**SECURITIES AND EXCHANGE COMMISSION****Washington, D.C. 20549**

**FORM 10-Q**

**x****                             ****QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**For the period ended March 31,2007**

**- or -**

**o****                                ****TRANSITION REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**For the transition period from                                   to                                   **

**Commission file number:  0-24168**

**TF FINANCIAL CORPORATION** (Exact Name of Registrant asSpecified in Its Charter)

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

 

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

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

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

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

(Title of Class)

Indicate by check mark whether the registrant: (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. YES x**  **NO o

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

Largeaccelerated filer o                  Accelerated filer o                  Non-accelerated filer x

Indicate by check mark whether the registrant isa shell company (as defined in Rule 12b-2 Exchange Act). YES o**  **NO x

Indicate the number of shares outstanding ofeach of the issuer’s classes of common stock as of the latest practicable date:May 6, 2007

| **Class**                    |   | **Outstanding**  |
|------------------------------|--------|------------------|
| $.10 par value  common stock |   | 2,928,128 shares |

 

 

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**CONTENTS**
| **PART I-CONSOLIDATED FINANCIAL INFORMATION**                                 | ** **                                                                                  |
|-------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------|
|                                                                          |                                                                                        |   |
| Item 1.                                                                       | Consolidated  Financial Statements                                                          |   |
|                                                                          |                                                                                        |   |
| Item 2.                                                                       | Management’s  Discussion and Analysis of Financial Condition 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  Sales 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

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**TF Financial Corporation andSubsidiaries**

**CONSOLIDATEDBALANCE SHEETS**
| ** **                                                                                                                                                                                                                                                      | ** ** | **Unaudited  March 31, 2007** | ** ** | **Audited  December 31, 2006** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                                                                                                                                                                                      | ** ** | **(in thousands)**                 | ** ** |
| ASSETS                                                                                                                                                                                                                                                          |       |                                    |       |                                     |       |
| Cash and cash  equivalents                                                                                                                                                                                                                                      |       | $                                       | 9,891      |                                     | $          | 12,364 |   |
| Certificates of deposit  in other financial institutions                                                                                                                                                                                                        |       | 40                                      |       | 40                                       |       |
| Investment securities  available for sale—at fair value                                                                                                                                                                                                    |       | 30,752                                  |       | 34,524                                   |       |
| Investment securities  held to maturity (fair value of $682 and $681 respectively)                                                                                                                                                                              |       | 677                                     |       | 677                                      |       |
| Mortgage-backed  securities available for sale—at fair value                                                                                                                                                                                               |       | 76,989                                  |       | 74,338                                   |       |
| Mortgage-backed  securities held to maturity (fair value of $7,259 and $7,788, respectively)                                                                                                                                                                    |       | 7,136                                   |       | 7,697                                    |       |
| Loans receivable, net  held for investment                                                                                                                                                                                                                      |       | 496,518                                 |       | 483,570                                  |       |
| Loans, held for sale                                                                                                                                                                                                                                            |       | 626                                     |       | 969                                      |       |
| Federal Home Loan Bank  stock—at cost                                                                                                                                                                                                                      |       | 6,651                                   |       | 7,130                                    |       |
| Accrued interest  receivable                                                                                                                                                                                                                                    |       | 2,873                                   |       | 3,030                                    |       |
| Premises and equipment,  net                                                                                                                                                                                                                                    |       | 6,387                                   |       | 6,544                                    |       |
| Goodwill                                                                                                                                                                                                                                                        |       | 4,324                                   |       | 4,324                                    |       |
| Bank-owned life  insurance                                                                                                                                                                                                                                      |       | 15,422                                  |       | 15,274                                   |       |
| Other assets                                                                                                                                                                                                                                                    |       | 3,310                                   |       | 2,122                                    |       |
| TOTAL ASSETS                                                                                                                                                                                                                                                    |       | $                                       | 661,596    |                                     | $          | 652,603 |   |
|                                                                                                                                                                                                                                                            |       |                                    |       |                                     |       |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                                                                                                                                                      |       |                                    |       |                                     |       |
| Liabilities                                                                                                                                                                                                                                                     |       |                                    |       |                                     |       |
| Deposits                                                                                                                                                                                                                                                        |       | $                                       | 484,698    |                                     | $          | 478,087 |   |
| Advances from  the Federal Home Loan Bank                                                                                                                                                                                                                       |       | 101,504                                 |       | 101,701                                  |       |
| Advances from  borrowers for taxes and insurance                                                                                                                                                                                                                |       | 1,803                                   |       | 1,866                                    |       |
| Accrued interest  payable                                                                                                                                                                                                                                       |       | 3,925                                   |       | 3,177                                    |       |
| Other  liabilities                                                                                                                                                                                                                                              |       | 2,198                                   |       | 2,133                                    |       |
| Total  liabilities                                                                                                                                                                                                                                              |       | 594,128                                 |       | 586,964                                  |       |
|                                                                                                                                                                                                                                                            |       |                                    |       |                                     |       |
| Stockholders’ equity                                                                                                                                                                                                                                       |       |                                    |       |                                     |       |
| Preferred stock,  no par value; 2,000,000 shares authorized at March 31, 2007 and December  31, 2006, none issued                                                                                                                                          |       | —                                  |       | —                                   |       |
| Common stock,  $0.10 par value; 10,000,000 shares authorized, 5,290,000 shares issued,  2,759,254 and 2,702,845 shares outstanding at March 31, 2007 and  December 31, 2006, respectively, net of shares in treasury 2,361,872 and  2,415,766 respectively |       | 529                                     |       | 529                                      |       |
| Retained  earnings                                                                                                                                                                                                                                              |       | 65,922                                  |       | 65,075                                   |       |
| Additional  paid-in capital                                                                                                                                                                                                                                     |       | 52,896                                  |       | 52,700                                   |       |
| Unearned ESOP  shares                                                                                                                                                                                                                                           |       | (1,678                                  | )          | (1,703                                   | )          |
| Treasury  stock—at cost                                                                                                                                                                                                                                    |       | (48,383                                 | )          | (48,980                                  | )          |
| Accumulated  other comprehensive loss                                                                                                                                                                                                                           |       | (1,818                                  | )          | (1,982                                   | )          |
| Total  stockholders’ equity                                                                                                                                                                                                                                |       | 67,468                                  |       | 65,639                                   |       |
| TOTAL LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                                                                                                                                                |       | $                                       | 661,596    |                                     | $          | 652,603 |   |

