**Exhibit 13**

 

**CONTENTS**

 
| CORPORATE PROFILE AND RELATED INFORMATION                                                  |   |
|--------------------------------------------------------------------------------------------|--------|
|                                                                                       |   |
| SELECTED FINANCIAL INFORMATION AND OTHER  DATA                                             |   |
|                                                                                       |   |
| MANAGEMENT’S DISCUSSION AND ANALYSIS OF  FINANCIAL POSITION AND RESULTS OF OPERATIONS |   |
|                                                                                       |   |
| 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   |   |
|                                                                                       |   |
| CONSOLIDATED STATEMENTS OF CASH FLOWS                                                      |   |
|                                                                                       |   |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                                 |   |
|                                                                                       |   |
| BOARD OF DIRECTORS AND EXECUTIVE OFFICERS                                                  |   |

 

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**CORPORATE PROFILE AND RELATED INFORMATION**

 

TF Financial Corporation (the “Company”) isthe parent company of Third Federal Bank and its subsidiaries Third DelawareCorporation and Teragon Financial Corporation (collectively, “Third Federal” orthe “Bank”), TF Investments Corporation, and Penns Trail DevelopmentCorporation. At December 31, 2004, total assets were approximately$629.0 million. The Company was formed as a Delaware corporation in March 1994at the direction of the Bank to acquire all of the capital stock that ThirdFederal issued upon its conversion from the mutual to stock form of ownership(the “Conversion”) and concurrent $52.9 million initial public offeringeffective July 13, 1994. At December 31, 2004, total stockholders’equity was approximately $61.2 million. The Company is a unitary savingsand loan holding company which, under existing laws, generally is notrestricted in the types of business activities in which it may engage, providedthat Third Federal retains a specified amount of its assets in housing-relatedinvestments. Third Federal is a federally chartered stock savings bankheadquartered in Newtown, Pennsylvania, which was originally chartered in 1921under the name “Polish American Savings Building and Loan Association.”Deposits of Third Federal have been federally insured since 1935 and arecurrently insured up to the maximum amount allowable by the Federal DepositInsurance Corporation (the “FDIC”). Third Federal is a community-orientedinstitution offering a variety of financial services to meet the needs of thecommunities that it serves. As of December 31, 2004 Third Federal operatedbranch offices in Bucks and Philadelphia counties, Pennsylvania and MercerCounty, New Jersey. Third Federal attracts deposits (approximately$459.9 million at December 31, 2004) from the general public and usessuch deposits, together with borrowings mainly from the Federal Home Loan Bankof Pittsburgh (approximately $102.7 million at December 31, 2004) andother funds, primarily to originate or purchase loans secured by firstmortgages on owner-occupied, one-to-four family residences, or purchasesecurities secured by such loans. Third Federal also originates and purchasescommercial real estate and multi-family loans, construction loans and consumerloans, and purchases other investment securities.

 

**Stock Market Information**

 

Since its issuance in July 1994, theCompany’s common stock has been traded on the Nasdaq National Market. The dailystock quotation for the Company is listed in the Nasdaq National Marketpublished in The Wall Street Journal, The Philadelphia Inquirer, and otherleading newspapers under the trading symbol of “THRD.” The number ofshareholders of record of common stock as of March 21, 2005, wasapproximately 500. This does not reflect the number of persons or entities whoheld stock in nominee or “street” name through various brokerage firms.

 

**Dividend Policy**

 

The Company’s ability to pay dividends tostockholders is dependent in part upon the dividends it receives from ThirdFederal. Among other limitations, Third Federal may not declare or pay a cashdividend on any of its stock if the effect thereof would cause Third Federal’sregulatory capital to be reduced below (1) the amount required for theliquidation account established in connection with Third Federal’s conversionfrom mutual to stock form, or (2) the regulatory capital requirementsimposed by the Office of Thrift Supervision (“OTS”). It is the Company’s policyto pay dividends when it is deemed prudent to do so. The Board of Directorswill consider the payment of a dividend on a quarterly basis, after givingconsideration to the level of profits for the previous quarter and otherrelevant information.

 

**Stock Price and Dividend History**

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

 

1

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**SELECTED FINANCIAL INFORMATION AND OTHER DATA**

**At December 31,**

**(Dollars in thousands, except per share data)**

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

 

**At or for the year ended December 31,**

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

 

2

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

 

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n.m. = not meaningful

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

 

3

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**MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL POSITION AND**

**RESULTS OF OPERATIONS**

 

**General.**  The following discussion and analysis shouldbe read in conjunction with the Company’s consolidated financial statements andis intended to assist in understanding and evaluating the major changes in thefinancial position and results of operations of the Company with a primaryfocus on an analysis of operating results. This document contains statementsthat project the future operations of the Company which involve risks anduncertainties. The Company’s actual results may differ significantly from theresults discussed in these forward-looking statements. Statements concerningfuture performance, developments, events, expectations for growth and marketforecasts, and any other guidance on future periods, constitute forward-lookingstatements which are subject to a number of risks and uncertainties, includinginterest rate fluctuations and government and regulatory actions which mightcause actual results to differ materially from stated expectations orestimates. The Company does not undertake to update any forward-lookingstatement, whether written or oral, that may be made from time-to-time by or onbehalf of the Company.

