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, 2005
- 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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  YES o  NO ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.  YES oNO ý

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.  ý

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-acclereated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o Accelerated filer o Non-accelerated filer ý

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).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, 2005, was $58.5 million (2,086,865 shares at $28.01 per share).

As of March 7, 2006 there were outstanding 2,877,440 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, 2005.  (Parts I, II and IV)

2.             Portions of the Proxy Statement for the 2006 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, 2005, the Company had total assets of $661 million, total liabilities of $598 million and stockholders’ equity of $63 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, 2005 the Bank operated fifteen branch offices and one loan production office in Bucks and Philadelphia counties, Pennsylvania and in Mercer County, New Jersey.

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, 2005, one-to-four family residential mortgage loans totaled $290 million or 59% of the Bank’s total loan portfolio.  At that same date, the Bank had

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approximately $94 million or 14% of total assets invested in mortgage-backed securities and $35 million or 5% 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 a 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 fifteen 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. Seven 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.  Based upon the latest available data, at June 30, 2005 the Company’s share of deposits in each of the counties in which it operates was as follows:

County, State	Market Share for Entire County		Market Share for ZIP Codes Including Company Branches
Philadelphia, Pennsylvania	0.9	%	10.9	%
Bucks, Pennsylvania	1.6	%	6.7	%
Mercer, New Jersey	0.9	%	4.8	%

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, 2005, the Bank’s mortgage loans outstanding were $404 million, of which $290 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, 17% were ARM’s and 83% were fixed-rate loans.  Total ARM loans in the Bank’s portfolio at December 31, 2005 amounted to $49 million or 10% of total loans.  At that same date, commercial real estate and multi-family residential loans totaled $89 million, and construction loans totaled $25 million. The construction loans are predominately floating-rate, prime-rate-based loans.

Consumer and other loans held by the Bank totaled $40 million or 8% of total loans outstanding at December 31, 2005, of which $37 million consisted of home equity and second mortgage loans. At that same date commercial business loans and leases totaled $49 million or 10% of total loans.

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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,
	2005					2004					2003					2002					2001
	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	$	289,746		58.76	%	$	284,645		64.14	%	$	276,849		68.22	%	$	227,953		61.33	%	$	222,016	58.42	%
Commercial real estate and multi-family	89,489			18.15		83,559			18.83		74,109			18.26		85,493			23.00		93,572		24.62
Construction	24,888			5.04		10,286			2.31		6,591			1.62		12,026			3.23		9,824		2.59
Total mortgage loans	404,123			81.95		378,490			85.28		357,549			88.10		325,472			87.56		325,412		85.63
Consumer loans:
Home equity and second mortgage	37,479			7.60		29,522			6.66		25,199			6.21		25,480			6.87		25,640		6.75
Other consumer	2,836			0.58		4,384			0.99		6,532			1.61		10,490			2.82		16,154		4.25
Total consumer and other loans	40,315			8.18		33,906			7.65		31,731			7.82		35,970			9.69		41,794		11.00
Commercial loans and leases:
Commercial loans	48,471			9.83		30,543			6.88		15,185			3.74		8,005			2.15		9,285		2.44
Commercial leases	186			0.04		857			0.19		1,371			0.34		2,246			0.60		3,544		0.93
Total commercial loans and leases	48,657			9.87		31,400			7.07		16,556			4.08		10,251			2.75		12,829		3.37
Total loans	493,095			100.00	%	443,796			100.00	%	405,836			100.00	%	371,693			100.00	%	380,035		100.00	%
Less:
Unearned discount, (premium), deferred loan fees, net	(505		)			(706		)			(924		)			(446		)			428
Allowance for loan losses	2,641					2,307					2,111					2,047					1,972
Total loans, net	$	490,959				$	442,195				$	404,649				$	370,092				$	377,635
Mortgage-backed securities held-to-maturity:
FHLMC	$	3,161		31.06	%	$	5,195		34.87	%	$	8,407		35.58	%	$	21,870		40.10	%	$	35,000	37.50	%
FNMA	3,969			39.00		5,182			34.77		7,205			30.49		11,781			21.60		15,739		16.90
GNMA	3,040			29.87		4,516			30.31		8,007			33.88		18,278			33.40		29,877		32.00
Real estate investment mortgage conduit	7			0.07		7			0.05		11			0.05		2,519			4.60		12,550		13.40
Other mortgage-backed securities	—			—		—			—		—			—		144			0.30		201		0.20
Total mortgage-backed and related securities held-to-maturity	$	10,177		100.00	%	$	14,900		100.00	%	$	23,630		100.00	%	$	54,592		100.00	%	$	93,367	100.00	%
Mortgage-backed securities available-for-sale:
FHLMC	$	9,686		11.60	%	$	6,614		6.38	%	$	8,525		7.98	%	$	699		0.60	%	$	1,108	1.10	%
FNMA	12,173			14.58		15,108			14.58		18,385			17.22		11,878			10.30		22,459		22.50
GNMA	—			—		—			—		—			—		—			—		5,515		5.50
Real estate investment mortgage conduit	61,652			73.82		81,888			79.04		79,864			74.80		102,666			89.10		70,681		70.90
Total	$	83,511		100.00	%	$	103,610		100.00	%	$	106,774		100.00	%	$	115,243		100.00	%	$	99,763	100.00	%

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Loan Maturity and Repricing Information.  The following table sets forth certain information at December 31, 2005, 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, 2006, are reported as due in one year or less.  The table does not include prepayments or scheduled principal repayments.

	Due 1/1/06 - 12/31/06		Due 1/1/07 - 12/31/10		Due After 12/31/10
	(In thousands)
Available for sale:
Mortgage-backed securities	$	—	$	3,800	$	79,711
Loans receivable	—		—		68
Total	$	—	$	3,800	$	79,779
Held to Maturity:
One-to-four family	$	85	$	7,209	$	282,384
Commercial real estate and multi-family	5,368		14,368		69,753
Construction	16,353		8,535		—
Consumer and other	236		4,689		35,390
Commercial loans and leases	26,895		10,821		10,941
Total loans receivable	48,937		45,622		398,468
Mortgage-backed securities	15		1,034		9,128
Total	$	48,952	$	46,656	$	407,596

The following table sets forth the dollar amount of all loans and mortgage-backed securities due after December 31, 2006, which have predetermined interest rates and which have floating or adjustable interest rates. Loans which have rate adjustments after ten years are considered to have predetermined rates.

	Predetermined Rates		Floating or Adjustable Rate
	(In thousands)
Available for sale:
Mortgage-backed securities	$	83,511	$	—
Loans	68		—
Total	$	83,579	$	—
Held to Maturity:
One-to-four family	$	240,701	$	48,892
Commercial real estate and multi-family	8,169		75,952
Construction	—		8,535
Consumer and other	20,842		19,237
Commercial loans and leases	14,950		6,812
Total loans receivable	284,662		159,428
Mortgage-backed securities	10,133		29
Total	$	294,795	$	159,457

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 3% to 5% 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 guidelines for fixed-rate mortgage loans conform to the FHLMC and FNMA guidelines. The Bank sells a 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 closings to correspondents. However, the Bank is primarily a portfolio lender.  As of December 31, 2005, the Bank’s portfolio of loans serviced for FHLMC or FNMA totaled approximately $10.9 million.

The Bank has a mortgage lending department that is separate as to its sales efforts from the consumer lending area of the Bank. This department employs a lending manager and several commissioned loan officers. Through this department the Bank offers, in addition to its standard portfolio loan products, other types of mortgage loans that are 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.

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 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, 2005, the five largest commercial real estate and multi-family loans totaled $24.5 million with no single loan larger than $6.0 million.  At December 31, 2005, all such loans were current and the properties securing such loans are in the Bank’s market area.

Construction Lending.  At December 31, 2005, the Bank had $25 million of construction loans or 5% 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 construction.  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 $40 million or 8% of the Bank’s total loan portfolio at December 31, 2005.  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.

Consumer loans tend to be originated at higher interest rates than conventional residential mortgage loans and for shorter terms, thus facilitating 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, 2005, $170,000 or 0.4% of the Bank’s consumer loans were delinquent more than 90 days, compared to $392,000 or 0.1% of residential one-to-four family loans.

The Bank offers second mortgage loans on one-to-four family residences.  At December 31, 2005, second mortgage and home equity loans totaled $37 million, or 8% 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 90% 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.  The Bank makes commercial business loans only on a secured or guaranteed basis.  The terms of these loans generally do not exceed five years. These loans can have floating interest rates which adjust with changes in market interest rates, usually the prime rate, or have a fixed rate related to their term to maturity.  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, 2005, the Bank had approximately $49 million outstanding in commercial business loans, which represented approximately 10% of its total loan portfolio.

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 $5,000 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 a 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 in excess of $200,000.  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 $8.6 million as of December 31, 2005.

At December 31, 2005, the Bank’s five largest aggregate lending relationships had balances ranging from $5.7 to $7.4 million.  At December 31, 2005, 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, 2005, consisted of pass-through certificates issued by the Federal Home Loan Mortgage Corporation (“FHLMC”) ($12.8 million), Government National Mortgage Association (“GNMA”), ($3.0 million) Federal National Mortgage Association (“FNMA”) ($16.2 million), and real estate mortgage investment conduits formed by these same agencies (“REMICs”) ($61.7 million).

At December 31, 2005, the amortized cost of mortgage-backed securities totaled $95.8 million, or 14% of total assets, and the market value of such securities totaled approximately $93.7 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,
	2005		2004		2003
	(In thousands)
Held to maturity:
GNMA-fixed rate	$	3,040	$	4,516	$	8,007
FHLMC ARMs	44		65		71
FHLMC-fixed rate	3,117		5,130		8,336
FNMA-fixed rate	3,969		5,182		7,205
REMICs	7		7		11
Other mortgage-backed securities	—		—		—
Total mortgage-backed securities held to maturity	$	10,177	$	14,900	$	23,630
Available-for-sale:
FHLMC	$	9,686	$	6,614	$	8,525
FNMA	12,173		15,108		18,385
GNMA	—		—		—
REMICs	61,652		81,888		79,864
Total mortgage-backed securities available-for-sale	$	83,511	$	103,610	$	106,774

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, 2005.  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	$	15	7.70	%	$	—	—	%
1 to 3 years	749		7.29		2,043		4.27
3 to 5 years	285		7.84		1,757		5.93
5 to 10 years	295		7.09		34,737		4.85
10 to 20 years	1,420		5.24		23,640		4.68
Over 20 years	7,413		6.41		21,334		4.64
Total mortgage-backed securities	$	10,177	6.37	%	$	83,511	4.76	%

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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 obtained by the Bank 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, 2005 the Bank used third-party servicers to service $50.6 million in mortgage loans, including one servicer that serviced $41.5 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,
	2005			2004				2003			2002			2001
	(Dollars in thousands)
Loans accounted for on a non-accrual basis:
Mortgage loans:
One-to-four family	$	392			$	536		$	1,549		$	1,013			$	1,821
Commercial real estate and multi-family	877				23			296			1,677				1,725
Consumer and other	170				84			135			245				227
Commercial loans and leases	150				317			369			887				3
Total non-accrual loans	1,589				960			2,348			3,822				3,776
Real estate owned, net	700				700			868			84				30
Total non-performing assets	$	2,289			$	1,660		$	3,216		$	3,906			$	3,806
Total non-accrual loans to loans	0.32		%		0.22		%	0.58		%	1.03		%		0.99		%
Total non-accrual loans to total assets	0.24		%		0.15		%	0.39		%	0.53		%		0.53		%
Total non-performing assets to total assets	0.35		%		0.26		%	0.53		%	0.54		%		0.54		%

At December 31, 2005, 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, 2005, 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 the establishment of a specific loss reserve is 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, 2005.