 

The accompanyingnotes are an integral part of these statements

3

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**TF FinancialCorporation and Subsidiaries**

**CONSOLIDATED STATEMENTS OF INCOME(Unaudited)**
| ** **                                           | ** ** | **For the three months ended  March 31,** | ** ** |
|------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                           | ** ** | **(in thousands, except per share data)** | ** ** |
| ** **                                           | ** ** | **2007**                                                           | ** ** | **2006** | ** ** |
| Interest income                                      |       |                                                               |       |   |   |
| Loans, including  fees                               |       | $                                                                  | 7,779      |   | $ | 7,671 |   |
| Mortgage-backed  securities                          |       | 933                                                                |       | 1,012 |   |
| Investment  securities                               |       | 434                                                                |       | 412 |   |
| Interest-bearing  deposits and other                 |       | 67                                                                 |       | 8 |   |
|                                                 |       |                                                               |       |   |   |
| TOTAL INTEREST  INCOME                               |       | 9,213                                                              |       | 9,103 |   |
|                                                 |       |                                                               |       |   |   |
| Interest expense                                     |       |                                                               |       |   |   |
| Deposits                                             |       | 3,230                                                              |       | 2,248 |   |
| Borrowings                                           |       | 979                                                                |       | 1,348 |   |
|                                                 |       |                                                               |       |   |   |
| TOTAL INTEREST  EXPENSE                              |       | 4,209                                                              |       | 3,596 |   |
|                                                 |       |                                                               |       |   |   |
| NET INTEREST  INCOME                                 |       | 5,004                                                              |       | 5,507 |   |
| Provision for loan  losses                           |       | —                                                             |       | 90 |   |
|                                                 |       |                                                               |       |   |   |
| NET INTEREST  INCOME AFTER PROVISION FOR LOAN LOSSES |       | 5,004                                                              |       | 5,417 |   |
|                                                 |       |                                                               |       |   |   |
| Non-interest income                                  |       |                                                               |       |   |   |
| Service fees,  charges and other operating income    |       | 547                                                                |       | 550 |   |
| Bank-owned life  insurance                           |       | 148                                                                |       | 122 |   |
| Gain on sale of  loans                               |       | 54                                                                 |       | 9 |   |
| Other income                                         |       | 777                                                                |       | — |   |
|                                                 |       |                                                               |       |   |   |
| TOTAL  NON-INTEREST INCOME                           |       | 1,526                                                              |       | 681 |   |
|                                                 |       |                                                               |       |   |   |
| Non-interest expense                                 |       |                                                               |       |   |   |
| Compensation and  benefits                           |       | 2,668                                                              |       | 2,639 |   |
| Occupancy and  equipment                             |       | 692                                                                |       | 704 |   |
| Professional  fees                                   |       | 224                                                                |       | 212 |   |
| Marketing and  advertising                           |       | 163                                                                |       | 177 |   |
| Other operating                                      |       | 843                                                                |       | 638 |   |
|                                                 |       |                                                               |       |   |   |
| TOTAL  NON-INTEREST EXPENSE                          |       | 4,590                                                              |       | 4,370 |   |
|                                                 |       |                                                               |       |   |   |
| INCOME BEFORE  INCOME TAXES                          |       | 1,940                                                              |       | 1,728 |   |
|                                                 |       |                                                               |       |   |   |
| Income taxes                                         |       | 542                                                                |       | 473 |   |
|                                                 |       |                                                               |       |   |   |
| NET INCOME                                           |       | $                                                                  | 1,398      |   | $ | 1,255 |   |
| Earnings per  share—basic                       |       | $                                                                  | 0.51       |   | $ | 0.47 |   |
| Earnings per  share—diluted                     |       | $                                                                  | 0.51       |   | $ | 0.46 |   |
| Dividends paid                                       |       | $                                                                  | 0.20       |   | $ | 0.19 |   |

 

The accompanying notes are an integral part of these statements

4

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**TF Financial Corporation andSubsidiaries**

**CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)**
| ** **                                                                        | ** ** | **For the three months ended  March 31,** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                        | ** ** | **2007**                                                           | ** ** | **2006** | ** ** |
| ** **                                                                        | ** ** | **(in thousands)**                                            | ** ** |
| OPERATING ACTIVITIES                                                              |       |                                                               |       |   |   |
| Net income                                                                        |       | $                                                                  | 1,398      |   | $ | 1,255 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities |       |                                                               |       |   |   |
| Amortization of                                                                   |       |                                                               |       |   |   |
| Mortgage loan  servicing rights                                                   |       | 10                                                                 |       | 4 |   |
| Deferred loan  origination fees                                                   |       | (28                                                                | )          | (14 | ) |
| Premiums and  discounts on investment securities, net                             |       | 21                                                                 |       | 17 |   |
| Premiums and  discounts on mortgage-backed securities, net                        |       | 22                                                                 |       | 101 |   |
| Premiums and  discounts on loans, net                                             |       | 36                                                                 |       | 44 |   |
| Discount on  wholesale deposits                                                   |       | 7                                                                  |       | — |   |
| Core deposit  intangibles                                                         |       | —                                                             |       | 28 |   |
| Provision for  loan losses                                                        |       | —                                                             |       | 90 |   |
| Provision for  decrease in fair value of mortgage servicing rights                |       | 3                                                                  |       | — |   |
| Depreciation of  premises and equipment                                           |       | 226                                                                |       | 247 |   |
| Increase in  value of bank-owned life insurance                                   |       | (148                                                               | )          | (122 | ) |
| Stock grant  expense                                                              |       | 90                                                                 |       | 91 |   |
| Stock option  expense                                                             |       | 99                                                                 |       | 94 |   |
| Stock-based benefit  programs: ESOP                                               |       | 77                                                                 |       | 141 |   |
| Proceeds from  sale of loans originated for sale                                  |       | 4,613                                                              |       | 1,263 |   |
| Origination of  loans held for sale                                               |       | (4,286                                                             | )          | (1,704 | ) |
| Tax benefit  arising from stock compensation                                      |       | 363                                                                |       | — |   |
| Gain on sale of                                                                   |       |                                                               |       |   |   |
| Mortgage loans  available for sale                                                |       | (54                                                                | )          | (9 | ) |
| Expense from  mortgage loan derivatives                                           |       | 3                                                                  |       | 13 |   |
| Income  associated with forward loan sales                                        |       | (2                                                                 | )          | (15 | ) |
| (Increase)  decrease in                                                           |       |                                                               |       |   |   |
| Accrued interest  receivable                                                      |       | 157                                                                |       | 420 |   |
| Other assets                                                                      |       | (1,221                                                             | )          | (710 | ) |
| Increase  (decrease) in                                                           |       |                                                               |       |   |   |
| Accrued interest  payable                                                         |       | 748                                                                |       | 760 |   |
| Other  liabilities                                                                |       | 65                                                                 |       | (49 | ) |
|                                                                              |       |                                                               |       |   |   |
| NET CASH  PROVIDED BY OPERATING ACTIVITIES                                        |       | 2,199                                                              |       | 1,945 |   |
|                                                                              |       |                                                               |       |   |   |
| INVESTING ACTIVITIES                                                              |       |                                                               |       |   |   |
| Loan  originations                                                                |       | (37,875                                                            | )          | (44,303 | ) |
| Loan principal  payments                                                          |       | 24,922                                                             |       | 24,614 |   |
| Principal repayments  on mortgage-backed securities held to maturity              |       | 559                                                                |       | 728 |   |
| Principal  repayments on mortgage-backed securities available for sale            |       | 2,470                                                              |       | 3,925 |   |
| Proceeds from  sale of loan participations                                        |       | —                                                             |       | 2,452 |   |
| Purchase of  investment securities available for sale                             |       | (771                                                               | )          | (981 | ) |
| Purchase of  mortgage-backed securities available for sale                        |       | (4,869                                                             | )          | — |   |
| Proceeds from  maturities of investment securities held to maturity               |       | 4,500                                                              |       | 2,673 |   |
| Redemption  (purchases) of Federal Home Loan Bank stock, net                      |       | 479                                                                |       | (806 | ) |
| Purchase of  premises and equipment                                               |       | (69                                                                | )          | (197 | ) |
| NET CASH USED IN  INVESTING ACTIVITIES                                            |       | (10,654                                                            | )          | (11,895 | ) |
|                                                                                   |            |                                                                    |            |  |  |  |  |

 

5

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| ** **                                                                                                      | ** ** | **For the three months ended  March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                                                      | ** ** | **2007**                                                           | ** ** | **2006** | ** ** |
| ** **                                                                                                      | ** ** | **(in thousands)**                                            | ** ** |
| FINANCING ACTIVITIES                                                                                            |       |                                                               |       |   |   |
| Net increase  (decrease) in demand deposit/NOW accounts, passbook savings accounts and  certificates of deposit |       | 6,604                                                              |       | (6,263 | ) |
| Net increase in  short-term Federal Home Loan Bank advances from Federal Home Loan Bank                         |       | 4,759                                                              |       | 7,130 |   |
| Proceeds of  long-term Federal Home Loan Bank advances                                                          |       | —                                                             |       | 15,535 |   |
| Repayment of  long-term Federal Home Loan Bank advances                                                         |       | (4,956                                                             | )          | (4,305 | ) |
| Net decrease in  advances from borrowers for taxes and insurance                                                |       | (63                                                                | )          | (66 | ) |
| Treasury stock  acquired                                                                                        |       | (1,553                                                             | )          | (1,096 | ) |
| Exercise of  stock options                                                                                      |       | 1,742                                                              |       | 124 |   |
| Common stock  dividends paid                                                                                    |       | (551                                                               | )          | (515 | ) |
| NET CASH  PROVIDED BY FINANCING ACTIVITIES                                                                      |       | 5,982                                                              |       | 10,544 |   |
|                                                                                                            |       |                                                               |       |   |   |
| NET INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS                                                           |       | (2,473                                                             | )          | 594 |   |
|                                                                                                            |       |                                                               |       |   |   |
| Cash and cash  equivalents at beginning of period                                                               |       | 12,364                                                             |       | 3,821 |   |
|                                                                                                            |       |                                                               |       |   |   |
| Cash and cash equivalents  at end of period                                                                     |       | $                                                                  | 9,891      |   | $ | 4,415 |   |
|                                                                                                            |       |                                                               |       |   |   |
| Supplemental disclosure  of cash flow information                                                               |       |                                                               |       |   |   |
| Cash paid for                                                                                                   |       |                                                               |       |   |   |
| Interest on  deposits and advances from Federal Home Loan Bank                                                  |       | $                                                                  | 3,461      |   | $ | 2,836 |   |
| Income taxes                                                                                                    |       | $                                                                  | 180        |   | $ | 65 |   |

 

The accompanyingnotes are an integral part of these statements

6

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**TF FINANCIAL CORPORATION AND SUBSIDIARIESNOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

**NOTE 1 - PRINCIPLES OF CONSOLIDATION**

Theconsolidated financial statements as of March 31, 2007 (unaudited) and December31, 2006 and for the three-month periods ended March 31, 2007 and 2006(unaudited) include the accounts of TF Financial Corporation (the “Company”)and its wholly owned subsidiaries Third Federal Bank (the “Bank”), TFInvestments Corporation and Penns Trail Development Corporation. The Company’sbusiness is conducted principally through the Bank. All significantintercompany accounts and transactions have been eliminated in consolidation.

