10-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS

PURSUANT TO SECTIONS 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

ý ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2004

- or -

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

For the transition period from                                   to                                   

Commission file number:  0-24168

TF FINANCIAL CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

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

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

Securities registered pursuant to Section 12(b) of the Act:  None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $.10 per share

(Title of Class)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES ýNO o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

Indicate by check mark whether the registrant is an accelerated filer as defined in Exchange Act Rule 12b-2.  YES oNO ý

The aggregate market value of the voting common equity held by non-affiliates of the registrant, based on the closing price of the registrant’s Common Stock as quoted on the Nasdaq System on June 30, 2004, was $60.7 million (2,023,641 shares at $30.00 per share).

As of March 21, 2005 there were outstanding 2,950,463 shares of the registrant’s Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

1.Portions of the Annual Report to Stockholders for the Fiscal Year Ended December 31, 2004.  (Parts I, II and IV)

2.Portions of the Proxy Statement for the 2005 Annual Meeting of Stockholders.  (Part III)

PART I

TF FINANCIAL CORPORATION (THE “COMPANY”) MAY FROM TIME TO TIME MAKE WRITTEN OR ORAL “FORWARD-LOOKING STATEMENTS”, INCLUDING STATEMENTS CONTAINED IN THE COMPANY’S FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION (INCLUDING THIS ANNUAL REPORT ON FORM 10-K AND THE EXHIBITS HERETO), IN ITS REPORTS TO STOCKHOLDERS AND IN OTHER COMMUNICATIONS BY THE COMPANY, WHICH ARE MADE IN GOOD FAITH BY THE COMPANY PURSUANT TO THE “SAFE HARBOR” PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.

THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES, SUCH AS STATEMENTS OF THE COMPANY’S PLANS, OBJECTIVES, EXPECTATIONS, ESTIMATES AND INTENTIONS, THAT ARE SUBJECT TO CHANGE BASED ON VARIOUS IMPORTANT FACTORS (SOME OF WHICH ARE BEYOND THE COMPANY’S CONTROL).  THE FOLLOWING FACTORS, AMONG OTHERS, COULD CAUSE THE COMPANY’S FINANCIAL PERFORMANCE TO DIFFER MATERIALLY FROM THE PLANS, OBJECTIVES, EXPECTATIONS, ESTIMATES AND INTENTIONS EXPRESSED IN SUCH FORWARD-LOOKING STATEMENTS: THE STRENGTH OF THE UNITED STATES ECONOMY IN GENERAL AND THE STRENGTH OF THE LOCAL ECONOMIES IN WHICH THE COMPANY CONDUCTS OPERATIONS; THE EFFECTS OF, AND CHANGES IN, MONETARY AND FISCAL POLICIES AND LAWS, INCLUDING INTEREST RATE POLICIES OF THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, INFLATION, INTEREST RATES, MARKET AND MONETARY FLUCTUATIONS; THE TIMELY DEVELOPMENT OF AND ACCEPTANCE OF NEW PRODUCTS AND SERVICES OF THE COMPANY AND THE PERCEIVED OVERALL VALUE OF THESE PRODUCTS AND SERVICES BY USERS, INCLUDING THE FEATURES, PRICING AND QUALITY COMPARED TO COMPETITORS’ PRODUCTS AND SERVICES; THE IMPACT OF CHANGES IN FINANCIAL SERVICES’ LAWS AND REGULATIONS (INCLUDING LAWS CONCERNING TAXES, BANKING, SECURITIES AND INSURANCE); TECHNOLOGICAL CHANGES; ACQUISITIONS; CHANGES IN CONSUMER SPENDING AND SAVING HABITS; AND THE SUCCESS OF THE COMPANY AT MANAGING THE RISKS INVOLVED IN THE FOREGOING.

THE COMPANY CAUTIONS THAT THE FOREGOING LIST OF IMPORTANT FACTORS IS NOT EXCLUSIVE.  THE COMPANY DOES NOT UNDERTAKE TO UPDATE ANY FORWARD-LOOKING STATEMENT, WHETHER WRITTEN OR ORAL, THAT MAY BE MADE FROM TIME TO TIME BY OR ON BEHALF OF THE COMPANY.

Item 1.  Business

BUSINESS OF THE COMPANY

On July 13, 1994, the Company consummated its public offering for 5,290,000 shares of its common stock and acquired Third Federal Bank (the “Bank”) as part of the Bank’s mutual-to-stock conversion.  The Company was incorporated under Delaware law in March 1994.  The Company is a savings and loan holding company and is subject to regulation by the Office of Thrift Supervision (the “OTS”), the Federal Deposit Insurance Corporation (the “FDIC”) and the Securities and Exchange Commission (the “SEC”).  The Company does not transact any material business other than through its direct and indirect subsidiaries: Third Federal Bank, TF Investments Corporation, Teragon Financial Corporation, Penns Trail Development Corporation and Third Delaware Corporation. At December 31, 2004, the Company had total assets of $629 million, total liabilities of $568 million and stockholders’ equity of $61 million.

BUSINESS OF THE BANK

The Bank is a federally-chartered stock savings bank, which was originally chartered in 1921 as a Pennsylvania-chartered building and loan association.  The Bank’s deposits are insured up to the maximum amount allowable by the FDIC.

The Bank is a community oriented savings institution offering a variety of financial services to meet the needs of the communities it serves.  As of December 31, 2004 the Bank operated fourteen branch offices in Bucks and

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Philadelphia counties, Pennsylvania and in Mercer County, New Jersey. A fifteenth branch is presently scheduled to open in Northeast Philadelphia during the second quarter of 2005.

The Bank attracts deposits from the general public and uses such deposits, together with borrowings and other funds primarily to originate or purchase loans secured by first mortgages on owner-occupied, one-to-four family residences in its market area and to invest in mortgage-backed and investment securities.  At December 31, 2004, one-to-four family residential mortgage loans totaled $285 million or 64% of the Bank’s total loan portfolio.  At that same date, the Bank had approximately $119 million or 19% of total assets invested in mortgage-backed securities and $25 million or 4% of total assets in investment securities. The Bank also originates commercial real estate and multi-family, construction and consumer loans.  The Bank has two subsidiaries, Third Delaware Corporation, which was incorporated in 1998 for the purpose of holding and managing mortgage-backed securities and investment securities for the Bank, and Teragon Financial Corporation which holds the Bank’s 75% limited partnership interest in a captive title insurance agency, Third Fed Abstract, L. P.

Market Area

The Bank offers a wide range of consumer and business products at its fourteen full service branch offices located in Bucks and Philadelphia Counties in Pennsylvania, and Mercer County in New Jersey. Five of the branch offices are located in Bucks County, the third wealthiest county in Pennsylvania. Bucks County is a growing region offering opportunity for growth for the Bank. Six branches are located in the northeast section of Philadelphia where the Bank was founded. Although Philadelphia County is experiencing population decline, the Bank’s branches in this section of Philadelphia represent a deposit stronghold. The remaining three branches are in Mercer County, New Jersey which has an expanding population and represents another growth area for the Bank.

Competition

The Bank faces varying degrees of competition from banks, thrift institutions and credit unions at its various branch locations.  Stronger competition has come from local and very large regional commercial banks based in and around the Philadelphia area.  At December 31, 2004 the Company believed that commercial banks held approximately 78% of the deposit market in Philadelphia County, 65% in Bucks County and 77% in Mercer County. The Bank’s estimated share of the deposit market in Philadelphia, Bucks and Mercer Counties was 0.7%, 1.6% and 1.0%, respectively, at December 31, 2004.

Lending Activities

General.  The Bank’s loan portfolio composition consists primarily of conventional adjustable-rate (“ARM”) and fixed-rate first mortgage loans secured by one- to four-family residences.  The Bank also makes commercial real estate and multi-family loans, construction loans and consumer and other loans.  At December 31, 2004, the Bank’s mortgage loans outstanding were $378 million, of which $285 million were secured by first mortgages on one- to four-family residential property.  Of the one- to four-family residential mortgage loans outstanding at that date, 11% were ARM’s and 89% were fixed-rate loans.  Total ARM loans in the Bank’s portfolio at December 31, 2004 amounted to $32 million or 7% of total loans.  At that same date, commercial real estate and multi-family residential and construction loans totaled $84 million and $10 million, respectively.

Consumer and other loans held by the Bank totaled $34 million or 8% of total loans outstanding at December 31, 2004, of which $30 million or 7% consisted of home equity and second mortgages, and other consumer loans At that same date commercial business loans and leases totaled $31 million.

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The following table sets forth the composition of the Bank’s loan portfolio and mortgage-backed and related securities portfolios in dollar amounts and in percentages of the respective portfolios at the dates indicated.

	At December 31,
	2004					2003					2002					2001				2000
	Amount			Percent of Total		Amount			Percent of Total		Amount			Percent of Total		Amount		Percent of Total		Amount		Percent of Total
	(Dollars in thousands)
Loans:
Mortgage loans:
One-to-four family	$	284,645		64.14	%	$	276,849		68.22	%	$	227,953		61.33	%	$	222,016	58.42	%	$	211,065	57.89	%
Commercial real estate and multi-family	83,559			18.83		74,109			18.26		85,493			23.00		93,572		24.62		77,486		21.25
Construction	10,286			2.31		6,591			1.62		12,026			3.23		9,824		2.59		13,950		3.82
Total mortgage loans	378,490			85.28		357,549			88.10		325,472			87.56		325,412		85.63		302,501		82.96
Consumer loans:
Home equity and second mortgage	29,522			6.66		25,199			6.21		25,480			6.87		25,640		6.75		20,887		5.73
Other consumer	4,384			0.99		6,532			1.61		10,490			2.82		16,154		4.25		23,113		6.34
Total consumer and other loans	33,906			7.65		31,731			7.82		35,970			9.69		41,794		11.00		44,000		12.07
Commercial loans and leases:
Commercial loans	30,543			6.88		15,185			3.74		8,005			2.15		9,285		2.44		14,630		4.01
Commercial leases	857			0.19		1,371			0.34		2,246			0.60		3,544		0.93		3,493		0.96
Total commercial loans and leases	31,400			7.07		16,556			4.08		10,251			2.75		12,829		3.37		18,123		4.97
Total loans	443,796			100.00	%	405,836			100.00	%	371,693			100.00	%	380,035		100.00	%	364,624		100.00	%
Less:
Unearned discount,(premium), deferred loan fees, net	(706		)			(924		)			(446		)			428				1,104
Allowance for loan losses	2,307					2,111					2,047					1,972				1,714
Total loans, net	$	442,195				$	404,649				$	370,092				$	377,635			$	361,806
Mortgage-backed securities held-to-maturity:
FHLMC	$	5,195		34.87	%	$	8,407		35.58	%	$	21,870		40.10	%	$	35,000	37.50	%	$	45,971	34.03	%
FNMA	5,182			34.77		7,205			30.49		11,781			21.60		15,739		16.90		20,756		15.36
GNMA	4,516			30.31		8,007			33.88		18,278			33.40		29,877		32.00		41,090		30.41
Real estate investment mortgage conduit	7			0.05		11			0.05		2,519			4.60		12,550		13.40		27,043		20.02
Other mortgage-backed securities	—			—-		—			—-		144			0.30		201		0.20		282		0.18
Total mortgage-backed and related securities held-to-maturity	$	14,900		100.00	%	$	23,630		100.00	%	$	54,592		100.00	%	$	93,367	100.00	%	$	135,142	100.00	%
Mortgage-backed securities available-for-sale:
FHLMC	$	6,614		6.38	%	$	8,525		7.98	%	$	699		0.60	%	$	1,108	1.10	%	$	1,431	1.46	%
FNMA	15,108			14.58		18,385			17.22		11,878			10.30		22,459		22.50		25,679		26.23
GNMA	—-			—-		—-			—-		—-			—-		5,515		5.50		7,561		7.72
Real estate investment mortgage conduit	81,888			79.04		79,864			74.80		102,666			89.10		70,681		70.90		63,243		64.59
Total	$	103,610		100.00	%	$	106,774		100.00	%	$	115,243		100.00	%	$	99,763	100.00	%	$	97,914	100.00	%

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Loan Maturity and Repricing Information.  The following table sets forth certain information at December 31, 2004, regarding the dollar amount of loans maturing in the Bank’s loan and mortgage-backed securities portfolios based on their maturity date.  Demand loans, loans having no stated schedule of repayments and no stated maturity, overdrafts and delinquent loans maturing prior to December 31, 2005, are reported as due in one year or less.  The table does not include prepayments or scheduled principal repayments.

	Due 1/1/05 - 12/31/05		Due 1/1/06 - 12/31/09		Due After 12/31/09
	(In thousands)
Available for sale:
Mortgage-backed securities	$	—	$	6,744	$	96,866
Loans receivable	—		—		683
Held to Maturity:
One-to-four family	$	34	$	4,622	$	279,306
Commercial real estate and multi-family	6,376		15,637		61,546
Construction	5,136		5,150		—
Consumer and other	1,664		4,610		27,632
Commercial loans and leases	15,433		6,764		9,203
Total loans receivable	28,643		36,783		377,687
Mortgage-backed securities	2		1,947		12,951
Total	$	28,645	$	38,730	$	390,638

The following table sets forth the dollar amount of all loans and mortgage-backed securities due after December 31, 2005, which have predetermined interest rates and which have floating or adjustable interest rates.

	Predetermined Rates		Floating or Adjustable Rate
	(In thousands)
Available for sale:
Mortgage-backed securities	$	103,610	$	—
Loans		495		188
Total	$	104,105	$	188
Held to Maturity:
One-to-four family	$	251,618	$	32,310
Commercial real estate and multi-family	7,857		69,326
Construction	—		5,150
Consumer and other	31,910		356
Commercial loans and leases	11,524		4,419
Total loans receivable	302,909		111,561
Mortgage-backed securities	14,835		65
Total	$	317,744	$	111,626

One-to-Four Family Mortgage Lending.  The Bank offers first mortgage loans secured by one-to-four family residences in the Bank’s lending area.  Typically, such residences are single-family homes that serve as the primary residence of the owner.  The Bank generally originates and invests in one-to-four family residential mortgage loans in amounts up to 80% of the lesser of the appraised value or selling price of the mortgaged property.  Loans originated in amounts over 80% of the lesser of the appraised value or selling price of the mortgaged property, other than loans to

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facilitate the sale of real estate acquired through foreclosure, must be owner-occupied and private mortgage insurance must be provided on the amount in excess of 80%.

Loan originations are obtained from existing or past customers, members of the local community, and referrals from established builders and realtors within the Bank’s lending area using direct advertising in local newspapers, branch signage and promotions, and word of mouth referrals.

The Bank offers a variety of ARM loans with terms of 30 years which adjust at the end of 6 months, one, three, five, seven and ten years and adjust by a maximum of 1% to 2% per adjustment with a lifetime cap of 5% to 6% over the life of the loan.

The Bank offers fixed-rate mortgage loans with terms of 10 to 30 years, which are payable monthly.  Interest rates charged on fixed-rate mortgage loans are competitively priced based on market conditions.  The origination fees for fixed-rate loans range from 0% to 3% depending on the underlying loan coupon. Generally, the Bank’s standard underwriting guideline for fixed-rate mortgage loans conform to the FHLMC and FNMA guidelines and may be sold in the secondary market. The Bank sells a small portion of its conforming fixed-rate mortgage loan originations in the secondary market to FHLMC and FNMA while retaining the servicing rights on these loans. The Bank also brokers a small portion of its loan applications to correspondents. However, the Bank is primarily a portfolio lender.  As of December 31, 2004, the Bank’s portfolio of loans serviced for FHLMC or FNMA totaled approximately $2.3 million.

Beginning in December 2003 the Bank initiated a mortgage lending department that is separate as to its sales efforts from the consumer lending area of the Bank. In connection with this initiative, the Bank has hired a mortgage lending manager and several commissioned loan officers. The Bank now offers, in addition to its standard portfolio loan products, other types of mortgage loans that will be originated in the name of, or sold on a servicing released basis to, third party investors. The mortgage loan officers support the Bank’s branches and customers, and additionally engage in calling efforts directed toward realtors, builders, and others that can be sources of lending business for the Bank. While these activities are a small part of the Company’s overall lending activities, the Company expects to grow this line of business in the future.

Commercial Real Estate and Multi-Family Lending.  The Bank originates loans secured by commercial real estate including non-owner occupied residential multi-family dwelling units (more than four units) primarily secured by professional office buildings and apartment complexes. The Bank generally originates commercial real estate and multi-family loans up to 75% of the appraised value of the property securing the loan.  Currently, it is the Bank’s philosophy to originate commercial real estate and multi-family loans primarily on properties in its general market area.  The commercial real estate and multi-family loans in the Bank’s portfolio consist of fixed-rate, ARM and balloon loans which were originated at prevailing market rates for terms of up to 25 years.  The Bank’s current policy is to originate commercial real estate and multi-family loans as ARM’s that amortize over a 20 to 25 year period and either balloon or are callable by the Bank after a 5 to 10 year period.

Loans secured by commercial and multi-family real estate are generally larger and involve a greater degree of risk than one- to four-family residential mortgage loans.  Of primary concern in commercial and multi-family real estate lending is the borrower’s creditworthiness and the feasibility and cash flow potential of the project.  Loans secured by income properties are generally larger and involve greater risks than residential mortgage loans because payments on loans secured by income properties are often dependent on successful operation or management of the properties.  As a result, repayment of such loans may be subject to a greater extent than residential real estate loans to adverse conditions in the real estate market or the economy.  In order to monitor cash flows on income properties, the Bank requires borrowers and loan guarantors, if any, to provide annual financial statements and rent rolls on multi-family loans.  At December 31, 2004, the five largest commercial real estate and multi-family loans totaled $18.9 million with no single loan larger than $6.2 million.  At December 31, 2004, all such loans were current and the properties securing such loans are in the Bank’s market area.

Construction Lending.  At December 31, 2004, the Bank had $10 million of construction loans or 2% of the Bank’s total loan portfolio.  Construction financing is generally considered to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate.  Risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the property’s value at completion of construction or development and the estimated cost (including interest) of construction.  During the construction phase, a number of factors could result in delays and

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cost overruns.  If the estimate of construction costs proves to be inaccurate, the Bank may be required to advance funds beyond the amount originally committed to permit completion of the development.  If the estimate of value proves to be inaccurate, the Bank may be confronted, at or prior to the maturity of the loan, with a project having a value which is insufficient to assure full repayment.

Consumer and Other Loans.  The Bank also offers consumer and other loans in the form of home equity and second mortgage loans (referred to hereinafter collectively as “second mortgage loans”), automobile loans and student loans.  These loans totaled $34 million or 8% of the Bank’s total loan portfolio at December 31, 2004.  Federal regulations permit federally chartered thrift institutions to make secured and unsecured consumer loans up to 35% of an institution’s assets.  In addition, a federal thrift has lending authority above the 35% category for certain consumer loans, property improvement loans, and loans secured by savings accounts.  The Bank originates consumer loans in order to provide a wide range of financial services to its customers and because the shorter terms and normally higher interest rates on such loans help maintain a profitable spread between its average loan yield and its cost of funds.

In connection with consumer loan applications, the Bank verifies the borrower’s income and reviews a credit bureau report.  In addition, the relationship of the loan to the value of the collateral is considered.  All automobile loan applications are reviewed and approved by the Bank.  The Bank reviews the credit report of the borrower as well as the value of the vehicle which secures the loan.

The Bank focuses on the origination of consumer loans. Consumer loans tend to be originated at higher interest rates than conventional residential mortgage loans and for shorter terms which benefits the Bank’s interest rate risk management.  Consumer loans, however, tend to have a higher risk of default than residential mortgage loans.  At December 31, 2004, $85,000 or 0.3% of the Bank’s consumer loans were delinquent more than 90 days.

The Bank offers second mortgage loans on one- to four-family residences.  At December 31, 2004, second mortgage and home equity loans totaled $30 million, or 7% of the Bank’s total loan portfolio.  Second mortgage loans are offered as fixed-rate loans for a term not to exceed 15 years.  Such loans are only made on owner-occupied one- to four-family residences and are subject to a 75% combined loan to value ratio.  The underwriting standards for second mortgage loans are the same as the Bank’s standards applicable to one- to four-family residential loans.

Business Lending. Federal thrift institutions are permitted to make secured or unsecured loans for commercial, corporate, business or agricultural purposes, including the issuance of letters of credit secured by real estate, business equipment, inventories, accounts receivable and cash equivalents. The aggregate amount of such loans outstanding may not exceed 10% of such institution’s assets.

The Bank makes commercial business loans on a secured basis.  The terms of such loans generally do not exceed five years.  The majority of these loans have floating interest rates which adjust with changes in market driven indices.  The Bank’s commercial business loans primarily consist of short-term loans for equipment, working capital, business expansion and inventory financing.  The Bank customarily requires a personal guaranty of payment by the principals of any borrowing entity and reviews the financial statements and income tax returns of the guarantors.  At December 31, 2004, the Bank had approximately $31 million outstanding in commercial business loans, which represented approximately 7% of its total loan portfolio.

Prior to 2002 the Bank purchased commercial leases; the Bank no longer engages in this activity. These lessees are generally small medical practitioners located throughout the United States. The average lease amount is less than $100,000. At December 31, 2004 the purchased lease portfolio totaled $0.9 million or 0.2% of total assets.

Loan Approval Authority and Underwriting.  The Board of Directors of the Bank sets the authority to approve loans based on the amount, type of loan (i.e., secured or unsecured) and total exposure to the borrower.  Where there are one or more existing loans to a borrower, the level of approval required is governed by the proposed total exposure including the new loan.  The Board has approved loan authority and limits for certain of the Bank’s lending personnel and senior officers, including the president of the Bank.  Approval authority ranges from $25,000 to $750,000 for secured loans, and $5,000 to $100,000 for unsecured loans. Members of an in-house loan committee comprising the four most senior members of management approve all loans over $500,000. Any two members may combine their lending authority. The committee has the authority to approve secured loans up to $2.5 million and unsecured loans up to $200,000. All loans greater than $2.5 million through $5 million require the approval of a Board Loan Committee

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composed of four members of the Board of Directors of the Bank. All loans over $5 million or loans that cause the aggregate lending relationship to exceed $5 million must be approved by the Bank’s Board of Directors.