 

The Company’s income on a consolidated basisis derived substantially from its investment in its subsidiary, Third Federal.The earnings of Third Federal depend primarily on its net interest income. Netinterest income is affected by the interest income that Third Federal receivesfrom its loans and investments and by the interest expense that Third Federalincurs on its deposits, borrowings and other sources of funds. In addition, themix of Third Federal’s interest-bearing assets and liabilities can have asignificant effect on Third Federal’s net interest income; loans generally havehigher yields than securities; retail deposits generally have lower interestrates than other borrowings.

 

Third Federal also receives income fromservice charges and other fees and occasionally from sales of investmentsecurities and real estate owned. Third Federal incurs expenses in addition tointerest expense in the form of salaries and benefits, deposit insurancepremiums, property operations and maintenance, advertising and other relatedbusiness expenses.

 

**Critical Accounting Policies**

 

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

 

**Financial Condition and Changes in FinancialCondition**

 

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

 

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

 

4

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Mortgage-backed securities available for saledecreased by $3.2 million during 2004 due to $30.1 million inrepayments throughout 2004 of the underlying mortgages comprising suchsecurities, partially offset by the purchases of $27.7 million of suchsecurities. The remaining net change in the portfolio was caused by $0.8 millionamortization of purchase premiums. Mortgage-backed securities held to maturitydecreased by $8.7 million during 2004 due to prepayment of the underlyingmortgages comprising the securities.

 

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

 

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

 

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

 

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

 

5

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

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

 

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| (1) | Nonaccrual loans have been included in the appropriate average loan  balance category, but interest on nonaccrual loans has not been included for  purposes of determining interest income.                                                                        |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Tax equivalent adjustments to interest on investment securities were  $225,000, $160,000 and $87,000 for the years ended December 31, 2004,  2003 and 2002, respectively. Tax equivalent interest income is based upon a  marginal effective tax rate of 34%. |
| (3) | Includes interest-bearing deposits in other banks.                                                                                                                                                                                                                 |
| (4) | Interest rate spread represents the difference between the average  yield on interest-earning assets and the average cost of interest-bearing  liabilities.                                                                                                        |
| (5) | Net yield on interest-earning assets represents net interest income  as a percentage of average interest-earning assets.                                                                                                                                           |

 

6

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**Rate/Volume Analysis.**  The following table presents, for the periodsindicated, the change in interest income and interest expense (in thousands)attributed to (i) changes in volume (changes in the weighted averagebalance of the total interest-earning asset and interest-bearing liabilityportfolios multiplied by the prior year rate), and (ii) changes in rate(changes in rate multiplied by prior year volume). Changes attributable to thecombined impact of volume and rate have been allocated proportionately based onthe absolute value of changes due to volume and changes due to rate.

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

 

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

 

**Net Income.**  Net income was $6.6 million for the yearended December 31, 2004. Net loss was $5.8 million for the year endedDecember 31, 2003. The increase in net income of $12.4 million whencomparing the year 2004 with 2003 is largely attributable to the debtrefinancing transaction described in the next paragraph, which produced a netloss for 2003 of $9.3 million after considering the income tax benefitassociated with the transaction.

 

During the third quarter of 2003, the Companycompleted a series of transactions (the “debt refinancing”) that resulted inthe repayment and refinancing of $187.4 million of Federal Home Loan Bankborrowings 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 wasassessed by the Federal Home Loan Bank. A portion of the funds used to repaythese borrowings came from the sale of $70.2 million of investmentsecurities available for sale and $9.5 million of mortgage-backedsecurities available for sale, which had been yielding a combined 1.93%. Theloss on the sale of these securities was $0.4 million. Management believedthat it was in the best interest of the Company’s shareholders and the Bank’semployees and customers to replace these high-cost borrowings in order toimprove the Company’s future net interest income and thus its overall financialperformance.

 

Pre-tax income was $9.0 million for2004. After adjusting for the $14.2 million pre-tax cost of the debtrefinancing, pre-tax income was $5.0 million for 2003. This $4.0 millionincrease in adjusted pre-tax income for 2003 compared to pre-tax income for2004 is mainly attributable to a $5.2 million increase in net interestincome, less a $0.3 million increase in provisions for loan losses and a$0.4 million increase in operating expenses, as described more fullybelow.

 

**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 thedecrease in the average balances of mortgage-backed

 

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securities and other interest-earning assets during 2004 compared with2003, largely due to the effect of the debt refinancing, and also due to thehigh rate of mortgage-backed security repayments that occurred in 2003 becauseof near-record low mortgage interest rates that existed throughout much of2003. Offsetting these net decreases in interest income was the positive effectof a $45.1 million increase in the average balance of loans receivableduring 2004 when compared to 2003, although the continued high level of loanprepayments and refinancing caused the average rate on loans receivable todecrease by 43 basis points during 2004 when compared to 2003.

 

Beginning in June 2004, the Federal OpenMarket Committee raised the federal funds rate five times by 125 basis pointsthrough year end 2004. At the same time, short-term market interest rates wererising, and by year end many short-term rates had risen by 150 basis pointssince the beginning of the year. However, long-term interest rates remainedapproximately flat during 2004. This 150 basis points of so-called “flattening”of the yield curve has had, and is expected to continue to have, a neutral toslightly positive effect on the Bank’s interest income since the positiveeffect on the Bank’s adjustable rate and prime-based loans will offset thenegative effect of expected, continued high levels of early repayment orrefinancing of the Bank’s above-current-market-rate, longer-term loans.

