10-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS

PURSUANT TO SECTIONS 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

ýANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2006

or

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                                   to                                   

Commission file number:  0-24168

TF FINANCIAL CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

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

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $.10 per share

(Title of Class)

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

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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES x     NO o

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

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

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

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

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

As of March 19, 2007 there were outstanding 2,928,005 shares of the registrant’s Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

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

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

PART I

TF FINANCIAL CORPORATION (THE “COMPANY”) MAY FROM TIME TO TIME MAKE WRITTEN OR ORAL “FORWARD-LOOKING STATEMENTS”, INCLUDING STATEMENTS CONTAINED IN THE COMPANY’S FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION (INCLUDING THIS ANNUAL REPORT ON FORM 10-K AND THE EXHIBITS HERETO), IN ITS REPORTS TO STOCKHOLDERS AND IN OTHER COMMUNICATIONS BY THE COMPANY, WHICH ARE MADE IN GOOD FAITH BY THE COMPANY PURSUANT TO THE “SAFE HARBOR” PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.

THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES, SUCH AS STATEMENTS OF THE COMPANY’S PLANS, OBJECTIVES, EXPECTATIONS, ESTIMATES AND INTENTIONS, THAT ARE SUBJECT TO CHANGE BASED ON VARIOUS IMPORTANT FACTORS (SOME OF WHICH ARE BEYOND THE COMPANY’S CONTROL).  THE FOLLOWING FACTORS, AMONG OTHERS, COULD CAUSE THE COMPANY’S FINANCIAL PERFORMANCE TO DIFFER MATERIALLY FROM THE PLANS, OBJECTIVES, EXPECTATIONS, ESTIMATES AND INTENTIONS EXPRESSED IN SUCH FORWARD-LOOKING STATEMENTS: THE STRENGTH OF THE UNITED STATES ECONOMY IN GENERAL AND THE STRENGTH OF THE LOCAL ECONOMIES IN WHICH THE COMPANY CONDUCTS OPERATIONS; THE EFFECTS OF, AND CHANGES IN, MONETARY AND FISCAL POLICIES AND LAWS, INCLUDING INTEREST RATE POLICIES OF THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, INFLATION, INTEREST RATES, MARKET AND MONETARY FLUCTUATIONS; THE TIMELY DEVELOPMENT OF AND ACCEPTANCE OF NEW PRODUCTS AND SERVICES OF THE COMPANY AND THE PERCEIVED OVERALL VALUE OF THESE PRODUCTS AND SERVICES BY USERS, INCLUDING THE FEATURES, PRICING AND QUALITY COMPARED TO COMPETITORS’ PRODUCTS AND SERVICES; THE IMPACT OF CHANGES IN FINANCIAL SERVICES’ LAWS AND REGULATIONS (INCLUDING LAWS CONCERNING TAXES, BANKING, SECURITIES AND INSURANCE); TECHNOLOGICAL CHANGES; ACQUISITIONS; CHANGES IN CONSUMER SPENDING AND SAVING HABITS; AND THE SUCCESS OF THE COMPANY AT MANAGING THE RISKS INVOLVED IN THE FOREGOING.

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

Item 1.Business

BUSINESS OF THE COMPANY

On July 13, 1994, the Company consummated its public offering for 5,290,000 shares of its common stock and acquired Third Federal Bank (the “Bank”) as part of the Bank’s mutual-to-stock conversion.  The Company was incorporated under Delaware law in March 1994.  The Company is a savings and loan holding company and is subject to regulation by the Office of Thrift Supervision (the “OTS”), the Federal Deposit Insurance Corporation (the “FDIC”) and the Securities and Exchange Commission (the “SEC”).  The Company does not transact any material business other than through its direct and indirect subsidiaries: Third Federal Bank, TF Investments Corporation, Teragon Financial Corporation, Penns Trail Development Corporation and Third Delaware Corporation. At December 31, 2006, the Company had total assets of $653 million, total liabilities of $587 million and stockholders’ equity of $66 million.

BUSINESS OF THE BANK

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

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

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

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

Market Area

The Bank offers a wide range of consumer and business products at its fifteen full service branch offices located in Bucks and Philadelphia Counties in Pennsylvania, and Mercer County in New Jersey. Five of the branch offices are located in Bucks County, the third wealthiest county in Pennsylvania. Bucks County is a growing region offering opportunity for growth for the Bank. Seven branches are located in the northeast section of Philadelphia where the Bank was founded. Although Philadelphia County is experiencing population decline, the Bank’s branches in this section of Philadelphia represent a deposit stronghold. The remaining three branches are in Mercer County, New Jersey which has an expanding population and represents another growth area for the Bank.

Competition

The Bank faces varying degrees of competition from banks, thrift institutions and credit unions at its various branch locations.  Stronger competition has come from local and very large regional commercial banks based in and around the Philadelphia area.  Based upon the latest available data, at June 30, 2006 the Company’s share of deposits in each of the counties in which it operates was as follows:

County, State	Market Share for Entire County		Market Share for ZIP Codes Including Company Branches
Philadelphia, Pennsylvania	0.5	%	10.9	%
Bucks, Pennsylvania	1.6	%	6.2	%
Mercer, New Jersey	0.8	%	4.6	%

Lending Activities

General.  The Bank’s loan portfolio composition consists primarily of conventional adjustable-rate (“ARM”) and fixed-rate first mortgage loans secured by one-to-four family residences.  The Bank also makes commercial real estate and multi-family loans, construction loans and consumer and other loans.  At December 31, 2006, the Bank’s mortgage loans outstanding were $396 million, of which $268 million were secured by first mortgages on one-to-four family residential property.  Of the one-to-four family residential mortgage loans outstanding at that date, 19% were ARM’s and 81% were fixed-rate loans.  Total ARM loans in the Bank’s residential mortgage portfolio at December 31, 2006 amounted to $51 million or 11% of total loans.  At that same date, commercial real estate and multi-family residential loans totaled $94 million, and construction loans totaled $35 million. The construction loans are predominately floating-rate, prime-rate-based loans.

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

The following table sets forth the composition of the Bank’s loan portfolio and mortgage-backed and related securities portfolios in dollar amounts and in percentages of the respective portfolios at the dates indicated.

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

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Loan Maturity and Repricing Information.  The following table sets forth certain information at December 31, 2006, regarding the dollar amount of loans maturing in the Bank’s loan and mortgage-backed securities portfolios based on their maturity date.  Demand loans, loans having no stated schedule of repayments and no stated maturity, overdrafts and delinquent loans maturing prior to December 31, 2007, are reported as due in one year or less.  The table does not include prepayments or scheduled principal repayments.

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

The following table sets forth the dollar amount of all loans and mortgage-backed securities due after December 31, 2007, which have predetermined interest rates and which have floating or adjustable interest rates. Loans which have rate adjustments after ten years are considered to have predetermined rates.

	Predetermined Rates		Floating or Adjustable Rate
	(In thousands)
Available for sale:
Mortgage-backed securities	$	72,860	$	—
Loans	969		—
Total	$	73,829	$	—
Held to Maturity:
One-to-four family	$	215,162	$	51,479
Commercial real estate and multi-family	7,166		82,634
Construction	—		9,123
Consumer and other	32,950		15,948
Commercial loans and leases	11,363		2,544
Total loans receivable	266,641		161,728
Mortgage-backed securities	7,513		40
Total	$	274,154	$	161,768

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

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Loan originations are obtained from existing or past customers, members of the local community, and referrals from established builders and realtors within the Bank’s lending area using direct advertising in local newspapers, branch signage and promotions, and word of mouth referrals.

The Bank offers a variety of ARM loans with terms of 30 years which adjust at the end of 6 months, one, three, five, seven and ten years and adjust by a maximum of 3% to 5% per adjustment with a lifetime cap of 5% to 6% over the life of the loan.

The Bank offers fixed-rate mortgage loans with terms of 10 to 30 years, which are payable monthly.  Interest rates charged on fixed-rate mortgage loans are competitively priced based on market conditions.  The origination fees for fixed-rate loans range from 0% to 3% depending on the underlying loan coupon. Generally, the Bank’s standard underwriting guidelines for fixed-rate mortgage loans conform to the FHLMC and FNMA guidelines. The Bank sells a portion of its conforming fixed-rate mortgage loan originations in the secondary market to FHLMC and FNMA while retaining the servicing rights on these loans. The Bank also brokers a small portion of its loan closings to correspondents. However, the Bank is primarily a portfolio lender.  As of December 31, 2006, the Bank’s portfolio of loans serviced for FHLMC or FNMA totaled approximately $23 million.

The Bank has a mortgage lending department that is separate as to its sales efforts from the consumer lending area of the Bank. This department employs a lending manager and several commissioned loan officers. Through this department the Bank offers, in addition to its standard portfolio loan products, other types of mortgage loans that are originated in the name of, or sold on a servicing released basis to, third party investors. The mortgage loan officers support the Bank’s branches and customers, and additionally engage in calling efforts directed toward realtors, builders, and others that can be sources of lending business for the Bank.

Commercial Real Estate and Multi-Family Lending.  The Bank originates loans secured by commercial real estate including non-owner occupied residential multi-family dwelling units (more than four units) primarily secured by professional office buildings and apartment complexes. The Bank generally originates commercial real estate and multi-family loans up to 75% of the appraised value of the property securing the loan.  Currently, it is the Bank’s philosophy to originate commercial real estate and multi-family loans primarily on properties in its general market area.  The commercial real estate and multi-family loans in the Bank’s portfolio consist of fixed-rate, ARM and balloon loans originated at prevailing market rates for terms of up to 25 years.  The Bank’s current policy is to originate commercial real estate and multi-family loans as ARM’s that amortize over a 20 to 25 year period and either have a scheduled interest rate reset, or are callable by the Bank after a 5 to 10 year period.

Loans secured by commercial and multi-family real estate are generally larger and involve a greater degree of risk than one-to-four family residential mortgage loans.  Of primary concern in commercial and multi-family real estate lending is the borrower’s creditworthiness and the feasibility and cash flow potential of the project.  Loans secured by income properties are generally larger and involve greater risks than residential mortgage loans because payments on loans secured by income properties are often dependent on successful operation or management of the properties.  As a result, repayment of such loans may be subject to a greater extent than residential real estate loans to adverse conditions in the real estate market or the economy.  In order to monitor cash flows on income properties, the Bank requires borrowers and loan guarantors, if any, to provide annual financial statements and rent rolls on multi-family loans.  Similarly, on commercial office buildings and hotel properties, the Bank requires minimum debt service coverage and obtains operating statements of such properties. At December 31, 2006, the five largest commercial real estate and multi-family loans totaled $24 million with no single loan larger than $6 million.  At December 31, 2006, all such loans were current and the properties securing such loans are in the Bank’s market area.

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

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

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

In connection with consumer loan applications, the Bank verifies the borrower’s income and reviews a credit bureau report.  In addition, the relationship of the loan to the value of the collateral is considered.  All automobile loan applications are reviewed and approved by the Bank.  The Bank reviews the credit report of the borrower as well as the value of the vehicle which secures the loan.

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

The Bank offers second mortgage loans on one-to-four family residences.  At December 31, 2006, second mortgage and home equity loans totaled $47 million, or 10% of the Bank’s total loan portfolio.  Second mortgage loans are offered as fixed-rate loans for a term not to exceed 15 years.  Such loans are only made on owner-occupied one-to-four family residences and are subject to a 90% combined loan to value ratio.  The underwriting standards for second mortgage loans are the same as the Bank’s standards applicable to one-to-four family residential loans.

Business Lending.  The Bank makes commercial business loans only on a secured or guaranteed basis.  The terms of these loans generally do not exceed five years. These loans can have floating interest rates which adjust with changes in market interest rates, usually the prime rate, or have a fixed rate related to their term to maturity.  The Bank’s commercial business loans primarily consist of short-term loans for equipment, working capital, business expansion and inventory financing.  The Bank customarily requires a personal guaranty of payment by the principals of any borrowing entity and reviews the financial statements and income tax returns of the guarantors.  At December 31, 2006, the Bank had approximately $40 million outstanding in commercial business loans, which represented approximately 8% of its total loan portfolio. At December 31, 2006, the five largest commercial business loans totaled $14 million with no single loan larger than $4 million.

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

One-to-four family residential mortgage loans are generally underwritten according to FHLMC and FNMA guidelines.  For all loans originated by the Bank, upon receipt of a completed loan application from a prospective borrower, a credit report is ordered, income and certain other information is verified and, if necessary, additional financial information is requested.  An appraisal of the real estate intended to secure the proposed loan is required

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which currently is performed by an independent appraiser designated and approved by the Bank.  The Bank makes construction/permanent loans on individual properties.  Funds advanced during the construction phase are held in a loan-in-process account and disbursed based upon various stages of completion.  An independent appraiser or loan officer determines the stage of completion based upon a physical inspection of the construction and funds are advanced only for work in place.  It is the Bank’s policy to obtain title insurance or a title opinion on all real estate first mortgage loans in excess of $200,000.  Borrowers must also obtain hazard or flood insurance (for loans on property located in a flood zone) prior to closing the loan.  For loans in excess of 80% of the loan to value ratio, borrowers are generally required to advance funds on a monthly basis together with each payment of principal and interest to an escrow account from which the Bank makes disbursements for items such as real estate taxes and hazard insurance premiums. The Bank does not engage in sub-prime or “no-doc” style lending.

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

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

Mortgage-Backed Securities

To supplement lending activities, the Bank invests in residential mortgage-backed securities.  Although the majority of such securities are held to maturity, they can serve as collateral for borrowings and, through repayments, as a source of liquidity.

The mortgage-backed securities portfolio as of December 31, 2006, consisted of pass-through certificates issued by the Federal Home Loan Mortgage Corporation (“FHLMC”) ($10.2 million), Government National Mortgage Association (“GNMA”), ($2.3 million) Federal National Mortgage Association (“FNMA”) ($13.4 million), and real estate mortgage investment conduits formed by these same agencies (“REMICs”) ($56.1 million).

At December 31, 2006, the amortized cost of mortgage-backed securities totaled $83.9 million, or 13% of total assets, and the market value of such securities totaled approximately $82.1 million.

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

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

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

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

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

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Non-Performing and Problem Assets

Loan Collection.  When a borrower fails to make a required payment on a loan, the Bank takes a number of steps to have the borrower cure the delinquency and restore the loan to current status.  In the case of residential mortgage loans and consumer loans, the Bank generally sends the borrower a written notice of non-payment after the loan is 15 days past due.  In the event payment is not then received, additional letters and phone calls are made.  If the loan is still not brought current and it becomes necessary for the Bank to take legal action, which typically occurs after a loan is delinquent more than 90 days, the Bank will commence foreclosure proceedings against any real property that secures the loan and attempt to repossess any personal property that secures a consumer loan.  If a foreclosure action is instituted and the loan is not brought current, paid in full, or refinanced before the foreclosure sale, the real property securing the loan generally is obtained by the Bank at foreclosure.

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

On mortgage loans or loan participations purchased by the Bank, the Bank receives monthly reports from its loan servicers with which it monitors the loan portfolio.  Based upon servicing agreements with the servicers of the loan, the Bank relies upon the servicer to contact delinquent borrowers, collect delinquent amounts and to initiate foreclosure proceedings, when necessary, all in accordance with applicable laws, regulations and the terms of the servicing agreements between the Bank and its servicing agents. At December 31, 2006 the Bank used third-party servicers to service $24.9 million in mortgage loans, including one servicer that serviced $17 million. Please see Item 3. Legal Proceedings for additional information regarding this servicer.  All of the Bank’s third-party mortgage loan servicers are regulated financial institutions or are approved by either HUD, FNMA, or FHLMC to service loans on their behalf.

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

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

Non-performing assets

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

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At December 31, 2006, the Bank had no foreign loans and no loan concentrations exceeding 10% of total loans not disclosed in above the table. “Loan concentrations” are considered to exist when there are amounts loaned to a multiple number of borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions.  Loans recorded in the category of other real estate owned are valued at the lower of book value of loans outstanding or fair market value less cost of disposal.

At December 31, 2006, the Bank was not aware of any potential problem loans that are not otherwise included in the foregoing table.  “Potential problem loans” are loans where information about possible credit problems of borrowers has caused management to have serious doubts about the borrowers’ ability to comply with present repayment terms.

Classified Assets.  OTS regulations provide for a classification system for problem assets of insured institutions which covers all problem assets.  Under this classification system, problem assets of insured institutions are classified as “substandard,” “doubtful,” or “loss.”  An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any.  “Substandard” assets include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected.  Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions and values, “highly questionable and improbable.”  Assets classified as “loss” are those considered “uncollectible” and of such little value that the establishment of a specific loss reserve is warranted.  Assets designated “special mention” by management are assets included on the Bank’s internal watchlist because of potential weakness but that do not currently warrant classification in one of the aforementioned categories.

When an insured institution classifies problem assets as either substandard or doubtful, it may establish general allowances for loan losses in an amount deemed prudent by management.  General allowances for OTS purposes represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets.  However, when an insured institution classifies all or a portion of a problem asset as “loss,” it is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge off such amount.  An institution’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the OTS, which may order the establishment of additional general or specific loss allowances.  A portion of general loss allowances established to cover possible losses related to assets classified as substandard or doubtful may be included in determining an institution’s regulatory capital, while specific valuation allowances for loan losses generally do not qualify as regulatory capital.

The following table provides further information in regard to the Bank’s classified assets as of December 31, 2006.

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

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

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recorded at the lower of fair value, minus estimated cost to sell, or cost.  If the property subsequently decreases in estimated value from the initial recorded amount, the Bank will provide a valuation allowance, through a charge to earnings, if the decrease is judged by management to be temporary. If the decrease is judged to be permanent, the Bank will reduce the recorded amount, through a charge to earnings, to the new estimated value.

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

In establishing reserves, a specific reserve is established for loans which because of past payment history, a review of recent financial information, or other facts regarding the credit, pose a higher than normal amount of perceived risk of collection. In addition, a reserve is assigned based upon qualitative and quantitative risk factors which are inherent in segments of the loan portfolio.

Although the allowance has been allocated to determine the appropriateness of the reserve, the total allowance is available to absorb any and all losses from any segment of the loan portfolio. At December 31, 2006, management believes that the allowance for loan loss is at an acceptable level.

