**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM10-Q**

 

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

 

**For the period ended September 30, 2007**

 

**- or -**

 

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

 

**For thetransition period from                                   to**

 

**Commission file number:  0-24168**

 

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

 

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

 

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

 

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

 

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

 
| Large accelerated filer o |   | Accelerated filer o |   | Non-accelerated  filer x |
|---------------------------|--------|---------------------|--------|--------------------------|

 

 

Indicateby check mark whether the registrant is a shell company (as defined inRule 12b-2 Exchange 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 9,2007**

 

| Class                        | ** ** | **Outstanding**   |
|------------------------------|------------|-------------------|
| $.10  par value common stock |       | 2,874,694  shares |

 

 

----

 

**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 |   | 13 |
|                                                                          |       |                                                                                        |   |   |
| Item 3.                                                                       |       | Quantitative  and Qualitative Disclosures about Market Risk                                 |   | 19 |
|                                                                          |       |                                                                                        |   |   |
| Item  4.                                                                      |       | Controls and Procedures                                                                     |   | 19 |
|                                                                          |       |                                                                                        |   |   |
| **PART II-OTHER  INFORMATION**                                                |       | 21                                                                                          |
|                                                                          |       |                                                                                        |   |   |
| Item  1.                                                                      |       | Legal Proceedings                                                                           |   | 21 |
|                                                                          |       |                                                                                        |   |   |
| Item 1A.                                                                      |       | Risk Factors                                                                                |   | 21 |
|                                                                          |       |                                                                                        |   |   |
| Item 2.                                                                       |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                |   | 21 |
|                                                                          |       |                                                                                        |   |   |
| Item 3.                                                                       |       | Defaults Upon  Senior Securities                                                            |   | 21 |
|                                                                          |       |                                                                                        |   |   |
| Item 4.                                                                       |       | Submission of  Matters to a Vote of Security Holders                                        |   | 21 |
|                                                                          |       |                                                                                        |   |   |
| Item  5.                                                                      |       | Other Information                                                                           |   | 21 |
|                                                                          |       |                                                                                        |   |   |
| Item 6.                                                                       |       | Exhibits                                                                                    |   | 22 |
|                                                                          |       |                                                                                        |   |   |
| **Signatures**                                                                |       |                                                                                        |   | 23 |
|                                                                          |       |                                                                                        |   |   |
| **Exhibits**                                                                  | ** ** | ** **                                                                                  | ** ** | ** ** |
|                                                                          |       |                                                                                        |   |   |
| 31. Certifications  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |       |                                                                                        |
|                                                                          |       |                                                                                        |   |   |
| 32. Certification  pursuant of Section 906 of the Sarbanes-Oxley Act of 2002  |       |                                                                                        |

 

2

----

 

**TFFinancial Corporation and Subsidiaries**

 

**CONSOLIDATEDBALANCE SHEETS**

 
| ** **                                                                                                                                                                                                                                                     | ** ** | **Unaudited  September 30,  2007** | ** ** | **Audited  December 31,  2006** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                                                                                                                                                                     | ** ** | **(in thousands)**                 | ** ** |
| ASSETS                                                                                                                                                                                                                                                         |       |                                    |       |                                 |       |
| Cash and cash equivalents                                                                                                                                                                                                                                      |       | $                                       | 4,863      |                                 | $          | 12,364 |   |
| Certificates of deposit in other financial  institutions                                                                                                                                                                                                       |       | —                                  |       | 40                                   |       |
| Investment securities available for sale—at  fair value                                                                                                                                                                                                   |       | 28,827                                  |       | 34,524                               |       |
| Investment securities held to maturity  (fair value of $461 and $681, respectively)                                                                                                                                                                            |       | 459                                     |       | 677                                  |       |
| Mortgage-backed securities available for  sale—at fair value                                                                                                                                                                                              |       | 80,262                                  |       | 74,338                               |       |
| Mortgage-backed securities held to maturity  (fair value of $6,565 and $7,788, respectively)                                                                                                                                                                   |       | 6,468                                   |       | 7,697                                |       |
| Loans receivable, net                                                                                                                                                                                                                                          |       | 510,966                                 |       | 483,570                              |       |
| Loans receivable held for sale                                                                                                                                                                                                                                 |       | 210                                     |       | 969                                  |       |
| Federal Home Loan Bank stock—at cost                                                                                                                                                                                                                      |       | 7,883                                   |       | 7,130                                |       |
| Accrued interest receivable                                                                                                                                                                                                                                    |       | 2,966                                   |       | 3,030                                |       |
| Premises and equipment, net                                                                                                                                                                                                                                    |       | 6,382                                   |       | 6,544                                |       |
| Goodwill                                                                                                                                                                                                                                                       |       | 4,324                                   |       | 4,324                                |       |
| Bank-owned life insurance                                                                                                                                                                                                                                      |       | 15,728                                  |       | 15,274                               |       |
| Other assets                                                                                                                                                                                                                                                   |       | 3,455                                   |       | 2,122                                |       |
| TOTAL ASSETS                                                                                                                                                                                                                                                   |       | $                                       | 672,793    |                                 | 652,603    |   |
|                                                                                                                                                                                                                                                           |       |                                    |       |                                 |       |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                                                                                                      |       |                                    |       |                                 |       |
| Liabilities                                                                                                                                                                                                                                                    |       |                                    |       |                                 |       |
| Deposits                                                                                                                                                                                                                                                       |       | $                                       | 472,532    |                                 | $          | 478,087 |   |
| Borrowings from the Federal Home Loan Bank                                                                                                                                                                                                                     |       | 124,272                                 |       | 101,701                              |       |
| Advances from borrowers for taxes and  insurance                                                                                                                                                                                                               |       | 1,710                                   |       | 1,866                                |       |
| Accrued interest payable                                                                                                                                                                                                                                       |       | 3,822                                   |       | 3,177                                |       |
| Other liabilities                                                                                                                                                                                                                                              |       | 2,577                                   |       | 2,133                                |       |
| Total liabilities                                                                                                                                                                                                                                              |       | 604,913                                 |       | 586,964                              |       |
|                                                                                                                                                                                                                                                           |       |                                    |       |                                 |       |
| Stockholders’ equity                                                                                                                                                                                                                                      |       |                                    |       |                                 |       |
| Preferred stock, no par value; 2,000,000  shares authorized at September 30, 2007 and December 31, 2006, none issued                                                                                                                                           |       | —                                  |       | —                               |       |
| Common stock, $0.10 par value; 10,000,000  shares authorized, 5,290,000 shares issued, 2,712,275 and 2,702,845 shares  outstanding at September 30, 2007 and December 31, 2006, respectively, net of  shares in treasury 2,414,929 and 2,415,766, respectively |       | 529                                     |       | 529                                  |       |
| Retained earnings                                                                                                                                                                                                                                              |       | 67,055                                  |       | 65,075                               |       |
| Additional paid-in capital                                                                                                                                                                                                                                     |       | 53,375                                  |       | 52,700                               |       |
| Unearned ESOP shares                                                                                                                                                                                                                                           |       | (1,617                                  | )          | (1,703                               | )          |
| Treasury stock—at cost                                                                                                                                                                                                                                    |       | (49,987                                 | )          | (48,980                              | )          |
| Accumulated other comprehensive loss                                                                                                                                                                                                                           |       | (1,475                                  | )          | (1,982                               | )          |
| Total stockholders’ equity                                                                                                                                                                                                                                |       | 67,880                                  |       | 65,639                               |       |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                                                                                                |       | $                                       | 672,793    |                                 | $          | 652,603 |   |

 

The accompanying notes are an integral partof these statements

 

3

----

 

**TF Financial Corporation and Subsidiaries**

 

