Tableof Contents

 

 

 

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

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

 

**For thetransition period from                                   to                                   **

 

**Commission file number:  0-24168**

 

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

 

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

 

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

 

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

 

Indicateby check mark whether the registrant: (1) has filed all reports requiredto be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. YES x**  **NO o

 

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

 

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

 

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

 

Indicate the number of shares outstanding ofeach of the issuer’s classes of common stock as of the latest practicabledate:  **August 8, 2008**

 

| Class                       | ** ** | **Outstanding**  |
|-----------------------------|------------|------------------|
| $.10 par value common stock |       | 2,802,035 shares |

 

 

 

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Tableof Contents

 

**CONTENTS**

 
| **PART I-CONSOLIDATED FINANCIAL INFORMATION**                                 | ** **                                                                                  |
|------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------|
|                                                                               |                                                                                        |   |
| Item 1.                                                                            | Consolidated  Financial Statements                                                          | 3 |
|                                                                               |                                                                                        |   |
| Item 2.                                                                            | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 14 |
|                                                                               |                                                                                        |   |
| Item 3.                                                                            | Quantitative  and Qualitative Disclosures about Market Risk                                 | 21 |
|                                                                               |                                                                                        |   |
| Item 4T.                                                                           | Controls and  Procedures                                                                    | 21 |
|                                                                               |                                                                                        |   |
| **PART II-OTHER  INFORMATION**                                                |                                                                                        |
|                                                                               |                                                                                        |   |
| Item  1.                                                                           | Legal Proceedings                                                                           | 22 |
|                                                                               |                                                                                        |   |
| Item  1A.                                                                          | Risk Factors                                                                                | 22 |
|                                                                               |                                                                                        |   |
| Item 2.                                                                            | Unregistered  Sales of Equity Securities and Use of Proceeds                                | 22 |
|                                                                               |                                                                                        |   |
| Item 3.                                                                            | Defaults Upon  Senior Securities                                                            | 22 |
|                                                                               |                                                                                        |   |
| Item 4.                                                                            | Submission  of Matters to a Vote of Security Holders                                        | 22 |
|                                                                               |                                                                                        |   |
| Item  5.                                                                           | Other Information                                                                           | 22 |
|                                                                               |                                                                                        |   |
| Item 6.                                                                            | Exhibits                                                                                    | 22 |
|                                                                               |                                                                                        |   |
| **Signatures**                                                                     |                                                                                        | 23 |
|                                                                               |                                                                                        |   |
| **Exhibits**                                                                       | ** **                                                                                  | ** ** |
|                                                                               |                                                                                        |   |
| 31. Certifications  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |                                                                                        |
|                                                                               |                                                                                        |   |
| 32.  Certification pursuant of Section 906 of the Sarbanes-Oxley Act of 2002  |                                                                                        |
|                                                                                    |                                                                                             |  |  |

 

2

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Tableof Contents

 

**TFFinancial Corporation and Subsidiaries**

 

**CONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                                                                                                                                                                                          | ** ** | **Unaudited   June 30,   2008** | ** ** | **Audited   December 31,   2007** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                                                                                                                                                                                          | ** ** | **(in thousands)**                        | ** ** |
| ASSETS                                                                                                                                                                                                                                                              |       |                                           |       |                                             |       |
| Cash and cash equivalents                                                                                                                                                                                                                                           |       | $                                              | 4,327      |                                             | $          | 5,680 |   |
| Investment securities available for sale—at  fair value                                                                                                                                                                                                        |       | 31,010                                         |       | 32,363                                           |       |
| Investment securities held to maturity  (fair value of $245 and $246, respectively)                                                                                                                                                                                 |       | 245                                            |       | 244                                              |       |
| Mortgage-backed securities available for  sale—at fair value                                                                                                                                                                                                   |       | 87,336                                         |       | 98,178                                           |       |
| Mortgage-backed securities held to maturity  (fair value of $5,408 and $6,343, respectively)                                                                                                                                                                        |       | 5,271                                          |       | 6,160                                            |       |
| Loans receivable, net                                                                                                                                                                                                                                               |       | 549,159                                        |       | 517,027                                          |       |
| Loans receivable held for sale                                                                                                                                                                                                                                      |       | 360                                            |       | 1,040                                            |       |
| Federal Home Loan Bank stock—at cost                                                                                                                                                                                                                           |       | 9,292                                          |       | 8,782                                            |       |
| Accrued interest receivable                                                                                                                                                                                                                                         |       | 2,941                                          |       | 3,036                                            |       |
| Premises and equipment, net                                                                                                                                                                                                                                         |       | 5,884                                          |       | 6,267                                            |       |
| Goodwill                                                                                                                                                                                                                                                            |       | 4,324                                          |       | 4,324                                            |       |
| Bank-owned life insurance                                                                                                                                                                                                                                           |       | 16,196                                         |       | 15,881                                           |       |
| Other assets                                                                                                                                                                                                                                                        |       | 3,242                                          |       | 2,691                                            |       |
| TOTAL ASSETS                                                                                                                                                                                                                                                        |       | $                                              | 719,587    |                                             | 701,673    |   |
|                                                                                                                                                                                                                                                                |       |                                           |       |                                             |       |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                                                                                                                                                          |       |                                           |       |                                             |       |
| Liabilities                                                                                                                                                                                                                                                         |       |                                           |       |                                             |       |
| Deposits                                                                                                                                                                                                                                                            |       | $                                              | 486,994    |                                             | $          | 472,394 |   |
| Borrowings from the Federal Home Loan Bank                                                                                                                                                                                                                          |       | 154,703                                        |       | 153,221                                          |       |
| Advances from borrowers for taxes and  insurance                                                                                                                                                                                                                    |       | 2,549                                          |       | 2,193                                            |       |
| Accrued interest payable                                                                                                                                                                                                                                            |       | 3,641                                          |       | 3,415                                            |       |
| Other liabilities                                                                                                                                                                                                                                                   |       | 2,639                                          |       | 2,607                                            |       |
| Total liabilities                                                                                                                                                                                                                                                   |       | 650,526                                        |       | 633,830                                          |       |
|                                                                                                                                                                                                                                                                |       |                                           |       |                                             |       |
| Stockholders’ equity                                                                                                                                                                                                                                           |       |                                           |       |                                             |       |
| Preferred stock, no par value; 2,000,000  shares authorized at June 30, 2008 and December 31, 2007, none  issued                                                                                                                                          |       | —                                         |       | —                                           |       |
| Common stock, $0.10 par value; 10,000,000  shares authorized, 5,290,000 shares issued, 2,648,576 and 2,671,083 shares  outstanding at June 30, 2008 and December 31, 2007, respectively,  net of shares in treasury 2,487,965 and 2,459,440, respectively |       | 529                                            |       | 529                                              |       |
| Additional paid-in capital                                                                                                                                                                                                                                          |       | 53,782                                         |       | 53,337                                           |       |
| Unearned ESOP shares                                                                                                                                                                                                                                                |       | (1,534                                         | )          | (1,595                                           | )          |
| Treasury stock-at cost                                                                                                                                                                                                                                              |       | (51,890                                        | )          | (51,216                                          | )          |
| Retained earnings                                                                                                                                                                                                                                                   |       | 69,135                                         |       | 67,735                                           |       |
| Accumulated other comprehensive loss                                                                                                                                                                                                                                |       | (961                                           | )          | (947                                             | )          |
| Total stockholders’ equity                                                                                                                                                                                                                                     |       | 69,061                                         |       | 67,843                                           |       |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                                                                                                     |       | $                                              | 719,587    |                                             | $          | 701,673 |   |

 

The accompanying notes are an integral partof these statements

 

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**TF Financial Corporation and Subsidiaries**

 