One- to four-family residential mortgage loans are generally underwritten according to FHLMC and FNMA guidelines.  For all loans originated by the Bank, upon receipt of a completed loan application from a prospective borrower, a credit report is ordered, income and certain other information is verified and, if necessary, additional financial information is requested.  An appraisal of the real estate intended to secure the proposed loan is required which currently is performed by an independent appraiser designated and approved by the Bank.  The Bank makes construction/permanent loans on individual properties.  Funds advanced during the construction phase are held in a loan-in-process account and disbursed based upon various stages of completion.  The independent appraiser or loan officer determines the stage of completion based upon its physical inspection of the construction.  It is the Bank’s policy to obtain title insurance or a title opinion on all real estate first mortgage loans.  Borrowers must also obtain hazard or flood insurance (for loans on property located in a flood zone) prior to closing the loan.  For loans in excess of 80% of the loan to value ratio, borrowers are generally required to advance funds on a monthly basis together with each payment of principal and interest to an escrow account from which the Bank makes disbursements for items such as real estate taxes and hazard insurance premiums.

Loans to One Borrower.  Current regulations limit loans to one borrower in an amount equal to 15% of unimpaired capital and retained income on an unsecured basis and an additional amount equal to 10% of unimpaired capital and retained income if the loan is secured by readily marketable collateral (generally, financial instruments, not real estate) or $500,000, whichever is higher.  Penalties for violations of the loan-to-one borrower statutory and regulatory restrictions include cease and desist orders, the imposition of a supervisory agreement and civil money penalties.  The Bank’s maximum loan-to-one borrower limit was approximately $8.0 million as of December 31, 2004.

At December 31, 2004, the Bank’s five largest aggregate lending relationships had balances ranging from $4.7 to $7.2 million.  At December 31, 2004, all of these loans were current.

Mortgage-Backed Securities

To supplement lending activities, the Bank invests in residential mortgage-backed securities.  Although the majority of such securities are held to maturity, they can serve as collateral for borrowings and, through repayments, as a source of liquidity.

The mortgage-backed securities portfolio as of December 31, 2004, consisted of pass-through certificates issued by the Federal Home Loan Mortgage Corporation (“FHLMC”) ($12 million), Government National Mortgage Association (“GNMA”), ($4 million) Federal National Mortgage Association (“FNMA”) ($21 million), and real estate mortgage investment conduits formed by these same agencies (“REMICs”) ($82 million).

At December 31, 2004, the amortized cost of mortgage-backed securities totaled $119 million, or 19% of total assets, and the market value of such securities totaled approximately $119 million.

The Bank’s mortgage-backed securities are so-called “pass-throughs” which represent a participation interest in a pool of single-family or multi-family mortgages, the principal and interest payments on which are passed from the mortgage originators, through intermediaries (generally quasi-governmental agencies) that pool and repackage the participation interests in the form of securities, to investors such as the Bank.  Such quasi-governmental agencies, which guarantee the payment of principal and interest to investors, primarily include FHLMC, FNMA and GNMA. The REMIC securities are composed of the same loan types as the pass through certificates, but offer differing characteristics as to their expected cash flows depending on the class of such securities purchased. The Bank’s REMICs are primarily “planned amortization classes” and “very accurately defined maturity classes” that, when purchased, offered a high probability of predictable cash flows.

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Mortgage-Backed Securities Carrying Value. The following table sets forth the carrying value of the Bank’s mortgage-backed securities held in portfolio at the dates indicated.

	At December 31,
	2004		2003		2002
	(In thousands)
Held to maturity:
GNMA-fixed rate	$	4,516	$	8,007	$	18,278
FHLMC ARMs	65		71		91
FHLMC-fixed rate	5,130		8,336		21,779
FNMA-fixed rate	5,182		7,205		11,781
REMICs	7		11		2,519
Other mortgage-backed securities	—		—		144
Total mortgage-backed securities held to maturity	$	14,900	$	23,630	$	54,592
Available-for-sale:
FHLMC	$	6,614	$	8,525	$	699
FNMA	15,108		18,385		11,878
GNMA	—		—		—
REMICs	81,888		79,864		102,666
Total mortgage-backed securities available-for-sale	$	103,610	$	106,774	$	115,243

Mortgage-Backed Securities Maturity.  The following table sets forth the maturity and the weighted average coupon (“WAC”) of the Bank’s mortgage-backed securities portfolio at December 31, 2004.  The table does not include estimated prepayments.  Adjustable-rate mortgage-backed securities are shown as maturing based on contractual maturities.

	Contractual Held To Maturity Maturities Due		WAC		Contractual Available -For-Sale Maturities Due		WAC
	(Dollars in thousands)
Less than 1 year	$	2	8.30	%	$	—	—	%
1 to 3 years	893		7.28		2,753		4.00
3 to 5 years	1,054		7.56		3,991		5.99
5 to 10 years	486		7.13		30,373		5.13
10 to 20 years	1,889		5.42		41,432		4.60
Over 20 years	10,576		6.48		25,061		4.64
Total mortgage-backed securities	$	14,900	6.49	%	$	103,610	4.80	%

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Non-Performing and Problem Assets

Loan Collection.  When a borrower fails to make a required payment on a loan, the Bank takes a number of steps to have the borrower cure the delinquency and restore the loan to current status.  In the case of residential mortgage loans and consumer loans, the Bank generally sends the borrower a written notice of non-payment after the loan is 15 days past due.  In the event payment is not then received, additional letters and phone calls are made.  If the loan is still not brought current and it becomes necessary for the Bank to take legal action, which typically occurs after a loan is delinquent more than 90 days, the Bank will commence foreclosure proceedings against any real property that secures the loan and attempt to repossess any personal property that secures a consumer loan.  If a foreclosure action is instituted and the loan is not brought current, paid in full, or refinanced before the foreclosure sale, the real property securing the loan generally is sold at foreclosure.

In the case of commercial real estate and multi-family loans, and construction loans, the Bank generally attempts to contact the borrower by telephone after any loan payment is ten days past due and a senior loan officer reviews all collection efforts made if payment is not received after the loan is 30 days past due.  Decisions as to when to commence foreclosure actions for commercial real estate and multi-family loans and construction loans are made on a case by case basis.  The Bank may consider loan work-out arrangements with these types of borrowers in certain circumstances.

On mortgage loans or loan participations purchased by the Bank, the Bank receives monthly reports from its loan servicers with which it monitors the loan portfolio.  Based upon servicing agreements with the servicers of the loan, the Bank relies upon the servicer to contact delinquent borrowers, collect delinquent amounts and to initiate foreclosure proceedings, when necessary, all in accordance with applicable laws, regulations and the terms of the servicing agreements between the Bank and its servicing agents. At December 31, 2004 the Bank used third-party servicers to service $64.7 million in mortgage loans, including one servicer that serviced $52.8 million. All of the Bank’s third-party mortgage loan servicers are regulated financial institutions or are approved by either HUD, FNMA, or FHLMC to service loans on their behalf.

Delinquent Loans.  Generally, the Bank reserves for uncollected interest on loans past due more than 90 days; these loans are included in the table of nonaccrual loans below.  Loans also are placed on a nonaccrual status when, in the judgment of management, the probability of collection of interest is deemed to be insufficient to warrant further collection.  When a loan is placed on nonaccrual status, previously accrued but unpaid interest is deducted from interest income and the further accrual of interest ceases unless the underlying facts that prompted a nonaccrual determination are deemed to have improved significantly.

Non-Performing Assets.  The following table sets forth information regarding non-accrual loans and real estate owned by the Bank at the dates indicated.  The Bank had no loans contractually past due more than 90 days for which accrued interest has been recorded.

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Non-performing assets

	At December 31,
	2004			2003			2002			2001			2000
	(Dollars in thousands)
Loans accounted for on a non-accrual basis:
Mortgage loans:
One- to four-family	$	536		$	1,549		$	1,013		$	1,821		$	687
Commercial real estate and multi-family	23			296			1,677			1,725			297
Consumer and other	84			135			245			227			486
Commercial loans and leases	317			369			887			3			—
Total non-accrual loans	960			2,348			3,822			3,776			1,470
Real estate owned, net	700			868			84			30			176
Total non-performing assets	$	1,660		$	3,216		$	3,906		$	3,806		$	1,646
Total non-accrual loans to loans	0.22		%	0.58		%	1.03		%	0.99		%	0.41		%
Total non-accrual loans to total assets	0.15		%	0.39		%	0.53		%	0.53		%	0.20		%
Total non-performing assets to total assets	0.26		%	0.53		%	0.54		%	0.54		%	0.23		%

At December 31, 2004, the Bank had no foreign loans and no loan concentrations exceeding 10% of total loans not disclosed in above the table. “Loan concentrations” are considered to exist when there are amounts loaned to a multiple number of borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions.  Loans recorded in the category of other real estate owned are valued at the lower of book value of loans outstanding or fair market value less cost of disposal.

At December 31, 2004, the Bank was not aware of any potential problem loans that are not otherwise included in the foregoing table.  “Potential problem loans” are loans where information about possible credit problems of borrowers has caused management to have serious doubts about the borrowers’ ability to comply with present repayment terms.

Classified Assets.  OTS regulations provide for a classification system for problem assets of insured institutions which covers all problem assets.  Under this classification system, problem assets of insured institutions are classified as “substandard,” “doubtful,” or “loss.”  An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any.  “Substandard” assets include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected.  Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions and values, “highly questionable and improbable.”  Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted.  Assets designated “special mention” by management are assets included on the Bank’s internal watchlist because of potential weakness but that do not currently warrant classification in one of the aforementioned categories.

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When an insured institution classifies problem assets as either substandard or doubtful, it may establish general allowances for loan losses in an amount deemed prudent by management.  General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets.  When an insured institution classifies all or a portion of a problem asset as “loss,” it is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge off such amount.  An institution’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the OTS, which may order the establishment of additional general or specific loss allowances.  A portion of general loss allowances established to cover possible losses related to assets classified as substandard or doubtful may be included in determining an institution’s regulatory capital, while specific valuation allowances for loan losses generally do not qualify as regulatory capital.

The following table provides further information in regard to the Bank’s classified assets as of December 31, 2004.

	At December 31, 2004
	(In thousands)
Special mention assets	$	7,295
Substandard	1,393
Doubtful assets	64
Loss	—
Total classified assets	$	8,752

Real Estate Owned.  Real estate acquired by the Bank as a result of foreclosure, judgment or by deed in lieu of foreclosure is classified as real estate owned (“REO”) until it is sold.  When property is acquired it is recorded at the lower of fair value, minus estimated cost to sell, or cost.  If the property subsequently decreases in estimated value from the initial recorded amount, the Bank will provide an additional valuation allowance, through a charge to earnings, if the decrease is judged by management to be temporary, or the Bank will write the property down, through a charge to earnings, to the new estimated value if the decrease is judged by management to be permanent.

The Bank records loans as in substance foreclosures if the borrower has little or no equity in the property based upon its documented current fair value and if the borrower has effectively abandoned control of the collateral or has continued to retain control of the collateral but because of the current financial status of the borrower it is doubtful the borrower will be able to repay the loan in the foreseeable future.  In substance foreclosures are accounted for as loans until such time that title to the collateral is acquired by the Bank.  There may be significant other expenses incurred such as attorney and other extraordinary servicing costs involved with in substance foreclosures.

Allowances for Loan Losses.  The Bank provides valuation allowances for estimated losses from uncollectible loans. Management determines the adequacy of the allowance on a quarterly basis to ensure that a provision for loan losses has been charged against earnings in an amount necessary to maintain the allowance at a level that is appropriate based on management’s estimate of probable losses. Several sources of data are used in making the evaluation as to the appropriateness of the allowance.

The Bank’s watch list contains all loans which because of past payment history, a review of recent financial information, or other facts regarding the credit, pose a higher than normal amount of perceived risk of collection. Once a loan is deemed to pose other than a normal level of risk of collection, it moves to the classified asset list as either special mention, substandard, doubtful, or loss as required by regulatory guidelines. Classified assets also include all loans over 90 days past due according to the contractual repayment terms. These loans are automatically considered at least substandard. All loans not on the classified asset list are assigned a reserve factor that is based on the Company’s actual loss experience over the last three years, with a small factor assigned to loans current as to their contractual payments, and an increased factor if the loan is 30 or 60 days past due. Classified loans with balances under $100,000 are typically pooled according to their underlying collateral, and a reserve factor assigned based on historical loss experience. Classified loans are evaluated on an individual basis if the loan balance exceeds $100,000. In such a case, the value of the underlying collateral, which is ordinarily real estate because of the nature of the Bank’s predominant past lending

12

activities, the cost of collection and disposition, and other factors are considered and an estimated reserve level is established. In establishing estimated reserves, current and projected economic conditions as they may affect the borrower and the collateral are considered. If prospects appear poor with respect to collateral disposition, for example, because of economic factors, a lower disposition value and thus a higher reserve level would be established. Similarly, the credit may be guaranteed by a governmental agency, or the collateral value may greatly exceed the loan balance such that no reserve is indicated for these loans that are nevertheless considered classified assets because of their delinquency. If a loan or a portion of a loan is judged to be unrecoverable, that amount is charged off. The calculated reserve determined using the methodologies described above is compared to the actual level of reserves; the difference reflects the imprecision of the multitude of assumptions that are made combined with the variability that can occur with a relatively small amount of troubled assets, and the reserve is maintained at reasonable levels by adjusting the provision that is charged to earnings.

The following table sets forth information with respect to the Bank’s allowance for loan losses at the dates and for the periods indicated:

	For the Years Ended December 31,
	2004			2003			2002			2001			2000
	(Dollars in thousands)
Balance at beginning of period	$	2,111		$	2,047		$	1,972		$	1,714		$	1,917
Provision for loan losses	600			330			988			500			410
Charge-offs:
One-to-four family	—			(16		)	(13		)	—			—
Commercial and multi-family real estate loans	(112		)	—			—			—			—
Consumer and other loans	(186		)	(219		)	(303		)	(430		)	(634		)
Commercial loans and leases	(161		)	(322		)	(625		)	—-			—-
Recoveries:
One-to-four family	—			—			3			—			—
Commercial and multi-family real estate loans	—			—			—			—			—
Consumer and other loans	55			36			25			188			21
Commercial loans and leases	—			255			—			—			—
Balance at end of year	$	2,307		$	2,111		$	2,047		$	1,972		$	1,714
Ratio of net charge-offs during the period to average loans outstanding during the period	0.09		%	0.07		%	0.25		%	0.07		%	0.20		%
Ratio of allowance for loan losses to non-performing loans at the end of the period	240.3		%	89.91		%	53.56		%	52.22		%	116.0		%
Ratio of allowance for loan losses to loans receivable at the end of the period	0.52		%	0.52		%	0.55		%	0.52		%	0.47		%
Ratio of allowance for loan losses and foreclosed real estate to total non-performing assets at the end of the period	181.1		%	92.63		%	52.41		%	52.60		%	114.8		%

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The following table sets forth the allocation of the Bank’s allowance for loan losses by loan category and the percent of loans in each category to total loans receivable, gross, at the dates indicated.  The portion of the loan loss allowance allocated to each loan category does not represent the total available for future losses which may occur within the loan category since the total loan loss allowance is a valuation reserve applicable to the entire loan portfolio.

	At December 31,
	2004				2003				2002				2001				2000
	Amount		Percent of Loans to Total Loans		Amount		Percent of Loans to Total Loans		Amount		Percent of Loans to Total Loans		Amount		Percent of Loans to Total Loans		Amount		Percent of Loans to Total Loans
	(Dollars in thousands)
At end of period allocated to:
One-to-four family	$	176	64.2	%	$	277	68.2	%	$	119	61.3	%	$	216	58.4	%	$	97	57.9	%
Commercial real estate and multi-family	1,035		18.8		1,230		18.3		1,021		23.0		1,100		24.6		835		21.3
Construction	121		2.3		109		1.6		90		3.2		74		2.6		105		3.8
Consumer and other loans	554		7.7		246		7.8		271		9.7		380		11.0		499		12.1
Commercial loans and leases	421		7.1		249		4.1		546		2.8		202		3.4		178		4.9
Total allowance	$	2,307	100.0	%	$	2,111	100.0	%	$	2,047	100.0	%	$	1,972	100.0	%	$	1,714	100.0	%

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Investment Activities

The investment policy of the Bank, which is established by the Board of Directors and implemented by the Asset Liability Committee, is designed primarily to provide and maintain liquidity, to generate a favorable return on investments without incurring undue interest rate and credit risk, and to complement the Bank’s lending activities.  In establishing its investment strategies, the Bank considers its business and growth plans, the economic environment, the types of securities to be held and other factors.  Federally chartered savings institutions have the authority to invest in various types of assets, including U.S. Treasury obligations, securities of various federal agencies, certain certificates of deposit of insured banks and savings institutions, certain bankers acceptances, repurchase agreements, loans on federal funds, and, subject to certain limits, commercial paper and mutual funds.

The following table sets forth certain information regarding the amortized cost and fair values of the Bank’s investments at the dates indicated.

	At December 31,
	2004				2003				2002
	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(In thousands)
Interest-earning deposits	$	252	$	252	$	508	$	508	$	93,143	$	93,143
Investment securities held-to-maturity:
U.S. government and agency obligations	$	—	$	—	$	2,000	$	2,011	$	4,000	$	4,125
State and political subdivisions	1,326		1,395		1,609		1,735		3,700		3,880
Corporate debt securities	5,701		5,793		6,780		7,069		6,863		7,182
Total	$	7,027	$	7,188	$	10,389	$	10,815	$	14,563	$	15,187
Securities available-for-sale:
U.S. government and agency obligations	$	2,978	$	2,958	$	2,972	$	2,947	$	15,964	$	16,084
State and political subdivisions	13,704		13,675		10,677		10,493		453		464
Corporate Debt Securities	1,000		992		1,000		993		10,034		10,197
Mutual funds	—		—		—		—		500		498
Total	$	17,682	$	17,625	$	14,649	$	14,433	$	26,951	$	27,243

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Investment Portfolio Maturities

The following table sets forth certain information regarding the amortized cost, weighted average yields and maturities of the Bank’s investment securities portfolio, exclusive of interest-earning deposits, at December 31, 2004.  Yields on tax exempt obligations have been computed on a tax equivalent basis.

	One Year or Less				One to Five Years				Five to Ten Years				More than Ten Years				Total Investment Securities(1)
	Amortized Cost		Average Yield		Amortized Cost		Average Yield		Amortized Cost		Average Yield		Amortized Cost		Average Yield		Amortized Cost		Average Yield		Fair Value
	(Dollars in thousands)
U.S. government agency	$	—	—	%	$	2,978	3.50	%	$	—	—	%	$	—	—	%	$	2,978	3.50	%	$	2,958
Municipal obligations	—		—		1,111		9.12		3,855		5.07		10,064		5.81		15,030		5.87		15,070
Corporate obligations	3,668		4.91		3,033		3.51		—		—		—		—		6,701		4.28		6,785
Total	$	3,668	4.91	%	$	7,122	4.38	%	$	3,855	5.07	%	$	10,064	5.81	%	$	24,709	5.15	%	$	24,813

(1)Includes $17.625 million of U.S. government agency, municipal and corporate obligations which are carried as available-for-sale at December 31, 2004.  Investment securities available-for-sale are carried at fair value.

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Sources of Funds

General.  Deposits, borrowings, loan repayments and cash flows generated from operations are the primary sources of the Bank’s funds for use in lending, investing and other general purposes.

Deposits.  The Bank offers a variety of deposit accounts having a range of interest rates and terms.  The Bank’s deposits consist of regular savings, non-interest bearing checking, NOW checking, money market, and certificate accounts.  Of the deposit accounts, $30 million or 6.6% consist of IRA, Keogh or SEP retirement accounts at December 31, 2004.

The flow of deposits is influenced significantly by general economic conditions, changes in money market and prevailing interest rates and competition.  The Bank’s deposits are primarily obtained from areas surrounding its offices, and the Bank relies primarily on customer service and long-standing relationships with customers to attract and retain these deposits.  The Bank has maintained a high level of core deposits consisting of regular savings, money market, non-interest-bearing checking, and NOW checking, which has contributed to a low cost-of-funds.  At December 31, 2004, core deposits amounted to 68% of total deposits.

The following table sets forth the distribution of the Bank’s deposit accounts at the dates indicated and the weighted average nominal interest rates on each category of deposits presented.  The Bank does not have significant amount of deposits from out-of-state sources.  Management does not believe that the use of year end balances instead of average balances resulted in any material difference in the information presented.

	At December 31,
	2004						2003						2002
	Amount		Percent of Total Deposits		Weighted Average Nominal Rate		Amount		Percent of Total Deposits		Weighted Average Nominal Rate		Amount		Percent of Total Deposits		Weighted Average Nominal Rate
	(Dollars in thousands)
Transaction Accounts
Interest-bearing checking accounts	$	54,887	11.93		0.47	%	$	52,647	11.46		0.47	%	$	48,496	10.96		0.60	%
Money market accounts	42,496		9.24		1.00		44,688		9.73		0.91		43,677		9.87		1.00
Non-interest-bearing checking accounts	32,636		7.10		0.00		26,375		5.74		0.00		20,810		4.70		0.00
Total transaction accounts	130,019		28.27				123,710		26.93				112,983		25.53
Passbook accounts	182,945		39.78		0.98		188,673		41.07		0.94		182,813		41.31		1.51
Certificates of deposit	146,939		31.95		2.42		146,960		32.00		2.43		146,762		33.16		2.84
Total deposits	$	459,903	100.00	%	1.31	%	$	459,343	100.00	%	1.31	%	$	442,558	100.00	%	1.73	%

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At December 31, 2004, the Bank had outstanding certificates of deposit in amounts of $100,000 or more maturing as follows:

Maturing Period	Amount
	(In thousands)
Three months or less	$	3,506
Over three through six months	3,135
Over six through 12 months	9,166
Over 12 months	10,752
Total	$	26,559

Borrowings

Deposits are the primary source of funds of the Bank’s lending and investment activities and for its general business purposes.  The Bank may obtain advances from the FHLB of Pittsburgh to supplement its supply of lendable funds.  Advances from the FHLB of Pittsburgh are typically secured by a pledge of the Bank’s stock in the FHLB of Pittsburgh and a portion of the Bank’s first mortgage loans and certain other assets.  The Bank, if the need arises, may also access the Federal Reserve Bank discount window.  The following tables set forth the maximum month-end balance, period ending balance, and weighted average balance of outstanding FHLB advances at the dates and for the periods indicated, together with the applicable weighted average interest rates.