 

**Total Interest Expense.**  Total interest expense decreased to$8.9 million from $15.3 million for the year ended December 31,2004 compared to 2003. $1.4 million of this decrease is primarily theresult of low market interest rates during 2003 and, consequently, the Companyhad lowered the interest rates paid on most of its deposit products in order tokeep them in line with short-term market interest rates. However, by the end of2004 the Company had begun to raise the interest rates on its deposit productsin light of the previously described increase in short-term market interestrates and the need to maintain competitive pricing of the Bank’s depositproducts. The Company expects to continue raising the interest rates paid ondeposit products during 2005 and, therefore, expects deposit interest expenseto increase.

 

Interest paid on advances from the FHLBdecreased by $5.3 million during 2004 compared with 2003, largely becauseof the debt refinancing transaction.

 

**Allowance for Loan Losses.**  The allowance for loan losses wasapproximately $2.3 million at December 31, 2004 and $2.1 millionat December 31, 2003. The provision for loan losses was $600,000 during2004 compared with $330,000 during 2003. Charge-offs were $404,000 during 2004compared to $266,000 during 2003. While management maintains Third Federal’sallowance for losses at a level which it considers to be adequate to providefor probable losses, there can be no assurance that further additions will notbe made to the allowance and that such losses will not exceed the estimatedamounts.

 

**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 largelydue to the introduction of new deposit account services. Gains on sales of realestate and securities were $0 during 2004 compared to $0.3 million during2003.

 

**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 andbenefits increased by $583,000 during 2004 compared to 2003. Approximately $252,000of this increase was due to normal salary increases and increased staff, and$271,000 of the increase was due to an increase in incentive compensationexpenses. Advertising expense increased by $104,000 due to an increase in theBank’s marketing efforts, and an expansion of the media used, to advertise itsimage, products, and services. During 2004 the Company incurred approximately$40,000 of expense due to the commencement of implementation of the Sarbanes-OxleyAct of 2002. Since the Company is not an accelerated filer, full implementationwill not occur until 2006. At the present time, the Company estimates that itwill spend in excess of $250,000 to fully implement the procedures, and producethe required documentation, required by the Sarbanes-Oxley Act.

 

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

 

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

 

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

 

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

 

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

 

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

 

**Allowance for Loan Losses.**  The allowance for loan losses wasapproximately $2.1 million at December 31, 2003 and $2.0 millionat December 31, 2002. The provision for loan losses was $330,000 during2003 compared with $988,000 during 2002. Charge-offs were $266,000 during 2003compared to $913,000 during 2002. Charge-offs during 2002 includedapproximately $625,000 during the second quarter attributable to a default bythe servicer of the Company’s purchased lease portfolio.

 

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

 

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

 

**Non-Interest Expense.**  Total non-interest expense, excluding the$13.8 million debt prepayment fee, increased by $1.5 million during2003 compared to 2002. Employee compensation and benefits increased by $557,000during 2003 compared to 2002: expense related to the employee stock ownershipplan increased by $326,000 due to an increase in the shares allocated to planparticipants and an increase in the per share cost associated with theseallocations; the expense of the Company’s defined benefit plan increased by$126,000; and, finally, there was a $66,000 one-time expense associated withthe retirement of the Bank’s president at June 30, 2003. The remainingincrease in compensation is due to the cost of staffing a new branch, openedduring the first quarter of 2003, and normal salary increases.

 

Professional fees increased by $201,000during 2003 due to increased legal expense, in part related to the retirementof the Bank’s president and appointment of new senior officers at the Bank, andin part due to the evaluation and adoption of various policies and proceduresrequired by the Sarbanes-Oxley Act of 2002. Also, during the second half of2003 the Company engaged an outside firm to completely review and then provideon-going assistance with the Bank’s regulatory compliance requirements.

 

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

 

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

 

**Liquidity and Capital Resources**

 

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

 

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

 

The amount of certificate accounts that arescheduled to mature during the twelve months ending December 31, 2005, isapproximately $101.7 million. To the extent that these deposits do notremain at

 

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the Bank upon maturity, the Bank believes that it can replace thesefunds with deposits, excess liquidity, advances from the FHLB or otherborrowings. It has been the Bank’s experience that substantial portions of suchmaturing deposits remain at the Bank.

 

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

 

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

 

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

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

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

 

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

 

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

 

**Impact of Inflation and Changing Prices**

 

The consolidated financial statements andrelated data have been prepared in accordance with accounting principlesgenerally accepted in the United States of America which require themeasurement of financial position and operating results in terms of historicaldollars, without consideration for changes in the relative purchasing power ofmoney over time caused by inflation. Unlike industrial companies, nearly all ofthe assets and liabilities of a financial institution are monetary in nature.As a result, interest rates have a more significant impact on a financialinstitution’s performance than general levels of inflation. Interest rates donot necessarily move in the same direction or in the same magnitude as theprice of goods and services, since such goods and services are affected byinflation. In the current interest rate environment, liquidity and the maturitystructure of the Bank’s assets and liabilities are critical to the maintenanceof acceptable performance levels.