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

	For the Years Ended December 31,
	2006			2005			2004			2003			2002
	(Dollars in thousands)
Balance at beginning of period	$	2,641		$	2,307		$	2,111		$	2,047		$	1,972
Provision for loan losses	150			540			600			330			988
Charge-offs:
One-to-four family	—			—			—			(16		)	(13		)
Commercial and multi-family real estate loans	—			—			(112		)	—			—
Consumer and other loans	(55		)	(122		)	(186		)	(219		)	(303		)
Commercial loans and leases	(1		)	(286		)	(161		)	(322		)	(625		)
Recoveries:
One-to-four family	—			—			—			—			3
Consumer and other loans	65			39			55			36			25
Commercial loans and leases	65			163			—			255			—
Balance at end of year	$	2,865		$	2,641		$	2,307		$	2,111		$	2,047
Ratio of net charge-offs during the period to average loans outstanding during the period	(0.01		)%	0.04		%	0.09		%	0.07		%	0.25		%
Ratio of allowance for loan losses to non-performing loans at the end of the period	135.8		%	166.3		%	240.3		%	89.9		%	53.6		%
Ratio of allowance for loan losses to loans receivable at the end of the period	0.59		%	0.54		%	0.52		%	0.52		%	0.55		%
Ratio of allowance for loan losses and foreclosed real estate to total non-performing assets at the end of the period	135.8		%	115.4		%	139.0		%	65.6		%	52.4		%

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

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

Investment Activities

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

The following table sets forth certain information regarding the amortized cost and fair values of the Bank’s investments at the dates indicated.

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

Investment Portfolio Maturities

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

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and maturities of the Bank’s investment securities portfolio, exclusive of interest-earning deposits, at December 31, 2006.  Yields on tax exempt obligations have been computed on a tax equivalent basis.

	One Year or Less				One to Five Years				Five to Ten Years				More than Ten Years				Total Investment Securities(1)
	Amortized Cost		Average Yield		Amortized Cost		Average Yield		Amortized Cost		Average Yield		Amortized Cost		Average Yield		Amortized Cost		Average Yield		Fair Value
	(Dollars in thousands)
Equities	$	150	—	%	$	—	—	%	$	—	—	%	$	—	—	%	$	150	—	%	$	202
U.S. government agency	3,000		4.27		2,990		3.40		—		—		—		—		5,990		3.83		5,911
Municipal obligations	—		—		1,923		5.59		12,008		5.11		11,152		5.61		25,083		5.37		25,110
Corporate obligations	3,003		3.91		1,000		4.64		—		—		—		—		4,003		4.09		3,982
Total	$	6,153	3.99	%	$	5,913	4.32	%	$	12,008	5.11	%	$	11,152	5.61	%	$	35,226	4.94	%	$	35,205

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

Sources of Funds

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

Deposits. The Bank offers a variety of deposit accounts having a range of interest rates and terms. The Bank’s deposits consist of regular savings, non-interest bearing checking, NOW checking, money market, and certificate accounts. Of the deposit accounts, $32 million or 6.6% consist of IRA, Keogh or SEP retirement accounts at December 31, 2006.

The flow of deposits is influenced significantly by general economic conditions, changes in money market and prevailing interest rates and competition. The Bank’s deposits are primarily obtained from areas surrounding its offices, and the Bank relies primarily on customer service and long-standing relationships with customers to attract and retain these deposits. The Bank has maintained a high level of core deposits consisting of regular savings, money market, non-interest-bearing checking, and NOW checking, which has contributed to a low cost-of-funds. At December 31, 2006, core deposits amounted to 59% of total deposits.

During 2005, the Bank introduced a floating-rate certificate of deposit, which has an interest rate that adjusts according to adjustments in the prime rate. At December 31, 2006 there were $10.2 million of these floating rate certificates of deposit. In 2006, the Bank obtained $11.7 million in broker-originated deposits.

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The following table sets forth the distribution of the Bank’s deposit accounts at the dates indicated and the weighted average nominal interest rates on each category of deposits presented. The Bank does not have significant amount of deposits from outside its market area. Management does not believe that the use of year end balances instead of average balances resulted in any material difference in the information presented.

	At December 31,
	2006						2005						2004
	Amount		Percent of Total Deposits		Weighted Average Nominal Rate		Amount		Percent of Total Deposits		Weighted Average Nominal Rate		Amount		Percent of Total Deposits		Weighted Average Nominal Rate
	(Dollars in thousands)
Transaction Accounts
Interest-bearing checking accounts	$	51,272	10.72		0.48	%	$	52,319	11.12		0.47	%	$	54,887	11.93		0.47	%
Money market accounts	62,914		13.16		3.21		79,666		16.93		2.72		42,496		9.24		1.00
Non-interest-bearing checking accounts	36,991		7.74		0.00		37,138		7.89		0.00		32,636		7.10		0.00
Total transaction accounts	151,177		31.62				169,123		35.94				130,019		28.27
Passbook accounts	131,359		27.48		2.21		151,725		32.25		1.11		182,945		39.78		0.98
Certificates of deposit	195,551		40.90		4.35		149,673		31.81		3.29		146,939		31.95		2.42
Total deposits	$	478,087	100.00	%	2.86	%	$	470,521	100.00	%	2.39	%	$	459,903	100.00	%	1.31	%

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

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

Borrowings

Deposits are the primary source of funds of the Bank’s lending and investment activities and for its general business purposes. The Bank may obtain advances from the FHLB of Pittsburgh to supplement its supply of lendable funds. Advances from the FHLB of Pittsburgh are typically secured by a pledge of the Bank’s stock in the FHLB of Pittsburgh and a portion of the Bank’s first mortgage loans and certain other assets. The Bank, if the need arises, may also access the Federal Reserve Bank discount window. The following tables set forth the maximum month-end balance, period ending balance, and weighted average balance of outstanding FHLB advances at the dates and for the periods indicated, together with the applicable weighted average interest rates.

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

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

Subsidiary Activity

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

Personnel

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

REGULATION

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

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Company Regulation

General. The Company is a unitary savings and loan holding company subject to regulatory oversight by the OTS. As such, the Company is required to register and file reports with the OTS and is subject to regulation and examination by the OTS. In addition, the OTS has enforcement authority over the Company and its non-savings association subsidiaries, should such subsidiaries be formed, which also permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings association. This regulation and oversight is intended primarily for the protection of the depositors of the Bank and not for the benefit of stockholders of the Company. The Company is also required to file certain reports with, and otherwise comply with, the rules and regulations of the OTS and the SEC.

Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 (the “Act”) implemented legislative reforms intended to address corporate and accounting fraud and improve public company reporting. The Securities and Exchange Commission (the “SEC”) has promulgated new regulations pursuant to the Act and may continue to propose additional implementing or clarifying regulations as necessary in furtherance of the Act. The passage of the Act by Congress and the implementation of new regulations by the SEC subject publicly-traded companies to additional and more cumbersome reporting regulations and disclosure. Compliance with the Act and corresponding regulations may increase the Company’s expenses.

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

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

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

Bank Regulation

General. As a federally chartered, FDIC-insured savings association, the Bank is subject to extensive regulation by the OTS and the FDIC. Lending activities and other investments must comply with various federal statutory and regulatory requirements. The Bank is also subject to certain reserve requirements promulgated by the Federal Reserve Board.

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

The Bank must file reports with the OTS and the FDIC concerning its activities and financial condition, in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with or acquisitions of other savings institutions. This regulation and supervision establishes a comprehensive framework of

19

activities in which an institution can engage and is intended primarily for the protection of the FDIC and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such regulations, whether by the OTS, the FDIC or the Congress could have a material adverse impact on the Company, the Bank and their operations. The Company is also required to file certain reports with, and otherwise comply with, the rules and regulations of the OTS and the SEC.

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

Deposit Insurance. The Bank’s deposits are insured to applicable limits by the Federal Deposit Insurance Company. Although the FDIC is authorized to assess premiums under a risk-based system for such deposit insurance, most insured depository institutions have not been required to pay premiums for the last ten years. The Federal Deposit Insurance Reform Act of 2005, which was signed into law on February 15, 2006, has resulted in significant changes to the federal deposit insurance program: (i) effective March 31, 2006, the Bank Insurance Fund (which formerly insured the deposits of banks) and the Savings Association Insurance Fund (which formerly insured the deposits of savings associations like the Bank) were merged into a combined fund, called the Deposit Insurance Fund; (ii) the current $100 thousand deposit insurance coverage will be indexed for inflation (with adjustments every five years, commencing January 1, 2011); and (iii) deposit insurance coverage for retirement accounts has been increased to $250 thousand per participant subject to adjustment for inflation. The FDIC has been given greater latitude in setting the assessment rates for insured depository institutions, which could be used to impose minimum assessments.

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

Pursuant to the Reform Act, the FDIC has determined to maintain the designated reserve ratio at its current 1.25%. The FDIC has also adopted a new risk-based premium system that provides for quarterly assessments based on an insured institution’s ranking in on of four risk categories based on their examination ratings and capital ratios. Beginning in 2007, well capitalized institutions with the CAMEL ratings of 1 or 2 will be grouped in Risk Category I and will be assessed for deposit insurance at an annual rate of between five and seven basis points with the assessment rate for an individual institution to be determined according to a formula based on a weighted average of the institution’s individual CAMEL component ratings plus either five financial ratios or the average ratings of it s long term debt. Institutions in Risk Categories II, III, and IV will be assessed at annual rates of 10, 28 and 43 basis points respectively.

In addition, all FDIC-insured institutions are required to pay assessments to the FDIC to fund interest payments on bonds issued by the Financing Corporation (“FICO”), an agency of the Federal government established to recapitalize the predecessor to the SAIF. The FICO assessment rates which are determined quarterly averaged 0.128% of insured deposits in fiscal 2006.  These assessments will continue until the FICO bonds mature in 2017.

Regulatory Capital Requirements. OTS capital regulations require savings institutions to meet three

20

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

At December 31, 2006, the Bank was in compliance with all of its regulatory capital requirements.

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

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

Qualified Thrift Lender Test. The Home Owners’ Loan Act (“HOLA”), as amended, requires savings institutions to meet a QTL test. If the Bank maintains an appropriate level of Qualified Thrift Investments (primarily residential mortgages and related investments, including certain mortgage-backed securities) (“QTIs”) and otherwise qualifies as a QTL, it will continue to enjoy full borrowing privileges from the FHLB of Pittsburgh. The required percentage of QTIs is 65% of portfolio assets (defined as all assets minus intangible assets, property used by the institution in conducting its business and liquid assets equal to 10% of total assets). Certain assets are subject to a percentage limitation of 20% of portfolio assets. In addition, savings associations may include shares of stock of the FHLBs, FNMA and FHLMC as qualifying QTIs. The method for measuring compliance with the QTL test requires an institution to be in compliance nine out of every 12 months. As of December 31, 2006, the Bank was in compliance with its QTL requirement with 73% of its assets invested in QTIs.

Federal Home Loan Bank System. The Bank is a member of the FHLB of Pittsburgh, one of 12 regional FHLBs that administer the home financing credit function of savings associations. Each FHLB serves as a reserve or central bank for its members within its assigned region. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It makes loans to members (i.e., advances) in accordance with policies and procedures established by the Board of Directors of the FHLB.

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

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

Savings associations have authority to borrow from the Federal Reserve Bank “discount window,” but

21

Federal Reserve policy generally requires savings associations to exhaust all other sources before borrowing from the Federal Reserve System. The Bank had no such borrowings at December 31, 2006.

Item 1A.Risk Factors

If the allowance for loan losses is inadequate, earnings will be reduced as the reserve is replenished. The establishment of the allowance for loan losses is based on a high degree of judgment and estimation. At December 31, 2006 the allowance was $2.9 million or 0.59% of the loans receivable balance of $487 million. Several factors could render the reserve inadequate, possibly over a short period of time: a single large loss, a severe and sustained economic downturn in the markets in which the Company’s loans are located, and a general decline in real estate values. These factors could produce charges to the allowance in excess of the amount provided. Replenishing the reserve would reduce earnings.

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

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

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

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

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

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Insider control and provisions in the Company’s charter and by-laws can be a deterrent to a sale of the Company. As of December 31, 2006 insiders control approximately 22% of the voting power of the Company’s stockholders. In addition, there are provisions in the Company’s charter and by-laws that can have the effect of making it difficult for a dissident shareholder or other party to force a sale of the Company.

Item 1B.Unresolved Staff Comments

None.

Item 2.Properties

The Company is located and conducts its business at 3 Penns Trail, Newtown, Pennsylvania. At December 31, 2006, the Bank operated from its administrative offices and fifteen branch offices located in Philadelphia and Bucks Counties, Pennsylvania and Mercer County, New Jersey. The Bank also owns two parcels of land and a building behind its Doylestown branch office. The parcel with the building is available to be leased to a third-party and the other parcel is used as a parking lot for employees of the Bank and tenants. The net book value of the two lots was $100,000. In addition, a subsidiary of the Company, Penns Trail Development Corporation, owns investment property with a book value of $744,000.

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

Location	Leased or Owned	Location	Leased or Owned
ADMINISTRATIVE OFFICE Newtown Office 3 Penns Trail Newtown, PA 18940	Owned
DEPOSIT OPERATIONS 828C Newtown-Yardley Road Suite 301B Newtown, PA 18940	Leased	PROCESSING OPERATIONS Operations Center 62 Walker Lane Newtown, PA 18940(1)	Owned
BRANCH AND LOAN OFFICES Frankford Office 4625 Frankford Avenue Philadelphia, PA 19124	Leased	Newtown Office 950 Newtown Yardley Road Newtown, PA 18940	Leased
Ewing Office 2075 Pennington Road Ewing, NJ 08618	Owned	Mayfair Office Roosevelt Blvd. at Unruh Philadelphia, PA 19149	Owned
Hamilton Office 1850 Route 33 Hamilton Square, NJ 08690	Owned	Doylestown Office 60 North Main Street Doylestown, PA 18901	Owned
Fishtown Office York & Memphis Streets Philadelphia, PA 19125	Owned	Feasterville Office Buck Hotel Complex Feasterville, PA 19053	Leased
Cross Keys Office 834 North Easton Highway Doylestown, PA 18901	Owned	Quakerbridge Office 590 Lawrence Square Blvd. Lawrenceville, NJ 08648	Leased
Bridesburg Office Orthodox & Almond Streets Philadelphia, PA 19137	Owned	Woodhaven Office 4014 Woodhaven Road Philadelphia, PA 19154	Leased

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New Britain Office 600 Town Center New Britain, PA 18901	Leased	Northern Liberties Office 905 North 2nd Street Philadelphia, PA 19123	Leased
Girard Office 136 West Girard Avenue Philadelphia, PA 19123	Leased

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Item 3.Legal Proceedings

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

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

Item 4.Submission of Matters to a Vote of Security Holders

None.

PART II

Item 5.Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities

Information relating to the market for Registrant’s common equity and related stockholder matters appears under the section captioned “Stock Market Information” in the Registrant’s 2006 Annual Report to Stockholders and is incorporated herein by reference.

The following table provides information on repurchases by the Company of its common stock in each month for the three months ended December 31, 2006:

Month	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plan or Program	Maximum Number of Shares that may yet be Purchased Under the Plans or Programs
October 1, 2006 - October 31, 2006	—	—		—	75,773
November 1, 2006 - November 30, 2006	10,500	$	31.27	—	75,773
December 1, 2006 - December 31, 2006	—	$	—	—	75,773

Item 6.Selected Financial Data

The above-captioned information appears under the section captioned “Selected Financial and Other Data” in the Registrant’s 2006 Annual Report to Stockholders and is incorporated herein by reference.

Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations

The information under the section captioned “Management’s Discussion and Analysis of Financial

25

Condition and Results of Operations” in the Registrant’s 2006 Annual Report to Stockholders is incorporated herein by reference.

Item 7A.Quantitative and Qualitative Disclosures about Market Risk

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

Item 8.Financial Statements and Supplementary Data

The Consolidated Financial Statements of TF Financial Corporation and its subsidiaries included in the Registrant’s 2006 Annual Report to Stockholders are incorporated herein by reference.

Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

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Item 9A.Controls and Procedures

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

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

Item 9B.Other Information

None.

PART III

Item 10.Directors, Executive Officers and Corporate Governance

The information contained under the sections captioned “Proposal 1 - Election of Directors — General Information and Nominees” and “— Biographical Information” and “Additional Information About Directors and Executive Officers — Section 16(a) Beneficial Ownership Reporting Compliance” in the Registrant’s definitive proxy statement for the Registrant’s 2007 Annual Meeting of Stockholders (the “Proxy Statement”) is incorporated herein by reference.

The Company has adopted a Code of Ethics that applies to its principal executive officer, principal financial officer, principal accounting officer or persons performing such functions. The Code of Ethics can be obtained without charge by sending a written request to the Corporate Secretary, TF Financial Corporation, 3 Penns Trail, Newtown, Pennsylvania 18940.

Item 11.Executive Compensation

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

Item 12.Security Ownership of Certain Beneficial Owners and Management

(a)           Security Ownership of Certain Beneficial Owners

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

(b)           Security Ownership of Management

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

(c)Management of the Company knows of no arrangements, including any pledge by any person of securities of the Company, the operation of which may at a subsequent date result in a change in control of the registrant.

(d)           Securities Authorized for Issuance Under Equity Compensation Plans

Set forth below is information as of December 31, 2006 with respect to compensation plans under which equity securities of the Registrant are authorized for issuance.

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EQUITY COMPENSATION PLAN INFORMATION

	(a) Number of securities to be issued upon exercise of outstanding options, warrants and rights	(b) Weighted-average exercise price of outstanding options, warrants and rights		(c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by shareholders(1)	365,734	$	23.62	44,617
Equity compensation plans not approved by shareholders	—	—		—
TOTAL	365,734	$	23.62	44,617

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

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

Item 13.Certain Relationships and Related Transactions and Director Independence

The information relating to certain relationships and related transactions is incorporated herein by reference to the information contained under the section captioned “Additional Information About Directors and Executive Officers — Certain Relationships and Related Transactions and Director Independence” in the Registrant’s Proxy Statement.

Item 14.Principal Accounting Fees and Services

The information relating to this item is incorporated herein by reference to the information contained under the section captioned “Principal Accounting Firm Fees” in the Registrant’s Proxy Statement.

PART IV

Item 15.Exhibits and Financial Statements

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

(1)           The following financial statements and the report of the independent auditor of the Company included in the Company’s 2006 Annual Report to Stockholders are incorporated herein by reference.

Report of Independent Registered Public Accounting Firm

Consolidated Statements of Financial Position as of December 31, 2006 and 2005

Consolidated Statements of Income For the Years Ended December 31, 2006, 2005 and 2004

Consolidated Statement of Changes in Stockholders’ Equity and Comprehensive Income for the Years Ended December 31, 2006, 2005 and 2004

Consolidated Statements of Cash Flows for the Years Ended December 31, 2006, 2005 and 2004

Notes to Consolidated Financial Statements

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(2)           All schedules are omitted because they are not required or applicable, or the required information is shown in the consolidated financial statements or the notes thereto.

(3)           Exhibits

 (a)          The following exhibits are filed as part of this report.

