NON-INTEREST EXPENSE                           |       | 4,370                                              |       | 4,131 |   |
|                                                 |       |                                               |       |   |   |
| INCOME BEFORE INCOME TAXES                           |       | 1,728                                              |       | 2,011 |   |
|                                                 |       |                                               |       |   |   |
| Income taxes                                         |       | 473                                                |       | 535 |   |
|                                                 |       |                                               |       |   |   |
| NET INCOME                                           |       | $                                                  | 1,255      |   | $ | 1,476 |   |
| Earnings per share—basic                        |       | $                                                  | 0.47       |   | $ | 0.54 |   |
| Earnings per share—diluted                      |       | $                                                  | 0.46       |   | $ | 0.52 |   |
| Dividends paid                                       |       | $                                                  | 0.19       |   | $ | 0.18 |   |

 

Theaccompanying notes are an integral part of these statements

 

4

----

 

**TFFinancial Corporation and Subsidiaries**

 

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| ** **                                                                        | ** ** | **For the three months ended** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                        | ** ** | **March 31,**                                 | ** ** |
| ** **                                                                        | ** ** | **2006**                                           | ** ** | **2005** | ** ** |
| ** **                                                                        | ** ** | **(in thousands)**                            | ** ** |
| OPERATING ACTIVITIES                                                              |       |                                               |       |   |   |
| Net income                                                                        |       | $                                                  | 1,255      |   | $ | 1,476 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities |       |                                               |       |   |   |
| Amortization of                                                                   |       |                                               |       |   |   |
| Mortgage loan servicing rights                                                    |       | 4                                                  |       | 1 |   |
| Deferred loan origination fees                                                    |       | (14                                                | )          | (29 | ) |
| Premiums and discounts on investment  securities, net                             |       | 17                                                 |       | 19 |   |
| Premiums and discounts on mortgage-backed  securities, net                        |       | 101                                                |       | 151 |   |
| Premiums and discounts on loans, net                                              |       | 44                                                 |       | 32 |   |
| Core deposit intangibles                                                          |       | 28                                                 |       | 34 |   |
| Provision for loan losses                                                         |       | 90                                                 |       | 150 |   |
| Depreciation of premises and equipment                                            |       | 247                                                |       | 235 |   |
| Increase in value of bank-owned life  insurance                                   |       | (122                                               | )          | (122 | ) |
| Stock grant expense                                                               |       | 91                                                 |       | — |   |
| Stock option expense                                                              |       | 94                                                 |       | — |   |
| Stock-based benefit programs: ESOP                                                |       | 141                                                |       | 137 |   |
| Proceeds from sale of loans originated for  sale                                  |       | 1,263                                              |       | 2,311 |   |
| Origination of loans held for sale                                                |       | (1,704                                             | )          | (1,797 | ) |
| Gain on sale of                                                                   |       |                                               |       |   |   |
| Mortgage loans available for sale                                                 |       | (9                                                 | )          | (22 | ) |
| Loss from mortgage loan derivatives                                               |       | 13                                                 |       | — |   |
| Income associated with forward loan sales                                         |       | (15                                                | )          | — |   |
| (Increase) decrease in                                                            |       |                                               |       |   |   |
| Accrued interest receivable                                                       |       | 420                                                |       | 49 |   |
| Other assets                                                                      |       | (710                                               | )          | (292 | ) |
| Increase (decrease) in                                                            |       |                                               |       |   |   |
| Accrued interest payable                                                          |       | 760                                                |       | 558 |   |
| Other liabilities                                                                 |       | (49                                                | )          | 20 |   |
|                                                                              |       |                                               |       |   |   |
| NET CASH PROVIDED BY OPERATING ACTIVITIES                                         |       | 1,945                                              |       | 2,911 |   |
|                                                                              |       |                                               |       |   |   |
| INVESTING ACTIVITIES                                                              |       |                                               |       |   |   |
| Loan originations                                                                 |       | (44,303                                            | )          | (34,734 | ) |
| Loan principal payments                                                           |       | 24,614                                             |       | 20,873 |   |
| Principal repayments on mortgage-backed  securities held to maturity              |       | 728                                                |       | 903 |   |
| Principal repayments on mortgage-backed  securities available for sale            |       | 3,925                                              |       | 7,616 |   |
| Proceeds from sale of loan participations                                         |       | 2,452                                              |       | 1,000 |   |
| Purchase of investment securities available  for sale                             |       | (981                                               | )          | (2,984 | ) |
| Purchase of mortgage-backed securities  available for sale                        |       | —                                             |       | (8,956 | ) |
| Proceeds from maturities of investment  securities held to maturity               |       | 2,673                                              |       | — |   |
| Purchase of Federal Home Loan Bank stock                                          |       | (806                                               | )          | (251 | ) |
| Purchase of premises and equipment                                                |       | (197                                               | )          | (317 | ) |
| NET CASH USED IN INVESTING ACTIVITIES                                             |       | (11,895                                            | )          | (16,850 | ) |
|                                                                                   |            |                                                    |            |  |  |  |  |

 

