**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-K**

 

**FOR ANNUAL AND TRANSITIONREPORTS**

**PURSUANT TO SECTIONS 13OR 15(d) OF THE**

**SECURITIES EXCHANGE ACTOF 1934**

 

**ý**                                 ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**For the fiscal year endedDecember 31, 2006**

** **

**or**

** **

**o**                                 TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934

**For the transition periodfrom                                   to                                   **

 

**Commission filenumber:  0-24168**

** **

**TF FINANCIAL CORPORATION**

(Exact Name of Registrant as Specified in Its Charter)

 

| **Delaware**                                                                 |   | **74-2705050**                        |
|------------------------------------------------------------------------------|--------|---------------------------------------|
| (State or Other  Jurisdiction of Incorporation  or Organization)             |   | (I.R.S. Employer  Identification No.) |
|                                                                         |   |                                  |
| **3 Penns  Trail, Newtown, Pennsylvania**                                    |   | **18940**                             |
| (Address of  Principal Executive Offices)                                    |   | (Zip Code)                            |
|                                                                         |   |                                  |
| Registrant’s  telephone number, including area code: **(215) 579-4000** |

 

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

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

**CommonStock, par value $.10 per share**

(Title of Class)

Indicate by check mark if the registrant is awell-known seasoned issuer, as defined in Rule 405 of the Securities Act.  YES o     NO x

Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 orSection 15(d) of the Exchange Act. YES o**     **NO x

Indicate by check mark whether the registrant:(1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.  YES x**     **NO o

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

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer” and “large accelerated filer” inRule 12b-2 of the Exchange Act.

| Large accelerated filer  o |   | Accelerated  filer  o |   | Non-accelerated  filer  x |
|--------------------------------------|--------|---------------------------------|--------|-------------------------------------|

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).  YES o**     **NO x

The aggregate market value of the voting common equityheld by non-affiliates of the registrant, based on the closing price of theregistrant’s Common Stock as quoted on the Nasdaq System on June 30, 2006,was $58.5 million (2,870,485 shares at $28.85 per share).

Asof March 19, 2007 there were outstanding 2,928,005 shares of theregistrant’s Common Stock.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

1.                  Portions of theAnnual Report to Stockholders for the Fiscal Year Ended December 31, 2006.(Parts I, II and IV)

2.                  Portions of theProxy Statement for the 2007 Annual Meeting of Stockholders. (Part III)

 

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**PART I**

TF FINANCIAL CORPORATION (THE “COMPANY”) MAY FROMTIME TO TIME MAKE WRITTEN OR ORAL “FORWARD-LOOKING STATEMENTS”, INCLUDINGSTATEMENTS CONTAINED IN THE COMPANY’S FILINGS WITH THE SECURITIES AND EXCHANGECOMMISSION (INCLUDING THIS ANNUAL REPORT ON FORM 10-K AND THE EXHIBITSHERETO), IN ITS REPORTS TO STOCKHOLDERS AND IN OTHER COMMUNICATIONS BY THECOMPANY, WHICH ARE MADE IN GOOD FAITH BY THE COMPANY PURSUANT TO THE “SAFEHARBOR” PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF1995.

THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS ANDUNCERTAINTIES, SUCH AS STATEMENTS OF THE COMPANY’S PLANS, OBJECTIVES,EXPECTATIONS, ESTIMATES AND INTENTIONS, THAT ARE SUBJECT TO CHANGE BASED ONVARIOUS IMPORTANT FACTORS (SOME OF WHICH ARE BEYOND THE COMPANY’SCONTROL).  THE FOLLOWING FACTORS, AMONGOTHERS, COULD CAUSE THE COMPANY’S FINANCIAL PERFORMANCE TO DIFFER MATERIALLYFROM THE PLANS, OBJECTIVES, EXPECTATIONS, ESTIMATES AND INTENTIONS EXPRESSED INSUCH FORWARD-LOOKING STATEMENTS: THE STRENGTH OF THE UNITED STATES ECONOMY INGENERAL AND THE STRENGTH OF THE LOCAL ECONOMIES IN WHICH THE COMPANY CONDUCTSOPERATIONS; THE EFFECTS OF, AND CHANGES IN, MONETARY AND FISCAL POLICIES ANDLAWS, INCLUDING INTEREST RATE POLICIES OF THE BOARD OF GOVERNORS OF THE FEDERALRESERVE SYSTEM, INFLATION, INTEREST RATES, MARKET AND MONETARY FLUCTUATIONS;THE TIMELY DEVELOPMENT OF AND ACCEPTANCE OF NEW PRODUCTS AND SERVICES OF THECOMPANY AND THE PERCEIVED OVERALL VALUE OF THESE PRODUCTS AND SERVICES BYUSERS, INCLUDING THE FEATURES, PRICING AND QUALITY COMPARED TO COMPETITORS’PRODUCTS AND SERVICES; THE IMPACT OF CHANGES IN FINANCIAL SERVICES’ LAWS ANDREGULATIONS (INCLUDING LAWS CONCERNING TAXES, BANKING, SECURITIES ANDINSURANCE); TECHNOLOGICAL CHANGES; ACQUISITIONS; CHANGES IN CONSUMER SPENDINGAND SAVING HABITS; AND THE SUCCESS OF THE COMPANY AT MANAGING THE RISKSINVOLVED IN THE FOREGOING.

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

**Item 1.**                            Business

**BUSINESS OF THECOMPANY**

On July 13, 1994, the Company consummated itspublic offering for 5,290,000 shares of its common stock and acquired ThirdFederal Bank (the “Bank”) as part of the Bank’s mutual-to-stockconversion.  The Company was incorporatedunder Delaware law in March 1994. The Company is a savings and loan holding company and is subject toregulation by the Office of Thrift Supervision (the “OTS”), the Federal DepositInsurance Corporation (the “FDIC”) and the Securities and Exchange Commission(the “SEC”).  The Company does nottransact any material business other than through its direct and indirectsubsidiaries: Third Federal Bank, TF Investments Corporation, Teragon FinancialCorporation, Penns Trail Development Corporation and Third DelawareCorporation. At December 31, 2006, the Company had total assets of $653million, total liabilities of $587 million and stockholders’ equity of $66million.

**BUSINESS OF THEBANK**

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

The Bank is a community oriented savings institutionoffering a variety of financial services to meet the needs of the communitiesit serves.  As of December 31, 2006the Bank operated fifteen branch offices in Bucks and 

3

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Philadelphia counties,Pennsylvania and in Mercer County, New Jersey.

The Bank attracts deposits from the general public anduses such deposits, together with borrowings and other funds primarily tooriginate or purchase loans secured by first mortgages on owner-occupied,one-to-four family residences in its market area and to invest inmortgage-backed and investment securities. At December 31, 2006, one-to-four family residential mortgage loanstotaled $268 million or 55% of the Bank’s total loan portfolio.  At that same date, the Bank had approximately$82 million or 13% of total assets invested in mortgage-backed securities and$35 million or 5% of total assets in investment securities. The Bank alsooriginates commercial real estate and multi-family, construction and consumerloans. The Bank has two subsidiaries, Third Delaware Corporation, which wasincorporated in 1998 for the purpose of holding and managing mortgage-backedsecurities and investment securities for the Bank, and Teragon FinancialCorporation which holds a 75% limited partnership interest in a captive titleinsurance agency, Third Fed Abstract, L. P. During 2006, Teragon FinancialCorporation was granted approval by the state of Pennsylvania to conductbusiness as an insurance agency.

**Market Area**

The Bank offers a wide range of consumer and businessproducts at its fifteen full service branch offices located in Bucks andPhiladelphia Counties in Pennsylvania, and Mercer County in New Jersey. Five ofthe branch offices are located in Bucks County, the third wealthiest county inPennsylvania. Bucks County is a growing region offering opportunity for growthfor the Bank. Seven branches are located in the northeast section ofPhiladelphia where the Bank was founded. Although Philadelphia County is experiencingpopulation decline, the Bank’s branches in this section of Philadelphiarepresent a deposit stronghold. The remaining three branches are in MercerCounty, New Jersey which has an expanding population and represents anothergrowth area for the Bank.

**Competition**

The Bank facesvarying degrees of competition from banks, thrift institutions and creditunions 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, atJune 30, 2006 the Company’s share of deposits in each of the counties inwhich it operates was as follows:
| **County, State**      | ** ** | **Market Share for  Entire County** | ** ** | **Market Share for ZIP Codes  Including Company Branches** | ** ** |
|-----------------------------|------------|----------------------------------------------------|------------|------------------------------------------------------------------------------------------|------------|
| Philadelphia,  Pennsylvania |       | 0.5                                                | %          | 10.9                                                                                     | %          |
| Bucks,  Pennsylvania        |       | 1.6                                                | %          | 6.2                                                                                      | %          |
| Mercer, New Jersey          |       | 0.8                                                | %          | 4.6                                                                                      | %          |

 

**Lending Activities**

**General.**  The Bank’sloan portfolio composition consists primarily of conventional adjustable-rate (“ARM”)and fixed-rate first mortgage loans secured by one-to-four familyresidences.  The Bank also makescommercial real estate and multi-family loans, construction loans and consumerand other loans.  At December 31,2006, the Bank’s mortgage loans outstanding were $396 million, of which $268million were secured by first mortgages on one-to-four family residentialproperty.  Of the one-to-four familyresidential mortgage loans outstanding at that date, 19% were ARM’s and 81%were fixed-rate loans.  Total ARM loansin the Bank’s residential mortgage portfolio at December 31, 2006 amountedto $51 million or 11% of total loans.  Atthat same date, commercial real estate and multi-family residential loanstotaled $94 million, and construction loans totaled $35 million. The constructionloans are predominately floating-rate, prime-rate-based loans.

Consumer and other loans held by the Bank totaled $50million or 10% of total loans outstanding at December 31, 2006, of which$47 million consisted of home equity and second mortgage loans. At that samedate commercial business loans and leases totaled $40 million or 8% of totalloans.

The following table sets forth the composition of theBank’s loan portfolio and mortgage-backed and related securities portfolios indollar amounts and in percentages of the respective portfolios at the datesindicated.