3.1	Certificate of Incorporation of TF Financial Corporation (1)
3.2	Bylaws of TF Financial Corporation (1)
4.0	Stock Certificate of TF Financial Corporation (1)
10.1	Third Federal Savings and Loan Association Management Stock Bonus Plan (1)
10.2	Third Federal Savings Bank Directors Consultation and Retirement Plan (2)
10.3	Severance Agreement with Kent C. Lufkin (3)
10.4	Severance Agreement with Floyd P. Haggar (3)
10.5	Severance Agreement with Dennis R. Stewart (4)
10.6	TF Financial Corporation 1997 Stock Option Plan (5)
10.7	Severance Agreement with Robert N. Dusek (6)
10.8	TF Financial Corporation 1996 Directors Stock Option Plan (7)
10.9	Retirement and Non-Competition Agreement with John R. Stranford (8)
10.10	Employment Agreement with John R. Stranford (8)
10.11	TF Financial Corporation Incentive Compensation Plan (9)
10.12	TF Financial Corporation 2005 Stock-Based Incentive Plan (10)
10.13	Severance Agreement with Elizabeth Kaspern
13.0	2006 Annual Report to Stockholders
21.0	Subsidiary Information
23.0	Consent of Independent Registered Public Accounting Firm
31.0	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.0	Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(1)Incorporated herein by reference to the Exhibits to Form S-1, Registration Statement, File No. 33-76960.

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

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

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

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

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

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

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

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

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

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

	TF FINANCIAL CORPORATION
Dated: March 28, 2007	By:	/s/ Kent C. Lufkin
		Kent C. Lufkin
		President, Chief Executive Officer
		(Duly Authorized Representative)

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated as of Dated: March 28, 2007.

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

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EX-10.13

Exhibit 10.13

CHANGE IN CONTROL SEVERANCE AGREEMENT

THIS CHANGE IN CONTROL SEVERANCE AGREEMENT (“Agreement”) entered into this 1st day of January, 2007 (“Effective Date”), by and between Third Federal Bank (the “Bank”) and Elizabeth Kaspern (the “Employee”).

WHEREAS, the Employee is currently employed by the Bank as Senior Vice President and is experienced in all phases of the business of the Bank; and

WHEREAS, the parties desire by this writing to set forth the rights and responsibilities of the Bank and Employee if the Bank should undergo a change in control (as defined hereinafter in the Agreement) after the Effective Date.

NOW, THEREFORE, it is AGREED as follows:

1.             Employment.  The Employee is employed in the capacity as the Senior Vice President.  The Employee shall render such administrative and management services to the Bank and TF Financial Corporation (“Parent”) as are currently rendered and as are customarily performed by persons situated in a similar executive capacity.  The Employee’s employment shall be for no definite period of time, and the Employee or the Bank may terminate such employment relationship at any time for any reason or no reason.  The employment at-will relationship remains in full force and effect regardless of any statements to the contrary made by company personnel or set forth in any documents other than those explicitly made to the contrary and signed by the President or the Chairman of the Bank. The Employee’s other duties shall be such as the President or the Board of Directors for the Bank (the “Board of Directors” or “Board”) may from time to time reasonably direct, including normal duties as an officer of the Bank.

2.             Term of Agreement.  The term of this Agreement shall be for the period commencing on the Effective Date and ending twenty-four (24) months thereafter.   Additionally, on, or before, each annual anniversary date from the Effective Date, the term of this Agreement may be extended for an additional one year period beyond the then effective expiration date upon a determination and resolution of the Board of Directors that the performance of the Employee has met the requirements and standards of the Board, and that the term of such Agreement shall be extended.  This Agreement shall be deemed terminated upon the Employee’s termination of employment with the Bank, absent a Change in Control coincident with or prior to such termination of employment.

3.Termination of Employment in Connection with or Subsequent to a Change in Control.

(a)           Notwithstanding any provision herein to the contrary, in the event of the involuntary termination of Employee’s employment under this Agreement, absent Just Cause, in connection with, or within one year following, any Change in Control of the Bank or Parent, Employee shall be paid an amount equal to two (2) times the prior (3) calendar year (or lesser period if not employed for such 3 year period) average annual compensation paid to the Employee by the Bank (whether said amounts were received or deferred by the Employee). In addition, Employee shall be reimbursed for the costs associated with maintaining coverage under the Bank’s medical and dental insurance reimbursement plans similar to that in effect on the date of termination of employment, or similar plans provided for by the Bank or its successor entity, for a period of one year thereafter.  Said sum shall be paid in one (1) lump sum on, or before the date of such date of termination of employment, and such payments shall be in lieu of any other future payments which the Employee would be otherwise entitled to receive. Notwithstanding the forgoing, all sums payable hereunder shall be reduced in such manner and to such extent so that no such payments made hereunder when aggregated with all other payments to be made to the Employee by the Bank or the Parent shall be deemed an “excess parachute payment” in accordance with Section 280G of the Internal Revenue Codes of 1986, as amended (the “Code”) and be subject to the excise tax provided at Section 4999(a) of the Code. The term

1

“Change in Control” shall mean:  (i) the sale of all, or a material portion, of the assets of the Bank or the  Parent; (ii) the merger or recapitalization of the Bank or the Parent whereby the Bank or the Parent is not the surviving  entity; (iii) a change in control of the Bank or the Parent, as otherwise defined or determined by the Office of Thrift Supervision or regulations promulgated by it; or (iv) the acquisition, directly or indirectly, of the beneficial ownership (within the meaning of that term as it is used in Section 13(d) of the Securities Exchange Act of 1934 and the rules and regulations promulgated thereunder) of twenty-five percent (25%) or more of the outstanding voting securities of the Bank or the Parent by any person, trust, entity or group.  The term “person” means an individual other than the Employee, or a corporation, partnership, trust, association, joint venture, pool, syndicate, sole proprietorship, unincorporated organization or any other form of entity not specifically listed herein.

(b)           Notwithstanding any other provision of this Agreement to the contrary except as provided at Sections 4(b), 4(c), 4(d), 4(e) and 5, Employee may voluntarily terminate his or her employment under this Agreement within one year following a Change in Control of the Bank or Parent, and Employee shall thereupon be entitled to receive the payment and benefits described in Section 3(a) of this Agreement, upon the occurrence, or within ninety (90) days thereafter, of any of the following events, which have not been consented to in advance by the Employee in writing: (i) if Employee would be required to move his personal residence or perform his principal executive functions more than fifty (50) miles from the Employee’s primary office as of the signing of this Agreement; (ii) if in the organizational structure of the Bank or Parent, Employee would be required to report to a person or persons deemed to be at a management level below the management level to which Employee was reporting to prior to the Change in Control; (iii) if the Bank or Parent should fail to maintain the Employee’s base compensation in effect as of the date of the Change in Control and existing employee benefits plans, including material fringe benefit, stock option and retirement plans, except to the extent that such reduction in benefit programs is part of an overall adjustment in benefits for all employees of the Bank or Parent and does not disproportionately adversely impact the Employee; (iv) if Employee would be assigned duties and responsibilities other than those normally associated with his position as referenced at Section 1, herein, for a period of more than six months; or (v) if Employee’s responsibilities or authority have in any way been materially diminished or reduced for a period of more than six months.

4.             Other Changes in Employment Status.

(a)           Except as provided for at Section 3, herein, the Board of Directors may terminate the Employee’s employment at any time, but any termination by the Board of Directors other than termination for Just Cause, shall not prejudice the Employee’s right to compensation or other benefits under the Agreement.  This Agreement shall not be deemed to give the Employee any right to be retained in the employment or service of the Bank, or to interfere with the right of the Bank to terminate the employment of the Employee at any time.  The Employee shall have no right to receive compensation or other benefits for any period after termination of employment with or without Just Cause, except as detailed herein.  Termination for “Just Cause” shall include termination because of the Employee’s personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or final cease-and-desist order, or material breach of any provision of the Agreement.

(b)           If the Employee is removed and/or permanently prohibited from participating in the conduct of the Bank’s affairs by an order issued under Sections 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act (“FDIA”) (12 U.S.C. 1818(e)(4) and (g)(1)), all obligations of the Bank under this Agreement shall terminate, as of the effective date of the order, but the vested rights of the parties shall not be affected.

(c)           If the Bank is in default (as defined in Section 3(x)(1) of FDIA) all obligations under this Agreement shall terminate as of the date of default, but this paragraph shall not affect any vested rights of the contracting parties.

(d)           All obligations under this Agreement shall be terminated, except to the extent determined that continuation of this Agreement is necessary for the continued operation of the Bank: (i) by the Director of the Office of Thrift Supervision (“Director of OTS”), or his or her designee, at the time that the Federal Deposit Insurance

2

Corporation (“FDIC”) enters into an agreement to provide assistance to or on behalf of the Bank under the authority contained in Section 13(c) of FDIA; or (ii) by the Director of the OTS, or his or her designee, at the time that the Director of the OTS, or his or her designee approves a supervisory merger to resolve problems related to operation of the Bank or when the Bank is determined by the Director of the OTS to be in an unsafe or unsound condition.  Any rights of the parties that have already vested, however, shall not be affected by such action.

(e)           Notwithstanding anything herein to the contrary, any payments made to the Employee pursuant to the Agreement, or otherwise, shall be subject to and conditioned upon compliance with 12 USC §1828(k) and any regulations promulgated thereunder.

5.             Suspension of Employment .  If the Employee is suspended and/or temporarily prohibited from participating in the conduct of the Bank’s affairs by a notice served under Section 8(e)(3) or (g)(1) of the FDIA (12 U.S.C. 1818(e)(3) and (g)(1)), the Bank’s obligations under the Agreement shall be suspended as of the date of service, unless stayed by appropriate proceedings.  If the charges in the notice are dismissed, the Bank shall, (i) pay the Employee all or part of the compensation withheld while its contract obligations were suspended and (ii) reinstate any of its obligations which were suspended.

6.             Successors and Assigns.

(a)           This Agreement shall inure to the benefit of and be binding upon any corporate or other successor of the Bank which shall acquire, directly or indirectly, by merger, consolidation, purchase or otherwise, all or substantially all of the assets or stock of the Bank.

(b)           The Employee shall be precluded from assigning or delegating his rights or duties hereunder without first obtaining the written consent of the Bank.

7.             Amendments.       No amendments or additions to this Agreement shall be binding upon the parties hereto unless made in writing and signed by both parties, except as herein otherwise specifically provided.

8.             Applicable Law.   This agreement shall be governed by all respects whether as to validity, construction, capacity, performance or otherwise, by the laws of the Commonwealth of Pennsylvania, except to the extent that Federal law shall be deemed to apply.

9.             Severability.          The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof.

10.           Arbitration.  Any controversy or claim arising out of or relating to this Agreement, or the breach thereof, shall be settled by arbitration in accordance with the rules then in effect of the district office of the American Arbitration Association (“AAA”) nearest to the home office of the Bank, and judgment upon the award rendered may be entered in any court having jurisdiction thereof, except to the extent that the parties may otherwise reach a mutual settlement of such issue.  The Bank shall incur the cost of all fees and expenses associated with filing a request for arbitration with the AAA, whether such filing is made on behalf of the Bank or the Employee, and the costs and  administrative fees associated with employing the arbitrator and related administrative expenses assessed by the AAA.  Each party shall be responsible for any fees incurred on its own behalf with respect to other expenses, including attorneys’ fees, arising from such dispute, proceedings or actions.

11.           Confidentiality.

(a)           Employee agrees that, at all times hereafter, he or she will keep all confidential and proprietary business and marketing strategies of Bank and any and all other information which he or she learned regarding the Bank during the course of his or her employment by Bank, in strictest confidence and will not disclose any part or aspect thereof to anyone for any reason unless required by law to do so.

3

(b)           All marketing and business materials, existing or prospective customer lists or statements, seminar materials, drawings, designs, books, cards, records, accounts, audio visual reports, slides, files, notes, memoranda, and other papers, and any software, computer programs, or data base information or any other information obtained from Bank or connected with or arising from any affairs of Bank or his or her employment hereunder (the “Records”), in the charge or possession or knowledge of Employee shall be and remain the exclusive property of Bank and shall not be used, transferred or disclosed in any way by Employee except in the ordinary performance of Employee’s duties for Bank while an employee of Bank.  Upon the termination of Employee’s employment, any and all Records of whatever kind and in whatever form maintained, as well as all copies and reproductions thereof in the possession or control of Employee shall be turned over and delivered by Employee to Bank without any hesitancy or delay.

12.           Compliance With Section 409A.  Notwithstanding anything herein to the contrary, any payments to be made in accordance with this Agreement shall not be made prior to the date that is 184 calendar days from the date of the Employee’s termination of employment if it is determined by the Bank or the Parent in good faith that such payments to be made to such Employee are subject to the limitations at Section 409A of the Code and regulations promulgated thereunder such that if the payments made in advance of such date would result in the requirement for the Employee to pay additional interest and taxes to be imposed in accordance with Section 409A(a)(1)(B) of the Code.

13.           Entire Agreement.                This Agreement together with any understanding or modifications thereof as agreed to in writing by the parties, shall constitute the entire agreement between the parties hereto.

4

IN WITNESS WHEREOF, the parties have executed this Agreement on the date first hereinabove written.

	THIRD FEDERAL BANK
	By:
	Kent C. Lufkin
ATTEST:
Secretary
WITNESS:
Elizabeth Kaspern, Employee

5

EX-13.0

CONTENTS

CORPORATE PROFILE AND RELATED INFORMATION	1
SELECTED FINANCIAL INFORMATION AND OTHER DATA	3
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS	4
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM	16
FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION	17
CONSOLIDATED STATEMENTS OF INCOME	18
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)	19
CONSOLIDATED STATEMENTS OF CASH FLOWS	20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	22
BOARD OF DIRECTORS AND EXECUTIVE OFFICERS	51

CORPORATE PROFILE AND RELATED INFORMATION

TF Financial Corporation (the “Company”) is the parent company of Third Federal Bank and its subsidiaries Third Delaware Corporation and Teragon Financial Corporation (collectively, “Third Federal” or the “Bank”), TF Investments Corporation, and Penns Trail Development Corporation. At December 31, 2006, total assets were approximately $652.6 million. The Company was formed as a Delaware corporation in March 1994 at the direction of the Bank to acquire all of the capital stock that Third Federal issued upon its conversion from the mutual to stock form of ownership (the “Conversion”) and concurrent $52.9 million initial public offering effective July 13, 1994. At December 31, 2006, total stockholders’ equity was approximately $65.6 million. The Company is a unitary savings and loan holding company which, under existing laws, generally is not restricted in the types of business activities in which it may engage, provided that Third Federal retains a specified amount of its assets in housing-related investments. Third Federal is a federally chartered stock savings bank headquartered in Newtown, Pennsylvania, which was originally chartered in 1921 under the name “Polish American Savings Building and Loan Association.” Deposits of Third Federal have been federally insured since 1935 and are currently insured up to the maximum amount allowable by the Federal Deposit Insurance Corporation (the “FDIC”). Third Federal is a community-oriented institution offering a variety of financial services to meet the needs of the communities that it serves. As of December 31, 2006, Third Federal operated branch offices in Bucks and Philadelphia counties, Pennsylvania and Mercer County, New Jersey. Third Federal attracts deposits (approximately $478.1 million at December 31, 2006) from the general public and uses such deposits, together with borrowings mainly from the Federal Home Loan Bank of Pittsburgh (approximately $101.7 million at December 31, 2006) and other funds, to originate loans secured by first mortgages and junior liens on owner-occupied, one-to-four family residences, and to originate loans secured by commercial real estate, including construction loans.

Stock Market Information

Since its issuance in July 1994, the Company’s common stock has been traded on the Nasdaq National Market. The daily stock quotation for the Company is listed in the Nasdaq National Market published in The Wall Street Journal, The Philadelphia Inquirer, and other leading newspapers under the trading symbol of “THRD.” The number of shareholders of record of common stock as of March 7, 2007, was approximately 500. This does not reflect the number of persons or entities who held stock in nominee or “street” name through various brokerage firms.

Dividend Policy

The Company’s ability to pay dividends to stockholders is dependent in part upon the dividends it receives from Third Federal. Among other limitations, Third Federal may not declare or pay a cash dividend on any of its stock if the effect thereof would cause Third Federal’s regulatory capital to be reduced below (1) the amount required for the liquidation account established in connection with Third Federal’s conversion from mutual to stock form, or (2) the regulatory capital requirements imposed by the Office of Thrift Supervision (“OTS”). It is the Company’s policy to pay dividends when it is deemed prudent to do so. The Board of Directors will consider the payment of a dividend on a quarterly basis, after giving consideration to the level of profits for the previous quarter and other relevant information.

1

Stock Price and Dividend History

	Quoted market price				Dividend paid
Quarter ended	High		Low		per share
December 31, 2006	$	32.00	$	30.25		$	0.19
September 30, 2006	$	33.00	$	27.00		$	0.19
June 30, 2006	$	30.86	$	28.40		$	0.19
March 31, 2006	$	30.99	$	27.90		$	0.19
December 31, 2005	$	29.67	$	27.50		$	0.18
September 30, 2005	$	28.97	$	27.25		$	0.18
June 30, 2005	$	29.64	$	26.75		$	0.18
March 31, 2005	$	32.09	$	28.71		$	0.18

Stock Performance Graph

Set forth below is a performance graph for the Common Stock for the period from December 31, 2001 through December 31, 2006. The performance graph compares the cumulative total stockholder return on the Common Stock with (a) the cumulative total stockholder return on stocks included in the Nasdaq U.S. Stock Market Index, (b) the cumulative total stockholder return on stocks included in the SNL Nasdaq Thrift Index and (c) the cumulative total stockholder return on stocks included in the SNL $500 million-$1 billion Thrift Index. The Nasdaq U.S. Stock Market Index was prepared by the Center for Research in Security Prices (CRSP) at the University of Chicago, and the SNL indices were prepared by SNL Securities, LC, Charlottesville, Virginia. The SNL $500 million-$1 billion Thrift and Nasdaq Indices are included in the performance graph because these indices track the performance of thrift institutions similar to the Company. Comparison with the Nasdaq U. S. Stock Market Index and the thrift indices assumes the investment of $100 as of December 31, 2001. The cumulative total return for each index and for the Company is computed with the reinvestment of dividends that were paid during the period.

	Period ending
	12/31/01			12/31/02			12/31/03			12/31/04			12/31/05			12/31/06
Nasdaq U. S. Market Index		$	100		$	69		$	103		$	113		$	115		$	126
SNL OTC Thrift Index		100			128			193			217			217			258
SNL $.5B-$1B Thrift Index		100			140			199			221			210			257
TF Financial Corporation		100			120			170			163			149			166

There can be no assurance that the Company’s future stock performance will be the same or similar to the historical stock performance shown in the graph above. The Company neither makes nor endorses any predictions as to stock performance.