5

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| ** **                                                                                          | ** ** | **For the three months ended** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                                          | ** ** | **March 31,**                                 | ** ** |
| ** **                                                                                          | ** ** | **2006**                                           | ** ** | **2005** | ** ** |
| ** **                                                                                          | ** ** | **(in thousands)**                            | ** ** |
| FINANCING ACTIVITIES                                                                                |       |                                               |       |   |   |
| Net decrease in demand deposit/NOW  accounts, passbook savings accounts and certificates of deposit |       | (6,263                                             | )          | (5,032 | ) |
| Net increase in short-term Federal Home  Loan Bank advances from Federal Home Loan Bank             |       | 7,130                                              |       | 8,887 |   |
| Proceeds of long-term Federal Home Loan  Bank advances                                              |       | 15,535                                             |       | 11,367 |   |
| Repayment of long-term Federal Home Loan  Bank advances                                             |       | (4,305                                             | )          | (3,640 | ) |
| Net decrease in advances from borrowers for  taxes and insurance                                    |       | (66                                                | )          | (75 | ) |
| Treasury stock acquired                                                                             |       | (1,096                                             | )          | (823 | ) |
| Exercise of stock options                                                                           |       | 124                                                |       | 521 |   |
| Common stock dividends paid                                                                         |       | (515                                               | )          | (492 | ) |
| NET CASH PROVIDED BY FINANCING ACTIVITIES                                                           |       | 10,544                                             |       | 10,713 |   |
|                                                                                                |       |                                               |       |   |   |
| NET INCREASE (DECREASE) IN CASH AND CASH  EQUIVALENTS                                               |       | 594                                                |       | (3,226 | ) |
|                                                                                                |       |                                               |       |   |   |
| Cash and cash equivalents at beginning of  period                                                   |       | 3,821                                              |       | 7,900 |   |
|                                                                                                |       |                                               |       |   |   |
| Cash and cash equivalents at end of period                                                          |       | $                                                  | 4,415      |   | $ | 4,674 |   |
|                                                                                                |       |                                               |       |   |   |
| Supplemental disclosure of cash flow  information                                                   |       |                                               |       |   |   |
| Cash paid for                                                                                       |       |                                               |       |   |   |
| Interest on deposits and advances from  Federal Home Loan Bank                                      |       | $                                                  | 2,836      |   | $ | 1,909 |   |
| Income taxes                                                                                        |       | $                                                  | 65         |   | $ | — |   |

 

Theaccompanying notes are an integral part of these statements

 

6

----

 

**TF FINANCIAL CORPORATION AND SUBSIDIARIES**

**NOTES TO UNAUDITED CONSOLIDATED FINANCIALSTATEMENTS**

 

**NOTE 1 -PRINCIPLES OF CONSOLIDATION**

 

The consolidated financial statements as ofMarch 31, 2006 (unaudited) and December 31, 2005 and for the three-monthperiods ended March 31, 2006 and 2005 (unaudited) include the accounts of TFFinancial Corporation (the “Company”) and its wholly owned subsidiaries ThirdFederal Bank (the “Bank”), TF Investments Corporation and Penns TrailDevelopment Corporation. The Company’s business is conducted principallythrough the Bank. All significant intercompany accounts and transactions havebeen eliminated in consolidation.

 

**NOTE 2 - BASISOF PRESENTATION**

 

The accompanying unaudited consolidatedfinancial statements were prepared in accordance with instructions for Form10-Q and, therefore, do not include all of the disclosures or footnotesrequired by accounting principles generally accepted in the United States ofAmerica. In the opinion of management, all adjustments, consisting of normalrecurring accruals, necessary for fair presentation of the consolidatedfinancial statements have been included. The results of operations for theperiod ended March 31, 2006 are not necessarily indicative of the results whichmay be expected for the entire fiscal year or any other period. For furtherinformation, refer to consolidated financial statements and footnotes theretoincluded in the Company’s Annual Report on Form 10-K for the fiscal year endedDecember 31, 2005.

 

**NOTE 3 –CONTINGENCIES**

 

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

 

**NOTE 4 - OTHERCOMPREHENSIVE INCOME**

 

TheCompany’s other comprehensive income consists of net unrealized losses oninvestment securities and mortgage-backed securities available for sale. Totalcomprehensive income for the three-month periods ended March 31, 2006 and 2005was $560,000 and $369,000, net of applicable income tax expense (benefit) of$115,000 and $(34,000) respectively.

 

**NOTE 5—EARNINGS PER SHARE**

 

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

 
| ** **                                                                  | ** ** | **Three months ended March 31, 2006** | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                                                  | ** ** | **Income  (numerator)**                                        | ** ** | **Weighted  average  shares  (denominator****)** | ** ** | **Per share  Amount** | ** ** |
| ** **                                                                  | ** ** | ** **                                                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic earnings per share                                                    |       |                                                           |       |   |   |   |   |   |   |
| Income available to common stockholders                                     |       | $                                                              | 1,255      |   | 2,698,547 |   | $ | 0.47 |   |
| Effect of dilutive securities                                               |       |                                                           |       |   |   |   |   |
| Stock options                                                               |       | —                                                         |       | 12,968 |   | (0.01 | ) |
|                                                                        |       |                                                           |       |   |   |   |   |
| Diluted earnings per share                                                  |       |                                                           |       |   |   |   |   |
| Income available to common stockholders  plus effect of dilutive securities |       | $                                                              | 1,255      |   | 2,711,515 |   | $ | 0.46 |   |

 

There were 24,226 options to purchase shares ofcommon stock at a price of $34.14 per share which were outstanding during thefirst quarter of 2006 that were not included in the computation of dilutedearnings per share because the options’ exercise prices were greater than theaverage market price of the common shares.

