Table of Contents

** **

 

** **

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

**FORM 10-Q**

** **
| **x**                                             | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**  |
|---------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|
|                                              |       |                                                                                                     |
| **For the period ended  September 30, 2008** |
|                                              |       |                                                                                                     |
| **- or -**                                        |
|                                              |       |                                                                                                     |
| **o**                                             | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |

 

**For the transition period from                                   to                                    **

 

**Commission file number:  0-24168**

 

**TF FINANCIAL CORPORATION**

(Exact Name of Registrant as Specified in ItsCharter)

 

| **Delaware**                                   | ** ** | **74-2705050**                        |
|------------------------------------------------|------------|---------------------------------------|
| (State  or Other Jurisdiction of Incorporation |       | (I.R.S.  Employer Identification No.) |
| or  Organization)                              |       |                                  |

 

| **3 Penns Trail, Newtown, Pennsylvania**  | ** ** | **18940**   |
|-------------------------------------------|------------|-------------|
| (Address  of Principal Executive Offices) |       | (Zip  Code) |

 

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

 

Indicateby check mark whether the registrant: (1) has filed all reports requiredto 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 tosuch filing requirements for the past 90 days. YES x**  **NO o

 

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

 
| Large accelerated filer o                     |   | Accelerated filer o         |
|-----------------------------------------------|--------|----------------------------------|
|                                          |   |                             |
| Non-accelerated filer o                       |   | Smaller reporting company x |
| (Do not check if a smaller reporting company) |   |                             |

 

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

 

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock as of the latest practicable date: **November 7, 2008**

 
| **Class**                    | ** ** | **Outstanding**  | ** ** |
|------------------------------|------------|------------------|------------|
| $.10 par  value common stock |       | 2,670,530 shares |       |

 

 

 

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Tableof Contents

 

**CONTENTS**

 
| **PART I-CONSOLIDATED FINANCIAL INFORMATION**                                 | ** **                                                                                  |
|------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------|
|                                                                               |                                                                                        |   |
| Item  1.                                                                           | Consolidated Financial  Statements                                                          | 3 |
|                                                                               |                                                                                        |   |
| Item 2.                                                                            | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 14 |
|                                                                               |                                                                                        |   |
| Item 3.                                                                            | Quantitative and  Qualitative Disclosures about Market Risk                                 | 22 |
|                                                                               |                                                                                        |   |
| Item 4T.                                                                           | Controls and  Procedures                                                                    | 22 |
|                                                                               |                                                                                        |   |
| **PART II-OTHER  INFORMATION**                                                |                                                                                        |
|                                                                               |                                                                                        |   |
| Item  1.                                                                           | Legal Proceedings                                                                           | 23 |
|                                                                               |                                                                                        |   |
| Item 1A.                                                                           | Risk Factors                                                                                | 23 |
|                                                                               |                                                                                        |   |
| Item 2.                                                                            | Unregistered  Sales of Equity Securities and Use of Proceeds                                | 23 |
|                                                                               |                                                                                        |   |
| Item 3.                                                                            | Defaults Upon  Senior Securities                                                            | 23 |
|                                                                               |                                                                                        |   |
| Item 4.                                                                            | Submission of  Matters to a Vote of Security Holders                                        | 23 |
|                                                                               |                                                                                        |   |
| Item  5.                                                                           | Other Information                                                                           | 23 |
|                                                                               |                                                                                        |   |
| Item 6.                                                                            | Exhibits                                                                                    | 23 |
|                                                                               |                                                                                        |   |
| **Signatures**                                                                     | 24                                                                                          |
|                                                                               |                                                                                        |   |
| **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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Tableof Contents

 

**TFFinancial Corporation and Subsidiaries**

 

**CONSOLIDATEDBALANCE SHEETS**

 
| ** **                                                                                                                                                                                                                                                               | ** ** | **Unaudited  September 30,  2008** | ** ** | **Audited  December 31,  2007** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                                                                                                                                                                               | ** ** | **(in thousands)**                 | ** ** |
| ASSETS                                                                                                                                                                                                                                                                   |       |                                    |       |                                 |       |
| Cash and cash equivalents                                                                                                                                                                                                                                                |       | $                                       | 4,562      |                                 | $          | 5,680 |   |
| Investment securities available for sale—at  fair value                                                                                                                                                                                                             |       | 30,328                                  |       | 32,363                               |       |
| Investment securities held to maturity  (fair value of $0 and $246, respectively)                                                                                                                                                                                        |       | —                                  |       | 244                                  |       |
| Mortgage-backed securities available for  sale—at fair value                                                                                                                                                                                                        |       | 88,067                                  |       | 98,178                               |       |
| Mortgage-backed securities held to maturity  (fair value of $5,047 and $6,343, respectively)                                                                                                                                                                             |       | 4,912                                   |       | 6,160                                |       |
| Loans receivable, net                                                                                                                                                                                                                                                    |       | 548,263                                 |       | 517,027                              |       |
| Loans receivable held for sale                                                                                                                                                                                                                                           |       | —                                  |       | 1,040                                |       |
| Federal Home Loan Bank stock—at cost                                                                                                                                                                                                                                |       | 9,490                                   |       | 8,782                                |       |
| Accrued interest receivable                                                                                                                                                                                                                                              |       | 2,783                                   |       | 3,036                                |       |
| Premises and equipment, net                                                                                                                                                                                                                                              |       | 5,765                                   |       | 6,267                                |       |
| Goodwill                                                                                                                                                                                                                                                                 |       | 4,324                                   |       | 4,324                                |       |
| Bank-owned life insurance                                                                                                                                                                                                                                                |       | 16,351                                  |       | 15,881                               |       |
| Other assets                                                                                                                                                                                                                                                             |       | 3,268                                   |       | 2,691                                |       |
| TOTAL ASSETS                                                                                                                                                                                                                                                             |       | $                                       | 718,113    |                                 | 701,673    |   |
|                                                                                                                                                                                                                                                                     |       |                                    |       |                                 |       |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                                                                                                                |       |                                    |       |                                 |       |
| Liabilities                                                                                                                                                                                                                                                              |       |                                    |       |                                 |       |
| Deposits                                                                                                                                                                                                                                                                 |       | $                                       | 492,535    |                                 | $          | 472,394 |   |
| Borrowings from the Federal Home Loan Bank                                                                                                                                                                                                                               |       | 148,341                                 |       | 153,221                              |       |
| Advances from borrowers for taxes and  insurance                                                                                                                                                                                                                         |       | 1,531                                   |       | 2,193                                |       |
| Accrued interest payable                                                                                                                                                                                                                                                 |       | 3,829                                   |       | 3,415                                |       |
| Other liabilities                                                                                                                                                                                                                                                        |       | 2,465                                   |       | 2,607                                |       |
| Total liabilities                                                                                                                                                                                                                                                        |       | 648,701                                 |       | 633,830                              |       |
|                                                                                                                                                                                                                                                                     |       |                                    |       |                                 |       |
| Stockholders’ equity                                                                                                                                                                                                                                                |       |                                    |       |                                 |       |
| Preferred stock, no par value; 2,000,000  shares authorized at September 30, 2008 and December 31, 2007, none  issued                                                                                                                                          |       | —                                  |       | —                               |       |
| Common stock, $0.10 par value; 10,000,000  shares authorized, 5,290,000 shares issued, 2,640,530 and 2,671,083 shares  outstanding at September 30, 2008 and December 31, 2007,  respectively, net of shares in treasury 2,499,305 and 2,459,440, respectively |       | 529                                     |       | 529                                  |       |
| Additional paid-in capital                                                                                                                                                                                                                                               |       | 53,999                                  |       | 53,337                               |       |
| Unearned ESOP shares                                                                                                                                                                                                                                                     |       | (1,504                                  | )          | (1,595                               | )          |
| Treasury stock-at cost                                                                                                                                                                                                                                                   |       | (52,128                                 | )          | (51,216                              | )          |
| Retained earnings                                                                                                                                                                                                                                                        |       | 69,857                                  |       | 67,735                               |       |
| Accumulated other comprehensive loss                                                                                                                                                                                                                                     |       | (1,341                                  | )          | (947                                 | )          |
| Total stockholders’ equity                                                                                                                                                                                                                                          |       | 69,412                                  |       | 67,843                               |       |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                                                                                                          |       | $                                       | 718,113    |                                 | $          | 701,673 |   |

 

The accompanying notes are anintegral part of these statements

 

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**TF FinancialCorporation and Subsidiaries**

 