**CONSOLIDATEDSTATEMENTS OF INCOME**

**(Unaudited)**

 
| ** **                                                     | ** ** | **For the three months  ended  September 30,** | ** ** | **For the nine months  ended  September 30,** | ** ** |
|----------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                     | ** ** | **2007**                                                           | ** ** | **2006**                                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                     | ** ** | **(in thousands, except per share data)** | ** ** |
| Interest income                                                |       |                                                               |       |                                                              |       |   |   |   |   |
| Loans, including fees                                          |       | $                                                                  | 8,262      |                                                              | $          | 8,243 |   | $ | 24,027 |   | $ | 24,081 |   |
| Mortgage-backed securities                                     |       | 1,054                                                              |       | 872                                                               |       | 2,993 |   | 2,841 |   |
| Investment securities                                          |       | 393                                                                |       | 453                                                               |       | 1,231 |   | 1,354 |   |
| Interest-bearing deposits and other                            |       | 11                                                                 |       | 43                                                                |       | 97 |   | 65 |   |
|                                                           |       |                                                               |       |                                                              |       |   |   |   |   |
| TOTAL INTEREST INCOME                                          |       | 9,720                                                              |       | 9,611                                                             |       | 28,348 |   | 28,341 |   |
|                                                           |       |                                                               |       |                                                              |       |   |   |   |   |
| Interest expense                                               |       |                                                               |       |                                                              |       |   |   |   |   |
| Deposits                                                       |       | 3,530                                                              |       | 2,949                                                             |       | 10,176 |   | 7,757 |   |
| Borrowings                                                     |       | 1,211                                                              |       | 1,144                                                             |       | 3,246 |   | 3,880 |   |
|                                                           |       |                                                               |       |                                                              |       |   |   |   |   |
| TOTAL INTEREST EXPENSE                                         |       | 4,741                                                              |       | 4,093                                                             |       | 13,422 |   | 11,637 |   |
|                                                           |       |                                                               |       |                                                              |       |   |   |   |   |
| NET INTEREST INCOME                                            |       | 4,979                                                              |       | 5,518                                                             |       | 14,926 |   | 16,704 |   |
| Provision for loan losses                                      |       | —                                                             |       | —                                                            |       | — |   | 150 |   |
|                                                           |       |                                                               |       |                                                              |       |   |   |   |   |
| NET INTEREST INCOME AFTER PROVISION FOR  LOAN LOSSES           |       | 4,979                                                              |       | 5,518                                                             |       | 14,926 |   | 16,554 |   |
|                                                           |       |                                                               |       |                                                              |       |   |   |   |   |
| Non-interest income                                            |       |                                                               |       |                                                              |       |   |   |   |   |
| Service fees, charges and other operating  income              |       | 503                                                                |       | 535                                                               |       | 1,564 |   | 1,606 |   |
| Bank-owned life insurance                                      |       | 153                                                                |       | 126                                                               |       | 454 |   | 374 |   |
| Gain on sale of loans                                          |       | 52                                                                 |       | 152                                                               |       | 169 |   | 190 |   |
| Loss on sale of mortgage-backed securities  available for sale |       | —                                                             |       | —                                                            |       | — |   | (51 | ) |
| Other income                                                   |       | —                                                             |       | —                                                            |       | 777 |   | — |   |
|                                                           |       |                                                               |       |                                                              |       |   |   |   |   |
| TOTAL NON-INTEREST INCOME                                      |       | 708                                                                |       | 813                                                               |       | 2,964 |   | 2,119 |   |
|                                                           |       |                                                               |       |                                                              |       |   |   |   |   |
| Non-interest expense                                           |       |                                                               |       |                                                              |       |   |   |   |   |
| Compensation and benefits                                      |       | 2,598                                                              |       | 2,693                                                             |       | 7,946 |   | 8,015 |   |
| Occupancy and equipment                                        |       | 729                                                                |       | 772                                                               |       | 2,133 |   | 2,170 |   |
| Professional fees                                              |       | 146                                                                |       | 128                                                               |       | 503 |   | 475 |   |
| Marketing and advertising                                      |       | —                                                             |       | 176                                                               |       | 326 |   | 528 |   |
| Other operating                                                |       | 584                                                                |       | 601                                                               |       | 2,007 |   | 1,853 |   |
|                                                           |       |                                                               |       |                                                              |       |   |   |   |   |
| TOTAL NON-INTEREST EXPENSE                                     |       | 4,057                                                              |       | 4,370                                                             |       | 12,915 |   | 13,041 |   |
|                                                           |       |                                                               |       |                                                              |       |   |   |   |   |
| INCOME BEFORE INCOME TAXES                                     |       | 1,630                                                              |       | 1,961                                                             |       | 4,975 |   | 5,632 |   |
|                                                           |       |                                                               |       |                                                              |       |   |   |   |   |
| Income taxes                                                   |       | 442                                                                |       | 549                                                               |       | 1,352 |   | 1,573 |   |
|                                                           |       |                                                               |       |                                                              |       |   |   |   |   |
| NET INCOME                                                     |       | $                                                                  | 1,188      |                                                              | $          | 1,412 |   | $ | 3,623 |   | $ | 4,059 |   |
|                                                           |       |                                                               |       |                                                              |       |   |   |   |   |
| Earnings per share—basic                                  |       | $                                                                  | 0.44       |                                                              | $          | 0.52 |   | $ | 1.32 |   | $ | 1.50 |   |
| Earnings per share—diluted                                |       | $                                                                  | 0.44       |                                                              | $          | 0.52 |   | $ | 1.32 |   | $ | 1.49 |   |
| Dividends paid                                                 |       | $                                                                  | 0.20       |                                                              | $          | 0.19 |   | $ | 0.60 |   | $ | 0.57 |   |

 

The accompanying notes are an integral part ofthese statements

 

4

----

 

**TF Financial Corporation and Subsidiaries**

 

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| ** **                                                                        | ** ** | **For the nine months  ended  September 30,** | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                                        | ** ** | **2007**                                                          | ** ** | **2006** | ** ** |
| ** **                                                                        | ** ** | **(in thousands)**                                           | ** ** |
| OPERATING ACTIVITIES                                                              |       |                                                              |       |   |   |
| Net income                                                                        |       | $                                                                 | 3,623      |   | $ | 4,059 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities |       |                                                              |       |   |   |
| Amortization of                                                                   |       |                                                              |       |   |   |
| Mortgage loan servicing rights                                                    |       | 37                                                                |       | 23 |   |
| Deferred loan origination fees                                                    |       | (82                                                               | )          | (151 | ) |
| Premiums and discounts on investment  securities, net                             |       | 67                                                                |       | 49 |   |
| Premiums and discounts on mortgage-backed  securities, net                        |       | 32                                                                |       | 201 |   |
| Premiums and discounts on loans, net                                              |       | 95                                                                |       | 129 |   |
| Discount on wholesale deposits                                                    |       | 14                                                                |       | 12 |   |
| Core deposit intangibles                                                          |       | —                                                            |       | 83 |   |
| Provision for loan losses                                                         |       | —                                                            |       | 150 |   |
| Provision for decrease in fair value of  mortgage servicing rights                |       | 7                                                                 |       | 5 |   |
| Depreciation of premises and equipment                                            |       | 666                                                               |       | 708 |   |
| Increase in value of bank-owned life  insurance                                   |       | (454                                                              | )          | (373 | ) |
| Stock grant expense                                                               |       | 271                                                               |       | 271 |   |
| Stock option expense                                                              |       | 293                                                               |       | 287 |   |
| Stock-based benefit programs: ESOP                                                |       | 253                                                               |       | 402 |   |
| Proceeds from sale of loans originated for  sale                                  |       | 14,371                                                            |       | 8,380 |   |
| Origination of loans held for sale                                                |       | (13,644                                                           | )          | (8,911 | ) |
| (Gain) loss on sale of                                                            |       |                                                              |       |   |   |
| Mortgage loans available for sale                                                 |       | (169                                                              | )          | (60 | ) |
| Mortgage-backed securities available for  sale                                    |       | —                                                            |       | 51 |   |
| Real estate acquired through foreclosure                                          |       | —                                                            |       | (29 | ) |
| Mortgage loans held to maturity                                                   |       | —                                                            |       | (130 | ) |
| Income from mortgage loan derivatives                                             |       | (1                                                                | )          | (1 | ) |
| Expense associated with forward loan sales                                        |       | 2                                                                 |       | 3 |   |
| (Increase) decrease in                                                            |       |                                                              |       |   |   |
| Accrued interest receivable                                                       |       | 64                                                                |       | 266 |   |
| Other assets                                                                      |       | (1,227                                                            | )          | (731 | ) |
| Increase in                                                                       |       |                                                              |       |   |   |
| Accrued interest payable                                                          |       | 645                                                               |       | 1,709 |   |
| Other liabilities                                                                 |       | 312                                                               |       | 138 |   |
| NET CASH PROVIDED BY OPERATING ACTIVITIES                                         |       | 5,175                                                             |       | 6,540 |   |
|                                                                              |       |                                                              |       |   |   |
| INVESTING ACTIVITIES                                                              |       |                                                              |       |   |   |
| Loan originations                                                                 |       | (96,875                                                           | )          | (101,166 | ) |
| Loan principal payments                                                           |       | 68,190                                                            |       | 71,412 |   |
| Principal repayments on mortgage-backed  securities held to maturity              |       | 1,224                                                             |       | 2,133 |   |
| Principal repayments on mortgage-backed  securities available for sale            |       | 8,479                                                             |       | 11,754 |   |
| Proceeds from loan sales                                                          |       | —                                                            |       | 16,251 |   |
| Proceeds from sale of loan participations                                         |       | 1,276                                                             |       | 5,027 |   |
| Purchase of investment securities available  for sale                             |       | (771                                                              | )          | (3,795 | ) |
| Purchase of mortgage-backed securities  available for sale                        |       | (13,798                                                           | )          | — |   |
| Proceeds from the sale of mortgaged-backed  securities available for sale         |       | —                                                            |       | 4,971 |   |
| Proceeds from maturity of investment securities  available for sale               |       | 6,455                                                             |       | — |   |
| Proceeds from maturities of investment  securities held to maturity               |       | 220                                                               |       | 3,018 |   |
| Purchases of Federal Home Loan Bank stock,  net                                   |       | (753                                                              | )          | (102 | ) |
| Purchase of premises and equipment                                                |       | (504                                                              | )          | (896 | ) |
| Proceeds from the sale of real estate  acquired through foreclosure               |       | —                                                            |       | 729 |   |
| Maturities of certificates of deposit in  other financial institutions            |       | 40                                                                |       | — |   |
| NET CASH (USED) PROVIDED BY INVESTING  ACTIVITIES                                 |       | (26,817                                                           | )          | 9,336 |   |
|                                                                                   |            |                                                                   |            |  |  |  |  |