 

7

----

 
| ** **                                                                  | ** ** | **Three months ended March 31, 2005** | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                                                  | ** ** | **Income  (numerator)**                                        | ** ** | **Weighted  average  shares  (denominator)** | ** ** | **Per share  Amount** | ** ** |
| ** **                                                                  | ** ** | ** **                                                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic earnings per share                                                    |       |                                                           |       |   |   |   |   |   |   |
| Income available to common stockholders                                     |       | $                                                              | 1,476      |   | 2,749,053 |   | $ | 0.54 |   |
| Effect of dilutive securities                                               |       |                                                           |       |   |   |   |   |
| Stock options                                                               |       | —                                                         |       | 74,507 |   | (0.02 | ) |
|                                                                        |       |                                                           |       |   |   |   |   |
| Diluted earnings per share                                                  |       |                                                           |       |   |   |   |   |
| Income available to common stockholders  plus effect of dilutive securities |       | $                                                              | 1,476      |   | 2,823,560 |   | $ | 0.52 |   |

 

There were options to purchase 28,714 shares ofcommon stock at a price of $34.14 per share which were outstanding during thefirst quarter of 2005 that were not included in the computation of dilutedearnings per share because the options’ exercise prices were greater than theaverage market price of the common shares.

 

**NOTE 6- STOCKBASED COMPENSATION**

 

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

 

OnJanuary 1, 2006, the Company adopted the provisions of Statement of FinancialAccounting Standards (“SFAS”) 123R, “Share-Based Payments,” using the modifiedprospective transition method. Under this transition method, compensation costto be recognized beginning in the first quarter of 2006 includes:(a) compensation cost for all share-based payments granted prior to, butnot yet vested as of January 1, 2006, based on the grant date fair valueestimated in accordance with the original provisions of SFAS 123, and(b) compensation cost for all share-based payments granted subsequent toJanuary 1, 2006, based on the grant-date fair value estimated inaccordance with the provisions of SFAS 123R. Stock-based compensation expense included innet income related to stock options was $94,000, resulting in a tax benefit of$28,000, for the three months ended March 31, 2006. Results for prior periods have not beenrestated. As of March 31, 2006, there was $1,021,000 of total unrecognizedcompensation cost, net of estimated forfeitures, related to non-vested optionsunder the Plan. That cost is expected to be recognized over a weighted averageperiod of 32.8 months

 

Priorto 2006, theCompany disclosed pro formacompensation expense quarterly and annually by calculating the stock optiongrant’s fair value using the intrinsicvalue method under APB Opinion No. 25, as permitted by SFAS No. 123 “Accountingfor Stock-Based Compensation,” which contains a fair value-based methodfor valuing stock-based compensation that entities may use, which measurescompensation cost at the grant date based on the fair value of the award.Compensation is then recognized over the service period, which is usually thevesting period. No stock-basedcompensation expense was reflected in net income in 2005, as all optionsgranted under the plans had an exercise price equal to the market value of theunderlying common stock on the date of the grant.

 

8

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The table below reflectsthe estimated impact the fair value method would have had on the Company’s netincome and net income per share if SFAS 123R had been in effect for the threemonths ended March 31, 2005

 
| Net income                                                                                                   |   |   |   |
|--------------------------------------------------------------------------------------------------------------|--------|--------|--------|
| As reported                                                                                                  |   | $      | 1,476  |   |
| Deduct: stock-based compensation expense  determined using the fair value method, net of related tax effects |   | 19     |   |
| Pro forma                                                                                                    |   | $      | 1,457  |   |
|                                                                                                         |   |   |   |
| Basic earnings per share                                                                                     |   |   |   |
| As reported                                                                                                  |   | $      | 0.54   |   |
| Deduct: stock-based compensation expense  determined using the fair value method, net of related tax effects |   | 0.01   |   |
| Pro forma                                                                                                    |   | $      | 0.53   |   |
|                                                                                                         |   |   |   |
| Diluted earnings per share                                                                                   |   |   |   |
| As reported                                                                                                  |   | $      | 0.52   |   |
| Deduct: stock-based compensation expense  determined using the fair value method, net of related tax effects |   | — |   |
| Pro forma                                                                                                    |   | $      | 0.52   |   |

 

Option activity under the Company’s stock optionplan as of March 31, 2006 is as follows:

 
| ** **                            | ** ** | **2006**               | ** ** |
|---------------------------------------|------------|------------------------|------------|
| ** **                            | ** ** | **Number  of  shares** | ** ** | **Weighted  average  exercise  price per  share** | ** ** | **Weighted  average  remaining  contractual  term (in  years)** | ** ** | **Aggregate  intrinsic  value ($000)** | ** ** |
| Outstanding at beginning of year      |       | 384,848                |       | $ | 23.18 |   |   |   |   |   |
| Options granted                       |       | —                 |       | — |   |   |   |   |   |
| Options exercised                     |       | (8,106                 | )          | 15.28 |   |   |   |   |   |
| Options forfeited                     |       | (1,217                 | )          | 27.53 |   |   |   |   |   |
| Outstanding at end of quarter         |       | 375,525                |       | $ | 23.34 |   | 3.90 |   | $ | 2,501 |   |
| Options exercisable at March 31, 2006 |       | 189,086                |       | $ | 18.11 |   | 2.36 |   | $ | 2,248 |   |

 

The aggregate intrinsic value in the table aboverepresents the total pre-tax intrinsic value (the difference between theCompany’s closing stock price on the last trading day of the first quarter of2006 and the exercise price, multiplied by the number of in-the money options).