**CONSOLIDATEDSTATEMENTS OF INCOME**

**(Unaudited)**

 
| ** **                                           | ** ** | **For the three months  ended  September 30,** | ** ** | **For the nine months  ended  September 30,** | ** ** |
|------------------------------------------------------|------------|--------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                           | ** ** | **2008**                                                           | ** ** | **2007**                                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                           | ** ** | **(in thousands, except per share data)** | ** ** |
| Interest income                                      |       |                                                               |       |                                                              |       |   |   |   |   |
| Loans, including fees                                |       | $                                                                  | 8,257      |                                                              | $          | 8,262 |   | $ | 24,595 |   | $ | 24,027 |   |
| Mortgage-backed securities                           |       | 1,079                                                              |       | 1,054                                                             |       | 3,442 |   | 2,993 |   |
| Investment securities                                |       | 383                                                                |       | 393                                                               |       | 1,161 |   | 1,231 |   |
| Interest-bearing deposits and other                  |       | 6                                                                  |       | 11                                                                |       | 16 |   | 97 |   |
|                                                 |       |                                                               |       |                                                              |       |   |   |   |   |
| TOTAL INTEREST INCOME                                |       | 9,725                                                              |       | 9,720                                                             |       | 29,214 |   | 28,348 |   |
|                                                 |       |                                                               |       |                                                              |       |   |   |   |   |
| Interest expense                                     |       |                                                               |       |                                                              |       |   |   |   |   |
| Deposits                                             |       | 2,772                                                              |       | 3,530                                                             |       | 8,984 |   | 10,176 |   |
| Borrowings                                           |       | 1,576                                                              |       | 1,211                                                             |       | 4,779 |   | 3,246 |   |
|                                                 |       |                                                               |       |                                                              |       |   |   |   |   |
| TOTAL INTEREST EXPENSE                               |       | 4,348                                                              |       | 4,741                                                             |       | 13,763 |   | 13,422 |   |
|                                                 |       |                                                               |       |                                                              |       |   |   |   |   |
| NET INTEREST INCOME                                  |       | 5,377                                                              |       | 4,979                                                             |       | 15,451 |   | 14,926 |   |
|                                                 |       |                                                               |       |                                                              |       |   |   |   |   |
| Provision for loan losses                            |       | 150                                                                |       | —                                                            |       | 490 |   | — |   |
|                                                 |       |                                                               |       |                                                              |       |   |   |   |   |
| NET INTEREST INCOME AFTER PROVISION FOR  LOAN LOSSES |       | 5,227                                                              |       | 4,979                                                             |       | 14,961 |   | 14,926 |   |
|                                                 |       |                                                               |       |                                                              |       |   |   |   |   |
| Non-interest income                                  |       |                                                               |       |                                                              |       |   |   |   |   |
| Service fees, charges and other operating  income    |       | 504                                                                |       | 503                                                               |       | 1,740 |   | 1,564 |   |
| Bank-owned life insurance                            |       | 155                                                                |       | 153                                                               |       | 470 |   | 454 |   |
| Gain on sale of loans                                |       | 40                                                                 |       | 52                                                                |       | 199 |   | 169 |   |
| Gain on sale of foreclosed real estate               |       | —                                                             |       | —                                                            |       | 342 |   | — |   |
| Other income                                         |       | —                                                             |       | —                                                            |       | 197 |   | 777 |   |
|                                                 |       |                                                               |       |                                                              |       |   |   |   |   |
| TOTAL NON-INTEREST INCOME                            |       | 699                                                                |       | 708                                                               |       | 2,948 |   | 2,964 |   |
|                                                 |       |                                                               |       |                                                              |       |   |   |   |   |
| Non-interest expense                                 |       |                                                               |       |                                                              |       |   |   |   |   |
| Compensation and benefits                            |       | 2,648                                                              |       | 2,598                                                             |       | 7,863 |   | 7,946 |   |
| Occupancy and equipment                              |       | 691                                                                |       | 729                                                               |       | 2,159 |   | 2,133 |   |
| Professional fees                                    |       | 142                                                                |       | 146                                                               |       | 563 |   | 503 |   |
| Marketing and advertising                            |       | 144                                                                |       | —                                                            |       | 433 |   | 326 |   |
| Other operating                                      |       | 589                                                                |       | 584                                                               |       | 1,790 |   | 2,007 |   |
|                                                 |       |                                                               |       |                                                              |       |   |   |   |   |
| TOTAL NON-INTEREST EXPENSE                           |       | 4,214                                                              |       | 4,057                                                             |       | 12,808 |   | 12,915 |   |
|                                                 |       |                                                               |       |                                                              |       |   |   |   |   |
| INCOME BEFORE INCOME TAXES                           |       | 1,712                                                              |       | 1,630                                                             |       | 5,101 |   | 4,975 |   |
|                                                 |       |                                                               |       |                                                              |       |   |   |   |   |
| Income taxes                                         |       | 462                                                                |       | 442                                                               |       | 1,386 |   | 1,352 |   |
|                                                 |       |                                                               |       |                                                              |       |   |   |   |   |
| NET INCOME                                           |       | $                                                                  | 1,250      |                                                              | $          | 1,188 |   | $ | 3,715 |   | $ | 3,623 |   |
|                                                 |       |                                                               |       |                                                              |       |   |   |   |   |
| Earnings per share—basic                        |       | $                                                                  | 0.47       |                                                              | $          | 0.44 |   | $ | 1.40 |   | $ | 1.32 |   |
| Earnings per share—diluted                      |       | $                                                                  | 0.47       |                                                              | $          | 0.44 |   | $ | 1.39 |   | $ | 1.32 |   |
| Dividends paid per share                             |       | $                                                                  | 0.20       |                                                              | $          | 0.20 |   | $ | 0.60 |   | $ | 0.60 |   |

 

The accompanying notes are an integral partof these statements

 

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**TF FinancialCorporation and Subsidiaries**

 

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| ** **                                                                                         | ** ** | **For the nine months  ended  September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                                                         | ** ** | **2008**                                                          | ** ** | **2007** | ** ** |
| ** **                                                                                         | ** ** | **(in thousands)**                                           | ** ** |
| OPERATING ACTIVITIES                                                                               |       |                                                              |       |   |   |
| Net income                                                                                         |       | $                                                                 | 3,715      |   | $ | 3,623 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities Amortization of: |       |                                                              |       |   |   |
| Mortgage loan servicing rights                                                                     |       | 104                                                               |       | 44 |   |
| Deferred loan origination fees                                                                     |       | (1                                                                | )          | (82 | ) |
| Premiums and discounts on investment  securities, net                                              |       | 65                                                                |       | 67 |   |
| Premiums and discounts on mortgage-backed  securities, net                                         |       | (105                                                              | )          | 32 |   |
| Premiums and discounts on loans, net                                                               |       | 61                                                                |       | 95 |   |
| Discount on wholesale deposits                                                                     |       | —                                                            |       | 14 |   |
| Provision for loan losses                                                                          |       | 490                                                               |       | — |   |
| Depreciation of premises and equipment                                                             |       | 720                                                               |       | 666 |   |
| Increase in value of bank-owned life  insurance                                                    |       | (470                                                              | )          | (454 | ) |
| Restricted stock grant expense                                                                     |       | 271                                                               |       | 271 |   |
| Stock option expense                                                                               |       | 278                                                               |       | 293 |   |
| Stock-based benefit programs: ESOP                                                                 |       | 206                                                               |       | 253 |   |
| Proceeds from sale of loans originated for  sale                                                   |       | 13,435                                                            |       | 14,371 |   |
| Origination of loans held for sale                                                                 |       | (12,372                                                           | )          | (13,644 | ) |
| (Gain) loss on sale of                                                                             |       |                                                              |       |   |   |
| Mortgage loans available for sale                                                                  |       | (199                                                              | )          | (169 | ) |
| Real estate acquired through foreclosure                                                           |       | (342                                                              | )          | — |   |
| Expense (income) from mortgage loan  derivatives                                                   |       | 6                                                                 |       | (1 | ) |
| (Income) expense associated with forward  loan sales                                               |       | (6                                                                | )          | 2 |   |
| Decrease (increase) in                                                                             |       |                                                              |       |   |   |
| Accrued interest receivable                                                                        |       | 253                                                               |       | 64 |   |
| Other assets                                                                                       |       | (101                                                              | )          | (1,227 | ) |
| Increase in                                                                                        |       |                                                              |       |   |   |
| Accrued interest payable                                                                           |       | 414                                                               |       | 645 |   |
| Other liabilities                                                                                  |       | 55                                                                |       | 312 |   |
| NET CASH PROVIDED BY OPERATING ACTIVITIES                                                          |       | 6,477                                                             |       | 5,175 |   |
|                                                                                               |       |                                                              |       |   |   |
| INVESTING ACTIVITIES                                                                               |       |                                                              |       |   |   |
| Loan originations                                                                                  |       | (106,805                                                          | )          | (95,599 | ) |
| Loan principal payments                                                                            |       | 73,773                                                            |       | 68,190 |   |
| Principal repayments on mortgage-backed  securities held to maturity                               |       | 1,243                                                             |       | 1,224 |   |
| Principal repayments on mortgage-backed  securities available for sale                             |       | 16,342                                                            |       | 8,479 |   |
| Purchase of investment securities available  for sale                                              |       | (2,937                                                            | )          | (771 | ) |
| Purchase of mortgage-backed securities  available for sale                                         |       | (5,895                                                            | )          | (13,798 | ) |
| Proceeds from maturity of investment  securities available for sale                                |       | 4,000                                                             |       | 6,455 |   |
| Proceeds from maturities of investment  securities held to maturity                                |       | 245                                                               |       | 220 |   |
| Purchases of Federal Home Loan Bank stock,  net                                                    |       | (708                                                              | )          | (753 | ) |
| Purchase of premises and equipment                                                                 |       | (218                                                              | )          | (504 | ) |
| Proceeds from the sale of real estate  acquired through foreclosure                                |       | 1,272                                                             |       | — |   |
| Maturities of certificates of deposits in  other financial institutions                            |       | —                                                            |       | 40 |   |
| NET CASH USED IN INVESTING ACTIVITIES                                                              |       | (19,688                                                           | )          | (26,817 | ) |
|                                                                                                    |            |                                                                   |            |  |  |  |  |

 