 

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| ** **                                                       | ** ** | **At December 31,**        | ** ** |
|------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                       | ** ** | **2006**                             | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                       | ** ** | **Amount**                           | ** ** | **Percent  of Total** | ** ** | **Amount** | ** ** | **Percent  of Total** | ** ** | **Amount** | ** ** | **Percent  of Total** | ** ** | **Amount** | ** ** | **Percent  of Total** | ** ** | **Amount** | ** ** | **Percent  of Total** | ** ** |
| ** **                                                       | ** ** | **(Dollars in thousands)** | ** ** |
| **Loans held for investment:**                                   | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Mortgage loans:                                                  |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| One-to-four  family                                              |       | $                                    | 266,789    |   | 54.91 | % | $ | 289,678 |   | 58.76 | % | $ | 283,965 |   | 64.08 | % | $ | 276,849 |   | 68.22 | % | $ | 227,953 |   | 61.33 | % |
| Commercial  real estate and multi-family                         |       | 93,607                               |       | 19.26 |   | 89,489 |   | 18.15 |   | 83,559 |   | 18.86 |   | 74,109 |   | 18.26 |   | 85,493 |   | 23.00 |   |
| Construction                                                     |       | 34,944                               |       | 7.19 |   | 24,888 |   | 5.04 |   | 10,286 |   | 2.32 |   | 6,591 |   | 1.62 |   | 12,026 |   | 3.23 |   |
| Total  mortgage loans                                            |       | 395,340                              |       | 81.36 |   | 404,055 |   | 81.95 |   | 377,810 |   | 85.26 |   | 357,549 |   | 88.10 |   | 325,472 |   | 87.56 |   |
| Consumer loans:                                                  |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Home  equity and second mortgage                                 |       | 46,864                               |       | 9.65 |   | 37,479 |   | 7.60 |   | 29,522 |   | 6.66 |   | 25,199 |   | 6.21 |   | 25,480 |   | 6.87 |   |
| Other  consumer                                                  |       | 3,206                                |       | 0.66 |   | 2,836 |   | 0.58 |   | 4,384 |   | 0.99 |   | 6,532 |   | 1.61 |   | 10,490 |   | 2.82 |   |
| Total  consumer and other loans                                  |       | 50,070                               |       | 10.31 |   | 40,315 |   | 8.18 |   | 33,906 |   | 7.65 |   | 31,731 |   | 7.82 |   | 35,970 |   | 9.69 |   |
| Commercial loans and  leases:                                    |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial  loans                                                |       | 40,458                               |       | 8.33 |   | 48,471 |   | 9.83 |   | 30,543 |   | 6.90 |   | 15,185 |   | 3.74 |   | 8,005 |   | 2.15 |   |
| Commercial  leases                                               |       | 36                                   |       | — |   | 186 |   | 0.04 |   | 857 |   | 0.19 |   | 1,371 |   | 0.34 |   | 2,246 |   | 0.60 |   |
| Total  commercial loans and leases                               |       | 40,494                               |       | 8.33 |   | 48,657 |   | 9.87 |   | 31,400 |   | 7.09 |   | 16,556 |   | 4.08 |   | 10,251 |   | 2.75 |   |
| Total  loans                                                     |       | 485,904                              |       | 100.00 | % | 493,027 |   | 100.00 | % | 443,116 |   | 100.00 | % | 405,836 |   | 100.00 | % | 371,693 |   | 100.00 | % |
| Less:                                                            |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Unearned  discount, (premium), deferred loan fees, net           |       | (531                                 | )          |   |   | (505 | ) |   |   | (706 | ) |   |   | (924 | ) |   |   | (446 | ) |   |   |
| Allowance  for loan losses                                       |       | 2,865                                |       |   |   | 2,641 |   |   |   | 2,307 |   |   |   | 2,111 |   |   |   | 2,047 |   |   |   |
| Total  loans, held for investment, net                           |       | $                                    | 483,570    |   |   |   | $ | 490,891 |   |   |   | $ | 441,515 |   |   |   | $ | 404,649 |   |   |   | $ | 370,092 |   |   |   |
| **Loans held for sale:**                                         |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mortgage loans:                                                  |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| One-to-four  family                                              |       | $                                    | 969        |   | 100.00 | % | $ | 68 |   | 100.00 | % | $ | 680 |   | 100.00 | % | — |   | — | % | — |   | — | % |
| Total  loans held for sale                                       |       | $                                    | 969        |   | 100.00 | % | $ | 68 |   | 100.00 | % | $ | 680 |   | 100.00 | % | — |   | — | % | — |   | — | % |
|                                                             |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Mortgage-backed securities  held-to-maturity:**                | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| FHLMC                                                            |       | $                                    | 2,297      |   | 29.84 | % | $ | 3,161 |   | 31.06 | % | $ | 5,195 |   | 34.87 | % | $ | 8,407 |   | 35.58 | % | $ | 21,870 |   | 40.10 | % |
| FNMA                                                             |       | 3,084                                |       | 40.07 |   | 3,969 |   | 39.00 |   | 5,182 |   | 34.77 |   | 7,205 |   | 30.49 |   | 11,781 |   | 21.60 |   |
| GNMA                                                             |       | 2,316                                |       | 30.09 |   | 3,040 |   | 29.87 |   | 4,516 |   | 30.31 |   | 8,007 |   | 33.88 |   | 18,278 |   | 33.40 |   |
| Real  estate investment mortgage conduit                         |       | —                               |       | — |   | 7 |   | 0.07 |   | 7 |   | 0.05 |   | 11 |   | 0.05 |   | 2,519 |   | 4.60 |   |
| Other  mortgage-backed securities                                |       | —                               |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   | 144 |   | 0.30 |   |
| Total  mortgage-backed and related securities held-to-maturity   |       | $                                    | 7,697      |   | 100.00 | % | $ | 10,177 |   | 100.00 | % | $ | 14,900 |   | 100.00 | % | $ | 23,630 |   | 100.00 | % | $ | 54,592 |   | 100.00 | % |
|                                                             |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Mortgage-backed securities  available-for-sale:**              | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| FHLMC                                                            |       | $                                    | 7,888      |   | 10.61 | % | $ | 9,686 |   | 11.60 | % | $ | 6,614 |   | 6.38 | % | $ | 8.525 |   | 7.98 | % | $ | 699 |   | 0.60 | % |
| FNMA                                                             |       | 10,330                               |       | 13.90 |   | 12,173 |   | 14.58 |   | 15,108 |   | 14.58 |   | 18,385 |   | 17.22 |   | 11,878 |   | 10.30 |   |
| Real  estate investment mortgage conduit                         |       | 56,120                               |       | 75.49 |   | 61,652 |   | 73.82 |   | 81,888 |   | 79.04 |   | 79,864 |   | 74.80 |   | 102,666 |   | 89.10 |   |
| Total mortgage-backed  and related securities available-for-sale |       | $                                    | 74,338     |   | 100.00 | % | $ | 83,511 |   | 100.00 | % | $ | 103,610 |   | 100.00 | % | $ | 106,774 |   | 100.00 | % | $ | 115,243 |   | 100.00 | % |

 

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**Loan Maturity and Repricing Information.**  Thefollowing table sets forth certain information at December 31, 2006,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 statedschedule of repayments and no stated maturity, overdrafts and delinquentloans maturing prior to December 31, 2007, are reported as due in one yearor less.  The table does not includeprepayments or scheduled principal repayments.

|                                          | ** ** | **Due 1/1/07 -  12/31/07** | ** ** | **Due 1/1/08 -  12/31/11** | ** ** | **Due After  12/31/11** | ** ** |
|------------------------------------------|------------|--------------------------------------|------------|--------------------------------------|------------|------------------------------|------------|
| ** **                               | ** ** | **(In thousands)**              | ** ** |
| Available for sale:                      |       |                                 |       |                                 |       |                         |       |
| Mortgage-backed  securities              |       | $                                    | 1,478      |                                 | $          | 86                           |       | $ | 72,774 |   |
| Loans receivable                         |       | —                               |       | —                               |       | 969                          |       |
| Total                                    |       | $                                    | 1,478      |                                 | $          | 86                           |       | $ | 73,743 |   |
|                                     |       |                                 |       |                                 |       |                         |       |
| Held to Maturity:                        |       |                                 |       |                                 |       |                         |       |
| One-to-four  family                      |       | $                                    | 148        |                                 | $          | 4,912                        |       | $ | 261,729 |   |
| Commercial real  estate and multi-family |       | 3,807                                |       | 10,450                               |       | 79,350                       |       |
| Construction                             |       | 25,821                               |       | 9,123                                |       | —                       |       |
| Consumer and  other                      |       | 1,172                                |       | 5,355                                |       | 43,543                       |       |
| Commercial loans  and leases             |       | 26,587                               |       | 5,395                                |       | 8,512                        |       |
| Total loans  receivable                  |       | 57,535                               |       | 35,235                               |       | 393,134                      |       |
| Mortgage-backed  securities              |       | 144                                  |       | 451                                  |       | 7,102                        |       |
| Total                                    |       | $                                    | 57,679     |                                 | $          | 35,686                       |       | $ | 400,236 |   |

 

Thefollowing table sets forth the dollar amount of all loans and mortgage-backedsecurities due after December 31, 2007, 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              |       | $                        | 72,860     |                                       | $          | — |   |
| Loans                                    |       | 969                      |       | —                                     |       |
| Total                                    |       | $                        | 73,829     |                                       | $          | — |   |
|                                     |       |                     |       |                                       |       |
| Held to Maturity:                        |       |                     |       |                                       |       |
| One-to-four  family                      |       | $                        | 215,162    |                                       | $          | 51,479 |   |
| Commercial real  estate and multi-family |       | 7,166                    |       | 82,634                                     |       |
| Construction                             |       | —                   |       | 9,123                                      |       |
| Consumer and  other                      |       | 32,950                   |       | 15,948                                     |       |
| Commercial loans  and leases             |       | 11,363                   |       | 2,544                                      |       |
| Total loans  receivable                  |       | 266,641                  |       | 161,728                                    |       |
| Mortgage-backed  securities              |       | 7,513                    |       | 40                                         |       |
| Total                                    |       | $                        | 274,154    |                                       | $          | 161,768 |   |

 

**One-to-Four Family MortgageLending.**  The Bank offers first mortgage loans securedby one-to-four family residences in the Bank’s lending area.  Typically, such residences are single-familyhomes that serve as the primary residence of the owner.  The Bank generally originates and invests inone-to-four family residential mortgage loans in amounts up to 80% of thelesser of the appraised value or selling price of the mortgaged property.  Loans originated in amounts over 80% of thelesser of the appraised value or selling price of the mortgaged property, otherthan loans to facilitate the sale of real estate acquired through foreclosure,must be owner-occupied and private mortgage insurance is typically required.

