SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                               -------------------

                                    FORM lO-Q

(Mark One)

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

     For the quarterly period ended  September 30, 1998
                                    --------------------
                                       OR

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

For the transition period from                        to
                               ----------------------    ----------------------

                         Commission file number 0-24168
                                                -------

                            TF FINANCIAL CORPORATION
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)



               Delaware                                      74-2705050
--------------------------------------------------------------------------------
(State or other jurisdiction of incorporation                 (I.R.S.
           or organization)                         employer identification no.)

3 Penns Trail, Newtown, Pennsylvania                          18940
--------------------------------------------------------------------------------
(Address of principal executive offices)                    (Zip Code)

Registrant's telephone number, including area code         215-579-4000     
                                                   -----------------------------

                                       N/A
--------------------------------------------------------------------------------
               Former name, former address and former fiscal year,
                          if changed since last report.

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

                      APPLICABLE ONLY TO CORPORATE ISSUERS:


     Indicate the number of shares  outstanding of each of the issuer's  classes
of common stock as of the latest practicable date November 20, 1998
                                             ----------------------

                     Class                              Outstanding   
        ---------------------------                  ----------------
        $.10 par value common stock                  2,901,812 shares


<PAGE>





                    TF FINANCIAL CORPORATION AND SUBSIDIARIES

                                    FORM 1O-Q

                    FOR THE QUARTER ENDED SEPTEMBER 30, 1998


                                      INDEX



                                                                           Page
                                                                          Number
                                                                          ------

PART I - CONSOLIDATED FINANCIAL INFORMATION

Item     1.       Consolidated Financial Statements                          3
Item     2.       Management's Discussion and Analysis of Financial
                  Condition and Results of Operations                        9
Item     3.       Quantitative and Qualitative Disclosures about
                  Market Risk                                                19

PART II- OTHER INFORMATION

Item     1.       Legal Proceedings                                          21
Item     2.       Changes in Securities                                      21
Item     3.       Defaults upon Senior Securities                            21
Item     4.       Submission of Matters to a Vote of Security Holders        21
Item     5.       Other Materially Important Events                          21
Item     6.       Exhibits and Reports on Form 8-K                           21

SIGNATURES                                                                   22

                                       2
<PAGE>

                    TF FINANCIAL CORPORATION AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
                                 (in thousands)

<TABLE>
<CAPTION>

                                                                                   Unaudited     Audited
                                                                                   ---------    ---------
                                                                                 September 30, December 31,
                     ASSETS                                                           1998        1997    
                                                                                   ---------    ---------

<S>                                                                                <C>          <C>   
Cash and cash equivalents                                                          $  45,983       41,625
Securities purchased under agreements to resell                                            0       10,000
Certificates of deposit in other financial institutions                                2,338        2,737
Investment securities available for sale - at market value                            36,225       32,037
Investment securities held to maturity (market value of $100,332 and $57,944          99,908       57,740
   respectively, for the periods shown)
Mortgage-backed securities available for sale - at market value                       37,678       36,847
Mortgage-backed securities held to maturity (market value of $233,683 and
    $145,723 respectively, for the periods shown)                                    229,224      144,074
Loans receivable, net                                                                222,886      250,711
Accrued interest receivable                                                            4,323        3,957
Goodwill/Core deposit intangible                                                       7,598        8,274
Premises and equipment, net                                                            8,639        7,889
Other assets                                                                           1,353        1,156
                                                                                   ---------    ---------
                      Total Assets                                                 $ 696,155    $ 597,047
                                                                                   =========    =========
                      LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities
   Deposits                                                                        $ 449,708    $ 450,429
   Advances from the Federal Home Loan Bank                                          183,359       88,359
   Advances from borrowers for taxes and insurance                                       691        1,591
   Accrued interest payable                                                            6,064        2,470
   Other liabilities                                                                   3,807        4,103
                                                                                   ---------    ---------
                      Total Liabilities                                              643,629      546,952
                                                                                   ---------    ---------

Commitments and contingencies                                                           --           --
Stockholders' Equity
   Preferred stock, no par value; 2,000,000 shares authorized
      and none issued                                                                   --           --
   Common stock, $0.10 par value; 10,000,000 shares authorized,
       5,290,000 issued; 2,901,812 and 2,886,251 shares outstanding at September
       30, 1998 and December 31, 1997, net of treasury shares of
        2,098,418 and 2,102,767 respectively                                             529          529
   Additional paid-in capital                                                         51,942       51,775
   Net unrealized (loss) gain on investment securities available for sale                133          169
   Unearned ESOP shares-at cost                                                       (2,898)      (3,010)
   Shares acquired by MSBP                                                              (575)        (895)
   Treasury stock - at cost                                                          (41,563)     (41,649)
   Retained earnings                                                                  44,958       43,176
                                                                                   ---------    ---------
                      Total Stockholders' Equity                                      52,526       50,095
                                                                                   ---------    ---------
                      TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                   $ 696,155    $ 597,047
                                                                                   =========    =========
</TABLE>

See notes to consolidated financial statements

                                       3

<PAGE>
                   TF FINANCIAL CORPORATION AND SUBSIDIARIES
                 UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS

                     (in thousands, except per share data)
<TABLE>
<CAPTION>
                                                                    For Quarter              For Nine Months
                                                                 Ended September 30,       Ended September 30, 
                                                               ---------    ---------    ---------    ---------
                                                                 1998         1997         1998         1997
                                                               ---------    ---------    ---------    ---------
<S>                                                          <C>          <C>          <C>          <C>       
Interest income
   Loans                                                      $    4,555   $    5,881   $   14,064   $   18,294
   Mortgage-backed securities                                      4,524        3,109       12,097        9,488
   Investment securities                                           1,828        1,336        5,155        4,291
   Interest bearing deposits and other                               472          592        1,202        1,126
                                                               ---------    ---------    ---------    ---------
TOTAL INTEREST INCOME                                             11,379       10,918       32,518       33,199
Interest expense
   Deposits                                                        4,425        4,500       13,103       13,820
   Borrowings                                                      2,667        1,485        6,241        4,415
                                                               ---------    ---------    ---------    ---------
TOTAL INTEREST EXPENSE                                             7,092        5,985       19,344       18,235
NET INTEREST INCOME                                                4,287        4,933       13,174       14,964
Provision for loan losses                                             15          202           45          382
                                                               ---------    ---------    ---------    ---------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES                4,272        4,731       13,129       14,582
Non-interest income
   Gain on sale of real estate acquired through foreclosure           11            0           35            0
   Gain (loss) on sale of mortgage-backed securities                  (1)          88          344          276
   Gain on sale of loans                                               0          249           91          288
   Gain on sale of servicing                                           0          330            0          330
   Service fees, charges and other operating income                  328          278          974          929
                                                               ---------    ---------    ---------    ---------
       TOTAL NON-INTEREST INCOME                                     338          945        1,444         1823
Non-interest expense
   Employee compensation and benefits                              1,597        1,555        4,882        4,854
   Occupancy and equipment                                           500          593        1,423        1,497
   Federal deposit insurance premium                                  69           73          209          226
   Data processing                                                     4          163          453          509
   Professional fees                                                 179          148          463          424
   Goodwill and other intangible amortization                        225          244          675          732
   Advertising                                                        91           90          271          278
   Other operating                                                   543          640        1,660        1,712
                                                               ---------    ---------    ---------    ---------
TOTAL NON-INTEREST EXPENSE                                         3,208        3,506       10,036       10,232
     INCOME BEFORE INCOME TAXES                                    1,402        2,170        4,537        6,173
Income taxes                                                         534          803        1,687        2,377
                                                               ---------    ---------    ---------    ---------
NET INCOME                                                    $      868   $    1,367   $    2,850   $    3,796
                                                               =========    =========    =========    =========

Basic earnings per share                                      $     0.30   $     0.36   $     0.97   $     0.99
Diluted earnings per share                                    $     0.27   $     0.34   $     0.88   $     0.95
Weighted average number of shares outstanding - Basic          2,898,674    3,782,818    2,893,759    3,782,818
Weighted average number of shares outstanding - Diluted        3,185,538    4,028,598    3,226,213    4,028,598

</TABLE>
See notes to consolidated financial statements.

                                       4
<PAGE>
                   TF FINANCIAL CORPORATION AND SUBSIDIARIES
                UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

                                 (in thousands)

<TABLE>
<CAPTION>
                                                                             For the Nine Months 
                                                                             Ended September 30,        
                                                                            ----------------------      
                                                                               1998         1997
                                                                            ---------    ---------
<S>                                                                        <C>          <C>      
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income                                                                  $   2,850    $   3,796
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of:
     Mortgage loan servicing rights                                                13           65
     Deferred loan origination fees                                               (91)        (112)
     Premiums and discounts on investment securities. net                          66           50
     Premiums and discounts on mortgage-backed securities and
     loans, net                                                                   431          168
     Amortization of goodwill and core deposit intangible                         677          732
Provision for loan losses and provision for losses on real estate                  45          382
Depreciation of premises and equipment                                            613          532
Recognition of ESOP and MSBP expenses                                             617          632
(Gain) loss on sale of mortgage-backed securities - available for sale            (80)        (269)
(Gain) on sale of investment securities - available for sale                     (265)          (8)
(Gain) loss on sale of real estate acquired through foreclosure                   (35)          --   
(Gain) on sale of mortgage servicing rights                                        --         (330)
(Gain) loss on sale of mortgage loans                                             (97)        (288)
Decrease (increase) in
     Accrued interest receivable                                                 (366)         117
     Other assets                                                                (280)      (1,155)
Increase (decrease) in
     Accrued interest payable                                                   3,594        2,975
     Other liabilities                                                           (172)         862
                                                                            ---------    ---------
     NET CASH PROVIDED BY OPERATING ACTIVITIES                                  7,520        8,149
CASH FLOWS FROM INVESTING ACTIVITIES
Loan origination and principal payments on loans. net                          22,391      (13,842)
Purchases of loans                                                            (14,144)     (13,623)
Proceeds from loan sales                                                       19,496       77,194
Purchases and maturities of certificates of deposit in other
   financial institutions. net                                                    399        1,292
Purchases and maturities of securities purchased under
   agreements to resell, net                                                   10,000       19,129
Purchases of investment securities - available for sale                      (206,158)     (48,665)
Purchases of investment securities - held to maturity                         (73,617)     (82,088)
Purchases of mortgage-backed securities - available for sale                  (16,244)     (28,418)
Purchase of mortgage-backed securities - held to maturity                    (126,185)     (15,071)
Proceeds from maturities of investment securities - held to maturity           34,661       82,680
Proceeds from maturities of investment securities - available for sale        195,567       22,540
Principal repayments from maturities of mortgage-backed securities-
   held to maturity                                                            40,889       20,201
Principal repayments from maturities of mortgage-backed securities-
   available for sale                                                           9,729        1,520
Proceeds from the sale of mortgage-backed securities - available for sale       5,683       16,320
Proceeds from the sale of investment securities - available for sale            7,445          510
Purchases and redemptions of Federal Home Loan Bank Stock, net                 (4,250)          -- 
Proceeds from the sale of loan servicing rights                                    --          981
Proceeds from sales of real estate acquired through foreclosure                   199           -- 
Purchase of premises and equipment                                             (1,363)        (238)
                                                                            ---------    ---------
 NET CASH PROVIDED BY (USED IN)  INVESTING ACTIVITIES                         (95,502)      40,422

</TABLE>

                                       5
<PAGE>

                    TF FINANCIAL CORPORATION AND SUBSIDIARIES
                 UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

                                 (in thousands)
<TABLE>
<CAPTION>
                                                                       For the Nine Months
                                                                       Ended September 30,
                                                                       -------------------
                                                                          1998        1997
<S>                                                                    <C>         <C>      
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand deposits/NOW accounts,
  passbook savings accounts and certificates of deposit                 $   (721)   $(25,504)
Advances from Federal Home Loan Bank  net                                 95,000          --
Net (decrease) increase in advances from borrowers for taxes
  and insurance                                                             (900)     (1,226)
Purchase of treasury stock                                                    --      (3,677)
Common stock cash dividend                                                (1,039)     (1,010)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES                       92,339     (31,417)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                       4,357      17,154

Cash and cash equivalents at beginning of period                          41,625      54,132
                                                                        --------    -------- 
Cash and cash equivalents at end of period                              $ 45,983    $ 71,286

Supplemental disclosure of cash flow information
     Cash paid for
     Interest on deposits and advances                                  $ 15,750    $ 15,260
     Income taxes                                                       $  1,709    $  1,421

Noncash transactions
     Transfers from loans to real estate acquired through foreclosure   $    159    $    231

</TABLE>

See notes to consolidated financial statements

                                       6

<PAGE>

                    TF FINANCIAL CORPORATION AND SUBSIDIARIES
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1 - PRINCIPLES OF CONSOLIDATION

         The  consolidated  financial  statements  as  of  September  30,  1998,
         December  31,  1997,  and for the three and nine  month  periods  ended
         September  30,  1998 and 1997  include  the  accounts  of TF  Financial
         Corporation (the "Corporation") and its wholly owned subsidiaries Third
         Federal Savings Bank (the "Savings Bank"), TF Investments  Corporation,
         Penns Trail Development  Corporation and Teragon Financial Corporation.
         The Corporation's business is conducted principally through the Savings
         Bank. All significant  intercompany accounts and transactions have been
         eliminated in consolidation.