	At December 31, 2005
	(In thousands)
Special mention assets	$	186
Substandard	2,289
Doubtful assets	—
Loss	—
Total classified assets	$	2,475

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 a valuation allowance, through a charge to earnings, if the decrease is judged by management to be temporary. If the decrease is judged to be permanent, the Bank will reduce the recorded amount, through a charge to earnings, to the new estimated value.

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 borrower’s current financial status repayment of the loan in the foreseeable future is doubtful.  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 upon 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

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activities, the cost of collection and disposition, and other factors are considered in establishing an estimated reserve level. 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,
	2005			2004			2003			2002				2001
	(Dollars in thousands)
Balance at beginning of period	$	2,307		$	2,111		$	2,047		$		1,972		$	1,714
Provision for loan losses	540			600			330			988				500
Charge-offs:
One-to-four family	—			—			(16		)	(13			)	—
Commercial and multi-family real estate loans	—			(112		)	—			—				—
Consumer and other loans	(122		)	(186		)	(219		)	(303			)	(430			)
Commercial loans and leases	(286		)	(161		)	(322		)	(625			)	—
Recoveries:
One-to-four family	—			—			—			3				—
Commercial and multi-family real estate loans	—			—			—			—				—
Consumer and other loans	39			55			36			25				188
Commercial loans and leases	163			—			255			—				—
Balance at end of year	$	2,641		$	2,307		$	2,111		$	2,047			$		1,972
Ratio of net charge-offs during the period to average loans outstanding during the period	0.04		%	0.09		%	0.07		%	0.25			%	0.07			%
Ratio of allowance for loan losses to non-performing loans at the end of the period	166.3		%	240.3		%	89.9		%	53.6			%	52.2			%
Ratio of allowance for loan losses to loans receivable at the end of the period	0.54		%	0.52		%	0.52		%	0.55			%	0.52			%
Ratio of allowance for loan losses and foreclosed real estate to total non-performing assets at the end of the period	115.4		%	139.0		%	65.6		%	52.4			%	51.8			%

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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,
	2005				2004				2003					2002					2001
	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	$	154	58.8	%	$	176	64.2	%	$	277	68.2	%	$		119	61.3	%	$		216	58.4	%
Commercial real estate and multi-family	1,010		18.2		1,035		18.8		1,230		18.3		1,021			23.0		1,100			24.6
Construction	738		5.0		121		2.3		109		1.6		90			3.2		74			2.6
Consumer and other loans	115		8.2		554		7.7		246		7.8		271			9.7		380			11.0
Commercial loans and leases	624		9.8		421		7.1		249		4.1		546			2.8		202			3.4
Total allowance	$	2,641	100.0	%	$	2,307	100.0	%	$	2,111	100.0	%	$		2,047	100.0	%	$		1,972	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,
	2005				2004				2003
	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(In thousands)
Interest-earning deposits	$	177	$	177	$	252	$	252	$	508	$	508
Investment securities held-to-maturity:
U.S. government and agency obligations	$	—	$	—	$	—	$	—	$	2,000	$	2,011
State and political subdivisions	1,015		1,036		1,326		1,395		1,609		1,735
Corporate debt securities	3,675		3,671		5,701		5,793		6,780		7,069
Total	$	4,690	$	4,707	$	7,027	$	7,188	$	10,389	$	10,815
Securities available-for-sale:
U.S. government and agency obligations	$	5,982	$	5,880	$	2,978	$	2,958	$	2,972	$	2,947
State and political subdivisions	20,844		20,563		13,704		13,675		10,677		10,493
Corporate Debt Securities	4,002		3,958		1,000		992		1,000		993
Mutual funds	—		—		—		—		—		—
Total	$	30,828	$	30,401	$	17,682	$	17,625	$	14,649	$	14,433

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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, 2005.  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	$	—	—	%	$	5,982	3.90	%	$	—	—	%	$	—	—	%	$	5,982	3.90	%	$	5,880
Municipal obligations	—		—		1,404		6.93		7,850		5.12		12,605		5.78		21,859		5.62		21,599
Corporate obligations	3,675		4.74		4,002		3.31		—		—		—		—		7,677		4.00		7,629
Total	$	3,675	4.74	%	$	11,388	4.07	%	$	7,850	5.12	%	$	12,605	5.78	%	$	35,518	4.98	%	$	35,108

(1)Includes $30.4 million of U.S. government agency, municipal and corporate obligations which are carried as available-for-sale at December 31, 2005.  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, $29 million or 6.2% consist of IRA, Keogh or SEP retirement accounts at December 31, 2005.

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, 2005, core deposits amounted to 68% of total deposits.

During 2005 the Bank introduced a floating-rate certificate of deposit, which has an interest rate that adjusts according to adjustments in the prime rate. At December 31, 2005 there were $20.8 million of these floating rate certificates of deposit. While the Bank does not presently use broker-originated deposits, it may use this source of funding in the future.

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,
	2005						2004						2003
	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	$	52,319	11.12		0.47	%	$	54,887	11.93		0.47	%	$	52,647	11.46		0.47	%
Money market accounts	79,666		16.93		2.72		42,496		9.24		1.00		44,688		9.73		0.91
Non-interest-bearing checking accounts	37,138		7.89		0.00		32,636		7.10		0.00		26,375		5.74		0.00
Total transaction accounts	169,123		35.94				130,019		28.27				123,710		26.93
Passbook accounts	151,725		32.25		1.11		182,945		39.78		0.98		188,673		41.07		0.94
Certificates of deposit	149,673		31.81		3.29		146,939		31.95		2.42		146,960		32.00		2.43
Total deposits	$	470,521	100.00	%	2.39	%	$	459,903	100.00	%	1.31	%	$	459,343	100.00	%	1.31	%

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At December 31, 2005, 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	$	4.625
Over three through six months	3,225
Over six through 12 months	11,097
Over 12 months	12,388
Total	$	31,335

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,
	2005			2004			2003
	(Dollars in thousands)
FHLB advances and other borrowings	$	121,260		$	102,747		$	86,853
Weighted average interest rate	3.79		%	3.32		%	3.01		%

	Years Ended December 31,
	2005			2004			2003
	(Dollars in thousands)
Maximum balance of FHLB advances and other borrowings outstanding	$	123,908		$	108,078		$	207,359
Weighted average balance of FHLB advances and other borrowings outstanding	$	111,628		$	91,660		$	160,325
Weighted average interest rate of FHLB advances and other borrowings	3.52		%	3.21		%	5.12		%

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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, 2005, the Bank was authorized to invest up to approximately $13.2 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, 2005, 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, 2005, the Bank had $123.8 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, 2005 the Bank had an investment of $59,700 in Teragon.

Personnel

As of December 31, 2005, the Company had 162 full-time and 22 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.

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 2006 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.

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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.

Loan Limitations.  Regulations limit the amount of non-residential mortgage loans a savings institution may hold as a percentage of assets or capital.  Separate from the qualified thrift lender test, regulations limit a savings institution to a maximum of 10% of its assets in large commercial loans (defined as loans in excess of $2 million), with another 10% of assets permissible in “small business loans.”  Commercial loans secured by real estate can be made in an amount up to four times an institution’s capital.  An institution can also have commercial leases, in addition to the above items, up to 10% of its assets. Commercial paper, corporate bonds, and consumer loans cannot collectively exceed 35% of an institution’s assets.  For this purpose, however, residential mortgage loans (including securities backed by such loans) and credit card loans are not considered consumer loans, and are both unlimited in amount.

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, 2005, 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 method for measuring compliance with the QTL test requires an institution to be in compliance nine out of every 12 months. As of December 31, 2005, the Bank was in compliance with its QTL requirement with 74% 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 4.55% of its advances outstanding from the FHLB plus 0.55% of its unused borrowing capacity. At December 31, 2005, the Bank had $7.4 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, 2005, the Bank’s total transaction accounts required a reserve level of $576,000 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, 2005.

Item 1A. Risk Factors

If the allowance for loan losses is inadequate, earnings will be reduced as the reserve is replenished. The establishment of the allowance for loan losses is based on a high degree of judgment and estimation. At December 31, 2005 the allowance was $2.6 million or 0.54% of the loans receivable balance of $491 million. Several factors could render the reserve inadequate, possibly over a short period of time: a single large loss, a severe and sustained economic downturn in the markets in which the Company’s loans are located, and a general decline in real estate values. These factors could produce charges to the allowance in excess of the amount provided. Replenishing the reserve would reduce earnings.

If the Company must raise the interest rates it pays to attract or retain its deposits, earnings will be reduced. The Company’s assets are primarily funded with deposits. The Company faces intense competition, both to retain current deposits and to attract new deposits that can be used to fund the Company’s growth. If the Company raises the interest rates it pays on a significant amount of these deposits, its interest expense could be substantially higher and earnings substantially lower.

Failure to attract or retain key individuals could severely affect the Company’s business objectives. Because the Company is a relatively small community bank, it operates with a small number of key people in key positions such as in executive administration, loan production, branch administration, and operations. Replacing these individuals, or expanding the Company’s business with additional human resources, requires the Company to compete for talent against companies that are much larger and possess much greater resources. Failure to attract and retain key individuals could negatively affect the Company’s business and earnings.

The Company operates in a highly regulated industry, and changes to regulations can require costly adjustments to the Company’s practices and procedures. In addition to the rule-making bodies under which most public companies operate, the Company’s primary subsidiary is a bank and operates under rules promulgated by governmental or quasi-governmental regulatory bodies that oversee lending, deposit-taking, and the operations of a bank. These agencies can issue rules which can impose costly compliance procedures upon a bank, can require a bank to modify or discontinue certain of its business practices, or impose other requirements, any of which can serve to reduce the Company’s earnings or reduce

22

its franchise value.

The Company is vulnerable to interest rate risk. Most of the Company’s assets and liabilities are interest rate sensitive, and changes in the level of market interest rates or the shape of the yield curve can have a substantial negative impact on the Company’s value and earnings.

The Company’s ability to pay dividends on its common stock can be negatively affected by regulation of its bank subsidiary. The Company is a thrift holding company and its bank subsidiary is the primary source of cash with which it pays the cash dividend on its common stock. Regulations require a bank that is a subsidiary of a thrift holding company to file either a notification or an application with its primary regulator when it seeks to pay a dividend to its parent company. If in the judgment of its primary regulator, the Office of Thrift Supervision, the payment of a dividend by the Company’s bank subsidiary presents safety and soundness concerns, or is otherwise not permitted by regulation, the notification or application can be denied, thereby eliminating the primary source of cash with which the Company pays its dividend to its shareholders.

Insider control and provisions in the Company’s charter and by-laws can be a deterrent to a sale of the Company. As of December 31, 2005 insiders control approximately 21% of the voting power of the Company’s stockholders. In addition, there are provisions in the Company’s charter and by-laws that can have the effect of making it difficult for a dissident shareholder or other party to force a sale of the Company.

