**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

**FORM 10-Q**

** **
| **ý** | **QUARTERLY REPORT PURSUANT TO SECTION 13  OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|------------|--------------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                             |

**For the period ended June 30, 2005**

 

**- or -**

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

** **

**For thetransition periodfrom                                   to**

 

**Commission file number:  0-24168**

 

**TF FINANCIAL CORPORATION**

(Exact Name of Registrant as Specified in Its Charter)

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

 

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

 

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

 

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

 

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

(Title of Class)

 

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

 

Indicateby check mark whether the registrant is an accelerated filer as defined inExchange Act Rule 12b-2.  YES o**  **NO ý

 

Indicate the number of sharesoutstanding of each of the issuer’s classes of common stock as of the latestpracticable date: July 27, 2005

 
| **Class**                   | ** ** | **Outstanding**  |
|-----------------------------|------------|------------------|
| $.10 par value common stock |       | 2,924,810 shares |

 

 

----

 

**CONTENTS**

 
| **PART I-CONSOLIDATED  FINANCIAL INFORMATION**                                | ** **                                                                                  |
|------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------|
|                                                                               |                                                                                        |
| Item 1.                                                                            | Consolidated Financial Statements                                                           |   |
|                                                                               |                                                                                        |   |
| Item 2.                                                                            | Management’s Discussion and Analysis of  Financial Condition and Results of Operations |   |
|                                                                               |                                                                                        |   |
| Item  3.                                                                           | Quantitative and Qualitative  Disclosures about Market Risk                                 |   |
|                                                                               |                                                                                        |   |
| Item 4.                                                                            | Controls and Procedures                                                                     |   |
|                                                                               |                                                                                        |   |
| **PART II-OTHER  INFORMATION**                                                |                                                                                        |
|                                                                               |                                                                                        |   |
| Item 1.                                                                            | Legal Proceedings                                                                           |   |
|                                                                               |                                                                                        |   |
| Item  2.                                                                           | Unregistered Sale of Equity Securities and  Use of Proceeds                                 |   |
|                                                                               |                                                                                        |   |
| Item 3.                                                                            | Defaults Upon Senior Securities                                                             |   |
|                                                                               |                                                                                        |   |
| Item  4.                                                                           | Submission of Matters to a Vote of Security  Holders                                        |   |
|                                                                               |                                                                                        |   |
| Item 5.                                                                            | Other Information                                                                           |   |
|                                                                               |                                                                                        |   |
| Item 6.                                                                            | Exhibits                                                                                    |   |
|                                                                               |                                                                                        |
| **Signatures**                                                                     |                                                                                        |
|                                                                               |                                                                                        |
| **Exhibits**                                                                       | ** **                                                                                  |
|                                                                               |                                                                                        |
| 10. Supervisory Agreement                                                          |                                                                                        |
|                                                                               |                                                                                        |
| 31. Certifications pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002 |                                                                                        |
|                                                                               |                                                                                        |
| 32. Certification pursuant of Section 906 of  the Sarbanes-Oxley Act of 2002  |                                                                                        |

 

2

----

 

**TF Financial Corporation and Subsidiaries**

 

**CONSOLIDATED STATEMENTS OF FINANCIAL POSITION**

 
| ** **                                                                                                                                                                                                                                                         | ** ** | **Unaudited  June 30,  2005** | ** ** | **Audited  December  31,  2004** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                                                                                                                                                                         | ** ** | **(in thousands)**                 | ** ** |
| ASSETS                                                                                                                                                                                                                                                             |       |                               |       |                             |       |
| Cash and cash equivalents                                                                                                                                                                                                                                          |       | $                                  | 10,970     |                             | $          | 7,900 |   |
| Certificates of deposit in other financial  institutions                                                                                                                                                                                                           |       | 40                                 |       | 38                               |       |
| Investment securities available for sale—at  fair value                                                                                                                                                                                                       |       | 23,658                             |       | 17,625                           |       |
| Investment securities held to maturity  (fair value of $7,073 and $7,188 respectively)                                                                                                                                                                             |       | 6,992                              |       | 7,027                            |       |
| Mortgage-backed securities available for  sale—at fair value                                                                                                                                                                                                  |       | 95,595                             |       | 103,610                          |       |
| Mortgage-backed securities held to maturity  (fair value of $12,966 and $15,546, respectively)                                                                                                                                                                     |       | 12,510                             |       | 14,900                           |       |
| Loans receivable, net (including loans held  for sale of $784 and $680, respectively)                                                                                                                                                                              |       | 464,382                            |       | 442,195                          |       |
| Federal Home Loan Bank stock—at cost                                                                                                                                                                                                                          |       | 6,819                              |       | 7,460                            |       |
| Accrued interest receivable                                                                                                                                                                                                                                        |       | 2,590                              |       | 2,500                            |       |
| Premises and equipment, net                                                                                                                                                                                                                                        |       | 5,932                              |       | 5,963                            |       |
| Core deposit intangible asset, net of  accumulated amortization of $2,679 and $2,611, respectively                                                                                                                                                                 |       | 145                                |       | 213                              |       |
| Goodwill                                                                                                                                                                                                                                                           |       | 4,324                              |       | 4,324                            |       |
| Other assets                                                                                                                                                                                                                                                       |       | 15,876                             |       | 15,211                           |       |
| TOTAL ASSETS                                                                                                                                                                                                                                                       |       | $                                  | 649,833    |                             | $          | 628,966 |   |
|                                                                                                                                                                                                                                                               |       |                               |       |                             |       |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                                                                                                          |       |                               |       |                             |       |
|                                                                                                                                                                                                                                                               |       |                               |       |                             |       |
| Liabilities                                                                                                                                                                                                                                                        |       |                               |       |                             |       |
| Deposits                                                                                                                                                                                                                                                           |       | $                                  | 479,579    |                             | $          | 459,903 |   |
| Advances from the Federal Home Loan Bank                                                                                                                                                                                                                           |       | 101,130                            |       | 102,747                          |       |
| Advances from borrowers for taxes and  insurance                                                                                                                                                                                                                   |       | 2,136                              |       | 1,778                            |       |
| Accrued interest payable                                                                                                                                                                                                                                           |       | 1,984                              |       | 1,638                            |       |
| Other liabilities                                                                                                                                                                                                                                                  |       | 2,658                              |       | 1,745                            |       |
| Total liabilities                                                                                                                                                                                                                                                  |       | 587,487                            |       | 567,811                          |       |
|                                                                                                                                                                                                                                                               |       |                               |       |                             |       |
| Stockholders’ equity                                                                                                                                                                                                                                          |       |                               |       |                             |       |
| Preferred stock, no par value; 2,000,000  shares authorized at June 30, 2005 and December 31, 2004, none  issued                                                                                                                                         |       | —                             |       | —                           |       |
| Common stock, $0.10 par value; 10,000,000  shares authorized, 5,290,000 shares issued, 2,730,951 and 2,742,345 shares  outstanding at June 30, 2005 and December 31, 2004, respectively,  net of shares in treasury 2,365,795 and 2,345,746 respectively |       | 529                                |       | 529                              |       |
| Retained earnings                                                                                                                                                                                                                                                  |       | 59,520                             |       | 57,428                           |       |
| Additional paid-in capital                                                                                                                                                                                                                                         |       | 51,832                             |       | 51,675                           |       |
| Unearned ESOP shares                                                                                                                                                                                                                                               |       | (1,932                             | )          | (2,019                           | )          |
| Treasury stock—at cost                                                                                                                                                                                                                                        |       | (47,060                            | )          | (46,081                          | )          |
| Accumulated other comprehensive loss                                                                                                                                                                                                                               |       | (543                               | )          | (377                             | )          |
| Total stockholders’ equity                                                                                                                                                                                                                                    |       | 62,346                             |       | 61,155                           |       |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                                                                                                    |       | $                                  | 649,833    |                             | $          | 628,966 |   |

 

Theaccompanying notes are an integral part of these statements

 

3

----

 

**TF Financial Corporation and Subsidiaries**

 