NOTE 2 - BASIS OF PRESENTATION

         The  accompanying  unaudited  consolidated  financial  statements  were
         prepared in accordance with instructions for Form 10-Q and,  therefore,
         do not  include  information  or  footnotes  necessary  for a  complete
         presentation   of   consolidated   financial   condition,   results  of
         operations,  and  cash  flows in  conformity  with  generally  accepted
         accounting principles.  However, all adjustments,  consisting of normal
         recurring accruals, which, in the opinion of management,  are necessary
         for fair  presentation of the  consolidated  financial  statements have
         been included. The results of operations for the period ended September
         30, 1998 are not  necessarily  indicative  of the results  which may be
         expected for the entire  fiscal year or any other  period.  For further
         information,  refer to consolidated  financial statements and footnotes
         thereto  included in the  Corporation's  Annual Report on Form 10-K for
         the fiscal year ended December 31, 1997.

NOTE 3 -  CONTINGENCIES

         The Corporation,  from time to time, is a party to routine  litigation,
         which  arise 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 condition or
         results of operations.

         A  petition  for  resettlement  has  been  filed  by the  Savings  Bank
         protesting  assessment  of certain  prior  years'  Pennsylvania  Mutual
         Thrift  Institutions  Tax.  Management  believes that the resolution of
         this liability, if any, would not have a material adverse effect on the
         Corporation's financial position or results of operations.


NOTE 4 -  NEW PRONOUNCEMENTS

         On January 1, 1998, the  Corporation  adopted 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. Other comprehensive income consists of net unrealized gains on
         investment  securities  available for sale.  Subsequent to the adoption
         date,  all prior period  amounts are required to be restated to conform
         to the provisions of SFAS No. 130. Total  comprehensive  income for the
         nine month period ended September 30, 1998 was $2,814,000,  compared to
         $4,173,000  for the nine month period ended  September 30, 1997.  Total
         comprehensive  income for the three month  period ended  September  30,
         1998 was $1,028,000,  compared to $1,620,000 for the three month period
         ended  September  30,  1997.  The  adoption  of SFAS 130 did not have a
         material impact on the Corporation's  financial  position or results of
         operations.

                                       7
<PAGE>

         On January 1, 1998, the Corporation adopted SFAS No. 131,  "Disclosures
         about Segments of an Enterprise and Related Information".  SFAS No. 131
         requires that public business  enterprises  report certain  information
         about operating  segments in a complete set of financial  statements of
         the enterprise and in condensed financial statements of interim periods
         issued to  shareholders.  It also  requires  the  reporting  of certain
         information  about their products and services,  the geographic area in
         which they operate, and their major customers. The adoption of SFAS No.
         131 did not have an impact on the Corporation's  financial  position or
         results of operations.

         The  American  Institute  of  Certified  Public   Accountants   (AICPA)
         executive  committee  has issued  Statement  of  Position  (SOP)  98-1,
         Accounting for the Costs of Computer Software Developed or Obtained for
         Internal Use. The SOP was issued to provide  authoritative  guidance on
         the subject of accounting for the cost  associated with the purchase or
         development of computer software. The statement is effective for fiscal
         years  beginning  after  December 15, 1998 for costs  incurred in those
         fiscal years for all projects,  including projects in progress when the
         SOP is  adopted.  The  adoption  of SOP 98-1 is not  expected to have a
         material impact on the Corporation's  financial  position or results of
         operations.

         In September  1998,  the Financial  Accounting  Standards  Board (FASB)
         issued  Statement of  Financial  Accounting  Standards  (SFAS) No. 133,
         "Accounting for Derivative Instruments and Hedging  Activity." SFAS No.
         133  established  accounting  and reporting  standards  for  derivative
         instruments, including certain derivative instruments imbedded in other
         contracts,  and for  hedging  activities.  It  requires  that an entity
         recognize  all  derivatives  as  either  assets or  liabilities  in the
         statement of financial  position and measure those  instruments at fair
         value.  If  certain  conditions  are  not  met,  a  derivative  may  be
         specifically  designated as a hedge. The accounting for changes in fair
         value of a derivative  (gains or losses) depends on the intended use of
         the derivative and resulting designation. SAFS No. 133 is effective for
         all fiscal quarters of fiscal years beginning after September 15, 1999.
         Early  application  is permitted only as of the beginning of any fiscal
         quarter.  On  October 1, 1998  the  Corporation  adopted  SFAS No. 133,
         "Accounting   for   Derivative   Instruments   and  Hedging  Activity".
         Concurrent  with the adoption of SFAS No. 133, the Company reclassified
         $33.3 million of mortgage-backed securities  from "held to maturity" to
         "available for sale" and $9.2  million  of  mortgage-backed  securities
         from "held to maturity" to "trading".


                                       8

<PAGE>

                    TF FINANCIAL CORPORATION AND SUBSIDIARIES
                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS
                  ---------------------------------------------

GENERAL

TF Financial  Corporation  (the "Company") may from time to time make written or
oral  "forward-looking  statements",   including  statements  contained  in  the
Company's  filings with the Securities and Exchange  Commission  (including this
Quarterly  Report on Form 10-Q and the  exhibits  thereto),  in its  reports  to
stockholders and in other communications by the Company,  which are made in good
faith by the Company  pursuant to the "Safe  Harbor"  Provisions  of the Private
Securities Litigation Reform Act of 1995.