Item 1B. Unresolved Staff Comments

None.

23

Item 2. Properties

The Company is located and conducts its business at 3 Penns Trail, Newtown, Pennsylvania. At December 31, 2005, the Bank operated from its administrative offices and fifteen branch offices and one loan production office 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 $747,000.

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 AND LOAN 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
Girard Office 136 West Girard Avenue Philadelphia, PA 19123	Leased	New Hope Loan Office 362 West Bridge Street New Hope, PA 18938	Leased

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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 that in the aggregate involve amounts which are believed by management to be immaterial to the consolidated financial condition or results of operations of the Company.

Item 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 2005 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, 2005:

Month	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plan or Program	Maximum Number of Shares that may yet be Purchased Under the Plans or Programs
October 1, 2005 - October 31, 2005	—	—		—	94,773
November 1, 2005 - November 30, 2005	27,500	$	29.09	4,500	90,273
December 1, 2005 - December 31, 2005	9,000	$	28.04	9,000	81,273

Item 6. Selected Financial Data

The above-captioned information appears under the section captioned “Selected Financial and Other Data” in the Registrant’s 2005 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 2005 Annual Report to Stockholders is incorporated herein by reference.

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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 2005 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 2005 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.

(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.

26

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 2006 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

27

Set forth below is information as of December 31, 2005 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)	359,848	$	23.77	58,888
Equity compensation plans not approved by shareholders(2)	25,000	14.75		—
TOTAL	284,848	$	23.18	58,888

(1)Plans approved by stockholders include: TF Financial Corporation 1997 Stock Option Plan, and TF Financial Corporation 2005 Stock-Based Incentive 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 I2 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.

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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 2005 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, 2005 and 2004

Consolidated Statements of Earnings For the Years Ended December 31, 2005, 2004  and 2003

Consolidated Statement of Changes in Stockholders’ Equity and Comprehensive Income  for the Years Ended December 31, 2005, 2004 and 2003

Consolidated Statements of Cash Flows for the Years Ended December 31, 2005, 2004  and 2003

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)
10.1	Third Federal Savings and Loan Association Management Stock Bonus Plan (1)
10.2	Third Federal Savings Bank Directors Consultation and Retirement Plan (2)
10.3	Severance Agreement with Kent C. Lufkin (3)
10.4	Severance Agreement with Floyd P. Haggar (3)
10.5	Severance Agreement with Dennis R. Stewart (4)
10.6	TF Financial Corporation 1997 Stock Option Plan (5)
10.7	Severance Agreement with Robert N. Dusek (6)
10.8	TF Financial Corporation 1996 Directors Stock Option Plan (7)
10.9	Retirement and Non-Competition Agreement with John R. Stranford (8)
10.10	Employment Agreement with John R. Stranford (8)
10.11	TF Financial Corporation Incentive Compensation Plan (9)
10.12	TF Financial Corporation 2005 Stock-Based Incentive Plan (10)
13.0	2005 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

29

(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 Annual Report on Form 10-K for the fiscal year ended December 31, 1995.
(3)	Incorporated herein by reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000.
(4)	Incorporated herein by reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 1999.
(5)	Incorporated herein by reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 1997.
(6)	Incorporated herein by reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001.
(7)	Incorporated herein by reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002.
(8)	Incorporated herein by reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003.
(9)	Incorporated herein by reference to the Registrant’s Form 8-K filed with the Securities and Exchange Commission on October 20, 2004.
(10)	Incorporated herein by reference to the Registrant’s Form S-8 filed with the Securities and Exchange Commission on May 20, 2005.

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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 30, 2006	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 30, 2006.

By:	/s/ Kent C. Lufkin	By:	/s/ Dennis R. Stewart
	Kent C. Lufkin		Dennis R. Stewart
	President, Chief Executive Officer (Principal Executive Officer)		Executive Vice President, Chief 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

31

EX-13.0

Exhibit 13.0

CONTENTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

CONSOLIDATED STATEMENTS OF OPERATIONS

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)

CONSOLIDATED STATEMENTS OF CASH FLOWS

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, 2005, total assets were approximately $660.8 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, 2005, total stockholders’ equity was approximately $62.6 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, 2005 Third Federal operated branch offices in Bucks and Philadelphia counties, Pennsylvania and Mercer County, New Jersey. Third Federal attracts deposits (approximately $470.5 million at December 31, 2005) from the general public and uses such deposits, together with borrowings mainly from the Federal Home Loan Bank of Pittsburgh (approximately $121.3 million at December 31, 2005) and other funds, to originate loans secured by first mortgages and junior liens on owner-occupied, one-to-four family residences, and to originate loans secured by commercial real estate, including construction loans.

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 7, 2006, 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

	Quoted market price				Dividend paid
Quarter ended	High		Low		per share
December 31, 2005	$	29.67	$	27.50	$	0.18
September 30, 2005	$	28.97	$	27.25	$	0.18
June 30, 2005	$	29.64	$	26.75	$	0.18
March 31, 2005	$	32.09	$	28.71	$	0.18
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

1

SELECTED FINANCIAL INFORMATION AND OTHER DATA
At December 31,
(Dollars in thousands, except per share data)

Financial Position	2005		2004		2003		2002		2001
Total assets	$	660,839	$	628,966	$	606,752	$	721,032	$	711,204
Loans receivable, net	490,959		442,195		404,649		370,092		377,635
Mortgage-backed securities available for sale, at fair value	83,511		103,610		106,774		115,243		99,763
Mortgage-backed securities held to maturity, at amortized cost	10,177		14,900		23,630		54,592		93,367
Investment securities available for sale, at fair value	30,401		17,625		14,443		27,243		22,671
Investment securities held to maturity, at amortized cost	4,690		7,027		10,389		14,563		9,866
Cash and cash equivalents(1)	3,821		7,900		8,241		100,580		69,139
Deposits	470,521		459,903		459,343		442,558		422,052
Advances from the Federal Home Loan Bank and other borrowings	121,260		102,747		86,853		207,359		222,359
Retained earnings	61,610		57,428		52,626		59,978		56,370
Total stockholders’ equity	62,648		61,155		55,480		62,840		57,975
Book value per common share	$	23.08	$	22.30	$	21.37	$	25.31	$	23.51
Tangible book value per common share	$	21.46	$	20.57	$	19.56	$	23.34	$	21.44

At or for the year ended December 31,

Summary of Operations	2005		2004		2003			2002		2001
Interest income	$	33,965	$	31,221	$	32,377		$	40,455	$	46,747
Interest expense	11,532		8,866		15,252			22,660		26,908
Net interest income	22,433		22,355		17,125			17,795		19,839
Provision for loan losses	540		600		330			988		500
Non-interest income	2,728		2,608		2,690			3,304		3,172
Non-interest expense	16,168		15,329		28,703			13,414		14,708
Net income (loss)	$	6,153	$	6,567	$	(5,834	)	$	5,092	$	5,733
Earnings (loss) per common share—basic	$	2.25	$	2.44	$	(2.30	)	$	2.06	$	2.32
Earnings (loss) per common share—diluted	$	2.20	$	2.33	$	(2.30	)	$	1.91	$	2.19

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Performance Ratios and Other Selected Data	2005		2004		2003		2002		2001
Return on average assets	0.96	%	1.06	%	n.m.		0.71	%	0.82	%
Return on average equity	10.16	%	11.58	%	n.m.		8.47	%	10.42	%
Average equity to average assets	9.40	%	9.16	%	9.01	%	8.34	%	7.83	%
Average interest rate spread	3.62	%	3.79	%	2.57	%	2.44	%	2.74	%
Non-performing loans to total assets	0.24	%	0.15	%	0.38	%	0.53	%	0.53	%
Non-performing loans to total loans	0.32	%	0.22	%	0.56	%	1.03	%	0.99	%
Allowance for loan losses to non-performing loans	166.31	%	240.31	%	92.51	%	53.86	%	52.22	%
Allowance for loan losses to total loans	0.54	%	0.52	%	0.52	%	0.54	%	0.52	%
Bank regulatory capital
Core	8.37	%	8.13	%	7.29	%	6.85	%	6.95	%
Tangible	8.37	%	8.13	%	7.29	%	6.85	%	6.95	%
Risk based	15.04	%	15.67	%	14.47	%	15.25	%	14.95	%
Dividend payout ratio(2)	32.73	%	28.33	%	n.m.		31.41	%	26.48	%

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.

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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.

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, in its reports to stockholders and in other communications by the Company, which are made in good faith by the Company pursuant to the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements involve risks and uncertainties, such as statements of the Company’s plans, objectives, expectations, estimates and intentions that are subject to change based on various important factors (some of which are beyond the Company’s control). The following factors, among others, could cause the Company’s financial performance to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements: the strength of the United States economy in general and the strength of the local economies in which the Company conducts operations; the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System, inflation, interest rate, market and monetary fluctuations; the timely development of and acceptance of new products and services of the Company and the perceived overall value of these products and services by users, including the features, pricing and quality compared to competitors’ products and services; the willingness of users to substitute competitors’ products and services for the Company’s products and services; the success of the Company in gaining regulatory approval of its products and services, when required; the impact of changes in financial services’ laws and regulations (including laws concerning taxes, banking, securities and insurance); technological changes, acquisitions; changes in consumer spending and saving habits; and the success of the Company at managing the risks involved in the foregoing.

The Company cautions that the foregoing list of important factors is not exclusive. The Company does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company.

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.

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Management believes that the most critical accounting policy requiring the use of a significant amount of accounting estimates and judgment is the determination of the allowance for loan losses. Allowances are established based on pools of similar loans, delinquencies, loss experience, economic conditions generally and as they may affect individual borrowers, and other factors. Individual loans are evaluated based on cash flows or value of the underlying collateral, or both. All of these evaluation factors are subject to a high degree of uncertainty. If the financial condition and collateral values of a significant amount of debtors should deteriorate more than the Company has estimated, present allowances for loan losses may be insufficient and additional provisions for loan losses may be required. In addition, a single loan loss of a substantial amount may significantly reduce the allowance. The allowance for loan losses was $2,641,000 at December 31, 2005.

Financial Condition and Changes in Financial Condition

Assets.  The Company’s total assets at December 31, 2005 were $660.8 million, an increase of $31.9 million during the year. This increase in total assets is essentially due to a $48.8 million increase in loans receivable, funded in part by a $14.4 million reduction in investment and mortgage-backed securities, in part by an $18.5 million increase in advances from the Federal Home Loan Bank (“FHLB”), and in part by a $10.6 million increase in deposits.

The Company’s loans receivable at December 31, 2005 were $491.0 million, a $48.8 million or 11.0% increase since December 31, 2004. During 2005 there were $96.6 million of principal payments of existing loans in the loans receivable portfolio; however, offsetting this reduction was the origination of $147.6 million in predominately commercial real estate loans and single-family residential first and second mortgage loans.

Mortgage-backed securities available for sale decreased by $20.1 million during 2005 due to $27.0 million in repayments throughout 2005 of the underlying mortgages comprising such securities, partially offset by the purchases of $9.0 million of such securities. The remaining net change in the portfolio was caused by $2.1 million amortization of purchase premiums and fair value adjustments. Mortgage-backed securities held to maturity decreased by $4.7 million during 2005 due to prepayment of the underlying mortgages comprising the securities.