 

9

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Stock options outstanding were 375,525 and 249,241at March 31, 2006 and 2005, respectively. The aggregate intrinsic value ofoptions exercised during the quarters ended March 31, 2006 and 2005 was$119,000 and $499,000, respectively. Exercise of stock option during the firstquarter 2006 and 2005 resulted in cash receipts of $124,000 and $521,000,respectively.

 

Stock-based compensation expense included in netincome related to stock grants was $91,000 for the three months ended March 31,2006. Stock-based compensation expense included in net income related to theCompany’s employee stock ownership plan totaled $107,000 and $108,000 for thethree-month periods ended March 31, 2006 and 2005, respectively.

 

**NOTE 7-EMPLOYEE BENEFIT PLANS**

 

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

 

| ** **                                     | ** ** | **Three months ended  March 31** | ** ** |
|------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                     | ** ** | **2006**                                        | ** ** | **2005** | ** ** |
|                                           |       |                                            |       |   |   |
| Components of net periodic benefit cost        |       |                                            |       |   |   |   |   |
| Service cost                                   |       | $                                               | 77         |   | $ | 78 |   |
| Interest cost                                  |       | 53                                              |       | 53 |   |
| Expected return on plan assets                 |       | (81                                             | )          | (47 | ) |
| Amortization of prior service cost             |       | 16                                              |       | 16 |   |
| Amortization of transition obligation  (asset) |       | —                                          |       | — |   |
| Recognized net actuarial (gain) loss           |       | 13                                              |       | 11 |   |
|                                           |       |                                            |       |   |   |
| Net periodic benefit cost                      |       | $                                               | 78         |   | $ | 111 |   |

 

The employer contributionmade for the three months ended March 31, 2006 and 2005 was $620,000 and$341,000, respectively.

 

**NOTE 8-RECLASSIFICATIONS**

 

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

 

10

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**TF FINANCIAL CORPORATION ANDSUBSIDIARIES**

 

**MANAGEMENT’S DISCUSSIONAND ANALYSIS OF**

### **FINANCIAL POSITION ANDRESULTS OF OPERATIONS**

### ** **

**GENERAL**

 

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

 

Theseforward-looking statements involve risks and uncertainties, such as statementsof the Company’s plans, objectives, expectations, estimates and intentions thatare subject to change based on various important factors (some of which arebeyond the Company’s control). The following factors, among others, could causethe Company’s financial performance to differ materially from the plans,objectives, expectations, estimates and intentions expressed in suchforward-looking statements: the strength of the United States economy ingeneral and the strength of the local economies in which the Company conductsoperations; the effects of, and changes in, trade, monetary and fiscal policiesand laws, including interest rate policies of the Board of Governors of theFederal Reserve System, inflation, interest rate, market and monetaryfluctuations; the timely development of and acceptance of new products andservices of the Company and the perceived overall value of these products andservices by users, including the features, pricing and quality compared tocompetitors’ products and services; the willingness of users to substitutecompetitors’ products and services for the Company’s products and services; thesuccess of the Company in gaining regulatory approval of its products andservices, when required; the impact of changes in financial services’ laws andregulations (including laws concerning taxes, banking, securities andinsurance); technological changes, acquisitions; changes in consumer spendingand saving habits; and the success of the Company at managing the risksinvolved in the foregoing.

 

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

 

**Financial Position**

 

The Company’s total assets at March 31, 2006 and December 31, 2005 were$673.0 million and $660.8 million, respectively, an increase of $12.2 million,or 1.9%, during the three-month period. Cash and cash equivalents increased by$0.6 million. Investment securities available for sale increased by $0.7million due to purchases of $1.0 million of tax free municipal bonds offset bya $0.3 million reduction in the market value of investment securities availablefor sale. Investment securities held to maturity decreased by $2.7 million as aresult of security maturities. Mortgage-backed securities available for saledecreased by $4.8 million due to $3.9 million in principal repayments received,as well as a decrease in the market value of these securities and amortizationof net premiums totaling $0.9 million. Mortgage-backed securities held tomaturity decreased by $0.7 million as a result of principal repayments.

 

Loans receivable increased by $17.6 million for the first quarter of2006. Consumer and single-family residential mortgage loans of $21.3 millionand commercial loans of $23.0 million were originated during the first quarterof 2006. Principal repayments of loans receivable were $24.6 million andproceeds from sales of loan participations totaled $2.5 million in the firstquarter of 2006. Loans originated for sale during the first quarter of 2006totaled $1.7 million, and there were $1.3 million in proceeds from the saleloans in the secondary market during this period.

 

11

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Total liabilities increased by $12.7 million. Deposit balances declinedby $6.3 million during the first three months of 2006. Non-interest bearingdemand deposits grew by $2.5 million while savings, money market, andinterest-bearing checking accounts decreased by a combined $16.9 million.Certificates of deposit increased by $8.1 million. Advances from the FederalHome Loan Bank increased by $18.4 million due to a $15.5 million increase inlong-term fixed rate advances and $7.1 million of short-term advances, lessscheduled amortization payments of $4.3 million. These borrowings were mainlyused to fund loan portfolio growth and deposit outflows that occurred duringthe quarter.