 

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**Quantitative and Qualitative DisclosuresAbout Market Risk**

 

**Interest Rate Risk Management**

 

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

 

The type of market risk which most affectsthe Company’s financial instruments is interest rate risk, which is bestquantified by measuring the change in net interest income that would occurunder specific changes in interest rates. Substantially all of the Bank’sinterest-bearing assets and liabilities are exposed to interest rate risk. Lossof economic value is measured using reports generated by the Office of ThriftSupervision (“OTS”), using input from the Bank, wherein the current netportfolio value of the Bank’s interest-sensitive assets and liabilities ismeasured at different hypothetical interest rate levels centered on the currentterm structure of interest rates. Gap reports are used to measure the netamount of assets and liabilities repricing, pre-paying and maturing duringfuture periods. ALCO evaluates the simulation results, the OTS model resultsand the “gap” reports and will make adjustments to the Bank’s plannedactivities if in its view there is a need to do so.

 

The Bank’s exposure to interest rate riskresults from, among other things, the difference in maturities in interest-earningassets and interest-bearing liabilities. Since the Bank’s assets currently havea longer maturity than its liabilities, the Bank’s earnings could be negativelyimpacted during a period of rising interest rates. Alternatively, in periods offalling interest rates the Bank’s mortgage loans will prepay at an increasingrate and caused the Bank to reinvest these cash flows in periods of lowinterest rates, also negatively affecting the Bank’s earnings. The relationshipbetween the interest rate sensitivity of the Bank’s assets and liabilities iscontinually monitored by management.

 

Fundamentally, the Bank prices and originatesloans, and prices and originates its deposits including CD’s at market interestrates. Volumes of such loans and deposits at various maturity and repricinghorizons will vary according to customer preferences as influenced by the termstructure of market interest rates. The Bank utilizes its investment andmortgage-backed security portfolios available for sale to generate additionalinterest income, to managing its liquidity, and to manage its interest raterisk. These securities are readily marketable and provide the Bank with a cashflow stream to fund asset growth or liability maturities. In addition, ifmanagement determines that it is advisable to do so, the Bank can lengthen orshorten the average maturity of all interest-bearing assets through theselection of fixed rate or variable rate securities, respectively.

 

The Bank utilizes advances from the FHLB inmanaging its interest rate risk and as a tool to augment deposits in fundingasset growth. The Bank may utilize these funding sources to better match itsfixed rate interest-bearing assets with longer maturities or repricingcharacteristics.

 

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

 

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

 

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

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

 

Management believes that the assumptionsutilized by OTS in evaluating the vulnerability of the Company’s net portfoliovalue to changes in interest rates are reasonable; however, the interest ratesensitivity of the Bank’s assets and liabilities as well as the estimated effectof changes in interest rates on NPV could vary substantially if differentassumptions are used or actual experience differs from the experience on whichthe assumptions were based. In the event the Bank should measure an excessivedecline in its NPV as the result of an immediate and sustained change ininterest rate, it has a number of options which it could utilize to remedy thatsituation. The Bank could restructure its investment portfolio through sale orpurchase of securities with more favorable repricing attributes. It could alsoemphasize loan products with appropriate maturities or repricing attributes, orit could attract deposits or obtain borrowings with desired maturities.

 

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

 

In addition to the level of interest rates,the most critical assumption regarding the estimated amount of the Bank’s NIIis the expected prepayment speed of the Bank’s 1-4 family residential loans,and related mortgage-backed securities, the book value of which comprises approximately69% of the Company’s total assets. For this prepayment speed assumption theCompany uses median expected prepayment speeds which are obtained from areliable third party source. The Company also incorporates into its simulationsthe effects of the interest rate caps and interest rate floors that are part ofthe majority of the Bank’s variable rate loans. Finally, the Company makescertain assumptions regarding the timing and magnitude of interest rate changeson its non-CD deposits.

 

The Company uses its business planningforecast as the basis for its NII simulations. Therefore, planned businessactivities are incorporated into the measurement horizon. Such activitiesinclude assumptions about substantial new loan and deposit volumes, the pricingof loan and deposit products, and other assumptions about future activitiesthat may or may not be realized. In order to quantify the Company’s NIIexposure at December 31, 2004, the Company focused on the simulation ofnet interest income over 24 months in three scenarios: ramped up 200 basispoints, shocked up 200 basis points, and shocked down 100 basis points. Theresults of these simulations are as follows:

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

 

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

 

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

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

 

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

 

**Recent Accounting Pronouncements**

 

On December 12, 2003, the AmericanInstitute of Certified Public Accountants issued Statement of Position No. 03-3,“Accounting for Certain Loans or Debt Securities Acquired in a Transfer”(SOP 03-3). SOP 03-3 requires acquired impaired loans for which it isprobable that the investor will be unable to collect all contractually requiredpayments receivable to be recorded at the present value of amounts expected tobe received and prohibits carrying over or creation of valuation allowances inthe initial accounting for these loans. SOP 03-3 is effective for loansacquired in fiscal years beginning after December 31, 2004. SOP 03-3 isnot expected to have a material impact on the Company’s results of operationsor financial condition.