**CONSOLIDATED STATEMENTS OF INCOME**

**(Unaudited)**

 
| ** **                                           | ** ** | **For the three months   ended   June 30,** | ** ** | **For the six months   ended   June 30,** | ** ** |
|------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|
| ** **                                           | ** ** | **2008**                                                                  | ** ** | **2007**                                                                | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                           | ** ** | **(in thousands, except per share data)**        | ** ** |
| Interest income                                      |       |                                                                      |       |                                                                    |       |   |   |   |   |
| Loans, including fees                                |       | $                                                                         | 8,155      |                                                                    | $          | 7,986 |   | $ | 16,338 |   | $ | 15,765 |   |
| Mortgage-backed securities                           |       | 1,132                                                                     |       | 1,006                                                                   |       | 2,363 |   | 1,939 |   |
| Investment securities                                |       | 365                                                                       |       | 404                                                                     |       | 778 |   | 838 |   |
| Interest-bearing deposits and other                  |       | 4                                                                         |       | 19                                                                      |       | 10 |   | 86 |   |
|                                                 |       |                                                                      |       |                                                                    |       |   |   |   |   |
| TOTAL INTEREST INCOME                                |       | 9,656                                                                     |       | 9,415                                                                   |       | 19,489 |   | 18,628 |   |
|                                                 |       |                                                                      |       |                                                                    |       |   |   |   |   |
| Interest expense                                     |       |                                                                      |       |                                                                    |       |   |   |   |   |
| Deposits                                             |       | 2,926                                                                     |       | 3,416                                                                   |       | 6,212 |   | 6,646 |   |
| Borrowings                                           |       | 1,571                                                                     |       | 1,056                                                                   |       | 3,203 |   | 2,035 |   |
|                                                 |       |                                                                      |       |                                                                    |       |   |   |   |   |
| TOTAL INTEREST EXPENSE                               |       | 4,497                                                                     |       | 4,472                                                                   |       | 9,415 |   | 8,681 |   |
|                                                 |       |                                                                      |       |                                                                    |       |   |   |   |   |
| NET INTEREST INCOME                                  |       | 5,159                                                                     |       | 4,943                                                                   |       | 10,074 |   | 9,947 |   |
|                                                 |       |                                                                      |       |                                                                    |       |   |   |   |   |
| Provision for loan losses                            |       | 340                                                                       |       | —                                                                  |       | 340 |   | — |   |
|                                                 |       |                                                                      |       |                                                                    |       |   |   |   |   |
| NET INTEREST INCOME AFTER PROVISION FOR  LOAN LOSSES |       | 4,819                                                                     |       | 4,943                                                                   |       | 9,734 |   | 9,947 |   |
|                                                 |       |                                                                      |       |                                                                    |       |   |   |   |   |
| Non-interest income                                  |       |                                                                      |       |                                                                    |       |   |   |   |   |
| Service fees, charges and other operating  income    |       | 543                                                                       |       | 514                                                                     |       | 1,236 |   | 1,061 |   |
| Bank-owned life insurance                            |       | 156                                                                       |       | 153                                                                     |       | 315 |   | 301 |   |
| Gain on sale of loans                                |       | 97                                                                        |       | 63                                                                      |       | 159 |   | 117 |   |
| Gain on sale of foreclosed real estate               |       | 342                                                                       |       | —                                                                  |       | 342 |   | — |   |
| Other income                                         |       | —                                                                    |       | —                                                                  |       | 197 |   | 777 |   |
|                                                 |       |                                                                      |       |                                                                    |       |   |   |   |   |
| TOTAL NON-INTEREST INCOME                            |       | 1,138                                                                     |       | 730                                                                     |       | 2,249 |   | 2,256 |   |
|                                                 |       |                                                                      |       |                                                                    |       |   |   |   |   |
| Non-interest expense                                 |       |                                                                      |       |                                                                    |       |   |   |   |   |
| Compensation and benefits                            |       | 2,677                                                                     |       | 2,680                                                                   |       | 5,215 |   | 5,348 |   |
| Occupancy and equipment                              |       | 740                                                                       |       | 712                                                                     |       | 1,468 |   | 1,404 |   |
| Professional fees                                    |       | 167                                                                       |       | 133                                                                     |       | 421 |   | 357 |   |
| Marketing and advertising                            |       | 145                                                                       |       | 163                                                                     |       | 289 |   | 326 |   |
| Other operating                                      |       | 603                                                                       |       | 580                                                                     |       | 1,201 |   | 1,423 |   |
|                                                 |       |                                                                      |       |                                                                    |       |   |   |   |   |
| TOTAL NON-INTEREST EXPENSE                           |       | 4,332                                                                     |       | 4,268                                                                   |       | 8,594 |   | 8,858 |   |
|                                                 |       |                                                                      |       |                                                                    |       |   |   |   |   |
| INCOME BEFORE INCOME TAXES                           |       | 1,625                                                                     |       | 1,405                                                                   |       | 3,389 |   | 3,345 |   |
|                                                 |       |                                                                      |       |                                                                    |       |   |   |   |   |
| Income taxes                                         |       | 441                                                                       |       | 368                                                                     |       | 924 |   | 910 |   |
|                                                 |       |                                                                      |       |                                                                    |       |   |   |   |   |
| NET INCOME                                           |       | $                                                                         | 1,184      |                                                                    | $          | 1,037 |   | $ | 2,465 |   | $ | 2,435 |   |
|                                                 |       |                                                                      |       |                                                                    |       |   |   |   |   |
| Earnings per share—basic                        |       | $                                                                         | 0.45       |                                                                    | $          | 0.38 |   | $ | 0.92 |   | $ | 0.89 |   |
| Earnings per share—diluted                      |       | $                                                                         | 0.44       |                                                                    | $          | 0.38 |   | $ | 0.92 |   | $ | 0.89 |   |
| Dividends paid per share                             |       | $                                                                         | 0.20       |                                                                    | $          | 0.20 |   | $ | 0.40 |   | $ | 0.40 |   |

 

The accompanying notes are an integral part of these statements

 

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**TF Financial Corporation and Subsidiaries**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| ** **                                                                        | ** ** | **For the six months   ended   June 30,** | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|
| ** **                                                                        | ** ** | **2008**                                                                | ** ** | **2007** | ** ** |
| ** **                                                                        | ** ** | **(in thousands)**                                                 | ** ** |
| OPERATING ACTIVITIES                                                              |       |                                                                    |       |   |   |
| Net income                                                                        |       | $                                                                       | 2,465      |   | $ | 2,435 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities |       |                                                                    |       |   |   |
| Amortization (accretion) of:                                                      |       |                                                                    |       |   |   |
| Mortgage loan servicing rights                                                    |       | 79                                                                      |       | 23 |   |
| Deferred loan origination fees                                                    |       | 19                                                                      |       | (53 | ) |
| Premiums and discounts on investment  securities, net                             |       | 44                                                                      |       | 46 |   |
| Premiums and discounts on mortgage-backed  securities, net                        |       | (96                                                                     | )          | 45 |   |
| Premiums and discounts on loans, net                                              |       | 42                                                                      |       | 67 |   |
| Discount on wholesale deposits                                                    |       | —                                                                  |       | 12 |   |
| Provision for loan losses                                                         |       | 340                                                                     |       | — |   |
| Depreciation of premises and equipment                                            |       | 484                                                                     |       | 442 |   |
| Increase in value of bank-owned life  insurance                                   |       | (315                                                                    | )          | (301 | ) |
| Stock grant expense                                                               |       | 180                                                                     |       | 180 |   |
| Stock option expense                                                              |       | 186                                                                     |       | 195 |   |
| Stock-based benefit programs: ESOP                                                |       | 141                                                                     |       | 168 |   |
| Proceeds from sale of loans originated for  sale                                  |       | 10,968                                                                  |       | 10,523 |   |
| Origination of loans held for sale                                                |       | (10,269                                                                 | )          | (10,370 | ) |
| Gain on sale of                                                                   |       |                                                                    |       |   |   |
| Mortgage loans available for sale                                                 |       | (159                                                                    | )          | (117 | ) |
| Real estate acquired through foreclosure                                          |       | (342                                                                    | )          | — |   |
| Expense from mortgage loan derivatives                                            |       | 6                                                                       |       | (9 | ) |
| Income associated with forward loan sales                                         |       | (1                                                                      | )          | 1 |   |
| (Increase) decrease in                                                            |       |                                                                    |       |   |   |
| Accrued interest receivable                                                       |       | 95                                                                      |       | 92 |   |
| Other assets                                                                      |       | (117                                                                    | )          | (1,284 | ) |
| Increase (decrease) in                                                            |       |                                                                    |       |   |   |
| Accrued interest payable                                                          |       | 226                                                                     |       | 145 |   |
| Other liabilities                                                                 |       | 32                                                                      |       | (44 | ) |
| NET CASH PROVIDED BY OPERATING ACTIVITIES                                         |       | 4,008                                                                   |       | 2,196 |   |
|                                                                              |       |                                                                    |       |   |   |
| INVESTING ACTIVITIES                                                              |       |                                                                    |       |   |   |
| Loan originations                                                                 |       | (88,249                                                                 | )          | (74,639 | ) |
| Loan principal payments                                                           |       | 54,471                                                                  |       | 58,950 |   |
| Principal repayments on mortgage-backed  securities held to maturity              |       | 887                                                                     |       | 964 |   |
| Principal repayments on mortgage-backed  securities available for sale            |       | 11,171                                                                  |       | 5,310 |   |
| Purchase of investment securities available  for sale                             |       | —                                                                  |       | (771 | ) |
| Purchase of mortgage-backed securities  available for sale                        |       | —                                                                  |       | (13,798 | ) |
| Proceeds from maturities of investment  securities held to maturity               |       | —                                                                  |       | 6,455 |   |
| Proceeds from maturities of investment  available for sale                        |       | 1,000                                                                   |       | — |   |
| (Purchase)/redemption of Federal Home Loan  Bank stock, net                       |       | (510                                                                    | )          | 255 |   |
| Proceeds from the sale of real estate  acquired through foreclosure               |       | 1,272                                                                   |       | — |   |
| Purchase of premises and equipment                                                |       | (101                                                                    | )          | (379 | ) |
| Maturities of certificates of deposits in  other financial institutions           |       | —                                                                  |       | 40 |   |
| NET CASH USED IN INVESTING ACTIVITIES                                             |       | (20,059                                                                 | )          | (17,613 | ) |
|                                                                                   |            |                                                                         |            |  |  |  |  |