	At December 31,
	2004			2003			2002
	(Dollars in thousands)
FHLB advances and other borrowings	$	102,747		$	86,853		$	207,359
Weighted average interest rate	3.32		%	3.01		%	5.46		%

	Years Ended December 31,
	2004			2003			2002
	(Dollars in thousands)
Maximum balance of FHLB advances and other borrowings outstanding	$	108,078		$	207,359		$	222,359
Weighted average balance of FHLB advances and other borrowings outstanding	$	91,660		$	162,695		$	218,578
Weighted average interest rate of FHLB advances and other borrowings	3.21		%	5.08		%	5.46		%

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Subsidiary Activity

The Bank is permitted to invest up to 2% of its assets in the capital stock of, or secured or unsecured loans to, subsidiary corporations, with an additional investment of 1% of assets when such additional investment is utilized primarily for community development purposes.  Under such limitations, as of December 31, 2004, the Bank was authorized to invest up to approximately $12.9 million in the stock of, or loans to, service corporations (based upon the 2% limitation).  In addition, the Bank can designate a subsidiary as an operating subsidiary, in which there is no percentage of assets investment limitation, if it engages only in activities in which it would be permissible for the Bank to engage.  At December 31, 2004, the Bank had two wholly-owned subsidiaries, Third Delaware Corporation and Teragon Financial Corporation.  Third Delaware Corporation was formed in 1998 for the purpose of investing in marketable securities.  At December 31, 2004, the Bank had $121.3 million invested in Third Delaware Corporation. Teragon Financial Corporation (“Teragon”) was formerly a subsidiary of the Company and had been dormant for several years until 2004, at which time the Company contributed its interest to the Bank. Shortly thereafter, Teragon invested $7,500 in a limited partnership entitled Third Fed Abstract, L. P., whose purpose is to operate a title insurance agency, primarily to capture certain title insurance premiums generated by the Bank’s lending activities. At December 31, 2004 the Bank had an investment of $36,000 in Teragon which, in turn, had an investment of $7,500 in Third Fed Abstract L. P.

Personnel

As of December 31, 2004, the Company had 156 full-time and 38 part-time employees.  None of the Company’s employees are represented by a collective bargaining group.  The Company believes that its relationship with its employees is good.

Executive Officers of the Registrant

Executive Officers of the Company and the Bank:

Kent C. Lufkin currently serves as President and Chief Executive Officer of the Company and the Bank and was appointed to such offices effective June 30, 2003. Mr. Lufkin joined the Bank in 2000 and formerly served as Senior Vice President and Retail Banking Officer. Prior to that, Mr. Lufkin was President and Chief Executive Officer of Roebling Bank in Roebling, New Jersey since 1996.

Dennis R. Stewart has been Executive Vice President and Chief Financial Officer of the Bank and the Company since July 2003, and Senior Vice President and Chief Financial Officer of the Bank and the Company since 1999.  Prior to that, Mr. Stewart served as Executive Vice President and Chief Financial Officer of First Coastal Bank in Virginia Beach, Virginia, where he had been employed since 1990.

Floyd P. Haggar has been with the Bank since 1998.  Mr. Haggar currently serves as Senior Vice President and Chief Lending Officer of the Bank.  His prior experience includes four years as Senior Vice President and Senior Loan Officer at Carnegie Bank in Princeton, New Jersey.

Cynthia G. Mullen has been Senior Vice President and Retail Banking Officer of the Bank since July 2003. Previously she was a twenty-three year employee of Commonwealth Bank in Norristown, Pennsylvania, holding a variety of positions, including Vice President of Traditional Banking.

The remaining information relating to Directors and Executive Officers of the Registrant is incorporated herein by reference to the Registrant’s Proxy Statement for the 2005 Annual Meeting of Stockholders.

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REGULATION

Set forth below is a brief description of all material laws and regulations which relate to the regulation of the Bank and the Company.  The description does not purport to be complete and is qualified in its entirety by reference to applicable laws and regulations.

On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002 (the “Act”).  The Securities and Exchange Commission (the “SEC”) has promulgated new regulations pursuant to the Act and may continue to propose additional implementing or clarifying regulations as necessary in furtherance of the Act. The passage of the Act by Congress and the implementation of new regulations by the SEC subject publicly-traded companies to additional and more cumbersome reporting regulations and disclosure. Compliance with the Act and corresponding regulations may increase the Company’s expenses.

Company Regulation

General.  The Company is a unitary savings and loan holding company subject to regulatory oversight by the OTS.  As such, the Company is required to register and file reports with the OTS and is subject to regulation and examination by the OTS.  In addition, the OTS has enforcement authority over the Company and its non-savings association subsidiaries, should such subsidiaries be formed, which also permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings association.  This regulation and oversight is intended primarily for the protection of the depositors of the Bank and not for the benefit of stockholders of the Company.  The Company is also required to file certain reports with, and otherwise comply with, the rules and regulations of the OTS and the SEC.

Financial Modernization.  The Gramm-Leach-Bliley Act (“GLB”) permits qualifying bank holding companies to become financial holding companies and thereby affiliate with securities firms and insurance companies and engage in other activities that are financial in nature.  GLB defines “financial in nature” to include securities underwriting, dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and agency; merchant banking activities; and activities that the Federal Reserve Board has determined to be closely related to banking.  A qualifying national bank also may engage, subject to limitations on investment, in activities that are financial in nature, other than insurance underwriting, insurance company portfolio investment, real estate development, and real estate investment, through a financial subsidiary of the bank.

GLB also prohibits new unitary thrift holding companies from engaging in nonfinancial activities or from affiliating with a nonfinancial entity.  As a grandfathered unitary thrift holding company, the Company has retained its authority to engage in nonfinancial activities.

QTL Test.  As a unitary savings and loan holding company, the Company generally is not subject to activity restrictions, provided the Bank satisfies the QTL test.  If the Company acquires control of another savings association as a separate subsidiary, it would become a multiple savings and loan holding company, and the activities of the Company and any of its subsidiaries (other than the Bank or any other SAIF-insured savings association) would become subject to restrictions applicable to bank holding companies unless such other associations each also qualify as a QTL and were acquired in a supervisory acquisition.

Bank Regulation

General.  As a federally chartered, SAIF-insured savings association, the Bank is subject to extensive regulation by the OTS and the FDIC.  Lending activities and other investments must comply with various federal statutory and regulatory requirements.  The Bank is also subject to certain reserve requirements promulgated by the Federal Reserve Board.

The OTS, in conjunction with the FDIC, regularly examines the Bank and prepares reports for the consideration of the Bank’s Board of Directors on any deficiencies that they find in the Bank’s operations.  The Bank’s relationship with its depositors and borrowers is also regulated to a great extent by federal law, especially in such matters as the ownership of savings accounts and the form and content of the Bank’s mortgage documents.

20

The Bank must file reports with the OTS and the FDIC concerning its activities and financial condition, in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with or acquisitions of other savings institutions.  This regulation and supervision establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of the SAIF and depositors.  The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes.  Any change in such regulations, whether by the OTS, the FDIC or the Congress could have a material adverse impact on the Company, the Bank and their operations.  The Company is also required to file certain reports with, and otherwise comply with, the rules and regulations of the OTS and the SEC.

Insurance of Deposit Accounts.  The Bank’s deposit accounts are insured by the SAIF to a maximum of $100,000 for each insured member (as defined by law and regulation).  The FDIC has the authority, should it initiate proceedings to terminate an institution’s deposit insurance, to suspend the insurance of any such institution without tangible capital.  However, if a savings association has positive capital when it includes qualifying intangible assets, the FDIC cannot suspend deposit insurance unless capital declines materially, the institution fails to enter into and remain in compliance with an approved capital plan or the institution is operating in an unsafe or unsound manner.

Regardless of an institution’s capital level, insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or the institution’s primary regulator.  The management of the Bank is unaware of any practice, condition or violation that might lead to termination of its deposit insurance.

The FDIC charges an annual assessment for the insurance of deposits based on the risk a particular institution poses to its deposit insurance fund.  This risk classification is based on an institution’s capital group and supervisory subgroup assignment.

Regulatory Capital Requirements.  OTS capital regulations require savings institutions to meet three capital standards: (1) tangible capital equal to 1.5% of total adjusted assets, (2) a leverage ratio (core capital) equal to at least 4% of total adjusted assets and (3) a risk-based capital requirement equal to 8.0% of total risk-weighted assets.  In addition, the OTS prompt corrective action regulation provides that a savings institution that has a leverage capital ratio of less than 4% (3% for institutions receiving the highest examination rating) will be deemed to be “undercapitalized” and may be subject to certain restrictions.

At December 31, 2004, the Bank was in compliance with all of its regulatory capital requirements.

Dividend and Other Capital Distribution Limitations.  The Bank may not declare or pay a cash dividend on its capital stock if the effect thereof would be to reduce the regulatory capital of the Bank below the amount required for the liquidation account established at the time of the Bank’s mutual-to-stock conversion.

Savings associations that would remain at least adequately capitalized following the capital distribution, and that meet other specified requirements, are not required to file a notice or application for capital distributions (such as cash dividends) declared below specified amounts.  Savings associations which are eligible for expedited treatment under current OTS regulations are not required to file an application with the OTS if (i) the savings association would remain at least adequately capitalized following the capital distribution and (ii) the amount of capital distribution does not exceed an amount equal to the savings association’s net income for that year to date, plus the savings association’s retained net income for the previous two calendar years.  Thus, only undistributed net income for the prior two years may be distributed in addition to the current year’s undistributed net income without the filing of an application with the OTS.  Savings associations which do not qualify for expedited treatment or which desire to make a capital distribution in excess of the specified amount, must file an application with, and obtain the approval of, the OTS prior to making the capital distribution.  A savings association such as the Bank that is a subsidiary of a savings and loan holding company, and under certain other circumstances, must file a notice with OTS prior to making the capital distribution.

Qualified Thrift Lender Test.  The Home Owners’ Loan Act (“HOLA”), as amended, requires savings institutions to meet a QTL test.  If the Bank maintains an appropriate level of Qualified Thrift Investments (primarily residential mortgages and related investments, including certain mortgage-backed securities) (“QTIs”) and otherwise

21

qualifies as a QTL, it will continue to enjoy full borrowing privileges from the FHLB of Pittsburgh.  The required percentage of QTIs is 65% of portfolio assets (defined as all assets minus intangible assets, property used by the institution in conducting its business and liquid assets equal to 10% of total assets).  Certain assets are subject to a percentage limitation of 20% of portfolio assets.  In addition, savings associations may include shares of stock of the FHLBs, FNMA and FHLMC as qualifying QTIs.  The FDICIA also amended the method for measuring compliance with the QTL test to be on a monthly basis in nine out of every 12 months, as opposed to on a daily or weekly average of QTIs.  As of December 31, 2004, the Bank was in compliance with its QTL requirement with 76% of its assets invested in QTIs.

Federal Home Loan Bank System.  The Bank is a member of the FHLB of Pittsburgh, one of 12 regional FHLBs that administer the home financing credit function of savings associations.  Each FHLB serves as a reserve or central bank for its members within its assigned region.  It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System.  It makes loans to members (i.e., advances) in accordance with policies and procedures established by the Board of Directors of the FHLB.

As a member, the Bank is required to purchase and maintain an investment in the capital stock of the FHLB of Pittsburgh in an amount equal to 5% of its advances outstanding from the FHLB plus 0.7% of its unused borrowing capacity. At December 31, 2004, the Bank had $7.5 million in FHLB stock, which was in compliance with this requirement.

Federal Reserve System.  The Federal Reserve Board requires all depository institutions to maintain non-interest bearing reserves at specified levels against their transaction accounts (primarily checking, NOW and Super NOW checking accounts) and non-personal time deposits.  The balances maintained to meet the reserve requirements imposed by the Federal Reserve Board may be used to satisfy the liquidity requirements that are imposed by the OTS.  At December 31, 2004, the Bank’s total transaction accounts required a reserve level of $5.1 million which was offset by the Bank’s vault cash on hand and cash on deposit at the Federal Reserve Bank of Philadelphia.

Savings associations have authority to borrow from the Federal Reserve Bank “discount window,” but Federal Reserve policy generally requires savings associations to exhaust all other sources before borrowing from the Federal Reserve System.  The Bank had no such borrowings at December 31, 2004.

22

Item 2.  Properties

The Company is located and conducts its business at 3 Penns Trail, Newtown, Pennsylvania.  At December 31, 2004, the Bank operated from its administrative offices and fourteen branch offices located in Philadelphia and Bucks Counties, Pennsylvania and Mercer County, New Jersey.  The Bank also owns two parcels of land and a building behind its Doylestown branch office.  The parcel with the building is available to be leased to a third-party and the other parcel is used as a parking lot for employees of the Bank and tenants. The net book value of the two lots was $100,000. In addition, a subsidiary of the Company, Penns Trail Development Corporation, owns investment property with a book value of $761,000.

The following table sets forth certain information regarding the Bank’s operating properties:

Location	Leased or Owned	Location	Leased or Owned
ADMINISTRATIVE OFFICE Newtown Office 3 Penns Trail Newtown, PA 18940	Owned
DEPOSIT OPERATIONS 828C Newtown-Yardley Road Suite 301B Newtown, PA 18940	Leased	PROCESSING OPERATIONS Operations Center 62 Walker Lane Newtown, PA 18940(1)	Owned
BRANCH OFFICES Frankford Office 4625 Frankford Avenue Philadelphia, PA 19124	Leased	Newtown Office 950 Newtown Yardley Road Newtown, PA 18940	Leased
Ewing Office 2075 Pennington Road Ewing, NJ 08618	Owned	Mayfair Office Roosevelt Blvd. at Unruh Philadelphia, PA 19149	Owned
Hamilton Office 1850 Route 33 Hamilton Square, NJ 08690	Owned	Doylestown Office 60 North Main Street Doylestown, PA 18901	Owned
Fishtown Office York & Memphis Streets Philadelphia, PA 19125	Owned	Feasterville Office Buck Hotel Complex Feasterville, PA 19053	Leased
Cross Keys Office 834 North Easton Highway Doylestown, PA 18901	Owned	Quakerbridge Office 590 Lawrence Square Blvd. Lawrenceville, NJ 08648	Leased
Bridesburg Office Orthodox & Almond Streets Philadelphia, PA 19137	Owned	Woodhaven Office 4014 Woodhaven Road Philadelphia, PA 19154	Leased
New Britain Office 600 Town Center New Britain, PA 18901	Leased	Northern Liberties Office 905 North 2nd Street Philadelphia, PA 19123	Leased

23

Item 3.  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, which 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 4.  Submission of Matters to a Vote of Security Holders

None.

PART II

Item 5.  Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities

Information relating to the market for Registrant’s common equity and related stockholder matters appears under the section captioned “Stock Market Information” in the Registrant’s 2004 Annual Report to Stockholders and is incorporated herein by reference.

The following table provides information on repurchases by the Company of its common stock in each month for the three months ended December 31, 2004:

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
October 1, 2004 - October 31, 2004	16,697	$28.22	—	114,082
November 1, 2004 - November 30, 2004	—	—	—	114,082
December 1, 2004 - December 31, 2004	—	—	—	114,082

The total number of shares repurchased during the quarter comprises 16,697 shares repurchased in conjunction with the exercise of 26,237 stock options.  The repurchase poses no modification to the rights of stockholders.  Furthermore, there has been no change in the ability of the Company to pay dividends or any material change in the working capital of the Company.  The stock repurchase did not alter the previously approved stock repurchase plan of the Company.

Item 6.  Selected Financial Data

The above-captioned information appears under the section captioned “Selected Financial and Other Data” in the Registrant’s 2004 Annual Report to Stockholders and is incorporated herein by reference.

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

The information under the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Registrant’s 2004 Annual Report to Stockholders is incorporated herein by reference.

24

Item 7A.  Quantitative and Qualitative Disclosures about Market Risk

The information under the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Registrant’s 2004 Annual Report to Stockholders is incorporated herein by reference.

Item 8.  Financial Statements and Supplementary Data

The Consolidated Financial Statements of TF Financial Corporation and its subsidiaries included in the Registrant’s 2004 Annual Report to Stockholders are incorporated herein by reference.

Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A.  Controls and Procedures

(a)Evaluation of disclosure controls and procedures.  Based on their evaluation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)), the Company’s principal executive officer and principal financial officer have concluded that as of the end of the period covered by this Annual Report on Form 10-K such disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

(b)Changes in internal control over financial reporting. During the last quarter of the year under report there was no change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

25

Item 9B.  Other Information

None.

PART III

Item 10.  Directors and Executive Officers of the Registrant

The information contained under the sections captioned “Proposal 1 - Election of Directors — General Information and Nominees” and “— Biographical Information” and “Additional Information About Directors and Executive Officers — Section 16(a) Beneficial Ownership Reporting Compliance” in the Registrant’s definitive proxy statement for the Registrant’s 2005 Annual Meeting of Stockholders (the “Proxy Statement”) is incorporated herein by reference.

Additional information concerning executive officers is included under “Item 1.  Business — Executive Officers of the Registrant.”

The Company has adopted a Code of Ethics that applies to its principal executive officer, principal financial officer, principal accounting officer or persons performing such functions. The Code of Ethics can be obtained without charge by sending a written request to the Corporate Secretary, TF Financial Corporation, 3 Penns Trail, Newtown, Pennsylvania 18940.

Item 11.  Executive Compensation

The information relating to executive compensation is incorporated herein by reference to the information contained under the section captioned “Director and Executive Officer Compensation” in the Registrant’s Proxy Statement.

Item 12.  Security Ownership of Certain Beneficial Owners and Management

(a)Security Ownership of Certain Beneficial Owners

Information required by this item is incorporated herein by reference to the Section captioned “Voting Securities and Principal Holders Thereof” in the Registrant’s Proxy Statement.

(b)Security Ownership of Management

Information required by this item is incorporated herein by reference to the section captioned “Proposal 1 — Election of Directors” in the Registrant’s Proxy Statement.

(c)Management of the Company knows of no arrangements, including any pledge by any person of securities of the Company, the operation of which may at a subsequent date result in a change in control of the registrant.

(d)Securities Authorized for Issuance Under Equity Compensation Plans

26

Set forth below is information as of December 31, 2004 with respect to compensation plans under which equity securities of the Registrant are authorized for issuance.

EQUITY COMPENSATION PLAN INFORMATION

	(a) Number of securities to be issued upon exercise of outstanding options, warrants and rights	(b) Weighted-average exercise price of outstanding options, warrants and rights	(c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by shareholders(1)	258,072	$19.51	—
Equity compensation plans not approved by shareholders(2)	25,000	14.75	—
TOTAL	283,072	$19.09	—

(1)Plans approved by stockholders include: TF Financial Corporation 1997 Stock Option Plan.

(2)Plans not approved by stockholders include: TF Financial Corporation 1996 Directors Stock Option Plan

For information regarding the material features of these plans, see Notes A9 and J2 to the Consolidated Financial Statements included as part of Exhibit 13 to this report.

Item 13.  Certain Relationships and Related Transactions

The information relating to certain relationships and related transactions is incorporated herein by reference to the information contained under the section captioned  “Additional Information About Directors and Executive Officers — Certain Relationships and Related Transactions” in the Registrant’s Proxy Statement.

Item 14.  Principal Accountant Fees and Services

The information relating to this item is incorporated herein by reference to the information contained under the section captioned “Principal Accounting Firm Fees” in the Registrant’s Proxy Statement.

27

PART IV

Item 15.  Exhibits and Financial Statements

(a)The following documents are filed as a part of this report:

(1)The following financial statements and the report of the independent auditor of the Company included in the Company’s 2004 Annual Report to Stockholders are incorporated herein by reference.

Report of Independent Registered Public Accounting Firm

Consolidated Statements of Financial Position as of December 31, 2004 and 2003

Consolidated Statements of Earnings For the Years Ended December 31, 2004, 2003  and 2002

Consolidated Statement of Changes in Stockholders’ Equity and Comprehensive Income  for the Years Ended December 31, 2004, 2003 and 2002

Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, 2003  and 2002

Notes to Consolidated Financial Statements

The remaining information appearing in the Annual Report to Stockholders is not deemed to be filed as part of this report, except as expressly provided herein.

(2)All schedules are omitted because they are not required or applicable, or the required information is shown in the consolidated financial statements or the notes thereto.

