**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**x****                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934**

 

**For the period ended March 31,2008**

 

**- or -**

 

**o****                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934**

 

**For the transition period from                                   to**

 

**Commission file number:  0-24168**

 

**TF FINANCIAL CORPORATION**(Exact Name of Registrant as Specified 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 requiredto be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. YES x**  **NO o

 

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

 

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

 

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

 

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock as of the latest practicable date: **May 8, 2008**

 
| Class                        | ** ** | **Outstanding**   |
|------------------------------|------------|-------------------|
| $.10  par value common stock |       | 2,820,485  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 |   | 12 |
|                                                                               |       |                                                                                        |   |   |
| Item 3.                                                                            |       | Quantitative  and Qualitative Disclosures about Market Risk                                 |   | 16 |
|                                                                               |       |                                                                                        |   |   |
| Item 4T.                                                                           |       | Controls and Procedures                                                                     |   | 16 |
|                                                                               |       |                                                                                        |   |   |
| **PART II-OTHER  INFORMATION**                                                |       |                                                                                        |
|                                                                               |       |                                                                                        |   |   |
| Item 1.                                                                            |       | Legal Proceedings                                                                           |   | 17 |
|                                                                               |       |                                                                                        |   |   |
| Item 1A.                                                                           |       | Risk Factors                                                                                |   | 17 |
|                                                                               |       |                                                                                        |   |   |
| Item 2.                                                                            |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                |   | 17 |
|                                                                               |       |                                                                                        |   |   |
| Item 3.                                                                            |       | Defaults Upon  Senior Securities                                                            |   | 17 |
|                                                                               |       |                                                                                        |   |   |
| Item 4.                                                                            |       | Submission of  Matters to a Vote of Security Holders                                        |   | 17 |
|                                                                               |       |                                                                                        |   |   |
| Item 5.                                                                            |       | Other Information                                                                           |   | 18 |
|                                                                               |       |                                                                                        |   |   |
| Item 6.                                                                            |       | Exhibits                                                                                    |   | 18 |
|                                                                               |       |                                                                                        |   |   |
| **Signatures**                                                                     |       | 19                                                                                          |
|                                                                               |       |                                                                                        |
| **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  March 31,  2008** | ** ** | **Audited  December 31,  2007** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                                                                                                                                                                           | ** ** | **(in thousands)**             | ** ** |
| ASSETS                                                                                                                                                                                                                                                               |       |                                |       |                                 |       |
| Cash and cash equivalents                                                                                                                                                                                                                                            |       | $                                   | 4,281      |                                 | $          | 5,680 |   |
| Investment securities available for sale—at fair value                                                                                                                                                                                                          |       | 32,587                              |       | 32,363                               |       |
| Investment securities held to maturity (fair value of $246)                                                                                                                                                                                                          |       | 245                                 |       | 244                                  |       |
| Mortgage-backed securities available for sale—at fair value                                                                                                                                                                                                     |       | 94,770                              |       | 98,178                               |       |
| Mortgage-backed securities held to maturity (fair value of $6,152 and  $6,343, respectively)                                                                                                                                                                         |       | 5,906                               |       | 6,160                                |       |
| Loans receivable, net                                                                                                                                                                                                                                                |       | 540,917                             |       | 517,027                              |       |
| Loans receivable held for sale                                                                                                                                                                                                                                       |       | 789                                 |       | 1,040                                |       |
| Federal Home Loan Bank stock—at cost                                                                                                                                                                                                                            |       | 9,329                               |       | 8,782                                |       |
| Accrued interest receivable                                                                                                                                                                                                                                          |       | 2,873                               |       | 3,036                                |       |
| Premises and equipment, net                                                                                                                                                                                                                                          |       | 6,058                               |       | 6,267                                |       |
| Goodwill                                                                                                                                                                                                                                                             |       | 4,324                               |       | 4,324                                |       |
| Bank-owned life insurance                                                                                                                                                                                                                                            |       | 16,040                              |       | 15,881                               |       |
| Other assets                                                                                                                                                                                                                                                         |       | 3,298                               |       | 2,691                                |       |
| TOTAL ASSETS                                                                                                                                                                                                                                                         |       | $                                   | 721,417    |                                 | 701,673    |   |
|                                                                                                                                                                                                                                                                 |       |                                |       |                                 |       |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                                                                                                                                                           |       |                                |       |                                 |       |
| Liabilities                                                                                                                                                                                                                                                          |       |                                |       |                                 |       |
| Deposits                                                                                                                                                                                                                                                             |       | $                                   | 478,964    |                                 | $          | 472,394 |   |
| Borrowings from the Federal Home Loan Bank                                                                                                                                                                                                                           |       | 163,601                             |       | 153,221                              |       |
| Advances from borrowers for taxes and insurance                                                                                                                                                                                                                      |       | 2,002                               |       | 2,193                                |       |
| Accrued interest payable                                                                                                                                                                                                                                             |       | 3,692                               |       | 3,415                                |       |
| Other liabilities                                                                                                                                                                                                                                                    |       | 3,429                               |       | 2,607                                |       |
| Total liabilities                                                                                                                                                                                                                                                    |       | 651,688                             |       | 633,830                              |       |
|                                                                                                                                                                                                                                                                 |       |                                |       |                                 |       |
| Stockholders’ equity                                                                                                                                                                                                                                            |       |                                |       |                                 |       |
| Preferred stock, no par value; 2,000,000 shares authorized at  March 31, 2008 and December 31, 2007, none issued                                                                                                                                           |       | —                              |       | —                               |       |
| Common stock, $0.10 par value; 10,000,000 shares authorized,  5,290,000 shares issued, 2,664,047 and 2,671,083 shares outstanding at  March 31, 2008 and December 31, 2007, respectively, net of shares  in treasury 2,469,515 and 2,459,440, respectively |       | 529                                 |       | 529                                  |       |
| Additional paid-in capital                                                                                                                                                                                                                                           |       | 53,560                              |       | 53,337                               |       |
| Unearned ESOP shares                                                                                                                                                                                                                                                 |       | (1,564                              | )          | (1,595                               | )          |
| Treasury stock-at cost                                                                                                                                                                                                                                               |       | (51,460                             | )          | (51,216                              | )          |
| Retained earnings                                                                                                                                                                                                                                                    |       | 68,482                              |       | 67,735                               |       |
| Accumulated other comprehensive income (loss)                                                                                                                                                                                                                        |       | 182                                 |       | (947                                 | )          |
| Total stockholders’ equity                                                                                                                                                                                                                                      |       | 69,729                              |       | 67,843                               |       |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                                                                                                      |       | $                                   | 721,417    |                                 | $          | 701,673 |   |

 

The accompanying notes are an integral partof these statements

 

3

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**TF FinancialCorporation and Subsidiaries**

 