 

5

----

 
| ** **                                                                        | ** ** | **For the nine months ended  September 30,** | ** ** |
|-----------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                                        | ** ** | **2007**                                                              | ** ** | **2006** | ** ** |
| ** **                                                                        | ** ** | **(in thousands)**                                               | ** ** |
| FINANCING ACTIVITIES                                                              |       |                                                                  |       |   |   |
| Net decrease in customer deposits                                                 |       | (5,569                                                                | )          | (135 | ) |
| Net increase (decrease) in short-term  borrowings from the Federal Home Loan Bank |       | 11,495                                                                |       | (11,436 | ) |
| Proceeds of long-term Federal Home Loan  Bank borrowings                          |       | 26,026                                                                |       | 15,535 |   |
| Repayment of long-term Federal Home Loan  Bank borrowings                         |       | (14,950                                                               | )          | (13,993 | ) |
| Net decrease in advances from borrowers for  taxes and insurance                  |       | (156                                                                  | )          | (631 | ) |
| Treasury stock acquired                                                           |       | (3,239                                                                | )          | (1,421 | ) |
| Exercise of stock options                                                         |       | 1,814                                                                 |       | 312 |   |
| Tax benefit arising from stock compensation                                       |       | 363                                                                   |       | 102 |   |
| Common stock dividends paid                                                       |       | (1,643                                                                | )          | (1,538 | ) |
| NET CASH PROVIDED (USED) BY FINANCING  ACTIVITIES                                 |       | 14,141                                                                |       | (13,205 | ) |
|                                                                              |       |                                                                  |       |   |   |
| NET (DECREASE) INCREASE IN CASH AND CASH  EQUIVALENTS                             |       | (7,501                                                                | )          | 2,671 |   |
|                                                                              |       |                                                                  |       |   |   |
| Cash and cash equivalents at beginning of  period                                 |       | 12,364                                                                |       | 3,821 |   |
|                                                                              |       |                                                                  |       |   |   |
| Cash and cash equivalents at end of period                                        |       | $                                                                     | 4,863      |   | $ | 6,492 |   |
|                                                                              |       |                                                                  |       |   |   |
| Supplemental disclosure of cash flow  information                                 |       |                                                                  |       |   |   |
| Cash paid for                                                                     |       |                                                                  |       |   |   |
| Interest on deposits and borrowings from  Federal Home Loan Bank                  |       | $                                                                     | 12,777     |   | $ | 9,928 |   |
| Income taxes                                                                      |       | $                                                                     | 830        |   | $ | 1,415 |   |
| Non-cash transactions                                                             |       |                                                                  |       |   |   |
| Capitalization of mortgage servicing rights                                       |       | $                                                                     | 210        |   | $ | 126 |   |

 

The accompanying notes are an integral part of these statements

 

6

----

 

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

 

**NOTE 1 -PRINCIPLES OF CONSOLIDATION**

 

The consolidated financial statements as ofSeptember 30, 2007 (unaudited) and December 31, 2006 and for the three andnine-month periods ended September 30, 2007 and 2006 (unaudited) include theaccounts of TF Financial Corporation (the “Company”) and its wholly ownedsubsidiaries Third Federal Bank (the “Bank”), TF Investments Corporation andPenns Trail Development Corporation. The Company’s business is conductedprincipally through the Bank. All significant intercompany accounts and transactionshave been eliminated in consolidation.

 

**NOTE 2 - BASISOF PRESENTATION**

 

The accompanying unaudited consolidated financial statements wereprepared in accordance with instructions for Form 10-Q and, therefore, do notinclude all of the disclosures or footnotes required by accounting principlesgenerally accepted in the United States of America. In the opinion ofmanagement, all adjustments, consisting of normal recurring accruals, necessaryfor fair presentation of the consolidated financial statements have beenincluded. The results of operations for the period ended September 30, 2007 arenot necessarily indicative of the results which may be expected for the entirefiscal year or any other period. For further information, refer to consolidatedfinancial statements and footnotes thereto included in the Company’s AnnualReport on Form 10-K for the fiscal year ended December 31, 2006.

 

**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 SFAS No. 130, “ReportingComprehensive Income.” SFAS No. 130 establishes standards to provideprominent disclosure of comprehensive income items. Comprehensive income is thechange in equity of a business enterprise during a period from transactions andother events and circumstances from non-owner sources. The components of othercomprehensive income are as follows for the three months ended:

 
| ** **                                                                           | ** ** | **September 30, 2007** | ** ** |
|--------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                           | ** ** | **Before tax  amount**      | ** ** | **Tax  (expense)  benefit** | ** ** | **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 |   |

 
| ** **                                      | ** ** | **September 30, 2006** | ** ** |
|-------------------------------------------------|------------|----------------------------------|------------|
| ** **                                      | ** ** | **Before tax  amount**      | ** ** | **Tax  (expense)  benefit** | ** ** | **Net of tax  amount** | ** ** |
| ** **                                      | ** ** | ** **                       | ** ** | **(in thousands)** | ** ** | ** ** | ** ** |
| Unrealized gains on securities                  |       |                             |       |   |   |   |   |
| Unrealized holding gains arising during  period |       | $                                | 1,805      |   | $ | (614 | ) | $ | 1,191 |   |
|                                            |       |                             |       |   |   |   |   |
| Other comprehensive income, net                 |       | $                                | 1,805      |   | $ | (614 | ) | $ | 1,191 |   |

 

7

----

 

The components of other comprehensive loss are as follows for the ninemonths ended:

 
| ** **                                                                           | ** ** | **September 30, 2007** | ** ** |
|--------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                           | ** ** | **Before tax  amount**      | ** ** | **Tax  (expense)  benefit** | ** ** | **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 |   |

 
| ** **                                       | ** ** | **September 30, 2006** | ** ** |
|--------------------------------------------------|------------|----------------------------------|------------|
| ** **                                       | ** ** | **Before tax  amount**      | ** ** | **Tax  (expense)  benefit** | ** ** | **Net of tax  amount** | ** ** |
| ** **                                       | ** ** | ** **                       | ** ** | **(in thousands)** | ** ** | ** ** | ** ** |
| Unrealized gains on securities                   |       |                             |       |   |   |   |   |
| Unrealized holding gains arising during  period  |       | $                                | 350        |   | $ | (119 | ) | $ | 231 |   |
| Reclassification adjustment for losses  realized |       | 51                               |       | (18 | ) | 33 |   |
|                                             |       |                             |       |   |   |   |   |
| Other comprehensive income, net                  |       | $                                | 401        |   | $ | (137 | ) | $ | 264 |   |

 

**NOTE 5—EARNINGS PER SHARE**

 

Thefollowing tables illustrate the reconciliation of the numerators anddenominators of the basic and diluted earnings per share computations (dollarsin thousands, except per share data):

 
| ** **                                                                  | ** ** | **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                                                    |       | —                                                             |       | 4,557 |   | — |   |
|                                                                        |       |                                                               |       |   |   |   |   |
| Diluted earnings per share                                                  |       |                                                               |       |   |   |   |   |
| Income available to common stockholders  plus effect of dilutive securities |       | $                                                                  | 1,188      |   | 2,719,921 |   | $ | 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                                                    |       | —                                                            |       | 3,113 |   | — |   |
|                                                                        |       |                                                              |       |   |   |   |   |
| Diluted earnings per share                                                  |       |                                                              |       |   |   |   |   |
| Income available to common stockholders  plus effect of dilutive securities |       | $                                                                 | 3,623      |   | 2,739,752 |   | $ | 1.32 |   |

 

There were 183,918 options to purchase shares ofcommon stock at an average price of $29.05 per share which were outstandingduring the first nine months of 2007 that were not included in the computationof diluted earnings per share because the options’ exercise prices were greaterthan the average market price of the common shares.