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

** **
| ** **                                           | ** ** | **For the three months  ended  June 30,** | ** ** | **For the six months  ended  June 30,** | ** ** |
|------------------------------------------------------|------------|------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                           | ** ** | **2005**                                       | ** ** | **2004**                                     | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                           | ** ** | **(in thousands, except per share data)**      | ** ** |
| Interest income                                      |       |                                           |       |                                         |       |   |   |   |   |
| Loans, including fees                                |       | $                                              | 6,703      |                                         | $          | 5,960 |   | $ | 13,174 |   | $ | 11,950 |   |
| Mortgage-backed securities                           |       | 1,292                                          |       | 1,531                                        |       | 2,595 |   | 2,988 |   |
| Investment securities                                |       | 364                                            |       | 280                                          |       | 677 |   | 560 |   |
| Interest-bearing deposits and other                  |       | 12                                             |       | 4                                            |       | 22 |   | 7 |   |
|                                                 |       |                                           |       |                                         |       |   |   |   |   |
| TOTAL INTEREST INCOME                                |       | 8,371                                          |       | 7,775                                        |       | 16,468 |   | 15,505 |   |
|                                                 |       |                                           |       |                                         |       |   |   |   |   |
| Interest expense                                     |       |                                           |       |                                         |       |   |   |   |   |
| Deposits                                             |       | 1,831                                          |       | 1,478                                        |       | 3,367 |   | 2,984 |   |
| Borrowings                                           |       | 966                                            |       | 673                                          |       | 1,897 |   | 1,319 |   |
|                                                 |       |                                           |       |                                         |       |   |   |   |   |
| TOTAL INTEREST EXPENSE                               |       | 2,797                                          |       | 2,151                                        |       | 5,264 |   | 4,303 |   |
|                                                 |       |                                           |       |                                         |       |   |   |   |   |
| NET INTEREST INCOME                                  |       | 5,574                                          |       | 5,624                                        |       | 11,204 |   | 11,202 |   |
| Provision for loan losses                            |       | 150                                            |       | 150                                          |       | 300 |   | 300 |   |
|                                                 |       |                                           |       |                                         |       |   |   |   |   |
| NET INTEREST INCOME AFTER PROVISION FOR  LOAN LOSSES |       | 5,424                                          |       | 5,474                                        |       | 10,904 |   | 10,902 |   |
|                                                 |       |                                           |       |                                         |       |   |   |   |   |
| Non-interest income                                  |       |                                           |       |                                         |       |   |   |   |   |
| Service fees, charges and other operating  income    |       | 669                                            |       | 681                                          |       | 1,309 |   | 1,390 |   |
| Gain on sale of loans                                |       | 8                                              |       | —                                       |       | 30 |   | — |   |
|                                                 |       |                                           |       |                                         |       |   |   |   |   |
| TOTAL NON-INTEREST INCOME                            |       | 677                                            |       | 681                                          |       | 1,339 |   | 1,390 |   |
|                                                 |       |                                           |       |                                         |       |   |   |   |   |
| Non-interest expense                                 |       |                                           |       |                                         |       |   |   |   |   |
| Employee compensation and benefits                   |       | 2,303                                          |       | 2,247                                        |       | 4,694 |   | 4,521 |   |
| Occupancy and equipment                              |       | 640                                            |       | 644                                          |       | 1,301 |   | 1,239 |   |
| Federal deposit insurance premium                    |       | 16                                             |       | 18                                           |       | 33 |   | 36 |   |
| Professional fees                                    |       | 211                                            |       | 132                                          |       | 437 |   | 338 |   |
| Marketing and advertising                            |       | 186                                            |       | 163                                          |       | 362 |   | 326 |   |
| Other operating                                      |       | 553                                            |       | 625                                          |       | 1,179 |   | 1,246 |   |
| Amortization of core deposit intangible  asset       |       | 34                                             |       | 40                                           |       | 68 |   | 80 |   |
|                                                 |       |                                           |       |                                         |       |   |   |   |   |
| TOTAL NON-INTEREST EXPENSE                           |       | 3,943                                          |       | 3,869                                        |       | 8,074 |   | 7,786 |   |
|                                                 |       |                                           |       |                                         |       |   |   |   |   |
| INCOME BEFORE INCOME TAXES                           |       | 2,158                                          |       | 2,286                                        |       | 4,169 |   | 4,506 |   |
|                                                 |       |                                           |       |                                         |       |   |   |   |   |
| Income taxes                                         |       | 553                                            |       | 630                                          |       | 1,088 |   | 1,241 |   |
|                                                 |       |                                           |       |                                         |       |   |   |   |   |
| NET INCOME                                           |       | $                                              | 1,605      |                                         | $          | 1,656 |   | $ | 3,081 |   | $ | 3,265 |   |
|                                                 |       |                                           |       |                                         |       |   |   |   |   |
| Earnings per share—basic                        |       | $                                              | 0.59       |                                         | $          | 0.62 |   | $ | 1.12 |   | $ | 1.23 |   |
| Earnings per share—diluted                      |       | $                                              | 0.57       |                                         | $          | 0.58 |   | $ | 1.09 |   | $ | 1.15 |   |
| Dividends paid                                       |       | $                                              | 0.18       |                                         | $          | 0.17 |   | $ | 0.36 |   | $ | 0.32 |   |

 

Theaccompanying notes are an integral part of these statements

 

4

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**TF Financial Corporation and Subsidiaries**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| ** **                                                                                  | ** ** | **For the six months ended  June 30,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                  | ** ** | **2005**                                    | ** ** | **2004** | ** ** |
| ** **                                                                                  | ** ** | **(in thousands)**                          | ** ** |
| OPERATING ACTIVITIES                                                                        |       |                                        |       |   |   |
| Net income                                                                                  |       | $                                           | 3,081      |   | $ | 3,265 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities           |       |                                        |       |   |   |
| Amortization of                                                                             |       |                                        |       |   |   |
| Mortgage loan servicing rights                                                              |       | 2                                           |       | — |   |
| Deferred loan origination fees                                                              |       | (31                                         | )          | (8 | ) |
| Premiums and discounts on investment  securities, net                                       |       | 42                                          |       | 41 |   |
| Premiums and discounts on mortgage-backed  securities, net                                  |       | 236                                         |       | 347 |   |
| Premiums and discounts on loans, net                                                        |       | 60                                          |       | 71 |   |
| Core deposit intangibles                                                                    |       | 68                                          |       | 80 |   |
| Provision for loan losses                                                                   |       | 300                                         |       | 300 |   |
| Depreciation of premises and equipment                                                      |       | 468                                         |       | 475 |   |
| Increase in value of bank-owned life  insurance                                             |       | (252                                        | )          | (270 | ) |
| Stock-based benefit programs                                                                |       | 258                                         |       | 274 |   |
| Tax benefit arising from stock compensation                                                 |       | 110                                         |       | — |   |
| Gain on sale of                                                                             |       |                                        |       |   |   |
| Real estate acquired through foreclosure                                                    |       | —                                      |       | (1 | ) |
| Mortgage loans available for sale                                                           |       | (30                                         | )          | — |   |
| (Increase) decrease in                                                                      |       |                                        |       |   |   |
| Accrued interest receivable                                                                 |       | (90                                         | )          | 111 |   |
| Other assets                                                                                |       | (249                                        | )          | 604 |   |
| Increase (decrease) in                                                                      |       |                                        |       |   |   |
| Accrued interest payable                                                                    |       | 346                                         |       | (89 | ) |
| Other liabilities                                                                           |       | 789                                         |       | 1,122 |   |
|                                                                                        |       |                                        |       |   |   |
| NET CASH PROVIDED BY  OPERATING ACTIVITIES                                                  |       | 5,108                                       |       | 6,322 |   |
|                                                                                        |       |                                        |       |   |   |
| INVESTING ACTIVITIES                                                                        |       |                                        |       |   |   |
| Loan originations                                                                           |       | (61,280                                     | )          | (71,106 | ) |
| Purchases of loans                                                                          |       | —                                      |       | (3,546 | ) |
| Loan principal payments                                                                     |       | 35,484                                      |       | 57,045 |   |
| Principal repayments on mortgage-backed  securities held to maturity                        |       | 2,377                                       |       | 5,418 |   |
| Principal repayments on mortgage-backed  securities available for sale                      |       | 16,484                                      |       | 17,242 |   |
| Proceeds from loan sales                                                                    |       | 3,311                                       |       | — |   |
| Purchases and (maturities) of certificates  of deposit in other financial institutions, net |       | (2                                          | )          | 117 |   |
| Purchase of investment securities available  for sale                                       |       | (5,985                                      | )          | (2,180 | ) |
| Purchase of mortgage-backed securities  available for sale                                  |       | (8,956                                      | )          | (27,701 | ) |
| Proceeds from maturities of investment  securities held to maturity                         |       | —                                      |       | 2,000 |   |
| Redemption of Federal Home Loan Bank stock                                                  |       | 641                                         |       | 84 |   |
| Proceeds from sale of real estate                                                           |       | —                                      |       | 32 |   |
| Purchase of premises and equipment                                                          |       | (437                                        | )          | (294 | ) |
| NET CASH USED IN INVESTING ACTIVITIES                                                       |       | (18,363                                     | )          | (22,889 | ) |
|                                                                                             |            |                                             |            |  |  |  |  |