**CONSOLIDATEDSTATEMENTS OF INCOME**

**(Unaudited)**

** **
| ** **                                          | ** ** | **For the three months ended  March 31,** | ** ** |
|-----------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                          | ** ** | **2008**                                                           | ** ** | **2007** | ** ** |
| ** **                                          | ** ** | **(in thousands, except per  share data)**     | ** ** |
| Interest income                                     |       |                                                               |       |   |   |
| Loans, including fees                               |       | $                                                                  | 8,183      |   | $ | 7,779 |   |
| Mortgage-backed securities                          |       | 1,231                                                              |       | 933 |   |
| Investment securities                               |       | 413                                                                |       | 434 |   |
| Interest-bearing deposits and other                 |       | 6                                                                  |       | 67 |   |
|                                                |       |                                                               |       |   |   |
| TOTAL INTEREST INCOME                               |       | 9,833                                                              |       | 9,213 |   |
|                                                |       |                                                               |       |   |   |
| Interest expense                                    |       |                                                               |       |   |   |
| Deposits                                            |       | 3,286                                                              |       | 3,230 |   |
| Borrowings                                          |       | 1,632                                                              |       | 979 |   |
|                                                |       |                                                               |       |   |   |
| TOTAL INTEREST EXPENSE                              |       | 4,918                                                              |       | 4,209 |   |
|                                                |       |                                                               |       |   |   |
| NET INTEREST INCOME                                 |       | 4,915                                                              |       | 5,004 |   |
| Provision for loan losses                           |       | —                                                             |       | — |   |
|                                                |       |                                                               |       |   |   |
| NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES |       | 4,915                                                              |       | 5,004 |   |
|                                                |       |                                                               |       |   |   |
| Non-interest income                                 |       |                                                               |       |   |   |
| Service fees, charges and other operating income    |       | 693                                                                |       | 547 |   |
| Bank owned life insurance                           |       | 159                                                                |       | 148 |   |
| Gain on sale of loans                               |       | 62                                                                 |       | 54 |   |
| Other income                                        |       | 197                                                                |       | 777 |   |
|                                                |       |                                                               |       |   |   |
| TOTAL NON-INTEREST INCOME                           |       | 1,111                                                              |       | 1,526 |   |
|                                                |       |                                                               |       |   |   |
| Non-interest expense                                |       |                                                               |       |   |   |
| Employee compensation and benefits                  |       | 2,538                                                              |       | 2,668 |   |
| Occupancy and equipment                             |       | 728                                                                |       | 692 |   |
| Professional fees                                   |       | 254                                                                |       | 224 |   |
| Marketing and advertising                           |       | 144                                                                |       | 163 |   |
| Other operating                                     |       | 598                                                                |       | 843 |   |
|                                                |       |                                                               |       |   |   |
| TOTAL NON-INTEREST EXPENSE                          |       | 4,262                                                              |       | 4,590 |   |
|                                                |       |                                                               |       |   |   |
| INCOME BEFORE INCOME TAXES                          |       | 1,764                                                              |       | 1,940 |   |
|                                                |       |                                                               |       |   |   |
| Income tax expense                                  |       | 483                                                                |       | 542 |   |
|                                                |       |                                                               |       |   |   |
| NET INCOME                                          |       | $                                                                  | 1,281      |   | $ | 1,398 |   |
| Earnings per share—basic                       |       | $                                                                  | 0.48       |   | $ | 0.51 |   |
| Earnings per share—diluted                     |       | $                                                                  | 0.48       |   | $ | 0.51 |   |
| Dividends paid                                      |       | $                                                                  | 0.20       |   | $ | 0.20 |   |

 

The accompanying notes are an integral partof these statements

 

4

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**TF FinancialCorporation and Subsidiaries**

 

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(Unaudited****)**

 
| ** **                                                                        | ** ** | **For the three months  ended  March 31,** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                                                        | ** ** | **2008**                                                       | ** ** | **2007** | ** ** |
| ** **                                                                        | ** ** | **(in thousands)**                                        | ** ** |
| OPERATING ACTIVITIES                                                              |       |                                                           |       |   |   |
| Net income                                                                        |       | $                                                              | 1,281      |   | $ | 1,398 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities |       |                                                           |       |   |   |
| Amortization of                                                                   |       |                                                           |       |   |   |
| Mortgage loan servicing rights                                                    |       | 13                                                             |       | 13 |   |
| Deferred loan origination fees                                                    |       | (20                                                            | )          | (28 | ) |
| Premiums and discounts on investment securities, net                              |       | 22                                                             |       | 21 |   |
| Premiums and discounts on mortgage-backed securities, net                         |       | (59                                                            | )          | 22 |   |
| Premiums and discounts on loans, net                                              |       | 21                                                             |       | 36 |   |
| Discount on wholesale deposits                                                    |       | —                                                         |       | 7 |   |
| Depreciation of premises and equipment                                            |       | 242                                                            |       | 226 |   |
| Increase in value of bank-owned life insurance                                    |       | (159                                                           | )          | (148 | ) |
| Stock grant expense                                                               |       | 90                                                             |       | 90 |   |
| Stock option expense                                                              |       | 94                                                             |       | 99 |   |
| Stock-based benefit programs: ESOP                                                |       | 71                                                             |       | 77 |   |
| Proceeds from sale of loans originated for sale                                   |       | 5,123                                                          |       | 4,613 |   |
| Origination of loans held for sale                                                |       | (4,870                                                         | )          | (4,286 | ) |
| Gain on sale of                                                                   |       |                                                           |       |   |   |
| Mortgage loans available for sale                                                 |       | (62                                                            | )          | (54 | ) |
| (Income) expense from mortgage loan derivatives                                   |       | (10                                                            | )          | 3 |   |
| Expense (income) associated with forward loan sales                               |       | 17                                                             |       | (2 | ) |
| (Increase) decrease in                                                            |       |                                                           |       |   |   |
| Accrued interest receivable                                                       |       | 163                                                            |       | 157 |   |
| Other assets                                                                      |       | (243                                                           | )          | (1,221 | ) |
| Increase in                                                                       |       |                                                           |       |   |   |
| Accrued interest payable                                                          |       | 277                                                            |       | 748 |   |
| Other liabilities                                                                 |       | 242                                                            |       | 65 |   |
| NET CASH PROVIDED BY OPERATING ACTIVITIES                                         |       | 2,233                                                          |       | 1,836 |   |
|                                                                              |       |                                                           |       |   |   |
| INVESTING ACTIVITIES                                                              |       |                                                           |       |   |   |
| Loan originations                                                                 |       | (47,228                                                        | )          | (37,875 | ) |
| Loan principal payments                                                           |       | 23,031                                                         |       | 24,922 |   |
| Principal repayments on mortgage-backed securities held to maturity               |       | 255                                                            |       | 559 |   |
| Principal repayments on mortgage-backed securities available for sale             |       | 4,910                                                          |       | 2,470 |   |
| Purchase of investment securities available for sale                              |       | —                                                         |       | (771 | ) |
| Purchase of mortgage-backed securities available for sale                         |       | —                                                         |       | (4,869 | ) |
| Proceeds from maturities of investment securities held to maturity                |       | —                                                         |       | 4,500 |   |
| (Purchase)/redemption of Federal Home Loan Bank stock, net                        |       | (547                                                           | )          | 479 |   |
| Purchase of premises and equipment                                                |       | (33                                                            | )          | (69 | ) |
| NET CASH USED IN INVESTING ACTIVITIES                                             |       | (19,612                                                        | )          | (10,654 | ) |
|                                                                                   |            |                                                                |            |  |  |  |  |

