SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C.  20549

                             ----------------------

                                   FORM 10-K
(Mark One)
  X   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
----  EXCHANGE ACT OF 1934 [FEE REQUIRED]

For the fiscal year ended      December 31, 1996
                          ------------------------------------

                                    - or -

      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
|_|   EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

For the transition period from  _________________   to  _____________________

Commission Number:  0-24168

                            TF FINANCIAL CORPORATION
            --------------------------------------------------------
            (Exact name of Registrant as specified in its Charter)

             Delaware                                         74-2705050
-----------------------------------------------            -------------------
(State or other jurisdiction of incorporation              (I.R.S. Employer
  or organization)                                         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  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
                                                  -----       -----

      Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (ss.229.405 of this chapter) 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. [ X ]

      The aggregate market value of the voting stock held by  non-affiliates  of
the  Registrant,  based on the  (18.875)  average bid price of the  Registrant's
Common Stock as quoted on the Nasdaq System on March 3, 1997,  was $57.3 million
(3,033,147 shares at $18.875 per share).

      As of March  11,  1997  there  were  outstanding  4,217,386  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, 1996. (Parts I, II and IV)
2.   Portions  of  the  Proxy   Statement   for  the  1997  Annual   Meeting  of
     Stockholders. (Part III)


<PAGE>



PART I

Item 1.  Business
-----------------

                            BUSINESS OF THE COMPANY

      On July 13, 1994, the Registrant, TF Financial Corporation (the "Company")
consummated  its public  offering for  5,290,000  shares of its common stock and
acquired Third Federal  Savings Bank (the "Savings Bank" or "Third  Federal") as
part of the  Savings  Bank's  conversion  from a  mutual  to a  stock  federally
chartered  savings bank. The Registrant was  incorporated  under Delaware law in
March 1994. The Registrant 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"). Currently, the Registrant does not transact any material
business other than through its  subsidiaries,  the Savings Bank, TF Investments
Corporation and Penns Trail Development Corporation.  TF Investments Corporation
loaned $21.6  million,  on a short-term  basis,  to Third  Federal.  Penns Trail
Development  Corporation  was  incorporated  on June 15, 1995 for the purpose of
land related business opportunities. At December 31, 1996, the Company had total
assets of $647.9  million,  total deposits of $469.1  million and  stockholders'
equity of $72.6 million.

      On August 19,  1994,  the Board of  Directors  approved  the change in the
Company's fiscal year from June 30 to December 31.

                         BUSINESS OF THE SAVINGS BANK

      Third Federal,  originally  organized in 1921 as a  Pennsylvania-chartered
building and loan association, converted to a federally chartered mutual savings
and loan  association in 1935. The Savings Bank's deposits are insured up to the
maximum amount allowable by the FDIC.

      The Savings Bank is a community  oriented savings  institution  offering a
variety of financial  services to meet the needs of the community it serves. The
Savings Bank significantly  expanded its operations throughout  Philadelphia and
Bucks Counties,  Pennsylvania in June 1992 through its acquisition of Doylestown
Federal  Savings and Loan  Association  ("Doylestown").  On September  20, 1996,
Third Federal acquired three branch offices,  certain assets and $143 million of
deposits from Cenlar Federal Savings Bank, Trenton, New Jersey ("Cenlar").  As a
result of the Cenlar acquisition, Third Federal currently operates eleven branch
offices  in Bucks and  Philadelphia  counties,  Pennsylvania  and  three  branch
offices in Mercer County,  New Jersey.  This acquisition was consistent with the
Savings Bank's strategic goal of growing its market share within its market area
and  reaching  into  adjacent  market  areas,   through  low-cost,   fill-in  or
market-extension acquisitions.


      The Savings Bank attracts  deposits from the general  public and uses such
deposits,  together  with  borrowings  and other  funds,  primarily to invest in
mortgage-backed  and  investment  securities  and to originate or purchase loans
secured by first mortgages on owner - occupied,  one- to four-family  residences
in its market  area.  At December  31,  1996,  one- to  four-family  residential
mortgage  loans totaled $265.6 million or 85.8% of the Savings Bank's total loan
portfolio.  At that same date, the Savings Bank had approximately $175.8 million
or 27.1% of total  assets  invested  in  mortgage-backed  securities  and  $51.0
million or 7.9% of total assets in investment  securities.  To a lesser  extent,
the  Savings  Bank also  originates  commercial  real  estate and  multi-family,
construction and consumer loans.

Market Area

      Third Federal operated five offices in Philadelphia County and six offices
in Bucks County, Pennsylvania. These two counties cover the city of Philadelphia
and the northeast suburbs of

                                      1

<PAGE>



Philadelphia.  The population of these two counties total over 2.1 million.  The
Savings Bank also operates three branch  offices in Mercer  County,  New Jersey.
The  population  of Bucks  and  Mercer  Counties,  have  experienced  distinctly
different  economic  and  demographic   trends  over  recent  decades.   Whereas
Philadelphia  County has  experienced a population  decline and has offered very
limited  lending  opportunities,   Bucks  and  Mercer  Counties,   with  growing
population, has offered Third Federal much greater lending opportunities.

Competition

      Third Federal faces varying degrees of competition  from local thrifts and
credit unions at its various branch  locations.  Stronger  competition  has come
from local and much larger  regional banks based in and around the  Philadelphia
area.  Commercial  banks  hold  approximately  79%  of  the  deposit  market  in
Philadelphia  County,  69% in  Bucks  County  and 66% in  Mercer  County.  Third
Federal's share of the deposit market in Philadelphia, Bucks and Mercer Counties
is very small, at 0.81%, 1.87% and 1.87%, respectively.

      Between 1980 and 1990, Bucks County's  population grew  approximately 13%,
Mercer County by 9%, while Philadelphia  County's population declined by 6%. The
per capita income in Bucks County ($22,548) exceeds those of the U.S. ($18,696),
the State ($18,679), Mercer County ($18,040) and Philadelphia County ($16,721).

      The drop in  population  and the lower per capita  income in  Philadelphia
County can also be attributed to the loss of well-paying  manufacturing  jobs as
companies  transferred  out of the City of Philadelphia  and the State.  Between
1982 and 1991, the number of employees in  goods-producing  industries  declined
over  14%  while  those  employed  in  the  service   industries   increased  by
approximately 20%.

      As of December  31,  1996,  there were 47 thrift  offices in Bucks  County
holding 22.13% of deposits,  Commercial Banks had 138 offices and held 68.50% of
deposits;  Credit  Unions  had 18  offices  and held  9.37% of  deposits;  Third
Federal's six offices held 1.87% of the total share.

Lending Activities

      General. The Savings 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  Savings  Bank  also  makes
commercial real estate and multi-family  loans,  construction loans and consumer
and other  loans.  At December  31,  1996,  the Savings  Bank's  mortgage  loans
outstanding  were  $290.8  million,   of  which  $265.6  million  were  one-  to
four-family  residential mortgage loans. Of the one- to four-family  residential
mortgage  loans  outstanding  at that  date,  28.9%  were  ARM's and 71.1%  were
fixed-rate  loans.  Total ARM mortgage loans in the Savings Bank's  portfolio at
December 31, 1996,  amounted to $88.1 million or 30.2% of total mortgage  loans.
At that same date,  commercial  real  estate and  multi-family  residential  and
construction loans totalled $20.4 million and $4.7 million, respectively.

      Consumer and other loans held by the Savings Bank  totalled  $21.1 million
or 6.8% of total loans  outstanding  at December 31, 1996, of which $9.7 million
or 3.1%  consisted  of home  equity  and  second  mortgages.  At that  same date
commercial  business loans,  leases and other loans totalled $3.1 million,  $3.1
million and $5.2 million, respectively.

                                        2

<PAGE>



      The following  table sets forth the composition of the Savings 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.

<TABLE>
<CAPTION>
                                             At December 31,                                         At June 30,
                           ------------------------------------------------------ --------------------------------------------------
                                1996                1995               1994             1994             1993             1992
                           ----------------- -----------------   ---------------- ---------------  ----------------- ---------------
                                   Percent            Percent            Percent          Percent          Percent           Percent
                           Amount  of Total   Amount  of Total   Amount  of Total Amount of Total  Amount  of Total  Amount of Total
                           -----   --------  -------  --------   ------  -------- ------ --------  ------  --------  ------ --------
                                      
Mortgage loans:
<S>                       <C>        <C>     <C>       <C>     <C>       <C>     <C>        <C>    <C>       <C>    <C>       <C>   
  One- to four-family ....$265,618   85.16%  $204,430  85.00%  $ 80,862  69.70%  $ 85,641   70.40% $104,577  71.52% $120,637  67.58%
  Commercial real e
    state and multi-
    family ...............  20,427    6.55     10,294   4.28     11,285   9.73     12,456   10.24    16,140  11.04    21,932  12.29
  Construction ...........   4,720    1.51      3,604   1.50      1,534   1.32        607    0.50       542   0.37       474   0.27
                          -------- -------   -------- ------   -------- ------   --------  ------  -------- ------  -------- ------ 
       Total mortgage 
        loan.............. 290,765   93.22    218,328  90.78     93,681  80.75     98,704   81.14   121,259  82.93   143,043  80.14
Consumer and other loans:
  Home equity and second
    mortgage .............   9,661    3.10     10,635   4.42     11,663  10.05     11,689    9.61    10,989   7.52     9,885   5.54
  Commercial business ....   3,126    1.00      2,887   1.20      3,679   3.17      4,285    3.52     5,980   4.09    16,260   9.11
  Leases .................   3,093    0.99      3,590   1.49      2,194   1.89      2,828    2.33     3,847   2.63     3,488   1.95
  Other ..................   5,261    1.69      5,072   2.11      4,796   4.14      4,138    3.40     4,145   2.83     5,821   3.26
                          -------- -------   -------- ------   -------- ------   --------  ------  -------- ------  -------- ------ 
       Total consumer 
         and other loans .  21,141    6.78     22,184   9.22     22,332  19.25     22,940   18.86    24,961  17.07    35,454  19.86
                          --------  ------   -------- ------   -------- ------   --------  ------  -------- ------  -------- ------ 
       Total loans ....... 311,906  100.00%   240,512 100.00%   116,013 100.00%   121,644  100.00%  146,220 100.00%  178,479 100.00%
                          ========  ======   ======== ======   ======== ======   ========  ======  ======== ======  ======== ====== 
Less:
  Unearned discount, 
    premium, deferred 
    loan fees, net .......     530                753               647               748             1,265            1,742
  Allowance for loan 
    losses................   1,806              1,484             1,473             1,450             1,656            1,800
                          --------           --------          --------          --------          --------         --------
      Total loans, net....$309,570           $238,275          $113,893          $119,446          $143,299         $174,955
                          ========           ========          ========          ========          ========         ========
Mortgage-backed securities
 held to maturity:
  FHLMC ..................$ 90,016   58.54%  $ 65,834  47.76%  $ 85,524  47.14%  $ 68,526   44.41% $ 54,093  56.44% $ 37,902  49.63%
  FNMA ...................  27,547   17.92     33,150  24.05     39,713  21.89     29,201   18.93     6,831   7.13     5,480   7.18
  GNMA ...................   6,043    3.93      7,644   5.55      9,358   5.16      9,653    6.26     7,480   7.81     9,517  12.46
  Real estate investment
    mortgage conduit .....  29,220   19.00     30,033  21.79     46,603  25.69     46,437   30.10    26,113  27.25    20,178  26.42
  Collateralized mortgage
    obligations ..........      --      --         19   0.01        213   0.12        471    0.30     1,319   1.37     3,290   4.31
  Other mortgage-backed
    securities ...........     932    0.61      1,161   0.84         --     --         --      --        --     --        --  --
                          --------  ------   -------- ------   -------- ------   --------  ------  -------- ------  -------- ------ 
    Total mortgage-backed
      and related 
      securities held to 
      maturity ...........$153,758  100.00%  $137,841 100.00%  $181,411 100.00%  $154,288  100.00  $ 95,836 100.00% $ 76,367 100.00%
                          ========  ======   ======== ======   ======== ======   ========  ======  ======== ======  ======== ====== 
Mortgage-backed 
  securities available 
  for sale:

    FHLMC ................$  8,905   40.43%  $ 15,422  52.03%  $     --     --%
    FNMA .................   3,240   14.71      4,010  13.53         --     --
    Real estate 
      investment mortgage 
      conduit ............   9,882   44.86     10,208  34.44         --     --
                          --------  ------   -------- ------   --------  -----
                                                                                 
