Summary of TF FINANCIAL CORP

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.

Table of Contents

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):

                                                    September 30,     December 31,      September 30,
                                                        2008              2007              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 %

Management maintains an allowance for loan losses at levels that are believed to be adequate; however, there can be no assurances that further additions will not be necessary or that losses inherent in the existing loan portfolio will not exceed the allowance. The following table sets forth the activity in the allowance 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

Table of Contents

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

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 as compared to net income of $1,188,000, or $0.44 per diluted share, for the three months ended September 30, 2007.

Average Balance Sheet

The following table sets forth information (dollars in thousands) relating to the Company's average balance sheet and reflects the average yield on assets and average cost of liabilities for the periods indicated. Yield and cost are computed by dividing income or expense by the average daily balance of interest-earning assets or interest-bearing liabilities, respectively, for the three-month periods indicated.

                                                     September 30,
                                       2008                                2007
                          Average                 Average     Average                 Average
                          balance     Interest    yld/cost    balance     Interest    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.

Table of Contents

Rate/Volume Analysis

The following table presents, for the periods indicated, the change in interest income and interest expense (in thousands) attributed to (i) changes in volume (changes in the weighted average balance of the total interest earning asset and interest bearing liability portfolios multiplied by the prior year rate), and
(ii) changes in rate (changes in rate multiplied by prior year volume). Changes attributable to the combined impact of volume and rate have been allocated proportionately based on the absolute value of changes due to volume and changes due to rate.

                                        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, on a 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 loans outstanding increased by $41.3 million between the two periods as a result of loan originations added to the portfolio during the intervening period. However, the average yield on loans decreased 47 basis points primarily as a result of the Bank's reduction of its prime rate four times during 2008 and two times during the last quarter of 2007 by a combined 275 basis points mirroring the action taken by the Federal Open Markets Committee (FOMC) when it acted to reduce the fed funds rate. Interest income from mortgage-backed securities was higher in the third quarter of 2008 in comparison to the same period of 2007 due to purchases of $25.5 million of securities during the intervening period. Interest income from investment securities decreased slightly as a result of reduced dividends received on FHLB stock despite increased balances of FHLB stock held.

Total Interest Expense. Total interest expense decreased by $393,000 to $4.3 million during the quarter ended September 30, 2008 as compared with the third quarter of 2007. Interest rates paid on the Bank's deposits were significantly lower during the third quarter of 2008 in comparison to the same period of 2007, primarily because the average rate on deposits indexed to the Merrill Lynch Ready Asset Money Market Fund decreased by 259 basis points during the intervening period. Although the average balance of deposits reflects a $6.5 million increase in balances, average deposit balances during the third quarter of 2007 included broker-originated certificates of deposit of $2.9 million which fully matured during the third quarter of 2007.

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

Non-interest income. Total non-interest income was $699,000 for the third quarter of 2008 compared with $708,000 for the same period in 2007. A slowing of loans originated for sale activities during the third quarter of 2008 contributed to the decline in non-interest income.

Table of Contents

Non-interest expense. Total non-interest expense increased 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 reflects significant curtailment actions enacted by the Company towards marketing-related expenditures. Offsetting the increase in marketing and advertising expenses between the quarters was a $28,000 reduction of branch facilities expenses which resulted from the closing of the banking office on Quakerbridge Road in Mercer County, NJ during June 2008.

Table of Contents

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

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 as compared to net income of $3,623,000, or $1.32 per diluted share, for the nine months ended September 30, 2007.

Average Balance Sheet

                                                     September 30,
                                       2008                                2007
                          Average                 Average     Average                 Average
                          balance     Interest    yld/cost    balance     Interest    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.

Table of Contents

Rate/Volume Analysis

                                          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, on a tax equivalent basis, increased by $862,000 or 3.0% to $29.5 million for the nine months ended September 30, 2008 compared with the first nine months of 2007. The average balance of loans outstanding increased as a result of $43.3 million of loan originations in excess of loan principal payments added to the portfolio during the intervening period. However, the average yield on loans decreased 39 basis points primarily as a result of the Bank's reduction of its prime rate four times during 2008 and two times during the last quarter of 2007 by a combined 275 basis points mirroring the action taken by the FOMC when it acted to reduce the fed funds rate. Interest income from mortgage-backed securities was higher in the first nine months of 2008 in comparison to the same period of 2007 due to purchases of $25.5 million of securities during the intervening period. Interest income from investment securities decreased as a result of reduced dividends received on FHLB stock despite increased balances of FHLB stock held.

Total Interest Expense. Total interest expense increased by $341,000 to $13.8 million during the nine-month period ended September 30, 2008 as compared with the first nine months of 2007. Interest rates paid on the Bank's deposits dropped primarily because the average rate on deposits indexed to the Merrill Lynch Ready Asset Money Market Fund decreased by 199 basis points during the intervening period and therefore significantly reduced interest expense on deposits. Although the average balance of deposits reflects only a $1.7 million increase in balances, average deposit balances during the first nine months of 2007 included broker-originated certificates of deposit of $7.2 million which fully matured during the second and third quarters of 2007.

Interest expense associated with borrowings from the Federal Home Loan Bank increased $1.5 million between the first nine months of 2008 and 2007. During the intervening period, the Bank increased its borrowings by $52.3 million from the FHLB to fund loan growth as well as security purchases.

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

Table of Contents

Non-interest expense. Total non-interest expense decreased 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 reflect an increase in marketing-related expenses of $107,000 over the same period in 2007 when the Company curtailed its marketing expenditures. During 2008, legal expenses increased $48,000 largely due to services rendered in conjunction with non-performing assets. Also, loan expenses related to satisfaction fees and appraisals of non performing assets increased $29,000 during the nine months ended 2008 compared to 2007. Offsetting these increases was a $64,000 reduction of branch facilities expenses resulting . . .