TF FINANCIAL CORPORATION
          ANNUAL REPORT
         DECEMBER 31, 1997




TABLE OF CONTENTS


Letter to Stockholders ...........................................   Front Cover


Corporate Profile and Stock Market Information ............................    2


Selected Financial Information and Other Data .............................    4


Management's Discussion and Analysis of
  Financial Condition and Results of Operations ...........................    6


Report of Independent Certified Public
  Accountants .............................................................   21


Consolidated Statements of Financial Condition ............................   22


Consolidated Statements of Income .........................................   23


Consolidated Statement of Changes in Stockholders' Equity .................   24


Consolidated Statements of Cash Flows .....................................   26


Notes to Consolidated Financial Statements ................................   38


Office Locations ..........................................................   64


Corporate Information.........................................        Back Cover



<PAGE>

                           TF FINANCIAL CORPORATION



To Our Shareholders:

     I would like to share with you some of the  actions  we  initiated  in 1997
that will positively impact shareholder value.

         The most  significant  action initiated by the company was our Modified
Dutch Auction.  In October, we offered to purchase shares of our stock at prices
not in excess of $26.00 per share in cash.  The  tender  offer was  designed  to
enhance  shareholder value going forward.  When the results were totaled, we had
acquired just over 900,000  shares.  Total shares  outstanding at the end of the
period have been  reduced 27% from 3.963  million at December  31, 1996 to 2.886
million at December 31, 1997.

         During the year we were able to improve  return on equity to 7.39% from
the year earlier return of 4.74%. Earnings per share improved to $1.25, assuming
dilution,  from $ .83 for 1996. While improving earnings,  we also substantially
reduced  non-performing  loans from 0.30% of assets in December 1996 to 0.23% of
assets at the end of 1997. The allowances for loan losses  increased from 91.60%
at December 31, 1996 to 146.82% of non-performing loans at December 31, 1997.

         In addition,  the restructuring of departments within the Bank to shift
our  emphasis  from  wholesale  to retail loan  services,  the addition of three
automated  transaction machines (ATM's), the introduction of a Visa credit card,
and the  addition  of a senior  level  executive  to handle our  technology  and
information  systems will all help further improve our ability to continue to be
the best community bank in our market area.

         Although we have  invested in talent and  resources to safely  increase
earnings,  we have controlled the  expenditures.  Our efficiency  ratio improved
during 1997 to 61.17% from 69.36% a year  earlier.  As we move  forward with new
products and services, we will continue to monitor expenses.

         We have  declared a cash  dividend  each quarter since our first one in
December 1994. That first dividend was $0.05 per share. The amount has increased
steadily  through  the  December  1997  period to $0.12.  The stock  market  has
recognized  our  accomplishments  by  trading  our  stock to a high of $30.00 in
December 1997 from a high during 1996 of $16.25.

         The  board,  management  and  employees  are  extremely  proud of these
results.  We thank you for your  continued  support  and  encouragement  and the
opportunity to serve you.



Sincerely,

/s/John R. Stranford
--------------------
John R. Stranford
President and Chief
Executive Officer


<PAGE>






Corporate Profile and Related Information

TF Financial  Corporation  (the  "Corporation")  is the parent  company of Third
Federal  Savings Bank ("Third  Federal" or the "Savings  Bank"),  TF Investments
Corporation,  Teragon, Inc. and Penns Trail Development Corporation. At December
31, 1997, total assets were  approximately  $597.0 million.  The Corporation was
formed as a Delaware  corporation  in March 1994 at the direction of the Savings
Bank to acquire  all of the  capital  stock that Third  Federal  issued upon its
conversion  from the mutual to stock form of ownership  (the  "Conversion")  and
concurrent  $52.9 million  initial public  offering  effective July 13, 1994. At
December 31, 1997, total  stockholders'  equity was approximately $50.1 million.
The  Corporation  is a unitary  savings and loan holding  company  which,  under
existing laws,  generally is not restricted in the types of business  activities
in which it may engage,  provided that Third Federal retains a specified  amount
of its assets in housing-related investments.

Third  Federal is a  federally-chartered  stock  savings bank  headquartered  in
Newtown,  Pennsylvania,  which was  originally  chartered in 1921 under the name
"Polish American Savings Building and Loan Association."  Third Federal became a
federally  chartered mutual savings and loan  association  under the name "Third
Federal Savings and Loan  Association of  Philadelphia" in 1935, and a federally
chartered  stock  savings  bank  under  its  present  name,  and a wholly  owned
subsidiary  of  the   Corporation,   in  July  1994,  in  connection   with  its
mutual-to-stock conversion.  Third Federal significantly expanded its operations
throughout Philadelphia and Bucks Counties,  Pennsylvania,  in June 1992 through
its   acquisition   of   Doylestown   Federal   Savings  and  Loan   Association
("Doylestown").  In September 1996,  Third Federal  expanded its operations into
Mercer County, New Jersey, through its acquisition of three branches, along with
the related deposits,  of Cenlar Federal Savings Bank. Deposits of Third Federal
have been  federally  insured  since  1935 and are  currently  insured up to the
maximum  amount  allowable by the Federal  Deposit  Insurance  Corporation  (the
"FDIC").  Third Federal is a community oriented savings  institution  offering a
variety  of  financial  services  to meet the needs of the  communities  that it
serves.  Third  Federal  conducts its business  from its main office in Newtown,
Pennsylvania,  and thirteen full service branch offices  located in Philadelphia
and Bucks Counties, Pennsylvania and Mercer County, New Jersey.

Third Federal attracts  deposits  (approximately  $450.4 million at December 31,
1997) from the general public and uses such deposits,  together with  borrowings
(approximately $88.4 million at December 31, 1997) 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. To a much lesser  extent,  the Savings Bank also
originates commercial real estate and multi-family loans, construction loans and
consumer loans.

Stock Market Information

Since its issuance in July 1994, the Corporation's  common stock has been traded
on the Nasdaq National Market.  The daily stock quotation for the Corporation is
listed in the Nasdaq National Market  published in The Wall Street Journal,  The
Philadelphia  Inquirer, and other leading newspapers under the trading symbol of
"THRD". The following table reflects the closing stock price as published by the
Nasdaq National Market statistical report for the past two fiscal years.


            Fiscal 1996                     HIGH               LOW
            -----------                     ----               ---
            First Quarter                 $   15.38          $   14.00
            Second Quarter                $   15.13          $   13.94
            Third Quarter                 $   15.13          $   13.75
            Fourth Quarter                $   16.25          $   14.50


<PAGE>



            Fiscal 1997                     HIGH               LOW
            -----------                     ----               ---
            First Quarter                 $   19.25          $   16.50
            Second Quarter                $   19.63          $   16.63
            Third Quarter                 $   25.69          $   19.13
            Fourth Quarter                $   30.00          $   23.25

                                       2
<PAGE>




The number of  shareholders  of record of common stock as of March 11, 1998, was
approximately  690.  This does not reflect the number of persons or entities who
held stock in nominee or "street" name through various brokerage firms. At March
11, 1998,  there were  3,187,233  shares of the common stock of the  Corporation
outstanding.

Dividend Policy

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

Dividend History

                                 HISTORY
           -----------------------------------------------------
              Financial       Declaration        Dividend Amount
            Period Ended          Date             (per share)
            ------------          ----             -----------

            June 30, 1994         None                 $0.00
          December 31, 1994   January 25, 1995         $0.05
            June 30, 1995       July 26, 1995          $0.07
            March 31, 1996      April 24, 1996         $0.08
          December 31, 1996   January 22, 1997         $0.10

Change in Accounting Period

On August 19, 1994, the Board of Directors of TF Financial  Corporation approved
a change in the Corporation's  fiscal year end from June 30 to December 31. This
change was instituted to enable the Corporation to present its financial reports
on a fiscal year end that is more prevalent in the financial  services industry.

                                       3
<PAGE>
SELECTED FINANCIAL INFORMATION AND OTHER DATA
<TABLE>
<CAPTION>
Financial Condition                                              At December 31,              At June 30,
(Dollars in Thousands, except per share data)           1997       1996       1995       1994       1994      1993
---------------------------------------------------------------------------------------------------------------------
<S>                                                   <C>        <C>        <C>        <C>        <C>        <C>
Total Assets ......................................   $597,047   $647,853   $490,358   $431,828   $436,043   $388,681
Loans Receivable, Net .............................   $250,711    309,570    238,275    113,893    119,043    143,299
Mortgage-backed Securities available
For sale, at fair value ...........................     36,847     22,027     29,640       --         --         --
Mortgage-backed securities held to maturity at cost    144,074    153,758    137,841    181,411    154,288     95,836
Securities purchased under agreements to resell ...     10,000     25,129       --         --         --         --
Investment securities available
For sale, at fair value ...........................     32,037     12,652     15,044     41,002     40,316       --

Investment securities held to maturity, at cost ...     52,822     38,544     23,640     36,531     25,859     72,137

Cash and cash equivalents(1) ......................     41,625     54,132     27,032     42,376     78,466     57,948

Savings deposits ..................................    450,429     469,088   337,069    347,631    367,133    350,328
Other borrowings ..................................     88,359     98,359     73,359       --          900      3,900
Retained earnings .................................     43,176     39,750     37,529     34,746     32,139     27,673
Total stockholder's equity ........................     50,095     72,575     73,332     79,972        N/A        N/A

Book value per common share .......................   $  17.36   $  18.31   $  17.08   $  16.38        N/A        N/A
Tangible book value per common share ..............   $  14.49   $  15.99   $  17.08   $  16.38        N/A        N/A
</TABLE>

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Summary of Operations                                                  Year ended           Six months ended         Year ended
                                                                       ----------           ----------------         ----------
(Dollars in Thousands, except per                                      December 31,            December 31,            June 30,
                                                                      ------------            ------------            --------
Share data)                                                 1997     1996 (2)     1995      1994        1993       1994        1993
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                       <C>        <C>       <C>        <C>        <C>        <C>          <C>
Interest income ......................................    $43,189    $38,989   $ 29,630   $ 13,901   $ 12,124   $ 24,516     $25,880
Interest expense .....................................     24,080     20,797     14,403      6,271      6,594     12,789      14,358
Net interest income ..................................     19,109     18,192     15,227      7,630      5,530     11,727      11,522
Provision for loan losses ............................        397        330         72         30          4       (144)         48
Non-interest income ..................................      2,327      1,794      1,161        617      1,249      1,903       1,895
Non-interest expense .................................     13,583     13,745      9,975      4,601      4,690      9,452       9,644
Net income before cumulative effect
 Of change in accounting method ......................      4,874      3,479      3,871      2,180      1,355      2,666       2,870
Net income ...........................................      4,874      3,479      3,871      2,607      3,155      4,466       2,870
Earnings per common share - basic
   Continuing operations .............................    $  1.33    $  0.86   $   0.84   $   0.45        N/A         N/A       N/A
   Cumulative effect of accounting changes ...........         --         --              $   0.08        N/A         N/A       N/A
   Earnings per common share & common share equivalent    $  1.33    $  0.86   $   0.84   $   0.53        N/A         N/A       N/A
Earnings per common share - assuming dilution
   Continuing operations .............................    $  1.25    $  0.83   $   0.83   $   0.45        N/A         N/A       N/A
   Cumulative effect of accounting changes ...........         --         --              $   0.08        N/A         N/A       N/A
   Earnings per common share & common share equivalent    $  1.33    $  0.83   $   0.83   $   0.53        N/A         N/A       N/A
</TABLE>
                                       4
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Performance Ratios and Other
                                                                Year ended             Six months ended            Year ended
Selected data                                                  December, 31              December 31,               June, 30,
                                                               ------------              ------------               ---------
                                                          1997    1996(2)   1995     1994 (3)(4) 1993 (3)(4)    1994     1993
------------------------------------------------------------------------------------------------------------------------------------

<S>                                                    <C>      <C>      <C>         <C>         <C>         <C>      <C>
Return on average assets .........................        0.77%    0.62%    0.88%       1.00%       0.68%       0.67%    0.77%
Return on average equity .........................        7.39%    4.74%    4.99%       5.40%       9.03%       8.59%   10.99%
Average equity to average assets .................       10.46%   12.91%   17.54%      18.48%       7.53%       7.65%    7.00%
Average interest rate spread .....................        2.72%    2.76%    2.84%       3.15%       2.61%       2.86%    2.90%
Non-performing loans to total assets .............        0.23%    0.30%    0.37%       0.42%       0.86%       0.48%    1.48%
Non-performing loans to total loans ..............        0.55%    0.64%    0.76%       1.48%       1.63%       1.49%    2.42%
Allowance for loan losses to non-performing loans       146.82%   91.60%   82.31%      87.13%      78.22%      84.71%   47.85%
Allowance for loan losses to total loans .........        0.80%    0.58%    0.62%       1.29%       1.25%       1.19%    1.13%
Savings Bank regulatory capital
    Core .........................................        7.16%    7.77%   12.21%      13.57%       7.63%       7.37%    7.12%
    Tangible .....................................        7.16%    7.77%   12.21%      13.57%       7.63%       7.37%    7.12%
    Risk based ...................................       17.41%   17.68%   27.07%      39.46%      20.40%      21.27%   17.30%
</TABLE>

1.   Consists of cash due from  banks,  interest-bearing  deposits,  and federal
     funds sold with maturities of less than three months.
2.   Includes  a  one-time  special   assessment  to  recapitalize  the  Savings
     Association  Insurance  Fund ("SAIF") - See  "Management's  Discussion  and
     Analysis of Financial  Condition  and Results of Operations - Comparison of
     Years Ended December 31, 1996 and December 31, 1995 - Net Income"
3.   Income  related  ratios  exclude  the  cumulative  effect  of a  change  in
     accounting  for certain  investments  of $427,000  for the six months ended
     12/31/94  (SFAS  #115) and change in  accounting  for income  taxes of $1.8
     million for the six month period ended 12/31/93 and fiscal year end 6/30/94
     (SFAS #109).
4.   Ratios for six month periods are stated on an annualized basis. Such ratios
     are not necessarily  indicative of the results that may be expected for the
     full year.

                                       5

<PAGE>

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS

General

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

         Certain  forward-looking  statements  contained  herein are  subject to
risks and uncertainties.  The Corporation's actual results may differ materially
from those set forth in such  forward-looking  statements.  Reference is made to
the Corporation's  reports filed with the Securities and Exchange Commission for
a discussion of factors that may cause such differences to occur.

         The   Corporation's   income  on  a   consolidated   basis  is  derived
substantially from its investment in its subsidiary, Third Federal. The earnings
of Third  Federal  depend  primarily  on its net interest  income.  Net interest
income is affected by the interest  income that Third Federal  receives from its
loans and investments  and by the interest  expense that the Savings Bank incurs
on its deposits,  borrowings and other sources of funds. The difference  between
average rate of interest earned on interest  earning assets and the average rate
paid on  interest  bearing  liabilities  is the  "interest  rate  spread".  When
interest  earning  assets  equal or exceed  interest  bearing  liabilities,  any
positive interest rate spread will produce net interest income. During the years
ended  December 31, 1997,  December 31, 1996, and December 31, 1995, the average
net interest rate spread was 2.72%, 2.76% and 2.84% respectively.


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

Interest Rate Sensitivity Analysis

         The Corporation's  asset/liability strategy for 1998 is to maintain its
present  positive gap  position  (interest-earning  assets  subject to repricing
greater than  interest-bearing  liabilities subject to repricing) for periods of
up to five years so that the impact of a slightly rising rate environment on net
interest  income  will  not be  significant  to  the  Corporation's  results  of
operations.  Effective  monitoring  of these  interest  sensitivity  gaps is the
priority of the Corporation's asset/liability management committee.

         The   following   table   indicates   the   time   periods   in   which
interest-earning assets and interest-bearing  liabilities will mature or reprice
in accordance with their  contractual  terms or assumed  prepayment  rates.  The
assumptions  used in the table are  included  in the notes  thereto.  Management
believes that the assumptions used to evaluate the  vulnerability of the Savings
Bank's operations to changes in interest rates are reasonable. The interest rate
sensitivity of the Savings  Bank's assets and  liabilities as shown in the table
below could vary  substantially if differing  assumptions were used or if actual
experience differs from the assumptions used in the table. 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 may lag behind changes in market rates.  Further, in the event of
a significant  change in interest rates,  prepayment and early withdrawal levels
would likely deviate significantly from those assumed in the table. Finally, the
ability of many borrowers to service their  adjustable-rate debt may decrease in
the event of an interest rate increase.