Investment securities available for sale increased by $12.8 million during the year. The Company purchased $13.2 million of such securities, mainly bank-qualified municipal bonds, during 2005. The remaining net change in the portfolio was caused by $0.4 million amortization of purchase premiums and fair value adjustments.

The Company’s cash and cash equivalents were $3.8 million at December 31, 2005. 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 $598.2 million at December 31, 2005, an increase of $30.4 million during 2005. Total deposits increased by $10.6 million, and certificates of deposit were 31.8% of total deposits at year end 2005. Advances from the FHLB increased by $18.5 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 2005 advances from the FHLB due in four years and beyond increased slightly to $48.9 million even though $16.3 million of advances at December 31, 2004 moved from a four year maturity horizon to a three year or less maturity horizon at December 31, 2005. In addition, at December 31, 2005 the Bank’s line of credit at the FHLB was $30 million of which $16.2 million was drawn.

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Stockholders’ equity.Total consolidated stockholders’ equity increased by $1.5 million to $62.6 million at December 31, 2005. The increase is largely the result of $6.2 million in net income less $2.0 million in cash dividends paid to the Company’s common stockholders and a $1.3 million other comprehensive loss, mainly due to the fair value adjustment on available for sale securities. In addition there was a $0.8 million increase in stockholders’ equity attributable to the exercise of stock options for 49,975 shares. The Company also purchased 95,172 shares of common stock, held in treasury, reducing stockholders’ equity by $2.8 million. Finally, there was a $0.5 million increase due to the allocation of 17,025 shares to participants in the Company’s employee stock ownership plan.

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.

	2005						2004						2003
	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)	$	462,389	$	27,570	5.96	%	$	423,482	$	24,359	5.75	%	$	378,414	$	23,372	6.18	%
Mortgage-backed securities	108,029		4,875		4.51	%	128,759		5,696		4.42	%	154,721		6,725		4.35	%
Investment securities(2)	37,357		1,774		4.75	%	30,969		1,377		4.45	%	62,747		1,966		3.13	%
Other interest-earning assets(3)	1,910		59		3.09	%	1,127		14		1.24	%	45,590		474		1.04	%
Total interest-earning assets	609,685		34,278		5.62	%	584,337		31,446		5.38	%	641,472		32,537		5.07	%
Non interest-earning assets	34,215						34,645						33,839
Total assets	$	643,900					$	618,982					$	675,311
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
Deposits	465,521		7,599		1.63	%	465,097		5,925		1.27	%	449,925		7,044		1.57	%
Advances from the FHLB and borrowings	111,628		3,933		3.52	%	91,660		2,941		3.21	%	160,325		8,208		5.12	%
Total interest-bearing liabilities	577,149		11,532		2.00	%	556,757		8,866		1.59	%	610,250		15,252		2.50	%
Non interest-bearing liabilities	6,199						5,536						4,195
Total liabilities	583,348						562,293						614,445
Stockholders’ equity	60,552						56,689						60,866
Total liabilities and stockholders’ equity	$	643,900					$	618,982					$	675,311
Net interest income			$	22,746					$	22,580					$	17,285
Interest rate spread(4)					3.62	%					3.79	%					2.57	%
Net yield on interest-earning assets(5)					3.73	%					3.86	%					2.69	%
Ratio of average interest-earning assets to average interest- bearing liabilities					106	%					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.

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(2)Tax equivalent adjustments to interest on investment securities were $313,000, $225,000 and $160,000 for the years ended December 31, 2005, 2004 and 2003, respectively. Tax equivalent interest income is based upon a marginal effective tax rate of 34%.

(3)Includes interest-bearing deposits in other banks.

(4)Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.

(5)Net yield on interest-earning assets represents net interest income as a percentage of average interest-earning assets.

Rate/Volume Analysis.The following table presents, for the periods indicated, the change 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.

	2005 vs 2004 Increase (decrease) due to									2004 vs 2003 Increase (decrease) due to
	Volume			Rate			Net			Volume			Rate			Net
Interest income:
Loans receivable, net	$	2,297		$	914		$	3,211		$	2,662		$	(1,675	)	$	987
Mortgage-backed securities	(933		)	112			(821		)	(1,147		)	118			(1,029		)
Investment securities	299			98			397			(1,224		)	635			(589		)
Other interest-earning assets	14			31			45			(537		)	77			(460		)
Total interest-earning assets	1,677			1,155			2,832			(246		)	(845		)	(1,091		)
Interest expense:
Deposits	5			1,669			1,674			231			(1,350		)	(1,119		)
Advances from the FHLB and borrowings	684			308			992			(2,814		)	(2,453		)	(5,267		)
Total interest-bearing liabilities	689			1,977			2,666			(2,583		)	(3,803		)	(6,386		)
Net change in net interest income	$	988		$	(822	)	$	166		$	2,337		$	2,958		$	5,295

Comparison of Years Ended December 31, 2005 and December 31, 2004

Net Income.Net income was $6.2 million for the year ended December 31, 2005 compared with net income of $6.6 million for the year ended December 31, 2004. The decrease in net income of $0.4 million when comparing the year 2005 with 2004 is largely attributable a $0.8 million increase in non-interest expense, which was not entirely offset by a $0.1 million increase in net interest income and a $0.1 million increase in non-interest income.

Total Interest Income.For the year ended December 31, 2005, total interest income increased to $34.0 million compared to $31.2 million for the year ended December 31, 2004. The $2.8 million increase in interest income was mainly the result of the $38.9 increase in the average balances of loans receivable.

In addition, beginning in June 2004, the Federal Open Market Committee raised the federal funds rate thirteen times by a total of 325 basis points through year end 2005. During 2005, the federal funds rate, and thus the prime rate, rose by 200 basis points while longer term interest rates relevant to the Company’s loan origination activities, as measured by 5 year and 10 year U S Treasury securities, rose by approximately 65 to 15 basis points, respectively. The higher prime rate had a positive effect on the Bank’s interest income because of the positive effect on the Bank’s adjustable rate and prime-based loans. At December 31, 2005 the Company had $65.2 million in floating rate, prime-based construction, home equity, and other loans. In addition, while longer term rates were higher, permitting the Company to raise

7

its prices on fixed rate loans, these rates were still relatively low historically, and thus new loan production at the Company exceeded expectations.

Total Interest Expense.Total interest expense increased to $11.5 million from $8.9 million for the year ended December 31, 2005 compared to 2004. During 2005 the Bank raised the interest rates paid on many of its deposit products in order to retain existing deposit relationships, attract new deposit relationships, and generally respond to the extreme competitive pricing pressures throughout the Company’s deposit markets. As a result, the average interest rate paid on deposits rose by 36 basis points during 2005 compared with 2004, and produced a $1.7 million increase in interest expense.

Interest paid on advances from the FHLB increased by $1.0 million during 2005 compared with 2004, largely because of the need to borrow from the FHLB in order to fund the Company’s lending activities from sources other than deposit growth.

Allowance for Loan Losses.The allowance for loan losses was approximately $2.6 million at December 31, 2005 and $2.3 million at December 31, 2004. The provision for loan losses was $540,000 during 2005 compared with $600,000 during 2004. Net recoveries of previously charged off loans were $206,000 during 2005 compared to net charge-offs of $404,000 during 2004. While management maintains the 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 $2.7 million during 2005 compared with $2.6 million during 2004. The increase is due to an increase in gain on sales of loans.

Non-Interest Expense.Total non-interest expense increased by $0.8 million during 2005 compared to 2004. Employee compensation and benefits increased by $480,000 during 2005 compared to 2004. Most of this increase was due to normal salary increases and increased staff, and higher incentive related compensation; $124,000 of the increase was due to an increase in pension plan expense. Advertising expense increased by $118,000 due to an increase in the Bank’s marketing efforts, and an expansion of the media used, to advertise its image, products, and services. Professional fees increased by $199,000 largely due to costs related to the Company’s concerted efforts to greatly enhance and improve the technology infrastructure and related security.

Income Tax Expense.The Company’s effective tax rate was 27.2% during 2005 compared to 27.3% during 2004. These effective tax rates are lower than the Company’s marginal tax rate of 34% largely due to the tax-exempt income associated with the Company’s investments in tax-exempt municipal bonds and bank-owned life insurance.

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

8

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 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.

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 to maintain competitive pricing.

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 compliance with the Sarbanes-Oxley Act of 2002.

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

9

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.

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 sources 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.

The Bank endeavors to fund its operations internally but has, when deemed prudent, borrowed funds from the Federal Home Loan Bank. As of December 31, 2005, such borrowed funds totaled $121.3 million. The amount of these borrowings that will mature during the twelve months ending December 31, 2006 is $32.7 million. At December 31, 2005 the Bank had a $30 million line of credit, $13.8 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, 2006, is approximately $92.4 million. To the extent that these deposits do not remain at 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, 2005, the Bank had outstanding commitments to originate loans or fund unused lines of credit of $72.1 million. The loan commitments will be funded during the twelve months ending December 31, 2006. 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, 2005, 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 $401,000 during the year ending December 31, 2006.

The following table combines the Company’s contractual obligations and commitments to make future payments as of December 31, 2005.

	Payments due by period
	Total		Less than 1 year		1-3 years		4-5 years		After 5 years
	(in thousands)
Contractual obligations:
FHLB advances	$	121,260	$	32,672	$	39,688	$	43,105	$	5,795
Time deposits	149,673		92,402		41,248		15,409		614
Operating leases	1,724		401		599		279		445
Total contractual obligations	$	272,657	$	125,475	$	81,535	$	58,793	$	6,854

	Amount of commitment expirations by period
Commitments:
Extensions of credit	$	69,822	$	22,272	$	8,338	$	499	$	38,713
Letters of credit	2,220		2,220		—		—		—
Loans sold with recourse	74		—		—		—		74
Total commitments	$	72,116	$	24,492	$	8,338	$	499	$	38,787

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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, 2005, 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.

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 simulating the hypothetical 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 prepared by the Bank 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

11

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, 2005, 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 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, 2005 are as follows:

Change in Interest Rates	NPV Amount		% Change		Policy Limitation
	(In Thousands)
+300 Basis Points	$	52,947	-37	%	+/- 50	%
+200 Basis Points	$	63,731	-24	%	+/- 35	%
+100 Basis Points	$	73,974	-12	%	+/- 25	%
Flat Rates	$	84,194	0	%	0	%
-100 Basis Points	$	91,406	+9	%	+/- 20	%
-200 Basis Points	$	91,564	+9	%	+/- 30	%

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.