(3)	Exhibits
(a)	The following exhibits are filed as part of this report.
3.1	Certificate of Incorporation of TF Financial Corporation (1)
3.2	Bylaws of TF Financial Corporation (1)
4.0	Stock Certificate of TF Financial Corporation (1)
4.1	The Company’s Rights Agreement dated November 22, 1995 (2)
10.1	Third Federal Savings and Loan Association Management Stock Bonus Plan (1)
10.2	Third Federal Savings Bank Directors Consultation and Retirement Plan (3)
10.3	Severance Agreement with Kent C. Lufkin (4)
10.4	Severance Agreement with Floyd P. Haggar (4)
10.5	Severance Agreement with Dennis R. Stewart (5)
10.6	TF Financial Corporation 1997 Stock Option Plan (6)
10.7	Severance Agreement with Robert N. Dusek (7)
10.8	TF Financial Corporation 1996 Directors Stock Option Plan (8)
10.9	Retirement and Non-Competition Agreement with John R. Stranford (9)
10.10	Employment Agreement with John R. Stranford (9)
10.11	TF Financial Corporation Incentive Compensation Plan (10)
13.0	2004 Annual Report to Stockholders
21.0	Subsidiary Information
23.0	Consent of Independent Registered Public Accounting Firm
31.0	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.0	Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

28

(1)	Incorporated herein by reference to the Exhibits to Form S-1, Registration Statement, File No. 33-76960.
(2)	Incorporated herein by reference to the Registrant’s Form 8-A filed with the Securities and Exchange Commission on November 22, 1995.
(3)	Incorporated herein by reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 1995.
(4)	Incorporated herein by reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000.
(5)	Incorporated herein by reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 1999.
(6)	Incorporated herein by reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 1997.
(7)	Incorporated herein by reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001.
(8)	Incorporated herein by reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002.
(9)	Incorporated herein by reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003.
(10)	Incorporated herein by reference to the Registrant’s Form 8-K filed with the Securities and Exchange Commission on October 20, 2004.

29

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

	TF FINANCIAL CORPORATION
Dated: March 28, 2005	By:	/s/ Kent C. Lufkin
		Kent C. Lufkin
		President, Chief Executive Officer
		(Duly Authorized Representative)

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated as of March 28, 2005.

By:	/s/ Kent C. Lufkin	By:	/s/ Dennis R. Stewart
	Kent C. Lufkin		Dennis R. Stewart
	President, Chief Executive Officer		Executive Vice President, Chief
	(Principal Executive Officer)		Financial Officer and Treasurer
			(Principal Financial and Accounting Officer)
By:	/s/ Carl F. Gregory	By:	/s/ Robert N. Dusek
	Carl F. Gregory		Robert N. Dusek
	Director		Chairman of the Board
By:	/s/ Dennis L. McCartney	By:	/s/ George A. Olsen
	Dennis L. McCartney		George A. Olsen
	Director		Director
By:	/s/ Albert M. Tantala	By:	/s/ John R. Stranford
	Albert M. Tantala		John R. Stranford
	Director		Director

30

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

		TF FINANCIAL CORPORATION
Dated:  March 28, 2005	By:
		Kent C. Lufkin
		President, Chief Executive Officer and Director
		(Duly Authorized Representative)

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated as of March 28, 2005.

By:		By:
	Kent C. Lufkin		Dennis R. Stewart
	President, Chief Executive Officer		Executive Vice President, Chief
	(Principal Executive Officer)		Financial Officer and Treasurer
			(Principal Financial and Accounting Officer)
By:		By:
	Carl F. Gregory		Robert N. Dusek
	Director		Chairman of the Board
By:		By:
	Dennis L. McCartney		George A. Olsen
	Director		Director
By:		By:
	Albert M. Tantala, Sr.		John R. Stranford
	Director		Director

31

EX-13

Exhibit 13

CONTENTS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

BOARD OF DIRECTORS AND EXECUTIVE OFFICERS

CORPORATE PROFILE AND RELATED INFORMATION

TF Financial Corporation (the “Company”) is the parent company of Third Federal Bank and its subsidiaries Third Delaware Corporation and Teragon Financial Corporation (collectively, “Third Federal” or the “Bank”), TF Investments Corporation, and Penns Trail Development Corporation. At December 31, 2004, total assets were approximately $629.0 million. The Company was formed as a Delaware corporation in March 1994 at the direction of the Bank to acquire all of the capital stock that Third Federal issued upon its conversion from the mutual to stock form of ownership (the “Conversion”) and concurrent $52.9 million initial public offering effective July 13, 1994. At December 31, 2004, total stockholders’ equity was approximately $61.2 million. The Company is a unitary savings and loan holding company which, under existing laws, generally is not restricted in the types of business activities in which it may engage, provided that Third Federal retains a specified amount of its assets in housing-related investments. Third Federal is a federally chartered stock savings bank headquartered in Newtown, Pennsylvania, which was originally chartered in 1921 under the name “Polish American Savings Building and Loan Association.” Deposits of Third Federal have been federally insured since 1935 and are currently insured up to the maximum amount allowable by the Federal Deposit Insurance Corporation (the “FDIC”). Third Federal is a community-oriented institution offering a variety of financial services to meet the needs of the communities that it serves. As of December 31, 2004 Third Federal operated branch offices in Bucks and Philadelphia counties, Pennsylvania and Mercer County, New Jersey. Third Federal attracts deposits (approximately $459.9 million at December 31, 2004) from the general public and uses such deposits, together with borrowings mainly from the Federal Home Loan Bank of Pittsburgh (approximately $102.7 million at December 31, 2004) and other funds, primarily to originate or purchase loans secured by first mortgages on owner-occupied, one-to-four family residences, or purchase securities secured by such loans. Third Federal also originates and purchases commercial real estate and multi-family loans, construction loans and consumer loans, and purchases other investment securities.

Stock Market Information

Since its issuance in July 1994, the Company’s common stock has been traded on the Nasdaq National Market. The daily stock quotation for the Company is listed in the Nasdaq National Market published in The Wall Street Journal, The Philadelphia Inquirer, and other leading newspapers under the trading symbol of “THRD.” The number of shareholders of record of common stock as of March 21, 2005, was approximately 500. This does not reflect the number of persons or entities who held stock in nominee or “street” name through various brokerage firms.

Dividend Policy

The Company’s ability to pay dividends to stockholders is dependent in part upon the dividends it receives from Third Federal. Among other limitations, Third Federal may not declare or pay a cash dividend on any of its stock if the effect thereof would cause Third Federal’s regulatory capital to be reduced below (1) the amount required for the liquidation account established in connection with Third Federal’s conversion from mutual to stock form, or (2) the regulatory capital requirements imposed by the Office of Thrift Supervision (“OTS”). It is the Company’s policy to pay dividends when it is deemed prudent to do so. The Board of Directors will consider the payment of a dividend on a quarterly basis, after giving consideration to the level of profits for the previous quarter and other relevant information.

Stock Price and Dividend History

Quarter ended	Quoted market price				Dividend paid per share
	High		Low
December 31, 2004	$	33.00	$	28.10	$	0.17
September 30, 2004	$	29.61	$	26.52	$	0.17
June 30, 2004	$	32.47	$	28.00	$	0.17
March 31, 2004	$	34.22	$	31.00	$	0.15
December 31, 2003	$	35.27	$	31.50	$	0.15
September 30, 2003	$	31.97	$	28.01	$	0.15
June 30, 2003	$	32.75	$	25.00	$	0.15
March 31, 2003	$	25.95	$	24.50	$	0.15

1

SELECTED FINANCIAL INFORMATION AND OTHER DATA

At December 31,

(Dollars in thousands, except per share data)

Financial Position	2004		2003		2002		2001		2000
Total assets	$	628,966	$	606,752	$	721,032	$	711,204	$	723,297
Loans receivable, net	442,195		404,649		370,092		377,635		361,806
Mortgage-backed securities available for sale, at fair value	103,610		106,774		115,243		99,763		97,914
Mortgage-backed securities held to maturity, at amortized cost	14,900		23,630		54,592		93,367		135,142
Investment securities available for sale, at fair value	17,625		14,443		27,243		22,671		18,865
Investment securities held to maturity, at amortized cost	7,027		10,389		14,563		9,866		63,461
Cash and cash equivalents(1)	7,900		8,241		100,580		69,139		10,618
Deposits	459,903		459,343		442,558		422,052		400,851
Advances from the Federal Home Loan Bank and other borrowings	102,747		86,853		207,359		222,359		259,821
Retained earnings	57,428		52,626		59,978		56,370		52,061
Total stockholders’ equity	61,155		55,480		62,840		57,975		53,109
Book value per common share	$	22.30	$	21.37	$	25.31	$	23.51	$	21.32
Tangible book value per common share	$	20.65	$	19.56	$	23.34	$	21.44	$	18.99

At or for the year ended December 31,

Summary of Operations	2004		2003			2002		2001		2000
Interest income	$	31,221	$	32,377		$	40,455	$	46,747	$	48,708
Interest expense	8,866		15,252			22,660		26,908		28,921
Net interest income	22,355		17,125			17,795		19,839		19,787
Provision for loan losses	600		330			988		500		410
Non-interest income	2,608		2,690			3,304		3,172		1,432
Non-interest expense	15,329		28,703			13,414		14,708		14,404
Net income (loss)	$	6,567	$	(5,834	)	$	5,092	$	5,733	$	4,482
Earnings (loss) per common share—basic	$	2.44	$	(2.30	)	$	2.06	$	2.32	$	1.76
Earnings (loss) per common share—diluted	$	2.33	$	(2.30	)	$	1.91	$	2.19	$	1.72

2

Performance Ratios and Other Selected Data	2004		2003		2002		2001		2000
Return on average assets	1.06	%	n.m.		0.71	%	0.82	%	0.63	%
Return on average equity	11.58	%	n.m.		8.47	%	10.42	%	9.18	%
Average equity to average assets	9.16	%	9.01	%	8.34	%	7.83	%	6.86	%
Average interest rate spread	3.79	%	2.57	%	2.44	%	2.74	%	2.70	%
Non-performing loans to total assets	0.15	%	0.38	%	0.53	%	0.53	%	0.20	%
Non-performing loans to total loans	0.22	%	0.56	%	1.03	%	0.99	%	0.41	%
Allowance for loan losses to non-performing loans	240.31	%	92.51	%	53.86	%	52.22	%	115.97	%
Allowance for loan losses to total loans	0.52	%	0.52	%	0.54	%	0.52	%	0.47	%
Bank regulatory capital
Core	8.13	%	7.29	%	6.85	%	6.95	%	6.18	%
Tangible	8.13	%	7.29	%	6.85	%	6.95	%	6.18	%
Risk based	15.67	%	14.47	%	15.25	%	14.95	%	11.97	%
Dividend payout ratio(2)	28.33	%	n.m.		31.41	%	26.48	%	30.23	%

n.m. = not meaningful

(1)	Consists of cash, cash due from banks, interest-bearing deposits with original maturities of less than three months, and federal funds sold.
(2)	Payout ratio is dividends paid for the period divided by earnings per common share—diluted.

3

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND

RESULTS OF OPERATIONS

General.  The following discussion and analysis should be read in conjunction with the Company’s consolidated financial statements and is intended to assist in understanding and evaluating the major changes in the financial position and results of operations of the Company with a primary focus on an analysis of operating results. This document contains statements that project the future operations of the Company which involve risks and uncertainties. The Company’s actual results may differ significantly from the results discussed in these forward-looking statements. Statements concerning future performance, developments, events, expectations for growth and market forecasts, and any other guidance on future periods, constitute forward-looking statements which are subject to a number of risks and uncertainties, including interest rate fluctuations and government and regulatory actions which might cause actual results to differ materially from stated expectations or estimates. The Company does not undertake to update any forward-looking statement, whether written or oral, that may be made from time-to-time by or on behalf of the Company.

The Company’s income on a consolidated basis is derived substantially from its investment in its subsidiary, Third Federal. The earnings of Third Federal depend primarily on its net interest income. Net interest income is affected by the interest income that Third Federal receives from its loans and investments and by the interest expense that Third Federal incurs on its deposits, borrowings and other sources of funds. In addition, the mix of Third Federal’s interest-bearing assets and liabilities can have a significant effect on Third Federal’s net interest income; loans generally have higher yields than securities; retail deposits generally have lower interest rates than other borrowings.

Third Federal also receives income from service charges and other fees and occasionally from sales of investment securities and real estate owned. Third Federal incurs expenses in addition to interest expense in the form of salaries and benefits, deposit insurance premiums, property operations and maintenance, advertising and other related business expenses.

Critical Accounting Policies

Certain critical accounting policies of the Company require the use of significant judgment and accounting estimates in the preparation of the consolidated financial statements and related data of the Company. These accounting estimates require management to make assumptions about matters that are highly uncertain at the time the accounting estimate is made. Management believes that the most critical accounting policy requiring the use of accounting estimates and judgment is the determination of the allowance for loan losses. If the financial position of a significant amount of debtors should deteriorate more than the Company has estimated, present reserves for loan losses may be insufficient and additional provisions for loan losses may be required. The allowance for loan losses was $2,307,000 at December 31, 2004.

Financial Condition and Changes in Financial Condition

Assets.  The Company’s total assets at December 31, 2004 were $629.0 million, an increase of $22.2 million during the year. This increase in total assets is essentially due to a $37.5 million increase in loans receivable, funded in part by a $12.1 million reduction in investment and mortgage-backed securities, in part by a $15.9 million increase in advances from the Federal Home Loan Bank (“FHLB”), and in part by a $5.7 million increase in stockholders’ equity.

The Company’s loans receivable at December 31, 2004 were $442.2 million, a $37.5 million or 9.3% increase since December 31, 2003. During 2004 there were $117.9 million of prepayments of existing mortgages in the loans receivable portfolio; however, offsetting this reduction was the origination of $152.8 million in predominately commercial real estate loans and single-family residential first and second mortgage loans, and the purchase of $3.9 million in single-family residential mortgage loans.

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Mortgage-backed securities available for sale decreased by $3.2 million during 2004 due to $30.1 million in repayments throughout 2004 of the underlying mortgages comprising such securities, partially offset by the purchases of $27.7 million of such securities. The remaining net change in the portfolio was caused by $0.8 million amortization of purchase premiums. Mortgage-backed securities held to maturity decreased by $8.7 million during 2004 due to prepayment of the underlying mortgages comprising the securities.

Investment securities available for sale increased by $3.2 million during the year. The Company purchased $3.0 million of such securities, mainly bank-qualified municipal bonds, during 2004. The remaining net change in the portfolio was caused by a $0.2 million increase in the fair value of such securities.

The Company’s cash and cash equivalents were $7.9 million at December 31, 2004. It is the Company’s current intent to keep cash and cash equivalents at a minimal level and use its line of credit at the FHLB to fund its day-to-day cash needs, if necessary.

Liabilities.  The Company’s total liabilities were $567.8 million at December 31, 2004, an increase of $16.5 million during 2004. Deposits increased by $0.6 million, and the mix of deposits was largely unchanged. Advances from the FHLB increased by $15.9 million. It is the current intent of the Company to fund a portion of its interest-bearing assets, not funded by deposits, with longer term advances from the FHLB, and fund its day-to-day cash needs and shorter term interest-bearing assets not otherwise funded with deposits using draws on its line of credit with the FHLB. Thus, during 2004 advances from the FHLB due in four years and beyond increased by $23.4 million to $48.3 million. In addition, at December 31, 2004 the Bank’s line of credit was $30 million of which $8.7 million was drawn.

Stockholders’ equity.  Total consolidated stockholders’ equity increased by $5.7 million to $61.2 million at December 31, 2004. The increase is largely the result of $6.6 million in net income less $1.8 million in cash dividends paid to the Company’s common stockholders. In addition there was a $3.4 million increase in stockholders’ equity attributable to the exercise of stock options for 294,925 shares and a $1.6 million increase in additional paid in capital due to the federal income tax benefit that the Company will receive due to the exercise of non-qualified stock options. The Company also purchased 166,305 shares of common stock, held in treasury, reducing stockholders’ equity by $4.7 million. Finally, there was a $0.5 million increase due to the allocation of 17,688 shares to participants in the Company’s employee stock ownership plan.

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

	2004						2003						2002
	Average balance		Interest		Average yld/cost		Average balance		Interest		Average yld/cost		Average balance		Interest		Average yld/cost
ASSETS
Interest-earning assets:
Loans receivable(1)	$	423,482	$	24,359	5.75	%	$	378,414	$	23,372	6.18	%	$	362,104	$	25,662	7.09	%
Mortgage-backed securities	128,759		5,696		4.42	%	154,721		6,725		4.35	%	200,316		11,423		5.70	%
Investment securities(2)	30,969		1,377		4.45	%	62,747		1,966		3.13	%	50,072		2,358		4.71	%
Other interest-earning assets(3)	1,127		14		1.24	%	45,590		474		1.04	%	74,058		1,099		1.48	%
Total interest-earning assets	584,337		31,446		5.38	%	641,472		32,537		5.07	%	686,550		40,542		5.91	%
Non interest-earning assets	34,645						33,839						34,494
Total assets	$	618,982					$	675,311					$	721,044
LIABILITIES AND STOCKHOLDERS’ EQUITY:
Interest-bearing liabilities
Deposits	465,097		5,925		1.27	%	449,925		7,044		1.57	%	433,522		10,506		2.42	%
Advances from the FHLB and borrowings	91,660		2,941		3.21	%	160,325		8,208		5.12	%	219,797		12,154		5.53	%
Total interest-bearing liabilities	556,757		8,866		1.59	%	610,250		15,252		2.50	%	653,319		22,660		3.47	%
Non interest-bearing liabilities	5,536						4,195						7,603
Total liabilities	562,293						614,445						660,922
Stockholders’ equity	56,689						60,866						60,122
Total liabilities and stockholders’ equity	$	618,982					$	675,311					$	721,044
Net interest income			$	22,580					$	17,285					$	17,882
Interest rate spread(4)					3.79	%					2.57	%					2.44	%
Net yield on interest-earning assets(5)					3.86	%					2.69	%					2.60	%
Ratio of average interest-earning assets to average interest- bearing liabilities					105	%					105	%					105	%

(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 $225,000, $160,000 and $87,000 for the years ended December 31, 2004, 2003 and 2002, 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.

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

	2004 vs 2003 Increase (decrease) due to									2003 vs 2002 Increase (decrease) due to
	Volume			Rate			Net			Volume			Rate			Net
Interest income:
Loans receivable, net	$	2,662		$	(1,675	)	$	987		$	1,117		$	(3,407	)	$	(2,290	)
Mortgage-backed securities	(1,147		)	118			(1,029		)	(2,298		)	(2,400		)	(4,698		)
Investment securities	(1,224		)	635			(589		)	511			(903		)	(392		)
Other interest-earning assets	(537		)	77			(460		)	(351		)	(274		)	(625		)
Total interest-earning assets	(246		)	(845		)	(1,091		)	(1,021		)	(6,984		)	(8,005		)
Interest expense:
Deposits	231			(1,350		)	(1,119		)	384			(3,846		)	(3,462		)
Advances from the FHLB and borrowings	(2,814		)	(2,453		)	(5,267		)	(3,097		)	(849		)	(3,946		)
Total interest-bearing liabilities	(2,583		)	(3,803		)	(6,386		)	(2,713		)	(4,695		)	(7,408		)
Net change in net interest income	$	2,337		$	2,958		$	5,295		$	1,692		$	(2,289	)	$	(597	)

Comparison of Years Ended December 31, 2004 and December 31, 2003

Net Income.  Net income was $6.6 million for the year ended December 31, 2004. Net loss was $5.8 million for the year ended December 31, 2003. The increase in net income of $12.4 million when comparing the year 2004 with 2003 is largely attributable to the debt refinancing transaction described in the next paragraph, which produced a net loss for 2003 of $9.3 million after considering the income tax benefit associated with the transaction.

During the third quarter of 2003, the Company completed a series of transactions (the “debt refinancing”) that resulted in the repayment and refinancing of $187.4 million of Federal Home Loan Bank borrowings which carried a weighted average interest rate of 5.46%. $80 million of these borrowings were refinanced at 3.23%; the remaining $107.4 million was repaid. A prepayment fee of $13.8 million was assessed by the Federal Home Loan Bank. A portion of the funds used to repay these borrowings came from the sale of $70.2 million of investment securities available for sale and $9.5 million of mortgage-backed securities available for sale, which had been yielding a combined 1.93%. The loss on the sale of these securities was $0.4 million. Management believed that it was in the best interest of the Company’s shareholders and the Bank’s employees and customers to replace these high-cost borrowings in order to improve the Company’s future net interest income and thus its overall financial performance.

Pre-tax income was $9.0 million for 2004. After adjusting for the $14.2 million pre-tax cost of the debt refinancing, pre-tax income was $5.0 million for 2003. This $4.0 million increase in adjusted pre-tax income for 2003 compared to pre-tax income for 2004 is mainly attributable to a $5.2 million increase in net interest income, less a $0.3 million increase in provisions for loan losses and a $0.4 million increase in operating expenses, as described more fully below.

Total Interest Income.  For the year ended December 31, 2004, total interest income decreased to $31.2 million compared to $32.4 million for the year ended December 31, 2003. The $1.2 million decrease in interest income was mainly the result of the decrease in the average balances of mortgage-backed

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securities and other interest-earning assets during 2004 compared with 2003, largely due to the effect of the debt refinancing, and also due to the high rate of mortgage-backed security repayments that occurred in 2003 because of near-record low mortgage interest rates that existed throughout much of 2003. Offsetting these net decreases in interest income was the positive effect of a $45.1 million increase in the average balance of loans receivable during 2004 when compared to 2003, although the continued high level of loan prepayments and refinancing caused the average rate on loans receivable to decrease by 43 basis points during 2004 when compared to 2003.

Beginning in June 2004, the Federal Open Market Committee raised the federal funds rate five times by 125 basis points through year end 2004. At the same time, short-term market interest rates were rising, and by year end many short-term rates had risen by 150 basis points since the beginning of the year. However, long-term interest rates remained approximately flat during 2004. This 150 basis points of so-called “flattening” of the yield curve has had, and is expected to continue to have, a neutral to slightly positive effect on the Bank’s interest income since the positive effect on the Bank’s adjustable rate and prime-based loans will offset the negative effect of expected, continued high levels of early repayment or refinancing of the Bank’s above-current-market-rate, longer-term loans.

Total Interest Expense.  Total interest expense decreased to $8.9 million from $15.3 million for the year ended December 31, 2004 compared to 2003. $1.4 million of this decrease is primarily the result of low market interest rates during 2003 and, consequently, the Company had lowered the interest rates paid on most of its deposit products in order to keep them in line with short-term market interest rates. However, by the end of 2004 the Company had begun to raise the interest rates on its deposit products in light of the previously described increase in short-term market interest rates and the need to maintain competitive pricing of the Bank’s deposit products. The Company expects to continue raising the interest rates paid on deposit products during 2005 and, therefore, expects deposit interest expense to increase.

