TF FINANCIAL CORPORATION 2001 ANNUAL REPORT


<PAGE>

                                                                        CONTENTS


                                                       To Our Stockholders     1

                               Corporate Profile and Related Information       2

                             Selected Financial Information and Other Data     3

              Management's Discussion and Analysis of Financial Conditions
                                                 and Results of Operations     5

                       Report of Independent Certified Public Accountants     11

                            Consolidated Statements of Financial Position     12

                                      Consolidated Statements of Earnings     13

                Consolidated Statement of Changes in Stockholder's Equity     14

                                    Consolidated Statements of Cash Flows     15

                               Notes to Consolidated Financial Statements     17

                                   Board of Directors and Management Team     46

                                                         Office Locations     47




<PAGE>


To Our stockholders


This past year has been a very  challenging  time for banks. The Federal Reserve
moved aggressively to spur economic activity by reducing the fed funds rate from
6.50% in  January  to a low of 1.75% by  year-end.  Bank loan  portfolio  yields
dropped  rapidly as borrowers  refinanced  at the lower rates.  With the economy
entering a recession and the stock market dropping, insured bank deposits became
the safe haven for the consumer's  financial  wealth.  Deposit yields dropped to
historic  lows but at least the  principal  was  protected  from loss.  For many
banks,  this resulted in a reduced net interest  spread coupled with a reduction
in loan quality caused by the recession.

Branch  profitability  analysis  indicated  that  two of our  offices  were  not
performing  according to our expectations.  During the first quarter of 2001, we
closed our office in Princeton,  NJ. This office was acquired in September  1996
as part of the  purchase of three  offices  from  Cenlar  Federal  Savings.  The
deposits were  transferred  to our new  Quakerbridge  office.  During the fourth
quarter, we sold the deposits of our Warminster, Pa. Office.

We are very proud of our  performance  during this difficult  year. Our interest
rate spread  increased from 2.70% in 2000 to 2.74% for 2001.  Loans  outstanding
increased 4.37% to $377.6 million.  Deposits  increased 5.29% to $422.1 million.
We repurchased a total of 60,900 shares of our stock during the year. Net income
increased 27.91% to $5.733 million and basic earnings per share increased 31.82%
to $2.32.  Return on equity at 10.42%  represents an increase of 13.51% over the
previous  year. All of this has helped our stock price increase 26% to $21.10 at
December 31,2001.  As a result, we were able to increase our quarterly  dividend
twice during the year to $0.15 per share.

Our bank has taken every opportunity to move forward in our mission to serve the
community.  This  past  year we met the  ever-changing  needs  of our  customers
through  newly  implemented  Sunday hours in each of our market  areas.  We will
continue to blend the products and services of a large regional  commercial bank
with the personal  attention of a community bank for a truly unique  experience.
Management and the Board of Directors are committed to  implementing  the latest
technology  necessary  to  further  assist  us in our  mission  to become a full
service community bank.

Your  continued  support has enabled us to achieve these  results.  The Board of
Directors and I would like to express our appreciation for your confidence.



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


                                        -1-
<PAGE>

Corporate Profile and Related Information

TF Financial  Corporation  (the  "Corporation")  is the parent  company of Third
Federal Savings Bank ("Third  Federal" or the "Savings Bank") and its subsidiary
Third  Delaware  Corporation,  TF  Investments  Corporation,  Teragon  Financial
Corporation and Penns Trail Development Corporation. At December 31, 2001, total
assets  were  approximately  $711.2  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,
2001,  total  stockholders'   equity  was  approximately   $58.0  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."  Deposits of Third
Federal have been federally  insured since 1935 and are currently  insured up to
the maximum amount allowable by the Federal Deposit  Insurance  Corporation (the
"FDIC").  Third Federal is a community oriented savings  institution  offering a
variety  of  financial  services  to meet the needs of the  communities  that it
serves.  Third  Federal  expanded  its  operations  in  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 branch offices and  approximately  $143 million of deposits
from Cenlar Federal Savings Bank.  Third Federal added a fourth branch office in
Mercer County in December,  1999 with the  Corporation's  acquisition of Village
Financial  Corporation  ("Village").  During  the  first  quarter  of  2000  the
Corporation closed the branch facility in its administrative office location and
simultaneously opened a larger, freestanding branch at a nearby site. During the
first quarter of 2001 the  Corporation  closed its branch facility in Princeton,
New Jersey and transferred  the deposits to its branch office in  Lawrenceville,
New  Jersey.  During  December  2001 the  Corporation  closed  the sale of $10.2
million in deposits  at what had been a leased  branch  facility in  Warminster,
Pennsylvania.  As of December 31, 2001 Third Federal  operated  thirteen  branch
offices in Bucks and Philadelphia counties,  Pennsylvania and Mercer County, New
Jersey.

Third Federal attracts  deposits  (approximately  $422.1 million at December 31,
2001) from the general public and uses such deposits,  together with  borrowings
mainly  from the  Federal  Home Loan Bank of  Pittsburgh  (approximately  $222.4
million at  December  31,  2001) and other  funds,  primarily  to  originate  or
purchase loans secured by first mortgages on owner-occupied,  one-to-four family
residences,  or purchase  securities  secured by such loans.  Third Federal also
originates  and  purchases   commercial  real  estate  and  multi-family  loans,
construction   loans  and  consumer  loans,   and  purchases  other   investment
securities.

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 number of  shareholders  of record of common stock as of March 18, 2002, was
approximately  600.  This does not reflect the number of persons or entities who
held stock in nominee or "street" name through various brokerage firms.

Dividend Policy

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

Stock Price and Dividend History


Quarter ended                    Quoted market price
                                 --------------------   Dividend paid
                                    High        Low       per share
                                 --------     -------   -------------

December 31, 2001                 $21.750     $18.880       $0.15
September 30, 2001                $23.700     $17.800       $0.15
June 30, 2001                     $19.790     $16.950       $0.14
March 31,2001                     $18.063     $15.625       $0.14
December 31, 2000                 $16.750     $13.250       $0.13
September 30, 2000                $15.000     $13.438       $0.13
June 30, 2000                     $14.875     $13.250       $0.13
March 31,2000                     $15.750     $12.750       $0.13



                                      -2-
<PAGE>




SELECTED FINANCIAL INFORMATION AND OTHER DATA
<TABLE>
<CAPTION>

(Dollars in thousands, except per share data)                                 At December 31,
                                                      -----------------------------------------------------------------
Financial Condition                                      2001           2000          1999         1998         1997
                                                      -----------------------------------------------------------------

<S>                                                <C>           <C>           <C>          <C>          <C>
Total assets                                          $711,204      $723,297      $721,874     $665,608     $597,047
Loans receivable, net                                  377,635       361,806       287,979      240,841      250,711
Mortgage-backed securities
  available for sale, at fair value                     99,763        97,914       132,515       75,285       36,847
Mortgage-backed securities
  held to maturity, at cost                             93,367       135,142       159,888      180,964      144,074
Securities purchased
  under agreements to resell                                 -             -             -            -       10,000
Investment securities available
  for sale, at fair value                               22,671        18,865        21,930        9,042       32,037
Investment securities held
  to maturity, at cost                                   9,866        63,461        66,760       80,895       52,822
Cash and cash equivalents(l)                            69,139        10,618        16,715       42,703       41,625
Deposits                                               422,052       400,851       401,698      438,913      450,429
Advances from the Federal Home
  Loan Bank and other borrowings                       222,359       259,821       264,299      163,359       88,359
Retained earnings                                       56,370        52,061        48,905       45,842       43,176
Total stockholders' equity                              57,975        53,109        48,447       52,660       50,095
Book value per common share                             $23.51        $21.32        $18.81       $18.43       $17.36
Tangible book value
  per common share                                      $21.44        $18.99        $16.26       $15.84       $14.49
                                                      -----------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
                                                                   At or for the year ended December 31,
                                                      -----------------------------------------------------------------
Summary of Operations                                    2001           2000          1999        1998(2)       1997
                                                      -----------------------------------------------------------------
<S>                                                 <C>           <C>           <C>          <C>          <C>
Interest income                                        $46,747       $48,708       $47,022      $43,579      $43,189
Interest expense                                        26,908        28,921        27,974       26,195       24,080
Net interest income                                     19,839        19,787        19,048       17,384       19,109
Provision for loan losses                                  500           410           300           60          397
Non-interest income                                      3,172         1,432         1,589        1,535        2,327
Non-interest expense                                    14,708        14,404        13,529       12,722       13,583
Net income before cumulative effect
  of change in accounting method                         5,733         4,482         4,422        3,830        4,874
Net income                                               5,733         4,482         4,422        4,038        4,874
Earnings per common share - basic
Continuing operations                                    $2.32         $1.76         $1.60        $1.32        $1.33
Cumulative effect of
  accounting change                                          -             -             -        $0.07            -
Earnings per common share - basic                        $2.32         $1.76         $1.60        $1.39        $1.33
Earnings per common share - diluted
Continuing operations                                    $2.15         $1.71         $1.52        $1.20        $1.25
Cumulative effect of accounting change                       -             -             -        $0.06            -
Earnings per common share - diluted                      $2.15         $1.71         $1.52        $1.26        $1.25
                                                       -----------------------------------------------------------------

</TABLE>

                                                                       Continued
                                       -3-
<PAGE>

Selected Financial Information and Other Data - Continued

<TABLE>
<CAPTION>


Performance Ratios and Other Selected Data               2001           2000          1999        1998         1997
                                                      -----------------------------------------------------------------
<S>                                                  <C>         <C>            <C>         <C>          <C>
Return on average assets                                 0.82%         0.63%         0.62%        0.58%        0.77%
Return on average equity                                10.42%         9.18%         8.60%        7.39%        7.39%
Average equity to average assets                         7.83%         6.86%         7.17%        7.74%       10.46%
Average interest rate spread                             2.74%         2.70%         2.54%        2.44%        2.72%
Non-performing loans to total assets                     0.53%         0.20%         0.18%        0.24%        0.23%
Non-performing loans to total loans                      0.99%         0.41%         0.45%        0.65%        0.55%
Allowance for loan losses to
  non-performing loans                                  52.22%       115.97%       145.56%      119.16%      146.82%
Allowance for loan losses to total loans                 0.52%         0.47%         0.66%        0.78%        0.80%
Savings Bank regulatory capital
  Core                                                   6.95%         6.18%         5.76%        6.79%        7.16%
  Tangible                                               6.95%         6.18%         5.76%        6.79%        7.16%
  Risk based                                            14.95%        11.97%        12.83%       17.73%       17.41%
Dividend payout ratio (3)                               26.98%        30.41%        32.24%       38.10%       32.00%
                                                      -----------------------------------------------------------------
</TABLE>


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

(2)  Income and income  related  ratios for the  year-ended  December  31,  1998
     include  the  cumulative  effect  of a change  in  accounting  for  certain
     investments of $208,000 (SFAS #133).

(3)  Payout  ratio is  dividends  paid for the period  divided by  earnings  per
     common share - diluted after cumulative effect of accounting change.


                                      -4-
<PAGE>

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

General

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

This  document  contains  statements  that project the future  operations of the
Corporation  which involve risks and  uncertainties.  The  Corporation's  actual
results  may  differ   significantly   from  the  results   discussed  in  these
forward-looking   statements.    Statements   concerning   future   performance,
developments,  events,  expectations  for growth and market  forecasts,  and any
other guidance on future periods,  constitute  forward-looking  statements which
are  subject to a number of risks and  uncertainties,  including  interest  rate
fluctuations  and  government  and  regulatory  actions which might cause actual
results  to  differ  materially  from  stated  expectations  or  estimates.  The
Corporation does not undertake to update any forward-looking statement,  whether
written  or oral,  that may be made  from  time to time by or on  behalf  of the
Corporation.

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 Third  Federal  incurs on its  deposits,
borrowings  and  other  sources  of  funds.  In  addition,  the mix of the Third
Federal's  interest bearing assets and liabilities can have a significant effect
on the Third Federal's net interest  income;  loans generally have higher yields
than securities;  retail deposits generally have lower interest rates than other
borrowings.

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

Changes to Financial Condition

Assets. The Corporation's total assets at December 31, 2001 were $711.2 million,
a  decrease  of $12.1  million  during  the year.  The  decrease  was mainly the
combined result of the net change in various asset  categories as described more
fully below.

Loans receivable, net increased by $15.8 million or 4.4%. During the year market
interest rates were relatively low compared to the interest rates many borrowers
were paying the Bank on loans held in the Bank's loan portfolio  causing a large
number of borrowers  with the higher coupons to refinance  their loans.  Many of
these loans were  refinanced  elsewhere.  Thus, the Bank subsidized its own loan
originations with approximately $74.6 million in loan purchases.

Investment  securities  held to maturity  decreased by $53.6 million during 2001
mainly as a result of $64.5  million in  callable  investment  securities  being
called  during the 2001,  primarily  during  the first  half of the year.  These
callable bonds had been yielding the  Corporation  5.93% at the beginning of the
year.  The cash  proceeds  from these  securities  were  invested  in fed funds,
earning  approximately  the federal  funds rate minus 25 basis  points,  for the
remainder of the year. As a result,  the Corporation's cash and cash equivalents
increased by $58.5 million during 2001.  While this cash was  accumulating,  the
Federal Reserve Board lowered the federal funds rate; the rate stood at 6.50% on
January 1, 2001 and was lowered eleven times to 1.75% at December 31, 2001. Thus
the  Corporation's  increasing cash was reinvested at a time of falling interest
rates and thus had a negative effect on the Corporation's interest income.

Mortgage-backed  securities  held to maturity  decreased by $41.8 million during
2001. This decrease  occurred due to the increased  prepayment of the underlying
mortgages  comprising  the  securities,  which was the result of near record low
mortgage rates during the second half of 2001,  resulting in an increased number
of  mortgagors  refinancing  their  mortgages  into  lower  interest  rates.  In
addition,  the  Corporation  sold $4.9  million of  mortgage-backed  securities,
mainly during the first quarter of 2001.