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| ** **                                                                        | ** ** | **For the nine months ended  September 30,** | ** ** |
|-----------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                                        | ** ** | **2008**                                                              | ** ** | **2007** | ** ** |
| ** **                                                                        | ** ** | **(in thousands)**                                               | ** ** |
| FINANCING ACTIVITIES                                                              |       |                                                                  |       |   |   |
| Net increase (decrease) in customer  deposits                                     |       | 20,141                                                                |       | (5,569 | ) |
| Net (decrease) increase in short-term  borrowings from the Federal Home Loan Bank |       | (4,584                                                                | )          | 11,495 |   |
| Proceeds of long-term Federal Home Loan  Bank borrowings                          |       | 19,309                                                                |       | 26,026 |   |
| Repayment of long-term Federal Home Loan  Bank borrowings                         |       | (19,605                                                               | )          | (14,950 | ) |
| Net decrease in advances from borrowers for  taxes and insurance                  |       | (662                                                                  | )          | (156 | ) |
| Treasury stock acquired                                                           |       | (923                                                                  | )          | (3,239 | ) |
| Exercise of stock options                                                         |       | 10                                                                    |       | 1,814 |   |
| Tax benefit arising from stock compensation                                       |       | —                                                                |       | 363 |   |
| Common stock dividends paid                                                       |       | (1,593                                                                | )          | (1,643 | ) |
| NET CASH PROVIDED BY FINANCING ACTIVITIES                                         |       | 12,093                                                                |       | 14,141 |   |
|                                                                              |       |                                                                  |       |   |   |
| NET DECREASE IN CASH AND CASH EQUIVALENTS                                         |       | (1,118                                                                | )          | (7,501 | ) |
|                                                                              |       |                                                                  |       |   |   |
| Cash and cash equivalents at beginning of  period                                 |       | 5,680                                                                 |       | 12,364 |   |
|                                                                              |       |                                                                  |       |   |   |
| Cash and cash equivalents at end of period                                        |       | $                                                                     | 4,562      |   | $ | 4,863 |   |
|                                                                              |       |                                                                  |       |   |   |
| Supplemental disclosure of cash flow  information                                 |       |                                                                  |       |   |   |
| Cash paid for                                                                     |       |                                                                  |       |   |   |
| Interest on deposits and borrowings from  Federal Home Loan Bank                  |       | $                                                                     | 13,349     |   | $ | 12,777 |   |
| Income taxes                                                                      |       | $                                                                     | 1,007      |   | $ | 830 |   |
| Non-cash transactions                                                             |       |                                                                  |       |   |   |
| Capitalization of mortgage servicing rights                                       |       | $                                                                     | 174        |   | $ | 210 |   |
| Transfers from loans to real estate acquired  through foreclosure                 |       | $                                                                     | 1,236      |   | — |   |

 

The accompanying notes are anintegral part of these statements

 

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

 

**NOTE 1 -PRINCIPLES OF CONSOLIDATION**

 

The consolidated financial statements as of September 30,2008 (unaudited) and December 31, 2007 and for the three and nine-month periodsended September 30, 2008 and 2007 (unaudited) include the accounts of TFFinancial Corporation (the “Company”) and its wholly owned subsidiaries ThirdFederal Bank (the “Bank”), TF Investments Corporation and Penns TrailDevelopment Corporation. The Company’s business is conducted principallythrough the Bank. All intercompany accounts and transactions have beeneliminated in consolidation.

 

**NOTE 2 - BASISOF PRESENTATION**

 

The accompanying unaudited consolidatedfinancial statements were prepared in accordance with instructions for Form 10-Qand, therefore, do not include all of the disclosures or footnotes required byaccounting principles generally accepted in the United States of America (“GAAP”).In the opinion of management, all adjustments, consisting of normal recurringaccruals, necessary for fair presentation of the consolidated financialstatements have been included. The results of operations for the period ended September 30,2008 are not necessarily indicative of the results which may be expected forthe entire fiscal year or any other period. For further information, refer toconsolidated financial statements and footnotes thereto included in the Company’sAnnual Report on Form 10-K for the fiscal year ended December 31,2007.

 

**NOTE 3 - CONTINGENCIES**

 

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

 

**NOTE 4 - OTHERCOMPREHENSIVE INCOME**

 

The Company follows Statement of FinancialAccounting Standard (SFAS) No. 130, “Reporting Comprehensive Income.” SFASNo. 130 establishes standards to provide prominent disclosure ofcomprehensive income items. Comprehensive income is the change in equity of abusiness enterprise during a period from transactions and other events andcircumstances from non-owner sources. The components of other comprehensive (loss)income are as follows for the three months ended:

 
| ** **                                                                           | ** ** | **September 30, 2008** | ** ** |
|--------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                           | ** ** | **Before tax  amount**      | ** ** | **Tax  benefit  (expense)** | ** ** | **Net of tax  amount** | ** ** |
| ** **                                                                           | ** ** | **(in thousands)**          | ** ** |
| Unrealized losses on securities                                                      |       |                             |       |   |   |   |   |
| Unrealized holding losses arising during  period                                     |       | $                                | (602       | ) | $ | 203 |   | $ | (399 | ) |
| Pension plan benefit adjustment related to  prior service costs and actuarial losses |       | 28                               |       | (9 | ) | 19 |   |
|                                                                                 |       |                             |       |   |   |   |   |
| Other comprehensive loss, net                                                        |       | $                                | (574       | ) | $ | 194 |   | $ | (380 | ) |

 
| ** **                                                                           | ** ** | **September 30, 2007** | ** ** |
|--------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                           | ** ** | **Before tax  amount**      | ** ** | **Tax  expense** | ** ** | **Net of tax  amount** | ** ** |
| ** **                                                                           | ** ** | **(in thousands)**          | ** ** |
| Unrealized gains on securities                                                       |       |                             |       |   |   |   |   |
| Unrealized holding gains arising during  period                                      |       | $                                | 1,561      |   | $ | (531 | ) | $ | 1,030 |   |
| Pension plan benefit adjustment related to  prior service costs and actuarial losses |       | 27                               |       | (9 | ) | 18 |   |
|                                                                                 |       |                             |       |   |   |   |   |
| Other comprehensive income, net                                                      |       | $                                | 1,588      |   | $ | (540 | ) | $ | 1,048 |   |

 

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The components of other comprehensive (loss) income are as follows forthe nine months ended:

 
| ** **                                                                           | ** ** | **September 30, 2008** | ** ** |
|--------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                           | ** ** | **Before tax  amount**      | ** ** | **Tax  benefit  (expense)** | ** ** | **Net of tax  amount** | ** ** |
| ** **                                                                           | ** ** | **(in thousands)**          | ** ** |
| Unrealized losses on securities                                                      |       |                             |       |   |   |   |   |
| Unrealized holding losses arising during  period                                     |       | $                                | (680       | ) | $ | 230 |   | $ | (450 | ) |
| Pension plan benefit adjustment related to  prior service costs and actuarial losses |       | 85                               |       | (29 | ) | 56 |   |
|                                                                                 |       |                             |       |   |   |   |   |
| Other comprehensive loss, net                                                        |       | $                                | (595       | ) | $ | 201 |   | $ | (394 | ) |

 
| ** **                                                                           | ** ** | **September 30, 2007** | ** ** |
|--------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                           | ** ** | **Before tax  amount**      | ** ** | **Tax  expense** | ** ** | **Net of tax  amount** | ** ** |
| ** **                                                                           | ** ** | **(in thousands)**          | ** ** |
| Unrealized gains on securities                                                       |       |                             |       |   |   |   |   |
| Unrealized holding gains arising during  period                                      |       | $                                | 689        |   | $ | (236 | ) | $ | 453 |   |
| Pension plan benefit adjustment related to  prior service costs and actuarial losses |       | 82                               |       | (28 | ) | 54 |   |
|                                                                                 |       |                             |       |   |   |   |   |
| Other comprehensive income, net                                                      |       | $                                | 771        |   | $ | (264 | ) | $ | 507 |   |

 

**NOTE 5 -EARNINGS PER SHARE**

 

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

 
| ** **                                                                  | ** ** | **Three months ended September 30, 2008** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                  | ** ** | **Income  (numerator)**                                            | ** ** | **Weighted  average  shares  (denominator)** | ** ** | **Per share  Amount** | ** ** |
| Basic earnings per share                                                    | ** ** | ** **                                                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income available to common stockholders                                     |       | $                                                                  | 1,250      |   | 2,646,506 |   | $ | 0.47 |   |
| Effect of dilutive securities                                               |       |                                                               |       |   |   |   |   |
| Stock options and grants                                                    |       | —                                                             |       | 10,482 |   | — |   |
|                                                                        |       |                                                               |       |   |   |   |   |
| Diluted earnings per share                                                  |       |                                                               |       |   |   |   |   |
| Income available to common stockholders  plus effect of dilutive securities |       | $                                                                  | 1,250      |   | 2,656,988 |   | $ | 0.47 |   |

 
| ** **                                                                  | ** ** | **Nine months ended September 30, 2008** | ** ** |
|-----------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                                  | ** ** | **Income  (numerator)**                                           | ** ** | **Weighted  average  shares  (denominator)** | ** ** | **Per share  Amount** | ** ** |
| Basic earnings per share                                     | ** ** | ** **                                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income available to common stockholders                                     |       | $                                                                 | 3,715      |   | 2,659,212 |   | $ | 1.40 |   |
| Effect of dilutive securities                                               |       |                                                              |       |   |   |   |   |
| Stock options and grants                                                    |       | —                                                            |       | 3,995 |   | (0.01 | ) |
|                                                                        |       |                                                              |       |   |   |   |   |
| Diluted earnings per share                                                  |       |                                                              |       |   |   |   |   |
| Income available to common stockholders  plus effect of dilutive securities |       | $                                                                 | 3,715      |   | 2,663,207 |   | $ | 1.39 |   |

 

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There were 204,008 options to purchase shares ofcommon stock at an average price range of $24.71 to $34.14 per share which wereoutstanding for the three months and nine months ended September 30, 2008that were not included in the computation of diluted earnings per share becausethe options’ exercise prices were greater than the average market price of thecommon shares.

