EXHIBIT 13

<PAGE>








                           TF FINANCIAL CORPORATION
                                 ANNUAL REPORT
                               DECEMBER 31, 1996



TABLE OF CONTENTS




Corporate Profile and Stock Market Information............................   3


Selected Financial Information and Other Data.............................   5


Letter to Stockholders....................................................   7


Management's Discussion and Analysis of
  Financial Condition and Results of Operations...........................   8


Report of Independent Certified Public
  Accountants ...........................................................   23


Consolidated Statements of Financial Condition...........................   24


Consolidated Statements of Income.........................................  25


Consolidated Statement of Changes in Stockholders' Equity...................26


Consolidated Statements of Cash Flows.......................................28


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


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


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


<PAGE>















                                       2


<PAGE>




                              TF FINANCIAL CORPORATION


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 and Penns Trail Development Corporation. At December 31, 1996, total
assets  were  approximately  $647.9  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,
1996,  total  stockholders'   equity  was  approximately   $72.6  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 company,  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 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  $469.1 million at December 31,
1996) from the general public and uses such deposits,  together with  borrowings
(approximately $98.4 million at December 31, 1996) 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.

      Fiscal 1994                                         HIGH            LOW
      -----------                                         ----            ---
      July 13, 1994 - September 30, 1994                 $12.25         $11.25
      October 1, 1994 - December 31, 1994                $12.00         $ 9.75

                                       3

<PAGE>




Fiscal 1995                                            HIGH       LOW
First Quarter                                         $12.75     $10.13
Second Quarter                                        $14.38     $12.38
Third Quarter                                         $16.25     $13.25
Fourth Quarter                                        $15.88     $14.50

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


The number of  shareholders  of record of common  stock as of the record date of
March 3,  1997,  was  approximately  738.  This does not  reflect  the number of
persons or entities who held stock in nominee or "street"  name through  various
brokerage firms. At March 3, 1997, there were 4,224,386 shares outstanding.

Dividend Policy

The Corporation's  ability to pay dividends to stockholders is dependent in part
upon the dividends it receives from Third Federal. 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

[GRAPHIC OMITTED - PLOTTING POINTS BELOW]

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.

                                       6

<PAGE>
<TABLE>
<CAPTION>


SELECTED FINANCIAL INFORMATION AND OTHER DATA
=============================================================================================
Financial Condition                      At December 31,              At June 30,
                                         --------------               ----------
(Dollars in Thousands, except      1996      1995       1994     1994     1993     1992
per share data)
=============================================================================================

<S>                              <C>       <C>        <C>      <C>      <C>       <C>     
Total Assets ..................  $647,853  $490,358   $431,828 $436,043 $388,681  $362,169

Loans Receivable, net .........   309,570    238,275   113,893  119,446  143,299   174,955
                                                                                                                             
Mortgage-backed securities
available .....................    22,027    29,640         --       --       --        --
for sale, at fair Value


Mortgage-backed securities held
to maturity at cost............   153,758   137,841    181,411   154,288  95,836    76,367


Securities purchased under ....    25,129        --         --        --      --        --
agreements to resell

Investment securities available
for sale, at fair value .......    12,652    15,044     41,002    40,316      --        --


Investment securities held to 
maturity, at cost..............    38,544    23,640     36,531    25,859  72,137    38,799


Cash and cash equivalents (1) .    54,132    27,032     42,376    78,466  57,948    47,044

Savings deposits ..............   469,088   337,069    347,631   367,133 350,328   326,053

Other borrowings ..............    98,359    73,359         --       900   3,900     4,800

Retainedearnings ..............    39,750    37,529     34,746    32,139  27,673    24,803

Total stockholder's equity ....    72,575    73,332     79,972       N/A     N/A       N/A

Book value per common share ...  $  18.31  $  17.08   $  16.38       N/A     N/A       N/A

Tangible book value per common   $  15.99  $  17.08   $  16.38       N/A     N/A       N/A
share
</TABLE>

<TABLE>
<CAPTION>

================================================================================================
Summary of Operations            Year ended              Six months ended
(Dollars in Thousands, except   December, 31               December, 31       Year ended June 30,
                                --------------             ------------       -------------------
per share data)                 1996 (2)  1995         1994    1993    1994     1993      1992
================================================================================================

<S>                             <C>      <C>         <C>      <C>     <C>       <C>      <C>    
Interest income ..............  $38,989  $29,630     $13,901  $12,124 $24,516   $25,88   $28,528

Interest .....................   20,797   14,403       6,271    6,594  12,789   14,358    18,907
expense

Net interest .................   18,192   15,227       7,630    5,530  11,727   11,522     9,621
income

Provision for (recovery of) ..      330       72          30        4    (144)      48     1,263
loan losses

Non-interest .................    1,794    1,161         617    1,249   1,903    1,895     2,784
income

Non-interest .................   13,745    9,975       4,601    4,690   9,452    9,644    13,024
expense

Net income (loss) before
cumulative effect of change
in accounting method..........    3,479    3,871       2,180    1,355   2,666    2,870    (2,769)

Net income ...................    3,479    3,871       2,607    3,155   4,466    2,870    (2,769)
(loss)

Per share data

     Continuing ..............   $ 0.83   $ 0.83      $ 0.45      N/A     N/A      N/A       N/A
operations

     Cumulative effect of 
     accounting changes.......       --       --      $ 0.08      N/A     N/A      N/A       N/A


     Earnings per common share
     & common share equivalent   $ 0.83   $ 0.83      $ 0.53      N/A     N/A      N/A       N/A
                                                  (footnotes on following page)
</TABLE>

                                       5

<PAGE>

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

Performance Ratios and Other                        Year ended            Six months ended
selected data                                       December, 31            December, 31          Year ended June 30,
                                                    ------------           --------------        ---------------------
                                                 1996(2)     1995       1994(3)(4) 1993(3)(4)    1994     1993    1992
========================================================================================================================

<S>                                               <C>        <C>           <C>        <C>        <C>      <C>     <C>  
Return on average assets.......................   0.62%      0.88          1.00%      0.68%      0.67%    0.77%  -0.75%

Return on average equity.......................   4.74%      4.99          5.40%      9.03%      8.59%   10.99%  -9.97%

Average equity to average assets...............   12.91%    17.54         18.48%      7.53%      7.65%    7.00%   7.54%

Average interest rate spread...................   2.76%      2.84          3.15%      2.61%      2.86%    2.90%   2.54%

Non-performing loans to total assets...........   0.30%      0.37          0.42%      0.86%      0.48%    1.48%   2.37%

Non-performing loans to total loans............   0.64%      0.76          1.48%      1.63%      1.49%    2.42%   2.48%

Allowance for loan losses to non-performing 
loans..........................................  91.60%     82.31         87.13%     78.22%     84.71%  47.85%  41.51%

Allowance for loan losses to total loans.......   0.58%      0.62          1.29%      1.25%      1.19%   1.13%   1.01%

Savings Bank regulatory capital

    Core ......................................   7.77%      12.21%       13.57%      7.63%      7.37%    7.12%   6.62%

    Tangible ..................................   7.77%      12.21%       13.57%      7.63%      7.37%    7.12%   6.62%

    Risk based.................................  17.68%      27.07%       39.46%     20.40%     21.27%   17.30%  13.90%
</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.





                                       6

<PAGE>

                            TF FINANCIAL CORPORATION


To Our Stockholders:

  The  attached  financial  statements  for the year ended  December  31,  1996,
reflect our second full  calendar year as a stock  organization.  Because of the
change in our fiscal  year end from June 30 to  December  31,  the twelve  month
comparison of results will look at December 31, 1996, December 31, 1995 and June
30, 1994.

  After our stock  conversion in July of 1994, our efforts were  concentrated on
rebuilding  our  loan  origination   function.  We  have  almost  tripled  loans
outstanding  to $310 million during this period and we are now beginning to sell
some of our loan production into the secondary market. Approximately half of our
loan growth was funded by maturities  and sales of  investments  and  borrowings
with a duration match to the new loans.  Our overall  interest rate  sensitivity
has been further enhanced as a result of this approach.

  Net interest  income  increased by 19.7% to $18.2 million.  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). 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. To further  enhance
our earnings per share,  the Company  repurchased  a total of 242,025  shares of
common  stock at an  average  cost of $14.86  during  the past  year.  The stock
repurchases  represent  4.6% of the common shares  issued in our initial  public
offering. Book value per share has increased from $17.08 at December 31, 1995 to
$18.31 at December 31, 1996,  through the combination of increased  earnings and
stock repurchases.

  The  consolidation  within the banking industry has created an opportunity for
the service  oriented  local  financial  institution.  We are moving  toward the
development  of new  products  and  delivery  systems to take  advantage of this
trend. Growth, through a deeper penetration in our current market areas, will be
our major focus in 1997.  Opportunities for new branch locations will be pursued
where they complement our existing branch structure.

  We appreciate your continued confidence in the employees, management and Board
of  Directors.  We will all  continue to work to  maintain  that  confidence  by
managing your institution in a safe, sound and profitable manner.


Sincerely,


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


                                       7

<PAGE>

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

General

      On July 13,  1994,  the  Corporation  completed  a public  offering of its
common stock. Any financial information presented for periods prior to that date
is only that of the Savings Bank. On August 19, 1994,  the Board of Directors of
the Corporation approved a change in the Corporation's fiscal year end from June
30 to December  31. 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.

      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
rates of interest  earned on interest  earning assets and the average rates 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,  1996,  December  31,  1995,  and June 30,  1994,  the average net
interest  rate spread was 2.76%,  2.84% and 2.86%  respectively.  During the six
months ended December 31, 1994, the average net interest rate spread was 3.15%.

      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 1997 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 three 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.

                                       8


<PAGE>
<TABLE>
<CAPTION>


Gap Table

                                  3 Months    3 Months      1 to 3     3 to 5     5 to10     10 to 20     Over 20
                                   or Less    to 1 Year     Years       Years       Years      Years       Years        Total
                                   -------    ---------     -----       -----       -----      -----       -----        -----
Interest-earning assets:
<S>                               <C>          <C>         <C>         <C>         <C>        <C>          <C>        <C>      
  Loans receivable - net (1)      $ 57,782     $61,713     $74,172     $36,948     $56,231    $19,540      $3,184     $ 309,570
                                  ========     =======     =======     =======     =======    =======      ======     =========
  Mortgage-backed securities
   available for sale (2)......      1,410       3,677       5,826       3,150       4,817      2,860         287        22,027
  Mortgage-backed securities
   held to maturity (2)........      9,432      25,741      40,789      25,200      33,718     16,870       2,008       153,758
  Investment securities 
    available for sale.........      1,636       7,011       4,005          --          --         --          --        12,652
  Investment securities
    held to maturity...........     15,576       8,989       9,095       4,884          --         --          --        38,544 
  Certificates of deposit-other
    banks (5)..................        900       2,066         100          --          --         --          --         3,066
  Other earning assets ........     77,661          --          --          --          --         --          --        77,661 
                                  --------     -------     -------     -------     -------    -------      ------     ---------
      Total interest-earning                  
      assets (4)...............   $164,397    $109,197    $133,987     $70,182     $94,766    $39,270      $5,479      $617,278
                                  ========     =======     =======     =======     =======    =======      ======     =========

Interest-bearing liabilities: (3)
  Non-interest bearing ........ 
   deposits ...................   $    486    $  1,199    $ 1,255     $    489     $   283    $     29     $    --     $  3,741
  NOW and Super NOW accounts...      3,472       9,281      10,099       6,672       8,381       4,028         580       42,513
  Savings accounts ............      5,806      16,711      31,378      34,834      46,724      37,671      14,541      187,665
  Money market deposit accounts      2,448       6,544       7,119       4,703       5,908       2,839         409       29,970
  Certificates of deposit .....     41,598      95,837      59,588       8,176          --          --          --      205,199
  Borrowings (5)                        --      16,963      70,000      25,000          --       3,359          --      115,322
                                  --------     -------     -------     -------     -------    -------      ------     ---------
      Total interest-bearing
       liabilities.............   $ 53,810    $146,535    $179,439    $ 79,874     $61,296    $ 47,926     $15,530     $584,410
                                  ========     =======     =======     =======     =======    =======      ======     =========

Interest sensitivity gap ......   $110,587    $(37,338)   $(45,452)   $ (9,692)    $33,470    $ (8,656)    $(10,05)    $ 32,868
                                  --------     -------     -------     -------     -------    -------      ------     ---------
Cumulative interest
sensitivity gap................   $110,587    $ 73,249    $ 18,105    $ 28,797    $ 51,575      42,919      32,868
Ratio of interest-earning assets
 to interest-bearing liabilities    305.51%      74.52%      74.67%      87.87%     154.60%      89.94%     35.28%       105.62%
                                  ========     =======     =======     =======     =======    =======      ======     =========
Ratio of cumulative gap
to total assets.................     16.94%      11.22%       4.26%       2.77%       7.90%       6.58%      5.04%
                                  ========     =======     =======     =======     =======    =======      ======     =========

</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
     1996. 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 1996.
(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.
(4)  Earning assets do not include Third Federal's investment of $4.9 million in
     stock of the Federal Home Loan Bank of  Pittsburgh  ("FHLB")  Although this
     asset is interest  earning,  the Savings  Bank's ability to reprice or sell
     this asset is limited by the regulations  governing  membership in the FHLB
     system.
(5)  Gap Table reflects the assets and liabilities of the savings bank only.

