**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM10-K**

 

**FORANNUAL AND TRANSITION REPORTS**

**PURSUANTTO SECTIONS 13 OR 15(d) OF THE**

**SECURITIESEXCHANGE ACT OF 1934**

 
| **ý**                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | ** ** | **ANNUAL REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**     |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| **For  the fiscal year ended December 31, 2005**                                                                                                                                                                                                                                                                                                                                                                                                                      |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| **- or -**                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| **o**                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       | ** **                                                                                              |
| **For  the transition period  from                                   to                                   ** |

 

**Commission file number:  0-24168**

 

**TFFINANCIAL CORPORATION**

(Exact Name of Registrant as Specified in Its Charter)

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

 

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

 

Securitiesregistered pursuant to Section 12(b) of the Act:  **None**

 

Securitiesregistered pursuant to Section 12(g) of the Act:

 

**Common Stock, par value $.10 per share**

(Title of Class)

 

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

 

Indicateby check mark if the registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Exchange Act. YES o**  **NO ý

 

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

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K.  ý

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-acclereated filer. See definition of “acceleratedfiler” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.
| Large  accelerated filer o |   | Accelerated  filer o |   | Non-accelerated  filer ý |
|---------------------------------|--------|---------------------------|--------|------------------------------------|

 

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

 

Theaggregate market value of the voting common equity held by non-affiliates ofthe registrant, based on the closing price of the registrant’s Common Stock asquoted on the Nasdaq System on June 30, 2005, was $58.5 million (2,086,865shares at $28.01 per share).

 

Asof March 7, 2006 there were outstanding 2,877,440 shares of the registrant’sCommon Stock.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

1.             Portions of the Annual Report to Stockholders for the Fiscal Year Ended December 31,2005.  (Parts I, II and IV)

2.             Portions of the Proxy Statement for the 2006 Annual Meeting ofStockholders.  (Part III)

 

 

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**PART I**

 

TFFINANCIAL CORPORATION (THE “COMPANY”) MAY FROM TIME TO TIME MAKE WRITTENOR ORAL “FORWARD-LOOKING STATEMENTS”, INCLUDING STATEMENTS CONTAINED IN THECOMPANY’S FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION (INCLUDING THISANNUAL REPORT ON FORM 10-K AND THE EXHIBITS HERETO), IN ITS REPORTS TOSTOCKHOLDERS AND IN OTHER COMMUNICATIONS BY THE COMPANY, WHICH ARE MADE IN GOODFAITH BY THE COMPANY PURSUANT TO THE “SAFE HARBOR” PROVISIONS OF THE PRIVATESECURITIES LITIGATION REFORM ACT OF 1995.

 

THESEFORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES, SUCH AS STATEMENTSOF THE COMPANY’S PLANS, OBJECTIVES, EXPECTATIONS, ESTIMATES AND INTENTIONS,THAT ARE SUBJECT TO CHANGE BASED ON VARIOUS IMPORTANT FACTORS (SOME OF WHICHARE BEYOND THE COMPANY’S CONTROL).  THEFOLLOWING FACTORS, AMONG OTHERS, COULD CAUSE THE COMPANY’S FINANCIALPERFORMANCE TO DIFFER MATERIALLY FROM THE PLANS, OBJECTIVES, EXPECTATIONS,ESTIMATES AND INTENTIONS EXPRESSED IN SUCH FORWARD-LOOKING STATEMENTS: THESTRENGTH OF THE UNITED STATES ECONOMY IN GENERAL AND THE STRENGTH OF THE LOCALECONOMIES IN WHICH THE COMPANY CONDUCTS OPERATIONS; THE EFFECTS OF, AND CHANGESIN, MONETARY AND FISCAL POLICIES AND LAWS, INCLUDING INTEREST RATE POLICIES OFTHE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, INFLATION, INTERESTRATES, MARKET AND MONETARY FLUCTUATIONS; THE TIMELY DEVELOPMENT OF ANDACCEPTANCE OF NEW PRODUCTS AND SERVICES OF THE COMPANY AND THE PERCEIVEDOVERALL VALUE OF THESE PRODUCTS AND SERVICES BY USERS, INCLUDING THE FEATURES,PRICING AND QUALITY COMPARED TO COMPETITORS’ PRODUCTS AND SERVICES; THE IMPACTOF CHANGES IN FINANCIAL SERVICES’ LAWS AND REGULATIONS (INCLUDING LAWSCONCERNING TAXES, BANKING, SECURITIES AND INSURANCE); TECHNOLOGICAL CHANGES;ACQUISITIONS; CHANGES IN CONSUMER SPENDING AND SAVING HABITS; AND THE SUCCESSOF THE COMPANY AT MANAGING THE RISKS INVOLVED IN THE FOREGOING.

 

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

 

Item1.  Business

 

**BUSINESS OF THE COMPANY**

 

OnJuly 13, 1994, the Company consummated its public offering for 5,290,000shares of its common stock and acquired Third Federal Bank (the “Bank”) as partof the Bank’s mutual-to-stock conversion. The Company was incorporated under Delaware law in March 1994.  The Company is a savings and loan holdingcompany and is subject to regulation by the Office of Thrift Supervision (the “OTS”),the Federal Deposit Insurance Corporation (the “FDIC”) and the Securities andExchange Commission (the “SEC”).  TheCompany does not transact any material business other than through its directand indirect subsidiaries: Third Federal Bank, TF Investments Corporation,Teragon Financial Corporation, Penns Trail Development Corporation and ThirdDelaware Corporation. At December 31, 2005, the Company had total assetsof $661 million, total liabilities of $598 million and stockholders’ equity of$63 million.

 

**BUSINESS OF THE BANK**

 

TheBank is a federally-chartered stock savings bank, which was originallychartered in 1921 as a Pennsylvania-chartered building and loanassociation.  The Bank’s deposits areinsured up to the maximum amount allowable by the FDIC.

 

TheBank is a community oriented savings institution offering a variety offinancial services to meet the needs of the communities it serves.  As of December 31, 2005 the Bankoperated fifteen branch offices and one loan production office in Bucks and Philadelphiacounties, Pennsylvania and in Mercer County, New Jersey.

 

TheBank attracts deposits from the general public and uses such deposits, togetherwith borrowings and other funds primarily to originate or purchase loanssecured by first mortgages on owner-occupied, one-to-four family residences inits market area and to invest in mortgage-backed and investment securities.  At December 31, 2005, one-to-four familyresidential mortgage loans totaled $290 million or 59% of the Bank’s total loanportfolio.  At that same date, the Bankhad

 

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approximately $94 million or 14%of total assets invested in mortgage-backed securities and $35 million or 5% oftotal assets in investment securities. The Bank also originates commercial realestate and multi-family, construction and consumer loans.  The Bank has two subsidiaries, Third DelawareCorporation, which was incorporated in 1998 for the purpose of holding andmanaging mortgage-backed securities and investment securities for the Bank, andTeragon Financial Corporation which holds a 75% limited partnership interest ina captive title insurance agency, Third Fed Abstract, L. P.

 

**Market Area**

 

TheBank offers a wide range of consumer and business products at its fifteen fullservice branch offices located in Bucks and Philadelphia Counties inPennsylvania, and Mercer County in New Jersey. Five of the branch offices arelocated in Bucks County, the third wealthiest county in Pennsylvania. BucksCounty is a growing region offering opportunity for growth for the Bank. Sevenbranches are located in the northeast section of Philadelphia where theBank was founded. Although Philadelphia County is experiencing populationdecline, the Bank’s branches in this section of Philadelphia represent adeposit stronghold. The remaining three branches are in Mercer County, New Jerseywhich has an expanding population and represents another growth area for theBank.

 

**Competition**

 

TheBank faces varying degrees of competition from banks, thrift institutions andcredit unions at its various branch locations. Stronger competition has come from local and very large regionalcommercial banks based in and around the Philadelphia area.  Based upon the latest available data, at June 30,2005 the Company’s share of deposits in each of the counties in which itoperates was as follows:

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

 

**Lending Activities**

 

**General.**  The Bank’s loan portfoliocomposition consists primarily of conventional adjustable-rate (“ARM”) andfixed-rate first mortgage loans secured by one-to-four family residences.  The Bank also makes commercial real estateand multi-family loans, construction loans and consumer and other loans.  At December 31, 2005, the Bank’smortgage loans outstanding were $404 million, of which $290 million weresecured by first mortgages on one-to-four family residential property.  Of the one-to-four family residentialmortgage loans outstanding at that date, 17% were ARM’s and 83% were fixed-rateloans.  Total ARM loans in the Bank’sportfolio at December 31, 2005 amounted to $49 million or 10% of totalloans.  At that same date, commercialreal estate and multi-family residential loans totaled $89 million, andconstruction loans totaled $25 million. The construction loans arepredominately floating-rate, prime-rate-based loans.

 

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

 

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Thefollowing table sets forth the composition of the Bank’s loan portfolio andmortgage-backed and related securities portfolios in dollar amounts and inpercentages of the respective portfolios at the dates indicated.