 

5

----

 
| ** **                                                                                          | ** ** | **For the six months ended  June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                          | ** ** | **2005**                                    | ** ** | **2004** | ** ** |
| ** **                                                                                          | ** ** | **(in thousands)**                          | ** ** |
| FINANCING ACTIVITIES                                                                                |       |                                        |       |   |   |
| Net increase in demand deposit/NOW  accounts, passbook savings accounts and certificates of deposit |       | 19,676                                      |       | 8,409 |   |
| Net increase (decrease) in advances from  Federal Home Loan Bank                                    |       | (1,617                                      | )          | 6,822 |   |
| Net increase in advances from borrowers for  taxes and insurance                                    |       | 358                                         |       | 358 |   |
| Treasury stock acquired                                                                             |       | (1,668                                      | )          | (1,226 | ) |
| Exercise of stock options                                                                           |       | 565                                         |       | 1,281 |   |
| Common stock dividends paid                                                                         |       | (989                                        | )          | (851 | ) |
| NET CASH PROVIDED BY FINANCING ACTIVITIES                                                           |       | 16,325                                      |       | 14,793 |   |
|                                                                                                |       |                                        |       |   |   |
| NET INCREASE (DECREASE) IN CASH AND CASH  EQUIVALENTS                                               |       | 3,070                                       |       | (1,774 | ) |
|                                                                                                |       |                                        |       |   |   |
| Cash and cash equivalents at beginning of  period                                                   |       | 7,900                                       |       | 8,241 |   |
|                                                                                                |       |                                        |       |   |   |
| Cash and cash equivalents at end of period                                                          |       | $                                           | 10,970     |   | $ | 6,467 |   |
|                                                                                                |       |                                        |       |   |   |
| Supplemental disclosure of cash flow  information                                                   |       |                                        |       |   |   |
| Cash paid for                                                                                       |       |                                        |       |   |   |
| Interest on deposits and advances from  Federal Home Loan Bank                                      |       | $                                           | 4,918      |   | $ | 4,392 |   |
| Income taxes                                                                                        |       | $                                           | 60         |   | $ | — |   |
| Non-cash transactions                                                                               |       |                                        |       |   |   |
| Transfers from loans to real estate  acquired through foreclosure                                   |       | $                                           | —     |   | $ | — |   |

 

Theaccompanying notes are an integral part of these statements

 

6

----

 

**TF FINANCIAL CORPORATION AND SUBSIDIARIES**

**NOTESTO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 1 -PRINCIPLES OF CONSOLIDATION**

 

The consolidated financial statements as of June 30,2005 (unaudited) and December 31, 2004 and for the six-month periods endedJune 30, 2005 and 2004 (unaudited) include the accounts of TF FinancialCorporation (the “Company”) and its wholly owned subsidiaries Third FederalBank (the “Bank”), TF Investments Corporation and Penns Trail DevelopmentCorporation. The Company’s business is conducted principally through the Bank.All significant intercompany accounts and transactions have been eliminated inconsolidation.

 

**NOTE 2 - BASISOF PRESENTATION**

 

The accompanying unaudited consolidatedfinancial statements were prepared in accordance with instructions for Form 10-Qand, therefore, do not include all of the disclosures or footnotes required byaccounting principles generally accepted in the United States of America. Inthe opinion of management, all adjustments, consisting of normal recurringaccruals, necessary for fair presentation of the consolidated financialstatements have been included.  Theresults of operations for the period ended June 30, 2005 are notnecessarily indicative of the results which may be expected for the entirefiscal year or any other period. For further information, refer to consolidatedfinancial statements and footnotes thereto included in the Company’s AnnualReport on Form 10-K for the fiscal year ended December 31, 2004.

 

**NOTE 3 –CONTINGENCIES**

 

The Company, from time to time, is a party toroutine litigation that arises in the normal course of business. In the opinionof management, the resolution of this litigation, if any, would not have amaterial adverse effect on the Company’s consolidated financial position orresults of operations.

 

**NOTE 4 - OTHERCOMPREHENSIVE INCOME (LOSS)**

 

The Company’sother comprehensive income (loss) consists of net unrealized gains (losses) oninvestment securities and mortgage-backed securities available for sale. Totalcomprehensive income (loss) for the three-month periods ended June 30,2005 and 2004 was $2,546,000 and $(99,000), net of applicable income tax expense(benefit) of $1,037,000 and $(275,000), respectively. Total comprehensiveincome for the six-month periods ended June 30, 2005 and 2004 was$2,915,000 and $2,309,000, net of applicable income tax expense of $1,003,000and $748,000, respectively.

 

**NOTE 5—EARNINGS PER SHARE**

 

The following tablesillustrate the reconciliation of the numerators and denominators of the basicand diluted earnings per share computations (dollars in thousands, except pershare data):

 
| ** **                                                                  | ** ** | **Three months ended June 30, 2005** | ** ** |
|-----------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                  | ** ** | **Income  (numerator)**                   | ** ** | **Weighted  average  shares  (denominator****)** | ** ** | **Per share  Amount** | ** ** |
| Basic earnings per share                                                    |       |                                      |       |   |   |   |   |
| Income available to common stockholders                                     |       | $                                         | 1,605      |   | 2,744,223 |   | $ | 0.59 |   |
| Effect of dilutive securities                                               |       |                                      |       |   |   |   |   |
| Stock options                                                               |       | —                                    |       | 74,383 |   | (0.02 | ) |
|                                                                        |       |                                      |       |   |   |   |   |
| Diluted earnings per share                                                  |       |                                      |       |   |   |   |   |
| Income available to common stockholders plus  effect of dilutive securities |       | $                                         | 1,605      |   | 2,818,606 |   | $ | 0.57 |   |

 
| ** **                                                                  | ** ** | **Six months ended June 30, 2005** | ** ** |
|-----------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                  | ** ** | **Income  (numerator)**                 | ** ** | **Weighted  average  shares  (denominator****)** | ** ** | **Per share  Amount** | ** ** |
| Basic earnings per share                                                    |       |                                    |       |   |   |   |   |
| Income available to common stockholders                                     |       | $                                       | 3,081      |   | 2,746,625 |   | $ | 1.12 |   |
| Effect of dilutive securities                                               |       |                                    |       |   |   |   |   |
| Stock options                                                               |       | —                                  |       | 74,444 |   | (0.03 | ) |
|                                                                        |       |                                    |       |   |   |   |   |
| Diluted earnings per share                                                  |       |                                    |       |   |   |   |   |
| Income available to common stockholders  plus effect of dilutive securities |       | $                                       | 3,081      |   | 2,821,069 |   | $ | 1.09 |   |

 

7

----

 

There were options topurchase 27,594 shares of common stock at a price of $34.14 per share whichwere outstanding during the six months ended June 30, 2005 that were notincluded in the computation of diluted earnings per share because the options’exercise prices were greater than the average market price of the commonshares.

 
| ** **                                                                  | ** ** | **Three months ended June 30, 2004** | ** ** |
|-----------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                  | ** ** | **Income  (numerator)**                   | ** ** | **Weighted  average  shares  (denominator)** | ** ** | **Per share  Amount** | ** ** |
| Basic earnings per share                                                    |       |                                      |       |   |   |   |   |
| Income available to common stockholders                                     |       | $                                         | 1,656      |   | 2,672,534 |   | $ | 0.62 |   |
| Effect of dilutive securities                                               |       |                                      |       |   |   |   |   |
| Stock options                                                               |       | —                                    |       | 166,559 |   | (0.04 | ) |
|                                                                        |       |                                      |       |   |   |   |   |
| Diluted earnings per share                                                  |       |                                      |       |   |   |   |   |
| Income available to common stockholders  plus effect of dilutive securities |       | $                                         | 1,656      |   | 2,839,093 |   | $ | 0.58 |   |

 
| ** **                                                                  | ** ** | **Six months ended June 30, 2004** | ** ** |
|-----------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                  | ** ** | **Income  (numerator)**                 | ** ** | **Weighted  average  shares  (denominator)** | ** ** | **Per share  Amount** | ** ** |
| Basic earnings per share                                                    |       |                                    |       |   |   |   |   |
| Income available to common stockholders                                     |       | $                                       | 3,265      |   | 2,660,871 |   | $ | 1.23 |   |
| Effect of dilutive securities                                               |       |                                    |       |   |   |   |   |
| Stock options                                                               |       | —                                  |       | 169,012 |   | (0.08 | ) |
|                                                                        |       |                                    |       |   |   |   |   |
| Diluted earnings per share                                                  |       |                                    |       |   |   |   |   |
| Income available to common stockholders  plus effect of dilutive securities |       | $                                       | 3,265      |   | 2,829,883 |   | $ | 1.15 |   |

 

Therewere options to purchase 31,913 shares of common stock at a price of $34.14 pershare which were outstanding during the the six months ended June 30, 2004that were not included in the computation of diluted earnings per share becausethe options’ exercise prices were greater than the average market price of thecommon shares.