                                       10

<PAGE>


Average Balance Sheets

      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 on the information presented.

<TABLE>
<CAPTION>
                                      Year Ended December 31,             Year ended December 31,          Year Ended June 30,
                                              1996                               1995                            1994
                                 -------------------------------   --------------------------------  ------------------------------
                                 Average                Average    Average                 Average   Average                Average
                                 Balance   Interest   Yield/Cost   Balance     Interest  Yield/Cost  Balance    Interest  Yield/Cost
                                 -------   --------   ----------   -------     --------  ----------  -------    --------  ----------
                                                         (Dollars in Thousands)
Assets:
Interest-earning assets:
<S>                              <C>        <C>         <C>       <C>          <C>         <C>      <C>         <C>           <C>  
  Loans receivable ..............$298,800   $23,117     7.74%     $149,741     $11,501     7.68%    $138,375    $ 10,963      7.92%
  Mortgage-backed securities..... 162,973    11,040     6.77%      173,301      11,877     6.85%     121,937       7,897      6.48%
  Investment securities .........  44,598     2,728     6.12%       64,844       3,870     5.97%      82,544       4,060      4.92%
  Securities purchased under
    agreements to resell (4) ....   3,761       160     4.25%           --          --       --           --          --        --
  Other interest-earning 
     assets(1)...................  43,024     1,944     4.52%       43,271       2,382     5.50%      42,015       1,596      3.80%
                                 --------   -------     ----      --------    --------     ----     --------   ---------      ---- 
    Total interest-earning 
     assets......................$553,156   $38,989     7.05%     $431,157    $ 29,630     6.87%    $384,871   $  24,516      6.37%
                                 ========   =======               ========    ========              ========   =========      
Non interest-earning assets .....$ 14,714                         $ 10,901                          $ 20,777
                                 --------                         --------                          --------   
     Total assets ...............$576,870                         $442,058                          $405,648
Liabilities and Stockholders' 
  Equity:
  Interest-bearing liabilities:
    Savings deposits ............$382,511   $14,739     3.85%     $337,699    $ 13,368     3.96%    $362,204   $  12,545      3.46%
    Borrowings .................. 102,526     6,058     5.91%       19,870       1,035     5.21%       2,650         244      9.21%
                                 --------   -------     ----      --------    --------     ----     --------   ---------      ---- 
      Total interest-bearing.....
       liabilities...............$485,037   $20,797     4.29      $357,699    $ 14,403     4.03%    $364,854   $  12,789      3.51%
Non interest-bearing ............$  9,498                         $  6,528                          $  9,757
liabilities
      Total liabilities ......... 494,535                          364,097                           374,611
Stockholders' equity ............  73,335                           77,961                            31,037
                                 --------                         --------                          --------  
      Total liabilities and
        stockholders' equity.....$567,870                         $442,058                          $405,648
                                 ========                         ========                          ========
Net interest income .............           $ 18,192                          $ 15,227              $ 11,727
                                            ========                          ========              ========
Interest rate spread (2) ........                       2.76%                              2.84%                              2.86%
Net yield on interest earning 
  assets.........................                       3.29%                              3.53%                              3.05%
Ratio of interest-earning
  assets to average interest 
  bearing liabilities............                        114%                               121%                               105%

</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)  Ratios have been annualized where applicable.


<PAGE>

Average Balance Sheets (continued)

<TABLE>
<CAPTION>

                                                               
                                            At December 31.                            Six Months Ended December
                                    ---------------------------- ------------------------------------------------------------------
                                              1994(4)                     1994(4)                            1993(4)
                                    Average             Average  Average             Average      Average                 Average
                                    Balance  Interest Yield/Cost Balance Interest   Yield/Cost    Balance    Interest    Yield/Cost
                                    -------  -------- ---------- ------- --------   ----------    -------    --------    ----------
                                                                              (Dollars in Thousands)
Assets:
Interest earning assets:
<S>                                 <C>      <C>         <C>    <C>       <C>         <C>         <C>         <C>         <C>  
  Loans receivable................. $119,967 $10,124     8.44%  $115,597  $ 4,921     8.51%       $138,794    $5,760      8.30%
                                                                        
  Mortgage-backed securities.......  157,974  10,064     6.37%   179,363    5,678     6.33%        107,638     3,511      6.52%
  Investment securities............   77,182   4,155     5.38%    76,911    2,117     5.51%         78,117     2,022      5.18%
  Other interest-earning assets(1).   53,548   1,950     3.64%    41,451    1,185     5.72%         63,058       831      2.64%
                                      ------   -----     ----     ------    -----     ----          ------       ---      ---- 
    Total interest-earning assets.. $408,671 $26,293     6.43%  $413,322  $13,901    6.73%        $387,607   $12,124      6.24%
                                    ======== =======     ====   ========  =======    ====         ========   =======      ==== 
Non interest-earning assets........ $ 15,374                    $ 23,629                           $10,855
                                    --------                    --------                           -------
    Total assets................... $424,045                    $436,951                          $398,462
                                    ========                    ========                          ========

Liabilities and Stockholders'
Equity:
  Interest-bearing liabilities:
    Savings deposits............... $358,300 $12,386     3.46%  $350,368  $ 6,271         3.58%   $356,356    $6,430      3.61%
                                                                         
    Borrowings.....................      700      80    11.42%        --       --           --       6,544       164      5.01%
                                                                               --
      Total interest-bearing        $359,000 $12,466     3.47%  $350,368  $ 6,271         3.58%   $362,900    $6,594      3.63%
                                    ======== =======     ====   ========  =======         ====    ========    ======      ==== 
liabilities........................
Non interest-bearing liabilities...   $8,813                    $  5,847                          $  5,543
      Total liabilities............  367,813                     356,215                           368,443
Stockholders' equity...............   56,232                      80,736                            30,019
                                      ------                      ------                            ------
      Total liabilities and         $424,045                    $436,951                          $398,462
                                    ========                    ========                          ========
stockholders' equity...............
Net interest income................          $13,827                      $ 7,630                 $  5,530
Interest rate spread (2)...........                      2.96%                            3.15%                           2.61%
Net yield on interest-earning                            3.38%                            3.69%                           2.85%
assets (3).........................
Ratio of interest-earning assets
to average interest-bearing........                       114%                             118%                            107%

</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)  Ratios have been annualized where applicable.

                                       11

<PAGE>


Changes to Financial Condition

      The Corporation's  total assets at December 31, 1996 and December 31, 1995
totaled $647.9 million and $490.4 million,  respectively,  an increase of $157.5
million or 32.1%.  This  increase was primarily as a result of the $27.1 million
or 100.3%  increase in cash and cash  equivalents,  the $71.3  million or 29.9.%
increase in loans receivable,  the $12.5 million or 32.3% increase in investment
securities,  the $8.3 million or 5.0% increase in mortgage-backed securities and
the $25.1 million  increase in securities  purchased under  agreements to resell
for the fiscal year ended  December  31, 1996.  This asset growth was  primarily
funded by the increase in total savings  deposits at December 31, 1996 of $132.0
million or 39.2% to $469.1  million as  compared  to savings  deposits of $337.1
million as of December 31,  1995,  coupled  with the $25.0  million  increase in
Federal Home Loan Bank  advances.  The increase in deposits  was  primarily  the
result of the acquisition of $137.6 million in deposit balances. The acquisition
of the $137.6 million in deposit  balances on September 20, 1996 resulted in the
receipt of $126.5  million in cash which  funded the  increases in cash and cash
equivalents,   securities  purchased  under  agreements  to  resell,  investment
securities,   loans  receivable  and  mortgage-backed  securities.  The  deposit
acquisition  also  contributed to the increase in assets for the period with the
addition of $9.5 million in goodwill/core deposit intangible.

      Total  consolidated  stockholders'  equity  of the  Corporation  decreased
$757,000 to $72.6  million at December  31, 1996 from $73.3  million at December
31, 1995. The 1.0% decrease is primarily attributed to the repurchase of 242,000
shares of the  Corporation's  outstanding  common stock in the open market, at a
total cost of $3.6 million  coupled with the payment of $942,000 in dividends to
shareholders, partially offset by the addition of $3.5 million of net income for
the period. The decrease in total consolidated stockholders' equity coupled with
the  increase  of $157.5  million in total  assets  resulted  in a  decrease  in
consolidated  stockholders'  equity as a percentage  of total assets to 11.2% at
December 30, 1996 from 15.0 % at December 31, 1995.

      Total assets  amounted to $490.4 million at December 31, 1995, an increase
of $58.6  million,  or 13.6% from  December 31,  1994. A major  component of the
asset  increase  during this period was the $94.7 million of purchased  mortgage
loans that were financed by $73.4 million in advances from the Federal Home Loan
Bank of Pittsburgh and the Savings Bank's liquidity. During this same comparable
period, savings deposits decreased by $10.6 million or 3.0% to $337.1 million at
December  31,  1995.  The  decrease in  deposits  was  primarily  due to deposit
withdrawals   resulting  from  management's  decision  to  price  deposits  more
conservatively.


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 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  

                                       12

<PAGE>


(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 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.

                                       13

<PAGE>


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 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 period ended December 31, 1996,  income
taxes  decreased  to $2.4  million  from $2.5 million for the fiscal years ended
Fiscal year. 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.


Comparison of Years Ended December 31, 1995 and June 30, 1994

Net Income.  The Corporation  recorded net income of $3.9 million for the fiscal
year ended  December 31, 1995  ("December  1995"),  as compared to net income of
$4.5 million for the fiscal year ended June 30, 1994 ("June 1994").  Included in
June 1994's  income was a $1.8 million one time  positive  adjustment  to income
resulting  from the  adoption of Statement  of  Financial  Accounting  Standards
(SFAS) No. 109 "Accounting for Income Taxes".  Excluding this accounting  change
from the June 1994 period,  earnings  from  continuing  operations  for the year
ended  December  31, 1995 of $3.9  million  increased  by $1.2  million  (45.2%)
compared to the $2.7 million in earnings from continuing operations for the year
ended June 30, 1994. 

Total Interest Income.  Total interest income increased by $5.1 million or 20.9%
to $29.6 million for December 1995,

                                       14

<PAGE>

from $24.5 million for June 1994.  This increase was primarily  attributable  to
the $46.3  million  increase  in the average  balance of total  interest-earning
assets to $431.2  million for  December  1995 from $384.9  million for June 1994
aided by an increase in the average yield on total interest-earning assets of 50
basis  points  (100  basis  points  equals  1%) or 7.8% from 6.37% for June 1994
compared to 6.87% for December 1995. Interest on loans receivable increased $0.5
million,  or 4.9%, from $11.0 million in June 1994 to $11.5 million for December
1995  primarily  attributable  to the increase in the average  balances of loans
receivable  offset  partially by the 24 basis point decline in the average yield
on loans  receivable.  The average balance of loans  receivable  increased $11.4
million,  or 8.2% to $149.7 million for December 1995 compared to $138.4 million
for June 1994.  The  average  yield on loans  receivable  declined  to 7.68% for
December 1995 compared to 7.92% for June 1994 primarily as a result of the lower
rates of interest available in the markets for mortgage loan products.  Interest
on  mortgage-backed  securities  increased by $4.0 million,  or 50.4%,  to $11.9
million for December  1995 from $7.9 million for June 1994 mainly as a result of
the increase in the average balance of  mortgage-backed  securities  aided by an
increase in the average yield on mortgage-backed securities. The average balance
on mortgage-backed securities increased to $173.3 million for December 1995 from
$121.9  million  for June  1994  while  the  average  yield on these  securities
increased  from 6.48% for June 1994 to 6.85% for December  1995. The increase in
mortgage-backed  securities is due mainly to management's decision to invest the
proceeds of the stock conversion primarily into mortgage-backed  securities. The
increase  in  interest  yield  on  these  securities  was due  primarily  to the
relatively  higher rates of interest  being  available in the markets during the
latter half of 1994.  Income from other  interest-earning  assets increased $0.8
million  offset in part by the  decline of $0.2  million in  interest  earned on
investment  securities for the periods being  compared.  Other  interest-earning
assets  increased  on  average by $1.3  million,  or 3.0% to $43.3  million  for
December  1995 from $42.0 for June 1994 while the average  yield on these assets
(primarily  overnight loans of Fed Funds)  increased from 3.8% to 5.5% for these
periods.  The  primary  reason  for the  increases  in  average  yields  was the
availability of higher market rates of interest on short term investments during
the latter half of 1994 and the first half of 1995.  Management's  policy during
the latter  portion  of 1994 was to  increase  investments  in  mortgage  backed
securities and investment securities in anticipation of increased loan demand in
1995.

Total Interest  Expense.  Total interest expense  increased to $14.4 million for
December  1995 from $12.8  million  for June 1994 while the  average  balance of
total interest-bearing liabilities decreased to $357.6 million for December 1995
from $364.9  million for June 1994.  The increase in total  interest  expense is
attributable to the increases in the average cost of savings deposits as well as
the increased average balance of borrowed money. The decreased average amount of
savings  deposits was accompanied by an increase in the average cost of deposits
from 3.46% in June 1994 to 3.96% in December 1995.  Management believes that the
primary reason for the reductions in deposits was the maturity and withdrawal of
certificates  of deposit and the  reinvestment  of such deposits in  alternative
investment  products  with  potentially  higher  rates  of  return.  The cost of
borrowed  money  increased as a result of an increase in the average  amounts of
borrowed  money of $17.2 million of Federal Home Loan Bank advances  during 1995
that had an average cost of 5.21%.