Interest paid on advances from the FHLB decreased by $5.3 million during 2004 compared with 2003, largely because of the debt refinancing transaction.

Allowance for Loan Losses.  The allowance for loan losses was approximately $2.3 million at December 31, 2004 and $2.1 million at December 31, 2003. The provision for loan losses was $600,000 during 2004 compared with $330,000 during 2003. Charge-offs were $404,000 during 2004 compared to $266,000 during 2003. While management maintains Third Federal’s allowance for losses at a level which it considers to be adequate to provide for probable losses, there can be no assurance that further additions will not be made to the allowance and that such losses will not exceed the estimated amounts.

Non-Interest Income.  Total non-interest income was $2.6 million during 2004 compared with $2.7 million during 2003. Service fees and other operating income increased by $0.2 million largely due to the introduction of new deposit account services. Gains on sales of real estate and securities were $0 during 2004 compared to $0.3 million during 2003.

Non-Interest Expense.  Total non-interest expense, excluding the $13.8 million debt prepayment fee paid during 2003, increased by $0.4 million during 2004 compared to 2003. Employee compensation and benefits increased by $583,000 during 2004 compared to 2003. Approximately $252,000 of this increase was due to normal salary increases and increased staff, and $271,000 of the increase was due to an increase in incentive compensation expenses. Advertising expense increased by $104,000 due to an increase in the Bank’s marketing efforts, and an expansion of the media used, to advertise its image, products, and services. During 2004 the Company incurred approximately $40,000 of expense due to the commencement of implementation of the Sarbanes-Oxley Act of 2002. Since the Company is not an accelerated filer, full implementation will not occur until 2006. At the present time, the Company estimates that it will spend in excess of $250,000 to fully implement the procedures, and produce the required documentation, required by the Sarbanes-Oxley Act.

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Income Tax Expense.  The Company’s effective tax rate was 27.3% (tax expense) during 2004 compared to 36.7% (tax benefit) during 2003. The high effective tax (benefit) rate during 2003 is due to the pre-tax loss for the year produced by the debt refinancing, which pre-tax loss produces a tax benefit at a 34% rate, further increased by the elimination of net non-taxable income from the pre-tax loss.

Comparison of Years Ended December 31, 2003 and December 31, 2002

Net Income.  Net loss was $5.8 million for the fiscal year ended December 31, 2003. Net income was $5.1 million for the year ended December 31, 2002. The difference in net income of $10.1 million when comparing the year 2003 with 2002 is largely attributable to the debt refinancing, which produced a net loss for 2003 of $9.3 million after considering the income tax benefit associated with the transaction. Pre-tax loss was $9.2 million for 2003. After adjusting for the $14.2 million pre-tax cost of the debt refinancing, pre-tax income was $5.0 million compared to pre-tax income of $6.7 million during 2002. This $1.7 million difference is mainly attributable to a $1.5 million increase in non-interest expense, after adjusting for the $13.8 million debt repayment fee, as described more fully below.

Total Interest Income.  For the year ended December 31, 2003, total interest income decreased to $32.4 million compared to $40.5 million for the year ended December 31, 2002. The $8.1 million decrease in interest income was mainly the result of the repayment of $165.9 million in higher yielding loans receivable, which were replaced and supplemented by the origination and purchase of $202.8 million in loans at substantially lower yields. In addition, the Company’s adjustable rate loans continued to adjust downward, also due to the continued decrease in market interest rates. As a result, the overall yield on the Company’s loan portfolio decreased by 91 basis points during 2003. A similar result of low market interest rates combined with high loan prepayments caused the average yield on the Company’s mortgage-backed securities portfolios to decrease by 135 basis points.

Mortgage-related loan repayments during 2003 caused an average of $45.6 million to be maintained in cash and cash equivalents during 2003, earning an average interest rate of 1.04%, which is substantially less than these funds were earning while invested in loans and mortgage-backed securities. However, by year end 2003 the Company’s cash and cash equivalents had been reduced to $8.2 million from $100.6 million at December 31, 2002 largely as a result of the debt refinancing, but also due to the Company’s increased lending activities, particularly during the second half of 2003.

Total Interest Expense.  Total interest expense decreased to $15.3 million from $22.7 million for the year ended December 31, 2003 compared to 2002. $3.5 million of this decrease is primarily the result of lower market interest rates during the period and, consequently, lower rates paid on the Company’s new certificates of deposit; in addition, the Company lowered the interest rates paid on several of its other deposit products in order to keep them in line with short-term market interest rates. In addition, the interest paid on advances from the FHLB decreased by $3.9 million during 2003 compared with 2002, largely because of the debt refinancing transaction.

Allowance for Loan Losses.  The allowance for loan losses was approximately $2.1 million at December 31, 2003 and $2.0 million at December 31, 2002. The provision for loan losses was $330,000 during 2003 compared with $988,000 during 2002. Charge-offs were $266,000 during 2003 compared to $913,000 during 2002. Charge-offs during 2002 included approximately $625,000 during the second quarter attributable to a default by the servicer of the Company’s purchased lease portfolio.

Non-Interest Income.  Total non-interest income was $2.7 million during 2003 compared with $3.3 million during 2002. During the first six months of 2003 the Company sold $14.5 million in mortgage-backed securities and recorded gains of $0.6 million. The debt refinancing during the third quarter of 2003 produced a loss on sale of securities of $0.4 million. During 2002 the Company sold approximately $37.2 million of mortgage-backed and investment securities available for sale and

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realized gains of $1.2 million. Service fees and other operating income increased by $0.3 million largely due to the introduction of new deposit account services during the year. However, fee income also includes $0.2 million of loan prepayment fees, largely attributable to large commercial loans, which, because of the nature of the fee, are non-recurring in nature. Gain on sale of real estate of $0.1 million resulted from the sale of operating property during 2003 while there were no such gains during 2002.

Non-Interest Expense.  Total non-interest expense, excluding the $13.8 million debt prepayment fee, increased by $1.5 million during 2003 compared to 2002. Employee compensation and benefits increased by $557,000 during 2003 compared to 2002: expense related to the employee stock ownership plan increased by $326,000 due to an increase in the shares allocated to plan participants and an increase in the per share cost associated with these allocations; the expense of the Company’s defined benefit plan increased by $126,000; and, finally, there was a $66,000 one-time expense associated with the retirement of the Bank’s president at June 30, 2003. The remaining increase in compensation is due to the cost of staffing a new branch, opened during the first quarter of 2003, and normal salary increases.

Professional fees increased by $201,000 during 2003 due to increased legal expense, in part related to the retirement of the Bank’s president and appointment of new senior officers at the Bank, and in part due to the evaluation and adoption of various policies and procedures required by the Sarbanes-Oxley Act of 2002. Also, during the second half of 2003 the Company engaged an outside firm to completely review and then provide on-going assistance with the Bank’s regulatory compliance requirements.

Other operating expenses increased by $511,000 during 2003. Loan expenses increased by $219,000 due to increased loan production. Other miscellaneous expenses include $113,000 attributable to estimated and realized losses on foreclosed real estate, and $110,000 attributable to various deposit item, robbery, and reconciling item losses that occurred throughout the year.

Income Tax Expense.  The Company’s effective tax rate was 36.7% during 2003 compared to 24.0% during 2002. The apparent increase in the effective tax rate during 2003 is due to the pre-tax loss for the year, produced by the debt refinancing, which produces a tax benefit at a 34% rate, further increased by the elimination of net non-taxable income from the pre-tax loss.

Liquidity and Capital Resources

Liquidity.  The Company’s liquidity is a measure of its ability to fund loans, pay withdrawals of deposits and other cash outflows, and pay dividends in an efficient, cost-effective manner. The Company’s primary source of funds are cash on hand and dividends from its wholly-owned Bank. The Bank’s primary sources of funds are deposits, borrowings, and scheduled amortization and prepayment of loan and mortgage-backed security principal. Loan prepayments, maturing investments and mortgage-backed security prepayments are greatly influenced by general interest rates, economic conditions and competition. During the past several years, the Bank has used such funds primarily to fund maturing time deposits, pay savings withdrawals, fund lending commitments, purchase new investments, repurchase its common stock, and increase the Bank’s, along with the Company’s, liquidity.

The Bank is currently able to fund its operations internally but has, when deemed prudent, borrowed funds from the Federal Home Loan Bank. As of December 31, 2004, such borrowed funds totaled $102.7 million. The amount of these borrowings that will mature during the twelve months ending December 31, 2005 is $23.4 million. At December 31, 2004 the Bank had a $30 million line of credit, $21.3 million of which was unused, and up to approximately $300 million of additional collateral-based borrowing capacity at the Federal Home Loan Bank.

The amount of certificate accounts that are scheduled to mature during the twelve months ending December 31, 2005, is approximately $101.7 million. To the extent that these deposits do not remain at

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the Bank upon maturity, the Bank believes that it can replace these funds with deposits, excess liquidity, advances from the FHLB or other borrowings. It has been the Bank’s experience that substantial portions of such maturing deposits remain at the Bank.

At December 31, 2004, the Bank had outstanding commitments to originate loans or fund unused lines of credit of $74.5 million. The loan commitments will be funded during the twelve months ending December 31, 2005. The unused lines of credit can be funded at any time. Funds required to fill these commitments will be derived primarily from current excess liquidity, deposit inflows or loan and security repayments. At December 31, 2004, the Bank had $1.1 million outstanding commitments to sell loans.

The Company also has obligations under lease agreements. Payments required under such lease agreements will be approximately $265,000 during the year ending December 31, 2005.

The following table combines the Company’s contractual obligations and commitments to make future payments as of December 31, 2004.

	Payments due by period
	Total		Less than 1 year		1-3 years		4-5 years		After 5 years
	(in thousands)
Contractual obligations:
FHLB advances	$	102,747	$	23,448	$	30,987	$	44,427	$	3,885
Time deposits	146,939		101,730		29,672		15,246		291
Operating leases	786		265		381		140		—
Total contractual obligations	$	250,472	$	125,443	$	61,040	$	59,813	$	4,176

	Amount of commitment expirations by period
Commitments:
Extensions of credit	$	73,330	$	33,361	$	11,933	$	1,117	$	26,919
Letters of credit	1,201		1,106		95		—		—
Loans sold with recourse	109		—		—		—		109
Total commitments	$	74,640	$	34,467	$	12,028	$	1,117	$	27,028

Capital Resources.  Under current regulations, the Bank must have core capital equal to 4% of adjusted total assets and risk-based capital equal to 8% of risk-weighted assets, of which 1.5% must be tangible capital, excluding goodwill and certain other intangible assets. On December 31, 2004, the Bank met its three regulatory capital requirements.

Management believes that under current regulations, the Bank will continue to meet its minimum capital requirements in the foreseeable future. However, events beyond the control of the Bank, such as increased interest rates or a downturn in the economy in areas in which the Bank operates, could adversely affect future earnings and as a result, the ability of the Bank to meet its future minimum capital requirements.

Impact of Inflation and Changing Prices

The consolidated financial statements and related data have been prepared in accordance with accounting principles generally accepted in the United States of America which require the measurement of financial position and operating results in terms of historical dollars, without consideration for changes in the relative purchasing power of money over time caused by inflation. Unlike industrial companies, nearly all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution’s performance than general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the price of goods and services, since such goods and services are affected by inflation. In the current interest rate environment, liquidity and the maturity structure of the Bank’s assets and liabilities are critical to the maintenance of acceptable performance levels.

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Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk Management

The Bank has established an Asset/Liability Management Committee (ALCO) for the purpose of monitoring and managing market risk, which is defined as the risk of loss of net interest income or economic value arising from changes in market interest rates and prices.

The type of market risk which most affects the Company’s financial instruments is interest rate risk, which is best quantified by measuring the change in net interest income that would occur under specific changes in interest rates. Substantially all of the Bank’s interest-bearing assets and liabilities are exposed to interest rate risk. Loss of economic value is measured using reports generated by the Office of Thrift Supervision (“OTS”), using input from the Bank, wherein the current net portfolio value of the Bank’s interest-sensitive assets and liabilities is measured at different hypothetical interest rate levels centered on the current term structure of interest rates. Gap reports are used to measure the net amount of assets and liabilities repricing, pre-paying and maturing during future periods. ALCO evaluates the simulation results, the OTS model results and the “gap” reports and will make adjustments to the Bank’s planned activities if in its view there is a need to do so.

The Bank’s exposure to interest rate risk results from, among other things, the difference in maturities in interest-earning assets and interest-bearing liabilities. Since the Bank’s assets currently have a longer maturity than its liabilities, the Bank’s earnings could be negatively impacted during a period of rising interest rates. Alternatively, in periods of falling interest rates the Bank’s mortgage loans will prepay at an increasing rate and caused the Bank to reinvest these cash flows in periods of low interest rates, also negatively affecting the Bank’s earnings. The relationship between the interest rate sensitivity of the Bank’s assets and liabilities is continually monitored by management.

Fundamentally, the Bank prices and originates loans, and prices and originates its deposits including CD’s at market interest rates. Volumes of such loans and deposits at various maturity and repricing horizons will vary according to customer preferences as influenced by the term structure of market interest rates. The Bank utilizes its investment and mortgage-backed security portfolios available for sale to generate additional interest income, to managing its liquidity, and to manage its interest rate risk. These securities are readily marketable and provide the Bank with a cash flow stream to fund asset growth or liability maturities. In addition, if management determines that it is advisable to do so, the Bank can lengthen or shorten the average maturity of all interest-bearing assets through the selection of fixed rate or variable rate securities, respectively.

The Bank utilizes advances from the FHLB in managing its interest rate risk and as a tool to augment deposits in funding asset growth. The Bank may utilize these funding sources to better match its fixed rate interest-bearing assets with longer maturities or repricing characteristics.

The nature of the Bank’s current operations is such that it is not subject to foreign currency exchange or commodity price risk. Additionally, neither the Company nor the Bank owns any trading assets. At December 31, 2004, the Bank did not have any hedging transactions in place such as interest rate swaps, caps, or floors, although these derivatives are often used by Banks to manage interest rate risk.

The Company’s bank subsidiary is a savings bank regulated by the OTS and has policies or procedures in place for measuring interest rate risk. These policies and procedures stipulate acceptable levels of interest rate risk. As part of its interest rate risk management, the Bank uses the Interest Rate Risk Exposure Report, which is generated quarterly by the OTS. This report forecasts the interest rate sensitivity of net portfolio value (“NPV”) under alternative interest rate environments. The NPV is

12

defined as the net present value of the Bank’s existing assets, liabilities and off-balance sheet instruments. The calculated estimates of change in NPV at December 31, 2004 are as follows:

Change in Interest Rates	NPV Amount		% Change		Policy Limitation
	(In Thousands)
+300 Basis Points	$	57,264	-34	%	+/- 50	%
+200 Basis Points	$	68,155	-22	%	+/- 35	%
+100 Basis Points	$	78,427	-10	%	+/- 25	%
Flat Rates	$	87,106	0	%	0	%
-100 Basis Points	$	90,556	+4	%	+/- 20	%

Management believes that the assumptions utilized by OTS in evaluating the vulnerability of the Company’s net portfolio value to changes in interest rates are reasonable; however, the interest rate sensitivity of the Bank’s assets and liabilities as well as the estimated effect of changes in interest rates on NPV could vary substantially if different assumptions are used or actual experience differs from the experience on which the assumptions were based. In the event the Bank should measure an excessive decline in its NPV as the result of an immediate and sustained change in interest rate, it has a number of options which it could utilize to remedy that situation. The Bank could restructure its investment portfolio through sale or purchase of securities with more favorable repricing attributes. It could also emphasize loan products with appropriate maturities or repricing attributes, or it could attract deposits or obtain borrowings with desired maturities.

In order to measure interest rate risk internally, the Company uses computer programs which enable it to simulate the changes that will occur to the Bank’s net interest income (“NII”) over several interest rate scenarios which are developed by “shocking” market interest rates (i.e. moving them immediately and permanently) up and down in 100 basis point increments from their current levels, and by “ramping” interest rates, i.e. spreading evenly the change over the horizon period. In addition, loan production is adjusted downward in the rates up scenarios.

In addition to the level of interest rates, the most critical assumption regarding the estimated amount of the Bank’s NII is the expected prepayment speed of the Bank’s 1-4 family residential loans, and related mortgage-backed securities, the book value of which comprises approximately 69% of the Company’s total assets. For this prepayment speed assumption the Company uses median expected prepayment speeds which are obtained from a reliable third party source. The Company also incorporates into its simulations the effects of the interest rate caps and interest rate floors that are part of the majority of the Bank’s variable rate loans. Finally, the Company makes certain assumptions regarding the timing and magnitude of interest rate changes on its non-CD deposits.

The Company uses its business planning forecast as the basis for its NII simulations. Therefore, planned business activities are incorporated into the measurement horizon. Such activities include assumptions about substantial new loan and deposit volumes, the pricing of loan and deposit products, and other assumptions about future activities that may or may not be realized. In order to quantify the Company’s NII exposure at December 31, 2004, the Company focused on the simulation of net interest income over 24 months in three scenarios: ramped up 200 basis points, shocked up 200 basis points, and shocked down 100 basis points. The results of these simulations are as follows:

	Net interest income volatility versus level interest rates
Year ending	Ramp UP 200 bp		Shocked UP 200 bp		Shocked DOWN 100 bp
2005	+0.39	%	-4.20	%	-6.38	%
2006	-3.61	%	-3.89	%	-12.87	%

In addition, the Company prepared current period “gap” reports in order to show potential mis-matches of repricing or cash flows from the Company’s current interest rate-sensitive assets and

13

liabilities. Negative amounts indicate that there is an excess of rate sensitive liabilities repricing during the period and, generally, the Company’s net interest income would be adversely affected by rising market interest rates. The results of these “gap” measurements are as follows: (in thousands)

	Gap: Greater (lesser) amount of assets sensitive to changes in market interest rates than liabilities
Year	Current rates			Ramp UP 200 bp			Shocked UP 200 bp			Shocked DOWN 100 bp
2005	$	21,639		$	(4,246	)	$	(40,576	)	$	86,949
2006	$	43,790		$	29,243		$	8,270		$	71,242
2007	$	12,699		$	4,927		$	(6,145	)	$	22,219
2008-2009	$	(4,689	)	$	(8,040	)	$	(11,706	)	$	(9,331	)
2010 and beyond	$	(42,026	)	$	9,528		$	81,570		$	(139,668	)

Essentially, the Company’s net interest income is highly sensitive to the sustained movement of long-term interest rates because of the resulting effect on the prepayment speeds of the Company’s mortgage-related earning assets. In the interest rates up scenarios, prepayment speeds slow and the Company becomes more sensitive to rising interest rates. In addition, the Company’s deposits are highly insensitive to the downward movement in short term market rates due to the perceived inability of the Company to move non-CD deposit rates much lower from where they are at December 31, 2004. However, these assumptions and measurements are highly subjective in nature and are not intended to be a forecast of net interest income under any rate scenario for the years 2005, 2006 or for any other period.

Recent Accounting Pronouncements

On December 12, 2003, the American Institute of Certified Public Accountants issued Statement of Position No. 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a Transfer” (SOP 03-3). SOP 03-3 requires acquired impaired loans for which it is probable that the investor will be unable to collect all contractually required payments receivable to be recorded at the present value of amounts expected to be received and prohibits carrying over or creation of valuation allowances in the initial accounting for these loans. SOP 03-3 is effective for loans acquired in fiscal years beginning after December 31, 2004. SOP 03-3 is not expected to have a material impact on the Company’s results of operations or financial condition.

On March 9, 2004, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 105, “Application of Accounting Principles to Loan Commitments” (SAB 105), which specifies that servicing assets embedded in commitments for loans to be held-for-sale should be recognized only when the servicing asset has been contractually separated from the associated loans by sale or securitization. The adoption of SAB 105 is effective for commitments entered into after March 31, 2004. The adoption of SAB 105 had no material impact on the Company’s results of operations or financial condition.

On March 18, 2004, the Emerging Issues Task Force (EITF) issued EITF 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (EITF 03-1). EITF 03-1 provides recognition and measurement guidance regarding when impairments of equity and debt securities are considered other-than-temporary thereby requiring a charge to earnings, and also requires additional annual disclosures for investments in unrealized loss positions. The additional annual disclosure requirements were previously issued by the EITF in November 2003 and were effective for the Company for the year ended December 31, 2003. In September 2004, the FASB issued FASB Staff Position (FSP) EITF 03-1-1, which delays the recognition and measurement provisions of EITF 03-1 pending the issuance of further implementation guidance. The Company is currently evaluating the effect of the recognition and measurement provisions of EITF 03-1.

14

On December 16, 2004, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004) “Share-based Payment” (SFAS 123R) which eliminates the ability to account for share-based compensation transactions using Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” (APB 25) and generally requires that such transactions be accounted for using a fair value-based method with the resulting compensation cost recognized over the period that the employee is required to provide service in order to receive their compensation. SFAS 123R also amends SFAS No. 95, “Statement of Cash Flows,” requiring the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as currently required. The Company plans to adopt SFAS 123R beginning July 1, 2005 and is currently evaluating the potential impact on the Company’s results of operations and financial condition.

15

FINANCIAL STATEMENTS AND REPORT OF

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

TF FINANCIAL CORPORATION AND SUBSIDIARIES

December 31, 2004 and 2003

16

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and

Shareholders of TF Financial Corporation

We have audited the accompanying consolidated statements of financial position of TF Financial Corporation and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of TF Financial Corporation and Subsidiaries as of December 31, 2004 and 2003, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the interim standards adopted by the Public Company Accounting Oversight Board (United States), the effectiveness of Third Federal Bank’s (a subsidiary of T F Financial Corporation) internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 25, 2005 expressed an unqualified opinion on management’s assertion that Third Federal Bank maintained effective internal control over financial reporting.