      Total ..............$ 22,027  100.00%  $ 29,640 100.00%  $     --     --%
                          ========  ======   ======== ======   ========  =====   
                                                                                
</TABLE>

                                            3

<PAGE>



      The following  table sets forth the Savings Bank's loan  originations  and
loan and mortgage-backed and related securities  purchases,  sales and principal
payments for the periods indicated:

<TABLE>
<CAPTION>

                                                                                   Six Months
                                                        Year Ended    Year Ended     Ended           Year Ended
                                                        December 31,  December 31, December 31,        June 30,
                                                        ------------  -----------  -----------         --------

                                                            1996         1995         1994         1994        1993
                                                           ------       ------       ------       ------       -----
                                                                         (In Thousands)
Total loans receivable (gross):
<S>                                                       <C>          <C>         <C>          <C>          <C>      
  At beginning of period .............................    $240,512     $116,013    $ 121,644    $ 146,220    $ 178,497
   Mortgage loans originated:
     One- to four-family .............................      64,643       41,627          811        8,982       13,503
     Commercial real estate and multi-family .........       8,488           --           --          925        2,729
     Construction ....................................      14,465        6,859           --        1,132          948
                                                         ---------    ---------    ---------    ---------    ---------
         Total mortgage loans originated .............      87,596       48,486          811       11,039       17,180
   Mortgage loans purchased:
     One- to four-family .............................      82,363       94,732           --          370           --
     Other non-residential ...........................         358           --        2,000           --           --
         Total mortgage loans purchased ..............      82,721       94,732        2,000          370           --
                                                         ---------    ---------    ---------    ---------    ---------
   Total mortgage loans originated and purchased......     170,317      143,218        2,811       11,409       17,180
   Consumer loans originated .........................       4,473        6,611        2,849        4,204        9,675
   Transfer of mortgage loans to real estate owned....        (242)        (136)        (103)        (557)        (150)
   Sale of loans .....................................     (19,591)          --           --         (949)          --
   Loans securitized .................................     (28,212)          --           --           --           --
   Principal repayments ..............................     (55,351)     (25,194)     (11,188)     (38,683)     (58,982)
                                                         ---------    ---------    ---------    ---------    ---------
   Total loans receivable at end of period............   $ 311,906    $ 240,512    $ 116,013    $ 121,644    $ 146,220
                                                         =========    =========    =========    =========    =========
Mortgage-backed securities:

   Held to maturity:
   At beginning of period ............................    $137,841      $18,411     $154,288    $  95,836    $  76,367
   Mortgage-backed securities purchased ..............      45,349       10,198       38,014       88,042       44,236
   Mortgage-backed securities sold ...................          --           --           --           --           --
   Transferred to available for sale .................          --      (29,640)          --           --           --
   Amortization and repayments .......................     (29,432)     (24,128)     (10,891)     (29,590)     (24,767)
                                                         ---------    ---------    ---------    ---------    ---------
   At end of period ..................................   $ 153,758    $ 137,841    $ 181,411    $ 154,288    $  95,836
                                                         =========    =========    =========    =========    =========

   Available for sale:
   At beginning of period ............................   $  29,640    $     --
   Transferred from held to maturity .................          --      29,640
   Mortgage-backed securities purchased ..............       4,952          --
   Mortgage-backed securities sold ...................      (8,943)         --
   Amortization and repayments .......................      (3,622)         --
                                                         ---------    --------
   At end of period ..................................   $  22,027    $ 29,640
                                                         =========    ========
</TABLE>



                                               4

<PAGE>



      Maturity  of  Loans  and  Mortgage-backed  and  Related  Securities.   The
following   table  sets  forth  the  maturity  of  Third   Federal's   loan  and
mortgage-backed  securities  at December  31,  1996.  The table does not include
prepayments  or  scheduled  principal  repayments.   Prepayments  and  scheduled
principal  repayments on loans  totalled $53.6  million,  $25.2  million,  $11.2
million,  $38.7 million and $59.0 million, for the years ended December 31, 1996
and 1995,  the six months ended  December 31, 1994, and the years ended June 30,
1994  and  1993,  respectively.  Adjustable-rate  mortgage  loans  are  shown as
maturing based on contractual maturities.

<TABLE>
<CAPTION>

                                    Commercial                                           Mortgage-
                          One- to   Real Estate                                           Backed
                           Four-    and Multi-                  Consumer    Total Loans and Related
                           Family     Family   Construction     and Other   Receivable   Securities    Total
                           ------    --------  ------------     ---------   -----------  ----------    -----

                                                            (In Thousands)
<S>                      <C>          <C>       <C>          <C>          <C>            <C>        <C>      
Non-performing.........  $    922     $    --   $      --    $    1,050   $    1,972     $     -    $   1,972
Amounts Due:
Within 3 months........        --       1,165     11,008             15      12,188          365       12,553
3 months to 1 Year.....        64         551        476          2,288       3,379        7,962       11,341

After 1 year:
  1 to 3 years.........        34         199      2,477          1,127       3,837       12,246       16,083
  3 to 5 years.........    17,645       1,961         --          4,293      23,899       17,153       41,052
  5 to 10 years........    45,665      12,175         --          9,797      67,637       24,690       92,327
  10 to 20 years.......    73,834       4,378         --          2,571      80,783       63,591      144,374
  Over 20 years........   127,454          --         --             --     127,454       49,778      177,232
Total due after one year  264,632      18,713      2,477         17,788     303,610      167,458      471,068
Total amounts due......   265,618      20,429     13,961         21,141     321,149      175,785      496,934

Less:
Allowance for loan loss     1,330         102         24            350       1,806           --        1,806
Loans in process.......        --           2      9,241             --       9,243           --        9,243
Deferred loan fees.....       521          --         --              9         530           --          530
                          -------     -------     ------        -------    --------     --------     --------
    Total..............  $263,767    $ 20,325    $ 4,696       $ 20,782   $ 309,570    $ 175,785    $ 485,355
                          =======     =======     ======        =======    ========     ========     ========
</TABLE>

                                        5

<PAGE>



      The  following  table sets forth the dollar  amount of all loans due after
December  31,  1997,  which  have  predetermined  interest  rates and which have
floating or adjustable interest rates.

                                           Fixed        Floating or
                                           Rates      Adjustable Rates   Total
                                           -----      ----------------   -----
                                                      (In Thousands)
One- to four-family ...................   $187,790        $ 76,830     $264,620
Commercial real estate and multi-family     12,055           6,416       18,471
Construction ..........................       --             2,477        2,477
Consumer and other ....................     10,429           6,959       17,388
                                          --------        --------     --------
  Total ...............................   $210,274        $ 92,682     $302,956
                                          ========        ========     ========


      One- to Four-Family Mortgage Loans. The Savings Bank offers first mortgage
loans secured by one- to  four-family  residences in the Savings  Bank's lending
area.  Typically,  such  residences  are  single-family  homes that serve as the
primary  residence  of the owner.  The Savings  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 must be provided on the amount in excess of 80%.

      Loan originations are generally  obtained from existing or past customers,
members of the local  community,  and referrals  from  established  builders and
realtors within the Savings Bank's lending area.  Mortgage loans  originated and
held by the Savings Bank in its portfolio  generally include due-on sale clauses
which  provide  the  Savings  Bank with the  contractual  right to deem the loan
immediately due and payable in the event that the borrower  transfers  ownership
of the property without the Savings Bank's consent.

      At  December  31,  1996,  91.3% of  mortgage  loans  consisted  of one- to
four-family  residential  loans, of which 28.9% were ARM loans. The Savings Bank
has  historically  not originated a large amount of ARM loans.  The Savings Bank
acquired $55.5 million or 96.9% of its ARM loans when it merged with  Doylestown
in June 1992.

      The  Savings  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 1 to 2 % per  adjustment  with a lifetime  cap of 5 to 6%
over the life of the loan.  The ARM loans acquired as a result of the Doylestown
merger  adjust at the end of one or three years and adjust by a maximum of 2.00%
per adjustment with a lifetime cap of 5.00% over the life of the loan

      The Savings Bank offers  fixed-rate  mortgage loans with terms of 10 to 30
years, which are payable monthly. The Savings Bank has continued its emphasis on
fixed-rate mortgage loans with terms of 15 years or less. Interest rates charged
on fixed-rate mortgage loans are competitively priced based on market conditions
and the Savings Bank's cost of funds.  The origination fees for fixed-rate loans
were generally 3.0% at December 31, 1996. Generally, the Savings Bank's standard
underwriting  guideline for  fixed-rate  mortgage loans conform to the FHLMC and
FNMA guidelines and may be sold in the secondary market. The Savings Bank has in
the past sold a  portion  of its  conforming  fixed-rate  mortgage  loans in the
secondary market to federal agencies while retaining the servicing rights on all
such loans. The Savings Bank,  however,  is primarily a portfolio  lender. As of
December 31, 1996,  the Savings  Bank's  portfolio of loans  serviced for others
totalled approximately $72.4 million.

                                      6

<PAGE>




      Commercial  Real  Estate and  Multi-Family  Loans.  The  Savings  Bank has
historically  originated a limited  number of 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.  In June,  1992, the Savings Bank acquired by merger,  the
assets and liabilities of Doylestown,  which included $8.9 million in commercial
real estate and multi-family loans. At December 31, 1996, $20.4 million, or 6.6%
of the Savings Bank's total loan portfolio was secured by commercial real estate
located primarily in the Savings Bank's primary market area.

      The  Savings  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 Savings Bank's  philosophy to originate  commercial
real estate and  multi-family  loans only to borrowers known to the Savings Bank
and  on  properties  in  its  market  area.  The  commercial   real  estate  and
multi-family  loans in the Savings Bank's portfolio  consist of fixed-rate,  ARM
and balloon loans which were originated at prevailing  market rates for terms of
up to 20 years.  The Savings Bank's  current  policy is to originate  commercial
real estate and multi-family loans as ARM's that are generally  amortized over a
period of 15 years or as balloon  loans  which  generally  have terms of 5 to 10
years, with 20-25 year amortizations.

      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  Savings  Bank  requires  borrowers  and loan
guarantors,  if any, to provide  annual  financial  statements and rent rolls on
multi-family  loans.  At December 31, 1996,  the five  largest  commercial  real
estate and  multi-family  loans totalled $8.4 million with no single loan larger
than $2.2  million.  At December 31,  1996,  all such loans were current and the
properties securing such loans are in the Savings Bank's market area.

      Construction  Loans.  At December  31,  1996,  the  Savings  Bank had $4.7
million  of  construction  loans  or  1.5%  of the  Savings  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 Savings Bank may be required to advance funds beyond the amount
originally committed to permit completion of the development. If the estimate of
value proves to be inaccurate,  the Savings 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.

      Consumer and Other Loans.  The Savings 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"), commercial business loans,
automobile  loans and student loans.  These loans totalled $21.1 million or 6.8%
of the Savings  Bank's  total loan  portfolio  at  December  31,  1996.  Federal
regulations permit federally  chartered thrift  institutions to make secured and
unsecured  consumer loans up to 35% of an institution's  assets. In addition,  a
federal thrift has lending authority above the 35% category for certain consumer
loans,  property  improvement loans, and loans secured by savings accounts.  The
Savings  Bank  originates  consumer  loans in order to  provide a wide  range of
financial services to its

                                      7

<PAGE>



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 Savings 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 Savings Bank. The
Savings Bank  reviews the credit  report of the borrower as well as the value of
the unit which secures the loan.

      The Savings  Bank  intends to continue to  emphasize  the  origination  of
consumer  loans.  Consumer loans tend to be originated at higher  interest rates
than  conventional  residential  mortgage  loans  and for  shorter  terms  which
benefits  the Savings  Bank's  interest  rate gap  management.  Consumer  loans,
however,  tend to have a higher risk of default than residential mortgage loans.
At December 31, 1996, the Savings Bank had $475,040 in consumer loans delinquent
more than 90 days.

      Federal  thrift  institutions  are  permitted to make secured or unsecured
loans for commercial,  corporate,  business or agricultural purposes,  including
the issuance of letters of credit  secured by real estate,  business  equipment,
inventories,  accounts receivable and cash equivalents.  The aggregate amount of
such loans outstanding may not exceed 10% of such institution's assets.