Net Interest  Income.  Net interest  income  increased $3.5 million or 29.8% for
December  1995 over the similar  period  ending  June 1994.  This  increase  was
primarily the result of total interest income increasing more rapidly than total
interest expense as the  Corporation's  interest-earning  assets repriced faster
than  its   interest-bearing   liabilities   during  the  rising  interest  rate
environment.

Allowance For Loan Losses.  Third  Federal's  allowance for loan losses was $1.5
million at December  31,  1995,  and June 30,  1994.  Such totals  correlate  to
non-performing  loans of $1.8  million at December  31, 1994 and $1.7 million at
June 30,  1994.  The  provision  for  losses on loans is the method by which the
allowance for losses is adjusted during the period.  The provision for losses on
loans was $72,000 for the year ended December 31, 1995 as compared to ($144,000)
for the year  ended  June 30,  1994.  As a result of the 1995  provision,  Third
Federal's allowance for loan losses constituted 82.3% of non-performing loans at
December 31, 1995 as compared to 84.7% of non-performing loans at June 30, 1994.
The decreased percentage of the allowance/non-performing loan ratio is primarily
attributable to the increase in  non-performing  loans.  Management policy is to
review the overall  allowance on a periodic  basis and 

                                       15

<PAGE>

to maintain the allowance at a level deemed  appropriate based on an analysis of
the loan portfolio and non-performing loans.

Non-interest  Income.  Total  non-interest  income decreased to $1.2 million for
December 1995 compared to $1.9 million for June 1994. This decrease is partially
attributable to the $386,000  recovery of taxes as a result of the  invalidation
of Philadelphia's mortgage transfer tax recorded in the year ended June 30, 1994
which was not present in December  1995,  and  $533,000 in gains on sale of real
estate owned which decreased to $82,000 for December 1995. Gains on sale of real
estate owned or held for sale in June 1994 were primarily attributed to the sale
of assets acquired through the merger with Doylestown and will not be recurring.

Non-interest Expense.  Total non-interest expense (operating expenses) increased
$425,000  or 4.5% from $9.5  million in June 1994 to $9.9  million  in  December
1995.  The major cause of this  increase  was the $545,000  (12.0%)  increase in
employee compensation and benefits due to normal salary increases, the hiring of
additional personnel and the increased costs of stock based benefit programs, as
well  as  the  $107,000   increase  in  professional  fees  resulting  from  the
Corporation becoming a public company.  These increases were offset in part by a
$236,000  reduction in other operating  costs comprised  mainly of reductions of
insurance and surety bond costs and miscellaneous operating costs.

Income Tax Expense. Income taxes increased by $912,000 or 55.1%, to $2.6 million
for the year ended December 31, 1995,  from $1.7 million for the year ended June
30, 1994. The primary  reason for the increase was the $2.1 million  increase in
net income before income taxes and cumulative  effects of changes in accounting.
The  Corporation has adopted the Financial  Accounting  Standards Board SFAS No.
109  "Accounting  for Income  Taxes".  This  required  accounting  method change
resulted in a one-time  cumulative  effect of $1.8 million in the operations for
the period ended June 30, 1994. The  Corporation's  effective tax rate was 39.9%
for the year ended  December 31, 1995  compared to 38.3% for the year ended June
30, 1994.


Comparison of Six Month Periods Ended December 31, 1994 and 1993

Net Income.  The  Corporation  recorded  net income of $2.6  million for the six
month  period  ended  December 31, 1994  ("December  1994"),  as compared to net
income  of $3.2  million  for the six  month  period  ended  December  31,  1993
("December  1993").  Included in December  1994's  income was a $0.4 million one
time positive  adjustment to income  resulting from the adoption of Statement of
Financial   Accounting   Standards   (SFAS)  No.  115  "Accounting  for  Certain
Investments in Debt and Equity  Securities".  Included in December 1993's income
was a $1.8 million one-time positive  adjustment  resulting from a change in the
method for  accounting  for income  taxes due to the  adoption  of SFAS No. 109.
Excluding these accounting  changes from both periods,  earnings from continuing
operations  for the six month  period  ended  December  31, 1994 of $2.2 million
increased by $0.8  million  compared to $1.4 million  earnings  from  continuing
operations for the six month period ended December 31, 1993.

Total Interest Income.  Total interest income increased by $1.8 million or 14.7%
to $13.9 million for December 1994,  from $12.1 million for December 1993.  This
increase was primarily  attributed to the $71.7 million  increase in the average
balance of  mortgage-backed  securities to $179.4 million for December 1994 from
$107.6  million for December  1993 offset  somewhat by a decrease in the average
yield on these  securities  of 19 basis points (100 basis  points  equals 1%) or
2.9% from 6.33% for December 1994 compared to 6.52% for December 1993.  Interest
on  mortgage-backed  securities  increased by $2.2  million,  or 61.7%,  to $5.7
million for December 1994 from $3.5 million for December  1993.  The increase in
mortgage-backed  securities is due mainly to management's decision to invest the
proceeds  of the stock  conversion  primarily  into short  term  mortgage-backed
securities. The decrease in interest yield on these securities was due primarily
to the prepayment of higher yielding  securities and the investing of funds into
shorter term, lower yielding securities.  The increased yield on mortgage-backed
securities  was  partially  offset by  decreases  of $0.8 million in interest on
loans  receivable  caused  primarily  by the  decline  in the  average  balances
outstanding.  Management's  

                                       16

<PAGE>


policy  during  the  latter  portion of 1994 was to  increase  holdings  of both
mortgage-backed  securities  and investment  securities to offset  reductions in
loan production.

Total Interest  Expense.  Total interest  expense  decreased to $6.3 million for
December 1994 from $6.6 million for December 1993. The average  balance of total
interest-bearing  liabilities decreased to $350.4 million for December 1994 from
$362.9 million for December 1993. The decreased size of deposits was accompanied
by a reduction  in the average cost of deposits  from 3.61% in December  1993 to
3.58% in December  1994.  Management  believes  that the primary  reason for the
reductions in deposits and costs was the maturity and withdrawal of certificates
of deposit  and the  reinvestment  of such  deposits in  alternative  investment
products with  potentially  higher rates of return.  The cost of borrowed  money
decreased as a result of the repayment of $3.9 million of Federal Home Loan Bank
advances  during 1994 that were  outstanding in December 1993 and had an average
cost of 8.0%.

Net Interest  Income.  Net interest  income  increased $2.1 million or 38.0% for
December 1994 over the similar period ending  December  1993.  This increase was
the result of total  interest  income  rising more rapidly  than total  interest
expense as the  Corporation's  interest-earning  assets repriced faster than its
interest-bearing liabilities during the rising interest rate environment.

Allowance For Loan Losses. The Savings Bank's allowance for loan losses was $1.5
million at December  31,  1994,  and June 30,  1994.  Such totals  correlate  to
non-performing loans of $1.7 million at December 31, 1994 and June 30, 1994. The
provision for losses on loans is the method by which the allowance for losses is
adjusted  during the period.  The  provision for losses on loans was $30,000 for
December  1994 as  compared  to $4,000  for June  1994.  As a result of the 1994
provision,  Third  Federal's  allowance  for loan  losses  constituted  88.2% of
non-performing loans at December 31, 1994 as compared to 84.7% of non-performing
loans at June 30, 1994. The increased percentage of the allowance/non-performing
loan ratio is primarily attributable to a reduction in non-performing loans, the
additional  provision,  and management's periodic review of the overall level of
the allowance.

Non-interest  Income.  Total  non-interest  income decreased to $0.6 million for
December  1994  compared to $1.2 million for  December  1993.  This  decrease is
partially  attributable  to the  $386,000  recovery  of taxes as a result of the
invalidation of Philadelphia's  mortgage transfer tax recorded in the six months
ended  December  31, 1993 which was not present in  December  1994.  Even though
gains on sale of real estate  owned or held for sale  increased  by $152,000 for
December  1994,  these gains were  primarily  offset by the $204,000  decline in
service fees and charges.

Non-interest Expense.  Total non-interest expense (operating expenses) decreased
$89,000 or 1.9% from $4.7 million in December  1993 to $ 4.6 million in December
1994. The major cause of this decrease was the $135,000 reduction in advertising
costs due to a reduction  in  advertising  for loan and deposit  products and an
$111,000  decrease  in other  operating  costs due to  overall  improvements  in
operating efficiencies. These decreases more than offset increases of $78,000 in
compensation due to increased costs of maintaining  qualified  personnel $26,000
in deposit insurance premiums, and $137,000 in professional fees.

Income Tax Expense. Income taxes increased by $706,000 or 96.7%, to $1.4 million
for the six month period ended December 31, 1994,  from $0.7 million for the six
month period ended  December 31, 1993.  The primary  reason for the increase was
the $1.5  million  increase in net income  before  income  taxes and  cumulative
effects of changes in  accounting.  The  Corporation  has adopted the  Financial
Accounting  Standards  Board SFAS No. 109  "Accounting  for Income Taxes".  This
required  accounting  method change resulted in a one-time  cumulative effect of
$1.8  million  in the  operations  for the  period  ended  June  30,  1994.  The
Corporation's  effective  tax rate was  39.7%  for the six  month  period  ended
December 31, 1994 compared to 35.0% for the six month period ended  December 31,
1993.

                                       17

<PAGE>



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. The OTS has proposed amending its regulations in such a
manner  that  would  increase  the core  capital  requirements  for most  thrift
institutions  from 3% to 4% or 5%,  depending  upon the  institutions  financial
condition and other factors. Although the final form of the regulation cannot be
foreseen, if adopted as proposed, the Savings Bank would expect its core capital
requirements to increase to at least 4%.


      On December 31, 1996, the Savings Bank exceeded with its three  regulatory
capital requirements as follows:


                                                     Amount    Percent
                                                     ------    -------

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

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

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

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

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

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


       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, 1996,  such borrowed  funds total $98.4 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
5% of its net  withdrawable  accounts  plus  

                                       18

<PAGE>


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 5%
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 24.16%,  12.48% and 22.93% at December 31, 1996,  1995
and 1994, respectively, and its short term liquidity was 19.8%, 7.0% and 15.18%,
at such dates, respectively.

       The amount of  certificate  accounts which are scheduled to mature during
the twelve months ending December 31, 1997, is approximately  $137.8 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 a substantial  portion of such maturing  deposits remain at the
Savings Bank.

      At December 31,  1996,  the Savings Bank had  outstanding  commitments  to
originate  loans of $24.9  million.  Also  outstanding at December 31, 1996 were
commitments  to purchase  $2.9 million of loans from  correspondents  along with
commitments to purchase $2.0 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,  1996,  the
Savings Bank had outstanding commitments to sell loans of $4.7 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
environment,  liquidity and the maturity  structure of the Savings Bank's assets
and  liabilities  are  critical to the  maintenance  of  acceptable  performance
levels.



                                       19

<PAGE>













                       FINANCIAL STATEMENTS AND REPORT OF
                    INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

                   TF FINANCIAL CORPORATION AND SUBSIDIARIES

                           December 31, 1996 and 1995








                                       20

<PAGE>
















                                  C O N T E N T S



                                                                     Page
                                                                     ----


REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS                     3


FINANCIAL STATEMENTS

      CONSOLIDATED STATEMENTS OF FINANCIAL POSITION                    4

      CONSOLIDATED STATEMENTS OF EARNINGS                              5

      CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY        6

      CONSOLIDATED STATEMENTS OF CASH FLOWS                            8

      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                      10








                                       21




<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, 1996
and 1995,  and the  related  consolidated  statements  of  earnings,  changes in
stockholders'  equity and cash flows for the years ended  December  31, 1996 and
1995,  the six-month  period ended December 31, 1994 and the year ended June 30,
1994. 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 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,  1996  and  1995,  and  the
consolidated  results of their operations and their  consolidated cash flows for
the years ended December 31, 1996 and 1995, the six-month  period ended December
31, 1994 and the year ended June 30, 1994 in conformity with generally  accepted
accounting principles.

      As described in the notes to the consolidated  financial  statements,  the
Corporation changed its method of accounting for certain investments in debt and
equity  securities  for the six-month  period ended December 31, 1994 and income
taxes for the year ended June 30, 1994.