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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,the Bank is primarily a portfolio lender. As of December 31, 2006, the Bank’s portfolio of loans serviced forFHLMC or FNMA totaled approximately $23 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.**  The Bank originates loans secured bycommercial real estate including non-owner occupied residential multi-familydwelling units (more than four units) primarily secured by professional officebuildings and apartment complexes. The Bank generally originates commercialreal estate and multi-family loans up to 75% of the appraised value of theproperty securing the loan.  Currently,it is the Bank’s philosophy to originate commercial real estate and multi-familyloans primarily on properties in its general market area.  The commercial real estate and multi-familyloans in the Bank’s portfolio consist of fixed-rate, ARM and balloon loansoriginated at prevailing market rates for terms of up to 25 years.  The Bank’s current policy is to originatecommercial real estate and multi-family loans as ARM’s that amortize over a 20to 25 year period and either have a scheduled interest rate reset, 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.  Similarly, on commercial office buildings andhotel properties, the Bank requires minimum debt service coverage and obtainsoperating statements of such properties. At December 31, 2006, the fivelargest commercial real estate and multi-family loans totaled $24 million withno single loan larger than $6 million. At December 31, 2006, all such loans were current and theproperties securing such loans are in the Bank’s market area.

**Construction Lending.**  At December 31, 2006, the Bank had $35million of construction loans or 7% of the Bank’s total loan portfolio.  Construction financing is generallyconsidered to involve a higher degree of risk of loss than long-term financingon improved, occupied real estate.  Riskof loss on a construction loan is dependent largely upon the accuracy of theinitial estimate of the property’s value at completion of construction ordevelopment and the estimated cost (including interest) of construction.  During the construction phase, a number offactors could result in delays and cost overruns.  If the estimate of construction costs provesto be inaccurate, the Bank may be required to advance funds beyond the amountoriginally committed to permit completion of the 

7

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construction.  If the estimate of value proves to beinaccurate, the Bank may be confronted, at or prior to the maturity of theloan, with a project having a value which is insufficient to assure fullrepayment. At December 31, 2006, the five largest construction loanstotaled $18 million with no single loan larger than $5 million.

**Consumer and Other Loans.**  The Bank also offers consumer and other loansin the form of home equity and second mortgage loans (referred to hereinaftercollectively as “second mortgage loans”), automobile loans and studentloans.  These loans totaled $50 millionor 10% of the Bank’s total loan portfolio at December 31, 2006.  The Bank originates consumer loans in orderto provide a wide range of financial services to its customers and because theshorter terms and normally higher interest rates on such loans help maintain aprofitable spread between its average loan yield and its cost of funds.

In connection withconsumer loan applications, the Bank verifies the borrower’s income and reviewsa credit bureau report.  In addition, therelationship of the loan to the value of the collateral is considered.  All automobile loan applications are reviewedand approved by the Bank.  The Bankreviews the credit report of the borrower as well as the value of the vehiclewhich secures the loan.

Consumer loans tend to beoriginated at higher interest rates than conventional residential mortgage loansand for shorter terms, thus facilitating the Bank’s interest rate riskmanagement.  Consumer loans, however,tend to have a higher risk of default than residential mortgage loans.  At December 31, 2006, $68,000 or 0.1% ofthe Bank’s consumer loans were delinquent more than 90 days, compared to$141,000 or 0.05% of residential one-to-four family loans.

TheBank offers second mortgage loans on one-to-four family residences.  At December 31, 2006, second mortgageand home equity loans totaled $47 million, or 10% 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 commercial business loans onlyon a secured or guaranteed basis.  The termsof these loans generally do not exceed five years. These loans can havefloating interest rates which adjust with changes in market interest rates,usually the prime rate, or have a fixed rate related to their term to maturity.  The Bank’s commercial business loansprimarily consist of short-term loans for equipment, working capital, businessexpansion and inventory financing.  TheBank customarily requires a personal guaranty of payment by the principals ofany borrowing entity and reviews the financial statements and income taxreturns of the guarantors.  AtDecember 31, 2006, the Bank had approximately $40 million outstanding incommercial business loans, which represented approximately 8% of its total loanportfolio. At December 31, 2006, the five largest commercial businessloans totaled $14 million with no single loan larger than $4 million.

**Loan Approval Authority and Underwriting.**  The Board of Directors of the Bank sets theauthority to approve loans based on the amount, type of loan (i.e., secured orunsecured) and total exposure to the borrower. Where there are one or more existing loans to a borrower, the level ofapproval required is governed by the proposed total exposure including the newloan.  The Board has approved loanauthority and limits for certain of the Bank’s lending personnel and seniorofficers, including the president of the Bank. Approval authority ranges from $5,000 to $750,000 for secured loans, and$5,000 to $100,000 for unsecured loans. Members of an in-house loan committeecomprising four senior members of management approve all loans over $500,000.Any two members may combine their lending authority. The committee has theauthority to approve secured loans up to $2.5 million and unsecured loans up to$200,000. All loans greater than $2.5 million through $5 million require theapproval of a Board Loan Committee composed of four members of the Board ofDirectors of the Bank. All loans over $5 million or loans that cause theaggregate lending relationship to exceed $5 million must be approved by theBank’s Board of Directors.

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 

8

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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.  An independent appraiser or loan officerdetermines the stage of completion based upon a physical inspection of theconstruction and funds are advanced only for work in place.  It is the Bank’s policy to obtain titleinsurance or a title opinion on all real estate first mortgage loans in excessof $200,000.  Borrowers must also obtainhazard or flood insurance (for loans on property located in a flood zone) priorto closing the loan.  For loans in excessof 80% of the loan to value ratio, borrowers are generally required to advancefunds on a monthly basis together with each payment of principal and interestto an escrow account from which the Bank makes disbursements for items such asreal estate taxes and hazard insurance premiums. The Bank does not engage insub-prime or “no-doc” style lending.

**Loans to One Borrower.**  Current regulations limit loans to oneborrower in an amount equal to 15% of unimpaired capital and retained income onan unsecured basis and an additional amount equal to 10% of unimpaired capitaland retained income if the loan is secured by readily marketable collateral(generally, financial instruments, not real estate) or $500,000, whichever ishigher.  Penalties for violations of theloan-to-one borrower statutory and regulatory restrictions include cease anddesist orders, the imposition of a supervisory agreement and civil moneypenalties.  The Bank’s maximumloan-to-one borrower limit was approximately $9.2 million as ofDecember 31, 2006.

At December 31,2006, the Bank’s five largest aggregate lending relationships had balancesranging from $6.3 to $7.4 million.  AtDecember 31, 2006, all of these loans were current.

**Mortgage-BackedSecurities**

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, 2006, consisted ofpass-through certificates issued by the Federal Home Loan Mortgage Corporation(“FHLMC”) ($10.2 million), Government National Mortgage Association (“GNMA”),($2.3 million) Federal National Mortgage Association (“FNMA”) ($13.4 million),and real estate mortgage investment conduits formed by these same agencies (“REMICs”)($56.1 million).

AtDecember 31, 2006, the amortized cost of mortgage-backed securitiestotaled $83.9 million, or 13% of total assets, and the market value of such securitiestotaled approximately $82.1 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 cash flowsdepending on the class of such securities purchased. The Bank’s REMICs areprimarily “planned amortization classes” and “very accurately defined maturityclasses” that, when purchased, offered a high probability of predictable cashflows.

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

|                                                      | ** ** | **At December 31,** | ** ** |
|------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                           | ** ** | **2006**                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                           | ** ** | **(In thousands)**       | ** ** |
| Held to maturity:                                    |       |                          |       |   |   |   |   |
| GNMA-fixed rate                                      |       | $                             | 2,316      |   | $ | 3,040 |   | $ | 4,516 |   |
| FHLMC ARMs                                           |       | 40                            |       | 44 |   | 65 |   |
| FHLMC-fixed rate                                     |       | 2,257                         |       | 3,117 |   | 5,130 |   |
| FNMA-fixed rate                                      |       | 3,084                         |       | 3,969 |   | 5,182 |   |
| REMICs                                               |       | —                        |       | 7 |   | 7 |   |
| Total  mortgage-backed securities held to maturity   |       | $                             | 7,697      |   | $ | 10,177 |   | $ | 14,900 |   |
| Available-for-sale:                                  |       |                          |       |   |   |   |   |
| FHLMC                                                |       | $                             | 7,888      |   | $ | 9,686 |   | $ | 6,614 |   |
| FNMA                                                 |       | 10,330                        |       | 12,173 |   | 15,108 |   |
| REMICs                                               |       | 56,120                        |       | 61,652 |   | 81,888 |   |
| Total mortgage-backed  securities available-for-sale |       | $                             | 74,338     |   | $ | 83,511 |   | $ | 103,610 |   |

 

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**Mortgage-Backed Securities Maturity.**  The following table sets forth the maturityand the weighted average coupon (“WAC”) of the Bank’s mortgage-backedsecurities portfolio at December 31, 2006. The table does not include estimated prepayments.  Adjustable-rate mortgage-backed securitiesare shown as maturing based on contractual maturities.

|                                  | ** ** | **Contractual Held  To Maturity  Maturities Due** | ** ** | **WAC** | ** ** | **Contractual  Available  -For-Sale  Maturities Due** | ** ** | **WAC** | ** ** |
|----------------------------------|------------|------------------------------------------------------------------|------------|---------|------------|------------------------------------------------------------|------------|---------|------------|
| ** **                       | ** ** | **(Dollars in thousands)**                             | ** ** |
| Less than 1 year                 |       | $                                                                | 144        |    | 7.16       | %                                                          | $          | 1,478   |       | 4.05 | % |
| 1 to 3 years                     |       | 298                                                              |       | 7.59    |       | 86                                                         |       | 7.18    |       |
| 3 to 5 years                     |       | 153                                                              |       | 6.81    |       | —                                                     |       | —  |       |
| 5 to 10 years                    |       | 106                                                              |       | 7.43    |       | 29,210                                                     |       | 4.75    |       |
| 10 to 20 years                   |       | —                                                           |       | —  |       | 24,219                                                     |       | 4.63    |       |
| Over 20 years                    |       | 6,996                                                            |       | 6.20    |       | 19,345                                                     |       | 4.42    |       |
| Total mortgage-backed securities |       | $                                                                | 7,697      |    | 6.30       | %                                                          | $          | 74,338  |       | 4.62 | % |

 

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**Non-Performing andProblem Assets**

**Loan Collection.**  When a borrower fails to make a requiredpayment on a loan, the Bank takes a number of steps to have the borrower curethe 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 isobtained by the Bank at foreclosure.