<PAGE>

Gap Table
<TABLE>
<CAPTION>
                                3 Months    3 Months    1 to 3       3 to 5        5 to 10    10 to 20     Over 20
                                 or Less     to 1 Year   Years        Years         Years       Years        Years       Total
                                 --------    --------  ---------    ---------      --------    -------       ------     ---------
<S>                             <C>        <C>         <C>          <C>           <C>        <C>          <C>           <C>
Interest-earning assets:
  Loans receivable - net (1) .. $  50,859  $  65,747   $  42,256    $  28,444     $  50,680  $  11,745    $     980     $ 250,711
  Mortgage-backed
    securities available
    for sale (2)...............     3,823      6,006      11,491        5,452         6,325      3,328          422        36,847
  Mortgage-backed securities
    held to maturity (2).......    14,947     23,482      44,930       21,318        24,732     13,014        1,651       144,074
Investment securities
  available for sale ..........    16,993      7,015       8,029            0             0          0            0        32,037
  Investment securities
    held to maturity ..........    10,530          0       7,815       12,815        21,662          0            0        52,822
Certificates of deposit-
  other Bank...................     1,137       1,200        400            0             0          0            0         2,737
Other earning assets ..........    52,033       1,231       3,279           0             0          0            0        56,543
                                 --------    --------  ---------    ---------      --------    -------       ------     ---------
Total interest-
  earning assets ..............  $150,322    $104,681  $ 118,200    $  68,029      $103,399    $28,087       $3,053     $ 575,771
                                 ========    ========  =========    =========      ========    =======       ======     =========

Interest-bearing
liabilities: (3)
Non-interest bearing
  deposits .................... $     462  $   1,148   $   1,200    $   1,928      $    271  $     28             0     $   5,037
  NOW and Super NOW
    accounts ..................     3,426      9,160       9,966        6,584         8,271      2,381          572        40,360
Savings accounts ..............     5,394     15,514      29,132       32,340        43,379     34,972       13,498       174,229
Money market deposit
  accounts ....................     3,336      8,622      10,515        4,842         4,029      1,274          159        32,777
Certificates of deposit .......    32,684    103,619      56,213        5,510             0         0             0       198,026
Borrowings ....................         0     25,000      60,000            0             0      3,359            0        88,359
                                ---------   --------    --------    ---------      --------  ---------      -------      --------
Total interest-bearing
  Liabilities ................. $  45,302   $163,063    $167,026    $  51,204      $ 55,950  $  42,014      $14,229      $538,788
                                =========   ========    ========    =========      ========  =========      =======      ========
Interest sensitivity gap ...... $ 105,020   $(58,382)  $ (48,826)   $  16,825      $ 47,449  $ (13,927)    $(11,176)    $  36,983
                                =========   ========    ========    =========      ========  =========      =======      ========
Cumulative interest
  sensitivity Gap.............. $ 105,020   $ 46,638     $(2,188)   $  14,637      $ 62,086  $  48,159     $ 36,983     $  36,983
                                =========   ========    ========    =========      ========  =========      =======      ========
Ratio of interest-
  earning assets To
  interest-bearing
  liabilities .................    331.82%     64.20%      70.77%      132.86%       184.81%     66.85%       21.46%       106.86%
                                =========   ========    ========    =========      ========  =========      =======      ========
Ratio of cumulative
 gap to Total assets ... ......     17.60%      7.81%      -0.37%        2.45%        10.40%      8.07%        6.20%         6.20%
                                =========   ========    ========    =========      ========  =========      =======      ========
</TABLE>

----------------------------------
(1)  Adjustable  rate loans are included in the period in which  interest  rates
     are next  scheduled  to adjust  rather than in the period in which they are
     due.  Fixed  rate  loans  are  included  in the  period  in which  they are
     scheduled  to be  repaid  and  adjusted  to  take  into  account  estimated
     prepayments  based  upon  assumptions  estimating  the  prepayments  in the
     interest rate environment  prevailing during the fourth calendar quarter of
     1997. The table assumes prepayments and scheduled principal amortization of
     fixed-rate  loans  and   mortgage-backed   securities,   and  assumes  that
     adjustable  rate  mortgage  loans  will  reprice at  contractual  repricing
     intervals.   There  has  been  no  adjustment  for  the  impact  of  future
     commitments and loans in process.
(2)  Reflects estimated prepayments in the interest rate environment  prevailing
     during the fourth quarter of 1997
(3)  Certificates  of  deposit  are  included  in the  period in which  they are
     scheduled to mature. Passbook and statement savings accounts are assumed to
     decay  at  a  rate  of  12%,  10%  and  10%  for  the  first  three  years,
     respectively,  and 12% per year thereafter.  Passbook,  statement  savings,
     NOW, and MMDA  accounts  are  generally  subject to  immediate  withdrawal,
     however,  management  considers  a  portion  of these  accounts  to be core
     deposits having  significantly  longer effective  maturities based upon the
     Savings Bank's  historical  retention of such deposits in changing interest
     rate  environments  and the  presentation of run off of such deposits based
     upon the financial industry's experience.

                                       7
<PAGE>

Average Balance Sheet

The  following  tables  sets forth  information  relating  to the  Corporation's
average balance sheets and reflects the average yield on assets and average cost
of liabilities for the periods  indicated.  The yields and costs are computed by
dividing income or expense by the monthly  average  balance of  interest-earning
assets or interest-bearing liabilities, respectively, for the periods indicated,
however,  management  does not believe the use of month-end  balances has caused
any material difference in the information presented.

<TABLE>
<CAPTION>
                                             Year Ended December 31,         Year Ended December 31,         Year Ended December 31,
                                                      1997                             1996                          1995
                                        --------------------------------  ------------------------------- --------------------------
                                                                Average                           Average                    Average
                                        Average                 Yield/    Average                 Yield/  Average             Yield/
                                        Balance     Interest    Cost      Balance     Interest    Cost    Balance   Interest   Cost
                                        -------     --------    ----      -------     --------    ----    -------   --------   ----

<S>                                     <C>         <C>          <C>      <C>         <C>         <C>     <C>       <C>        <C>
Interest-earning assets:
  Loans receivable (4)                  $293,023    $23,050      7.87%    $298,800    $23,116      7.74%  $149,741  $11,501    7.68%
  Mortgage-backed securities             185,391     12,514      6.75%     162,973     11,041      6.77%   173,301   11,877    6.85%
  Investment securities                   90,708      5,683      6.27%      44,598      2,728      6.12%    64,844    3,870    5.97%
  Securities purchased under
  Agreements to resell                     9,744        555      5.70%       3,761        160      4.25%        --      --       --
  Other interest-earning assets(1)        32,713      1,387      4.24%      43,024      1,944      4.52%    43,271   2,382     5.50%
                                        --------     ------               --------     ------             --------
      Total interest-earning assets     $611,579    $43,189      7.06%    $553,156    $38,989      7.05%  $431,157 $29,630     6.87%
                                        --------                          --------                        --------
Non interest-earning assets               18,987                           $14,714                         $10,901
                                        --------                          --------                        --------
      Total assets                      $630,566                          $567,870                        $442,058
                                        ========                          ========                        ========
Liabilities and Stockholders' Equity:
  Interest-bearing liabilities:
    Savings deposits                     456,345    $18,211      3.99%    $382,511    $14,739      3.85%  $337,699 $13,368     3.96%
    Borrowings                            97,942      5,869      5.99%     102,526      6,058      5.91%    19,870   1,035     5.21%
                                          ------      -----               -------      -----               -------  -----
      Total interest-bearing
        liabilities..................   $554,287    $24,080      4.34%    $485,037    $20,797      4.29%  $357,569 $14,403     4.03%
                                        ========    =======               ========    =======             ======== =======
Non interest-bearing liabilities          10,293                             9,498                          $6,528
     Total liabilities                   564,580                           494,535                         364,097
Stockholders' equity                      65,986                            73,335                          77,961
                                       --------                          --------                        --------
     Total liabilities and
       Stockholders' equity             $630,566                          $567,870                        $442,058
                                         ========                          ========                        ========
Net interest income                                 $19,109                           $18,192                      $15,227
                                                    =======                           =======                      =======
Interest rate spread (2)                                         2.72%                             2.76%                       2.84%
Net yield on interest-earning assets (3)                         3.12%                             3.29%                       3.53%
Ratio of interest-earning assets to
  Average interest bearing liabilities                            110%                              114%                        121%
</TABLE>

(1)  Includes interest-bearing deposits in other banks.
(2)  Interest-rate spread represents the difference between the average yield on
     interest-earning   assets  and  the   average   cost  of   interest-bearing
     liabilities.
(3)  Net yield on  interest-earning  assets  represents net interest income as a
     percentage of average interest-earning assets.
(4)  Nonaccrual loans have been included in the appropriate average loan balance
     category,  but  interest  on  nonaccrual  loans has not been  included  for
     purposes of determining interest income.

                                       8
<PAGE>



Changes to Financial Condition

         The  Corporation's  total  assets at December 31, 1997 and December 31,
1996 totaled  $597.0  million and $647.9  million,  respectively,  a decrease of
$50.9  million or 7.9%.  This  decrease  was  primarily as a result of the $12.5
million or 23.1%  decrease in cash and cash  equivalents,  the $15.1  million or
60.2% decrease in securities  purchased  under  agreements to resell,  the $58.9
million or 19.0%  decrease in loans  receivable,  partially  offset by the $33.7
million or 65.8% increase in investment  securities and the $5.1 million or 2.9%
increase in  mortgage-backed  securities  for the fiscal year ended December 31,
1997.  The decrease in loans  receivable was primarily the result of the sale of
$43.6 million of mortgage  loans,  coupled with the normal  amortization of such
loans. This net decrease in assets funded the decrease in total savings deposits
of $18.7  million or 4.0% at  December  31, 1997 to $450.4  million  from $469.1
million as of December 31, 1996,  the $10.0 million or 10.2% decrease in Federal
Home Loan Bank  advances,  along with the  increase in  treasury  stock of $26.9
million to $41.6 million at December 31, 1997. The decrease in savings  deposits
was  primarily  the  result of  management's  decision  to price  deposits  less
aggressively.  The  decrease  in  Federal  Home  Loan Bank  Advances  was due to
maturing advances during the period.

Total  consolidated  stockholders'  equity of the  Corporation  decreased  $22.5
million to $50.1 million at December 31, 1997 from $72.6 million at December 31,
1996. The 31.0% decrease is primarily  attributed to the repurchase of shares of
the  Corporation's  outstanding  common stock,  at a total cost of $27.0 million
coupled with the payment of $1.4 million in dividends to shareholders, partially
offset by the  addition  of $4.9  million  of net  income  for the  period.  The
decrease in total consolidated stockholders' equity coupled with the decrease of
$50.9  million  in  total  assets   resulted  in  a  decrease  in   consolidated
stockholders'  equity as a  percentage  of total  assets to 8.4% at December 31,
1997 from 11.2 % at December 31, 1996.


Comparison of Years Ended December 31, 1997 and December 31, 1996

Net Income.  Net Income of $4.9  million for the fiscal year ended  December 31,
1997 increased $1.4 million,  or 40.1%,  over net income of $3.5 million for the
fiscal year ended  December 31, 1996.  The increase in earnings is primarily due
to the $917,000,  or 5.0%,  increase in net interest  income,  the $533,000,  or
29.7%, increase in non-interest income and the $162,000 decrease in non-interest
expense,  partially offset by the $150,000  increase in income tax expense.  Net
interest  income  before  provision  for loan  losses was $19.1  million for the
fiscal year ended  December  31, 1997 as compared to $18.2  million for the same
period  in 1996,  an  increase  of  $917,000,  or 5.0%.  Total  interest  income
increased  $4.2  million  or 10.8% to $43.2  million  from  $39.0  million  from
December 31, 1996 to December  31, 1997  respectively.  For these same  periods,
total  interest  expense was $24.1 million and $20.8 million,  respectively,  an
increase of $3.3  million,  or 15.8%.  Non-interest  income was $2.3 million and
$1.8 million,  respectively for these same periods, an increase of $533,000,  or
29.7%.  The increase in non-interest  income was attributed to the gains on sale
of investment  securities,  mortgage loans and loan servicing rights.  Operating
expense  (non-interest  expense)  was $13.6  million  and $13.7  million for the
fiscal years ended  December 31, 1997 and December 31, 1996,  respectively.  The
decrease  in  operating  expense  was  attributable  to the  decrease in federal
deposit insurance  premiums and the absence of the one-time "SAIF" assessment of
$2.6 million offset by an increase in the costs associated with the operation of
the branch offices acquired from Cenlar Federal Savings Bank.

Total  Interest  Income.  For the fiscal year ended  December  31,  1997,  total
interest  income  increased to $43.2  million from $39.0  million for the fiscal
year ended December 31, 1996.  This increase of $4.2 million,  or 10.8%,  is due
primarily  to the $3.0  million,  or 108.3%,  increase  in income on  investment
securities to $5.7 million for the fiscal year ended December 31, 1997 from $2.7
million  for the same  period in 1996.  This  increase  was also due to the $1.5
million, or 13.3%, increase in interest income on mortgage-backed  securities to
$12.5 million for the fiscal year ended December 31, 1997 from $11.0 million for
the same  period in 1996.  The  average  balance of  mortgage-backed  securities
increased  $22.4 million to $185.4 million from $163.0 million while the average
yield on mortgage-backed securities decreased to 6.75% from 6.77% when comparing
these  same  periods.  The  increase  in total  interest  income  attributed  to
investment and mortgage-backed securities, $4.5 million, was partially offset by

                                       9
<PAGE>

the decrease in income on loans and other interest  earning  assets.  During the
same time  periods the average  balance of  investment  securities  increased by
$46.1  million to $90.7  million  from $44.6  million,  with the  average  yield
increasing to 6.27% from 6.12%.  Interest on loans declined by $66,000,  or .3%,
for the fiscal year ended December 31, 1997 as compared to the similar period in
1996 as a result of the decrease in the average  balance to $293.0  million from
$298.8  million.  Interest on securities  purchased  under  agreements to resell
increased to $555,000 for the fiscal year ended  December 31, 1997 from $160,000
for the fiscal year ended  December  31,  1996,  primarily  as the result in the
increase in the average  balance to $9.7  million from $3.8 million for the same
periods.  Interest  on other  interest  earning  assets  declined by $557,000 or
28.7%,  to $1.4 million from $1.9 million for the fiscal year ended December 31,
1997  compared to the similar  period ended  December  31, 1996,  primarily as a
result of a decrease in the average  yield to 4.24% from 4.52%  coupled with the
decrease  in the  average  balance  of other  interest  earning  assets to $32.7
million from $43.0 million for those same periods.  The increases in the average
balances  of  mortgage-backed  and  investment  securities  are a result  of the
reinvestment  of the cash proceeds  received from the  acquisition of the $137.6
million in deposit balances from Cenlar Savings Bank on September 20, 1996.

Total interest  expense.  Total interest expense  increased to $24.1 million for
the fiscal year ended  December 31, 1997 from $20.8  million for the fiscal year
ended  December 31, 1996.  This  increase of $3.3  million,  or 15.8%,  in total
interest  expense is a result of the increase in the average  balance of savings
deposits  to $456.3  million  from  $382.5  million  for the fiscal  years ended
December  31, 1997 and 1996,  respectively,  together  with the  increase in the
average  rate paid to 3.99% from 3.85% for those same  periods.  The increase in
average  savings  deposits was primarily the result of the acquisition of $137.6
million in deposit  balances during 1996. The increase in total interest expense
was  partially  offset by the $189,000  decrease in interest  expense on Federal
Home Loan Bank advances for the fiscal year ended December 31, 1997. The average
balance of  Federal  Home Loan Bank  advances  decreased  $4.6  million to $97.9
million for the fiscal year ended  December 31, 1997 from $102.5 million for the
same period in 1996 while the average  rate paid  increased to 5.99% from 5.91%.
The average balance of total  interest-bearing  liabilities  increased to $554.3
million  during the fiscal year ended  December  31,  1997 from  $485.0  million
during the fiscal  year ended  December  31, 1996  primarily  as a result of the
acquisition  of $137.6  million in deposit  balances.  The  increase  in average
balances of savings  deposits  was  utilized  primarily  to fund the purchase of
investment and mortgage-backed securities.

Net Interest Income.  Net interest income for the fiscal year ended December 31,
1997  increased by $917,000,  or 5%, to $19.1 million from $18.2 million for the
same  period  in  1996.  This  increase  is  primarily  due to the  increase  in
interest-earning  assets  partially  offset by the increase to  interest-bearing
liabilities.  The average  balances of  interest-earning  assets increased $58.4
million or 10.6% to $611.6  million for the fiscal year ended  December 31, 1997
from  $553.2  million  for the  comparable  period in 1996.  During  these  same
periods,  the average balances on interest-bearing  liabilities  increased $69.3
million or 14.3% to $554.3 million from $485.0 million. The average rate paid on
interest-bearing  liabilities  increased  from 4.29% to 4.34% while the yield on
interest-earning  assets  increased  from  7.05% to 7.06%  for the  fiscal  year
periods ended December 31, 1996 and 1997 respectively.

Allowance for Loan Losses. The allowance for loan losses increased $223,000,  or
12.3% to $2.0  million at December  31, 1997 from $1.8  million at December  31,
1996. Such totals correlate to non-performing  loans of $1.4 million at December
31, 1997 and $2.0 million at December 31,  1996.  The increase in the  allowance
for loan losses resulted from the addition of $397,000 to the provision for loan
losses and the deduction of $174,000 of net charge offs for losses on loans. The
provision for losses on loans is the method by which the allowance for losses is
adjusted during the period.  At December 31, 1997, the allowance for loan losses
was 146.8% of non-performing  loans as compared to 91.6% of non-performing loans
at December 31, 1996. While  management  maintains its allowance for losses at a
level which it considers to be adequate to provide for potential  losses,  there
can be no assurance that further additions will not be made to the allowance and
that such losses will not exceed the estimated amounts.

Non-Interest Income. Total non-interest income increased $533,000,  or 29.7%, to
$2.3  million for the fiscal year ended  December 31, 1997 from $1.8 million for
the similar  period in 1996.  This increase can be attributed to the gain on the
sale of loan servicing rights of $330,000,  the increase in the gain on the sale
of  investment  securities  of

                                       10
<PAGE>

$77,000,  the increase in the gain on the sale of loans of  $308,000,  partially
offset by the  decrease in other  operating  income of $67,000 in 1997,  and the
absence of the gain on the sale real  estate  acquired  through  foreclosure  of
$115,000 in 1996.

Non-interest Expense.  Total non-interest expense decreased to $13.6 million for
the fiscal year ended  December  31,  1997 as compared to $13.7  million for the
similar  period in 1996.  This  decrease  of  $162,000,  or 1.2%,  is  primarily
attributable  to the  decrease  in federal  deposit  insurance  premiums of $2.6
million offset by a $617,000 increase in employee compensation and benefits, the
$520,000  increase  in  occupancy  and  equipment,   the  $713,000  increase  in
amortization  of  intangibles,  and the  $323,000  increase  in other  operating
expense. The decrease in federal deposit insurance premiums was primarily due to
the absence of the "SAIF"  assessment  previously  discussed.  The  increases in
compensation  and benefit  costs were  primarily a result of increased  staffing
necessary to support the operation of the three branch offices  associated  with
the acquisition of the $137.6 million of deposit  balances,  coupled with salary
increases resulting from annual performance  reviews.  The increase in occupancy
and equipment  expenses are due to the  continued  operation of the three branch
offices purchased from Cenlar Federal Savings Bank. The increase in amortization
of  intangibles  was the  result of the  acquisition  of the  $137.6  million in
deposit balances.  The increase in other operating expenses are primarily due to
costs associated with the acquisition of the three branch offices purchased from
Cenlar Federal Savings Bank.

Income Tax Expense.  For the fiscal year ended  December 31, 1997,  income taxes
increased to $2.6  million  from $2.4 million for the same period in 1996.  This
increase of  $150,000  is  primarily  attributed  to the  increase in net income
before taxes to $7.5 million from $5.9 million for the fiscal year periods ended
December 31, 1997 and 1996, respectively, while partially offset by the reversal
of certain deferred tax liabilities.