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

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

Financial Condition

The  Corporation's  total  assets at  September  30, 1998 and  December 31, 1997
totaled $696.2 million and $597.0  million,  respectively,  an increase of $99.2
million or 16.6% for the nine month period. This increase was primarily a result
of the $86.0 million increase in  mortgage-backed  securities,  coupled with the
$46.4 million increase in investment securities and the $4.4 million increase in
cash and cash  equivalents,  partially  offset by the $27.8 million  decrease in
loans  receivable and the $10.0 million  decrease in securities  purchased under
agreements to resell.  The increase in total assets was primarily  funded by the
$95.0  million  increase in  advances  from the  Federal  Home Loan Bank.  Total
liabilities  increased to $643.6  million at  September  30, 1998 from $547.0 at
December 31, 1997.  This increase was primarily the result of the $95.0 million,
or  107.5%,  increase  in  advances  from the  Federal  Home Loan Bank to $183.4
million at September  30, 1998 from $88.4  million at December  31, 1997.  Total
deposits balances decreased by $700,000 from $450.4 million at December 31, 1997
to $449.7 million at September 30, 1998.

The decrease in loans receivable of $27.8 million, or 11.1%, from $250.7 million
at December  31, 1997 to $222.9  million at  September  30, 1998 was a result of
mortgage loan repayments.

Cash and cash  equivalent  balances  increased by $4.4 million,  or 10.6%,  from
$41.6  million at  December  31,  1997 to $46.0  million at  September  30, 1998
primarily as a result of the  reinvestment  of cash flow  generated  through the
repayment of mortgage loans.

                                       9

<PAGE>

Balances of securities  purchased under  agreements to resell decreased by $10.0
million,  or 100.0%,  from $10.0 million at December 31, 1997 to $0 at September
30, 1998  primarily  as a result of the  reinvestment  of  maturing  balances to
investment securities.

Investment  securities  at September  30, 1998  totaled  $136.1  million,  which
represents an increase of $46.4 million or 51.7% as compared to $89.7 million at
December 31, 1997.  This increase is primarily due to the  reinvestment  of cash
and cash flow caused by  repayments of mortgage  loans and mortgage  securities,
coupled with the reinvestment of maturing securities  purchased under agreements
to resell balances.

Mortgage-backed  securities  totaled  $266.9  million at  September  30, 1998 as
compared to $180.9 million at December 31, 1997.  This increase of $86.0 million
or,  47.5%,  is a result the  investment of the proceeds of the $95.0 million of
Federal  Home Loan  advances,  coupled  with cash flow caused by  repayments  of
mortgage loans.

Total  consolidated  stockholders'  equity  of the  Corporation  increased  $2.4
million or 4.8%, to $52.5  million,  or 7.55% of total assets,  at September 30,
1998,  from  $50.1  million  or 8.39 % of total  assets at  December  31,  1997,
primarily  due to the $1.8  million  increase to retained  earnings for the nine
month  period.  The  amortization  of stock  incentive  plans of  $400,000  also
contributed to this increase in stockholders' equity.

                                       10

<PAGE>

Average Balance Sheet

The following table sets forth information relating to the Corporation'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 monthly  average  balance of  interest-earning
assets or interest-bearing liabilities, respectively for the periods indicated.

<TABLE>
<CAPTION>

                                                       Three Months Ended September 30,         Three Months Ended September 30,
                                                                  1998 (5)                                  1997(5)
                                                        -----------------------------            ------------------------------
                                                     Average                     Average      Average                    Average
                                                     Balance       Interest     Yield/Cost    Balance      Interest    Yield/Cost
                                                     -------       --------     ----------    -------      --------    ----------
                                                                                 (Dollars in Thousands)
<S>                                                <C>            <C>             <C>       <C>            <C>            <C>  
     Assets:
     Interest-earning assets:
       Loans receivable (4)....................     $229,198        $4,555         7.95%     $291,374        $5,881        8.07%
       Mortgage-backed securities..............      271,596         4,524         6.66%      181,513         3,109        6.85%
       Investment securities...................      125,044         1,828         5.85%       87,645         1,336        6.10%
       Other interest-earning assets(1)........       48,034           472         3.93%       60,062           592        3.94%
         Total interest-earning assets.........     $673,872       $11,379         6.75%     $620,594       $10,918        7.04%
                                                    ========       =======                   ========       =======         
     Non interest-earning assets...............       22,299                                   $8,636
                                                      ------                                   ------
         Total assets..........................     $696,171                                 $629,230
                                                    ========                                 ========

     Liabilities and Stockholders' Equity:
       Interest-bearing liabilities:
         Savings deposits......................      451,399        $4,425         3.92%     $447,731        $4,500        4.02%
         Borrowings............................      181,692         2,667         5.87%       98,359         1,485        6.04%
                                                     -------         -----                     ------         -----         
           Total interest-bearing liabilities..     $633,091        $7,092         4.48%     $546,090        $5,985        4.38%
                                                    ========        ======                   ========        ======         
     Non interest-bearing liabilities..........       10,946                                   10,930
           Total liabilities...................      644,037                                  557,020
     Stockholders' equity......................       52,134                                   72,210
                                                      ------                                   ------
           Total liabilities and Stockholders'
           equity..............................     $696,171                                 $629,230
                                                    ========                                 ========
     Net interest income.......................                     $4,287                                   $4,933
                                                                    ======                                   ======

     Interest rate spread (2)..................                                    2.27%                                   2.66%
     Net yield on interest-earning assets (3)..                                    2.54%                                   3.18%
     Ratio of Average interest-earning assets
     to Average interests bearing liabilities..                                     106%                                    114%

</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.
(5)  Ratios have been annualized where applicable.


                                       11

<PAGE>

Average Balance Sheet (continued)

<TABLE>
<CAPTION>

                                                       Nine Months Ended September 30,          Nine Months Ended September 30,
                                                                   1998 (5)                                   1997 (5)
                                                        -----------------------------            -----------------------------
                                                    Average                       Average     Average                    Average
                                                    Balance       Interest      Yield/Cost    Balance      Interest     Yield/Cost
                                                    -------       --------      ----------    -------      --------     ----------
                                                                              (Dollars in Thousands)
<S>                                                <C>            <C>             <C>       <C>            <C>            <C>  
     Assets:
     Interest-earning assets:
       Loans receivable (4)....................     $235,460       $14,064         7.96%     $305,978       $18,294        7.97%
       Mortgage-backed securities..............      247,944        12,097         6.51%      187,608         9,488        6.74%
       Investment securities...................      115,216         5,155         5.97%       89,983         4,291        6.36%
       Other interest-earning assets(1)........       38,022         1,202         4.22%       35,585         1,126        4.22%
                                                      ------         -----                     ------         -----         
         Total interest-earning assets.........     $636,642       $32,518         6.81%     $619,154       $33,199        7.15%
                                                    ========       =======                   ========       =======         
     Non interest-earning assets...............       22,277                                  $18,028
         Total assets..........................     $658,919                                 $637,182