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

 

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**Loan Maturity and Repricing Information.**  Thefollowing table sets forth certain information at December 31, 2005,regarding the dollar amount of loans maturing in the Bank’s loan andmortgage-backed securities portfolios based on their maturity date.  Demand loans, loans having no stated schedule ofrepayments and no stated maturity, overdrafts and delinquent loans maturingprior to December 31, 2006, are reported as due in one year or less.  The table does not include prepayments orscheduled principal repayments.

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

 

Thefollowing table sets forth the dollar amount of all loans and mortgage-backedsecurities due after December 31, 2006, which have predetermined interestrates and which have floating or adjustable interest rates. Loans which haverate adjustments after ten years are considered to have predetermined rates.

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

 

**One-to-Four Family Mortgage Lending.**  TheBank offers first mortgage loans secured by one-to-four family residences inthe Bank’s lending area.  Typically, suchresidences are single-family homes that serve as the primary residence of theowner.  The Bank generally originates andinvests in one-to-four family residential mortgage loans in amounts up to 80%of the lesser of the appraised value or selling price of the mortgagedproperty.  Loans originated in amountsover 80% of the lesser of the appraised value or selling price of the mortgagedproperty, other than loans to

 

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

 

Loanoriginations are obtained from existing or past customers, members of the localcommunity, and referrals from established builders and realtors within the Bank’slending area using direct advertising in local newspapers, branch signage andpromotions, and word of mouth referrals.

 

TheBank offers a variety of ARM loans with terms of 30 years which adjust at theend of 6 months, one, three, five, seven and ten years and adjust by a maximumof 3% to 5% per adjustment with a lifetime cap of 5% to 6% over the life of theloan.

 

TheBank offers fixed-rate mortgage loans with terms of 10 to 30 years, which arepayable monthly.  Interest rates chargedon fixed-rate mortgage loans are competitively priced based on marketconditions.  The origination fees forfixed-rate loans range from 0% to 3% depending on the underlying loan coupon.Generally, the Bank’s standard underwriting guidelines for fixed-rate mortgageloans conform to the FHLMC and FNMA guidelines. The Bank sells a portion of itsconforming fixed-rate mortgage loan originations in the secondary market toFHLMC and FNMA while retaining the servicing rights on these loans. The Bankalso brokers a small portion of its loan closings to correspondents. However, theBank is primarily a portfolio lender.  Asof December 31, 2005, the Bank’s portfolio of loans serviced for FHLMC orFNMA totaled approximately $10.9 million.

 

TheBank has a mortgage lending department that is separate as to its sales effortsfrom the consumer lending area of the Bank. This department employs a lendingmanager and several commissioned loan officers. Through this department theBank offers, in addition to its standard portfolio loan products, other typesof mortgage loans that are originated in the name of, or sold on a servicingreleased basis to, third party investors. The mortgage loan officers supportthe Bank’s branches and customers, and additionally engage in calling effortsdirected toward realtors, builders, and others that can be sources of lendingbusiness for the Bank.

 

**Commercial Real Estate and Multi-Family Lending.**  TheBank originates loans secured by commercial real estate including non-owneroccupied residential multi-family dwelling units (more than four units)primarily secured by professional office buildings and apartment complexes. TheBank generally originates commercial real estate and multi-family loans up to75% of the appraised value of the property securing the loan.  Currently, it is the Bank’s philosophy tooriginate commercial real estate and multi-family loans primarily on propertiesin its general market area.  Thecommercial real estate and multi-family loans in the Bank’s portfolio consistof fixed-rate, ARM and balloon loans originated at prevailing market rates forterms of up to 25 years.  The Bank’scurrent policy is to originate commercial real estate and multi-family loans asARM’s that amortize over a 20 to 25 year period and either balloon or arecallable by the Bank after a 5 to 10 year period.

 

Loanssecured by commercial and multi-family real estate are generally larger andinvolve a greater degree of risk than one-to-four family residential mortgageloans.  Of primary concern in commercialand multi-family real estate lending is the borrower’s creditworthiness and thefeasibility and cash flow potential of the project.  Loans secured by income properties aregenerally larger and involve greater risks than residential mortgage loansbecause payments on loans secured by income properties are often dependent onsuccessful operation or management of the properties.  As a result, repayment of such loans may besubject to a greater extent than residential real estate loans to adverseconditions in the real estate market or the economy.  In order to monitor cash flows on incomeproperties, the Bank requires borrowers and loan guarantors, if any, to provideannual financial statements and rent rolls on multi-family loans.  At December 31, 2005, the five largestcommercial real estate and multi-family loans totaled $24.5 million with no singleloan larger than $6.0 million.  At December 31,2005, all such loans were current and the properties securing such loans are inthe Bank’s market area.

 

**Construction Lending.**  At December 31,2005, the Bank had $25 million of construction loans or 5% of the Bank’s totalloan portfolio.  Construction financingis generally considered to involve a higher degree of risk of loss thanlong-term financing on improved, occupied real estate.  Risk of loss on a construction loan isdependent largely upon the accuracy of the initial estimate of the property’svalue at completion of construction or development and the estimated cost(including interest) of construction. During the construction phase, a number of factors could result indelays and

 

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cost overruns.  If the estimateof construction costs proves to be inaccurate, the Bank may be required toadvance funds beyond the amount originally committed to permit completion ofthe construction.  If the estimate ofvalue proves to be inaccurate, the Bank may be confronted, at or prior to thematurity of the loan, with a project having a value which is insufficient toassure full repayment.

 

**Consumer and Other Loans.**  TheBank also offers consumer and other loans in the form of home equity and secondmortgage loans (referred to hereinafter collectively as “second mortgage loans”),automobile loans and student loans.  Theseloans totaled $40 million or 8% of the Bank’s total loan portfolio at December 31,2005.  The Bank originates consumer loansin order to provide a wide range of financial services to its customers and becausethe shorter terms and normally higher interest rates on such loans helpmaintain a profitable spread between its average loan yield and its cost offunds.

 

Inconnection with consumer loan applications, the Bank verifies the borrower’sincome and reviews a credit bureau report. In addition, the relationship of the loan to the value of the collateralis considered.  All automobile loanapplications are reviewed and approved by the Bank.  The Bank reviews the credit report of theborrower as well as the value of the vehicle which secures the loan.

 

Consumerloans tend to be originated at higher interest rates than conventionalresidential mortgage loans and for shorter terms, thus facilitating the Bank’sinterest rate risk management.  Consumerloans, however, tend to have a higher risk of default than residential mortgageloans.  At December 31, 2005, $170,000or 0.4% of the Bank’s consumer loans were delinquent more than 90 days,compared to $392,000 or 0.1% of residential one-to-four family loans.

 

TheBank offers second mortgage loans on one-to-four family residences.  At December 31, 2005, second mortgage andhome equity loans totaled $37 million, or 8% of the Bank’s total loanportfolio.  Second mortgage loans areoffered as fixed-rate loans for a term not to exceed 15 years.  Such loans are only made on owner-occupiedone-to-four family residences and are subject to a 90% combined loan to valueratio.  The underwriting standards forsecond mortgage loans are the same as the Bank’s standards applicable toone-to-four family residential loans.

 

**Business Lending.**  The Bank makes commercialbusiness loans only on a secured or guaranteed basis.  The terms of these loans generally do notexceed five years. These loans can have floating interest rates which adjustwith changes in market interest rates, usually the prime rate, or have a fixedrate related to their term to maturity. The Bank’s commercial business loans primarily consist of short-termloans for equipment, working capital, business expansion and inventoryfinancing.  The Bank customarily requiresa personal guaranty of payment by the principals of any borrowing entity andreviews the financial statements and income tax returns of the guarantors.  At December 31, 2005, the Bank had approximately$49 million outstanding in commercial business loans, which representedapproximately 10% of its total loan portfolio.

 

**Loan Approval Authority and Underwriting.**  TheBoard of Directors of the Bank sets the authority to approve loans based on theamount, type of loan (i.e., secured or unsecured) and total exposure to theborrower.  Where there are one or moreexisting loans to a borrower, the level of approval required is governed by theproposed total exposure including the new loan. The Board has approved loan authority and limits for certain of the Bank’slending personnel and senior officers, including the president of the Bank.  Approval authority ranges from $5,000 to $750,000for secured loans, and $5,000 to $100,000 for unsecured loans. Members of anin-house loan committee comprising the four most senior members of managementapprove all loans over $500,000. Any two members may combine their lendingauthority. The committee has the authority to approve secured loans up to $2.5million and unsecured loans up to $200,000. All loans greater than $2.5 millionthrough $5 million require the approval of a Board Loan Committee

 

7

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

 

One-to-fourfamily residential mortgage loans are generally underwritten according to FHLMCand FNMA guidelines.  For all loansoriginated by the Bank, upon receipt of a completed loan application from aprospective borrower, a credit report is ordered, income and certain otherinformation is verified and, if necessary, additional financial information isrequested.  An appraisal of the realestate intended to secure the proposed loan is required which currently isperformed by an independent appraiser designated and approved by the Bank.  The Bank makes construction/permanent loanson individual properties.  Funds advancedduring the construction phase are held in a loan-in-process account anddisbursed based upon various stages of completion.  The independent appraiser or loan officerdetermines the stage of completion based upon a physical inspection of theconstruction.  It is the Bank’s policy toobtain title insurance or a title opinion on all real estate first mortgageloans in excess of $200,000.  Borrowersmust also obtain hazard or flood insurance (for loans on property located in aflood zone) prior to closing the loan. For loans in excess of 80% of the loan to value ratio, borrowers aregenerally required to advance funds on a monthly basis together with eachpayment of principal and interest to an escrow account from which the Bankmakes disbursements for items such as real estate taxes and hazard insurancepremiums.