Comparison of Years Ended December 31, 1996 and December 31, 1995

Net Income.  Net Income of $3.5  million for the fiscal year ended  December 31,
1996 showed a $392,000  decrease  over net income of $3.9 million for the fiscal
year ended  December  31,  1995.  The  decrease in  earnings  for this period is
primarily  attributable to the one-time deposit  insurance  assessment  totaling
$2.2  million  ($1.4  million  after  tax),  partially  offset by an increase in
earnings in conjunction  with gains  associated with the sale of real estate and
mortgage-backed securities. The deposit insurance assessment was the result of a
one-time  fee  assessed to members of the  Savings  Association  Insurance  Fund
("SAIF") for its recapitalization.  Net income, absent of the $1.4 million after
tax "SAIF"  recapitalization  assessment,  was $4.8  million for the fiscal year
ended  December  31,  1996,  as compared  to net income of $3.9  million for the
fiscal year ended December 31, 1995.  This increase in net income of $.9 million
to $4.8  million  (absent  the "SAIF"  assessment),  for the  fiscal  year ended
December 31, 1996,  reflects a 24.9%  increase over the similar  period in 1995.
Net interest income before  provisions for loan losses was $18.2 million for the
fiscal year ended  December  31, 1996 as compared to $15.2  million for the same
period in 1995, an increase of $3.0 million,  or 19.5%.  For these same periods,
total  interest  expense was $20.8 million and $14.4 million,  respectively,  an
increase of $6.4  million,  or 44.4%.  Non-interest  income was $1.8 million and
$1.2 million,  respectively  for these same periods,  an increase of 54.5%.  The
increase in non-interest  income was attributed to the gains associated with the
sale of the real  estate and  mortgage-backed  securities  along with a $207,000
increase in other operating income. Operating expense (non-interest expense) was
$13.7 million and $10.0 million for the fiscal year ending December 31, 1996 and
December 31, 1995, respectively. The increase in operating expense was primarily
attributable  to the  $2.2  million  "SAIF"  assessment  along  with  the  costs
associated with the acquisition of the $137.6 million in deposit  balances,  and
related branch offices of Cenlar Federal Savings Bank of Trenton, New Jersey.

Total  Interest  Income.  For the fiscal year ended  December  31,  1996,  total
interest  income  increased to $39.0  million from $29.6  million for the fiscal
year ended December 31, 1995.  This increase of $9.4 million,  or 31.6%,  is due
primarily  to the  increase in income on loans  receivable  to $23.1  million at
December  31, 1996 from $11.5  million at December 31,  1995,  this  increase of
$11.6  million,  or 101.0%,  was  somewhat  offset by the  decrease in

                                       11
<PAGE>
income on mortgage-backed  securities,  investment securities and other interest
earning  assets.  During  the same time  periods  the  average  balance of loans
receivable  increased by $149.1 million to $298.8  million from $149.7  million,
with  the  average   yield   increasing   to  7.74%  from  7.68%.   Interest  on
mortgage-backed securities decreased $836,000, or (7.0%), from December 31, 1995
to December 31, 1996. The average yield on mortgage-backed  securities decreased
to 6.77% from 6.85%,  while the average  balance of  mortgage-backed  securities
decreased  by $10.3  million  when  comparing  these two  periods.  Interest  on
investment  securities  declined by $1.1 million or, 29.5%,  for the fiscal year
ended December 31, 1996 as compared to the similar period in 1995 as a result of
the decrease in the average  balance to $44.6 million from $64.8 million for the
same  periods.  Interest on  securities  purchased  under  agreements  to resell
increased  to $160,000  for the fiscal year ended  December 31, 1996 from $0 for
the fiscal year ended December 31, 1995, primarily as the result in the increase
in the average balance to $3.8 million from $0 for the same periods. Interest on
other interest  earning assets  declined by $438,000,  or 18.4%,  for the fiscal
year ended  December 31, 1996 compared to the similar  period ended December 31,
1995  primarily  as a result  of a  decrease  in the  average  yield to 4.52% at
December 31, 1996 from 5.50% at December 31, 1995.  The increases in the average
balances  of loans  receivable  and the  decreases  in the  average  balances of
mortgage-backed   securities   and   investment   securities  are  a  result  of
management's  decision  to increase  the  origination  and  purchase of mortgage
loans.

Total interest  expense.  Total interest expense  increased to $20.8 million for
the fiscal year ended  December 31, 1996 from $14.4  million for the fiscal year
period ended  December 31, 1995.  This  increase of $6.4 million,  or 44.4%,  in
total  interest  expense is a result of the  increase in the average  balance of
Federal Home Loan Bank  advances to $102.5  million  from $19.9  million for the
fiscal years ended  December 31, 1996 and 1995,  respectively,  coupled with the
increase in the average balance of savings deposits by $44.8 million,  or 13.3%,
for the same periods.  The increase in savings  deposits was primarily result of
the  acquisition of $137.6 million in deposit  balances.  The average balance of
total interest-bearing liabilities increased to $485.0 million during the fiscal
years ended  December 31, 1996 from $357.6  million during the fiscal year ended
December  31,  1995 as a result  of the  increase  in  Federal  Home  Loan  Bank
borrowings and the acquisition of deposit  balances.  The increase in borrowings
was utilized primarily to fund the origination or purchase of mortgage loans.

Net Interest Income.  Net interest income for the fiscal year ended December 31,
1996  increased by $3.0 million or 19.5% to $18.2 million from $15.2 million for
the same period in 1995.  This  increase  is  primarily  due to the  increase in
interest-earning  assets  partially  offset by the increase to  interest-bearing
liabilities. The average balances of interest-earning assets increased to $553.2
million for the fiscal year ended  December  31,  1996 from $431.2  million,  or
28.3%, for the comparable period in 1995. During these same periods, the average
balances on interest-bearing liabilities increased to $485.0 million from $357.6
million, or 35.6%. The cost of interest-bearing liabilities increased from 4.03%
to 4.29%  while the yield on  interest-earning  assets  increased  from 6.87% to
7.05% for the fiscal year periods ended December 31, 1995 and 1996 respectively.

Allowance for Loan Losses. The allowance for loan losses increased $322,000,  or
21.7% to $1.8 at December 31, 1996 from $1.5 million at December 31, 1995,  as a
result of increased lending activity during the period. Such totals correlate to
non-performing  loans of $2.0  million at December  31, 1996 and $1.8 million at
December 31, 1995.  The increase in the allowance for loan losses  resulted from
the addition of $330,000 to the  provision  for loan losses and the deduction of
$8,000 of net charge offs for losses on loans. The provision for losses on loans
is the method by which the allowance  for losses is adjusted  during the period.
At December 31, 1996, the allowance for loan losses was 91.6% of  non-performing
loans as compared to 82.3% of  non-performing  loans at December 31, 1995. While
management  maintains  its allowance for losses at a level which it considers to
be adequate to provide for  potential  losses,  there can be no  assurance  that
further  additions  will not be made to the  allowance and that such losses will
not exceed the estimated amounts.

Non-Interest Income. Total non-interest income increased to $1.8 million for the
fiscal year period ended December 31, 1996 from $1.2 million,  or 54.5%, for the
similar  period in 1995.  This increase can be attributed to the increase in the
gain on the sale of real estate acquired  through  foreclosure of $33,000 and an
increase  in the  gain  on  the  sale  of  mortgage-backed  securities  totaling
$314,000.  The  remainder of the increase  can be  attributed  to an

                                       12
<PAGE>

increase of $207,000 in service fee income, which was a result of increased loan
servicing activity during the period, coupled with a $79,000 gain on the sale of
loans.

Non-interest Expense.  Total non-interest expense increased to $13.7 million for
the fiscal years ended  December  31, 1996 as compared to $10.0  million for the
similar period in 1995.  This increase of $3.7 million,  or 37.8%,  is primarily
attributable  to the  increase  in federal  deposit  insurance  premiums of $2.1
million, a $749,000 increase in employee compensation and benefits,  the $62,000
increase in  professional  fees, the $429,000  increase in other operating costs
and the increase of $244,000 in  amortization  of  intangibles.  The increase in
federal deposit insurance  premium was due to the "SAIF"  assessment  previously
discussed.  The increases in  compensation  and benefit  costs were  primarily a
result of increased  staffing  necessary to support the acquisition of the three
branch offices  associated with the acquisition of the $137.6 million of deposit
balances,  coupled  with salary  increases  resulting  from  annual  performance
reviews.  Benefit  costs  were  also  increased  due to the  increases  in costs
associated  with Employee Stock  Ownership  Plans  utilizing  Corporation  stock
(portions of the costs of benefit plans  utilizing  Corporation  stock change as
the market value of the stock changes). The increase in other operating expenses
are  primarily  due to increases in the costs  associated  with current  lending
activities coupled with the costs associated with the continued operation of the
three branch offices purchased from Cenlar Federal Savings Bank. The increase in
amortization  of  intangibles  was the result of the  acquisition  of the $137.6
million in deposit balances.

Income Tax Expense.  For the fiscal year ended  December 31, 1996,  income taxes
decreased to $2.4  million  from $2.5 million for the same period in 1995.  This
decrease of $38,000 is primarily attributed to the decrease in net income before
taxes to $5.9  million  from $6.3  million  for the fiscal  year  periods  ended
December  31,  1996 and 1995,  respectively,  primarily  as a result of the SAIF
assessment previously mentioned.

Liquidity and Capital Resources

Under current  regulations,  the Savings Bank must have core capital equal to 3%
of total assets and risk-based  capital equal to 8% of risk-weighted  assets, of
which 1.5% must be  tangible  capital,  excluding  goodwill  and  certain  other
intangible assets.

On December 31, 1997,  the Savings Bank  exceeded its three  regulatory  capital
requirements as follows:

                                         Amount      Percent
                                         ------      -------
Tangible capital .............          $42,544        7.16%
Tangible capital requirement .            8,902        1.50%
Excess over requirement ......          $33,642        5.66%
Core Capital .................          $42,544        7.16%
Core Capital requirement .....           17,804        3.00%
Excess over requirement ......          $24,740        4.16%
Risk based capital ...........          $44,573       17.41%
Risk based capital requirement           20,487        8.00%
Excess over requirement ......          $24,086        9.41%

                                       13
<PAGE>

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

         The Savings Bank's liquidity is a measure of its ability to fund loans,
pay  withdrawals  of  deposits,   and  other  cash  outflows  in  an  efficient,
cost-effective  manner. The Savings Bank's primary source of funds are deposits,
borrowings,   and   scheduled   amortization   and   prepayment   of  loan   and
mortgage-backed  security principal.  During the past several years, the Savings
Bank has used such funds  primarily to fund maturing time deposits,  pay savings
withdrawals, fund lending commitments, purchase new investments,  repurchase its
common stock,  and increase the Savings  Bank's,  along with the  Corporation's,
liquidity.  The Savings Bank is currently able to fund its operations internally
but has, when deemed prudent,  borrowed funds from the Federal Home Loan Bank of
Pittsburgh.  As of December 31, 1997,  such borrowed  funds total $88.4 million.
Loan prepayments,  maturing investments and mortgage-backed security prepayments
are greatly  influenced  by general  interest  rates,  economic  conditions  and
competition.

         The Savings  Bank is required  under  federal  regulations  to maintain
certain specified levels of "liquid  investments",  which include certain United
States   government   obligations  and  other  approved   investments.   Current
regulations  require the Savings Bank to maintain liquid assets of not less than
4% of its net  withdrawable  accounts  plus  short term  borrowings.  Short term
liquid assets must consist of not less than 1% of such accounts and  borrowings,
which amount is also  included  within the 4%  requirement.  These levels may be
changed  from  time  to time  by the  regulators  to  reflect  current  economic
conditions. The Savings Bank has generally maintained liquidity far in excess of
regulatory  requirements.  The Savings Bank's  regulatory  liquidity was 21.01%,
24.16% and 12.48% at December 31,  1997,  1996 and 1995,  respectively,  and its
short term liquidity was 11.3%, 19.8%, and 7.0%, at such dates, respectively.

         The amount of certificate accounts which are scheduled to mature during
the twelve months ending December 31, 1998, is approximately  $136.3 million. To
the extent that these  deposits do not remain at the Savings Bank upon maturity,
the Savings Bank believes that it can replace these funds with deposits,  excess
liquidity,  FHLB advances or other  borrowings.  It has been the Savings  Bank's
experience  that  substantial  portions of such maturing  deposits remain at the
Savings Bank.

At December 31, 1997, the Savings Bank had outstanding  commitments to originate
loans of $22.7 million.  Also  outstanding at December 31, 1997 were commitments
to purchase  $304,000 of loans from  correspondents  along with  commitments  to
purchase $1.5 million of  investment  securities.  Funds  required to fill these
commitments are derived primarily from current excess liquidity, deposit inflows
or loan and security  repayments.  At December  31,  1997,  the Savings Bank had
outstanding commitments to sell loans of $6.9 million.


Impact of Inflation and Changing Prices

         The  consolidated  financial  statements  and  related  data  have been
prepared in accordance  with  generally  accepted  accounting  principles  which
require the measurement of financial  position and operating results in terms of
historical dollars, without consideration for changes in the relative purchasing
power of money over time caused by inflation.

         Unlike industrial  companies,  nearly all of the assets and liabilities
of a financial  institution are monetary in nature. As a result,  interest rates
have a more  significant  impact on a financial  institution's  performance than
general levels of inflation.  Interest rates do not necessarily move in the same
direction  or in the same  magnitude as the price of goods and  services,  since
such goods and services are affected by inflation.  In the current interest rate



                                       14
<PAGE>

environment,  liquidity and the maturity  structure of the Savings Bank's assets
and  liabilities  are  critical to the  maintenance  of  acceptable  performance
levels.


Year 2000 Issue

The  Corporation is utilizing both internal and external  resources to identify,
correct  or  reprogram,  and  test  its  computer  systems  for  the  year  2000
compliance.  The year 2000  problem is the  result of  computer  programs  being
written using two digits  rather than four to define the  applicable  year.  The
Corporation  presently  believes  that  the  year  2000  problem  will  not pose
significant  operational  problems for the Corporation's  computer systems as so
modified and reprogramed.  It is anticipated that all reprogramming efforts will
be completed by December 31, 1998,  allowing adequate time for testing. To date,
confirmations  have been  received  from the  Corporation's  primary  processing
vendors that plans are being developed to address  processing of transactions in
the year 2000.  Management  believes the year 2000  compliance  expense will not
have a material adverse effect on the Corporation.


Other Matters

         On  September  26, 1997 the  Corporation  commenced  a "Modified  Dutch
Auction"  self  tender  offer  for the  purchase  of up to  900,000  shares,  or
approximately  22% of its 4,088,432 common shares  outstanding at that time. The
"Modified  Dutch  Auction"  self tender  offer  expired on October 27, 1997 with
shareholders  tendering  1,064,083  shares or  approximately  26% of the  common
shares outstanding.  The Corporation repurchased 901,199 shares or approximately
84.5%  of all  shares  tendered,  with all  shares  tendered  and not  purchased
returned to stockholders.  The shares repurchased were repurchased at a price of
$26.00 per share with a total cost of $23.4 million.




                                       15
<PAGE>


FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

TF FINANCIAL CORPORATION AND SUBSIDIARIES

December 31, 1997 and 1996














<PAGE>


                                C O N T E N T S



                                                                            Page


REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS                            21


FINANCIAL STATEMENTS

        CONSOLIDATED STATEMENTS OF FINANCIAL POSITION                         22

        CONSOLIDATED STATEMENTS OF EARNINGS                                   23

        CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY             24

        CONSOLIDATED STATEMENTS OF CASH FLOWS                                 26

        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                            28




<PAGE>





               Report of Independent Certified Public Accountants
               --------------------------------------------------


Board of Directors
TF Financial Corporation


        We have audited the  accompanying  consolidated  statements of financial
position of TF Financial  Corporation  and  Subsidiaries as of December 31, 1997
and 1996,  and the  related  consolidated  statements  of  earnings,  changes in
stockholders'  equity  and cash  flows for each of the  years in the  three-year
period  ended   December  31,  1997.   These   financial   statements   are  the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

        We conducted our audits in accordance with generally  accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

        In our  opinion,  the  financial  statements  referred to above  present
fairly,  in all material  respects,  the consolidated  financial  position of TF
Financial Corporation and Subsidiaries as of December 31, 1997 and 1996, and the
consolidated  results of their operations and their  consolidated cash flows for
each of the years in the three-year period ended December 31, 1997 in conformity
with generally accepted accounting principles.




/s/ Grant Thornton
Philadelphia, Pennsylvania
January 22, 1998


<PAGE>
                   TF Financial Corporation and Subsidiaries

                 CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

                                  December 31,

<TABLE>
<CAPTION>
                                                                                             1997          1996
                                                                                            -------      -------
            ASSETS                                                                              (in thousands)
<S>                                                                                       <C>          <C>
Cash and cash  equivalents                                                                 $ 41,625     $ 54,132
Certificates of deposit in other financial institutions                                       2,737        4,220
Securities  purchased under agreements to resell                                             10,000       25,129
Investment  securities  available for sale - at market value                                 32,037       12,652
Investment  securities  held to maturity (market value of $53,026 and
  $38,393 as of December 31, 1997 and 1996,  respectively)                                   52,822       38,544
Mortgage-backed  securities available for sale - at market value                             36,847       22,027
Mortgage-backed  securities held to maturity (market value of $145,723
  and $153,269 as of December 31, 1997 and 1996, respectively)                              144,074      153,758
Loans receivable, net                                                                       250,711      309,570
Federal Home Loan Bank stock - at cost                                                        4,918        4,918
Accrued interest receivable                                                                   3,957        4,247
Premises and equipment, net                                                                   7,889        8,002
Goodwill and other intangible assets                                                          8,274        9,232
Other assets                                                                                  1,156        1,422
                                                                                            -------      -------
                        TOTAL ASSETS                                                      $ 597,047    $ 647,853
                                                                                          =========    =========

                LIABILITIES AND STOCKHOLDERS' EQUITY
 Liabilities
   Deposits                                                                               $ 450,429    $ 469,088
   Advances from the Federal Home Loan Bank                                                  88,359       98,359
   Advances from borrowers for taxes and insurance                                            1,591        2,364
   Accrued interest payable                                                                   2,470        2,030
   Other liabilities                                                                          4,103        3,437
                                                                                            -------      -------
                        Total liabilities                                                   546,952      575,278
                                                                                            -------      -------
 Stockholders' equity
   Preferred stock, no par value; 2,000,000 shares authorized
     at December 31, 1997 and 1996, none issued                                                  --           --
   Common stock, $0.10 par value; 10,000,000 shares authorized,
     5,290,000 shares issued, 2,886,251 and 3,962,544 shares
     outstanding at December 31, 1997 and 1996, respectively,
     net of shares in treasury:  1997 - 2,102,767; 1996 - 1,008,614                             529          529
   Retained earnings                                                                         43,176       39,750
   Additional paid-in capital                                                                51,775       51,645
   Unearned ESOP shares                                                                      (3,010)      (3,188)
   Shares acquired by MSBP                                                                     (895)      (1,322)
   Treasury stock - at cost                                                                 (41,649)     (14,712)
   Net unrealized gain (loss) on securities available for sale, net of tax                      169         (127)
                                                                                            -------      -------
                        Total stockholders' equity                                           50,095       72,575
                                                                                            -------      -------
         TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                       $ 597,047    $ 647,853
                                                                                          =========    =========
</TABLE>
The accompanying notes are an integral part of these statements.