 

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| ** **                                                                        | ** ** | **For the six months ended   June 30,** | ** ** |
|-----------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                                        | ** ** | **2008**                                                              | ** ** | **2007** | ** ** |
| ** **                                                                        | ** ** | **(in thousands)**                                               | ** ** |
| FINANCING ACTIVITIES                                                              |       |                                                                  |       |   |   |
| Net increase in customer deposits                                                 |       | 14,600                                                                |       | 11,479 |   |
| Net (decrease) increase in short-term  borrowings from the Federal Home Loan Bank |       | (3,090                                                                | )          | 8,366 |   |
| Proceeds of long-term Federal Home Loan  Bank borrowings                          |       | 14,309                                                                |       | — |   |
| Repayment of long-term Federal Home Loan  Bank borrowings                         |       | (9,737                                                                | )          | (9,957 | ) |
| Net increase in advances from borrowers for  taxes and insurance                  |       | 356                                                                   |       | 868 |   |
| Treasury stock acquired                                                           |       | (683                                                                  | )          | (2,909 | ) |
| Exercise of stock options                                                         |       | 8                                                                     |       | 1,771 |   |
| Tax benefit arising from stock compensation                                       |       | —                                                                |       | 363 |   |
| Common stock dividends paid                                                       |       | (1,065                                                                | )          | (1,102 | ) |
| NET CASH PROVIDED BY FINANCING ACTIVITIES                                         |       | 14,698                                                                |       | 8,879 |   |
|                                                                              |       |                                                                  |       |   |   |
| NET DECREASE IN CASH AND CASH EQUIVALENTS                                         |       | (1,353                                                                | )          | (6,538 | ) |
|                                                                              |       |                                                                  |       |   |   |
| Cash and cash equivalents at beginning of  period                                 |       | 5,680                                                                 |       | 12,364 |   |
|                                                                              |       |                                                                  |       |   |   |
| Cash and cash equivalents at end of period                                        |       | $                                                                     | 4,327      |   | $ | 5,826 |   |
|                                                                              |       |                                                                  |       |   |   |
| Supplemental disclosure of cash flow  information                                 |       |                                                                  |       |   |   |
| Cash paid for                                                                     |       |                                                                  |       |   |   |
| Interest on deposits and borrowings from  Federal Home Loan Bank                  |       | $                                                                     | 9,189      |   | $ | 8,536 |   |
| Income taxes                                                                      |       | $                                                                     | 342        |   | $ | 180 |   |
| Non-cash transactions                                                             |       |                                                                  |       |   |   |
| Capitalization of mortgage servicing rights                                       |       | $                                                                     | 140        |   | $ | 150 |   |
| Transfers from loans to real estate  acquired through foreclosure                 |       | $                                                                     | 1,236      |   | $ | — |   |

 

The accompanying notes are an integral partof these statements

 

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

 

**NOTE 1 -PRINCIPLES OF CONSOLIDATION**

 

The consolidated financial statements asof June 30, 2008 (unaudited) and December 31, 2007 and for the threeand six-month periods ended June 30, 2008 and 2007 (unaudited) include theaccounts of TF Financial Corporation (the “Company”) and its wholly ownedsubsidiaries Third Federal Bank (the “Bank”), TF Investments Corporation andPenns Trail Development Corporation. The Company’s business is conductedprincipally through the Bank. All significant intercompany accounts andtransactions have been eliminated in consolidation.

 

**NOTE 2 - BASISOF PRESENTATION**

 

The accompanying unaudited consolidated financial statements wereprepared in accordance with instructions for Form 10-Q and, therefore, donot include all of the disclosures or footnotes required by accountingprinciples generally accepted in the United States of America (“GAAP”). In theopinion 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 June 30,2008 are not necessarily indicative of the results which may be expected forthe entire fiscal year or any other period. For further information, refer toconsolidated financial statements and footnotes thereto included in the Company’sAnnual Report on Form 10-K for the fiscal year ended December 31,2007.

 

**NOTE 3 -CONTINGENCIES**

 

The Company, from time to time, is a partyto routine litigation that arises in the normal course of business. In theopinion of management, the resolution of this litigation, if any, would nothave a material adverse effect on the Company’s consolidated financial positionor results of operations.

 

**NOTE 4 - OTHERCOMPREHENSIVE INCOME**

 

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

 
| ** **                                                                           | ** ** | **June 30, 2008**       | ** ** |
|--------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                           | ** ** | **Before tax   amount** | ** ** | **Tax   (expense)   benefit** | ** ** | **Net of tax   amount** | ** ** |
| ** **                                                                           | ** ** | **(in thousands)**           | ** ** |
| Unrealized losses on securities                                                      |       |                              |       |   |   |   |   |
| Unrealized holding losses arising during  period                                     |       | $                                 | (1,768     | ) | $ | 603 |   | $ | (1,165 | ) |
| Pension plan benefit adjustment related to  prior service costs and actuarial losses |       | 34                                |       | (12 | ) | 22 |   |
|                                                                                 |       |                              |       |   |   |   |   |
| Other comprehensive loss, net                                                        |       | $                                 | (1,734     | ) | $ | 591 |   | $ | (1,143 | ) |

 
| ** **                                                                           | ** ** | **June 30, 2007** | ** ** |
|--------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                           | ** ** | **Before tax  amount** | ** ** | **Tax  (expense)  benefit** | ** ** | **Net of tax  amount** | ** ** |
| ** **                                                                           | ** ** | **(in thousands)**     | ** ** |
| Unrealized losses on securities                                                      |       |                        |       |   |   |   |   |
| Unrealized holding losses arising during  period                                     |       | $                           | (1,122     | ) | $ | 381 |   | $ | (741 | ) |
| Pension plan benefit adjustment related to  prior service costs and actuarial losses |       | 55                          |       | (19 | ) | 36 |   |
|                                                                                 |       |                        |       |   |   |   |   |
| Other comprehensive loss, net                                                        |       | $                           | (1,067     | ) | $ | 362 |   | $ | (705 | ) |

 