In thecase of commercial real estate and multi-family loans, and construction loans,the Bank generally attempts to contact the borrower by telephone after any loanpayment is ten days past due and a senior loan officer reviews all collectionefforts made if payment is not received after the loan is 30 days pastdue.  Decisions as to when to commenceforeclosure actions for commercial real estate and multi-family loans andconstruction 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 loan portfolio.  Based upon servicing agreements with theservicers of the loan, the Bank relies upon the servicer to contact delinquentborrowers, collect delinquent amounts and to initiate foreclosure proceedings,when necessary, all in accordance with applicable laws, regulations and theterms of the servicing agreements between the Bank and its servicing agents. AtDecember 31, 2006 the Bank used third-party servicers to service $24.9million in mortgage loans, including one servicer that serviced $17 million. Pleasesee Item 3. Legal Proceedings for additional information regarding thisservicer.  All of the Bank’s third-partymortgage loan servicers are regulated financial institutions or are approved byeither HUD, FNMA, or FHLMC to service loans on their behalf.

**Delinquent Loans.**  Generally, the Bank reserves for uncollectedinterest on loans past due more than 90 days; these loans are included in thetable of nonaccrual loans below.  Loansalso are placed on a nonaccrual status when, in the judgment of management, theprobability of collection of interest is deemed to be insufficient to warrantfurther collection.  When a loan isplaced on nonaccrual status, previously accrued but unpaid interest is deductedfrom interest income and the further accrual of interest ceases unless theunderlying facts that prompted a nonaccrual determination are deemed to haveimproved significantly.

**Non-Performing Assets.** The following table sets forth informationregarding non-accrual loans and real estate owned by the Bank at the datesindicated.  The Bank had no loanscontractually past due more than 90 days for which accrued interest has beenrecorded.

**Non-performingassets**
| ** **                                   | ** ** | **At December 31,**        | ** ** |
|----------------------------------------------|------------|--------------------------------------|------------|
| ** **                                   | ** ** | **2006**                             | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                   | ** ** | **(Dollars in thousands)** | ** ** |
| Loans accounted for on a  non-accrual basis: |       |                                 |       |   |   |   |   |   |   |   |   |
| Mortgage loans:                              |       |                                 |       |   |   |   |   |   |   |   |   |
| One-to-four  family                          |       | $                                    | 141        |   | $ | 392 |   | $ | 536 |   | $ | 1,549 |   | $ | 1,013 |   |
| Commercial real  estate and multi-family     |       | 61                                   |       | 877 |   | 23 |   | 296 |   | 1,677 |   |
| Consumer and other                           |       | 68                                   |       | 170 |   | 84 |   | 135 |   | 245 |   |
| Commercial loans and  leases                 |       | 1,840                                |       | 150 |   | 317 |   | 368 |   | 887 |   |
| Total  non-accrual loans                     |       | 2,110                                |       | 1,589 |   | 960 |   | 2,348 |   | 3,822 |   |
|                                         |       |                                 |       |   |   |   |   |   |   |   |   |
| Real estate owned, net                       |       | —                               |       | 700 |   | 700 |   | 868 |   | 84 |   |
| Total non-performing  assets                 |       | $                                    | 2,110      |   | $ | 2,289 |   | $ | 1,660 |   | $ | 3,216 |   | $ | 3,906 |   |
| Total non-accrual loans  to loans            |       | 0.43                                 | %          | 0.32 | % | 0.22 | % | 0.58 | % | 1.03 | % |
| Total non-accrual loans  to total assets     |       | 0.32                                 | %          | 0.24 | % | 0.15 | % | 0.39 | % | 0.53 | % |
| Total non-performing assets to total assets  |       | 0.32                                 | %          | 0.35 | % | 0.26 | % | 0.53 | % | 0.54 | % |

 

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AtDecember 31, 2006, 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, 2006, 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 presentrepayment terms.

**Classified Assets.**  OTS regulations provide for a classificationsystem for problem assets of insured institutions which covers all problemassets.  Under this classificationsystem, problem assets of insured institutions are classified as “substandard,”“doubtful,” or “loss.”  An asset isconsidered “substandard” if it is inadequately protected by the current networth and paying capacity of the obligor or of the collateral pledged, ifany.  “Substandard” assets include thosecharacterized by the “distinct possibility” that the insured institution willsustain “some loss” if the deficiencies are not corrected.  Assets classified as “doubtful” have all ofthe weaknesses inherent in those classified “substandard,” with the addedcharacteristic that the weaknesses present make “collection or liquidation infull,” on the basis of currently existing facts, conditions and values, “highlyquestionable and improbable.”  Assetsclassified as “loss” are those considered “uncollectible” and of such littlevalue that the establishment of a specific loss reserve is warranted.  Assets designated “special mention” bymanagement are assets included on the Bank’s internal watchlist because ofpotential weakness but that do not currently warrant classification in one ofthe aforementioned categories.

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 for OTS purposes represent loss allowances which have beenestablished to recognize the inherent risk associated with lending activities,but which, unlike specific allowances, have not been allocated to particularproblem assets.  However, when an insuredinstitution classifies all or a portion of a problem asset as “loss,” it isrequired either to establish a specific allowance for losses equal to 100% ofthat portion of the asset so classified or to charge off such amount.  An institution’s determination as to theclassification of its assets and the amount of its valuation allowances issubject to review by the OTS, which may order the establishment of additionalgeneral or specific loss allowances.  Aportion of general loss allowances established to cover possible losses relatedto assets classified as substandard or doubtful may be included in determiningan institution’s regulatory capital, while specific valuation allowances forloan losses generally do not qualify as regulatory capital.

Thefollowing table provides further information in regard to the Bank’s classifiedassets as of December 31, 2006.

|                          | ** ** | **At December 31, 2006** | ** ** |
|--------------------------|------------|-----------------------------------------|------------|
| ** **               | ** ** | **(In thousands)**                 | ** ** |
|                     |       |                                    |       |
| Special mention  assets  |       | $                                       | 36         |   |
| Substandard              |       | 3,186                                   |       |
| Doubtful assets          |       | —                                  |       |
| Loss                     |       | —                                  |       |
| Total classified  assets |       | $                                       | 3,222      |   |

 

**Real Estate Owned.**  Real estate acquired by the Bank as a resultof foreclosure, judgment or by deed in lieu of foreclosure is classified asreal estate owned (“REO”) until it is sold. When property is acquired it is 

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recorded at thelower 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.

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

Inestablishing reserves, a specific reserve is established for loans whichbecause of past payment history, a review of recent financial information, orother facts regarding the credit, pose a higher than normal amount of perceivedrisk of collection. In addition, a reserve is assigned based upon qualitativeand quantitative risk factors which are inherent in segments of the loanportfolio.

Althoughthe allowance has been allocated to determine the appropriateness of thereserve, the total allowance is available to absorb any and all losses from anysegment of the loan portfolio. At December 31, 2006, management believesthat the allowance for loan loss is at an acceptable level.

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,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                                                                              | ** ** | **2006**                                                      | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                                                              | ** ** | **(Dollars in thousands)**                          | ** ** |
| Balance at  beginning of period                                                                                         |       | $                                                             | 2,641      |   | $ | 2,307 |   | $ | 2,111 |   | $ | 2,047 |   | $ | 1,972 |   |
| Provision for  loan losses                                                                                              |       | 150                                                           |       | 540 |   | 600 |   | 330 |   | 988 |   |
| Charge-offs:                                                                                                            |       |                                                          |       |   |   |   |   |   |   |   |   |
| One-to-four family                                                                                                      |       | —                                                        |       | — |   | — |   | (16 | ) | (13 | ) |
| Commercial and multi-family real estate loans                                                                           |       | —                                                        |       | — |   | (112 | ) | — |   | — |   |
| Consumer and other loans                                                                                                |       | (55                                                           | )          | (122 | ) | (186 | ) | (219 | ) | (303 | ) |
| Commercial loans and leases                                                                                             |       | (1                                                            | )          | (286 | ) | (161 | ) | (322 | ) | (625 | ) |
| Recoveries:                                                                                                             |       |                                                          |       |   |   |   |   |   |   |   |   |
| One-to-four family                                                                                                      |       | —                                                        |       | — |   | — |   | — |   | 3 |   |
| Consumer and other loans                                                                                                |       | 65                                                            |       | 39 |   | 55 |   | 36 |   | 25 |   |
| Commercial loans and leases                                                                                             |       | 65                                                            |       | 163 |   | — |   | 255 |   | — |   |
| Balance at end  of year                                                                                                 |       | $                                                             | 2,865      |   | $ | 2,641 |   | $ | 2,307 |   | $ | 2,111 |   | $ | 2,047 |   |
|                                                                                                                    |       |                                                          |       |   |   |   |   |   |   |   |   |
| Ratio of net  charge-offs during the period to average loans outstanding during the period                              |       | (0.01                                                         | )%         | 0.04 | % | 0.09 | % | 0.07 | % | 0.25 | % |
| Ratio of  allowance for loan losses to non-performing loans at the end of the period                                    |       | 135.8                                                         | %          | 166.3 | % | 240.3 | % | 89.9 | % | 53.6 | % |
| Ratio of  allowance for loan losses to loans receivable at the end of the period                                        |       | 0.59                                                          | %          | 0.54 | % | 0.52 | % | 0.52 | % | 0.55 | % |
| Ratio of allowance for  loan losses and foreclosed real estate to total non-performing assets at the  end of the period |       | 135.8                                                         | %          | 115.4 | % | 139.0 | % | 65.6 | % | 52.4 | % |

 

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The followingtable sets forth the allocation of the Bank’s allowance for loan losses by loancategory and the percent of loans in each category to total loans receivable,gross, at the dates indicated.