 

8

----

 
| ** **                                                                  | ** ** | **Three months ended September 30, 2006** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                  | ** ** | **Income  (numerator)**                                            | ** ** | **Weighted  average  shares  (denominator)** | ** ** | **Per share  Amount** | ** ** |
| Basic earnings per share                                                    |       |                                                               |       |   |   |   |   |
| Income available to common stockholders                                     |       | 1,412                                                              |       | 2,696,878 |   | $ | 0.52 |   |
| Effect of dilutive securities                                               |       |                                                               |       |   |   |   |   |
| Stock options and grants                                                    |       | —                                                             |       | 21,858 |   | — |   |
|                                                                        |       |                                                               |       |   |   |   |   |
| Diluted earnings per share                                                  |       |                                                               |       |   |   |   |   |
| Income available to common stockholders  plus effect of dilutive securities |       | $                                                                  | 1,412      |   | 2,718,736 |   | $ | 0.52 |   |
|                                                                             |            |                                                                    |            |  |  |  |  |  |  |

 
| ** **                                                                  | ** ** | **Nine months ended September 30, 2006** | ** ** |
|-----------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                                  | ** ** | **Income  (numerator)**                                           | ** ** | **Weighted  average  shares  (denominator)** | ** ** | **Per share  Amount** | ** ** |
| Basic earnings per share                                                    |       |                                                              |       |   |   |   |   |
| Income available to common stockholders                                     |       | 4,059                                                             |       | 2,696,798 |   | $ | 1.50 |   |
| Effect of dilutive securities                                               |       |                                                              |       |   |   |   |   |
| Stock options and grants                                                    |       | —                                                            |       | 18,011 |   | (0.01 | ) |
|                                                                        |       |                                                              |       |   |   |   |   |
| Diluted earnings per share                                                  |       |                                                              |       |   |   |   |   |
| Income available to common stockholders  plus effect of dilutive securities |       | $                                                                 | 4,059      |   | 2,714,809 |   | $ | 1.49 |   |
|                                                                             |            |                                                                   |            |  |  |  |  |  |  |

 

There were 20,768 options to purchase shares ofcommon stock at a price of $34.14 per share which were outstanding during thenine months ended September 30, 2006 that were not included in thecomputation of diluted earnings per share because the options’ exercise priceswere greater than the average market price of the common shares.

 

**NOTE 6- STOCKBASED COMPENSATION**

 

TheCompany has stock benefit plans that allow the Company to grant options andstock to employees and directors. The awards, which have a term of up to10 years when issued, vest over a three to five year period. The exerciseprice of each award equals the market price of the Company’s stock on the dateof the grant. There was $516,000 and $909,000 of total unrecognizedcompensation cost, net of estimated forfeitures, related to non-vested awardsunder the Plan at September 30, 2007 and 2006, respectively. That cost isexpected to be recognized over a weighted average period of 16.5 months and27.5 months at September 30, 2007 and 2006, respectively.

 

Stock-basedcompensation expense included in net income related to stock options was$98,000 for each of the quarters ended September 30, 2007 and 2006, resultingin a tax benefit of $30,000 and $29,000, for the three months ended September30, 2007 and 2006, respectively. Stock-based compensation expense included innet income related to stock options was $293,000 and $287,000, resulting in atax benefit of $90,000 and $86,000, for the nine months ended September 30,2007 and 2006, respectively.

 

9

----

 

Option activity under theCompany’s stock option plan as of September 30, 2007 and 2006 is as follows:

 
| ** **                                | ** ** | **2007**                   | ** ** |
|-------------------------------------------|------------|----------------------------|------------|
| ** **                                | ** ** | **Number  of shares** | ** ** | **Weighted  average  exercise  price per  share** | ** ** | **Weighted  average  remaining  contractual  term (in  years)** | ** ** | **Aggregate  intrinsic  value ($ 000)** | ** ** |
| Outstanding at January 1, 2007            |       | 365,734                    |       | $ | 23.62 |   |   |   |   |   |
| Options granted                           |       | —                     |       | — |   |   |   |   |   |
| Options exercised                         |       | (109,396                   | )          | 16.58 |   |   |   |   |   |
| Options forfeited                         |       | (1,732                     | )          | 31.37 |   |   |   |   |   |
| Options expired                           |       | —                     |       | — |   |   |   |   |   |
| Outstanding at September 30, 2007         |       | 254,606                    |       | $ | 26.59 |   | 3.87 |   | $ | 257 |   |
| Options exercisable at September 30, 2007 |       | 132,612                    |       | $ | 24.69 |   | 3.81 |   | $ | 386 |   |

 
| ** **                                | ** ** | **2006**                   | ** ** |
|-------------------------------------------|------------|----------------------------|------------|
| ** **                                | ** ** | **Number  of shares** | ** ** | **Weighted  average  exercise  price per  share** | ** ** | **Weighted  average  remaining  contractual  term (in  years)** | ** ** | **Aggregate  intrinsic  value ($ 000)** | ** ** |
| Outstanding at January 1, 2006            |       | 384,848                    |       | $ | 23.18 |   |   |   |   |   |
| Options granted                           |       | 11,000                     |       | 27.20 |   |   |   |   |   |
| Options exercised                         |       | (20,717                    | )          | 15.07 |   |   |   |   |   |
| Options forfeited                         |       | (8,509                     | )          | 29.69 |   |   |   |   |   |
| Options expired                           |       | —                     |       | — |   |   |   |   |   |
| Outstanding at September 30, 2006         |       | 366,622                    |       | $ | 23.61 |   | 3.56 |   | $ | 2,577 |   |
| Options exercisable at September 30, 2006 |       | 179,391                    |       | $ | 18.48 |   | 3.33 |   | $ | 2,181 |   |

 

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, 2007 and 2006 was $1,478,000 and$311,000, respectively. Exercise of stock options during the nine months endedSeptember 30, 2007 and 2006 resulted in cash receipts of $1,814,000 and$312,000, respectively.

 

Stock-based compensation expense included in netincome related to stock grants was $90,000 for each of the quarters endedSeptember 30, 2007 and 2006. Stock-based compensation expense included in netincome related to the Company’s employee stock ownership plan totaled $69,000and $88,000 for the three-month periods ended September 30, 2007 and 2006,respectively.

 

Stock-based compensation expense included in netincome related to stock grants was $271,000 for both nine- month periods endedSeptember 30, 2007 and 2006. Stock-based compensation expense included in netincome related to the Company’s employee stock ownership plan totaled $207,000and $303,000 for the nine-month periods ended September 30, 2007 and 2006,respectively.

 

10

----

 

**NOTE 7- EMPLOYEE BENEFIT PLANS**

 

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

 
| ** **                              | ** ** | **Three months ended  September 30** | ** ** |
|-----------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                              | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
|                                    |       |                                                |       |   |   |
| Components of net periodic benefit cost |       |                                                |       |   |   |
| Service cost                            |       | $                                                   | 84         |   | $ | 77 |   |
| Interest cost                           |       | 53                                                  |       | 53 |   |
| Expected return on plan assets          |       | (100                                                | )          | (81 | ) |
| Amortization of prior service cost      |       | 16                                                  |       | 16 |   |
| Recognized net actuarial (gain) loss    |       | 11                                                  |       | 12 |   |
|                                    |       |                                                |       |   |   |
| Net periodic benefit cost               |       | $                                                   | 64         |   | $ | 77 |   |

 
| ** **                              | ** ** | **Nine months ended  September 30** | ** ** |
|-----------------------------------------|------------|----------------------------------------------------|------------|
| ** **                              | ** ** | **2007**                                           | ** ** | **2006** | ** ** |
|                                    |       |                                               |       |   |   |
| Components of net periodic benefit cost |       |                                               |       |   |   |
| Service cost                            |       | $                                                  | 252        |   | $ | 231 |   |
| Interest cost                           |       | 158                                                |       | 158 |   |
| Expected return on plan assets          |       | (299                                               | )          | (242 | ) |
| Amortization of prior service cost      |       | 47                                                 |       | 47 |   |
| Recognized net actuarial (gain) loss    |       | 35                                                 |       | 38 |   |
|                                    |       |                                               |       |   |   |
| Net periodic benefit cost               |       | $                                                  | 193        |   | $ | 232 |   |

 

The employer contributionmade for the nine months ended September 30, 2007 and 2006 was $1,107,000 and$620,000, respectively.