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

 
| ** **                                                                           | ** ** | **June 30, 2008** | ** ** |
|--------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                           | ** ** | **Before tax  amount** | ** ** | **Tax  (expense)  benefit** | ** ** | **Net of tax  amount** | ** ** |
| ** **                                                                           | ** ** | **(in thousands)**     | ** ** |
| Unrealized losses on securities                                                      |       |                        |       |   |   |   |   |
| Unrealized holding losses arising during  period                                     |       | $                           | (77        | ) | $ | 26 |   | $ | (51 | ) |
| Pension plan benefit adjustment related to  prior service costs and actuarial losses |       | 55                          |       | (18 | ) | 37 |   |
|                                                                                 |       |                        |       |   |   |   |   |
| Other comprehensive loss, net                                                        |       | $                           | (22        | ) | $ | 8 |   | $ | (14 | ) |

 
| ** **                                                                           | ** ** | **June 30, 2007** | ** ** |
|--------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                           | ** ** | **Before tax  amount** | ** ** | **Tax  (expense)  benefit** | ** ** | **Net of tax  amount** | ** ** |
| ** **                                                                           | ** ** | **(in thousands)**     | ** ** |
| Unrealized losses on securities                                                      |       |                        |       |   |   |   |   |
| Unrealized holding losses arising during  period                                     |       | $                           | (872       | ) | $ | 295 |   | $ | (577 | ) |
| Pension plan benefit adjustment related to  prior service costs and actuarial losses |       | 55                          |       | (19 | ) | 36 |   |
|                                                                                 |       |                        |       |   |   |   |   |
| Other comprehensive loss, net                                                        |       | $                           | (817       | ) | $ | 276 |   | $ | (541 | ) |

 

**NOTE 5 -EARNINGS PER SHARE**

 

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

 
| ** **                                                                  | ** ** | **Three months ended June 30, 2008** | ** ** |
|-----------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                                  | ** ** | **Income   (numerator)**                                 | ** ** | **Weighted   average   shares   (denominator)** | ** ** | **Per share   Amount** | ** ** |
| Basic earnings  per share                                                   | ** ** | ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income available to common stockholders                                     |       | $                                                             | 1,184      |   | 2,660,757 |   | $ | 0.45 |   |
| Effect of dilutive securities                                               |       |                                                          |       |   |   |   |   |
| Stock options and grants                                                    |       | —                                                        |       | 10,011 |   | (0.01 | ) |
|                                                                        |       |                                                          |       |   |   |   |   |
| Diluted earnings per share                                                  |       |                                                          |       |   |   |   |   |
| Income available to common stockholders  plus effect of dilutive securities |       | $                                                             | 1,184      |   | 2,670,768 |   | $ | 0.44 |   |

 
| ** **                                                                  | ** ** | **Six months ended June 30, 2008** | ** ** |
|-----------------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                                                  | ** ** | **Income   (numerator)**                               | ** ** | **Weighted   average   shares   (denominator)** | ** ** | **Per share   Amount** | ** ** |
| Basic earnings per share                                     | ** ** | ** **                                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income available to common stockholders                                     |       | $                                                           | 2,465      |   | 2,665,544 |   | $ | 0.92 |   |
| Effect of dilutive securities                                               |       |                                                        |       |   |   |   |   |
| Stock options and grants                                                    |       | —                                                      |       | 5,477 |   | — |   |
|                                                                        |       |                                                        |       |   |   |   |   |
| Diluted earnings per share                                                  |       |                                                        |       |   |   |   |   |
| Income available to common stockholders  plus effect of dilutive securities |       | $                                                           | 2,465      |   | 2,671,021 |   | $ | 0.92 |   |

 

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Therewere 204,773 options to purchase shares of common stock at an average pricerange of $24.71 to $34.14 per share which were outstanding for the three monthsand six months ended June 30, 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 June 30, 2007** | ** ** |
|-----------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                                  | ** ** | **Income   (numerator)**                                 | ** ** | **Weighted   average   shares   (denominator)** | ** ** | **Per share   Amount** | ** ** |
| Basic earnings per share                                                    |       |                                                          |       |   |   |   |   |
| Income available to common stockholders                                     |       | $                                                             | 1,037      |   | 2,743,959 |   | $ | 0.38 |   |
| Effect of dilutive securities                                               |       |                                                          |       |   |   |   |   |
| Stock options and grants                                                    |       | —                                                        |       | 4,610 |   | — |   |
|                                                                        |       |                                                          |       |   |   |   |   |
| Diluted earnings per share                                                  |       |                                                          |       |   |   |   |   |
| Income available to common stockholders  plus effect of dilutive securities |       | $                                                             | 1,037      |   | 2,748,569 |   | $ | 0.38 |   |

 
| ** **                                                                  | ** ** | **Six months ended June 30, 2007** | ** ** |
|-----------------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                                                  | ** ** | **Income   (numerator)**                               | ** ** | **Weighted   average   shares   (denominator)** | ** ** | **Per share   Amount** | ** ** |
| Basic earnings per share                                                    |       |                                                        |       |   |   |   |   |
| Income available to common stockholders                                     |       | $                                                           | 2,435      |   | 2,747,498 |   | $ | 0.89 |   |
| Effect of dilutive securities                                               |       |                                                        |       |   |   |   |   |
| Stock options and grants                                                    |       | —                                                      |       | 2,344 |   | — |   |
|                                                                        |       |                                                        |       |   |   |   |   |
| Diluted earnings per share                                                  |       |                                                        |       |   |   |   |   |
| Income available to common stockholders  plus effect of dilutive securities |       | $                                                           | 2,435      |   | 2,749,842 |   | $ | 0.89 |   |

 

Therewere 20,128 options to purchase shares of common stock at a price of $34.14 pershare which were outstanding for the three months and six months ended June 30,2007 that were not included in the computation of diluted earnings per sharebecause the options’ exercise prices were greater than the average market priceof the common shares.

 

**NOTE 6 - FAIR VALUE MEASUREMENTS**

 

On January 1,2008, the Company adopted Financial Accounting Standards Board (FASB) StatementNo. 157 (SFAS 157), “Fair Value Measurements”. SFAS 157 defines fairvalue, establishes a framework for measuring fair value and expands the relateddisclosure requirements. SFAS 157 clarifies that fair value is an exit price,representing the amount that would be received to sell an asset or paid totransfer a liability in an orderly transaction between market participants.SFAS 157 establishes a fair value measurement hierarchy for inputs in valuationtechniques used to measure fair value. The hierarchy gives the highest priorityto unadjusted quoted prices in active markets for identical assets orliabilities (level 1 measurements) and the lowest priority to unobservableinputs (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.

 

·                  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 

 

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significantto the fair value measurement for the instrument or security.  Assets and liabilities measured at fair valueon a recurring basis segregated by value hierarchy level are summarized below(dollars in thousands):

 
| ** **                                     | ** ** | **Quoted   Prices in   Active   Markets   for   Identical   Assets   (Level 1)** | ** ** | **Significant   Other   Observable   Inputs   (Level 2)** | ** ** | **Significant   Unobservable   Inputs   (Level 3)** | ** ** | **Balance as of   June 30,   2008** | ** ** |
|------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| **Assets**                                     | ** ** | ** **                                                                                                                    | ** ** | ** **                                                                         | ** ** | ** **                                                              | ** ** | ** **                                                   | ** ** |
| Investment securities available for sale       |       | $                                                                                                                             | 154        |                                                                               | $          | 30,856                                                                  |       | $                                                            | —     |   | $ | 31,010 |   |
| Mortgage-backed securities available for  sale |       | —                                                                                                                        |       | 87,336                                                                             |       | —                                                                  |       | 87,336                                                       |       |
| Impaired loans                                 |       | —                                                                                                                        |       | —                                                                             |       | 2,076                                                                   |       | 2,076                                                        |       |
| Derivative loan commitments                    |       | —                                                                                                                        |       | —                                                                             |       | 3                                                                       |       | 3                                                            |       |
|                                           |       |                                                                                                                          |       |                                                                               |       |                                                                    |       |                                                         |       |
| **Liabilities**                                |       |                                                                                                                          |       |                                                                               |       |                                                                    |       |                                                         |       |
| Forward loan sales                             |       | —                                                                                                                        |       | —                                                                             |       | 4                                                                       |       | 4                                                            |       |
| Derivative loan commitments                    |       | —                                                                                                                        |       | —                                                                             |       | 6                                                                       |       | 6                                                            |       |
|                                                |            |                                                                                                                               |            |                                                                                    |            |                                                                         |            |                                                              |            |  |  |  |  |

 

Investment securities available for sale and mortgage-backed securitiesavailable for sale are valued primarily by a third party pricing agent. Activelisted equities are generally classified within Level 1 of the fair valuehierarchy.  Government-sponsored agencydebt securities and corporate bonds are primarily priced through amulti-dimensional relational model, a level 2 hierarchy, which incorporatesdealer quotes and other market information including, defined sector breakdown,benchmark yields, base spread, yield to maturity, and corporate actions.  Municipal securities are also measured withinthe level 2 hierarchy using inputs with a series of matrices that reflectbenchmark yields, ratings updates, and spread adjustments. Mortgage-backedsecurities include FNMA and FHLMC certificates and real estate mortgageinvestment conduits which are valued under a level 2 hierarchy using a matrix correlationto benchmark yields, spread analysis, and prepayment speeds.