 

5

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| ** **                                                            | ** ** | **For the three months ended  March 31,** | ** ** |
|-----------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                            | ** ** | **2008**                                                           | ** ** | **2007** | ** ** |
| ** **                                                            | ** ** | **(in thousands)**                                            | ** ** |
| FINANCING ACTIVITIES                                                  |       |                                                               |       |   |   |
| Net increase in customer deposits                                     |       | 6,570                                                              |       | 6,604 |   |
| Net increase in short-term borrowings from the Federal Home Loan Bank |       | 7,551                                                              |       | 4,759 |   |
| Proceeds of long-term Federal Home Loan Bank borrowings               |       | 7,900                                                              |       | — |   |
| Repayment of long-term Federal Home Loan Bank borrowings              |       | (5,071                                                             | )          | (4,956 | ) |
| Net decrease in advances from borrowers for taxes and insurance       |       | (191                                                               | )          | (63 | ) |
| Treasury stock acquired                                               |       | (253                                                               | )          | (1,553 | ) |
| Exercise of stock options                                             |       | 8                                                                  |       | 1,742 |   |
| Tax benefit arising from stock compensation                           |       | —                                                             |       | 363 |   |
| Common stock dividends paid                                           |       | (534                                                               | )          | (551 | ) |
| NET CASH PROVIDED BY FINANCING ACTIVITIES                             |       | 15,980                                                             |       | 6,345 |   |
|                                                                  |       |                                                               |       |   |   |
| NET DECREASE IN CASH AND CASH EQUIVALENTS                             |       | (1,399                                                             | )          | (2,473 | ) |
|                                                                  |       |                                                               |       |   |   |
| Cash and cash equivalents at beginning of period                      |       | 5,680                                                              |       | 12,364 |   |
|                                                                  |       |                                                               |       |   |   |
| Cash and cash equivalents at end of period                            |       | $                                                                  | 4,281      |   | $ | 9,891 |   |
|                                                                  |       |                                                               |       |   |   |
| Supplemental disclosure of cash flow information                      |       |                                                               |       |   |   |
| Cash paid for                                                         |       |                                                               |       |   |   |
| Interest on deposits and borrowings from Federal Home Loan Bank       |       | $                                                                  | 4,641      |   | $ | 3,461 |   |
| Income taxes                                                          |       | $                                                                  | 22         |   | $ | 180 |   |
| Non-cash transactions                                                 |       |                                                               |       |   |   |
| Capitalization of mortgage servicing rights                           |       | $                                                                  | 65         |   | $ | 70 |   |
| Transfers from loans to real estate acquired through foreclosure      |       | $                                                                  | 306        |   | $ | — |   |

 

The accompanying notes are an integral partof these statements

 

6

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**TF FINANCIAL CORPORATION ANDSUBSIDIARIESNOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 1 -PRINCIPLES OF CONSOLIDATION**

 

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

 

**NOTE 2 - BASISOF PRESENTATION**

 

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

 

**NOTE 3 —CONTINGENCIES**

 

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

 

**NOTE 4 - OTHERCOMPREHENSIVE INCOME**

 

The Company follows 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:

 
| ** **                                                                           | ** ** | **March 31, 2008** | ** ** |
|--------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                           | ** ** | **Before tax  amount**  | ** ** | **Tax  (expense)  benefit** | ** ** | **Net of tax  amount** | ** ** |
| ** **                                                                           | ** ** | **(in thousands)**      | ** ** |
| Unrealized gains on securities                                                       |       |                         |       |   |   |   |   |
| Unrealized holding gains arising during period                                       |       | $                            | 1,690      |   | $ | (575 | ) | $ | 1,115 |   |
| Pension plan benefit adjustment related to prior service costs and  actuarial losses |       | 22                           |       | (8 | ) | 14 |   |
|                                                                                 |       |                         |       |   |   |   |   |
| Other comprehensive income, net                                                      |       | $                            | 1,712      |   | $ | (583 | ) | $ | 1,129 |   |

 
| ** **                                     | ** ** | **March 31, 2007** | ** ** |
|------------------------------------------------|------------|------------------------------|------------|
| ** **                                     | ** ** | **Before tax  amount**  | ** ** | **Tax  (expense)  benefit** | ** ** | **Net of tax  amount** | ** ** |
| ** **                                     | ** ** | **(in thousands)**      | ** ** |
| Unrealized gains on securities                 |       |                         |       |   |   |   |   |
| Unrealized holding gains arising during period |       | $                            | 250        |   | $ | (86 | ) | $ | 164 |   |
|                                           |       |                         |       |   |   |   |   |
| Other comprehensive income, net                |       | $                            | 250        |   | $ | (86 | ) | $ | 164 |   |

 

7

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**NOTE 5—EARNINGS PER SHARE**

 

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

 
| ** **                                                                  | ** ** | **Three months ended March 31, 2008** | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                                                  | ** ** | **Income  (numerator)**                                        | ** ** | **Weighted  average  shares  (denominator)** | ** ** | **Per share  Amount** | ** ** |
| Basic earnings per share                                     | ** ** | ** **                                                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income available to common stockholders                                     |       | $                                                              | 1,281      |   | 2,665,614 |   | $ | 0.48 |   |
| Effect of dilutive securities                                               |       |                                                           |       |   |   |   |   |
| Stock options and grants                                                    |       | —                                                         |       | 789 |   | — |   |
|                                                                        |       |                                                           |       |   |   |   |   |
| Diluted earnings per share                                                  |       |                                                           |       |   |   |   |   |
| Income available to common stockholders plus effect of dilutive  securities |       | $                                                              | 1,281      |   | 2,666,403 |   | $ | 0.48 |   |

 

There were 209,883 options to purchase shares ofcommon stock at an average price range of $24.71 to $34.14 per share which wereoutstanding during the first three months of 2008 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.