     Liabilities and Stockholders' Equity:
       Interest-bearing liabilities:
         Savings deposits......................      449,929       $13,103         3.88%     $456,475       $13,820        4.04%
         Borrowings............................      147,248         6,241         5.65%       98,915         4,415        5.95%
                                                     -------         -----                     ------         -----         
           Total interest-bearing liabilities..     $597,177       $19,344         4.32%     $555,390       $18,235        4.38%
                                                    ========       =======                   ========       =======         
     Non interest-bearing liabilities..........       10,336                                   10,427
           Total liabilities...................      607,513                                  565,817
     Stockholders' equity......................       51,406                                   71,365
                                                      ------                                   ------
           Total liabilities and Stockholders'
           equity..............................     $658,919                                 $637,182
                                                    ========                                 ========
     Net interest income.......................                    $13,174                                  $14,964
                                                                   =======                                  =======
     Interest rate spread (2)..................                                    2.49%                                   2.77%
     Net yield on interest-earning assets (3)..                                    2.76%                                   3.22%
     Ratio of Average interest-earning assets
     to Average interest bearing liabilities...                                     107%                                    111%

</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.
(5)  Ratios have been annualized where applicable.


                                       12

<PAGE>

RESULTS OF OPERATIONS


Net Income. The Corporation recorded net income of $868,000 for the three months
ended  September 30, 1998 as compared to $1.4 million for the three months ended
September  30, 1997.  This  decrease of $500,000,  or 35.7%,  was  primarily the
result of the increase in total interest expense from $6.0 million for the three
months  ended  September  30, 1997 to $7.1  million for the three  months  ended
September 30, 1998,  partially offset by an increase in total interest income of
$500,000. Net interest income before provisions for loan losses was $4.3 million
for the three month period ended  September 30, 1998 as compared to $4.9 million
for the same period in 1997.  Non-interest  income was  $300,000  and  $900,000,
respectively,  for these same periods. Operating expenses (non-interest expense)
were $3.2 million for the three month period ended  September  30, 1998 and $3.5
million for the three month period ended September 30, 1997.

The  Corporation  recorded  net income of $2.9 million for the nine months ended
September  30,  1998 as  compared  to $3.8  million  for the nine  months  ended
September  30, 1997.  This  decrease of $900,000,  or 23.7%,  was  primarily the
result of the decrease in total interest  income from $33.2 million for the nine
month period ended September 30, 1997 to $32.5 million for the nine month period
ended September 30, 1998. Net interest  income before  provision for loan losses
was $13.2 million for the nine month period ended September 30, 1998 as compared
to $15.0  million for the same  period in 1997.  For these same  periods,  total
interest  expense  increased to $19.3 million from $18.2  million.  Non-interest
income  was $1.4  million  and  $1.8,  respectively,  for  these  same  periods.
Operating expenses  (non-interest  expense) were $10.0 million and $10.2 million
for the nine month  periods  ended  September  30, 1998 and  September 30, 1997,
respectively.

Total Interest  Income.  Total interest income  increased by $500,000 or 4.6% to
$11.4 million for the three months ended  September 30, 1998, from $10.9 million
for the three months ended September 30, 1997, due primarily to increases in the
average  balance  of  mortgage-backed   securities  and  investment   securities
partially  offset by decreases in the average  balance of loans  receivable  and
other interest earning assets. The average balance of loans receivable decreased
$62.2 million,  or 21.3%, to $229.2 million for the three months ended September
30, 1998, from $291.4 million for the three months ended September 30, 1997. The
decrease in the average balance of loans receivable is primarily attributable to
the sale of $43.6  million  of  mortgage  loans in the  third  quarter  of 1997,
coupled with mortgage loan repayments. Interest attributable to loans receivable
decreased $1.3 million or 22.0% to $4.6 million for the three month period ended
September 30, 1998, from $5.9 million for the three month period ended September
30, 1997. This decrease is primarily attributable to the decrease in the average
balance of loans  receivable  coupled  with a decrease in the  average  yield on
loans  receivable  from 8.07% for the three month period end September 30, 1997,
to 7.95% for the three  month  period  ended  September  30,  1998.  Interest on
mortgage-backed securities increased $1.4 million, or 45.2%, for the three month
period ended  September  30, 1998,  from $3.1 million for the three month period
ended  September  30, 1997  primarily  as a result of  increases  in the average
balances of  mortgage-backed  securities to $271.6 million at September 30, 1998
from $181.5 million at September 30, 1997.  The increase in income  attributable
to the  increase  in the  average  balance  of  mortgage-backed  securities  was
partially  offset by a decrease in the average yield of the  securities to 6.66%
at September 30, 1998 from 6.85% at September  30, 1997.  Interest on investment
securities  increased  to $1.8  million  from $1.3  million  for the three month
periods  ended  September  30,  1998 and 1997  respectively.  This  increase  of
$500,000,  or 38.6%,  was  primarily  as a result of the increase in the average
balance of investment  securities  to $125.0  million at September 30, 1998 from
$87.6 million at September 30, 1997. Interest on other  interest-earning  assets
decreased  by  $120,000  for the three month  period  ended  September  30, 1998
compared to the similar period ended September 30, 1997 primarily as a result of
the average balance  decreasing by $12.1 million to $48.0 million,  coupled with
the decrease in the average  yield to 3.93% at September  30, 1998 from 3.94% at
September  30,  1997.  The  increases  in the  average  balances  of  investment
securities is the result of the  reinvestment  of $43.6 million in proceeds from
the sale of mortgage  loans coupled with cash flows from  repayments of mortgage
loans.  The increase in the average  balance of  mortgage-backed  securities  is
primarily the result of the reinvestment of borrowed funds into  mortgage-backed
securities coupled with the reinvestment of mortgage loan repayments,  partially
offset by the repayment of  mortgage-backed  securities.  The average balance of
total  interest  earning  assets  increased  $53.3  million,  or 8.6%, to $673.9
million for the three months ended  September  30, 1998 from $620.6  million for
the three months ended September 30, 1997.