                                       22
<PAGE>
                   TF Financial Corporation and Subsidiaries

                      CONSOLIDATED STATEMENTS OF EARNINGS

                            Year ended December 31,

<TABLE>
<CAPTION>
                                                                            1997      1996      1995
                                                                            ----      ----      ----
                                                                     (in thousands, except per share data)

<S>                                                                        <C>       <C>       <C>
Interest income
        Loans, including fees                                              $23,050   $23,116   $11,501
        Mortgage-backed securities                                          12,514    11,041    11,877
        Investment securities                                                5,683     2,728     3,870
        Interest-bearing deposits and other                                  1,942     2,104     2,382
                                                                           -------   -------   -------
                        TOTAL INTEREST INCOME                               43,189    38,989    29,630
                                                                           -------   -------   -------
Interest expense
        Deposits                                                            18,211    14,739    13,368
        Borrowings                                                           5,869     6,058     1,035
                                                                           -------   -------   -------
                        TOTAL INTEREST EXPENSE                              24,080    20,797    14,403
                                                                           -------   -------   -------
                        NET INTEREST INCOME                                 19,109    18,192    15,227

Provision for possible loan losses                                             397       330        72
                                                                           -------   -------   -------
                        NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE
                          LOAN LOSSES                                       18,712    17,862    15,155
                                                                           -------   -------   -------
Non-interest income
        Gain on sale of real estate acquired through foreclosure                --       115        82
        Gain on sale of investment securities                                  407       330        16
        Gain on sale of loans                                                  387        79        --
        Gain on sale of loan servicing rights                                  330        --        --
        Service fees, charges and other operating income                     1,203     1,270     1,063
                                                                           -------   -------   -------
                        TOTAL NON-INTEREST INCOME                            2,327     1,794     1,161
                                                                           -------   -------   -------
Non-interest expense
        Employee compensation and benefits                                   6,445     5,828     5,079
        Occupancy and equipment                                              1,952     1,432     1,357
        Federal deposit insurance premium                                      299     2,929       791
        Data processing                                                        667       505       448
        Professional fees                                                      579       508       446
        Advertising                                                            354       292       276
        Other operating                                                      2,330     2,007     1,578
        Amortization of goodwill and other intangible assets                   957       244        --
                                                                           -------   -------   -------
                        TOTAL NON-INTEREST EXPENSE                          13,583    13,745     9,975
                                                                           -------   -------   -------
                        INCOME BEFORE INCOME TAXES                           7,456     5,911     6,341

Income taxes                                                                 2,582     2,432     2,470
                                                                           -------   -------   -------
                        NET INCOME                                         $ 4,874   $ 3,479   $ 3,871
                                                                           =======   =======   =======

Earnings per common share - basic                                          $  1.33   $  0.86   $  0.84

Earnings per common share - assuming dilution                              $  1.25   $  0.83   $  0.83

</TABLE>

The accompanying notes are an integral part of these statements.

                                       23

<PAGE>

                   TF Financial Corporation and Subsidiaries

           CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

                  Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
                                                                                                            Net unrealized
                                                                                                            gain (loss) on
                                    Common stock                                                              securities
                                   ---------------   Additional  Unearned     Shares                          available
                                              Par      paid-in     ESOP    acquired by Treasury   Retained   for sale, net
                                   Shares     value    capital    shares       MSBP      stock    earnings      of tax       Total
                                   ------     -----    -------    ------       ----      -----    --------  --------------   -----
                                                                       (dollars in thousands)

<S>                              <C>         <C>      <C>        <C>       <C>          <C>        <C>        <C>           <C>
Balance at January 1, 1995       4,875,812   $  529   $   51,234 $ (3,809) $   (2,090)  $      --  $34,746    $     (638)   $79,972

Allocation of ESOP shares           31,719       --          117      318          --          --       --            --        435

Shares awarded by MSBP              24,000       --           --       --          --          --       --            --         --

Amortization of MSBP expense            --       --          124       --         359          --       --            --        483

Purchase of treasury stock        (765,500)      --           --       --          --     (11,100)      --            --    (11,100)

Treasury stock acquired from ESOP   (1,089)      --           --       --          --         (16)      --            --        (16)

Cash dividends on common stock          --       --           --       --          --          --   (1,088)           --     (1,088)

Net unrealized gain on securities
        available for sale              --       --           --       --          --          --       --           775        775

Net income for the year ended
        December 31, 1995               --       --           --       --          --          --    3,871            --      3,871
                                 ---------      ---       ------   ------      ------     -------   ------          ----     ------
Balance at December 31, 1995     4,164,942      529       51,475   (3,491)     (1,731)    (11,116)  37,529           137     73,332

Allocation of ESOP shares           30,319       --          147      303          --          --       --            --        450

Shares awarded by MSBP               9,308       --           --       --          --          --       --            --         --

Amortization of MSBP expense            --       --           23       --         409          --       --            --        432

Purchase of treasury stock        (242,025)      --           --       --          --       3,596)      --            --     (3,596)

Cash dividends on common stock          --       --           --       --          --          --   (1,258)           --     (1,258)

Net unrealized loss on securities
        available for sale              --       --           --       --          --          --       --          (264)      (264)

Net income for the year ended
        December 31, 1996               --       --           --       --          --          --    3,479            --      3,479
                                 ---------      ---       ------   ------      ------     -------   ------          ----     ------
Balance at December 31, 1996     3,962,544      529       51,645   (3,188)     (1,322)    (14,712)  39,750          (127)    72,575

</TABLE>
(Continued)

                                       24
<PAGE>

                   TF Financial Corporation and Subsidiaries

     CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY - CONTINUED

                  Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
                                                                                                            Net unrealized
                                                                                                            gain (loss) on
                                    Common stock                                                              securities
                                   ---------------   Additional  Unearned     Shares                          available
                                              Par      paid-in     ESOP    acquired by Treasury   Retained   for sale, net
                                   Shares     value    capital    shares       MSBP      stock    earnings      of tax       Total
                                   ------     -----    -------    ------       ----      -----    --------  --------------   -----
                                                                       (dollars in thousands)

<S>                              <C>         <C>      <C>        <C>       <C>        <C>        <C>        <C>           <C>
Balance at December 31, 1996       3,962,544    $ 529 $51,645    $(3,188)  $(1,322)   $(14,712)   $39,750    $     (127)   $ 72,575

Allocation of ESOP shares             17,860       --     173        178        --          --         --            --         351

Amortization of MSBP expense              --       --      31         --       427          --         --            --         458

Purchase of treasury stock        (1,100,068)      --     (74)        --        --     (27,027)        --            --     (27,101)

Cash dividends on common stock            --       --      --         --        --          --     (1,433)           --      (1,433)

Net unrealized gain on investment
  securities available for sale           --       --      --         --        --          --         --           296         296

Exercise of stock options              5,915       --      --         --        --          90        (15)           --          75

Net income for the year
  ended December 31, 1997                 --       --      --         --        --          --      4,874            --       4,874
                                   ---------    ----- -------    -------   -------    --------    -------    ----------    --------
Balance at December 31, 1997       2,886,251    $ 529 $51,775    $(3,010)  $  (895)   $(41,649)   $43,176    $      169    $ 50,095
                                   =========    ===== =======    =======   =======    ========    =======    ==========    ========


</TABLE>


         The accompanying notes are an integral part of this statement.

                                       25
<PAGE>

                   TF Financial Corporation and Subsidiaries

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                            Year ended December 31,



<TABLE>
<CAPTION>
                                                                                        1997         1996         1995
                                                                                        ----         ----         ----
                                                                                              (in thousands)
<S>                                                                                 <C>          <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES
        Net income                                                                  $   4,874    $   3,479    $   3,871
        Adjustments to reconcile net income to net cash provided
                        by operating activities
                Amortization of
                        Mortgage loan servicing rights                                     68           21           --
                        Deferred loan origination fees                                   (156)        (197)        (117)
                        Premiums and discounts on investment securities, net               63          (69)         (31)
                        Premiums and discounts on mortgage-backed securities
                                and loans, net                                            208          139          166
                        Goodwill and other intangibles                                    957          244           --
                Deferred income taxes                                                    (233)         (84)         140
                Provision for loan losses and provision for losses on real estate         402          333           74
                Depreciation of premises and equipment                                    708          560          509
                Stock-based benefit programs                                              809          882          919
                Gain on sale of
                        Investment securities                                            (407)        (330)         (16)
                        Real estate acquired through foreclosure                           --         (115)         (82)
                        Mortgage loans                                                   (387)         (79)          --
                        Loan servicing rights                                            (330)          --           --
                (Increase) decrease in
                        Accrued interest receivable                                       290         (817)          (7)
                        Other assets                                                       19         (580)        (238)
                Increase in
                        Accrued interest payable                                          440          267          980
                        Other liabilities                                                 477          723          697
                                                                                    ---------    ---------    ---------
                                NET CASH PROVIDED BY OPERATING
                                  ACTIVITIES                                            7,802        4,377        6,865
                                                                                    ---------    ---------    ---------
CASH FLOWS FROM INVESTING ACTIVITIES
        Loan originations and principal payments on loans, net                        (22,672)     (38,475)     (37,289)
        Principal repayments on mortgage-backed securities
                held to maturity                                                       33,732       28,450       24,171
        Principal repayments on mortgage-backed securities available
                for sale                                                                2,746        3,050           --
        Purchases of loans                                                            (13,927)     (83,704)     (87,165)
        Proceeds from loan sales                                                       95,261       22,648           --
        Purchases and maturities of certificates of deposit in other
                financial institutions, net                                             1,483            1         (214)
        Purchases of investment and mortgage-backed securities
                held to maturity                                                     (125,219)     (49,069)     (18,445)
        Purchase of investment securities and mortgage-backed
                securities available for sale                                        (140,694)     (22,917)          --

</TABLE>
                                  (Continued)

                                       26
<PAGE>

                   TF Financial Corporation and Subsidiaries

               CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

                            Year ended December 31,
<TABLE>
<CAPTION>

                                                                                         1997            1996            1995
                                                                                      ---------       ---------        ---------
                                                                                                    (in thousands)
<S>                                                                                   <C>             <C>              <C>
        Purchase and maturities of securities purchased under
                agreement to resell, net                                              $  15,129       $ (25,129)       $      --
        Proceeds from maturities of investment securities held to maturity               83,007          17,551           20,987
        Proceeds from maturities of investment securities available for sale             86,225          20,500           23,000
        Proceeds from the sale of investment and mortgage-backed securities
                available for sale                                                       22,126           9,279            4,014
        Proceeds from the sale of loan servicing rights                                     981              --               --
        Purchase of Federal Home Loan Bank stock                                             --          (1,250)          (1,968)
        Proceeds from sales of real estate acquired through foreclosure                      --             722              221
        Purchase of premises and equipment                                                 (595)         (2,007)            (370)
        Premium paid for deposit liabilities                                                 --          (9,476)              --
                                                                                      ---------       ---------        ---------
                                NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES      37,583        (129,826)         (73,058)
                                                                                      ---------       ---------        ---------
CASH FLOWS FROM FINANCING ACTIVITIES
        Net (decrease) increase in demand deposit/NOW accounts,
                passbook savings accounts and certificates of deposit                   (18,659)        132,019          (10,562)
        Net (decrease) increase in advances from Federal Home Loan Bank                 (10,000)         25,000           73,359
        Net (decrease) increase in advances from borrowers for
                taxes and insurance                                                        (773)            384              256
        Treasury stock acquired                                                         (27,027)         (3,596)         (11,116)
        Common stock dividends paid                                                      (1,433)         (1,258)          (1,088)
                                                                                      ---------       ---------        ---------
                                NET CASH (USED IN) PROVIDED BY FINANCING
                                  ACTIVITIES                                            (57,892)        152,549           50,849
                                                                                      ---------       ---------        ---------
                                NET (DECREASE) INCREASE IN CASH AND CASH
                                  EQUIVALENTS                                           (12,507)         27,100          (15,344)
Cash and cash equivalents at beginning of year                                           54,132          27,032           42,376
                                                                                      ---------       ---------        ---------
Cash and cash equivalents at end of year                                              $  41,625       $  54,132        $  27,032
                                                                                      =========       =========        =========

Supplemental disclosure of cash flow information
        Cash paid for
                Interest on deposits and advances                                     $  23,640       $  20,530        $  13,423
                Income taxes                                                          $   2,436       $   2,235        $   1,943
        Non-cash transactions
                Transfers from loans to real estate acquired through
                        foreclosure                                                   $     231       $     327        $     127
                Transfer of investment and mortgage-backed securities
                        to available for sale                                         $      --       $      --        $  29,640
                Securitization of mortgage loans held for investment                  $      --       $  27,854        $      --

</TABLE>

        The accompanying notes are an integral part of these statements.

                                       27
<PAGE>

                   TF Financial Corporation and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 1997 and 1996




NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

     The Bank is subject to  regulations  of certain state and federal  agencies
     and,  accordingly,  they are  periodically  examined  by  those  regulatory
     authorities.  As a consequence  of the  extensive  regulation of commercial
     banking  activities,  the Bank's  business is  particularly  susceptible to
     being affected by state and federal legislation and regulations.

     1.    Principles    of    Consolidation    and   Basis   of    Presentation
           ---------------------------------------------------------------------

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

     The accounting  policies of the Corporation  conform to generally  accepted
     accounting   principles.   The  preparation  of  financial   statements  in
     conformity  with  generally   accepted   accounting   principles   requires
     management  to make  estimates  and  assumptions  that affect the  reported
     amounts of assets and liabilities  and disclosure of contingent  assets and
     liabilities  at the  date of the  financial  statements  and  the  reported
     amounts of  revenues  and  expenses  during the  reporting  period.  Actual
     results could differ from those estimates.  The more significant accounting
     policies are summarized below.

     2. Acquisitions
        ------------

     On September 20, 1996, the Bank acquired  three Mercer  County,  New Jersey
     offices  and related  deposits of Cenlar  Federal  Savings  Bank.  The Bank
     assumed  $137.6 million in deposits in exchange for $126.5 million in cash.
     As a result of the acquisition, the Bank added a core deposit intangible of
     $2.9 million and goodwill of $6.6 million.


                                  (Continued)

                                       28
<PAGE>

                   TF Financial Corporation and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1997 and 1996



NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

     The core deposit  intangible  acquired is being amortized on an accelerated
     basis  over 10  years.  The  goodwill  acquired  is  being  amortized  on a
     straight-line basis over 15 years.

     3. Cash and Cash Equivalents
        -------------------------

     The  Corporation  considers  cash,  due from banks,  federal funds sold and
     interest-bearing  deposits in other financial  institutions,  with original
     terms to  maturity  of less than  three  months,  as cash  equivalents  for
     presentation purposes in the consolidated  statements of financial position
     and cash flows.

     4.  Investment and Mortgage-Backed Securities
         -----------------------------------------

     The Corporation  accounts for investment and mortgage-backed  securities in
     accordance with Statement of Financial Accounting Standards (SFAS) No. 115,
     "Accounting for Certain  Investments in Debt and Equity  Securities."  This
     statement requires the Bank to classify its investment, mortgage-backed and
     marketable equity securities in one of three categories:  held to maturity,
     trading or available for sale. The Corporation  does not engage in security
     trading activities.

     Investment,  mortgage-backed and marketable equity securities available for
     sale are  stated  at fair  value,  with net  unrealized  gains  and  losses
     excluded from income and reported as a separate  component of stockholders'
     equity,  net of income  taxes.  Realized  gains  and  losses on the sale of
     securities are recognized using the specific identification method.

     Investment and  mortgage-backed  securities held to maturity are carried at
     cost,  net of unamortized  premiums and discounts,  which are recognized in
     interest  income  using the  interest  method over the period to  maturity.
     Mortgage-backed  securities are stated at the principal amount  outstanding
     (cost),  adjusted for  amortization  of premiums and  accretion of fees and
     discounts using the interest method. The Corporation has the ability and it
     is management's intention to hold such assets to maturity.

     5. Loans Receivable
        ----------------

     Loans receivable are stated at unpaid principal balances less the allowance
     for loan losses and net  deferred  loan  origination  fees and  unamortized
     premiums.  Loan origination fees and unamortized premiums on mortgage loans
     are amortized to income using the interest method over the remaining period
     to contractual maturity, adjusted for actual prepayments.

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


                                  (Continued)

                                       29
<PAGE>

                   TF Financial Corporation and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1997 and 1996




NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

     Uncollectible  interest on loans that are contractually past due is charged
     off,  or  an  allowance  is  established  based  on  management's  periodic
     evaluation.  The allowance is  established  by a charge to interest  income
     equal to all  interest  previously  accrued,  and  income  is  subsequently
     recognized  only to the extent that cash  payments are received  until,  in
     management's judgment, the borrower's ability to make periodic interest and
     principal payments is back to normal, in which case the loan is returned to
     accrual status.

     The  Corporation  accounts  for  loans in  accordance  with  SFAS No.  114,
     "Accounting  by Creditors for Impairment of a Loan," as amended by SFAS No.
     118, "Accounting by Creditors for Impairment of a Loan - Income Recognition
     and Disclosures."

     6. Premises and Equipment
        ----------------------

     Land is carried at cost.  Buildings and  furniture,  fixtures and equipment
     are carried at cost less accumulated depreciation. Depreciation is provided
     by the straight-line method over the estimated useful lives of the assets.