2

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

Financial Position	2006		2005		2004		2003		2002
Total assets	$	652,603	$	660,839	$	628,966	$	606,752	$	721,032
Loans receivable, net, held for investment	483,570		490,891		441,515		404,649		370,092
Loans receivable, available for sale	969		68		680		—		—
Mortgage-backed securities available for sale, at fair value	74,338		83,511		103,610		106,774		115,243
Mortgage-backed securities held to maturity, at amortized cost	7,697		10,177		14,900		23,630		54,592
Investment securities available for sale, at fair value	34,524		30,401		17,625		14,443		27,243
Investment securities held to maturity, at amortized cost	677		4,690		7,027		10,389		14,563
Cash and cash equivalents(1)	12,364		3,821		7,900		8,241		100,580
Deposits	478,087		470,521		459,903		459,343		442,558
Advances from the Federal Home Loan Bank and other borrowings	101,701		121,260		102,747		86,853		207,359
Retained earnings	65,075		61,610		57,428		52,626		59,978
Total stockholders’ equity	65,639		62,648		61,155		55,480		62,840
Book value per common share	$	24.29	$	23.08	$	22.30	$	21.37	$	25.31
Tangible book value per common share(3)	$	22.68	$	21.46	$	20.57	$	19.56	$	23.34

At or for the year ended December 31,

Summary of Operations	2006		2005		2004		2003			2002
Interest income	$	38,019	$	33,965	$	31,221	$	32,377		$	40,455
Interest expense	15,861		11,532		8,866		15,252			22,660
Net interest income	22,158		22,433		22,355		17,125			17,795
Provision for loan losses	150		540		600		330			988
Non-interest income	2,810		2,728		2,608		2,690			3,304
Non-interest expense	17,168		16,168		15,329		28,703			13,414
Net income (loss)	$	5,514	$	6,153	$	6,567	$	(5,834	)	$	5,092
Earnings (loss) per common share—basic	$	2.04	$	2.25	$	2.44	$	(2.30	)	$	2.06
Earnings (loss) per common share—diluted	$	2.03	$	2.20	$	2.33	$	(2.30	)	$	1.91

Performance Ratios and Other Selected Data	2006			2005			2004			2003			2002
Return on average assets		0.83	%		0.96	%		1.06	%		n.m.			0.71	%
Return on average equity		8.68	%		10.16	%		11.58	%		n.m.			8.47	%
Average equity to average assets		9.59	%		9.40	%		9.16	%		9.01	%		8.34	%
Average interest rate spread		3.45	%		3.62	%		3.79	%		2.57	%		2.44	%
Non-performing loans to total assets		0.32	%		0.24	%		0.15	%		0.38	%		0.53	%
Non-performing loans to total loans		0.43	%		0.32	%		0.22	%		0.56	%		1.03	%
Allowance for loan losses to non-performing loans		135.78	%		166.31	%		240.31	%		92.51	%		53.86	%
Allowance for loan losses to total loans		0.59	%		0.54	%		0.52	%		0.52	%		0.54	%
Bank regulatory capital
Core		8.95	%		8.26	%		8.13	%		7.29	%		6.85	%
Tangible		8.95	%		8.26	%		8.13	%		7.29	%		6.85	%
Risk based		16.29	%		14.82	%		15.67	%		14.47	%		15.25	%
Dividend payout ratio(2)		37.44	%		32.73	%		28.33	%		n.m.			31.41	%

n.m.=not meaningful

(1)Consists of cash, cash due from banks, interest-bearing deposits with original maturities of less than three months, and federal funds sold.

(2)Payout ratio is dividends paid for the period divided by earnings per common share—diluted.

(3)This is a non-GAAP disclosure. Tangible book value per common share is computed by reducing stockholder equity by recorded intangible assets, divided by shares outstanding.

3

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND
RESULTS OF OPERATIONS

General.   The following discussion and analysis should be read in conjunction with the Company’s consolidated financial statements and is intended to assist in understanding and evaluating the major changes in the financial position and results of operations of the Company with a primary focus on an analysis of operating results.

The Company may from time to time make written or oral “forward-looking statements”, including statements contained in the Company’s filings with the Securities and Exchange Commission, in its reports to stockholders and in other communications by the Company, which are made in good faith by the Company pursuant to the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995.

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

4

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

The Company’s income on a consolidated basis is derived substantially from its investment in its subsidiary, Third Federal. The earnings of Third Federal depend primarily on its net interest income. Net interest income is affected by the interest income that Third Federal receives from its loans and investments and by the interest expense that Third Federal incurs on its deposits, borrowings and other sources of funds. In addition, the mix of Third Federal’s interest-bearing assets and liabilities can have a significant effect on Third Federal’s net interest income; loans generally have higher yields than securities; retail deposits generally have lower interest rates than other borrowings.

Third Federal also receives income from service charges and other fees and occasionally from sales of investment securities and real estate owned. Third Federal incurs expenses in addition to interest expense in the form of salaries and benefits, deposit insurance premiums, property operations and maintenance, advertising and other related business expenses.

Critical Accounting Policies

Certain critical accounting policies of the Company require the use of significant judgment and accounting estimates in the preparation of the consolidated financial statements and related data of the Company. These accounting estimates require management to make assumptions about matters that are highly uncertain at the time the accounting estimate is made.

Management believes that the most critical accounting policy requiring the use of a significant amount of accounting estimates and judgment is the determination of the allowance for loan losses. Allowances are established based on pools of similar loans, delinquencies, loss experience, economic conditions generally and as they may affect individual borrowers, and other factors. Individual loans are evaluated based on cash flows or value of the underlying collateral, or both. All of these evaluation factors are subject to a high degree of uncertainty. If the financial condition and collateral values of a significant amount of debtors should deteriorate more than the Company has estimated, present allowances for loan losses may be insufficient and additional provisions for loan losses may be required. In addition, a single loan loss of a substantial amount may significantly reduce the allowance. The allowance for loan losses was $2,865,000 at December 31, 2006.

Financial Condition and Changes in Financial Condition

Assets.   The Company’s total assets at December 31, 2006 were $652.6 million, a decrease of $8.2 million during the year. This decrease in total assets was mainly the combined result of the net change in various asset and liability categories discussed below.

The Company’s loans receivable held for investment at December 31, 2006 were $483.6 million, a $7.3 million or 1.5% decrease since December 31, 2005. During 2006, there were $109.6 million of principal payments of existing loans in the loans receivable portfolio and the Company sold $16.3 million of previously purchased loans as well as $7.2 million of commercial loan participation. Offsetting this reduction was the origination of $125.7 million in predominately commercial real estate loans and single-family residential first and second mortgage loans. Mortgage loans available for sale at December 31, 2006 were $969,000, the result of loan origination efforts of $14.0 million and related sale proceeds of $13.0 million.

Mortgage-backed securities available for sale decreased by $9.2 million during 2006 due to sales of $5.0 million and repayments of $14.3 million of the underlying mortgages comprising such securities, partially offset by the purchases of $10.1 million of such securities. Mortgage-backed securities held to

5

maturity decreased by $2.5 million during 2006 due to prepayment of the underlying mortgages comprising the securities.

Investment securities available for sale increased by $4.1 million during the year. The Company purchased $3.8 million of such securities, mainly bank-qualified municipal bonds, during 2006. The remaining net change in the portfolio was caused by $0.3 million amortization of purchase premiums and fair value adjustments.

The Company’s cash and cash equivalents were $12.4 million at December 31, 2006. It is the Company’s current intent to keep cash and cash equivalents at a minimal level and use its line of credit at the FHLB to fund its day-to-day cash needs; however, the increase in cash was the direct result of commercial loan repayments in late December 2006 totaling $11.4 million.

Liabilities.   The Company’s total liabilities were $587.0 million at December 31, 2006, a decrease of $11.2 million during 2006. Total deposits increased by $7.6 million including broker originated deposits of $11.7 million received during the second quarter of 2006. Advances from the FHLB decreased by $19.6 million mostly related to the reduction of borrowings outstanding on the line of credit at year end. It is the current intent of the Company to fund a portion of its interest-bearing assets, not funded by deposits, with longer term advances from the FHLB, and fund its day-to-day cash needs and shorter term interest-bearing assets not otherwise funded with deposits using draws on its line of credit with the FHLB. The Bank’s line of credit at the FHLB was $30 million of which $0 was drawn at December 31, 2006.

Stockholders’ equity.   Total consolidated stockholders’ equity increased by $3.0 million to $65.6 million at December 31, 2006. The increase is largely the result of $5.5 million in net income less $2.0 million in cash dividends paid to the Company’s common stockholders. Other comprehensive loss of $0.3 million was the net result of a $0.7 million loss related to the recognition of the funded status of the pension plan and a $0.4 million gain due to the fair value adjustment on available for sale securities. In addition there was a $0.4 million increase in stockholders’ equity attributable to the exercise of stock options for 21,415 shares. The Company also purchased 58,904 shares of common stock, held in treasury, reducing stockholders’ equity by $1.7 million. Finally, there was a $0.4 million increase due to the allocation of 13,495 shares to participants in the Company’s employee stock ownership plan, and an increase of $0.7 million attributable to stock grants and stock options.

6

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

	2006			2005			2004
	Average balance	Interest	Average yld/cost	Average balance	Interest	Average yld/cost	Average balance	Interest	Average yld/cost
ASSETS
Interest-earning assets:

Loans receivable(1)	$	502,048	$	32,342	6.44	%	$	462,389	$	27,570	5.96	%	$	423,482	$	24,359	5.75	%
Mortgage-backed securities	81,750		3,722		4.55	%	108,029		4,875		4.51	%	128,759		5,696		4.42	%
Investment securities(2)	41,984		2,295		5.47	%	37,357		1,774		4.75	%	30,969		1,377		4.45	%
Other interest-earning assets(3)	1,653		94		5.69	%	1,910		59		3.09	%	1,127		14		1.24	%
Total interest-earning assets	627,435		38,453		6.13	%	609,685		34,278		5.62	%	584,337		31,446		5.38	%
Non interest-earning assets	35,050						34,215						34,645
Total assets	$	662,485					$	643,900					$	618,982
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
Deposits	468,933		10,923		2.33	%	465,521		7,599		1.63	%	465,097		5,925		1.27	%
Advances from the FHLB	122,671		4,938		4.03	%	111,628		3,933		3.52	%	91,660		2,941		3.21	%
Total interest-bearing liabilities	591,604		15,861		2.68	%	577,149		11,532		2.00	%	556,757		8,866		1.59	%
Non interest-bearing liabilities	7,332						6,199						5,536
Total liabilities	598,936						583,348						562,293
Stockholders’ equity	63,549						60,552						56,689
Total liabilities and stockholders’ equity	$	662,485					$	643,900					$	618,982
Net interest income			$	22,592					$	22,746					$	22,580
Interest rate spread(4)					3.45	%					3.62	%					3.79	%
Net yield on interest-earning assets(5)					3.60	%					3.73	%					3.86	%
Ratio of average interest-earning assets to average interest-bearing liabilities					106	%					106	%					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 $434,000, $313,000, and $225,000 for the years ended December 31, 2006, 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.

7

Rate/Volume Analysis.   The following table presents, for the periods indicated, the change in interest income and interest expense (in thousands) attributed to (i) changes in volume (changes in the weighted average balance of the total interest-earning asset and interest-bearing liability portfolios multiplied by the prior year rate), and (ii) changes in rate (changes in rate multiplied by prior year volume). Changes attributable to the combined impact of volume and rate have been allocated proportionately based on the absolute value of changes due to volume and changes due to rate.

	2006 vs 2005 Increase (decrease) due to									2005 vs 2004 Increase (decrease) due to
	Volume			Rate			Net			Volume			Rate			Net
Interest income:
Loans receivable, net	$	2,463		$	2,309		$	4,772		$	2,297		$	914		$	3,211
Mortgage-backed securities	(1,196		)	43			(1,153		)	(933		)	112			(821		)
Investment securities(1)	235			286			521			299			98			397
Other interest-earning assets	(9		)	44			35			14			31			45
Total interest-earning assets	1,493			2,682			4,175			1,677			1,155			2,832
Interest expense:
Deposits	56			3,268			3,324			5			1,669			1,674
Advances from the FHLB	412			593			1,005			684			308			992
Total interest-bearing liabilities	468			3,861			4,329			689			1,977			2,666
Net change in net interest income	$	1,025		$	(1,179	)	$	(154	)	$	988		$	(822	)	$	166

(1)Tax equivalent adjustments to interest on investment securities were $434,000, $313,000, and $225,000 for the years ended December 31, 2006, 2005 and 2004, respectively. Tax equivalent interest income is based upon a marginal effective rate of 34%.

Comparison of Years Ended December 31, 2006 and December 31, 2005

Net Income.   Net income was $5.5 million for the year ended December 31, 2006 compared with net income of $6.2 million for the year ended December 31, 2005. The decrease in net income of $0.7 million when comparing the year 2006 with 2005 is largely attributable a $1.0 million increase in non-interest expense.

Total Interest Income.   For the year ended December 31, 2006, total interest income, on a taxable equivalent basis, increased to $38.5 million compared to $34.3 million for the year ended December 31, 2005. The $4.2 million increase in interest income was mainly the result of the $39.7 million increase in the average balances of loans receivable. In addition, beginning in June 2004, the Federal Open Market Committee raised the federal funds rate seventeen times by a total of 425 basis points through year end 2006. During 2006, the federal funds rate, and thus the prime rate, rose by 100 basis points while longer term interest rates relevant to the Company’s loan origination activities, as measured by 5 year and 10 year U S Treasury securities, rose by approximately 37 to 32 basis points, respectively. The higher prime rate had a positive effect on the Bank’s interest income because of the positive effect on the Bank’s adjustable rate and prime-based loans. At December 31, 2006 the Company had $74.3 million in floating rate, prime-based construction, home equity, and other loans. In addition, because longer term rates were higher, the Company was able raise its prices on fixed rate loans.

8

Total Interest Expense.   Total interest expense increased to $15.9 million from $11.5 million for the year ended December 31, 2006 compared to 2005. During 2006 the Bank raised the interest rates paid on many of its deposit products in order to retain existing deposit relationships, attract new deposit relationships, and generally respond to competitive pricing pressures throughout the Company’s deposit markets. As a result, the average interest rate paid on deposits rose by 70 basis points during 2006 compared with 2005, and produced a $3.3 million increase in interest expense. Interest paid on advances from the FHLB increased by $1.0 million during 2006 compared with 2005, largely because of the need to borrow from the FHLB in order to fund the Company’s lending activities from sources other than deposit growth.

Allowance for Loan Losses.   The allowance for loan losses was approximately $2.9 million at December 31, 2006 and $2.6 million at December 31, 2005. The provision for loan losses was $150,000 during 2006 compared with $540,000 during 2005. Net recoveries of previously charged off loans were $74,000 during 2006 compared to net charge-offs of $206,000 during 2005. While management maintains the allowance for losses at a level which it considers to be adequate to provide for probable losses, there can be no assurance that further additions will not be made to the allowance and that such losses will not exceed the estimated amounts.

Non-Interest Income.   Total non-interest income was $2.8 million during 2006 compared with $2.7 million during 2005. The increase is due to an increase in gain on sales of loans.

Non-Interest Expense.   Total non-interest expense increased by $1.0 million during 2006 compared to 2005. Employee compensation increased by $1.4 million during 2006 largely due to $747,000 of stock-based compensation expense related to stock grants and the recognition of option expense associated with the new accounting standard SFAS 123R, “Share-Based Payment”. In addition, compensation and other benefit expenses were higher in 2006 due to hiring of staff at the new and renovated branches as well as annual salary increases. Office and occupancy costs increased $189,000 between the years mainly as a result of costs associated with the relocation and renovations of the Feasterville branch as well as the new branch opened in Philadelphia during 2005. Professional fees declined $75,000 during 2006 over 2005 as expenses associated with technology-related compliance work which was completed in 2005. Marketing and advertising expense decreased by $273,000 in 2006 in comparison to prior year of 2005 when the Bank’s efforts to increase market visibility included an expansion of the media used to advertise image, products, and services.

Income Tax Expense.   The Company’s effective tax rate was 27.9% during 2006 compared to 27.2% during 2005. These effective tax rates are lower than the Company’s marginal tax rate of 34% largely due to the tax-exempt income associated with the Company’s investments in tax-exempt municipal bonds and bank-owned life insurance.

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

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

Total Interest Income.   For the year ended December 31, 2005, total interest income, on a tax equivalent basis, increased to $34.3 million compared to $31.5 million for the year ended December 31, 2004. The $2.8 million increase in interest income was mainly the result of the $38.9 million increase in the average balances of loans receivable.

9

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

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

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

Allowance for Loan Losses.   The allowance for loan losses was approximately $2.6 million at December 31, 2005 and $2.3 million at December 31, 2004. The provision for loan losses was $540,000 during 2005 compared with $600,000 during 2004. Net charged-off loans were $206,000 during 2005 compared to net charge-offs of $404,000 during 2004. While management maintains the allowance for losses at a level which it considers to be adequate to provide for probable losses, there can be no assurance that further additions will not be made to the allowance and that such losses will not exceed the estimated amounts.

Non-Interest Income.   Total non-interest income was $2.7 million during 2005 compared with $2.6 million during 2004. The increase is due to an increase in gain on sales of loans.

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

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

Liquidity and Capital Resources

Liquidity.   The Company’s liquidity is a measure of its ability to fund loans, pay withdrawals of deposits and other cash outflows, and pay dividends in an efficient, cost-effective manner. The Company’s primary sources of funds are cash on hand and dividends from its wholly-owned Bank. The Bank’s primary

10

sources of funds are deposits, borrowings, and scheduled amortization and prepayment of loan and mortgage-backed security principal.

The Bank endeavors to fund its operations internally but has, when deemed prudent, borrowed funds from the Federal Home Loan Bank. As of December 31, 2006, such borrowed funds totaled $101.7 million. The amount of these borrowings that will mature during the twelve months ending December 31, 2007 is $25.1 million. At December 31, 2006 the Bank had a $30 million line of credit, $30.0 million of which was unused, and up to approximately $300 million of additional collateral-based borrowing capacity at the Federal Home Loan Bank.

The amount of certificate accounts that are scheduled to mature during the twelve months ending December 31, 2006, is approximately $170.9 million. To the extent that these deposits do not remain at the Bank upon maturity, the Bank believes that it can replace these funds with deposits, excess liquidity, and advances from the FHLB or other borrowings. It has been the Bank’s experience that substantial portions of such maturing deposits remain at the Bank.

At December 31, 2006, the Bank had outstanding commitments to originate loans or fund unused lines of credit of $87.4 million. The loan commitments will be funded during the twelve months ending December 31, 2007. The unused lines of credit can be funded at any time. Funds required to fill these commitments will be derived primarily from current excess liquidity, deposit inflows or loan and security repayments. At December 31, 2006, the Bank had $2.9 million outstanding commitments to sell loans.