The Corporation's other assets increased by $8.9 million during 2001 as a result
of the Savings Bank's purchase of $9.0 million in bank-owned life insurance. The
increase in the cash surrender value associated with such insurance was $174,000
during  2001 and is  included  in other  operating  income in the  Corporation's
consolidated statement of earnings.

Liabilities. The Corporation's total liabilities were $653.2 million at December
31, 2001, a decrease of $17.0 million during 2001.

Deposits  increased by $21.2 million;  certificates of deposit decreased by $8.9
million,  while the remaining or "core"  deposit  categories  increased by $30.1
million.  These net  changes  occurred  even  after the sale of $3.7  million in
certificates of deposit, and $7.1 million in other core deposits during December
of 2001.  Management believes that deposit growth occurred mainly as a result of
increased sales initiatives and focused advertising campaigns implemented by the
Corporation,  but also due to external  factors that were causing deposit growth
to occur throughout the community banking industry.

Advances  from the Federal  Home Loan Bank and other  borrowings  (collectively,
"borrowings")  decreased by $37.5 million.  Throughout the year the  Corporation
used excess cash from loan and  security  repayments,  and deposit  increases to
repay maturing borrowings.

Stockholder'  equity.  Total  consolidated  stockholders'  equity increased $4.9
million to $58.0  million at  December  31,  2001.  The  increase is largely the
result  of  $5.7  million  in  net  income,  plus  a $1.1  million  increase  in
accumulated other comprehensive income, less $1.4 million in cash dividends paid
to the Corporation's  common  stockholders,  less a $0.7 million increase in the
cost  of  treasury   stock.   During  the  year  the   Corporation   repurchased
approximately  60,900  shares of its common stock at an average  price of $18.19
per share.

                                       -5-
<PAGE>


Average Balance Sheet

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

<TABLE>
<CAPTION>
                                           2001                           2000                         1999
                            ----------------------------------------------------------------------------------------------
                            Average               Average     Average             Average     Average             Average
                            Balance     Interest  Yld/Cost    Balance   Interest  Yld/Cost    Balance   Interest  Yld/Cost
                            ----------------------------------------------------------------------------------------------

<S>                         <C>        <C>       <C>       <C>        <C>        <C>       <C>        <C>       <C>
ASSETS
Interest-earning assets:
Loans receivable (4)          $359,928   $28,443    7.90%    $299,770   $23,756     7.92%    $285,439   $21,843    7.65%
Mortgage-backed
  securities                   212,951    13,749    6.46%     278,434    18,449     6.63%     278,537    17,831    6.40%
Investment securities           51,384     3,015    5.87%     100,274     6,180     6.16%     113,731     6,646    5.84%
Other interest-
  earning assets(1)             49,206     1,540    3.13%       5,236       323     6.17%      14,331       702    4.90%
                              --------   -------             --------   -------              --------   -------
Total interest-
  earning assets               673,469    46,747    6.94%     683,714    48,708     7.12%     692,038    47,022    6.79%
                                         -------                        -------                         -------
Non interest-
  earning assets                29,202                         28,529                          25,803
                              --------                       --------                        --------
Total assets                   702,671                        712,243                         717,841
                              ========                       ========                        ========
LIABILITIES AND
STOCKHOLDERS'EQUITY:
Interest-bearing liabilities
Deposits                       409,688    14,043    3.43%     410,330    15,082     3.68%     416,514    14,645    3.52%
Advances from the
  FHLB and borrowings          230,078    12,865    5.59%     243,656    13,839     5.68%     240,371    13,329    5.55%
                              --------   -------             --------   -------              --------   -------
Total interest-bearing
  liabilities                  639,766    26,908    4.20%     653,986    28,921     4.42%     656,885    27,974    4.26%
                                         -------                        -------                         -------
Non interest-bearing
  liabilities                    7,865                          9,432                           9,514
                              --------                       --------                        --------
Total liabilities              647,631                        663,418                         666,399
Stockholders' equity            55,040                         48,825                          51,442
                              --------                       --------                        --------
Total liabilities and
  stockholders' equity        $702,671                       $712,243                        $717,841
                              ========                       ========                        ========
Net interest income                      $19,839                        $19,787                         $19,048
                                        ========                       ========                        ========
Interest rate spread (2)                            2.74%                           2.70%                          2.53%
Net yield on interest-
  earning assets(3)                                 2.95%                           2.89%                          2.75%
Ratio of average
  interest-earning assets
  to average interest
  bearing liabilities                                105%                            105%                           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)  Nonaccrual loans have been included in the appropriate average loan balance
     category,  but  interest  on  nonaccrual  loans has not been  included  for
     purposes of determining interest income.


                                      -6-
<PAGE>

Rate/Volume Analysis

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

<TABLE>
<CAPTION>

                                                   2001 Vs 2000                     2000 Vs 1999
                                            Increase (decrease) due to       Increase (decrease) due to
                                         -----------------------------------------------------------------
                                           Volume      Rate        Net      Volume      Rate       Net
                                         -----------------------------------------------------------------
<S>                                       <C>         <C>       <C>        <C>          <C>     <C>
Interest income:
Loans receivable, net                        $4,740       $(53)    $4,687     $1,123        $790    $1,913
Mortgage-backed securities                   (4,229)      (471)    (4,700)        (7)        624       617
Investment securities                        (2,884)      (281)    (3,165)      (816)        350      (466)
Other interest-earning assets                 1,450       (233)     1,217       (525)        147      (378)
                                         -----------------------------------------------------------------
Total interest-earning assets                  (923)    (1,038)    (1,961)      (225)      1,911     1,686
                                         =================================================================
Interest expense:
Deposits                                        (23)    (1,016)    (1,039)      (221)        658       437
Advances from the FHLB and borrowings          (761)      (213)      (974)       188         322       510
                                         -----------------------------------------------------------------
Total interest-bearing liabilities             (784)    (1,229)    (2,013)       (33)        980       947
                                         =================================================================
Net change in net interest income             $(139)      $191        $52      $(192)       $931      $739
                                         =================================================================
</TABLE>


       Comparison of Years Ended December 31, 2001 and December 31, 2000

Net Income. Net income was $5.733 million for the fiscal year ended December 31,
2001,  an  increase  of $1.251  million  or 27.9%  compared  with the year ended
December 31, 2000.

In addition,  the  Corporation's  basic earnings per share increased by 31.8% to
$2.32 per share during 2001,  exceeding the  percentage  growth in net income by
14%, due to the 25,468 net decrease in shares  outstanding during the year. This
decrease occurred as the combined result of the Corporation's  share repurchases
during 2001,  which resulted in the repurchase of 60,900 shares of common stock,
less 23,276 shares issued as a result of stock option  exercises and less 12,156
shares allocated to employee stock ownership plan participants at year end.

Total  Interest  Income.  For the year ended  December 31, 2001,  total interest
income  decreased to $46.7 million compared to $48.7 million from the year ended
December 31, 2000. The $2.0 million  decrease in interest  income was mainly the
result of a $65.5  million  decrease in the average  balance of  mortgage-backed
securities  and a $48.9  million  decrease in the average  balance of investment
securities.  These  decreases  were  mainly  the direct  result of lower  market
interest  rates  during  2001  compared  to 2000,  causing  an  acceleration  of
prepayments  of the  Corporation's  mortgage-backed  securities  and  the  early
redemption  or  "call" of the  callable  bonds in the  Corporation's  investment
securities  portfolios.  The Corporation was able to reinvest a portion of these
proceeds into loans receivable that on average increased by $60.1 million during
2001.  However,  an average of $49.2  million  was  maintained  in cash and cash
equivalents,  earning an average interest rate of 3.13%,  which is substantially
less than these funds were earning while invested in mortgage-backed  securities
or investment securities.

At  year-end  2001,  cash and cash  equivalents  totaled  $69.1  million and was
earning the federal  funds rate minus 25 basis  points or  approximately  1.50%.
Thus, the Corporation's  earnings during 2002 will be significantly  affected by
the general level of market interest rates and the timing of its reinvestment of
cash and cash equivalents into other interest-bearing  assets, or the use of the
cash and cash equivalents to reduce interest-bearing liabilities.

Total Interest  Expense.  Total interest expense decreased to $26.9 million from
$28.9  million  for the year ended  December  31, 2001  compared  to 2000.  This
decrease is mainly the result of lower market  interest  rates during the period
and,  consequently,  lower rates paid on the  Corporation's  new certificates of
deposit. In addition, the Corporation lowered the interest rates paid on several
of its other  deposit  products  in order to keep  them in line with  short-term
market  interest rates,  mainly the federal funds rate.  During 2001 the Federal
Reserve  Board  lowered  the federal  funds rate eleven  times by a total of 475
basis points.  The  Corporation  reacted to this  situation by lowering  certain
administered  deposit  account  rates by 25 to 75 basis points during the fourth
quarter of 2001.

Allowance for Loan Losses.  The allowance for loan losses was approximately $2.0
million  at  December  31,  2001 and $1.7  million at  December  31,  2000.  The
provision for loan losses was $500,000 during 2001 compared with $410,000 during
2000. Charge-offs were $242,000 during 2001 compared to $613,000 during 2000. In
addition,  the allowance for loan losses was 0.52% of gross loans  receivable at
December  2001  compared  with 0.47% at  December  31,  2000 while  gross  loans
receivable  grew  by  approximately


                                        -7-
<PAGE>


$16.1  million.  Thus, the growth in the allowance for loan losses is consistent
with the growth in the loan portfolio and the level of actual charge-offs. While
management  maintains Third  Federal's  allowance for losses at a level which it
considers  to be  adequate  to  provide  for  probable  losses,  there can be no
assurance that further additions will not be made to the allowance and that such
losses will not exceed the estimated amounts.

Non-Interest  Income.  Total  non-interest  income was $3.2 million  during 2001
compared with $1.4 million during 2000.  Several items had an impact on the $1.8
million  increase in non-interest  income.  The Corporation  recorded a one-time
gain of $1.1  million  related to the sale of $10.8  million in deposits and the
related closure of its Warminster,  Pennsylvania branch office. In addition, the
Corporation  recorded a $444,000  non-recurring gain on the sale of $1.3 million
of land that had been held as a potential site for an  administrative  facility.
Finally,  Third  Federal  purchased $9 million in bank-owned  life  insurance on
approximately  September  1, 2001.  This asset  produced an increase in its cash
surrender  value of  $174,000  during  2001,  which  income is included in other
operating income.

Non-interest  Expense.  Total non-interest  expense increased by $304,000 during
2001  compared to 2000.  This increase  occurred  mainly from a $489,000 or 6.6%
increase in employee  compensation  and benefits.  In addition,  during 2001 the
Corporation decreased its advertising  expenditures by $204,000 and decreased by
$122,000 other operating expenses,  mainly those related to bank service charges
because the Corporation  ceased using a third-party bank for its item processing
activities and rather used its own personnel and technology.

Income Tax Expense.  The Corporation's  effective tax rate was 26.5% during 2001
compared to 30.0% during 2000. The decrease  occurred as a result of certain tax
reduction efforts initiated during 2001 and 2000.


       Comparison of Years Ended December 31, 2000 and December 31, 1999

Net Income. Net income was $4.482 million for the fiscal year ended December 31,
2000, an increase of $60,000 compared with the year ended December 31, 1999.

While net income is essentially  unchanged from 1999,  the  Corporation's  basic
earnings  per share  increased  by 10% to $1.76 per share during 2000 due to the
84,706  net  decrease  in shares  outstanding  during  the year.  This  decrease
occurred as a result of the Corporation's  share  repurchases  during 2000 which
resulted in the repurchase of 138,112 shares of common stock, less 41,250 shares
issued as a result of stock option exercises and less 12,156 shares allocated to
employee stock ownership plan participants at year end.

Total  Interest  Income.  For the year ended  December 31, 2000,  total interest
income  increased to $48.7 million compared to $47.0 million from the year ended
December 31, 1999. The $1.7 million  increase in interest  income was mainly the
result of a $14.3 million  increase in the average  balance of loans  receivable
combined  with a 27 basis point  increase in the average  rate  received on such
loans.  This rate increase is the result of the  Corporation's  loan origination
and  purchase  activities  during 2000,  a period  during which market  interest
rates,  and thus the  interest  rates on new loans  closed and  purchased,  were
higher than those on the Corporation's existing portfolio.

Interest  income also  increased due to a 23 basis point increase in the average
interest  rate on  mortgage-backed  securities.  This rate  increase also is the
result of the Corporation's  securities purchases during 2000, a period in which
market  interest  rates on new purchases  exceeded  those  interest rates on the
Corporation's existing mortgage-backed securities.

Total Interest  Expense.  Total interest expense  increased to $28.9 million for
the year ended  December 31, 2000.  This increase is mainly the result of higher
market interest rates during the period and, consequently,  higher rates paid on
the Corporation's new certificates of deposit and borrowings.

Allowance for Loan Losses.  The allowance for loan losses was approximately $1.7
million  at  December   31,  2000  and  $1.9   million  at  December  31,  1999.
Non-performing  loans were  approximately  $1.5  million at  December  31,  2000
compared to $1.4 million a year earlier.  Charge-offs  were $613,000 during 2000
compared to $292,000  during 1999.  The increase in  charge-offs  during 2000 is
largely  the result of a  one-time,  comprehensive  review of the  Corporation's
student loan  portfolio.  At December 31, 2000 the allowance for loan losses was
116.0% of non-performing  loans as compared to 145.6% of non-performing loans at
December 31, 1999.  While  management  maintains Third  Federal's  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 was $1.4 million  during 2000
compared with $1.6 million during 1999.  During 1999 the Corporation  recorded a
one-time  gain of  $350,000  on the  sale of real  estate  held  for  investment
compared to no such gain during 2000.