      The  Savings  Bank offers  second  mortgage  loans on one- to  four-family
residences. At December 31, 1996, second mortgage and home equity loans totalled
$9.7  million,  or 3.1% of the  Savings  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 75%  combined  loan to  value  ratio.  The  underwriting
standards for second mortgage loans are the same as the Savings Bank's standards
applicable to one- to four-family residential loans.

      The Savings Bank makes  commercial  business  loans on a secured basis and
generally requires additional collateral consisting of real estate. The terms of
such loans generally do not exceed five years.  The majority of these loans have
floating interest rates which adjust with changes in market driven indices.  The
Savings Bank's  commercial  business loans primarily consist of short-term loans
for equipment,  working capital, business expansion and inventory financing. The
Savings  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, 1996, the Savings Bank had
approximately  $3.1 million  outstanding  in commercial  business  loans,  which
represented approximately 1.0% of its total loan portfolio.

      Loan Approval  Authority and  Underwriting.  All loans must be approved by
either  two or more  loan  officers  specifically  designated  by the  Board  of
Directors  or by the Board of  Directors,  depending  on the  amount and type of
loan. Any two designated  underwriters  may approve loans on one- to four-family
residences,  not to exceed FHLMC and FNMA conforming single-family limits, which
at December 31, 1996,  was $214,600 or consumer  loans up to $100,000  providing
the loan meets all of the Savings  Bank's  underwriting  guidelines for consumer
loans.  All other loans up to $500,000  must be approved by the Loan  Committee.
All loans that exceed  $500,000  must be submitted to the Board of Directors for
approval.

      One- to four-family  residential mortgage loans are generally underwritten
according to FHLMC and FNMA guidelines.  For all loans originated by the Savings
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

                                      8

<PAGE>



intended to secure the proposed loan is required which currently is performed by
an  independent  appraiser  designated  and  approved by the Savings  Bank.  The
Savings 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.  The independent appraiser or
loan  officer  determines  the  stage of  completion  based  upon  its  physical
inspection of the construction.  It is the Savings Bank's policy to obtain title
insurance or a title opinion on all real estate first mortgage loans.  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 Savings  Bank makes  disbursements  for items such as real estate
taxes and hazard insurance premiums.

      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 Savings  Bank's  maximum loan- to-one
borrower limit was approximately $8.4 million as of December 31, 1996.

      At December 31, 1996,  the Savings Bank's five largest  aggregate  lending
relationships  had balances  ranging from $2.2 to $6.3 million.  At December 31,
1996, all of these loans were current.

Mortgage-Backed Securities

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

      The  mortgage-backed   securities  portfolio  as  of  December  31,  1996,
consisted  primarily of fixed-rate  certificates issued by the Federal Home Loan
Mortgage  Corporation  ("FHLMC") ($98.9 million),  Government  National Mortgage
Association  ("GNMA"),  ($6.0 million)  Federal  National  Mortgage  Association
("FNMA") ($30.8 million),  real estate  investment  mortgage conduit  ("REMICs")
($39.1 million),  collateralized  mortgage  obligations  ("CMOs") ($0) and other
mortgage-backed securities ($.9
million).

      At December 31, 1996,  the carrying  value of  mortgage-backed  securities
totalled  $175.8  million,  or 27.1% of total  assets.  The market value of such
securities totalled approximately $175.3 million at December 31, 1996.

      Mortgage-backed securities 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
Savings Bank. Such quasi-governmental  agencies,  which guarantee the payment of
principal and interest to investors, primarily include FHLMC, FNMA and GNMA.

      FHLMC issues participation certificates backed principally by conventional
mortgage loans. FHLMC guarantees the timely payment of interest and the ultimate
return of principal within one year.  FHLMC securities are indirect  obligations
of the United States Government. FNMA is a private

                                      9

<PAGE>



corporation chartered by Congress with a mandate to establish a secondary market
for conventional mortgage loans. FNMA guarantees the timely payment of principal
and interest,  and FNMA securities are indirect obligations of the United States
Government.  GNMA is a government  agency  within the  Department of Housing and
Urban Development  ("HUD") which is intended to help finance government assisted
housing programs.  GNMA guarantees the timely payment of principal and interest,
and GNMA securities are backed by the full faith and credit of the United States
Government.  Since FHLMC,  FNMA and GNMA were established to provide support for
low- and  middle-income  housing,  there are limits to the maximum size of loans
that qualify for these programs. Currently, GNMA limits its maximum loan size to
$144,000 for Veterans  Administration  ("VA") loans and on average  $137,750 for
Federal  Housing  Authority  ("FHA") loans.  FNMA and FHLMC limit their loans to
$214,600. To accommodate  larger-sized loans, and loans that, for other reasons,
do not conform to the agency  programs,  a number of private  institutions  have
established their own home-loan origination and securitization programs.

      Mortgage-backed  securities  typically  are issued with  stated  principal
amounts,  and the  securities  are backed by pools of mortgages  that have loans
with  interest  rates that are within a range and have varying  maturities.  The
underlying  pool of  mortgages  are  primarily  composed  of  either  fixed-rate
mortgages or adjustable-rate mortgage ("ARM") loans.  Mortgage-backed securities
are generally referred to as mortgage participation certificates or pass-through
certificates.  As a  result,  the  interest  rate  risk  characteristics  of the
underlying pool of mortgages,  i.e.,  fixed-rate or adjustable-rate,  as well as
prepayment  risk,  are  passed  on to the  certificate  holder.  The  life  of a
mortgage-backed  pass-through  security  is equal to the life of the  underlying
mortgages.  Mortgage-backed  securities issued by FHLMC, FNMA and GNMA make up a
majority of the pass-through market.

      CMOs and REMICs are  typically  issued by a  special-purpose  entity  (the
"issuer"),  which may be organized in a variety of legal forms, such as a trust,
a corporation,  or a partnership.  The entity  aggregates  pools of pass-through
securities,  which are used to collateralize  the mortgage  related  securities.
Once  combined,  the cash flows can be divided into  "tranches"  or "classes" of
individual  securities,  thereby creating more predictable average durations for
each security than the underlying  pass-through pools.  Accordingly,  under this
security they structure all principal pay downs from the various  mortgage pools
are allocated to a mortgage-related class or classes structured to have priority
until it has been paid off.  Thus these  securities  are intended to address the
reinvestment concerns associated with mortgage-backed  securities  pass-through,
namely that (i) they tend to pay off when interest  rates fall,  thereby  taking
their relatively high coupon with them, and (ii) their expected average life may
vary significantly among the different tranches.

      Some CMO and REMIC  instruments are most like traditional debt instruments
because  they  have  stated   principal   amounts  and   traditionally   defined
interest-rate  terms.  Purchasers of certain other CMO and REMIC instruments are
entitled  to the  excess,  if  any,  of the  issuer's  cash  inflows,  including
reinvestment   earnings,   over  the  cash   outflows   for  debt   service  and
administrative   expenses.   These  mortgage  related  instruments  may  include
instruments designated as residual interests, and are riskier in that they could
result in the loss of a portion  of the  original  investment.  Cash  flows from
residual  interests are very sensitive to prepayments and, thus,  contain a high
degree of interest-rate risk. Residual interests represent an ownership interest
in the  underlying  collateral,  subject to the first lien of the CMO and REMICs
investors.

      The CMOs  and  REMICs  held by the  Savings  Bank at  December  31,  1996,
consisted solely of fixed-rate notes and adjustable-rate  notes with contractual
maturities  ranging  from 1 to 27 years.  The  portfolio of CMOs and REMICs held
within the Savings Bank's  mortgage-backed  securities portfolio at December 31,
1996, did not include any residual interests. Further, at December 31, 1996, the
Savings

                                      10

<PAGE>



Bank's mortgage-backed  securities portfolio did not include any "stripped" CMOs
and  REMICs,  i.e.  CMOs and  REMICs  that pay  interest  only and do not  repay
principal or CMOs that repay principal only and do not pay interest.

      The following  table sets forth the carrying  value of the Savings  Bank's
mortgage-backed securities held in portfolio at the dates indicated.

<TABLE>
<CAPTION>

                                        At December 31,                  At June 30,
                              -----------------------------------   ---------------------
                                 1996        1995        1994         1994        1993
                              ----------  ----------  -----------   ---------   ---------
                                                          (In Thousands)
Held for Investment:
<S>                          <C>          <C>          <C>          <C>          <C>    
  GNMA-fixed rate........... $  6,043     $  7,644     $  9,358     $  9,653     $ 7,480
                             --------     --------     --------     --------     -------
  FHLMC ARMs................      364         407           496          522         591
  FHLMC-fixed rate..........   89,652      65,427        85,028       68,004      53,501
  FNMA-fixed rate...........   27,547      33,150        39,713       29,201       6,831
  CMOs......................       --          19           213          471       1,320
  Remics....................   29,220      30,033        46,603       46,437      26,113
  Other mortgage-backed 
    securities..............      932       1,161            --           --          --
                             --------    --------      --------     --------     -------
   Total mortgage-backed
    securities.............. $153,758    $137,841      $181,411     $154,288     $95,836
                             ========    ========      ========     ========     =======
Mortgage-backed Securities
Available for Sale:
  FHLMC                      $  8,905    $ 15,422      $     --     $     --     $    --
  FNMA                          3,240       4,010            --           --          --
  Remics....................    9,882      10,208            --           --          --
                             --------    --------      --------     --------     -------
    Total mortgage-backed 
      securities available 
      for sale.............. $ 22,027    $ 29,640      $     --     $     --     $    --
                             ========    ========      ========     ========     =======  
</TABLE>


      Mortgage-Backed  Securities  Maturity.  The following table sets forth the
maturity  and  the  weighted  average  coupon  ("WAC")  of  the  Savings  Bank's
mortgage-backed  securities  portfolio at December 31, 1996.  The table does not
include estimated prepayments.  Adjustable-rate  mortgage-backed  securities are
shown as maturing based on contractual maturities.

                                                    Contractural
                           Contractual              Available For
                             Held to                     Sale
                          Maturities Due     WAC     Maturities Due     WAC
                          --------------     ---     --------------    ----
                                        (Dollars In Thousands)
Less than 1 year......... $    8,327         6.08%      $     --          --%
1 to 3 years.............     11,150         6.54          1,097        6.00
3 to 5 years.............     15,282         6.70          1,871        6.00
5 to 10 years............     18,592         6.95          6,098        6.42
10 to 20 years...........     58,869         7.21          4,721        6.46
Over 20 years............     41,538         7.03          8,240        7.25
                             -------         ----         ------      ------
Total mortgage-backed
  securities.............   $153,758         6.97%      $ 22,027        6.68%
                             =======         ====         =======      =====

Non-Performing and Problem Assets

      Loan  Collection.  When a borrower  fails to make a required  payment on a
loan,  the Savings  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 Savings 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

                                      11

<PAGE>



and it  becomes  necessary  for the  Savings  Bank to take legal  action,  which
typically  occurs after a loan is delinquent  90 days or more,  the Savings 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 sold at foreclosure.

      In the  case  of  commercial  real  estate  and  multi-family  loans,  and
construction  loans, the Savings 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  Savings  Bank may  consider  loan  work-out
arrangements with these types of borrowers in certain circumstances.

      On mortgage  loans or loan  participations  purchased by the Savings Bank,
the Savings 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 Savings  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 Savings Bank and its  servicing
agents.

      Delinquent  Loans.  Generally,  the Savings Bank reserves for  uncollected
interest  on  loans  past  due 90 days or  more.  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.



                                      12

<PAGE>



      Non-Performing   Assets.   The  following  table  sets  forth  information
regarding  non-accrual  loans and real estate  owned by the Savings  Bank at the
dates indicated. The Savings Bank had no loans contractually past due 90 days or
more or for which accrued interest has been recorded.  At December 31, 1996, the
Savings Bank had no restructured loans within the meaning of FASB Statement 15.