                                       13
<PAGE>

Total  interest  income  decreased by $700,000 or 2.11% to $32.5 million for the
nine months ended  September  30, 1998,  from $33.2  million for the nine months
ended September 30, 1997 due primarily to the decrease in the average balance of
loans  receivable,  partially  offset by  increases  in the  average  balance of
mortgage-backed  securities,  investment  securities and other interest  earning
assets.  The average balance of loans  receivable  decreased  $70.5 million,  or
23.0%, to $235.5 million from $306.0 million for the nine months ended September
30, 1998 and 1997,  respectively.  The decrease in the average  balance of loans
receivable  is primarily  attributable  to the sale of $43.6 million of mortgage
loans in the third  quarter of 1997,  coupled  with  mortgage  loan  repayments.
Interest  attributable  to loans  receivable  decreased $4.2 million or 23.0% to
$14.1  million for the nine month period ended  September  30, 1998,  from $18.3
million for the nine month period ended  September  30, 1997.  This  decrease is
primarily  attributable  to  the  decrease  in  the  average  balance  of  loans
receivable coupled with a decrease in the average yield on loans receivable from
7.97% for the nine month period end  September  30, 1997,  to 7.96% for the nine
month period ended September 30, 1998.  Interest on  mortgage-backed  securities
increased $2.6 million,  or 27.4%, for the nine month period ended September 30,
1998, from $9.5 million for the nine months ended September 30, 1997,  primarily
as a result of increases in the average balances of  mortgage-backed  securities
to $247.9  million at September  30, 1998 from $187.6  million at September  30,
1997.  This increase was partially  offset by a decrease in the average yield of
the  securities to 6.51% at September 30, 1998 from 6.74% at September 30, 1997.
Interest on  investment  securities  increased to $5.2 million from $4.3 million
for the nine month periods ended September 30, 1998 and 1997, respectively. This
increase of $900,000, or 20.9%, was primarily as a result of the increase in the
average balance of investment securities to $115.2 million at September 30, 1998
from $90.0  million at September  30, 1997.  Interest on other  interest-earning
assets  increased by $76,000 for the nine month period ended  September 30, 1998
compared to the similar period ended September 30, 1997 primarily as a result of
the average  balance  increasing  by $2.4 million to $38.0  million for the nine
months  ended  September  30, 1998 from $35.6  million for the nine months ended
September  30,  1997.  The  increases  in the  average  balances  of  investment
securities is the result of the  reinvestment  of $43.6 million in proceeds from
the sale of mortgage  loans coupled with cash flows from  repayments of mortgage
loans.  The increase in the average  balance of  mortgage-backed  securities  is
primarily the result of the reinvestment of borrowed funds into  mortgage-backed
securities, coupled with the reinvestment of mortgage loan repayments, partially
offset by the repayment of  mortgage-backed  securities.  The average balance of
total  interest  earning  assets  increased  $17.4  million,  or 2.8%, to $636.6
million at September 30, 1998 from $619.2 million at September 30, 1997.

Total Interest Expense. Total interest expense increased to $7.1 million for the
three month  period  ended  September  30,  1998 from $6.0  million for the same
period in 1997.  This  increase  in total  interest  expense  is a result of the
increase  in the average  balance of borrowed  money,  in  conjunction  with the
increase  in the average  balance of savings  deposits.  The average  balance of
borrowed  money  increased  from $98.4  million for the three month period ended
September 30, 1997 to $181.7 million for the three month period ended  September
30, 1998. The average balance of savings deposits  increased from $447.7 million
for the three month period ended  September  30, 1997 to $451.4  million for the
three month period ended  September 30, 1998.  The average rate paid on borrowed
money  decreased from 6.04% for the three month period ended  September 30, 1997
to 5.87% for the same period in 1998. The average rate paid on savings  deposits
decreased  from 4.02% for the three month  period  ended  September  30, 1997 to
3.92% for the three month period ended  September  30, 1998.  As a result of the
decrease in the average rate paid on savings  deposits,  partially offset by the
increase  in the  average  balance of  savings  deposits,  the  portion of total
interest expense attributable to savings deposits decreased to $4.4 million from
$4.5  million  for the three month  period  ended  September  30, 1998 and 1997,
respectively.  The portion of total interest  expense  attributable  to borrowed
money  increased  to $2.7  million  from  $1.5  million  for the  periods  ended
September 30, 1998 and 1997 respectively.  This increase is primarily the result
of the increase in the average  balance of borrowed money,  partially  offset by
the decrease in the average rate paid for borrowed funds. The average balance of
total  interest-bearing  liabilities  increased to $633.1  million for the three
month period ended  September  30, 1998 from $546.1  million for the three month
period  ended  September  30, 1997  primarily as a result of increase in Federal
Home Loan Bank advances which were used to fund asset growth.

Total  interest  expense  increased  to $19.3  million for the nine month period
ended  September  30, 1998 from $18.2  million for the nine month  period  ended
September 30, 1997.  This increase in total interest  expense is a result of the
increase  in the  average  balance of  borrowed  money  partially  offset by the
decrease  in the average  balance of savings  deposits.  The average  balance of
borrowed  money  increased  from $98.9  million for the nine month  period ended
September 30, 1997 to $147.2  million for the 

                                       14
<PAGE>

nine month  period ended  September  30,  1998.  The average  balance of savings
deposits decreased from $456.5 million for the nine month period ended September
30, 1997 to $449.9  million for the nine month period ended  September 30, 1998.
The average rate paid on borrowed money  decreased from 5.95% for the nine month
period  ended  September  30,  1997 to 5.65%  for the nine  month  period  ended
September 30, 1998.  The average rate paid on savings  deposits  decreased  from
4.04% for the nine month period ended  September  30, 1997 to 3.88% for the nine
month  period  ended  September  30,  1998.  As a result of the  decrease in the
average rate paid on savings  deposits in  conjunction  with the decrease in the
average  balance of savings  deposits,  the  portion of total  interest  expense
attributable to savings  deposits  decreased to $13.1 million from $13.8 million
for the nine month periods ended September 30, 1998 and 1997  respectively.  The
portion of total interest  expense  attributable  to borrowed money increased to
$6.2 million from $4.4 million for the periods ended September 30, 1998 and 1997
respectively.  This  increase  is  primarily  the result of the  increase in the
average  balance of  borrowed  money,  partially  offset by the  decrease in the
average  rate  paid  for   borrowed   funds.   The  average   balance  of  total
interest-bearing  liabilities  increased  to $597.2  million  for the nine month
period ended  September  30, 1998 from $555.4  million for the nine month period
ended  September 30, 1997 primarily as a result of increase in Federal Home Loan
Bank advances which were used to fund asset growth.