12

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 64% of the Company’s total assets. For this prepayment speed assumption the Company uses its own experience and 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, 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:

At December 31, 2005	Net interest income volatility versus level interest rates
Year ending	Ramp UP 200 bp		Shocked UP 200 bp		Shocked DOWN 100 bp
2006	-0.39	%	-5.24	%	-3.64	%
2007	-3.55	%	-3.42	%	-7.69	%

At December 31, 2004	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 “gap” reports in order to show potential mis-matches of repricing or cash flows from the Company’s current interest rate-sensitive assets and 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: Net rate sensitive assets (liabilities)
At December 31, 2005	2006			2007			2008		2009 and beyond
Current rates	$	30,815		$	26,844		$	22,041	$	(41,782	)
Shocked down 100 bp	$	111,647		$	62,072		$	33,276	$	(169,077	)
Shocked up 200 bp	$	(21,353	)	$	(599	)	$	10,491	$	49,379
Ramped up 200 bp	$	2,161		$	11,894		$	15,675	$	8,188

	GAP: Net rate sensitive assets (liabilities)
At December 31, 2004	2005			2006		2007			2008 and beyond
Current rates	$	21,639		$	43,790	$	12,699		$	(46,715	)
Shocked down 100 bp	$	86,949		$	71,242	$	22,219		$	(148,997	)
Shocked up 200 bp	$	(40,576	)	$	8,270	$	(6,145	)	$	69,864
Ramped up 200 bp	$	(4,246	)	$	29,243	$	4,927		$	1,489

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 flattening of the yield curve, which has occurred over the past two years has required the Bank to reprice upward a large amount of its savings and money market accounts in order to prevent the outflows of these funds. Thus, the Bank has experienced

13

margin compression, and expects this situation to continue given the level of interest rates that existed at December 31, 2005. 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 2006, 2007 or for any other period.

Recent Accounting Pronouncements

On December 16, 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 123(R) (SFAS 123 R), “Share-Based Payment.” This statement establishes standards for the accounting for transactions in which the entity exchanges its equity instruments in exchange for goods and services and addresses transactions in which an entity incurs liabilities in exchange for goods and services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. SFAS123(R) focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. Under SFAS123(R), all forms of share-based payments to employees, including employee stock options, will be treated the same as other forms of compensation by recognizing the related cost in the income statement. The expense of the award will generally be measured at fair value at the grant date. The grant-date fair value of employee share options and similar instruments will be estimated using option pricing models. Current accounting guidance requires that the expense relating to so-called fixed plan employee stock options only be disclosed in the footnotes to the financial statements. The Company plans on implementing SFAS 123(R) on January 1, 2006 using the modified prospective method whereby the cost of share-based awards not vested as of the adoption date will be recorded in results of operations over the remaining vesting period; the Company intends to use a straight-line methodology. At the present time the Company estimates that the adoption of SFAS
123(R) will reduce net income by approximately $274,000 during the year ending December 31, 2006.

In March 2005, the FASB issued Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations” (FIN 47). FIN 47 requires an entity to recognize a liability for the fair value of a legal obligation to perform asset-retirement activities that are conditional on a future event if the amount can be reasonably estimated. The Interpretation provides guidance to evaluate whether fair value is reasonably estimable. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. FIN 47 is not expected to have a material impact on the Company’s financial position or results of operations.

In May 2005, the FASB issued Statement No. 154, “Accounting Changes and Error Corrections—a replacement of APB Opinion No. 20 and FASB Statement No. 3” (SFAS 154.) SFAS 154 changes the accounting for and reporting of a voluntary change in an accounting principle and replaces ABP Opinion No. 20, “Accounting Changes” and FASB Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements.” Under Opinion No. 20, most changes in an accounting principle were reported in the income statement of the period of change as a cumulative adjustment. However, under SFAS 154, a voluntary change in an accounting principle must be shown retrospectively in the financial statements, if practicable, for all periods presented. In cases where retrospective application is impracticable, an adjustment to the assets, liabilities and a corresponding adjustment to retained earnings can be made as of the beginning of the earliest period for which retrospective application is practicable rather than being reported in the income statement. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years ending after December 15, 2005. The adoption of SFAS 154 did not have a material impact on the Company’s financial position or results of operations.

In November, 2005, the FASB issued staff position FSP FAS 115-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”. The staff position replaced the guidance in paragraphs 10-18 of EITF Issue 03-1 with references to already established other-than-temporary impairment guidance as is set forth in FASB Statement 115, “Accounting for Certain

14

Investments in Debt and Equity Securities”, Staff Accounting Bulletin 59, “Accounting for Non-current Marketable Equity Securities” and APB Opinion 18, “The Equity Method of Accounting for Investments in Common Stock.” FSP FAS 115-1 clarified that an investor should recognize an impairment loss no later than when the impairment is considered other than temporary, even if a decision to sell has not been made. FSP FAS 115-1 was effective for other-than-temporary impairment analysis conducted in periods after September 15, 2005. The adoption of FSP FAS 115-1 did not have a material impact on the Company’s financial position or results of operations.

15

FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

TF FINANCIAL CORPORATION AND SUBSIDIARIES

December 31, 2005 and 2004

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, 2005 and 2004, and the related consolidated statements of operations, changes in stockholders’ equity and comprehensive income and cash flows for each of the three years in the period ended December 31, 2005. 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 audits 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. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also 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 statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the 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, 2005 and 2004, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.

/s/ Grant Thornton LLP

Philadelphia, Pennsylvania

March 15, 2006

17

TF Financial Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

	December 31
	2005			2004
	(in thousands)
ASSETS
Cash and cash equivalents	$	3,821		$	7,900
Certificates of deposit in other financial institutions	40			38
Investment securities available for sale—at fair value	30,401			17,625
Investment securities held to maturity (fair value of $4,707 and $7,188 as of December 31, 2005 and 2004, respectively)	4,690			7,027
Mortgage-backed securities available for sale—at fair value	83,511			103,610
Mortgage-backed securities held to maturity (fair value of $10,385 and $15,546 as of December 31, 2005 and 2004, respectively)	10,177			14,900
Loans receivable, net (including loans held for sale of $68 and $680 as of December 31, 2005 and 2004, respectively)	490,959			442,195
Federal Home Loan Bank stock—at cost	7,432			7,460
Accrued interest receivable	3,048			2,500
Premises and equipment, net	6,289			5,963
Core deposit intangible asset, net of accumulated amortization of $2,741 and $2,611 as of December 31, 2005 and 2004, respectively	83			213
Goodwill	4,324			4,324
Other assets	16,064			15,211
TOTAL ASSETS	$	660,839		$	628,966
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Deposits	$	470,521		$	459,903
Advances from the Federal Home Loan Bank	121,260			102,747
Advances from borrowers for taxes and insurance	1,915			1,778
Accrued interest payable	2,052			1,638
Other liabilities	2,443			1,745
Total liabilities	598,191			567,811
Stockholders’ equity
Preferred stock, no par value; 2,000,000 shares authorized at December 31, 2005 and 2004, none issued	—			—
Common stock, $0.10 par value; 10,000,000 shares authorized, 5,290,000 shares issued, 2,714,173 and 2,742,345 shares outstanding at December 31, 2005 and 2004, respectively, net shares in treasury: 2005—2,390,943; 2004—2,345,746	529			529
Retained earnings	61,610			57,428
Additional paid-in capital	53,048			51,675
Unearned restricted stock	(1,080		)	—
Unearned ESOP shares	(1,849		)	(2,019		)
Treasury stock—at cost	(47,920		)	(46,081		)
Accumulated other comprehensive income (loss)	(1,690		)	(377		)
Total stockholders’ equity	62,648			61,155
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	660,839		$	628,966

The accompanying notes are an integral part of these statements.

18

TF Financial Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS

	Year ended December 31,
	2005		2004		2003
	(in thousands, except per share data)
Interest income
Loans, including fees	$	27,570	$	24,359	$	23,372
Mortgage-backed securities	4,875		5,696		6,725
Investment securities	1,461		1,152		1,806
Interest-bearing deposits and other	59		14		474
TOTAL INTEREST INCOME	33,965		31,221		32,377
Interest expense
Deposits	7,599		5,925		7,044
Borrowings	3,933		2,941		8,208
TOTAL INTEREST EXPENSE	11,532		8,866		15,252
NET INTEREST INCOME	22,433		22,355		17,125
Provision for loan losses	540		600		330
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES	21,893		21,755		16,795
Non-interest income
Service fees, charges and other operating income	2,570		2,600		2,372
Gain on sale of real estate	—		—		110
Gain on sale of investment and mortgage-backed securities	—		—		208
Gain on sale of loans	158		8		—
TOTAL NON-INTEREST INCOME	2,728		2,608		2,690
Non-interest expense
Employee compensation and benefits	9,249		8,769		8,186
Occupancy and equipment	2,645		2,518		2,488
Federal deposit insurance premium	64		70		72
Professional fees	814		615		609
Marketing and advertising	773		655		551
Other operating	2,493		2,547		2,847
Amortization of core deposit intangible asset	130		155		185
Debt prepayment fee	—		—		13,765
TOTAL NON-INTEREST EXPENSE	16,168		15,329		28,703
INCOME (LOSS) BEFORE INCOME TAXES	8,453		9,034		(9,218		)
Income tax expense (benefit)	2,300		2,467		(3,384		)
NET INCOME (LOSS)	$	6,153	$	6,567	$	(5,834	)
Earnings (loss) per share—basic	$	2.25	$	2.44	$	(2.30	)
Earnings (loss) per share—diluted	$	2.20	$	2.33	$	(2.30	)

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 (LOSS)

Years ended December 31, 2005, 2004 and 2003

(in thousands, except share data)

																				Accumulated
	Common Stock				Additional			Unearned			Unearned									other
			Par		paid-in			restricted			ESOP			Treasury			Retained			comprehensive						Comprehensive
	Shares		value		capital			stock			shares			stock			Earnings			income (loss)			Total			income (loss)
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 loss, net of taxes	—		—		—			—			—			—			—			(2,314		)	(2,314		)	$	(2,314	)
Net loss for the year ended December 31, 2003	—		—		—			—			—			—			(5,834		)	—			(5,834		)	(5,834		)
Comprehensive 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
Allocation of ESOP shares	17,025		—		324			—			170			—			—			—			494
Purchase of treasury stock	(95,172	)	—		—			—			—			(2,830		)	—			—			(2,830		)
Cash dividends—common stock	—		—		—			—			—			—			(1,971		)	—			(1,971		)
Restricted stock grant	—		—		1,095			(1,095		)	—			—			—			—			—
Compensation expense—restricted shares	—		—		—			15			—			—			—			—			15
Exercise of options	49,975		—		(190		)	—			—			991			—			—			801
Income tax benefit arising from stock compensation	—		—		144			—			—			—			—			—			144
Other comprehensive loss, net of taxes	—		—		—			—			—			—			—			(1,313		)	(1,313		)	$	(1,313	)
Net income for the year ended December 31, 2005	—		—		—			—			—			—			6,153			—			6,153			6,153
Comprehensive income	—																									$	4,840
Balance at December 31, 2005	2,714,173		$	529	$	53,048		$	(1,080	)	$	(1,849	)	$	(47,920	)	$	61,610		$	(1,690	)	$	62,648