Philadelphia, Pennsylvania
January 22, 1997

                                       22

<PAGE>



                     TF Financial Corporation and Subsidiaries


                   CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

                                    December 31,

<TABLE>
<CAPTION>

                                                                              1996           1995
                                                                            --------       --------
                                                                                (in thousands)
            ASSETS

<S>                                                                         <C>          <C>      
Cash and cash equivalents                                                   $  54,132    $  27,032
Certificates of deposit in other financial institutions                         4,220        4,221
Securities purchased under agreements to resell                                25,129         --
Investment securities available for sale - at market value                     12,652       15,044
Investment securities held to maturity (market value of $38,393 and
  $23,880 as of December 31, 1996 and 1995, respectively)                      38,544       23,640
Mortgage-backed securities available for sale - at market value                22,027          29,640
Mortgage-backed securities held to maturity (market value of                 $153,269
  and $139,260 as of December 31, 1996 and 1995, respectively)                153,758         137,841
Loans receivable, net                                                         309,570      238,275
Federal Home Loan Bank stock - at cost                                          4,918        3,668
Accrued interest receivable                                                     4,247        3,430
Premises and equipment, net                                                     8,002        6,555
Goodwill and other intangible assets                                            9,232         --
Other assets                                                                    1,422        1,012
                                                                            ---------    ---------

         TOTAL ASSETS                                                       $ 647,853    $ 490,358
                                                                            =========    =========

         LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
 Deposits                                                                   $ 469,088    $ 337,069
 Advances from the Federal Home Loan Bank                                      98,359       73,359
 Advances from borrowers for taxes and insurance                                2,364        1,980
 Accrued interest payable                                                       2,030        1,763
 Other liabilities                                                              3,437        2,855
                                                                            ---------    ---------
        Total liabilities                                                     575,278      417,026
                                                                            ---------    ---------
Stockholders' equity
  Preferred stock, no par value; 2,000,000 shares authorized
    at December 31, 1996 and 1995, none issued                                     --           --
  Common stock, $0.10 par value; 10,000,000 shares authorized,
    5,290,000 shares issued, 3,962,544 and 4,164,942 shares
    outstanding at December 31, 1996 and 1995, respectively,
    net of shares in treasury:  1996 - 1,008,614; 1995 - 766,589                  529          529
  Retained earnings                                                            39,750       37,529
  Additional paid-in capital                                                   51,645       51,475
  Unearned ESOP shares                                                         (3,188)      (3,491)
  Shares acquired by MSBP                                                      (1,322)      (1,731)
  Treasury stock - at cost                                                    (14,712)     (11,116)
  Net unrealized (loss) gain on securities available for sale, net of tax        (127)         137
                                                                            ---------    ---------
         Total stockholders' equity                                            72,575       73,332
                                                                            ---------    ---------
         TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                         $ 647,853    $ 490,358
                                                                            ---------    ---------

</TABLE>


The accompanying notes are an integral part of these statements.

                                       23
<PAGE>
                     TF Financial Corporation and Subsidiaries

                        CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
                                                                                            Six-month
                                                                                           period ended
                                                                Year ended December 31,     December 31,     June 30,
                                                                -----------------------
                                                                    1996          1995          1994           1994
                                                                    ----          ----          ----           -----
                                                                                      (in thousands)
Interest income                                                                                                           
<S>                                                                <C>          <C>           <C>            <C>     
   Loans, including fees                                           $23,116      $ 11,501      $  4,921       $ 10,963
   Mortgage-backed securities                                       11,041        11,877         5,678          7,897
   Investment securities                                             2,728         3,870         2,117          4,060
   Interest-bearing deposits and other                               2,104         2,382         1,185          1,596
                                                                   -------      --------      --------       --------  
                                                                                                           
      TOTAL INTEREST INCOME                                         38,989        29,630        13,901         24,516
                                                                   -------      --------      --------       --------  
                                                                                                           
Interest expense                                                                                           
   Deposits                                                         14,739        13,368         6,271         12,545
   Borrowings                                                        6,058         1,035           --             244
                                                                   -------      --------      --------       --------  
                                                                                                           
      TOTAL INTEREST EXPENSE                                        20,797        14,403         6,271         12,789
                                                                   -------      --------      --------       --------  
                                                                                                           
      NET INTEREST INCOME                                           18,192        15,227         7,630         11,727
                                                                                                           
Provision for (recoveries of) loan losses                              330            72            30           (144)
                                                                   -------      --------      --------       --------  
                                                                                                           
      NET INTEREST INCOME AFTER PROVISION FOR                                                              
            LOAN LOSSES                                             17,862        15,155         7,600         11,871
                                                                   -------      --------      --------       --------  
                                                                                                           
Non-interest income                                                                                        
   Gain on sale of real estate acquired through foreclosure            115            82           152            533
   Gain (loss) on sale of investment securities                        330            16            14           (244)
   Gain on sale of real estate held for sale                            --            --            --            532
   Gain on sale of loans                                                79            --            --             --
   Unrealized loss on valuation of investments held for sale-           --            --          (648)    
   Service fees, charges and other operating income                  1,270         1,063           451          1,730
                                                                   -------      --------      --------       --------  
                                                                                                           
      TOTAL NON-INTEREST INCOME                                      1,794         1,161           617          1,903
                                                                   -------      --------      --------       -------- 
                                                                                                           
Non-interest expense                                                                                       
   Employee compensation and benefits                                5,828         5,079         2,334          4,534
   Occupancy and equipment                                           1,432         1,357           634          1,317
   Federal deposit insurance premium                                 2,929           791           421            810
   Data processing                                                     505           448           216            469
   Professional fees                                                   508           446           269            339
   Advertising                                                         292           276            42            268
   Other operating                                                   2,007         1,578           685          1,715
   Amortization of goodwill and other intangible assets                244            --            --             --
                                                                   -------      --------      --------       --------  
                                                                                                           
      TOTAL NON-INTEREST EXPENSE                                    13,745         9,975         4,601          9,452
                                                                   -------      --------      --------       --------  
                                                                                                           
      INCOME BEFORE INCOME TAXES AND CUMULATIVE                                                            
          EFFECT OF ACCOUNTING CHANGES                               5,911         6,341         3,616          4,322
                                                                                                           
Income taxes                                                         2,432         2,470         1,436          1,656
                                                                   -------      --------      --------       --------  
                                                                                                           
      INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING                                                        
           CHANGES                                                   3,479         3,871         2,180          2,666
                                                                                                           
Cumulative effect of accounting changes                                 --            --           427          1,800
                                                                   -------      --------      --------       --------  
                                                                                                           
      NET INCOME                                                   $ 3,479      $  3,871      $  2,607       $  4,466
                                                                   =======      ========      ========       ========
                                                                                                           
Earnings per share                                                                                         
   Continuing operations                                           $  0.83      $   0.83      $   0.45       $     --
   Cumulative effect of accounting changes                              --            --          0.08             --
                                                                   -------      --------      --------       --------  
                                                                                                           
   Primary earnings per share                                      $  0.83      $   0.83      $   0.53       $     --
                                                                   =======      ========      ========       ========  
</TABLE>
The accompanying notes are an integral part of these statements.

                                       24                                      


<PAGE>



                    TF Financial Corporation and Subsidiaries


            CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

   Years ended December 31, 1996 and 1995,  six-month  period ended December 31,
1994 and year ended June 30, 1994

<TABLE>
<CAPTION>
                                                                                                            
                                                                                                             Net unrealized
                             Common Stock                                                                    gain (loss) on
                             ------------                                                                      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)

Balance at July 1, 
<S>                    <C>            <C>          <C>            <C>         <C>          <C>   <C>           <C>        <C>    
  1993                 $       -      $      -     $     -        $     -     $      -     $   - $27,673       $    -     $27,673

Net income for the 
  year ended June 
  30, 1994                     -             -           -              -            -         -   4,466            -       4,466

Balance at June 30, 
  1994                         -             -           -              -            -         -  32,139            -       32,139

Shares issued upon 
  conversion to
  stock form of  
  ownership           $5,290,000           529      51,202              -            -         -       -            -       51,731

Cumulative effect of 
  change in accounting 
  method for investment
  securities on July 1, 
  1994                        -              -           -              -            -         -       -         (427)        (427)
 
Common stock acquired
  by ESOP              (423,200)             -           -         (4,232)           -         -       -            -       (4,232)

Allocation of ESOP 
  shares                 42,320              -          32            423            -         -       -            -          455

Shares acquired by 
  MSBP                 (211,600)             -           -              -       (2,135)        -       -            -       (2,135)

Shares awarded by 
  MSBP                  178,292              -           -              -            -         -       -            -            -

Amortization of MSBP
  expense                     -              -           -              -           45         -       -            -           45

Net unrealized loss 
  on securities 
  available for sale          -              -           -              -            -         -       -         (211)        (211)

Net income for the
  six-month period 
  ended December 31, 
  1994                        -               -          -              -            -         -   2,607            -        2,607
                        --------       -------      ------         ------      -------      ----  -------       -----      -------

Balance at December 
  31,  1994           4,875,812             529     51,234         (3,809)      (2,090)        -  34,746         (638)      79,972

</TABLE>

                                  (Continued)

                                       25
<PAGE>




<PAGE>
                    TF Financial Corporation and Subsidiaries

            CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

   Years ended December 31, 1996 and 1995,  six-month  period ended December 31,
1994 and year ended June 30, 1994

<TABLE>
<CAPTION>
                                                                                                            
                                                                                                             Net unrealized
                             Common Stock                                                                    gain (loss) on
                             ------------                                                                      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)



Allocation of ESOP
<S>                    <C>             <C>       <C>            <C>        <C>           <C>       <C>          <C>        <C>     
 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 gain 
 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>
         The accompanying notes are an integral part of this statement.

                                       26
<PAGE>

                    TF Financial Corporation and Subsidiaries

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                                                   
                                                                                                      Six-month
                                                                            Year ended December 31,  period ended    Year ended
                                                                            ----------------------   December 31,     June 30,
                                                                                1996       1995          1994           1994
                                                                             ---------  ---------    -------------   ----------

                                                                                                (in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
<S>                                                                           <C>         <C>          <C>              <C>   
   Net income                                                                 $ 3,479     $ 3,871      $  2,607         $4,466
   Adjustments to reconcile net income to net cash provided
        by operating activities
     Amortization of
        Purchased loan servicing rights                                            21          --            --            524
        Deferred loan origination fees                                           (197)       (117)         (106)          (230)
        Premiums and discounts on investment securities, net                      (69)        (31)          (29)           304
        Premiums and discounts on mortgage-backed securities
          and loans, net                                                          139         166           132           (291)
        Goodwill and other intangibles                                            244          --            --             --
     Deferred income taxes                                                         84         140           434             --
     Provision for loan losses and provision for losses on real estate            333          74            41           (143)
     Depreciation of premises and equipment                                       560         509           258            557
     Stock-based benefit programs                                                 882         919           358             --
     (Gain) loss on sale of
        Investment securities                                                    (330)        (16)          (14)           244
        Real estate held for sale                                                  --          --            --           (532)
        Real estate acquired through foreclosure                                 (115)        (82)         (152)          (533)
        Mortgage loans                                                            (79)         --            --             --
     Unrealized loss on investments held for sale                                  --          --            --            648
     (Increase) decrease in
        Accrued interest receivable                                              (817)         (7)          (51)          (143)
        Other assets                                                             (748)       (238)        1,135           (731)
     Increase (decrease) in
        Accrued interest payable                                                  267         980          (187)          (274)
        Other liabilities                                                         723         697          (917)        (1,103)
                                                                              -------     -------      --------         ------
          NET CASH PROVIDED BY OPERATING
              ACTIVITIES                                                        4,377       6,865         3,509          2,763
                                                                              -------     -------      --------         ------
CASH FLOWS FROM INVESTING ACTIVITIES
   Loan originations and principal payments on loans, net                     (38,475)    (37,289)        5,358         37,233
   Principal repayments on mortgage-backed securities
     held to maturity                                                          28,450      24,171        13,438         29,590
   Principal repayments on mortgage-backed securities available 
     for sale                                                                   3,050          --            --             --
   Purchases of loans                                                         (83,704)    (87,165)           --             --
   Proceeds from loan sales                                                    22,648          --            --             --
   Purchases and maturities of certificates of deposit in other
     financial institutions, net                                                    1        (214)         (310)         1,096
   Purchases of investment and mortgage-backed securities
     held to maturity                                                         (49,069)    (18,445)      (54,310)      (145,039)
   Purchase of investment securities and mortgage-backed
     securities available for sale                                            (22,917)         --        (7,955)            --

</TABLE>
                                   (continued)
                                       27

<PAGE>

                     TF Financial Corporation and Subsidiaries

                CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

<TABLE>
<CAPTION>


                                                                                                           Six-month
                                                                                                          period ended  Year ended
                                                                                  Year ended December 31,  December 31,  June 30,
                                                                                  ----------------------
                                                                                  1996             1995       1994        1994
                                                                                  ----             ----       ----        ----
                                                                                                   (in thousands)
   Purchase and maturities of securities purchased under
<S>                                                                              <C>             <C>          <C>       <C>     
     agreement to resell                                                         $  (25,129)     $    --      $    --   $     --
   Proceeds from maturities of investment securities held to maturity                17,551       20,987        2,861     29,756
   Proceeds from maturities of investment securities available for sale              20,500       23,000        7,000         --
   Proceeds from the sale of investment securities available and
     held for sale                                                                    9,279        4,014           --     18,749
   (Purchase) redemption of Federal Home Loan Bank stock                             (1,250)      (1,968)          --        111
   Development of real estate acquired through foreclosure                               --           --           --         (4)
   Proceeds from sales of real estate acquired through foreclosure                      722          221          489      3,585
                                                                                  ---------    ---------     --------    -------
   Purchase of premises and equipment                                                (2,007)        (370)        (216)    (1,541)
   Premium paid for deposit liabilities                                              (9,476)          --           --        --
 
          NET CASH USED IN INVESTING ACTIVITIES                                    (129,826)     (73,058)     (33,645)   (26,518)
                                                                                  ---------    ---------     --------    -------