     On January 1, 1996, the Corporation  adopted SFAS No. 121,  "Accounting for
     the  Impairment  of  Long-Lived  Assets  and for  Long-Lived  Assets  to be
     Disposed  of," which  provides  guidance  on when to  recognize  and how to
     measure  impairment  losses of long-lived  assets and certain  identifiable
     intangibles  and how to value  long-lived  assets to be  disposed  of.  The
     adoption  of  SFAS  No.  121  did  not  have  a  material   impact  on  the
     Corporation's consolidated financial position or results of operations.

     7.  Mortgage Servicing Rights
         -------------------------

     On January 1, 1997, the Corporation  adopted SFAS No. 125,  "Accounting for
     Transfers  and  Servicing  of  Financial  Assets  and   Extinguishments  of
     Liabilities,"  as amended by SFAS No. 127,  "Deferral of the Effective Date
     of  Certain   Provisions   of  SFAS  No.  125."  SFAS  No.  125  applies  a
     control-oriented, financial components approach to financial asset transfer
     transactions  whereby the  Corporation:  (1)  recognizes  the financial and
     servicing  assets it controls  and the  liabilities  it has  incurred;  (2)
     derecognizes  financial assets when control has been  surrendered;  and (3)
     derecognizes  liabilities once they are  extinguished.  Under SFAS No. 125,
     control is considered to have been surrendered only if: (i) the transferred
     assets have been isolated from the transferor  and its  creditors,  even in
     bankruptcy  or other  receivership;  (ii) the  transferee  has the right to
     pledge  or   exchange   the   transferred   assets   or  is  a   qualifying
     special-purpose  entity,  and the holders of  beneficial  interests in that
     entity have the right to pledge or exchange those interests;  and (iii) the
     transferor does not maintain  effective control over the transferred assets
     through an agreement  which both entitles and obligates it to repurchase or
     redeem those assets prior to maturity,  or through an agreement  which both
     entitles it to  repurchase  or redeem those assets if they were not readily
     obtainable  elsewhere.  If  any  of  these  conditions  are  not  met,  the
     Corporation accounts for the transfer as a secured borrowing.  The adoption
     of this  statement  did not have a  material  impact  on the  Corporation's
     consolidated financial position or results of operations.



                                  (Continued)

                                       30
<PAGE>

                   TF Financial Corporation and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1997 and 1996




NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

     8. Benefit Plans
        -------------

     The  Corporation  has  established an Employee Stock  Ownership Plan (ESOP)
     covering  eligible  employees  with one year of service,  as defined by the
     ESOP. The Corporation accounts for the ESOP in accordance with the American
     Institute  of Certified  Public  Accountants'  Statement of Position  (SOP)
     93-6,  "Employers' Accounting for Employee Stock Ownership Plans." SOP 93-6
     addresses  the  accounting  for shares of stock  issued to  employees by an
     ESOP. SOP 93-6 requires that the employer  record  compensation  expense in
     the amount equal to the fair value of shares  committed to be released from
     the  ESOP  to  employees.   In  addition,  the  Corporation  established  a
     Management Stock Bonus Plan (MSBP) for key directors and personnel.

     On January 1, 1996, the Corporation  adopted SFAS No. 123,  "Accounting for
     Stock-Based  Compensation,"  which contains a fair  value-based  method for
     valuing  stock-based  compensation  that entities may use,  which  measures
     compensation  cost at the grant  date based on the fair value of the award.
     Compensation is then  recognized over the service period,  which is usually
     the  vesting  period.  Alternatively,  the  standard  permits  entities  to
     continue  accounting  for employee  stock  options and similar  instruments
     under  Accounting  Principles  Board (APB) Opinion No. 25,  "Accounting for
     Stock Issued to  Employees."  Entities  that  continue to account for stock
     options using APB Opinion No. 25 are required to make pro forma disclosures
     of net income and earnings per share, as if the fair value-based  method of
     accounting  defined in SFAS No.  123 had been  applied.  The  Corporation's
     employee stock option plan is accounted for under APB Opinion No. 25.

     9.  Income Taxes
         ------------

     The  Corporation  accounts  for income  taxes  under the  liability  method
     specified in SFAS No. 109,  "Accounting  for Income  Taxes." Under SFAS No.
     109,  deferred  income taxes are  recognized  for the tax  consequences  of
     "temporary  differences" by applying enacted statutory tax rates applicable
     to future years to  differences  between the financial  statement  carrying
     amounts and the tax bases of existing  assets and  liabilities.  Under SFAS
     No.  109,  the  effect  on  deferred  taxes  of a  change  in tax  rates is
     recognized in income in the period that includes the enactment date.

     10.  Advertising Costs
          -----------------

     The Corporation expenses advertising costs as incurred.


                                  (Continued)

                                       31
<PAGE>

                   TF Financial Corporation and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1997 and 1996




NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

     11. Earnings Per Share
         ------------------

     On December 15, 1997,  the  Corporation  adopted the provisions of SFAS No.
     128,  "Earnings  Per  Share."  SFAS No. 128  eliminates  primary  and fully
     diluted  earnings per share and requires  presentation of basic and diluted
     earnings per share in conjunction  with the  disclosure of the  methodology
     used in  computing  such  earnings  per  share.  Basic  earnings  per share
     excludes  dilution and is computed by dividing  income  available to common
     shareholders by the weighted average common shares  outstanding  during the
     period.  Diluted  earnings  per share  takes  into  account  the  potential
     dilution that could occur if securities or other  contracts to issue common
     stock were  exercised  and  converted  into common  stock.  Prior  periods'
     earnings per share  calculations have been restated to reflect the adoption
     of SFAS No. 128.

     12. New Financial Accounting Standards
         ----------------------------------

     In June 1997, the Financial  Accounting  Standards Board (FASB) issued SFAS
     No. 130,  "Reporting  Comprehensive  Income,"  which is effective for years
     beginning  after December 15, 1997.  This new statement  requires  entities
     presenting  a complete set of financial  statements  to include  details of
     comprehensive  income.  Comprehensive income consists of net income or loss
     for the current period and income, expenses,  gains, and losses that bypass
     the income statement and are reported  directly in a separate  component of
     equity. The adoption of SFAS No. 130 will not have a material impact on the
     Corporation's consolidated financial position or results of operations.

     In June 1997, the FASB issued SFAS No. 131,  "Disclosures about Segments of
     an Enterprise and Related  Information," which is effective for all periods
     beginning  after  December  15,  1997.  SFAS No. 131  requires  that public
     business enterprises report certain information about operating segments in
     complete sets of financial  statements of the  enterprise  and in condensed
     financial  statements of interim  periods issued to  shareholders.  It also
     requires that public business  enterprises report certain information about
     their products and services,  the  geographic  areas in which they operate,
     and their major customers.

     13. Reclassifications
         -----------------

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

                                       32
<PAGE>

                   TF Financial Corporation and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1997 and 1996




NOTE B - CASH AND CASH EQUIVALENTS

     Cash and cash equivalents consist of the following:
<TABLE>
<CAPTION>
                                                                   December 31,
                                                            ---------------------------
                                                             1997      1996      1995
                                                            -------   -------   -------
                                                                   (in thousands)

<S>                                                         <C>       <C>       <C>
Cash and due from banks                                     $14,222   $14,737   $ 9,926
Interest-bearing deposits in other financial institutions    25,628    38,120    15,606
Federal funds sold                                            1,775     1,275     1,500
                                                            -------   -------   -------
                                                            $41,625   $54,132   $27,032
                                                            =======   =======   =======
</TABLE>

NOTE C - SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL

     The  Bank  enters  into  purchases  of  mortgage-backed   securities  under
     agreements  to  resell  substantially   identical  securities.   Securities
     purchased under  agreements to resell at December 31, 1997 and 1996 consist
     of mortgage-backed securities.

     The amounts advanced under these agreements  represent short-term loans and
     are  reflected as a receivable in the  consolidated  statement of financial
     position.   The   securities   underlying  the  agreements  are  book-entry
     securities.  During the year, the securities  were delivered by appropriate
     entry into a third-party custodian's account designated by the Bank under a
     written custodial agreement that explicitly  recognizes the Bank's interest
     in the securities.  At December 31, 1997 and 1996, these agreements matured
     within  30 days and  substantially  all  agreements  to  resell  securities
     purchased were  outstanding  with one dealer.  Securities  purchased  under
     agreements to resell averaged $9.7 million and $3.8 million during 1997 and
     1996,  respectively,  and the maximum amounts  outstanding at any month-end
     during 1997 and 1996 was $25.3 million and $25.1 million, respectively.

                                       33
<PAGE>

                   TF Financial Corporation and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1997 and 1996




NOTE D - INVESTMENT AND MORTGAGE-BACKED SECURITIES

     The amortized cost, gross unrealized gains and losses, and estimated market
     value of the  Corporation's  investment and  mortgage-backed  securities at
     December 31, 1997 and 1996 are summarized as follows:

<TABLE>
<CAPTION>
                                                                   December 31, 1997
                                                -------------------------------------------------
                                                              Gross          Gross     Estimated
                                                Amortized   unrealized      unrealized   market
                                                   cost       gains          losses      value
                                                   ----       -----          ------      -----
                                                                 (in thousands)
<S>                                             <C>         <C>          <C>          <C>
Investment securities held to maturity
        U.S. Government and federal agencies    $  50,278   $     190    $     (35)   $  50,433
        State and political subdivisions            2,544          49           --        2,593
                                                ---------   ---------    ---------    ---------
                                                   52,822         239          (35)      53,026
Mortgage-backed securities held to maturity       144,074       2,096         (447)     145,723
                                                ---------   ---------    ---------    ---------
                                                $ 196,896   $   2,335    $    (482)   $ 198,749
                                                =========   =========    =========    =========
Investment securities available for sale
        U.S. Government and federal agencies    $  31,254   $      75    $      (2)   $  31,327
        Equity securities (SLMA stock)                 10         200           --          210
        Mutual funds                                  500          --           --          500
                                                ---------   ---------    ---------    ---------
                                                   31,764         275           (2)      32,037
Mortgage-backed securities available for sale      36,843         182         (178)      36,847
                                                ---------   ---------    ---------    ---------
                                                $  68,607   $     457    $    (180)   $  68,884
                                                =========   =========    =========    =========
</TABLE>

<TABLE>
<CAPTION>
                                                                December 31, 1996
                                               -----------------------------------------------
                                                             Gross         Gross     Estimated
                                               Amortized   unrealized    unrealized   market
                                                   cost      gains        losses      value
                                                   ----      -----        ------      -----
                                                             (in thousands)
<S>                                            <C>         <C>          <C>          <C>
Investment securities held to maturity
        U.S. Government and federal agencies   $  34,976   $      57    $    (179)   $  34,854
        State and political subdivisions           3,068           3          (31)       3,040
        Corporate debt securities                    500          --           (1)         499
                                               ---------   ---------    ---------    ---------
                                                  38,544          60         (211)      38,393
Mortgage-backed securities held to maturity      153,758       1,136       (1,625)     153,269
                                               ---------   ---------    ---------    ---------
                                               $ 192,302   $   1,196    $  (1,836)   $ 191,662
                                               =========   =========    =========    =========

</TABLE>



                                   (Continued)

                                       34
<PAGE>

                   TF Financial Corporation and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1997 and 1996




NOTE D - INVESTMENT AND MORTGAGE-BACKED SECURITIES - Continued
<TABLE>
<CAPTION>
                                                              December 31, 1996
                                                -------------------------------------------
                                                             Gross       Gross    Estimated
                                                Amortized  unrealized  unrealized   market
                                                   cost      gains       losses     value
                                                   ----      -----       ------     -----
                                                                (in thousands)
<S>                                             <C>        <C>         <C>         <C>
Investment securities available for sale
        U.S. Government and federal agencies    $ 11,976   $     40    $     (1)   $ 12,015
        Equity securities (SLMA stock)                10        129          --         139
        Mutual funds                                 500         --          (2)        498
                                                --------   --------    --------    --------
                                                  12,486        169          (3)     12,652
Mortgage-backed securities available for sale     22,401         75        (449)     22,027
                                                --------   --------    --------    --------
                                                $ 34,887   $    244    $   (452)   $ 34,679
                                                ========   ========    ========    ========
</TABLE>

     Gross  realized  gains were  $407,000,  $330,000  and $16,000 for the years
     ended December 31, 1997, 1996 and 1995, respectively.  These gains resulted
     from the sale of investment and mortgage-backed  securities of $22 million,
     mortgage-backed  securities  of $9.3  million  and the  sale of  investment
     securities  of $4 million for the years ended  December 31, 1997,  1996 and
     1995, respectively.

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

<TABLE>
<CAPTION>
                                                              December 31, 1997
                                                -------------------------------------------
                                                   Held to maturity    Available for sale
                                                --------------------- ---------------------
                                                           Estimated             Estimated
                                                Amortized   market    Amortized   market
                                                   cost     value       cost      value
                                                   ----     -----       ----      -----
                                                               (in thousands)
<S>                                             <C>        <C>        <C>        <C>
Investment securities
        Due in one year or less                 $  3,499   $  3,501   $ 23,777   $ 24,009
        Due after one year through five years     27,780     27,868      7,987      8,028
        Due after five years through 10 years     16,768     16,799         --         --
        Due after 10 years                         4,775      4,858         --         --
                                                --------   --------   --------   --------
                                                  52,822     53,026     31,764     32,037
Mortgage-backed securities                       144,074    145,723     36,843     36,847
                                                --------   --------   --------   --------
                                                $196,896   $198,749   $ 68,607   $ 68,884
                                                ========   ========   ========   ========
</TABLE>




                                  (Continued)

                                       35
<PAGE>

                   TF Financial Corporation and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1997 and 1996



NOTE D - INVESTMENT AND MORTGAGE-BACKED SECURITIES - Continued

     The amortized cost, gross unrealized gains and losses, and estimated market
     value of mortgage-backed securities, by issuer, are summarized as follows:
<TABLE>
<CAPTION>

                                                                           December 31, 1997
                                                         ------------------------------------------------
                                                                         Gross       Gross      Estimated
                                                         Amortized    unrealized  unrealized      market
                                                            cost         gains       losses       value
                                                            ----         -----       ------       -----
                                                                           (in thousands)
<S>                                                      <C>         <C>          <C>          <C>
Mortgage-backed securities held to maturity
        FHLMC certificates                               $  76,523   $   1,508    $     (44)   $  77,987
        FNMA certificates                                   22,927         340          (71)      23,196
        GNMA certificates                                    7,483         213           --        7,696
        Real estate mortgage investment conduit             36,389          35         (319)      36,105
        Other mortgage-backed securities                       752          --          (13)         739
                                                          --------   ---------    ---------    ---------
                                                         $ 144,074   $   2,096    $    (447)   $ 145,723
                                                         =========   =========    =========    =========
Mortgage-backed securities available for sale
        FHLMC certificates                               $  19,099   $     142    $     (18)   $  19,223
        FNMA certificates                                    7,851          36          (24)       7,863
        Real estate mortgage investment conduit              9,893           4         (136)       9,761
                                                          --------   ---------    ---------    ---------
                                                         $  36,843   $     182    $    (178)   $  36,847
                                                         =========   =========    =========    =========
</TABLE>

<TABLE>
<CAPTION>
                                                                        December 31, 1996
                                                         ------------------------------------------------
                                                                       Gross       Gross      Estimated
                                                         Amortized   unrealized   unrealized    market
                                                             cost      gains       losses       value
                                                             ----      -----       ------       -----
                                                                          (in thousands)
<S>                                                      <C>         <C>          <C>          <C>
Mortgage-backed securities held to maturity
        FHLMC certificates                               $  90,016   $     697    $    (698)   $  90,015
        FNMA certificates                                   27,547         198         (261)      27,484
        GNMA certificates                                    6,043         205           --        6,248
        Real estate mortgage investment conduit             29,220          34         (643)      28,611
        Other mortgage-backed securities                       932           2          (23)         911
                                                         ---------   ---------    ---------    ---------
                                                         $ 153,758   $   1,136    $  (1,625)   $ 153,269
                                                         =========   =========    =========    =========

Mortgage-backed securities available for sale
        FHLMC certificates                               $   8,956   $      52    $    (103)   $   8,905
        FNMA certificates                                    3,314          23          (97)       3,240
        Real estate mortgage investment conduit             10,131          --         (249)       9,882
                                                         ---------   ---------    ---------    ---------
                                                         $  22,401   $      75    $    (449)   $  22,027
                                                         =========   =========    =========    =========
</TABLE>

                                  (Continued)

                                       36
<PAGE>

                   TF Financial Corporation and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1997 and 1996




NOTE D - INVESTMENT AND MORTGAGE-BACKED SECURITIES - Continued

     Investment  securities having an aggregate  amortized cost of approximately
     $7  million  and $1  million  were  pledged to secure  public  deposits  at
     December 31, 1997 and 1996, respectively.

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

NOTE E - LOANS RECEIVABLE

     Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
                                                                       December 31,
                                                                  ----------------------
                                                                      1997       1996
                                                                      ----       ----
                                                                      (in thousands)
<S>                                                                <C>        <C>
First mortgage loans (principally conventional)
Secured by one-to-four family residences                           $198,328   $265,618
Secured by other non-residential properties                          26,653     20,427
Construction loans                                                    5,052      4,720
                                                                    -------    -------
                                                                    230,033    290,765
Less net deferred loan origination fees and unamortized premiums        133        521
                                                                    -------    -------
        Total first mortgage loans                                  229,900    290,244
                                                                    -------    -------

Consumer and other loans
Commercial                                                            2,798      3,126
Home equity and second mortgage                                      12,147      9,661
Leases                                                                1,671      3,093
Other                                                                 6,230      5,261
                                                                    -------    -------
                                                                     22,846     21,141
Less unearned discount                                                    6          9
                                                                    -------    -------

                Total consumer and other loans                       22,840     21,132

Less allowance for loan losses                                        2,029      1,806
                                                                    -------    -------

                Total loans receivable                             $250,711   $309,570
                                                                   ========   ========
</TABLE>

                                  (Continued)

                                       37
<PAGE>

                   TF Financial Corporation and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1997 and 1996




NOTE E - LOANS RECEIVABLE - Continued

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

                                                December 31,
                                       ------------------------------
                                         1997       1996       1995
                                         ----       ----       ----
`                                             (in thousands)

        Balance at beginning of year   $ 1,806    $ 1,484    $ 1,473
        Provision charged to income        397        330         72
        Charge-offs                       (174)        (8)       (61)
                                       -------    -------    -------
        Balance at end of year         $ 2,029    $ 1,806    $ 1,484
                                       =======    =======    =======

     Non-performing loans, which include non-accrual loans for which the accrual
     of interest has been  discontinued  and loan  balances  past due 90 days or
     more that are not on a non-accrual  status but that management expects will
     eventually  be paid in full,  totalled  approximately  $1.4  million and $2
     million at  December  31,  1997 and 1996,  respectively.  Of such  amounts,
     approximately  $800,000  at  December  31,  1997 and  1996 are  residential
     mortgage  loans  secured  by  one-to-four   family   residences  for  which
     management has experienced insignificant charge-offs.  Interest income that
     would have been recorded  under the original  terms of such loans  totalled
     approximately $19,000, $30,000 and $49,000 for the years ended December 31,
     1997, 1996 and 1995,  respectively.  No interest income has been recognized
     on non-accrual loans for any of the periods presented.