 
| ** **                                                                  | ** ** | **Three months ended September 30, 2007** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                  | ** ** | **Income  (numerator)**                                            | ** ** | **Weighted  average  shares  (denominator)** | ** ** | **Per share  Amount** | ** ** |
| Basic earnings per share                                                    |       |                                                               |       |   |   |   |   |
| Income available to common stockholders                                     |       | $                                                                  | 1,188      |   | 2,715,364 |   | $ | 0.44 |   |
| Effect of dilutive securities                                               |       |                                                               |       |   |   |   |   |
| Stock options and grants                                                    |       | —                                                             |       | — |   | — |   |
|                                                                        |       |                                                               |       |   |   |   |   |
| Diluted earnings per share                                                  |       |                                                               |       |   |   |   |   |
| Income available to common stockholders  plus effect of dilutive securities |       | $                                                                  | 1,188      |   | 2,715,364 |   | $ | 0.44 |   |

 
| ** **                                                                  | ** ** | **Nine months ended September 30, 2007** | ** ** |
|-----------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                                  | ** ** | **Income  (numerator)**                                           | ** ** | **Weighted  average  shares  (denominator)** | ** ** | **Per share  Amount** | ** ** |
| Basic earnings per share                                                    |       |                                                              |       |   |   |   |   |
| Income available to common stockholders                                     |       | $                                                                 | 3,623      |   | 2,736,639 |   | $ | 1.32 |   |
| Effect of dilutive securities                                               |       |                                                              |       |   |   |   |   |
| Stock options and grants                                                    |       | —                                                            |       | 1,554 |   | — |   |
|                                                                        |       |                                                              |       |   |   |   |   |
| Diluted earnings per share                                                  |       |                                                              |       |   |   |   |   |
| Income available to common stockholders  plus effect of dilutive securities |       | $                                                                 | 3,623      |   | 2,738,193 |   | $ | 1.32 |   |

 

There were 183,918 options to purchase shares ofcommon stock at an average price range of $28.00 to $34.14 per share which wereoutstanding for the three months and nine months ended September 30, 2007that were not included in the computation of diluted earnings per share becausethe options’ exercise prices were greater than the average market price of thecommon shares.

 

**NOTE 6 - FAIR VALUE MEASUREMENTS**

 

On January 1, 2008, the Company adopted FinancialAccounting Standards Board (FASB) Statement No. 157 (SFAS 157), “FairValue Measurements”. SFAS 157 defines fair value, establishes a framework formeasuring fair value and expands the related disclosure requirements. SFAS 157clarifies that fair value is an exit price, representing the amount that wouldbe received to sell an asset or paid to transfer a liability in an orderlytransaction between market participants. SFAS 157 establishes a fair valuemeasurement hierarchy for inputs in valuation techniques used to measure fairvalue. The hierarchy gives the highest priority to unadjusted quoted prices inactive markets for identical assets or liabilities (level 1 measurements) andthe lowest priority to unobservable inputs (level 3 measurements).

 

The fair value hierarchy levels are summarized below:

 

·                  Level 1 inputs are quoted prices (unadjusted) in activemarkets for identical assets or liabilities.

 

·                  Level 2 inputs are inputs that are observable for the assetor liability, either directly or indirectly.

 

·                  Level 3 inputs are unobservable and contain assumptions ofthe party fair valuing the asset or liability.

 

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

 
| ** **                                     | ** ** | **Quoted  Prices in  Active  Markets  for  Identical  Assets  (Level 1)** | ** ** | **Significant  Other  Observable  Inputs  (Level 2)** | ** ** | **Significant  Unobservable  Inputs  (Level 3)** | ** ** | **Balance as of  September  30,  2008** | ** ** |
|------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|-------------------------------------------------------|------------|---------------------------------------------------|------------|
| **Assets**                                     | ** ** | ** **                                                                          | ** ** | ** **                                                 | ** ** | ** **                                            | ** ** | ** **                                        | ** ** |
| Investment securities available for sale       |       | $                                                                                   | 176        |                                                       | $          | 30,152                                                |       | $                                                 | —     |   | $ | 30,328 |   |
| Mortgage-backed securities available for  sale |       | —                                                                              |       | 88,067                                                     |       | —                                                |       | 88,067                                            |       |
| Impaired loans                                 |       | —                                                                              |       | —                                                     |       | 2,076                                                 |       | 2,076                                             |       |
|                                                |            |                                                                                     |            |                                                            |            |                                                       |            |                                                   |            |  |  |  |  |

 

Investment securities available for sale andmortgage-backed securities available for sale are valued primarily by a thirdparty pricing agent. Active listed equities are generally classified withinLevel 1 of the fair value hierarchy. Government-sponsored agency debt securities and corporate bonds areprimarily priced through a multi-dimensional relational model, a level 2hierarchy, which incorporates dealer quotes and other market informationincluding, defined sector breakdown, benchmark yields, base spread, yield tomaturity, and corporate actions. Municipal securities are also measured within the level 2 hierarchyusing inputs with a series of matrices that reflect benchmark yields, ratingsupdates, and spread adjustments. Mortgage-backed securities include FNMA andFHLMC certificates and real estate mortgage investment conduits which arevalued under a level 2 hierarchy using a matrix correlation to benchmarkyields, spread analysis, and prepayment speeds.

 

Impaired loans are evaluated and valued atthe time the loan is identified as impaired, at the lower of the recordedinvestment in the loan or market value. The loans identified as impaired arereal estate secured.  Market value isdetermined by using the value of the collateral securing the loans and istherefore classified as a level 3 hierarchy. The value of the real estate is determined by qualified independentlicensed appraisers contracted by the Company to perform the assessment.  The appraised value is then discounted basedupon management’s experience, which includes estimated disposal costs,understanding of the customer and the customer’s business as well as economicconditions.  Impaired loans are reviewedand evaluated on a quarterly basis for additional impairment and adjustedaccordingly, based upon the pertinent conditions.

 

The Company also measures certain otherfinancial assets at fair value on a non-recurring basis in accordance withGAAP.  Adjustments may result fromapplication of lower-of-cost or fair value accounting.

 

**NOTE 7 - STOCKBASED COMPENSATION**

 

The Company has stock benefit plans that allow theCompany to grant options and restricted stock to employees and directors. Theawards, which have a term of up to 10 years when issued, vest over a threeto five year period. The exercise price of each award equals the market priceof the Company’s stock on the date of the grant. At September 30 2008,there was $141,000 of total unrecognized compensation cost, net of estimatedforfeitures, related to non-vested awards under the Plan. That cost is expectedto be recognized over a weighted average period of 6 months.

 

Stock-based compensation expense included in netincome related to stock options was $92,000 and $98,000 for the quarters ended September 30,2008 and 2007 respectively, resulting in a tax benefit of $28,000 and $30,000,respectively. Stock-based compensation expense included in net income relatedto stock options was $278,000 and $293,000 for the nine months ended September 30,2008 and 2007 respectively, resulting in a tax benefit of $86,000 and $90,000,respectively.

 

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Option activity under the Company’s stock optionplan as of September 30, 2008 is as follows:

 
| ** **                                      | ** ** | **2008**                   | ** ** |
|-------------------------------------------------|------------|----------------------------|------------|
| ** **                                      | ** ** | **Number  of shares** | ** ** | **Weighted  average  exercise  price per  share** | ** ** | **Weighted  average  remaining  contractual  term (in  years)** | ** ** | **Aggregate  intrinsic  value ($ 000)** | ** ** |
| Outstanding at January 1, 2008             |       | 252,576                    |       | $ | 26.56 |   |   |   |   |   |
| Options granted                                 |       | —                     |       | — |   |   |   |   |   |
| Options exercised                               |       | (535                       | )          | 18.12 |   |   |   |   |   |
| Options forfeited                               |       | (6,542                     | )          | 28.30 |   |   |   |   |   |
| Options expired                                 |       | —                     |       | — |   |   |   |   |   |
| Outstanding at September 30, 2008          |       | 245,499                    |       | $ | 26.54 |   | 2.91 |   | $ | 242 |   |
| Options exercisable at September 30,  2008 |       | 185,341                    |       | $ | 25.84 |   | 2.92 |   | $ | 242 |   |

 

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

 

The aggregate intrinsic value of options exercisedduring the nine months ended September 30, 2008 and 2007 was $2,200 and$1,478,000, respectively. Exercise of stock options during the nine monthsended September 30, 2008 and 2007 resulted in cash receipts of $9,700 and$1,814,000, respectively.

 

Stock-based compensation expense included innet income related to restricted stock grants was $90,000 for each of the quartersended September 30, 2008 and 2007. Stock-based compensation expenseincluded in net income related to the Company’s employee stock ownership plantotaled $48,000 and $69,000 for the quarters ended September 30, 2008 and2007, respectively. Stock-based compensation expense included in net incomerelated to restricted stockgrants was $271,000 for each of the nine month periods ended September 30,2008 and 2007. Stock-based compensation expense included in net income relatedto the Company’s employee stock ownership plan totaled $157,000 and $207,000for the nine month periods ended September 30, 2008 and 2007,respectively.

 

**NOTE 8 - EMPLOYEE BENEFIT PLANS**

 

Net periodic defined benefit pension cost includedthe following (in thousands):

 
| ** **                              | ** ** | **Three months ended  September 30,** | ** ** |
|-----------------------------------------|------------|------------------------------------------------------|------------|
| ** **                              | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
|                                    |       |                                                 |       |   |   |
| Components of net periodic benefit cost |       |                                                 |       |   |   |
| Service cost                            |       | $                                                    | 98         |   | $ | 84 |   |
| Interest cost                           |       | 62                                                   |       | 53 |   |
| Expected return on plan assets          |       | (106                                                 | )          | (100 | ) |
| Amortization of prior service cost      |       | 8                                                    |       | 16 |   |
| Recognized net actuarial (gain) loss    |       | 20                                                   |       | 11 |   |
|                                    |       |                                                 |       |   |   |
| Net periodic benefit cost               |       | $                                                    | 82         |   | $ | 64 |   |

 

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| ** **                              | ** ** | **Nine months ended  September 30,** | ** ** |
|-----------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                              | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
|                                    |       |                                                |       |   |   |
| Components of net periodic benefit cost |       |                                                |       |   |   |
| Service cost                            |       | $                                                   | 293        |   | $ | 252 |   |
| Interest cost                           |       | 185                                                 |       | 158 |   |
| Expected return on plan assets          |       | (316                                                | )          | (299 | ) |
| Amortization of prior service cost      |       | 23                                                  |       | 47 |   |
| Recognized net actuarial loss           |       | 62                                                  |       | 35 |   |
|                                    |       |                                                |       |   |   |
| Net periodic benefit cost               |       | $                                                   | 247        |   | $ | 193 |   |

 

The employer contributionmade for the nine months ended September 30, 2008 and 2007 was $218,000and $1,107,000, respectively.