 

8

----

 

**NOTE 6- STOCKBASED COMPENSATION**

 

TheCompany has two fixed stock option plans. The Company’s employee stock optionplans are accounted for using the intrinsic value method under APB Opinion No. 25,as permitted by SFAS No. 123. No stock-based compensation expense isreflected in net income, as all options granted under the plans had an exerciseprice equal to the market value of the underlying common stock on the date ofthe grant.

 

Hadcompensation cost for the plans been determined based on the fair value ofoptions at the grant dates consistent with the method of SFAS No. 123, “Accountingfor Stock-Based Compensation,” the Company’s net income and earnings per sharewould have been reduced to the pro forma amounts indicated below (in thousands,except per share data):

 
| ** **                                                                                                   | ** ** | **Three months ended June 30** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                                   | ** ** | **2005**                            | ** ** | **2004** | ** ** |
| Net income                                                                                                   |       |                                |       |   |   |
| As reported                                                                                                  |       | $                                   | 1,605      |   | $ | $1,656 |   |
| Deduct: stock-based compensation expense  determined using the fair value method, net of related tax effects |       | 15                                  |       | 26 |   |
| Pro forma                                                                                                    |       | $                                   | 1,590      |   | $ | 1,630 |   |
|                                                                                                         |       |                                |       |   |   |
| Basic earnings per share                                                                                     |       |                                |       |   |   |
| As reported                                                                                                  |       | $                                   | 0.59       |   | $ | 0.62 |   |
| Deduct: stock-based compensation expense  determined using the fair value method, net of related tax effects |       | 0.01                                |       | 0.01 |   |
| Pro forma                                                                                                    |       | $                                   | 0.58       |   | $ | 0.61 |   |
|                                                                                                         |       |                                |       |   |   |
| Diluted earnings per share                                                                                   |       |                                |       |   |   |
| As reported                                                                                                  |       | $                                   | 0.57       |   | $ | 0.58 |   |
| Deduct: stock-based compensation expense  determined using the fair value method, net of related tax effects |       | —                              |       | — |   |
| Pro forma                                                                                                    |       | $                                   | 0.57       |   | $ | 0.58 |   |

 

Stock-basedcompensation expense included in net income is related to stock grants in lieuof salary and the Company’s employee stock ownership plan. Such expense totaled$96,000 and $106,000 for the three-month periods ended June 30, 2005 and2004, respectively.

 
| ** **                                                                                                   | ** ** | **Six months ended June 30** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                                   | ** ** | **2005**                          | ** ** | **2004** | ** ** |
| Net income                                                                                                   |       |                              |       |   |   |
| As reported                                                                                                  |       | $                                 | 3,081      |   | $ | $3,265 |   |
| Deduct: stock-based compensation expense  determined using the fair value method, net of related tax effects |       | 34                                |       | 51 |   |
| Pro forma                                                                                                    |       | $                                 | 3,047      |   | $ | 3,214 |   |
|                                                                                                         |       |                              |       |   |   |
| Basic earnings per share                                                                                     |       |                              |       |   |   |
| As reported                                                                                                  |       | $                                 | 1.12       |   | $ | 1.23 |   |
| Deduct: stock-based compensation expense  determined using the fair value method, net of related tax effects |       | 0.01                              |       | 0.02 |   |
| Pro forma                                                                                                    |       | $                                 | 1.11       |   | $ | 1.21 |   |
|                                                                                                         |       |                              |       |   |   |
| Diluted earnings per share                                                                                   |       |                              |       |   |   |
| As reported                                                                                                  |       | $                                 | 1.09       |   | $ | 1.15 |   |
| Deduct: stock-based compensation expense  determined using the fair value method, net of related tax effects |       | —                            |       | — |   |
| Pro forma                                                                                                    |       | $                                 | 1.09       |   | $ | 1.15 |   |

 

9

----

 

Stock-basedcompensation expense included in net income is related to stock grants in lieuof salary and the Company’s employee stock ownership plan. Such expense totaled$204,000 and $227,000 for the six-month periods ended June 30, 2005 and2004, respectively.

 

OnApril 27, 2005, the Company’s shareholders approved the 2005 Stock-Based Incentive Plan (the “2005” Plan) which provides for grants of stockoptions and/or restricted stock aggregating up to 240,000 shares of the Company’scommon stock, with a maximum of 40,000 shares of restricted stock. No grantsmay be issued from the 2005 Plan prior to June 1, 2005.

 

**NOTE 7- EMPLOYEE BENEFIT PLANS**

 

Netperiodic defined benefit pension cost included the following (in thousands):

 
| ** **                                     | ** ** | **Three months ended  June 30** | ** ** |
|------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                     | ** ** | **2005**                             | ** ** | **2004** | ** ** |
|                                           |       |                                 |       |   |   |
| Components of net periodic benefit cost        |       |                                 |       |   |   |
| Service cost                                   |       | $                                    | 78         |   | $ | 57 |   |
| Interest cost                                  |       | 53                                   |       | 51 |   |
| Expected return on plan assets                 |       | (56                                  | )          | (53 | ) |
| Amortization of prior service cost             |       | 16                                   |       | 16 |   |
| Amortization of transition obligation  (asset) |       | —                               |       | 1 |   |
| Recognized net actuarial (gain) loss           |       | 11                                   |       | 8 |   |
|                                           |       |                                 |       |   |   |
| Net periodic benefit cost                      |       | $                                    | 102        |   | $ | 80 |   |

** **
| ** **                                     | ** ** | **Six months ended  June 30** | ** ** |
|------------------------------------------------|------------|------------------------------------|------------|
| ** **                                     | ** ** | **2005**                           | ** ** | **2004** | ** ** |
|                                           |       |                               |       |   |   |
| Components of net periodic benefit cost        |       |                               |       |   |   |
| Service cost                                   |       | $                                  | 156        |   | $ | 115 |   |
| Interest cost                                  |       | 106                                |       | 95 |   |
| Expected return on plan assets                 |       | (103                               | )          | (105 | ) |
| Amortization of prior service cost             |       | 32                                 |       | 31 |   |
| Amortization of transition obligation  (asset) |       | —                             |       | 2 |   |
| Recognized net actuarial (gain) loss           |       | 22                                 |       | 12 |   |
|                                           |       |                               |       |   |   |
| Net periodic benefit cost                      |       | $                                  | 213        |   | $ | 150 |   |

 

Theemployer contribution made for the six months ended June 30, 2005 and 2004was $1,015,000 and $0, respectively.

 

**NOTE 8- RECLASSIFICATIONS**

 

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

 

10

----

 

**TF FINANCIAL CORPORATION AND SUBSIDIARIES**

** **

**MANAGEMENT’S DISCUSSION AND ANALYSIS OF**

### **FINANCIALPOSITION AND RESULTS OF OPERATIONS**

 

**GENERAL**

 

TheCompany may from time to time make written or oral “forward-looking statements”,including statements contained in the Company’s filings with the Securities andExchange Commission (including this Quarterly Report on Form 10-Q and theexhibits thereto), in its reports to stockholders and in other communicationsby the Company, which are made in good faith by the Company pursuant to the “SafeHarbor” Provisions of the Private Securities Litigation Reform Act of 1995.