 

Totalconsolidated stockholders’ equity of the Company was $62.0 million or 9.2% oftotal assets at March 31, 2006. During the first quarter of 2006 the Companyrepurchased 37,400 shares of its common stock and issued 8,106 shares pursuantto the exercise of stock options. As of March 31, 2006, there wereapproximately 81,000 shares available for repurchase under the previouslyannounced share repurchase plan.

 

###### **AssetQuality**

###### ** **

During the first quarter of 2006 and 2005, the Company’s provision forloan losses was $90,000 and $150,000, respectively. As of March 31, 2006, theCompany owned one parcel of foreclosed real estate. This parcel has beenrecorded as real estate owned at the lower of the recorded investment in theloan or estimated fair value in the amount of $0.7 million and is included inother assets in the statement of financial position at March 31, 2006.Management of the Company believes that there has not been any significantdeterioration in its asset quality during such period.

 

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

 
| ** **                                                  | ** ** | **March 31,** | ** ** | **December 31,** | ** ** | **March 31,** | ** ** |
|-------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|--------------------|------------|
| ** **                                                  | ** ** | **2006**           | ** ** | **2005**              | ** ** | **2005**           | ** ** |
| ** **                                                  | ** ** | ** **         | ** ** | ** **            | ** ** | ** **         | ** ** |
| Non-performing loans                                        |       | $                  | 1,570      |                  | $          | 1,588              |       | $ | 727 |   |
| Ratio of non-performing loans  to gross loans               |       | 0.31               | %          | 0.32                  | %          | 0.16               | %          |
| Ratio of non-performing loans  to total assets              |       | 0.23               | %          | 0.24                  | %          | 0.11               | %          |
| Foreclosed property                                         |       | $                  | 700        |                  | $          | 700                |       | $ | 700 |   |
| Foreclosed property to total  assets                        |       | 0.10               | %          | 0.11                  | %          | 0.11               | %          |
| Ratio of total non-performing  assets to total assets       |       | 0.34               | %          | 0.35                  | %          | 0.22               | %          |
| Ratio of allowance for loan  losses to total loans          |       | 0.53               | %          | 0.54                  | %          | 0.49               | %          |
| Ratio of allowance for loan  losses to non-performing loans |       | 173.12             | %          | 166.31                | %          | 305.50             | %          |

 

Managementmaintains an allowance for loan losses at levels that are believed to beadequate; however, there can be no assurances that further additions will notbe necessary or that losses inherent in the existing loan portfolio will notexceed the allowance. The following table sets forth the activity in theallowance for loan losses during the periods indicated (in thousands):

 
| ** **                                 | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|
| Beginning balance, January 1,              |       | $        | 2,641      |     | $          | 2,307 |   |
| Provision                                  |       | 90       |       | 150      |       |
| Less: charge-off’s  (recoveries), net |       | 13       |       | 236      |       |
| Ending balance, March 31,                  |       | 2,718    |       | 2,221    |       |
|                                            |            |          |            |          |            |  |  |

 

12

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**RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND2005**

 

**Net Income**. TheCompany recorded net income of $1,255,000, or $0.46 per diluted share, for thethree months ended March 31, 2006 as compared to net income of $1,476,000, or$0.52 per diluted share, for the three months ended March 31, 2005.

 

### **Average Balance Sheet**

### ** **

Thefollowing table sets forth information relating to the Company’s averagebalance sheet and reflects the average yield on assets and average cost ofliabilities for the periods indicated. Yield and cost are computed by dividingincome or expense by the average daily balance of interest-earning assets orinterest-bearing liabilities, respectively, at-or for the three month periodsindicated.