<TABLE>
<CAPTION>
                                                        At December 31,                 At June 30,
                                               ----------------------------------      --------------
                                               1996      1995      1994      1994      1993      1992
                                               -----     -----     -----     ----      ----      ----
                                                             (Dollars in Thousands)
Loans accounted for on a non-accrual basis:
Mortgage loans:
<S>                                           <C>       <C>       <C>       <C>       <C>       <C>   
  One- to four-family .....................   $  922    $  999    $  928    $1,041    $1,782    $2,000
  Commercial real estate and multi-famil...       --        28       119       120       994       558
  Construction loans ......................       --        --        --        --        --       314
Consumer and other ........................    1,050       776       639       552       685     1,464
                                              ------    ------    ------    ------    ------    ------
   Total non-accrual loans ................   $1,972    $1,803    $1,686    $1,713    $3,461    $4,336
                                              ======    ======    ======    ======    ======    ======

Real estate owned, net ....................   $  112    $  129    $  139    $  376    $1,687    $4,245
Other non-performing assets(1) ............       --        --        --        --       609        --
                                              ------    ------    ------    ------    ------    ------
Total non-performing assets ...............   $2,084    $1,932    $1,825    $2,089    $5,757    $8,581
                                              ======    ======    ======    ======    ======    ======
Total non-accrual to net loans ............     0.64%     0.76%     1.48%     1.43%     2.42%     2.48%
                                              ======    ======    ======    ======    ======    ======
Total non-accrual loans to total assets....     0.30%     0.37%     0.39%     0.39%     0.89%     1.20%
                                              ======    ======    ======    ======    ======    ======
Total non-performing assets to total assets     0.32%     0.39%     0.42%     0.48%     1.48%     2.37%
                                              ======    ======    ======    ======    ======    ======
</TABLE>

----------------
(1)   Other  non-performing  assets consists of Third Federal's investment in an
      administrative  building for all dates  presented.  Such building was sold
      subsequent to December 31, 1993.

      At  December  31,  1996,  the  Company  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, 1996,  the Company 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  their  continuance  as  assets  without  the
establishment  of a specific loss reserve is not  warranted.  Assets  designated
"special mention"

                                      13

<PAGE>



by  management  are assets  included on the Savings  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  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. When an insured  institution  classifies
problem  assets 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 Savings
Bank's classified assets as of December 31, 1996.

                                      At
                                 December 31,
                                     1996
                                 ------------
                                (In Thousands)

  Special mention assets......    $       --
  Substandard.................         2,804
  Doubtful assets.............           108
  Loss .......................            --
                                  ----------

     Total classified assets..    $    2,912
                                  ==========

---------------------
(1)  Substandard assets include approximately $816,000 of performing assets that
     are less than 90 days  delinquent,  that are  classified  for reasons other
     than delinquency.

      Real Estate Owned. Real estate acquired by the Savings 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 recorded
at the lower of fair value, minus estimated cost to sell, or cost.

      The  Savings  Bank  records  loans  as in  substance  foreclosures  if the
borrower  has  little or no equity in the  property  based  upon its  documented
current fair value and if the borrower has effectively  abandoned control of the
collateral or has continued to retain  control of the  collateral but because of
the current financial status of the borrower it is doubtful the borrower will be
able to repay the loan in the foreseeable future. In substance  foreclosures are
accounted for as loans until such time that title to the  collateral is acquired
by the Savings Bank.  There may be significant  other expenses  incurred such as
attorney and other  extraordinary  servicing  costs  involved  with in substance
foreclosures.

      Allowances  for Loan Losses and Real  Estate  Acquired  in  Settlement  of
Loans. The Savings Bank provides valuation  allowances for estimated losses from
uncollectible   loans  and  real  estate   acquired  in   settlement  of  loans.
Management's  periodic  evaluation  of the  adequacy of the  allowance  for loan
losses

                                      14

<PAGE>



is  based  on  loss  experience,  known  and  inherent  risk  in the  portfolio,
prevailing market  conditions,  and management's  judgment as to collectibility.
The Savings  Bank's  determination  as to the amount of its  allowance  for loan
losses is  subject to review of the  federal  regulatory  agencies,  the OTS and
FDIC, which can order the  establishment of additional  general or specific loan
loss reserves. The allowance for loan losses is increased by charges to earnings
and  decreased by  charge-offs  (net of  recoveries).  The Savings Bank provides
valuation  allowances for losses on real estate  acquired in settlement of loans
based on the lower of fair value, minus estimated cost to sell, or cost.

      The allowance for loan losses is established  through a provision for loan
losses  based  on  management's  evaluation  of the  risk  inherent  in its loan
portfolio and the general economy.  Such evaluation,  which includes a review of
all loans on which full collectibility may not be reasonably assured,  considers
among other  matters,  the estimated  fair value of the  underlying  collateral,
economic  conditions,  historical  loan loss  experience  and other factors that
warrant recognition in providing for an adequate loan loss allowance.


                                      15

<PAGE>



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

<TABLE>
<CAPTION>

                                        For the Years Ended     For the Six Months         For the Year Ended
                                             December 31,        Ended December 31,              June 30,
                                         -----------------       ------------------         ----------------
                                         1996         1995        1994         1994         1993        1992
                                         ----         ----        ----         ----         ----        ----
                                                          (Dollars In Thousands)

<S>                                     <C>         <C>           <C>         <C>         <C>         <C>    
Balance at beginning of period          $ 1,484     $ 1,473       $ 1,450     $ 1,656     $ 1,800     $ 1,730

Provision for loan losses .........         330          72            30        (144)         48       1,263
Charge-offs:
  One- to four-family .............          --         (48)           --          --          --          --
  Commercial and multi-family  
  real estate loans ...............          --          --            --         (31)       (380)       (684)
  Consumer and other loans(1) .....          (8)        (13)           (7)        (31)       (300)       (679)
Recoveries:
  Commercial and multi-family
  real estate loans ...............          --          --            --          --         413          75
  Consumer and other loans(1) .....          --          --            --          --          75          95
                                        -------     -------       -------     -------     -------     -------
Balance at end of year(2) .........     $ 1,806     $ 1,484       $ 1,473     $ 1,450     $ 1,656     $ 1,800
                                        =======     =======       =======     =======     =======     =======


Ratio of net charge-offs during
  the period to average loans
  outstanding during the period....       0.003%       0.04%         0.01%        .04%        .12%        .57%
Ratio of allowance for loan
  losses to non-performing
  loans at the end of the period...       91.58%       82.3%         87.3%       84.6%       47.8%       41.5%
Ratio of allowance for loan
  losses to net loans receivable
  at the end of period ............        0.58%       0.62%          1.3%        1.2%        1.2%          1%
Ratio of allowances for loan
  losses and foreclosed real
  estate to total non-performing
  assets at the end of period......       92.03%       76.8%         81.3%       69.4%       29.5%       30.8%

</TABLE>

---------------
(1)  Consumer and other loan  charge-offs  for all periods  presented are almost
     solely comprised of commercial business loan losses.
(2)  Third  Federal had not incurred any  material  charge-offs  or received any
     material  recoveries on the one-to four-family and consumer loan portfolios
     for any of the periods presented.

                                       16

<PAGE>



      The  following  table  sets forth the  allocation  of the  Savings  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.  The portion
of the loan loss  allowance  allocated to each loan  category does not represent
the total  available  for future losses which may occur within the loan category
since the total loan loss  allowance is a valuation  reserve  applicable  to the
entire loan portfolio.

<TABLE>
<CAPTION>
                                      At December 31,                                         At June 30,
                    ----------------------------------------------------- ---------------------------------------------------
                         1996              1995                1994            1994              1993             1992
                   ----------------  ----------------  ------------------ ----------------  --------------- -----------------
                           Percent           Percent              Percent         Percent          Percent           Percent
                           of Loans          of Loans            of Loans         of Loans         of Loans          of Loans
                           to Total          to Total            to Total         to Total         to Total          to Total
                   Amount   Loans    Amount    Loans   Amount     Loans   Amount   Loans    Amount  Loans   Amount    Loans
                   ------  -------  -------  --------  ------    -------  ------  -------   ------  ------  ------   ------

                                                             (Dollars in thousands)
At end of period
 allocated to:
One- to four-
<S>               <C>       <C>      <C>       <C>      <C>       <C>     <C>      <C>      <C>     <C>     <C>       <C>  
 family........... $ 1,330   73.7%   $1,042     85.1%   $ 990      67.2%  $  958    70.4%   $  788   72.0%  $  793     67.5%
                   -------  -----    ------     ----    -----      ----   ------    ----    ------   ----   ------     ---- 
Commercial real 
 estate and
 multi-family.....     102    5.7        46       4.1     134       9.1      132    10.2      422    10.9      425     12.3
Construction......      24    1.3        24       1.6       8       0.5       12     0.5        2     0.4        2      0.3
Consumer and
  other loans.....     350   19.3       372       9.2     341      23.2      348    18.9      490    17.1      580     19.9
                   -------  -----    ------     ----    -----      ----   ------    ----    ------   ----   ------     ---- 
Total allowance... $ 1,806  100.0%   $1,484     100.0% $1,473     100.0%  $1,450   100.0%  $1,656  100.0%   $1,800    100.0%

</TABLE>


                                       17

<PAGE>



Analysis of the Allowance for Real Estate Owned

                                     At December 31,            At June 30,
                                 -----------------------      ---------------
                                 1996     1995      1994      1994       1993
                                 ----     ----      ----      ----       ----
                                               (Dollars in thousands)
Total real estate owned and in
  judgment, net............      $116     $129      $139      $376      $1,687
                                 ====     ====      ====      ====      ======

Allowance balances - beginning   $ --     $ 11      $ --      $ 40      $  846

Provision..................         3        2        11         1           8

Charge-offs................        --      (13)       --       (41)       (814)
                                 ----     ----      ----      ----      ------

Allowance balances - ending      $  3     $ --      $ 11    $   --      $   40
                                 ====     ====      ====      ====      ======

Allowance for losses on real
estate owned and in judgment
to net real estate owned and in
judgment...................       2.5%      --%      7.9%       --%        2.4%
                                 ====     ====      ====      ====      ======




Investment Activities

      The  investment  policy of the Savings 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 Savings Bank's lending activities. In establishing its investment
strategies,  the Savings  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.

      OTS  guidelines  regarding  investment  portfolio  policy  and  accounting
require insured  institutions to categorize  securities and certain other assets
as held for  "investment,"  "sale," or "trading." The Savings Bank's  investment
policy has policies and strategies for each type of security. The portion of the
investment  securities  portfolio  which  is held  with  the  intent  to hold to
maturity is accounted for on an amortized cost basis.  At December 31, 1996, the
Savings Bank had $38.5 million in securities  held for investment  consisting of
interest-earning  deposits  due in three  months or less,  U.S.  government  and
agency  obligations.  Securities which are categorized as available for sale are
carried at the lower of historical  cost or market value.  At December 31, 1996,
the Savings Bank had securities available for sale consisting of U.S. government
and  agency  securities  and mutual  funds  which had a market and book value of
$12.7  million.  The  Savings  Bank does not  engage  in  security  trading  and
therefore had no securities in a trading account at December 31, 1996.



                                      18

<PAGE>



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

<TABLE>
<CAPTION>
                                                  At December 31,                                        At June 30,
                          --------------------------------------------------------------  ----------------------------------------
                                  1996                 1995                  1994                  1994                 1993
                          -------------------  -------------------  --------------------  --------------------  ------------------
                          Amortized   Market   Amortized    Market   Amortized    Market    Amortized   Market  Amortized   Market
                             Cost     Value       Cost      Value       Cost      Value        Cost     Value      Cost     Value
                          ---------  --------  ---------  ---------  ---------   --------   ---------  -------- ----------  ------
                                                                                  (In Thousands)

<S>                       <C>        <C>        <C>        <C>         <C>       <C>        <C>       <C>        <C>       <C>     
Interest-earning deposits $ 38,120   $ 38,120   $15,606    $15,606     $31,898   $31,898    $ 68,733  $ 68,733   $ 51,426  $ 51,426
                           =======    =======    ======     ======      ======    ======     =======   =======    =======   =======

Investment securities 
 held to maturity:
  U.S. Government and 
   agency obligations...  $34,976   $34,854     $14,475    $14,739     $23,466   $22,558    $  9,470  $  8,957   $ 48,210  $ 48,546
State and political
  subdivisions..........    3,068     3,040       3,140      3,139       3,219     3,080       3,216     3,140      3,862     3,939
Corporate Debt Securities     500       499       6,025      6,002       9,846     9,634      13,173    13,140     20,055    20,477
                          -------   -------     -------    -------     -------   -------    --------  --------   --------  --------
    Total...............  $38,544   $38,393     $23,640    $23,880     $36,531   $35,272    $ 25,859  $ 25,237   $ 72,137  $ 73,039
                          =======   =======     =======    =======     =======   =======    ========  ========   ========  ========

Securities available for 
  sale(1):
  U.S. Government and 
   agency obligations...  $11,976   $12,015     $14,489    $14,448     $41,460   $40,466     $40,454   $39,765   $     --  $     --
Equity Securities
  (SLMA Stock)..........       10       139          10         98          64        50          10        59         10        77
                          -------   -------     -------    -------     -------   -------    --------  --------   --------  --------
  Mutual funds..........      500       498         500        498         447       486         500       492         --        --
                          -------   -------     -------    -------     -------   -------    --------  --------   --------  --------
    Total...............  $12,486    $12,652    $14,999    $15,044     $41,971   $41,002    $ 40,964  $ 40,316   $     --  $     --
                          =======    =======    =======    =======     =======   =======    ========  ========   ======    ======  
</TABLE>

-------------------
(1)   Securities designated as held for sale at June 30, 1994.