 

Impaired loans are evaluated and valued at the time the loan isidentified as impaired, at the lower of the recorded investment in the loan ormarket value. The loans identified as impaired are real estate secured.  Market value is determined by using the valueof the collateral securing the loans and is therefore classified as a level 3hierarchy.  The value of the real estateis determined by qualified independent licensed appraisers contracted by theCompany to perform the assessment.  Theappraised value is then discounted based upon management’s experience, whichincludes estimated disposal costs, understanding of the customer and thecustomer’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.

 

The fair value of derivative loan commitments and forward loan salesare determined at the time the underlying loan is identified as held for salewith changes in fair value correlated to the change in secondary market loanpricing. The value is adjusted to reflect the Company’s historical loan “fallout”experience which incorporates such factors as changes in market rates,origination channels and loan purpose.

 

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

 

The following table presents additional information about assetsmeasured at fair value on a recurring basis for which the Company has utilizedLevel 3 inputs to determine fair value (in thousands):

 
| ** **                                      | ** ** | **Derivative loan   commitments** | ** ** |
|-------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                      | ** ** | ** **                                  | ** ** |
| Beginning balance December 31, 2007        |       | $                                           | 3          |   |
| Total gains/(losses) –realized/unrealized: |       |                                        |       |
| Included in earnings                            |       | —                                      |       |
| Included in other comprehensive income          |       | —                                      |       |
| Purchases, issuances, and settlements           |       | —                                      |       |
| Ending balance June 30, 2008               |       | $                                           | 3          |   |

 

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The following table presents additional information about liabilitiesmeasured at fair value on a recurring basis for which the Company has utilizedLevel 3 inputs to determine fair value (in thousands):

 
| ** **                                       | ** ** | **Forward loan sales** | ** ** | **Derivative loan   commitments** | ** ** |
|--------------------------------------------------|------------|----------------------------------|------------|---------------------------------------------|------------|
| ** **                                       | ** ** | ** **                       | ** ** | ** **                                  | ** ** |
| Beginning balance December 31, 2007         |       | $                                | 3          |                                        | $          | — |   |
| Total losses/ (gains) –realized/unrealized: |       |                             |       |                                        |       |
| Included in earnings                             |       | 1                                |       | 6                                           |       |
| Included in other comprehensive income           |       | —                           |       | —                                      |       |
| Purchases, issuances, and settlements            |       | —                           |       | —                                      |       |
| Ending balance June 30, 2008                |       | $                                | 4          |                                        | $          | 6 |   |

 

**NOTE 7 - STOCKBASED COMPENSATION**

 

TheCompany has stock benefit plans that allow the Company to grant options andstock to employees and directors. The awards, which have a term of up to10 years when issued, vest over a three to five year period. The exerciseprice of each award equals the market price of the Company’s stock on the dateof the grant. At June 30 2008, there was $232,000 of total unrecognizedcompensation cost, net of estimated forfeitures, related to non-vested awardsunder the Plan. That cost is expected to be recognized over a weighted averageperiod of 8.8 months.

 

Stock-basedcompensation expense included in net income related to stock options was$92,000 and $96,000 for the quarters ended June 30, 2008 and 2007respectively, resulting in a tax benefit of $28,000 and $30,000, respectively.Stock-based compensation expense included in net income related to stockoptions was $186,000 and $195,000 for the six months ended June 30, 2008and 2007 respectively, resulting in a tax benefit of $58,000 and $60,000,respectively.

 

Optionactivity under the Company’s stock option plan as of June 30, 2008 is asfollows:

 
| ** **                                | ** ** | **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                         |       | (5,610                           | )          | 28.27 |   |   |   |   |   |
| Options expired                           |       | —                           |       | — |   |   |   |   |   |
| Outstanding at June 30, 2008         |       | 246,541                          |       | $ | 26.54 |   | 3.16 |   | $ | 296 |   |
| Options exercisable at June 30, 2008 |       | 179,113                          |       | $ | 25.76 |   | 3.08 |   | $ | 296 |   |

 

Theaggregate intrinsic value in the table above represents the total pre-taxintrinsic value (the difference between the Company’s closing stock price onthe last trading day of the second quarter and the exercise price, multipliedby the number of in-the money options).

 

Theaggregate intrinsic value of options exercised during the six months ended June 30,2008 and 2007 was $2,100 and $1,085,000, respectively. Exercise of stockoptions during the six months ended June 30, 2008 and 2007 resulted incash receipts of $8,000 and $1,770,000, respectively.

 

Stock-based compensation expense included in net income related tostock grants was $90,000 for each of the quarters ended June 30, 2008 and2007. Stock-based compensation expense included in net income related to theCompany’s employee stock ownership plan totaled $54,000 and $77,000 for thequarters ended June 30, 2008 and 2007, respectively. Stock-basedcompensation expense included in net income related to stock grants was$180,000 for each of the six month periods ended June 30, 2008 and 2007.Stock-based compensation expense included in net income related to the Company’semployee stock ownership plan totaled $109,000 and $137,000 for the six monthperiods ended June 30, 2008 and 2007, respectively.

 

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**NOTE 8 - EMPLOYEE BENEFIT PLANS**

 

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

 
| ** **                              | ** ** | **Three months ended   June 30,** | ** ** |
|-----------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                              | ** ** | **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      |       | 8                                                     |       | 16 |   |
| Recognized net actuarial loss           |       | 26                                                    |       | 13 |   |
|                                    |       |                                                  |       |   |   |
| Net periodic benefit cost               |       | $                                                     | 89         |   | $ | 66 |   |

 
| ** **                              | ** ** | **Six months ended   June 30,** | ** ** |
|-----------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                              | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
|                                    |       |                                                |       |   |   |
| Components of net periodic benefit cost |       |                                                |       |   |   |
| Service cost                            |       | $                                                   | 196        |   | $ | 168 |   |
| Interest cost                           |       | 123                                                 |       | 106 |   |
| Expected return on plan assets          |       | (210                                                | )          | (200 | ) |
| Amortization of prior service cost      |       | 15                                                  |       | 30 |   |
| Recognized net actuarial loss           |       | 40                                                  |       | 25 |   |
|                                    |       |                                                |       |   |   |
| Net periodic benefit cost               |       | $                                                   | 164        |   | $ | 129 |   |

 

Theemployer contribution made for the six months ended June 30, 2008 and 2007was $218,000 and $1,107,000, respectively.

 

**NOTE 9 - NEW ACCOUNTING PRONOUNCEMENTS**

 

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

 

In February 2008, FASB issued FASB Staff Position(FSP) FAS 157-2 which provides a one-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.

 

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

 

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In April 2008, FASB issued Statement FSP 142-3 which amends the list of factorsan entity should consider in developing renewal of extension assumptions usedin determining the useful life of recognized intangible assets under Statement142. The new guidance applies to intangible assets that are acquiredindividually or with a group of other assets and to intangible assets acquiredin both business combinations and asset acquisitions.  The FSP is effective for financial statementsissued for fiscal years beginning after December 15, 2008 and interimperiods within those fiscal years.  Theguidance must be applied prospectively only to intangible assets acquired afterthe FSP’s effective date.

 

**NOTE 10 - RECLASSIFICATIONS**

 

Certain prior period amounts have been reclassified toconform to the current period presentation.