 
| ** **                                                                         | ** ** | **March 31,**   | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                         | ** ** | **2006**             | ** ** | **2005** | ** ** |
| ** **                                                                         | ** ** | **Average  balance** | ** ** | **Interest** | ** ** | **Average  yld/cost** | ** ** | **Average  balance** | ** ** | **Interest** | ** ** | **Average  yld/cost** | ** ** |
| **ASSETS**                                                                         |       |                 |       |   |   |   |   |   |   |   |   |   |   |
| **Interest-earning assets:**                                                       |       |                 |       |   |   |   |   |   |   |   |   |   |   |
| Loans receivable(1)                                                                |       | $                    | 498,329    |   | $ | 7,671 |   | 6.24 | % | $ | 446,618 |   | $ | 6,471 |   | 5.88 | % |
| Mortgage-backed securities                                                         |       | 91,476               |       | 1,012 |   | 4.49 | % | 118,816 |   | 1,303 |   | 4.45 | % |
| Investment securities(2)                                                           |       | 41,638               |       | 515 |   | 5.02 | % | 32,861 |   | 379 |   | 4.68 | % |
| Other interest-earning assets(3)                                                   |       | 781                  |       | 8 |   | 4.15 | % | 1,135 |   | 10 |   | 3.57 | % |
| Total interest-earning assets                                                      |       | 632,224              |       | 9,206 |   | 5.90 | % | 599,430 |   | 8,163 |   | 5.52 | % |
| Non interest-earning assets                                                        |       | 33,424               |       |   |   |   |   | 33,211 |   |   |   |   |   |
| Total assets                                                                       |       | $                    | 665,648    |   |   |   |   |   | $ | 632,641 |   |   |   |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                      |       |                 |       |   |   |   |   |   |   |   |   |   |   |
| **Interest-bearing liabilities:**                                                  |       |                 |       |   |   |   |   |   |   |   |   |   |   |
| Deposits                                                                           |       | 460,705              |       | 2,248 |   | 1.98 | % | 455,316 |   | 1,536 |   | 1.37 | % |
| Advances from the FHLB                                                             |       | 135,916              |       | 1,348 |   | 4.02 | % | 111,888 |   | 931 |   | 3.37 | % |
| Total interest-bearing liabilities                                                 |       | 596,621              |       | 3,596 |   | 2.44 | % | 567,204 |   | 2,467 |   | 1.76 | % |
| Non interest-bearing liabilities                                                   |       | 6,542                |       |   |   |   |   | 5,155 |   |   |   |   |   |
| Total liabilities                                                                  |       | 603,163              |       |   |   |   |   | 572,359 |   |   |   |   |   |
| Stockholders’ equity                                                          |       | 62,485               |       |   |   |   |   | 60,282 |   |   |   |   |   |
| Total liabilities and stockholders’ equity                                    |       | $                    | 665,648    |   |   |   |   |   | $ | 632,641 |   |   |   |   |   |
| Net interest income                                                                |       |                 |       | $ | 5,610 |   |   |   |   |   | $ | 5,696 |   |   |   |
| Interest rate spread(4)                                                            |       |                 |       |   |   | 3.46 | % |   |   |   |   | 3.76 | % |
| Net yield on interest-earning assets(5)                                            |       |                 |       |   |   | 3.60 | % |   |   |   |   | 3.85 | % |
| Ratio of average interest-earning assets to  average interest- bearing liabilities |       |                 |       |   |   | 106 | % |   |   |   |   | 106 | % |

 

----

| (1) | Nonaccrual loans have been included in the appropriate average loan  balance category, but interest on nonaccrual loans has not been included for  purposes of determining interest income.                                                        |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Tax equivalent adjustments to interest on investment securities were  $103,000 and $66,000 for the quarters ended March 31, 2006 and 2005,  respectively. Tax equivalent interest income is based upon a marginal  effective tax rate of 34%. |
| (3) | Includes interest-bearing deposits in other banks.                                                                                                                                                                                                 |
| (4) | Interest rate spread represents the difference between the average  yield on interest-earning assets and the average cost of interest-bearing  liabilities.                                                                                        |
| (5) | Net yield on interest-earning assets represents net interest income as  a percentage of average interest-earning assets.                                                                                                                           |

 

13

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**Rate/Volume Analysis**

 

Thefollowing table presents, for the periods indicated, the change in interestincome and interest expense (in thousands) attributed to (i) changes in volume(changes in the weighted average balance of the total interest earning assetand 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 beenallocated proportionately based on the absolute value of changes due to volumeand changes due to rate.

 
| ** **                         | ** ** | **Three months ended March 31,**                  | ** ** |
|------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                         | ** ** | **2006 vs 2005  Increase (decrease) due to** | ** ** |
| ** **                         | ** ** | **Volume**                                                            | ** ** | **Rate** | ** ** | **Net** | ** ** |
| **Interest income:**               |       |                                                                  |       |   |   |   |   |
| Loans receivable, net              |       | $                                                                     | 780        |   | $ | 420 |   | $ | 1200 |   |
| Mortgage-backed securities         |       | (370                                                                  | )          | 79 |   | (291 | ) |
| Investment securities (1)          |       | 107                                                                   |       | 29 |   | 136 |   |
| Other interest-earning assets      |       | (10                                                                   | )          | 8 |   | (2 | ) |
| Total interest-earning assets      |       | 507                                                                   |       | 536 |   | 1043 |   |
| **Interest expense:**              |       |                                                                  |       |   |   |   |   |
| Deposits                           |       | 18                                                                    |       | 694 |   | 712 |   |
| Advances from the FHLB             |       | 220                                                                   |       | 197 |   | 417 |   |
| Total interest-bearing liabilities |       | 238                                                                   |       | 891 |   | 1129 |   |
| Net change in net interest income  |       | $                                                                     | 269        |   | $ | (355 | ) | $ | (86 | ) |

 

----

| (1) | Tax equivalent adjustments to interest on investment securities were  $103,000 and $66,000 for the quarters ended March 31, 2006 and 2005,  respectively. Tax equivalent interest income is based upon a marginal  effective tax rate of 34%. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**Total Interest Income**. Total interest income, on a taxable equivalent basis, increased by$1.0 million or 12.8% to $9.2 million for the quarter ended March 31, 2006compared with the first quarter of 2005 primarily because of a $51.7 millionincrease in average loans outstanding combined with an increase of 36 basispoints on the average yield on these loans. Interest income frommortgage-backed securities was lower in the first three months of 2006 incomparison to the same period of 2005 due to the reduction of balancesmaintained in mortgage-backed securities.