 

**NOTE 9 -NEW ACCOUNTING PRONOUNCEMENTS**

 

In May 2008, the Financial Accounting StandardsBoard (FASB) Issued Statement No. 162 (SFAS 162), “The Hierarchy ofGenerally Accepted Accounting Principles”. This statement identifies thesources of accounting principles and the framework for selecting the accountingprinciples to be used in the preparation of financial statements prepared inconformity with generally accepted accounting principles (GAAP) in the UnitedStates. The statement is not expected to result in changes to current practicesnor have a material effect on the Company.

 

In February 2008, FASB issued FASB Staff Position (FSP) FAS 140-3, “Accounting forTransfers of Financial Assets and Repurchase Financing Transactions”, whichprovides guidance on accounting for a transfer of a financial asset and arepurchase financing. The FSP presumes that an initial transfer of a financialasset and a repurchase financing are considered part of the same arrangementunder FASB Statement No. 140 “Accounting for Transfers and Servicing ofFinancial Assets and Extinguishments of Liabilities”. However, if certaincriteria are met, the initial transfer and repurchase shall not be evaluated asa linked transaction and therefore evaluated separately under FASB 140. The FSPis effective for repurchase financing in which the initial transfer is enteredin fiscal years beginning after November 15, 2008. The Company does not anticipate a material impact on its consolidatedfinancial statements as a result of this statement.

 

In February 2008,FASB issued FASB Staff Position (FSP) FAS 157-2 which provides a one-yeardeferral of the effective date for SFAS 157 with respect to all nonfinancialassets and liabilities, except those items recognized or disclosed in thefinancial statements on a recurring basis (that is at least annually). The FSPis effective upon issuance.

 

In March 2008, FASB Issued Statement No. 161 (SFAS 161), “DisclosuresAbout Derivative Instruments and Hedging Activities an amendment of FASBStatement 133”. The statement requires expanded disclosures about an entity’sderivative instruments and hedging activities but does not change SFAS 133’sscope or accounting. This statement iseffective for fiscal years and interim periods beginning after November 15,2008 with early adoption permitted. The Company does not anticipate a materialimpact as a result of this statement on its consolidated financial statements.

 

In April 2008, FASB issued Statement FSP 142-3 which amends the list of factorsan entity should consider in developing renewal of extension assumptions usedin determining the useful life of recognized intangible assets under SFAS 142 “Goodwilland Other Intangibles”. The new guidance applies to intangible assets that areacquired individually or with a group of other assets and to intangible assetsacquired in both business combinations and asset acquisitions.  The FSP is effective for financial statementsissued for fiscal years beginning after December 15, 2008 and interimperiods within those fiscal years.  Theguidance must be applied prospectively only to intangible assets acquired afterthe FSP’s effective date.

 

In September 2008 FASB issued FSP FAS 133-1 and FIN 45-4, “Disclosuresabout Credit Derivatives and Certain Guarantees,” to improve disclosures aboutcredit-indexed derivative instruments (credit derivatives) and financialguarantees. The FSP requires companies that sell credit derivatives to discloseinformation that will enable financial statement users to assess the potentialeffect of the credit derivatives on the seller’s financial position, financialperformance, and cash flows. FSP FAS 133-1 and FIN 45-4 is effective forinterim and annual periods ending after November 15, 2008. The Company does not anticipate a materialimpact as a result of this statement on its consolidated financial statements.

 

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In September 2008, the SEC and FASB jointlyissued a press release clarifying fair value measurement practices in thecurrent market environment.  The keyissues discussed in the press release include: the use of internal assumptionsto estimate fair value when no relevant market data exists, use of market(broker) quotes to measure fair value, consideration of how transactions fromdistressed sales or inactive markets impact fair value, and factors to considerin the assessment of other-than-temporary impairment.

 

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**TF FINANCIAL CORPORATION ANDSUBSIDIARIES**

 

**ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALPOSITION 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 and servicesof the Company and the perceived overall value of these products and servicesby users, including the features, pricing and quality compared to competitors’products and services; the willingness of users to substitute competitors’products and services for the Company’s products and services; the success ofthe Company in gaining regulatory approval of its products and services, whenrequired; the impact of changes in financial services’ laws and regulations(including laws concerning taxes, banking, securities and insurance);technological changes, acquisitions; changes in consumer spending and savinghabits; and the success of the Company at managing the risks involved in theforegoing.

 

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

 

**Financial Position**

 

TheCompany’s total assets at September 30, 2008 and December 31, 2007were $718.1 million and $701.7 million, respectively, an increase of $16.4million, or 2.3% during the nine-month period. Investment securities availablefor sale decreased $2.0 million due to maturities of $4.0 million and a decreasein the fair value of the securities of $0.9 million offset by purchases of $2.9million. Mortgage-backed securities available for sale decreased by $10.1million due to principal repayments received of $16.3 million offset bypurchases of $5.9 million, an increase in the fair value of the securities of$0.2 million and net discount amortization of $0.1 million.  Mortgage-backed securities held to maturitydecreased by $1.2 million mainly as a result of principal repayments.

 

Loansreceivable increased by $30.2 million during the first nine months of 2008.Consumer and single-family residential mortgage loans of $58.0 million andcommercial loans of $48.8 were originated during the nine months of 2008.Principal repayments of loans receivable were $73.8 million. The Company had$78.1 million of prime-rate based loans at September 30, 2008.  Loans originated for sale during the firstnine months of 2008 totaled $12.4 million, and there were $13.4 million inproceeds from the sale of loans in the secondary market during this period.

 

Totalliabilities increased by $14.9 million during the first nine months of 2008.Deposit balances grew by $20.1 million which included an increase of $29.2 million in retail certificates during this timeperiod. Non-interest checking and money markets accounts increased by $5.4million while interest checking and savings accounts decreased by $14.5million. At September 30, 2008, the Bank had $61.5 million of depositsindexed to the yield of the Merrill Lynch Ready Asset Money Market Fund.Advances from the Federal Home Loan Bank decreased by $4.9 million in the firstnine months of 2008, the result of a $4.6 million decrease in short-termborrowings and scheduled amortization payments of $19.6 million offset by $19.3million in new long term advances.

 

Totalconsolidated stockholder’s equity of the Company was $69.4 million or 9.7 % oftotal assets at September 30, 2008. During the first nine months of 2008,the Company repurchased 40,115 shares of its common stock and issued 535 sharespursuant to the exercise of stock options. At September 30, 2008, therewere approximately 124,000 shares available for repurchase under the previouslyannounced share repurchase plan.

 

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Duringthe second quarter of 2008, the Company closed its branch office onQuakerbridge Road in Mercer County, New Jersey, and reassigned approximately $9million in deposits to its nearby offices in Ewing and Hamilton, New Jersey.

 

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

######  

At the end of the first quarter of 2008, the Company completedforeclosure proceedings on two parcels of commercial real estate with acombined loan balance of $1.5 million. These loans were non-performing at December 31,2007. One parcel has been recorded as real estate owned totaling $306,000 andwas included in other assets in the consolidated balance sheet at September 30,2008. As a result of this specific foreclosure, the Bank recorded a charge offin the amount of $347,000. During the foreclosure proceedings of the secondproperty, a bid from an unrelated party was made which satisfied theoutstanding contractual obligations of the borrower with the Bank. Thisforeclosure and simultaneous sale resulted in a $342,000 gain which is includedin non-interest income of the Company during 2008. The Bank does not anticipateany further charges against the allowance as a result of the foregoingdiscussed foreclosures. During the first nine months of 2008 and 2007, theCompany’s provision for loan losses was $490,000 and $0, respectively. Withrespect to each of the remaining non-performing loans, all of which are realestate secured, the Bank is taking appropriate steps to resolve the individualsituations.

 

Thefollowing table sets forth information regarding the Company’s asset quality(dollars in thousands):

 
| ** **                                                  | ** ** | **September 30,  2008** | ** ** | **December 31,  2007** | ** ** | **September 30,  2007** | ** ** |
|-------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|------------------------------|------------|
| ** **                                                  | ** ** | ** **                   | ** ** | ** **                  | ** ** | ** **                   | ** ** |
| Non-performing loans                                        |       | $                            | 2,615      |                        | $          | 5,358                        |       | $ | 2,780 |   |
| Ratio of non-performing loans to gross loans                |       | 0.47                         | %          | 1.03                        | %          | 0.54                         | %          |
| Ratio of non-performing loans to total assets               |       | 0.36                         | %          | 0.76                        | %          | 0.41                         | %          |
| Ratio of total non-performing assets to total  assets       |       | 0.41                         | %          | 0.76                        | %          | 0.41                         | %          |
| Ratio of allowance for loan losses to total loans           |       | 0.54                         | %          | 0.55                        | %          | 0.55                         | %          |
| Ratio of allowance for loan losses to  non-performing loans |       | 114.6                        | %          | 53.00                       | %          | 102.48                       | %          |
|                                                             |            |                              |            |                             |            |                              |            |  |  |  |

 

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

 
| ** **                                | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------------------------|------------|----------|------------|----------|------------|
| Beginning balance, January 1,        |       | $        | 2,842      |     | $          | 2,865 |   |
| Provision                                 |       | 490      |       | —   |       |
| Less: charge-off’s (recoveries), net |       | 336      |       | 16       |       |
| Ending balance, September 30,        |       | 2,996    |       | 2,849    |       |
|                                           |            |          |            |          |            |  |  |

 

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**RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2008 AND2007**

 

**Net Income**. The Company recorded net income of $1,250,000, or$0.47 per diluted share, for the three months ended September 30, 2008 ascompared to net income of $1,188,000, or $0.44 per diluted share, for the threemonths ended September 30, 2007.