**NOTE 2 - BASIS OF PRESENTATION**

Theaccompanying unaudited consolidated financial statements were prepared inaccordance with instructions for Form 10-Q and, therefore, do not include allof the disclosures or footnotes required by accounting principles generallyaccepted in the United States of America. In the opinion of management, alladjustments, consisting of normal recurring accruals, necessary for fairpresentation of the consolidated financial statements have been included. Theresults of operations for the period ended March 31, 2007 are not necessarilyindicative of the results which may be expected for the entire fiscal year orany other period. For further information, refer to consolidated financialstatements and footnotes thereto included in the Company’s Annual Report onForm 10-K for the fiscal year ended December 31, 2006. The aggregatemarket value of the voting common equity held by non-affiliates of theregistrant, based on the closing price of the registrant’s Common Stock asquoted on the Nasdaq System on June 30, 2006, was $58.5 million (2,027,416shares at $28.85 per share).

**NOTE 3 — CONTINGENCIES**

TheCompany, from time to time, is a party to routine litigation that arises in thenormal course of business. In the opinion of management, the resolution of thislitigation, if any, would not have a material adverse effect on the Company’sconsolidated financial position or results of operations.

**NOTE 4 - OTHER COMPREHENSIVE INCOME**

The Company’s other comprehensive incomeconsists of net unrealized losses on investment securities and mortgage-backedsecurities available for sale. Total comprehensive income for the three-monthperiods ended March 31, 2007 and 2006 was $1,562,000 and $560,000, net ofapplicable income tax expense of $628,000 and $115,000 respectively.

**NOTE 5—EARNINGS PER SHARE**

The following tables illustrate thereconciliation of the numerators and denominators of the basic and dilutedearnings per share computations (dollars in thousands, except per share data):
| ** **                                                                  | ** ** | **Three months ended March 31, 2007** | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                                                  | ** ** | **Income  (numerator)**                                        | ** ** | **Weighted  average  shares  (denominator)** | ** ** | **Per share  Amount** | ** ** |
| Basic earnings per  share                                                   |       |                                                           |       |   |   |   |   |
| Income available  to common stockholders                                    |       | $                                                              | 1,398      |   | 2,751,158 |   | $ | 0.51 |   |
| Effect of dilutive  securities                                              |       |                                                           |       |   |   |   |   |
| Stock options                                                               |       | —                                                         |       | — |   | — |   |
|                                                                        |       |                                                           |       |   |   |   |   |
| Diluted earnings per  share                                                 |       |                                                           |       |   |   |   |   |
| Income available to  common stockholders plus effect of dilutive securities |       | $                                                              | 1,398      |   | 2,751,158 |   | $ | 0.51 |   |

 

Therewere 20,638 options to purchase shares of common stock at a price of $34.14 pershare which were outstanding during the first quarter of 2007 that were notincluded in the computation of diluted earnings per share because the options’exercise prices were greater than the average market price of the commonshares.

7

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| ** **                                                                  | ** ** | **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 |   |
|                                                                             |            |                                                                |            |  |  |  |  |  |  |

 

Therewere 24,226 options to purchase shares of common stock at a price of $34.14 pershare which were outstanding during the first quarter of 2006 that were not includedin the computation of diluted earnings per share because the options’ exerciseprices were greater than the average market price of the common shares.

**NOTE 6- STOCK BASED COMPENSATION**

The Company has stock benefitplans that allow the Company to grant options and stock to employees anddirectors. The awards, which have a term of up to 10 years when issued,vest over a three to five year period. The exercise price of each award equalsthe market price of the Company’s stock on the date of the grant. There was$909,000 and $1,021,000 of total unrecognized compensation cost, net ofestimated forfeitures, related to non-vested awards under the Plan at March 31,2007 and 2006, respectively. That cost is expected to be recognized over aweighted average period of 21.2 months and 32.3 months at March 31, 2007 and2006, respectively.

Stock-based compensation expense included in netincome related to stock options was $99,000 and $94,000, resulting in a taxbenefit of $29,000 and $28,000, for the three months ended March 31, 2007 and2006, respectively.

 

8

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Option activity under theCompany’s stock option plan as of March 31, 2007 and 2006 is as follows:
|                                        | ** ** | **2007**                   | ** ** |
|----------------------------------------|------------|----------------------------|------------|
| ** **                             | ** ** | **Number  of shares** | ** ** | **Weighted  average  exercise  price per  share** | ** ** | **Weighted  average  remaining  contractual  term (in  years)** | ** ** | **Aggregate  intrinsic  value ($000)** | ** ** |
| Outstanding at  January 1, 2007        |       | 365,734                    |       | $ | 23.62 |   |   |   |   |   |
| Options granted                        |       | —                     |       | — |   |   |   |   |   |
| Options  exercised                     |       | (105,453                   | )          | 16.52 |   |   |   |   |   |
| Options  forfeited                     |       | —                     |       | — |   |   |   |   |   |
| Options expired                        |       | —                     |       | — |   |   |   |   |   |
| Outstanding at  March 31, 2007         |       | 260,281                    |       | $ | 26.49 |   | 4.37 |   | $ | 1,044 |   |
| Options exercisable at  March 31, 2007 |       | 130,451                    |       | $ | 24.38 |   | 4.18 |   | $ | 798 |   |

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

 

Theaggregate intrinsic value in the table above represents the total pre-taxintrinsic value (the difference between the Company’s closing stock price on thelast trading day of the first quarter of 2007 and the exercise price,multiplied by the number of in-the money options).