     The  Corporation  accounts  for loans in  accordance  with SFAS No. 114, as
     amended by SFAS No.  118.  SFAS No. 114  requires  that a creditor  measure
     impairment  based  on the  present  value of  expected  future  cash  flows
     discounted  at  the  loan's  effective  interest  rate,  except  that  as a
     practical  expedient,  a creditor may measure  impairment based on a loan's
     observable market price, or the fair value of the collateral if the loan is
     collateral dependent. Regardless of the measurement method, a creditor must
     measure  impairment  based on the fair  value  of the  collateral  when the
     creditor  determines  that  foreclosure  is  probable.  SFAS No. 118 allows
     creditors  to use  existing  methods  for  recognizing  interest  income on
     impaired loans.

     The  Bank  has  identified  a loan as  impaired  when it is  probable  that
     interest and principal will not be collected  according to the  contractual
     terms of the loan  agreement.  The accrual of interest is  discontinued  on
     such loans and cash  payments  received are applied to reduce  principal to
     the  extent   necessary  to   eliminate   any  doubt  as  to  the  ultimate
     collectibility of principal either in whole or in part.









                                  (Continued)

                                       38
<PAGE>

                   TF Financial Corporation and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1997 and 1996




NOTE E - LOANS RECEIVABLE - Continued

     Loan  impairment is measured by estimating  the expected  future cash flows
     and  discounting  them  at the  respective  effective  interest  rate or by
     valuing the underlying collateral.  An allowance for credit losses has been
     established for all loans identified as impaired.  The recorded  investment
     in impaired loans and the valuation for credit losses are as follows:

                                                      December 31,
                                                     --------------
                                                      1997    1996
                                                      ----    ----
                                                     (in thousands)

                Principal amount of impaired loans   $  81   $  601
                Less valuation allowance                12      128
                                                     -----   ------
                                                     $  69   $  473
                                                     =====   ======

     The average  recorded  investment in impaired  loans during the years ended
     December 31, 1997 and 1996 was $463,000 and $433,000, respectively.

     Total cash  collected on impaired  loans during the year ended December 31,
     1997 was $447,000,  of which $434,000 was credited to the principal balance
     outstanding  on such loans and $13,000 was  recognized as interest  income.
     Interest that would have been accrued on impaired loans during the year was
     $43,000.

     Total cash  collected on impaired  loans during the year ended December 31,
     1996 was $300,000,  of which $253,000 was credited to the principal balance
     outstanding  on such loans and $47,000 was  recognized as interest  income.
     Interest that would have been accrued on impaired loans during the year was
     $46,000.

     The Bank has no  concentration  of loans to  borrowers  engaged  in similar
     activities which exceeded 10% of total loans at December 31, 1997 and 1996.
     In the ordinary  course of business,  the Bank has granted loans to certain
     executive  officers,  directors and their related interests.  Related party
     loans are made on  substantially  the same terms as those prevailing at the
     time for comparable  transactions with unrelated persons and do not involve
     more than the normal risk of collectibility. The aggregate dollar amount of
     these loans was  approximately  $493,000  and $511,000 at December 31, 1997
     and 1996,  respectively.  For the year ended  December 31, 1997,  principal
     repayments  of  approximately  $18,000  were  received  and no  funds  were
     disbursed to executive officers, directors or their related interests.











                                       39
<PAGE>

                   TF Financial Corporation and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1997 and 1996





NOTE F - LOAN SERVICING

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

                                                   December 31,
                                                ------------------
                                                 1997       1996
                                                 ----       ----
                                                  (in thousands)

     Mortgage loan servicing portfolios
       FHLMC                                    $18,775   $66,521
       Other investors                            7,630     5,861
                                                -------   -------
                                                $26,405   $72,382
                                                =======   =======

     Custodial  balances  maintained  in  connection  with  the  foregoing  loan
     servicing  totalled  approximately  $523,000 and $1,490,000 at December 31,
     1997 and 1996,  respectively.  The net servicing  revenue on mortgage loans
     serviced for others is immaterial for all periods presented

NOTE G - PREMISES AND EQUIPMENT

     Premises and equipment are summarized as follows:

                                                         December 31,
                                        Estimated     -----------------
                                       useful lives     1997      1996
                                       ------------     ----      ----
                                                       (in thousands)

    Buildings                                30       $ 5,790   $ 5,715
    Leasehold improvements                    5           322       333
    Furniture, fixtures and equipment       3-7         4,955     4,436
                                                      -------   -------
                                                       11,067    10,484
    Less accumulated depreciation                       6,437     5,741
                                                      -------   -------
                                                        4,630     4,743
    Land                                                3,259     3,259
                                                      -------   -------
                                                      $ 7,889   $ 8,002
                                                      =======   =======









                                       40
<PAGE>

                   TF Financial Corporation and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1997 and 1996




NOTE H - DEPOSITS

     Deposits are summarized as follows:

                                                              December 31,
                                                          -------------------
    Deposit type                                            1997       1996
------------------------------------------------          --------   --------

                                                             (in thousands)

Demand                                                    $  5,037   $  3,741

NOW                                                         40,360     42,513

Money Market                                                32,777     29,970

Passbook Savings - Fixed Rate                              122,952    127,213

Passbook Savings - Adjustable Rate                          51,277     60,452
                                                          --------   --------
                Total demand, transaction and
                      passbook deposits                    252,403    263,889

Certificates of Deposit                                    198,026    205,199
                                                          --------   --------
                                                          $450,429   $469,088
                                                          ========   ========

     The aggregate amount of certificates of deposit with a minimum denomination
     of $100,000 was approximately $9.4 million and $8.6 million at December 31,
     1997 and 1996, respectively.

     At December 31, 1997,  scheduled  maturities of certificates of deposit are
     as follows:

                              Year ending December 31,
   ---------------------------------------------------------------------------
      1998      1999       2000       2001       2002   Thereafter     Total
   --------  --------   --------   --------   --------  ----------    --------
                                  (in thousands)

   $136,326  $ 44,391   $ 11,821   $  2,103   $  2,948   $    437     $198,026
   ========  ========   ========   ========   ========   ========     ========



                                       41
<PAGE>

                   TF Financial Corporation and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1997 and 1996




NOTE I - ADVANCES FROM THE FEDERAL HOME LOAN BANK

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

                                             December 31,
                          ------------------------------------------------------
                                 1997                         1996
                          ----------------------      --------------------------
                                      Weighted                        Weighted
           Due date        Amount   average rate       Amount       average rate
           --------        ------   ------------       ------       ------------
                                   (in thousands)

             1997         $    -           - %        $10,000             5.57%
             1998          30,000        5.85          30,000             5.85
             1999          30,000        6.05          30,000             6.05
             2000          25,000        6.13          25,000             6.13
             2010           3,359        6.70           3,359             6.70
                           ------        ----         -------             ----
                          $88,359        6.03%        $98,359             5.98%
                          =======        ====         =======             ====

     The advances are collateralized by Federal Home Loan Bank stock and certain
     first mortgage loans and mortgage-backed securities. Unused lines of credit
     at the Federal  Home Loan Bank were $30 million and $32 million at December
     31, 1997 and 1996, respectively.

NOTE J - BENEFIT PLANS

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

     Additionally,  the  Bank  maintains  a  profit-sharing  plan  for  eligible
     employees.  Profit-sharing contributions are at the discretion of the Board
     of Directors. There were no profit-sharing plan contributions for the years
     ended December 31, 1997, 1996 and 1995.





                                  (Continued)

                                       42
<PAGE>

                   TF Financial Corporation and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1997 and 1996




NOTE J - BENEFIT PLANS - Continued

     The following table sets forth the pension plan's funded status and amounts
     recognized  in the  consolidated  statements  of financial  position at the
     dates indicated.

                                                                 December 31,
                                                            --------------------
                                                               1997       1996
                                                               ----       ----
                                                                (in thousands)
Actuarial present value of benefit obligations
  Accumulated benefit obligation
    Vested                                                   $ 1,765    $ 1,796
    Non-vested                                                   186        137
                                                             -------    -------
                                                             $ 1,951    $ 1,933
                                                             =======    =======
Projected benefit obligation for service rendered
        to date                                              $(2,609)   $(3,004)
Plan assets at fair value (primarily listed stocks,
        cash and short-term investments)                       1,762      1,338
                                                             -------    -------
Projected benefit obligation in excess of plan assets           (847)    (1,666)
Unrecognized net (gain) loss from past experience
        different from that assumed and effects of changes
        in assumptions                                          (256)       542
Unrecognized net obligation being recognized over
        15 years                                                  36         41
Prior service cost not yet recognized in net periodic
        pension cost                                             419        466
                                                             -------    -------
Accrued pension cost                                         $  (648)   $  (617)
                                                             =======    =======

     The net pension cost included the following components:

                                                        Year ended December 31,
                                                       -------------------------
                                                         1997     1996     1995
                                                        -----    -----    -----
                                                            (in thousands)

Service cost - benefits earned during the year          $ 157    $ 173    $ 159
Interest cost on projected benefit obligation             160      196      202
Actual return on plan assets                             (244)     (59)    (193)
Net amortization and deferral                             180      (28)      92
                                                        -----    -----    -----
                Net pension costs                       $ 253    $ 282    $ 260
                                                        =====    =====    =====

                                  (Continued)

                                       43
<PAGE>

                   TF Financial Corporation and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1997 and 1996




NOTE J - BENEFIT PLANS - Continued

     Assumptions used to develop the net periodic pension cost were as follows:


                                                         Year ended December 31,
                                                         -----------------------
                                                          1997    1996    1995
                                                          ----    ----    ----

          Discount rate                                   6.00%   6.00%   6.00%
          Expected long-term rate of return on assets     8.00    8.00    8.50
          Rate of increase in compensation levels         4.00    6.00    6.00

     The Corporation also maintains the following benefit plans:

     1. Employee Stock Ownership Plan
        -----------------------------

     In 1994,  the  Corporation  established  an internally  leveraged  ESOP for
     eligible  employees  who have  completed  six  months of  service  with the
     Corporation  or its  subsidiaries.  In July 1994,  the ESOP  borrowed  $4.2
     million from the  Corporation  to purchase  423,200  newly issued shares of
     common stock. The Corporation makes discretionary contributions to the ESOP
     in order to service the ESOP's  debt.  Any  dividends  received by the ESOP
     will be used to pay debt service. The ESOP shares initially were pledged as
     collateral  for its debt.  As the debt is repaid,  shares are released from
     collateral and allocated to qualifying employees based on the proportion of
     debt service  paid in the year.  The  Corporation  accounts for its ESOP in
     accordance with SOP 93-6. Accordingly,  the debt of the ESOP is recorded as
     debt and the shares  pledged as  collateral  are reported as unearned  ESOP
     shares in the consolidated  statements of financial position. As shares are
     released from  collateral,  the Corporation  reports  compensation  expense
     equal to the current market price of the shares,  and the allocated  shares
     are included in  outstanding  shares for  earnings per share  computations.
     Dividends  on  allocated  ESOP shares  will be  recorded as a reduction  of
     retained earnings; dividends on unallocated ESOP shares will be recorded as
     a reduction of debt and accrued  interest.  ESOP  compensation  expense was
     $351,000, $450,000 and $435,000 in 1997, 1996 and 1995, respectively.

          Allocated shares                        122,218
          Unreleased shares                       300,982
                                               ----------
                Total ESOP shares                 423,200
                                               ==========

          Fair value of unreleased shares      $9,029,460
                                               ==========


                                  (Continued)

                                       44
<PAGE>

                   TF Financial Corporation and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1997 and 1996




NOTE J - BENEFIT PLANS - Continued

     2. Management Stock Bonus Plan
        ---------------------------

     The Board of  Directors  also  adopted a MSBP  which  was  approved  by the
     Corporation's  stockholders  on October 13, 1994. The MSBP provides that up
     to 211,600 shares of common stock may be granted,  at the discretion of the
     Board,  to key  directors and officers at no cost to the  individuals.  The
     Corporation  granted 178,292 shares on November 18, 1994,  24,000 shares on
     December  18,  1995,  and 9,308  shares on December 15, 1996 in the form of
     restricted  stock  payable  over five  years  from the date of  grant.  The
     recipients  of the  restricted  stock are  entitled to all voting and other
     stockholder rights,  except that the shares,  while restricted,  may not be
     sold,  pledged or  otherwise  disposed  of and are  required  to be held in
     escrow.  In  the  event  the  recipient  terminates  association  with  the
     Corporation for reasons other than death,  disability or change in control,
     the recipient forfeits all rights to the allocated shares under restriction
     which are cancelled and revert to the Corporation for reissuance  under the
     plan.  Shares acquired by MSBP of $2.1 million were recorded at the date of
     award  based on the market  value of shares  acquired  by the  Corporation.
     Shares  acquired by the MSBP,  which are shown as a separate  component  of
     stockholders'  equity,  are being  amortized to expense over the  five-year
     vesting period; $458,000, $432,000 and $483,000 was amortized to expense in
     1997,  1996 and 1995,  respectively.  At December 31,  1997,  there were no
     shares reserved for future grants under the plan.

     3. Stock Option Plans
        ------------------

     The  Corporation  has fixed  stock  option  plans  accounted  for under APB
     Opinion No. 25 and related interpretations. The plans allow the Corporation
     to grant options to employees  and  directors  for up to 794,000  shares of
     common stock. The options,  which have a term of 10 years when issued, vest
     either  immediately or over a three to five year period. The exercise price
     of each option  equals the market price of the  Corporation's  stock on the
     date of grant. Had compensation cost for the plans been determined based on
     the fair value of options at the grant dates  consistent with the method of
     SFAS No. 123, "Accounting for Stock-Based  Compensation," the Corporation's
     net income and  earnings per share would have been reduced to the pro forma
     amounts indicated below.

                                           1997         1996         1995
                                           ----         ----         ----
           Net income
                   As reported           $ 4,874      $ 3,479      $ 3,871
                   Pro forma             $ 4,726      $ 3,365      $ 3,871

           Basic earnings per share
                   As reported           $  1.33      $  0.86      $  0.84
                   Pro forma             $  1.29      $  0.83      $  0.83

           Diluted earnings per share
                   As reported           $  1.25      $  0.83      $  0.83
                   Pro forma             $  1.21      $  0.80      $  0.83

                                  (Continued)

                                       45
<PAGE>

                   TF Financial Corporation and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1997 and 1996


NOTE J - BENEFIT PLANS - Continued

     These pro forma  amounts may not be  representative  of future  disclosures
     because  they do not take into  effect the pro forma  compensation  expense
     related to grants before 1995.

     The fair value of each option grant is estimated on the date of grant using
     the Black-Scholes  option-pricing model with the following weighted average
     assumptions  used for  grants  in 1997,  1996 and  1995,  respectively:  no
     dividend yield for all years;  expected volatility of 21%, 12.1% and 12.1%;
     risk-free  interest rate of 6.4%, 6.4% and 5.7%; and expected lives of five
     years for all options.

     A summary of the status of the Corporation's fixed stock option plans as of
     December  31,  1997,  and  changes for each of the years in the three years
     then ended was as follows:
<TABLE>
<CAPTION>
                                                      1997                 1996                1995
                                                ------------------   ------------------  --------------------
                                                         Weighted             Weighted             Weighted
                                                         average              average              average
                                                Number   exercise    Number   exercise   Number    exercise
                                                   of    price per     of     price per    of     price per
                                                shares     share     shares     share    shares    share
                                                ------     -----     ------     -----    ------    -----

        <S>                                     <C>       <C>       <C>       <C>       <C>       <C>
        Outstanding at beginning of year        551,833   $11.82    514,480   $11.82    460,480   $11.50
        Options granted                         170,155    16.62     41,103    15.09     55,000    14.53
        Options exercised                        (5,915)   11.50     (1,667)   11.50       (500)   11.50
        Options forfeited                       (20,198)   16.50     (2,083)   11.50       (500)   11.50
                                                -------             -------             -------

        Outstanding at end of year              695,875    13.08    551,833    12.06    514,480    11.82
                                                =======             =======             =======

        Options exercisable at year-end         545,924             501,730             306,820
                                                =======             =======             =======

        Weighted average fair value of
                options granted during year               $ 5.42              $ 4.34              $ 3.83
</TABLE>

     The following table summarizes  information about stock options outstanding
     at December 31, 1997:
<TABLE>
<CAPTION>
                                         Options outstanding                Options exercisable
                             -----------------------------------------   --------------------------
                                              Weighted
                                Number        average        Weighted       Number        Weighted
                             outstanding at   remaining      average     exercisable at   average
        Range of exercise     December 31,   contractual     exercise     December 31,    exercise
             prices              1997       life (years)      price          1997           price
             ------              ----       ------------      -----          ----           -----

        <S>                   <C>             <C>             <C>           <C>             <C>
        $11.50 to $17.25      686,720         7.5 years       $12.99        544,529         $12.13
        $18.00 to $19.25        9,155         9.6 years       $18.57          1,395         $18.50
</TABLE>

     Total  compensation cost recognized for stock-based  employee  compensation
     awards was  approximately  $99,000,  $28,000 and $16,000 for 1997, 1996 and
     1995, respectively.