 

Theseforward-looking statements involve risks and uncertainties, such as statementsof the Company’s plans, objectives, expectations, estimates and intentions thatare subject to change based on various important factors (some of which arebeyond the Company’s control).  Thefollowing factors, among others, could cause the Company’s financialperformance to differ materially from the plans, objectives, expectations,estimates and intentions expressed in such forward-looking statements: thestrength of the United States economy in general and the strength of the localeconomies in which the Company conducts operations; the effects of, and changesin, trade, monetary and fiscal policies and laws, including interest ratepolicies of the Board of Governors of the Federal Reserve System, inflation,interest rate, market and monetary fluctuations; the timely development of andacceptance of new products and services of the Company and the perceivedoverall value of these products and services by users, including the features,pricing and quality compared to competitors’ products and services; thewillingness of users to substitute competitors’ products and services for theCompany’s products and services; the success of the Company in gainingregulatory approval of its products and services, when required; the impact ofchanges in financial services’ laws and regulations (including laws concerningtaxes, banking, securities and insurance); technological changes, acquisitions;changes in consumer spending and saving habits; and the success of the Companyat managing the risks involved in the foregoing.

 

TheCompany cautions that the foregoing list of important factors is notexclusive.  The Company does notundertake to update any forward-looking statement, whether written or oral,that may be made from time to time by or on behalf of the Company.

 

**FinancialCondition**

 

The Company’s total assets at June 30,2005 and December 31, 2004 were $649.8 million and $629.0 million,respectively, an increase of $20.8 million, or 3.31%, during the six-monthperiod. Cash and cash equivalents increased by $3.1 million. Investmentsecurities available for sale increased by $6.0 million due to purchases of $3.0million of tax free municipal bonds and purchases of $3.0 million corporatenotes.  Mortgage-backed securitiesavailable for sale decreased by $8.0 million as $9.0 million of securitypurchases was off-set by $16.5 million in principal pay-downs, a decrease inthe market value of these securities totaling $0.3 million and net premiumamortization of $0.2 million. Mortgage-backed securities held to maturitydecreased by $2.4 million as a result of principal repayments. Loans receivableincreased by $22.2 million for the first six months of 2005. Consumer andsingle-family residential mortgage loans of $37.7 million and commercial loansof $23.5 million were originated during the first six months of 2005. Proceedsfrom the sale of loans in the secondary market were $3.3 million during the six-monthperiod. In addition, principal repayments of loans receivable were $35.5million during this period.

 

Total liabilities increased by $19.7 million.Deposit balances increased by $19.7 million during the six-month period ended June 30,2005.Non-interest bearing demand deposits grew by $2.8 million and money marketdeposits increased by $31.3 million while savings and interest-bearing checkingaccounts decreased by a combined $14.2 million. Certificates of deposit decreasedby $0.2 million. Advances from the Federal Home Loan Bank decreased by $1.6million due to an $11.4 million increase in long-term fixed rate advances less$5.5 million repayment of short-term advances and scheduled amortizationpayments of $7.5 million.

 

Totalconsolidated stockholders’ equity of the Company was $62.3 million or 9.59% oftotal assets at June 30, 2005. During the first half of 2005 the Companyrepurchased 54,922 shares of its common stock and issued 34,873 shares pursuantto the exercise of stock options. As of June 30, 2005, there wereapproximately 98,523 shares available for repurchase under the previouslyannounced share repurchase plan.

 

11

----

 

###### **Asset Quality**

 

During the first six months of 2005 and 2004,the Company’s provision for loan losses was $300,000.  As of June 30, 2005, the Company ownedone parcel of foreclosed real estate. This parcel has been recorded as realestate owned at the lower of the recorded investment in the loan or estimatedfair value in the amount of $0.7 million and is included in other assets in thestatement of financial position at June 30, 2005. Management of theCompany believes that there has not been any significant deterioration in itsasset quality during the first six months of 2005.

 

Thefollowing table sets forth information regarding the Company’s asset quality(dollars in thousands):

 
| ** **                                            | ** ** | **June 30,** | ** ** | **December 31,** | ** ** | **June 30,** | ** ** |
|-------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                                            | ** ** | **2005**          | ** ** | **2004**              | ** ** | **2004**          | ** ** |
|                                                  |       |              |       |                  |       |              |       |
| Non-performing loans                                  |       | $                 | 724        |                  | $          | 960               |       | $ | 2,054 |   |
| Ratio of non-performing loans  to gross loans         |       | 0.16              | %          | 0.22                  | %          | 0.48              | %          |
| Ratio of non-performing loans  to total assets        |       | 0.11              | %          | 0.15                  | %          | 0.33              | %          |
| Foreclosed property                                   |       | $                 | 700        |                  | $          | 700               |       | $ | 837 |   |
| Foreclosed property to total  assets                  |       | 0.11              | %          | 0.11                  | %          | 0.13              | %          |
| Ratio of total non-performing  assets to total assets |       | 0.22              | %          | 0.26                  | %          | 0.46              | %          |

 

Managementmaintains an allowance for loan losses at levels that are believed to beadequate; however, there can be no assurances that further additions will notbe necessary or that losses inherent in the existing loan portfolio will not exceedthe allowance.  The following table setsforth the activity in the allowance for loan losses during the periodsindicated (in thousands):

 
| ** **                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|
| Beginning balance,  January 1,        |       | $        | 2,307      |     | $          | 2,111 |   |
| Provision                                  |       | 300      |       | 300      |       |
| Less: charge-off’s (recoveries),  net |       | 147      |       | 207      |       |
| Ending balance, June 30,              |       | $        | 2,460      |     | $          | 2,204 |   |

 

12

----

 

**RESULTSOF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2005 AND 2004**

 

**NetIncome**.  The Company recorded net income of $1,605,000,or $0.57 per diluted share, for the three months ended June 30, 2005 ascompared to net income of $1,656,000, or $0.58 per diluted share, for the threemonths ended June 30, 2004.

 

### **Average Balance Sheet**

### ** **

Thefollowing table sets forth information relating to the Company’s averagebalance sheet and reflects the average yield on assets and average cost ofliabilities for the periods indicated. Yield and cost are computed by dividingincome or expense by the average daily balance of interest-earning assets orinterest-bearing liabilities, respectively, at-or for the three month periodsindicated.

 
| ** **                                                                        | ** ** | **June 30,**    | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                        | ** ** | **2005**             | ** ** | **2004** | ** ** |
| ** **                                                                        | ** ** | **Average  balance** | ** ** | **Interest** | ** ** | **Average  yld/cost** | ** ** | **Average  balance** | ** ** | **Interest** | ** ** | **Average  yld/cost** | ** ** |
| **ASSETS**                                                                        |       |                 |       |   |   |   |   |   |   |   |   |   |   |
| **Interest-earning assets:**                                                      |       |                 |       |   |   |   |   |   |   |   |   |   |   |
| Loans receivable(1)                                                               |       | $                    | 457,289    |   | $ | 6,703 |   | 5.88 | % | $ | 418,545 |   | $ | 5,960 |   | 5.73 | % |
| Mortgage-backed securities                                                        |       | 112,939              |       | 1,292 |   | 4.59 | % | 132,144 |   | 1,531 |   | 4.66 | % |
| Investment securities(2)                                                          |       | 35,635               |       | 441 |   | 4.96 | % | 30,111 |   | 334 |   | 4.46 | % |
| Other interest-earning assets(3)                                                  |       | 2,368                |       | 12 |   | 2.03 | % | 1,648 |   | 4 |   | 0.98 | % |
| Total interest-earning assets                                                     |       | 608,231              |       | 8,448 |   | 5.57 | % | 582,448 |   | 7,829 |   | 5.41 | % |
| Non interest-earning assets                                                       |       | 36,599               |       |   |   |   |   | 35,974 |   |   |   |   |   |
| Total assets                                                                      |       | $                    | 644,830    |   |   |   |   |   | $ | 618,422 |   |   |   |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY:**                                    |       |                 |       |   |   |   |   |   |   |   |   |   |   |
| **Interest-bearing liabilities**                                                  |       |                 |       |   |   |   |   |   |   |   |   |   |   |
| Deposits                                                                          |       | 466,679              |       | 1,831 |   | 1.57 | % | 471,402 |   | 1,478 |   | 1.26 | % |
| Advances from the FHLB                                                            |       | 111,734              |       | 966 |   | 3.47 | % | 82,984 |   | 673 |   | 3.26 | % |
| Total interest-bearing liabilities                                                |       | 578,413              |       | 2,797 |   | 1.94 | % | 554,386 |   | 2,151 |   | 1.56 | % |
| Non interest-bearing liabilities                                                  |       | 6,331                |       |   |   |   |   | 5,801 |   |   |   |   |   |
| Total liabilities                                                                 |       | 584,744              |       |   |   |   |   | 560,187 |   |   |   |   |   |
| Stockholders’ equity                                                         |       | 60,086               |       |   |   |   |   | 58,235 |   |   |   |   |   |
| Total liabilities and stockholders’ equity                                   |       | $                    | 644,830    |   |   |   |   |   | $ | 618,422 |   |   |   |   |   |
| Net interest income                                                               |       |                 |       | $ | 5,651 |   |   |   |   |   | $ | 5,678 |   |   |   |
| Interest rate spread(4)                                                           |       |                 |       |   |   | 3.63 | % |   |   |   |   | 3.85 | % |
| Net yield on interest-earning assets(5)                                           |       |                 |       |   |   | 3.73 | % |   |   |   |   | 3.92 | % |
| Ratio of average interest-earning assets to  average interest-bearing liabilities |       |                 |       |   |   | 105 | % |   |   |   |   | 105 | % |