 
| ** **                                                                  | ** ** | **Three months ended March 31, 2007** | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                                                  | ** ** | **Income  (numerator)**                                        | ** ** | **Weighted  average  shares  (denominator)** | ** ** | **Per share  Amount** | ** ** |
| Basic earnings per share                                                    |       |                                                           |       |   |   |   |   |
| Income available to common stockholders                                     |       | $                                                              | 1,398      |   | 2,751,158 |   | $ | 0.51 |   |
| Effect of dilutive securities                                               |       |                                                           |       |   |   |   |   |
| Stock options and grants                                                    |       | —                                                         |       | — |   | — |   |
|                                                                        |       |                                                           |       |   |   |   |   |
| Diluted earnings per share                                                  |       |                                                           |       |   |   |   |   |
| Income available to common stockholders plus effect of dilutive  securities |       | $                                                              | 1,398      |   | 2,751,158 |   | $ | 0.51 |   |

 

There were 20,638 options to purchase shares ofcommon stock at a price of $34.14 per share which were outstanding during thethree months ended March 31, 2007 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- FAIR VALUE MEASUREMENTS**

 

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

 

Thefair value hierarchy levels are summarized below:

 

·                  Level1 inputs are quoted prices (unadjusted) in active markets for identical assetsor liabilities.

 

·                  Level2 inputs are inputs that are observable for the asset or liability, eitherdirectly or indirectly.

 

8

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·                  Level3 inputs are unobservable and contain assumptions of the party fair valuing theasset or liability.

 

Determinationof the appropriate level within the fair value hierarchy is based on the lowestlevel of input that is significant to the fair value measurement for theinstrument or security.  Assets andliabilities measured at fair value on a recurring basis segregated by valuehierarchy level are summarized below (dollars in thousands):

 
| ** **                                    | ** ** | **Quoted  Prices in  Active  Markets  for  Identical  Assets  (Level 1)** | ** ** | **Significant  Other  Observable  Inputs  (Level 2)** | ** ** | **Significant  Unobservable  Inputs  (Level 3)** | ** ** | **Balance as of  March 31,  2008** | ** ** |
|-----------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|-------------------------------------------------------|------------|---------------------------------------------------|------------|
| **Assets**                                    | ** ** | ** **                                                                          | ** ** | ** **                                                 | ** ** | ** **                                            | ** ** | ** **                                        | ** ** |
| Investment securities available for sale      |       | $                                                                                   | 170        |                                                       | $          | 32,417                                                |       | $                                                 | —     |   | $ | 32,587 |   |
| Mortgage-backed securities available for sale |       | —                                                                              |       | 94,770                                                     |       | —                                                |       | 94,770                                            |       |
| Impaired loans                                |       | —                                                                              |       | —                                                     |       | 3,144                                                 |       | 3,144                                             |       |
| Derivative loan commitments                   |       | —                                                                              |       | —                                                     |       | 13                                                    |       | 13                                                |       |
| Forward loan sales                            |       |                                                                                |       |                                                       |       |                                                  |       |                                              |       |
|                                          |       |                                                                                |       |                                                       |       |                                                  |       |                                              |       |
| **Liabilities**                               |       |                                                                                |       |                                                       |       |                                                  |       |                                              |       |
| Forward loan sales                            |       | —                                                                              |       | —                                                     |       | 20                                                    |       | 20                                                |       |
|                                               |            |                                                                                     |            |                                                            |            |                                                       |            |                                                   |            |  |  |  |  |

 

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

 

Impairedloans are evaluated and valued at the time the loan is identified as impaired,at the lower of the recorded investment in the loan or market value. The loansidentified as impaired are real estate secured. Market value is determined by using the value of the collateral securingthe loans and is therefore classified as a level 3 hierarchy.  The value of the real estate is determined byqualified independent licensed appraisers contracted by the Company to performthe assessment.  The appraised value isthen discounted based upon management’s experience, understanding of thecustomer and the customer’s business as well as economic conditions.  Impaired loans are reviewed and evaluated ona quarterly basis for additional impairment and adjusted accordingly, basedupon the pertinent conditions.

 

Thefair value of derivative loan commitments and forward loan sales are determinedat the time the underlying loan is identified as held for sale with changes infair value correlated to the change in secondary market loan pricing. The valueis adjusted to reflect the Company’s historical loan “fallout” experience whichincorporates such factors as changes in market rates, origination channels andloan purpose.

 

TheCompany is also required to measure certain other financial assets at fairvalue on a non-recurring basis in accordance with GAAP.  Adjustments may result from application oflower-of-cost or fair value accounting.

 

Thefollowing table presents additional information about assets measured at fairvalue on a recurring basis for which the Company has utilized Level 3 inputs todetermine fair value (in thousands):

 

9

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| ** **                                      | ** ** | **Derivative loan  commitments** | ** ** |
|-------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                      | ** ** | ** **                            | ** ** |
| Beginning balance December 31, 2007        |       | $                                     | 3          |   |
| Total gains/(losses) –realized/unrealized: |       |                                  |       |
| Included in earnings                            |       | 10                                    |       |
| Included in other comprehensive income          |       | —                                |       |
| Purchases, issuances, and settlements           |       | —                                |       |
| Ending balance March 31, 2008              |       | $                                     | 13         |   |

 

Thefollowing table presents additional information about liabilities measured atfair value on a recurring basis for which the Company has utilized Level 3inputs to determine fair value (in thousands):

 
| ** **                                       | ** ** | **Forward loan sales** | ** ** |
|--------------------------------------------------|------------|----------------------------------|------------|
| ** **                                       | ** ** | ** **                       | ** ** |
| Beginning balance December 31, 2007         |       | $                                | 3          |   |
| Total losses/ (gains) –realized/unrealized: |       |                             |       |
| Included in earnings                             |       | 17                               |       |
| Included in other comprehensive income           |       | —                           |       |
| Purchases, issuances, and settlements            |       | —                           |       |
| Ending balance March 31, 2008               |       | $                                | 20         |   |

 

**NOTE 7- STOCKBASED COMPENSATION**

 

The Company has stock benefit plans that allow theCompany to grant options and stock to employees and directors. The awards,which have a term of up to 10 years when issued, vest over a three to fiveyear period. The exercise price of each award equals the market price of theCompany’s stock on the date of the grant. At March 31 2008, there was$324,000 of total unrecognized compensation cost, net of estimated forfeitures,related to non-vested awards under the Plan. That cost is expected to berecognized over a weighted average period of 14.7 months.

 

Stock-based compensation expense included in netincome related to stock options was $94,000 and $99,000 for the quarters ended March 31,2008 and 2007 respectively, resulting in a tax benefit of $29,000 for bothquarters ended March 31, 2008 and 2007.