CASH FLOWS FROM FINANCING ACTIVITIES
   Net increase (decrease) in demand deposit/NOW accounts,
     passbook savings accounts and certificates of deposit                          132,019      (10,562)     (19,502)    16,805
   Net increase (decrease) in advances from Federal Home Loan Bank                   25,000       73,359         (900)    (3,000)
   Net increase (decrease) in advances from borrowers for
     taxes and insurance                                                                384          256           (3)      (445)
   Proceeds from issuance of common stock, net                                           --           --       16,586     30,913
   Common stock acquired by MSBP                                                         --           --       (2,135)        --
   Treasury stock acquired                                                           (3,596)     (11,116)          --         --
   Common stock dividends paid                                                       (1,258)      (1,088)          --         --

          NET CASH PROVIDED BY (USED IN) FINANCING
                ACTIVITIES                                                          152,549       50,849       (5,954)    44,273
                                                                                  ---------    ---------     --------    -------

          NET INCREASE (DECREASE) IN CASH AND CASH
                 EQUIVALENTS                                                         27,100      (15,344)     (36,090)    20,518

Cash and cash equivalents at beginning of period                                     27,032       42,376       78,466     57,948
                                                                                  ---------    ---------     --------    -------
                                                                                 
Cash and cash equivalents at end of period                                        $  54,132    $  27,032     $ 42,376    $78,466
                                                                                  =========    =========     ========    =======
Supplemental disclosure of cash flow information
   Cash paid for
     Interest on deposits and advances                                            $  20,530    $   3,423     $  6,459    $13,064
     Income taxes                                                                 $   2,235    $   1,943     $  1,203    $   978
                                                                                                                                  
   Non-cash transactions
     Transfers from loans to real estate acquired through
        foreclosure                                                               $     327    $    127      $    110    $   597
                                                                                                                                  
     Transfer of investment and mortgage-backed securities
        to available for sale                                                     $      --    $ 29,640      $    --     $40,316
                                                                                                                                  
     Securitization of mortgage loans held for investment                        $  27,854     $     --       $   --     $    --
</TABLE>

The accompanying notes are an integral part of these statements.

                                       28
<PAGE>


                    TF Financial Corporation and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 1996 and 1995


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

   TF Financial  Corporation  (the  Corporation)  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) and TF
   Investments 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.

   During  1994,  the  Board of  Directors  of Third  Federal  Savings  and Loan
   Association (the  Association)  adopted a plan of conversion (the Plan or the
   Conversion) whereby the Association  converted to a federally chartered stock
   savings bank known as Third Federal  Savings Bank whereby the Bank issued all
   of its  outstanding  stock to a newly formed  holding  company,  TF Financial
   Corporation (the Corporation).  The conversion to the stock form of ownership
   was  completed  on July 13,  1994,  culminating  in the issuance of 5,290,000
   shares of common stock of the  Corporation  to the public.  The  consolidated
   financial  statements  for the  periods  prior to July  1994 are those of the
   Association prior to conversion.

   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
   Corporation and its wholly-owned subsidiaries: Third Federal Savings Bank, TF
   Investments   Corporation  (TF  Investments)  and  Penns  Trail   Development
   Corporation.  All material  intercompany  balances and transactions have been
   eliminated in consolidation.

   The accounting  policies of the Corporation and its  subsidiaries  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.

                                   (Continued)

                                       29

<PAGE>

                    TF Financial Corporation and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1996 and 1995


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

   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.

   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 Available for Sale
       ------------------------------------------------------------

   The Corporation  adopted Statement of Financial  Accounting  Standards (SFAS)
   No. 115,  "Accounting for Certain Investments in Debt and Equity Securities,"
   in 1994.  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.

   The cumulative effect of the change in accounting for certain  investments in
   debt and equity securities of $427,000,  net of income taxes, is reflected in
   the  consolidated  statement  of  earnings  for the  six-month  period  ended
   December 31, 1994.

   5.  Investment and Mortgage-Backed Securities Held to Maturity
       ----------------------------------------------------------

   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.

                                   (Continued)

                                       30

<PAGE>

                    TF Financial Corporation and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1996 and 1995


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

   6.  Loans Receivable
       ----------------

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

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

   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.

   On January 1, 1995,  the  Corporation  adopted 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."
   The  adoption  of SFAS No. 114,  as  amended,  had no material  effect on the
   Corporation's consolidated financial position or results of operations.

   7.  Real Estate Acquired through Foreclosure
       ----------------------------------------

   Real estate acquired through  foreclosure is initially  recorded at the lower
   of the loan's unpaid  principal  balance (cost) or the fair value at the date
   of foreclosure less estimated selling expenses. Costs relating to development
   and  improvement of property are  capitalized,  whereas costs relating to the
   holding of property are expensed.  Valuations are  periodically  performed by
   management  and a loss  provision is established by a charge to operations if
   the carrying value of a property exceeds its estimated fair value.

   8.  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.

                                   (Continued)

                                       31

<PAGE>


                    TF Financial Corporation and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1996 and 1995


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

   9.  Mortgage Servicing Rights
       -------------------------

   On January 1, 1996, the  Corporation  adopted SFAS No. 122,  "Accounting  for
   Mortgage Servicing Rights," which requires that a mortgage banking enterprise
   recognize as separate  assets  rights to service  mortgage  loans for others,
   however those servicing rights are acquired.  In circumstances where mortgage
   loans are  originated,  separate  asset rights to service  mortgage loans are
   only recorded when the enterprise intends to sell such loans. The adoption of
   SFAS No. 122 did not have a material impact on the Corporation's consolidated
   financial position or results of operations.

   The  Financial  Accounting  Standards  Board  (FASB)  issued  SFAS  No.  125,
   "Accounting   for   Transfers   and   Servicing  of   Financial   Assets  and
   Extinguishments  of  Liabilities," as amended by SFAS No. 127, which provides
   accounting guidance on transfers of financial assets,  servicing of financial
   assets, and  extinguishments of liabilities.  This statement is effective for
   transfers  of  financial   assets,   servicing  of  financial   assets,   and
   extinguishments of liabilities occurring after December 31, 1996. Adoption of
   this  new  statement  is not  expected  to  have  a  material  impact  on the
   Corporation's consolidated financial position or results of operations.

   10. 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.
   In November  1993,  the American  Institute of Certified  Public  Accountants
   (AICPA) issued 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.

                                  (Continued)

                                       32

<PAGE>

                    TF Financial Corporation and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1996 and 1995


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

   11.  Income Taxes
        ------------

   The Corporation  adopted,  effective July 1, 1993, SFAS No. 109,  "Accounting
   for Income  Taxes," which  requires a change from the deferred  method to the
   asset and liability  method of accounting  for income taxes.  Under the asset
   and  liability  method,  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.  The  cumulative  effect  of the  change in  accounting  method of $1.8
   million was reported in the  consolidated  statement of earnings for the year
   ended June 30, 1994.

   12.  Advertising Costs
        -----------------

   The Corporation expenses advertising costs as incurred.

   13.  Earnings Per Share
        ------------------

   Primary earnings per share is computed by dividing net income by the weighted
   average  number  of  common  shares   outstanding,   including  common  stock
   equivalents  (stock  options),  during the period  (4,193,987,  4,638,000 and
   4,881,295  shares at December 31, 1996, 1995 and 1994,  respectively).  Fully
   diluted earnings per share is not materially  different from primary earnings
   per share.  Common shares  outstanding  gives effect to issued  shares,  less
   unallocated shares held by the ESOP, and the remaining common shares reserved
   for issuance under the MSBP. The provisions of APB Opinion No. 15,  "Earnings
   Per Share," are not  applicable for the year ended June 30, 1994, as the Bank
   converted to the stock form of ownership in July 1994.

   14.  Reclassifications
        -----------------

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

NOTE B - CASH AND CASH EQUIVALENTS

   Cash and cash equivalents consist of the following:

                                                        December 31,
                                            -----------------------------------
                                                1996       1995        1994
                                            ---------- ------------ ----------
                                                        (in thousands)

        Cash and due from banks            $  14,737     $ 9,926    $ 9,308
        Interest-bearing deposits in other 
         financial institutions               38,120      15,606     31,898
        Federal funds sold                     1,275       1,500      1,170
                                           ---------   ---------  ---------

                                           $  54,132     $27,032    $42,376
                                            ========    ========   ========

                                       33

<PAGE>


                    TF Financial Corporation and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1996 and 1995


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,  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, 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
   $3.8  million  during  1996,  and  the  maximum  amounts  outstanding  at any
   month-end during 1996 was $25.1 million.

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, 1996 and 1995 are summarized as follows:

<TABLE>
<CAPTION>

                                                             December 31, 1996
                                                 -----------------------------------------------
                                                               Gross        Gross     Estimated
                                                 Amortized   unrealized   unrealized    market
                                                     cost      gains       losses        value
                                                 ----------  ----------   ----------  ----------
                                                                 (in thousands)

Investment securities held to maturity
<S>                                              <C>         <C>          <C>          <C>      
   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
                                                 =========   =========    =========    =========

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>
                                   (Continued)

                                       34

<PAGE>

                    TF Financial Corporation and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1996 and 1995


NOTE D - INVESTMENT AND MORTGAGE-BACKED SECURITIES - Continued

<TABLE>
<CAPTION>
                                                               December  31, 1995
                                                -----------------------------------------------
                                                               Gross        Gross     Estimated
                                                Amortized    unrealized   unrealized    market
                                                   cost        gains        losses      value
                                                ----------   ----------   ----------   ---------
                                                                  (in thousands)
Investment securities held to maturity
<S>                                              <C>         <C>          <C>          <C>      
   U.S. Government and federal agencies          $  14,475   $     313    $     (49)   $  14,739
   State and political subdivisions                  3,140          21          (22)       3,139
   Corporate debt securities                         6,025          15          (38)       6,002
                                                 ---------   ---------    ---------    ---------
                                                    23,640         349         (109)      23,880
Mortgage-backed securities held to maturity        137,841       2,201         (782)     139,260
                                                 ---------   ---------    ---------    ---------
                                                 $ 161,481   $   2,550    $    (891)   $ 163,140
                                                 =========   =========    =========    =========
Investment securities available for sale
   U.S. Government and federal agencies$         $  14,489    $     --    $     (41)   $  14,448
   Equity securities (SLMA stock)                       10          88           --           98
   Mutual funds                                        500          --           (2)         498
                                                             ---------    ---------    ---------
                                                    14,999          88          (43)      15,044
Mortgage-backed securities available for sale       29,477         416         (253)      29,640
                                                 ---------   ---------    ---------    ---------
                                                 $  44,476   $     504    $    (296)   $  44,684
                                                 =========   =========    =========    =========
</TABLE>

   Net realized  gains  (losses) were  $330,000 for the year ended  December 31,
   1996, $16,000 for the year ended December 31, 1995, $14,000 for the six-month
   period ended  December 31, 1994,  and  ($244,000) for the year ended June 30,
   1994.  These  gains  (losses)  resulted  from  the  sale  of  mortgage-backed
   securities of $9.3 million for the year ended  December 31, 1996, the sale of
   investment securities of $4 million for the year ended December 31, 1995, the
   maturity of securities of $3 million for the six-month  period ended December
   31, 1994, and the sale of securities of $18.7 million for the year ended June
   30, 1994.



                                   (Continued)

                                       35

<PAGE>

                    TF Financial Corporation and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1996 and 1995


NOTE D - INVESTMENT AND MORTGAGE-BACKED SECURITIES - Continued

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

<TABLE>
<CAPTION>

                                                           December  31, 1996
                                                 --------------------------------------------
                                                   Held to maturity     Available for sale
                                                 --------------------   ---------------------
                                                            Estimated               Estimated
                                                  Carrying    market    Carrying     market
                                                   value      value      value       value
                                                 ---------- ---------   --------    ---------
                                                                (in thousands)
 Investment securities
<S>                                              <C>        <C>        <C>        <C>     
   Due in one year or less                       $ 10,474   $ 10,474   $  8,647   $  8,647
   Due after one year through five years           12,303     12,209      4,005      4,005
   Due after five years through 10 years           13,767     13,724         --         --
   Due after 10 years                               2,000      1,986         --         --
                                                 --------   --------   --------   --------
                                                   38,544     38,393     12,652     12,652
Mortgage-backed securities                        153,758    153,269     22,027     22,027
                                                 --------   --------   --------   --------
                                                 $192,302   $191,662   $ 34,679   $ 34,679
                                                 ========   ========   ========   ========
</TABLE>

   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, 1996
                                                 ----------------------------------------------
                                                               Gross       Gross      Estimated
                                                 Amortized   unrealized  unrealized     market
                                                    cost       gains       losses       value
                                                 ----------  ----------  -----------  ----------
                                                                  (in thousands)
Mortgage-backed securities held to maturity
<S>                                              <C>          <C>         <C>         <C>      
 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, 1996 and 1995


NOTE D - INVESTMENT AND MORTGAGE-BACKED SECURITIES - Continued

<TABLE>
<CAPTION>

                                                               December 31, 1995
                                                 -----------------------------------------------
                                                               Gross       Gross      Estimated
                                                 Amortized   unrealized  unrealized     market
                                                    cost       gains        losses      value
                                                 -----------------------------------------------
                                                                 (in thousands)
Mortgage-backed securities held to maturity
<S>                                              <C>         <C>          <C>         <C>       
 FHLMC certificates                              $  65,834   $   1,225    $     (80)  $   66,979
 FNMA certificates                                  33,150         522         (138)      33,534
 GNMA certificates                                   7,644         353           --        7,997
 Real estate mortgage investment conduit            30,033          95         (534)      29,594
 Collateralized mortgage obligations                    19          --           --           19
 Other mortgage-backed securities                    1,161           6          (30)       1,137
                                                 ---------    ---------    ---------    ---------

                                                 $ 137,841   $   2,201    $    (782)  $  139,260
                                                 =========    =========    =========    =========

Mortgage-backed securities available for sale
 FHLMC certificates                              $  15,081   $     373    $     (32)  $   15,422
 FNMA certificates                                   4,012          42          (44)       4,010
 Real estate mortgage investment conduit            10,384           1         (177)      10,208
                                                 ---------   ---------    ---------    ---------

                                                 $ 29,477    $     416    $    (253)  $   29,640
                                                 =========   =========    =========    =========
</TABLE>

   Investment  securities having an aggregate amortized cost of approximately $1
   million were pledged to secure public deposits at December 31, 1996 and 1995.