Theaggregate intrinsic value of options exercised during the three months endedMarch 31, 2007 and 2006 was $1,069,000 and $119,000, respectively. Exercise ofstock options during the three months ended March 31, 2007 and 2006 resulted incash receipts of $1,742,000 and $124,000, respectively.

Stock-basedcompensation expense included in net income related to stock grants was $90,000and $91,000 for the three months ended March 31, 2007 and 2006, respectively.Stock-based compensation expense included in net income related to theCompany’s employee stock ownership plan totaled $61,000 and $107,000 for thethree-month periods ended March 31, 2007 and 2006, respectively.

**NOTE 7-EMPLOYEE BENEFIT PLANS**

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

|                                          | ** ** | **Three months ended  March 31** | ** ** |
|------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                               | ** ** | **2007**                                        | ** ** | **2006** | ** ** |
|                                     |       |                                            |       |   |   |
| Components of  net periodic benefit cost |       |                                            |       |   |   |
| Service cost                             |       | 84                                              |       | $ | 77 |   |
| Interest cost                            |       | 53                                              |       | 53 |   |
| Expected return on plan assets           |       | (100                                            | )          | (81 | ) |
| Amortization of prior service cost       |       | 12                                              |       | 16 |   |
| Recognized net actuarial (gain) loss     |       | 15                                              |       | 12 |   |
|                                     |       |                                            |       |   |   |
| Net periodic  benefit cost               |       | $                                               | 64         |   | $ | 77 |   |
|                                          |            |                                                 |            |  |  |  |  |

 

The employer contributionmade for the three months ended March 31, 2007 and 2006 was $1,107,000 and$620,000, respectively.

9

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**NOTE 8- NEW ACCOUNTINGPRONOUNCEMENTS**

InSeptember 2006, , theFinancial Accounting Standards Board (FASB) Issued StatementNo. 157 (SFAS 157), “Fair Value Measurements” which is effective forfiscal years beginning after November 15, 2007 and for interim periodswithin those years. This statement defines fair value, establishes a frameworkfor measuring fair value and expands the related disclosure requirements. TheCompany is currently evaluating the impact the adoption of SFAS No. 157will have on its consolidated financial statements.

In September 2006, the Emerging Issues Task Force(EITF) finalized Issue No. 06-5, “Accounting for Purchases of LifeInsurance—Determining the Amount That Could Be Realized in Accordance with FASBTechnical Bulletin No. 85-4 (Accounting for Purchases of LifeInsurance)”.**This issue requires that a policyholderconsider contractual terms of a life insurance policy in determining the amountthat could be realized under the insurance contract. It also requires that ifthe contract provides for a greater surrender value if all individual policiesin a group are surrendered at the same time, that the surrender value bedetermined based on the assumption that policies will be surrendered on anindividual basis. Lastly, the issue discusses whether the cash surrender valueshould be discounted when the policyholder is contractually limited in itsability to surrender a policy. This issue is effective for fiscal yearsbeginning after December 15, 2006. Application of this issue has not madea material impact on the financial statements.

The Company adopted the provisions ofFASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in IncomeTaxes”, on January 1, 2007. Previously, the Company had accounted for taxcontingencies in accordance with SFAS 5, “Accounting for Contingencies”. As required by FIN 48, whichclarifies SFAS 109, “Accounting for Income Taxes”, the Company recognizes thefinancial statement benefit of a tax position only after determining that therelevant tax authority would more likely than not sustain the positionfollowing an audit. For tax positions meeting the more-likely-than-not**threshold, the amount recognized in the financialstatements is the largest benefit that has a greater than 50 percent likelihoodof being realized upon ultimate settlement with the relevant taxauthority.  The Company is subject toincome taxes in the U.S. federal jurisdiction, and the states of Pennsylvaniaand New Jersey. Tax regulations within each jurisdiction are subject to theinterpretation of the related tax laws and regulations and require significantjudgment to apply.  The Company appliedInterpretation 48 to all tax positions for which the statute of limitationsremained open. The adoption of FIN 48 did not have a material impact on theresults operations or financial condition of the Company.

In February 2007, FASB issued Statement No. 159 (SFAS 159),“The Fair Value Option for Financial Assets and Financial Liabilities,including an amendment of FASB Statement No. 115”. The statement permitsentities to choose to measure many financial instruments and certain otheritems at fair value.  SFAS 159 providesan opportunity to mitigate volatility in reporting earnings caused by measuringrelated assets and liabilities differently without having to apply complexhedge accounting provisions. This statement is effective as of the beginning ofan entity’s first fiscal year that begins after November 15, 2007.  Early adoption is permitted as of thebeginning of a fiscal year that begins on or before November 15, 2007, providedthe entity also elects to apply the provisions of FASB Statement No. 157 (SFAS157), “Fair Value Measurements”. Although the Company has decided against early adoption, the Companywill adopt SFAS No. 159 and does not anticipate any material impact on itsconsolidated financial statements.

**NOTE 9- RECLASSIFICATIONS**

Certain priorperiod amounts have been reclassified to conform to the current periodpresentation.

10

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**TF FINANCIAL CORPORATION AND SUBSIDIARIES**

**MANAGEMENT’SDISCUSSION AND ANALYSIS OFFINANCIAL POSITION AND RESULTS 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.

**FinancialPosition**

The Company’stotal assets at March 31, 2007 and December 31, 2006 were $661.6 million and$652.6 million, respectively, an increase of $9.0 million, or 1.4%, during thethree-month period. Cash and cash equivalents decreased by $2.5 million.Investment securities available for sale decreased by $3.8 million due tomaturities of agency and corporate notes totaling $4.5 million offset bypurchases of $0.8 million of tax-exempt municipal bonds, as well as an increasein the market value of these securities. Mortgage-backed securities availablefor sale increased by $2.7 million due to $4.9 million of purchases as well asan increase in the market value of these securities of $0.3 million net of $2.5million in principal repayments received. Mortgage-backed securities held tomaturity decreased by $0.6 million as a result of principal repayments.