14

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| ** **                               | ** ** | **At December 31,**        | ** ** |
|------------------------------------------|------------|--------------------------------------|------------|
| ** **                               | ** ** | **2006**                             | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                               | ** ** | **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                       |       | $                                    | 332        |   | 54.9 | % | $ | 154 |   | 58.8 | % | $ | 176 |   | 64.1 | % | $ | 277 |   | 68.2 | % | $ | 119 |   | 61.3 | % |
| Commercial real estate  and multi-family |       | 665                                  |       | 19.3 |   | 1,010 |   | 18.2 |   | 1,035 |   | 18.8 |   | 1,230 |   | 18.3 |   | 1,021 |   | 23.0 |   |
| Construction                             |       | 621                                  |       | 7.2 |   | 738 |   | 5.0 |   | 121 |   | 2.3 |   | 109 |   | 1.6 |   | 90 |   | 3.2 |   |
| Consumer and other loans                 |       | 248                                  |       | 10.3 |   | 115 |   | 8.2 |   | 554 |   | 7.7 |   | 246 |   | 7.8 |   | 271 |   | 9.7 |   |
| Commercial loans and  leases             |       | 999                                  |       | 8.3 |   | 624 |   | 9.8 |   | 421 |   | 7.1 |   | 249 |   | 4.1 |   | 546 |   | 2.8 |   |
| Total allowance                          |       | $                                    | 2,865      |   | 100.0 | % | $ | 2,641 |   | 100.0 | % | $ | 2,307 |   | 100.0 | % | $ | 2,111 |   | 100.0 | % | $ | 2,047 |   | 100.0 | % |

 

**InvestmentActivities**

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

The followingtable sets forth certain information regarding the amortized cost and fairvalues of the Bank’s investments at the dates indicated.
| ** **                               | ** ** | **At December 31,** | ** ** |
|------------------------------------------|------------|-------------------------------|------------|
| ** **                               | ** ** | **2006**                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                               | ** ** | **Amortized  Cost**           | ** ** | **Fair  Value** | ** ** | **Amortized  Cost** | ** ** | **Fair  Value** | ** ** | **Amortized  Cost** | ** ** | **Fair  Value** | ** ** |
| ** **                               | ** ** | **(In thousands)**       | ** ** |
| Interest-earning  deposits               |       | $                             | 6,860      |   | $ | 6,860 |   | $ | 177 |   | $ | 177 |   | $ | 252 |   | $ | 252 |   |
|                                     |       |                          |       |   |   |   |   |   |   |   |   |   |   |
| Investment securities  held-to-maturity: |       |                          |       |   |   |   |   |   |   |   |   |   |   |
| State and  political subdivisions        |       | $                             | 677        |   | $ | 681 |   | $ | 1,015 |   | $ | 1,036 |   | $ | 1,326 |   | $ | 1,395 |   |
| Corporate debt  securities               |       | —                        |       | — |   | 3,675 |   | 3,671 |   | 5,701 |   | 5,793 |   |
| Total                                    |       | $                             | 677        |   | $ | 681 |   | $ | 4,690 |   | $ | 4,707 |   | $ | 7,027 |   | $ | 7,188 |   |
|                                     |       |                          |       |   |   |   |   |   |   |   |   |   |   |
| Securities  available-for-sale:          |       |                          |       |   |   |   |   |   |   |   |   |   |   |
| U.S. government  and agency obligations  |       | $                             | 5,990      |   | $ | 5,911 |   | $ | 5,982 |   | $ | 5,880 |   | $ | 2,978 |   | $ | 2,958 |   |
| State and  political subdivisions        |       | 24,406                        |       | 24,429 |   | 20,844 |   | 20,563 |   | 13,704 |   | 13,675 |   |
| Corporate debt  securities               |       | 4,003                         |       | 3,982 |   | 4,002 |   | 3,958 |   | 1,000 |   | 992 |   |
| Equities                                 |       | 150                           |       | 202 |   | — |   | — |   | — |   | — |   |
| Total                                    |       | $                             | 34,549     |   | $ | 34,524 |   | $ | 30,828 |   | $ | 30,401 |   | $ | 17,682 |   | $ | 17,625 |   |

 

**InvestmentPortfolio Maturities**

The following table sets forth certain informationregarding the amortized cost, weighted average yields 

15

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and maturities of theBank’s investment securities portfolio, exclusive of interest-earning deposits,at December 31, 2006.  Yields on taxexempt obligations have been computed on a tax equivalent basis.
| ** **              | ** ** | **One Year or Less**  | ** ** | **One to Five Years** | ** ** | **Five to Ten Years** | ** ** | **More than Ten Years** | ** ** | **Total Investment Securities(1)** | ** ** |
|-------------------------|------------|--------------------------------------|------------|--------------------------------------|------------|--------------------------------------|------------|----------------------------------------|------------|----------------------------------------------|------------|
| ** **              | ** ** | **Amortized  Cost**                  | ** ** | **Average  Yield**                   | ** ** | **Amortized  Cost**                  | ** ** | **Average  Yield**                     | ** ** | **Amortized  Cost**                          | ** ** | **Average  Yield** | ** ** | **Amortized  Cost** | ** ** | **Average  Yield** | ** ** | **Amortized  Cost** | ** ** | **Average  Yield** | ** ** | **Fair  Value** | ** ** |
| ** **              | ** ** | **(Dollars in thousands)** | ** ** |
| Equities                |       | $                                    | 150        |                                 | —     | %                                    | $          | —                                 |       | —                                       | %          | $ | — |   | — | % | $ | — |   | — | % | $ | 150 |   | — | % | $ | 202 |   |
| U.S. government  agency |       | 3,000                                |       | 4.27                                 |       | 2,990                                |       | 3.40                                   |       | —                                       |       | — |   | — |   | — |   | 5,990 |   | 3.83 |   | 5,911 |   |
| Municipal  obligations  |       | —                               |       | —                               |       | 1,923                                |       | 5.59                                   |       | 12,008                                       |       | 5.11 |   | 11,152 |   | 5.61 |   | 25,083 |   | 5.37 |   | 25,110 |   |
| Corporate  obligations  |       | 3,003                                |       | 3.91                                 |       | 1,000                                |       | 4.64                                   |       | —                                       |       | — |   | — |   | — |   | 4,003 |   | 4.09 |   | 3,982 |   |
| Total                   |       | $                                    | 6,153      |                                 | 3.99       | %                                    | $          | 5,913                                  |       | 4.32                                         | %          | $ | 12,008 |   | 5.11 | % | $ | 11,152 |   | 5.61 | % | $ | 35,226 |   | 4.94 | % | $ | 35,205 |   |

----

(1)             Includes $34.5 million of U.S. governmentagency, municipal and corporate obligations which are carried asavailable-for-sale at December 31, 2006. Investment securities available-for-sale are carried at fair value.

**Sourcesof Funds**

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

**Deposits.**The Bank offers a variety ofdeposit accounts having a range of interest rates and terms. The Bank’sdeposits consist of regular savings, non-interest bearing checking, NOWchecking, money market, and certificate accounts. Of the deposit accounts, $32million or 6.6% consist of IRA, Keogh or SEP retirement accounts at December31, 2006.

Theflow of deposits is influenced significantly by general economic conditions,changes in money market and prevailing interest rates and competition. The Bank’sdeposits are primarily obtained from areas surrounding its offices, and theBank relies primarily on customer service and long-standing relationships withcustomers to attract and retain these deposits. The Bank has maintained a highlevel of core deposits consisting of regular savings, money market,non-interest-bearing checking, and NOW checking, which has contributed to a lowcost-of-funds. At December 31, 2006, core deposits amounted to 59% of totaldeposits.

During2005, the Bank introduced a floating-rate certificate of deposit, which has aninterest rate that adjusts according to adjustments in the prime rate. AtDecember 31, 2006 there were $10.2 million of these floating rate certificatesof deposit. In 2006, the Bank obtained $11.7 million in broker-originateddeposits.