 

**Loans to One Borrower.** Current regulations limit loans to one borrower in an amount equal to15% of unimpaired capital and retained income on an unsecured basis and anadditional amount equal to 10% of unimpaired capital and retained income if theloan is secured by readily marketable collateral (generally, financialinstruments, not real estate) or $500,000, whichever is higher.  Penalties for violations of the loan-to-oneborrower statutory and regulatory restrictions include cease and desist orders,the imposition of a supervisory agreement and civil money penalties.  The Bank’s maximum loan-to-one borrower limitwas approximately $8.6 million as of December 31, 2005.

 

AtDecember 31, 2005, the Bank’s five largest aggregate lending relationshipshad balances ranging from $5.7 to $7.4 million. At December 31, 2005, all of these loans were current.

 

**Mortgage-Backed Securities**

 

Tosupplement lending activities, the Bank invests in residential mortgage-backedsecurities.  Although the majority ofsuch securities are held to maturity, they can serve as collateral forborrowings and, through repayments, as a source of liquidity.

 

Themortgage-backed securities portfolio as of December 31, 2005, consisted ofpass-through certificates issued by the Federal Home Loan Mortgage Corporation(“FHLMC”) ($12.8 million), Government National Mortgage Association (“GNMA”),($3.0 million) Federal National Mortgage Association (“FNMA”) ($16.2 million),and real estate mortgage investment conduits formed by these same agencies (“REMICs”)($61.7 million).

 

AtDecember 31, 2005, the amortized cost of mortgage-backed securitiestotaled $95.8 million, or 14% of total assets, and the market value of suchsecurities totaled approximately $93.7 million.

 

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

 

8

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**Mortgage-Backed Securities Carrying Value.** The following table sets forth the carryingvalue of the Bank’s mortgage-backed securities held in portfolio at the datesindicated.

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

 

**Mortgage-Backed Securities Maturity.**  Thefollowing table sets forth the maturity and the weighted average coupon (“WAC”)of the Bank’s mortgage-backed securities portfolio at December 31, 2005.  The table does not include estimatedprepayments.  Adjustable-ratemortgage-backed securities are shown as maturing based on contractualmaturities.

 
| ** **                        | ** ** | **Contractual Held  To Maturity  Maturities Due** | ** ** | **WAC** | ** ** | **Contractual  Available  -For-Sale  Maturities Due** | ** ** | **WAC** | ** ** |
|-----------------------------------|------------|---------------------------------------------------|------------|---------|------------|-------------------------------------------------------|------------|---------|------------|
| ** **                        | ** ** | **(Dollars in thousands)**                        | ** ** |
|                              |       |                                              |       |    |       |                                                  |       |    |       |
| Less than 1  year                 |       | $                                                 | 15         |    | 7.70       | %                                                     | $          | —  |       | — | % |
| 1 to 3 years                      |       | 749                                               |       | 7.29    |       | 2,043                                                 |       | 4.27    |       |
| 3 to 5 years                      |       | 285                                               |       | 7.84    |       | 1,757                                                 |       | 5.93    |       |
| 5 to 10  years                    |       | 295                                               |       | 7.09    |       | 34,737                                                |       | 4.85    |       |
| 10 to 20  years                   |       | 1,420                                             |       | 5.24    |       | 23,640                                                |       | 4.68    |       |
| Over 20  years                    |       | 7,413                                             |       | 6.41    |       | 21,334                                                |       | 4.64    |       |
| Total  mortgage-backed securities |       | $                                                 | 10,177     |    | 6.37       | %                                                     | $          | 83,511  |       | 4.76 | % |

 

9

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**Non-Performing and Problem Assets**

 

**Loan Collection.**  When a borrower fails to make arequired payment on a loan, the Bank takes a number of steps to have theborrower cure the delinquency and restore the loan to current status.  In the case of residential mortgage loans andconsumer loans, the Bank generally sends the borrower a written notice ofnon-payment after the loan is 15 days past due. In the event payment is not then received, additional letters and phonecalls are made.  If the loan is still notbrought current and it becomes necessary for the Bank to take legal action,which typically occurs after a loan is delinquent more than 90 days, the Bankwill commence foreclosure proceedings against any real property that securesthe loan and attempt to repossess any personal property that secures a consumerloan.  If a foreclosure action isinstituted and the loan is not brought current, paid in full, or refinancedbefore the foreclosure sale, the real property securing the loan generally is obtainedby the Bank at foreclosure.

 

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

 

Onmortgage loans or loan participations purchased by the Bank, the Bank receivesmonthly reports from its loan servicers with which it monitors the loanportfolio.  Based upon servicingagreements with the servicers of the loan, the Bank relies upon the servicer tocontact delinquent borrowers, collect delinquent amounts and to initiateforeclosure proceedings, when necessary, all in accordance with applicablelaws, regulations and the terms of the servicing agreements between the Bankand its servicing agents. At December 31, 2005 the Bank used third-partyservicers to service $50.6 million in mortgage loans, including one servicerthat serviced $41.5 million. All of the Bank’s third-party mortgage loanservicers are regulated financial institutions or are approved by either HUD,FNMA, or FHLMC to service loans on their behalf.

 

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

 

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

 

10

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**Non-performing assets**

 
| ** **                                   | ** ** | **At December 31,**   | ** ** |
|----------------------------------------------|------------|----------------------------|------------|
| ** **                                   | ** ** | **2005**                   | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                   | ** ** | **(Dollars in thousands)** | ** ** |
| Loans  accounted for on a non-accrual basis: |       |                       |       |   |   |   |   |   |   |   |   |
| Mortgage loans:                              |       |                       |       |   |   |   |   |   |   |   |   |
| One-to-four family                           |       | $                          | 392        |   | $ | 536 |   | $ | 1,549 |   | $ | 1,013 |   | $ | 1,821 |   |
| Commercial real estate and multi-family      |       | 877                        |       | 23 |   | 296 |   | 1,677 |   | 1,725 |   |
| Consumer and other                           |       | 170                        |       | 84 |   | 135 |   | 245 |   | 227 |   |
| Commercial loans and leases                  |       | 150                        |       | 317 |   | 369 |   | 887 |   | 3 |   |
| Total non-accrual loans                      |       | 1,589                      |       | 960 |   | 2,348 |   | 3,822 |   | 3,776 |   |
|                                         |       |                       |       |   |   |   |   |   |   |   |   |
| Real estate owned, net                       |       | 700                        |       | 700 |   | 868 |   | 84 |   | 30 |   |
| Total non-performing assets                  |       | $                          | 2,289      |   | $ | 1,660 |   | $ | 3,216 |   | $ | 3,906 |   | $ | 3,806 |   |
| Total non-accrual loans to loans             |       | 0.32                       | %          | 0.22 | % | 0.58 | % | 1.03 | % | 0.99 | % |
| Total non-accrual loans to total assets      |       | 0.24                       | %          | 0.15 | % | 0.39 | % | 0.53 | % | 0.53 | % |
| Total non-performing assets to total assets  |       | 0.35                       | %          | 0.26 | % | 0.53 | % | 0.54 | % | 0.54 | % |
|                                              |            |                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

AtDecember 31, 2005, the Bank had no foreign loans and no loanconcentrations exceeding 10% of total loans not disclosed in above the table. “Loanconcentrations” are considered to exist when there are amounts loaned to amultiple number of borrowers engaged in similar activities that would causethem to be similarly impacted by economic or other conditions.  Loans recorded in the category of other realestate owned are valued at the lower of book value of loans outstanding or fairmarket value less cost of disposal.

 

AtDecember 31, 2005, the Bank was not aware of any potential problem loansthat are not otherwise included in the foregoing table.  “Potential problem loans” are loans whereinformation about possible credit problems of borrowers has caused managementto have serious doubts about the borrowers’ ability to comply with present repaymentterms.