 

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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, among others,could cause the Company’s financial performance to differ materially from theplans, objectives, expectations, estimates and intentions expressed in suchforward-looking statements: the strength of the United States economy ingeneral and the strength of the local economies in which the Company conductsoperations; the effects of, and changes in, trade, monetary and fiscal policiesand laws, including interest rate policies of the Board of Governors of theFederal Reserve System, inflation, interest rate, market and monetaryfluctuations; the timely development of and acceptance of new products 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 June 30, 2008 and December 31,2007 were $719.6 million and $701.7 million, respectively, an increase of $17.9million, or 2.6% during the six-month period. Investment securities availablefor sale decreased $1.4 million due to maturities of $1.0 million, a decreasein the fair value of the securities of $0.3 million, as well as net premiumamortization of $0.1 million. Mortgage-backed securities available for saledecreased by $10.8 million due to principal repayments received of $11.2million offset by an increase in the fair value of the securities of $0.3million and net premium amortization of $0.1 million.  Mortgage-backed securities held to maturitydecreased by $0.9 million mainly as a result of principal repayments.

 

Loans receivable increased by $31.5 million during the first six monthsof 2008. Consumer and single-family residential mortgage loans of $47.6 millionand commercial loans of $40.7 were originated during the six months of 2008.Principal repayments of loans receivable were $54.5 million. The Company had$80.7 million of prime-rate based loans at June 30, 2008.  Loans originated for sale during the sixmonths of 2008 totaled $10.3 million, and there were $11.0 million in proceedsfrom the sale of loans in the secondary market during this period.

 

Total liabilities increased by $16.7 million during the first sixmonths of 2008. Deposit balances grew by $14.6 million during the first half ofthe year; the net result of a $7.4 million increase in non-interest checking,interest-bearing checking and money market accounts offset by a $5.1 milliondecrease in savings accounts. At June 30, 2008, the Bank had $77.5 millionof deposits indexed to the yield of the Merrill Lynch Ready Asset Money MarketFund. Retail certificates of deposit increased $12.2 million during thefirst six months of 2008. Advances from the Federal Home Loan Bankincreased by $1.5 million in the first six months of 2008; the result of $14.3million in new long term advances less a $3.1 million decrease in short-termborrowings, less scheduled amortization payments of $9.7 million.

 

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Total consolidated stockholder’s equity of the Company was $69.1million or 9.6 % of total assets at June 30, 2008. During the first sixmonths of 2008, the Company repurchased 28,950 shares of its common stock andissued 425 shares pursuant to the exercise of stock options. At June 30,2008, there were approximately 132,000 shares available for repurchase underthe previously announced share repurchase plan.

 

During the quarter, the Company closed its branch office on QuakerbridgeRoad in Mercer County, New Jersey, and reassigned approximately $9 million indeposits to its nearby offices in Ewing and Hamilton, New Jersey.

 

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

######  

At the end of the first quarter of 2008, the Company completedforeclosure proceedings on two parcels of commercial real estate with acombined loan balance of $1.5 million. These loans were non-performing at December 31,2007. One parcel has been recorded as real estate owned totaling $306,000 andwas included in other assets in the consolidated balance sheet at June 30,2008. As a result of this specific foreclosure, the Bank recorded a charge offin the amount of $347,000. During the foreclosure proceedings of the secondproperty, a bid from an unrelated party was made which satisfied the outstandingcontractual obligations of the borrower with the Bank. This foreclosure andsimultaneous sale resulted in a $342,000 gain which is included in non-interestincome of the Company during the second quarter of 2008. The Bank does notanticipate any further charges against the allowance as a result of theforegoing discussed foreclosures. During the first half of 2008 and 2007, theCompany’s provision for loan losses was $340,000 and $0, respectively. Withrespect to each of the remaining non-performing loans, all of which are realestate secured, the Bank is taking appropriate steps to resolve the individualsituations.

 

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

 
| ** **                                                  | ** ** | **June 30,** | ** ** | **December 31,** | ** ** | **June 30,** | ** ** |
|-------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                                                  | ** ** | **2008**          | ** ** | **2007**              | ** ** | **2007**          | ** ** |
| ** **                                                  | ** ** | ** **        | ** ** | ** **            | ** ** | ** **        | ** ** |
| Non-performing loans                                        |       | $                 | 2,368      |                  | $          | 5,358             |       | $ | 4,965 |   |
| Ratio of non-performing loans  to gross loans               |       | 0.43              | %          | 1.03                  | %          | 0.99              | %          |
| Ratio of non-performing loans  to total assets              |       | 0.33              | %          | 0.76                  | %          | 0.75              | %          |
| Ratio of total non-performing  assets to total assets       |       | 0.37              | %          | 0.76                  | %          | 0.75              | %          |
| Ratio of allowance for loan  losses to total loans          |       | 0.52              | %          | 0.55                  | %          | 0.57              | %          |
| Ratio of allowance for loan  losses to non-performing loans |       | 120.1             | %          | 53.00                 | %          | 57.40             | %          |
|                                                             |            |                   |            |                       |            |                   |            |  |  |  |

 

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 the activityin the allowance for loan losses during the periods indicated (in thousands):

 
| ** **                                 | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|
| Beginning balance,  January 1,        |       | $        | 2,842      |     | $          | 2,865 |   |
| Provision                                  |       | 340      |       | —   |       |
| Less: charge-off’s  (recoveries), net |       | 337      |       | 15       |       |
| Ending balance, June 30,              |       | 2,845    |       | 2,850    |       |
|                                            |            |          |            |          |            |  |  |

 

15

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Table of Contents

 

**RESULTS OF OPERATIONS FOR THE THREE MONTHSENDED JUNE 30, 2008 AND 2007**

 

**Net Income**. TheCompany recorded net income of $1,184,000, or $0.44 per diluted share, for thethree months ended June 30, 2008 as compared to net income of $1,037,000,or $0.38 per diluted share, for the three months ended June 30, 2007.

 

### **Average Balance Sheet**

###  

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

 
| ** **                                                                        | ** ** | **June 30,**          | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                        | ** ** | **2008**                   | ** ** | **2007** | ** ** |
| ** **                                                                        | ** ** | **Average   balance** | ** ** | **Interest** | ** ** | **Average   yld/cost** | ** ** | **Average   balance** | ** ** | **Interest** | ** ** | **Average   yld/cost** | ** ** |
| **ASSETS**                                                                        |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| **Interest-earning assets:**                                                      |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Loans receivable(1)                                                               |       | $                          | 545,958    |   | $ | 8,155 |   | 6.01 | % | $ | 498,321 |   | $ | 7,986 |   | 6.43 | % |
| Mortgage-backed securities                                                        |       | 97,397                     |       | 1,132 |   | 4.67 | % | 86,619 |   | 1,006 |   | 4.66 | % |
| Investment securities(2)                                                          |       | 41,915                     |       | 482 |   | 4.63 | % | 37,474 |   | 512 |   | 5.48 | % |
| Other interest-earning assets(3)                                                  |       | 665                        |       | 4 |   | 2.42 | % | 1,195 |   | 19 |   | 6.38 | % |
| Total interest-earning assets                                                     |       | 685,935                    |       | 9,773 |   | 5.73 | % | 623,609 |   | 9,523 |   | 6.13 | % |
| Non interest-earning assets                                                       |       | 36,265                     |       |   |   |   |   | 34,032 |   |   |   |   |   |
| Total assets                                                                      |       | $                          | 722,200    |   |   |   |   |   | $ | 657,641 |   |   |   |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                     |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| **Interest-bearing liabilities:**                                                 |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Deposits                                                                          |       | 486,394                    |       | 2,926 |   | 2.42 | % | 481,084 |   | 3,416 |   | 2.85 | % |
| Borrowings from the FHLB                                                          |       | 155,675                    |       | 1,571 |   | 4.06 | % | 103,182 |   | 1,056 |   | 4.10 | % |
| Total interest-bearing liabilities                                                |       | 642,069                    |       | 4,497 |   | 2.82 | % | 584,266 |   | 4,472 |   | 3.07 | % |
| Non interest-bearing liabilities                                                  |       | 9,934                      |       |   |   |   |   | 8,260 |   |   |   |   |   |
| Total liabilities                                                                 |       | 652,003                    |       |   |   |   |   | 592,526 |   |   |   |   |   |
| Stockholders’ equity                                                         |       | 70,197                     |       |   |   |   |   | 65,115 |   |   |   |   |   |
| Total liabilities and stockholders’ equity                                   |       | $                          | 722,200    |   |   |   |   |   | $ | 657,641 |   |   |   |   |   |
| Net interest income                                                               |       |                       |       | $ | 5,276 |   |   |   |   |   | $ | 5,051 |   |   |   |
| Interest rate spread(4)                                                           |       |                       |       |   |   | 2.91 | % |   |   |   |   | 3.06 | % |
| Net yield on interest-earning assets(5)                                           |       |                       |       |   |   | 3.09 | % |   |   |   |   | 3.25 | % |
| 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 $108,000  for the quarter ended June 30, 2008 and 2007, respectively. Tax  equivalent interest income is based upon a marginal effective tax rate of  34%. |
| (3) |   | Includes  interest-bearing deposits in other banks.                                                                                                                                                                                                |
| (4) |   | Interest rate spread  represents the difference between the average yield on interest-earning  assets and the average cost of interest-bearing liabilities.                                                                                        |
| (5) |   | Net yield on  interest-earning assets represents net interest income as a percentage of  average interest-earning assets.                                                                                                                          |