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

   On November 15, 1995, the FASB issued a Special  Report  entitled "A Guide to
   Implementation of Statement No. 115 on Accounting for Certain  Investments in
   Debt and Equity  Securities."  This guide allows  enterprises to reassess the
   appropriateness  of the  classification  of all  securities  held. A one-time
   reassessment  can be made on one day between  November  15, 1995 and December
   31, 1995.  Reclassifications  from the held-to-maturity  category that result
   from this one-time  reassessment will not call into question the intent of an
   enterprise to hold other debt securities to maturity in the future.

   Based on this Special Report, on December 26, 1995,  management  reclassified
   certain mortgage-backed  securities from the held-to-maturity category to the
   available-for-sale category. The transfer was made to satisfy asset/liability
   management  objectives  and  provide an  additional  source of  liquidity  to
   originate and purchase loans in 1996. The transfer was made at fair value and
   resulted in an estimated net unrealized gain of approximately $163,000 and an
   increase in retained earnings of approximately $107,000, net of income taxes,
   based on current market values.

                                       37

<PAGE>



                    TF Financial Corporation and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1996 and 1995


NOTE E - LOANS RECEIVABLE

   Loans receivable are summarized as follows:

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

       First mortgage loans (principally conventional)
       Secured by one-to-four family residences           $265,618   $204,430
       Secured by other non-residential properties          20,427     10,294
       Construction loans                                    4,720      3,604
                                                         ---------  ---------
                                                           290,765    218,328
       Less
         Net deferred loan origination fees                    885        882
         Net unearned discount (unamortized premium)          (364)      (138)
                                                         ---------  ---------
                                                               521        744

         Total first mortgage loans                        290,244    217,584
                                                         ---------  ---------

       Consumer and other loans
       Commercial                                            3,126      2,887
       Home equity and second mortgage                       9,661     10,635
       Leases                                                3,093      3,590
       Other                                                 5,261      5,072
                                                         ---------  ---------
                                                            21,141     22,184
       Less unearned discount                                    9          9
                                                         ---------- ---------

               Total consumer and other loans               21,132     22,175

       Less allowance for loan losses                        1,806      1,484
                                                         ---------  ---------

               Total loans receivable                     $309,570   $238,275
                                                         =========  =========

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

                                              December 31,         
                                      -----------------------------  June 30,
                                       1996       1995       1994      1994
                                      --------   -------   --------  -------
                                                   (in thousands)
     Balance at beginning of period    $ 1,484   $ 1,473   $ 1,450   $ 1,656
     Provision charged to income           330        72        30      (144)
     Charge-offs                            (8)      (61)       (7)      (62)
                                       -------    -------   -------   -------
     Balance at end of period          $ 1,806    $ 1,484   $ 1,473   $ 1,450
                                       =======    =======   =======   =======

                                   (Continued)

                                       38

<PAGE>

                    TF Financial Corporation and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1996 and 1995


NOTE E - LOANS RECEIVABLE - Continued

   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  $2  million  and $1.8
   million  at  December  31,  1996 and  1995,  respectively.  Of such  amounts,
   approximately  $900,000  and $1  million  at  December  31,  1996  and  1995,
   respectively,  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  $30,000 for the year ended  December 31,
   1996, $49,000 for the year ended December 31, 1995, $67,000 for the six-month
   period  ended  December  31,  1994,  and $134,000 for the year ended June 30,
   1994. No interest income has been recognized on non-accrual  loans for any of
   the periods presented.

   On January 1, 1995,  the Bank adopted SFAS No. 114,  "Accounting by Creditors
   for  Impairment  of a Loan,"  as  amended  by SFAS No.  118,  "Accounting  by
   Creditors for  Impairment of a Loan - Income  Recognition  and  Disclosures."
   SFAS No. 114 requires 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.

   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,
                                                  ---------------------
                                                     1996        1995
                                                  ----------   ---------
                                                      (in thousands)
     Principal amount of impaired loans           $     601   $    265
     Accrued interest                                     -          -
     Deferred loan costs                                  -          -
                                                  ---------  ---------
                                                        601        265
        Less valuation allowance                        128         40
                                                  ---------  ---------
                                                  $     473  $     225
                                                  =========  =========

                                   (Continued)

                                       39

<PAGE>


                    TF Financial Corporation and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1996 and 1995


NOTE E - LOANS RECEIVABLE - Continued

   The average  recorded  investment  in impaired  loans  during the years ended
   December 31, 1996 and 1995 was $433,000 and $271,000, respectively.

   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.

   Total cash  collected on impaired  loans  during the year ended  December 31,
   1995 was  $20,000,  of which  $12,000 was credited to the  principal  balance
   outstanding  on such loans and  $8,000 was  recognized  as  interest  income.
   Interest  that would have been accrued on impaired  loans during the year was
   $25,000.   Interest income recognized during the year was $8,000.

   The  Bank has no  concentration  of loans to  borrowers  engaged  in  similar
   activities  which  exceeded 10% of total loans at December 31, 1996 and 1995.
   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  $511,000 and $541,000 at December 31, 1996 and
   1995,  respectively.   For  the  year  ended  December  31,  1996,  loans  of
   approximately  $41,000  were  disbursed  to  officers  and  directors,  while
   principal repayments of approximately $71,000 were received.

NOTE F - LOAN SERVICING

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

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

      Mortgage loan servicing portfolios
         FHLMC                                    $  66,521  $  25,440
         Other investors                              5,861      1,506
                                                  ---------  ---------

                                                  $  72,382  $  26,946
                                                   ========   ========

   Custodial balances maintained in connection with the foregoing loan servicing
   totalled approximately $1,490,000 and $547,000 at December 31, 1996 and 1995,
   respectively. The net servicing revenue on mortgage loans serviced for others
   is immaterial for all periods presented.


                                       40

<PAGE>

                    TF Financial Corporation and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1996 and 1995


NOTE G - PREMISES AND EQUIPMENT

   Premises and equipment are summarized as follows:

                                                          December 31,
                                       Estimated        ----------------
                                      useful lives      1996        1995
                                      ------------      ----        -----
                                                          (in thousands)

     Buildings                             30        $    5,715 $    4,863
     Leasehold improvements                 5               333        237
     Furniture, fixtures and equipme      3-7             4,436      4,064
                                                      ---------  ---------
                                                         10,484      9,164
        Less accumulated depreciation                    (5,741)    (5,363)
                                                      ---------  ---------
                                                          4,743      3,801
          Land                                            3,259      2,754
                                                      ---------  ---------
                                                     $    8,002 $    6,555
                                                      =========  =========

NOTE H - DEPOSITS

   Deposits are summarized as follows:

                                                           December 31,
    Deposit type and weighted average                    ----------------
            interest rate                                1996        1995
    ---------------------------------                    ----        ----
                                                             (in thousands)
    Demand
      December 31, 1996 0.00%                         $   3,741
      December 31, 1995 0.00%                                    $   1,573
    NOW
      December 31, 1996 0.98%                            42,513
      December 31, 1995 1.57%                                       33,581
    Money Market
      December 31, 1996 3.54%                            29,970
      December 31, 1995 2.75%                                       10,481
    Passbook Savings - Fixed Rate
      December 31, 1996 3.00%                           127,213
      December 31, 1995 3.00%                                      120,387
    Passbook Savings - Adjustable Rate
      December 31, 1996 4.88%                            60,452
      December 31, 1995 4.74%                                       68,247
                                                       --------   --------
         Total demand, transaction and
               passbook deposits                        263,889    234,269

                                  (Continued)

                                       41

<PAGE>


                                   (Continued)
                    TF Financial Corporation and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1996 and 1995


NOTE H - DEPOSITS - Continued

                                                      December 31,
    Deposit type and weighted average            ----------------------
            interest rate                         1996         1995
    ---------------------------------            ------      ----------
                                                    (in thousands)
    Certificates of Deposit
      December 31, 1996 5.30%                    $205,199
      December 31, 1995 5.22%                                $102,800
                                                  -------    ---------
                                                 $469,088    $337,069

   The aggregate  amount of certificates of deposit with a minimum  denomination
   of $100,000 was  approximately  $8.6 million and $4.4 million at December 31,
   1996 and 1995, respectively.

   Interest expense on deposits for the periods indicated below is summarized as
follows:

                                             December 31,          June 30,
                                ------------------------------   -----------
                                 1996      1995          1994       1994
                                -------  --------      --------  -----------
                                                (in thousands)

     Money market            $     508  $     312   $      168  $     337
     Passbook savings            6,264      7,110        3,393      7,387
     NOW                           397        520          253        656
     Certificates of deposit     7,570      5,426        2,457      4,165
                             ---------  ---------    ---------  ---------

                             $  14,739  $  13,368   $    6,271  $  12,545
                              ========   ========    =========   ========

   At December 31, 1996,  scheduled maturities of certificates of deposit are as
follows:

<TABLE>
<CAPTION>
                                              Year ending December 31,
                           ------------------------------------------------------------------
                             1997     1998      1999     2000     2001   Thereafter    Total
                           --------  -------  -------   ------   ------  ----------  --------

<S>                        <C>       <C>      <C>       <C>      <C>      <C>       <C>     
      Amount               $137,811  $44,153  $15,434   $5,908   $1,552   $   341   $205,199
                            ======= ======= ======= ======= ======= ========= =======

      Weighted average 
       interest rate           5.12%    5.49%    5.57%    5.76%    5.56%     5.93%
                               ====     ====     ====     ====     ====      ====
</TABLE>

                                       23

<PAGE>








                    TF Financial Corporation and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1996 and 1995


NOTE I - ADVANCES FROM THE FEDERAL HOME LOAN BANK

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

                                              December 31,
                           ---------------------------------------------------
                                   1996                       1995
                           -------------------------  ------------------------
                                         Weighted                 Weighted
        Due date            Amount      average rate   Amount    average rate
        --------           --------     ------------  --------   -------------
                                               (in thousands)

        1997               $  10,000         5.57%    $  5,000        5.57%
        1998                  30,000         5.85       10,000        5.57
        1999                  30,000         6.05       25,000        5.97
        2000                  25,000         6.13       15,000        6.29
        2001                       -            -       15,000        6.39
        2010                   3,359         6.70        3,359        6.70
                           ---------        -----    ---------       -----

                           $  98,359         5.98     $ 73,359        6.07%
                            ========         ====     ========       =====

   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 $32  million and $45 million at December
   31, 1996 and 1995, 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. The contributions to the profit-sharing plan were $187,000 for the
   year ended June 30, 1994. There were no profit-sharing plan contributions for
   the years ended December 31, 1996 and 1995 or for the six-month  period ended
   December 31, 1994.