 

On March 9, 2004, the Securities andExchange Commission (SEC) issued Staff Accounting Bulletin No. 105, “Applicationof Accounting Principles to Loan Commitments” (SAB 105), which specifies thatservicing assets embedded in commitments for loans to be held-for-sale shouldbe recognized only when the servicing asset has been contractually separatedfrom the associated loans by sale or securitization. The adoption of SAB 105 iseffective for commitments entered into after March 31, 2004. The adoptionof SAB 105 had no material impact on the Company’s results of operations orfinancial condition.

 

On March 18, 2004, the Emerging IssuesTask Force (EITF) issued EITF 03-1, “The Meaning of Other-Than-TemporaryImpairment and Its Application to Certain Investments” (EITF 03-1).EITF 03-1 provides recognition and measurement guidance regarding whenimpairments of equity and debt securities are considered other-than-temporarythereby requiring a charge to earnings, and also requires additional annualdisclosures for investments in unrealized loss positions. The additional annualdisclosure requirements were previously issued by the EITF in November 2003and were effective for the Company for the year ended December 31, 2003.In September 2004, the FASB issued FASB Staff Position (FSP) EITF 03-1-1,which delays the recognition and measurement provisions of EITF 03-1 pendingthe issuance of further implementation guidance. The Company is currentlyevaluating the effect of the recognition and measurement provisions of EITF03-1.

 

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

 

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**FINANCIAL STATEMENTS****AND REPORTOF**

**INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM**

 

**TF FINANCIAL CORPORATION AND SUBSIDIARIES**

 

**December 31, 2004 and 2003**

 

 

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**REPORT OF INDEPENDENT REGISTERED PUBLICACCOUNTING FIRM**

 

Board of Directors and

Shareholders of TF Financial Corporation

 

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

 

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

 

In our opinion, the consolidated financialstatements referred to above present fairly, in all material respects, theconsolidated financial position of TF Financial Corporation and Subsidiaries asof December 31, 2004 and 2003, and the consolidated results of theiroperations and their consolidated cash flows for each of the three years in theperiod ended December 31, 2004, in conformity with accounting principlesgenerally accepted in the United States of America.

 

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

 

 
| /s/ Grant Thornton LLP     |   |
|----------------------------|--------|
| Philadelphia, Pennsylvania |
| March 25. 2005        |

 

17

----

 

**TF Financial Corporation and Subsidiaries**

 

**CONSOLIDATED STATEMENTS OF FINANCIAL POSITION**

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

 

The accompanying notes are an integral partof these statements.

 

18

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**TF Financial Corporation and Subsidiaries**

 

**CONSOLIDATED STATEMENTS OF OPERATIONS**

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

 

The accompanying notes are an integral partof these statements.

 

19

----

 

**TF Financial Corporation and Subsidiaries**

 

**CONSOLIDATED STATEMENT OF CHANGES INSTOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME**

 

**Years ended December 31, 2004, 2003 and2002**

 

**(in thousands, except share data)**

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

 

The accompanying notes are an integral partof this statement

 

20

----

 

**TF Financial Corporation and Subsidiaries**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

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

 

 

21

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

 

The accompanying notes are an integral partof these statements.

 

22

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**TF Financial Corporation and Subsidiaries**

 

**NOTES TO CONSOLIDATED FINANCIAL****STATEMENTS**

 

**December 31, 2004 and 2003**

 

**NOTE A—SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES**

 

TF Financial Corporation (the “Company”) is a unitary savings and loanholding company, organized under the laws of the State of Delaware, whichconducts its consumer banking operations primarily through its wholly ownedsubsidiary, Third Federal Bank (Third Federal or the Bank). Third Federal is afederally chartered-stock savings bank insured by the Federal Deposit InsuranceCorporation. Third Federal is a community-oriented savings institution thatconducts operations from its main office in Newtown, Pennsylvania, elevenfull-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 inits primary market communities, including financial institutions with resourcessubstantially greater than its own. Commercial banks, savings banks, savingsand loan associations, credit unions and money market funds actively competefor savings and time deposits and loans. Such institutions, as well as consumerfinance and insurance companies, may be considered competitors of the Bank withrespect to one or more of the services it renders.

 

The Bank is subject to regulations of certain state and federalagencies and, accordingly, those regulatory authorities conduct periodicexaminations. As a consequence of the extensive regulation of commercialbanking activities, the Bank’s business is particularly susceptible to beingaffected by state and federal legislation and regulations.

 

1.* Principles of Consolidation and Basis of Presentation*

 

The consolidated financial statements include the accounts of theCompany and its wholly owned subsidiaries: TF Investments, Penns TrailDevelopment 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 beeneliminated in consolidation.

 

The accounting policies of the Company conform to accounting principlesgenerally accepted in the United States of America (US GAAP) and predominantpractices within the banking industry. The preparation of financial statementsin conformity with US GAAP requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements, and the reported amounts of revenues and expenses during thereporting period. Actual results could differ from those estimates. The moresignificant accounting policies are summarized below.

 

2.* Cash and Cash Equivalents*

 

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

 

3.* Investment and Mortgage-Backed Securities*

 

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

 

23

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

 

Investment, mortgage-backed and marketable equity securities availablefor sale are stated at fair value, with net unrealized gains and lossesexcluded from income and reported in other comprehensive income. Realized gainsand losses on the sale of securities are recognized using the specificidentification method.