 

**Classified Assets.**  OTS regulations provide for aclassification system for problem assets of insured institutions which coversall problem assets.  Under thisclassification system, problem assets of insured institutions are classified as“substandard,” “doubtful,” or “loss.”  Anasset is considered “substandard” if it is inadequately protected by thecurrent net worth and paying capacity of the obligor or of the collateralpledged, if any.  “Substandard” assetsinclude those characterized by the “distinct possibility” that the insuredinstitution will sustain “some loss” if the deficiencies are notcorrected.  Assets classified as “doubtful”have all of the weaknesses inherent in those classified “substandard,” with theadded characteristic that the weaknesses present make “collection orliquidation in full,” on the basis of currently existing facts, conditions andvalues, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and ofsuch little value that the establishment of a specific loss reserve iswarranted.  Assets designated “specialmention” by management are assets included on the Bank’s internal watchlistbecause of potential weakness but that do not currently warrant classification inone of the aforementioned categories.

 

11

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

 

Thefollowing table provides further information in regard to the Bank’s classifiedassets as of December 31, 2005.

 

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

 

**Real Estate Owned.**  Real estate acquired by theBank as a result of foreclosure, judgment or by deed in lieu of foreclosure isclassified as real estate owned (“REO”) until it is sold.  When property is acquired it is recorded atthe lower of fair value, minus estimated cost to sell, or cost.  If the property subsequently decreases inestimated value from the initial recorded amount, the Bank will provide avaluation allowance, through a charge to earnings, if the decrease is judged bymanagement to be temporary. If the decrease is judged to be permanent, the Bankwill reduce the recorded amount, through a charge to earnings, to the newestimated value.

 

TheBank records loans as in substance foreclosures if the borrower has little orno equity in the property based upon its documented current fair value and ifthe borrower has effectively abandoned control of the collateral or hascontinued to retain control of the collateral but because of the borrower’s currentfinancial status repayment of the loan in the foreseeable future is doubtful.  In substance foreclosures are accounted foras loans until such time that title to the collateral is acquired by theBank.  There may be significant otherexpenses incurred such as attorney and other extraordinary servicing costsinvolved with in substance foreclosures.

 

**Allowances for Loan Losses.**  TheBank provides valuation allowances for estimated losses from uncollectibleloans. Management determines the adequacy of the allowance on a quarterly basisto ensure that a provision for loan losses has been charged against earnings inan amount necessary to maintain the allowance at a level that is appropriatebased upon management’s estimate of probable losses. Several sources of data areused in making the evaluation as to the appropriateness of the allowance.

 

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

 

12

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

 

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

 
| ** **                                                                                                              | ** ** | **For the Years Ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                                              | ** ** | **2005**                                  | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                                                                                              | ** ** | **(Dollars in thousands)**                | ** ** |
|                                                                                                                    |       |                                      |       |   |   |   |   |   |   |   |   |
| Balance at beginning of period                                                                                          |       | $                                         | 2,307      |   | $ | 2,111 |   | $ | 2,047 |   | $ | 1,972 |   | $ | 1,714 |   |
| Provision for loan losses                                                                                               |       | 540                                       |       | 600 |   | 330 |   | 988 |   | 500 |   |
| Charge-offs:                                                                                                            |       |                                      |       |   |   |   |   |   |   |   |   |
| One-to-four family                                                                                                      |       | —                                    |       | — |   | (16 | ) | (13 | ) | — |   |
| Commercial and multi-family real estate  loans                                                                          |       | —                                    |       | (112 | ) | — |   | — |   | — |   |
| Consumer and other loans                                                                                                |       | (122                                      | )          | (186 | ) | (219 | ) | (303 | ) | (430 | ) |
| Commercial loans and leases                                                                                             |       | (286                                      | )          | (161 | ) | (322 | ) | (625 | ) | — |   |
| Recoveries:                                                                                                             |       |                                      |       |   |   |   |   |   |   |   |   |
| One-to-four family                                                                                                      |       | —                                    |       | — |   | — |   | 3 |   | — |   |
| Commercial and multi-family real estate  loans                                                                          |       | —                                    |       | — |   | — |   | — |   | — |   |
| Consumer and other loans                                                                                                |       | 39                                        |       | 55 |   | 36 |   | 25 |   | 188 |   |
| Commercial loans and leases                                                                                             |       | 163                                       |       | — |   | 255 |   | — |   | — |   |
| Balance at end of year                                                                                                  |       | $                                         | 2,641      |   | $ | 2,307 |   | $ | 2,111 |   | $ | 2,047 |   | $ | 1,972 |   |
|                                                                                                                    |       |                                      |       |   |   |   |   |   |   |   |   |
| Ratio of net charge-offs during the period  to average loans outstanding during the period                              |       | 0.04                                      | %          | 0.09 | % | 0.07 | % | 0.25 | % | 0.07 | % |
| Ratio of allowance for loan losses to  non-performing loans at the end of the period                                    |       | 166.3                                     | %          | 240.3 | % | 89.9 | % | 53.6 | % | 52.2 | % |
| Ratio of allowance for loan losses to loans  receivable at the end of the period                                        |       | 0.54                                      | %          | 0.52 | % | 0.52 | % | 0.55 | % | 0.52 | % |
| Ratio of allowance for loan losses and  foreclosed real estate to total non-performing assets at the end of the  period |       | 115.4                                     | %          | 139.0 | % | 65.6 | % | 52.4 | % | 51.8 | % |
|                                                                                                                         |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

13

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

 
| ** **                               | ** ** | **At  December 31,**   | ** ** |
|------------------------------------------|------------|-----------------------------|------------|
| ** **                               | ** ** | **2005**                    | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                               | ** ** | **Amount**                  | ** ** | **Percent  of  Loans to  Total Loans** | ** ** | **Amount** | ** ** | **Percent  of  Loans to  Total Loans** | ** ** | **Amount** | ** ** | **Percent  of  Loans to  Total Loans** | ** ** | **Amount** | ** ** | **Percent  of  Loans to  Total Loans** | ** ** | **Amount** | ** ** | **Percent  of  Loans to  Total Loans** | ** ** |
| ** **                               | ** ** | **(Dollars  in thousands)** | ** ** |
| At end of period  allocated to:          |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| One-to-four  family                      |       | $                           | 154        |   | 58.8 | % | $ | 176 |   | 64.2 | % | $ | 277 |   | 68.2 | % | $ | 119 |   | 61.3 | % | $ | 216 |   | 58.4 | % |
| Commercial real  estate and multi-family |       | 1,010                       |       | 18.2 |   | 1,035 |   | 18.8 |   | 1,230 |   | 18.3 |   | 1,021 |   | 23.0 |   | 1,100 |   | 24.6 |   |
| Construction                             |       | 738                         |       | 5.0 |   | 121 |   | 2.3 |   | 109 |   | 1.6 |   | 90 |   | 3.2 |   | 74 |   | 2.6 |   |
| Consumer and  other loans                |       | 115                         |       | 8.2 |   | 554 |   | 7.7 |   | 246 |   | 7.8 |   | 271 |   | 9.7 |   | 380 |   | 11.0 |   |
| Commercial loans  and leases             |       | 624                         |       | 9.8 |   | 421 |   | 7.1 |   | 249 |   | 4.1 |   | 546 |   | 2.8 |   | 202 |   | 3.4 |   |
| Total allowance                          |       | $                           | 2,641      |   | 100.0 | % | $ | 2,307 |   | 100.0 | % | $ | 2,111 |   | 100.0 | % | $ | 2,047 |   | 100.0 | % | $ | 1,972 |   | 100.0 | % |
|                                          |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

14

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**Investment Activities**

 

Theinvestment policy of the Bank, which is established by the Board of Directorsand implemented by the Asset Liability Committee, is designed primarily to provideand maintain liquidity, to generate a favorable return on investments withoutincurring undue interest rate and credit risk, and to complement the Bank’slending activities.  In establishing itsinvestment strategies, the Bank considers its business and growth plans, theeconomic environment, the types of securities to be held and otherfactors.  Federally chartered savingsinstitutions have the authority to invest in various types of assets, includingU.S. Treasury obligations, securities of various federal agencies, certaincertificates of deposit of insured banks and savings institutions, certainbankers acceptances, repurchase agreements, loans on federal funds, and,subject to certain limits, commercial paper and mutual funds.