Net  Interest  Income.  Net  interest  income for the three month  period  ended
September 30, 1998  decreased by $600,000,  or 12.2%,  to $4.3 million from $4.9
million for the same period in 1997.  The decrease was  primarily  the result of
the increase in total interest expense partially offset by the increase in total
interest income. The average balance of total interest-earning  assets increased
$53.3  million,  or 8.6%,  to $673.9  million at September  30, 1998 from $620.6
million at September 30, 1997.  During these same periods,  the average balances
of interest-bearing liabilities increased to $633.1 million from $546.1 million.
The cost of interest-bearing liabilities increased from 4.38% to 4.48% while the
yield on  interest-earning  assets  decreased  from 7.04% to 6.75% for the three
month periods ended  September 30, 1997 and 1998, respectively.  The increase in
the average balance of interest earning assets and interest earning  liabilities
was  primarily  the result of the increase in Federal Home Loan Bank  borrowings
and the  subsequent  reinvestment  of the  cash  proceeds  into  mortgage-backed
securities.

Net interest income for the nine month period ended September 30, 1998 decreased
by $1.8  million,  or 12.0%,  to $13.2  million from $15.0  million for the same
period in 1997.  The decrease was  primarily the result of the decrease in total
interest income in conjunction with the increase in total interest expense.  The
average  balance of total  interest-earning  assets  increased to $636.6 million
from $619.1 million at September 30, 1998 and September 30, 1997,  respectively.
During these same periods, the average balances of interest-bearing  liabilities
increased to $597.2 million from $555.4  million.  The cost of  interest-bearing
liabilities  decreased  from 4.38% to 4.32% while the yield on  interest-earning
assets  decreased from 7.15% to 6.81% for the nine month periods ended September
30, 1997 and 1998, respectively.

Allowance for Loan Losses.  The allowance for loan losses remained level at $2.1
million at September 30, 1998 and September 30, 1997.  Such totals  correlate to
non-performing  loans of $1.7 million at September  30, 1998 and $1.3 million at
September  30, 1997.  The increase in the  allowance  for loan losses of $48,000
resulted  from the addition of $45,000 to the  provision for loan losses and the
addition of $3,000 of recoveries  net of  charge-offs  for losses on loans.  The
provision for losses on loans is the method by which the allowance for losses is
adjusted  during the period.  The  provision for losses on loans was $15,000 for
the three month period ended  September  30, 1998.  At September  30, 1998,  the
allowance  for loan  losses was 119.2% of  non-performing  loans as  compared to
154.0% of non-performing loans at September 30, 1997. While management maintains
its allowance for losses at a level which it considers to be adequate to provide
for potential losses,  there can be no assurance that further additions will not
be made to the  allowance  and that such  losses  will not exceed the  estimated
amounts.

Non-interest  Income.  Total  non-interest  income decreased to $338,000 for the
three month period ended September 30, 1998 from $945,000 for the same period in
1997. This decrease of $607,000 is primarily attributable to the decrease in the
gain on sale of investment securities of $89,000 and the decrease of $579,000 in
the gain on sale of loans and loan servicing,  partially  offset by the increase
of $50,000 in service fees, charges and other operating income, and the increase
of $11,000 in the gain on sale of real estate acquired through foreclosure.

                                       15
<PAGE>

Total  non-interest  income  decreased to $1.4 million for the nine months ended
September 30, 1998 from $1.8 million for the same period in 1997.  This decrease
of $400,000 can be primarily attributable to the decrease in the gain on sale of
loans and loan  servicing of $527,000,  partially  offset by the increase in the
gain on sale of investment securities of $68,000, the increase of $35,000 in the
gain on sale of real estate  acquired  through  foreclosure  and the increase of
$45,000 in service fees, charges and other operating income.


Non-interest  Expense.  Total  non-interest  expense decreased  $300,000 to $3.2
million for the three  months  ended  September  30, 1998 as compared  with $3.5
million for the  similar  period in 1997.  Employee  compensation  and  benefits
remained  level at $1.6 million for the compared  periods,  while  occupancy and
equipment  decreased by $93,000,  data processing  decreased by $159,000,  other
operating  costs  decreased  by  $97,000,   amortization  of  other  intangibles
decreased by $19,000 and professional fees increased by $31,000. Advertising and
federal deposit insurance expense remained  relatively level for the period. The
decreases to occupancy and equipment and data processing  expenses were a result
of cost reductions related to a data processing system conversion.

Total  non-interest  expense  decreased  $200,000 to $10.0  million for the nine
months ended  September  30, 1998 as compared with $10.2 million for the similar
period  in 1997.  Employee  compensation  and  benefits  remained  level at $4.9
million for the compared  periods,  while  occupancy and equipment  decreased by
$74,000,  data processing decreased by $56,000,  other operating costs decreased
by  $52,000,   amortization  of  other  intangibles  decreased  by  $57,000  and
professional  fees  increased  by  $39,000.   Advertising  and  federal  deposit
insurance  expense remained  relatively  level for the period.  The decreases to
occupancy  and  equipment  and data  processing  expenses  were a result of cost
reductions related to a data processing system conversion.

Income Tax Expense. Income taxes decreased by $269,000 to $534,000 for the three
month period ended  September 30, 1998, from $803,000 for the three months ended
September 30, 1997. The primary reason for this decrease was the decrease in net
income  before taxes to $1.4 million for the three  months ended  September  30,
1998, from $2.2 million for the three months ended September 30, 1997.

Income  taxes  decreased  by $690,000 to $1.7  million for the nine month period
ended  September 30, 1998, from $2.4 million for the nine months ended September
30, 1997.  The primary  reason for this  decrease was the decrease in net income
before taxes to $4.5 million for the nine months ended  September 30, 1998, from
$6.2 million for the nine months ended September 30, 1997.

                                       16
<PAGE>


Liquidity and Capital Resources

Under current Office of Thrift Supervision (OTS)  regulations,  the Savings Bank
must have core capital equal to 4% of total assets and risk-based  capital equal
to 8% of risk-weighted assets.