 

On March 18, 2004, the Emerging Issues Task Force issued EITF 03-1,“The Meaning of Other-than-Temporary Impairment and Its Application to CertainInvestments”. EITF 03-1 provides recognition and measurement guidanceregarding treatment of equity and debt security impairment which is considered “other-thantemporary” and thereby requiring a charge to earnings. EITF 03-1 alsorequires additional annual disclosure for investments in unrealized losspositions. The additional annual disclosure requirements were previously issuedby the EITF in November 2003 and were effective for the Company for theyear ended December 31, 2003. In September 2004, the FASB issued FASBStaff Position (FSP) EITF 03-1-1, which delays the recognition andmeasurement provisions of EITF 03-1 pending the issuance of furtherguidance.

 

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

 

4.* Loans Receivable*

 

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

 

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

 

The Bank provides an allowance for accrued but uncollected interestwhen the loan becomes more than ninety days past due or is identified asimpaired. The allowance is established by a charge to interest income equal toall interest previously accrued, and income is subsequently recognized only tothe extent that cash payments are received until, in management’s judgment, theborrower’s ability to make periodic interest and principal payments is nolonger impaired, in which case the loan is returned to accrual status.

 

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

 

24

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observable market price, or the fair value of the collateral if theloan is collateral dependent. Regardless of the measurement method, a creditormust measure impairment based on the fair value of the collateral when thecreditor determines that foreclosure is probable. SFAS No. 118 allowscreditors to use existing methods for recognizing interest income on impairedloans.

 

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

 

5.* Mortgage Loans Held-for-Sale*

 

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

 

The Company adopted SFAS No. 149, “Amendment of Statement 133 onDerivative Instruments and Hedging Activities,” on July 1, 2003.Implementation issue C13, “When a Loan Commitment Is Included in the Scope ofStatement 133” is included in SFAS No. 149. SFAS No. 149 amends SFAS No. 133to add a scope exception for borrowers (all commitments) and lenders (allcommitments except those relating to mortgage loans that will be held forsale). Statement 149 also amends paragraph SFAS No. 133 to require alender to account for loan commitments related to mortgage loans that will beheld for sale as derivatives. SFAS No. 149 is effective for contractsentered into or modified after June 30, 2003. The Bank periodically entersinto commitments with its customers, which it intends to sell in the future.The Bank’s commitments to extend credit for loans intended for resale were notmaterial at December 31, 2004.

 

On March 2004, the Securities and Exchange Commission releasedStaff Accounting Bulletin (SAB) 105, “Loan Commitments Accounted for asDerivative Instruments.” SAB 105 requires that a lender should not consider theexpected cash flows related to loan servicing or include any internallydeveloped intangible assets in determining the fair value of loan commitmentsaccounted for as derivatives. The Company adopted SAB 105 effective forcommitments entered into after June 30, 2004. The requirements of SAB 105apply to the Company’s mortgage interest rate lock commitments related to loansheld for sale. The Company’s application of SAB 105 did not have a materialimpact of the Company’s financial position or results of operations.

 

6.* Premises and Equipment*

 

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

 

25

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7.* Goodwill and Other Intangible Assets*

 

In 1996 the Bank acquired three Mercer County, New Jersey offices andrelated deposits of Cenlar Federal Savings Bank. The Bank assumed$137.6 million in deposits in exchange for $126.5 million in cash. Asa result of the acquisition, the Bank recorded core deposit intangible of$2.8 million and goodwill of $6.7 million. The core depositintangible acquired is being amortized on an accelerated basis over10 years. The goodwill acquired from the acquisition was recorded as anunidentifiable intangible asset under SFAS No. 72, “Accounting for CertainAcquisitions of Banking or Thrift Institutions.” On January 1, 2002, theCompany adopted Financial Accounting Standards Board (FASB) SFAS No. 141,“Business Combinations,” SFAS No. 142, “Goodwill and Intangible Assets,”SFAS No. 144, “Accounting for the Impairment or Disposal of Long-LivedAssets,” and SFAS No. 147,”Acquisitions of Certain Financial Institutions.”Adoption of these statements resulted in that goodwill would no longer beamortized on a recurring basis, but rather be subject to periodic impairmenttesting. The Company had $4,324,000 of SFAS 72 goodwill at January 1, 2002remaining from the 1996 branch acquisition that management of the Company hasconcluded was a business combination in accordance with SFAS No. 147. Inaddition, the Company has tested the goodwill and core deposit intangibleassets for impairment prior to its fiscal year ending December 31, 2004.No impairment has been recognized.

 

8.* Transfers of Financial Assets*

 

The Company accounts for the transfer of financial assets in accordancewith SFAS No. 140 “Accounting for Transfers and Servicing of FinancialAssets and Extinguishments of Liabilities.” The standard is based on consistentapplication of a financial-components approach that recognizes the financialand servicing assets it controls and the liabilities it has incurred,derecognizes financial assets when control has been surrendered andderecognizes liabilities when extinguished. The standard provides consistentguidelines for distinguishing transfers of financial assets from transfers thatare secured borrowings

 

9.* Benefit Plans*

 

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

 

The Company has stock option plans that allowed the Company to grantoptions to employees and directors. The options, which have a term of10 years when issued, vest either immediately or over a three to five yearperiod. The exercise price of each option equals the market price of theCompany’s stock on the date of grant. The Company accounts for stock-basedcompensation in accordance with SFAS No. 123, “Accounting for Stock-BasedCompensation,” which contains a fair value-based method for valuing stock-basedcompensation that entities may use, which measures compensation cost at thegrant date based on the fair value of the award. Compensation is thenrecognized over the service period, which is usually the vesting period.Alternatively, the standard permits entities to continue