                                       19

<PAGE>



Investment Portfolio Maturities

      The following table sets forth certain information  regarding the carrying
values,  weighted average yields and maturities of the Savings Bank's investment
securities  portfolio,  exclusive of interest-earning  deposits, at December 31,
1996.

<TABLE>
<CAPTION>
                                                                                                                      Total
                         One Year or Less   One to Five Years   Five to Ten Years  More than Ten Years    Investment Securities(2)
                        ------------------  ------------------  -----------------  -------------------  ---------------------------
                        Carrying   Average  Carrying   Average  Carrying  Average   Carrying  Average   Carrying   Average   Market
                          Value     Yield     Value     Yield    Value     Yield     Value     Yield     Value     Yield     Value
                          -----     -----     -----     -----    -----     -----     -----     -----     -----     -----     -----
                                                                   (Dollars in Thousands)
U.S. Government 
<S>                       <C>         <C>    <C>          <C>   <C>           <C>    <C>        <C>    <C>          <C>    <C>     
  Obligation............  $ 6,010     5.75%  $  4,005     6.32% $     --        --%  $    --      --%  $ 10,015     5.98%  $ 10,015
U. S. Agency Obligations   12,113     5.41      9,235     6.31    13,767      6.97     2,000    8.33     37,115     6.37     36,993
Municipal Obligations...       --       --      3,068     5.33        --        --        --      --      3,068     5.33      3,040
Corporate Obligations...      500     7.22         --       --        --        --        --      --        500     7.22        499
Other Securities(1).....      498     6.08         --       --        --        --        --      --        498     6.08        498
                          -------   ------    -------    -----  --------     -----   -------   -----    -------   ------    -------
  Total.................  $19,121     5.58%   $16,308     6.13% $ 13,767      6.97%  $ 2,000    8.33%  $ 51,196     6.24%  $ 51,045
                           ======   ======     ======    =====   =======     =====    ======   ======    ======   ======     ======
</TABLE>

----------------------
(1)  Other   securities   consists   of   an   investment   in   adjustable-rate
     mortgage-backed  securities  mutual funds.  Such  investments do not have a
     stated  maturity and are  considered in the one year or less category based
     on quarterly repricing of the investment.
(2)  Includes $12.7 million of U.S.  Government and Agency obligations and other
     investments  which are carried as available  for sale at December 31, 1996.
     Investment securities available for sale are carried at fair value.

                                       20

<PAGE>



Sources of Funds

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

      Deposits.  The Savings Bank offers a variety of deposit  accounts having a
range of  interest  rates and terms.  The  Savings  Bank's  deposits  consist of
regular savings,  non-interest bearing checking, NOW checking, money market, and
certificate accounts. Of the deposit accounts, $31.58 million or 6.7% consist of
IRA, Keogh or SEP retirement accounts at December 31, 1996.

      The flow of  deposits  is  influenced  significantly  by general  economic
conditions,   changes  in  money  market  and  prevailing   interest  rates  and
competition.  The Savings  Bank's  deposits are  primarily  obtained  from areas
surrounding  its  offices,  and the Savings  Bank relies  primarily  on customer
service and  long-standing  relationships  with  customers to attract and retain
these  deposits.  The Savings 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,
1996, core deposits amounted to 56.26% of total deposits.


                                      21

<PAGE>



      The  following  table sets forth the  distribution  of the Savings  Bank's
deposit  accounts  at the  dates  indicated  and the  weighted  average  nominal
interest rates on each category of deposits presented. The Savings Bank does not
have a significant amount of deposits from out-of state sources. Management does
not  believe  that the use of year end  balances  instead  of  average  balances
resulted in any material difference in the information presented.

<TABLE>
<CAPTION>
                                                                       At December 31,
                                    -------------------------------------------------------------------------------------------
                                               1996                          1995                            1994
                                    -----------------------------  ----------------------------   -----------------------------
                                                        Weighted                      Weighted                        Weighted
                                              Percent   Average             Percent    Average              Percent    Average
                                              of Total  Nominal             of Total   Nominal              of Total   Nominal
                                    Amount    Deposits    Rate     Amount   Deposits     Rate     Amount    Deposits    Rate
                                    ------    --------   ------    ------   --------    -----     ------    --------   ------ 

                                                                                           (Dollars in Thousands)

Transaction accounts:
  Interest-bearing checking
<S>                               <C>           <C>     <C>       <C>       <C>        <C>       <C>         <C>      <C>  
   accounts ...................   $ 42,513        9.06%   0.98%   $ 33,581     9.96%     1.57%   $ 33,840      9.73%    1.53%

  Money market accounts........     29,970        6.39    3.54      10,481     3.11      2.75      11,696      3.36     2.95
  Non-interest-bearing
 checking accounts ............      3,741        0.80      --       1,573     0.47        --       1,026      0.30       --
                                  --------     -------            --------  -------  --------    --------
Total transaction accounts.....     76,224       16.25             45,635     13.54                46,562     13.39
Fixed-rate passbook accounts...    127,213       27.12    3.00     120,387    35.72      3.00     136,824     39.36     2.95
Adjustable-rate passbook
 accounts .....................     60,452       12.89    4.88      68,247    20.25      4.74      77,198     22.21     5.11
      Total ...................    187,665       40.01             234,269    69.51   260,584       74.96
                                  --------     -------            --------  -------  --------    --------
Certificate accounts:
  90-day certificates .........      2,354        0.50    3.96       4,541     1.35      4.05       1,034      0.30     3.22
  Six-month certificates.......     18,861        4.02    4.44      10,351     3.07      4.10      14,604      4.20     3.47
  Seven-month certificates.....      3,555        0.76    4.93          --       --        --          --        --       --
  Nine-month certificates......     13,116        2.80    4.96       5,144     1.53      5.86         646      0.19     3.65
  Ten-month certificates.......     19,341        4.12    5.29          --       --        --          --        --       --
  One-year certificates........     55,586       11.85    5.28      17,409     5.16      5.08      20,076      5.77     3.67
  15-month certificates .......      1,450        0.31    5.54          --       --        --          --        --       --
  17-month certificates .......      8,801        1.88    5.53       7,515     2.23      5.75          --        --       --
  18-month certificates .......      5,052        1.08    4.83      12,004     3.56      6.07       4,378      1.26     4.54
  21-month certificates .......        677        0.14    5.20          --       --        --          --        --       --
  Two-year certificates........     22,632        4.82    5.65       6,139     1.82      4.99       5,948      1.71     4.14
  25-month certificates .......      8,666        1.85    5.81          --       --        --          --        --       --
  30-month certificates .......      8,539        1.82    5.45       7,371     2.19      4.54       8,884      2.55     3.83
  Three-year certificates......      9,628        2.05    5.55       5,442     1.61      4.55       6,236      1.79     4.52
  Four year certificates.......      2,645        0.56    5.48         929     0.27      5.33       1,628      0.47     6.38
  54 month certificates .......      1,975        0.42    5.83       1,921     0.57      5.80          --        --       --
  Five year certificates.......     19,356        4.13    5.35      18,274     5.42      5.66      18,812      5.41     6.07
  Six-year certificates .......        211        0.04    5.34          --       --        --          --        --       --
  Seven-year certificates .....          1          --    7.30          --       --        --          --        --       --
  Eight-year certificates .....         99        0.02    5.80         105     0.03      5.83         236      0.07     6.37
  10-year .....................      1,398        0.30    7.85       1,050     0.31      7.88       1,422      0.41     8.12
  Jumbo certificates(1) .......      1,256        0.27    5.40       4,436     1.32      5.12       2,942      0.85     5.36
                                  --------      ------    ----    --------   ------      ----    --------     -----     ---- 
     Total certificate accounts    205,199       43.74    5.30     102,800    30.49      5.22      87,047     25.04     4.52
                                  --------      ------    ----    --------   ------      ----    --------     -----     ---- 
Total deposits ................   $469,088      100.00%   4.08%   $337,069   100.00%     3.87%   $347,631     100.0     3.67%
                                  ========      ======    ====    ========   ======      ====    ========     =====     ==== 

</TABLE>


                                       22

<PAGE>

<TABLE>
<CAPTION>
                                                                              At June 30,
                                    ----------------------------------------------------------------------------------------------
                                                1994                             1993                           1992
                                    -------------------------------    ------------------------------  --------------------------
                                                           Weighted                          Weighted                    Weighted
                                               Percent     Average              Percent      Average            Percent   Average
                                               of Total    Nominal             of Total      Nominal            of Total  Nominal
                                    Amount     Deposits     Rate      Amount    Deposits      Rate     Amount   Deposits    Rate
                                    ------     --------     ----      ------    --------      ----     ------   --------    ----
                                                                        (Dollars in Thousands)
Transaction accounts:
  Interest-bearing checking
<S>                               <C>           <C>         <C>    <C>          <C>           <C>    <C>          <C>       <C>  
    accounts ..................   $ 33,522        9.13%     1.47%  $  34,659      9.89%       2.30%  $  28,287      8.68%   3.15%
  Money market accounts........     12,131        3.30      2.72      12,543      3.58        2.71      15,454      4.74    3.51
  Non-interest-bearing checking
    accounts ..................        658         .18        --         180       .05          --       3,460      1.06      --
                                  --------      ------              --------    ------                --------    ------    

Total transaction accounts.....     46,311       12.61        --      47,382     13.52          --      47,201     14.48      --

Fixed-rate passbook accounts...    151,121       41.17      2.95     143,936     41.09        3.20     138,601     42.51    4.56
                                                                    --------    ------                --------    ------    
Adjustable-rate passbook
  accounts ....................     79,373       21.62      4.16      52,721     15.05        4.14          --        --      --
                                  --------      ------            
      Total ...................    276,805       75.40               244,039     69.66                 185,802     56.99      --
                                  --------      ------              --------    ------                --------    ------   
Certificate accounts:
  90-day certificates .........        929         .25      2.75       1,307       .36        2.71       2,092       .64    3.66
  Six-month certificates.......     16,325        4.45      2.74      19,837      5.66        2.88      28,070      8.61    3.99
  Nine-month certificates .....        887         .24      2.91       1,213       .35        3.06       1,657       .51    4.45
  One-year certificates........     21,632        5.89      3.12      24,700      7.05        3.68      37,810     11.60    5.16
  18-month certificates .......      2,514         .69      3.36       2,423       .69        3.75       5,255      1.61    6.22
  Two-year certificates .......      5,033        1.37      3.67       4,987      1.42        4.78       7,727      2.37    6.81
  30-month certificates .......      9,888        2.69      3.85      12,262      3.50        5.07      15,638      4.80    6.89
  Three-year certificates......      6,867        1.87      4.73       8,991      2.57        6.37       9,249      2.84    7.03
  Four year certificates.......      2,045         .56      7.26       3,381       .97        7.74       3,980      1.22    8.13
  Five year certificates.......     18,972        5.17      6.26      23,760      6.78        7.74      21,214      6.50    8.01
  Six-year certificates .......        214         .06      7.46         302       .09        5.64         376       .11    7.86
  Eight-year certificates......      1,761         .48      8.11         412       .12        7.36         406       .12    7.46
  10-year .....................         51         .01      8.02       1,452       .41        8.36       1,338       .41    8.40
  Jumbo certificates(1) .......      3,210         .87      5.29       1,262       .37        3.93       5,439      1.67    5.40
                                  --------      ------      ----    --------    ------        ----    --------    ------    ---- 
     Total certificate accounts     90,328       24.60      4.25     106,289     30.34        4.90     140,251     43.01    5.80
                                  --------      ------      ----    --------    ------        ----    --------    ------    ---- 
Total deposits ................   $367,133      100.00%     3.38%   $350,328    100.00%       3.74%   $326,053    100.00%   4.87%
                                  ========      ======      ====    ========    ======        ====    ========    ======    ==== 
</TABLE>



                                       23

<PAGE>



      At December 31, 1996,  the Savings Bank had  outstanding  certificates  of
deposit in amounts of $100,000 or more maturing as follows:

                                                    Amount
                                                    ------
Maturing Period                                 (In Thousands)
---------------
Three months or less..........................     $  1,070
Over three through six months.................        1,066
Over six through 12 months....................        3,115
Over 12 months................................        3,313
                                                    -------
    Total.....................................     $  8,564
                                                    =======


      The following table presents,  by various rate  categories,  the amount of
time deposits outstanding at December 31, 1996, 1995 and 1994, and June 30, 1994
and 1993, and the periods to maturity of the certificate accounts outstanding at
December 31, 1996.