 

**Total Interest Expense.**Total interest expense increased by $1.1 million to $3.6 million duringthe three-month period ended March 31, 2006 as compared with the first quarterof 2005. During 2005 and the first quarter of 2006, the Bank raised theinterest rates paid on many of its deposit products due to the competitivepricing environment in the Bank’s deposit market. As a result, interest expenseon deposits increased by 61 basis points. Interest on advances from the FederalHome Loan Bank increased by $0.4 million during the first quarter of 2006versus the first quarter of 2005 as a result of a $24 million increase in theaverage balance of borrowings as well as an increase of 65 basis points in thecost of these funds.

 

**Non-interestincome.**Totalnon-interest income was $681,000 for the three-month period ended March 31,2006 compared with $662,000 for the same period in 2005. The increase is mainlyattributable to an increase in overdraft fees collected on deposit accounts. Incontrast, net gain on the sale of loans totaled $9,000 during the first quarterof 2006 while the gain during the first quarter of 2005 totaled $22,000 mainlydue to a decline in the dollar amount of loans sold during each of the twoquarters.

 

14

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**Non-interestexpense.**Totalnon-interest expense increased by $239,000 to $4.4 million for the three monthsended March 31, 2006 compared to the same period in 2005. Stock-basedcompensation expense related to stock grants and the recognition of optionexpense associated with the new accounting standard SFAS 123R, “Share-BasedPayment” amounted to $185,000 for the first quarter of 2006 while there was nosuch expense for the first quarter of 2005. Compensation and other benefitexpenses were higher by $63,000 mainly due to staffing related to the GirardAvenue branch which opened in June 2005 as well as annual salary increases.Office and occupancy costs increased $43,000 between the two quarters mainly asa result of office and occupancy costs associated with the Girard Avenuebranch. Other non-interest expense decreased during the first quarter of 2006as a result of the sale of the credit card portfolio in the third quarter of2005 as $18,000 of credit card related expenses incurred in the first quarterof 2005 and there were no such expenses for the first quarter of 2006.

 

15

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**LIQUIDITY AND CAPITALRESOURCES**

** **

**Liquidity**

** **

The Company’s liquidity is a measure of its ability tofund loans, pay withdrawals of deposits, and other cash outflows in anefficient, cost-effective manner. The Company’s short-term sources of liquidityinclude maturity, repayment and sales of assets, excess cash and cashequivalents, new deposits, broker deposits, other borrowings, and new advancesfrom the Federal Home Loan Bank. There has been no material adverse changeduring three-month period ended March 31, 2006 in the ability of the Companyand its subsidiaries to fund their operations.

 

At March 31, 2006, the Company had commitmentsoutstanding under letters of credit of $2.3 million, commitments to originateloans of $20.0 million, and commitments to fund undisbursed balances of closedloans and unused lines of credit of $63.7 million. At March 31, 2006, theBank had $2.1 million outstanding commitments to sell loans. There has been no material change duringthe three months ended March 31, 2006 in any of the Company’s other contractualobligations or commitments to make future payments.

 

**Capital Requirements**

 

The Bank was in compliance with all of its capitalrequirements as of March 31, 2006.

 

###### **QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

###### ** **

###### **Assetand Liability Management**

###### ** **

TheCompany’s market risk exposure is predominately caused by interest rate risk,which is defined as the sensitivity of the Company’s current and futureearnings, the values of its assets and liabilities, and the value of itscapital to changes in the level of market interest rates. Management of theCompany believes that there has not been a material adverse change in marketrisk during the three months ended March 31, 2006.

 

**CONTROLSAND PROCEDURES**

 

**Evaluation of Disclosure Controlsand Procedures**

 

Basedon their evaluation of the Company’s disclosure controls and procedures (asdefined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “ExchangeAct”)), the Company’s principal executive officer and principal financialofficer have concluded that as of the end of the period covered by thisQuarterly Report on Form 10-Q such disclosure controls and procedures areeffective.

 

**Changes in Internal Controls overFinancial Reporting**

 

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

 

16

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**CRITICAL ACCOUNTING POLICIES**

 

Certaincritical accounting policies of the Company require the use of significantjudgment and accounting estimates in the preparation of the consolidatedfinancial statements and related data of the Company. These accountingestimates require management to make assumptions about matters that are highlyuncertain at the time the accounting estimate is made. Management believes thatthe most critical accounting policy requiring the use of accounting estimatesand judgment is the determination of the allowance for loan losses. If thefinancial position of a significant amount of debtors should deteriorate morethan the Company has estimated, present reserves for loan losses may beinsufficient and additional provisions for loan losses may be required. Theallowance for loan losses was $2,718,000 at March 31, 2006.

 

**NEW ACCOUNTING PRONOUNCEMENTS**

 

InMarch 2006, the Financial Accounting Standards Board (FASB) issuedStatement No. 156 (SFAS 156), “Accounting for Servicing of FinancialAssets”. SFAS 156 amends SFAS No. 140, “Accounting for Transfers andServicing of Financial Assets and Extinguishments of Liabilities.” SFAS 156permits, but does not require, an entity to choose either the amortizationmethod or the fair value measurement method for measuring each class ofseparately recognized servicing assets and servicing liabilities. SFAS 156 iseffective for fiscal years beginning after September 15, 2006 and is notexpected to have a material impact on the Company’s consolidated financialstatements.