Loans receivableincreased by $12.9 million for the first quarter of 2007. Consumer andsingle-family residential mortgage loans of $17.1 million and commercial loansof $20.8 million were originated during the first quarter of 2007. Principalrepayments of loans receivable were $24.9 million. Loans originated for saleduring the first quarter of 2007 totaled $4.3 million, and there were $4.6million in proceeds from the sale loans in the secondary market during thisperiod.

11

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Total liabilitiesincreased by $7.2 million. Deposit balances increased by $6.6 million duringthe first three months of 2007. Savings, and money market accounts increased bya combined $6.1 million while interest-bearing and non-interest checkingaccounts decreased $3.0 million during the quarter. Certificates of depositincreased by $3.5 million in the first quarter of 2007. Advances from theFederal Home Loan Bank decreased by $0.2 million, a result of a $4.8 millionincrease of short-term advances, less scheduled amortization payments of $5.0million.

Totalconsolidated stockholders’ equity of the Company was $67.5 million or 10.2% oftotal assets at March 31, 2007. During the first quarter of 2007 the Companyrepurchased 51,559 shares of its common stock and issued 105,453 sharespursuant to the exercise of stock options. As of March 31, 2007, there wereapproximately 76,000 shares available for repurchase under the previouslyannounced share repurchase plan.

###### **Asset Quality**

During the firstquarter of 2007 and 2006, the Company’s provision for loan losses was $0 and$90,000, respectively. Management of the Company believes that there has notbeen any significant deterioration in its asset quality during the firstquarter of 2007.

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

|                                                             | ** ** | **March 31,** | ** ** | **December 31,** | ** ** | **March 31,** | ** ** |
|-------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|--------------------|------------|
| ** **                                                  | ** ** | **2007**           | ** ** | **2006**              | ** ** | **2006**           | ** ** |
| ** **                                                  | ** ** | ** **         | ** ** | ** **            | ** ** | ** **         | ** ** |
| Non-performing loans                                        |       | $                  | 2,783      |                  | $          | 2,110              |       | $ | 1,570 |   |
| Ratio of non-performing loans to gross loans                |       | 0.57               | %          | 0.59                  | %          | 0.31               | %          |
| Ratio of non-performing loans to total assets               |       | 0.42               | %          | 0.32                  | %          | 0.23               | %          |
| Foreclosed property                                         |       | $                  | —     |                  | $          | —             |       | $ | 700 |   |
| Foreclosed property to total assets                         |       | —             | %          | —                | %          | 0.10               | %          |
| Ratio of total non-performing assets to total assets        |       | 0.42               | %          | 0.32                  | %          | 0.34               | %          |
| Ratio of allowance for loan losses to total loans           |       | 0.58               | %          | 0.59                  | %          | 0.53               | %          |
| Ratio  of allowance for loan losses to non-performing loans |       | 103.13             | %          | 135.78                | %          | 173.12             | %          |

 

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 the allowancefor loan losses during the periods indicated (in thousands):
|                                           | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------|------------|----------|------------|----------|------------|
| Beginning balance, January 1,             |       | $        | 2,865      |     | $          | 2,641 |   |
| Provision                                 |       | —   |       | 90       |       |
| Less: charge-off’s (recoveries), net |       | (5       | )          | 13       |       |
| Ending  balance, March 31,                |       | 2,870    |       | 2,718    |       |
|                                           |            |          |            |          |            |  |  |

 

12

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**RESULTSOF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006**

**NetIncome**. The Company recorded net income of $1,398,000, or$0.51 per diluted share, for the three months ended March 31, 2007 as comparedto net income of $1,255,000, or $0.46 per diluted share, for the three monthsended March 31, 2006.

### **Average Balance Sheet**

Thefollowing table sets forth information (dollars in thousands) relating to theCompany’s average balance sheet and reflects the average yield on assets andaverage cost of liabilities for the periods indicated. Yield and cost arecomputed by dividing income or expense by the average daily balance ofinterest-earning assets or interest-bearing liabilities, respectively, at-orfor the three month periods indicated.
| ** **                                                                         | ** ** | **March 31,**   | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                         | ** ** | **2007**             | ** ** | **2006** | ** ** |
| ** **                                                                         | ** ** | **Average  balance** | ** ** | **Interest** | ** ** | **Average  yld/cost** | ** ** | **Average  balance** | ** ** | **Interest** | ** ** | **Average  yld/cost** | ** ** |
| **ASSETS**                                                                         |       | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |
| **Interest-earning  assets:**                                                      |       |                 |       |   |   |   |   |   |   |   |   |   |   |
| Loans  receivable(1)                                                               |       | $                    | 487,698    |   | $ | 7,779 |   | 6.47 | % | $ | 498,329 |   | $ | 7,671 |   | 6.24 | % |
| Mortgage-backed  securities                                                        |       | 80,637               |       | 933 |   | 4.69 | % | 91,476 |   | 1,012 |   | 4.49 | % |
| Investment  securities(2)                                                          |       | 41,282               |       | 544 |   | 5.34 | % | 41,638 |   | 506 |   | 4.93 | % |
| Other  interest-earning assets(3)                                                  |       | 5,983                |       | 67 |   | 4.54 | % | 781 |   | 8 |   | 4.15 | % |
| Total  interest-earning assets                                                     |       | 615,600              |       | 9,323 |   | 6.14 | % | 632,224 |   | 9,197 |   | 5.90 | % |
| Non  interest-earning assets                                                       |       | 34,076               |       |   |   |   |   | 33,424 |   |   |   |   |   |
| Total assets                                                                       |       | $                    | 649,676    |   |   |   |   |   | $ | 665,648 |   |   |   |   |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                     |       |                 |       |   |   |   |   |   |   |   |   |   |   |
| **Interest-bearing  liabilities:**                                                 |       |                 |       |   |   |   |   |   |   |   |   |   |   |
| Deposits                                                                           |       | 476,374              |       | 3,230 |   | 2.75 | % | 460,705 |   | 2,248 |   | 1.98 | % |
| Advances from  the FHLB                                                            |       | 99,270               |       | 979 |   | 4.00 | % | 135,916 |   | 1,348 |   | 4.02 | % |
| Total  interest-bearing liabilities                                                |       | 575,644              |       | 4,209 |   | 2.97 | % | 596,621 |   | 3,596 |   | 2.44 | % |
| Non  interest-bearing liabilities                                                  |       | 7,917                |       |   |   |   |   | 6,542 |   |   |   |   |   |
| Total  liabilities                                                                 |       | 583,561              |       |   |   |   |   | 603,163 |   |   |   |   |   |
| Stockholders’  equity                                                         |       | 66,115               |       |   |   |   |   | 62,485 |   |   |   |   |   |
| Total  liabilities and stockholders’ equity                                   |       | $                    | 649,676    |   |   |   |   |   | $ | 665,648 |   |   |   |   |   |
| Net interest  income                                                               |       |                 |       | $ | 5,114 |   |   |   |   |   | $ | 5,601 |   |   |   |
| Interest rate  spread(4)                                                           |       |                 |       |   |   | 3.18 | % |   |   |   |   | 3.46 | % |
| Net yield on interest-earning  assets(5)                                           |       |                 |       |   |   | 3.37 | % |   |   |   |   | 3.59 | % |
| Ratio of average  interest-earning assets to average interest- bearing liabilities |       |                 |       |   |   | 107 | % |   |   |   |   | 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 $110,000 and $94,000 for the quarters ended March 31,  2007 and 2006, 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/VolumeAnalysis**