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,
	2005			2004			2003
	(in thousands)
OPERATING ACTIVITIES
Net income (loss)	$	6,153		$	6,567		$	(5,834	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities
Amortization of
Mortgage loan servicing rights	8			—			11
Deferred loan origination fees	(96		)	(50		)	(259		)
Premiums and discounts on investment securities, net	81			74			170
Premiums and discounts on mortgage-backed securities, net	386			775			1,527
Premiums and discounts on loans, net	123			127			414
Core deposit intangibles	130			155			185
Deferred income taxes	(403		)	(343		)	596
Provision for loan losses and provision for losses on real estate	540			737			443
Provision for decrease in fair value of mortgage service rights	1			—			—
Depreciation of premises and equipment	961			973			1,041
Increase in value of bank-owned life insurance	(501		)	(525		)	(553		)
Stock-based benefit programs	509			531			606
Proceeds from sale of loans originated for sale	9,765			657			—
Origination of loans held for sale	(8,995		)	(1,329		)	—
Tax benefit arising from stock compensation	144			1,616			552
(Gain) loss on sale of
Investment and mortgage-backed securities	—			—			(208		)
Real estate acquired through foreclosure	—			(1		)	(23		)
Real estate	—			—			(110		)
Mortgage loans available for sale	(158		)	(8		)	—
Income from mortgage loan derivatives	(8		)	—			—
Expense associated with forward loan sales	7			—			—
(Increase) decrease in
Accrued interest receivable	(548		)	171			905
Other assets	763			3,709			(3,924		)
Increase (decrease) in
Accrued interest payable	414			(270		)	(989		)
Other liabilities	758			(10		)	(1,427		)
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES	10,034			13,556			(6,877		)

21

	Year ended December 31,
	2005			2004			2003
	(in thousands)
INVESTING ACTIVITIES
Loan originations	$	(147,629	)	$	(151,517	)	$	(178,578	)
Purchases of loans	—			(3,922		)	(24,176		)
Loan principal payments	96,579			117,896			165,855
Principal repayments on mortgage-backed securities held to maturity	4,709			8,730			31,013
Principal repayments on mortgage-backed securities available for sale	26,959			30,099			62,169
Proceeds from loan sales	1,108			—			—
(Purchases) and maturities of certificates of deposit in other financial institutions, net	(2		)	117			65
Purchase of investment securities available for sale	(13,170		)	(3,040		)	(98,708		)
Purchase of mortgage-backed securities available for sale	(8,956		)	(27,701		)	(82,350		)
Purchase of bank-owned life insurance	—			—			(1,500		)
Proceeds from maturities of investment securities held to maturity	2,280			3,295			4,105
Proceeds from maturities of investment securities available for sale	—			—			40,000
Proceeds from the sale of investment and mortgage-backed securities available for sale	—			—			95,193
(Purchase) redemption of Federal Home Loan Bank stock	28			(635		)	4,599
(Purchase) sale of property, equipment and real estate held for investment	—			3			8
Proceeds from sale of real estate	—			32			1,277
Purchase of premises and equipment	(1,287		)	(668		)	(751		)
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES	(39,381		)	(27,311		)	18,221
FINANCING ACTIVITIES
Net increase in deposits	10,618			560			16,785
Net increase (decrease) in short-term Federal Home Loan Bank advances	7,483			(1,179		)	9,887
Proceeds of long-term Federal Home Loan Bank advances	26,367			30,000			80,000
Repayment of long-term Federal Home Loan Bank advances	(15,337		)	(12,927		)	(210,393		)
Net increase in advances from borrowers for taxes and insurance	137			40			408
Treasury stock acquired	(2,830		)	(4,725		)	—
Exercise of stock options	801			3,410			1,148
Common stock dividends paid	(1,971		)	(1,765		)	(1,518		)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES	25,268			13,414			(103,683		)
NET DECREASE IN CASH AND CASH EQUIVALENTS	(4,079		)	(341		)	(92,339		)
Cash and cash equivalents at beginning of year	7,900			8,241			100,580
Cash and cash equivalents at end of year	$	3,821		$	7,900		$	8,241
Supplemental disclosure of cash flow information
Cash paid for
Interest on deposits and advances from Federal Home Loan Bank	$	11,118		$	9,136		$	16,241
Income taxes	$	1,475		$	1,330		$	250
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, 2005 and 2004

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, twelve 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. The Company is required to maintain certain cash reserves relating to deposit liabilities. This requirement is ordinarily satisfied by cash on hand.

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

23

Equity Securities.” The Company classifies its investment, mortgage-backed and marketable 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. Decreases in fair value deemed to be other than temporary are reported as a component of income. Realized gains and losses on the sale of securities are recognized using the specific identification method.

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. Decreases in fair value deemed to be other than temporary are reported as a component of income. The Company has the ability and it is management’s intention to hold such assets to maturity.

4.   Loans Receivable

Loans receivable that management has the intent and ability to hold for the foreseeable future, or until maturity or payoff are stated at unpaid principal balances less the allowance for loan losses, and net of deferred loan origination fees, direct origination costs and unamortized premiums and discounts associated with purchased loans, and unearned income. 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 impaired 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 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.

24

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 if 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.

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 that acquired impaired loans for which it is probable that the investor will be unable to collect all contractually required payments receivable 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. The adoption of SOP 03-3 did not have a material impact on the Company’s results of operations or financial position.

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 fair value of the Bank’s loans held as available was valued in excess of cost at December 31, 2005 and 2004.

The Company adopted SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities,” on July 1, 2004. 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). SFAS No. 149 also amends SFAS No. 133 to require a lender to account for as derivatives loan commitments related to mortgage loans that will be held for sale. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2004. The Bank periodically enters into commitments with its customers for loans, 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, 2005 and 2004.

On March 2005, 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 Bank’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.

25

6.   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.

7.   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. The Company accounts for the impairment of long-lived assets in accordance with SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”. The standard requires recognition and measurement for the impairment of long-lived assets to be held and used or to be disposed of by sale. The Company had no impaired long-lived assets at December 31, 2005 and 2004.

8.   Goodwill and Other Intangible Assets

Goodwill does not require amortization but is subject to annual impairment testing. The Company has tested the goodwill for impairment prior to its fiscal year ending December 31, 2005. No impairment has been recognized.

Core deposit intangible asset is the result of the Company’s 1996 acquisition of the deposits of Cenlar Federal Savings Bank. The core deposit intangible acquired is being amortized over 10 years and is scheduled to be fully amortized by September 30, 2006.

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 a defined benefit pension plan covering substantially all full-time employees meeting certain requirements. The Company accounts for the defined benefit plan in accordance with SFAS No. 87, “Employers’ Accounting for Pensions”  which provides guidance for the various components of pension expense recognized in the income statement and any related employer pension assets or liabilities. Additionally, the Company includes reporting disclosures required by SFAS No. 132R, “Employers’ Disclosures about Pensions and Other Postretirement Benefits”.

26

The Company purchased $10.5 million in life insurance policies on the lives of its executives and officers prior to 2004. The Company is the owner and beneficiary of the policies. The cash surrender values of the policies are approximately $12.8 million and $12.3 million at December 31, 2005 and 2004, respectively.

The Company has stock benefit plans that allow the Company to grant options and stock to employees and directors. The options, which have a term of up to 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 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.

	2005		2004		2003
Net income (loss)
As reported	$	6,153	$	6,567	$	(5,834	)
Deduct: stock-based compensation expense determined using the fair value method, net of related tax effects	68		88		53
Pro forma	$	6,085	$	6,479	$	(5,887	)
Basic earnings (loss) per share
As reported	$	2.25	$	2.44	$	(2.30	)
Deduct: stock-based compensation expense determined using the fair value method, net of related tax effects	0.03		0.03		0.02
Pro forma	$	2.22	$	2.41	$	(2.32	)
Diluted earnings (loss) per share
As reported	$	2.20	$	2.33	$	(2.30	)
Deduct: stock-based compensation expense determined using the fair value method, net of related tax effects	0.01		0.02		0.02
Pro forma	$	2.19	$	2.31	$	(2.32	)

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There were no options granted in 2004. The fair value of each option grant during 2005 and 2003 was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

	2005			2004	2003
Weighted average assumptions
Dividend yield	2.41		%	N/A	2.09		%
Expected volatility	22.77		%	N/A	32.00		%
Risk-free interest rate	4.34		%	N/A	3.40		%
Fair value of options granted during the year	$	6.15		N/A	$	9.50
Expected lives in years	5.14			N/A	6.00

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 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.

28

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. The components of other comprehensive income (loss) are as follows:

	December 31, 2005
	Before tax amount			Tax (expense) benefit			Net of tax amount
	(in thousands)
Unrealized losses on securities
Unrealized holding losses arising during period	$	(2,094	)	$	711		$	(1,383	)
Minimum pension liability adjustment	107			(37		)	70
Other comprehensive loss, net	$	(1,987	)	$	674		$	(1,313	)

	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 loss, net	$	(3,505	)	$	1,191	$	(2,314	)

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 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.

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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,
	2005		2004
	(in thousands)
Cash and due from banks	$	3,684	$	7,686
Interest-bearing deposits in other financial institutions	137		214
	$	3,821	$	7,900

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, 2005 and 2004, are summarized as follows:

	December 31, 2005
	Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value
	(in thousands)
Investment securities held to maturity
State and political subdivisions	$	1,015	$	21	$	—		$	1,036
Corporate debt securities	3,675		—		(4		)	3,671
	$	4,690	$	21	$	(4	)	$	4,707
Investment securities available for sale
U.S. Government and federal agencies	$	5,982	$	—	$	(102	)	$	5,880
Corporate debt securities	4,002		—		(44		)	3,958
State and political subdivisions	20,844		64		(345		)	20,563
	$	30,828	$	64	$	(491	)	$	30,401
Mortgage-backed securities held to maturity
FHLMC certificates	$	3,161	$	124	$	—		$	3,285
FNMA certificates	3,969		55		(76		)	3,948
GNMA certificates	3,040		105		—			3,145
Real estate mortgage investment conduit	7		—		—			7
	$	10,177	$	284	$	(76	)	$	10,385
Mortgage-backed securities available for sale
FHLMC certificates	$	9,986	$	3	$	(303	)	$	9,686
FNMA certificates	12,594		1		(422		)	12,173
Real estate mortgage investment conduit	63,064		—		(1,412		)	61,652
	$	85,644	$	4	$	(2,137	)	$	83,511

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	December 31, 2004
	Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value
	(in thousands)
Investment securities held to maturity
State and political subdivisions	$	—	$	—	$	—		$	—
U.S. Government and federal agencies	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
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

There were no sales of investments and mortgage-backed securities during the years ended December 31, 2005 and 2004.

Gross realized gains were $725,000 for the year ended December 31, 2003. These gains resulted from the sale of investment and mortgage-backed securities of $22.6 million for the year ended December 31, 2003.

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

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

	December 31, 2005
	Available for sale				Held to maturity
	Amortized cost		Fair value		Amortized cost		Fair value
	(in thousands)
Investment securities
Due in one year or less	$	—	$	—	$	3,675	$	3,671
Due after one year through five years	10,588		10,431		800		821
Due after five years through 10 years	7,634		7,572		215		215
Due after 10 years	12,606		12,398		—		—
	30,828		30,401		4,690		4,707
Mortgage-backed securities	85,644		83,511		10,177		10,385
	$	116,472	$	113,912	$	14,867	$	15,092

Investment securities having an aggregate amortized cost of approximately $3.0 million were pledged to secure public deposits at December 31, 2005 and 2004.