 

26

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

 

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

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

 

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

 

10.* Income Taxes*

 

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

 

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of “temporary differences” by applying enacted statutory tax ratesapplicable to future years to differences between the financial statementcarrying amounts and the tax bases of existing assets and liabilities. Theeffect on deferred taxes of a change in tax rates is recognized in income inthe 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 PerShare.” Basic earnings per share excludes dilution and is computed by dividingincome available to common shareholders by the weighted average common sharesoutstanding during the period. Diluted earnings per share takes into accountthe potential dilution that could occur if securities or other contracts toissue common stock were exercised and converted into common stock.

 

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13.* Comprehensive Income*

 

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

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

 

14.* Segment Reporting*

 

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

 

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activities are interrelated, and each activity is dependent andassessed based on how each of the activities of the Company supports theothers. For example, commercial lending is dependent upon the ability of theBank to fund itself with retail deposits and other borrowings and to manageinterest rate and credit risk. This situation is also similar for consumer andresidential mortgage lending. Accordingly, all significant operating decisionsare based upon analysis of the Company as one operating segment or unit.

 

15.* Reclassifications*

 

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

 

**NOTE B—CASH AND CASH EQUIVALENTS**

 

Cash and cash equivalents consist of the following:

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

 

**NOTE C—INVESTMENT AND MORTGAGE-BACKEDSECURITIES**

 

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

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

 

30

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

 

The amortized cost, gross unrealized gains and losses, and estimatedmarket value of mortgage-backed securities, by issuer, are summarized asfollows:

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

 

31

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

 

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

 

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

 

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

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

 

32

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

 

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

 

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

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

 

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

 

33

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**NOTE D—LOANS RECEIVABLE**

 

Loans receivable are summarized as follows:

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

 

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

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

 

Non-performing loans, which include non-accrual loans for which theaccrual of interest has been discontinued and loan balances past due over90 days that are not on a non-accrual status but that management expectswill eventually be paid in full, totaled approximately $960,000 and$2.3 million at December 31, 2004 and 2003, respectively. Interestincome that would have been recorded under the original terms of such loanstotaled approximately $30,000, $171,000, and $307,000 for the years ended

 

34

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

 

The Bank has no concentration of loans to borrowers engaged in similaractivities that exceeded 10% of loans at December 31, 2004 and 2003. Inthe ordinary course of business, the Bank has granted loans to certainexecutive officers, directors and their related interests. Related party loansare made on substantially the same terms as those prevailing at the time forcomparable transactions with unrelated persons and do not involve more than thenormal risk of collectibility. The aggregate dollar amount of these loans wasapproximately $82,000, and $1,291,000 at December 31, 2004 and 2003,respectively. For the year ended December 31, 2004, principal repaymentsof approximately $1,209,000 were received.

 

**NOTE E—LOAN SERVICING**

 

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

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

 

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

 

35

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**NOTE F—PREMISES AND EQUIPMENT**

 

Premises and equipment are summarized as follows:

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

 

**NOTE G—CORE DEPOSIT INTANGIBLE ASSET**

 

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

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

 

36

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**NOTE H—DEPOSITS**

 

Deposits are summarized as follows:

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

 

The aggregate amount of certificates of deposit with a minimumdenomination of $100,000 was approximately $26.6 million and$22.2 million at December 31, 2004 and 2003, respectively. The Bankhad no broker-originated certificates of deposit at December 31, 2004 and2003.

 

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

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

 

**NOTE I—ADVANCES FROM THE FEDERAL HOME LOANBANK AND OTHER BORROWINGS**

 

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

 

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

 

37

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

 

**NOTE J—BENEFIT PLANS**

 

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

 

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

 

38

----

 

 

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

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

 

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

 

39

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

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

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

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

 

The long-term rate of return on assets was developed through analysisof historical market returns, current market conditions and the fund’s pastexperience. Estimates of future market returns by asset category are lower thanactual long-term historical returns in order to reflect current marketconditions.

 

Estimated future benefits payments are as follows:

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

 

40

----

 

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

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

 

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

 

The Company also maintains the following benefit plans:

 

1.* Employee Stock Ownership Plan*

 

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

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

 

41

----

 

2.* Stock Option Plans*

 

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

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

 

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

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

 

42

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**NOTE K—INCOME TAXES**

 

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

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

 

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

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

 

43

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Deferred taxes are included in the accompanying consolidated statementsof financial position at December 31, 2004 and 2003, for the estimatedfuture tax effects of differences between the financial statement and federalincome tax bases of assets and liabilities according to the provisions ofcurrently enacted tax laws. No valuation allowance was recorded againstdeferred tax assets at December 31, 2004 and 2003. The Company’s netdeferred tax asset (liability) at December 31, 2004 and 2003, was composedof the following:

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

 

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

 

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

 

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

 

44

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**NOTE L—REGULATORY MATTERS**

 