 

16

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**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.

 
| ** **                         | ** ** | **Three months ended June 30,**                         | ** ** |
|------------------------------------|------------|-----------------------------------------------------------------------------|------------|
| ** **                         | ** ** | **2008 vs 2007   Increase (decrease) due to** | ** ** |
| ** **                         | ** ** | **Volume**                                                                  | ** ** | **Rate** | ** ** | **Net** | ** ** |
| **Interest income:**               |       |                                                                        |       |   |   |   |   |
| Loans receivable, net              |       | $                                                                           | 2,588      |   | $ | (2,419 | ) | $ | 169 |   |
| Mortgage-backed securities         |       | 123                                                                         |       | 3 |   | 126 |   |
| Investment securities (1)          |       | 264                                                                         |       | (294 | ) | (30 | ) |
| Other interest-earning assets      |       | (6                                                                          | )          | (9 | ) | (15 | ) |
| Total interest-earning assets      |       | 2,969                                                                       |       | (2,719 | ) | 250 |   |
| **Interest expense:**              |       |                                                                        |       |   |   |   |   |
| Deposits                           |       | 248                                                                         |       | (738 | ) | (490 | ) |
| Borrowings from the FHLB           |       | 597                                                                         |       | (82 | ) | 515 |   |
| Total interest-bearing liabilities |       | 845                                                                         |       | (820 | ) | 25 |   |
| Net change in net interest income  |       | $                                                                           | 2,124      |   | $ | (1,899 | ) | $ | 225 |   |

 

----

| (1) |   | Tax  equivalent adjustments to interest on investment securities were $117,000 and  $108,000 for the quarters ended June 30, 2008 and 2007, respectively.  Tax equivalent interest income is based upon a marginal effective tax rate of  34%. |
|-----|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**Total Interest Income**.Total interest income, on a tax equivalent basis, increased by $250,000 or 2.6%to $9.8 million for the quarter ended June 30, 2008 compared with thesecond quarter of 2007. The average balance of loans outstanding increased betweenthe two periods as a result of loan originations added to the portfolio duringthe intervening period. However, the average yield on loans decreased 42 basispoints primarily as a result of the Company’s reduction of its prime rate fourtimes during 2008 and three times during the last two quarters of 2007 by acombined 325 basis points mirroring the action taken by the Federal OpenMarkets Committee (FOMC) when it acted to reduce the fed funds rate. Interestincome from mortgage-backed securities was higher in the second quarter of 2008in comparison to the same period of 2007 due to purchases of $19.6 million ofsecurities during the intervening period. Interest income from investmentsecurities decreased slightly as a result of reduced dividends received on FHLBstock despite increased balances of FHLB stock held.

 

**Total Interest Expense.**Total interest expense increased by $25,000 to $4.5 million during thethree-month period ended June 30, 2008 as compared with the second quarterof 2007. Interest rates paid on the Bank’s deposits dropped significantlyduring the second quarter of 2008, as rates on deposits indexed to the MerrillLynch Ready Asset Money Market Fund decreased by 228 basis points during thefirst six months of 2008. Although the average balance of deposits reflects a$5.3 million increase in balances, the average deposit balances during thesecond quarter of 2007 included broker-originated certificates of deposit of$7.1 million which fully matured during the second and third quarters of 2007.

 

Interestexpense associated with borrowings from the Federal Home Loan Bank increased$515,000 between the second quarters of 2008 and 2007. During the interveningperiod, the Bank increased its borrowings by $52.5 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 second quarter of 2008compared with $0.7 million for the same period in 2007. During the secondquarter of 2008, non-interest income included the $342,000 gain on sale offoreclosed real estate.

 

**Non-interest expense.**Totalnon-interest expense in creased by $64,000 to $4.3 million for the three monthsended June 30, 2008 compared to the same period in 2007. Legal expensesincreased $25,000 between the two quarters largely due to services rendered inconjunction with non-performing assets.

 

17

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**RESULTS OF OPERATIONS FOR THE SIX MONTHSENDED JUNE 30, 2008 AND 2007**

 

**Net Income**. TheCompany recorded net income of $2,465,000, or $0.92 per diluted share, for thesix months ended June 30, 2008 as compared to net income of $2,435,000, or$0.89 per diluted share, for the six months ended June 30, 2007.

 

### **Average Balance Sheet**

###  

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

 
| ** **                                                                         | ** ** | **June 30,**          | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                         | ** ** | **2008**                   | ** ** | **2007** | ** ** |
| ** **                                                                         | ** ** | **Average   balance** | ** ** | **Interest** | ** ** | **Average   yld/cost** | ** ** | **Average   balance** | ** ** | **Interest** | ** ** | **Average   yld/cost** | ** ** |
| **ASSETS**                                                                         |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| **Interest-earning assets:**                                                       |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Loans receivable(1)                                                                |       | $                          | 537,411    |   | $ | 16,338 |   | 6.11 | % | $ | 493,038 |   | $ | 15,765 |   | 6.45 | % |
| Mortgage-backed securities                                                         |       | 99,810                     |       | 2,363 |   | 4.76 | % | 83,644 |   | 1,939 |   | 4.67 | % |
| Investment securities(2)                                                           |       | 41,850                     |       | 1,012 |   | 4.86 | % | 39,368 |   | 1,056 |   | 5.41 | % |
| Other interest-earning assets(3)                                                   |       | 818                        |       | 10 |   | 2.46 | % | 3,571 |   | 86 |   | 4.86 | % |
| Total interest-earning assets                                                      |       | 679,889                    |       | 19,723 |   | 5.83 | % | 619,621 |   | 18,846 |   | 6.13 | % |
| Non interest-earning assets                                                        |       | 35,344                     |       |   |   |   |   | 34,091 |   |   |   |   |   |
| Total assets                                                                       |       | $                          | 715,233    |   |   |   |   |   | $ | 653,712 |   |   |   |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                      |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| **Interest-bearing liabilities:**                                                  |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Deposits                                                                           |       | 479,497                    |       | 6,212 |   | 2.61 | % | 478,742 |   | 6,646 |   | 2.80 | % |
| Borrowings from the FHLB                                                           |       | 157,363                    |       | 3,203 |   | 4.09 | % | 101,237 |   | 2,035 |   | 4.05 | % |
| Total interest-bearing liabilities                                                 |       | 636,860                    |       | 9,415 |   | 2.97 | % | 579,979 |   | 8,681 |   | 3.02 | % |
| Non interest-bearing liabilities                                                   |       | 9,285                      |       |   |   |   |   | 8,103 |   |   |   |   |   |
| Total liabilities                                                                  |       | 646,145                    |       |   |   |   |   | 588,082 |   |   |   |   |   |
| Stockholders’ equity                                                          |       | 69,088                     |       |   |   |   |   | 65,630 |   |   |   |   |   |
| Total liabilities and stockholders’ equity                                    |       | $                          | 715,233    |   |   |   |   |   | $ | 653,712 |   |   |   |   |   |
| Net interest income                                                                |       |                       |       | $ | 10,308 |   |   |   |   |   | $ | 10,165 |   |   |   |
| Interest rate spread(4)                                                            |       |                       |       |   |   | 2.86 | % |   |   |   |   | 3.12 | % |
| Net yield on interest-earning assets(5)                                            |       |                       |       |   |   | 3.05 | % |   |   |   |   | 3.31 | % |
| 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 $234,000 and $218,000  for the six months ended June 30, 2008 and 2007, respectively. Tax  equivalent interest income is based upon a marginal effective tax rate of  34%. |
| (3) |   | Includes  interest-bearing deposits in other banks.                                                                                                                                                                                                   |
| (4) |   | Interest rate spread  represents the difference between the average yield on interest-earning  assets and the average cost of interest-bearing liabilities.                                                                                           |
| (5) |   | Net yield on  interest-earning assets represents net interest income as a percentage of average  interest-earning assets.                                                                                                                             |