 

### **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, for thethree-month periods indicated.

 
| ** **                                                                        | ** ** | **September 30,** | ** ** |
|-----------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                        | ** ** | **2008**               | ** ** | **2007** | ** ** |
| ** **                                                                        | ** ** | **Average  balance**   | ** ** | **Interest** | ** ** | **Average  yld/cost** | ** ** | **Average  balance** | ** ** | **Interest** | ** ** | **Average  yld/cost** | ** ** |
| **ASSETS**                                                                        |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| **Interest-earning assets:**                                                      |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Loans receivable(1)                                                               |       | $                      | 547,748    |   | $ | 8,257 |   | 6.00 | % | $ | 506,471 |   | $ | 8,262 |   | 6.47 | % |
| Mortgage-backed securities                                                        |       | 93,100                 |       | 1,079 |   | 4.61 | % | 87,723 |   | 1,054 |   | 4.77 | % |
| Investment securities(2)                                                          |       | 40,862                 |       | 489 |   | 4.76 | % | 36,039 |   | 500 |   | 5.50 | % |
| Other interest-earning assets(3)                                                  |       | 1,102                  |       | 6 |   | 2.17 | % | 901 |   | 11 |   | 4.84 | % |
| Total interest-earning assets                                                     |       | 682,812                |       | 9,831 |   | 5.73 | % | 631,134 |   | 9,827 |   | 6.18 | % |
| Non interest-earning assets                                                       |       | 36,301                 |       |   |   |   |   | 35,964 |   |   |   |   |   |
| Total assets                                                                      |       | $                      | 719,113    |   |   |   |   |   | $ | 667,098 |   |   |   |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                     |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| **Interest-bearing liabilities:**                                                 |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Deposits                                                                          |       | 482,521                |       | 2,772 |   | 2.29 | % | 476,021 |   | 3,530 |   | 2.94 | % |
| Borrowings from the FHLB                                                          |       | 158,385                |       | 1,576 |   | 3.96 | % | 113,630 |   | 1,211 |   | 4.23 | % |
| Total interest-bearing liabilities                                                |       | 640,906                |       | 4,348 |   | 2.70 | % | 589,651 |   | 4,741 |   | 3.19 | % |
| Non interest-bearing liabilities                                                  |       | 8,552                  |       |   |   |   |   | 10,893 |   |   |   |   |   |
| Total liabilities                                                                 |       | 649,458                |       |   |   |   |   | 600,544 |   |   |   |   |   |
| Stockholders’ equity                                                         |       | 69,655                 |       |   |   |   |   | 66,554 |   |   |   |   |   |
| Total liabilities and stockholders’ equity                                   |       | $                      | 719,113    |   |   |   |   |   | $ | 667,098 |   |   |   |   |   |
| Net interest income                                                               |       |                   |       | $ | 5,483 |   |   |   |   |   | $ | 5,086 |   |   |   |
| Interest rate spread(4)                                                           |       |                   |       |   |   | 3.03 | % |   |   |   |   | 2.99 | % |
| Net yield on interest-earning assets(5)                                           |       |                   |       |   |   | 3.19 | % |   |   |   |   | 3.20 | % |
| Ratio of average interest-earning assets to average interest-bearing  liabilities |       |                   |       |   |   | 107 | % |   |   |   |   | 107 | % |

 

----

| (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 $106,000 and $107,000  for the quarter ended September 30, 2008 and 2007, respectively. Tax  equivalent interest income is based upon a marginal effective tax rate of  34%. |
| (3) |   | Includes  interest-bearing deposits in other banks.                                                                                                                                                                                                |
| (4) |   | Interest rate spread  represents the difference between the average yield on interest-earning  assets and the average cost of interest-bearing liabilities.                                                                                        |
| (5) |   | Net yield on  interest-earning assets represents net interest income as a percentage of  average interest-earning assets.                                                                                                                          |

 

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**Rate/Volume Analysis**

 

Thefollowing table presents, for the periods indicated, the change in interestincome and interest expense (in thousands) attributed to (i) changes involume (changes in the weighted average balance of the total interest earningasset and interest bearing liability portfolios multiplied by the prior yearrate), and (ii) changes in rate (changes in rate multiplied by prior yearvolume). Changes attributable to the combined impact of volume and rate havebeen allocated proportionately based on the absolute value of changes due tovolume and changes due to rate.

 
| ** **                         | ** ** | **Three months ended September 30,**              | ** ** |
|------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                         | ** ** | **2008 vs 2007  Increase (decrease) due to** | ** ** |
| ** **                         | ** ** | **Volume**                                                            | ** ** | **Rate** | ** ** | **Net** | ** ** |
| **Interest income:**               |       |                                                                  |       |   |   |   |   |
| Loans receivable, net              |       | $                                                                     | 2,529      |   | $ | (2,534 | ) | $ | (5 | ) |
| Mortgage-backed securities         |       | 195                                                                   |       | (170 | ) | 25 |   |
| Investment securities (1)          |       | 261                                                                   |       | (272 | ) | (11 | ) |
| Other interest-earning assets      |       | 12                                                                    |       | (17 | ) | (5 | ) |
| Total interest-earning assets      |       | 2,997                                                                 |       | (2,993 | ) | 4 |   |
| **Interest expense:**              |       |                                                                  |       |   |   |   |   |
| Deposits                           |       | 317                                                                   |       | (1,075 | ) | (758 | ) |
| Borrowings from the FHLB           |       | 842                                                                   |       | (477 | ) | 365 |   |
| Total interest-bearing liabilities |       | 1,159                                                                 |       | (1,552 | ) | (393 | ) |
| Net change in net interest income  |       | $                                                                     | 1,838      |   | $ | (1,441 | ) | $ | 397 |   |

 

----

| (1) |   | Tax  equivalent adjustments to interest on investment securities were $106,000 and  $107,000 for the quarters ended September 30, 2008 and 2007,  respectively. Tax equivalent interest income is based upon a marginal  effective tax rate of 34%. |
|-----|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**Total Interest Income**. Total interest income, ona tax equivalent basis, increased by $4,000 for the quarter ended September 30,2008 compared with the third quarter of 2007. The average balance of loansoutstanding increased by $41.3 million between the two periods as a result ofloan originations added to the portfolio during the intervening period.However, the average yield on loans decreased 47 basis points primarily as aresult of the Bank’s reduction of its prime rate four times during 2008 and twotimes during the last quarter of 2007 by a combined 275 basis points mirroringthe action taken by the Federal Open Markets Committee (FOMC) when it acted toreduce the fed funds rate. Interest income from mortgage-backed securities washigher in the third quarter of 2008 in comparison to the same period of 2007due to purchases of $25.5 million of securities during the intervening period.Interest income from investment securities decreased slightly as a result ofreduced dividends received on FHLB stock despite increased balances of FHLBstock held.

 

**TotalInterest Expense.**Totalinterest expense decreased by $393,000 to $4.3 million during the quarter endedSeptember 30, 2008 as compared with the third quarter of 2007. Interestrates paid on the Bank’s deposits were significantly lower during the third quarterof 2008 in comparison to the same period of 2007, primarily because the averagerate on deposits indexed to the Merrill Lynch Ready Asset Money Market Funddecreased by 259 basis points during the intervening period. Although theaverage balance of deposits reflects a $6.5 million increase in balances,average deposit balances during the third quarter of 2007 includedbroker-originated certificates of deposit of $2.9 million which fully maturedduring the third quarter of 2007.

 

Interest expense associatedwith borrowings from the Federal Home Loan Bank was $365,000 higher in thethird quarter of 2008 compared to the third quarter of 2007. During theintervening period, the Bank increased its borrowings by $44.8 million from theFHLB to fund loan growth as well as security purchases. Although the averageoutstanding balances were higher in the third quarter of 2008 compared to thesame period in 2007, the rate associated with these new advances were at a ratewhich was 50 basis points lower than the average rate on outstanding borrowingsduring the third quarter of 2007.

 

**Non-interest income**. Total non-interest incomewas $699,000 for the third quarter of 2008 compared with $708,000 for the sameperiod in 2007. A slowing ofloans originated for sale activities during the third quarter of 2008contributed to the decline in non-interest income.

 

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**Non-interest expense.**Total non-interest expenseincreased by $157,000 to $4.2 million for the three months ended September 30,2008 compared to the same period in 2007. The third quarter of 2007 reflectssignificant curtailment actions enacted by the Company towards marketing-relatedexpenditures. Offsetting the increase in marketing and advertising expensesbetween the quarters was a $28,000 reduction of branch facilities expenseswhich resulted from the closing of the banking office on Quakerbridge Road inMercer County, NJ during June 2008.

 

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**RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND2007**

 

**Net Income**. The Company recorded net income of $3,715,000 or$1.39 per diluted share, for the nine months ended September 30, 2008 ascompared to net income of $3,623,000, or $1.32 per diluted share, for the ninemonths ended September 30, 2007.