 

----

| (1) | Nonaccrual  loans have been included in the appropriate average loan balance category,  but interest on nonaccrual loans has not been included for purposes of  determining interest income.                                                      |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Tax  equivalent adjustments to interest on investment securities were $77,000 and  $54,000 for the quarters ended June 30, 2005 and 2004, respectively. Tax  equivalent interest income is based upon a marginal effective tax rate of  34%. |
| (3) | Includes  interest-bearing deposits in other banks.                                                                                                                                                                                               |
| (4) | Interest  rate spread represents the difference between the average yield on interest-earning  assets and the average cost of interest-bearing liabilities.                                                                                       |
| (5) | Net  yield on interest-earning assets represents net interest income as a  percentage of average interest-earning assets.                                                                                                                         |

 

13

----

 

**Rate/VolumeAnalysis**

 

Thefollowing table presents, for the periods indicated, the change in interestincome and interest expense (in thousands) attributed to (i) changes involume (changes in the weighted average balance of the total interest earningasset and interest bearing liability portfolios multiplied by the prior yearrate), and (ii) changes in rate (changes in rate multiplied by prior yearvolume). Changes attributable to the combined impact of volume and rate havebeen allocated proportionately based on the absolute value of changes due tovolume and changes due to rate.

 
| ** **                         | ** ** | **Three months ended June 30,**         | ** ** |
|------------------------------------|------------|----------------------------------------------|------------|
| ** **                         | ** ** | **2005 vs 2004  Increase (decrease) due to** | ** ** |
| ** **                         | ** ** | **Volume**                                   | ** ** | **Rate** | ** ** | **Net** | ** ** |
| Interest income:                   |       |                                         |       |   |   |   |   |
| Loans receivable, net              |       | $                                            | 577        |   | $ | 166 |   | $ | 743 |   |
| Mortgage-backed securities         |       | (216                                         | )          | (23 | ) | (239 | ) |
| Investment securities (1)          |       | 66                                           |       | 41 |   | 107 |   |
| Other interest-earning assets      |       | 2                                            |       | 6 |   | 8 |   |
| Total interest-earning assets      |       | 429                                          |       | 190 |   | 619 |   |
| Interest expense:                  |       |                                         |       |   |   |   |   |
| Deposits                           |       | (101                                         | )          | 454 |   | 353 |   |
| Advances from the FHLB             |       | 248                                          |       | 45 |   | 293 |   |
| Total interest-bearing liabilities |       | 147                                          |       | 499 |   | 646 |   |
| Net change in net interest income  |       | $                                            | 282        |   | $ | (309 | ) | $ | (27 | ) |

 

----

| (1) | Tax  equivalent adjustments to interest on investment securities were $77,000 and  $54,000 for the quarters ended June 30, 2005 and 2004, respectively. Tax  equivalent interest income is based upon a marginal effective tax rate of  34%. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**TotalInterest Income**.  Total interest income, on a taxableequivalent basis, increased by $0.6 million or 8.0% to $8.4 million for thequarter ended June 30, 2005 compared with the second quarter of 2004primarily because of a $38.7 million increase in average loans outstanding.Additionally, there has been a rise in the yield on new loans added to theportfolio during the intervening period in part due to nine, 25 basis pointincreases in the Bank’s prime rate during the period June 30, 2004 throughJune 30, 2005 corresponding to identical increases in the fed fundsinterest rate by the Federal Reserve Bank. The Bank has approximately $50.6million in primarily construction loans and commercial and consumer lines ofcredit which are indexed to the prime rate. Interest income frommortgage-backed securities was lower during the second quarter of 2005 incomparison to the same period of 2004.  This decrease is consistent with the reductionof balances maintained in mortgage-backed securities. Investment securitiesinterest income reflected an increase between the quarters as a result ofinvestment security purchases during the intervening period.

 

**TotalInterest Expense.** Total interest expense increased by $0.6million to $2.8 million during the three-month period ended June 30, 2005as compared with the second quarter of 2004. The decrease in the averagebalance of deposits was more than offset by an increase in interest rates on theBank’s demand deposit accounts in order to remain in line with short-termmarket interest rates and the Bank’s competitors.  Increases in the advances from the FederalHome Loan Bank during 2004 and the first half of 2005 is the primary cause forthe increase in the related interest expense between the two quarters.

 

**Non-interestincome.**  Total non-interest income was $677,000 forthe three-month period ended June 30, 2005 compared with $681,000 for thesame period in 2004.  Loan prepayment andother loan fees decreased by $31,000 and mortgage brokered fees collected increasedby $44,000 in the second quarter of 2005 versus the same quarter of 2004.Retail banking fees were $25,000 less in the second quarter of 2005 due to adecrease in demand deposit account fees. In contrast, during the second quarterof 2005 net gain on the sale of loans totaled $8,000 while there was no such gainduring the second quarter of 2004.

 

**Non-interestexpense.**  Total non-interest expense increased by $74,000to $3.9 million for the three months ended June 30, 2005 compared to thesame period in 2004.  Compensation andbenefit expenses were higher by $56,000 mainly due to additional staffing aswell as salary increases. Professional expenses of the Company were $79,000higher mainly because of technology-related compliance and audit work.

 

14

----

 

**RESULTSOF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004**

 

**NetIncome**.  The Company recorded net income of$3,081,000, or $1.09 per diluted share, for the six months ended June 30,2005 as compared to net income of $3,265,000, or $1.15 per diluted share, forthe six months ended June 30, 2004.

 

### **Average Balance Sheet**

 

Thefollowing table sets forth information relating to the Company’s averagebalance sheet and reflects the average yield on assets and average cost ofliabilities for the periods indicated. Yield and cost are computed by dividingincome or expense by the average daily balance of interest-earning assets orinterest-bearing liabilities, respectively, at-or for the six month periodsindicated.

 
| ** **                                                                        | ** ** | **June 30,**    | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                        | ** ** | **2005**             | ** ** | **2004** | ** ** |
| ** **                                                                        | ** ** | **Average  balance** | ** ** | **Interest** | ** ** | **Average  yld/cost** | ** ** | **Average  balance** | ** ** | **Interest** | ** ** | **Average  yld/cost** | ** ** |
| **ASSETS**                                                                        |       |                 |       |   |   |   |   |   |   |   |   |   |   |
| **Interest-earning assets:**                                                      |       |                 |       |   |   |   |   |   |   |   |   |   |   |
| Loans receivable(1)                                                               |       | $                    | 451,983    |   | $ | 13,174 |   | 5.88 | % | $ | 414,761 |   | $ | 11,950 |   | 5.79 | % |
| Mortgage-backed securities                                                        |       | 115,861              |       | 2,595 |   | 4.52 | % | 131,400 |   | 2,988 |   | 4.57 | % |
| Investment securities(2)                                                          |       | 34,256               |       | 820 |   | 4.83 | % | 30,282 |   | 663 |   | 4.40 | % |
| Other interest-earning assets(3)                                                  |       | 1,755                |       | 22 |   | 2.53 | % | 1,609 |   | 7 |   | 0.87 | % |
| Total interest-earning assets                                                     |       | 603,855              |       | 16,611 |   | 5.55 | % | 578,052 |   | 15,608 |   | 5.43 | % |
| Non interest-earning assets                                                       |       | 34,870               |       |   |   |   |   | 36,133 |   |   |   |   |   |
| Total assets                                                                      |       | $                    | 638,725    |   |   |   |   |   | $ | 614,185 |   |   |   |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY:**                                    |       |                 |       |   |   |   |   |   |   |   |   |   |   |
| **Interest-bearing liabilities**                                                  |       |                 |       |   |   |   |   |   |   |   |   |   |   |
| Deposits                                                                          |       | 461,028              |       | 3,367 |   | 1.47 | % | 468,073 |   | 2,984 |   | 1.28 | % |
| Advances from the FHLB                                                            |       | 111,810              |       | 1,897 |   | 3.42 | % | 83,149 |   | 1,319 |   | 3.19 | % |
| Total interest-bearing liabilities                                                |       | 572,838              |       | 5,264 |   | 1.85 | % | 551,222 |   | 4,303 |   | 1.57 | % |
| Non interest-bearing liabilities                                                  |       | 5,703                |       |   |   |   |   | 5,517 |   |   |   |   |   |
| Total liabilities                                                                 |       | 578,541              |       |   |   |   |   | 556,739 |   |   |   |   |   |
| Stockholders’ equity                                                         |       | 60,184               |       |   |   |   |   | 57,446 |   |   |   |   |   |
| Total liabilities and stockholders’ equity                                   |       | $                    | 638,725    |   |   |   |   |   | $ | 614,185 |   |   |   |   |   |
| Net interest income                                                               |       |                 |       | $ | 11,347 |   |   |   |   |   | $ | 11,305 |   |   |   |
| Interest rate spread(4)                                                           |       |                 |       |   |   | 3.69 | % |   |   |   |   | 3.86 | % |
| Net yield on interest-earning assets(5)                                           |       |                 |       |   |   | 3.80 | % |   |   |   |   | 3.93 | % |
| Ratio of average interest-earning assets to  average interest-bearing liabilities |       |                 |       |   |   | 105 | % |   |   |   |   | 105 | % |