 

11

----

 

**NOTE 8-NEW ACCOUNTING PRONOUNCEMENTS**

 

In September 2006,  theFinancial Accounting Standards Board (FASB) Issued StatementNo. 157 (SFAS 157), “Fair Value Measurements” which is effective forfiscal years beginning after November 15, 2007 and for interim periodswithin those years. This statement defines fair value, establishes a frameworkfor measuring fair value and expands the related disclosure requirements. TheCompany will adopt SFAS 157 effective January 1, 2008 which will result inincreased disclosures regarding fair value measurement.

 

In September 2006, the Emerging Issues Task Force(EITF) finalized Issue No. 06-5, “Accounting for Purchases of LifeInsurance—Determining the Amount That Could Be Realized in Accordance with FASBTechnical Bulletin No. 85-4 (Accounting for Purchases of Life Insurance)”.**This issue requires that a policyholder considercontractual terms of a life insurance policy in determining the amount thatcould be realized under the insurance contract. It also requires that if the contractprovides for a greater surrender value if all individual policies in a groupare surrendered at the same time, that the surrender value be determined basedon the assumption that policies will be surrendered on an individual basis.Lastly, the issue discusses whether the cash surrender value should bediscounted when the policyholder is contractually limited in its ability tosurrender a policy. This issue is effective for fiscal years beginning afterDecember 15, 2006. Application of this issue did not have a materialimpact on the Company’sconsolidated financial statements.

 

TheCompany adopted the provisions of FASB Interpretation No. 48 (FIN 48), “Accountingfor Uncertainty in Income Taxes”, on January 1, 2007. Previously, the Companyhad accounted for tax contingencies in accordance with SFAS 5, “Accounting for Contingencies”. Asrequired by FIN 48, which clarifies SFAS 109, “Accounting for Income Taxes”,the Company recognizes the financial statement benefit of a tax position onlyafter determining that the relevant tax authority would more likely than notsustain the position following an audit. For tax positions meeting themore-likely-than-not**threshold, theamount recognized in the financial statements is the largest benefit that has agreater than 50 percent likelihood of being realized upon ultimate settlementwith the relevant tax authority. The Company is subject to income taxes in theU.S. federal jurisdiction, and the states of Pennsylvania and New Jersey. Taxregulations within each jurisdiction are subject to the interpretation of therelated tax laws and regulations and require significant judgment to apply. TheCompany applied Interpretation 48 to all tax positions for which the statute oflimitations remained open. The adoption of FIN 48 did not have a materialimpact on the results of operations or financial condition of the Company.

 

InFebruary 2007, FASB issuedStatement No. 159 (SFAS 159), “The Fair Value Option for Financial Assetsand Financial Liabilities, including an amendment of FASB Statement No. 115”.The statement permits entities to choose to measure many financial instrumentsand certain other items at fair value. SFAS 159 provides an opportunity tomitigate volatility in reporting earnings caused by measuring related assetsand liabilities differently without having to apply complex hedge accountingprovisions. This statement is effective as of the beginning of an entity’sfirst fiscal year that begins after November 15, 2007. Early adoption ispermitted as of the beginning of a fiscal year that begins on or beforeNovember 15, 2007, provided the entity also elects to apply the provisions ofFASB Statement No. 157 (SFAS 157), “Fair Value Measurements”. Although theCompany has decided against early adoption, the Company will adopt SFAS No. 159effective January 1, 2008 and is currently evaluating whether it will elect tocarry any assets or liabilities at fair value.

 

**NOTE 9-RECLASSIFICATIONS**

 

Certain prior period amounts have been reclassified to conform to thecurrent period presentation.

 

12

----

 

**TFFINANCIAL CORPORATION AND SUBSIDIARIES**

 

**MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS**

 

**GENERAL**

 

The Company may from time to time make written or oral “forward-lookingstatements”, including statements contained in the Company’s filings with theSecurities and Exchange Commission (including this Quarterly Report on Form10-Q and the exhibits thereto), in its reports to stockholders and in othercommunications by the Company, which are made in good faith by the Companypursuant to the “Safe Harbor” Provisions of the Private Securities LitigationReform Act of 1995.

 

These forward-looking statements involve risks and uncertainties, suchas statements of the Company’s plans, objectives, expectations, estimates andintentions that are subject to change based on various important factors (someof which are beyond the Company’s control). The following factors, amongothers, could cause the Company’s financial performance to differ materiallyfrom the plans, objectives, expectations, estimates and intentions expressed insuch forward-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 monetary fluctuations;the timely development of and acceptance of new products and services of theCompany and the perceived overall value of these products and services byusers, 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.

 

The Company cautions that the foregoing list of important factors isnot exclusive. The Company does not undertake to update any forward-lookingstatement, whether written or oral, that may be made from time to time by or onbehalf of the Company.

 

**Financial Position**

 

The Company’s total assets at September 30, 2007 and December 31, 2006were $672.8 million and $652.6 million, respectively, an increase of $20.2million, or 3.1%, during the nine-month period. Cash and cash equivalentsdecreased by $7.5 million. Investment securities available for sale decreasedby $5.7 million due to maturities of agency and corporate notes totaling $6.5million offset by purchases of $0.8 million of tax-exempt municipal bonds. Investmentsecurities held to maturity decreased by $0.2 million as a result of securitymaturities. Mortgage-backedsecurities available for sale increased by $5.9 million due to $13.8 million ofpurchases and an increase in the fair value of the securities of $0.6 millionreduced by $8.5 million in principal repayments received. Mortgage-backedsecurities held to maturity decreased by $1.2 million as a result of principalrepayments.

 

Loans receivable increased by $27.4 million during the first ninemonths of 2007. Consumer and single-family residential mortgage loans of $44.4million and commercial loans of $52.5 million were originated during the firstnine months of 2007. Principal repayments of loans receivable were $68.2million. The Bank’s loans to deposit ratio, a measure of the success of theBank’s lending efforts was 108.1% at September 30, 2007. The Company has $72.0million of prime-rate based loans at September 30, 2007. Loans originated forsale during the first nine months of 2007 totaled $13.6 million, and there were$14.4 million in proceeds from the sale of loans in the secondary market duringthis period.

 

13

----

 

Total liabilities increased by $17.9 million. Deposit balancesdecreased by $5.6 million during the first nine months of 2007. Non-interestchecking, savings, and money market accounts increased by a combined $12.7million while interest-bearing checking accounts decreased $6.5 million duringthe period. Retail certificates of deposit decreased $95,000 during the periodand maturities of broker originated certificates of deposit totaled $11.7million during the first nine months of 2007. At September 30, 2007, the Bankhas $69.2 million of deposits indexed to the yield of the Merrill Lynch ReadyAsset Money Market Fund. Borrowings from the Federal Home Loan Bank increasedby $22.6 million, a result of new long term advances of $26.0 million and an$11.5 million increase of short-term borrowings, less scheduled amortizationpayments of $14.9 million.

 

Total consolidated stockholders’ equity of the Company was $67.9million or 10.0% of total assets at September 30, 2007. During the first ninemonths of 2007 the Company repurchased 108,559 shares of its common stock andissued 109,396 shares pursuant to the exercise of stock options. As ofSeptember 30, 2007, there were approximately 19,000 shares available forrepurchase under the previously announced share repurchase plan. OnOctober 25, 2007, the Board of Directors approved a new stock repurchase plancovering up to 200,000 shares or approximately 7% of the Company’s outstandingcommon stock.

 

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

######  

During the nine months of 2007 and 2006, the Company’s provision forloan losses was $0 and $150,000, respectively. The Company is takingappropriate steps with respect to each of the non-performing loans, all ofwhich are real estate secured, to resolve the individual situations.