 

Thefollowing table sets forth certain information regarding the amortized cost andfair values of the Bank’s investments at the dates indicated.

 
| ** **                              | ** ** | **At December 31,** | ** ** |
|-----------------------------------------|------------|--------------------------|------------|
| ** **                              | ** ** | **2005**                 | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                              | ** ** | **Amortized  Cost**      | ** ** | **Fair  Value** | ** ** | **Amortized  Cost** | ** ** | **Fair  Value** | ** ** | **Amortized  Cost** | ** ** | **Fair  Value** | ** ** |
| ** **                              | ** ** | **(In thousands)**       | ** ** |
|                                    |       |                     |       |   |   |   |   |   |   |   |   |   |   |
| Interest-earning deposits               |       | $                        | 177        |   | $ | 177 |   | $ | 252 |   | $ | 252 |   | $ | 508 |   | $ | 508 |   |
|                                    |       |                     |       |   |   |   |   |   |   |   |   |   |   |
| Investment securities held-to-maturity: |       |                     |       |   |   |   |   |   |   |   |   |   |   |
| U.S. government and agency obligations  |       | $                        | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | 2,000 |   | $ | 2,011 |   |
| State and political subdivisions        |       | 1,015                    |       | 1,036 |   | 1,326 |   | 1,395 |   | 1,609 |   | 1,735 |   |
| Corporate debt securities               |       | 3,675                    |       | 3,671 |   | 5,701 |   | 5,793 |   | 6,780 |   | 7,069 |   |
| Total                                   |       | $                        | 4,690      |   | $ | 4,707 |   | $ | 7,027 |   | $ | 7,188 |   | $ | 10,389 |   | $ | 10,815 |   |
|                                    |       |                     |       |   |   |   |   |   |   |   |   |   |   |
| Securities available-for-sale:          |       |                     |       |   |   |   |   |   |   |   |   |   |   |
| U.S. government and agency obligations  |       | $                        | 5,982      |   | $ | 5,880 |   | $ | 2,978 |   | $ | 2,958 |   | $ | 2,972 |   | $ | 2,947 |   |
| State and political subdivisions        |       | 20,844                   |       | 20,563 |   | 13,704 |   | 13,675 |   | 10,677 |   | 10,493 |   |
| Corporate Debt Securities               |       | 4,002                    |       | 3,958 |   | 1,000 |   | 992 |   | 1,000 |   | 993 |   |
| Mutual funds                            |       | —                   |       | — |   | — |   | — |   | — |   | — |   |
| Total                                   |       | $                        | 30,828     |   | $ | 30,401 |   | $ | 17,682 |   | $ | 17,625 |   | $ | 14,649 |   | $ | 14,433 |   |

 

15

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**Investment Portfolio Maturities**

 

Thefollowing table sets forth certain information regarding the amortized cost,weighted average yields and maturities of the Bank’s investment securitiesportfolio, exclusive of interest-earning deposits, at December 31, 2005.  Yields on tax exempt obligations have beencomputed on a tax equivalent basis.

 
| ** **              | ** ** | **One Year  or Less**       | ** ** | **One to  Five Years** | ** ** | **Five to  Ten Years** | ** ** | **More  than Ten Years** | ** ** | **Total  Investment Securities(1)** | ** ** |
|-------------------------|------------|-----------------------------|------------|------------------------|------------|------------------------|------------|--------------------------|------------|-------------------------------------|------------|
| ** **              | ** ** | **Amortized  Cost**         | ** ** | **Average  Yield**     | ** ** | **Amortized  Cost**    | ** ** | **Average  Yield**       | ** ** | **Amortized  Cost**                 | ** ** | **Average  Yield** | ** ** | **Amortized  Cost** | ** ** | **Average  Yield** | ** ** | **Amortized  Cost** | ** ** | **Average  Yield** | ** ** | **Fair  Value** | ** ** |
| ** **              | ** ** | **(Dollars  in thousands)** | ** ** |
|                    |       |                        |       |                   |       |                   |       |                     |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| U.S. government  agency |       | $                           | —     |                   | —     | %                      | $          | 5,982                    |       | 3.90                                | %          | $ | — |   | — | % | $ | — |   | — | % | $ | 5,982 |   | 3.90 | % | $ | 5,880 |   |
| Municipal  obligations  |       | —                      |       | —                 |       | 1,404                  |       | 6.93                     |       | 7,850                               |       | 5.12 |   | 12,605 |   | 5.78 |   | 21,859 |   | 5.62 |   | 21,599 |   |
| Corporate  obligations  |       | 3,675                       |       | 4.74                   |       | 4,002                  |       | 3.31                     |       | —                              |       | — |   | — |   | — |   | 7,677 |   | 4.00 |   | 7,629 |   |
| Total                   |       | $                           | 3,675      |                   | 4.74       | %                      | $          | 11,388                   |       | 4.07                                | %          | $ | 7,850 |   | 5.12 | % | $ | 12,605 |   | 5.78 | % | $ | 35,518 |   | 4.98 | % | $ | 35,108 |   |

 

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(1)                                  Includes $30.4 million of U.S. governmentagency, municipal and corporate obligations which are carried as available-for-saleat December 31, 2005.  Investment securities available-for-sale are carriedat fair value.

 

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**Sources ofFunds**

 

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

 

**Deposits.**The Bank offers a variety of deposit accounts having a range ofinterest rates and terms. The Bank’s deposits consist of regular savings,non-interest bearing checking, NOW checking, money market, and certificateaccounts. Of the deposit accounts, $29 million or 6.2% consist of IRA, Keogh orSEP retirement accounts at December 31, 2005.

 

The flow of deposits isinfluenced significantly by general economic conditions, changes in moneymarket and prevailing interest rates and competition. The Bank’s deposits areprimarily obtained from areas surrounding its offices, and the Bank reliesprimarily on customer service and long-standing relationships with customers toattract and retain these deposits. The Bank has maintained a high level of coredeposits consisting of regular savings, money market, non-interest-bearingchecking, and NOW checking, which has contributed to a low cost-of-funds. AtDecember 31, 2005, core deposits amounted to 68% of total deposits.

 

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

 

The following table setsforth the distribution of the Bank’s deposit accounts at the dates indicatedand the weighted average nominal interest rates on each category of depositspresented. The Bank does not have significant amount of deposits fromout-of-state sources. Management does not believe that the use of year endbalances instead of average balances resulted in any material difference in theinformation presented.

 
| ** **                             | ** ** | **At December 31,**        | ** ** |
|----------------------------------------|------------|--------------------------------------|------------|
| ** **                             | ** ** | **2005**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                             | ** ** | **Amount**                           | ** ** | **Percent  of Total  Deposits** | ** ** | **Weighted  Average  Nominal  Rate** | ** ** | **Amount** | ** ** | **Percent  of Total  Deposits** | ** ** | **Weighted  Average  Nominal  Rate** | ** ** | **Amount** | ** ** | **Percent  of Total  Deposits** | ** ** | **Weighted  Average  Nominal  Rate** | ** ** |
| ** **                             | ** ** | **(Dollars in thousands)** | ** ** |
| Transaction Accounts                   |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing checking accounts     |       | $                                    | 52,319     |   | 11.12 |   | 0.47 | % | $ | 54,887 |   | 11.93 |   | 0.47 | % | $ | 52,647 |   | 11.46 |   | 0.47 | % |
| Money market accounts                  |       | 79,666                               |       | 16.93 |   | 2.72 |   | 42,496 |   | 9.24 |   | 1.00 |   | 44,688 |   | 9.73 |   | 0.91 |   |
| Non-interest-bearing checking accounts |       | 37,138                               |       | 7.89 |   | 0.00 |   | 32,636 |   | 7.10 |   | 0.00 |   | 26,375 |   | 5.74 |   | 0.00 |   |
| Total transaction accounts             |       | 169,123                              |       | 35.94 |   |   |   | 130,019 |   | 28.27 |   |   |   | 123,710 |   | 26.93 |   |   |   |
|                                   |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Passbook accounts                      |       | 151,725                              |       | 32.25 |   | 1.11 |   | 182,945 |   | 39.78 |   | 0.98 |   | 188,673 |   | 41.07 |   | 0.94 |   |
|                                   |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Certificates of deposit                |       | 149,673                              |       | 31.81 |   | 3.29 |   | 146,939 |   | 31.95 |   | 2.42 |   | 146,960 |   | 32.00 |   | 2.43 |   |
| Total deposits                         |       | $                                    | 470,521    |   | 100.00 | % | 2.39 | % | $ | 459,903 |   | 100.00 | % | 1.31 | % | $ | 459,343 |   | 100.00 | % | 1.31 | % |

 

17

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At December 31, 2005, theBank had outstanding certificates of deposit in amounts of $100,000 or morematuring as follows:

 
| **Maturing Period**      | ** ** | **Amount**              | ** ** |
|-------------------------------|------------|-------------------------|------------|
| ** **                    | ** ** | **(In thousands)** | ** ** |
| Three months or less          |       | $                       | 4.625      |   |
| Over three through six months |       | 3,225                   |       |
| Over six through 12 months    |       | 11,097                  |       |
| Over 12 months                |       | 12,388                  |       |
| Total                         |       | $                       | 31,335     |   |

 

**Borrowings**

 

Deposits are the primarysource of funds of the Bank’s lending and investment activities and for itsgeneral business purposes. The Bank may obtain advances from the FHLB ofPittsburgh to supplement its supply of lendable funds. Advances from the FHLBof Pittsburgh are typically secured by a pledge of the Bank’s stock in the FHLBof Pittsburgh and a portion of the Bank’s first mortgage loans and certainother assets. The Bank, if the need arises, may also access the Federal ReserveBank discount window. The following tables set forth the maximum month-endbalance, period ending balance, and weighted average balance of outstandingFHLB advances at the dates and for the periods indicated, together with theapplicable weighted average interest rates.