 

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| (1) | Nonaccrual  loans have been included in the appropriate average loan balance category,  but interest on nonaccrual loans has not been included for purposes of  determining interest income.                                                       |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Tax  equivalent adjustments to interest on investment securities were $143,000 and  $103,000 for the periods ended June 30, 2005 and 2004, respectively. Tax  equivalent interest income is based upon a marginal effective tax rate of  34%. |
| (3) | Includes  interest-bearing deposits in other banks.                                                                                                                                                                                                |
| (4) | Interest  rate spread represents the difference between the average yield on interest-earning  assets and the average cost of interest-bearing liabilities.                                                                                        |
| (5) | Net  yield on interest-earning assets represents net interest income as a percentage  of average interest-earning assets.                                                                                                                          |

 

15

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**Rate/VolumeAnalysis**

 

Thefollowing table presents, for the periods indicated, the change in interestincome and interest expense (in thousands) attributed to (i) changes involume (changes in the weighted average balance of the total interest earningasset and interest bearing liability portfolios multiplied by the prior yearrate), and (ii) changes in rate (changes in rate multiplied by prior yearvolume). Changes attributable to the combined impact of volume and rate havebeen allocated proportionately based on the absolute value of changes due tovolume and changes due to rate.

 
| ** **                         | ** ** | **Six months ended June 30,**           | ** ** |
|------------------------------------|------------|----------------------------------------------|------------|
| ** **                         | ** ** | **2005 vs 2004  Increase (decrease) due to** | ** ** |
| ** **                         | ** ** | **Volume**                                   | ** ** | **Rate** | ** ** | **Net** | ** ** |
| Interest income:                   |       |                                         |       |   |   |   |   |
| Loans receivable, net              |       | $                                            | 1,054      |   | $ | 170 |   | $ | 1,224 |   |
| Mortgage-backed securities         |       | (356                                         | )          | (37 | ) | (393 | ) |
| Investment securities (1)          |       | 91                                           |       | 66 |   | 157 |   |
| Other interest-earning assets      |       | 1                                            |       | 14 |   | 15 |   |
| Total interest-earning assets      |       | 790                                          |       | 213 |   | 1,003 |   |
| Interest expense:                  |       |                                         |       |   |   |   |   |
| Deposits                           |       | (129                                         | )          | 512 |   | 383 |   |
| Advances from the FHLB             |       | 478                                          |       | 100 |   | 578 |   |
| Total interest-bearing liabilities |       | 349                                          |       | 612 |   | 961 |   |
| Net change in net interest income  |       | $                                            | 441        |   | $ | (399 | ) | $ | 42 |   |

 

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| (1) | Tax  equivalent adjustments to interest on investment securities were $143,000 and  $103,000 for the periods ended June 30, 2005 and 2004, respectively. Tax  equivalent interest income is based upon a marginal effective tax rate of  34%. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**TotalInterest Income**.  Total interest income, on a taxableequivalent basis, increased by $1.0 million or 6.4% to $16.6 million for the sixmonths ended June 30, 2005 compared with the first six months of 2004primarily because of a $37.2 million increase in average loans outstanding.Interest income from mortgage-backed securities was lower during the first halfof 2005 in comparison to the same period of 2004.  This decrease is consistent with thereduction of balances maintained in mortgage-backed securities. Investment securitiesinterest income reflected an increase between the periods as a result ofinvestment security purchases during the intervening period.

 

**TotalInterest Expense.** Total interest expense increased by $1.0million to $5.3 million during the six-month period ended June 30, 2005 ascompared with the same six-month period of 2004. The decrease in the averagebalance of deposits was more than offset by an increase in interest rates on theBank’s demand deposit accounts in order to remain in line with short-termmarket interest rates and the Bank’s competitors.  Increases in the advances from the FederalHome Loan Bank during 2004 and the first half of 2005 is the primary cause forthe increase in the related interest expense between the two periods.

 

**Non-interestincome.**  Total non-interest income was $1,339,000 forthe six-month period ended June 30, 2005 compared with $1,390,000 for thesame period in 2004.  Loan prepayment andother loan fees decreased by $63,000 and mortgage brokered fees collected increasedby $29,000 during the first six months of 2005 versus the same period in 2004.Retail banking fees were $53,000 less between the two periods due to a decreasein demand deposit account fees. In contrast, net gain on the sale of loanstotaled $30,000 in 2005 while there was no such gain during 2004.

 

**Non-interestexpense.**  Total non-interest expense increased by $288,000to $8.1 million for the six months ended June 30, 2005 compared to thesame period in 2004.  Compensation andbenefit expenses were higher by $173,000 mainly due to additional staffing aswell as salary increases. Office and occupancy costs rose$62,000 between the two periods due to $54,000 of additional space leasedduring the second quarter of 2004 for deposit services support, annual rentincreases, additional security guard services and $7,000 of greater officemaintenance costs. Professional expenses of the Company were $99,000 highermainly because of technology-related compliance and audit work.

 

16

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**LIQUIDITYAND CAPITAL RESOURCES**

 

**Liquidity**

 

The Company’s liquidity is ameasure of its ability to fund loans, pay withdrawals of deposits, and othercash outflows in an efficient, cost-effective manner.  The Company’s short-term sources of liquidityinclude maturity, repayment and sales of assets, excess cash and cashequivalents, new deposits, broker deposits, other borrowings, and new advancesfrom the Federal Home Loan Bank. There has been no material adverse changeduring six-month period ended June 30, 2005 in the ability of the Companyand its subsidiaries to fund their operations.

 

At June 30, 2005, theCompany had commitments outstanding under letters of credit of $1.1 million,commitments to originate loans of $36.6 million, and commitments to fundundisbursed balances of closed loans and unused lines of credit of $57.4million.  At June 30, 2005, the Bankhad $1.3 million outstanding commitments to sell loans. There has been nomaterial change during the six months ended June 30, 2005 in any of theCompany’s other contractual obligations or commitments to make future payments.

 

**Capital Requirements**

 

The Bank was in compliancewith all of its capital requirements as of June 30, 2005.

 

###### **QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

###### ** **

###### **Asset and Liability Management**

###### ** **

TheCompany’s market risk exposure is predominately caused by interest rate risk,which is defined as the sensitivity of the Company’s current and futureearnings, the values of its assets and liabilities, and the value of itscapital to changes in the level of market interest rates.  Management of the Company believes that therehas not been a material adverse change in market risk during the six monthsended June 30, 2005.

 

**CONTROLS AND PROCEDURES**

 

**Evaluationof Disclosure Controls and Procedures**

 

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

 

**Changesin Internal Controls over Financial Reporting**

 

Duringthe quarter 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.

 

**CRITICALACCOUNTING POLICIES**

 

Certaincritical accounting policies of the Company require the use of significantjudgment and accounting estimates in the preparation of the consolidatedfinancial statements and related data of the Company. These accountingestimates require management to make assumptions about matters that are highlyuncertain at the time the accounting estimate is made. Management believes thatthe most critical accounting policy requiring the use of accounting estimatesand judgment is the determination of the allowance for loan losses. If thefinancial position of a significant amount of debtors should deteriorate morethan the Company has estimated, present reserves for loan losses may beinsufficient and additional provisions for loan losses may be required. The allowancefor loan losses was $2,460,000 at June 30, 2005.