 

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

 
| ** **                                                  | ** ** | **September 30,** | ** ** | **December 31,** | ** ** | **September 30,** | ** ** |
|-------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                                                  | ** ** | **2007**               | ** ** | **2006**              | ** ** | **2006**               | ** ** |
| ** **                                                  | ** ** | ** **             | ** ** | ** **            | ** ** | ** **             | ** ** |
| Non-performing loans                                        |       | $                      | 2,780      |                  | $          | 2,110                  |       | $ | 1,131 |   |
| Ratio of non-performing loans  to gross loans               |       | 0.54                   | %          | 0.43                  | %          | 0.22                   | %          |
| Ratio of non-performing loans  to total assets              |       | 0.41                   | %          | 0.32                  | %          | 0.17                   | %          |
| Ratio of total non-performing  assets to total assets       |       | 0.41                   | %          | 0.32                  | %          | 0.17                   | %          |
| Ratio of allowance for loan  losses to total loans          |       | 0.55                   | %          | 0.59                  | %          | 0.56                   | %          |
| Ratio of allowance for loan  losses to non-performing loans |       | 102.48                 | %          | 135.78                | %          | 248.45                 | %          |
|                                                             |            |                        |            |                       |            |                        |            |  |  |  |

 

Management maintains an allowance for loan losses at levels that arebelieved to be adequate; however, there can be no assurances that furtheradditions will not be necessary or that losses inherent in the existing loanportfolio will not exceed the allowance. The following table sets forth theactivity in the allowance for loan losses during the periods indicated (inthousands):

 
| ** **                                 | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|
| Beginning balance, January 1,              |       | $        | 2,865      |     | $          | 2,641 |   |
| Provision                                  |       | —   |       | 150      |       |
| Less: charge-off’s  (recoveries), net |       | 16       |       | (19      | )          |
| Ending balance, September 30,              |       | 2,849    |       | 2,810    |       |
|                                            |            |          |            |          |            |  |  |

 

14

----

 

**RESULTS OF OPERATIONS FOR THE THREE MONTHSENDED SEPTEMBER 30, 2007 AND 2006**

 

**Net Income**. TheCompany recorded net income of $1,188,000, or $0.44 per diluted share, for thethree months ended September 30, 2007 as compared to net income of $1,412,000,or $0.52 per diluted share, for the three months ended September 30, 2006.

 

### **Average Balance Sheet**

###  

The following table sets forth information (dollars in thousands)relating to the Company’s average balance sheet and reflects the average yieldon assets and average cost of liabilities for the periods indicated. Yield andcost are computed 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,** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                         | ** ** | **2007**               | ** ** | **2006** | ** ** |
| ** **                                                                         | ** ** | **Average  balance**   | ** ** | **Interest** | ** ** | **Average  yld/cost** | ** ** | **Average  balance** | ** ** | **Interest** | ** ** | **Average  yld/cost** | ** ** |
| **ASSETS**                                                                         |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| **Interest-earning assets:**                                                       |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Loans receivable(1)                                                                |       | $                      | 506,471    |   | $ | 8,262 |   | 6.47 | % | $ | 501,012 |   | $ | 8,243 |   | 6.53 | % |
| Mortgage-backed securities                                                         |       | 87,723                 |       | 1,054 |   | 4.77 | % | 75,620 |   | 872 |   | 4.57 | % |
| Investment securities(2)                                                           |       | 36,039                 |       | 500 |   | 5.50 | % | 41,957 |   | 555 |   | 5.25 | % |
| Other interest-earning assets(3)                                                   |       | 901                    |       | 11 |   | 4.84 | % | 3,432 |   | 43 |   | 4.97 | % |
| Total interest-earning assets                                                      |       | 631,134                |       | 9,827 |   | 6.18 | % | 622,021 |   | 9,713 |   | 6.20 | % |
| Non interest-earning assets                                                        |       | 35,964                 |       |   |   |   |   | 34,613 |   |   |   |   |   |
| Total assets                                                                       |       | $                      | 667,098    |   |   |   |   |   | $ | 656,634 |   |   |   |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                      |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| **Interest-bearing liabilities:**                                                  |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Deposits                                                                           |       | 476,021                |       | 3,530 |   | 2.94 | % | 471,556 |   | 2,949 |   | 2.48 | % |
| Borrowings from the FHLB                                                           |       | 113,630                |       | 1,211 |   | 4.23 | % | 114,070 |   | 1,144 |   | 3.98 | % |
| Total interest-bearing liabilities                                                 |       | 589,651                |       | 4,741 |   | 3.19 | % | 585,626 |   | 4,093 |   | 2.77 | % |
| Non interest-bearing liabilities                                                   |       | 10,893                 |       |   |   |   |   | 7,297 |   |   |   |   |   |
| Total liabilities                                                                  |       | 600,544                |       |   |   |   |   | 592,923 |   |   |   |   |   |
| Stockholders’ equity                                                          |       | 66,554                 |       |   |   |   |   | 63,711 |   |   |   |   |   |
| Total liabilities and stockholders’ equity                                    |       | $                      | 667,098    |   |   |   |   |   | $ | 656,634 |   |   |   |   |   |
| Net interest income                                                                |       |                   |       | $ | 5,086 |   |   |   |   |   | $ | 5,620 |   |   |   |
| Interest rate spread(4)                                                            |       |                   |       |   |   | 2.99 | % |   |   |   |   | 3.42 | % |
| Net yield on interest-earning assets(5)                                            |       |                   |       |   |   | 3.20 | % |   |   |   |   | 3.58 | % |
| Ratio of average interest-earning assets to  average interest- bearing liabilities |       |                   |       |   |   | 107 | % |   |   |   |   | 106 | % |

 

----

| (1) |   | Nonaccrual loans have  been included in the appropriate average loan balance category, but interest  on nonaccrual loans has not been included for purposes of determining  interest income.                                                       |
|-----|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | Tax equivalent  adjustments to interest on investment securities were $107,000 and $102,000  for the quarter ended September 30, 2007 and 2006, respectively. Tax  equivalent interest income is based upon a marginal effective tax rate of  34%. |
| (3) |   | Includes  interest-bearing deposits in other banks.                                                                                                                                                                                                |
| (4) |   | Interest rate spread  represents the difference between the average yield on interest-earning  assets and the average cost of interest-bearing liabilities.                                                                                        |
| (5) |   | Net yield on  interest-earning assets represents net interest income as a percentage of  average interest-earning assets.                                                                                                                          |

 

15

----

 

**Rate/Volume Analysis**

 

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

 
| ** **                         | ** ** | **Three months ended September 30,**              | ** ** |
|------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                         | ** ** | **2007 vs 2006  Increase (decrease) due to** | ** ** |
| ** **                         | ** ** | **Volume**                                                            | ** ** | **Rate** | ** ** | **Net** | ** ** |
| **Interest income:**               |       |                                                                  |       |   |   |   |   |
| Loans receivable, net              |       | $                                                                     | 323        |   | $ | (304 | ) | $ | 19 |   |
| Mortgage-backed securities         |       | 144                                                                   |       | 38 |   | 182 |   |
| Investment securities (1)          |       | (201                                                                  | )          | 146 |   | (55 | ) |
| Other interest-earning assets      |       | (31                                                                   | )          | (1 | ) | (32 | ) |
| Total interest-earning assets      |       | 235                                                                   |       | (121 | ) | 114 |   |
| **Interest expense:**              |       |                                                                  |       |   |   |   |   |
| Deposits                           |       | 28                                                                    |       | 553 |   | 581 |   |
| Borrowings from the FHLB           |       | (29                                                                   | )          | 96 |   | 67 |   |
| Total interest-bearing liabilities |       | (1                                                                    | )          | 649 |   | 648 |   |
| Net change in net interest income  |       | $                                                                     | 236        |   | $ | (770 | ) | $ | (534 | ) |

 

----

| (1) |   | Tax  equivalent adjustments to interest on investment securities were $107,000 and  $102,000 for the quarters ended September 30, 2007 and 2006, respectively.  Tax equivalent interest income is based upon a marginal effective tax rate of  34%. |
|-----|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**Total Interest Income**.Total interest income, on a taxable equivalent basis, increased by $114,000 or1.2% to $9.8 million for the quarter ended September 30, 2007 compared with thethird quarter of 2006. The average balance of loans outstanding increasedbetween the two periods as a result of loan originations added to the portfolioduring the intervening period. However the average yield on loans decreased 6basis points due to an adjustment tointerest income for non-accrual loans which was $71,000 higher than the prioryear period. Interest income from mortgage-backed securities was higherin the third quarter of 2007 in comparison to the same period of 2006 due topurchases of $23.9 million of higher yielding securities during the interveningperiod. Interest income from investment securities decreased as a result ofmaturities of $6.5 million in excess of purchases of $2.6 million during theintervening period.

 

**Total Interest Expense.**Total interest expense increased by $648,000 to $4.7 million during thethree-month period ended September 30, 2007 as compared with the third quarterof 2006. During 2006 and the first nine months of 2007, the Bank raised theinterest rates paid on many of its deposit products due to the competitivepricing environment in the Bank’s deposit market. Additionally during theintervening period, the Bank offered new products with higher rates which alsocontributed to average balance deposit growth and a shift in the deposit mix.Accordingly, the interest rate paid on deposits increased by 46 basis points.Interest on borrowings from the Federal Home Loan Bank increased by $67,000during the third quarter of 2007 versus the same quarter of 2006 due to anincrease of 25 basis points in the cost of these funds.