                                       46


<PAGE>

                   TF Financial Corporation and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1997 and 1996




NOTE K - INCOME TAXES

     The components of income tax expense are summarized as follows:
<TABLE>
<CAPTION>
                                                       Year ended December 31,
                                                    -----------------------------
                                                      1997       1996       1995
                                                    -------    -------    -------
                                                           (in thousands)
<S>                                                 <C>        <C>        <C>
        Federal
                Current                             $ 2,420    $ 2,173    $ 2,033
                Deferred                               (233)       (84)       140
                                                    -------    -------    -------
                                                      2,187      2,089      2,173

        State and local - current                       395        343        297
                                                    -------    -------    -------

        Income tax provision                        $ 2,582    $ 2,432    $ 2,470
                                                    =======    =======    =======
</TABLE>

     The  Corporation's  effective  income  tax  rate  was  different  than  the
     statutory federal income tax rate as follows:

                                                     Year ended December 31,
                                                     -----------------------
                                                      1997     1996     1995
                                                      ----     ----     ----
                                                           (in thousands)

        Statutory federal income tax                  34.0%    34.0%    34.0%
        Increase (decrease) resulting from
                Tax-exempt income                     (1.8)    (2.7)    (1.6)
                State tax, net of federal benefit      3.5      3.8      3.0
                Other                                 (1.1)     5.9      3.5
                                                      ----     ----     ----

                                                      34.6%    41.0%    38.9%
                                                      ====     ====     ====



                                   (Continued)

                                       47
<PAGE>

                   TF Financial Corporation and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1997 and 1996




NOTE K - INCOME TAXES - Continued

     Deferred taxes are included in the accompanying  consolidated statements of
     financial  position at December 31, 1997 and 1996 for the estimated  future
     tax effects of  differences  between the  financial  statement  and federal
     income  tax  bases of  assets  and  liabilities  given  the  provisions  of
     currently  enacted tax laws. No valuation  allowance  was recorded  against
     deferred tax assets at December 31, 1997 and 1996.  The  Corporation's  net
     deferred  tax asset at  December  31,  1997 and 1996 was  comprised  of the
     following:

                                                                 December 31,
                                                                 ------------
                                                                 1997   1996
                                                                 ----   ----
                                                                (in thousands)

      Deferred tax assets
              Deferred loan origination fees                     $130   $154
              Deferred compensation                               135    112
              Accrued pension expense                              68     68
              Amortization                                        123     --
              Unrealized loss on securities available for sale     --     81
                                                                 ----   ----
                                                                  456    415
                                                                 ----   ----
      Deferred tax liabilities
              Allowance for loan losses, net                       37    148
              Unrealized gain on securities available for sale    108     --
                                                                 ----   ----
                                                                  145    148
                                                                 ----   ----

                       Deferred tax asset                        $311   $267
                                                                 ====   ====

     The  Corporation  files its income tax returns on the basis of a fiscal tax
     year ending June 30.

     Prior to 1996, the Bank was permitted to deduct a percentage of its taxable
     income as an addition to a bad debt reserve for tax purposes  regardless of
     the Bank's charge-off  experience.  This special deduction was repealed for
     taxable years  following  1995. The Bank is now required to compute its bad
     debt  deductions  for tax purposes  using the specific  charge-off  method.
     Moreover,   the  Bank  is  required,   beginning  in  1998,   to  recapture
     approximately   $2.4   million  of  its  total  tax  bad  debt  reserve  of
     approximately  $8.1 million into  taxable  income over a four-year  period.
     Deferred tax liabilities  have been accrued in respect of the amount of the
     reserve to be recaptured.

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

                                  (Continued)

                                       48
<PAGE>

                   TF Financial Corporation and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1997 and 1996




NOTE K - INCOME TAXES - Continued

     Deferred tax expense (benefit) results from temporary or timing differences
     in the  recognition of revenue and expense for tax and financial  reporting
     purposes.  The sources and effect of these temporary and timing differences
     are as follows:

                                                       Year ended December 31,
                                                       -----------------------
                                                        1997     1996     1995
                                                       -----    -----    -----
                                                            (in thousands)

    Recognition of deferred tax  expenses (benefits)
            Loan losses                                $(111)   $   2    $ 147
            Deferred compensation                        (24)    (110)      (2)
            Deferred loan origination fees                24       24       24
            Depreciation                                  --       --      (29)
            Amortization                                (122)      --       --
                                                       -----    -----    -----

                                                       $(233)   $ (84)   $ 140
                                                       =====    =====    =====

NOTE L - REGULATORY MATTERS

     The Bank is subject to minimum regulatory capital standards  promulgated by
     the Office of Thrift  Supervision  (OTS).  Failure to meet minimum  capital
     requirements  can  initiate  certain  mandatory - and  possible  additional
     discretionary  - actions by regulators  that, if  undertaken,  could have a
     direct  material  effect  on  the  Corporation's   consolidated   financial
     statements.  Under capital adequacy guidelines and the regulatory framework
     for  prompt  corrective   action,  the  Bank  must  meet  specific  capital
     guidelines  that  involve  quantitative  measures  of  the  Bank's  assets,
     liabilities,  and  certain  off-balance  sheet  items as  calculated  under
     regulatory  accounting  practices.  The  Corporation's  capital amounts and
     classification are also subject to qualitative  judgments by the regulators
     about components,  risk weightings, and other factors. Such minimum capital
     standards   generally   require  the  maintenance  of  regulatory   capital
     sufficient  to meet  each of  three  tests,  hereinafter  described  as the
     tangible  capital  requirement,   the  core  capital  requirement  and  the
     risk-based capital  requirement.  The tangible capital requirement provides
     for minimum  tangible  capital  (defined as  stockholders'  equity less all
     intangible assets) equal to 1.5% of adjusted total assets. The core capital
     requirement  provides  for minimum  core  capital  (tangible  capital  plus
     certain  forms of  supervisory  goodwill  and other  qualifying  intangible
     assets) equal to 3% of adjusted total assets.




                                  (Continued)

                                       49
<PAGE>

                   TF Financial Corporation and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1997 and 1996




NOTE L - REGULATORY MATTERS - Continued

     As of December 31, 1997,  management believes that the Bank met all capital
     adequacy requirements to which it was subject to.
<TABLE>
<CAPTION>
                                                                               Regulatory capital
                                                 ----------------------------------------------------------------------------
                                                                               December 31, 1997
                                                 ----------------------------------------------------------------------------
                                                 Tangible                  Core                      Risk-based
                                                  capital     Percent     capital      Percent        capital       Percent
                                                 --------     -------     --------     -------       --------      --------
<S>                                              <C>           <C>        <C>            <C>         <C>             <C>
Capital under generally accepted
        accounting principles
                Corporation                      $ 50,095      8.51%      $ 50,095       8.51%       $ 50,095        19.56%
                Bank                               50,987      8.58         50,987       8.58          50,987        19.91

Unrealized gain on certain
        available-for-sale securities
                Corporation                          (169)    (0.03)          (169)     (0.03)           (169)       (0.06)
                Bank                                 (169)    (0.03)          (169)     (0.03)           (169)       (0.06)

Goodwill and other intangible assets
                Corporation                        (8,274)    (1.41)        (8,274)     (1.41)         (8,274)       (3.23)
                Bank                               (8,274)    (1.39)        (8,274)     (1.39)         (8,274)       (3.23)

Additional capital items
        General valuation allowances - limited
                Corporation                            --        --             --         --           2,029         0.79
                Bank                                   --        --             --         --           2,029         0.79
                                                 --------      ----       --------       ----        --------         ----
Regulatory capital computed
                Corporation                        41,652      7.07         41,652       7.07          43,681        17.06
                Bank                               42,544      7.16         42,544       7.16          44,573        17.41

Minimum capital requirement
                Corporation                         8,831      1.50         17,662       3.00          20,491         8.00
                Bank                                8,902      1.50         17,804       3.00          20,487         8.00
                                                 --------      ----       --------       ----        --------         ----
Regulatory capital - excess
                Corporation                      $ 32,821      5.57%      $ 23,990       4.07%       $ 23,190         9.06%
                                                 ========      ====       ========       ====        ========         ====

                Bank                             $ 33,642      5.66%      $ 24,740       4.16%       $ 24,086         9.41%
                                                 ========      ====       ========       ====        ========         ====

</TABLE>

                                  (Continued)

                                       50
<PAGE>

                   TF Financial Corporation and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1997 and 1996




NOTE L - REGULATORY MATTERS - Continued
<TABLE>
<CAPTION>
                                                                                 Regulatory capital
                                                ------------------------------------------------------------------------------------
                                                                                 December 31, 1996
                                                ------------------------------------------------------------------------------------
                                                 Tangible                        Core                     Risk-based
                                                  capital        Percent       capital      Percent        capital         Percent
                                                 --------        -------       -------      -------       ----------       -------
<S>                                              <C>              <C>         <C>            <C>          <C>              <C>
Capital under generally accepted
        accounting principles
                Corporation                      $ 72,575         11.36%      $ 72,575       11.36%$       72,575           24.71%
                Bank                               59,208          9.20         59,208        9.20         59,208           20.18

Unrealized loss on certain
        available-for-sale securities
                Corporation                           127          0.02            127        0.02            127            0.04
                Bank                                  127          0.01            127        0.01            127            0.04

Goodwill and other intangible assets
                Corporation                        (9,232)        (1.44)        (9,232)      (1.44)        (9,232)          (3.14)
                Bank                               (9,232)        (1.43)        (9,232)      (1.43)        (9,232)          (3.14)

Additional capital items
        General valuation allowances - limited
                Corporation                            --            --             --          --          1,806            0.62
                Bank                                   --            --             --          --          1,806            0.62
                                                 --------          ----        -------        ----        -------           -----

Regulatory capital computed
                Corporation                        63,470          9.94         63,470        9.94         65,276           22.23
                Bank                               50,103          7.78         50,103        7.78         51,909           17.70

Minimum capital requirement
                Corporation                         9,581          1.50         19,162        3.00         23,492            8.00
                Bank                                9,655          1.50         19,310        3.00         23,468            8.00
                                                 --------          ----        -------        ----        -------           -----
Regulatory capital - excess
                Corporation                      $ 53,889          8.44%       $44,308        6.94%       $41,784           14.23%
                                                 ========          ====        =======        ====        =======           =====

                Bank                             $ 40,448          6.28%       $30,793        4.78%       $28,441            9.70%
                                                 ========          ====        =======        ====        =======            ====
</TABLE>





                                  (Continued)

                                       51
<PAGE>

                   TF Financial Corporation and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1997 and 1996




NOTE L - REGULATORY MATTERS - Continued

     At  December  31,  1997,  the  Bank  met all  regulatory  requirements  for
     classification as a  "well-capitalized"  institution.  A "well-capitalized"
     institution must have risk-based capital of 10% and core capital of 5%. The
     Bank's capital exceeded the minimum required amounts for  classification as
     a   "well-capitalized"   institution   by  $19  million  and  $13  million,
     respectively.  There are no  conditions  or events which have occurred that
     management   believes   have  changed  the  Bank's   classification   as  a
     "well-capitalized" institution.

     On September 30, 1996, the President signed into law the Deposit  Insurance
     Funds Act of 1996 to recapitalize  the Savings  Association  Insurance Fund
     (SAIF) administered by the Federal Deposit Insurance Corporation (FDIC) and
     to provide for the repayment of Financial Institution Collateral Obligation
     (FICO) bonds issued by the United States Treasury  Department.  Pursuant to
     this law, the FDIC levied a one-time  special  assessment  of SAIF deposits
     equal to $0.657 per $100 of the  SAIF-assessable  deposit  base as of March
     31, 1995.  Based on the Bank's deposits as of March 31, 1995, the Bank paid
     a special assessment of $2.2 million to recapitalize the SAIF. This expense
     was accrued for in the third quarter of 1996.  During 1998,  1999 and 2000,
     the Bank Insurance  Funds (BIF) will pay $322 million of FICO debt service,
     and SAIF will pay $458 million.

     During 1998,  1999 and 2000, the average  regular annual deposit  insurance
     assessment  is  estimated  at $0.0129 per $100 of deposits for BIF deposits
     and $0.0644 per $100 of deposits for SAIF deposits.  Individual institution
     assessments will continue to vary according to their capital and management
     ratings.  As  always,  the FDIC  will be able to raise the  assessments  as
     necessary to maintain the funds at their target capital ratios  provided by
     law.  After  2000,  BIF and SAIF will  share the FICO cost  equally.  Under
     current estimates,  BIF and SAIF assessment bases would each be assessed at
     the rate of approximately $0.024 per $100 of deposits.

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

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

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



                                  (Continued)

                                       52
<PAGE>

                   TF Financial Corporation and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1997 and 1996




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

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

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

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

                                                          December 31,
                                                        -----------------
                                                         1997      1996
                                                        -------   -------
                                                          (in thousands)

        Commitments to extend credit                    $22,720   $24,858
        Commitments to purchase loans                       304     2,852
        Standby letters of credit                           787       819
        Loans sold with recourse                            572       587
                                                        -------   -------

                                                        $24,383   $29,116
                                                        =======   =======

     Commitments  to extend credit are  agreements to lend to a customer as long
     as there is no  violation of any  condition  established  in the  contract.
     Commitments  generally  have fixed  expiration  dates or other  termination
     clauses and may require  payment of a fee. The  Corporation  evaluates each
     customer's   creditworthiness  on  a  case-by-case  basis.  The  amount  of
     collateral  obtained,  if it is deemed  necessary by the  Corporation  upon
     extension of credit,  is based on  management's  credit  evaluation  of the
     counterparty.  Collateral  held  generally  includes  residential  and some
     commercial property.

     Standby letters of credit are conditional commitments issued by the Bank to
     guarantee the  performance of a customer to a third party.  The credit risk
     involved  in  issuing  letters  of credit is  essentially  the same as that
     involved in extending  loan  facilities to customers.  Typically,  the Bank
     issues letters of credit to other financial institutions and generally does
     not require collateral for standby letters of credit.

NOTE N - COMMITMENTS AND CONTINGENCIES

     The Bank had  commitments  to sell  mortgage  loans  to  investors  of $6.9
     million  and $4.7  million  outstanding  at  December  31,  1997 and  1996,
     respectively.

     The Bank leases branch  facilities  for periods  ranging up to seven years.
     These  leases are  classified  as operating  leases and contain  options to
     renew for additional  periods.  Rental expense was approximately  $296,000,
     $229,000 and $193,000 for the years ended December 31, 1997, 1996 and 1995,
     respectively.


                                   (Continued)

                                       53
<PAGE>

                   TF Financial Corporation and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1997 and 1996




NOTE N - COMMITMENTS AND CONTINGENCIES - Continued

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

     Year ending December 31,
     ------------------------

                1998           $       230
                1999                    52
                2000                    35
                               -----------

                               $       317
                               ===========

     The Bank has a five-year  contract with a third-party  computer  processing
     center which  expires in 2002 with an annual  commitment  of  approximately
     $109,000.

     The Corporation has employment  agreements with certain key executives that
     provide  severance  pay  benefits  if there is a change in  control  of the
     Corporation. The agreements will continue in effect on a year-to-year basis
     until terminated or not renewed by the Corporation or key executives.  Upon
     a  change  in  control,  the  Corporation  shall  continue  to pay  the key
     executives'  salary per the agreements  and certain  benefits for one year.
     The maximum contingent  liability under the agreements at December 31, 1997
     was $1,486,973.

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

NOTE O - SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK

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




                                       54
<PAGE>

                   TF Financial Corporation and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1997 and 1996




NOTE P - FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

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

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

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

                                                     December 31,
                                      ------------------------------------------
                                               1997                1996
                                      --------------------  --------------------
                                      Estimated             Estimated
                                         fair     Carrying     fair     Carrying
                                         value      value      value      value
                                         -----      -----      -----      -----
                                                     (in thousands)

Cash and cash equivalents              $ 41,625   $ 41,625   $ 54,132   $ 54,132
Investment securities                    85,063     84,859     51,045     51,196
Mortgage-backed securities              182,570    180,921    175,296    175,785
Securities purchased under
        agreements to resell             10,000     10,000     25,129     25,129





                                  (Continued)

                                       55
<PAGE>

                   TF Financial Corporation and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1997 and 1996



NOTE P - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued

     Fair  value  of  financial  instruments  with  stated  maturities  has been
     estimated using present value cash flow, discounted at a rate approximating
     current market for similar assets and liabilities.
<TABLE>
<CAPTION>

                                                                   December 31,
                                                   -----------------------------------------
                                                            1997               1996
                                                   -------------------   -------------------
                                                   Estimated             Estimated
                                                     fair     Carrying     fair     Carrying
                                                     value      value      value     value
                                                     -----      -----      -----     -----
                                                                 (in thousands)
<S>                                                <C>        <C>        <C>        <C>
Assets
        Interest-bearing deposits with banks       $  2,740   $  2,737   $  4,221   $  4,220
Liabilities
        Deposits with stated maturities             197,345    198,026    204,744    205,199
        Borrowings with stated maturities
                Short-term (due within 6 months)      5,000      5,000     10,038     10,000
                Long-term                            83,178     83,359     89,422     88,359

</TABLE>

     Fair value of financial  instrument  liabilities with no stated  maturities
     has been  estimated  to equal the  carrying  amount (the amount  payable on
     demand).
<TABLE>
<CAPTION>
                                                      December 31,
                          ---------------------------------------------------------------
                                   1997                1996                 1995
                          -------------------  --------------------  --------------------
                          Estimated            Estimated             Estimated
                            fair     Carrying    fair      Carrying    fair      Carrying
                            value      value     value       value     value     value
                            -----      -----     -----       -----     -----     -----
                                                    (in thousands)
<S>                       <C>        <C>        <C>        <C>        <C>        <C>
Deposits with no stated
        maturities        $252,403   $252,403   $263,889   $263,889   $234,269   $234,269
                          ========   ========   ========   ========   ========   ========
</TABLE>

     The fair value of the net loan portfolio has been  estimated  using present
     value cash  flows,  discounted  at the  approximate  current  market  rates
     adjusted  for  non-interest  operating  costs and giving  consideration  to
     estimated prepayment risk and credit loss factors.
<TABLE>
<CAPTION>
                                                      December 31,
                          ---------------------------------------------------------------
                                   1997                1996                 1995
                          -------------------  --------------------  --------------------
                          Estimated            Estimated             Estimated
                            fair     Carrying    fair      Carrying    fair      Carrying
                            value      value     value       value     value       value
                            -----      -----     -----       -----     -----       -----
                                                    (in thousands)

<S>                       <C>        <C>        <C>        <C>        <C>        <C>
         Net loans        $254,568   $250,711   $307,942   $309,570   $242,154   $238,275
                          ========   ========   ========   ========   ========   ========
</TABLE>

                                  (Continued)

                                       56

<PAGE>

                   TF Financial Corporation and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1997 and 1996



NOTE P - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued

     There  is no  material  difference  between  the  carrying  amount  and the
     estimated fair value of  off-balance-sheet  items  totalling  approximately
     $24.4   million  and  $29.1   million  at  December   31,  1997  and  1996,
     respectively,   which  are  primarily   comprised  of  floating  rate  loan
     commitments priced to market at funding.