 

Option activity under theCompany’s stock option plan as of March 31, 2008 is as follows:

 
| ** **                                 | ** ** | **2008**                   | ** ** |
|--------------------------------------------|------------|----------------------------|------------|
| ** **                                 | ** ** | **Number  of shares** | ** ** | **Weighted  average  exercise  price per  share** | ** ** | **Weighted  average  remaining  contractual  term (in  years)** | ** ** | **Aggregate  intrinsic  value ($ 000)** | ** ** |
| Outstanding at January 1, 2008        |       | 252,576                    |       | $ | 26.56 |   |   |   |   |   |
| Options granted                            |       | —                     |       | — |   |   |   |   |   |
| Options exercised                          |       | (425                       | )          | 17.56 |   |   |   |   |   |
| Options forfeited                          |       | (500                       | )          | 29.75 |   |   |   |   |   |
| Options expired                            |       | —                     |       | — |   |   |   |   |   |
| Outstanding at March 31, 2008         |       | 251,651                    |       | $ | 26.57 |   | 3.35 |   | $ | 331 |   |
| Options exercisable at March 31, 2008 |       | 184,201                    |       | $ | 25.83 |   | 3.61 |   | $ | 331 |   |

 

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 first quarter andthe exercise price, multiplied by the number of in-the money options).

 

The aggregate intrinsic value of options exercisedduring the three months ended March 31, 2008 and 2007 was $2,100 and$1,069,000, respectively. Exercise of stock options during the three monthsended March 31, 2008 and 2007 resulted in cash receipts of $8,000 and$1,742,000, respectively.

 

Stock-based compensation expense included in netincome related to stock grants was $90,000 for each of the quarters ended March 31,2008 and 2007. Stock-based compensation expense included in net income relatedto the Company’s employee stock ownership plan totaled $55,000 and $61,000 forthe three-month periods ended March 31, 2008 and 2007, respectively.

 

10

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**NOTE 8- EMPLOYEE BENEFIT PLANS**

 

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

 
| ** **                              | ** ** | **Three months ended  March 31,** | ** ** |
|-----------------------------------------|------------|--------------------------------------------------|------------|
| ** **                              | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
|                                    |       |                                             |       |   |   |
| Components of net periodic benefit cost |       |                                             |       |   |   |
| Service cost                            |       | $                                                | 98         |   | $ | 84 |   |
| Interest cost                           |       | 62                                               |       | 53 |   |
| Expected return on plan assets          |       | (105                                             | )          | (100 | ) |
| Amortization of prior service cost      |       | 14                                               |       | 12 |   |
| Recognized net actuarial loss           |       | 8                                                |       | 15 |   |
|                                    |       |                                             |       |   |   |
| Net periodic benefit cost               |       | $                                                | 77         |   | $ | 64 |   |

 

The employer contributionmade for the three months ended March 31, 2008 and 2007 was $218,000 and$1,107,000, respectively.

 

**NOTE 9-NEW ACCOUNTING PRONOUNCEMENTS**

 

InFebruary 2008, FASB Issued FASB Staff Position(FSP) FAS 140-3, “Accounting for Transfers of Financial Assets and RepurchaseFinancing Transactions”, which provides guidance on accounting for a transferof a financial asset and a repurchase financing. The FSP presumes that aninitial transfer of a financial asset and a repurchase financing are consideredpart of the same arrangement under FASB Statement No. 140 “Accounting forTransfers and Servicing of Financial Assets and Extinguishments of Liabilities”.However, if certain criteria are met, the initial transfer and repurchase shallnot be evaluated as a linked transaction and therefore evaluated separatelyunder FASB 140. The FSP is effective for repurchase financing in which theinitial transfer is entered in fiscal years beginning after November 15,2008. The Company does not anticipate a material impact as a result of thisstatement on its consolidated financial statements.

 

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

 

InMarch 2008, FASB Issued Statement No. 161(SFAS 161), “Disclosures About Derivative Instruments and Hedging Activities anamendment of FASB Statement 133”. The statement requires expanded disclosuresabout an entity’s derivative instruments and hedging activities but does notchange SFAS 133’s scope or accounting. This statement is effectivefor fiscal years and interim periods beginning November 15, 2008 withearly adoption permitted. The Company does not anticipate a material impact asa result of this statement on its consolidated financial statements

 

**NOTE 10-RECLASSIFICATIONS**

 

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

 

11

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**TFFINANCIAL CORPORATION AND SUBSIDIARIES**

 

**ITEM2.  MANAGEMENT’S DISCUSSION AND ANALYSISOF 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 Form 10-Qand 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 monetaryfluctuations; the timely development of and acceptance of new products andservices of the Company and the perceived overall value of these products andservices by users, including the features, pricing and quality compared tocompetitors’ products and services; the willingness of users to substitutecompetitors’ products and services for the Company’s products and services; thesuccess of the Company in gaining regulatory approval of its products andservices, when required; the impact of changes in financial services’ laws andregulations (including laws concerning taxes, banking, securities andinsurance); technological changes, acquisitions; changes in consumer spendingand saving habits; and the success of the Company at managing the risksinvolved in the foregoing.

 

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 March 31, 2008 and December 31,2007 were $721.4 million and $701.7 million, respectively, an increase of $19.7million, or 2.8% during the three-month period. Cash and cash equivalentsdecreased by $1.4 million. Investment securities available for sale increased$224,000 due to an increase in the fair value of the securities.Mortgage-backed securities available for sale decreased by $3.4 million due toprincipal repayments received of $4.9 million offset by an increase in the fairvalue of the securities of $1.4 million. Mortgage-backed securities held to maturity decreased by $254,000 mainlyas a result of principal repayments.

 

Loans receivable increased by $23.6 million during the first threemonths of 2008. Consumer and single-family residential mortgage loans of $27.5million and commercial loans of $19.7 were originated during the first quarterof 2008. Principal repayments of loans receivable were $23.0 million. The Bank’sloans to deposit ratio, a measure of the success of the Bank’s lending effortswas 113.1% at March 31, 2008. The Company had $79.1 million of prime-ratebased loans at March 31, 2008. Loans originated for sale during the first quarter of 2008 totaled $4.9million, and there were $5.1 million in proceeds from the sale of loans in thesecondary market during this period.

 

Total liabilities increased by $17.9 million during the first quarterof 2008. Deposit balances grew by $6.6 million during the quarter; the netresult of a $9.1 million increase in non-interest checking, interest-bearingchecking and money market offset by a $2.6 million decrease in savingsaccounts. At March 31, 2008, the Bank had $85.2 million of depositsindexed to the yield of the Merrill Lynch Ready Asset Money Market Fund.Advances from the Federal Home Loan Bank increased by $10.4 million in thefirst quarter of 2008; the result of $7.9 million in new long term advances anda $7.6 million increase in short-term borrowings, less scheduled amortizationpayments of $5.1 million.

 

Total consolidated stockholder’s equity of the Company was $69.7million or 9.7 % of total assets at March 31, 2008. During the firstquarter of 2008, the Company repurchased 10,500 shares of its common stock andissued 425 shares pursuant to the exercise of stock options. At March 31,2008, there were approximately 150,000 shares available for repurchase underthe previously announced share repurchase plan.