Non-Interest  Expense.  Total non-interest  expense increased by $875,000 during
2000 compared to 1999. This increase  occurred mainly from $569,000  increase in
employee  compensation  and benefits,  the result of the full year effect of two
new  branch  offices,  lending,  sales and  support  staff  associated  with the
expansion of the  Corporation's  retail banking  facilities  throughout 1999 and
early 2000. In addition,  during 2000 the Corporation  increased its advertising
expenditures by $391,000 and decreased by $333,000  expenditures  related to the
use of outside professional services for special projects.

Income Tax Expense.  The Corporation's  effective tax rate was 30.0% during 2000
compared to 35.1% during 1999. The decrease  occurred as a result of certain tax
reduction efforts initiated during 1998 and 1999.


                                      -8-
<PAGE>

                        Liquidity and Capital Resources

Liquidity.  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 sources 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. As
of  December  31,  2001,  such  borrowed  funds  totaled  $222.4  million.  Loan
prepayments,  maturing investments and mortgage-backed  security prepayments are
greatly   influenced  by  general  interest  rates,   economic   conditions  and
competition.

The amount of  certificate  accounts  that are  scheduled  to mature  during the
twelve months ending December 31, 2002, is approximately  $100.0 million. To the
extent that these deposits do not remain at the Savings Bank upon maturity,  the
Savings Bank  believes  that it can replace  these funds with  deposits,  excess
liquidity,  FHLB advances or other  borrowings.  It has been the Savings  Bank's
experience  that  substantial  portions of such maturing  deposits remain at the
Savings Bank.

At December 31, 2001, the Savings Bank had outstanding  commitments to originate
loans or fund unused lines of credit of $28.8  million.  Funds  required to fill
these  commitments  will be derived  primarily  from current  excess  liquidity,
deposit  inflows or loan and security  repayments.  At December  31,  2001,  the
Savings Bank had no outstanding commitments to sell loans.

Capital.  Under  current  regulations,  the Savings  Bank must have core capital
equal to 4% of  adjusted  total  assets and  risk-based  capital  equal to 8% of
risk-weighted assets, of which 1.5% must be tangible capital, excluding goodwill
and certain other intangible  assets. On December 31, 2001, the Savings Bank met
its three regulatory capital requirements.

Management  believes  that under  current  regulations,  the  Savings  Bank will
continue to meet its minimum capital  requirements  in the  foreseeable  future.
However,  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.

                         Asset and Liability Management

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

The  type  of  market  risk  which  most  affects  the  Corporation's  financial
instruments  is interest  rate risk,  which is best  quantified by measuring the
change in net  interest  income  that  would  occur  under  specific  changes in
interest rates.  Substantially all of the Savings Bank's interest bearing assets
and  liabilities  are exposed to interest rate risk.  Loss of economic  value is
measured using reports  generated by the OTS wherein the current market value of
portfolio  equity,  or economic  value,  is measured at  different  hypothetical
interest rate levels  centered on the current term structure of interest  rates.
Gap  reports  are used to measure the amount of, and  expected  change  during a
one-year  forward period,  the net amount of assets and  liabilities  repricing,
pre-paying and maturing during future periods.

Because the Corporation's  bank subsidiary is a savings bank and is regulated by
the OTS, it has policies or  procedures  in place for  measuring  interest  rate
risk. These policies and procedures stipulate acceptable levels of interest rate
risk.

Interest  Rate  Risk  Measurements.  In  order to  measure  interest  rate  risk
internally,  the Corporation uses computer  programs which enable it to simulate
the changes that will occur to the Savings  Bank's net interest  income  ("NII")
over several  interest rate scenarios  which are developed by "shocking"  market
interest rates (i.e. moving them immediately and permanently) up and down in 100
basis point  increments  from their current  levels,  and by "ramping"  interest
rates in such a manner as to adversely  affect the Savings Bank's  simulated net
interest  income.  In addition to the level of interest rates, the most critical
assumption  regarding  the  estimated  amount of the  Savings  Bank's NII is the
expected  prepayment speed of the Savings Bank's 1-4 family  residential  loans,
and  related  mortgage  backed  securities,  the book  value of which  comprises
approximately 58% of the Corporation's  total assets.  For this prepayment speed
assumption the  Corporation  uses median  expected  prepayment  speeds which are
obtained from a reliable third party source.  The Corporation also  incorporates
into its  simulations  the effects of the interest  rate caps and interest  rate
floors that are part of the majority of the Savings Bank's variable rate loans.

The  Corporation  uses its business  planning  forecast as the basis for its NII
simulations.  Therefore,  planned business  activities are incorporated into the
measurement  horizon.  Such activities include assumptions about substantial new
loan and deposit volumes,  the pricing of loan and deposit  products,  and other
assumptions about future activities that may or may not be realized. In order to
quantify the  Corporation's  NII exposure at December 31, 2001, the  Corporation
focused on the  simulation  of net interest  income in the "shocked up 200 basis
points" and "shocked down 100 basis points" scenarios. The Corporation also used
the results of the OTS  model's  forecast of market  value of  portfolio  equity
under different interest rate scenarios.  In addition,  the Corporation prepared
current  period and one-year  forward "gap"  reports in order to show  potential
mis-matches  of  repricing  or cash flows  from the  Corporation's  current  and
projected  interest rate sensitive  assets and  liabilities.  ALCO evaluated the
simulation  results,  the OTS model  results and the "gap" reports and will make
adjustments to the Savings  Bank's planned  activities if in its view there is a
need to do so.

                                       -9-

<PAGE>

At December 31, 2001,  the most adverse  change in net interest  income over the
one-year  horizon  commencing  January 1, 2002 using the  "shocked  up 200 basis
points" and "shocked down 100 basis points" simulation  methodologies was a $3.2
million or a 15%  decrease in expected  net  interest  income.  The  Corporation
estimated its one-year positive gap (i.e. assets repricing/maturing in excess of
liabilities repricing/maturing) to be $65.5 million in the "shocked up 200 basis
points"  scenario,  and $135.4  million in the "shocked  down 100 basis  points"
scenario,  compared to $87.8 million under the "rates  unchanged"  interest rate
scenario.  However,  these  measurements are highly subjective in nature and are
not intended to be a forecast of net interest income under any rate scenario for
the year 2002 or for any other period.

                    Impact of Inflation and Changing Prices

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

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


                                      -10-
<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, 2001
and 2000,  and the  related  consolidated  statements  of  earnings,  changes in
stockholders'  equity and cash  flows for each of the three  years in the period
ended December 31, 2001. 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 auditing standards generally
accepted in the United States of America.  Those standards  require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

         In our opinion, the following consolidated financial statements present
fairly,  in all material  respects,  the consolidated  financial  position of TF
Financial Corporation and Subsidiaries as of December 31, 2001 and 2000, and the
consolidated  results of their operations and their  consolidated cash flows for
each of the three years in the period ended  December 31,  2001,  in  conformity
with accounting principles generally accepted in the United States of America.



/s/Grant Thornton LLP

Philadelphia, Pennsylvania
January 24, 2002

                                      -11-
<PAGE>

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

<TABLE>
<CAPTION>
                                                                                                          December 31,
                                                                                                     ----------------------
                   ASSETS                                                                              2001         2000
                                                                                                     ----------------------
                                                                                                        (in thousands)

<S>                                                                                                <C>           <C>
Cash and cash equivalents                                                                            $ 69,139      $ 10,618
Certificates of deposit in other financial institutions                                                   194           191
Investment securities available for sale - at fair value                                               22,671        18,865
Investment securities held to maturity (fair value of $9,830
         and $61,919 as of December 31, 2001 and 2000, respectively)                                    9,866        63,461
Mortgage-backed securities available for sale - at fair value                                          99,763        97,914
Mortgage-backed securities held to maturity (fair value of $94,735
         and $133,458 as of December 31, 2001 and 2000, respectively)                                  93,367       135,142
Loans receivable, net                                                                                 377,635       361,806
Federal Home Loan Bank stock - at cost                                                                 11,368        13,042
Accrued interest receivable                                                                             4,154         5,523
Premises and equipment, net                                                                             7,484         9,410
Goodwill and other intangible assets, net                                                               5,099         5,809
Other assets                                                                                           10,464         1,516
                                                                                                     ----------------------
                   TOTAL ASSETS                                                                      $711,204      $723,297
                                                                                                     ======================


                   LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
         Deposits                                                                                    $422,052      $400,851
         Advances from the Federal Home Loan Bank                                                     222,359       244,859
         Other borrowings                                                                                   -        14,962
         Advances from borrowers for taxes and insurance                                                1,241         1,158
         Accrued interest payable                                                                       3,762         4,670
         Other liabilities                                                                              3,815         3,688
                                                                                                     ----------------------
                   Total liabilities                                                                  653,229       670,188
                                                                                                     ----------------------

Stockholders' equity
         Preferred stock, no par value; 2,000,000 shares authorized
                  at December 31, 2001 and 2000, none issued                                                -             -
         Common stock, $0.10 par value; 10,000,000 shares authorized,
                  5,290,000 shares issued, 2,465,986 and 2,491,454 shares
                  outstanding at December 31, 2001 and 2000, respectively,
                  net of shares in treasury:  2001 - 2,571,712; 2000 - 2,534,088                          529           529
         Retained earnings                                                                             56,370        52,061
         Additional paid-in capital                                                                    51,652        51,704
         Unearned ESOP shares                                                                          (2,523)       (2,644)
         Shares acquired by MSBP                                                                            -            (4)
         Treasury stock - at cost                                                                     (48,838)      (48,173)
         Accumulated other comprehensive income (loss)                                                    785          (364)
                                                                                                     ----------------------
                   Total stockholders' equity                                                          57,975        53,109
                                                                                                     ----------------------
                   TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                        $711,204      $723,297
                                                                                                     ======================
</TABLE>

The accompanying notes are an integral part of these statements.

                                    -12-
<PAGE>


CONSOLIDATED STATEMENTS OF EARNINGS

<TABLE>
<CAPTION>
                                                                      Year ended December 31,
                                                                 ----------------------------
                                                                    2001      2000      1999
                                                                 ----------------------------
                                                            (in thousands, except per share data)
<S>                                                            <C>       <C>       <C>
Interest income
         Loans, including fees                                   $28,443   $23,756   $21,843
         Mortgage-backed securities                               13,749    18,449    17,831
         Investment securities                                     3,015     6,180     6,646
         Interest-bearing deposits and other                       1,540       323       702
                                                                 ----------------------------
                           TOTAL INTEREST INCOME                  46,747    48,708    47,022
                                                                 ----------------------------
Interest expense
         Deposits                                                 14,043    15,082    14,645
         Borrowings                                               12,865    13,839    13,329
                                                                 ----------------------------
                           TOTAL INTEREST EXPENSE                 26,908    28,921    27,974
                                                                 ----------------------------
                           NET INTEREST INCOME                    19,839    19,787    19,048
                                                                 ----------------------------
Provision for possible loan losses                                   500       410       300

                           NET INTEREST INCOME AFTER PROVISION
                                    FOR POSSIBLE LOAN LOSSES      19,339    19,377    18,748
                                                                 ----------------------------

Non-interest income
         Service fees, charges and other operating income          1,734     1,353     1,239
         Gain on sale of deposits                                  1,092         -         -
         Gain on sale of real estate held for investment             444         -       350
         Gain (loss) on sale of investment and mortgage-backed
            securities                                              (126)       46         -
         Gain on sale of loans                                        28        33         -
                                                                 ----------------------------
                           TOTAL NON-INTEREST INCOME               3,172     1,432     1,589
                                                                 ----------------------------
Non-interest expense
         Employee compensation and benefits                        7,865     7,376     6,805
         Occupancy and equipment                                   2,493     2,392     2,055
         Federal deposit insurance premium                            75        85       258
         Professional fees                                           486       385       718
         Advertising                                                 507       711       320
         Other operating                                           2,572     2,694     2,552
         Amortization of goodwill and other intangible assets        710       761       821
                                                                 ----------------------------
                           TOTAL NON-INTEREST EXPENSE             14,708    14,404    13,529
                                                                 ----------------------------
                           INCOME BEFORE INCOME TAXES              7,803     6,405     6,808

Income taxes                                                       2,070     1,923     2,386
                                                                 ----------------------------
                           NET INCOME                            $ 5,733   $ 4,482   $ 4,422
                                                                 ============================
Earnings per share - basic                                       $  2.32   $  1.76   $  1.60
                                                                 ============================
Earnings per share - diluted                                     $  2.15   $  1.71   $  1.52
                                                                 ============================
</TABLE>

  The accompanying notes are an integral part of these statements.