 
| ** **                         | ** ** | **At December 31,**        | ** ** |
|------------------------------------|------------|--------------------------------------|------------|
| ** **                         | ** ** | **2005**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                         | ** ** | **(Dollars in thousands)** | ** ** |
|                               |       |                                 |       |   |   |   |   |
| FHLB advances and other borrowings |       | $                                    | 121,260    |   | $ | 102,747 |   | $ | 86,853 |   |
|                               |       |                                 |       |   |   |   |   |
| Weighted average interest rate     |       | 3.79                                 | %          | 3.32 | % | 3.01 | % |
|                                    |            |                                      |            |  |  |  |  |  |  |  |

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

 

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**SubsidiaryActivity**

 

The Bank is permitted toinvest up to 2% of its assets in the capital stock of, or secured or unsecuredloans to, subsidiary corporations, with an additional investment of 1% ofassets when such additional investment is utilized primarily for communitydevelopment purposes. Under such limitations, as of December 31, 2005, the Bankwas authorized to invest up to approximately $13.2 million in the stock of, orloans to, service corporations (based upon the 2% limitation). In addition, theBank can designate a subsidiary as an operating subsidiary, in which there isno percentage of assets investment limitation, if it engages only in activitiesin which it would be permissible for the Bank to engage. At December 31,2005, the Bank had two wholly-owned subsidiaries, Third Delaware Corporationand Teragon Financial Corporation. Third Delaware Corporation was formed in1998 for the purpose of investing in marketable securities. At December 31,2005, the Bank had $123.8 million invested in Third Delaware Corporation.Teragon Financial Corporation (“Teragon”) was formerly a subsidiary of theCompany and had been dormant for several years until 2004, at which time theCompany contributed its interest to the Bank. Shortly thereafter, Teragoninvested $7,500 in a limited partnership entitled Third Fed Abstract, L. P.,whose purpose is to operate a title insurance agency, primarily to capturecertain title insurance premiums generated by the Bank’s lending activities. AtDecember 31, 2005 the Bank had an investment of $59,700 in Teragon.

 

**Personnel**

 

As of December 31, 2005, theCompany had 162 full-time and 22 part-time employees. None of the Company’semployees are represented by a collective bargaining group. The Companybelieves that its relationship with its employees is good.

 

**ExecutiveOfficers of the Registrant**

 

Executive Officers of theCompany and the Bank:

 

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

 

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

 

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

 

The remaining informationrelating to Directors and Executive Officers of the Registrant is incorporatedherein by reference to the Registrant’s Proxy Statement for the 2006 AnnualMeeting of Stockholders.

 

19

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**REGULATION**

 

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

 

On July 30, 2002, PresidentBush signed into law the Sarbanes-Oxley Act of 2002 (the “Act”). The Securitiesand Exchange Commission (the “SEC”) has promulgated new regulations pursuant tothe Act and may continue to propose additional implementing or clarifyingregulations as necessary in furtherance of the Act. The passage of the Act byCongress and the implementation of new regulations by the SEC subjectpublicly-traded companies to additional and more cumbersome reportingregulations and disclosure. Compliance with the Act and corresponding regulationsmay increase the Company’s expenses.

 

**CompanyRegulation**

 

**General.**The Company is a unitary savings and loan holding company subject toregulatory oversight by the OTS. As such, the Company is required to registerand file reports with the OTS and is subject to regulation and examination bythe OTS. In addition, the OTS has enforcement authority over the Company andits non-savings association subsidiaries, should such subsidiaries be formed,which also permits the OTS to restrict or prohibit activities that aredetermined to be a serious risk to the subsidiary savings association. Thisregulation and oversight is intended primarily for the protection of thedepositors of the Bank and not for the benefit of stockholders of the Company. TheCompany is also required to file certain reports with, and otherwise complywith, the rules and regulations of the OTS and the SEC.

 

**Financial Modernization.**The Gramm-Leach-Bliley Act (“GLB”) permitsqualifying bank holding companies to become financial holding companies andthereby affiliate with securities firms and insurance companies and engage inother activities that are financial in nature. GLB defines “financial in nature”to include securities underwriting, dealing and market making; sponsoringmutual funds and investment companies; insurance underwriting and agency;merchant banking activities; and activities that the Federal Reserve Board hasdetermined to be closely related to banking. A qualifying national bank alsomay engage, subject to limitations on investment, in activities that arefinancial in nature, other than insurance underwriting, insurance companyportfolio investment, real estate development, and real estate investment,through a financial subsidiary of the bank.

 

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

 

**QTL Test.**As a unitary savings and loan holding company, the Company generally isnot subject to activity restrictions, provided the Bank satisfies the QTL test.If the Company acquires control of another savings association as a separatesubsidiary, it would become a multiple savings and loan holding company, andthe activities of the Company and any of its subsidiaries (other than the Bankor any other SAIF-insured savings association) would become subject torestrictions applicable to bank holding companies unless such otherassociations each also qualify as a QTL and were acquired in a supervisoryacquisition.

 

**BankRegulation**

 

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

 

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

 

20

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

 

**Loan Limitations.**  Regulations limit the amount ofnon-residential mortgage loans a savings institution may hold as a percentageof assets or capital.  Separate from thequalified thrift lender test, regulations limit a savings institution to amaximum of 10% of its assets in large commercial loans (defined as loans inexcess of $2 million), with another 10% of assets permissible in “smallbusiness loans.”  Commercial loanssecured by real estate can be made in an amount up to four times an institution’scapital.  An institution can also havecommercial leases, in addition to the above items, up to 10% of its assets.Commercial paper, corporate bonds, and consumer loans cannot collectivelyexceed 35% of an institution’s assets. For this purpose, however, residential mortgage loans (includingsecurities backed by such loans) and credit card loans are not consideredconsumer loans, and are both unlimited in amount.

 

**Insurance of Deposit Accounts.**The Bank’s deposit accounts are insured bythe SAIF to a maximum of $100,000 for each insured member (as defined by lawand regulation). The FDIC has the authority, should it initiate proceedings toterminate an institution’s deposit insurance, to suspend the insurance of anysuch institution without tangible capital. However, if a savings associationhas positive capital when it includes qualifying intangible assets, the FDICcannot suspend deposit insurance unless capital declines materially, theinstitution fails to enter into and remain in compliance with an approvedcapital plan or the institution is operating in an unsafe or unsound manner.

 

Regardless of an institution’scapital level, insurance of deposits may be terminated by the FDIC upon afinding that the institution has engaged in unsafe or unsound practices, is inan unsafe or unsound condition to continue operations or has violated anyapplicable law, regulation, rule, order or condition imposed by the FDIC or theinstitution’s primary regulator. The management of the Bank is unaware of anypractice, condition or violation that might lead to termination of its depositinsurance.

 

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

 

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

 

At December 31, 2005, theBank was in compliance with all of its regulatory capital requirements.

 

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

 

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

 

**Qualified Thrift Lender Test.**The Home Owners’ Loan Act (“HOLA”), asamended, requires savings institutions to meet a QTL test. If the Bankmaintains an appropriate level of Qualified Thrift Investments (primarilyresidential mortgages and related investments, including certain mortgage-backedsecurities) (“QTIs”) and otherwise

 

21

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qualifies as a QTL, it will continue to enjoyfull borrowing privileges from the FHLB of Pittsburgh. The required percentageof QTIs is 65% of portfolio assets (defined as all assets minus intangibleassets, property used by the institution in conducting its business and liquidassets equal to 10% of total assets). Certain assets are subject to apercentage limitation of 20% of portfolio assets. In addition, savingsassociations may include shares of stock of the FHLBs, FNMA and FHLMC asqualifying QTIs. The method for measuring compliance with the QTL test requiresan institution to be in compliance nine out of every 12 months. As of December31, 2005, the Bank was in compliance with its QTL requirement with 74% of itsassets invested in QTIs.

 

**Federal Home Loan Bank System.**The Bank is a member of the FHLB ofPittsburgh, one of 12 regional FHLBs that administer the home financing creditfunction of savings associations. Each FHLB serves as a reserve or central bankfor its members within its assigned region. It is funded primarily fromproceeds derived from the sale of consolidated obligations of the FHLB System. Itmakes loans to members (*i.e.*,advances) in accordance with policies and procedures established by the Boardof Directors of the FHLB.

 

As a member, the Bank isrequired to purchase and maintain an investment in the capital stock of theFHLB of Pittsburgh in an amount equal to 4.55% of its advances outstanding fromthe FHLB plus 0.55% of its unused borrowing capacity. At December 31, 2005, theBank had $7.4 million in FHLB stock, which was in compliance with thisrequirement.

 

**Federal Reserve System.**The Federal Reserve Board requires alldepository institutions to maintain non-interest bearing reserves at specifiedlevels against their transaction accounts (primarily checking, NOW and SuperNOW checking accounts) and non-personal time deposits. The balances maintainedto meet the reserve requirements imposed by the Federal Reserve Board may beused to satisfy the liquidity requirements that are imposed by the OTS. AtDecember 31, 2005, the Bank’s total transaction accounts required a reservelevel of $576,000 which was offset by the Bank’s vault cash on hand and cash ondeposit at the Federal Reserve Bank of Philadelphia.