 

### **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, for thenine-month periods indicated.

 
| ** **                                                                          | ** ** | **September 30,** | ** ** |
|-------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                          | ** ** | **2008**               | ** ** | **2007** | ** ** |
| ** **                                                                          | ** ** | **Average  balance**   | ** ** | **Interest** | ** ** | **Average  yld/cost** | ** ** | **Average  balance** | ** ** | **Interest** | ** ** | **Average  yld/cost** | ** ** |
| **ASSETS**                                                                          |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| **Interest-earning assets:**                                                        |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Loans receivable(1)                                                                 |       | $                      | 540,882    |   | $ | 24,595 |   | 6.07 | % | $ | 497,565 |   | $ | 24,027 |   | 6.46 | % |
| Mortgage-backed securities                                                          |       | 97,558                 |       | 3,442 |   | 4.71 | % | 85,018 |   | 2,993 |   | 4.71 | % |
| Investment securities(2)                                                            |       | 41,518                 |       | 1,481 |   | 4.76 | % | 38,227 |   | 1,555 |   | 5.44 | % |
| Other interest-earning assets(3)                                                    |       | 913                    |       | 16 |   | 2.34 | % | 2,502 |   | 97 |   | 5.18 | % |
| Total interest-earning assets                                                       |       | 680,871                |       | 29,534 |   | 5.79 | % | 623,212 |   | 28,672 |   | 6.15 | % |
| Non interest-earning assets                                                         |       | 35,584                 |       |   |   |   |   | 34,847 |   |   |   |   |   |
| Total assets                                                                        |       | $                      | 716,455    |   |   |   |   |   | $ | 658,159 |   |   |   |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                       |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| **Interest-bearing liabilities:**                                                   |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Deposits                                                                            |       | 480,512                |       | 8,984 |   | 2.50 | % | 478,790 |   | 10,176 |   | 2.84 | % |
| Borrowings from the FHLB                                                            |       | 157,706                |       | 4,779 |   | 4.05 | % | 105,413 |   | 3,246 |   | 4.12 | % |
| Total interest-bearing liabilities                                                  |       | 638,218                |       | 13,763 |   | 2.88 | % | 584,203 |   | 13,422 |   | 3.07 | % |
| Non interest-bearing liabilities                                                    |       | 8,958                  |       |   |   |   |   | 7,293 |   |   |   |   |   |
| Total liabilities                                                                   |       | 647,176                |       |   |   |   |   | 591,496 |   |   |   |   |   |
| Stockholders’ equity                                                           |       | 69,279                 |       |   |   |   |   | 66,663 |   |   |   |   |   |
| Total liabilities and stockholders’ equity                                     |       | $                      | 716,455    |   |   |   |   |   | $ | 658,159 |   |   |   |   |   |
| Net interest income                                                                 |       |                   |       | $ | 15,771 |   |   |   |   |   | $ | 15,250 |   |   |   |
| Interest rate spread(4)                                                             |       |                   |       |   |   | 2.91 | % |   |   |   |   | 3.08 | % |
| Net yield on interest-earning assets(5)                                             |       |                   |       |   |   | 3.09 | % |   |   |   |   | 3.27 | % |
| Ratio of average interest- earning assets to average interest-  bearing liabilities |       |                   |       |   |   | 107 | % |   |   |   |   | 107 | % |

 

----

| (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 $320,000 and $324,000  for the nine months ended September 30, 2008 and 2007, respectively. Tax  equivalent interest income is based upon a marginal effective tax rate of  34%. |
| (3) |   | Includes  interest-bearing deposits in other banks.                                                                                                                                                                                                         |
| (4) |   | Interest rate spread  represents the difference between the average yield on interest-earning  assets and the average cost of interest-bearing liabilities.                                                                                                 |
| (5) |   | Net yield on  interest-earning assets represents net interest income as a percentage of  average interest-earning assets.                                                                                                                                   |

 

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**Rate/Volume Analysis**

 

Thefollowing table presents, for the periods indicated, the change in interestincome and interest expense (in thousands) attributed to (i) changes involume (changes in the weighted average balance of the total interest earningasset and interest bearing liability portfolios multiplied by the prior yearrate), and (ii) changes in rate (changes in rate multiplied by prior yearvolume). Changes attributable to the combined impact of volume and rate havebeen allocated proportionately based on the absolute value of changes due tovolume and changes due to rate.

 
| ** **                         | ** ** | **Nine months ended September 30,**               | ** ** |
|------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                         | ** ** | **2008 vs 2007  Increase (decrease) due to** | ** ** |
| ** **                         | ** ** | **Volume**                                                            | ** ** | **Rate** | ** ** | **Net** | ** ** |
| **Interest income:**               |       |                                                                  |       |   |   |   |   |
| Loans receivable, net              |       | $                                                                     | 2,602      |   | $ | (2,034 | ) | $ | 568 |   |
| Mortgage-backed securities         |       | 445                                                                   |       | 4 |   | 449 |   |
| Investment securities (1)          |       | 181                                                                   |       | (255 | ) | (74 | ) |
| Other interest-earning assets      |       | (43                                                                   | )          | (38 | ) | (81 | ) |
| Total interest-earning assets      |       | 3,185                                                                 |       | (2,323 | ) | 862 |   |
| **Interest expense:**              |       |                                                                  |       |   |   |   |   |
| Deposits                           |       | 61                                                                    |       | (1,253 | ) | (1,192 | ) |
| Borrowings from the FHLB           |       | 1,624                                                                 |       | (91 | ) | 1,533 |   |
| Total interest-bearing liabilities |       | 1,685                                                                 |       | (1,344 | ) | 341 |   |
| Net change in net interest income  |       | $                                                                     | 1,500      |   | $ | (979 | ) | $ | 521 |   |

 

----

| (1) |   | Tax  equivalent adjustments to interest on investment securities were $320,000 and  $324,000 for the nine months ended September 30, 2008 and 2007,  respectively. Tax equivalent interest income is based upon a marginal  effective tax rate of 34%. |
|-----|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**Total Interest Income**. Total interest income, ona tax equivalent basis, increased by $862,000 or 3.0% to $29.5 million for thenine months ended September 30, 2008 compared with the first nine monthsof 2007. The average balance of loans outstanding increased as a result of$43.3 million of loan originations in excess of loan principal payments addedto the portfolio during the intervening period. However, the average yield onloans decreased 39 basis points primarily as a result of the Bank’s reductionof its prime rate four times during 2008 and two times during the last quarterof 2007 by a combined 275 basis points mirroring the action taken by the FOMCwhen it acted to reduce the fed funds rate. Interest income frommortgage-backed securities was higher in the first nine months of 2008 incomparison to the same period of 2007 due to purchases of $25.5 million ofsecurities during the intervening period. Interest income from investmentsecurities decreased as a result of reduced dividends received on FHLB stockdespite increased balances of FHLB stock held.

 

**TotalInterest Expense.**Totalinterest expense increased by $341,000 to $13.8 million during the nine-monthperiod ended September 30, 2008 as compared with the first nine months of2007. Interest rates paid on the Bank’s deposits dropped primarily because theaverage rate on deposits indexed to the Merrill Lynch Ready Asset Money MarketFund decreased by 199 basis points during the intervening period and thereforesignificantly reduced interest expense on deposits. Although the averagebalance of deposits reflects only a $1.7 million increase in balances, averagedeposit balances during the first nine months of 2007 included broker-originatedcertificates of deposit of $7.2 million which fully matured during the secondand third quarters of 2007.

 

Interest expenseassociated with borrowings from the Federal Home Loan Bank increased $1.5million between the first nine months of 2008 and 2007. During the interveningperiod, the Bank increased its borrowings by $52.3 million from the FHLB tofund loan growth as well as security purchases.

 

**Non-interest income**. Total non-interest incomewas $2.9 million for the first nine months of 2008 compared with $3.0 millionfor the same period in 2007. The first nine months of 2008 included a $197,000insurance claim recovery related to a 2007 expense sustained as a result of thebankruptcy of one of the Bank’s loan servicing agents. Additionally, otherincome during the first nine months of 2008 included a $342,000 gain on thesale of foreclosed real estate and $87,000 of investment referral commissions.Also, retail deposit account fees increased $49,000 during 2008. The first ninemonths of 2007 included $777,000 of non-recurring income from a fraud-relatedsettlement.

 

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**Non-interest expense.**Total non-interest expensedecreased by $107,000 to $12.8 million for the nine months ended September 30,2008 compared to the same period in 2007. The first nine months of 2008 reflectan increase in marketing-related expenses of $107,000 over the same period in2007 when the Company curtailed its marketing expenditures. During 2008, legalexpenses increased $48,000 largely due to services rendered in conjunction withnon-performing assets. Also, loan expenses related to satisfaction fees andappraisals of non performing assets increased $29,000 during the nine monthsended 2008 compared to 2007. Offsetting these increases was a $64,000 reductionof branch facilities expenses resulting from the closing of the banking officeon Quakerbridge Road in Mercer County, NJ during June 2008. The mostsignificant factor contributing to the decrease between the periods was the$306,000loss incurredby the Bank in 2007 due to the related bankruptcy of one of the Bank’s loanservicing agents.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

**Liquidity**

 

The Company’s liquidity is a measure of its ability tofund loans, pay withdrawals of deposits, and other cash outflows in anefficient, cost-effective manner. The Company’s short-term sources of liquidityinclude maturity, repayment and sales of assets, excess cash and cashequivalents, new deposits, broker deposits, other borrowings, and newborrowings from the Federal Home Loan Bank. There has been no material adversechange during the nine-month period ended September 30, 2008 in theability of the Company and its subsidiaries to fund their operations.

 

At September 30, 2008, the Company hadcommitments outstanding under letters of credit of $1.5 million, commitments tooriginate loans of $14.2 million, and commitments to fund undisbursed balancesof closed loans and unused lines of credit of $51.0 million. At September 30,2008, the Bank had $1.4 million outstanding commitments to sell loans. There has been no material change duringthe nine months ended September 30, 2008 in any of the Company’s othercontractual obligations or commitments to make future payments.

 

**Capital Requirements**

 

The Bank was in compliance with all of its capitalrequirements as of September 30, 2008.