                                       -13-

<PAGE>


CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                        Years ended December 31, 2001, 2000 and 1999
                                  --------------------------------------------------------------------------------------------------
                                                               (in thousands, except share data)

                                                                                                         Accumu-
                                                                                                         lated
                                                                                                         other
                                      Common stock   Additional Unearned  Shares                         compre-            Compre-
                                                Par   paid-in   ESOP      acquired  Treasury  Retained   income             hensive
                                  Shares        Value capital   shares    by MSBP   stock     earnings   (loss)    Total    income
                                  --------------------------------------------------------------------------------------------------
<S>                           <C>            <C>     <C>      <C>      <C>      <C>        <C>      <C>       <C>        <C>
Balance at January 1, 1999        2,857,932   $  529   $51,877 $(2,888) $(468)    $(42,386)  $45,842  $   154   $52,660
Allocation of ESOP shares            12,156        -        86     122      -            -         -        -       208
Amortization of MSBP expense              -        -        33       -    397            -         -        -       430
Purchase of treasury stock         (303,578)       -         -       -      -       (4,800)        -        -    (4,800)
Cash dividends - common stock             -        -         -       -      -            -    (1,359)       -    (1,359)
Exercise of options                   9,650        -       (65)      -      -          190         -        -       125
Other comprehensive loss, net of
  taxes                                   -        -         -       -      -            -         -   (3,239)   (3,239)  $(3,239)
Net income for the year ended
December 31, 1999                         -        -         -       -      -            -     4,422        -     4,422     4,422
                                  --------------------------------------------------------------------------------------------------
Comprehensive income                                                                                                      $ 1,183
                                  ==================================================================================================
Balance at December 31, 1999      2,576,160   $  529   $51,931 $(2,766) $ (71)    $(46,996)  $48,905  $(3,085)  $48,447
                                  ==================================================================================================
Allocation of ESOP shares            12,156        -        52     122      -            -         -        -       174
Amortization of MSBP expense              -        -        33       -     67            -         -        -       100
Purchase of treasury stock         (138,112)       -         -       -      -       (1,972)        -        -    (1,972)
Cash dividends - common stock             -        -         -       -      -            -    (1,326)       -    (1,326)
Exercise of options                  41,250        -      (312)      -      -          795         -        -       483
Other comprehensive income, net of
  taxes                                   -        -         -       -      -            -         -    2,721     2,721   $ 2,721
Net income for the year ended
  December 31, 2000                       -        -         -       -      -            -     4,482        -     4,482     4,482
                                  --------------------------------------------------------------------------------------------------
Comprehensive income                                                                                                      $ 7,203
                                  --------------------------------------------------------------------------------------------------
Balance at December 31, 2000      2,491,454   $  529   $51,704 $(2,644) $  (4)    $(48,173)  $52,061  $  (364)  $53,109
                                  ==================================================================================================
Allocation of ESOP shares            12,156        -       112     121      -            -         -        -       233
Amortization of MSBP expense              -        -         3       -      4            -         -        -         7
Purchase of treasury stock          (60,900)       -         -       -      -       (1,110)        -        -    (1,110)
Cash dividends - common stock             -        -         -       -      -            -    (1,424)       -    (1,424)
Exercise of options                  23,276        -      (167)      -      -          445         -        -       278
Other  comprehensive  income, net
  of taxes                                -        -         -       -      -            -         -    1,149     1,149   $ 1,149
Net income for the year ended
December 31, 2001                         -        -         -       -      -            -     5,733        -     5,733     5,733
                                  --------------------------------------------------------------------------------------------------
Comprehensive income                                                                                                      $ 6,882
                                  ==================================================================================================
Balance at December 31, 2001      2,465,986   $  529   $51,652 $(2,523) $   -     $(48,838)  $56,370  $   785   $57,975
                                  ==================================================================================================
</TABLE>

The accompanying notes are an integral part of this statement.

                                      -14-

<PAGE>


CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                             Year ended December 31,
                                                                      -----------------------------------
                                                                           2001         2000         1999
                                                                      -----------------------------------
                                                                                 (in thousands)
<S>                                                                  <C>          <C>         <C>
OPERATING ACTIVITIES
Net income                                                            $   5,733    $   4,482    $   4,422
Adjustments to reconcile net income to net cash provided
        by operating activities
     Amortization of
     Mortgage loan servicing rights                                          14           13           14
     Deferred loan origination fees                                        (387)        (119)         (75)
     Premiums and  discounts on  investment  securities, net                 36           65           36
     Premiums and discounts on mortgage-backed
        securities and loans, net                                           (72)        (544)         607
     Goodwill and other intangibles                                         710          761          821
Deferred income taxes                                                      (172)        (122)          99
Provision  for loan losses and  provision for losses on real estate         510          459          306
Depreciation of premises and equipment                                    1,092        1,040          903
Increase in value of bank-owned life insurance                             (174)           -            -
Stock-based benefit programs                                                240          274          637
(Gain) loss on sale of
     Investment and mortgage-backed securities                              126          (46)           -
     Real estate acquired through foreclosure                               (27)         (48)          (5)
     Property, equipment and real estate held for investment               (444)           -         (350)
     Mortgage loans                                                         (28)         (33)           -
     Deposits                                                            (1,092)           -            -
(Increase) decrease in
     Accrued interest receivable                                          1,369         (565)        (400)
     Other assets                                                           248         (283)        (210)
Increase (decrease) in
     Accrued interest payable                                              (908)         921         (417)
     Other liabilities                                                     (470)        (122)      (2,822)
                                                                       ----------------------------------
              NET CASH PROVIDED BY OPERATING ACTIVITIES                   6,304        6,133        3,566
                                                                       ----------------------------------
INVESTING ACTIVITIES
     Loan originations and principal payments on loans, net              57,493       (2,831)      35,634
     Principal repayments on mortgage-backed securities
        held to maturity                                                 41,456       24,827       56,448
     Principal repayments on mortgage-backed securities
        available for sale                                               22,415       11,925       20,258
     Purchases of loans                                                 (74,647)     (72,990)     (83,643)
     Proceeds from loan sales                                             1,480        1,669            -
     Purchases and maturities of certificates of deposit in other
        financial institutions, net                                          (3)         656        1,391
     Purchases of investment and mortgage-backed securities
        held to maturity                                                      -      (96,595)    (189,650)
     Purchase of investment securities and mortgage-backed
        securities available for sale                                   (47,364)     (11,508)    (108,882)

</TABLE>


                                                                     (Continued)

                                       -15-
<PAGE>


CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

<TABLE>
<CAPTION>
                                                                                       Year ended December 31,
                                                                                ------------------------------------
                                                                                    2001         2000         1999
                                                                                ------------------------------------
                                                                                             (in thousands)
<S>                                                                           <C>          <C>          <C>
Purchase of bank-owned life insurance                                           $  (9,000)   $       -    $       -
Proceeds from maturities of investment securities
   held to maturity                                                                51,233       99,726      174,104
Proceeds from maturities of investment securities
   available for sale                                                              18,501            -        6,000
Proceeds from the sale of investment and mortgage-backed
   securities available for sale                                                    4,890       41,892        3,145
(Purchase) redemption of Federal Home Loan Bank stock                               1,674            -       (3,874)
Sale (purchase) of property, equipment and real estate held for investment          1,635            -        2,698
Proceeds from sales of real estate acquired through foreclosure                       163          452          195
Purchase of premises and equipment                                                   (357)      (1,273)      (1,063)
                                                                                ------------------------------------
                     NET CASH (USED IN) PROVIDED BY
                          INVESTING ACTIVITIES                                     69,569       (4,050)     (87,239)
                                                                                ------------------------------------
FINANCING ACTIVITIES
   Net increase (decrease) in demand deposit/NOW accounts, passbook
      savings accounts and certificates of deposit                                 31,989         (847)     (37,215)
   Funding of sale of deposits                                                     (9,706)           -            -
   Net increase (decrease) in advances from Federal Home Loan Bank                (22,500)      (3,674)      85,174
   Net increase (decrease) in securities sold under agreements to repurchase      (14,962)        (804)      15,766
   Net increase (decrease) in advances from borrowers for taxes and insurance          83          (40)          (6)
   Treasury stock acquired                                                         (1,110)      (1,972)      (4,800)
   Exercise of stock options                                                          278          483          125
   Common stock dividends paid                                                     (1,424)      (1,326)      (1,359)
                                                                                ------------------------------------
                     NET CASH PROVIDED BY (USED IN)
                        FINANCING ACTIVITIES                                      (17,352)      (8,180)      57,685
                                                                                ------------------------------------
                     NET INCREASE (DECREASE) IN CASH AND
                         CASH EQUIVALENTS                                          58,521       (6,097)     (25,988)
Cash and cash equivalents at beginning of year                                     10,618       16,715       42,703
                                                                                ------------------------------------
Cash and cash equivalents at end of year                                        $  69,139    $  10,618    $  16,715
                                                                                ====================================
Supplemental disclosure of cash flow information
  Cash paid for
    Interest on deposits and advances from Federal Home Loan Bank               $  27,816    $  28,122    $  28,391
    Income taxes                                                                $   2,495    $   1,675    $   1,940
  Non-cash transactions
    Transfers from loans to real estate acquired through
      foreclosure                                                               $       -    $     127    $     434
</TABLE>

The accompanying notes are an integral part of these statements.

                                      -16-
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 2001 and 2000




NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

    1.  Principles of Consolidation and Basis of Presentation

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

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

    2.  Cash and Cash Equivalents

    The  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.

    3.  Investment and Mortgage-Backed Securities

    The Corporation  accounts for investment and  mortgage-backed  securities in
    accordance with Statement of Financial  Accounting Standards (SFAS) No. 115,
    "Accounting  for Certain  Investments  in Debt and Equity  Securities."  The
    Corporation classifies 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 presently  engage in security
    trading activities.

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

    Investment and  mortgage-backed  securities  held to maturity are carried at
    cost,  net of unamortized  premiums and  discounts,  which are recognized in
    interest income using the interest  method.  The Corporation has the ability
    and it is management's intention to hold such assets to maturity.

    The Corporation accounts for derivatives under SFAS No. 133, "Accounting for
    Derivative  Instruments and Hedging  Activities" as amended in June, 1999 by
    SFAS No. 137, "Accounting for Derivative  Instruments and Hedging Activities
    - Deferral of the  Effective  Date of FASB  Statement No. 133," and in June,
    2000, by SFAS No. 138,  "Accounting for Certain  Derivative  Instruments and
    Certain  Hedging  Activities,"  (collectively  SFAS No.  133).  SFAS No. 133
    requires  that  entities  recognize  all  derivatives  as  either  assets or
    liabilities  in the  statement  of  financial  condition  and measure  those
    instruments  at fair  value.  Under SFAS No. 133 an entity may  designate  a
    derivative as a hedge of exposure to either  changes in: (a) fair value of a
    recognized  asset or  liability  or firm  commitment,  (b)  cash  flows of a
    recognized or  forecasted  transaction,  or (c) foreign  currencies of a net
    investment  in  foreign  operations,  firm  commitments,  available-for-sale
    securities or a forecasted transaction.  Depending upon the effectiveness of
    the hedge and/or the transaction being hedged,  any change in the fair value
    of the derivative instrument is either recognized in earnings in the current
    year,  deferred to future  periods,  or  recognized  in other  comprehensive
    income.  Changes  in the  fair  value  of  all  derivative  instruments  not
    recognized as hedge accounting are recognized in current year earnings

    SFAS No. 119 "Disclosure  About  Derivative  Financial  Instruments and Fair
    Value of Financial  Instruments"  ("SFAS 119")  requires  disclosures  about
    financial  instruments,  which are  defined as futures,  forwards,  swap and
    option   contracts   and   other   financial    instruments   with   similar
    characteristics. On balance sheet receivables and payables are excluded from
    this  definition.   The  Company  did  not  hold  any  derivative  financial
    instruments as defined by SFAS No. 119 at December 31, 2001, 2000 or 1999.

                                      -17-
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 2001 and 2000




NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

    4.  Loans Receivable

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

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

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

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

    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.  When necessary an allowance for loan losses has been
    established for all loans identified as impaired.

    On July 6, 2001, the Securities and Exchange  Commission  (SEC) issued Staff
    Accounting Bulletin (SAB) No. 102, Selected Loan Loss Allowance  Methodology
    and Documentation  Issues, SAB No. 102 provides guidance on the development,
    documentation,  and application of a systematic  methodology for determining
    the allowance for loan loses in accordance with US GAAP. The adoption of SAB
    No.  102 did not  have a  material  impact  on the  Corporation's  financial
    position or results of operations.

    5.  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.

    In August 2001, the Financial  Accounting Standards Board (FASB) issued SFAS
    No. 144,  "Accounting for the Impairment or Disposal of Long-Lived Assets").
    SFAS No. 144 retains the existing  requirements to recognize and measure the
    impairment of long-lived  assets to be held and used or to be disposed of by
    sale.  However,  SFAS  No.  144  makes  changes  to the  scope  and  certain
    measurement  requirements of existing accounting guidance. SFAS No. 144 also
    changes the requirements  relating to reporting the effects of a disposal or
    discontinuation  of a segment of a business.  SFAS No. 144 is effective  for
    financial  statements  issued for fiscal years  beginning after December 15,
    2001 and interim  periods  within those fiscal  years.  The adoption of this
    statement  is not  expected to have a  significant  impact on the  financial
    condition or results of operations of the Corporation.

                                      -18-
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 2001 and 2000




NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

6.  Goodwill and Other Intangible Assets

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
recorded  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.  Amortization  expense  for  2001,  2000 and 1999 was  $710,000,
$761,000, and $819,000, respectively.

On July 20, 2001,  the FASB issued SFAS No. 141,  "Business  Combinations",  and
SFAS No. 142,  "Goodwill and Intangible  Assets".  SFAS No. 141 is effective for
all  business  combinations  completed  after  June 30,  2001.  SFAS No.  142 is
effective for fiscal years beginning after December 15, 2001;  however,  certain
provisions  of this  Statement  apply to goodwill  and other  intangible  assets
acquired  between  July 1, 2001 and the  effective  date of SFAS No. 142.  Major
provisions of these Statements and their effective dates for the Corporation are
as follows:

o    all  business  combinations  initiated  after  June 30,  2001  must use the
     purchase method of accounting. The pooling of interest method of accounting
     is prohibited except for transactions initiated before July 1, 2001.

o    intangible  assets  acquired  in a business  combination  must be  recorded
     separately  from  goodwill  if they arise from  contractual  or other legal
     rights  or are  separable  from  the  acquired  entity  and  can  be  sold,
     transferred,  licensed, rented or exchanged, either individually or as part
     of a related contract, asset or liability

o    goodwill,  as well as intangible  assets with  indefinite  lives,  acquired
     after June 30, 2001, will not be amortized.  Effective January 1, 2002, all
     previously  recognized goodwill and intangible assets with indefinite lives
     will no longer be subject to amortization.

o    effective  January 1, 2002,  goodwill and intangible assets with indefinite
     lives will be tested  for  impairment  annually  and  whenever  there is an
     impairment indicator.

o    all acquired goodwill must be assigned to reporting units for  purposes  of
     impairment testing and segment reporting.

