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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the transition period from                                     to                                    

Commission file number:  0-24168

TF FINANCIAL CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x  NO o

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: November 7, 2008

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CONTENTS

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TF Financial Corporation and Subsidiaries

CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these statements

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TF Financial Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

The accompanying notes are an integral part of these statements

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TF Financial Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

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The accompanying notes are an integral part of these statements

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TF FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES 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 periods ended September 30, 2008 and 2007 (unaudited) include the accounts of TF Financial Corporation (the “Company”) and its wholly owned subsidiaries Third Federal Bank (the “Bank”), TF Investments Corporation and Penns Trail Development Corporation. The Company’s business is conducted principally through the Bank. All intercompany accounts and transactions have been eliminated in consolidation.

NOTE 2 - BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include all of the disclosures or footnotes required by accounting principles generally accepted in the United States of America (“GAAP”). In the opinion of management, all adjustments, consisting of normal recurring accruals, necessary for fair presentation of the consolidated financial statements 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 for the entire fiscal year or any other period. For further information, refer to consolidated financial statements and footnotes thereto included in the Company’s Annual 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 to routine litigation that arises in the normal course of business. In the opinion of management, the resolution of this litigation, if any, would not have a material adverse effect on the Company’s consolidated financial position or results of operations.

NOTE 4 - OTHER COMPREHENSIVE INCOME

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

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

NOTE 5 - EARNINGS PER SHARE

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

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

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

NOTE 6 - FAIR VALUE MEASUREMENTS

On January 1, 2008, the Company adopted Financial Accounting Standards Board (FASB) Statement No. 157 (SFAS 157), “Fair Value Measurements”. SFAS 157 defines fair value, establishes a framework for measuring fair value and expands the related disclosure requirements. SFAS 157 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. SFAS 157 establishes a fair value measurement hierarchy for inputs in valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements).

The fair value hierarchy levels are summarized below:

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

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

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

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

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

Impaired loans are evaluated and valued at the time the loan is identified as impaired, at the lower of the recorded investment in the loan or market value. The loans identified as impaired are real estate secured.  Market value is determined by using the value of the collateral securing the loans and is therefore classified as a level 3 hierarchy.  The value of the real estate is determined by qualified independent licensed appraisers contracted by the Company to perform the assessment.  The appraised value is then discounted based upon management’s experience, which includes estimated disposal costs, understanding of the customer and the customer’s business as well as economic conditions.  Impaired loans are reviewed and evaluated on a quarterly basis for additional impairment and adjusted accordingly, based upon the pertinent conditions.

The Company also measures certain other financial assets at fair value on a non-recurring basis in accordance with GAAP.  Adjustments may result from application of lower-of-cost or fair value accounting.

NOTE 7 - STOCK BASED COMPENSATION

The Company has stock benefit plans that allow the Company to grant options and restricted stock to employees and directors. The awards, which have a term of up to 10 years when issued, vest over a three to five year period. The exercise price of each award equals the market price of 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 estimated forfeitures, related to non-vested awards under the Plan. That cost is expected to be recognized over a weighted average period of 6 months.

Stock-based compensation expense included in net income 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 related to 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 option plan as of September 30, 2008 is as follows:

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

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

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

NOTE 8 - EMPLOYEE BENEFIT PLANS

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

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

NOTE 9 - NEW ACCOUNTING PRONOUNCEMENTS

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

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

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

In March 2008, FASB Issued Statement No. 161 (SFAS 161), “Disclosures About Derivative Instruments and Hedging Activities an amendment of FASB Statement 133”. The statement requires expanded disclosures about an entity’s derivative instruments and hedging activities but does not change SFAS 133’s scope or accounting. This statement is effective for fiscal years and interim periods beginning after November 15, 2008 with early adoption permitted. The Company does not anticipate a material impact 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 factors an entity should consider in developing renewal of extension assumptions used in determining the useful life of recognized intangible assets under SFAS 142 “Goodwill and Other Intangibles”. The new guidance applies to intangible assets that are acquired individually or with a group of other assets and to intangible assets acquired in both business combinations and asset acquisitions.  The FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years.  The guidance must be applied prospectively only to intangible assets acquired after the FSP’s effective date.

In September 2008 FASB issued FSP FAS 133-1 and FIN 45-4, “Disclosures about Credit Derivatives and Certain Guarantees,” to improve disclosures about credit-indexed derivative instruments (credit derivatives) and financial guarantees. The FSP requires companies that sell credit derivatives to disclose information that will enable financial statement users to assess the potential effect of the credit derivatives on the seller’s financial position, financial performance, and cash flows. FSP FAS 133-1 and FIN 45-4 is effective for interim and annual periods ending after November 15, 2008. The Company does not anticipate a material impact as a result of this statement on its consolidated financial statements.

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

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TF FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS

GENERAL

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

These forward-looking statements involve risks and uncertainties, such as statements of the Company’s plans, objectives, expectations, estimates and intentions that are subject to change based on various important factors (some of which are beyond the Company’s control). The following factors, among others, could cause the Company’s financial performance to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements: the strength of the United States economy in general and the strength of the local economies in which the Company conducts operations; the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System, inflation, interest rate, market and monetary fluctuations; the timely development of and acceptance of new products and services of the Company and the perceived overall value of these products and services by users, including the features, pricing and quality compared to competitors’ products and services; the willingness of users to substitute competitors’ products and services for the Company’s products and services; the success of the Company in gaining regulatory approval of its products and services, when required; the impact of changes in financial services’ laws and regulations (including laws concerning taxes, banking, securities and insurance); technological changes, acquisitions; changes in consumer spending and saving habits; and the success of the Company at managing the risks involved in the foregoing.

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

Financial Position

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

Loans receivable increased by $30.2 million during the first nine months of 2008. Consumer and single-family residential mortgage loans of $58.0 million and commercial 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 first nine months of 2008 totaled $12.4 million, and there were $13.4 million in proceeds from the sale of loans in the secondary market during this period.

Total liabilities 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 time period. Non-interest checking and money markets accounts increased by $5.4 million while interest checking and savings accounts decreased by $14.5 million. At September 30, 2008, the Bank had $61.5 million of deposits indexed 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 first nine months of 2008, the result of a $4.6 million decrease in short-term borrowings and scheduled amortization payments of $19.6 million offset by $19.3 million in new long term advances.

Total consolidated stockholder’s equity of the Company was $69.4 million or 9.7 % of total 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 shares pursuant to the exercise of stock options. At September 30, 2008, there were approximately 124,000 shares available for repurchase under the previously announced share repurchase plan.

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During the second quarter of 2008, the Company closed its branch office on Quakerbridge Road in Mercer County, New Jersey, and reassigned approximately $9 million 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 completed foreclosure proceedings on two parcels of commercial real estate with a combined 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 and was 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 off in the amount of $347,000. During the foreclosure proceedings of the second property, a bid from an unrelated party was made which satisfied the outstanding contractual obligations of the borrower with the Bank. This foreclosure and simultaneous sale resulted in a $342,000 gain which is included in non-interest income of the Company during 2008. The Bank does not anticipate any further charges against the allowance as a result of the foregoing discussed foreclosures. During the first nine months of 2008 and 2007, the Company’s provision for loan losses was $490,000 and $0, respectively. With respect to each of the remaining non-performing loans, all of which are real estate secured, the Bank is taking appropriate steps to resolve the individual situations.

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