/s/ Grant Thornton LLP

Philadelphia, Pennsylvania

March 25. 2005

17

TF Financial Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

	December 31
	2004			2003
	(in thousands)
ASSETS
Cash and cash equivalents	$	7,900		$	8,241
Certificates of deposit in other financial institutions	38			155
Investment securities available for sale—at fair value	17,625			14,433
Investment securities held to maturity (fair value of $7,188 and $10,815 as of December 31, 2004 and 2003, respectively)	7,027			10,389
Mortgage-backed securities available for sale—at fair value	103,610			106,774
Mortgage-backed securities held to maturity (fair value of $15,546 and $24,774 as of December 31, 2004 and 2003, respectively)	14,900			23,630
Loans receivable, net (including loans held for sale of $680 and $0 as of December 31, 2004 and 2003, respectively)	442,195			404,649
Federal Home Loan Bank stock—at cost	7,460			6,825
Accrued interest receivable	2,500			2,671
Premises and equipment, net	5,963			6,268
Core deposit intangible asset, net of accumulated amortization of $2,611 and $2,456 as of December 31, 2004 and 2003, respectively	213			368
Goodwill	4,324			4,324
Other assets	15,211			18,025
TOTAL ASSETS	$	628,966		$	606,752
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Deposits	$	459,903		$	459,343
Advances from the Federal Home Loan Bank	102,747			86,853
Advances from borrowers for taxes and insurance	1,778			1,738
Accrued interest payable	1,638			1,908
Other liabilities	1,745			1,430
Total liabilities	567,811			551,272
Stockholders’ equity
Preferred stock, no par value; 2,000,000 shares authorized at December 31, 2004 and 2003, none issued	—			—
Common stock, $0.10 par value; 10,000,000 shares authorized, 5,290,000 shares issued, 2,742,345 and 2,596,037 shares outstanding at December 31, 2004 and 2003, respectively, net of shares in treasury: 2004—2,345,746; 2003—2,474,366	529			529
Retained earnings	57,428			52,626
Additional paid-in capital	51,675			51,982
Unearned ESOP shares	(2,019		)	(2,196		)
Treasury stock—at cost	(46,081		)	(47,043		)
Accumulated other comprehensive income	(377		)	(418		)
Total stockholders’ equity	61,155			55,480
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	628,966		$	606,752

The accompanying notes are an integral part of these statements.

18

TF Financial Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS

	Year ended December 31,
	2004		2003			2002
	(in thousands, except per share data)
Interest income
Loans, including fees	$	24,359	$	23,372		$	25,662
Mortgage-backed securities	5,696		6,725			11,423
Investment securities	1,152		1,806			2,271
Interest-bearing deposits and other	14		474			1,099
TOTAL INTEREST INCOME	31,221		32,377			40,455
Interest expense
Deposits	5,925		7,044			10,506
Borrowings	2,941		8,208			12,154
TOTAL INTEREST EXPENSE	8,866		15,252			22,660
NET INTEREST INCOME	22,355		17,125			17,795
Provision for loan losses	600		330			988
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES	21,755		16,795			16,807
Non-interest income
Service fees, charges and other operating income	2,600		2,372			2,114
Gain on sale of real estate	—		110			—
Gain on sale of investment and mortgage-backed securities	—		208			1,190
Gain on sale of loans	8		—			—
TOTAL NON-INTEREST INCOME	2,608		2,690			3,304
Non-interest expense
Employee compensation and benefits	8,769		8,186			7,629
Occupancy and equipment	2,518		2,488			2,303
Federal deposit insurance premium	70		72			75
Professional fees	615		609			408
Marketing and advertising	655		551			441
Other operating	2,547		2,847			2,336
Amortization of core deposit intangible asset	155		185			222
Debt prepayment fee	—		13,765			—
TOTAL NON-INTEREST EXPENSE	15,329		28,703			13,414
INCOME (LOSS) BEFORE INCOME TAXES	9,034		(9,218		)	6,697
Income taxes (benefit)	2,467		(3,384		)	1,605
NET INCOME (LOSS)	$	6,567	$	(5,834	)	$	5,092
Earnings (loss) per share—basic	$	2.44	$	(2.30	)	$	2.06
Earnings (loss) per share—diluted	$	2.33	$	(2.30	)	$	1.91

The accompanying notes are an integral part of these statements.

19

TF Financial Corporation and Subsidiaries

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

Years ended December 31, 2004, 2003 and 2002

(in thousands, except share data)

					Additional paid-in capital			Unearned ESOP shares			Treasury stock			Retained Earnings			Accumulated other comprehensive income (loss)			Total			Comprehensive income (loss)
	Common stock
	Shares		Par value
Balance at January 1, 2002	2,465,986		$	529	$	51,652		$	(2,523	)	$	(48,838	)	$	56,370		$	785		$	57,975
Allocation of ESOP shares	12,156		—		151			122			—			—			—			273
Purchase of treasury stock	(16,894	)	—		—			—			(376		)	—			—			(376		)
Cash dividends—common stock	—		—		—			—			—			(1,484		)	—			(1,484		)
Exercise of options	21,338		—		(156		)	—			405			—			—			249
Other comprehensive income, net of taxes	—		—		—			—			—			—			1,111			1,111			$	1,111
Net income for the year ended December 31, 2002	—		—		—			—			—			5,092			—			5,092			5,092
Comprehensive income																							$	6,203
Balance at December 31, 2002	2,482,586		$	529	$	51,647		$	(2,401	)	$	(48,809	)	$	59,978		$	1,896		$	62,840
Allocation of ESOP shares	20,549		—		401			205			—			—			—			606
Cash dividends—common stock	—		—		—			—			—			(1,518		)	—			(1,518		)
Exercise of options	92,902		—		(618		)	—			1,766			—			—			1,148
Income tax benefit arising from stock compensation	—		—		552			—			—			—			—			552
Other comprehensive income (loss), net of taxes	—		—		—			—			—			—			(2,314		)	(2,314		)	$	(2,314	)
Net income (loss) for the year ended December 31, 2003	—		—		—			—			—			(5,834		)	—			(5,834		)	(5,834		)
Comprehensive income (loss)																							$	(8,148	)
Balance at December 31, 2003	2,596,037		$	529	$	51,982		$	(2,196	)	$	(47,043	)	$	52,626		$	(418	)	$	55,480
Allocation of ESOP shares	17,688		—		354			177			—			—			—			531
Purchase of treasury stock	(166,305	)	—		—			—			(4,725		)	—			—			(4,725		)
Cash dividends—common stock	—		—		—			—			—			(1,765		)	—			(1,765		)
Exercise of options	294,925		—		(2,277		)	—			5,687			—			—			3,410
Income tax benefit arising from stock compensation	—		—		1,616			—			—			—			—			1,616
Other comprehensive income, net of taxes	—		—		—			—			—			—			41			41			$	41
Net income for the year ended December 31, 2004	—		—		—			—			—			6,567			—			6,567			6,567
Comprehensive income																							$	6,608
Balance at December 31, 2004	2,742,345		$	529	$	51,675		$	(2,019	)	$	(46,081	)	$	57,428		$	(377	)	$	61,155

The accompanying notes are an integral part of this statement

20

TF Financial Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Year ended December 31,
	2004			2003			2002
	(in thousands)
OPERATING ACTIVITIES
Net income (loss)	$	6,567		$	(5,834	)	$	5,092
Adjustments to reconcile net income to net cash provided by (used in) operating activities
Amortization of
Mortgage loan servicing rights	—			11			14
Deferred loan origination fees	(50		)	(259		)	(201		)
Premiums and discounts on investment securities, net	74			170			108
Premiums and discounts on mortgage-backed securities, net	775			1,527			697
Premiums and discounts on loans, net	127			414			61
Core deposit intangibles	155			185			222
Deferred income taxes	(343		)	596			(19		)
Provision for loan losses and provision for losses on real estate	737			443			988
Depreciation of premises and equipment	973			1,041			1,014
(Increase) in value of bank-owned life insurance	(525		)	(553		)	(520		)
Stock-based benefit programs	531			606			273
Tax benefit arising from stock compensation	1,616			552			—
(Gain) loss on sale of
Investment and mortgage-backed securities	—			(208		)	(1,190		)
Real estate acquired through foreclosure	(1		)	(23		)	(60		)
Real estate	—			(110		)	—
Mortgage loans available for sale	(8		)	—			—
(Increase) decrease in
Accrued interest receivable	171			905			578
Other assets	3,709			(3,924		)	(89		)
Increase (decrease) in
Accrued interest payable	(270		)	(989		)	(865		)
Other liabilities	(10		)	(1,427		)	(318		)
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES	14,228			(6,877		)	5,785
INVESTING ACTIVITIES
Loan originations	(152,846		)	(178,578		)	(80,943		)
Purchases of loans	(3,922		)	(24,176		)	(59,926		)
Loan principal payments	117,896			165,855			147,296
Principal repayments on mortgage-backed securities held to maturity	8,730			31,013			41,499
Principal repayments on mortgage-backed securities available for sale	30,099			62,169			39,005
Proceeds from loan sales	657			—			—
Purchases and maturities of certificates of deposit in other financial institutions, net	117			65			(26		)
Purchases of investment securities held to maturity	—			—			(6,821		)
Purchases of mortgage-backed securities held to maturity	—			—			(2,829		)
Purchase of investment securities available for sale	(3,040		)	(98,708		)	(16,406		)
Purchase of mortgage-backed securities available for sale	(27,701		)	(82,350		)	(86,795		)

21

	Year ended December 31,
	2004			2003			2002
	(in thousands)
Purchase of bank-owned life insurance	$	—		$	(1,500	)	$	—
Proceeds from maturities of investment securities held to maturity	3,295			4,105			2,060
Proceeds from maturities of investment securities available for sale	—			40,000			8,000
Proceeds from the sale of investment and mortgage-backed securities available for sale	—			95,193			38,380
(Purchase) redemption of Federal Home Loan Bank stock	(635		)	4,599			(56		)
(Purchase) sale of property, equipment and real estate held for investment	3			8			(769		)
Proceeds from sale of real estate	32			1,277			275
Purchase of premises and equipment	(668		)	(751		)	(272		)
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES	(27,983		)	18,221			21,672
FINANCING ACTIVITIES
Net increase in demand deposit/NOW accounts, passbook savings accounts and certificates of deposit	560			16,785			20,506
Net increase (decrease) in advances from Federal Home Loan Bank	15,894			(120,506		)	(15,000		)
Net increase in advances from borrowers for taxes and insurance	40			408			89
Treasury stock acquired	(4,725		)	—			(376		)
Exercise of stock options	3,410			1,148			249
Common stock dividends paid	(1,765		)	(1,518		)	(1,484		)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES	13,414			(103,683		)	3,984
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	(341		)	(92,339		)	31,441
Cash and cash equivalents at beginning of year	8,241			100,580			69,139
Cash and cash equivalents at end of year	$	7,900		$	8,241		$	100,580
Supplemental disclosure of cash flow information
Cash paid for
Interest on deposits and advances from Federal Home Loan Bank	$	9,136		$	16,241		$	23,525
Income taxes	$	1,330		$	250		$	2,050
Non-cash transactions
Transfers from loans to real estate acquired through foreclosure	$	—		$	1,857		$	—

The accompanying notes are an integral part of these statements.

22

TF Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004 and 2003

NOTE A—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

TF Financial Corporation (the “Company”) is a unitary savings and loan holding company, organized under the laws of the State of Delaware, which conducts its consumer banking operations primarily through its wholly owned subsidiary, Third Federal Bank (Third Federal or the Bank). Third Federal is a federally chartered-stock savings bank insured by the Federal Deposit Insurance Corporation. Third Federal is a community-oriented savings institution that conducts operations from its main office in Newtown, Pennsylvania, eleven full-service branch offices located in Philadelphia and Bucks counties, Pennsylvania, and three full-service branch offices located in Mercer County, New Jersey. The Bank competes with other banking and financial institutions in its primary market communities, including financial institutions with resources substantially greater than its own. Commercial banks, savings banks, savings and loan associations, credit unions and money market funds actively compete for savings and time deposits and loans. Such institutions, as well as consumer finance and insurance companies, may be considered competitors of the Bank with respect to one or more of the services it renders.

The Bank is subject to regulations of certain state and federal agencies and, accordingly, those regulatory authorities conduct periodic examinations. As a consequence of the extensive regulation of commercial banking activities, the Bank’s business is particularly susceptible to being affected by state and federal legislation and regulations.

1.  Principles of Consolidation and Basis of Presentation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries: TF Investments, Penns Trail Development Corporation and Third Federal, and its wholly owned subsidiaries, Third Delaware Corporation and Teragon Financial Corporation, (collectively, the “Company”). All material intercompany balances and transactions have been eliminated in consolidation.

The accounting policies of the Company conform to accounting principles generally accepted in the United States of America (US GAAP) and predominant practices within the banking industry. The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The more significant accounting policies are summarized below.

2.  Cash and Cash Equivalents

The Company considers cash, due from banks, federal funds sold and interest-bearing deposits in other financial institutions, with original terms to maturity of less than three months, as cash equivalents for presentation purposes in the consolidated statements of financial position and cash flows.

3.  Investment and Mortgage-Backed Securities

The Company accounts for investment and mortgage-backed securities in accordance with Statement of Financial Accounting Standards (SFAS) No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” The Company classifies its investment, mortgage-backed and marketable

23

equity securities in one of three categories: held to maturity, trading, or available for sale. The Company does not presently engage in security trading activities.

Investment, mortgage-backed and marketable equity securities available for sale are stated at fair value, with net unrealized gains and losses excluded from income and reported in other comprehensive income. Realized gains and losses on the sale of securities are recognized using the specific identification method.

On March 18, 2004, the Emerging Issues Task Force issued EITF 03-1, “The Meaning of Other-than-Temporary Impairment and Its Application to Certain Investments”. EITF 03-1 provides recognition and measurement guidance regarding treatment of equity and debt security impairment which is considered “other-than temporary” and thereby requiring a charge to earnings. EITF 03-1 also requires additional annual disclosure for investments in unrealized loss positions. The additional annual disclosure requirements were previously issued by the EITF in November 2003 and were effective for the Company for the year ended December 31, 2003. In September 2004, the FASB issued FASB Staff Position (FSP) EITF 03-1-1, which delays the recognition and measurement provisions of EITF 03-1 pending the issuance of further guidance.

Investment and mortgage-backed securities held to maturity are carried at cost, net of unamortized premiums and discounts, which are recognized in interest income using the interest method. The Company has the ability and it is management’s intention to hold such assets to maturity.

4.  Loans Receivable

Loans receivable are stated at unpaid principal balances less the allowance for loan losses, and net of deferred loan origination fees and unamortized premiums. Loan origination fees and unamortized premiums on mortgage loans are amortized to income using the interest method over the remaining period to contractual maturity, adjusted for actual prepayments.

Management’s periodic evaluation of the adequacy of the loan loss allowance is based on the Bank’s historical loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral and current economic conditions. Actual losses may be higher or lower than historical trends, which vary. The allowance for loan losses is increased by charges to income and decreased by charge-offs (net of recoveries).

The Bank provides an allowance for accrued but uncollected interest when the loan becomes more than ninety days past due or is identified as impaired. The allowance is established by a charge to interest income equal to all interest previously accrued, and income is subsequently recognized only to the extent that cash payments are received until, in management’s judgment, the borrower’s ability to make periodic interest and principal payments is no longer impaired, in which case the loan is returned to accrual status.

The Company accounts for loans in accordance with SFAS No. 114, “Accounting by Creditors for Impairment of a Loan,” as amended by SFAS No. 118, “Accounting by Creditors for Impairment of a Loan—Income Recognition and Disclosures.” SFAS No. 114 requires that a creditor measure impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, a creditor may measure impairment based on a loan’s

24

observable market price, or the fair value of the collateral if the loan is collateral dependent. Regardless of the measurement method, a creditor must measure impairment based on the fair value of the collateral when the creditor determines that foreclosure is probable. SFAS No. 118 allows creditors to use existing methods for recognizing interest income on impaired loans.

The Company adopted FASB Interpretation (FIN) 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others”. FIN 45 requires certain disclosures regarding the nature of the guarantee, the maximum potential amount of future payments that the guarantor could be required to make under the guarantee, and the current amount of the liability, if any, for the guarantor’s obligations under the guarantee. The Bank issues financial and performance letters of credit. Financial letters of credit require the Bank to make payment it the customer’s financial condition deteriorates, as defined in the agreements. Performance letters of credit require the Bank to make payments if the customer fails to perform identified non-financial contractual obligations. FIN 45 applied to guarantees the Bank issued or modified subsequent to December 31, 2002.

5.  Mortgage Loans Held-for-Sale

Mortgages loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or estimated fair value. Any resulting unrealized losses are included in other income.

The Company adopted SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities,” on July 1, 2003. Implementation issue C13, “When a Loan Commitment Is Included in the Scope of Statement 133” is included in SFAS No. 149. SFAS No. 149 amends SFAS No. 133 to add a scope exception for borrowers (all commitments) and lenders (all commitments except those relating to mortgage loans that will be held for sale). Statement 149 also amends paragraph SFAS No. 133 to require a lender to account for loan commitments related to mortgage loans that will be held for sale as derivatives. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003. The Bank periodically enters into commitments with its customers, which it intends to sell in the future. The Bank’s commitments to extend credit for loans intended for resale were not material at December 31, 2004.

On March 2004, the Securities and Exchange Commission released Staff Accounting Bulletin (SAB) 105, “Loan Commitments Accounted for as Derivative Instruments.” SAB 105 requires that a lender should not consider the expected cash flows related to loan servicing or include any internally developed intangible assets in determining the fair value of loan commitments accounted for as derivatives. The Company adopted SAB 105 effective for commitments entered into after June 30, 2004. The requirements of SAB 105 apply to the Company’s mortgage interest rate lock commitments related to loans held for sale. The Company’s application of SAB 105 did not have a material impact of the Company’s financial position or results of operations.

6.  Premises and Equipment

Land is carried at cost. Buildings and furniture, fixtures and equipment are carried at cost less accumulated depreciation. Depreciation is provided by the straight-line method over the estimated useful lives of the assets.

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7.  Goodwill and Other Intangible Assets

In 1996 the Bank acquired three Mercer County, New Jersey offices and related deposits of Cenlar Federal Savings Bank. The Bank assumed $137.6 million in deposits in exchange for $126.5 million in cash. As a result of the acquisition, the Bank recorded core deposit intangible of $2.8 million and goodwill of $6.7 million. The core deposit intangible acquired is being amortized on an accelerated basis over 10 years. The goodwill acquired from the acquisition was recorded as an unidentifiable intangible asset under SFAS No. 72, “Accounting for Certain Acquisitions of Banking or Thrift Institutions.” On January 1, 2002, the Company adopted Financial Accounting Standards Board (FASB) SFAS No. 141, “Business Combinations,” SFAS No. 142, “Goodwill and Intangible Assets,” SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” and SFAS No. 147,”Acquisitions of Certain Financial Institutions.” Adoption of these statements resulted in that goodwill would no longer be amortized on a recurring basis, but rather be subject to periodic impairment testing. The Company had $4,324,000 of SFAS 72 goodwill at January 1, 2002 remaining from the 1996 branch acquisition that management of the Company has concluded was a business combination in accordance with SFAS No. 147. In addition, the Company has tested the goodwill and core deposit intangible assets for impairment prior to its fiscal year ending December 31, 2004. No impairment has been recognized.

8.  Transfers of Financial Assets

The Company accounts for the transfer of financial assets in accordance with SFAS No. 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” The standard is based on consistent application of a financial-components approach that recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered and derecognizes liabilities when extinguished. The standard provides consistent guidelines for distinguishing transfers of financial assets from transfers that are secured borrowings

9.  Benefit Plans

The Company has established an Employee Stock Ownership Plan (ESOP) covering eligible employees with six months of service, as defined by the ESOP. The Company accounts for the ESOP in accordance with the American Institute of Certified Public Accountants’ Statement of Position (SOP) 93-6, “Employers’ Accounting for Employee Stock Ownership Plans.” SOP 93-6 addresses the accounting for shares of stock issued to employees by an ESOP. SOP 93-6 requires that the employer record compensation expense in the amount equal to the fair value of shares committed to be released from the ESOP to employees.

The Company has stock option plans that allowed the Company to grant options to employees and directors. The options, which have a term of 10 years when issued, vest either immediately or over a three to five year period. The exercise price of each option equals the market price of the Company’s stock on the date of grant. The Company accounts for stock-based compensation in accordance with SFAS No. 123, “Accounting for Stock-Based Compensation,” which contains a fair value-based method for valuing stock-based compensation that entities may use, which measures compensation cost at the grant date based on the fair value of the award. Compensation is then recognized over the service period, which is usually the vesting period. Alternatively, the standard permits entities to continue

26

accounting for employee stock options and similar instruments under Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees.” Entities that continue to account for stock options using APB Opinion No. 25 are required to make pro forma disclosures of net income and earnings per share, as if the fair value-based method of accounting defined in SFAS No. 123 had been applied. The Company’s employee stock option plans are accounted for using the intrinsic value method under APB Opinion No. 25. No stock-based compensation expense is reflected in net income, as all options granted under the plans had an exercise price equal to the market value of the underlying common stock on the date of the grant.

Had compensation cost for the plans been determined based on the fair value of options at the grant dates consistent with the method of SFAS No. 123, “Accounting for Stock-Based Compensation,” the Company’s net income and earnings per share would have been reduced to the pro forma amounts indicated below.

	2004		2003			2002
Net income (loss)
As reported	$	6,567	$	(5,834	)	$	5,092
Deduct: stock-based compensation expense determined using the fair value method, net of related tax effects	88		53			58
Pro forma	$	6,479	$	(5,887	)	$	5,034
Basic earnings (loss) per share
As reported	$	2.44	$	(2.30	)	$	2.06
Deduct: stock-based compensation expense determined using the fair value method, net of related tax effects	0.03		0.02			0.02
Pro forma	$	2.41	$	(2.32	)	$	2.04
Diluted earnings (loss) per share
As reported	$	2.33	$	(2.30	)	$	1.91
Deduct: stock-based compensation expense determined using the fair value method, net of related tax effects	0.02		0.03			0.01
Pro forma	$	2.31	$	(2.33	)	$	1.90
Weighted average fair value of options granted during the year	N/A		$	9.50		$	6.60

There were no option grants during 2004. The fair value of each option grant during 2003 and 2002 was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 2003 and 2002, respectively: a dividend yield of 2.09% and 2.78%; expected volatility 32% and 29%, risk-free interest rate of 3.40% and 2.78%, and expected lives of six years for all options.