The goodwill  acquired from the acquisition of the offices and related  deposits
of Cenlar  Federal  Savings  Bank was recorded as an  unidentifiable  intangible
asset  under SFAS No. 72,  "Accounting  for Certain  Acquisitions  of Banking or
Thrift  Institutions",  and is not at the present time subject to the provisions
of SFAS No. 142.  Accordingly,  the Corporation will continue to amortize all of
its goodwill as of January 1, 2002.

7.  Transfers of Financial Assets

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

In September  2000, the FASB issued SFAS No. 140  "Accounting  for Transfers and
Servicing of Financial Assets and  Extinguishments  of  Liabilities,"  replacing
SFAS No.  125.  This new  statement  revises the  standard  for  accounting  and
reporting for transfers and servicing of financial assets and extinguishments of
liabilities.   The  new  standard  is  based  on  consistent  application  of  a
financial-components approach that recognizes the financial and servicing assets
it controls and the liabilities it has incurred,  derecognizes  financial assets
when  control  has  been   surrendered   and   derecognizes   liabilities   when
extinguished.  The standard provides  consistent  guidelines for  distinguishing
transfers of financial assets from transfers that are secured  borrowings.  SFAS
No. 140 is  effective  for  transfers  and  servicing  of  financial  assets and
extinguishments  of liabilities  occurring  after March 31, 2001.  However,  for
recognition and  reclassification of collateral and for disclosures  relating to
securitizations  transactions  and  collateral  this  statement is effective for
fiscal years ending after December 15, 2000 with earlier application not allowed
and is to be applied  prospectively.  The  adoption of this new standard did not
have a material impact upon the Corporation's consolidated financial statements.

                                      -19-
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 2001 and 2000



NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

    8.  Benefit Plans

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

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

    9.  Income Taxes

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

    10. Advertising Costs

    The Corporation expenses advertising costs as incurred.

    11. Earnings Per Share

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

                                       -20-
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 2001 and 2000


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

    12. Comprehensive Income

    The Corporation follows SFAS No. 130, "Reporting Comprehensive Income." SFAS
    No.  130   establishes   standards  to  provide   prominent   disclosure  of
    comprehensive income items.  Comprehensive income is the change in equity of
    a business enterprise during a period from transactions and other events and
    circumstances from non-owner sources.  The Corporation's other comprehensive
    income consists of net unrealized gains and losses on investment  securities
    available  for  sale.  Comprehensive  income  for  2001,  2000  and 1999 was
    $6,882,000,  $7,203,000,  and  $1,183,000,  respectively.  The components of
    other comprehensive income (loss) are as follows:

<TABLE>
<CAPTION>
                                                                                       December 31, 2001
                                                                         ------------------------------------------------
                                                                                              Tax
                                                                         Before tax         (expense)         Net of tax
                                                                           amount            benefit            amount
                                                                         ------------------------------------------------
                                                                                         (in thousands)
<S>                                                                      <C>                <C>               <C>
Unrealized gains on securities
         Unrealized holding gains arising during period                    $ 1,872            $ (640)           $ 1,232
Reclassification adjustment for losses realized in net income                  126               (43)                83
                                                                           --------------------------------------------
Other comprehensive income, net                                            $ 1,746            $ (597)           $ 1,149
                                                                           ============================================
</TABLE>

<TABLE>
<CAPTION>
                                                                                       December 31, 2000
                                                                         ------------------------------------------------
                                                                                              Tax
                                                                         Before tax         (expense)         Net of tax
                                                                           amount            benefit            amount
                                                                         ------------------------------------------------
                                                                                         (in thousands)
<S>                                                                      <C>              <C>                 <C>
Unrealized gains on securities
         Unrealized holding gains arising during period                    $ 4,165          $ (1,414)           $ 2,751
Reclassification adjustment for gains realized in net income                   (46)               16                (30)
                                                                           --------------------------------------------
Other comprehensive income, net                                            $ 4,119          $ (1,398)           $ 2,721
                                                                           ============================================
</TABLE>

<TABLE>
<CAPTION>

                                                                                       December 31, 1999
                                                                         ------------------------------------------------
                                                                                              Tax
                                                                         Before tax         (expense)         Net of tax
                                                                           amount            benefit            amount
                                                                         ------------------------------------------------
                                                                                         (in thousands)
Unrealized losses on securities
<S>                                                                    <C>                  <C>             <C>
         Unrealized holding losses arising during period                 $ (4,927)            $ 1,688         $ (3,239)
                                                                         ---------------------------------------------
Other comprehensive loss, net                                            $ (4,927)            $ 1,688         $ (3,239)
                                                                         =============================================
</TABLE>


                                                                     (Continued)

                                       -21-
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 2001 and 2000




NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

    13. Segment Reporting

    The  Corporation  follows SFAS No. 131,  "Disclosures  about  Segments of an
    Enterprise and Related  Information." SFAS No. 131 established standards for
    the way public  business  enterprises  report  information  about  operating
    segments in annual financial  statements and requires that those enterprises
    report selected  information about operating  segments in subsequent interim
    financial reports issued to shareholders.  It also establishes standards for
    related disclosure about products and services,  geographic areas, and major
    customers.  The statement requires that a public business  enterprise report
    financial  and  descriptive   information  about  its  reportable  operating
    segments.  Operating  segments are  components of an enterprise  about which
    separate financial  information is available that is evaluated  regularly by
    the chief operating decision-maker in deciding how to allocate resources and
    assess  performance.  The statement  also  requires that public  enterprises
    report a measure of segment  profit or loss,  certain  specific  revenue and
    expense  items and segment  assets.  It also requires  that  information  be
    reported about revenues derived from the enterprises'  products or services,
    or about the  countries  in which the  enterprises  earn  revenues and holds
    assets, and about major customers, regardless of whether that information is
    used in making operating decisions.

    The Corporation has one reportable segment,  "Community Banking." All of the
    Corporation's  activities are  interrelated,  and each activity is dependent
    and assessed based on how each of the activities of the Corporation supports
    the others. For example, commercial lending is dependent upon the ability of
    the Bank to fund itself with retail  deposits  and other  borrowings  and to
    manage  interest  rate and credit risk.  This  situation is also similar for
    consumer and  residential  mortgage  lending.  Accordingly,  all significant
    operating  decisions  are based  upon  analysis  of the  Corporation  as one
    operating segment or unit.

    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:

<TABLE>
<CAPTION>
                                                                   December 31,
                                                             ---------------------
                                                                2001         2000
                                                             ---------------------
                                                                 (in thousands)

<S>                                                        <C>           <C>
Cash and due from banks                                      $ 11,176      $ 8,744
Interest-bearing deposits in other financial institutions      57,863        1,774
Federal funds sold                                                100          100
                                                             ---------------------
                                                             $ 69,139      $10,618
                                                             =====================

</TABLE>

                                       -22-
<PAGE>


             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 2001 and 2000



NOTE C - SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL

    The Bank has entered into purchases of securities under agreements to resell
    substantially  identical  securities.  However,  there  were  no  securities
    purchased under  agreements to resell at during the years ended December 31,
    2001 or 2000.



NOTE D - INVESTMENT AND MORTGAGE-BACKED SECURITIES

    The amortized cost, gross unrealized gains and losses, and fair value of the
    Corporation's investment and mortgage-backed securities at December 31, 2001
    and 2000, are summarized as follows:

<TABLE>
<CAPTION>
                                                                                  December 31, 2001
                                                              -------------------------------------------------------
                                                                                Gross            Gross
                                                              Amortized       unrealized      unrealized        Fair
                                                                 cost           gains           losses          value
                                                              -------------------------------------------------------
                                                                                   (in thousands)
<S>                                                         <C>               <C>              <C>         <C>
Investment securities held to maturity
         State and political subdivisions                     $  5,743          $   44                -      $  5,787
         Corporate debt securities                               4,123               -              (80)        4,043
                                                              -------------------------------------------------------
                                                                 9,866              44              (80)        9,830
Mortgage-backed securities held to maturity                     93,367           1,449              (81)       94,735
                                                              -------------------------------------------------------
                                                              $103,233          $1,493          $  (161)     $104,565
                                                              =======================================================
Investment securities available for sale
         U.S. Government and federal agencies                 $ 11,018          $   10          $   (99)     $ 10,929
         Corporate debt securities                              11,070             202              (27)       11,245
         Mutual funds                                              500               -               (3)          497
                                                              -------------------------------------------------------
                                                                22,588             212             (129)       22,671

Mortgage-backed securities available for sale                   98,656           1,491             (384)       99,763
                                                              -------------------------------------------------------
                                                              $121,244          $1,703          $  (513)     $122,434
                                                              =======================================================
</TABLE>

                                       -23-

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 2001 and 2000




NOTE D - INVESTMENT AND MORTGAGE-BACKED SECURITIES - Continued

<TABLE>
<CAPTION>
                                                                                December 31, 2000
                                                            ------------------------------------------------------------
                                                                               Gross            Gross
                                                             Amortized       unrealized      unrealized        Fair
                                                                cost           gains           losses          value
                                                            ------------------------------------------------------------
                                                                               (in thousands)
<S>                                                         <C>               <C>          <C>            <C>
Investment securities held to maturity
         U.S. Government and federal agencies                 $ 52,499           $  11        $ (1,494)      $ 51,016
         State and political subdivisions                        5,958             133            (112)         5,979
         Corporate debt securities                               5,004               -             (80)         4,924
                                                            ------------------------------------------------------------
                                                                63,461             144          (1,686)        61,919

Mortgage-backed securities held to maturity                    135,142             339          (2,023)       133,458
                                                            ------------------------------------------------------------
                                                              $198,603           $ 483        $ (3,709)      $195,377
                                                            ============================================================
Investment securities available for sale
         U.S. Government and federal agencies                  $12,003           $   -        $    (36)      $ 11,967
         Corporate debt securities                               6,034               -             (30)         6,004
         Mutual funds                                              500               -              (6)           494
         Other                                                     500               -            (100)           400
                                                            ------------------------------------------------------------
                                                                19,037               -            (172)        18,865

Mortgage-backed securities available for sale                   98,298             173            (557)        97,914
                                                            ------------------------------------------------------------
                                                              $117,335           $ 173        $   (729)      $116,779
                                                            ============================================================
</TABLE>

    Gross  realized  gains were $7,000,  $151,000,  and $-0- for the years ended
    December 31, 2001,  2000 and 1999,  respectively.  These gains resulted from
    the sale of investment  and  mortgage-backed  securities of $507,000,  $18.9
    million,  and $3.1 million for the years ended  December 31, 2001,  2000 and
    1999, respectively.

    Gross realized losses were $133,000,  $105,000, and $-0- for the years ended
    December 31, 2001, 2000 and 1999,  respectively.  These losses resulted from
    the sale of investment and mortgage-backed securities of $4.4 million, $23.0
    million,  and $-0- for the years ended  December  31,  2001,  2000 and 1999,
    respectively.

                                       -24-

<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 2001 and 2000




NOTE D - INVESTMENT AND MORTGAGE-BACKED SECURITIES - Continued

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

<TABLE>
<CAPTION>
                                                                            December 31, 2001
                                                           ------------------------------------------------------------
                                                                Held to maturity              Available for sale
                                                           ------------------------------------------------------------
                                                           Amortized           Fair          Amortized          Fair
                                                             cost             value            cost             value
                                                           ------------------------------------------------------------
                                                                             (in thousands)
<S>                                                      <C>              <C>              <C>              <C>
Investment securities
         Due in one year or less                            $     -          $     -          $ 2,521         $  2,536
         Due after one year through five years                4,453            4,374           20,067           20,135
         Due after five years through 10 years                3,144            3,166                -                -
         Due after 10 years                                   2,269            2,290                -                -
                                                           ------------------------------------------------------------
                                                              9,866            9,830           22,588           22,671
Mortgage-backed securities                                   93,367           94,735           98,656           99,763
                                                           ------------------------------------------------------------
                                                           $103,233         $104,565         $121,244         $122,434
                                                           ============================================================
</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, 2001
                                                            ----------------------------------------------------------
                                                                              Gross           Gross
                                                           Amortized        unrealized       unrealized         Fair
                                                             cost             gains           losses            value
                                                            ----------------------------------------------------------
                                                                             (in thousands)

<S>                                                      <C>              <C>              <C>              <C>
Mortgage-backed securities held to maturity
         FHLMC certificates                                 $35,000           $  789        $  (36)            $35,754
         FNMA certificates                                   15,739              168           (35)             15,871
         GNMA certificates                                   29,877              274             -              30,151
         Real estate mortgage investment conduit             12,550              218            (3)             12,765
         Other mortgage-backed securities                       201                -            (7)                194
                                                            ----------------------------------------------------------
                                                            $93,367           $1,449        $  (81)            $94,735
                                                            ==========================================================
Mortgage-backed securities available for sale
         FHLMC certificates                                 $ 1,077           $   31             -             $ 1,108
         FNMA certificates                                   22,415               74           (30)             22,459
         GNMA certificates                                    5,462               53             -               5,515
         Real estate mortgage investment conduit             69,702            1,333          (354)             70,681
                                                            ----------------------------------------------------------
                                                            $98,656          $ 1,491        $ (384)            $99,763
                                                            ===========================================================
</TABLE>

                                                                              25
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 2001 and 2000




NOTE D - INVESTMENT AND MORTGAGE-BACKED SECURITIES - Continued

<TABLE>
<CAPTION>
                                                                            December 31, 2000
                                                            ----------------------------------------------------------
                                                                             Gross         Gross
                                                           Amortized       unrealized     unrealized            Fair
                                                             cost            gains         losses               value
                                                            ----------------------------------------------------------
                                                                             (in thousands)
<S>                                                     <C>                <C>          <C>                <C>
Mortgage-backed securities held to maturity
         FHLMC certificates                                $ 45,971           $  251       $  (420)           $ 45,802
         FNMA certificates                                   20,756               26          (378)             20,404
         GNMA certificates                                   41,090               48          (620)             40,518
         Real estate mortgage investment conduit             27,043               14          (603)             26,454
         Other mortgage-backed securities                       282              -              (2)                280
                                                           -----------------------------------------------------------
                                                           $135,142           $  339       $(2,023)           $133,458
                                                           ===========================================================
Mortgage-backed securities available for sale
         FHLMC certificates                                $  1,419           $   17       $    (5)           $  1,431
         FNMA certificates                                   26,097               16          (434)             25,679
         GNMA certificates                                    7,593                -           (32)              7,561
         Real estate mortgage investment conduit             63,189              140           (86)             63,243
                                                           -----------------------------------------------------------
                                                           $ 98,298           $  173       $  (557)           $ 97,914
                                                           ===========================================================
</TABLE>


    Investment  securities  having an aggregate  amortized cost of approximately
    $4.0 and $21.0  million were pledged to secure  public  deposits at December
    31, 2001 and 2000, respectively.