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,**                  | ** ** |
|-------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                          | ** ** | **2007 vs 2006  Increase (decrease) due to** | ** ** |
| ** **                          | ** ** | **Volume**                                                            | ** ** | **Rate** | ** ** | **Net** | ** ** |
| **Interest  income:**               |       |                                                                  |       |   |   |   |   |
| Loans  receivable, net              |       | $                                                                     | (795       | ) | $ | 903 |   | $ | 108 |   |
| Mortgage-backed  securities         |       | (328                                                                  | )          | 249 |   | (79 | ) |
| Investment  securities (1)          |       | (28                                                                   | )          | 66 |   | 38 |   |
| Other  interest-earning assets      |       | 57                                                                    |       | 2 |   | 59 |   |
| Total  interest-earning assets      |       | (1,094                                                                | )          | 1,220 |   | 126 |   |
| **Interest  expense:**              |       |                                                                  |       |   |   |   |   |
| Deposits                            |       | 79                                                                    |       | 903 |   | 982 |   |
| Advances from  the FHLB             |       | (361                                                                  | )          | (8 | ) | (369 | ) |
| Total  interest-bearing liabilities |       | (282                                                                  | )          | 895 |   | 613 |   |
| Net change in net  interest income  |       | $                                                                     | (812       | ) | $ | 325 |   | $ | (487 | ) |

 

----

| (1) | Tax equivalent adjustments to interest on investment securities were  $110,000 and $94,000 for the quarters ended March 31, 2007 and 2006,  respectively. Tax equivalent interest income is based upon a marginal  effective tax rate of 34%. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**TotalInterest Income**. Total interest income, on a taxableequivalent basis, increased by $126,000 or 1.37% to $9.3 million for thequarter ended March 31, 2007 compared with the first quarter of 2006. Theaverage balance of loans outstanding decreased between the two periods largelybecause of the sale of $16.3 million of previously purchased loans during thethird quarter of 2006. However, there was a 23 basis point increase in the averageyield earned on loans reflecting a rise in the yield on both existing loans and new loans added to the portfolioduring the intervening period in part due to two, 25 basis point increases inthe Bank’s prime rate during the period March 31, 2006 through March 31, 2007corresponding to identical increases in the federal funds interest rate of theFederal Reserve Bank. At March 31, 2007, the Bank had approximately $74.4million in loans that are indexed to the prime rate primarily consisting ofconstruction loans and commercial and consumer lines of credit.  Interest income from mortgage-backedsecurities was lower in the first three months of 2007 in comparison to thesame period of 2006 due to normal repayments, plus the sale of $5.0 million ofthese securities during the second quarter of 2006, offset by a 20 basis pointincrease in average yield in these securities as a result of purchases of $15.0million in higher yielding securities during the intervening period.

**TotalInterest Expense.**Total interest expense increased by$613,000 to $4.2 million during the three-month period ended March 31, 2007 ascompared with the first quarter of 2006. During 2006 and the first quarter of2007, the Bank raised the interest rates paid on many of its deposit productsdue to the competitive pricing environment in the Bank’s deposit market.Additionally during the intervening period, the Bank offered new products withhigher rates which also contributed to a shift in the deposit mix. Accordingly,the interest rate paid on deposits increased by 77 basis points. Interest onadvances from the Federal Home Loan Bank decreased by $0.4 million during thefirst quarter of 2007 versus the first quarter of 2006 as a result of a $36.6million decrease in the average balance of borrowings.

**Non-interestincome.**Total non-interest income was $1.5 million for thethree-month period ended March 31, 2007 compared with $681,000 for the sameperiod in 2006. The increase is mainly attributable a $777,000 settlement awardrelated to a lease fraud which occurred prior to 2003. Also, net gain on thesale of loans totaled $54,000 during the first quarter of 2007 while the gainduring the first quarter of 2006 totaled $9,000 mainly due to an increasebetween the two quarters in the dollar amount of loans sold.