 

Savings associations haveauthority to borrow from the Federal Reserve Bank “discount window,” butFederal Reserve policy generally requires savings associations to exhaust allother sources before borrowing from the Federal Reserve System. The Bank had nosuch borrowings at December 31, 2005.

 

**Item 1A. Risk Factors**

 

**If theallowance for loan losses is inadequate, earnings will be reduced as thereserve is replenished.**The establishment of the allowance for loan losses is based on a high degree ofjudgment and estimation. At December 31, 2005 the allowance was $2.6 million or0.54% of the loans receivable balance of $491 million. Several factors couldrender the reserve inadequate, possibly over a short period of time: a singlelarge loss, a severe and sustained economic downturn in the markets in whichthe Company’s loans are located, and a general decline in real estate values.These factors could produce charges to the allowance in excess of the amountprovided. Replenishing the reserve would reduce earnings.

 

**If theCompany must raise the interest rates it pays to attract or retain itsdeposits, earnings will be reduced.** The Company’s assets are primarily funded with deposits. The Companyfaces intense competition, both to retain current deposits and to attract newdeposits that can be used to fund the Company’s growth. If the Company raisesthe interest rates it pays on a significant amount of these deposits, itsinterest expense could be substantially higher and earnings substantiallylower.

 

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

 

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

 

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its franchise value.

 

**TheCompany is vulnerable to interest rate risk**. Most of the Company’s assets andliabilities are interest rate sensitive, and changes in the level of marketinterest rates or the shape of the yield curve can have a substantial negativeimpact on the Company’s value and earnings.

 

**TheCompany’s ability to pay dividends on its common stock can be negativelyaffected by regulation of its bank subsidiary.** The Company is a thrift holding company andits bank subsidiary is the primary source of cash with which it pays the cashdividend on its common stock. Regulations require a bank that is a subsidiaryof a thrift holding company to file either a notification or an application withits primary regulator when it seeks to pay a dividend to its parent company. Ifin the judgment of its primary regulator, the Office of Thrift Supervision, thepayment of a dividend by the Company’s bank subsidiary presents safety andsoundness concerns, or is otherwise not permitted by regulation, thenotification or application can be denied, thereby eliminating the primarysource of cash with which the Company pays its dividend to its shareholders.

 

**Insidercontrol and provisions in the Company’s charter and by-laws can be a deterrentto a sale of the Company.** As of December 31, 2005 insiders control approximately 21% of thevoting power of the Company’s stockholders. In addition, there are provisionsin the Company’s charter and by-laws that can have the effect of making itdifficult for a dissident shareholder or other party to force a sale of theCompany.

 

**Item 1B. Unresolved StaffComments**

 

None.

 

23

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**Item 2. Properties**

 

The Company is located andconducts its business at 3 Penns Trail, Newtown, Pennsylvania. At December 31, 2005,the Bank operated from its administrative offices and fifteen branch officesand one loan production office located in Philadelphia and Bucks Counties,Pennsylvania and Mercer County, New Jersey. The Bank also owns two parcels ofland and a building behind its Doylestown branch office. The parcel with thebuilding is available to be leased to a third-party and the other parcel isused as a parking lot for employees of the Bank and tenants. The net book valueof the two lots was $100,000. In addition, a subsidiary of the Company, PennsTrail Development Corporation, owns investment property with a book value of$747,000.

 

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

 
| **Location**                                                                                     | ** ** | **Leased or  Owned** | ** ** | **Location**                                                                  | ** ** | **Leased or  Owned** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|----------------------|------------|-------------------------------------------------------------------------------|------------|----------------------|------------|
| **ADMINISTRATIVE  OFFICE**

Newtown  Office3 Penns TrailNewtown, PA 18940                        |       | Owned                |       |                                                                          |       |                 |       |
| ** **                                                                                       | ** ** | ** **           | ** ** | ** **                                                                    | ** ** | ** **           | ** ** |
| **DEPOSIT  OPERATIONS**

828C  Newtown-Yardley Road

Suite  301B

Newtown,  PA 18940             |       | Leased               |       | **PROCESSING  OPERATIONS**Operations Center62 Walker LaneNewtown, PA 18940(1) |       | Owned                | ** ** |
| ** **                                                                                       |       |                 |       | ** **                                                                    |       |                 | ** ** |
| **BRANCH  AND LOAN OFFICES**

Frankford  Office

4625  Frankford Avenue

Philadelphia,  PA 19124 |       | Leased               |       | Newtown Office950 Newtown Yardley Road  Newtown, PA 18940                     |       | Leased               |       |
|                                                                                             |       |                 |       |                                                                          |       |                 |       |
| Ewing  Office

2075  Pennington Road

Ewing,  NJ 08618                                           |       | Owned                |       | Mayfair OfficeRoosevelt Blvd. at Unruh  Philadelphia, PA 19149                |       | Owned                |       |
|                                                                                             |       |                 |       |                                                                          |       |                 |       |
| Hamilton  Office

1850  Route 33

Hamilton  Square, NJ 08690                                     |       | Owned                |       | Doylestown Office

60 North Main StreetDoylestown, PA 18901                   |       | Owned                |       |
|                                                                                             |       |                 |       |                                                                          |       |                 |       |
| Fishtown  Office

York  & Memphis Streets

Philadelphia,  PA 19125                           |       | Owned                |       | Feasterville Office

Buck Hotel ComplexFeasterville, PA 19053                 |       | Leased               |       |
|                                                                                             |       |                 |       |                                                                          |       |                 |       |
| Cross  Keys Office

834  North Easton Highway

Doylestown,  PA 18901                             |       | Owned                |       | Quakerbridge Office

590 Lawrence Square Blvd.Lawrenceville, NJ 08648         |       | Leased               |       |
|                                                                                             |       |                 |       |                                                                          |       |                 |       |
| Bridesburg  Office  Orthodox & Almond Streets  Philadelphia, PA 19137                        |       | Owned                |       | Woodhaven Office4014 Woodhaven RoadPhiladelphia, PA 19154                     |       | Leased               |       |
|                                                                                             |       |                 |       |                                                                          |       |                 |       |
| New  Britain Office  600 Town Center  New Britain, PA 18901                                      |       | Leased               |       | Northern Liberties Office905 North 2nd  StreetPhiladelphia, PA 19123          |       | Leased               |       |
|                                                                                             |       |                 |       |                                                                          |       |                 |       |
| Girard  Office  136 West Girard Avenue  Philadelphia, PA 19123                                   |       | Leased               |       | New Hope Loan Office  362 West Bridge Street  New Hope, PA 18938              |       | Leased               |       |

 

24

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**Item 3. LegalProceedings**

 

Neither the Company nor itssubsidiaries are involved in any pending legal proceedings, other than routinelegal matters occurring in the ordinary course of business that in theaggregate involve amounts which are believed by management to be immaterial tothe consolidated financial condition or results of operations of the Company.

 

**Item 4. Submissionof Matters to a Vote of Security Holders**

 

None.

 

**PART II**

 

**Item 5. Marketfor Registrant****’****s Common Equity and RelatedStockholder Matters and Issuer Purchases of Equity Securities**

 

Information relating to themarket for Registrant’s common equity and related stockholder matters appearsunder the section captioned “Stock Market Information” in the Registrant’s 2005Annual Report to Stockholders and is incorporated herein by reference.

 

The following table providesinformation on repurchases by the Company of its common stock in each month forthe three months ended December 31, 2005:

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

 

**Item 6. SelectedFinancial Data**

 

The above-captionedinformation appears under the section captioned “Selected Financial and OtherData” in the Registrant’s 2005 Annual Report to Stockholders and isincorporated herein by reference.

 

**Item 7. Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

The information under thesection captioned “Management’s Discussion and Analysis of Financial Conditionand Results of Operations” in the Registrant’s 2005 Annual Report toStockholders is incorporated herein by reference.

 

25

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**Item 7A. Quantitativeand Qualitative Disclosures about Market Risk**

 

The information under thesection captioned “Management’s Discussion and Analysis of Financial Conditionand Results of Operations” in the Registrant’s 2005 Annual Report toStockholders is incorporated herein by reference.

 

**Item 8. FinancialStatements and Supplementary Data**

 

The Consolidated FinancialStatements of TF Financial Corporation and its subsidiaries included in theRegistrant’s 2005 Annual Report to Stockholders are incorporated herein byreference.

 

**Item 9. Changesin and Disagreements with Accountants on Accounting and Financial Disclosure**

 

None.

 

**Item 9A. Controlsand Procedures**

 

(a)                                  Evaluation of disclosure controls andprocedures. Based on theirevaluation of the Company’s disclosure controls and procedures (as defined inRule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)),the Company’s principal executive officer and principal financial officer haveconcluded that as of the end of the period covered by this Annual Report onForm 10-K such disclosure controls and procedures are effective.

 

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

 

26

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**Item 9B. OtherInformation**

 

None.