 

17

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**NEW ACCOUNTINGPRONOUNCEMENTS**

 

OnDecember 16, 2004, the Financial Accounting Standards Board (FASB) issuedStatement of Financial Accounting Standards No. 123(R) (SFAS 123 R), “Share-BasedPayment.” This statement establishes standards for the accounting fortransactions in which the entity exchanges its equity instruments in exchange forgoods and services and addresses transactions in which an entity incursliabilities in exchange for goods and services that are based on the fair valueof the entity’s equity instruments or that may be settled by the issuance ofthose equity instruments. SFAS123(R) focuses primarily on accounting fortransactions in which an entity obtains employee services in share-basedpayment transactions. Under SFAS123(R), all forms of share-based payments toemployees, including employee stock options, will be treated the same as otherforms of compensation by recognizing the related cost in the income statement.  The expense of the award will generally bemeasured at fair value at the grant date. The grant-date fair value of employeeshare options and similar instruments will be estimated using option pricingmodels. Current accounting guidance requires that the expense relating toso-called fixed plan employee stock options only be disclosed in the footnotesto the financial statements. In April 2005, the Securities and ExchangeCommission adopted a new rule amending Regulation S-X to amend the datefor compliance with SFAS123(R). Under SFAS123(R), registrants would have beenrequired to apply the provisions of SFAS123(R) as of the first interim ofannual reporting period that begins after June 15, 2005 or after December 15,2005 for small business issuers. The Commission’s new rule allowsregistrants to implement SFAS123(R) at the beginning of their next fiscal yearthat begins after June 15, 2005 or after December 15, 2005 for smallbusiness issuers.

 

InMarch 2005, the FASB issued Interpretation No. 47, “Accounting forConditional Asset Retirement Obligations” (FIN 47). FIN 47 requires an entityto recognize a liability for the fair value of a legal obligation to performasset-retirement activities that are conditional on a future event if theamount can be reasonably estimated. The Interpretation provides guidance toevaluate whether fair value is reasonably estimable.  FIN 47 is effective no later than the end offiscal years ending after December 15, 2005. FIN 47 is not expected tohave a material impact on the Company’s financial position or results ofoperations.

 

OnJune 29, 2005, the FASB decided to issue a staff position which will betitled FSP FAS 115-1, “The Meaning of Other-Than-Temporary Impairment and ItsApplication to Certain Investments,” and will supercede EITF 03-1, “The Meaningof Other-Than-Temporary Impairment and Its Application to Certain Investments,”and EITF Topic D-44, “Recognition of Other-Than-Temporary Impairment upon thePlanned Sale of a Security Whose Cost Exceeds Fair Value.”  The staff position will replace the guidancein paragraphs 10-18 of EITF Issue 03-1 with references to already establishedother-than-temporary impairment guidance as is set forth in Statement 115, “Accountingfor Certain Investments in Debt and Equity Securities”, Staff AccountingBulletin 59, “Accounting for Noncurrent Marketable Equity Securities” and APB Opinion18, “The Equity Method of Accounting for Investments in Common Stock.” FSP FAS115-1 will codify the guidance set forth in EITF Topic D-44 and clarify that aninvestor should recognize an impairment loss no later than when the impairmentis considered other than temporary, even if a decision to sell has not beenmade. FSP FAS 115-1 will be effective for other-than-temporary impairmentanalysis conducted in periods after September 15, 2005. The Company doesnot expect FSP FAS 115-1 to have a material impact on the Company’s financialposition or results of operations.

 

18

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**TF FINANCIAL CORPORATION AND SUBSIDIARIES**

 

**PART II**

 

**ITEM 1.****                                           ****LEGAL PROCEEDINGS**

 

Asa result of a routine regulatory examination by the Office of ThriftSupervision (“OTS”) of the Bank’s information technology systems conducted in January 2005,the Bank recently entered into a Supervisory Agreement (the “Agreement”) withthe OTS related solely to information technology matters.  No operating restrictions have been imposedon the Bank.  The Bank continues to be ina safe and sound financial condition.

 

Pursuantto the Agreement, the Bank agreed to take all necessary steps to ensure thatthe Bank comply with OTS regulatory guidelines for establishing and maintainingoperational and managerial standards for its information technology systems.  Under the terms of the Agreement, the Bankhas created and begun implementing an information technology remediation plan(the “Plan”) which must be fully implemented by March 31, 2006. The Bankhas made significant progress in implementing the Plan and believes that itsinformation technology systems are currently in substantial compliance with allOTS regulatory guidelines and are being operated in a safe and secure manner.

 

TheBank has appointed a compliance committee of the Board of Directors to overseecompliance with the Agreement and implementation of the Plan.  The Agreement will remain in effect untilterminated, modified or suspended by the OTS. The Bank believes that the Agreement will be terminated by the OTS atthe next regularly scheduled routine OTS examination of the Bank’s informationtechnology systems, although no assurance can be given that the OTS willterminate the Agreement at that time. The Bank believes that the Agreement will not have a material adverseeffect on the financial condition or results of operations of the Bank or theCompany, taken as a whole.  Failure tocomply with the Agreement, however, could result in further regulatory actionby the OTS. A copy of the Agreement has been filed as an exhibit to this Reportand is incorporated herein by reference.

 

**ITEM 2.****                                           ****UNREGISTERED SALE OF EQUITYSECURITIES AND USE OF PROCEEDS**

 

Thefollowing table provides information on repurchases by the Company of itscommon stock in each month for the three months ended June 30, 2005:

 
| **Month**                                 | ** ** | **Total Number of  Shares Purchased** | ** ** | **Average Price  Paid per Share** | ** ** | **Total Number of  Shares Purchased as  Part of Publicly  Announced Plan or  Program** | ** ** | **Maximum Number of  Shares that may yet  be Purchased Under  the Plans or  Programs** |
|-------------------------------------------|------------|---------------------------------------|------------|-----------------------------------|------------|---------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------|
|                                      |       |                                  |       |                              |       |                                                                                        |       |                                                                                   |
| April 1,  2005 - April 30, 2005 |       | —                                |       | —                            |       | —                                                                                      |       | 101,123                                                                                |
|                                      |       |                                  |       |                              |       |                                                                                        |       |                                                                                   |
| May 1,  2005 - May 31, 2005     |       | 27,785                                |       | $                                 | 29.51      |                                                                                        | 1,700      |                                                                                   | 99,423 |
|                                      |       |                                  |       |                              |       |                                                                                        |       |                                                                                   |
| June 1,  2005 - June 30, 2005   |       | 900                                   |       | $                                 | 28.08      |                                                                                        | 900        |                                                                                   | 98,523 |

 

Therepurchase poses no modification to the rights of stockholders.  Furthermore, there has been no change in theability of the Company to pay dividends or any material change in the workingcapital of the Company.  The stockrepurchase did not alter the previously approved stock repurchase plan of theCompany.

 

**ITEM 3.****                                           ****DEFAULTS UPON SENIOR SECURITIES**

 

Not applicable.

 

**I****TEM4.****                                           ****SUBMISSION OF MATTERS TO A VOTEOF SECURITY HOLDERS**

 

None

 

**ITEM 5.****                                           ****OTHER INFORMATION**

 

None

 

19

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**ITEM 6.****                                           ****EXHIBITS**

 

(a)  Exhibits

 

10.        Supervisory Agreement

 

31.        Certification pursuant to Section 302 ofthe Sarbanes-Oxley Act of 2002.

 

32.        Certification pursuant to Section 906 ofthe Sarbanes-Oxley Act of 2002.

 

20

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**TF FINANCIAL CORPORATION**

 

**SIGNATURES**

 

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this Report to be signed on its behalf by the undersigned,thereunto duly authorized.

 

 
|   |                 | /s/  Kent C. Lufkin                                  |   |
|--------|----------------------|------------------------------------------------------|--------|
| Date:  | August 5,  2005 |                                                 |   | Kent  C. Lufkin |
|   |                 | President  and CEO                                   |
|   |                 | (Principal  Executive Officer)                       |
|   |                 |                                                 |
|   |                 |                                                 |
|   |                 | /s/  Dennis R. Stewart                               |   |
| Date:  | August 5,  2005 |                                                 |   | Dennis  R. Stewart |
|   |                 | Executive  Vice President and                        |
|   |                 | Chief  Financial Officer                             |
|   |                 | (Principal  Financial & Accounting Officer) |
|        |                      |                                                      |        |  |  |  |

 

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