The Company also has obligations under lease agreements. Payments required under such lease agreements will be approximately $432,000 during the year ending December 31, 2007.

The following table combines the Company’s contractual obligations and commitments to make future payments as of December 31, 2006.

	Payments due by period
	Total		Less than 1 year		1-3 years		4-5 years		After 5 years
	(in thousands)
Contractual obligations:
FHLB advances	$	101,701	$	25,122	$	57,710	$	15,850	$	3,019
Time deposits	195,551		170,926		19,940		4,259		426
Operating leases	1,476		432		487		182		375
Total contractual obligations	$	298,728	$	196,480	$	78,137	$	20,291	$	3,820

	Amount of commitment expirations by period
Commitments:
Extensions of credit	$	85,199	$	44,780	$	7,141	$	359	$	32,919
Letters of credit	2,151		1,345		806		—		—
Loans sold with recourse due 2019	71		—		—		—		71
Total commitments	$	87,421	$	46,125	$	7,947	$	359	$	32,990

Capital Resources.   Under current regulations, the Bank must have core capital equal to 4% of adjusted total assets and risk-based capital equal to 8% of risk-weighted assets, of which 1.5% must be tangible capital, excluding goodwill and certain other intangible assets. On December 31, 2006, the Bank met its three regulatory capital requirements.

Management believes that under current regulations, the Bank will continue to meet its minimum capital requirements in the foreseeable future. However, events beyond the control of the Bank, such as increased interest rates or a downturn in the economy in areas in which the Bank operates, could adversely

11

affect future earnings and as a result, the ability of the Bank to meet its future minimum capital requirements.

Impact of Inflation and Changing Prices

The consolidated financial statements and related data have been prepared in accordance with accounting principles generally accepted in the United States of America which require the measurement of financial position and operating results in terms of historical dollars, without consideration for changes in the relative purchasing power of money over time caused by inflation. Unlike industrial companies, nearly all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution’s performance than general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the price of goods and services, since such goods and services are affected by inflation. In the current interest rate environment, liquidity and the maturity structure of the Bank’s assets and liabilities are critical to the maintenance of acceptable performance levels.

Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk Management

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

The type of market risk which most affects the Company’s financial instruments is interest rate risk, which is best quantified by simulating the hypothetical change in net interest income that would occur under specific changes in interest rates. Substantially all of the Bank’s interest-bearing assets and liabilities are exposed to interest rate risk. Loss of economic value is measured using reports generated by the Office of Thrift Supervision (“OTS”), using input from the Bank, wherein the current net portfolio value of the Bank’s interest-sensitive assets and liabilities is measured at different hypothetical interest rate levels centered on the current term structure of interest rates. Gap reports prepared by the Bank are used to measure the net amount of assets and liabilities repricing, repaying and maturing during future periods. ALCO evaluates the simulation results, the OTS model results and the “gap” reports and will make adjustments to the Bank’s planned activities if in its view there is a need to do so.

The Bank’s exposure to interest rate risk results from, among other things, the difference in maturities in interest-earning assets and interest-bearing liabilities. Since the Bank’s assets currently have a longer maturity than its liabilities, the Bank’s earnings could be negatively impacted during a period of rising interest rates. Alternatively, in periods of falling interest rates the Bank’s mortgage loans will repay at an increasing rate and cause the Bank to reinvest these cash flows in periods of low interest rates, also negatively affecting the Bank’s earnings. The relationship between the interest rate sensitivity of the Bank’s assets and liabilities is continually monitored by management and ALCO.

Fundamentally, the Bank prices and originates loans, and prices and originates its deposits including CD’s at market interest rates. Volumes of such loans and deposits at various maturity and repricing horizons will vary according to customer preferences as influenced by the term structure of market interest rates. The Bank utilizes its investment and mortgage-backed security portfolios available for sale to generate additional interest income, to manage its liquidity, and to manage its interest rate risk. These securities are readily marketable and provide the Bank with a cash flow stream to fund asset growth or liability maturities. In addition, if management determines that it is advisable to do so, the Bank can lengthen or shorten the average maturity of all interest-bearing assets through the selection of fixed rate or variable rate securities, respectively.

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The Bank utilizes advances from the FHLB in managing its interest rate risk and as a tool to augment deposits in funding asset growth. The Bank may utilize these funding sources to better match its fixed rate interest-bearing assets with longer maturities or repricing characteristics.

The nature of the Bank’s current operations is such that it is not subject to foreign currency exchange or commodity price risk. Additionally, neither the Company nor the Bank owns any trading assets. At December 31, 2006, the Bank did not have any hedging transactions in place such as interest rate swaps, caps, or floors, although these derivatives are often used by banks to manage interest rate risk.

The Company’s bank subsidiary is a savings bank regulated by the OTS and has policies or procedures in place for measuring interest rate risk. These policies and procedures stipulate acceptable levels of interest rate risk. As part of its interest rate risk management, the Bank uses the Interest Rate Risk Exposure Report, which is generated quarterly by the OTS. This report forecasts the interest rate sensitivity of net portfolio value (“NPV”) under alternative interest rate environments. The NPV is defined as the net present value of the Bank’s existing assets, liabilities and off-balance sheet instruments. The calculated estimates of change in NPV at December 31, 2006 are as follows:

Change in Interest Rates	NPV  Amount			% Change			Policy Limitation
	(In Thousands)
+300 Basis Points		$	53,984		-37	%		+/- 5	0%
+200 Basis Points		$	65,194		-24	%		+/- 3	5%
+100 Basis Points		$	75,934		-11	%		+/- 2	5%
Flat Rates		$	85,278		0	%		0	%
-100 Basis Points		$	92,257		+8	%		+/- 2	0%
-200 Basis Points		$	95,935		+12	%		+/- 3	0%

Management believes that the assumptions utilized by OTS in evaluating the vulnerability of the Company’s net portfolio value to changes in interest rates are reasonable; however, the interest rate sensitivity of the Bank’s assets and liabilities as well as the estimated effect of changes in interest rates on NPV could vary substantially if different assumptions are used or actual experience differs from the experience on which the assumptions were based. In the event the Bank should measure an excessive decline in its NPV as the result of an immediate and sustained change in interest rate, it has a number of options which it could utilize to remedy that situation. The Bank could restructure its investment portfolio through sale or purchase of securities with more favorable repricing attributes. It could also emphasize loan products with appropriate maturities or repricing attributes, or it could attract deposits or obtain borrowings with desired maturities.

In order to measure interest rate risk internally, the Company uses computer programs which enable it to simulate the changes that will occur to the Bank’s net interest income (“NII”) over a number of interest rate scenarios which are developed by “shocking” market interest rates (i.e. moving them immediately and permanently) up and down in 100 basis point increments from their current levels. In addition, loan production is adjusted downward in the rates up scenarios.

In addition to the level of interest rates, the most critical assumption regarding the estimated amount of the Bank’s NII is the expected prepayment speed of the Bank’s 1-4 family residential loans, and related mortgage-backed securities, the book value of which comprises approximately 61% of the Company’s total assets. For this prepayment speed assumption, the Company uses its own experience and compares it with median expected prepayment speeds obtained from third party sources. The Company also incorporates into its simulations the effects of the interest rate caps and interest rate floors that are part of the majority of the Bank’s variable rate loans. Finally, the Company makes certain assumptions regarding the timing and magnitude of interest rate changes on its non-CD deposits.

The Company uses its business planning forecast as the basis for its NII simulations. Therefore, planned business activities are incorporated into the measurement horizon. Such activities include assumptions about substantial new loan and deposit volumes, the pricing of loan and deposit products, and

13

other assumptions about future activities that may or may not be realized. In order to quantify the Company’s NII exposure, the Company focused on the simulation of net interest income over 24 months in two scenarios: shocked up 200 basis points and shocked down 100 basis points. The results of these simulations are as follows:

At December 31, 2006	Net interest income volatility versus level interest rates
Year ending	Shocked UP 200 bp		Shocked DOWN 100 bp
2007		-4.4%		-3.0%
2008		-4.7%		-4.7%

At December 31, 2005	Net interest income volatility versus level interest rates
Year ending	Shocked UP 200 bp		Shocked DOWN 100 bp
2006		-5.2%		-3.6%
2007		-3.4%		-7.7%

In addition, the Company prepared “gap” reports in order to show potential mis-matches of repricing or cash flows from the Company’s current interest rate-sensitive assets and liabilities. Negative amounts indicate that there is an excess of rate sensitive liabilities repricing during the period and, generally, the Company’s net interest income would be adversely affected by rising market interest rates. The results of these “gap” measurements are as follows: (in thousands)

	GAP: Net rate sensitive assets (liabilities)
At December 31, 2006	2007			2008		2009			2010 and beyond
Current rates	$	(61,844	)	$	26,416	$	2,704			$	71,624
Shocked down 100 bp	$	9,053		$	61,771	$	16,525			$	(48,449	)
Shocked up 200 bp	$	(90,961	)	$	8,607	$	(6,992	)		$	128,245

	GAP: Net rate sensitive assets (liabilities)
At December 31, 2005	2006			2007			2008		2009 and beyond
Current rates	$	30,815		$	26,844		$	22,041		$	(41,782	)
Shocked down 100 bp	$	111,647		$	62,072		$	33,276		$	(169,077	)
Shocked up 200 bp	$	(21,353	)	$	(599	)	$	10,491		$	49,379

The results of the NPV, NII, and gap measurements collectively reflect the fact that the Company is highly sensitive to the sustained movement of long-term interest rates because of the resulting effect on the prepayment speeds of the Company’s mortgage-related earning assets. In the interest rates up scenarios, prepayment speeds slow, new loan volume is reduced, and deposits and other borrowings reprice at higher rates. In the rates down scenarios, higher rate earning assets repay at an increasing rate, floating rate earning assets reprice downward, and deposits are more difficult to reprice downward. Each of these simulated scenarios was calculated using severe changes in prepayment speeds and other assumptions in order to stress-test the Company’s current position.

During 2006, the Company experienced the adverse effects of a “flattening” of the yield curve which occurred because short-term market interest rates increased more than long term interest rates. As a result, the interest rates on floating rates loans adjusted upward, but borrowers refinanced these loans into fixed rate loans at lower interest rates. Depositors were in search of higher interest rates on their deposits and moved many of their deposits into higher rate CD’s or floating rate money market accounts. Thus, the Bank has experienced margin compression, and expects this situation to continue given the level of interest rates that existed at December 31, 2006. However, these assumptions and measurements are highly subjective in nature and are not intended to be a forecast of net interest income under any rate scenario for the years 2007, 2008 or for any other period.

Recent Accounting Pronouncements

See Note B in the Consolidated Financial Statements for a discussion on this topic.

14

FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

TF FINANCIAL CORPORATION AND SUBSIDIARIES

December 31, 2006 and 2005

15

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and
Shareholders of TF Financial Corporation

We have audited the accompanying consolidated balance sheets of TF Financial Corporation and subsidiaries (the Company) as of December 31, 2006 and 2005, and the related consolidated statements of income, changes in stockholders’ equity and comprehensive income and cash flows for each of the three years in the period ended December 31, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of TF Financial Corporation and subsidiaries as of December 31, 2006 and 2005, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note A to the consolidated financial statements, the Company has adopted Financial Accounting Standards Board Statement No. 123(R), Share-Based Payments in 2006. Also, as discussed in Note A to the consolidated financial statements, the Company adopted Financial Accounting Standards Board Statement No. 158, Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R) in 2006.

Philadelphia, Pennsylvania

March 28, 2007

16

TF Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

	December 31
	2006			2005
	(in thousands)
ASSETS
Cash and cash equivalents	$	12,364		$	3,821
Certificates of deposit in other financial institutions	40			40
Investment securities available for sale—at fair value	34,524			30,401
Investment securities held to maturity (fair value of $681 and $4,707 as of December 31, 2006 and 2005, respectively)	677			4,690
Mortgage-backed securities available for sale—at fair value	74,338			83,511
Mortgage-backed securities held to maturity (fair value of $7,788 and $10,385 as of December 31, 2006 and 2005, respectively)	7,697			10,177
Loans receivable, net held for investment	483,570			490,891
Loans receivable, held for sale	969			68
Federal Home Loan Bank stock—at cost	7,130			7,432
Accrued interest receivable	3,030			3,048
Premises and equipment, net	6,544			6,289
Core deposit intangible asset, net of accumulated amortization of $2,824 and $2,741 as of December 31, 2006 and 2005, respectively	—			83
Goodwill	4,324			4,324
Bank owned life insurance	15,274			12,771
Other assets	2,122			3,293
TOTAL ASSETS	$	652,603		$	660,839
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Deposits	$	478,087		$	470,521
Advances from the Federal Home Loan Bank	101,701			121,260
Advances from borrowers for taxes and insurance	1,866			1,915
Accrued interest payable	2,942			2,052
Other liabilities	2,368			2,443
Total liabilities	586,964			598,191
Stockholders’ equity
Preferred stock, no par value; 2,000,000 shares authorized at December 31, 2006 and 2005, none issued	—			—
Common stock, $0.10 par value; 10,000,000 shares authorized, 5,290,000 shares issued, 2,702,845 and 2,714,173 shares outstanding at December 31, 2006 and 2005, respectively, net shares in treasury: 2006—2,415,766; 2005—2,390,943	529			529
Retained earnings	65,075			61,610
Additional paid-in capital	52,700			53,048
Unearned restricted stock	—			(1,080		)
Unearned ESOP shares	(1,703		)	(1,849		)
Treasury stock—at cost	(48,980		)	(47,920		)
Accumulated other comprehensive income (loss)	(1,982		)	(1,690		)
Total stockholders’ equity	65,639			62,648
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	652,603		$	660,839

The accompanying notes are an integral part of these statements.

17

TF Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME

	Year ended December 31,
	2006			2005		2004
	(in thousands, except per share data)
Interest income
Loans, including fees	$	32,342		$	27,570	$	24,359
Mortgage-backed securities	3,722			4,875		5,696
Investment securities	1,861			1,461		1,152
Interest-bearing deposits and other	94			59		14
TOTAL INTEREST INCOME	38,019			33,965		31,221
Interest expense
Deposits	10,923			7,599		5,925
Borrowings	4,938			3,933		2,941
TOTAL INTEREST EXPENSE	15,861			11,532		8,866
NET INTEREST INCOME	22,158			22,433		22,355
Provision for loan losses	150			540		600
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES	22,008			21,893		21,755
Non-interest income
Service fees, charges and other operating income	2,091			2,069		2,075
Bank owned life insurance	503			501		525
Gain on sale of real estate	29			—		—
Loss on sale of mortgage-backed securities	(51		)	—		—
Gain on sale of loans	238			158		8
TOTAL NON-INTEREST INCOME	2,810			2,728		2,608
Non-interest expense
Employee compensation and benefits	10,636			9,249		8,769
Occupancy and equipment	2,834			2,645		2,518
Federal deposit insurance premium	60			64		70
Professional fees	739			814		615
Marketing and advertising	500			773		655
Other operating	2,316			2,493		2,547
Amortization of core deposit intangible asset	83			130		155
TOTAL NON-INTEREST EXPENSE	17,168			16,168		15,329
INCOME BEFORE INCOME TAXES	7,650			8,453		9,034
Income tax expense	2,136			2,300		2,467
NET INCOME	$	5,514		$	6,153	$	6,567
Earnings per share—basic	$	2.04		$	2.25	$	2.44
Earnings per share—diluted	$	2.03		$	2.20	$	2.33

The accompanying notes are an integral part of these statements.

18

TF Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY AND
COMPREHENSIVE INCOME
Years ended December 31, 2006, 2005 and 2004
(in thousands, except share data)

							Accumulated
Common Stock		Additional	Unearned	Unearned			other		Comprehensive
	Par	paid-in	restricted	ESOP	Treasury	Retained	comprehensive		income
Shares	value	capital	stock	shares	stock	Earnings	income (loss)	Total	(loss)

Balance at December 31, 2003	2,596,037		$	529	$	51,982		$	—		$	(2,196	)	$	(47,043	)	$	52,626		$	(418	)	$	55,480
Allocation of ESOP shares	17,688		—		354			—			177			—			—			—			531
Purchase of treasury stock	(166,305	)	—		—			—			—			(4,725		)	—			—			(4,725		)
Cash dividends—common stock	—		—		—			—			—			—			(1,765		)	—			(1,765		)
Exercise of options	294,925		—		(2,277		)	—			—			5,687			—			—			3,410
Income tax benefit arising from stock compensation	—		—		1,616			—			—			—			—			—			1,616
Other comprehensive loss, net of taxes	—		—		—			—			—			—			—			41			41			$	41
Net income for the year ended December 31, 2004	—		—		—			—			—			—			6,567			—			6,567			6,567
Comprehensive income																										$	6,608
Balance at December 31, 2004	2,742,345		$	529	$	51,675		—			$	(2,019	)	$	(46,081	)	$	57,428		$	(377	)	$	61,155
Allocation of ESOP shares	17,025		—		324			—			170			—			—			—			494
Purchase of treasury stock	(95,172	)	—		—			—			—			(2,830		)	—			—			(2,830		)
Cash dividends—common stock	—		—		—			—			—			—			(1,971		)	—			(1,971		)
Restricted stock grant	—		—		1,095			(1,095		)	—			—			—			—			—
Compensation expense— Restricted shares	—		—		—			15			—			—			—			—			15
Exercise of options	49,975		—		(190		)	—			—			991			—			—			801
Income tax benefit arising from stock compensation	—		—		144			—			—			—			—			—			144
Other comprehensive loss, net of taxes	—		—		—			—			—			—			—			(1,313		)	(1,313		)	$	(1,313	)
Net income for the year ended December 31, 2005	—		—		—			—			—			—			6,153			—			6,153			6,153
Comprehensive income																										$	4,840
Balance at December 31, 2005	2,714,173		$	529	$	53,048		(1,080		)	$	(1,849	)	$	(47,920	)	$	61,610		$	(1,690	)	$	62,648
Allocation of ESOP shares	13,495		—		228			—			146			—			—			—			374
Purchase of treasury stock	(58,904	)	—		—			—			—			(1,749		)	—			—			(1,749		)
Cash dividends—common stock	—		—		—			—			—			—			(2,049		)	—			(2,049		)
Restricted stock grant	—		—		(1,080		)	1,080			—			—			—			—			—
Compensation expense—restricted shares	—		—		361			—			—			—			—			—			361
Exercise of options	21,415		—		(108		)	—			—			433			—			—			325
Income tax benefit arising from stock compensation	—		—		121			—			—			—			—			—			121
Stock option expense	—		—		386			—			—			—			—			—			386
Vesting of stock grant	12,666		—		(256		)	—			—			256			—			—			—
Other comprehensive income, net of taxes	—		—		—			—			—			—			—			421			421			$	421
Adjustment to record funded status of pension (net of tax of $367)	—		—		—			—			—			—			—			(713		)	(713		)	(713		)
Net income for the year ended December 31, 2006	—		—		—			—			—			—			5,514			—			5,514			5,514
Comprehensive income																										$	5,222
Balance at December 31, 2006	2,702,845		$	529	$	52,700		$	—		$	(1,703	)	$	(48,980	)	$	65,075		$	(1,982	)	$	65,639