10.  Income Taxes

The Company accounts for income taxes under the liability method specified in SFAS No. 109, “Accounting for Income Taxes” whereby deferred income taxes are recognized for the tax consequences

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of “temporary differences” by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date.

11.  Advertising Costs

The Company expenses marketing and advertising costs as incurred.

12.  Earnings Per Share

The Company follows the provisions of SFAS No. 128, “Earnings Per Share.” Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the weighted average common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock.

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13.  Comprehensive Income

The Company follows SFAS No. 130, “Reporting Comprehensive Income.” SFAS No. 130 establishes standards to provide prominent disclosure of comprehensive income items. Comprehensive income is the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. Comprehensive income (loss) for 2004, 2003 and 2002 was $6,608,000, $(8,148,000), and $6,203,000, respectively. The components of other comprehensive income are as follows:

	December 31, 2004
	Before tax amount			Tax (expense) benefit			Net of tax amount
	(in thousands)
Unrealized gains on securities
Unrealized holding gains arising during period	$	168		$	(57	)	$	111
Minimum pension liability adjustment	(107		)	37			(70		)
Other comprehensive income, net	$	61		$	(20	)	$	41
	December 31, 2003
	Before tax amount			Tax (expense) benefit			Net of tax amount
	(in thousands)
Unrealized losses on securities
Unrealized holding (losses) arising during period	$	(3,297	)	$	1,120		$	(2,177	)
Reclassification adjustment for gains realized in net income	(208		)	71			(137		)
Other comprehensive income (loss), net	$	(3,505	)	$	1,191		$	(2,314	)
	December 31, 2002
	Before tax amount			Tax (expense) benefit			Net of tax amount
	(in thousands)
Unrealized gains on securities
Unrealized holding gains arising during period	$	2,872		$	(976	)	$	1,896
Reclassification adjustment for gains realized in net income	(1,190		)	405			(785		)
Other comprehensive income, net	$	1,682		$	(571	)	$	1,111

14.  Segment Reporting

The Company follows SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.” The Company has one reportable segment, “Community Banking.” All of the Company’s

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activities are interrelated, and each activity is dependent and assessed based on how each of the activities of the Company supports the others. For example, commercial lending is dependent upon the ability of the Bank to fund itself with retail deposits and other borrowings and to manage interest rate and credit risk. This situation is also similar for consumer and residential mortgage lending. Accordingly, all significant operating decisions are based upon analysis of the Company as one operating segment or unit.

15.  Reclassifications

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

NOTE B—CASH AND CASH EQUIVALENTS

Cash and cash equivalents consist of the following:

	December 31,
	2004		2003
	(in thousands)
Cash and due from banks	$	7,686	$	7,888
Interest-bearing deposits in other financial institutions	214		353
	$	7,900	$	8,241

NOTE C—INVESTMENT AND MORTGAGE-BACKED SECURITIES

The amortized cost, gross unrealized gains and losses, and fair value of the Company’s investment securities at December 31, 2004 and 2003, are summarized as follows:

	December 31, 2004
	Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value
	(in thousands)
Investment securities held to maturity
State and political subdivisions	$	1,326	$	69	$	—		$	1,395
Corporate debt securities	5,701		92		—			5,793
	$	7,027	$	161	$	—		$	7,188
Investment securities available for sale
U.S. Government and federal agencies	$	2,978	$	—	$	(20	)	$	2,958
Corporate debt securities	1,000		—		(8		)	992
State and political subdivisions	13,704		121		(150		)	13,675
	$	17,682	$	121	$	(178	)	$	17,625

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	December 31, 2003
	Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value
	(in thousands)
Investment securities held to maturity
State and political subdivisions	$	1,609	$	126	$	—		$	1,735
U.S. Government and federal agencies	2,000		11		—			2,011
Corporate debt securities	6,780		289		—			7,069
	$	10,389	$	426	$	—		$	10,815
Investment securities available for sale
U.S. Government and federal agencies	$	2,972	$	—	$	(25	)	$	2,947
Corporate debt securities	1,000		—		(7		)	993
State and political subdivisions	10,677		34		(218		)	10,493
	$	14,649	$	34	$	(250	)	$	14,433

The amortized cost, gross unrealized gains and losses, and estimated market value of mortgage-backed securities, by issuer, are summarized as follows:

	December 31, 2004
	Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair Value
	(in thousands)
Mortgage-backed securities held to maturity
FHLMC certificates	$	5,195	$	322	$	—		$	5,517
FNMA certificates	5,182		135		(41		)	5,276
GNMA certificates	4,516		230		—			4,746
Real estate mortgage investment conduit	7		—		—			7
	$	14,900	$	687	$	(41	)	$	15,546
Mortgage-backed securities available for sale
FHLMC certificates	$	6,635	$	11	$	(32	)	$	6,614
FNMA certificates	15,255		5		(152		)	15,108
Real estate mortgage investment conduit	82,129		218		(459		)	81,888
	$	104,019	$	234	$	(643	)	$	103,610

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	December 31, 2003
	Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value
	(in thousands)
Mortgage-backed securities held to maturity
FHLMC certificates	$	8,407	$	544	$	—		$	8,951
FNMA certificates	7,205		211		(50		)	7,366
GNMA certificates	8,007		440		—			8,447
Real estate mortgage investment conduit	11		—		(1		)	10
Other mortgage-backed securities	—		—		—			—
	$	23,630	$	1,195	$	(51	)	$	24,774
Mortgage-backed securities available for sale
FHLMC certificates	$	8,523	$	23	$	(21	)	$	8,525
FNMA certificates	18,522		14		(151		)	18,385
GNMA certificates	—		—		—			—
Real estate mortgage investment conduit	80,147		504		(787		)	79,864
	$	107,192	$	541	$	(959	)	$	106,774

Gross realized gains were $0, $725,000, and $1,190,000 for the years ended December 31, 2004, 2003 and 2002, respectively. These gains resulted from the sale of investment and mortgage-backed securities of $0, $22.6 million, and $37.2 million for the years ended December 31, 2004, 2003 and 2002, respectively.

Gross realized losses were $0, $517,000, and $0 for the years ended December 31, 2004, 2003 and 2002, respectively. These losses resulted from the sale of investment and mortgage-backed securities of $0, $72.4 million, and $0 for the years ended December 31, 2004, 2003 and 2002 respectively.

The amortized cost and fair value of investment and mortgage-backed securities, by contractual maturity, are shown below.

	December 31, 2004
	Available for sale				Held to maturity
	Amortized cost		Fair value		Amortized cost		Fair value
	(in thousands)
Investment securities
Due in one year or less	$	—	$	—	$	3,668	$	3,725
Due after one year through five years	3,978		3,950		3,144		3,247
Due after five years through 10 years	3,855		3,871		—		—
Due after 10 years	9,849		9,804		215		216
	17,682		17,625		7,027		7,188
Mortgage-backed securities	104,019		103,610		14,900		15,546
	$	121,701	$	121,235	$	21,927	$	22,734

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Investment securities having an aggregate amortized cost of approximately $3.0 million were pledged to secure public deposits at December 31, 2004 and 2003.

There were no securities held other than U.S. Government and agencies from a single issuer that represented more than 10% of stockholders’ equity.

The table below indicates the length of time individual securities, both held-to-maturity and available-for-sale, have been in a continuous unrealized loss position at December 31, 2004:

Description of Securities	Number of Securities	Less than 12 months					12 months or longer					Total
		Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair value		Unrealized Loss
	(on thousands)
U.S. Government and federal agencies	1	$	—	$	—		$	2,957	$	(20	)	$	2,957	$	(20	)
Corporate debt securities	1	—		—			993		(8		)	993		(8		)
State and political subdivisions	7	—		—			5,092		(150		)	5,092		(150		)
MBS	25	22,901		(130		)	46,367		(554		)	69,268		(684		)
Total temporarily impaired securities	34	$	22,901	$	(130	)	$	55,409	$	(732	)	$	78,310	$	(862	)

Management has attributed interest rate fluctuations as the underlying factor causing the decline in fair value of these securities. Management maintains the intent and ability to hold such securities until maturity at which point the market value of the security will no longer reflect impairment. Accordingly, management has concluded that there are no securities that are other-than-temporarily impaired as of December 31, 2004.

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NOTE D—LOANS RECEIVABLE

Loans receivable are summarized as follows:

	December 31,
	2004			2003
	(in thousands)
First mortgage loans (principally conventional)
Secured by one-to-four family residences	$	284,645		$	276,849
Secured by other non-residential properties	83,559			74,109
Construction loans	10,286			6,591
	378,490			357,549
Net deferred loan origination costs and unamortized premiums	700			903
Total first mortgage loans	379,190			358,452
Other loans
Commercial non-real estate	30,543			15,185
Home equity and second mortgage	29,522			25,199
Commercial leases	857			1,371
Other	4,384			6,532
	65,306			48,287
Unamortized premiums	6			21
Total other loans	65,312			48,308
Less allowance for loan losses	(2,307		)	(2,111		)
Total loans receivable	$	442,195		$	404,649

Activity in the allowance for loan losses is summarized as follows:

	December 31,
	2004			2003			2002
	(in thousands)
Balance at beginning of year	$	2,111		$	2,047		$	1,972
Provision charged to income	600			330			988
Charge-offs, net	(404		)	(266		)	(913		)
Balance at end of year	$	2,307		$	2,111		$	2,047

Non-performing loans, which include non-accrual loans for which the accrual of interest has been discontinued and loan balances past due over 90 days that are not on a non-accrual status but that management expects will eventually be paid in full, totaled approximately $960,000 and $2.3 million at December 31, 2004 and 2003, respectively. Interest income that would have been recorded under the original terms of such loans totaled approximately $30,000, $171,000, and $307,000 for the years ended

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December 31, 2004, 2003 and 2002, respectively. No interest income has been recognized on non-accrual loans for any of the periods presented.

The Bank has no concentration of loans to borrowers engaged in similar activities that exceeded 10% of loans at December 31, 2004 and 2003. In the ordinary course of business, the Bank has granted loans to certain executive officers, directors and their related interests. Related party loans are made on substantially the same terms as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than the normal risk of collectibility. The aggregate dollar amount of these loans was approximately $82,000, and $1,291,000 at December 31, 2004 and 2003, respectively. For the year ended December 31, 2004, principal repayments of approximately $1,209,000 were received.

NOTE E—LOAN SERVICING

Mortgage loans serviced for others are not included in the accompanying consolidated statements of financial position. The unpaid principal balances of these loans are summarized as follows:

	December 31,
	2004		2003
	(in thousands)
Mortgage loan servicing portfolios
FHLMC	$	1,619	$	2,018
FNMA	653		—
Other investors	6,997		5,367
	$	9,269	$	7,385

Custodial balances maintained in connection with the foregoing loan servicing totaled approximately $198,000, and $80,000 at December 31, 2004 and 2003, respectively. The net servicing revenue on mortgage loans serviced for others is immaterial for all periods presented.

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NOTE F—PREMISES AND EQUIPMENT

Premises and equipment are summarized as follows:

	Estimated useful lives	December 31,
		2004		2003
		(in thousands)
Buildings	30 years	$	6,063	$	6,046
Leasehold improvements	5 years	1,429		1,266
Furniture, fixtures and equipment	3-7 years	9,398		8,932
		16,890		16,244
Less accumulated depreciation		12,619		11,668
		4,271		4,576
Land		1,692		1,692
		$	5,963	$	6,268

NOTE G—CORE DEPOSIT INTANGIBLE ASSET

Core deposit intangible amortization for each of the years subsequent to December 31, 2004 is estimated to be as follows:

Year ending December 31,	(in thousands)
2005	$	129
2006	84
	$	213

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NOTE H—DEPOSITS

Deposits are summarized as follows:

	December 31,
Deposit type	2004		2003
	(in thousands)
Demand	$	32,636	$	26,375
NOW	54,887		52,647
Money Market	42,496		44,688
Passbook savings	182,945		188,673
Total demand, transaction and passbook deposits	312,964		312,383
Certificates of deposit	146,939		146,960
	$	459,903	$	459,343

The aggregate amount of certificates of deposit with a minimum denomination of $100,000 was approximately $26.6 million and $22.2 million at December 31, 2004 and 2003, respectively. The Bank had no broker-originated certificates of deposit at December 31, 2004 and 2003.

At December 31, 2004, scheduled maturities of certificates of deposit are as follows:

Year ending December 31,
2005		2006		2007		2008		2009		Thereafter		Total
(in thousands)
$	101,730	$	14,896	$	14,776	$	5,651	$	9,595	$	291	$	146,939

NOTE I—ADVANCES FROM THE FEDERAL HOME LOAN BANK AND OTHER BORROWINGS

Advances from the Federal Home Loan Bank consist of the following:

	December 31,
	2004				2003
Principal payments due during	Amount		Weighted average rate		Amount		Weighted average rate
	(in thousands)				(in thousands)
2004	$	—	—	%	22,268		2.38
2005	23,448		2.90		12,787		3.23
2006	15,237		3.32		13,206		3.23
2007	15,750		3.32		13,639		3.23
2008	16,280		3.32		9,340		3.23
Thereafter	32,032		3.64		15,613		3.23
	$	102,747	3.32	%	$	86,853	3.01	%

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The advances are collateralized by Federal Home Loan Bank stock and certain first mortgage loans and mortgage-backed securities. At December 31, 2004 principal payments due during 2005 included $8.7 million at a daily variable interest rate of 2.21%, pursuant to a line of credit agreement with the Federal Home Loan Bank. Unused lines of credit at the Federal Home Loan Bank were $21.3 million at December 31, 2004.

NOTE J—BENEFIT PLANS

The Bank maintains a 401(k) profit-sharing plan for eligible employees. Participants may contribute up to 15% of pretax eligible compensation. The Bank makes matching discretionary contributions equal to 75% of the initial $1,000 deferral. Contributions to the 401(k) plan totaled $65,000, $58,000, and $52,000 in 2004, 2003 and 2002, respectively.

The Bank has a non-contributory defined benefit pension plan covering substantially all full-time employees meeting certain eligibility requirements. The benefits are based on each employee’s years of service and an average earnings formula. An employee becomes fully vested upon completion of five years of qualifying service. It is the policy of the Bank to fund the maximum amount allowable under the individual aggregate cost method to the extent deductible under existing federal income tax regulations.

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The following tables sets forth the projected benefit obligation, funded status of the defined benefit pension plan and the amounts reflected in the consolidated statements of financial position, and fair value of assets of the plan.

	December 31,
	2004			2003
	(in thousands)
Reconciliation of Projected Benefit Obligation
Benefit obligation at beginning of year	$	3,028		$	2,612
Service cost	230			191
Interest cost	190			185
Plan amendments	—			—
Actuarial loss	304			388
Benefits paid	(370		)	(348		)
Benefits obligation at end of year	$	3,382		$	3,028
Reconciliation of Fair Value of Assets
Fair value of plan assets at beginning of year	$	2,768		$	2,726
Actual return on plan assets	62			390
Employer contribution	30			—
Benefits paid	(370		)	(348		)
Fair value of plan assets at end of year	$	2,490		$	2,768
Reconciliation of Funded Status
Funded status	$	(892	)	$	(260	)
Unrecognized transition obligation	—			4
Unrecognized net actuarial loss	954			527
Unrecognized prior service cost	219			281
Prepaid benefit cost at end of year	$	281		$	552

The accumulated benefit obligation at December 31, 2004 and 2003 was $2,815,949 and $2,511,106 respectively.

39

Employer contributions and benefits paid in the above table include only those amounts contributed directly to, or paid directly from, plan assets. The expected employer contribution for 2005 is $341,328.

	2004		2003
Weighted-average assumptions used to determine benefit obligations, end of year
Discount rate	6.00	%	6.25	%
Rate of compensation increase	4.00		4.00

	2004			2003			2002
Components of net periodic benefit cost
Service cost	$	230		$	191		$	172
Interest cost	190			185			163
Expected return on plan assets	(210		)	(217		)	(185		)
Amortization of prior service cost	63			63			63
Amortization of transition obligation (asset)	4			4			4
Recognized net actuarial (gain) loss	24			13			—
Net periodic benefit cost	$	301		$	239		$	217

	2004		2003		2002
Weighted-average assumptions used to determine net benefit costs as of December 31
Discount rate	6.25	%	6.75	%	7.00	%
Expected return on plan assets	8.00		8.00		8.00
Rate of compensation increase	4.00		4.00		4.00

The long-term rate of return on assets was developed through analysis of historical market returns, current market conditions and the fund’s past experience. Estimates of future market returns by asset category are lower than actual long-term historical returns in order to reflect current market conditions.

Estimated future benefits payments are as follows:

	(in thousands)
2005	$	300
2006	326
2007	54
2008	73
2009	105
2010-2014	733

40

The Company’s pension plan weighted-average asset allocations by asset category is as follows:

	Percentage of Plan Assets at Year End
	2004		2003
Asset Category
Equity securities	57	%	41	%
Debt securities	26	%	14	%
Cash	—		45	%
Other	17	%	—
Total	100	%	100	%

Trustees of the Retirement Plan of the Bank are responsible for defining and implementing the investment objectives and policies for the Plan’s assets. Assets are invested in accordance with sound investment practices that emphasize long-term investment fundamentals that closely match the demographics of the plan’s participants. The Plan’s goal is to earn long-term returns that match or exceed the benefit obligations of the Plan through a well-diversified portfolio structure. The Plan’s return objectives and risk parameters are managed through a diversified mix of assets. The asset mix and investment strategy are reviewed on a quarterly basis and rebalanced when necessary. The asset allocation for the Plan is targeted at 60% equity securities and 40% debt securities.

The Company also maintains the following benefit plans:

1.  Employee Stock Ownership Plan

The Company has an internally leveraged ESOP for eligible employees who have completed six months of service with the Company or its subsidiaries. The ESOP borrowed $4.2 million from the Company in 1996 to purchase 423,200 newly issued shares of common stock. The Company makes discretionary contributions to the ESOP in order to service the ESOP’s debt. Any dividends received by the ESOP will be used to pay debt service. The ESOP shares are pledged as collateral for its debt. As the debt is repaid, shares are released from collateral and allocated to qualifying employees based on the proportion of debt service paid in the year. The Company accounts for its ESOP in accordance with SOP 93-6. As shares are released from collateral, the Company reports compensation expense equal to the current market price of the shares, and the allocated shares are included in outstanding shares for earnings per share computations. ESOP compensation expense was $431,000, $523,000, and $197,000 in 2004, 2003 and 2002, respectively.

	2004		2003
Allocated shares	158,300		144,600
Unreleased shares	200,700		218,400
Total ESOP shares	359,000		363,000
Fair value of unreleased shares(in thousands)	$	6,422	$	7,472

41

2.  Stock Option Plans

A summary of the status of the Company’s fixed stock option plans as of December 31, 2004, and changes for each of the years in the three-year period then ended is as follows:

	2004				2003				2002
	Number of shares		Weighted average exercise price per share		Number of shares		Weighted average exercise price per share		Number of Shares		Weighted Average Exercise price per Share
Outstanding at beginning of year	585,714		$	15.40	658,973		$	14.11	652,443		$	13.52
Options granted	—		—		40,248		32.42		32,150		24.77
Options exercised	(294,925	)	11.56		(92,902	)	12.34		(21,338	)	11.66
Options forfeited	(7,717	)	26.75		(20,605	)	21.09		(4,282	)	15.93
Outstanding at end of year	283,072		$	19.09	585,714		$	15.40	658,973		$	14.11

The following table summarizes information about stock options outstanding at December 31, 2004:

	Options outstanding				Options exercisable
Range of exercise prices	Number outstanding at December 31, 2004	Weighted average remaining contractual life (years)	Weighted average exercise price		Number exercisable at December 31, 2004	Weighted average exercise price
$10.83-14.99	71,409	3.02 years	$	14.37	65,795	$	14.42
$15.00-17.99	128,713	2.06 years	16.48		128,713	16.48
$18.00-23.49	23,521	6.00 years	20.28		17,117	20.27
$23.50-34.14	59,429	8.09 years	29.92		19,228	28.73

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NOTE K—INCOME TAXES

The components of income tax expense (benefit) are summarized as follows:

	Year ended December 31,
	2004		2003			2002
	(in thousands)
Federal
Current	$	508	$	(4,364	)	$	1,623
Charge in lieu of income tax relating to stock compensation	1,616		379			—
Deferred	343		596			(19		)
	2,467		(3,389		)	1,604
State and local—current	—		5			1
Income tax provision	$	2,467	$	(3,384	)	$	1,605

The Company’s effective income tax rate was different than the statutory federal income tax rate as follows:

	Year ended December 31,
	2004		2003		2002
Statutory federal income tax (benefit)	34.0	%	(34.0	)%	34.0	%
Increase (decrease) resulting from
Tax-exempt income	(3.7	)	(2.6	)	(8.3	)
State tax, net of federal benefit	0.0		(0.0	)	0.0
Other	(3.0	)	(0.1	)	(1.7	)
	27.3	%	(36.7	)%	24.0	%

43

Deferred taxes are included in the accompanying consolidated statements of financial position at December 31, 2004 and 2003, for the estimated future tax effects of differences between the financial statement and federal income tax bases of assets and liabilities according to the provisions of currently enacted tax laws. No valuation allowance was recorded against deferred tax assets at December 31, 2004 and 2003. The Company’s net deferred tax asset (liability) at December 31, 2004 and 2003, was composed of the following:

	December 31,
	2004		2003
	(in thousands)
Deferred tax assets
Deferred compensation	$	277	$	230
Allowance for loan losses, net	784		650
Amortization of goodwill	—		70
Unrealized loss on securities available for sale	158		215
Minimum pension liability adjustment	37		—
Other	9		3
	1,265		1,168
Deferred tax liabilities
Accrued pension expense	399		492
Prepaid expenses	51		—
Deferred loan costs	391		—
Amortization of goodwill	93		—
Other	290		272
	1,224		764
Net deferred tax asset	$	41	$	404

During 2003 and 2004 the Company filed its income tax returns on the basis of a fiscal tax year ending June 30. Effective July 1, 2004, the Company changed the tax year end to coincide with the fiscal reporting period end of December 31.