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The following table sets forth the distribution of theBank’s deposit accounts at the dates indicated and the weighted average nominalinterest rates on each category of deposits presented. The Bank does not havesignificant amount of deposits from outside its market area. Management doesnot believe that the use of year end balances instead of average balancesresulted in any material difference in the information presented.
| ** **                              | ** ** | **At December 31,**        | ** ** |
|-----------------------------------------|------------|--------------------------------------|------------|
| ** **                              | ** ** | **2006**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                              | ** ** | **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     |       | $                                    | 51,272     |   | 10.72 |   | 0.48 | % | $ | 52,319 |   | 11.12 |   | 0.47 | % | $ | 54,887 |   | 11.93 |   | 0.47 | % |
| Money market  accounts                  |       | 62,914                               |       | 13.16 |   | 3.21 |   | 79,666 |   | 16.93 |   | 2.72 |   | 42,496 |   | 9.24 |   | 1.00 |   |
| Non-interest-bearing  checking accounts |       | 36,991                               |       | 7.74 |   | 0.00 |   | 37,138 |   | 7.89 |   | 0.00 |   | 32,636 |   | 7.10 |   | 0.00 |   |
| Total transaction accounts              |       | 151,177                              |       | 31.62 |   |   |   | 169,123 |   | 35.94 |   |   |   | 130,019 |   | 28.27 |   |   |   |
|                                    |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Passbook accounts                       |       | 131,359                              |       | 27.48 |   | 2.21 |   | 151,725 |   | 32.25 |   | 1.11 |   | 182,945 |   | 39.78 |   | 0.98 |   |
|                                    |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Certificates of  deposit                |       | 195,551                              |       | 40.90 |   | 4.35 |   | 149,673 |   | 31.81 |   | 3.29 |   | 146,939 |   | 31.95 |   | 2.42 |   |
| Total deposits                          |       | $                                    | 478,087    |   | 100.00 | % | 2.86 | % | $ | 470,521 |   | 100.00 | % | 2.39 | % | $ | 459,903 |   | 100.00 | % | 1.31 | % |

 

At December 31, 2006, the Bank had outstandingcertificates of deposit in amounts of $100,000 or more maturing as follows:

| Maturing Period           | ** ** | **Amount**              | ** ** |
|--------------------------------|------------|-------------------------|------------|
| ** **                     | ** ** | **(In thousands)** | ** ** |
| Three months or  less          |       | $                       | 4,205      |   |
| Over three  through six months |       | 14,903                  |       |
| Over six through  12 months    |       | 11,277                  |       |
| Over 12 months                 |       | 12,014                  |       |
| Total                          |       | $                       | 42,399     |   |

 

**Borrowings**

Deposits are the primary source of funds of the Bank’slending and investment activities and for its general business purposes. TheBank may obtain advances from the FHLB of Pittsburgh to supplement its supplyof lendable funds. Advances from the FHLB of Pittsburgh are typically securedby a pledge of the Bank’s stock in the FHLB of Pittsburgh and a portion of theBank’s first mortgage loans and certain other assets. The Bank, if the needarises, may also access the Federal Reserve Bank discount window. The followingtables set forth the maximum month-end balance, period ending balance, andweighted average balance of outstanding FHLB advances at the dates and for theperiods indicated, together with the applicable weighted average interestrates.

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|                                 | ** ** | **At December 31,**        | ** ** |
|---------------------------------|------------|--------------------------------------|------------|
| ** **                      | ** ** | **2006**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                      | ** ** | **(Dollars in thousands)** | ** ** |
|                            |       |                                 |       |   |   |   |   |
| FHLB advances                   |       | $                                    | 101,701    |   | $ | 121,260 |   | $ | 102,747 |   |
|                            |       |                                 |       |   |   |   |   |
| Weighted average  interest rate |       | 3.93                                 | %          | 3.79 | % | 3.32 | % |
|                                 |            |                                      |            |  |  |  |  |  |  |  |

 

|                                                  | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                       | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                       | ** ** | **(Dollars in thousands)**        | ** ** |
| Maximum balance of FHLB  advances                |       | $ 148,538                              |       | $ 123,908 |   | $ 108,078 |   |
| Weighted average balance of FHLB advances        |       | $ 124,013                              |       | $ 111,628 |   | $   91,660 |   |
| Weighted average interest  rate of FHLB advances |       | 4.02                                        | %          | 3.52 | % | 3.21 | % |

 

**SubsidiaryActivity**

The Bankis permitted to invest up to 2% of its assets in the capital stock of, orsecured or unsecured loans to, subsidiary corporations, with an additionalinvestment of 1% of assets when such additional investment is utilizedprimarily for community development purposes. Under such limitations, as ofDecember 31, 2006, the Bank was authorized to invest up to approximately $13 millionin the stock of, or loans to, service corporations (based upon the 2%limitation). In addition, the Bank can designate a subsidiary as an operatingsubsidiary, in which there is no percentage of assets investment limitation, ifit engages only in activities in which it would be permissible for the Bank toengage. At December 31, 2006, the Bank had two wholly-owned subsidiaries, ThirdDelaware Corporation and Teragon Financial Corporation. Third DelawareCorporation was formed in 1998 for the purpose of investing in marketablesecurities. At December 31, 2006, the Bank had $128 million invested inThird Delaware Corporation. During 2004, Teragon Financial Corporation (“Teragon”)invested $7,500 in a limited partnership entitled Third Fed Abstract, L. P.,whose purpose is to operate a title insurance agency, primarily to capturecertain title insurance premiums generated by the Bank’s lending activities. AtDecember 31, 2006 the Bank had an investment of $74,000 in Teragon. During2006, Teragon Financial Corporation was granted approval by the state ofPennsylvania to conduct business as an insurance agency, and expects to receivea modest amount of insurance commissions in the future.

**Personnel**

As of December 31, 2006, the Company had 176 full-timeand 26 part-time employees. None of the Company’s employees are represented bya collective bargaining group. The Company believes that its relationship withits employees is good.

**REGULATION**

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

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**Company Regulation**

**General.**The Company is a unitary savingsand loan holding company subject to regulatory oversight by the OTS. As such,the Company is required to register and file reports with the OTS and issubject to regulation and examination by the OTS. In addition, the OTS hasenforcement authority over the Company and its non-savings associationsubsidiaries, should such subsidiaries be formed, which also permits the OTS torestrict or prohibit activities that are determined to be a serious risk to thesubsidiary savings association. This regulation and oversight is intendedprimarily for the protection of the depositors of the Bank and not for thebenefit of stockholders of the Company. The Company is also required to filecertain reports with, and otherwise comply with, the rules and regulations ofthe OTS and the SEC.

**Sarbanes-OxleyAct of 2002**. The Sarbanes-Oxley Act of 2002 (the “Act”)implemented legislative reforms intended to address corporate and accountingfraud and improve public company reporting. The Securities and ExchangeCommission (the “SEC”) has promulgated new regulations pursuant to the Act andmay continue to propose additional implementing or clarifying regulations asnecessary in furtherance of the Act. The passage of the Act by Congress and theimplementation of new regulations by the SEC subject publicly-traded companiesto additional and more cumbersome reporting regulations and disclosure.Compliance with the Act and corresponding regulations may increase the Company’sexpenses.

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

GLBalso prohibits new unitary thrift holding companies from engaging in nonfinancialactivities or from affiliating with a nonfinancial entity. As a grandfatheredunitary thrift holding company, the Company has retained its authority toengage in nonfinancial activities.

**QTL Test.**As a unitary savings and loanholding company, the Company generally is not subject to activity restrictions,provided the Bank satisfies the QTL test. If the Company acquires control ofanother savings association as a separate subsidiary, it would become amultiple savings and loan holding company, and the activities of the Companyand any of its subsidiaries (other than the Bank) would become subject torestrictions applicable to bank holding companies unless such otherassociations each also qualify as a QTL and were acquired in a supervisoryacquisition.

**Bank Regulation**

**General.**As a federally chartered,FDIC-insured savings association, the Bank is subject to extensive regulationby the OTS and the FDIC. Lending activities and other investments must complywith various federal statutory and regulatory requirements. The Bank is alsosubject to certain reserve requirements promulgated by the Federal ReserveBoard.

TheOTS, in conjunction with the FDIC, regularly examines the Bank and preparesreports for the consideration of the Bank’s Board of Directors on anydeficiencies that they find in the Bank’s operations. The Bank’s relationshipwith its depositors and borrowers is also regulated to a great extent byfederal law, especially in such matters as the ownership of savings accountsand the form and content of the Bank’s mortgage documents.

TheBank must file reports with the OTS and the FDIC concerning its activities andfinancial condition, in addition to obtaining regulatory approvals prior toentering into certain transactions such as mergers with or acquisitions ofother savings institutions. This regulation and supervision establishes acomprehensive framework of 

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activities inwhich an institution can engage and is intended primarily for the protection ofthe FDIC and depositors. The regulatory structure also gives the regulatoryauthorities extensive discretion in connection with their supervisory andenforcement activities and examination policies, including policies withrespect to the classification of assets and the establishment of adequate loanloss reserves for regulatory purposes. Any change in such regulations, whetherby the OTS, the FDIC or the Congress could have a material adverse impact onthe Company, the Bank and their operations. The Company is also required tofile certain reports with, and otherwise comply with, the rules and regulationsof the OTS and the SEC.

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

**Deposit Insurance.**The Bank’s deposits areinsured to applicable limits by the Federal Deposit Insurance Company. Althoughthe FDIC is authorized to assess premiums under a risk-based system for suchdeposit insurance, most insured depository institutions have not been requiredto pay premiums for the last ten years. The Federal Deposit Insurance ReformAct of 2005, which was signed into law on February 15, 2006, has resulted insignificant changes to the federal deposit insurance program: (i) effectiveMarch 31, 2006, the Bank Insurance Fund (which formerly insured the deposits ofbanks) and the Savings Association Insurance Fund (which formerly insured thedeposits of savings associations like the Bank) were merged into a combinedfund, called the Deposit Insurance Fund; (ii) the current $100 thousand depositinsurance coverage will be indexed for inflation (with adjustments every fiveyears, commencing January 1, 2011); and (iii) deposit insurance coverage forretirement accounts has been increased to $250 thousand per participant subjectto adjustment for inflation. The FDIC has been given greater latitude insetting the assessment rates for insured depository institutions, which couldbe used to impose minimum assessments.

TheFDIC is authorized to set the reserve ratio for the Deposit Insurance Fundannually between 1.15% and 1.5% of estimated insured deposits. If the DepositInsurance Fund’s reserves exceed the designated reserve ratio, the FDIC isrequired to pay out all or, if the reserve ratio is less than 1.5%, a portionof the excess as a dividend to insured depository institutions based on thepercentage of insured deposits held on December 31, 1996 adjusted forsubsequently paid premiums. Insured depository institutions that were inexistence on December 31, 1996 and paid assessments prior to that date (ortheir successors) are entitled to a one-time credit against future assessmentsbased on the amount of their assessable deposits on that date. The Bankanticipates that it will be able to offset its deposit insurance premium for2007 with the special on-time assessment credit it will receive during 2007.

Pursuantto the Reform Act, the FDIC has determined to maintain the designated reserveratio at its current 1.25%. The FDIC has also adopted a new risk-based premiumsystem that provides for quarterly assessments based on an insured institution’sranking in on of four risk categories based on their examination ratings andcapital ratios. Beginning in 2007, well capitalized institutions with the CAMELratings of 1 or 2 will be grouped in Risk Category I and will be assessed fordeposit insurance at an annual rate of between five and seven basis points withthe assessment rate for an individual institution to be determined according toa formula based on a weighted average of the institution’s individual CAMELcomponent ratings plus either five financial ratios or the average ratings ofit s long term debt. Institutions in Risk Categories II, III, and IV will beassessed at annual rates of 10, 28 and 43 basis points respectively.