 

**Non-interestincome.**Totalnon-interest income was $708,000 for the three-month period ended September 30,2007 compared with $813,000 for the same period in 2006. Net gain on the saleof loans totaled $52,000 during the third quarter of 2007, while the gainduring the third quarter of 2006 totaled $152,000 and was inclusive of a$130,000 gain associated with the non-recurring sale of previously purchasedportfolio loans. The increase in the value of the bank-owned life insurance of$27,000 during the third quarter of 2007 versus 2006 is largely due to anadditional $2.0 million purchase during November of 2006.

 

**Non-interestexpense.**Totalnon-interest expense decreased by $313,000 to $4.1 million for the three monthsended September 30, 2007 compared to the same period in 2006. During the thirdquarter of 2007, the Bank significantly curtailed marketing-relatedexpenditures in an effort to reduce non-interest related expenses. Thisresulted in a decrease in marketing expenses of $176,000 in the third quarterof 2007 versus the same period of 2006. In 2006, other non-interest expenseincluded core deposit intangible amortization expense totaling $27,000 and asthe asset was fully amortized in 2006, there was no such charge during thethird quarter of 2007.

 

16

----

 

**RESULTSOF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006**

 

**Net Income**.The Company recorded net income of $3,623,000, or $1.32 per diluted share, forthe nine months ended September 30, 2007 as compared to net income of$4,059,000, or $1.49 per diluted share, for the nine months ended September 30,2006.

 

### **Average Balance Sheet**

###  

Thefollowing table sets forth information (dollars in thousands) relating to theCompany’s average balance sheet and reflects the average yield on assets andaverage cost of liabilities for the periods indicated. Yield and cost arecomputed by dividing income or expense by the average daily balance of interest-earningassets or interest-bearing liabilities, respectively, for the nine-monthperiods indicated.

 
| ** **                                                                         | ** ** | **September 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                         | ** ** | **2007**               | ** ** | **2006** | ** ** |
| ** **                                                                         | ** ** | **Average  balance**   | ** ** | **Interest** | ** ** | **Average  yld/cost** | ** ** | **Average  balance** | ** ** | **Interest** | ** ** | **Average  yld/cost** | ** ** |
| **ASSETS**                                                                         |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| **Interest-earning assets:**                                                       |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Loans receivable(1)                                                                |       | $                      | 497,565    |   | $ | 24,027 |   | 6.47 | % | $ | 503,971 |   | $ | 24,081 |   | 6.39 | % |
| Mortgage-backed securities                                                         |       | 85,018                 |       | 2,993 |   | 4.72 | % | 83,107 |   | 2,841 |   | 4.57 | % |
| Investment securities(2)                                                           |       | 38,227                 |       | 1,555 |   | 5.45 | % | 41,767 |   | 1,644 |   | 5.26 | % |
| Other interest-earning assets(3)                                                   |       | 2,502                  |       | 97 |   | 5.20 | % | 1,831 |   | 65 |   | 4.75 | % |
| Total interest-earning assets                                                      |       | 623,312                |       | 28,672 |   | 6.17 | % | 630,676 |   | 28,631 |   | 6.07 | % |
| Non interest-earning assets                                                        |       | 34,847                 |       |   |   |   |   | 34,489 |   |   |   |   |   |
| Total assets                                                                       |       | $                      | 658,159    |   |   |   |   |   | $ | 665,165 |   |   |   |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                      |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| **Interest-bearing liabilities:**                                                  |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Deposits                                                                           |       | 478,790                |       | 10,176 |   | 2.85 | % | 466,652 |   | 7,757 |   | 2.22 | % |
| Borrowings from the FHLB                                                           |       | 105,413                |       | 3,246 |   | 4.13 | % | 128,381 |   | 3,880 |   | 4.04 | % |
| Total interest-bearing liabilities                                                 |       | 584,203                |       | 13,422 |   | 3.08 | % | 595,033 |   | 11,637 |   | 2.61 | % |
| Non interest-bearing liabilities                                                   |       | 7,293                  |       |   |   |   |   | 7,269 |   |   |   |   |   |
| Total liabilities                                                                  |       | 591,496                |       |   |   |   |   | 602,302 |   |   |   |   |   |
| Stockholders’ equity                                                          |       | 66,663                 |       |   |   |   |   | 62,863 |   |   |   |   |   |
| Total liabilities and stockholders’ equity                                    |       | $                      | 658,159    |   |   |   |   |   | $ | 665,165 |   |   |   |   |   |
| Net interest income                                                                |       |                   |       | $ | 15,250 |   |   |   |   |   | $ | 16,994 |   |   |   |
| Interest rate spread(4)                                                            |       |                   |       |   |   | 3.09 | % |   |   |   |   | 3.45 | % |
| Net yield on interest-earning assets(5)                                            |       |                   |       |   |   | 3.28 | % |   |   |   |   | 3.60 | % |
| Ratio of average interest-earning assets to  average interest- bearing liabilities |       |                   |       |   |   | 107 | % |   |   |   |   | 106 | % |

 

----

| (1) |   | Nonaccrual loans have  been included in the appropriate average loan balance category, but interest  on nonaccrual loans has not been included for purposes of determining  interest income.                                                           |
|-----|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | Tax equivalent  adjustments to interest on investment securities were $324,000 and $290,000  for the nine months ended September 30, 2007 and 2006, respectively. Tax  equivalent interest income is based upon a marginal effective tax rate of  34%. |
| (3) |   | Includes  interest-bearing deposits in other banks.                                                                                                                                                                                                    |
| (4) |   | Interest rate spread  represents the difference between the average yield on interest-earning  assets and the average cost of interest-bearing liabilities.                                                                                            |
| (5) |   | Net yield on  interest-earning assets represents net interest income as a percentage of  average interest-earning assets.                                                                                                                              |

 

17

----

 

**Rate/Volume Analysis**

 

The following table presents, for the periods indicated, the change ininterest income and interest expense (in thousands) attributed to (i) changesin volume (changes in the weighted average balance of the total interestearning asset and interest bearing liability portfolios multiplied by the prioryear rate), 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,**               | ** ** |
|------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                         | ** ** | **2007 vs 2006  Increase (decrease) due to** | ** ** |
| ** **                         | ** ** | **Volume**                                                            | ** ** | **Rate** | ** ** | **Net** | ** ** |
| **Interest income:**               |       |                                                                  |       |   |   |   |   |
| Loans receivable, net              |       | $                                                                     | (446       | ) | $ | 392 |   | $ | (54 | ) |
| Mortgage-backed securities         |       | 63                                                                    |       | 89 |   | 152 |   |
| Investment securities (1)          |       | (174                                                                  | )          | 85 |   | (89 | ) |
| Other interest-earning assets      |       | 25                                                                    |       | 7 |   | 32 |   |
| Total interest-earning assets      |       | (532                                                                  | )          | 573 |   | 41 |   |
| **Interest expense:**              |       |                                                                  |       |   |   |   |   |
| Deposits                           |       | 204                                                                   |       | 2,215 |   | 2,419 |   |
| Borrowings from the FHLB           |       | (766                                                                  | )          | 132 |   | (634 | ) |
| Total interest-bearing liabilities |       | (562                                                                  | )          | 2,347 |   | 1,785 |   |
| Net change in net interest income  |       | $                                                                     | 30         |   | $ | (1,774 | ) | $ | (1,744 | ) |

 

----

| (1) |   | Tax equivalent  adjustments to interest on investment securities were $324,000 and $290,000  for the nine months ended September 30, 2007 and 2006, respectively. Tax  equivalent interest income is based upon a marginal effective tax rate of  34%. |
|-----|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**Total Interest Income**.Total interest income, on a taxable equivalent basis, increased by $41,000 or0.1% to $28.7 million for the nine months ended September 30, 2007 comparedwith the first nine months of 2006. The average balance of loans outstandingdecreased between the two periods largely because of the sale of $16.3 millionof previously purchased loans during the third quarter of 2006. However, theaverage yield on loans increased a net 9 basis points, reflecting a rise in the yield on new loans added to the portfolioduring the intervening period. Offsetting the rise in increased rates was areduction of interest income for interest on non-accrual loans which was$233,000 higher than the prior nine-month period. Interest income frommortgage-backed securities was higher in the first nine months of 2007 incomparison to the same period of 2006 as a result of purchases of $23.9 millionin higher yielding securities during the intervening period. Interest incomefrom investment securities decreased during the period as a result ofmaturities of $6.5 million in excess of purchases of $2.6 million during theintervening period.

 

**Total Interest Expense.**Totalinterest expense increased by $1.8 million to $13.4 million during thenine-month period ended September 30, 2007 as compared with the same period in2006. During 2006 and the first nine months of 2007, the Bank raised theinterest rates paid on many of its deposit products due to the competitivepricing environment in the Bank’s deposit market. Additionally during theintervening period, the Bank offered new products with higher rates which alsocontributed to average balance deposit growth and a shift in the deposit mix.Accordingly, the interest rate paid on deposits increased by 63 basis points.Interest on borrowings from the Federal Home Loan Bank decreased by $0.6million during the first nine months of 2007 versus 2006 as a result of a $23.0million decrease in the average balance of borrowings. Although total FHLBadvances increased between the periods, the increases in advances during 2007occurred late in the third quarter of 2007.