 

**PART III**

 

**Item 10. Directorsand Executive Officers of the Registrant**

 

The information containedunder the sections captioned “Proposal 1 - Election of Directors — GeneralInformation and Nominees” and “— Biographical Information” and “AdditionalInformation About Directors and Executive Officers — Section 16(a) BeneficialOwnership Reporting Compliance” in the Registrant’s definitive proxy statementfor the Registrant’s 2006 Annual Meeting of Stockholders (the “Proxy Statement”)is incorporated herein by reference.

 

Additional informationconcerning executive officers is included under “Item 1. Business — ExecutiveOfficers of the Registrant.”

 

The Company has adopted aCode of Ethics that applies to its principal executive officer, principalfinancial officer, principal accounting officer or persons performing suchfunctions. The Code of Ethics can be obtained without charge by sending awritten request to the Corporate Secretary, TF Financial Corporation, 3 PennsTrail, Newtown, Pennsylvania 18940.

 

**Item 11. ExecutiveCompensation**

 

The information relating toexecutive compensation is incorporated herein by reference to the informationcontained under the section captioned “Director and Executive OfficerCompensation” in the Registrant’s Proxy Statement.

 

**Item 12. SecurityOwnership of Certain Beneficial Owners and Management**

 

(a)                                  Security Ownership of Certain BeneficialOwners

 

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

 

(b)                                 Security Ownership of Management

 

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

 

(c)                                  Management of the Company knows of noarrangements, including any pledge by any person of securities of the Company,the operation of which may at a subsequent date result in a change in controlof the registrant.

 

(d)                                 Securities Authorized for Issuance UnderEquity Compensation Plans

 

27

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Set forth below is informationas of December 31, 2005 with respect to compensation plans under which equitysecurities of the Registrant are authorized for issuance.

 

**EQUITY COMPENSATION PLAN INFORMATION**

 
| ** **                                                 | ** ** | **(a)  Number of securities  to be issued upon  exercise of  outstanding options,  warrants and rights** | ** ** | **(b)  Weighted-average  exercise price of  outstanding  options, warrants  and rights** | ** ** | **(c)  Number of securities  remaining available for  future issuance under  equity compensation plans  (excluding securities  reflected in column (a))** | ** ** |
|------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity compensation plans approved by  shareholders(1)     |       | 359,848                                                                                                                                               |       | $                                                                                                            | 23.77      |                                                                                                                                                                                                                  | 58,888     |   |
| Equity compensation plans not approved by  shareholders(2) |       | 25,000                                                                                                                                                |       | 14.75                                                                                                        |       | —                                                                                                                                                                                                                |       |
| TOTAL                                                      |       | 284,848                                                                                                                                               |       | $                                                                                                            | 23.18      |                                                                                                                                                                                                                  | 58,888     |   |

 

----

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

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

 

For information regardingthe material features of these plans, see Notes A9 and I2 to the ConsolidatedFinancial Statements included as part of Exhibit 13 to this report.

 

**Item 13. CertainRelationships and Related Transactions**

 

The information relating tocertain relationships and related transactions is incorporated herein byreference to the information contained under the section captioned “AdditionalInformation About Directors and Executive Officers — Certain Relationships andRelated Transactions” in the Registrant’s Proxy Statement.

 

**Item 14. PrincipalAccountant Fees and Services**

 

The information relating tothis item is incorporated herein by reference to the information containedunder the section captioned “Principal Accounting Firm Fees” in the Registrant’sProxy Statement.

 

28

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**PART IV**

 

**Item 15. Exhibitsand Financial Statements**

 

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

 

(1)                                  The following financial statements and thereport of the independent auditor of the Company included in the Company’s 2005Annual Report to Stockholders are incorporated herein by reference.

 
| Report  of Independent Registered Public Accounting Firm                                                                                             |
|------------------------------------------------------------------------------------------------------------------------------------------------------|
| Consolidated  Statements of Financial Position as of December 31, 2005 and 2004                                                                      |
| Consolidated  Statements of Earnings For the Years Ended December 31, 2005, 2004  and 2003                                                      |
| Consolidated  Statement of Changes in Stockholders’ Equity and Comprehensive Income  for the Years Ended December 31, 2005, 2004  and 2003 |
| Consolidated  Statements of Cash Flows for the Years Ended December 31, 2005, 2004  and 2003                                                    |
| Notes  to Consolidated Financial Statements                                                                                                          |

 

The remaining informationappearing in the Annual Report to Stockholders is not deemed to be filed as partof this report, except as expressly provided herein.

 

(2)                                  All schedules are omitted because they arenot required or applicable, or the required information is shown in theconsolidated financial statements or the notes thereto.

 
| (3)    |   | Exhibits                                                                    |
|--------|--------|-----------------------------------------------------------------------------|
|   |   |                                                                        |
| (a)    |   | The  following exhibits are filed as part of this report.                   |
|   |   |                                                                        |
| 3.1    |   | Certificate  of Incorporation of TF Financial Corporation (1)               |
| 3.2    |   | Bylaws of TF  Financial Corporation (1)                                     |
| 4.0    |   | Stock  Certificate of TF Financial Corporation (1)                          |
| 10.1   |   | Third  Federal Savings and Loan Association Management Stock Bonus Plan (1) |
| 10.2   |   | Third  Federal Savings Bank Directors Consultation and Retirement Plan (2)  |
| 10.3   |   | Severance  Agreement with Kent C. Lufkin (3)                                |
| 10.4   |   | Severance  Agreement with Floyd P. Haggar (3)                               |
| 10.5   |   | Severance  Agreement with Dennis R. Stewart (4)                             |
| 10.6   |   | TF Financial  Corporation 1997 Stock Option Plan (5)                        |
| 10.7   |   | Severance  Agreement with Robert N. Dusek (6)                               |
| 10.8   |   | TF Financial  Corporation 1996 Directors Stock Option Plan (7)              |
| 10.9   |   | Retirement  and Non-Competition Agreement with John R. Stranford (8)        |
| 10.10  |   | Employment  Agreement with John R. Stranford (8)                            |
| 10.11  |   | TF Financial  Corporation Incentive Compensation Plan (9)                   |
| 10.12  |   | TF Financial  Corporation 2005 Stock-Based Incentive Plan (10)              |
| 13.0   |   | 2005 Annual  Report to Stockholders                                         |
| 21.0   |   | Subsidiary  Information                                                     |
| 23.0   |   | Consent of  Independent Registered Public Accounting Firm                   |
| 31.0   |   | Certification  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002    |
| 32.0   |   | Certification  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002    |

 

29

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----

| (1)  |   | Incorporated herein by  reference to the Exhibits to Form S-1, Registration Statement, File No.  33-76960.                                  |
|------|--------|---------------------------------------------------------------------------------------------------------------------------------------------|
| (2)  |   | Incorporated herein by  reference to the Registrant’s Annual Report on Form 10-K for the fiscal year  ended December 31, 1995.         |
| (3)  |   | Incorporated herein by  reference to the Registrant’s Annual Report on Form 10-K for the fiscal year  ended December 31, 2000.         |
| (4)  |   | Incorporated herein by  reference to the Registrant’s Annual Report on Form 10-K for the fiscal year  ended December 31, 1999.         |
| (5)  |   | Incorporated herein by  reference to the Registrant’s Annual Report on Form 10-K for the fiscal year  ended December 31, 1997.         |
| (6)  |   | Incorporated herein by  reference to the Registrant’s Annual Report on Form 10-K for the fiscal year  ended December 31, 2001.         |
| (7)  |   | Incorporated herein by  reference to the Registrant’s Annual Report on Form 10-K for the fiscal year  ended December 31, 2002.         |
| (8)  |   | Incorporated herein by  reference to the Registrant’s Annual Report on Form 10-K for the fiscal year  ended December 31, 2003.         |
| (9)  |   | Incorporated herein by  reference to the Registrant’s Form 8-K filed with the Securities and Exchange  Commission on October 20, 2004. |
| (10) |   | Incorporated herein by  reference to the Registrant’s Form S-8 filed with the Securities and Exchange  Commission on May 20, 2005.     |

 

30

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**SIGNATURES**

 

Pursuantto the requirements of Section 13 or 15(d) of the Securities Exchange Act of1934, as amended, the Registrant has duly caused this Report to be signed onits behalf by the undersigned, thereunto duly authorized.

 
| ** **             | **TF  FINANCIAL CORPORATION** |
|------------------------|-------------------------------|
| ** **             | ** **                    |
| ** **             | ** **                    |
| Dated: March  30, 2006 | By:                           | /s/ Kent  C. Lufkin |   |
|                   |                          | Kent C.  Lufkin |
|                   |                          | President,  Chief Executive Officer |
|                   |                          | (Duly  Authorized Representative) |

 

 

Pursuantto the requirements of the Securities Exchange Act of 1934, as amended, thisReport has been signed below by the following persons on behalf of theRegistrant and in the capacities indicated as of March 30, 2006.

 

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

 

31

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