<TABLE>
<CAPTION>
                          Period to Maturity from
                             December 31, 1996
                     --------------------------------
                     Within
                       One     One to                         At December 31,             At June 30,
                      Year   Three Years   Thereafter    1996      1995       1994       1994      1993
                     ------  -----------  -----------   -------   ------     ------      ----      ----

                                                        (In Thousands)
Time deposits:
<S>                  <C>        <C>        <C>        <C>         <C>       <C>        <C>        <C>     
  2.00% to 2.99% .   $      1   $     16   $     --         17   $    273   $  5,306   $ 28,708   $ 21,144
  3.00% to 3.99% .      2,803        124         --      2,927     11,711     39,120     27,946     29,598
  4.00% to 4.99% .     49,007     11,633        715     61,355     27,319     11,296     10,031      4,987
  5.00% to 5.99% .     80,058     44,590      5,287    129,935     49,298     20,837      8,844     12,564
  6.00% to 6.99% .      5,535      2,498      1,600      9,633     11,578      2,204      3,874      8,991
  7.00% to 7.99% .        334         95        199        628      1,886      6,541      8,064     27,553
  8.00% to 8.99% .         43        553         --        596        735      1,551         --         --
  9.00% to 9.99% .         30         78         --        108         --        192      2,861      1,452
                     --------   --------   --------   --------   --------  ---------   --------   --------
       Total .....   $137,811   $ 59,587   $  7,801   $205,199   $102,800   $ 87,047   $ 90,328   $106,289
                     ========   ========   ========   ========   ========  =========   ========   ========
</TABLE>



                                       24

<PAGE>



Borrowings

      Deposits are the primary source of funds of the Savings Bank's lending and
investment  activities and for its general business  purposes.  The Savings 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 Savings  Bank's stock in the FHLB of  Pittsburgh  and a portion of
the Savings Bank's first  mortgage  loans and certain other assets.  The Savings
Bank,  if the need arises,  may also access the Federal  Reserve  Bank  discount
window to supplement its supply of lendable funds and to meet deposit withdrawal
requirements.  The  following  table sets forth the  maximum  month-end  balance
period and 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.

<TABLE>
<CAPTION>
                                           At December 31,                  At June 30,
                              ---------------------------------           -------------
                                   1996        1995      1994             1994     1993
                                -----------  ---------  ------            ----     ----
                                                     (Dollars in Thousands)

<S>                               <C>        <C>        <C>              <C>       <C>   
FHLB advances...............      $98,359    $73,359    $    --          $ 900     $3,900
                                   ======     ======     ======           ====      =====


Weighted average interest rate      5.98%      6.07%        --%          9.80%      7.98%

</TABLE>

<TABLE>
<CAPTION>
                                                             Six Months
                                                               Ended
                                Years Ended December 31,    December 31,       Year Ended June 30,
                                -----------------------     -----------        -------------------
                                   1996         1995            1994           1994          1993
                                   ----         ----            ----           ----          ----
                                                     (Dollars in Thousands)
Maximum balance of
<S>                              <C>           <C>             <C>            <C>           <C>   
 FHLB advances outstanding       $ 98,359      $73,359         $     --       $3,900        $4,800
                                  =======       ======          =======        =====         =====
Weighted average balance of
FHLB advances outstanding.       $ 89,343      $16,171         $     --       $2,650        $4,125
                                  =======       ======          =======        =====         =====
Weighted average interest rate
of FHLB advances                    5.99%        6.22%               --%        7.98%         8.10%
                                  ======         ====           =======         ====          ====
</TABLE>


Subsidiary Activity

      Third Federal 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,  1996,  Third  Federal  was  authorized  to  invest  up to
approximately  $13.0 million in the stock of, or loans to, service  corporations
(based upon the 2%  limitation).  At December 31, 1996,  the Savings Bank had no
active subsidiaries.

Personnel

      As of  December  31,  1996,  the  Savings  Bank had 139  full-time  and 18
part-time  employees.  None of the Savings Bank's employees are represented by a
collective  bargaining  group.  The Savings Bank believes that its  relationship
with its employees is good.


                                       25

<PAGE>



Executive Officers of the Registrant

      Executive Officers of the Savings Bank and Company (these individuals have
held their respective positions with the Company since March 1994):

      Carl F.  Gregory is Chairman of the Savings  Bank.  Mr.  Gregory was Chief
Executive  Officer of the Savings  Bank and of the Company from April 1982 until
December 1994. He has been with the Savings Bank since 1962 and will continue to
represent Third Federal  throughout the communities that the Savings Bank serves
in his role as Chairman of the Savings Bank and Director of the Company.

      John R.  Stranford has been with the Savings Bank since 1968. He presently
serves as  President,  Chief  Executive  Officer,  Chief  Operating  Officer and
Director of the Savings  Bank and  Company.  Mr.  Stranford  has served as Chief
Operating  Officer of the Savings  Bank since 1984 and  President of the Savings
Bank since January 1994.  Prior to that time he served in various  capacities as
an officer of the Savings Bank.

      William C.  Niemczura  has been with the Savings Bank as an officer  since
1987. Prior to his current position as Senior Vice President and Chief Financial
Officer, Mr. Niemczura was Asst. Vice President and Vice President-Lending.  Mr.
Niemczura is Senior Vice President, Treasurer and Chief Financial Officer of the
Company.

      Elizabeth  Davidson  Maier is Senior Vice  President  and Secretary of the
Savings Bank and the Company and has been with the Savings Bank since 1964.  Ms.
Maier has been an officer of the  Savings  Bank since 1974.  Prior to that,  Ms.
Maier held various positions at the Savings Bank.

      The remaining  information relating to Directors and Executive Officers of
the Registrant is  incorporated  herein by reference to the  Registrant's  Proxy
Statement for the 1997 Annual Meeting of Stockholders.

                                  REGULATION

      Set  forth  below  is a  brief  description  of  all  materials  laws  and
regulations  which relate to the regulation of the Savings 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.

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
Savings 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.

      QTL Test.  As a unitary  savings  and loan  holding  company,  the Company
generally  is not subject to activity  restrictions,  provided  the Savings 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

                                      26

<PAGE>



holding  company,  and the activities of the Company and any of its subsidiaries
(other  than the Savings  Bank or any other  SAIF-insured  savings  association)
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.

      Restrictions  on  Acquisitions.  The Company must obtain approval from the
OTS  before  acquiring  control  of any  other  SAIF-insured  association.  Such
acquisitions  are generally  prohibited if they result in a multiple savings and
loan holding company  controlling  savings  associations in more than one state.
However,  such  interstate  acquisitions  are permitted  based on specific state
authorization or in a supervisory acquisition of a failing savings association.

      Federal  law  generally  provides  that no  "person,"  acting  directly or
indirectly or through or in concert with one or more other persons,  may acquire
"control," as that term is defined in OTS  regulations,  of a federally  insured
savings  institution  without giving at least 60 days' written notice to the OTS
and providing the OTS an  opportunity  to disapprove  the proposed  acquisition.
Such acquisitions of control may be disapproved if it is determined, among other
things,  that (i) the acquisition would substantially  lessen competition;  (ii)
the financial  condition of the acquiring  person might jeopardize the financial
stability  of  the  savings  institution  or  prejudice  the  interests  of  its
depositors;  or (iii) the  competency,  experience or integrity of the acquiring
person or the proposed  management  personnel  indicates that it would not be in
the  interest  of the  depositors  or the public to permit the  acquisitions  of
control by such person.

      FIRREA amended provisions of the Bank Holding Company Act of 1956 ("BHCA")
to specifically authorize the Federal Reserve Board to approve an application by
a bank holding company to acquire control of a savings association.  FIRREA also
authorized a bank holding  company that controls a savings  association to merge
or consolidate  the assets and liabilities of the savings  association  with, or
transfer assets and liabilities to, any subsidiary bank which is a member of the
BIF with the approval of the appropriate  federal banking agency and the Federal
Reserve  Board.  FDICIA  further  amended  the BHCA to  permit  federal  savings
associations to acquire or be acquired by any insured depository institution. As
a result  of these  provisions,  there  have been a number  of  acquisitions  of
savings associations by bank holding companies and other financial  institutions
in recent years.

      Federal   Securities  Law.  Stock  held  by  persons  who  are  affiliates
(generally  officers,  directors and principal  stockholders) of the Company may
not be resold  without  registration  or unless sold in accordance  with certain
resale  restrictions.  If the Company meets specified current public information
requirements,  each  affiliate  of the  Company  is able  to sell in the  public
market,  without  registration,  a limited  number of shares in any  three-month
period.

Savings Bank Regulation

      General. As a federally chartered,  SAIF-insured savings association,  the
Savings 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 Savings Bank is also  subject to certain  reserve
requirements promulgated by the Federal Reserve Board.

      The OTS, in conjunction with the FDIC, regularly examines the Savings Bank
and  prepares  reports  for the  consideration  of the Savings  Bank's  Board of
Directors on any deficiencies  that they find in the Savings Bank's  operations.
The Savings  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 Savings  Bank's
mortgage documents.

                                      27

<PAGE>




      The Savings 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 activities in which an institution can
engage and is intended  primarily for the protection of the SAIF 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 Savings 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.

      Insurance of Deposit  Accounts.  The Savings Bank's  deposit  accounts are
insured by the SAIF to a maximum of $100,000 for each insured member (as defined
by law and  regulation).  FIRREA,  enacted in 1989, gave the FDIC the authority,
should it initiate proceedings to terminate an institution's  deposit insurance,
to suspend the  insurance  of any such  institution  without  tangible  capital.
However,  if a  savings  association  has  positive  capital  when  it  includes
qualifying  intangible  assets, the FDIC cannot suspend deposit insurance unless
capital declines  materially,  the institution fails to enter into and remain in
compliance  with an approved  capital plan or the institution is operating in an
unsafe or unsound manner.

      Regardless of an institution's capital level, insurance of deposits may be
terminated by the FDIC upon a finding that the institution has engaged in unsafe
or  unsound  practices,  is  in an  unsafe  or  unsound  condition  to  continue
operations  or has violated  any  applicable  law,  regulation,  rule,  order or
condition  imposed  by the  FDIC or the  institution's  primary  regulator.  The
management  of the  Savings  Bank  is  unaware  of any  practice,  condition  or
violation that might lead to termination of its deposit insurance.

      The FDIC charges an annual  assessment for the insurance of deposits based
on the risk a particular  institution  poses to its deposit insurance fund. This
risk  classification is based on an institution's  capital group and supervisory
subgroup  assignment.  In  addition,  the FDIC is  authorized  to increase  such
deposit  insurance  rates,  on a semi-annual  basis,  if it determines that such
action is  necessary  to cause the balance in the SAIF to be  maintained  at the
designated reserve ratio of 1.25% of SAIF- insured deposits.

      Prior to September 30, 1996,  savings  associations paid within a range of
 .23% to .31% of domestic deposits and the SAIF was substantially underfunded. By
comparison,  prior to September  30, 1996,  members of the Bank  Insurance  Fund
("BIF"),  predominantly  commercial  banks,  were required to pay  substantially
lower, or virtually no, federal deposit insurance premiums.  Effective September
30, 1996,  federal law was revised to mandate a one-time  special  assessment on
SAIF members such as the Savings Bank of approximately .657% of deposits held on
March 31, 1995.  The Savings Bank  recorded a $2.2 million  pre-tax  expense for
this  assessment  at September  30,  1996.  Beginning  January 1, 1997,  deposit
insurance  assessments for SAIF members were reduced to  approximately  .064% of
deposits on an annual  basis;  this rate may  continue  through the end of 1999.
During this same period,  BIF members are expected to be assessed  approximately
0.13% of deposits.  Thereafter,  assessments  for BIF and SAIF members should be
the  same  and the  SAIF  and BIF  may be  merged.  It is  expected  that  these
continuing  assessments  for  both  SAIF and BIF  members  will be used to repay
outstanding  Financing  Corporation  bond  obligations.  As a  result  of  these
changes,  beginning January 1, 1997, the rate of deposit insurance  assessed the
Bank declined by  approximately  70% from rates in effect prior to September 30,
1996.