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

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, 2005:

	Number	Less than 12 months					12 months or longer					Total
Description of Securities	of Securities	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair value		Unrealized Loss
	(in thousands)
U.S. Government and federal agencies	2	$	2,984	$	(14	)	$	2,897	$	(88	)	$	5,881	$	(102	)
Corporate debt securities	6	6,632		(44		)	997		(4		)	7,629		(48		)
State and political subdivisions	20	11,061		(155		)	5,042		(190		)	16,103		(345		)
Mortgage-backed securities	32	35,899		(657		)	49,199		(1,556		)	85,098		(2,213		)
Total temporarily impaired securities	60	$	56,576	$	(870	)	$	58,135	$	(1,838	)	$	114,711	$	(2,708	)

The unrealized losses on investments in securities issued by the U. S. Treasury and Government agencies, U. S. Government sponsored agencies and agency mortgage-backed securities were caused by changes in market interest rates. The contractual terms and contractual cash flows of these securities do not permit the issuer to settle at a price less than the amortized cost of the investment. The Company has the ability and intent to hold these investments until a market price recovery or maturity. Accordingly, the Company has determined that the unrealized losses at December 31, 2005 are not considered other-than-temporary.

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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:

	Number	Less than 12 months					12 months or longer					Total
Description of Securities	of Securities	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair value		Unrealized Loss
	(in 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		)
Mortgage-backed securities	25	22,901		(130		)	46,367		(554		)	69,268		(684		)
Total temporarily impaired securities	34	$	22,901	$	(130	)	$	55,409	$	(732	)	$	78,310	$	(862	)

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

NOTE D—LOANS RECEIVABLE

Loans receivable are summarized as follows:

	December 31,
	2005			2004
	(in thousands)
First mortgage loans (principally conventional)
Secured by one-to-four family residences	$	289,746		$	284,645
Secured by other non-residential properties	89,489			83,559
Construction loans	24,888			10,286
	404,123			378,490
Net deferred loan origination costs and unamortized premiums	504			700
Total first mortgage loans	404,627			379,190
Other loans
Commercial non-real estate	48,471			30,543
Home equity and second mortgage	37,479			29,522
Commercial leases	186			857
Other	2,836			4,384
	88,972			65,306
Unamortized premiums	1			6
Total other loans	88,973			65,312
Less allowance for loan losses	(2,641		)	(2,307		)
Total loans receivable	$	490,959		$	442,195

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

	December 31,
	2005			2004			2003
	(in thousands)
Balance at beginning of year	$	2,307		$	2,111		$	2,047
Provision charged to income	540			600			330
Charge-offs, net	(206		)	(404		)	(266		)
Balance at end of year	$	2,641		$	2,307		$	2,111

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 $1.6 million and $960,000 at December 31, 2005 and 2004, respectively. The Company has reviewed these loans and has determined there was no impairment at December 31, 2005 and 2004.

The Bank has no concentration of loans to borrowers engaged in similar activities that exceeded 10% of loans at December 31, 2005 and 2004. 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 $70,000 and $82,000 at December 31, 2005 and 2004, respectively. For the year ended December 31, 2005, principal repayments of approximately $12,000 were received. No new loans to related parties were issued during the year.

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,
	2005		2004
	(in thousands)
Mortgage loan servicing portfolios
FHLMC	$	1,182	$	1,619
FNMA	9,696		653
Other investors	6,173		6,997
	$	17,051	$	9,269

Custodial balances maintained in connection with the foregoing loan servicing totaled approximately $168,000 and $198,000 at December 31, 2005 and 2004, respectively. The net servicing revenue on mortgage loans serviced for others is immaterial for all periods presented. Mortgage servicing rights are reported as a component of other assets and were not material at December 31, 2005 and 2004.

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NOTE F—PREMISES AND EQUIPMENT

Premises and equipment are summarized as follows:

	Estimated	December 31,
	useful lives	2005		2004
		(in thousands)
Buildings	30 years	$	6,472	$	6,063
Leasehold improvements	5 years	1,429		1,429
Furniture, fixtures and equipment	3-7 years	10,178		9,398
		18,079		16,890
Less accumulated depreciation		13,482		12,619
		4,597		4,271
Land		1,692		1,692
		$	6,289	$	5,963

NOTE G—DEPOSITS

Deposits are summarized as follows:

	December 31,
Deposit type	2005		2004
	(in thousands)
Demand	$	37,138	$	32,636
NOW	52,319		54,887
Money Market	79,666		42,496
Passbook savings	151,725		182,945
Total demand, transaction and passbook deposits	320,848		312,964
Certificates of deposit	149,673		146,939
	$	470,521	$	459,903

The aggregate amount of certificates of deposit with a minimum denomination of $100,000 was approximately $31.3 million and $26.6 million at December 31, 2005 and 2004, respectively. The Bank had no broker-originated certificates of deposit at December 31, 2005 and 2004.

At December 31, 2005, scheduled maturities of certificates of deposit are as follows:

Year ending December 31,
2006		2007		2008		2009		2010		Thereafter		Total
(in thousands)
$	92,402	$	34,239	$	7,009	$	7,643	$	7,766	$	614	$	149,673

Related party deposits are on substantially the same terms as for comparable transactions with unrelated persons. The aggregate dollar amount of these deposits was approximately $2.0 million and $1.4 million at December 31, 2005 and 2004, respectively.

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

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

	December 31,
	2005				2004
Principal payments due during	Amount		Weighted average rate		Amount		Weighted average rate
	(in thousands)				(in thousands)
2005	$	—	—	%	23,448		2.90	%
2006	32,672		3.81		15,237		3.32
2007	22,050		3.73		15,750		3.32
2008	17,638		3.40		16,280		3.32
2009	34,566		3.84		28,147		3.60
2010	8,539		4.25		2,058		3.89
Thereafter	5,795		4.20		1,827		3.94
	$	121,260	3.79	%	$	102,747	3.32	%

The advances are collateralized by Federal Home Loan Bank stock and certain first mortgage loans and mortgage-backed securities. At December 31, 2005 principal payments due during 2006 included $16.2 million at a daily variable interest rate of 4.23%, pursuant to a line of credit agreement with the Federal Home Loan Bank. Unused lines of credit at the Federal Home Loan Bank were $13.8 million at December 31, 2005. The remaining long-term advances from the Federal Home Loan Bank are fixed rate.

NOTE I—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 $61,000, $65,000, and $58,000 in 2005, 2004 and 2003, 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 set 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,
	2005			2004
	(in thousands)
Reconciliation of Projected Benefit Obligation
Benefit obligation at beginning of year	$	3,382		$	3,028
Service cost	314			230
Interest cost	211			190
Plan amendments	—			—
Actuarial loss	122			304
Benefits paid	(408		)	(370		)
Benefits obligation at end of year	$	3,621		$	3,382
Reconciliation of Fair Value of Assets
Fair value of plan assets at beginning of year	$	2,490		$	2,768
Actual return on plan assets	77			62
Employer contribution	1,015			30
Benefits paid	(408		)	(370		)
Fair value of plan assets at end of year	$	3,174		$	2,490
Reconciliation of Funded Status
Funded status	$	(447	)	$	(892	)
Unrecognized transition obligation	—			—
Unrecognized net actuarial loss	1,162			954
Unrecognized prior service cost	156			219
Prepaid benefit cost at end of year	$	871		$	281

The accumulated benefit obligation at December 31, 2005 and 2004 was $3,079,000 and $2,816,000 respectively.

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 2006 is $1.0 million.

	2005		2004
Weighted-average assumptions used to determine benefit obligations, end of year
Discount rate	5.75	%	6.00	%
Rate of compensation increase	4.00		4.00

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	2005			2004			2003
Components of net periodic benefit cost
Service cost	$	314		$	230		$	191
Interest cost	211			190			185
Expected return on plan assets	(205		)	(210		)	(217		)
Amortization of prior service cost	63			63			63
Amortization of transition obligation (asset)	—			4			4
Recognized net actuarial (gain) loss	42			24			13
Net periodic benefit cost	$	425		$	301		$	239

	2005		2004		2003
Weighted-average assumptions used to determine net benefit costs as of December 31
Discount rate	6.00	%	6.25	%	6.75	%
Expected return on plan assets	8.00		8.00		8.00
Rate of compensation increase	4.00		4.00		4.00

The expected rate of return was determined by applying the average rates of return over the past ten years on the assets which the Plan is currently invested.

Estimated future benefits payments are as follows:

	(in thousands)
2006	$	324
2007	49
2008	65
2009	89
2001	88
2011-2015	689

The Plan’s weighted-average asset allocations by asset category is as follows:

	Percentage of Plan Assets at Year End
	2005		2004
Asset Category
Equity securities	64	%	57	%
Debt securities	27		26
Other	9		17
Total	100	%	100	%

Trustees of the Plan 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

38

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. 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 $387,000, $431,000 and $523,000 in 2005, 2004 and 2003, respectively.

	2005		2004
Allocated shares	165,000		158,300
Unreleased shares	184,000		200,700
Total ESOP shares	349,000		359,000
Fair value of unreleased shares (in thousands)	$	5,235	$	6,422

2.   Stock Compensation Plans

A summary of the status of the Company’s fixed stock option plans as of December 31, 2005, and changes for each of the years in the three-year period then ended is as follows:

	2005				2004				2003
	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	283,072		$	19.09	585,714		$	15.40	658,973		$	14.11
Options granted	160,500		28.46		—		—		40,248		32.42
Options exercised	(49,975	)	16.01		(294,925	)	11.56		(92,902	)	12.34
Options forfeited	(8,749	)	28.40		(7,717	)	26.75		(20,605	)	21.09
Outstanding at end of year	384,848		$	23.18	283,072		$	19.09	585,714		$	15.40

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The following table summarizes information about stock options outstanding at December 31, 2005:

	Options outstanding				Options exercisable
Range of exercise prices	Number outstanding at December 31, 2005	Weighted average remaining contractual life (years)	Weighted average exercise price		Number exercisable at December 31, 2005	Weighted average exercise price
$13.25-19.88	154,743	1.58 years	$	15.81	154,743	$	15.81
$19.89-29.84	205,284	5.50 years	27.41		31,455	23.40
$29.85-34.14	24,821	7.97 years	34.14		9.928	34.14
	384,848	4.08 years	$	23.18	196,126	$	17.96

The Company granted 39,000 shares of stock in December 2005 which will vest over a three-year period. As a result, the Company recognized $15,000 of compensation expense based on the market value of the stock on the date of the grant and the vesting period. There were no stock grants in 2004 and 2003.

NOTE J—INCOME TAXES

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

	Year ended December 31,
	2005		2004		2003
	(in thousands)
Federal
Current	$	1,753	$	508	$	(4,364	)
Charge in lieu of income tax relating to stock compensation	144		1,616		379
Deferred	403		343		596
	2,300		2,467		(3,389		)
State and local—current	—		—		5
Income tax provision	$	2,300	$	2,467	$	(3,384	)

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

	Year ended December 31,
	2005		2004		2003
Statutory federal income tax (benefit)	34.0	%	34.0	%	(34.0	)%
Increase (decrease) resulting from
Tax-exempt income	(5.7	)	(3.7	)	(2.6	)
State tax, net of federal benefit	(0.0	)	(0.0	)	(0.0	)
Other	(1.1	)	(3.0	)	(0.1	)
	27.2	%	27.3	%	(36.7	)%

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Deferred taxes are included in the accompanying consolidated statements of financial position at December 31, 2005 and 2004, 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, 2005 and 2004. The Company’s net deferred tax asset at December 31, 2005 and 2004, was composed of the following:

	December 31,
	2005		2004
	(in thousands)
Deferred tax assets
Deferred compensation	$	208	$	277
Allowance for loan losses, net	885		784
Unrealized loss on securities available for sale	869		158
Minimum pension liability adjustment	—		37
Other	51		9
	2,013		1,265
Deferred tax liabilities
Accrued pension expense	504		399
Prepaid expenses	43		51
Deferred loan costs	472		391
Amortization of goodwill	263		93
Other	419		290
	1,701		1,224
Net deferred tax asset	$	312	$	41

Prior to 2004 the Company filed its income tax returns on the basis of a fiscal tax year ending June 30. Effective July 1, 2005, the Company changed the tax year end to coincide with the fiscal reporting period end of December 31.