Inaddition, all FDIC-insured institutions are required to pay assessments to theFDIC to fund interest payments on bonds issued by the Financing Corporation (“FICO”),an agency of the Federal government established to recapitalize the predecessorto the SAIF. The FICO assessment rates which are determined quarterly averaged0.128% of insured deposits in fiscal 2006. These assessments will continue until the FICO bonds mature in 2017.

**Regulatory Capital Requirements.**OTScapital regulations require savings institutions to meet three 

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capital standards: (1) tangible capital equal to 1.5% of total adjusted assets,(2) a leverage ratio (core capital) equal to at least 4% of total adjustedassets and (3) a risk-based capital requirement equal to 8.0% of totalrisk-weighted assets. In addition, the OTS prompt corrective action regulationprovides that a savings institution that has a leverage capital ratio of lessthan 4% (3% for institutions receiving the highest examination rating) will bedeemed to be “undercapitalized” and may be subject to certain restrictions.

AtDecember 31, 2006, the Bank was in compliance with all of its regulatorycapital requirements.

**Dividend and Other Capital Distribution Limitations.**TheBank may not declare or pay a cash dividend on its capital stock if the effectthereof would be to reduce the regulatory capital of the Bank below the amountrequired for the liquidation account established at the time of the Bank’smutual-to-stock conversion.

Savingsassociations that would remain at least adequately capitalized following thecapital distribution, and that meet other specified requirements, are notrequired to file a notice or application for capital distributions (such ascash dividends) declared below specified amounts. Savings associations whichare eligible for expedited treatment under current OTS regulations are notrequired to file an application with the OTS if (i) the savings associationwould remain at least adequately capitalized following the capital distributionand (ii) the amount of capital distribution does not exceed an amount equal tothe savings association’s net income for that year to date, plus the savingsassociation’s retained net income for the previous two calendar years. Thus,only undistributed net income for the prior two years may be distributed inaddition to the current year’s undistributed net income without the filing ofan application 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 HomeOwners’ Loan Act (“HOLA”), as amended, requires savings institutions to meet aQTL test. If the Bank maintains an appropriate level of Qualified ThriftInvestments (primarily residential mortgages and related investments, includingcertain mortgage-backed securities) (“QTIs”) and otherwise qualifies as a QTL,it will continue to enjoy full borrowing privileges from the FHLB ofPittsburgh. The required percentage of QTIs is 65% of portfolio assets (definedas all assets minus intangible assets, property used by the institution inconducting its business and liquid assets equal to 10% of total assets). Certainassets are subject to a percentage limitation of 20% of portfolio assets. Inaddition, savings associations may include shares of stock of the FHLBs, FNMAand FHLMC as qualifying QTIs. The method for measuring compliance with the QTLtest requires an institution to be in compliance nine out of every 12 months.As of December 31, 2006, the Bank was in compliance with its QTL requirementwith 73% of its assets invested in QTIs.

**Federal Home Loan Bank System.**The Bank isa member of the FHLB of Pittsburgh, one of 12 regional FHLBs that administerthe home financing credit function of savings associations. Each FHLB serves asa reserve or central bank for its members within its assigned region. It isfunded primarily from proceeds derived from the sale of consolidatedobligations of the FHLB System. It makes loans to members (*i.e.*, advances) in accordance withpolicies and procedures established by the Board of Directors of the FHLB.

As amember, the Bank is required to purchase and maintain an investment in thecapital stock of the FHLB of Pittsburgh in an amount equal to 4.55% of itsadvances outstanding from the FHLB plus 0.55% of its unused borrowing capacity.At December 31, 2006, the Bank had $7.1 million in FHLB stock, which was incompliance with this requirement.

**Federal Reserve System.**The Federal ReserveBoard requires all depository institutions to maintain non-interest bearingreserves at specified levels against their transaction accounts (primarilychecking, NOW and Super NOW checking accounts) and non-personal time deposits.The balances maintained to meet the reserve requirements imposed by the FederalReserve Board may be used to satisfy the liquidity requirements that areimposed by the OTS. At December 31, 2006, the Bank’s total transaction accountsrequired a reserve level of $251,000 which was offset by the Bank’s vault cashon hand and cash on deposit at the Federal Reserve Bank of Philadelphia.

Savingsassociations have authority to borrow from the Federal Reserve Bank “discountwindow,” but 

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Federal Reservepolicy generally requires savings associations to exhaust all other sourcesbefore borrowing from the Federal Reserve System. The Bank had no suchborrowings at December 31, 2006.

**Item 1A.**                 Risk Factors

**If theallowance for loan losses is inadequate, earnings will be reduced as thereserve is replenished.** The establishment of the allowancefor loan losses is based on a high degree of judgment and estimation. AtDecember 31, 2006 the allowance was $2.9 million or 0.59% of the loans receivablebalance of $487 million. Several factors could render the reserveinadequate, possibly over a short period of time: a single large loss, a severeand sustained economic downturn in the markets in which the Company’s loans arelocated, and a general decline in real estate values. These factors couldproduce charges to the allowance in excess of the amount provided. Replenishingthe reserve would reduce earnings.

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

**Failureto attract or retain key individuals could severely affect the Company’sbusiness objectives.** Because the Company is a relativelysmall community bank, it operates with a small number of key people in keypositions such as in executive administration, loan production, branchadministration, and operations. Replacing these individuals, or expanding theCompany’s business with additional human resources, requires the Company tocompete for talent against companies that are much larger and possess muchgreater resources. Failure to attract and retain key individuals couldnegatively affect the Company’s business 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 under which most public companies operate,the Company’s primary subsidiary is a bank and operates under rules promulgatedby governmental or quasi-governmental regulatory bodies that oversee lending,deposit-taking, and the operations of a bank. These agencies can issue ruleswhich can impose costly compliance procedures upon a bank, can require a bankto modify or discontinue certain of its business practices, or impose otherrequirements, any of which can serve to reduce the Company’s earnings or reduceits franchise value.

**TheCompany is vulnerable to interest rate risk**. Most of theCompany’s assets and liabilities are interest rate sensitive, and changes inthe level of market interest rates or the shape of the yield curve can have asubstantial negative impact 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 isa thrift holding company and its bank subsidiary is the primary source of cashwith which it pays the cash dividend on its common stock. Regulations require abank that is a subsidiary of a thrift holding company to file either anotification or an application with its primary regulator when it seeks to paya dividend to its parent company. If in the judgment of its primary regulator,the Office of Thrift Supervision, the payment of a dividend by the Company’sbank subsidiary presents safety and soundness concerns, or is otherwise notpermitted by regulation, the notification or application can be denied, therebyeliminating the primary source of cash with which the Company pays its dividendto its shareholders.

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**Insidercontrol and provisions in the Company’s charter and by-laws can be a deterrentto a sale of the Company.** As of December 31, 2006 insiderscontrol approximately 22% of the voting power of the Company’s stockholders. Inaddition, there are provisions in the Company’s charter and by-laws that canhave the effect of making it difficult for a dissident shareholder or otherparty to force a sale of the Company.

**Item 1B.**                 Unresolved StaffComments

None.

**Item 2.**                          Properties

TheCompany is located and conducts its business at 3 Penns Trail, Newtown,Pennsylvania. At December 31, 2006, the Bank operated from its administrativeoffices and fifteen branch offices 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$744,000.

Thefollowing table sets forth certain information regarding the Bank’s operatingproperties:
| **Location**                                                                                   | ** ** | **Leased or  Owned** | ** ** | **Location**                                                                       | ** ** | **Leased or  Owned** |
|------------------------------------------------------------------------------------------------|------------|----------------------|------------|------------------------------------------------------------------------------------|------------|----------------------|
| **ADMINISTRATIVE OFFICE**

Newtown Office

3 Penns Trail

Newtown, PA  18940                   |       | Owned                |       |                                                                               |       |                 |
| ** **                                                                                     | ** ** | ** **           | ** ** | ** **                                                                         | ** ** | ** **           |
| **DEPOSIT OPERATIONS**

828C  Newtown-Yardley Road

Suite 301B

Newtown, PA  18940             |       | Leased               | ** ** | **PROCESSING OPERATIONS**

Operations Center  62 Walker Lane  Newtown, PA 18940(1) |       | Owned                |
| ** **                                                                                     |       |                 | ** ** | ** **                                                                         |       |                 |
| **BRANCH AND LOAN OFFICES**

Frankford Office

4625 Frankford  Avenue

Philadelphia, PA  19124 |       | Leased               |       | Newtown Office  950 Newtown Yardley Road  Newtown, PA 18940                        |       | Leased               |
|                                                                                           |       |                 |       |                                                                               |       |                 |
| Ewing Office

2075 Pennington  Road

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

1850 Route 33

Hamilton Square,  NJ 08690                                     |       | Owned                |       | Doylestown Office  60 North Main Street  Doylestown, PA 18901                      |       | Owned                |
|                                                                                           |       |                 |       |                                                                               |       |                 |
| Fishtown Office

York &  Memphis Streets

Philadelphia, PA  19125                          |       | Owned                |       | Feasterville Office  Buck Hotel Complex  Feasterville, PA 19053                    |       | Leased               |
|                                                                                           |       |                 |       |                                                                               |       |                 |
| Cross Keys  Office

834 North Easton  Highway

Doylestown, PA  18901                           |       | Owned                |       | Quakerbridge Office  590 Lawrence Square Blvd.  Lawrenceville, NJ 08648            |       | Leased               |
|                                                                                           |       |                 |       |                                                                               |       |                 |
| Bridesburg  Office

Orthodox &  Almond Streets

Philadelphia, PA  19137                    |       | Owned                |       | Woodhaven Office  4014 Woodhaven Road  Philadelphia, PA 19154                      |       | Leased               |
|                                                                                           |       |                 |       |                                                                               |       |                 |

 

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| New Britain  Office

600 Town Center

New Britain, PA  18901    |   | Leased |   | Northern Liberties Office  905 North 2nd Street  Philadelphia, PA 19123 |   | Leased |
|-----------------------------------------------------------------|--------|--------|--------|------------------------------------------------------------------------------|--------|--------|
|                                                            |   |   |   |                                                                         |   |   |
| Girard Office

136 West Girard  Avenue

Philadelphia, PA  19123 |   | Leased |   |                                                                         |   |   |

 

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**Item 3.**                          LegalProceedings

Neitherthe Company nor its subsidiaries are involved in any pending legal proceedings,other than routine legal matters occurring in the ordinary course of businessthat in the aggregate involve amounts which are believed by management to beimmaterial to the consolidated financial condition or results of operations ofthe Company.