 

12

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

######  

At the end of the first quarter of 2008, the Company consummatedforeclosure proceedings on two parcels of commercial real estate with acombined loan balance of $1.5 million. These loans were non-performing at December 31,2007. One parcel has been recorded as real estate owned totaling $306,000 andwas included in other assets in the consolidated balance sheet at March 31,2008. The Company is currently awaiting transfer of title from the sheriff’soffice. As a result of this specific foreclosure, the Bank recorded a chargeoff in the amount of $347,000. During the foreclosure proceedings of the secondproperty, a bid from an unrelated party was made which would satisfy theoutstanding contractual obligations of the borrower with the Bank. The relatedloan of $939,000 was disclosed as a nonperforming loan as the transaction was inthe process of settlement with the sheriff’s office at March 31, 2008. TheBank does not anticipate any further charges against the allowance as a resultof the foregoing discussed foreclosures. During the first quarter of 2008 and2007, the Company’s provision for loan losses was $0. With respect to each ofthe remaining non-performing loans, all of which are real estate secured, theBank is taking appropriate steps to resolve the individual situations.

 

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

 
| ** **                                                  | ** ** | **March 31,** | ** ** | **December 31,** | ** ** | **March 31,** | ** ** |
|-------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|--------------------|------------|
| ** **                                                  | ** ** | **2008**           | ** ** | **2007**              | ** ** | **2007**           | ** ** |
| ** **                                                  | ** ** | ** **         | ** ** | ** **            | ** ** | ** **         | ** ** |
| Non-performing loans                                        |       | $                  | 3,144      |                  | $          | 5,358              |       | $ | 2,783 |   |
| Ratio of non-performing loans  to gross loans               |       | 0.58               | %          | 1.03                  | %          | 0.57               | %          |
| Ratio of non-performing loans  to total assets              |       | 0.44               | %          | 0.76                  | %          | 0.42               | %          |
| Ratio of total non-performing  assets to total assets       |       | 0.48               | %          | 0.76                  | %          | —             | %          |
| Ratio of allowance for loan  losses to total loans          |       | 0.46               | %          | 0.55                  | %          | 0.58               | %          |
| Ratio of allowance for loan  losses to non-performing loans |       | 79.61              | %          | 53.00                 | %          | 103.13             | %          |
|                                                             |            |                    |            |                       |            |                    |            |  |  |  |

 

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):

 
| ** **                                 | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|
| Beginning balance,  January 1,        |       | $        | 2,842      |     | $          | 2,865 |   |
| Provision                                  |       | —   |       | —   |       |
| Less: charge-off’s  (recoveries), net |       | 339      |       | (5       | )          |
| Ending balance, March 31,             |       | 2,503    |       | 2,870    |       |
|                                            |            |          |            |          |            |  |  |

 

**RESULTS OF OPERATIONS FOR THE THREE MONTHSENDED MARCH 31, 2008 AND 2007**

 

**Net Income**. TheCompany recorded net income of $1,281,000, or $0.48 per diluted share, for thethree months ended March 31, 2008 as compared to net income of $1,398,000,or $0.51 per diluted share, for the three months ended March 31, 2007.

 

### **Average Balance Sheet**

###  

The following table sets forth information (dollars in thousands)relating to the Company’s average balance sheet and reflects the average 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.

 

13

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| ** **                                                                         | ** ** | **March 31,**   | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                         | ** ** | **2008**             | ** ** | **2007** | ** ** |
| ** **                                                                         | ** ** | **Average  balance** | ** ** | **Interest** | ** ** | **Average  yld/cost** | ** ** | **Average  balance** | ** ** | **Interest** | ** ** | **Average  yld/cost** | ** ** |
| **ASSETS**                                                                         |       |                 |       |   |   |   |   |   |   |   |   |   |   |
| **Interest-earning assets:**                                                       |       |                 |       |   |   |   |   |   |   |   |   |   |   |
| Loans receivable(1)                                                                |       | $                    | 528,865    |   | $ | 8,183 |   | 6.22 | % | $ | 487,698 |   | $ | 7,779 |   | 6.47 | % |
| Mortgage-backed securities                                                         |       | 102,223              |       | 1,231 |   | 4.84 | % | 80,637 |   | 933 |   | 4.69 | % |
| Investment securities(2)                                                           |       | 41,783               |       | 530 |   | 5.10 | % | 41,282 |   | 544 |   | 5.34 | % |
| Other interest-earning assets(3)                                                   |       | 971                  |       | 6 |   | 2.49 | % | 5,983 |   | 67 |   | 4.54 | % |
| Total interest-earning assets                                                      |       | 673,842              |       | 9,950 |   | 5.94 | % | 615,600 |   | 9,323 |   | 6.14 | % |
| Non interest-earning assets                                                        |       | 34,879               |       |   |   |   |   | 34,076 |   |   |   |   |   |
| Total assets                                                                       |       | $                    | 708,721    |   |   |   |   |   | $ | 649,676 |   |   |   |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                      |       |                 |       |   |   |   |   |   |   |   |   |   |   |
| **Interest-bearing liabilities:**                                                  |       |                 |       |   |   |   |   |   |   |   |   |   |   |
| Deposits                                                                           |       | 473,160              |       | 3,286 |   | 2.79 | % | 476,374 |   | 3,230 |   | 2.75 | % |
| Borrowings from the FHLB                                                           |       | 159,051              |       | 1,632 |   | 4.13 | % | 99,270 |   | 979 |   | 4.00 | % |
| Total interest-bearing liabilities                                                 |       | 632,211              |       | 4,918 |   | 3.13 | % | 575,644 |   | 4,209 |   | 2.97 | % |
| Non interest-bearing liabilities                                                   |       | 8,531                |       |   |   |   |   | 7,917 |   |   |   |   |   |
| Total liabilities                                                                  |       | 640,742              |       |   |   |   |   | 583,561 |   |   |   |   |   |
| Stockholders’ equity                                                          |       | 67,979               |       |   |   |   |   | 66,115 |   |   |   |   |   |
| Total liabilities and stockholders’ equity                                    |       | $                    | 708,721    |   |   |   |   |   | $ | 649,676 |   |   |   |   |   |
| Net interest income                                                                |       |                 |       | $ | 5,032 |   |   |   |   |   | $ | 5,114 |   |   |   |
| Interest rate spread(4)                                                            |       |                 |       |   |   | 2.81 | % |   |   |   |   | 3.18 | % |
| Net yield on interest-earning assets(5)                                            |       |                 |       |   |   | 3.00 | % |   |   |   |   | 3.37 | % |
| Ratio of average interest-earning assets to  average interest- bearing liabilities |       |                 |       |   |   | 107 |  % |   |   |   |   | 107 | % |

 

----

| (1) |   | Nonaccrual loans have  been included in the appropriate average loan balance category, but interest  on nonaccrual loans has not been included for purposes of determining  interest income.                                                        |
|-----|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | Tax equivalent  adjustments to interest on investment securities were $117,000 and $110,000  for the quarter ended March 31, 2008 and 2007, respectively. Tax  equivalent interest income is based upon a marginal effective tax rate of  34%. |
| (3) |   | Includes  interest-bearing deposits in other banks.                                                                                                                                                                                                 |
| (4) |   | Interest rate spread  represents the difference between the average yield on interest-earning  assets and the average cost of interest-bearing liabilities.                                                                                         |
| (5) |   | Net yield on  interest-earning assets represents net interest income as a percentage of  average interest-earning assets.                                                                                                                           |

 

**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 prioryear volume). Changes attributable to the combined impact of volume and ratehave been allocated proportionately based on the absolute value of changes dueto volume and changes due to rate.