 

**Non-interest income.**Total non-interest incomewas $3.0 million for the nine-month period ended September 30, 2007 comparedwith $2.1 million for the same period in 2006. The increase is mainlyattributable to a $777,000 settlement award related to a lease fraud whichoccurred prior to 2003. The increase in the value of the bank-owned lifeinsurance of $80,000 during 2007 versus 2006 is due to the additional $2.0million purchase during November of 2006. Additionally, loss on sale of mortgage-backed securities in thesecond quarter of 2006 totaled $51,000 while there was no such loss in 2007.

 

18

----

 

**Non-interest expense.**Total non-interestexpense decreased by $126,000 to $12.9 million for the nine months ended September30, 2007 compared to the same period in 2006. During the third quarter of 2007, the Bank significantly curtailedmarketing-related expenditures in an effort to reduce non-interest relatedexpenses. This resulted in a decrease in marketing expenses of $202,000 in 2007in contrast to 2006. Expenses associated with the Company’s retirement plansdecreased $129,000 during the period as a result of company contributions tothe defined benefit plan made early in 2007 which reduced the expense. Costsrelated to the Employee Stock Ownership Plan also decreased because the costper share and the number of shares allocated declined. Additionally, coredeposit intangible amortization expense of $83,000 is included in othernon-interest expense in 2006; however, the asset was fully amortized in 2006and there was no such charge during 2007.Offsetting total decreases was a $306,000 expense related to thebankruptcy of one of the Company’s loan servicing agents. On February 2, 2007,the Company became aware that one of its loan servicers which was servicing 43loans for the Company totaling $15.4 million had filed for protection andreorganization under Chapter 11 of the United States Bankruptcy Code onDecember 20, 2006. On March 2, 2007 the bankruptcy filing was converted to aChapter 7 liquidation and the Company shortly thereafter obtained the servicingand began to directly service the loans. At the present time, the Company isseeking recovery of all monies collected and held on its behalf by the servicerand bankruptcy trustee.

 

**LIQUIDITYAND 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, 2007 in the ability ofthe Company and its subsidiaries to fund their operations.

 

At September 30, 2007, the Company had commitmentsoutstanding under letters of credit of $1.7 million, commitments to originateloans of $14.4 million, and commitments to fund undisbursed balances of closedloans and unused lines of credit of $51.0 million. At September 30, 2007, theBank had $0.6 million outstanding commitments to sell loans. There has been no material change duringthe nine months ended September 30, 2007 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, 2007.

 

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

######  

###### **Asset and Liability Management**

######  

The Company’s market risk exposure is predominately caused by interestrate risk, which is defined as the sensitivity of the Company’s current andfuture earnings, the values of its assets and liabilities, and the value of itscapital to changes in the level of market interest rates. Management of theCompany believes that there has not been a material adverse change in marketrisk during the nine months ended September 30, 2007.

 

**CONTROLS AND PROCEDURES**

 

**Evaluation of Disclosure Controls and Procedures**

 

Based on their evaluation of the Company’s disclosure controls andprocedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of1934 (the “Exchange Act”)), the Company’s principal executive officer andprincipal financial officer have concluded that as of the end of the periodcovered by this Quarterly Report on Form 10-Q such disclosure controls andprocedures are effective.

 

**Changes in Internal Controls over Financial Reporting**

 

During the quarter under report, there was no change in the Company’sinternal control over financial reporting that has materially affected, or isreasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

19

----

 

**CRITICAL ACCOUNTING POLICIES**

 

Certain critical accounting policies of the Company require the use ofsignificant judgment and accounting estimates in the preparation of theconsolidated financial statements and related data of the Company. Theseaccounting estimates require management to make assumptions about matters thatare highly uncertain at the time the accounting estimate is made. Managementbelieves that the most critical accounting policy requiring the use ofaccounting estimates and judgment is the determination of the allowance forloan losses. If the financial position of a significant amount of debtorsshould deteriorate more than the Company has estimated, present reserves forloan losses may be insufficient and additional provisions for loan losses maybe required. The allowance for loan losses was $2,849,000 at September 30,2007.

 

20

----

 

**TFFINANCIAL CORPORATION AND SUBSIDIARIES**

 

**PART II**

 
| **ITEM 1.**  | ** ** | **LEGAL  PROCEEDINGS**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|--------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|         |       | On February 2, 2007,  the Company became aware that one of its loan servicers which was servicing  43 loans for the Company totaling $15.4 million had filed for protection and  reorganization under Chapter 11 of the United States Bankruptcy Code on  December 20, 2006. On March 2, 2007 the bankruptcy filing was converted to a  Chapter 7 liquidation and the Company shortly thereafter obtained the  servicing and began to directly service the loans. At the present time, the  Company is seeking recovery of all monies collected and held on its behalf by  the servicer and bankruptcy trustee. At September 30, 2007, the Company  reported an expense of $306,000 during 2007 related to this matter. |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| **ITEM 1A.** | ** ** | **RISK  FACTORS**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|         |       | Management does not  believe there have been any material changes to the Risk Factors previously  disclosed under Item 1A. on the Company’s Form 10-K for the year ended  December 31, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| **ITEM 2.**  | ** ** | **UNREGISTERED  SALE OF EQUITY SECURITIES AND USE OF PROCEEDS**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|         |       | The following table  provides information on repurchases by the Company of its common stock in  each month for the three months ended September 30, 2007:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |

 
| **Month**                              | ** ** | **Total Number of  Shares Purchased** | ** ** | **Average Price  Paid per Share** | ** ** | **Total Number of  Shares Purchased  as  Part of Publicly  Announced Plan of  Program** | ** ** | **Maximum Number  of  Shares that may yet  be Purchased  Under  the Plans or  Programs** | ** ** |
|----------------------------------------|------------|------------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------|------------|
|                                   |       |                                                 |       |                                             |       |                                                                                                                       |       |                                                                                                                        |       |
| July 1, 2007 - July 31, 2007           |       | —                                               |       | $                                                | —     |                                                                                                                       | —     |                                                                                                                        | 30,773     |   |
|                                   |       |                                                 |       |                                             |       |                                                                                                                       |       |                                                                                                                        |       |
| August 1, 2007 – August 31, 2007  |       | 7,000                                                |       | $                                                | 28.05      |                                                                                                                       | 7,000      |                                                                                                                        | 23,773     |   |
|                                   |       |                                                 |       |                                             |       |                                                                                                                       |       |                                                                                                                        |       |
| September 1, 2007 - September 30, 2007 |       | 5,000                                                |       | $                                                | 26.65      |                                                                                                                       | 5,000      |                                                                                                                        | 18,773     |   |

 
|  |   | On October 25, 2007,  the Board of Directors approved a new stock repurchase plan covering up to  200,000 shares or approximately 7% of the Company’s outstanding common stock. |
|--|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 
| **ITEM 3.** | ** ** | **DEFAULTS  UPON SENIOR SECURITIES**                     |
|-------------|------------|----------------------------------------------------------|
|        |       |                                                     |
|        |       | Not applicable.                                          |
|        |       |                                                     |
|        |       |                                                     |
| **ITEM 4.** | ** ** | **SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS** |
| ** **  | ** ** | ** **                                               |
|        |       | None                                                     |
| ** **  | ** ** | ** **                                               |
| **ITEM 5.** | ** ** | **OTHER  INFORMATION**                                   |
| ** **  | ** ** | ** **                                               |
|        |       | None                                                     |

 

21

----

 
| **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. |

 

22

----

 

**TF FINANCIAL CORPORATION**

 

**SIGNATURES**

Pursuant to the requirements of the Securities Exchange Act of 1934,the Registrant has duly caused this Report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
| Date:  | November 13, 2007 |                                            | /s/ Kent C. Lufkin    |   |
|--------|-------------------|-------------------------------------------------|-----------------------|--------|
|   |              | Kent C. Lufkin                                  |
|   |              | President and CEO                               |
|   |              | (Principal Executive Officer)                   |
|   |              |                                            |
|   |              |                                            |
| Date:  | November 13, 2007 |                                            | /s/ Dennis R. Stewart |   |
|   |              | Dennis R. Stewart                               |
|   |              | Executive Vice President and                    |
|   |              | Chief Financial Officer                         |
|   |              | (Principal  Financial & Accounting Officer) |
|        |                   |                                                 |                       |        |  |

 

23

----