14

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**Non-interestexpense.**Total non-interest expense increased by $220,000 to$4.6 million for the three months ended March 31, 2007 compared to the sameperiod in 2006. Other non-interest expense increased during the first quarterof 2007 as a result of a $270,000 expense related to the bankruptcy of one ofthe Company’s loan servicing agents. On February 2, 2007, the Company becameaware that one of its loan servicers which was servicing 43 loans totaling $15.4million had filed for protection and reorganization under Chapter 11 of theUnited States Bankruptcy Code on December 20, 2006.  On March 2, 2007 the bankruptcy filing wasconverted to a  Chapter 7 liquidation andthe Company shortly thereafter obtained the servicing and began to directlyservice the loans. At the present time, the Company is seeking recovery of allmonies collected and held on its behalf by the servicer and bankruptcy trustee.

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**LIQUIDITYAND CAPITAL RESOURCES**

**Liquidity**

The Company’s liquidityis a measure of its ability to fund loans, pay withdrawals of deposits, andother cash outflows in an efficient, cost-effective manner. The Company’sshort-term sources of liquidity include maturity, repayment and sales ofassets, excess cash and cash equivalents, new deposits, broker deposits, otherborrowings, and new advances from the Federal Home Loan Bank. There has been nomaterial adverse change during three-month period ended March 31, 2007 in theability of the Company and its subsidiaries to fund their operations.

At March 31, 2007,the Company had commitments outstanding under letters of credit of $2.0million, commitments to originate loans of $14.8 million, and commitments tofund undisbursed balances of closed loans and unused lines of credit of $57.0million. At March 31, 2007, the Bank had $3.3 million outstandingcommitments to sell loans. There has been no material change during the three months ended March31, 2007 in any of the Company’s other contractual obligations or commitmentsto make future payments.

**CapitalRequirements**

The Bank was incompliance with all of its capital requirements as of March 31, 2007.

###### **QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

###### **Asset and 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, 2007.

**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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**CRITICALACCOUNTING POLICIES**

Certaincritical accounting policies of the Company require the use of significant judgmentand accounting estimates in the preparation of the consolidated financialstatements and related data of the Company. These accounting estimates requiremanagement to make assumptions about matters that are highly uncertain at thetime the accounting estimate is made. Management believes that the mostcritical accounting policy requiring the use of accounting estimates andjudgment 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 $2,870,000 at March 31, 2007.

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**TF FINANCIAL CORPORATION AND SUBSIDIARIES**

**PART II**
| **ITEM 1.**  | ** ** | **LEGAL PROCEEDINGS**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|--------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|         |       | On February 2, 2007, the Company became aware that  one of its loan servicers which was servicing 43 loans totaling $15.4 million  had filed for protection and reorganization under Chapter 11 of the United  States Bankruptcy Code on December 20, 2006. On March 2, 2007 the bankruptcy  filing was converted to a Chapter 7 liquidation and the Company shortly  thereafter obtained the servicing and began to directly service the loans. At  the present time, the Company is seeking recovery of all monies collected and  held on its behalf by the servicer and bankruptcy trustee. At March 31, 2007,  the Company reported an expense of $270,000 related to this matter. |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| **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, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| **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, 2007:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |

 
| 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, 2007  - January 31, 2007   |       | 51,559                                               |       | $                                                | 30.12      |                                                                                                                       | —     |                                                                                                                        | 75,773     |   |
|                                  |       |                                                 |       |                                             |       |                                                                                                                       |       |                                                                                                                        |       |
| February 1, 2007  - February 28, 2007 |       | —                                               |       | $                                                | —     |                                                                                                                       | —     |                                                                                                                        | 75,773     |   |
|                                  |       |                                                 |       |                                             |       |                                                                                                                       |       |                                                                                                                        |       |
| March 1, 2007 - March  31, 2007       |       | —                                               |       | $                                                | —     |                                                                                                                       | —     |                                                                                                                        | 75,773     |   |

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

 

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**ITEM 4.****                                                                                                                             SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

TheAnnual Meeting of Stockholders (the “Meeting”) of the Company was held on April25, 2007. There were outstanding and entitled to vote at the Meeting 2,928,005shares of Common Stock of the Company. There were present at the meeting or by proxythe holders of 2,707,906 shares of Common Stock representing 92.49% of thetotal eligible votes to be cast. Proposal 1 was to elect two directors of theCompany. Proposal 2 was to ratify the appointment of the independent auditorfor the December 31, 2007 fiscal year. The result of the voting at the Meetingis as follows (percentages in terms of votes cast):

**Proposal 1**

| George A. Olsen      |   | FOR:      |   | 2,391,339 |   | PERCENT FOR:      |   | 88.31% |
|----------------------|--------|-----------|--------|-----------|--------|-------------------|--------|--------|
|                 |   | WITHHELD: |   | 316,567   |   | PERCENT WITHHELD: |   | 11.69% |
| Dennis L.  McCartney |   | FOR:      |   | 2,437,032 |   | PERCENT FOR:      |   | 90.00% |
|                 |   | WITHHELD: |   | 270,874   |   | PERCENT WITHHELD: |   | 10.00% |

 

**Proposal 2**

Ratification of theappointment of Grant Thornton, LLP as independent auditor for the Company forthe December 31, 2007 fiscal year.
| FOR:     |   | 2,658,388 |   | PERCENT FOR:     |   | 98.17% |
|----------|--------|-----------|--------|------------------|--------|--------|
| AGAINST: |   | 35,801    |   | PERCENT AGAINST: |   | 1.32%  |
| ABSTAIN: |   | 13,717    |   | PERCENT ABSTAIN  |   | 0.51%  |

 
| **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 11, 2007 |                                           |   | Kent C. Lufkin |
|   |         | President and CEO                              |
|   |         | (Principal Executive Officer)                  |
|   |         |                                           |
|   |         |                                           |
|   |         | /s/ Dennis R. Stewart                          |   |
| Date:  | May 11, 2007 |                                           |   | Dennis R. Stewart |
|   |         | Executive Vice President and                   |
|   |         | Chief Financial Officer                        |
|   |         | (Principal Financial & Accounting Officer) |
|        |              |                                                |        |  |  |  |

 

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