 

14

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| ** **                         | ** ** | **Three months ended March 31,**                  | ** ** |
|------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                         | ** ** | **2008 vs 2007  Increase (decrease) due to** | ** ** |
| ** **                         | ** ** | **Volume**                                                            | ** ** | **Rate** | ** ** | **Net** | ** ** |
| **Interest income:**               |       |                                                                  |       |   |   |   |   |
| Loans receivable, net              |       | $                                                                     | 1,931      |   | $ | (1,527 | ) | $ | 404 |   |
| Mortgage-backed securities         |       | 266                                                                   |       | 32 |   | 298 |   |
| Investment securities (1)          |       | 39                                                                    |       | (53 | ) | (14 | ) |
| Other interest-earning assets      |       | (40                                                                   | )          | (21 | ) | (61 | ) |
| Total interest-earning assets      |       | 2,196                                                                 |       | (1,569 | ) | 627 |   |
| **Interest expense:**              |       |                                                                  |       |   |   |   |   |
| Deposits                           |       | (107                                                                  | )          | 163 |   | 56 |   |
| Borrowings from the FHLB           |       | 620                                                                   |       | 33 |   | 653 |   |
| Total interest-bearing liabilities |       | 513                                                                   |       | 196 |   | 709 |   |
| Net change in net interest income  |       | $                                                                     | 1,683      |   | $ | (1,765 | ) | $ | (82 | ) |

 

----

| (1) |   | Tax  equivalent adjustments to interest on investment securities were $117,000 and  $110,000 for the quarters ended March 31, 2008 and 2007, respectively.  Tax equivalent interest income is based upon a marginal effective tax rate of  34%. |
|-----|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**Total Interest Income**.Total interest income, on a taxable equivalent basis, increased by $627,000 or6.7% to $10.0 million for the quarter ended March 31, 2008 compared withthe first quarter of 2007. 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 25basis points primarily as a result of the Company’s reduction of its primerate, three times during the first quarter of 2008 and three times during thelast two quarters of 2007 by a combined 300 basis points mirroring the actiontaken by the Federal Open Markets Committee (FOMC) when it acted to reduce thefed funds rate. Interest income from mortgage-backed securities was higher inthe first quarter of 2008 in comparison to the same period of 2007 due to purchasesof $28.5 million of securities during the intervening period. Interest incomefrom investment securities increased slightly as a result of purchases of $3.3million in excess of maturities of $2.4 million of securities during theintervening period.

 

**Total Interest Expense.**Total interest expense increased by $709,000 to $4.9 million during thethree-month period ended March 31, 2008 as compared with the first quarterof 2007. Interest rates paid on the Bank’s deposits remained high for most ofthe first quarter of 2008 as a result of the competitive pricing environment ofthe Bank’s deposit market. Although the average balance of deposits reflectsonly a $3.2 million reduction in balances, the average deposit balances duringthe first quarter of 2007 included broker-originated certificates of deposit of$11.7 million which fully matured during the second and third quarters of 2007.

 

Interestexpense associated with borrowings from the Federal Home Loan Bank increased$653,000 between the first quarter of 2008 and 2007. During the interveningperiod, the Bank increased its borrowings by $62.1 million from the FHLB tofund loan growth as well as security purchases.

 

**Non-interest income**.Total non-interest income was $1.1 million for the first quarter of 2008compared with $1.5 million for the same period in 2007.  The first quarter of 2007 included $777,000of non-recurring income from a fraud-related settlement while the first quarterof 2008 included a $197,000 insurance claim recovery related to a 2007 expensesustained as a result of the bankruptcy of one of the Bank’s loan servicingagents. Additionally, other income during the first quarter of 2008 included$100,000 of non-recurring income recognized due to forfeited deposits on realestate held for development.

 

**Non-interest expense.**Totalnon-interest expense decreased by $328,000 to $4.3 million for the three monthsended March 31, 2008 compared to the same period in 2007. During the firstquarter of 2007, the Bank incurred a $270,000 loss as the result of thebankruptcy of one of the Bank’s loan servicing agents.

 

15

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**LIQUIDITY AND CAPITAL RESOURCES**

 

**Liquidity**

 

The Company’s liquidity is a measure of its ability tofund loans, pay withdrawals of deposits, and other cash outflows in anefficient, cost-effective manner. The Company’s short-term sources of liquidityinclude maturity, repayment and sales of assets, excess cash and cashequivalents, new deposits, broker deposits, other borrowings, and newborrowings from the Federal Home Loan Bank. There has been no material adversechange during the three-month period ended March 31, 2008 in the abilityof the Company and its subsidiaries to fund their operations.

 

At March 31, 2008, the Company had commitmentsoutstanding under letters of credit of $1.4 million, commitments to originateloans of $19.4 million, and commitments to fund undisbursed balances of closedloans and unused lines of credit of $55.7 million. At March 31, 2008, theBank had $3.8 million outstanding commitments to sell loans. There has been no material change duringthe three months ended March 31, 2008 in any of the Company’s othercontractual obligations or commitments to make future payments.

 

**Capital Requirements**

 

The Bank was in compliance with all of its capitalrequirements as of March 31, 2008.

 

**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 $2,503,000 at March 31,2008.

 

###### **ITEM 3. QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

######  

As a “smaller reporting company” as defined by Item 10 of RegulationS-K, the Company is not required to provide the information required by thisitem.

 

**ITEM 4T. CONTROLS AND PROCEDURES**

 

**Evaluation of Disclosure Controls andProcedures**

 

Based on their evaluation of the Company’s disclosure controls andprocedures (as defined in Rule 13a-15(e) under the SecuritiesExchange Act of 1934 (the “Exchange Act”)), the Company’s principal executiveofficer and principal financial officer have concluded that as of the end ofthe period covered by this Quarterly Report on Form 10-Q such disclosurecontrols and procedures are effective to ensure that information required to bedisclosed by the Company in the reports it files and submits pursuant to the rules andforms of the SEC is accumulated and communicated to the Company’s managementincluding the principal executive officer and principal financial officer, asappropriate, to allow timely decisions regarding required disclosures.