OnFebruary 2, 2007, the Company became aware that one of its loan servicers whichwas servicing 43 loans totaling $15.4 million had filed for protection andreorganization under Chapter 11 of the United States Bankruptcy Code onDecember 20, 2006.  On March 2, 2007 thebankruptcy filing was converted to a Chapter 7 liquidation and the Company shortly thereafter obtained theservicing and began to directly service the loans. At the present time, theCompany is seeking recovery of all monies collected and held on its behalf bythe servicer and bankruptcy trustee, and the Company does not expect a materialloss to result from the ultimate resolution of this matter.

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

None.

**PART II**

**Item 5.**                          Marketfor Registrant’s Common Equity and Related Stockholder Matters and IssuerPurchases of Equity Securities

Informationrelating to the market for Registrant’s common equity and related stockholdermatters appears under the section captioned “Stock Market Information” in theRegistrant’s 2006 Annual Report to Stockholders and is incorporated herein byreference.

The following table provides information onrepurchases by the Company of its common stock in each month for the threemonths ended December 31, 2006:
| **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, 2006 -  October 31, 2006   |       | —                                               |       | —                                           |       | —                                                                                                                         |       | 75,773                                                                                                                              |       |
|                                  |       |                                                 |       |                                             |       |                                                                                                                           |       |                                                                                                                                |       |
| November 1, 2006 -  November 30, 2006 |       | 10,500                                               |       | $                                                | 31.27      |                                                                                                                           | —     |                                                                                                                                | 75,773     |   |
|                                  |       |                                                 |       |                                             |       |                                                                                                                           |       |                                                                                                                                |       |
| December 1, 2006 - December 31, 2006  |       | —                                               |       | $                                                | —     |                                                                                                                           | —     |                                                                                                                                | 75,773     |   |

 

**Item 6.**                          SelectedFinancial Data

Theabove-captioned information appears under the section captioned “SelectedFinancial and Other Data” in the Registrant’s 2006 Annual Report toStockholders and is incorporated herein by reference.

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

Theinformation under the section captioned “Management’s Discussion and Analysisof Financial 

25

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Condition andResults of Operations” in the Registrant’s 2006 Annual Report to Stockholdersis incorporated herein by reference.

**Item 7A.**                 Quantitative andQualitative Disclosures about Market Risk

Theinformation under the section captioned “Management’s Discussion and Analysisof Financial Condition and Results of Operations” in the Registrant’s 2006Annual Report to Stockholders is incorporated herein by reference.

**Item 8.**                          FinancialStatements and Supplementary Data

TheConsolidated Financial Statements of TF Financial Corporation and its subsidiariesincluded in the Registrant’s 2006 Annual Report to Stockholders areincorporated herein by reference.

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

None.

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**Item 9A.**                 Controls andProcedures

(a)           Evaluationof disclosure controls and procedures. Based on their evaluation of theCompany’s disclosure controls and procedures (as defined in Rule 13a-15(e)under the Securities Exchange Act of 1934 (the “Exchange Act”)), the Company’sprincipal executive officer and principal financial officer have concluded thatas of the end of the period covered by this Annual Report on Form 10-K suchdisclosure controls and procedures are effective.

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

**Item 9B.**                 Other Information

None.

**PART III**

**Item 10.**                   Directors,Executive Officers and Corporate Governance

Theinformation contained under the sections captioned “Proposal 1 - Election ofDirectors — General Information and Nominees” and “— Biographical Information”and “Additional Information About Directors and Executive Officers — Section16(a) Beneficial Ownership Reporting Compliance” in the Registrant’s definitiveproxy statement for the Registrant’s 2007 Annual Meeting of Stockholders (the “ProxyStatement”) is incorporated herein by reference.

TheCompany has adopted a Code of Ethics that applies to its principal executiveofficer, principal financial officer, principal accounting officer or personsperforming such functions. The Code of Ethics can be obtained without charge bysending a written request to the Corporate Secretary, TF Financial Corporation,3 Penns Trail, Newtown, Pennsylvania 18940.

**Item 11.**                   ExecutiveCompensation

Theinformation relating to executive compensation is incorporated herein byreference to the information contained under the sections captioned “CompensationDiscussion and Analysis,” “Executive Compensation” and “Director Compensation”in the Registrant’s Proxy Statement.

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

(a)           SecurityOwnership of Certain Beneficial Owners

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

(b)           SecurityOwnership of Management

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

(c)                                  Managementof the Company knows of no arrangements, including any pledge by any person ofsecurities of the Company, the operation of which may at a subsequent dateresult in a change in control of the registrant.

(d)           SecuritiesAuthorized for Issuance Under Equity Compensation Plans

Setforth below is information as of December 31, 2006 with respect to compensationplans under which equity securities of the Registrant are authorized forissuance.

27

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**EQUITYCOMPENSATION 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)  |       | 365,734                                                                                                                                               |       | $                                                                                                            | 23.62      |                                                                                                                                                                                                                  | 44,617     |   |
| Equity compensation  plans not approved by shareholders |       | —                                                                                                                                                |       | —                                                                                                       |       | —                                                                                                                                                                                                                |       |
| TOTAL                                                   |       | 365,734                                                                                                                                               |       | $                                                                                                            | 23.62      |                                                                                                                                                                                                                  | 44,617     |   |

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(1)             Plansapproved by stockholders include: TF Financial Corporation 1997 Stock OptionPlan, and TF Financial Corporation 2005 Stock-Based Incentive 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 and Director Independence

Theinformation relating to certain relationships and related transactions isincorporated herein by reference to the information contained under the sectioncaptioned “Additional Information About Directors and Executive Officers —Certain Relationships and Related Transactions and Director Independence” inthe Registrant’s Proxy Statement.

**Item 14.**                   PrincipalAccounting Fees and Services

Theinformation relating to this item is incorporated herein by reference to theinformation contained under the section captioned “Principal Accounting FirmFees” in the Registrant’s Proxy Statement.

**PART IV**

**Item 15.**                   Exhibits andFinancial Statements

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

(1)           Thefollowing financial statements and the report of the independent auditor of theCompany included in the Company’s 2006 Annual Report to Stockholders areincorporated herein by reference.

| Report of Independent  Registered Public Accounting Firm                                                                                       |   |   |   |
|------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|
| Consolidated  Statements of Financial Position as of December 31, 2006 and 2005                                                                |   |   |   |
| Consolidated  Statements of Income For the Years Ended December 31, 2006, 2005 and 2004                                                        |   |   |   |
| Consolidated  Statement of Changes in Stockholders’ Equity and Comprehensive Income for the  Years Ended December 31, 2006, 2005 and 2004 |   |   |   |
| Consolidated  Statements of Cash Flows for the Years Ended December 31, 2006, 2005 and 2004                                                    |   |   |   |
| Notes to Consolidated  Financial Statements                                                                                                    |   |   |   |

 

28

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(2)           All schedules are omittedbecause they are not required or applicable, or the required information isshown in the consolidated financial statements or the notes thereto.

(3)           Exhibits

 (a)          The following exhibits are filed aspart 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)              |   |
| 10.13 |   | Severance  Agreement with Elizabeth Kaspern                                 |   |
| 13.0  |   | 2006 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    |   |

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(1)             Incorporatedherein by reference to the Exhibits to Form S-1, Registration Statement, FileNo. 33-76960.

(2)             Incorporatedherein by reference to the Registrant’s Annual Report on Form 10-K for thefiscal year ended December 31, 1995.

(3)             Incorporatedherein by reference to the Registrant’s Annual Report on Form 10-K for thefiscal year ended December 31, 2000.

(4)             Incorporatedherein by reference to the Registrant’s Annual Report on Form 10-K for thefiscal year ended December 31, 1999.

(5)             Incorporatedherein by reference to the Registrant’s Annual Report on Form 10-K for thefiscal year ended December 31, 1997.

(6)             Incorporatedherein by reference to the Registrant’s Annual Report on Form 10-K for thefiscal year ended December 31, 2001.

(7)             Incorporatedherein by reference to the Registrant’s Annual Report on Form 10-K for thefiscal year ended December 31, 2002.

(8)             Incorporatedherein by reference to the Registrant’s Annual Report on Form 10-K for thefiscal year ended December 31, 2003.

(9)             Incorporatedherein by reference to the Registrant’s Form 8-K filed with the Securities andExchange Commission on October 20, 2004.

(10)       Incorporatedherein by reference to the Registrant’s Form S-8 filed with the Securities andExchange Commission on May 20, 2005.

29

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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 28, 2007 |   | 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 Dated: March 28, 2007.
|        |   |                                |   |   |   |                                                             |
|--------|--------|-------------------------------------|--------|--------|--------|------------------------------------------------------------------|
| By:    |   | /s/ Kent C. Lufkin                  |   |   |   | By:                                                              |   | /s/ Dennis R. Stewart |   |   |
|   |   | Kent C. Lufkin                      |   |   |   | Dennis R. Stewart                                                |
|   |   | President, Chief  Executive Officer |   |   |   | Executive Vice  President, Chief Financial Officer and Treasurer |
|   |   | (Principal Executive  Officer)      |   |   |   | (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,  Sr.         |   |   |   | By:                                                              |   | /s/ John R. Stranford |   |   |
|   |   | Albert M. Tantala, Sr.              |   |   |   | John R. Stranford                                                |
|   |   | Director                            |   |   |   | Director                                                         |
|        |        |                                     |        |        |        |                                                                  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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