The accompanying notes are an integral part of this statement

19

TF Financial Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Year ended December 31,
	2006			2005			2004
	(in thousands)
OPERATING ACTIVITIES
Net income	$	5,514		$	6,153		$	6,567
Adjustments to reconcile net income to net cash provided by operating activities
Amortization of
Mortgage loan servicing rights	29			8			—
Deferred loan origination fees	(303		)	(96		)	(50		)
Premiums and discounts on investment securities, net	69			81			74
Premiums and discounts on mortgage-backed securities, net	252			386			775
Premiums and discounts on loans, net	167			123			127
Core deposit intangibles	83			130			155
Discounts on wholesale deposits	20			—			—
Deferred income taxes	327			403			343
Provision for loan losses and provision for losses on real estate	150			540			737
Provision for decrease in fair value of mortgage service rights	13			1			—
Depreciation of premises and equipment	954			961			973
Increase in value of bank-owned life insurance	(502		)	(501		)	(525		)
Stock grant expense	361			15			—
Stock option expense	386			—			—
ESOP expense	374			494			531
Proceeds from sale of loans originated for sale	13,044			9,765			657
Origination of loans held for sale	(14,033		)	(8,995		)	(1,329		)
Tax benefit arising from stock compensation	121			144			1,616
(Gain) loss on sale of
Investment and mortgage-backed securities	51			—			—
Real estate acquired through foreclosure	(29		)	—			(1		)
Mortgage loans available for sale	(104		)	(158		)	(8		)
Mortgage loans held to maturity	(134		)	—			—
(Income) expense from mortgage loan derivatives	7			(8		)	—
(Income) expense associated with forward loan sales	(5		)	7			—
(Increase) decrease in
Accrued interest receivable	18			(548		)	171
Other assets	(639		)	(43		)	3,026
Increase (decrease) in
Accrued interest payable	890			414			(270		)
Other liabilities	(75		)	758			(10		)
NET CASH PROVIDED BY OPERATING ACTIVITIES	7,006			10,034			13,559

20

	Year ended December 31,
	2006			2005			2004
	(in thousands)
INVESTING ACTIVITIES
Loan originations	$	(125,660	)	$	(147,629	)	$	(151,517	)
Purchases of loans	—			—			(3,922		)
Loan principal payments	109,589			96,579			117,896
Principal repayments on mortgage-backed securities held to maturity	2,472			4,709			8,730
Principal repayments on mortgage-backed securities available for sale	14,263			26,959			30,099
Proceeds from loan sales	23,512			1,108			—
(Purchases) and maturities of certificates of deposit in other financial institutions, net	—			(2		)	117
Purchase of investment securities available for sale	(3,795		)	(13,170		)	(3,040		)
Purchase of mortgage-backed securities available for sale	(10,120		)	(8,956		)	(27,701		)
Purchase of bank-owned life insurance	(2,000		)	—			—
Proceeds from maturities of investment securities held to maturity	4,018			2,280			3,295
Proceeds from the sale of mortgage-backed securities available for sale	4,971			—			—
(Purchase) redemption of Federal Home Loan Bank stock	302			28			(635		)
Proceeds from sale of real estate	729			—			32
Purchase of premises and equipment	(1,209		)	(1,287		)	(668		)
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES	17,072			(39,381		)	(27,314		)
FINANCING ACTIVITIES
Net increase in deposits	7,546			10,618			560
Net increase (decrease) in short-term Federal Home Loan Bank advances	(16,190		)	7,483			(1,179		)
Proceeds of long-term Federal Home Loan Bank advances	15,535			26,367			30,000
Repayment of long-term Federal Home Loan Bank advances	(18,904		)	(15,337		)	(12,927		)
Net increase(decrease) in advances from borrowers for taxes and insurance	(49		)	137			40
Treasury stock acquired	(1,749		)	(2,830		)	(4,725		)
Exercise of stock options	325			801			3,410
Common stock dividends paid	(2,049		)	(1,971		)	(1,765		)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES	(15,535		)	25,268			13,414
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	8,543			(4,079		)	(341		)
Cash and cash equivalents at beginning of year	3,821			7,900			8,241
Cash and cash equivalents at end of year	$	12,364		$	3,821		$	7,900
Supplemental disclosure of cash flow information
Cash paid for
Interest on deposits and advances from Federal Home Loan Bank	$	14,971		$	11,118		$	9,136
Income taxes	$	1,645		$	1,475		$	1,330

The accompanying notes are an integral part of these statements.

21

TF Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006 and 2005

NOTE A—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

TF Financial Corporation (the “Company”) is a unitary savings and loan holding company, organized under the laws of the State of Delaware, which conducts its consumer banking operations primarily through its wholly owned subsidiary, Third Federal Bank (Third Federal or the Bank). Third Federal is a federally chartered-stock savings bank insured by the Federal Deposit Insurance Corporation. Third Federal is a community-oriented savings institution that conducts operations from its main office in Newtown, Pennsylvania, twelve full-service branch offices located in Philadelphia and Bucks counties, Pennsylvania, and three full-service branch offices located in Mercer County, New Jersey. The Bank competes with other banking and financial institutions in its primary market communities, including financial institutions with resources substantially greater than its own. Commercial banks, savings banks, savings and loan associations, credit unions and money market funds actively compete for savings and time deposits and loans. Such institutions, as well as consumer finance and insurance companies, may be considered competitors of the Bank with respect to one or more of the services it renders.

The Bank is subject to regulations of certain state and federal agencies and, accordingly, those regulatory authorities conduct periodic examinations. As a consequence of the extensive regulation of commercial banking activities, the Bank’s business is particularly susceptible to being affected by state and federal legislation and regulations.

1.Principles of Consolidation and Basis of Presentation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries: TF Investments, Penns Trail Development Corporation and Third Federal, and its wholly owned subsidiaries, Third Delaware Corporation and Teragon Financial Corporation, (collectively, the “Company”). All material intercompany balances and transactions have been eliminated in consolidation.

The accounting policies of the Company conform to accounting principles generally accepted in the United States of America (US GAAP) and predominant practices within the banking industry. The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The more significant accounting policies are summarized below.

2.Cash and Cash Equivalents

The Company considers cash, due from banks, federal funds sold and interest-bearing deposits in other financial institutions, with original terms to maturity of less than three months, as cash equivalents for presentation purposes in the consolidated statements of financial position and cash flows. The Company is required to maintain certain cash reserves relating to deposit liabilities. This requirement is ordinarily satisfied by cash on hand.

3.Investment and Mortgage-Backed Securities

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

22

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

Investment, mortgage-backed and marketable equity securities available for sale are stated at fair value, with net unrealized gains and losses excluded from income and reported in other comprehensive income. Decreases in fair value deemed to be other than temporary are reported as a component of income. Realized gains and losses on the sale of securities are recognized using the specific identification method.

Investment and mortgage-backed securities held to maturity are carried at cost, net of unamortized premiums and discounts, which are recognized in interest income using the interest method. Decreases in fair value deemed to be other than temporary are reported as a component of income. The Company has the ability and it is management’s intention to hold such assets to maturity.

4.Loans Receivable Held- for-Investment

Loans receivable that management has the intent and ability to hold for the foreseeable future, or until maturity or payoff are stated at unpaid principal balances less the allowance for loan losses, and net of deferred loan origination fees, direct origination costs and unamortized premiums and discounts associated with purchased loans, and unearned income. Loan origination fees and costs as well as unamortized premiums and discounts on mortgage loans are amortized to income using the interest method over the remaining period to contractual maturity, adjusted for actual prepayments.

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

The Bank provides an allowance for accrued but uncollected interest when a loan becomes more than ninety days past due or is identified as impaired. The allowance is established by a charge to interest income equal to all interest previously accrued, and income is subsequently recognized only to the extent that cash payments are received until, in management’s judgment, the borrower’s ability to make periodic interest and principal payments is no longer impaired, in which case the loan is returned to accrual status.

The Company accounts for impaired loans in accordance with SFAS No. 114, “Accounting by Creditors for Impairment of a Loan,” as amended by SFAS No. 118, “Accounting by Creditors for Impairment of a Loan—Income Recognition and Disclosures.” SFAS No. 114 requires a creditor to measure impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, a creditor may measure impairment based on a loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. Regardless of the measurement method, a creditor must measure impairment based on the fair value of the collateral when the creditor determines that foreclosure is probable.

The Company accounts for loans acquired in a transfer in accordance with the American Institute of Certified Public Accountants’ Statement of Position No. 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a Transfer” (SOP 03-3). SOP 03-3 requires that acquired impaired loans for which it is probable that the investor will be unable to collect all contractually required payments receivable be recorded at the present value of amounts expected to be received and prohibits carrying over or creation of valuation allowances in the initial accounting for these loans.

23

5.Loans Receivable Held-for-Sale

Mortgages loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or estimated fair value. Any resulting unrealized losses are included in other income. The fair value of the Bank’s loans held as available for sale was valued in excess of cost at December 31, 2006 and 2005.

6.Transfers of Financial Assets

The Company accounts for the transfer of financial assets in accordance with SFAS No. 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” The standard is based on consistent application of a financial-components approach that recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered and derecognizes liabilities when extinguished. The standard provides consistent guidelines for distinguishing transfers of financial assets from transfers that are secured borrowings.

7.Premises and Equipment

Land is carried at cost. Buildings and furniture, fixtures and equipment are carried at cost less accumulated depreciation. Depreciation is provided by the straight-line method over the estimated useful lives of the assets. The Company accounts for the impairment of long-lived assets in accordance with SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”. The standard requires recognition and measurement for the impairment of long-lived assets to be held and used or to be disposed of by sale. The Company had no impaired long-lived assets at December 31, 2006 and 2005.

8.Goodwill and Other Intangible Assets

Goodwill does not require amortization but is subject to annual impairment testing. The Company has tested the goodwill for impairment prior to its fiscal year ending December 31, 2006. No impairment has been recognized.

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

9.Bank Owned Life Insurance

The Company purchased $10.5 million in life insurance policies on the lives of its executives and officers prior to 2004 and an additional $2.0 million in November 2006. The Company is the owner and beneficiary of the policies. The cash surrender values of the policies are approximately $15.3 million and $12.8 million at December 31, 2006 and 2005, respectively.

10.Benefit Plans

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

24

The Company has a defined benefit pension plan covering substantially all full-time employees meeting certain requirements. The Company accounts for the defined benefit plan in accordance with SFAS No. 87, “Employers’ Accounting for Pensions”  which provides guidance for the various components of pension expense recognized in the income statement and any related employer pension assets or liabilities. Additionally, the Company includes reporting disclosures required by SFAS No. 132R, “Employers’ Disclosures about Pensions and Other Postretirement Benefits”. The Company adopted (SFAS 158), “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R)”. SFAS 158 requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status including the gains and or losses and prior service costs or credits that were not recognized as components of net periodic benefit cost pursuant to FASB No. 87 in the year in which the changes occur through comprehensive income. This Statement also improves financial reporting by requiring an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. The Company was required to initially recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after December 15, 2006.

The following table illustrates the effect of applying the provisions of this statement:

Incremental Effect of Applying Statement No. 158
on Individual Line Items in the Statement of Financial Position

	December 31, 2006
	Before  Application of Statement 158			Adjustments				After  Application of Statement 158
	(in thousands)
Assets:
Prepaid pension cost		$	1,380		$	(1,080	)		$	300
Deferred income tax asset		—			137				137
Liabilities:
Deferred income tax liability		230			(230		)		—
Equity:
Accumulated other comprehensive loss		$	421		$	(713	)		$	(292	)

11.Stock-Based Compensation

The Company has stock benefit plans that allow the Company to grant options and stock to employees and directors. The options, which have a term of up to 10 years when issued, vest over a three to five year period. The exercise price of each option equals the market price of the Company’s stock on the date of the grant.

On January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) 123R, “Share-Based Payment,” using the modified prospective transition method. Under this transition method, compensation cost to be recognized beginning in the first quarter of 2006 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R

25

Prior to 2006, the Company disclosed pro forma compensation expense quarterly and annually by calculating the stock option grant’s fair value using the intrinsic value method under APB Opinion No. 25, “Accounting for Stock Issued to Employees”, as permitted by SFAS No. 123 “Accounting for Stock-Based Compensation,” that contains a fair value-based method for valuing stock-based compensation that entities may use, measures compensation cost at the grant date based on the fair value of the award. Compensation is then recognized over the service period, which is usually the vesting period. No stock-based compensation expense related to stock options was reflected in net income in 2005 and 2004, as all options granted under the plans had an exercise price equal to the market value of the underlying common stock on the date of the grant.

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

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

The fair value of each option grant during 2006 and 2005 was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: There were no options granted in 2004.

	2006			2005
Weighted average assumptions
Dividend yield	2.59		%	2.41		%
Expected volatility	25.48		%	22.77		%
Risk-free interest rate	5.00		%	4.34		%
Fair value of options granted during the year	$	7.27		$	6.15
Expected lives in years	6.64			5.14

12.Income Taxes

The Company accounts for income taxes under the liability method specified in SFAS No. 109, “Accounting for Income Taxes” whereby deferred income taxes are recognized for the tax consequences of “temporary differences” by applying enacted statutory tax rates applicable to future years to differences

26

between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date.

13.Advertising Costs

The Company expenses marketing and advertising costs as incurred.

14.Earnings Per Share

The Company follows the provisions of SFAS No. 128, “Earnings Per Share.” Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the weighted average common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock.

15.Comprehensive Income

The Company follows SFAS No. 130, “Reporting Comprehensive Income.” SFAS No. 130 establishes standards to provide prominent disclosure of comprehensive income items. Comprehensive income is the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. The components of other comprehensive income (loss) are as follows:

	December 31, 2006
	Before tax amount			Tax (expense) benefit				Net of tax amount
	(in thousands)
Unrealized gains on securities
Unrealized holding gains arising during period		$	586		$	(198	)		$	388
Reclassification adjustment for losses realized		51			(18		)		33
Other comprehensive income, net		$	637		$	(216	)		$	421

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

	December 31, 2004
	Before tax amount				Tax (expense) benefit				Net of tax amount
	(in thousands)
Unrealized gains on securities
Unrealized holding gains arising during period		$	168			$	(57	)		$	111
Minimum pension liability adjustment		(107		)		37				(70		)
Other comprehensive income, net		$	61			$	(20	)		$	41

27

16.Segment Reporting

The Company follows SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.” The Company has one reportable segment, “Community Banking.” All of the Company’s activities are interrelated, and each activity is dependent and assessed based on how each of the activities of the Company supports the others. For example, commercial lending is dependent upon the ability of the Bank to fund itself with retail deposits and other borrowings and to manage interest rate and credit risk. This situation is also similar for consumer and residential mortgage lending. Accordingly, all significant operating decisions are based upon analysis of the Company as one operating segment or unit.

17.Reclassifications

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

NOTE B—RECENT ACCOUNTING PRONOUNCEMENTS

In March 2006, the Financial Accounting Standards Board (FASB) issued Statement No. 156 (SFAS 156), “Accounting for Servicing of Financial Assets”. SFAS 156 amends SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS 156 permits, but does not require, an entity to choose either the amortization method or the fair value measurement method for measuring each class of separately recognized servicing assets and servicing liabilities. SFAS 156 is effective for fiscal years beginning after September 15, 2006 and is not expected to have a material impact on the Company’s consolidated financial statements.

In July 2006, FASB issued FASB Interpretation (FIN) 48, “Accounting for Uncertainty in Income Taxes: an interpretation of FASB Statement No. 109, “Accounting for Income Taxes”. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with Statement of SFAS No. 109. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006 and is currently under evaluation by the Company to determine the impact on the Company’s consolidated financial statements.

In September 2006, FASB Issued Statement No. 157 (SFAS 157), “Fair Value Measurements” which is effective for fiscal years beginning after November 15, 2007 and for interim periods within those years. This statement defines fair value, establishes a framework for measuring fair value and expands the related disclosure requirements. The Company is currently evaluating the impact the adoption of SFAS No. 157 will have on its consolidated financial statements.

In September 2006, FASB Issued Statement No. 158 (SFAS 158), “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R)”. SFAS 158 requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. This Statement also improves financial reporting by requiring an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. An employer with publicly traded equity securities is required to initially recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after December 15, 2006. The Company adopted the recognition and disclosure provisions of SFAS 158. The effects of the adoption of SFAS 158 on the Company’s financial condition at December 31, 2006 has been reflected in the consolidated financial statements and resulted in the recognition $713,000 of accumulated other comprehensive loss, net of income tax of $367,000.

28

In September 2006, the SEC staff issued Staff Accounting Bulletin No.108 “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements”. SAB 108 was issued to provide consistency among registrants in the quantification of financial statement misstatements. SAB 108 established an approach that requires quantification of financial statement misstatements based on the effects of the misstatement on each of the company’s financial statements and the related disclosures. SAB 108 allows registrants to initially apply the approach either by (1) retroactively adjusting prior financial statements as if the approach had always been used or (2) recording the cumulative effect of initially applying the approach as adjustments to the carrying values of assets and liabilities as of January 1, 2006 with the related offset recorded to the opening balance of retained earnings. Use of the “cumulative effect” transition requires full disclosure as to the nature and amount of each individual error being corrected. As the Company is not aware of any material misstatement, the adoption of SAB 108 did not have a material effect on the financial statements.

In September 2006, the FASB EITF finalized Issue No. 06-5, “Accounting for Purchases of Life Insurance—Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4 (Accounting for Purchases of Life Insurance)”. This issue requires that a policyholder consider contractual terms of a life insurance policy in determining the amount that could be realized under the insurance contract. It also requires that if the contract provides for a greater surrender value if all individual policies in a group are surrendered at the same time, that the surrender value be determined based on the assumption that policies will be surrendered on an individual basis. Lastly, the issue discusses whether the cash surrender value should be discounted when the policyholder is contractually limited in its ability to surrender a policy. This issue is effective for fiscal years beginning after December 15, 2006. The Company does not believe the application of this EITF conclusion will have a material impact on its financial statements.