 

**Changes in Internal Controls over FinancialReporting**

 

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.

 

16

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**TFFINANCIAL CORPORATION AND SUBSIDIARIES**

 

**PART II**

 
| **ITEM 1.**  | ** ** | **LEGAL  PROCEEDINGS**                                                                                                                                                                                                                                                                                                                              |
|--------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **   | ** ** | ** **                                                                                                                                                                                                                                                                                                                                          |
| ** **   | ** ** | Neither the  Company nor its subsidiaries are involved in any pending legal proceedings,  other than routine legal matters occurring in the ordinary course of business  that in the aggregate involve amounts which are believed by management to be  immaterial to the consolidated financial condition or results of operations  of the Company. |
| ** **   | ** ** | ** **                                                                                                                                                                                                                                                                                                                                          |
| **ITEM 1A**. | ** ** | **RISK****FACTORS**                                                                                                                                                                                                                                                                                                                                 |
|         |       |                                                                                                                                                                                                                                                                                                                                                |
|         |       | As a “smaller reporting  company” as defined by Item 10 of Regulation S-K, the Company is not required  to provide the information required by this item.                                                                                                                                                                                 |
|         |       |                                                                                                                                                                                                                                                                                                                                                |
| **ITEM 2.**  | ** ** | **UNREGISTERED  SALE OF EQUITY SECURITIES AND USE OF PROCEEDS**                                                                                                                                                                                                                                                                                     |
|         |       |                                                                                                                                                                                                                                                                                                                                                |
|         |       | The following table  provides information on repurchases by the Company of its common stock in  each month for the three months ended March 31, 2008:                                                                                                                                                                                          |

 
| **Month**                                            | ** ** | **Total Number of  Shares Purchased** | ** ** | **Average Price  Paid per Share** | ** ** | **Total Number of  Shares Purchased  as  Part of Publicly  Announced Plan of  Program** | ** ** | **Maximum Number  of  Shares that may yet  be Purchased  Under  the Plans or  Programs** | ** ** |
|------------------------------------------------------|------------|------------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------|------------|
|                                                 |       |                                                 |       |                                             |       |                                                                                                                       |       |                                                                                                                        |       |
| January 1, 2008 - January 31,  2008        |       | —                                               |       | $                                                | —     |                                                                                                                       | —     |                                                                                                                        | 160,957    |   |
|                                                 |       |                                                 |       |                                             |       |                                                                                                                       |       |                                                                                                                        |       |
| February 1, 2008 – February 29,  2008 |       | —                                               |       | $                                                | —     |                                                                                                                       | —     |                                                                                                                        | 160,957    |   |
|                                                 |       |                                                 |       |                                             |       |                                                                                                                       |       |                                                                                                                        |       |
| March 1, 2008 - March 31, 2008             |       | 10,500                                               |       | $                                                | 24.09      |                                                                                                                       | 10,500     |                                                                                                                        | 150,457    |   |

 
| **ITEM 3.** | ** ** | **DEFAULTS  UPON SENIOR SECURITIES**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|-------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|        |       | Not applicable.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| **ITEM 4.** | ** ** | **SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| ** **  | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|        |       | The Annual Meeting of Stockholders (the “Meeting”) of the Company was  held on April 23, 2008. There were outstanding and entitled to  vote at the Meeting 2,830,684 shares of Common Stock of the Company. There  were present at the meeting or by proxy the holders of 2,620,182 shares of Common  Stock representing 92.56% of the total eligible votes to be cast. Proposal 1  was to elect two directors of the Company. Proposal 2 was to ratify the  appointment of the independent auditor for the December 31, 2008 fiscal  year. The result of the voting at the Meeting is as follows (percentages in  terms of votes cast): |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| ** **  | ** ** | **Proposal 1**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| ** **  | ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| ** **  | ** ** | Election of two directors of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| ** **  | ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| ** **  | ** ** | John R. Stranford                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | FOR: | 2,030,024 | ** ** | PERCENT FOR: | 77.48% |
| ** **  | ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | WITHHELD: | 590,158 | ** ** | PERCENT WITHHELD: | 22.52% |
| ** **  | ** ** | Albert M. Tantala                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | FOR: | 2,377,676 | ** ** | PERCENT FOR: | 90.74% |
| ** **  | ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | WITHHELD: | 242,506 | ** ** | PERCENT WITHHELD: | 9.26% |

 

17

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| ** **  | ** ** | **Proposal 2**                                                                                                                      |
|-------------|------------|-------------------------------------------------------------------------------------------------------------------------------------|
|        |       |                                                                                                                                |
|        |       | Ratification of the appointment of Grant  Thornton, LLP as independent auditor for the Company December 31, 2008  fiscal year. |
|        |       |
|        |       |                                                                                                                                |
| ** **  | ** ** | ** **                                                                                                                          | FOR: | 2,576,055 | ** ** | PERCENT FOR: | 98.31% |
| ** **  | ** ** |                                                                                                                                | AGAINST: | 33,167 | ** ** | PERCENT AGAINST: | 1.27% |
| ** **  | ** ** |                                                                                                                                | ABSTAIN: | 10,960 | ** ** | PERCENT ABSTAIN | 0.42% |
|        |       |                                                                                                                                |
| **ITEM 5.** | ** ** | **OTHER  INFORMATION**                                                                                                              |
| ** **  | ** ** | ** **                                                                                                                          |
|        |       | None.                                                                                                                               |
|        |       |                                                                                                                                |
| **ITEM 6.** |       | **EXHIBITS**                                                                                                                        |
|        |       |                                                                                                                                |
|        |       | (a)                                                                                                                                 | Exhibits |
|        |       |                                                                                                                                | 31. | Certification pursuant to Section 302  of the Sarbanes-Oxley Act of 2002. |
|        |       |                                                                                                                                | 32. | Certification pursuant to Section 906  of the Sarbanes-Oxley Act of 2002. |
|             |            |                                                                                                                                     |  |  |  |  |  |  |  |

 

18

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**TFFINANCIAL 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:  | May 14, 2008 |   | /s/ Kent C. Lufkin                                  |
|--------|-------------------|--------|-----------------------------------------------------|
|   |              |   | Kent C. Lufkin                                      |
|   |              |   | President and CEO                                   |
|   |              |   | (Principal Executive Officer)                       |
|   |              |   |                                                |
|   |              |   |                                                |
| Date:  | May 14, 2008 |   | /s/ Dennis R. Stewart                               |
|   |              |   | Dennis R. Stewart                                   |
|   |              |   | Executive Vice President and                        |
|   |              |   | Chief Financial Officer                             |
|   |              |   | (Principal Financial & Accounting Officer) |

 

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