                                      28

<PAGE>



      Regulatory Capital  Requirements.  OTS capital regulations require savings
institutions to meet three capital standards: (1) tangible capital equal to 1.5%
of total adjusted assets,  (2) a leverage ratio (core capital) equal to at least
3% of total adjusted assets and (3) a risk-based  capital  requirement  equal to
8.0% of total risk-weighted assets.

      The  following  table sets forth the Savings  Bank's  compliance  with its
regulatory capital requirements as of December 31, 1996:

                                                      Amount      Percent
                                                      ------      -------
                                                    (Dollars in Thousands)

Tangible capital.................................    $ 50,103      7.78%
Tangible capital requirement.....................       9,655       1.50
                                                      -------      -----

Excess over requirement..........................    $ 40,448      6.28%
                                                      =======     =====

Core Capital.....................................    $ 50,103      7.78%
Core Capital requirement.........................      19,310       3.00
                                                      -------      -----

Excess over requirement..........................    $ 30,793      4.78%
                                                      =======     =====

Risk-based capital...............................    $ 51,909     17.70%
Risk-based capital requirement...................      23,468       8.00
                                                      -------      -----

Excess over requirement..........................    $ 28,441      9.70%
                                                      =======     =====



      Net  Portfolio  Value  Analysis.  In recent  years,  the Savings  Bank has
measured its interest rate sensitivity by computing the "gap" between the assets
and liabilities which were expected to mature or reprice within certain periods,
based on assumptions  regarding loan prepayment and deposit decay rates formerly
provided by the OTS. However, the OTS now requires the computation of amounts by
which  the net  present  value  of an  institution's  cash  flows  from  assets,
liabilities and off-balance sheet items (the  institution's net portfolio value,
or "NPV")  would  change in the event of a range of  assumed  changes  in market
interest rates. The OTS also requires  institutions  with assets of $500 million
or more to compute  estimated changes in net interest income over a four-quarter
period.  These computations  estimate the effect on an institution's NPV and net
interest income of instantaneous  and permanent 1% to 4% increases and decreases
in market interest rates.

      At December  31, 1996,  Third  Federal's  Board of  Directors  had adopted
interest rate risk target limits which established  maximum potential  decreases
in the Savings  Bank's NPV of 20%,  30%,  40% and 50% in the event of 1%, 2%, 3%
and 4% immediate and sustained increases in market interest rates, respectively.
At that date, the target limits also provided for maximum potential decreases of
5%, 10%, 15% and 20% in the Savings Bank's NPV in the event of 1%, 2%, 3% and 4%
immediate and sustained decreases in market interest rates, respectively.  These
target limits  indicate that the Savings Bank's NPV could be adversely  affected
by changes in interest  rates.  The  Savings  Bank's  interest  rate risk target
limits  are  reviewed  by the  Board of  Directors  at least  quarterly  and are
regularly changed in light of market conditions and other factors.

      While  management did not believe that Third Federal's NPV would have been
subject  to  decreases  in excess of the  percentages  set forth in the  Savings
Bank's interest rate risk target limits at

                                      29

<PAGE>



December 31, 1996,  management  cannot  predict  future  interest rates or their
effect on the Savings  Bank's NPV in the  future.  Computations  of  prospective
effects of  hypothetical  interest rate changes  generally are based on numerous
assumptions, including relative levels of market interest rates, prepayments and
deposit  run-offs and should not be relied upon as indicative of actual results.
Further,  the  computations may not contemplate any actions the Savings Bank may
undertake in response to changes in interest rates.  Certain shortcomings may be
inherent in the method of analysis  presented  in the  computation  of NPV.  For
example,  although certain assets and liabilities may have similar maturities or
periods to repricing,  they may react in differing  degrees to changes in market
interest  rates.  The interest rates on certain types of assets and  liabilities
may fluctuate in advance of changes in market  interest  rates,  while  interest
rates on other  types,  such as ARMs indexed to the cost of funds may lag behind
changes in market rates.  Additionally,  certain assets, such as adjustable-rate
loans, have features which restrict changes in interest rates during the initial
term and over the remaining  life of the asset.  In addition,  the proportion of
adjustable-rate  loans in the Savings Bank's portfolios could decrease in future
periods  due to  refinancing  activity  if market  interest  rates  remain at or
decrease  below current  levels.  Further,  in the event of a change in interest
rates,  prepayment and early withdrawal levels could deviate  significantly from
those assumed in the tables.  Finally,  the ability of many borrowers to service
their  adjustable-rate  debt  may  decrease  in the  event of an  interest  rate
increase.

      Based on its  interest  rate risk  position  as  measured  by the OTS,  at
December 31, 1996,  the Savings  Bank was not subject to any  increased  capital
requirements.

      Prompt Corrective  Action.  The FDICIA also established a system of prompt
corrective  action to resolve  the  problems of  undercapitalized  institutions.
Under  this  system,  the  banking  regulators  are  required  to  take  certain
supervisory actions against undercapitalized institutions, the severity of which
depends upon the  institution's  degree of  capitalization.  Under the OTS final
rule implementing the prompt corrective action provisions,  an institution shall
be deemed to be (i) "well  capitalized"  if it has total  risk-based  capital of
10.0% or more, has a Tier I risk-based  capital ratio (core or leverage  capital
to risk-weighted assets) of 6.0% or more, has a leverage capital of 5.0% or more
and is not subject to any order or final capital  directive to meet and maintain
a specific capital level for any capital measure, (ii) "adequately  capitalized"
if it  has a  total  risk-based  capital  ratio  of  8.0%  or  more,  a  Tier  I
risked-based  ratio of 4.0% or more and a leverage capital ratio of 4.0% or more
(3.0% under  certain  circumstances)  and does not meet the  definition of "well
capitalized,"  (iii)  "undercapitalized"  if it has a total  risk-based  capital
ratio that is less than 8.0%,  a Tier I  risk-based  capital  ratio that is less
than 4.0% or a  leverage  capital  ratio that is less than 4.0% (3.0% in certain
circumstances),   (iv)  "significantly  undercapitalized"  if  it  has  a  total
risk-based  capital  ratio that is less than 6.0%, a Tier I  risk-based  capital
ratio that is less than 3.0% or a leverage  capital ratio that is less than 3.0%
and (v)  "critically  undercapitalized"  if it has a ratio of tangible equity to
total  assets that is equal to or less than 2.0%.  In  addition,  under  certain
circumstances,  a federal  banking  agency  may  reclassify  a well  capitalized
institution as adequately  capitalized and may require an adequately capitalized
institution  or an  undercapitalized  institution  to  comply  with  supervisory
actions as if it were in the next lower  category  (except that the FDIC may not
reclassify  a   significantly   undercapitalized   institution   as   critically
undercapitalized).  Immediately upon becoming  undercapitalized,  an institution
shall become subject to various  restrictions and could be subject to additional
supervisory actions.

        The  Savings  Bank is  currently  a "well  capitalized  institution"  as
defined in the prompt corrective  action  regulations and as such is not subject
to any prompt corrective action measures.

      Dividend  and Other  Capital  Distribution  Limitations.  OTS  regulations
require the Savings Bank to give the OTS 30 days' advance notice of any proposed
declaration of dividends to the Company, and the OTS has the authority under its
supervisory powers to prohibit the payment of dividends to the

                                      30

<PAGE>



Company. In addition, the Savings 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  Savings  Bank  below the amount  required  for the  liquidation
account to be established pursuant to the Savings Bank's Plan of Conversion.

      Qualified  Thrift  Lender Test.  The Home Owners'  Loan Act  ("HOLA"),  as
amended,  requires savings  institutions to meet a QTL test. If the Savings 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
FDICIA also amended the method for measuring  compliance with the QTL test to be
on a monthly  basis in nine out of every 12 months,  as opposed to on a daily or
weekly  average of QTIs.  As of  December  31,  1996,  the  Savings  Bank was in
compliance with its QTL requirement with 88.0% of its assets invested in QTIs .

      A savings association that does not meet a QTL test must either convert to
a bank charter or comply with the following restrictions on its operations:  (i)
the  savings  association  may not  engage in any new  activity  or make any new
investment,  directly or  indirectly,  unless such  activity  or  investment  is
permissible  for a  national  bank;  (ii) the  branching  powers of the  savings
association  shall be restricted to those of a national bank;  (iii) the savings
association shall not be eligible to obtain any advances from its FHLB; and (iv)
payment of  dividends by the savings  association  shall be subject to the rules
regarding  payment of dividends by a national bank. Upon the expiration of three
years from the date the  savings  association  ceases to be a QTL, it must cease
any activity and not retain any investment not  permissible  for a national bank
and  immediately  repay any  outstanding  FHLB  advances  (subject to safety and
soundness considerations).

      Loans-to-One  Borrower.  Under the HOLA, as amended,  savings institutions
are subject to the national bank limits on loans-to-one  borrower.  Generally, a
savings  association may not make a loan or extend credit to a single or related
group of borrowers in excess of 15% of the association's  unimpaired capital and
surplus.  An additional  amount may be lent, equal to 10% of unimpaired  capital
and surplus, if such loan is secured by readily-marketable  collateral, which is
defined to include  certain  securities  and  bullion,  but  generally  does not
include real estate. The Savings Bank is in compliance with this requirement.

      Liquidity Requirements.  All savings associations are required to maintain
an average daily  balance of liquid assets equal to a certain  percentage of the
sum of its  average  daily  balance of net  withdrawable  deposit  accounts  and
borrowings payable in one year or less. The liquidity  requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings  associations.  At the present  time,  the required  liquid
asset ratio is 5%. At December 31, 1996, the Savings Bank's  liquidity ratio was
24.16%.

      Federal Home Loan Bank System. The Savings Bank is a member of the FHLB of
Pittsburgh, which is 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.


                                      31

<PAGE>



      As a member,  the Savings Bank is required to purchase and maintain  stock
in the FHLB of  Pittsburgh  in an amount  equal to at least 1% of its  aggregate
unpaid   residential   mortgage  loans,  home  purchase   contracts  or  similar
obligations  at the  beginning of each year.  At December 31, 1996,  the Savings
Bank  had  $4.9  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, 1996, the Savings Bank's total transaction accounts required a reserve level
of $750,000 which was entirely offset by the Bank's vault cash on hand.

      Savings  associations  have  authority to borrow from the Federal  Reserve
Bank "discount  window," but Federal Reserve policy  generally  requires savings
associations  to exhaust  all OTS  sources  before  borrowing  from the  Federal
Reserve System. The Savings Bank had no such borrowings at December 31, 1996.

Item  2.  Description of Property
---------------------------------

    The Company is located and conducts its business at 3 Penns Trail,  Newtown,
Pennsylvania.  The  Savings  Bank  operates  from its main  office and 13 branch
offices located in  Philadelphia  and Bucks  Counties,  Pennsylvania  and Mercer
County,  New  Jersey.  The Savings  Bank also owns two lots,  one of which has a
building,  behind its  Doylestown  branch  office.  The  building is leased to a
third-party  and the other is used as a parking lot for employees and tenants of
Third  Federal.  The net book value of the two lots was $117,000 at December 31,
1996.  In addition,  the Savings Bank owns a vacant lot at Newtown  Yardley Road
and Friends  Lane,  Newtown,  Pennsylvania.  This lot was  purchased in 1993 for
future expansion and had a net book value of $1.6 million at December 31, 1996.