 

18

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**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.

 
| ** **                         | ** ** | **Six months ended June 30,**                           | ** ** |
|------------------------------------|------------|-----------------------------------------------------------------------------|------------|
| ** **                         | ** ** | **2008 vs 2007   Increase (decrease) due to** | ** ** |
| ** **                         | ** ** | **Volume**                                                                  | ** ** | **Rate** | ** ** | **Net** | ** ** |
| **Interest income:**               |       |                                                                        |       |   |   |   |   |
| Loans receivable, net              |       | $                                                                           | 2,455      |   | $ | (1,882 | ) | $ | 573 |   |
| Mortgage-backed securities         |       | 387                                                                         |       | 37 |   | 424 |   |
| Investment securities (1)          |       | 148                                                                         |       | (192 | ) | (44 | ) |
| Other interest-earning assets      |       | (46                                                                         | )          | (30 | ) | (76 | ) |
| Total interest-earning assets      |       | 2,944                                                                       |       | (2,067 | ) | 877 |   |
| **Interest expense:**              |       |                                                                        |       |   |   |   |   |
| Deposits                           |       | 32                                                                          |       | (466 | ) | (434 | ) |
| Borrowings from the FHLB           |       | 1,148                                                                       |       | 20 |   | 1,168 |   |
| Total interest-bearing liabilities |       | 1,180                                                                       |       | (446 | ) | 734 |   |
| Net change in net interest income  |       | $                                                                           | 1,764      |   | $ | (1,621 | ) | $ | 143 |   |

 

----

| (1) |   | Tax  equivalent adjustments to interest on investment securities were $234,000 and  $218,000 for the six months ended June 30, 2008 and 2007, respectively.  Tax equivalent interest income is based upon a marginal effective tax rate of  34%. |
|-----|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**Total Interest Income**.Total interest income, on a tax equivalent basis, increased by $877,000 or 4.7%to $19.7 million for the six months ended June 30, 2008 compared with thefirst six months of 2007. The average balance of loans outstanding increased asa result of $52.8 million of loan originations in excess of loan principalpayments added to the portfolio during the intervening period. However, theaverage yield on loans decreased 34 basis points primarily as a result of theCompany’s reduction of its prime rate four times during 2008 and three timesduring the last two quarters of 2007 by a combined 325 basis points mirroringthe action taken by the FOMC when it acted to reduce the fed funds rate.Interest income from mortgage-backed securities was higher in the first twoquarters of 2008 in comparison to the same period of 2007 due to purchases of$19.6 million of securities during the intervening period. Interest income frominvestment securities decreased as a result of reduced dividends received onFHLB stock despite increased balances of FHLB stock held.

 

**Total Interest Expense.**Total interest expense increased by $734,000 to $9.4 million during thesix-month period ended June 30, 2008 as compared with the first half of2007. Interest rates paid on the Bank’s deposits dropped notably as rates ondeposits indexed to the Merrill Lynch Ready Asset Money Market Fund decreasedby 228 basis points during the first six months of 2008 and thereforesignificantly reduced interest expense on deposits. Although the averagebalance of deposits reflects only a $755,000 increase in balances, the averagedeposit balances during the first six months of 2007 included broker-originatedcertificates of deposit of $9.4 million which fully matured during the secondand third quarters of 2007.

 

Interestexpense associated with borrowings from the Federal Home Loan Bank increased$1.2 million between the first six months of 2008 and 2007. During theintervening period, the Bank increased its borrowings by $56.1 million from theFHLB to fund loan growth as well as security purchases.

 

**Non-interest income**.Total non-interest income was $2.2 million for the first six months of 2008compared with $2.3 million for the same period in 2007.  The first six months of 2008 included a$197,000 insurance claim recovery related to a 2007 expense sustained as aresult of the bankruptcy of one of the Bank’s loan servicing agents. Additionally,other income during the first six months of 2008 included $100,000 ofnon-recurring income related to the Company’s real estate held for development,a $342,000 gain on the sale of foreclosed real estate and $61,000 of investmentreferral commissions. The first six months of 2007 included $777,000 ofnon-recurring income from a fraud-related settlement.

 

19

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**Non-interest expense.**Totalnon-interest expense decreased by $264,000 to $8.6 million for the six monthsended June 30, 2008 compared to the same period in 2007. During 2007, theBank incurred a $270,000 loss as the result of the bankruptcy of one of theBank’s loan servicing agents.

 

20

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Table of Contents

 

**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 six-month period ended June 30, 2008 in the ability ofthe Company and its subsidiaries to fund their operations.

 

At June 30, 2008, the Company had commitmentsoutstanding under letters of credit of $1.5 million, commitments to originateloans of $10.2 million, and commitments to fund undisbursed balances of closedloans and unused lines of credit of $53.8 million. At June 30, 2008, theBank had $1.6 million outstanding commitments to sell loans. There has been no material change duringthe six months ended June 30, 2008 in any of the Company’s othercontractual obligations or commitments to make future payments.

 

**Capital Requirements**

 

The Bank was in compliance with all of its capitalrequirements as of June 30, 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 $2,845,000 at June 30,2008.

 

###### **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.

 

21

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Table of Contents

 

**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 June 30, 2008:                                                                                                                                                                                           |

 
| **Month**                                     | ** ** | **Total Number of   Shares Purchased** | ** ** | **Average Price   Paid per Share** | ** ** | **Total Number of   Shares Purchased   as   Part of Publicly   Announced Plan of   Program** | ** ** | **Maximum Number   of   Shares that may yet   be Purchased   Under   the Plans or   Programs** | ** ** |
|-----------------------------------------------|------------|------------------------------------------------------------|------------|--------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                                          |       |                                                       |       |                                                   |       |                                                                                                                                                     |       |                                                                                                                                                            |       |
| April 1, 2008 – April 30, 2008 |       | —                                                     |       | $                                                      | —     |                                                                                                                                                     | —     |                                                                                                                                                            | 150,457    |   |
|                                          |       |                                                       |       |                                                   |       |                                                                                                                                                     |       |                                                                                                                                                            |       |
| May 1, 2008 – May 31, 2008     |       | 3,300                                                      |       | $                                                      | 23.52      |                                                                                                                                                     | 3,300      |                                                                                                                                                            | 147,157    |   |
|                                          |       |                                                       |       |                                                   |       |                                                                                                                                                     |       |                                                                                                                                                            |       |
| June 1, 2008 - June 30, 2008        |       | 15,150                                                     |       | $                                                      | 23.24      |                                                                                                                                                     | 15,150     |                                                                                                                                                            | 132,007    |   |

 
| **ITEM 3.** | ** ** | **DEFAULTS  UPON SENIOR SECURITIES**                     |
|-------------|------------|----------------------------------------------------------|
|        |       |                                                     |
|        |       | Not applicable.                                          |
|        |       |                                                     |
| **ITEM 4.** | ** ** | **SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS** |
| ** **  | ** ** | ** **                                               |
|        |       | None.                                                    |
|        |       |                                                     |
| **ITEM 5.** | ** ** | **OTHER  INFORMATION**                                   |
| ** **  | ** ** | ** **                                               | ** ** | ** ** |
|        |       | None.                                                    |   |   |
|        |       |                                                     |   |   |
| **ITEM 6.** | ** ** | **EXHIBITS**                                             |   |   |
|        |       |                                                     |
|        |       | (a)                                                      | Exhibits |
|        |       |                                                     |   |
|        |       |                                                     | 31. | Certification pursuant to Section 302  of the Sarbanes-Oxley Act of 2002. |
|        |       |                                                     | 32. | Certification pursuant to Section 906  of the Sarbanes-Oxley Act of 2002. |
|             |            |                                                          |  |  |  |  |

 

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Table of Contents

 

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

 

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