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


                                      -26-
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 2001 and 2000

NOTE E - LOANS RECEIVABLE

    Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
                                                                                          December 31,
                                                                                     ------------------------
                                                                                       2001          2000
                                                                                     ------------------------
                                                                                          (in thousands)
<S>                                                                                <C>             <C>
First mortgage loans (principally conventional)
         Secured by one-to-four family residences                                    $222,016        $211,065
         Secured by other non-residential properties                                   93,572          77,486
         Construction loans                                                             9,824          13,950
                                                                                     ------------------------
                                                                                      325,412         302,501
Less net deferred loan origination fees and unamortized premiums                         (633)         (1,501)
                                                                                     ------------------------
                  Total first mortgage loans                                          324,779         301,000
                                                                                     ========================
Consumer and other loans
         Commercial                                                                     9,285          14,630
         Home equity and second mortgage                                               25,640          20,887
         Leases                                                                         3,544           3,493
         Other                                                                         16,154          23,113
                                                                                     ------------------------
                                                                                       54,623          62,123
Unearned premiums                                                                         205             397
                                                                                     ------------------------
                  Total consumer and other loans                                       54,828          62,520
                                                                                     ------------------------
         Less allowance for loan losses                                                (1,972)         (1,714)
                                                                                     ------------------------
                  Total loans receivable                                             $377,635        $361,806
                                                                                     ========================
</TABLE>

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

<TABLE>
<CAPTION>
                                                                                     December 31,
                                                                    -----------------------------------------
                                                                       2001              2000            1999
                                                                    -----------------------------------------
                                                                                     (in thousands)
<S>                                                               <C>               <C>             <C>
Balance at beginning of year                                        $ 1,714           $ 1,917         $ 1,909
Provision charged to income                                             500               410             300
Charge-offs, net                                                       (242)             (613)           (292)
                                                                    -----------------------------------------
Balance at end of year                                              $ 1,972           $ 1,714         $ 1,917
                                                                    =========================================
</TABLE>

    Non-performing  loans, which include non-accrual loans for which the accrual
    of interest has been  discontinued  and loan  balances past due over 90 days
    that are not on a  non-accrual  status  but  that  management  expects  will
    eventually  be paid in full,  totaled  approximately  $3.8  million and $1.5
    million at December 31, 2001 and 2000,  respectively.  Interest  income that
    would have been  recorded  under the  original  terms of such loans  totaled
    approximately  $284,000,  $112,000, and $70,000 for the years ended December
    31,  2001,  2000  and  1999,  respectively.  No  interest  income  has  been
    recognized on non-accrual loans for any of the periods presented.

    The Bank has no  concentration  of loans to  borrowers  engaged  in  similar
    activities  that exceeded 10% of loans at December 31, 2001 and 2000. 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 $1,039,000,  and $1,290,000 at December 31, 2001 and
    2000,  respectively.  For  the  year  ended  December  31,  2001,  principal
    repayments  of  approximately  $251,000  were  received  and no  funds  were
    disbursed to executive officers, directors or their related interests.

                                       -27-
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 2001 and 2000


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,
                                                        ------------------------
                                                           2001            2000
                                                        ------------------------
                                                             (in thousands)
Mortgage loan servicing portfolios
         FHLMC                                          $ 6,789          $ 9,209
         Other investors                                  7,068            4,894
                                                        ------------------------
                                                        $13,857          $14,103
                                                        ========================


    Custodial  balances   maintained  in  connection  with  the  foregoing  loan
    servicing totaled approximately  $287,000, and $240,000 at December 31, 2001
    and 2000, respectively. The net servicing revenue on mortgage loans serviced
    for others is immaterial for all periods presented.

NOTE G - PREMISES AND EQUIPMENT

    Premises and equipment are summarized as follows:

                                          Estimated             December 31,
                                        useful lives      ----------------------
                                                             2001          2000
                                        ---------------------------------------
                                                           (in thousands)

Buildings                                 30 years        $ 5,772       $ 5,747
Leasehold improvements                     5 years          1,264         1,263
Furniture, fixtures and equipment         3-7 years         8,123         7,849
                                                          ---------------------
                                                           15,159        14,859
Less accumulated depreciation                              10,201         9,166
                                                          ---------------------
                                                            4,958         5,693
Land                                                        2,526         3,717
                                                          ---------------------
                                                          $ 7,484       $ 9,410
                                                          ======================


NOTE H - DEPOSITS

    Deposits are summarized as follows:
                                                               December 31,
                                                      --------------------------
                                                          2001              2000
                                                      --------------------------
                                                             (in thousands)

Demand                                                 $18,200           $12,096
NOW                                                     46,990            35,127
Money Market                                            42,557            44,325
Passbook savings                                       169,576           155,699
                                                      --------------------------
Total demand, transaction and passbook deposits        277,323           247,247
Certificates of deposit                                144,729           153,604
                                                      --------------------------
                                                      $422,052          $400,851
                                                      ==========================

    The aggregate amount of certificates of deposit with a minimum  denomination
    of $100,000 was  approximately  $17.3  million and $17.5 million at December
    31, 2001 and 2000, respectively.

                                      -28-
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

                           December 31, 2001 and 2000


    At December 31, 2001, scheduled maturities of certificates of deposit are as
follows:

<TABLE>
<CAPTION>
                                  Year ending December 31,
-----------------------------------------------------------------------------------------
   2002          2003         2004           2005         2006    Thereafter        Total
-----------------------------------------------------------------------------------------
                                   (in thousands)
<S>          <C>           <C>          <C>           <C>           <C>      <C>
$99,994         $25,805       $8,423       $8,757        $1,414        $336     $144,729
=========================================================================================
</TABLE>


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

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

                                        December 31,
                ------------------------------------------------------------
                        2001                              2000
                ------------------------------------------------------------
 Contractual                 Weighted                             Weighted
maturity date     Amount   average rate                Amount   average rate
                ------------------------------------------------------------
                                      (in thousands)

    2001        $      -            -  %             $ 47,500           6.75%
    2002          15,000         5.52                   5,000           6.05
    2003          27,000         5.70                  12,000           6.18
    2004          52,000         5.23                  52,000           5.23
    2005           5,000         6.58                   5,000           6.58
    2006          25,000         5.44                  25,000           5.44
    2008          70,000         5.62                  70,000           5.62
    2009          25,000         4.86                  25,000           4.86
    2010           3,359         6.70                   3,359           6.70
                ------------------------------------------------------------
                $222,359         5.46%               $244,859           5.73%
                ============================================================

    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 $20 million at December 31, 2001.

    Other borrowings comprise repurchase  agreements entered into with a primary
    broker-dealer.  There were no borrowings categorized as other borrowings for
    the period ended  December 31,  2001.  At year end December 31, 2000,  these
    agreements totaled $15.0 million,  matured within one year at year end, were
    at  interest  rates of 6.61%,  and were  collateralized  by  investment  and
    mortgage-backed securities of $20.8 million.

NOTE J - BENEFIT PLANS

    The Bank  maintains a 401(k)  profit-sharing  plan for  eligible  employees.
    Participants may contribute up to 15% of pretax eligible  compensation.  The
    Bank makes discretionary  matching  contributions equal to 100% of the first
    $600 deferred.  Contributions to the 401(k) plan totaled  $48,000,  $48,000,
    and $40,000 in 2001, 2000 and 1999, respectively.

    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.
                                       -29-
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 2001 and 2000


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,
                                                                                                ---------------------
                                                                                                   2001          2000
                                                                                                ---------------------
                                                                                                    (in thousands)
<S>                                                                                          <C>           <C>
Change in benefit obligation
  Benefit obligation at beginning of year                                                         $ 3,017       $ 2,898
  Service cost                                                                                        114            68
  Interest cost                                                                                       194           210
  Actuarial loss                                                                                      (96)          (81)
  Benefits paid                                                                                    (1,238)          (78)
                                                                                                -----------------------
  Benefits obligation at end of year                                                              $ 1,991       $ 3,017
                                                                                                =======================
Change in plan assets
  Fair value of plan assets at beginning of year                                                  $ 2,713       $ 2,382
  Actual return on plan assets                                                                        391            61
  Employer contribution                                                                               457           348
  Benefits paid                                                                                    (1,238)          (78)
                                                                                                -----------------------
  Fair value of plan assets at end of year                                                        $ 2,323       $ 2,713
                                                                                                =======================
Funded status
  Unfunded accumulated benefits                                                                   $   331       $  (304)
  Unrecognized transition obligation                                                                   15            20
  Unrecognized net actuarial loss (gain)                                                             (245)            3
  Unrecognized prior service cost                                                                     364           424
                                                                                                -----------------------
  Prepaid benefit cost                                                                            $   465       $   143
                                                                                                =======================
</TABLE>

                                                      2001      2000      1999
                                                      ------------------------

Weighted-average assumptions as of December 31
         Discount rate                                7.00%     7.50%     6.50%
         Expected return on plan assets               8.00      8.00      8.00
         Rate of compensation increase                4.00      4.00      4.00

Components of net periodic benefit cost
         Service cost                                $ 114     $  68     $  47
         Interest cost                                 194       210       203
         Expected return on plan assets               (231)     (204)     (176)
         Amortization of prior service cost             58        65        65
                                                      ------------------------
         Net periodic benefit cost                   $ 135     $ 139     $ 139
                                                     =========================

                                      -30-
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

                           December 31, 2001 and 2000


NOTE J - BENEFIT PLANS - Continued

    The Corporation also maintains the following benefit plans:

    1.  Employee Stock Ownership Plan

    The  Corporation  established  an  internally  leveraged  ESOP for  eligible
    employees who have  completed six months of service with the  Corporation or
    its  subsidiaries.  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. 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.  ESOP
    compensation expense was $162,000,  $112,000, and $151,000 in 2001, 2000 and
    1999, respectively.

                                                          December 31,
                                                   ------------------------
                                                        2001          2000
                                                   ------------------------
              Allocated shares                        126,600       124,700
              Unreleased shares                       252,300       264,400
                                                   ------------------------
                       Total ESOP shares              378,900       389,100
                                                   ========================
              Fair value of unreleased shares      $5,323,500    $4,428,700
                                                   ========================


    2.  Management Stock Bonus Plan

    The  Board  of  Directors  also  adopted  a MSBP  that 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  directors  and key officers at no cost to the  individuals.  The
    Corporation  granted  178,292 shares on November 18, 1994,  24,000 shares on
    December  18, 1995,  and 9,308  shares on December 15, 1998,  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;  $7,000,  $100,000, and $430,000 was amortized to expense in
    2001,  2000 and 1999,  respectively.  At December  31,  2001,  there were no
    shares reserved for future grants under the plan.


                                      -31-
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 2001 and 2000




NOTE J - BENEFIT PLANS - Continued

    3.  Stock Option Plans

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

                                              2001          2000         1999
                                            ---------------------------------

               Net income
                        As reported         $5,733        $4,482       $4,422
                        Pro forma           $5,542        $4,306       $4,243

               Basic earnings per share
                        As reported         $ 2.32        $ 1.76       $ 1.60
                        Pro forma           $ 2.25        $ 1.70       $ 1.53

               Diluted earnings per share
                        As reported         $ 2.15        $ 1.71       $ 1.52
                        Pro forma           $ 2.08        $ 1.65       $ 1.46


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

    The fair value of each option  grant is estimated on the date of grant using
    the Black-Scholes  option-pricing  model with the following weighted average
    assumptions used for grants in 2001, 2000 and 1999, respectively: a dividend
    yield of 2.73%,  3.20%, and 3.73%;  expected volatility of 32% 30%, and 30%,
    risk-free  interest rate of 5.00%,  6.20%,  and 5.87%, and expected lives of
    six years for all options.

    A summary of the status of the Corporation's  fixed stock option plans as of
    December  31,  2001,  and  changes  for each of the years in the  three-year
    period then ended was as follows:

<TABLE>
<CAPTION>

                                               2001                       2000                      1999
                                        ---------------------------------------------------------------------------
                                                    Weighted                   Weighted                  Weighted
                                                     average                   average                    average
                                        Number      exercise       Number      exercise      Number      exercise
                                          of        price per        of       price per        of        price per
                                        shares        share        shares       share        shares        share
                                        ---------------------------------------------------------------------------

<S>                                  <C>            <C>         <C>            <C>        <C>             <C>
Outstanding at beginning of year       659,810        $13.22      697,867        $13.26     696,019         $13.24
Options granted                         24,275         20.30       45,930         13.82      17,515          16.31
Options exercised                      (23,276)        12.11      (41,250)        11.72      (9,650)         13.00
Options forfeited                       (7,456)        14.89      (42,737)        15.62      (6,017)         20.24
                                       -------                    -------                   -------
Outstanding at end of year             653,353        $13.52      659,810        $13.22     697,867         $13.26
                                       -------                    -------                   -------

Weighted average fair value of
options granted during year           $   5.71                   $   3.73                  $   4.57
</TABLE>


                                       -32-
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

                           December 31, 2001 and 2000


NOTE J - BENEFIT PLANS - Continued

    The following table summarizes  information about stock options  outstanding
at December 31, 2001:

<TABLE>
<CAPTION>
                                          Options outstanding                      Options exercisable
------------------------------------------------------------------------------------------------------------
                                                Weighted
                             Number              average        Weighted          Number         Weighted
                         outstanding at         remaining        average      exercisable at      average
  Range of exercise       December 31,         contractual      exercise       December 31,      exercise
        prices                2001            life (years)        price            2001            price
------------------------------------------------------------------------------------------------------------
<S> <C>    <C>               <C>               <C>                <C>              <C>             <C>
    $11.50-14.125            413,820           3.15 years         $11.63           392,220         $11.53
     $14.50-18.00            200,648           5.18 years          15.93           161,229          15.94
     $19.00-28.00             38,885           8.75 years          21.22             8,024          22.87

</TABLE>

    Total  compensation  cost recognized for stock-based  employee  compensation
    awards was approximately $162,000, $110,000, and $117,000 for 2001, 2000 and
    1999, respectively.