      The following table sets forth certain  information  regarding the Savings
Bank's properties:

                          Leased or                                    Leased or
    Location                Owned            Location                     Owned
    --------              ---------          --------                  ---------

MAIN OFFICE
  Newtown Office
  3 Penns Trail
  Newtown, PA 18940          Owned



 BRANCH OFFICES                          950 Newtown Yardley Road        Leased
  Frankford Office                       Newtown, Pennsylvania 18940
  4625 Frankford Avenue
  Philadelphia, PA 19124     Owned


  Princeton Shopping Center
  301 N. Harrison Street                 2075 Pennington Road
  Princeton, NJ 08540       Leased       Trenton, NJ 08618               Owned



                                       32

<PAGE>



                          Leased or                              Leased or
    Location                Owned            Location              Owned
    --------              ---------          --------            ---------


                                         Mayfair Office
  1850 Route 33                          Roosevelt Blvd. at Unruh
  Hamilton Square, NJ 08690  Owned       Philadelphia, PA 19149    Owned


  Fishtown Office                        Doylestown Office
  York & Memphis Streets                 60 North Main Street
  Philadelphia, PA 19125     Owned       Doylestown, PA 18901      Owned

  Cross Keys Office                      Administrative Office
  834 North Easton Highway               62 Walker Lane
  Doylestown, PA 18901       Owned       Newtown, PA 18940(1)      Owned

  Woodhaven Office                       Warminster Office
  Knights Road Center                    601 Louis Drive
  4014 Woodhaven Road                    Warminster, PA 18974      Owned
  Philadelphia, PA 19154     Leased

  Bridgesburg Office                     Feasterville Office
  Orthodox & Almond Streets              Buck Hotel Complex
  Philadelphia, PA 19137     Owned       Feasterville, PA 19053    Owned


  New Britain Office
  100 Town Center
  New Britain, PA 18901      Leased

--------------------------------------
(1)   This office serves as administrative  offices, check processing,  training
      center, mail processing and storage center for the Savings Bank
(2)   Includes $1.6 million in excess land held for future expansion.
(3)   Includes $117,000 for two lots and building behind main office.


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,  which 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.

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

      None.



                                       33

<PAGE>



                                    PART II

Item 5.  Market for Common Equity and Related Stockholder Matters
------------------------------------------------------------------

      Information  relating  to the market for  Registrant's  common  equity and
related  stockholder  matters  appears under "Stock Market  Information"  in the
Registrant's  1996  Annual  Report  to  Stockholders  on  pages 1 and 2,  and is
incorporated herein by reference.

Item 6.  Selected Financial Data
--------------------------------

      The  above-captioned  information  appears under  "Selected  Financial and
Other Data" in the  Registrant's  1996 Annual Report to  Stockholders on page 5,
and is incorporated herein by reference.


                                      34

<PAGE>



Item 7. Management's Discussion and Analysis of Financial Conditions and Results
-------------------------------------------------------------------------------
of Operations
-------------

Rate/Volume Analysis

      The table  below  sets  forth  certain  information  regarding  changes in
interest  income  and  interest  expense  of the  Savings  Bank for the  periods
indicated.  For each category of  interest-earning  assets and  interest-bearing
liabilities,  information is provided on changes  attributable to (i) changes in
volume (changes in average volume multiplied by old rate); (ii) changes in rates
(changes in rate  multiplied  by old  average  volume);  (iii) total  changes in
rate-volume.  The  combined  effects of changes in both  volume and rate,  which
cannot be separately  identified,  have been  allocated  proportionately  to the
change due to volume and the change due to rate.

<TABLE>
<CAPTION>


                            Years Ended           Twelve Months Ended
                        December 31 December 31    December 31, June 30                        Year Ended June 30,
                        -----------------------   ---------------------            --------------------------------------------
                          1996    vs  1995           1995   vs   1994              1994   vs  1993            1993    vs  1992
                        -----------------------   ---------------------           -------------------       -------------------
                         Increase (Decrease)        Increase (Decrease)          Increase (Decrease)       Increase (Decrease)
                                Due to                     Due to                       Due to                      Due to
                        -----------------------   ---------------------          -------------------       -------------------
                           Volume     Rate    Net     Volume   Rate      Net     Volume    Rate      Net    Volume    Rate      Net
                        ----------  -------- ----     ------   ----      ---    -------- ---------- -----   -------  -------   -----
Interest Income:                                                                      (In Thousands)
<S>                        <C>      <C>      <C>      <C>     <C>      <C>      <C>       <C>      <C>      <C>      <C>    <C>     
 Loans receivable.....     $1,645   $  (30)  $11,615  $  853  $ (315)  $  538   $(1,431)  $(1,734) $(3,165) $(2,604) $(624) $(3,228)
 Mortgage-backed 
  securities(1........       (699)    (137)     (836)  3,506     474    3,980     1,295        (7)   1,288    1,223    (807)    416
 Investment securities(1)    (982)     --       (982)   (401)    211     (190)      894      (436)     458    1,441  (1,025)    416
 Other interest-earning 
   assets.............        (14)    (424)     (438)     50     736      786       (84)      139       55      591    (843)   (252)
                            ------  ------    ------     ---   -----    -----   ------    ------   ------   ------   -----    -----
    Total interest-
     earning assets...     $9,950   $ (591)  $ 9,359  $4,008  $1,106   $5,114    $  674   $(2,038) $(1,364) $   651 $(3,299)$(2,648)
                             =====   =====     =====   =====   =====    =====     =====    ======   ======   ======  ======  ======


Interest Expense:
 Savings deposits.....     $ 1,734  $ (363)  $ 1,371  $ (724) $1,547   $  823    $1,343   $(2,822) $(1,479) $1,473  $(5,332)$(3,859)

 Borrowed money.......       4,866     157     5,023     848     (57)     791      (118)       28      (90)   (456)    (234)   (690)
                           -------  ------    ------   ----- ------     -----    -----    ------   ------   -----    -----    -----
    Total interest bearing
      liabilities.....     $ 6,600  $ (206)  $ 6,394  $  124  $1,490   $1,614    $1,225   $(2,794) $(1,569) $1,017  $(5,566)$(4,549)
                            ======   ======   ======   =====   =====    =====     =====    ======   ======   =====   ======  ======


Net change in interest 
  income..............     $ 3,350  $ (385)  $ 2,965  $3,884  $(384)   $3,500   $ (551)   $   756  $   205  $ (366) $ 2,267 $ 1,901
                            ======   =====    ======   =====  =====     =====    =====     ======   ======   ======  ======  ======

</TABLE>


      ---------------------
      (1)   Includes intest income on investment securities held for sale.


                                      35

<PAGE>



      The  remaining  above-captioned  information  appears  under  Management's
Discussion and Analysis of Financial  Condition and Results of Operations in the
Registrant's  1996 Annual  Report to  Stockholders  on pages 8 through 20 and is
incorporated herein by reference.

Item 8.  Financial Statements
------------------------------

      The Consolidated  Financial Statements of TF Financial Corporation and its
subsidiaries are included in the Registrant's 1996 Annual Report to Stockholders
on pages 24 through 63 and are incorporated herein by reference.

Item 9. Change In and Disagreements with Accountants on Accounting and Financial
-------------------------------------------------------------------------------
Disclosure
----------

      None.


                                   PART III

Item 10.  Directors and Executive Officers of the Registrant
------------------------------------------------------------

      The information  contained under the section  captioned  "Information with
Respect to Nominee for  Director,  Directors  Continuing in Office and Executive
Officers  --  Election  of  Directors"  at  pages  4 to 6  of  the  Registrant's
definitive  proxy  statement  for  the  Registrant's   1997  Annual  Meeting  of
Stockholders (the "Proxy Statement") is incorporated herein by reference.

      Additional  information  concerning  executive  officers is included under
"Item 1. Business -- Executive Officers of the Registrant."


Item 11.  Executive Compensation
--------------------------------

      The information relating to executive  compensation is incorporated herein
by reference to the Registrant's Proxy Statement at pages 7 through 11.


Item 12.  Security Ownership of Certain Beneficial Owners and Management
-------------------------------------------------------------------------

      The  information  relating to  security  ownership  of certain  beneficial
owners and management is  incorporated  herein by reference to the  Registrant's
Proxy Statement at pages 3 and 4.


Item 13.  Certain Relationships and Related Transactions
--------------------------------------------------------

      The information relating to certain relationships and related transactions
is incorporated  herein by reference to the Registrant's Proxy Statement at page
14.



                                      36

<PAGE>



                                    PART IV

Item 14.  Exhibits and Reports on Form 8-K
------------------------------------------

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

      (1) Financial  Statements of the Company are  incorporated by reference to
the following indicated pages of the 1996 Annual Report to Stockholders.

<TABLE>
<CAPTION>

                                                                                        PAGE

<S>                                                                                      <C>
Independent Auditors' Report.....................................................        23

Consolidated Statements of Financial Position as of December 31, 1996 and 1995...        24

Consolidated Statements of Earnings For the Years Ended
  December 31, 1996 and 1995 and the six months ended December 31, 1994 and the
  Year Ended June 30, 1994 ......................................................        25

Consolidated Statement of Changes in Stockholders' Equity
  for the Years Ended December 31, 1996 and 1995, the six months ended December
 31, 1994 and the Year Ended June 30, 1994.......................................        26

Consolidated  Statements of Cash Flows for the Years Ended December 31, 1996 and
 1995, the six months ended December 31, 1994 and the Year Ended June 30, 19928

Notes to Consolidated Financial Statements.......................................        30

</TABLE>


      The remaining  information  appearing in the Annual Report to Stockholders
is not deemed to be filed as part of this report,  except as expressly  provided
herein.

      (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* 3.2 Bylaws
            of TF Financial  Corporation* 4.0 Stock  Certificate of TF Financial
            Corporation*
      10.1  Form of Third Federal Savings and Loan Association  Management Stock
            Bonus Plan*
      10.2  Form of TF Financial Corporation 1994 Stock Option Plan*
      10.3  Third Federal  Savings Bank  Directors  Consultation  and Retirement
            Plan**
      10.4  TF Financial Corporation Incentive Compensation Plan**
      10.5  Severance Agreement with John R. Stranford**
      10.6  Severance Agreement with Francis J. Poiesz**
      10.7  Severance Agreement with William C. Niemczura**
      11.0  Statement re Computation of Per Share Earnings
      13.0  1996 Annual Report to Stockholders

                                       37

<PAGE>



      21.0  Subsidiary Information
      23.0  Consent of Independent Auditor

            (b)   Reports on Form 8-K.

                  The Registrant filed the following Current Reports on Form 8-K
with the SEC during the quarter ended December 31, 1996:

                  1) Form 8-K/A No.1,  Item 2, dated  September 20, 1996,  filed
                  with the SEC to report the  acquisition  of certain assets and
                  the assumption of certain  liabilities of three branch offices
                  of Cenlar.

                  2) Form 8-K/A No. 2, Item 7, dated  September 20, 1996,  filed
                  with  the SEC to file the  financial  statements  of  acquired
                  business  and certain  pro forma  financial  information  with
                  respect  to  the   acquisition   of  certain  assets  and  the
                  assumption of certain  liabilities  of three branch offices of
                  Cenlar.

                  3) Form 8-K Item 5, dated October 23, 1996, filed with the SEC
                  to report the commencement of a repurchase program covering up
                  to 5% of the Registrant's outstanding common stock.

---------------------------
*    Incorporated   herein  by   reference   from  the  Exhibits  to  Form  S-1,
     Registration Statement, File No. 33-76960.
**   Incorporated  herein by reference to the Registrant's Annual Report on Form
     10-K for the fiscal year ended December 31, 1995.











                                      38

<PAGE>



                                  SIGNATURES

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

                                         TF FINANCIAL CORPORATION

Dated:  March 26, 1997                   By:/s/ John R. Stranford
                                            ----------------------------------
                                            John R. Stranford
                                            President, Chief Executive
                                               Officer and Director
                                            (Duly Authorized Representative)

      Pursuant to the  requirement of the Securities  Exchange Act of 1934, this
Report  has  been  signed  below  by the  following  persons  on  behalf  of the
Registrant and in the capacities and on the dates indicated.

By:   /s/ John R. Stranford              By: /s/ William C. Niemczura
      ----------------------------------    ---------------------------------
      John R. Stranford                     William C. Niemczura
      President, Chief Executive Officer    Senior Vice President, Chief
        and Director                        Financial Officer and Treasurer
      (Principal Executive Officer)         (Principal Financial and Accounting
                                                Officer)

Date: March 26, 1997                     Date: March 26, 1997


By:   /s/ Carl F. Gregory                By:/s/ Robert N. Dusek    
      ----------------------------------    -----------------------------------
      Carl F. Gregory                       Robert N. Dusek
      Director                              Chairman of the Board

Date: March 26, 1997                     Date: March 26, 1997


By:   /s/ Thomas J. Gola                 By:/s/ George A. Olsen
      ---------------------------------     -----------------------------------
      Thomas J. Gola                        George A. Olsen
      Director                              Director

Date: March 26, 1997                     Date: March 26, 1997