 

**Recent Legislation and Other RegulatoryInitiatives**

** **

On October 3, 2008, the President of the United Statessigned the Emergency Economic Stabilization Act of 2008 (“EESA”) into law. Thislegislation, among other things, authorized the Secretary of Treasury(“Treasury”) to establish a Troubled Asset Relief Program (“TARP”) to purchaseup to $700 billion in troubled assets from qualified financial institutions(“QFI”). EESA is also being interpreted by the Treasury to allow it to makedirect equity investments in QFIs. Subsequent to the enactment of EESA, theTreasury announced the TARP Capital Purchase Program (“CPP”) under which theTreasury will purchase up to $250 billion in senior perpetual preferred stockof QFIs that elect to participate in the CPP. The Treasury’s investment in anindividual QFI may not exceed the lesser of 3% of the QFI’s risk-weightedassets or $25 billion and may not be less than 1% of risk-weighted assets.  QFIs have until November 14, 2008, to elect toparticipate in the CPP. The CPP also requires the issuance of warrantsexercisable for a number of shares of common stock with an aggregate valueequal to 15% of the amount of the preferred stock investment.

 

EESA increases the maximum deposit insurance amount upto $250,000 until December 31, 2009 and removes the statutory limits on theFDIC’s ability to borrow from the Treasury during this period. The FDIC may nottake the temporary increase in deposit insurance coverage into account whensetting assessments. EESA allows financial institutions to treat any loss onthe preferred stock of the Federal National Mortgage Association or FederalHome Loan Mortgage Corporation as an ordinary loss for tax purposes.

 

As a condition to selling troubled assets to the TARPand/or participating in the CPP, the QFI must agree to the Treasury’s standardsfor executive compensation and corporate governance. These standards generallyapply to the Chief Executive Officer, Chief Financial Officer, and next threehighest compensated officers of the QFI. In general, these standards requirethe QFI to: (1) ensure that incentive compensation for senior executives doesnot encourage unnecessary and excessive risk taking; (2) recoup any bonus orincentive compensation paid to a senior executive based on financial statementsthat later prove to be erroneous; (3) prohibit the QFI from making “goldenparachute” payments in connection with certain terminations of employment; and(4) not deduct, for tax purposes, executive compensation in excess of $500,000for each senior executive. Participation in the CPP also results in certainrestrictions on the QFI’s dividend and stock repurchase activities. Theserestrictions remain in place until the Treasury no longer holds any equity ordebt securities of the QFI.

 

Concurrent with the announcement of the CPP, the FDICalso established the Temporary Liquidity Guarantee Program. This programcontains two elements: (i) a debt guarantee program and (ii) an increase indeposit insurance coverage for certain types of non-interest bearing accounts.Pursuant to the debt guarantee program, newly issued senior unsecured debt ofbanks, thrifts or their holding companies issued on or before June 30, 2009would be protected in the events the issuing institution subsequently fails orits holding company files for bankruptcy. Financial institutions opting to participatein this program would be charged an annualized fee equal to 75 basis pointsmultiplied by the amount of debt being guaranteed. The amount of debt that maybe guaranteed cannot exceed 125% of the institution’s outstanding debt atSeptember 30, 2008 and due to mature before June 30, 2009. The guarantee wouldexpire by June 30, 2012 even if the debt itself has not matured. Pursuant tothe temporary unlimited deposit insurance coverage, a qualifying institutionmay elect to provide unlimited coverage for non-interest bearing transactiondeposit accounts in excess of the $250,000 limit by paying a 10 basis pointssurcharge on the covered amounts in excess of $250,000. All institutions willhave this coverage without charge for until December 5, 2008. Institutions maychoose whether to continue the coverage and be charged the surcharge. To optout of the program, institutions must notify the FDIC by December 5, 2008. Thiscoverage would expire on December 31, 2009.

 

The Company is still determining whether to elect toparticipate in these programs. It is not clear at this time what impact these programsannounced by the Treasury and other bank regulatory agencies and any additionalprograms that may be initiated in the future, will have on the Company or the financialmarkets as a whole. However, the Company remains well-capitalized with strongliquidity.

 

21

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**CRITICAL ACCOUNTING POLICIES**

 

Certaincritical accounting policies of the Company require the use of significantjudgment and accounting estimates in the preparation of the consolidatedfinancial statements and related data of the Company. These accountingestimates require management to make assumptions about matters that are highlyuncertain at the time the accounting estimate is made. Management believes thatthe most critical accounting policy requiring the use of accounting estimatesand judgment is the determination of the allowance for loan losses. If thefinancial position of a significant amount of debtors should deteriorate morethan the Company has estimated, present reserves for loan losses may beinsufficient and additional provisions for loan losses may be required. Theallowance for loan losses was $2,996,000 at September 30, 2008.

 

###### **ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

######  

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

 

**ITEM 4T. CONTROLS AND PROCEDURES**

 

**Evaluation of Disclosure Controls and 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 “Exchange Act”)), the Company’s principal executive officer and principalfinancial officer have concluded that as of the end of the period covered bythis Quarterly Report on Form 10-Q such disclosure controls and proceduresare effective to ensure that information required to be disclosed by theCompany in the reports it files and submits pursuant to the rules andforms of the SEC is accumulated and communicated to the Company’s managementincluding the principal executive officer and principal financial officer, asappropriate, to allow timely decisions regarding required disclosures.

 

**Changes in Internal Controls over Financial 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.

 

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**TF FINANCIAL CORPORATION ANDSUBSIDIARIES**

 

**PART II**

 
| **ITEM 1.**  | ** ** | **LEGAL  PROCEEDINGS**                                                                                                                                                                                                                                                                                                                              |
|--------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **   | ** ** | ** **                                                                                                                                                                                                                                                                                                                                          |
|         |       | Neither the  Company nor its subsidiaries are involved in any pending legal proceedings,  other than routine legal matters occurring in the ordinary course of business  that in the aggregate involve amounts which are believed by management to be  immaterial to the consolidated financial condition or results of operations  of the Company. |
| ** **   | ** ** | ** **                                                                                                                                                                                                                                                                                                                                          |
| **ITEM 1A**. | ** ** | **RISK****FACTORS**                                                                                                                                                                                                                                                                                                                                 |
|         |       |                                                                                                                                                                                                                                                                                                                                                |
|         |       | As a “smaller reporting  company” as defined by Item 10 of Regulation S-K, the Company is not required  to provide the information required by this item.                                                                                                                                                                                 |
|         |       |                                                                                                                                                                                                                                                                                                                                                |
| **ITEM 2.**  | ** ** | **UNREGISTERED  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 September 30, 2008:                                                                                                                                                                                      |

 
| **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** | ** ** |
|--------------------------------------------------|------------|------------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------|------------|
|                                             |       |                                                 |       |                                             |       |                                                                                                                       |       |                                                                                                                        |       |
| July 1, 2008 – July 31, 2008      |       | —                                               |       | $                                                | —     |                                                                                                                       | —     |                                                                                                                        | 132,007    |   |
|                                             |       |                                                 |       |                                             |       |                                                                                                                       |       |                                                                                                                        |       |
| August 1, 2008 – August 31, 2008  |       | 4,800                                                |       | $                                                | 21.29      |                                                                                                                       | 4,800      |                                                                                                                        | 127,207    |   |
|                                             |       |                                                 |       |                                             |       |                                                                                                                       |       |                                                                                                                        |       |
| September 1, 2008 - September 30, 2008 |       | 6,365                                                |       | $                                                | 21.58      |                                                                                                                       | 3,700      |                                                                                                                        | 123,507    |   |
|                                             |       |                                                 |       |                                             |       |                                                                                                                       |       |                                                                                                                        |       |
| Quarterly total                                  |       | 11,165                                               |       | $                                                | 21.46      |                                                                                                                       | 8,500      |                                                                                                                        |       |   |

 
| **ITEM  3.** | ** ** | **DEFAULTS UPON SENIOR SECURITIES**                                                                                                                                                                                                                                                                 |
|--------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |       |                                                                                                                                                                                                                                                                                                |
|         |       | Not applicable.                                                                                                                                                                                                                                                                                     |
|         |       |                                                                                                                                                                                                                                                                                                |
| **ITEM 4.**  | ** ** | **SUBMISSION OF MATTERS TO A VOTE  OF SECURITY HOLDERS**                                                                                                                                                                                                                                            |
| ** **   | ** ** | ** **                                                                                                                                                                                                                                                                                          |
|         |       | None.                                                                                                                                                                                                                                                                                               |
|         |       |                                                                                                                                                                                                                                                                                                |
| **ITEM 5.**  | ** ** | **OTHER INFORMATION**                                                                                                                                                                                                                                                                               |
| ** **   | ** ** | ** **                                                                                                                                                                                                                                                                                          |
|         |       | On October 30, 2008, the Company agreed to repurchase 120,000  shares of its common stock through a private negotiated sale. The total sale  settled on November 4, 2008 for $2,262,000. Under existing plans for  share repurchase 123,057 shares still remain available for repurchase. |
|         |       |                                                                                                                                                                                                                                                                                                |   |   |
| **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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Table ofContents

 

**TF FINANCIAL 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.

 
| Date:  | November 13, 2008 |           | /s/ Kent C. Lufkin                                   |
|--------|------------------------|----------------|------------------------------------------------------|
|   |                   | Kent C. Lufkin |
|   |                   |           | President and CEO                                    |
|   |                   |           | (Principal Executive  Officer)                       |
|   |                   |           |                                                 |
|   |                   |           |                                                 |
| Date:  | November 13, 2008 |           | /s/ Dennis R.  Stewart                               |
|   |                   |           | Dennis R.  Stewart                                   |
|   |                   |           | Executive Vice  President and                        |
|   |                   |           | Chief Financial  Officer                             |
|   |                   |           | (Principal  Financial & Accounting Officer) |

 

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