 

17

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**TF FINANCIAL CORPORATION ANDSUBSIDIARIES**

 

**PART II**

 
| **ITEM 1.**  | ** ** | **LEGAL PROCEEDINGS**                                                                                                                                                                            |
|--------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |       |                                                                                                                                                                                             |
|         |       | Not applicable.                                                                                                                                                                                  |
|         |       |                                                                                                                                                                                             |
| **ITEM 1A.** | ** ** | **RISK FACTORS**                                                                                                                                                                                 |
|         |       |                                                                                                                                                                                             |
|         |       | Management does not believe there have been any material changes to  the Risk Factors previously disclosed under Item 1A. on the Company’s Form  10-K for the year ended December 31, 2005. |
|         |       |                                                                                                                                                                                             |
| **ITEM 2.**  | ** ** | **UNREGISTERED SALE OF EQUITY  SECURITIES AND USE OF PROCEEDS**                                                                                                                                  |
|         |       |                                                                                                                                                                                             |
|         |       | The following table provides information on repurchases by the  Company of its common stock in each month for the three months ended March  31, 2006:                                            |

 
| **Month**                            | ** ** | **Total Number of  Shares Purchased** | ** ** | **Average Price  Paid per Share** | ** ** | **Total Number of  Shares Purchased  as  Part of Publicly  Announced Plan of  Program** | ** ** | **Maximum Number  of  Shares that may yet  be Purchased  Under  the Plans or  Programs** | ** ** |
|--------------------------------------|------------|------------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------|------------|
|                                 |       |                                                 |       |                                             |       |                                                                                                                       |       |                                                                                                                        |       |
| January 1, 2006 - January 31, 2006   |       | 18,000                                               |       | $                                                | 28.30      |                                                                                                                       | —     |                                                                                                                        | 81,273     |   |
|                                 |       |                                                 |       |                                             |       |                                                                                                                       |       |                                                                                                                        |       |
| February 1, 2006 - February 28, 2006 |       | 11,400                                               |       | $                                                | 30.00      |                                                                                                                       | —     |                                                                                                                        | 81,273     |   |
|                                 |       |                                                 |       |                                             |       |                                                                                                                       |       |                                                                                                                        |       |
| March 1, 2006 - March 31, 2006       |       | 8,000                                                |       | $                                                | 30.55      |                                                                                                                       | —     |                                                                                                                        | 81,273     |   |

 
| **ITEM 3.** | ** ** | **DEFAULTS UPON SENIOR SECURITIES** |
|-------------|------------|-------------------------------------|
|        |       |                                |
|        |       | Not applicable.                     |

 

 

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**ITEM 4.****                                                                                                                            ****SUBMISSION OF MATTERS TO A VOTEOF SECURITY HOLDERS**

 

The Annual Meeting ofStockholders (the “Meeting”) of the Company was held on April 27, 2006. Therewere outstanding and entitled to vote at the Meeting 2,877,440 shares of CommonStock of the Company. There were present at the meeting or by proxy the holdersof 2,558,997 shares of Common Stock representing 88.93% of the total eligiblevotes to be cast. Proposal 1 was to elect two directors of the Company. Proposal2 was to ratify the appointment of the independent auditor for the December 31,2006 fiscal year. The result of the voting at the Meeting is as follows(percentages in terms of votes cast):

 
| **Proposal 1**  |   |      |   |      |   |               |   |   |   |
|-----------------|--------|-----------|--------|-----------|--------|--------------------|--------|--------|--------|
| Robert N. Dusek |   | FOR:      |   | 2,266,649 |   | PERCENT FOR:       |   | 88.58  | %      |
|            |   | WITHHELD: |   | 292,348   |   | PERCENT  WITHHELD: |   | 11.42  | %      |
| Carl F. Gregory |   | FOR:      |   | 2,298,199 |   | PERCENT FOR:       |   | 89.81  | %      |
|            |   | WITHHELD: |   | 260,798   |   | PERCENT  WITHHELD: |   | 10.19  | %      |

 

**Proposal 2**

Ratification of the appointment of Grant Thornton,LLP as independent auditor for the Company for the December 31, 2006 fiscalyear.

 
| FOR:     |   | 2,530,956 |   | PERCENT FOR:      |   | 98.90 | % |
|----------|--------|-----------|--------|-------------------|--------|-------|---|
| AGAINST: |   | 24,564    |   | PERCENT  AGAINST: |   | 0.96  | % |
| ABSTAIN: |   | 3,477     |   | PERCENT  ABSTAIN  |   | 0.14  | % |

 
| **ITEM 5.** | ** ** | **OTHER INFORMATION** |
|-------------|------------|-----------------------|
|        |       | None                  |

 
| **ITEM 6.** | ** ** | **EXHIBITS** |
|-------------|------------|--------------|
|        |       | (a) Exhibits |
|        |       |         | 31. | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of  2002. |
|        |       |         | 32. | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of  2002. |

 

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**TFFINANCIAL CORPORATION**

 

**SIGNATURES**

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

 

 
|   | /s/ Kent C. Lufkin                              |   |
|--------|-------------------------------------------------|--------|
| Date:  | May 12, 2006                                    |   | Kent C. Lufkin |
|   | President and CEO                               |
|   | (Principal Executive Officer)                   |
|   |                                            |
|   |                                            |
|   | /s/ Dennis R. Stewart                           |   |
| Date:  | May 12, 2006                                    |   | Dennis R. Stewart |
|   | Executive Vice President and                    |
|   | Chief Financial Officer                         |
|   | (Principal  Financial & Accounting Officer) |
|        |                                                 |        |  |  |  |

 

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