The Bank is subject to minimum regulatory capital standards promulgatedby the Office of Thrift Supervision (OTS). Failure to meet minimum capitalrequirements can initiate certain mandatory—and possible additionaldiscretionary—actions by regulators that, if undertaken, could have a directmaterial effect on the Company’s consolidated financial statements. Undercapital adequacy guidelines and the regulatory framework for prompt correctiveaction, the Bank must meet specific capital guidelines that involvequantitative measures of the Bank’s assets, liabilities, and certainoff-balance sheet items as calculated under regulatory accounting practices.The Company’s capital amounts and classification are also subject toqualitative judgments by the regulators about components, risk weightings, andother factors. Such minimum capital standards generally require the maintenanceof regulatory capital sufficient to meet each of three tests, hereinafterdescribed as the tangible capital requirement, the core capital requirement andthe risk-based capital requirement. The tangible capital requirement providesfor minimum tangible capital (defined as stockholders’ equity less allintangible assets) equal to 1.5% of adjusted total assets. The core capitalrequirement provides for minimum core capital (tangible capital plus certainforms of supervisory goodwill and other qualifying intangible assets) equal to4% of adjusted total assets at December 31, 2004.

 

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

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

 

45

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

 

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

 

The Bank maintains a liquidation account for the benefit of eligiblesavings account holders who maintained deposit accounts in the Bank after theBank converted to a stock form of ownership. The Bank may not declare or pay acash dividend on or repurchase any of its common shares if the effect thereofwould cause the Bank’s stockholders’ equity to be reduced below either theamount required for the liquidation account or the regulatory capitalrequirements for insured institutions.

 

**NOTE M—FINANCIAL INSTRUMENTS WITHOFF-BALANCE-SHEET RISK**

 

The Company is a party to financial instruments with off-balance-sheetrisk in the normal course of business to meet the financing needs of itscustomers. These financial instruments are primarily commitments to extendcredit and standby letters of credit. Such financial instruments are recordedin the consolidated financial statements when they become receivable orpayable. Those instruments involve, to varying degrees, elements of credit andinterest rate risk in excess of the amount recognized in the consolidatedstatements of financial position. The contract or notional amounts of thoseinstruments reflect the extent of the Bank’s involvement in particular classesof financial instruments.

 

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

 

46

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

 

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

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

 

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

 

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

 

**NOTE N—COMMITMENTS AND CONTINGENCIES**

 

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

 

The Bank leases branch facilities and office space for periods rangingup to seven years. These leases are classified as operating leases and containoptions to renew for additional periods. Rental expense was approximately $359,000$304,000, and $279,000, for the years ended December 31, 2004, 2003 and2002, respectively.

 

47

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

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

 

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

 

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

 

**NOTE O—SIGNIFICANT CONCENTRATIONS OF CREDITRISK**

 

The Bank is principally engaged in originating and investing inone-to-four family residential real estate and commercial real estate loans ineastern Pennsylvania and New Jersey. The Bank offers both fixed and adjustablerates of interest on these loans that have amortization terms ranging to30 years. The loans are generally originated or purchased on the basis ofan 80% loan-to-value ratio, which has historically provided the Bank with morethan adequate collateral coverage in the event of default. Nevertheless, theBank, as with any lending institution, is subject to the risk that residentialreal estate values in the primary lending area will deteriorate, therebypotentially impairing collateral values in the primary lending area. However,management believes that residential and commercial real estate values arepresently stable in its primary lending area and that loan loss allowances havebeen provided for in amounts commensurate with its current perception of theforegoing risks in the portfolio.

 

**NOTE P—FAIR VALUE OF FINANCIAL INSTRUMENTS**

 

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

 

48

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transaction. Also, it is the Company’s general practice and intent tohold its financial instruments to maturity or available for sale and to notengage in trading or significant sales activities. Therefore, the Company andthe Bank had to use significant estimations and present value calculations toprepare this disclosure.

 

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

 

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

 

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

 

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

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

 

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

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

 

49

----

 

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

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

 

The fair value of the net loan portfolio has been estimated using thepresent value of cash flows, discounted at the approximate current marketrates, and giving consideration to estimated prepayment risk and credit lossfactors.

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

 

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

 

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

 

50

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

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

 

**NOTE R—SHAREHOLDER RIGHTS PLAN**

 

The Company adopted a Shareholder Rights Plan (the Rights Plan) toprotect shareholders from attempts to acquire control of the Company at aninadequate price. Under the Rights Plan, the Company distributed a dividend ofone Preferred Share Purchase Right (a Right) for each share of outstandingcommon stock. The rights are currently not exercisable and will expire on November 22,2005, unless the expiration date is extended or unless the Company earlierredeems the Rights.

 

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

 

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

 

51

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

 

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

 

**NOTE S—EARNINGS PER SHARE**

 

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

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

 

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

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

 

52

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

 

There were options to purchase 27,150 shares of common stock at a rangeof $25.35 to $28.00 per share which were outstanding during 2002 that were notincluded in the computation of diluted earnings per share because the options’exercise prices were greater than the average market price of the commonshares.

 

**NOTE T—SELECTED QUARTERLY CONSOLIDATEDFINANCIAL DATE (UNAUDITED)**

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

 

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

 

54

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**NOTE U—CONDENSED FINANCIAL INFORMATION—PARENTCOMPANY ONLY**

 

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

 

**BALANCE SHEET**

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

 

**STATEMENT OF OPERATIONS**

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

 

55

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**STATEMENT OF CASH FLOWS**

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

 

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