                                   (Continued)

                                       43

<PAGE>

                    TF Financial Corporation and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1996 and 1995


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.
<TABLE>
<CAPTION>
                                                                   December 31,
                                                              ----------------------
                                                                1996         1995
                                                              --------     ---------
                                                                   (in thousands)
     Actuarial present value of benefit obligations
       Accumulated benefit obligation
<S>                                                           <C>         <C>      
         Vested                                               $    1,796  $   2,453
         Non-vested                                                  137        267
                                                              ---------- ----------

                                                              $    1,933  $   2,720
                                                               =========  =========

     Projected benefit obligation for service rendered
       to date                                                $   (3,004) $  (3,594)
     Plan assets at fair value (primarily listed stocks,
       cash and short-term investments)                            1,338      2,069
                                                               ---------  ---------

     Projected benefit obligation in excess of plan assets        (1,666)    (1,525)
     Unrecognized net gain from past experience
       different from that assumed and effects of changes
       in assumptions                                                542        440
     Unrecognized net obligation being recognized over
       15 years                                                       41         47
     Adjustment to recognize minimum liability                         -       (125)
     Prior service cost not yet recognized in net periodic
       pension cost                                                  466        512
                                                              ----------  ---------

     Accrued pension cost                                     $     (617  $    (651)
                                                              ==========  =========
</TABLE>

   The net pension cost included the following components:

<TABLE>
<CAPTION>

                                                                                 Six-month
                                                                               period ended   Year ended
                                                     Year ended December 31,   December 31,    June 30,
                                                     ----------------------    
                                                          1996     1995            1994          1994
                                                     ----------- ----------       ------        ------
                                                                         (in thousands)
<S>                                                       <C>      <C>            <C>           <C>  
Service cost - benefits earned during the period          $ 173    $ 159          $  98         $ 255
Interest cost on projected benefit obligation               196      202            100           220
Actual return on plan assets                                (59)    (193)          (100)         (197)
Net amortization and deferral                               (28)      92             28           130
                                                          -----    -----          -----         -----
     Net pension costs                                    $ 282    $ 260          $ 126         $ 408
                                                          =====    =====          =====         =====
</TABLE>

                                   (Continued)

                                       44

<PAGE>


                    TF Financial Corporation and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1996 and 1995


NOTE J - BENEFIT PLANS - Continued

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

<TABLE>
<CAPTION>
                                                                        Six-month
                                                                      period ended   Year ended
                                            Year ended December 31,    December 31,   June 30,
                                                1996     1995             1994         1994
                                                ----     ----             ----         ----
                                                           (in thousands)

<S>                                              <C>     <C>              <C>          <C>  
Discount rate                                    6.00%   6.00%            6.75%        6.75%
Expected long-term rate of return on assets      8.00    8.50             8.50         8.50
Rate of increase in compensation levels          6.00    6.00             6.00         6.00

</TABLE>

   In conjunction with and subsequent to the Conversion, the Corporation adopted
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 $450,000,  $435,000 and
   $358,000 in 1996, 1995 and 1994, respectively. The ESOP shares as of December
   31, 1996 were as follows:

     Allocated shares                                             104,358
     Unreleased shares                                            318,842
         Total ESOP shares                                        423,200
     Fair value of unreleased shares                           $5,181,182



                                   (Continued)

                                       45

<PAGE>

                    TF Financial Corporation and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1996 and 1995


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 and 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;  $432,000,
   $483,000  and  $45,000  was  amortized  to  expense  in 1996,  1995 and 1994,
   respectively.  At December 31, 1996, 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
   25 and  related  interpretations.  The plans allow the  Corporation  to grant
   options to employees and directors for up to 554,000  shares of common stock.
   The  options,  which  have  a term  of 10  years  when  issued,  vest  either
   immediately  or over a three-year  period.  The exercise price of each option
   equals  the  market  price of the  Corporation's  stock on the date of grant.
   Accordingly,  no  compensation  cost has been  recognized for the plans.  Had
   compensation  cost for the plans been  determined  based on the fair value of
   the  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.

                                                         1996         1995
                                                     ----------  -----------
     Net income                     As reported      $    3,479  $    3,871
                                    Pro forma        $    3,365  $    3,871

     Primary earnings per share     As reported      $      0.83 $      0.83
                                    Pro forma        $      0.80 $      0.83

   The fair value of each option  grant is  estimated on the date of grant using
   the Black-Scholes  options-pricing model with the following  weighted-average
   assumptions used for grants in 1996 and 1995, respectively: dividend yield of
   0% and expected  volatility of 12.1% for all years;  risk-free interest rates
   of 6.4% and 5.7%; and expected lives of five years.

                                   (Continued)

                                       46

<PAGE>


                    TF Financial Corporation and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1996 and 1995


NOTE J - BENEFIT PLANS - Continued

   A summary of the status of the  Corporation's  fixed stock option plans as of
   December 31, 1996,  1995 and 1994,  and changes  during the periods ending on
   those dates is presented below:

<TABLE>
<CAPTION>

                                           1996                     1995                          1994
                                    -------------------      -----------------------    -------------------------
                                             Weighted                    Weighted                    Weighted
                                              average                     average                     average
                                              exercise                    exercise                   exercise
                                     Shares     price         Shares        price        Shares        price
                                     ------   -------        -------     -----------     -------     ---------
<S>                                 <C>        <C>           <C>          <C>                        <C>      
Outstanding at beginning of year    514,480    $ 11.82       460,480      $   11.50           --     $      --
Granted                              41,103    $ 11.82         15.09      $   14.83      460,480     $   11.50
Exercised                            (1,667)   $ 15.09         11.50      $   11.50           --            --
Forfeited                            (2,083)   $ 11.50         11.50      $   11.50           --            --
                                    --------   -------       ------       ---------      -------     ---------
Outstanding at end of year          551,833    $ 12.06       514,480      $   11.82      460,480     $   11.50
Options exercisable at year-end     501,730                  306,820
Weighted average fair value of
  options granted during the year              $  4.34                    $    3.83

</TABLE>

   The  following  information  applies to options  outstanding  at December 31,
1996:

     Number outstanding                                     551,833
     Range of exercise prices                            $10.83-$15.88
     Weighted average exercise price                        $12.06
     Weighted average remaining contractual life            8 years

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

NOTE K - INCOME TAXES

   As previously discussed in note A11, the Bank adopted SFAS No. 109 as of July
   1, 1993. The cumulative  effect of the change in accounting  method increased
   net income by  approximately  $1.8 million and is reported  separately in the
   consolidated  statement of earnings for the period ended June 30, 1994. Prior
   years' financial statements have not been restated to apply the provisions of
   SFAS No. 109.  SFAS No. 109 had no effect on the income tax provision for the
   year ended June 30, 1994, exclusive of such cumulative effect adjustment.


                                   (Continued)

                                       47

<PAGE>

                    TF Financial Corporation and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1996 and 1995


NOTE K - INCOME TAXES - Continued

   The  components  of  income  tax  expense  before  extraordinary  credit  are
summarized as follows:

<TABLE>
<CAPTION>
                                                               Six-month
                                                              period ended    Year ended
                                     Year ended December 31,  December 31,     June 30,
                                         1996        1995         1994          1994
                                     ----------    --------    ----------      -----
                                                        (in thousands)

     Federal
<S>                                    <C>         <C>        <C>            <C>      
        Current                        $   2,173   $   2,033  $      841     $     473
        Deferred                             (84)        140         434           683
                                        --------    --------    --------     ---------
                                           2,089       2,173       1,275         1,156
                                        --------    --------    --------     ---------

     State and local
        Current                              343         297         161           276
        Deferred                               -           -           -           224
                                       ---------   ---------  ----------      --------
                                             343         297         161           500
                                       ---------   ---------  ----------      --------

     Income tax provision before 
       extraordinary credit            $   2,432  $    2,470   $   1,436    $   1,656
                                        ========    ========    ========     ========
</TABLE>

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

<TABLE>
<CAPTION>

                                                              Six-month
                                                            period ended   Year ended
                                    Year ended December 31,  December 31,    June 30,
                                         1996    1995           1994         1994
                                         ----    -----          -----        ----     
                                 (in thousands)

<S>                                      <C>      <C>          <C>          <C>  
Statutory federal income tax             34.0%    34.0%        34.0%        34.0%
Increase (decrease) resulting from
   Tax-exempt income                     (2.7)    (1.6)        (1.2)        (2.3)
   Bad debt deduction                      --       --           --         (0.9)
   State tax, net of federal benefit      3.8      3.0          2.9          7.6
   Other                                  5.9      3.5          4.0         (0.1)
                                         ----     ----         ----         ----

                                         41.0%    38.9%        39.7%        38.3%
                                         ====     ====           ====         ====
</TABLE>

                                   (Continued)

                                       48

<PAGE>

                    TF Financial Corporation and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1996 and 1995


NOTE K - INCOME TAXES - Continued

   Deferred taxes are included in the  accompanying  consolidated  statements of
   financial position at December 31, 1996 and 1995 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, 1996 and 1995.  The  Corporation's  net  deferred  tax asset at
   December 31, 1996 and 1995 was comprised of the following:

<TABLE>
<CAPTION>
                                                                   December 31,
                                                              -----------------------
                                                                 1996         1995
                                                              ---------- ------------
                                                                      (in thousands)

     Deferred tax assets
<S>                                                           <C>        <C>       
        Deferred loan origination fees                        $      154 $      178
        Deferred compensation                                        112          2
        Accrued pension expense                                       68         68
                                                              ---------- ----------
                                                                     334        248
     Deferred tax liabilities
        Allowance for loan losses, net                               148        146
        Unrealized gain on securities available for sale              43         70
                                                              ---------- ----------
                                                                     191        216

                 Deferred tax asset                           $      143 $       32
                                                               =========  =========
</TABLE>

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

   The Bank is allowed a special bad debt  deduction  based on a  percentage  of
   taxable income (presently 8%) or on specified experience formulas, subject to
   certain  limitations  based upon  aggregate  loan  balances at the end of the
   year.  The Bank used the  percentage-of-taxable  income  method in fiscal tax
   year 1994 and anticipates using the same method for its fiscal tax year 1995.
   If the amounts  deducted  are used for  purposes  other than for loan losses,
   such as in a distribution  in liquidation or otherwise,  or if the Bank would
   cease to be a qualified thrift lender under the tax law, the amounts deducted
   would be subject to federal  income  tax at the then  current  corporate  tax
   rate.  Prior to July 1, 1994, no deferred  taxes were recorded for the excess
   of the cumulative  percentage of income bad debt  deductions in excess of the
   loan loss allowance provided for financial statement purposes. Effective with
   the adoption of SFAS No. 109,  however,  the Bank is required to record,  and
   has  recorded,  a deferred tax asset related to the allowance for loan losses
   reported for financial reporting  purposes,  and a deferred tax liability for
   percentage  of  income  bad debt  deductions  after  December  31,  1987.  In
   accordance  with SFAS No.  109,  the Bank has not  recorded  a  deferred  tax
   liability of approximately $1.9 million related to approximately $5.7 million
   of cumulative  percentage of income bad debt deductions prior to December 31,
   1987.

                                   (Continued)

                                       49

<PAGE>



                    TF Financial Corporation and Subsidiaries


             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1996 and 1995


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:

<TABLE>
<CAPTION>
                                                                          Six-month
                                                                        period ended   Year ended
                                              Year ended December 31,    December 31,   June 30,
                                                    1996    1995           1994           1994
                                                    ----    ----           ----           ----
                                                                    (in thousands)
<S>                                                <C>      <C>             <C>          <C>  
Recognition of previously deferred tax benefits    $  --    $  --           $  --        $ 620
Loan losses                                           (2)     147             254          300
Deferred compensation                                110       (2)            165          (99)
Deferred loan origination fees                       (24)      24              12           24
Depreciation                                          --      (29)             --           --
Pension expense                                       --       --              --          (68)
Unrealized securities losses                          --       --               3         (220)
Allowance on real estate held for sale                --       --              --          350
                                                                            -----         -----
                                                   $  84    $ 140           $ 434        $ 907
                                                   =====    =====           =====         =====
</TABLE>

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 Corporation  must meet specific  capital
   guidelines that involve  quantitative  measures of the Corporation'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. An OTS proposal, if adopted in present form, would increase the
   core capital  requirement  to a range of 4% - 5% of adjusted total assets for
   substantially  all savings  associations.  An OTS  regulation  affecting  all
   savings  institutions,  which was adopted in 1995, imposes an addition to the
   risk-based  capital  requirement  based on an  institution's  sensitivity  to
   interest  rate  risk.  There  was no  material  change to the  Bank's  excess
   regulatory  capital  position as a result of these changes in the  regulatory
   capital  requirement.  The risk-based capital requirement  currently provides
   for the maintenance of core capital plus general loss allowances  equal to 8%
   of  risk-weighted  assets.  In  computing   risk-weighted  assets,  the  Bank
   multiplies the value of each asset on its statement of financial  position by
   a defined  risk-weighting factor (e.g.,  one-to-four family residential loans
   carry a risk-weighted factor of 50%).

                                   (Continued)

                                       50

<PAGE>



<PAGE>



                    TF Financial Corporation and Subsidiaries


             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1996 and 1995


NOTE L - REGULATORY MATTERS - Continued

   As of December 31, 1996,  management  believes  that the Bank met all capital
   adequacy requirements to which it was subject to.

<TABLE>
<CAPTION>
                                                                       Regulatory capital
                                            -------------------------------------------------------------------------
                                            Tangible                      Core                 Risk-based
                                             capital        Percent      capital      Percent   capital       Percent
                                            ---------       -------      -------      -------  ----------    --------
Capital under generally accepted
   accounting principles
<S>                                         <C>              <C>         <C>          <C>      <C>             <C>   
     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)     (1.44)     (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, 1996 and 1995


NOTE L - REGULATORY MATTERS - Continued

   At  December  31,  1996,  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  $22.6   million  and  $17.9   million,
   respectively.  There are no  conditions  or events which have  occurred  that
   management believes have changed the Bank's category.

   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 1997,  1998 and 1999,  the
   Bank  Insurance  Funds (BIF) will pay $322 million of FICO debt service,  and
   SAIF will pay $458 million.

   During 1997,  1998 and 1999, 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 FIDC  will be able to  raise  the  assessments  as
   necessary to maintain the funds at their target  capital  ratios  provided by
   law. After 1999, 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.

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.

   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.




                                   (Continued)

                                       52

<PAGE>

                    TF Financial Corporation and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1996 and 1995


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

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

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

     Commitments to extend credit             $  24,858  $  19,496
     Commitments to purchase loans                2,852     30,737
     Standby letters of credit                      819        491
     Loans sold with recourse                       587        846
                                               --------   --------
                                              $  29,116  $  51,570
                                               ========   ========

   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 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  $229,000,  $193,000
   and  $95,000  for  the  years  ended  December  31,  1996,   1995  and  1994,
   respectively, and $188,000 for the year ended June 30, 1994.