The Bank is required, beginning in 1998, to recapture approximately $2.4 million of its total tax bad debt reserve of approximately $8.1 million into taxable income over a six-year period. Deferred tax liabilities have been accrued in respect of the amount of the reserve to be recaptured.

The Bank is not required to recapture approximately $5.7 million of its tax bad debt reserve, attributable to bad debt deductions taken by it prior to 1988, as long as the Bank continues to operate as a bank under federal tax law and does not use the reserve for any other purpose. In accordance with SFAS No. 109, the Bank has not recorded any deferred tax liability on this portion of its tax bad debt reserve. The tax that would be paid were the Bank ultimately required to recapture that portion of the reserve would amount to approximately $1.9 million.

44

NOTE L—REGULATORY MATTERS

The Bank is subject to minimum regulatory capital standards promulgated by the Office of Thrift Supervision (OTS). Failure to meet minimum capital requirements can initiate certain mandatory—and possible additional discretionary—actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Such minimum capital standards generally require the maintenance of regulatory capital sufficient to meet each of three tests, hereinafter described as the tangible capital requirement, the core capital requirement and the risk-based capital requirement. The tangible capital requirement provides for minimum tangible capital (defined as stockholders’ equity less all intangible assets) equal to 1.5% of adjusted total assets. The core capital requirement provides for minimum core capital (tangible capital plus certain forms of supervisory goodwill and other qualifying intangible assets) equal to 4% of adjusted total assets at December 31, 2004.

As of December 31, 2004, management believes that the Bank met all capital adequacy requirements to which it was subject.

	Regulatory capital December 31, 2004
	Tangible					Core					Risk-based
	Capital			Percent		Capital			Percent		Capital			Percent
	(in thousands)
Capital under generally accepted accounting principles	$	55,143		8.81	%	$	55,143		8.81	%	$	55,143		16.30	%
Unrealized loss on certain available-for-sale securities	307			0.04		307			0.04		307			0.09
Goodwill and other intangible assets	(4,537		)	(0.72	)	(4,537		)	(0.72	)	(4,537		)	(1.34	)
Additional capital items
General valuation allowances—limited	—			—		—			—		2,104			0.62
Regulatory capital computed	50,913			8.13		50,913			8.13		53,017			15.67
Minimum capital requirement	9,390			1.50		25,041			4.00		27,060			8.00
Regulatory capital—excess	$	41,523		6.63	%	$	25,872		4.13	%	$	25,957		7.67	%

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	Regulatory capital December 31, 2003
	Tangible					Core					Risk-based
	Capital			Percent		Capital			Percent		Capital			Percent
	(in thousands)
Capital under generally accepted accounting principles	$	48,241		8.00	%	$	48,241		8.00	%	$	48,241		15.15	%
Unrealized loss on certain available-for-sale securities	418			0.07		418			0.07		418			0.13
Goodwill and other intangible assets	(4,692		)	(0.78	)	(4,692		)	(0.78	)	(4,692		)	(1.47	)
Additional capital items
General valuation allowances—limited	—			—		—			—		2,111			0.66
Regulatory capital computed	43,967			7.29		43,967			7.29		46,078			14.47
Minimum capital requirement	9,047			1.50		24,127			4.00		25,483			8.00
Regulatory capital—excess	$	34,920		5.79	%	$	19,840		3.29	%	$	20,595		6.47	%

At December 31, 2004, the Bank met all regulatory requirements for classification as a “well-capitalized” institution. A “well-capitalized” institution must have risk-based capital of 10% and core capital of 5%. The Bank’s capital exceeded the minimum required amounts for classification as a “well-capitalized” institution. There are no conditions or events that have occurred that management believes have changed the Bank’s classification as a “well-capitalized” institution.

The Bank maintains a liquidation account for the benefit of eligible savings account holders who maintained deposit accounts in the Bank after the Bank converted to a stock form of ownership. The Bank may not declare or pay a cash dividend on or repurchase any of its common shares if the effect thereof would cause the Bank’s stockholders’ equity to be reduced below either the amount required for the liquidation account or the regulatory capital requirements for insured institutions.

NOTE M—FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments are primarily commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the consolidated financial statements when they become receivable or payable. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statements of financial position. The contract or notional amounts of those instruments reflect the extent of the Bank’s involvement in particular classes of financial instruments.

The Company’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

46

Unless noted otherwise, the Company requires collateral to support financial instruments with credit risk.

Financial instruments, the contract amounts of which represent credit risk, are as follows:

	December 31,
	2004		2003
	(in thousands)
Commitments to extend credit	$	73,330	$	74,716
Standby letters of credit	1,201		1,276
Loans sold with recourse	109		113
	$	74,640	$	76,105

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if it is deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the borrower. Collateral held generally includes residential and some commercial real estate.

Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.

NOTE N—COMMITMENTS AND CONTINGENCIES

The Bank had optional commitments of $1,069,000 and $0 to sell mortgage loans to investors at December 31, 2004 and 2003 respectively.

The Bank leases branch facilities and office space for periods ranging up to seven years. These leases are classified as operating leases and contain options to renew for additional periods. Rental expense was approximately $359,000 $304,000, and $279,000, for the years ended December 31, 2004, 2003 and 2002, respectively.

47

The minimum annual rental commitments of the Bank under all non-cancelable leases with terms of one year or more are as follows:

Year ending December 31,	(in thousands)
2005	$	265
2006	219
2007	162
2008	107
2009	33
Thereafter	—
	$	786

The Company has agreements with certain key executives that provide severance pay benefits if there is a change in control of the Company. The agreements will continue in effect until terminated or not renewed by the Company or key executives. Upon a change in control, the Company shall make a lump-sum payment or continue to pay the key executives’ salaries per the agreements, and reimburse the executive for certain benefits for one year. The maximum contingent liability under the agreements at December 31, 2004 was approximately $1,683,000.

From time to time, the Company and its subsidiaries are parties to routine litigation that arises in the normal course of business. In the opinion of management, the resolution of these lawsuits would not have a material adverse effect on the Company’s consolidated financial position or results of operations.

NOTE O—SIGNIFICANT CONCENTRATIONS OF CREDIT RISK

The Bank is principally engaged in originating and investing in one-to-four family residential real estate and commercial real estate loans in eastern Pennsylvania and New Jersey. The Bank offers both fixed and adjustable rates of interest on these loans that have amortization terms ranging to 30 years. The loans are generally originated or purchased on the basis of an 80% loan-to-value ratio, which has historically provided the Bank with more than adequate collateral coverage in the event of default. Nevertheless, the Bank, as with any lending institution, is subject to the risk that residential real estate values in the primary lending area will deteriorate, thereby potentially impairing collateral values in the primary lending area. However, management believes that residential and commercial real estate values are presently stable in its primary lending area and that loan loss allowances have been provided for in amounts commensurate with its current perception of the foregoing risks in the portfolio.

NOTE P—FAIR VALUE OF FINANCIAL INSTRUMENTS

SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” requires all entities to disclose the estimated fair value of their assets and liabilities considered to be financial instruments. For the Bank, as for most financial institutions, the majority of its assets and liabilities are considered financial instruments as defined in SFAS No. 107. However, many such instruments lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange

48

transaction. Also, it is the Company’s general practice and intent to hold its financial instruments to maturity or available for sale and to not engage in trading or significant sales activities. Therefore, the Company and the Bank had to use significant estimations and present value calculations to prepare this disclosure.

Changes in the assumptions or methodologies used to estimate fair values may materially affect the estimated amounts. Also, management is concerned that there may not be reasonable comparability between institutions due to the wide range of permitted assumptions and methodologies in the absence of active markets. This lack of uniformity gives rise to a high degree of subjectivity in estimating financial instrument fair values.

Fair values have been estimated using data which management considered the best available, as generally provided by estimation methodologies deemed suitable for the pertinent category of financial instrument. The estimation methodologies, resulting fair values and recorded carrying amounts are as follows:

Fair value of loans and deposits with floating interest rates is generally presumed to approximate the recorded carrying amounts.

Fair value of financial instruments actively traded in a secondary market has been estimated using quoted market prices.

	December 31,
	2004				2003
	Fair value		Carrying value		Fair value		Carrying value
	(in thousands)
Cash and cash equivalents	$	7,900	$	7,900	$	8,241	$	8,241
Investment securities	24,813		24,652		25,248		24,822
Mortgage-backed securities	119,156		118,510		131,548		130,404

The fair value of financial instruments with stated maturities has been estimated using the present value of cash flows, discounted at rates approximating current market rates for similar assets and liabilities.

	December 31,
	2004				2003
	Fair value		Carrying value		Fair Value		Carrying value
	(in thousands)
Assets
Certificates of deposit	$	38	$	38	$	155	$	155
Liabilities
Deposits with stated maturities	145,933		146,939		147,937		146,960
Borrowings with stated maturities	101,504		102,747		86,618		86,853

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The fair value of financial instrument liabilities with no stated maturities is generally presumed to approximate the carrying amount (the amount payable on demand).

	December 31,
	2004				2003
	Fair value		Carrying Value		Fair value		Carrying value
	(in thousands)
Deposits with no stated maturities	$	312,964	$	312,964	$	312,383	$	312,383

The fair value of the net loan portfolio has been estimated using the present value of cash flows, discounted at the approximate current market rates, and giving consideration to estimated prepayment risk and credit loss factors.

	December 31,
	2004				2003
	Fair value		Carrying value		Fair value		Carrying value
	(in thousands)
Net loans	$	445,457	$	442,195	$	412,741	$	404,649

The fair value of commitments to extend credit is estimated based on the amount of unamortized deferred loan commitment fees. The fair value of letters of credit is based on the amount of unearned fees plus the estimated cost to terminate the letters of credit. Fair values of unrecognized financial instruments including commitments to extend credit and the fair value of letters of credit are considered immaterial.

The Bank’s remaining assets and liabilities are not considered financial instruments. No disclosure of the relationship value of the Bank’s deposits is required by SFAS No. 107.

50

NOTE Q—SERVICE FEES, CHARGES AND OTHER OPERATING INCOME AND OTHER OPERATING EXPENSE

	Year ended December 31,
	2004		2003		2002
	(in thousands)
Service fees, charges and other operating income
Loan servicing fees	$	331	$	358	$	338
Late charge income	90		100		99
Deposit service charges	1,092		923		750
Bank-owned life insurance value increase	525		553		520
Other income	562		438		407
	$	2,600	$	2,372	$	2,114
Other operating expense
Insurance and surety bond	$	190	$	180	$	146
Office supplies	220		234		192
Loan expense	444		491		272
MAC expense	315		307		315
Postage	237		299		299
Telephone	273		283		262
Supervisory examination fees	130		147		148
Other expenses	738		906		702
	$	2,547	$	2,847	$	2,336

NOTE R—SHAREHOLDER RIGHTS PLAN

The Company adopted a Shareholder Rights Plan (the Rights Plan) to protect shareholders from attempts to acquire control of the Company at an inadequate price. Under the Rights Plan, the Company distributed a dividend of one Preferred Share Purchase Right (a Right) for each share of outstanding common stock. The rights are currently not exercisable and will expire on November 22, 2005, unless the expiration date is extended or unless the Company earlier redeems the Rights.

After the Rights become exercisable, under certain circumstances, the Rights (other than rights held by a 15% beneficial owner or an “acquiring person”) will entitle the holders to purchase one one-hundredth of a share of a new series of junior participating preferred stock at an exercise price of $45 or purchase either the Company’s common shares or the common shares of the potential acquirer at a substantially reduced price.

The Company is entitled to redeem the Rights at $0.01 per Right prior to the acquisition by a person or group of beneficial ownership of 15% or more of the Company’s common stock. Following the acquisition by a person or group of beneficial ownership of 15% or more of the Company’s common stock and prior to an acquisition of 50% or more, the Board of Directors may exchange the Rights (other than Rights owned by such person or group), in whole or in part, at an exchange ratio of

51

one share of common stock (or one one-hundredth of a share of the new series of junior participating preferred stock) per Right.

The Rights Plan was not adopted in response to any specific effort to acquire control of the Company. The issuance of rights has no dilutive effect, does not affect the Company’s reported earnings per share, and was not taxable to the Company or its shareholders.

NOTE S—EARNINGS PER SHARE

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

	Year ended December 31, 2004
	Income (numerator)		Weighted average shares (denominator)	Per share Amount
Basic earnings (loss) per share
Income (loss) available to common stockholders	$	6,567	2,686,732	$	2.44
Effect of dilutive securities
Stock options	—		136,518	(0.11		)
Diluted earnings (loss) per share
Income available to common stockholders plus effect of dilutive securities	$	6,567	2,823,250	$	2.33

There were options to purchase 30,029 shares of common stock at a price of $34.14 per share which were outstanding during 2004 that were not included in the computation of diluted earnings per share because the options’ exercise prices were greater than the average market price of the common shares.

	Year ended December 31, 2003
	Income (numerator)			Weighted average shares (denominator)	Per share Amount
Basic earnings per share
Income available to common stockholders	$	(5,834	)	2,541,677	$	(2.30	)
Effect of dilutive securities
Stock options	—			—	—
Diluted earnings per share
Income available to common stockholders plus effect of dilutive securities	$	(5,834	)	2,541,677	$	(2.30	)

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	Year ended December 31, 2002
	Income (numerator)		Weighted average shares (denominator)	Per share amount
Basic earnings per share
Income available to common stockholders	$	5,092	2,473,044	$	2.06
Effect of dilutive securities
Stock options	—		175,144	(0.15		)
Diluted earnings per share
Income available to common stockholders plus effect of dilutive securities	$	5,092	2,648,188	$	1.91

There were options to purchase 27,150 shares of common stock at a range of $25.35 to $28.00 per share which were outstanding during 2002 that were not included in the computation of diluted earnings per share because the options’ exercise prices were greater than the average market price of the common shares.

NOTE T—SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATE (UNAUDITED)

	Three months ended
	Dec. 31, 2004		Sept. 30, 2004		June 30, 2004		March 31, 2004
	(in thousands, except per share data)
Total interest income	$	7,848	$	7,868	$	7,775	$	7,730
Total interest expense	2,349		2,214		2,151		2,152
Net interest income	5,499		5,654		5,624		5,578
Provision for possible loan losses	150		150		150		150
Net interest income after provision	5,349		5,504		5,474		5,428
Other income	623		595		681		709
Other expenses	3,800		3,743		3,869		3,917
Income before income taxes	2,172		2,356		2,286		2,220
Income taxes	584		642		630		611
Net income	$	1,588	$	1,714	$	1,656	$	1,609
Earnings per share—basic	$	0.58	$	0.64	$	0.62	$	0.61
Earnings per share—assuming dilution	$	0.56	$	0.61	$	0.58	$	0.57

53

	Three months ended
	Dec. 31, 2003		Sept. 30, 2003			June 30, 2003		March 31, 2003
	(in thousands, except per share data)
Total interest income	$	7,729	$	7,835		$	8,156	$	8,657
Total interest expense	2,188		3,716			4,525		4,823
Net interest income	5,541		4,119			3,631		3,834
Provision for possible loan losses	60		90			90		90
Net interest income after provision	5,481		4,029			3,541		3,744
Other income	636		322			648		1,084
Other expenses	3,887		17,478			3,599		3,739
Income before income taxes	2,230		(13,127		)	590		1,089
Income tax (benefit)	714		(4,562		)	154		310
Net income (loss)	$	1,516	$	(8,565	)	$	436	$	779
Earnings (loss) per share—basic	$	0.59	$	(3.33	)	$	0.17	$	0.31
Earnings (loss) per share—assuming dilution	$	0.54	$	(3.33	)	$	0.16	$	0.29

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NOTE U—CONDENSED FINANCIAL INFORMATION—PARENT COMPANY ONLY

Condensed financial information for TF Financial Corporation (parent company only) follows:

BALANCE SHEET

	December 31,
	2004		2003
	(in thousands)
ASSETS
Cash	$	4,630	$	4,953
Certificates of deposit—other institutions	38		155
Investment in Third Federal	53,054		46,597
Investment in TF Investments	2,347		2,321
Investment in Teragon	—		7
Investment in Penns Trail Development	1,001		1,010
Other assets	121		488
Total assets	$	61,191	$	55,531
LIABILITIES AND STOCKHOLDERS’ EQUITY
Total liabilities	$	36	$	51
Stockholders’ equity	61,155		55,480
Total liabilities and stockholders’ equity	$	61,191	$	55,531

STATEMENT OF OPERATIONS

	Year ended December 31,
	2004		2003			2002
	(in thousands)
INCOME
Equity in earnings of subsidiaries	$	6,906	$	(5,556	)	$	5,269
Interest and dividend income	74		99			110
Total income (loss)	6,980		(5,457		)	5,379
EXPENSES
Other	413		377			287
Total expenses	413		377			287
NET INCOME (LOSS)	$	6,567	$	(5,834	)	$	5,092

55

STATEMENT OF CASH FLOWS

	Year ended December 31,
	2004			2003			2002
	(in thousands)
Cash flows from operating activities
Net income (loss)	$	6,567		$	(5,834	)	$	5,092
Adjustments to reconcile net income to net cash provided by (used in) operating activities
Equity in (earnings) loss of subsidiaries	(6,906		)	5,556			(5,269		)
Net change in assets and liabilities	357			(147		)	(64		)
Net cash provided by (used in) operating activities	18			(425		)	(241		)
Cash flows from investing activities
Capital distribution from subsidiaries	2,622			—			5,853
Capital contribution to subsidiary	—			—			(750		)
Purchase and maturities of certificates of deposit in other financial institutions, net	117			65			(26		)
Net cash provided by investing activities	2,739			65			5,077
Cash flows from financing activities
Cash dividends paid to stockholders	(1,765		)	(1,518		)	(1,484		)
Treasury stock acquired	(4,725		)	—			(376		)
Exercise of stock options	3,410			1,148			249
Net cash used in financing activities	(3,080		)	(370		)	(1,611		)
NET INCREASE (DECREASE) IN CASH	(323		)	(730		)	3,225
Cash at beginning of year	4,953			5,683			2,458
Cash at end of year	$	4,630		$	4,953		$	5,683
Supplemental disclosure of cash flow information
Cash paid during the year for income taxes	$	—		$	—		$	—

56

EX-21.0

EXHIBIT 21

SUBSIDIARIES OF THE REGISTRANT

Parent

TF Financial Corporation

Subsidiaries	Percentage Owned		Jurisdiction of Incorporation
Third Federal Bank (a)	100	%	United States
TF Investments Corporation (a)	100	%	Delaware
Teragon Financial Corporation (a)(b)	100	%	Pennsylvania
Penns Trail Development Corporation (a)	100	%	Delaware
Third Delaware Corporation (a) (b)	100	%	Delaware

(a)The operations of this subsidiary are included in the consolidated financial statements contained in the 2004 Annual Report to Stockholders incorporated herein by reference.

(b)Third Delaware Corporation  and Teragon Financial Corporation are a wholly-owned subsidiaries of Third Federal Bank.

1

EX-23.0

EXHIBIT 23.0

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We have issued our report dated March 25, 2005, accompanying the consolidated financial statements  incorporated by reference or included in the Annual Report of TF Financial Corporation on Form 10-K for the year ended December 31, 2004.  We hereby consent to the incorporation by reference of said report in the Registration Statements of TF Financial Corporation on Form S-8 (File No. 33-87176, effective December 7, 1994, File No. 333-09235, effective July 31, 1996 and File No. 333-27085, effective May 14, 1997).

Philadelphia, Pennsylvania

March 25, 2005

EX-31

Exhibit 31.1

CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Kent C. Lufkin, President and Chief Executive Officer, certify that:

1.I have reviewed this annual report on Form 10-K of TF Financial Corporation (Registrant);

2.Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3.Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this annual report;

4.The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) for the Registrant and we have:

a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b)evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c)disclosed in this report any change in the Registrant’s internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) that occurred during the Registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5.The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and to the audit committee of the Registrant’s board of directors:

a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

b)any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

Date:	March 28, 2005	/s/ Kent C. Lufkin
		Kent C. Lufkin
		President and Chief Executive Officer
		(Principal Executive Officer)

Exhibit 31.2

CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Dennis R. Stewart, Executive Vice President and Chief Financial Officer, certify that:

1.I have reviewed this annual report on Form 10-K of TF Financial Corporation (Registrant);

2.Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3.Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this annual report;

4.The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) for the Registrant and we have:

a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b)evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c)disclosed in this report any change in the Registrant’s internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) that occurred during the Registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5.The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and to the audit committee of the Registrant’s board of directors:

a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

b)any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

Date:	March 28, 2005	/s/ Dennis R. Stewart
		Dennis R. Stewart
		Executive Vice President and Chief Financial Officer
		(Principal Financial & Accounting Officer)

EX-32.0

EXHIBIT 32.0

CERTIFICATION PURSUANT TO

18 U.S.C. ‘ 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 10-K for the year ended December 31, 2004 (the “Report”) of TF Financial Corporation (the “Company”) as filed with the Securities and Exchange Commission, we, Kent C. Lufkin, President and Chief Executive Officer, and Dennis R. Stewart, Executive Vice President and Chief Financial Officer (Principal Accounting Officer), hereby certify, pursuant to 18 U.S.C. ‘1350, as adopted pursuant to ‘906 of the Sarbanes-Oxley Act of 2002, that:

(1)           The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and

(2)           The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Kent C. Lufkin	/s/ Dennis R. Stewart
Kent C. Lufkin	Dennis R. Stewart
President and Chief Executive Officer	Executive Vice President and Chief Financial Officer
March 28, 2005