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.

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NOTE K—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, 2005. The risk-based capital requirement provides for minimum core capital (tangible capital plus certain forms of supervisory goodwill and other qualifying intangible assets) adjusted for the general  valuation allowances equal to 8% of  total assets classified in one of four risk-weighted categories at December 31, 2005.

As of December 31, 2005, management believes that the Bank met all capital adequacy requirements to which it was subject.

	Regulatory capital December 31, 2005
	Tangible					Core					Risk-based
	Capital			Percent		Capital			Percent		Capital			Percent
	(in thousands)
Capital under generally accepted accounting principles	$	57,421		8.69	%	$	57,421		8.69	%	$	57,421		14.90	%
Unrealized loss on certain available-for-sale securities	1,689			0.25		1,689			0.25		1,689			0.44
Goodwill and other intangible assets	(3,774		)	(0.57	)	(3,774		)	(0.57	)	(3,774		)	(0.98	)
Additional capital items
General valuation allowances—limited	—			—		—			—		2,641			0.68
Regulatory capital computed	55,336			8.37		55,336			8.37		57,977			15.04
Minimum capital requirement	9,913			1.50		26,434			4.00		30,834			8.00
Regulatory capital—excess	$	45,423		6.87	%	$	28,902		4.37	%	$	27,143		7.04	%

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	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	%

At December 31, 2005, 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 L—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.

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

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

	December 31,
	2005		2004
	(in thousands)
Commitments to extend credit	$	69,822	$	73,330
Standby letters of credit	2,220		1,201
Loans sold with recourse	74		109
	$	72,116	$	74,640

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 or 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 M—COMMITMENTS AND CONTINGENCIES

The Bank had optional commitments of $1,085,000 and $1,069,000 to sell mortgage loans to investors at December 31, 2005 and 2004 respectively.

The Bank leases branch facilities and office space for periods ranging up to ten years. These leases are classified as operating leases and contain options to renew for additional periods. Rental expense was approximately $420,000, $359,000, and $304,000 for the years ended December 31, 2005, 2004 and 2003, respectively.

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)
2006	$	401
2007	344
2008	255
2009	179
2010	100
Thereafter	445
	$	1,724

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

44

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, 2005 was approximately $1,691,000.

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 N—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 underlying collateral values. 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 O—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 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 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. In addition, 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.

45

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

	December 31,
	2005				2004
	Fair value		Carrying value		Fair value		Carrying value
	(in thousands)
Cash and cash equivalents	$	3,821	$	3,821	$	7,900	$	7,900
Investment securities	35,108		35,091		24,813		24,652
Mortgage-backed securities	93,896		93,688		119,156		118,510

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,
	2005				2004
	Fair value		Carrying value		Fair Value		Carrying value
	(in thousands)
Assets
Certificates of deposit	$	40	$	40	$	38	$	38
Liabilities
Deposits with stated maturities	147,561		149,673		145,933		146,939
Borrowings with stated maturities	118,352		121,260		101,504		102,747

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,
	2005				2004
	Fair value		Carrying Value		Fair value		Carrying value
	(in thousands)
Deposits with no stated maturities	$	320,848	$	320,848	$	312,964	$	312,964

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,
	2005				2004
	Fair value		Carrying value		Fair value		Carrying value
	(in thousands)
Net loans	$	486,214	$	490,959	$	445,457	$	442,195

46

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 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.

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

	Year ended December 31,
	2005		2004		2003
	(in thousands)
Service fees, charges and other operating income
Loan servicing fees	$	363	$	331	$	358
Late charge income	83		90		100
Deposit service charges	1,061		1,092		923
Bank-owned life insurance value increase	501		525		553
Other income	562		562		438
	$	2,570	$	2,600	$	2,372
Other operating expense
Insurance and surety bond	$	193	$	190	$	180
Office supplies	221		220		234
Loan expense	337		444		491
MAC expense	328		315		307
Postage	272		237		299
Telephone	306		273		283
Supervisory examination fees	138		130		147
Other expenses	698		738		906
	$	2,493	$	2,547	$	2,847

47

The following tables set forth 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, 2005
	Income (numerator)		Weighted average shares (denominator)	Per share Amount
Basic earnings per share
Income available to common stockholders	$	6,153	2,736,945	$	2.25
Effect of dilutive securities
Stock compensation plans	—		61,226	(0.05		)
Diluted earnings per share
Income available to common stockholders plus effect of dilutive securities	$	6,153	2,798,171	$	2.20

There were options to purchase 170,321 shares of common stock at a range of $28.48 to $34.14 per share which were outstanding during 2005 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, 2004
	Income (numerator)		Weighted average shares (denominator)	Per share Amount
Basic earnings per share
Income available to common stockholders	$	6,567	2,686,732	$	2.44
Effect of dilutive securities
Stock compensation plans	—		126,173	(0.11		)
Diluted earnings per share
Income available to common stockholders plus effect of dilutive securities	$	6,567	2,812,905	$	2.33

48

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 (loss) per share
Loss available to common stockholders	$	(5,834	)	2,541,677	$	(2.30	)
Effect of dilutive securities
Stock compensation plans	—			—	—
Diluted earnings (loss) per share
Income available to common stockholders plus effect of dilutive securities	$	(5,834	)	2,541,677	$	(2.30	)

Due to the net loss in 2003, the effect of stock options on diluted loss per share was not included due to the anti-dilutive impact of such items on the calculation.

NOTE R—SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATE (UNAUDITED)

	Three months ended
	Dec. 31, 2005		Sept. 30, 2005		June 30, 2005		March 31, 2005
	(in thousands, except per share data)
Total interest income	$	8,927	$	8,570	$	8,371	$	8,097
Total interest expense	3,281		2,987		2,797		2,467
Net interest income	5,646		5,583		5,574		5,630
Provision for possible loan losses	90		150		150		150
Net interest income after provision	5,556		5,433		5,424		5,480
Other income	647		742		677		662
Other expenses	4,010		4,084		3,943		4,131
Income before income taxes	2,193		2,091		2,158		2,011
Income taxes	666		546		553		535
Net income	$	1,527	$	1,545	$	1,605	$	1,476
Earnings per share—basic	$	0.56	$	0.57	$	0.59	$	0.54
Earnings per share—assuming dilution	$	0.55	$	0.55	$	0.57	$	0.52

49

	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 tax expense	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

50

NOTE S—CONDENSED FINANCIAL INFORMATION—PARENT COMPANY ONLY

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

BALANCE SHEET

	December 31,
	2005		2004
	(in thousands)
ASSETS
Cash	$	3,452	$	4,630
Certificates of deposit—other institutions	40		38
Investment in Third Federal	55,611		53,054
Investment in TF Investments	2,392		2,347
Investment in Penns Trail Development	991		1,001
Other assets	240		121
Total assets	$	62,726	$	61,191
LIABILITIES AND STOCKHOLDERS’ EQUITY
Total liabilities	$	78	$	36
Stockholders’ equity	62,648		61,155
Total liabilities and stockholders’ equity	$	62,726	$	61,191

STATEMENT OF OPERATIONS

	Year ended December 31,
	2005		2004		2003
	(in thousands)
INCOME
Equity in earnings (loss) of subsidiaries	$	6,510	$	6,906	$	(5,556	)
Interest and dividend income	72		74		99
Total income (loss)	6,582		6,980		(5,457		)
EXPENSES
Other	429		413		377
Total expenses	429		413		377
NET INCOME (LOSS)	$	6,153	$	6,567	$	(5,834	)

51

STATEMENT OF CASH FLOWS

	Year ended December 31,
	2005			2004			2003
	(in thousands)
Cash flows from operating activities
Net income (loss)	$	6,153		$	6,567		$	(5,834	)
Adjustments to reconcile net income to net cash provided by (used in) operating activities
Equity in (earnings) loss of subsidiaries	(6,510		)	(6,906		)	5,556
Net change in assets and liabilities	(74		)	357			(147		)
Net cash provided by (used in) operating activities	(431		)	18			(425		)
Cash flows from investing activities
Capital distribution from subsidiaries	3,255			2,622			—
(Purchase) and maturities of certificates of deposit in other financial institutions, net	(2		)	117			65
Net cash provided by investing activities	3,253			2,739			65
Cash flows from financing activities
Cash dividends paid to stockholders	(1,971		)	(1,765		)	(1,518		)
Treasury stock acquired	(2,830		)	(4,725		)	—
Exercise of stock options	801			3,410			1,148
Net cash used in financing activities	(4,000		)	(3,080		)	(370		)
NET DECREASE IN CASH	(1,178		)	(323		)	(730		)
Cash at beginning of year	4,630			4,953			5,683
Cash at end of year	$	3,452		$	4,630		$	4,953
Supplemental disclosure of cash flow information Cash paid during the year for income taxes	$	—		$	—		$	—

52

BOARD OF DIRECTORS AND EXECUTIVE OFFICERS

TF Financial Corporation

Board of Directors

Robert N. Dusek
Chairman of the Board

Carl F. Gregory

Dennis L. McCartney

George A. Olsen

John R. Stranford

Albert M. Tantala

Executive Officers

Kent C. Lufkin
President and Chief Executive Officer

Dennis R. Stewart
Executive Vice President and Chief Financial Officer

Lorraine A. Wolf
Corporate Secretary

53

EX-21.0

EXHIBIT 21.0

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 2005 Annual Report to Stockholders incorporated herein by reference.

(b)Third Delaware Corporation and Teragon Financial Corporation are 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 15, 2006, accompanying the consolidated financial statements incorporated by reference in the Annual Report of TF Financial Corporation on Form 10-K for the year ended December 31, 2005. We hereby consent to the incorporation by reference of said report in the Registration Statements of TF Financial Corporation on Forms S-8 (File No. 333-87176, effective December 7, 1994, File No. 333-09235, effective July 31, 1996, File No. 333-27085, effective May 14, 1997, and File No. 333-125116, effective May 20, 2005).

/s/ GRANT THORNTON LLP

Philadelphia, Pennsylvania

March 15, 2006

1

EX-31.1

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 30, 2006	/s/ Kent C. Lufkin
		Kent C. Lufkin
		President and Chief Executive Officer
		(Principal Executive Officer)

1

EX-31.2

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 30, 2006	/s/ Dennis R. Stewart
		Dennis R. Stewart
		Executive Vice President and Chief Financial Officer
		(Principal Financial & Accounting Officer)

1

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, 2005 (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 30, 2006

1