   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,

            1997                                           $  198
            1998                                              125
            1999                                               48
            2000                                               32
            2001                                                -
                                                            -----

                                                           $  403

                                   (Continued)

                                       53
<PAGE>

                    TF Financial Corporation and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1996 and 1995


NOTE N - COMMITMENTS AND CONTINGENCIES - Continued

   The Bank has a five-year  contract  with a  third-party  computer  processing
   center  which  expires  in 1997 with an annual  commitment  of  approximately
   $500,000.

   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,  1996  was
   $1,227,000.

   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.

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  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.



                                   (Continued)

                                       54

<PAGE>

                    TF Financial Corporation and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1996 and 1995


NOTE P - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued

   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.

<TABLE>
<CAPTION>
                                                                    December 31,
                                         --------------------------------------------------------------
                                                   1996                1995                1994
                                         -------------------  -------------------  --------------------
                                         Estimated            Estimated            Estimated
                                           fair     Carrying    fair     Carrying    fair     Carrying
                                           value      value     value      value     value      value
                                         ---------  --------  ---------- --------  ---------  --------
                                                                       (in thousands)
<S>                                       <C>       <C>       <C>       <C>      <C>         <C>    
Cash and cash equivalents                 $ 54,132  $ 54,132  $ 27,032  $ 27,032 $  42,376   $42,376
Investment securities                       51,045    51,196    38,924    38,684    76,274    77,533
Mortgage-backed securities                 175,296   175,785   168,900   167,481   171,880   181,411
Securities sold under
 agreements to repurchase                   25,129    25,129        --        --        --        --


</TABLE>

   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,
                              ---------------------------------------------------------------
                                       1996                1995                 1994
                              --------------------  -------------------  --------------------
                              Estimated             Estimated            Estimated
                                 fair     Carrying    fair     Carrying    fair     Carrying
                                value      value     value      value      value      value
                              ---------  ---------  ---------- -------   ---------  --------- 
                                                   (in thousands)

Assets
  Interest-bearing deposits
<S>                          <C>         <C>        <C>       <C>        <C>         <C>     
     with banks              $   4,221   $  4,220   $  4,231  $   4,221  $   3,977   $  4,007
Liabilities
  Deposits with stated
     maturities                204,744    205,199    102,083    102,800     87,854     87,047
  Borrowings with stated
        maturities
     Short-term                 10,038     10,000      5,003      5,000       --         --
     Long-term                  89,422     88,359     67,648     68,359       --         --
</TABLE>


                                   (Continued)

                                       55

<PAGE>

                    TF Financial Corporation and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1996 and 1995


NOTE P - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued

   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,
                                -----------------------------------------------------------------------
                                        1996                   1995                       1994
                                -------------------   -----------------------   -----------------------
                                Estimated             Estimated                 Estimated
                                   fair    Carrying      fair        Carrying      fair        Carrying
                                  value     value       value         value       value          value
                                ---------  --------   ----------    ----------  ---------     ----------
                                                   (in thousands)

Deposits with no stated
<S>                              <C>        <C>        <C>          <C>          <C>          <C>     
  maturities                     $263,889   $263,889   $234,269     $234,269     $260,584     $260,584
                                 ========   ========   ========     ========     ========     ========

   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>

<TABLE>
<CAPTION>
                                                    December 31,
                         -------------------------------------------------------------------
                                   1996                  1995                   1994
                         --------------------   ---------------------   --------------------
                         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             $307,942  $309,570    $242,154     $238,275    $111,700   $113,893
                           =======   =======     =======      =======     =======    =======
</TABLE>

   There is no material difference between the carrying amount and the estimated
   fair value of off-balance-sheet  items totalling approximately $29.1 million,
   $51.6  million  and $6.1  million  at  December  31,  1996,  1995  and  1994,
   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 - CONVERSION TO STOCK FORM OF OWNERSHIP

   On July 13,  1994,  the  Association  pursuant to a plan of  conversion  (the
   Plan), completed its conversion from a federally chartered mutual savings and
   loan association to a federally chartered stock savings bank via the issuance
   of common stock.  Pursuant to the Plan, the Bank transferred all of its newly
   issued shares to a newly organized holding company, TF Financial Corporation,
   and the Corporation  sold 5.3 million shares of common stock at $10 per share
   which, after giving effect to offering expenses of $1.2 million,  resulted in
   net cash proceeds of $51.7 million.

                                   (Continued)

                                       56

<PAGE>

                    TF Financial Corporation and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1996 and 1995


NOTE Q - CONVERSION TO STOCK FORM OF OWNERSHIP - Continued

   In the  event  of a  complete  liquidation  (and  only in such  event),  each
   eligible  savings  account  holder will be entitled to receive a  liquidation
   distribution  from the liquidation  account in the amount of the then current
   adjusted balance of deposit accounts held before any liquidation distribution
   may be made with respect to the common  shares.  Except for the repurchase of
   stock and payment of dividends by the Bank, the existence of the  liquidation
   account  will not restrict the use or further  application  of such  retained
   earnings.

   At the date of the conversion,  the Bank established a liquidation account in
   an amount equal to retained earnings reflected in the statements of financial
   position used in the conversion  offering circular.  The liquidation  account
   will be maintained for the benefit of eligible  savings  account  holders who
   maintained deposit accounts in the Bank after conversion.

   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 R - SERVICE FEES, CHARGES AND OTHER OPERATING INCOME AND OTHER OPERATING
         EXPENSE

<TABLE>
<CAPTION>
                                                                Six-month
                                                               period ended   Year ended
                                      Year ended December 31,  December 31,    June 30,
                                         1996        1995          1994          1994
                                      ---------- -----------   ------------   ----------
                                                              (in thousands)
     Service fees, charges and other 
       operating income
<S>                                     <C>         <C>        <C>           <C>      
        Loan servicing fees             $     577   $     395  $       95    $     382
        Late charge income                     98          83          39           97
        Deposit service charges               439         435         236          499
        Recovery of local taxes                 -           -           -          386
        Other income                          156         150          81          366
                                         --------    --------   ---------     --------

                                         $  1,270    $  1,063   $     451     $  1,730
                                          =======     =======    ========      =======
     Other operating expense
        Employee education             $       22  $       35  $       11 $       25
        Insurance and surety bond             129         129          89        199
        Office supplies                       272         218         108        169
        Postage                               207         173          80        184
        Telephone                             103          77          38         79
        Service charges on bank accounts       83          82          31        122
        Supervisory examination fees          112         103          49         89
        Other expenses                      1,079         761         279        848
                                          -------   ---------    --------   --------

                                         $  2,007   $   1,578   $     685  $   1,715
                                          =======    ========    ========   ========
</TABLE>

                                       57

<PAGE>

                    TF Financial Corporation and Subsidiaries


             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1996 and 1995


NOTE S - 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.

   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.





                                       58

<PAGE>



                    TF Financial Corporation and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1996 and 1995


NOTE T - SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>

                                                       Three months ended
                                             ---------------------------------------
                                              Dec. 31, Sept. 30,  June 30, March 31,
                                                1996     1996       1996     1996
                                             -------- ---------  -------  ----------
<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 before income tax provision     1,968     (311)    1,931    2,323
   Income tax provision                           776     (102)      829      929
                                               ------    ------   ------   ------
         Net income                           $ 1,192  $  (209)  $ 1,102 $  1,394
                                               ======   ======    ======   ======
Earnings per share (1)                        $  0.29   $(0.05)  $  0.26 $   0.32

</TABLE>

<TABLE>
<CAPTION>


                                                   Three months ended
                                           ------------------------------------
                                           Dec. 31, Sept. 30, June 30, March 31,
                                             1995     1995     1995     1995
                                             ----    -----   -------   ------
<S>                                        <C>      <C>      <C>      <C>    
   Total interest income                   $ 8,019  $ 7,425  $ 7,093  $ 7,093
   Total interest expense                    4,122    3,657    3,422    3,202
                                            ------   ------   ------  -------
         Net interest income                 3,897    3,768    3,671    3,891
   Provision for possible loan losses           21       21       15       15
                                            ------   ------   ------   ------
         Net interest income after provision 3,876    3,747    3,656    3,876
   Other income                                311      352      252      246
   Other expenses                            2,507    2,556    2,410    2,404
                                            ------   ------   ------   ------
         Income before income tax provision  1,680    1,543    1,498    1,718
   Income tax provision                        666      594      599      709
                                            ------   ------   ------   ------
         Net income                         $1,014  $   949      899  $ 1,009
                                            ======   ======   ======   ======
Earnings per share (1)                      $ 0.23  $  0.20  $  0.19  $  0.21

</TABLE>

(1) Per share data  presented  represents  both primary and fully  diluted share
computations.




                    TF Financial Corporation and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1996 and 1995


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,
                                                               1996           1995
                                                                 (in thousands)
      ASSETS

<S>                                                           <C>         <C>      
   Cash                                                       $      70   $     199
        Certificates of deposit - other institutions                154         150
        Investment in Third Federal                              59,208      55,500
        Investment in TF Investments                             27,580      26,224
        Other assets                                                 12           6
                                                           ------------------------

               Total assets                                   $  87,024   $  82,079
                                                               ========    ========

      LIABILITIES AND STOCKHOLDERS' EQUITY
        Loan payable to TF Investments                        $   9,740   $   8,718
        Payable to Third Federal and other liabilities            4,709          29
                                                              ---------  ----------

        Total liabilities                                        14,449       8,747

        Stockholders' equity                                     72,575      73,332
                                                               --------    --------

               Total liabilities and stockholders' equity     $  87,024   $  82,079
                                                               ========    ========
</TABLE>


                                       60
<PAGE>



                                   (Continued)
                    TF Financial Corporation and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1996 and 1995


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

                              STATEMENT OF EARNINGS
<TABLE>
<CAPTION>
                                                                             Six-month
                                                                            period ended
                                                 Year ended December 31,    December 31,
                                                -------------------------               
                                                    1996       1995            1994
                                                ---------   ----------       -----------
1994
                                                             (in thousands)
<S>                                           <C>           <C>              <C>       
                                                                               
     INCOME                                                                 
        Dividend income from subsidiaries     $         -   $   4,220        $        -
        Interest income                                10           6                 -
                                                ---------   ---------        ----------
            Total income                               10       4,226                 -
                                                ---------   ---------        ----------
      EXPENSES                                                               
        Interest                                      722         118                 -
        Other                                                     257               257                         56
                                                           ----------          --------                -----------
            Total expenses                            979         375                56
                                                ---------  ----------         ---------
            (Loss) income before income                                      
                taxes and undistributed                                      
                earnings of subsidiaries             (969)      3,851               (56)
      Income taxes                                    -           -                   -
                                                ---------------------        ----------
            (Loss) income before                                             
                undistributed earnings                                       
                of subsidiaries                      (969)      3,851               (56)
      Undistributed earnings of subsidiaries        4,448          20             2,663
                                                ---------  ----------           -------  
            NET INCOME                        $     3,479   $   3,871          $  2,607
                                                =========   =========           =======
                                                                             
</TABLE>
                                                                             
                                                                             
                                       61
<PAGE>
                      

                                   (Continued)
                    TF Financial Corporation and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1996 and 1995


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

                             STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>

                                                                                                                Six-month
                                                                                                               period ended
                                                                                Year ended December 31,        December 31,
                                                                                -------------------------------
                                                                                   1996       1995                1994
                                                                                ---------   ---------        ---------------
                                                                                          (in thousands)
<S>                                                                             <C>         <C>                 <C>     

   Cash flows from operating activities
     Net income                                                                 $  3,479    $  3,871            $  2,607
     Adjustments to reconcile net income to net cash
       provided by operating activities
         Undistributed earnings from subsidiaries                                 (4,448)                           (20)     (2,663)
         Net change in assets and liabilities                                      4,676         (20)                 41
            Net cash provided by operating activities                              3,707       3,831                 (15)
                                                                                                                --------
   Cash flows from investing activities
     Capital contributions to subsidiaries                                          --          --               (47,479)
     Purchase and maturities of certificates of deposit
       in other financial institutions, net                                           (4)       (151)               --
                                                                                --------    --------            --------
            Net cash used in investing activities                                     (4)       (151)
                                                                                --------    --------            --------
   Cash flows from financing  activities Net proceeds from issuance of common
     stock after
       considering benefit plans                                                    --          --                47,499
     Cash dividends paid to stockholders                                          (1,258)     (1,088)               --
     Net increase in borrowings from TF Investments                                1,022                           8,718        --
     Treasury stock acquired                                                      (3,596)    (11,116)               --
                                                                                --------    --------            --------
            Net cash (used in) provided by financing
               activities                                                         (3,832)     (3,486)             47,499
                                                                                --------    --------            --------
            NET (DECREASE) INCREASE IN CASH
               AND CASH EQUIVALENTS                                                 (129)        194                   5
   Cash and cash equivalents at beginning of period                                  199           5                --
                                                                                                                --------
   Cash and cash equivalents at end of period                                   $     70    $    199            $      5
                                                                                ========    ========            ========
Supplemental disclosures
   Cash paid during the year for income taxes                                   $     80    $     32            $      -
                                                                                ========    ========            ========
</TABLE>

                                       62