NOTE K - INCOME TAXES

    The components of income tax expense are summarized as follows:

<TABLE>
<CAPTION>
                                                                             Year ended December 31,
                                                                         ------------------------------
                                                                            2001       2000       1999
                                                                         ------------------------------
                                                                                 (in thousands)
<S>                                                                    <C>        <C>        <C>
Federal
         Current                                                         $ 2,257    $ 1,875    $ 2,254
         Charge in lieu of income tax relating to stock compensation           3        170          -
         Deferred                                                           (172)      (122)        99
                                                                         ------------------------------
                                                                           2,088      1,923      2,353

State and local - current                                                    (18)         -          33
                                                                         ------------------------------

Income tax provision                                                     $ 2,070    $ 1,923    $ 2,386
                                                                         =============================
</TABLE>

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

                                                   Year ended December 31,
                                                 ---------------------------
                                                 2001       2000       1999
                                                 ---------------------------

Statutory federal income tax                     34.0%      34.0%      34.0%
Increase (decrease) resulting from
         Tax-exempt income                       (5.3)      (6.7)      (5.1)
         State tax, net of federal benefit        0.0        0.0        0.3
         Other                                   (2.2)       2.7        5.9
                                                 ---------------------------
                                                 26.5%      30.0%      35.1%
                                                 ===========================

                                      -33-



<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 2001 and 2000


NOTE K - INCOME TAXES - Continued

    Deferred taxes are included in the accompanying  consolidated  statements of
    financial  position at December 31, 2001 and 2000, for the estimated  future
    tax effects of  differences  between  the  financial  statement  and federal
    income tax bases of assets and  liabilities  according to the  provisions of
    currently  enacted tax laws.  No valuation  allowance  was recorded  against
    deferred tax assets at December  31, 2001 and 2000.  The  Corporation's  net
    deferred  tax asset at  December  31,  2001 and 2000,  was  composed  of the
    following:

<TABLE>
<CAPTION>
                                                                                          December 31,
                                                                                   -------------------------
                                                                                        2001          2000
                                                                                   -------------------------
                                                                                        (in thousands)
<S>                                                                                <C>           <C>
        Deferred tax assets
                 Deferred loan origination fees                                       $   35        $   59
                 Deferred compensation                                                   351           288
                 Allowance for loan losses, net                                          586           494
                 Amortization                                                            361           334
                 Unrealized loss on securities available for sale                          -           192
                 Other                                                                     -             1
                                                                                 -------------------------
                                                                                       1,333         1,368
                                                                                 -------------------------
        Deferred tax liabilities
                 Accrued pension expense                                                 534           582
                 Unrealized gain on securities available for sale                        405             -
                 Other                                                                    33             -
                                                                                 -------------------------
                                                                                         972           582
                                                                                 -------------------------
                 Deferred tax asset                                              $       361   $       786
                                                                                 =========================
</TABLE>

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

    The Bank is required,  beginning in 1998,  to recapture  approximately  $2.4
    million of its total tax bad debt reserve of approximately $8.1 million into
    taxable income over a six-year  period.  Deferred tax liabilities  have been
    accrued in respect of the amount of the reserve to be recaptured.

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

                                      -34-

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 2001 and 2000

NOTE L - REGULATORY MATTERS

    The Bank is subject to minimum regulatory  capital standards  promulgated by
    the Office of Thrift  Supervision  (OTS).  Failure to meet  minimum  capital
    requirements  can  initiate  certain  mandatory  - and  possible  additional
    discretionary  - actions by  regulators  that, if  undertaken,  could have a
    direct  material  effect  on  the   Corporation's   consolidated   financial
    statements.  Under capital adequacy guidelines and the regulatory  framework
    for prompt corrective action, the Bank must meet specific capital guidelines
    that involve quantitative  measures of the Bank's assets,  liabilities,  and
    certain  off-balance  sheet items as calculated under regulatory  accounting
    practices.  The Corporation's  capital amounts and  classification  are also
    subject to qualitative  judgments by the regulators about  components,  risk
    weightings,  and other factors.  Such minimum  capital  standards  generally
    require the  maintenance  of regulatory  capital  sufficient to meet each of
    three tests, hereinafter described as the tangible capital requirement,  the
    core  capital  requirement  and  the  risk-based  capital  requirement.  The
    tangible capital requirement  provides for minimum tangible capital (defined
    as  stockholders'  equity  less  all  intangible  assets)  equal  to 1.5% of
    adjusted  total assets.  The core capital  requirement  provides for minimum
    core capital  (tangible  capital plus certain forms of supervisory  goodwill
    and other qualifying intangible assets) equal to 4% of adjusted total assets
    at December 31, 2001.

    As of December 31, 2001,  management  believes that the Bank met all capital
    adequacy requirements to which it was subject.

<TABLE>
<CAPTION>
                                                                      Regulatory capital
                                                                      December 31, 2001
                                              ---------------------------------------------------------------------
                                                   Tangible                    Core                  Risk-based
                                              Capital     Percent       Capital     Percent     Capital     Percent
                                              ---------------------------------------------------------------------

<S>                                          <C>         <C>         <C>           <C>       <C>          <C>
Capital under generally
         accepted accounting principles       $55,074        7.78%       $55,074       7.78%    $55,074       16.10%

Unrealized gain on certain
         available-for-sale securities           (785)      (0.11)          (785)     (0.11)       (785)      (0.23)

Goodwill and other intangible assets           (5,099)      (0.72)        (5,099)     (0.72)     (5,099)     (01.50)
Additional capital items
         General valuation allowances -
                  limited                           -           -              -          -       1,972        0.58
                                              ---------------------------------------------------------------------
Regulatory capital computed                    49,190        6.95         49,190       6.95      51,162       14.95

Minimum capital requirement                    10,618        1.50         28,313       4.00      27,374        8.00
                                              ---------------------------------------------------------------------
Regulatory capital - excess                   $38,572        5.45%       $20,877       2.95%    $23,788        6.95%
                                              =====================================================================
</TABLE>

                                       -35-
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 2001 and 2000




NOTE L - REGULATORY MATTERS - Continued

<TABLE>
<CAPTION>
                                                                      Regulatory capital
                                                                      December 31, 2000
                                              ---------------------------------------------------------------------
                                                  Tangible                   Core                  Risk-based
                                              Capital      Percent      Capital      Percent     Capital    Percent
                                              ---------------------------------------------------------------------
<S>                                        <C>            <C>        <C>           <C>       <C>          <C>
Capital under generally
         accepted accounting principles       $49,976         6.95%     $49,976        6.95%    $49,976       12.97%

Unrealized loss on certain
         available-for-sale securities            309         0.04          309        0.04         309        0.08

Goodwill and other intangible assets           (5,809)       (0.81)      (5,809)      (0.81)     (5,809)      (1.51)
Additional capital items
         General valuation allowances -
                  limited                           -            -            -           -       1,654        0.43
                                              ---------------------------------------------------------------------
Regulatory capital computed                    44,476         6.18       44,476        6.18      46,130       11.97

Minimum capital requirement                    10,801         1.50       28,803        4.00      30,836        8.00
                                              ---------------------------------------------------------------------
Regulatory capital - excess                   $33,675         4.68%     $15,673        2.18%    $15,294        3.97%
                                              =====================================================================
</TABLE>

    At  December  31,  2001,  the  Bank  met  all  regulatory  requirements  for
    classification as a  "well-capitalized"  institution.  A  "well-capitalized"
    institution must have risk-based  capital of 10% and core capital of 5%. The
    Bank's capital exceeded the minimum required amounts for classification as a
    "well-capitalized"  institution. There are no conditions or events that have
    occurred that management believes have changed the Bank's  classification as
    a "well-capitalized" institution.

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

                                       -36-
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 2001 and 2000




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.
These  financial  instruments  are  primarily  commitments  to extend credit and
standby  letters of credit.  Such  financial  instruments  are  recorded  in the
consolidated  financial statements when they become receivable or payable. Those
instruments  involve,  to varying degrees,  elements of credit and interest rate
risk in  excess of the  amount  recognized  in the  consolidated  statements  of
financial  position.  The  contract  or  notional  amounts of those  instruments
reflect the extent of the Bank's  involvement in particular classes of financial
instruments.

The 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  amount of those
instruments. The Corporation uses the same credit policies in making commitments
and conditional obligations as it does for on-balance-sheet instruments.

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

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

                                                          December 31,
                                                     ---------------------
                                                     2001             2000
                                                     ---------------------
                                                        (in thousands)

               Commitments to extend credit          $28,799        $42,455
               Standby letters of credit               2,338          3,656
               Loans sold with recourse                  175            268
                                                     ----------------------
                                                     $31,312        $46,379
                                                     ======================


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  borrower.  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.

                                       -37-
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 2001 and 2000


NOTE N - COMMITMENTS AND CONTINGENCIES

The Bank had no  commitments to sell mortgage loans to investors at December 31,
2001 and 2000.

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  $316,000,  $343,000,  and
$298,000 for the years ended December 31, 2001, 2000 and 1999, respectively.

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

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

                    2002                  $142,540
                    2003                   130,495
                    2004                   109,255
                    2005                    67,967
                    2006                    38,475
                    Thereafter              76,950
                    ------------------------------
                                          $565,682
                    ==============================


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,  2001,   was
approximately $2,294,000.

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

NOTE O - SIGNIFICANT CONCENTRATIONS OF CREDIT RISK

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


                                       -38-

<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 2001 and 2000


NOTE P - FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

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

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

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

                                                          December 31,
                                       ----------------------------------------------
                                                 2001                     2000
                                       ----------------------------------------------
                                         Fair        Carrying       Fair     Carrying
                                         value        value         value      value
                                       ----------------------------------------------
                                                        (in thousands)

<S>                                  <C>          <C>         <C>         <C>
Cash and cash equivalents               $ 69,139     $ 69,139    $ 10,618    $ 10,618
Investment securities                     32,501       32,537      80,784      82,326
Mortgage-backed securities               194,498      193,130     231,372     233,056

</TABLE>

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

                                                         December 31,
                                       ----------------------------------------------
                                                 2001                    2000
                                       ----------------------------------------------
                                         Fair        Carrying     Fair       Carrying
                                         value        value       value        value
                                       ----------------------------------------------
                                                        (in thousands)

<S>                                   <C>          <C>         <C>         <C>
Assets
  Interest-bearing deposits with banks  $    194     $    194    $    190    $    191
Liabilities
  Deposits with stated maturities        146,227      144,729     153,296     153,604
  Borrowings with stated maturities
   Short-term (due  within 6 months)           -            -      62,486      62,462
   Long-term                             231,648      222,359     198,493     197,359
</TABLE>


                                       -39-
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 2001 and 2000


NOTE P - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued

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

                                                                           December 31,
                                                     --------------------------------------------------------------
                                                              2001                               2000
                                                     --------------------------------------------------------------
                                                     Fair            Carrying            Fair           Carrying
                                                     value             value             value            value
                                                     --------------------------------------------------------------
                                                                          (in thousands)

<S>                                              <C>              <C>                <C>            <C>
Deposits with no stated maturities                  $277,323         $277,323           $247,247       $247,247

</TABLE>

The fair value of the net loan  portfolio has been  estimated  using the present
value of cash flows, discounted at the approximate current market rates adjusted
for  non-interest   operating  costs,  and  giving  consideration  to  estimated
prepayment risk and credit loss factors.
<TABLE>
<CAPTION>

                                                                           December 31,
                                                     ---------------------------------------------------------------
                                                              2001                               2000
                                                     ---------------------------------------------------------------
                                                      Fair           Carrying              Fair           Carrying
                                                      value            value              value            value
                                                     ---------------------------------------------------------------
                                                                          (in thousands)

<S>                                               <C>              <C>                <C>            <C>
Net loans                                           $386,302         $377,635           $367,667       $361,806
</TABLE>

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

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

                                       -40-
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 2001 and 2000


NOTE Q - SERVICE FEES, CHARGES AND OTHER OPERATING INCOME AND OTHER OPERATING
EXPENSE
<TABLE>
<CAPTION>
                                                                Year ended December 31,
                                                         ---------------------------------
                                                           2001         2000          1999
                                                         ---------------------------------
                                                                   (in thousands)

<S>                                                   <C>          <C>           <C>
Service fees, charges and other operating income
         Loan servicing fees                             $  241       $  329        $  358
         Late charge income                                 105          126            74
         Deposit service charges                            835          548           548
         Bank-owned life insurance value increase           174            -             -
         Other income                                       379          350           259
                                                         ---------------------------------
                                                         $1,734       $1,353        $1,239
                                                         =================================
Other operating expense
         Insurance and surety bond                       $  128       $  120        $  127
         Office supplies                                    249          202           202
         Loan expense                                       359          342           238
         Loan servicing fees                                223          258           284
         Postage                                            261          140           137
         Telephone                                          286          242           187
         Service charges on bank accounts                   205          423           385
         Supervisory examination fees                       141          138           139
         Other expenses                                     720          829           853
                                                         ---------------------------------
                                                         $2,572       $2,694        $2,552
                                                         =================================
</TABLE>

NOTE R - SHAREHOLDER RIGHTS PLAN

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

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.