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

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

                                                    Year ended December 31,
                                                    -----------------------
                                                    1997     1996     1995
                                                   ------   ------   ------
                                                        (in thousands)

Service fees, charges and other operating income
        Loan servicing fees                        $  512   $  577   $  395
        Late charge income                             92       98       83
        Deposit service charges                       471      439      435
        Other income                                  128      156      150
                                                   ------   ------   ------

                                                   $1,203   $1,270   $1,063
                                                   ======   ======   ======

Other operating expense
        Employee education                         $   49   $   22   $   35
        Insurance and surety bond                     149      129      129
        Office supplies                               318      272      218
        Postage                                       218      207      173
        Telephone                                     130      103       77
        Service charges on bank accounts              111       83       82
        Supervisory examination fees                  144      112      103
        Other expenses                              1,211    1,079      761
                                                   ------   ------   ------

                                                   $2,330   $2,007   $1,578
                                                   ======   ======   ======

NOTE R - SHAREHOLDER RIGHTS PLAN

     The  Corporation  adopted a  Shareholder  Rights Plan (the Rights  Plan) to
     protect shareholders from attempts to acquire control of the Corporation at
     an inadequate price.  Under the Rights Plan, the Corporation  distributed a
     dividend of one Preferred  Share Purchase Right (a Right) for each share of
     outstanding common stock. The rights are currently not exercisable and will
     expire on November  22,  2005,  unless the  expiration  date is extended or
     unless the Rights are earlier redeemed by the Corporation.

                                  (Continued)

                                       57
<PAGE>

                   TF Financial Corporation and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1997 and 1996




NOTE R - SHAREHOLDER RIGHTS PLAN - Continued

     After the Rights  become  exercisable,  under  certain  circumstances,  the
     Rights (other than rights held by a 15%  beneficial  owner or an "acquiring
     person") will entitle the holders to purchase one  one-hundredth of a share
     of a new  series of junior  participating  preferred  stock at an  exercise
     price of $45 or  purchase  either the  Corporation's  common  shares or the
     common shares of the potential acquirer at a substantially reduced price.

     The  Corporation  is entitled to redeem the Rights at $0.01 per Right prior
     to the  acquisition by a person or group of beneficial  ownership of 15% or
     more of the  Corporation's  common stock.  Following the  acquisition  by a
     person or group of beneficial ownership of 15% or more of the Corporation's
     common  stock  and  prior to an  acquisition  of 50% or more,  the Board of
     Directors  may exchange the Rights  (other than Rights owned by such person
     or group), in whole or in part, at an exchange ratio of one share of common
     stock  (or  one  one-hundredth  of a  share  of the new  series  of  junior
     participating preferred stock) per Right.

     The Rights  Plan was not  adopted in  response  to any  specific  effort to
     acquire control of the Corporation.  The issuance of rights has no dilutive
     effect,  did not affect the Corporation's  reported earnings per share, and
     was not taxable to the Corporation or its shareholders.

NOTE S - EARNINGS PER SHARE

     The following table  illustrates the  reconciliation  of the numerators and
     denominators of the basic and diluted earnings per share computations.
<TABLE>
<CAPTION>
                                                                  Year ended December 31, 1997
                                                             -----------------------------------------
                                                                               Weighted
                                                                                average
                                                               Income             shares     Per share
                                                             (numerator)     (denominator)     amount
                                                             -----------     -------------     ------
<S>                                                           <C>              <C>           <C>
Net income                                                    $4,874,000
                                                              ==========

Basic earnings per share
        Income available to common stockholders              $ 4,874,000        3,656,924     $   1.33
                                                                                              ========
Effect of dilutive securities
        Stock options                                               --            251,667
                                                             -----------        ---------
Diluted earnings per share
        Income available to common stockholders plus
                effect of dilutive securities                 $4,874,000        3,908,591     $   1.25
                                                              ==========        =========     ========
</TABLE>



                                  (Continued)

                                       58
<PAGE>

                   TF Financial Corporation and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1997 and 1996



NOTE S - EARNINGS PER SHARE - Continued
<TABLE>
<CAPTION>
                                                                   Year ended December 31, 1996
                                                             ----------------------------------------
                                                                             Weighted
                                                                             average
                                                               Income        shares        Per share
                                                             (numerator)  (denominator)      amount
                                                             -----------  -------------      ------
<S>                                                           <C>           <C>             <C>
Net income                                                    $3,479,000
                                                              ==========

Basic earnings per share
        Income available to common stockholders              $ 3,479,000    4,066,615       $   0.86
                                                                                            ========
Effect of dilutive securities
        Stock options                                                 --      127,372
                                                              ----------    ---------

Diluted earnings per share
        Income available to common stockholders plus
                effect of dilutive securities                 $3,479,000    4,193,987       $   0.83
                                                              ==========    =========       ========
</TABLE>

     There were options to purchase  13,103 shares of common stock at $15.88 per
     share were  outstanding  during the year  which  were not  included  in the
     computation  of diluted  earnings per share  because the options'  exercise
     price was greater than the average market price of the common  shares.  The
     options,  which  expire on December  18, 2006,  were still  outstanding  at
     December 31, 1997.
<TABLE>
<CAPTION>
                                                                   Year ended December 31, 1995
                                                             ----------------------------------------
                                                                             Weighted
                                                                             average
                                                               Income        shares        Per share
                                                             (numerator)  (denominator)      amount
                                                             -----------  -------------      ------
<S>                                                           <C>           <C>             <C>
Net income                                                    $3,871,000
                                                              ==========

Basic earnings per share
        Income available to common stockholders               $3,871,000    4,583,610       $   0.84
                                                                                            ========
Effect of dilutive securities
        Stock options                                                 --       76,107
                                                              ----------    ---------
Diluted earnings per share
        Income available to common stockholders plus
                effect of dilutive securities                 $3,871,000    4,659,717       $   0.83
                                                              ==========    =========       ========
</TABLE>

     There were options to purchase  52,000 shares of common stock at a range of
     $14.75 to $15.06 per share were outstanding  during the year which were not
     included  in the  computation  of diluted  earnings  per share  because the
     options'  exercise  price was greater than the average  market price of the
     common shares;  42,000 of the options,  which expire  through  December 18,
     2005, were still outstanding at December 31, 1997.

                                       59
<PAGE>

                   TF Financial Corporation and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1997 and 1996



NOTE T - SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
                                                                             Three months ended
                                                                 ------------------------------------------
                                                                 Dec 31,     Sept. 30,  June 30,  March 31,
                                                                  1997       1997        1997       1997
                                                                --------   --------    --------   --------
                                                                    (in thousands, except per share data)
<S>                                                             <C>        <C>         <C>        <C>
Total interest income                                           $  9,990   $ 10,918    $ 11,106   $ 11,175
Total interest expense                                             5,845      5,985       6,136      6,114
                                                                --------   --------    --------   --------
                Net interest income                                4,145      4,933       4,970      5,061
Provision for possible loan losses                                    15        202          75        105
                                                                --------   --------    --------   --------
                Net interest income after provision                4,130      4,731       4,895      4,956
Other income                                                         504        945         488        390
Other expenses                                                     3,351      3,506       3,318      3,408
                                                                --------   --------    --------   --------
                Income before income tax provision                 1,283      2,170       2,065      1,938
Income tax provision                                                 205        803         800        774
                                                                --------   --------    --------   --------
                Net income                                      $  1,078   $  1,367    $  1,265   $  1,164
                                                                ========   ========    ========   ========
Earnings per common share - basic                               $   0.34   $   0.36    $   0.33   $   0.30
Earnings per common share - assuming dilution                   $   0.30   $   0.34    $   0.32   $   0.29

</TABLE>

<TABLE>
<CAPTION>
                                                                           Three months ended
                                                                ------------------------------------------
                                                                 Dec 31,   Sept. 30,   June 30,   March 31,
                                                                  1996       1996        1996       1996
                                                                --------   --------    --------   --------
                                                                    (in thousands, except per share data)
<S>                                                             <C>        <C>         <C>        <C>
Total interest income                                           $ 11,205   $  9,711    $  9,083   $  8,990
Total interest expense                                             6,368      5,109       4,738      4,582
                                                                --------   --------    --------   --------
                Net interest income                                4,837      4,602       4,345      4,408
Provision for possible loan losses                                   120        120          60         30
                                                                --------   --------    --------   --------
                Net interest income after provision                4,717      4,482       4,285      4,378
Other income                                                         504        296         303        691
Other expenses                                                     3,253      5,089       2,657      2,746
                                                                --------   --------    --------   --------
                Income (loss) before income tax provision
                     (benefit)                                     1,968       (311)      1,931      2,323
Income tax provision (benefit)                                       776       (102)        829        929
                                                                --------   --------    --------   --------
                Net income (loss)                               $  1,192   $   (209)   $  1,102   $  1,394
                                                                ========   ========    ========   ========
Earnings (loss) per common share - basic                        $   0.31   $  (0.04)   $   0.26   $   0.33
Earnings (loss) per common share - assuming dilution            $   0.29   $  (0.05)   $   0.26   $   0.33
</TABLE>

                                       60
<PAGE>

                   TF Financial Corporation and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1997 and 1996




NOTE U - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY

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

                                 BALANCE SHEET
<TABLE>
<CAPTION>
                                                                                December 31,
                                                                             -----------------
                                                                               1997      1996
                                                                             -------   -------
                                                                              (in thousands)
                ASSETS

<S>                                                                          <C>       <C>
Cash                                                                         $   127   $    70
Certificates of deposit - other institutions                                     171       154
Investment in Third Federal                                                   47,081    59,208
Investment in TF Investments                                                   2,832    27,580
Investment in Teragon                                                             28        --
Other assets                                                                       8        12
                                                                             -------   -------

                        Total assets                                         $50,247   $87,024
                                                                             =======   =======

                LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities
        Loan payable to TF Investments                                       $   103   $ 9,740
        Payable to Third Federal and other liabilities                            49     4,709
                                                                             -------   -------

                        Total liabilities                                        152    14,449

Stockholders' equity                                                          50,095    72,575
                                                                             -------   -------
                        Total liabilities and stockholders' equity           $50,247   $87,024
                                                                             =======   =======

</TABLE>











                                  (Continued)

                                       61
<PAGE>

                   TF Financial Corporation and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1997 and 1996




NOTE U - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY - Continued

                             STATEMENT OF EARNINGS
<TABLE>
<CAPTION>

                                                                          Year ended December 31,
                                                                      -----------------------------
                                                                         1997      1996       1995
                                                                      -------   -------    -------
                                                                              (in thousands)
<S>                                                                   <C>       <C>        <C>
INCOME
        Dividend income from subsidiaries                             $ 1,276   $    --    $ 4,220
        Interest income                                                    10        10          6
                                                                      -------   -------    -------

                Total income                                            1,286        10      4,226
                                                                      -------   -------    -------
EXPENSES
        Interest                                                          256       722        118
        Other                                                             226       257        257
                                                                      -------   -------    -------

                Total expenses                                            482       979        375
                                                                      -------   -------    -------

                Income (loss) before undistributed earnings
                  of subsidiaries                                         803      (969)     3,851

Undistributed earnings of subsidiaries                                  4,072     4,448         20
                                                                      -------   -------    -------

                NET INCOME                                            $ 4,874   $ 3,479    $ 3,871
                                                                      =======   =======    =======
</TABLE>






                                  (Continued)

                                       62
<PAGE>
                   TF Financial Corporation and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1997 and 1996


NOTE U - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY - Continued

                            STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                                Year ended December 31,
                                                                           --------------------------------
                                                                             1997        1996        1995
                                                                           --------    --------    --------
                                                                                     (in thousands)
<S>                                                                        <C>         <C>         <C>
Cash flows from operating activities
        Net income                                                         $  4,874    $  3,479    $  3,871
        Adjustments to reconcile net income to net cash
                (used in) provided by operating activities
                        Undistributed earnings from subsidiaries             (4,072)     (4,448)        (20)
                        Net change in assets and liabilities                 (4,656)      4,676         (20)
                                                                           --------    --------    --------
                        Net cash (used in) provided by operating
                             activities                                      (3,854)      3,707       3,831
                                                                           --------    --------    --------
Cash flows from investing activities
        Capital distribution to/from subsidiaries                            42,025          --          --
        Purchase and maturities of certificates of deposit
                in other financial institutions, net                            (17)         (4)       (151)
                                                                           --------    --------    --------
                                Net cash provided by (used in) investing
                                     activities                              42,008          (4)       (151)
                                                                           --------    --------    --------
Cash flows from financing activities
        Cash dividends paid to stockholders                                  (1,433)     (1,258)     (1,088)
        Net (decrease) increase in borrowings from
                TF Investments                                               (9,637)      1,022       8,718
        Treasury stock acquired                                             (27,027)     (3,596)    (11,116)
                                                                           --------    --------    --------

                                Net cash used in financing activities       (38,097)     (3,832)     (3,486)
                                                                           --------    --------    --------

                                NET INCREASE (DECREASE) IN CASH                  57        (129)        194

Cash at beginning of year                                                        70         199           5
                                                                           --------    --------    --------

Cash at end of year                                                        $    127    $     70    $    199
                                                                           ========    ========    ========

Supplemental disclosure of cash flow information
        Cash paid during the year for income taxes                         $     63    $     80    $     32
                                                                           ========    ========    ========
</TABLE>

                                       63

<PAGE>

                           THIRD FEDERAL SAVINGS BANK
                           --------------------------

                                OFFICE LOCATIONS

                                CORPORATE OFFICE

                                  3 Penns Trail
                             Newtown, PA 18940-3433
                                 (215) 579-4000

                                   OPERATIONS

                                 (215) 579-4600

                       BUCKS COUNTY, PENNSYLVANIA BRANCHES

<TABLE>
<CAPTION>

<S>                                      <C>                                      <C>
Newtown Office                           Feasterville Office                      Doylestown Office
3 Penns Trail                            Buck Hotel Complex                       60 North Main St.
Newtown, PA  18940-3433                  Feasterville, PA  19053-2209             Doylestown, PA  18901-3730
(215) 579-4607                           (215) 364-7096                           (215) 348-0921


New Britain Office                       Cross Keys Office                        Warminster Office
100 Town Center                          834 North Easton Highway                 601 Louis Drive
New Britain, PA  18901-5199              Doylestown, PA  18901-1007               Warminster, PA  18974-2843
(215) 345-5800                           (215) 348-5566                           (215) 672-7990


                                         Loan Center
                                         950 Newtown-Yardley Road
                                         Newtown, PA  18940-4018
                                         (215) 968-4444
</TABLE>


                   PHILADELPHIA COUNTY, PENNSYLVANIA BRANCHES

<TABLE>
<CAPTION>

<S>                                      <C>                                      <C>
Frankford Office                         Mayfair Office                           Bridesburg Office
4625 Frankford Ave.                      Roosevelt Blvd. at Unruh                 Orthodox & Almonds Sts.
Philadelphia, PA  19124-5889             Philadelphia, PA 19149-2494              Philadelphia, PA  19137-1626
(215) 289-1440                           (215) 332-7650                           (215) 743-6673

Fishtown Office                          Woodhaven Office
York & Memphis Sts.                      Knights Road Center
Philadelphia, PA  19125-3029             Knights & Woodhaven Rds.
(215) 423-2314                           Philadelphia, PA  19154-2810
                                         (215) 824-0151

</TABLE>

                       MERCER COUNTY, NEW JERSEY BRANCHES
<TABLE>
<CAPTION>

<S>                                     <C>                                    <C>

Ewing Office                            Princeton Office                       Hamilton Square Office
2075 Pennington Road                    Princeton Shopping Center              1850 Route 33
Trenton, NJ  08618-1003                 301 N. Hamilton Street                 Hamilton Square, NJ  08690-1712
(609) 883-7033                          Princeton, NJ  08540-3512              (609) 890-1333
                                        (609) 683-4488

</TABLE>




<PAGE>




                 MEET OUR BORAD OF DIRECTORS AND MANAGEMENT TEAM



                                  [GROUP PHOTO]


         William J. Happ, Jr., William H. Yerkes, III, Thomas J. Gola, George A.
Olsen, Albert M. Tantala, John R. Stranford, Carl F. Gregory, Robert N. Dusek

<TABLE>
<CAPTION>


                            TF Financial Corporation
                               Board of Directors
<S>                          <C>                                             <C>
Carl F. Gregory                  Robert N. Dusek                             John R. Stranford
Thomas J. Gola                   Chairman of the Board                       George A. Olsen

                               Executive Officers

William C. Niemczura             John R. Stranford                           Elizabeth Davidson Maier
Senior Vice President            President and Chief                         Senior Vice President and
and Treasurer                    Executive Officer                           Corporate Secretary

                             Third Federal Savings Bank
                               Board of Directors

John R. Stranford                 Carl F. Gregory                            Thomas J. Gola
Robert N. Dusek                  Chairman of the Board                       William H. Yerkes, III
George A. Olsen                                                              William J. Happ, Jr.
Albert M. Tantala

                               Executive Officers

William C. Niemczura             John R. Stranford                           Earl A. Pace, Jr.
Senior Vice President and        President and Chief                         Senior Vice President
Chief Financial Officer          Executive Officer                           Chief  Information Officer

Thomas J. Sposito, II                                                        Elizabeth Davidson Maier
Senior Vice President and                                                    Senior Vice President and
Retail Banking Officer                                                       Corporate Secretary
</TABLE>

================================================================================
<TABLE>
<CAPTION>

<S>                              <C>                                            <C>
Independent Auditors                   Special Counsel                           Transfer Agent and Registrar

Grant Thornton, LLP              Malizia, Spidi, Sloane & Fisch, P.C.           American Securities Transfer &
Two Commerce Square                     One Franklin Square                              Trust, Inc.
2001 Market Street               1301 K Street,NW., Ste. 700 East                938 Quail Street, Suite 101
Philadelphia, PA 19103-7080           Washington, D.C. 20005                       Lakewood, CO 80215-5513

</TABLE>