On February 15, 2007, the FASB issued FASB Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities-Including an Amendment of FASB Statement No. 115.” This standard permits an entity to choose to measure many financial instruments and certain other items at fair value. Most of the provisions in Statement 159 are elective; however, the amendment to FASB Statement No. 115, “Accounting for Certain Investments in Debt and Equity Securities”, applies to all entities with available-for-sale and trading securities. The fair value option established by Statement 159 permits all entities to choose to measure eligible items at fair value at specified election dates. A business entity will report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. The fair value option: (a) may be applied instrument by instrument, with a few exceptions, such as investments otherwise accounted for by the equity method; (b) is irrevocable (unless a new election date occurs); and (c) is applied only to entire instruments and not to portions of instruments. Statement 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of the previous fiscal year provided that the entity makes that choice in the first 120 days of that fiscal year and also elects to apply the provisions of FASB Statement No 157, “Fair Value Measurements.” The Company is currently evaluating the impact of this pronouncement.

NOTE C—CASH AND CASH EQUIVALENTS

Cash and cash equivalents consist of the following:

	December 31,
	2006		2005
	(in thousands)
Cash and due from banks	$	5,544	$	3,684
Interest-bearing deposits in other financial institutions	6,820		137
	$	12,364	$	3,821

29

NOTE D—INVESTMENT AND MORTGAGE-BACKED SECURITIES

The amortized cost, gross unrealized gains and losses, and fair value of the Company’s investment securities at December 31, 2006 and 2005, are summarized as follows:

	December 31, 2006
	Amortized cost			Gross unrealized gains			Gross unrealized losses				Fair value
	(in thousands)
Investment securities held to maturity
State and political subdivisions		$	677		$	4		$	—		$	681
Corporate debt securities		—			—			—			—
		$	677		4			—			$	681
Investment securities available for sale
U.S. Government and federal agencies		$	5,990		$	—		$	(79	)	$	5,911
Corporate debt securities		4,003			—			(21		)	3,982
State and political subdivisions		24,406			177			(154		)	24,429
Equities		150			52			—			202
		$	34,549		$	229		$	(254	)	$	34,524
Mortgage-backed securities held to maturity
FHLMC certificates		$	2,297		$	79		$	—		$	2,376
FNMA certificates		3,084			34			(69		)	3,049
GNMA certificates		2,316			47			—			2,363
Real estate mortgage investment conduit		—			—			—			—
		$	7,697		$	160		$	(69	)	$	7,788
Mortgage-backed securities available for sale
FHLMC certificates		$	8,106		$	1		$	(219	)	$	7,888
FNMA certificates		10,765			—			(435		)	10,330
Real estate mortgage investment conduit		57,365			8			(1,253		)	56,120
		$	76,236		$	9		$	(1,907	)	$	74,338

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

Gross realized loses were $51,000 for the year ended December 31, 2006. These losses resulted from the sale of mortgage-backed securities of $5.0 million during the year ended December 31, 2006.

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

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

	December 31, 2006
	Available for sale				Held to maturity
	Amortized cost		Fair value		Amortized cost			Fair value
	(in thousands)
Investment securities
Due in one year or less	$	6,153	$	6,187		$	—	$	—
Due after one year through five years	5,451		5,348			462		466
Due after five years through 10 years	11,793		11,763			215		215
Due after 10 years	11,152		11,226			—		—
	34,549		34,524			677		681
Mortgage-backed securities	76,236		74,338			7,697		7,788
	$	110,785	$	108,862		$	8,374	$	8,469

Investment securities having an aggregate amortized cost of approximately $3.0 million were pledged to secure public deposits at December 31, 2006 and 2005.

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

31

The table below indicates the length of time individual securities, both held-to-maturity and available-for-sale, have been in a continuous unrealized loss position at December 31, 2006:

	Number		Less than 12 months							12 months or longer							Total
Description of Securities	of Securities		Fair Value			Unrealized Loss				Fair Value			Unrealized Loss				Fair value			Unrealized Loss
	(in thousands)
U.S. Government and federal agencies		2		$	—		$	—			$	5,911		$	(79	)		$	5,911		$	(79	)
Corporate debt securities		3		—			—				3,982			(21		)		3,982			(21		)
State and political subdivisions		19		976			(4		)		13,375			(150		)		14,351			(154		)
Mortgage-backed securities		38		7,298			(53		)		65,827			(1,923		)		73,125			(1,976		)
Total temporarily impaired securities		62		$	8,274		$	(57	)		$	89,095		$	(2,173	)		$	97,369		$	(2,230	)

The table below indicates the length of time individual securities, both held-to-maturity and available-for-sale, have been in a continuous unrealized loss position at December 31, 2005:

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

The unrealized losses on investments in securities issued by the U.S. Treasury and Government agencies, U.S. Government sponsored agencies and agency mortgage-backed securities were caused by changes in market interest rates. The contractual terms and contractual cash flows of these securities do not permit the issuer to settle at a price less than the amortized cost of the investment. The Company has the ability and intent to hold these investments until a market price recovery or maturity. Accordingly, the Company  has evaluated relevant factors and has determined that the unrealized losses at December 31, 2006 and 2005, respectively are not considered other-than-temporary.

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NOTE E—LOANS RECEIVABLE

Loans receivable are summarized as follows:

	December 31,
	2006			2005
	(in thousands)
Held for investment:
First mortgage loans (principally conventional)
Secured by one-to-four family residences	$	266,789		$	289,678
Secured by other non-residential properties	93,607			89,489
Construction loans	34,944			24,888
	395,340			404,055
Net deferred loan origination costs and unamortized premiums	531			504
Total first mortgage loans	395,871			404,559
Other loans
Commercial non-real estate	40,458			48,471
Home equity and second mortgage	46,864			37,479
Commercial leases	36			186
Other	3,206			2,836
	90,564			88,972
Unamortized premiums	0			1
Total other loans	90,564			88,973
Less allowance for loan losses	(2,865		)	(2,641		)
Total loans receivable	$	483,570		$	490,891
Held for sale:
First mortgage loans (principally conventional)
Secured by one-to four family residences	$	969		$	68

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

	December 31,
	2006		2005			2004
	(in thousands)
Balance at beginning of year	$	2,641	$	2,307		$	2,111
Provision charged to income	150		540			600
(Charge-offs), net of recoveries	74		(206		)	(404		)
Balance at end of year	$	2,865	$	2,641		$	2,307

33

Non-performing loans, which include non-accrual loans for which the accrual of interest has been discontinued and loan balances past due over 90 days that are not on a non-accrual status but that management expects will eventually be paid in full are summarized as follows:

	December 31,
	2006		2005
	(in thousands)
Impaired loans with a related allowance	$	—	$	—
Impaired loans without a related allowance	$	—	$	—
Total impaired loans	$	—	$	—
Allowance for impaired loans	$	—	$	—
Total non-accrual loans	$	2,110	$	1,589
Total loans past due 90 days as to interest or principal and accruing interest	$	—	$	—

Interest income that would have been recorded under the original terms of such loans totaled approximately $130,000, $60,000, and $30,000 for the years ended December 31, 2006, 2005, and 2004. No interest income has been recognized on non-accrual loans for any of the periods presented. The Company has reviewed these loans and has determined there was no impairment at December 31, 2006 and 2005.

The Bank has no concentration of loans to borrowers engaged in similar activities that exceeded 10% of loans at December 31, 2006 and 2005. In the ordinary course of business, the Bank has granted loans to certain executive officers, directors and their related interests. Related party loans are made on substantially the same terms as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than the normal risk of collectibility. The aggregate dollar amount of these loans was approximately $252,000 and $70,000 at December 31, 2006 and 2005, respectively. New loans to related parties of $230,000 were made during the year. For the year ended December 31, 2006, principal repayments of approximately $48,000 were received.

NOTE F—LOAN SERVICING

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

	December 31,
	2006		2005
	(in thousands)
Mortgage loan servicing portfolios
FHLMC	$	903	$	1,182
FNMA	21,918		9,696
Other investors	10,841		6,173
	$	33,662	$	17,051

Custodial balances maintained in connection with the foregoing loan servicing totaled approximately $238,000 and $168,000 at December 31, 2006 and 2005, respectively. Net servicing revenue on mortgage loans serviced for other was $19,000, $18,000 and $11,000 for the years ended December 31, 2006, 2005, and 2004, respectively. Mortgage servicing rights of $279,000 and $137,000 are reported as a component of other assets at December 31, 2006 and 2005.

34

NOTE G—PREMISES AND EQUIPMENT

Premises and equipment are summarized as follows:

	Estimated	December 31,
	useful lives	2006	2005
		(in thousands)
Buildings	30 years	$6,207	$6,125
Leasehold improvements	5 years	1,932	1,623
Furniture, fixtures and equipment	3-7 years	10,257	10,331
		18,396	18,079
Less accumulated depreciation		13,544	13,482
		4,852	4,597
Land		1,692	1,692
		$6,544	$6,289

NOTE H—DEPOSITS

Deposits are summarized as follows:

	December 31,
Deposit type	2006	2005
	(in thousands)
Demand	$36,991	$37,138
NOW	51,272	52,319
Money market	62,914	79,666
Passbook savings	131,359	151,725
Total demand, transaction and passbook deposits	282,536	320,848
Certificates of deposit	195,551	149,673
	$478,087	$470,521

The aggregate amount of certificates of deposit with a minimum denomination of $100,000 was approximately $42.4 million and $31.3 million at December 31, 2006 and 2005, respectively. The Bank had broker-originated certificates of deposit of $11.7 million and $0 at December 31, 2006 and 2005, respectively.

At December 31, 2006, scheduled maturities of certificates of deposit are as follows:

Year ending December 31,
2007	2008	2009	2010	2011	Thereafter	Total
(in thousands)
$170,926	$12,745	$7,195	$3,493	$766	$426	$195,551

Related party deposits are on substantially the same terms as for comparable transactions with unrelated persons. The aggregate dollar amount of these deposits was approximately $2.5 million and $2.0 million at December 31, 2006 and 2005, respectively.

35

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

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

	December 31,
	2006						2005
Principal payments due during	Amount			Weighted average rate			Amount			Weighted average rate
	(in thousands)						(in thousands)
2006		$	—		—	%		32,672			3.81	%
2007		25,122			3.92			22,050			3.73
2008		23,144			3.76			17,638			3.40
2009		34,566			3.84			34,566			3.84
2010		13,074			4.41			8,539			4.25
2011		2,776			4.17			2,776			4.17
Thereafter		3,019			4.23			3,019			4.23
		$	101,701		3.93	%		$	121,260		3.79	%

The advances are collateralized by Federal Home Loan Bank stock and certain first mortgage loans and mortgage-backed securities. Total unused lines of credit at the Federal Home Loan Bank were $30.0 million at December 31, 2006. The advances from the Federal Home Loan Bank are fixed rate, fixed term.

NOTE J—BENEFIT PLANS

1.   Defined Contribution Plan

The Bank maintains a 401(k) profit-sharing plan for eligible employees. Participants may contribute up to 15% of pretax eligible compensation. The Bank makes matching discretionary contributions equal to 75% of the initial $1,000 deferral. Contributions to the 401(k) plan totaled $65,000, $61,000, and $65,000 in 2006, 2005 and 2004, respectively.

2.   Defined Benefit Plan

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

36

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

	December 31,
	2006			2005
	(in thousands)
Reconciliation of Projected Benefit Obligation
Benefit obligation at beginning of year	$	3,621		$	3,382
Service cost	308			314
Interest cost	211			211
Plan amendments	—			—
Actuarial loss	(82		)	122
Benefits paid	(498		)	(408		)
Benefits obligation at end of year	$	3,560		$	3,621
Reconciliation of Fair Value of Assets
Fair value of plan assets at beginning of year	$	3,174		$	2,490
Actual return on plan assets	364			77
Employer contribution	820			1,015
Benefits paid	(498		)	(408		)
Fair value of plan assets at end of year	$	3,860		$	3,174
Reconciliation of Funded Status
Funded status	$	300		$	(447	)
Unrecognized net actuarial loss	—			1,162
Unrecognized prior service cost	—			156
Prepaid benefit cost at end of year	$	300		$	871

The amount recognized in accumulated other comprehensive income at December 31, 2006 was $1,080,000 which included a net actuarial loss of $987,000 and prior service cost of $93,000. The expected 2007 amortization of accumulated other comprehensive income is $42,000 of loss and $63,000 of prior service cost.

The accumulated benefit obligation at December 31, 2006 and 2005 was $3,036,000 and $3,079,000 respectively.

Employer contributions and benefits paid in the above table include only those amounts contributed directly to, or paid directly from, Plan assets. The expected employer contribution for 2007 is $1.1 million.

	2006		2005
Weighted-average assumptions used to determine benefit obligations, end of year
Discount rate	5.75	%	5.75	%
Rate of compensation increase	4.00		4.00

37

	2006			2005			2004
	(in thousands)
Components of net periodic benefit cost
Service cost	$	308		$	314		$	230
Interest cost	211			211			190
Expected return on plan assets	(324		)	(205		)	(210		)
Amortization of prior service cost	63			63			63
Amortization of transition obligation (asset)	—			—			4
Recognized net actuarial (gain) loss	51			42			24
Net periodic benefit cost	$	309		$	425		$	301

	2006		2005		2004
Weighted-average assumptions used to determine net benefit costs as of December 31
Discount rate	5.75	%	6.00	%	6.25	%
Expected return on plan assets	9.00		8.00		8.00
Rate of compensation increase	4.00		4.00		4.00

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

Estimated future benefits payments are as follows:

	(in thousands)
2007		$	296
2008		49
2009		78
2010		78
2011		79
2012-2016		698

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

	Percentage of Plan Assets at Year End
	2006			2005
Asset Category
Equity securities		59	%		64	%
Debt securities		21			27
Other		20			9
Total		100	%		100	%

Trustees of the Plan are responsible for defining and implementing the investment objectives and policies for the Plan’s assets. Assets are invested in accordance with sound investment practices that emphasize long-term investment fundamentals that closely match the demographics of the plan’s participants. The Plan’s goal is to earn long-term returns that match or exceed the benefit obligations of the Plan through a well-diversified portfolio structure. The Plan’s return objectives and risk parameters are managed through a diversified mix of assets. The asset mix and investment strategy are reviewed on a quarterly basis and rebalanced when necessary. The asset allocation for the Plan is targeted at 60% equity securities and 40% debt and other securities.

38

3..   Employee Stock Ownership Plan (ESOP)

The Company has an internally leveraged ESOP for eligible employees who have completed six months of service with the Company or its subsidiaries. The ESOP borrowed $4.2 million from the Company in 1996 to purchase 423,200 newly issued shares of common stock. The Company makes discretionary contributions to the ESOP in order to service the ESOP’s debt. Any dividends received by the ESOP will be used to pay debt service. The ESOP shares are pledged as collateral for its debt. As the debt is repaid, shares are released from collateral based on the proportion of debt service paid in the year and allocated to qualifying employees. As shares are released from collateral, the Company reports compensation expense equal to the current market price of the shares, and the allocated shares are included in outstanding shares for earnings per share computations. ESOP compensation expense was $332,000, $387,000 and $431,000 in 2006, 2005 and 2004, respectively.

	2006		2005
Allocated shares	169,000		165,000
Unreleased shares	171,000		184,000
Total ESOP shares	340,000		349,000
Fair value of unreleased shares (in thousands)	$	5,301	$	5,235

4.     Stock-Based Compensation Plans

A summary of the status of the Company’s stock option plans as of December 31, 2006, and changes for each of the years in the three-year period then ended is as follows:

	2006					2005					2004
	Number of shares		Weighted average exercise price per share			Number of shares		Weighted average exercise price per share			Number of Shares		Weighted Average Exercise price per Share
Outstanding at beginning of year	384,848			$	23.18	283,072			$	19.09	585,714			$	15.40
Options granted	11,000			27.20		160,500			28.46		—			—
Options exercised	(21,415	)		15.25		(49,975	)		16.01		(294,925	)		11.56
Options forfeited	(8,699	)		29.72		(8,749	)		28.40		(7,717	)		26.75
Options expired	—			—		—			—		—			—
Outstanding at end of year	365,734			$	23.62	384,848			$	23.18	283,072			$	19.09

39

The following table summarizes information about stock options outstanding at December 31, 2006:

	Options outstanding							Options exercisable
Range of exercise prices	Number outstanding at December 31, 2006		Weighted average remaining contractual life (years)		Weighted average exercise price			Number exercisable at December 31, 2006		Weighted average exercise price
$13.25-19.88		133,854		0.73		$	15.96		133,854		$	15.96
$19.89-29.84		211,242		4.58		27.44			88,068		26.36
$29.85-34.14		20,638		6.97		34.14			12,383		34.14
		365,734		3.31		$	23.62		234,305		$	20.83

The aggregate intrinsic value represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last trading day of 2006 and the exercise price, multiplied by the number of in-the money options). At December 31, 2006 the aggregate intrinsic value of options outstanding totaled $2,699,000 and the aggregate intrinsic value of options exercisable was $2,383,000. The aggregate intrinsic value of options exercised during the years ended December 31, 2006 and 2005 was $320,000 and $714,000, respectively. Exercise of stock options during the year ended December 31, 2006 and 2005 resulted in cash receipts of $325,000 and $801,000, respectively. The Company has a policy of issuing shares from treasury to satisfy share option exercises.

Stock-based compensation expense included in net income related to stock options was $386,000, resulting in a tax benefit of $116,000, for the year ended December 31, 2006. Results for prior periods have not been restated. At  December 31, 2006, there was $818,000 of total unrecognized compensation cost, net of estimated forfeitures, related to non-vested options under the Plan. That cost is expected to be recognized over a weighted average period of 26.8 months

The table below summarizes the changes in non-vested restricted stock during the past year:

	December 31, 2006
	Shares			Weighted Average grant date fair value
Total non-vested restricted stock at December 31, 2005		39,000			$	28.48
Restricted stock grant in 2006		—			—
Vested restricted stock in 2006		(12,666	)		$	28.48
Forfeitures of restricted stock in 2006		(1,000	)		$	28.48
Total non-vested restricted stock at December 31, 2006		25,334			$	28.48

Stock-based compensation expense included in net income related to stock grants was $361,000 and $15,000 for the years ended December 31, 2006 and 2005, respectively. The expected compensation expense for 2007 and 2008 is $361,000 and $346,000, respectively.