                                       -41-
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 2001 and 2000


NOTE S - EARNINGS PER SHARE

The  following  tables  illustrate  the  reconciliation  of the  numerators  and
denominators of the basic and diluted earnings per share  computations  (dollars
in thousands, except per share data):
<TABLE>
<CAPTION>
                                                                          Year ended December 31, 2001
                                                                  --------------------------------------------
                                                                                    Weighted
                                                                                    average
                                                                     Income          shares        Per share
                                                                  (numerator)    (denominator)       amount
                                                                  --------------------------------------------
<S>                                                              <C>            <C>               <C>
Basic earnings per share
         Income available to common stockholders                    $5,733         2,466,149         $2.32
                                                                                                     =========
Effect of dilutive securities
         Stock options                                                   -           203,880
                                                                  --------------------------
Diluted earnings per share
         Income available to common stockholders plus
            effect of dilutive securities                           $5,733         2,670,029         $2.15
                                                                  ============================================
</TABLE>

There  were  options to  purchase  10,000  shares of common  stock at a range of
$20.88 to $28.00 per share  which  were  outstanding  during  2001 that were not
included in the  computation of diluted  earnings per share because the options'
exercise prices were greater than the average market price of the common shares.
<TABLE>
<CAPTION>


                                                                            Year ended December 31, 2000
                                                                  --------------------------------------------
                                                                                    Weighted
                                                                                    average
                                                                     Income          shares        Per share
                                                                  (numerator)    (denominator)       amount
                                                                  --------------------------------------------
<S>                                                              <C>            <C>               <C>
Basic earnings per share
         Income available to common stockholders                    $4,482         2,540,242         $1.76
                                                                                                     =========
Effect of dilutive securities
         Stock options                                                   -            82,657
                                                                  --------------------------
Diluted earnings per share
         Income available to common stockholders plus
                  effect of dilutive securities                     $4,482         2,622,899         $1.71
                                                                  ============================================
</TABLE>

There were  options to  purchase  207,929  shares of common  stock at a range of
$14.75 to $28.00 per share  which  were  outstanding  during  2000 that were not
included in the  computation of diluted  earnings per share because the options'
exercise prices were greater than the average market price of the common shares.
<TABLE>
<CAPTION>


                                                                            Year ended December 31, 1999
                                                                  --------------------------------------------
                                                                                    Weighted
                                                                                    average
                                                                     Income          shares        Per share
                                                                  (numerator)    (denominator)      amount
                                                                  --------------------------------------------

<S>                                                              <C>            <C>               <C>
Basic earnings per share
         Income available to common stockholders                    $4,422         2,759,690         $1.60
                                                                                                     =====
Effect of dilutive securities
         Stock options                                                   -           158,666
                                                                  --------------------------
Diluted earnings per share
         Income available to common stockholders plus
                  effect of dilutive securities                     $4,422         2,918,356         $1.52
                                                                  ============================================
</TABLE>

There were  options to  purchase  246,109  shares of common  stock at a range of
$14.50 to $28.00  per share  that were  outstanding  during  1999 which were not
included in the  computation of diluted  earnings per share because the options'
exercise prices were greater than the average market price of the common shares.

                                       -42-
<PAGE>


             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 2001 and 2000



NOTE T - SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATE (UNAUDITED)
<TABLE>
<CAPTION>

                                                                           Three months ended
                                                        --------------------------------------------------------
                                                        Dec. 31,          Sept. 30,       June 30,     March 31,
                                                          2001               2001           2001         2001
                                                        --------------------------------------------------------
                                                            (in thousands, except per share data)

<S>                                                  <C>               <C>             <C>            <C>
Total interest income                                   $11,130           $11,470         $11,817        $12,330
Total interest expense                                    6,431             6,653           6,733          7,091
         Net interest income                              4,699             4,817           5,084          5,239

Provision for possible loan losses                          127               124             124            125
                                                        --------------------------------------------------------
         Net interest income after provision              4,572             4,693           4,960          5,114
Other income                                              1,489               474             809            400
Other expenses                                            3,784             3,627           3,486          3,811
                                                        --------------------------------------------------------

         Income before income taxes                       2,277             1,540           2,283          1,703
Income taxes                                                641               389             595            445
                                                        --------------------------------------------------------
         Net income                                     $ 1,636           $ 1,151         $ 1,688        $ 1,258
                                                        ========================================================
Earnings per share - basic                              $  0.66           $  0.47         $  0.69        $  0.51
                                                        ========================================================
Earnings per share - assuming dilution                  $  0.61           $  0.43         $  0.64        $  0.48
                                                        ========================================================
</TABLE>

<TABLE>
<CAPTION>

                                                                           Three months ended
                                                        --------------------------------------------------------
                                                        Dec. 31,          Sept. 30,       June 30,     March 31,
                                                         2000               2000           2000          2000
                                                        --------------------------------------------------------
                                                                    (in thousands, except per share data)

<S>                                                  <C>               <C>             <C>            <C>
Total interest income                                   $12,103           $12,249         $12,326        $12,029
Total interest expense                                    7,096             7,294           7,352          7,179
         Net interest income                              5,007             4,955           4,974          4,850
Provision for possible loan losses                          145               100             120             44
                                                        --------------------------------------------------------
         Net interest income after provision              4,862             4,855           4,854          4,806
Other income                                                369               367             349            347
Other expenses                                            3,382             3,735           3,690          3,597
                                                        --------------------------------------------------------
         Income before income taxes                       1,849             1,487           1,513          1,556
Income taxes                                                523               417             456            527
                                                        --------------------------------------------------------
         Net income                                     $ 1,326           $ 1,070         $ 1,057        $ 1,029
                                                        ========================================================
Earnings per share - basic                              $  0.53           $  0.42         $  0.42        $  0.40
                                                        ========================================================
Earnings per share - assuming dilution                  $  0.51           $  0.41         $  0.40        $  0.39
                                                        ========================================================

</TABLE>

                                       -43-

<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 2001 and 2000



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 ,
                                                                            --------------------
                                                                            2001         2000
                                                                            --------------------
                                                                               (in thousands)
<S>                                                                      <C>          <C>
                   ASSETS
Cash                                                                        $ 2,458      $ 2,354
Certificates of deposit - other institutions                                    194          190
Investment securities available-for-sale                                          -          400
Investment in Third Federal                                                  52,551       47,328
Investment in TF Investments                                                  2,261        2,245
Investment in Teragon                                                            10           14
Investment in Penns Trail Development                                           275          404
Other assets                                                                    226          174
                                                                            --------------------
                   Total assets                                             $57,975      $53,109
                                                                            ====================

                   LIABILITIES AND STOCKHOLDERS' EQUITY

Total liabilities                                                           $     -      $     -
Stockholders' equity                                                         57,975       53,109
                                                                            --------------------
                   Total liabilities and stockholders' equity               $57,975      $53,109
                                                                            ====================
</TABLE>

<TABLE>
<CAPTION>
                                                                            --------------------
STATEMENT OF EARNINGS

                                                                                   Year ended December 31,
                                                                            ---------------------------------
                                                                              2001          2000         1999
                                                                            ---------------------------------
                                                                                      (in thousands)

<S>                                                                      <C>          <C>          <C>
INCOME
    Equity in earnings of subsidiaries                                      $ 5,825      $ 4,573      $ 4,528
    Interest and dividend income                                                108          140          125
    Other                                                                        29            -            -
                                                                            ---------------------------------
                   Total income                                               5,962        4,713        4,653
                                                                            ---------------------------------
EXPENSES
    Other                                                                       229          231          231
                                                                            ---------------------------------
                   Total expenses                                               229          231          231
                                                                            ---------------------------------
                   NET INCOME                                               $ 5,733      $ 4,482      $ 4,422
                                                                            =================================
</TABLE>

                                       -44-
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 2001 and 2000


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

STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>

                                                                                    Year ended December 31,
                                                                         --------------------------------------------
                                                                          2001               2000              1999
                                                                         --------------------------------------------
                                                                                  (in thousands)

<S>                                                                   <C>               <C>               <C>
Cash flows from operating activities
   Net income                                                            $ 5,733           $ 4,482           $ 4,422
   Adjustments to reconcile net income to net cash
     provided by (used in) operating activities
       Equity in earnings of subsidiaries                                 (5,825)           (4,573)           (4,528)
       Gain on sale investment securities available for sale                  (7)                -                -
   Net change in assets and liabilities                                      (97)              (56)             (954)
                                                                         -------------------------------------------
   Net cash provided by (used in) operating activities                      (196)             (147)           (1,060)
                                                                         -------------------------------------------
Cash flows from investing activities
   Capital distribution from subsidiaries                                  2,053             2,938             8,500
   Sale of investment securities available for sale                          507                 -                -
   Purchase and maturities of certificates of deposit
      in other financial institutions, net                                    (4)               (9)               (9)
                                                                         -------------------------------------------
Net cash provided by investing activities                                  2,556             2,929             8,491
                                                                         -------------------------------------------
Cash flows from financing activities
   Cash dividends paid to stockholders                                    (1,424)           (1,326)           (1,359)
   Net (decrease) increase in borrowings from
     Treasury stock acquired                                              (1,110)           (1,972)           (4,800)
   Exercise of stock options                                                 278               483               125
                                                                         -------------------------------------------
Net cash used in financing activities                                     (2,256)           (2,815)           (6,034)
                                                                         -------------------------------------------
NET INCREASE (DECREASE) IN CASH                                              104               (33)            1,397
Cash at beginning of year                                                  2,354             2,387               990
                                                                         -------------------------------------------
Cash at end of year                                                      $ 2,458           $ 2,354           $ 2,387
                                                                         -------------------------------------------
Supplemental disclosure of cash flow information
   Cash paid during the year for income taxes                            $     -           $     -           $    -
                                                                         -------------------------------------------
</TABLE>



                                       -45-
<PAGE>
<TABLE>
<CAPTION>


TF Financial Corporation
----------------------------------------------------------------------------------------------

<S>                         <C>                           <C>
Board of Directors                         Executive Officers

Robert N. Dusek                            John R. Stranford
Chairman of the Board                      President and Chief Executive Officer

John R. Stranford                          Elizabeth Davidson Maier
                                           Senior Vice President and Corporate Secretary
Carl F. Gregory
                                           Dennis R. Stewart
Thomas J. Gola                             Senior Vice President and Chief Financial Officer

George A. Olsen


Third Federal Savings Bank
----------------------------------------------------------------------------------------------

Board of Directors                         Executive Officers

John R. Stranford                          John R. Stranford
Chairman of the Board                      President and Chief Executive Officer

Carl F. Gregory                            Elizabeth Davidson Maier
Chairman Emeritus                          Corporate Secretary

Robert N. Dusek                            Dennis R. Stewart
                                           Senior Vice President and Chief Financial Officer
Thomas J. Gola
                                           Floyd P. Haggar
George A. Olsen                            Senior Vice President and Chief Lending Officer

Albert M. Tantala                          Kent C. Lufkin
                                           Senior Vice President and Retail Banking Officer
William H. Yerkes, III
                                           Earl A. Pace, Jr.
William J. Happ, Jr.                       Senior Vice President and Chief Information Officer

Dennis L. McCartney




Independent Auditors           Special Counsel               Transfer Agent and Registrar
Grant Thornton LLP             Malizia Spidi & Fisch, P.C.   Computershare Investor Services
Two Commerce Square            1100 New York Avenue, NW      350 Indiana Street
2001 Market Street             Suite 340 West                Suite 800
Philadelphia, PA  19103-7080   Washington, DC  20005         Golden, CO  80401

</TABLE>


                                      -46-

<PAGE>


<TABLE>
<CAPTION>

                           Third Federal Savings Bank
----------------------------------------------------------------------------------------------

<S>                                               <C>                 <C>

                 Corporate Office                       Operations
                  3 Penns Trail                        215-579-4600
             Newtown, PA  18940-3433                www.thirdfedbank.com
                   215-579-4000                email:  service@thirdfedbank.com


                                    Pennsylvania Branches

                                         Bucks County

    Feasterville Office               New Britain Office                  Cross Keys Office
    Buck Hotel Complex                  600 Town Center               834 North Easton Highway
Feasterville, PA  19053-2209      New Britain, PA  18901-5199        Doylestown, PA  18901-1007
        215-364-7096                     215-345-5800                      215-348-5566


                   Newtown Office                   Doylestown Office
             Route 332 and Campus Drive           60 North Main Street
              Newtown, PA  18940-4018          Doylestown, PA  18901-3730
                   215-968-4444                       215-348-9021


                                     Philadelphia County

       Frankford Office                 Fishtown Office                      Mayfair Office
   4625 Frankford Avenue              York & Memphis Streets          Roosevelt Blvd. at Unruh
Philadelphia, PA  19124-5889      Philadelphia, PA  19125-3029      Philadelphia, PA  19149-2494
        215-289-1400                     215-423-2314                      215-332-7650


                 Bridesburg Office                      Woodhaven Office
             Orthodox & Almond Streets                Knights Road Center
              Philadelphia, PA  19137-1626         Knights & Woodhaven Roads
                   215-743-6673                   Philadelphia, PA  19154-2810
                                                        215-824-0151

                                    New Jersey Branches

                 Ewing Office                       Quakerbridge Road Office
             2075 Pennington Road                 590 Lawrence Square Blvd. So.
              Ewing, NJ  08618-1003              Lawrenceville, NJ 08648-2674
                   609-883-7033                          609-689-1010

                                  Hamilton Square Office
                                      1850 Route 33
                              Hamilton Square, NJ 08690-1712
                                      609-890-1333

</TABLE>
                                      -47-