40

NOTE K—INCOME TAXES

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

	Year ended December 31,
	2006		2005		2004
	(in thousands)
Federal
Current	$	1,687	$	1,753	$	508
Charge in lieu of income tax relating to stock compensation	121		144		1,616
Deferred	327		403		343
	2,135		2,300		2,467
State and local—current	1		—		—
Income tax provision	$	2,136	$	2,300	$	2,467

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

	Year ended December 31,
	2006		2005		2004
Statutory federal income tax (benefit)	34.0	%	34.0	%	(34.0	)%
Increase (decrease) resulting from
Tax-exempt income	(6.4	)	(5.7	)	(3.7	)
State tax, net of federal benefit	(0.0	)	(0.0	)	(0.0	)
Other	0.3		(1.1	)	(3.0	)
	27.9	%	27.2	%	27.3	%

Deferred taxes are included in the accompanying consolidated statements of financial position at December 31, 2006 and 2005, for the estimated future tax effects of differences between the financial statement and federal income tax bases of assets and liabilities according to the provisions of currently enacted tax laws. No valuation allowance was recorded against deferred tax assets at December 31, 2006 and 2005. The Company’s net deferred tax asset at December 31, 2006 and 2005, was composed of the following:

	December 31,
	2006		2005
	(in thousands)
Deferred tax assets
Deferred compensation	$	202	$	208
Allowance for loan losses, net	974		885
Unrealized loss on securities available for sale	653		869
Stock compensation	121		—
Adjustment to record funded status of pension	367		—
Other	41		51
	2,358		2,013
Deferred tax liabilities
Accrued pension expense	843		504
Prepaid expenses	44		43
Deferred loan costs	492		472
Amortization of goodwill	450		263
Other	393		419
	2,222		1,701
Net deferred tax asset	$	136	$	312

41

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

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

NOTE L—REGULATORY MATTERS

The Bank is subject to minimum regulatory capital standards promulgated by the Office of Thrift Supervision (OTS). Failure to meet minimum capital requirements can initiate certain mandatory—and possible additional discretionary—actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Such minimum capital standards generally require the maintenance of regulatory capital sufficient to meet each of three tests, hereinafter described as the tangible capital requirement, the core capital requirement and the risk-based capital requirement. The tangible capital requirement provides for minimum tangible capital (defined as stockholders’ equity less all intangible assets) equal to 1.5% of adjusted total assets. The core capital requirement provides for minimum core capital (tangible capital plus certain forms of supervisory goodwill and other qualifying intangible assets) equal to 4% of adjusted total assets at December 31, 2006. The risk-based capital requirement provides for minimum core capital (tangible capital plus certain forms of supervisory goodwill and other qualifying intangible assets) adjusted for the general valuation allowances equal to 8% of total assets classified in one of four risk-weighted categories at December 31, 2006.

As of December 31, 2006, management believes that the Bank met all capital adequacy requirements to which it was subject.

	Regulatory capital December 31, 2006
	Tangible						Core						Risk-based
	Capital			Percent			Capital			Percent			Capital			Percent
	(in thousands)
Capital under generally accepted accounting principles	$	61,306			9.41	%	$	61,306			9.41	%	$	61,306			16.33	%
Unrealized loss on certain available-for-sale securities	1,304				0.20		1,304				0.20		1,304				0.35
Goodwill and other intangible assets	(4,324		)		(0.66	)	(4,324		)		(0.66	)	(4,324		)		(1.15	)
Additional capital items
General valuation allowances—limited	—				—		—				—		2,865				0.76
Regulatory capital computed	58,286				8.95		58,286				8.95		61,151				16.29
Minimum capital requirement	9,774				1.50		26,063				4.00		30,035				8.00
Regulatory capital—excess	$	48,512			7.45	%	$	32,223			4.95	%	$	31,116			8.29	%

42

	Regulatory capital December 31, 2005
	Tangible						Core						Risk-based
	Capital			Percent			Capital			Percent			Capital			Percent
	(in thousands)
Capital under generally accepted accounting principles	$	57,421			8.70	%	$	57,421			8.70	%	$	57,421			14.90	%
Unrealized loss on certain available-for-sale securities	1,689				0.26		1,689				0.26		1,689				0.44
Goodwill and other intangible assets	(4,626		)		(0.70	)	(4,626		)		(0.70	)	(4,626		)		(1.20	)
Additional capital items
General valuation allowances—limited	—				—		—				—		2,641				0.68
Regulatory capital computed	54,484				8.26		54,484				8.26		57,125				14.82
Minimum capital requirement	9,900				1.50		26,400				4.00		30,834				8.00
Regulatory capital—excess	$	44,584			6.76	%	$	28,084			4.26	%	$	26,291			6.82	%

At December 31, 2006, the Bank met all regulatory requirements for classification as a “well-capitalized” institution. A “well-capitalized” institution must have risk-based capital of 10% and core capital of 5%. The Bank’s capital exceeded the minimum required amounts for classification as a “well-capitalized” institution. There are no conditions or events that have occurred that management believes have changed the Bank’s classification as a “well-capitalized” institution.

The Bank maintains a liquidation account for the benefit of eligible savings account holders who maintained deposit accounts in the Bank after the Bank converted to a stock form of ownership. The Bank may not declare or pay a cash dividend on or repurchase any of its common shares if the effect thereof would cause the Bank’s stockholders’ equity to be reduced below either the amount required for the liquidation account or the regulatory capital requirements for insured institutions.

NOTE M—FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments are primarily commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the consolidated financial statements when they become receivable or payable. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statements of financial position. The contract or notional amounts of those instruments reflect the extent of the Bank’s involvement in particular classes of financial instruments.

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

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

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

	December 31,
	2006		2005
	(in thousands)
Commitments to extend credit	$	85,199	$	69,822
Standby letters of credit	2,151		2,220
Loans sold with recourse	71		74
	$	87,421	$	72,116

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other

43

termination clauses and may require payment of a fee. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if it is deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the borrower. Collateral held generally includes residential and or commercial real estate.

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

NOTE N—COMMITMENTS AND CONTINGENCIES

The Bank had optional commitments of $2,910,000 and $1,085,000 to sell mortgage loans to investors at December 31, 2006 and 2005 respectively.

The Bank leases branch facilities and office space for periods ranging up to ten years. These leases are classified as operating leases and contain options to renew for additional periods. Rental expense was approximately $481,000, $420,000, and $359,000, for the years ended December 31, 2006, 2005 and 2004, respectively.

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

Year ending December 31,	(in thousands)
2007		$	432
2008		302
2009		185
2010		100
2011		82
Thereafter		375
		$	1,476

The Company has agreements with certain key executives that provide severance pay benefits if there is a change in control of the Company. The agreements will continue in effect until terminated or not renewed by the Company or key executives. Upon a change in control, the Company shall make a lump-sum payment or continue to pay the key executives’ salaries per the agreements, and reimburse the executive for certain benefits for one year. The contingent liability under the agreements at December 31, 2006 was approximately $1,973,000.

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

NOTE O—SIGNIFICANT CONCENTRATIONS OF CREDIT RISK

The Bank is principally engaged in originating and investing in one-to-four family residential real estate and commercial real estate loans in eastern Pennsylvania and New Jersey. The Bank offers both fixed and adjustable rates of interest on these loans that have amortization terms ranging to 30 years. The loans are generally originated or purchased on the basis of an 80% loan-to-value ratio, which has historically provided the Bank with more than adequate collateral coverage in the event of default. Nevertheless, the Bank, as with any lending institution, is subject to the risk that residential real estate values in the primary lending area will deteriorate, thereby potentially impairing underlying collateral values. However, management believes that residential and commercial real estate values are presently

44

stable in its primary lending area and that loan loss allowances have been provided for in amounts commensurate with its current perception of the foregoing risks in the portfolio.

NOTE P—FAIR VALUE OF FINANCIAL INSTRUMENTS

SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” requires all entities to disclose the estimated fair value of their assets and liabilities considered to be financial instruments. For the Bank, as for most financial institutions, the majority of its assets and liabilities are considered financial instruments as defined in SFAS No. 107. However, many such instruments lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction. Also, it is the Company’s general practice and intent to hold its financial instruments to maturity or available for sale and to not engage in trading or significant sales activities. Therefore, the Company and the Bank use significant estimations and present value calculations to prepare this disclosure.

Changes in the assumptions or methodologies used to estimate fair values may materially affect the estimated amounts. In addition, there may not be reasonable comparability between institutions due to the wide range of permitted assumptions and methodologies in the absence of active markets. This lack of uniformity gives rise to a high degree of subjectivity in estimating financial instrument fair values.

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

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

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

	December 31,
	2006					2005
	Fair value			Carrying value		Fair value		Carrying value
	(in thousands)
Cash and cash equivalents		$	12,364	$	12,364	$	3,821	$	3,821
Investment securities		35,205		35,201		35,108		35,091
Mortgage-backed securities		82,126		82,035		93,896		93,688

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

	December 31,
	2006				2005
	Fair value		Carrying value		Fair Value		Carrying value
	(in thousands)
Assets
Certificates of deposit	$	40	$	40	$	40	$	40
Liabilities
Deposits with stated maturities	194,441		195,551		147,561		149,673
Borrowings with stated maturities	99,179		101,701		118,352		121,260

45

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

	December 31,
	2006				2005
	Fair value		Carrying Value		Fair value		Carrying value
	(in thousands)
Deposits with no stated maturities	$	282,536	$	282,536	$	320,848	$	320,848

The fair value of the net loan portfolio has been estimated using the present value of cash flows, discounted at the approximate current market rates, and giving consideration to estimated prepayment risk and credit loss factors.

	December 31,
	2006				2005
	Fair value		Carrying value		Fair value		Carrying value
	(in thousands)
Net loans	$	480,660	$	484,539	$	486,214	$	490,959

The fair value of commitments to extend credit is estimated based on the amount of unamortized deferred loan commitment fees. The fair value of letters of credit is based on the amount of unearned fees plus the estimated cost to terminate the letters of credit. Fair values of unrecognized financial instruments including commitments to extend credit and the fair value of letters of credit are immaterial.

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

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

	Year ended December 31,
	2006		2005		2004
	(in thousands)
Service fees, charges and other operating income
Loan servicing fees	$	245	$	363	$	331
Late charge income	94		83		90
Deposit service charges	1,100		1,061		1,092
Debt card income	266		219		169
Other income	386		343		393
	$	2,091	$	2,069	$	2,075
Other operating expense
Insurance and surety bond	$	194	$	193	$	190
Office supplies	193		221		220
Loan expense	252		337		444
MAC expense	309		328		315
Postage	285		272		237
Telephone	298		306		273
Supervisory examination fees	146		138		130
Other expenses	639		698		738
	$	2,316	$	2,493	$	2,547

46

NOTE R—EARNINGS PER SHARE

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

	Year ended December 31, 2006
	Income (numerator)			Weighted average shares (denominator)		Per share Amount
Basic earnings per share
Income available to common stockholders		$	5,514		2,697,460		$	2.04
Effect of dilutive securities
Stock compensation plans		—			22,782		(0.01		)
Diluted earnings per share
Income available to common stockholders plus effect of dilutive securities		$	5,514		2,720,242		$	2.03

There were options to purchase 20,638 shares of common stock at a price of $34.14 per share which were outstanding during 2006 that were not included in the computation of diluted earnings per share because the options’ exercise prices were greater than the average market price of the common shares.

	Year ended December 31, 2005
	Income (numerator)			Weighted average shares (denominator)		Per share Amount
Basic earnings per share
Income available to common stockholders		$	6,153		2,736,945		$	2.25
Effect of dilutive securities
Stock compensation plans		—			61,226		(0.05		)
Diluted earnings per share
Income available to common stockholders plus effect of dilutive securities		$	6,153		2,798,171		$	2.20

There were options to purchase 170,321 shares of common stock at a range of $28.48 to $34.14 per share which were outstanding during 2005 that were not included in the computation of diluted earnings per share because the options’ exercise prices were greater than the average market price of the common shares.

	Year ended December 31, 2004
	Income (numerator)			Weighted average shares (denominator)		Per share amount
Basic earnings per share
Income available to common stockholders		$	6,567		2,686,732		$	2.44
Effect of dilutive securities
Stock compensation plans		—			126,173		(0.11		)
Diluted earnings per share
Income available to common stockholders plus effect of dilutive securities		$	6,567		2,812,905		$	2.33

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

47

NOTE S—SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATE (UNAUDITED)

	Three months ended
	Dec. 31, 2006		Sept. 30, 2006			June 30, 2006			March 31, 2006
	(in thousands, except per share data)
Total interest income	$	9,678		$	9,611		$	9,627		$	9,103
Total interest expense	4,224			4,093			3,948			3,596
Net interest income	5,454			5,518			5,679			5,507
Provision for possible loan losses	—			—			60			90
Net interest income after provision	5,454			5,518			5,619			5,417
Other income	691			813			625			681
Other expenses	4,127			4,370			4,301			4,370
Income before income taxes	2,018			1,961			1,943			1,728
Income taxes	563			549			551			473
Net income	$	1,455		$	1,412		$	1,392		$	1,255
Earnings per share—basic	$	0.54		$	0.52		$	0.52		$	0.47
Earnings per share—assuming dilution	$	0.53		$	0.52		$	0.51		$	0.46

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

48

NOTE T—CONDENSED FINANCIAL INFORMATION—PARENT COMPANY ONLY

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

BALANCE SHEET

	December 31,
	2006		2005
	(in thousands)
ASSETS
Cash	$	2,959	$	3,452
Certificates of deposit—other institutions	40		40
Investment in Third Federal	58,995		55,611
Investment in TF Investments	2,463		2,392
Investment in Penns Trail Development	1,007		991
Investment securities available for sale	203		—
Other assets	12		240
Total assets	$	65,679	$	62,726
LIABILITIES AND STOCKHOLDERS’ EQUITY
Total liabilities	$	40	$	78
Stockholders’ equity	65,639		62,648
Total liabilities and stockholders’ equity	$	65,679	$	62,726

STATEMENT OF OPERATIONS

	Year ended December 31,
	2006		2005		2004
	(in thousands)
INCOME
Equity in earnings of subsidiaries	$	6,448	$	6,510	$	6,906
Interest and dividend income	54		72		74
Total income	6,502		6,582		6,980
EXPENSES
Other	988		429		413
Total expenses	988		429		413
NET INCOME	$	5,514	$	6,153	$	6,567

49

STATEMENT OF CASH FLOWS

	Year ended December 31,
	2006			2005			2004
	(in thousands)
Cash flows from operating activities
Net income	$	5,514		$	6,153		$	6,567
Adjustments to reconcile net income to net cash provided by (used in) operating activities
Stock compensation plans	747			15			—
Equity in earnings of subsidiaries	(6,448		)	(6,510		)	(6,906		)
Net change in assets and liabilities	199			(89		)	357
Net cash provided by (used in) operating activities	12			(431		)	18
Cash flows from investing activities
Capital distribution from subsidiaries	3,118			3,255			2,622
(Purchase) and maturities of certificates of deposit in other financial institutions, net	(150		)	(2		)	117
Net cash provided by investing activities	2,968			3,253			2,739
Cash flows from financing activities
Cash dividends paid to stockholders	(2,049		)	(1,971		)	(1,765		)
Treasury stock acquired	(1,749		)	(2,830		)	(4,725		)
Exercise of stock options	325			801			3,410
Net cash used in financing activities	(3,473		)	(4,000		)	(3,080		)
NET DECREASE IN CASH	(493		)	(1,178		)	(323		)
Cash at beginning of year	3,452			4,630			4,953
Cash at end of year	$	2,959		$	3,452		$	4,630
Supplemental disclosure of cash flow information
Cash paid during the year for income taxes	$	—		$	—		$	—

50

BOARD OF DIRECTORS AND EXECUTIVE OFFICERS

TF Financial Corporation

Board of Directors

Robert N. Dusek
Chairman of the Board

Carl F. Gregory

Dennis L. McCartney

George A. Olsen

John R. Stranford

Albert M. Tantala, Sr.

Kent C. Lufkin

Executive Officers

Kent C. Lufkin
President and Chief Executive Officer

Dennis R. Stewart
Executive Vice President and Chief Financial Officer

Lorraine A. Wolf
Corporate Secretary

51

EX-21.0

Exhibit 21.0

SUBSIDIARIES OF THE REGISTRANT

Parent

TF Financial Corporation

Subsidiaries	Percentage Owned			Jurisdiction of Incorporation
Third Federal Bank(a)		100	%	United States
TF Investments Corporation(a)		100	%	Delaware
Teragon Financial Corporation(a)(b)		100	%	Pennsylvania
Penns Trail Development Corporation(a)		100	%	Delaware
Third Delaware Corporation(a)(b)		100	%	Delaware

(a)The operations of this subsidiary are included in the consolidated financial statements contained in the 2006 Annual Report to Stockholders incorporated herein by reference.

(b)Third Delaware Corporation and Teragon Financial Corporation are wholly-owned subsidiaries of Third Federal Bank.

EX-23.0

Exhibit 23.0

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We have issued our report dated March 28, 2007 (which includes an explanatory paragraph relating to the application of Statement of Financial Accounting Standard No. 123(R) and 158 as of December 31, 2006), accompanying the consolidated financial statements incorporated by reference in the Annual Report of TF Financial Corporation on Form 10-K for the year ended December 31, 2006. We hereby consent to the incorporation by reference of said report in the Registration Statements of TF Financial Corporation on Forms S-8 (File No. 333-87176, effective December 7, 1994, File No. 333-09235, effective July 31, 1996, File No. 333-27085, effective May 14, 1997, and File No. 333-125116, effective May 20, 2005).

/s/ GRANT THORNTON LLP

Philadelphia, Pennsylvania

March 28, 2007

EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Kent C. Lufkin, President and Chief Executive Officer, certify that:

1.I have reviewed this annual report on Form 10-K of TF Financial Corporation (Registrant);

2.Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3.Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this annual report;

4.The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) for the Registrant and we have:

a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b)evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c)disclosed in this report any change in the Registrant’s internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) that occurred during the Registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5.The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and to the audit committee of the Registrant’s board of directors:

a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

b)any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

Date:	March 28, 2007	/s/ KENT C. LUFKIN
		Kent C. Lufkin
		President and Chief Executive Officer
		(Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Dennis R. Stewart, Executive Vice President and Chief Financial Officer, certify that:

1.I have reviewed this annual report on Form 10-K of TF Financial Corporation (Registrant);

2.Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3.Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this annual report;

4.The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) for the Registrant and we have:

a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b)evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c)disclosed in this report any change in the Registrant’s internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) that occurred during the Registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5.The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and to the audit committee of the Registrant’s board of directors:

a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

b)any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

Date:	March 28, 2007	/s/ DENNIS R. STEWART
		Dennis R. Stewart
		Executive Vice President and Chief Financial Officer
		(Principal Financial & Accounting Officer)

EX-32.0

Exhibit 32.0

CERTIFICATION PURSUANT TO
18 U.S.C. 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 10-K for the year ended December 31, 2006 (the “Report”) of TF Financial Corporation (the “Company”) as filed with the Securities and Exchange Commission, we, Kent C. Lufkin, President and Chief Executive Officer, and Dennis R. Stewart, Executive Vice President and Chief Financial Officer (Principal Accounting Officer), hereby certify, pursuant to 18 U.S.C. ‘1350, as adopted pursuant to ‘906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ KENT C. LUFKIN	/s/ DENNIS R. STEWART
Kent C. Lufkin	Dennis R. Stewart
President and Chief Executive Officer	Executive Vice President and Chief Financial Officer
March 28, 2007	March 28, 2007

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