On  September  30,  1998,  the  Savings  Bank  was in  compliance  with  its two
regulatory capital requirements as follows:

                                                     Amount       Percent
                                                     ------       -------
                                                    (dollars in thousands)
Core capital                                         $44,491         6.4%
Core capital requirement                              27,693         4.0
                                                     -------         --- 
Excess over requirement                              $16,798         2.4%
                                                     =======         === 

Risk based capital                                   $46,568        18.5%
Risk based capital requirement                        20,092         8.0
                                                     -------         --- 
Excess over requirement                              $26,476        10.5%
                                                     =======        ==== 


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

The Savings  Bank's  liquidity  is a measure of its  ability to fund loans,  pay
withdrawals of deposits, and other cash outflows in an efficient, cost-effective
manner. The Savings Bank's primary source of funds are deposits, borrowings from
the Federal Home Loan Bank and other  borrowings and scheduled  amortization and
prepayment of loan and  mortgage-backed  securities  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
mortgage-backed  securities and other investments,  and increase liquidity.  The
Savings Bank is currently able to fund its  operations  internally but has, when
deemed prudent, borrowed funds from the Federal Home Loan Bank of Pittsburgh. As
of September 30, 1998, such borrowed funds total $183.4 million.  Loan payments,
maturing  investments  and  mortgage-backed  security  prepayments  are  greatly
influenced by general interest rates, economic conditions and competition.

The Savings  Bank is required  under  federal  regulations  to maintain  certain
specified  levels of "liquid  investments",  which include certain United States
government  obligations  and other  approved  investments.  Current  regulations
require the Savings  Bank to maintain  liquid  assets of not less than 4% of its
net withdrawable  accounts plus short term borrowings.  Short term liquid assets
must consist of not less than 1% of such accounts and  borrowings,  which amount
is also  included  within the 4%  requirement.  These levels may be changed from
time to time by the  regulators  to reflect  current  economic  conditions.  The
Savings Bank has  generally  maintained  liquidity  far in excess of  regulatory
requirements.  The Savings Bank's  regulatory  liquidity was 25.37% and 22.7% at
September 30, 1998 and 1997, respectively.

The amount of  certificate  accounts,  which are  scheduled to mature during the
twelve months ending September 30, 1999, is approximately $153.6 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 outside borrowings.  It has been the Savings Bank's
experience  that a substantial  portion of such maturing  deposits remain at the
Savings Bank.


At September 30, 1998, the Savings Bank had outstanding commitments to originate
loans of $19.3 million and to purchase  investment  securities of $13.1 million.
Funds  required to fill these  commitments  are derived  primarily  from current
excess  liquidity or loan and security  repayments.  At September 30, 1998,  the
Savings Bank had no outstanding commitments to sell loans.

                                       17
<PAGE>

Year 2000 

Readiness Efforts

In 1998, a comprehensive  project plan ("Plan") to address the Year 2000 problem
and related  issues as those relate to the Company's  operations  was developed,
approved by the Board of Directors  and  implemented.  The  Company's  Year 2000
effort is proceeding in accordance with the written Plan.  Progress  reports are
provided to the Board at least monthly.

The Year 2000 problem is the result of potential  problems  with software
and computer  systems or any equipment  with computer  chips that store the year
portion of the date as just  two-digits.  Systems using this two-digit  approach
may not be able to determine  whether 00 represents  the year 2000 or 1900.  The
problem,  if not  corrected,  will make those systems fail  altogether  or, even
worse,  allow them to generate  incorrect  calculations  causing a disruption of
normal computer and related operations.

The  Company's  Plan is divided  into four  broad  areas of  concern:  hardware,
software,  service providers and customers.  Year 2000 issues being addressed in
each  of  these  areas  include  both   information   related   technology   and
non-information related technology.  A project team that consists of key members
of the Company's technology staff,  representatives of functional business units
and senior  management  was  developed.  From the  assessment,  the  Company has
identified and prioritized  those systems deemed to be mission critical or those
that have a significant impact on normal operations.  Formal communications with
those  providers of data  processing  capabilities  and other  external  counter
parties  were  initiated  in 1997 and 1998 to assess the Year 2000  readiness of
their  products and  services.  Thus far,  responses  indicate  that most of the
significant  providers  are  currently  following  plans  developed  to  address
processing of transactions beginning January 1, 2000.

Costs

The total cost to the Company of these Year 2000  compliance  activities has not
been and is not anticipated to be material to its financial  position or results
of operations in any given year. In total, the Company estimates that its costs,
excluding  personal  expenses,  for Year 2000  remediation  and  testing  of its
computer  systems  will amount to less than  $25,000 for the twelve month period
ending  December  31,  1998.  At  September  30,  1998,  there are no  material,
incomplete tasks pursuant to the Plan.

Risk Assessment

Based upon current  information related to the progress of its major vendors and
service  providers,  management has determined that the Year 2000 issue will not
pose   significant   operational   problems  for  its  computer   systems.   The
determination is based on the ability of those vendors and service  providers to
renovate,  in a timely  manner,  the  products and services on which the Company
systems rely.  However,  the Company can give no assurance that the systems
of these suppliers will be timely renovated.

Contingency Plan

Realizing that some  disruption may occur despite its best efforts,  the Company
is in the process of developing  contingency  plans for each critical  system in
the event  that one or more of those  systems  fail.  While  this is an  ongoing
process,  the  Company  expects  to  have  the  contingency  plan  substantially
completed by July 31, 1999.

                                       18
<PAGE>

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Asset and Liability Management

Managing Interest Rate Risk. Interest rate risk is defined as the sensitivity of
the Company's  current and future  earnings as well as its capital to changes in
the level of market interest rates. The Company's exposure to interest rate risk
results   from,   among  other   things,   the   difference   in  maturities  in
interest-earning  assets and interest-bearing  liabilities.  Since the Company's
assets  currently  have a longer  maturity than its  liabilities,  the Company's
earnings could be negatively  impacted  during a period of rising interest rates
and conversely,  positively  impacted during a period of falling interest rates.
The  relationship  between the interest rate sensitivity of the Company's assets
and  liabilities is continually  monitored by  management.  In this regard,  the
Company emphasizes the origination of shorter term or adjustable rate assets for
portfolio  while  originating  longer  term fixed rate  assets  for  resale.  At
September  30, 1998,  approximately  76% of the  Company's  loan  portfolio  was
comprised  of loans  with  original  maturities  of less than 15 years,  balloon
mortgages or adjustable rate loans. Additionally, the origination level of fixed
rate assets are  continually  monitored and if deemed  appropriate,  the Company
will enter into forward  commitments  for the sale of these assets to ensure the
Company is not exposed to undue interest rate risk.

The Company utilizes its investment and  mortgage-backed  security  portfolio in
managing its liquidity and therefore  seeks  securities with a stated or average
estimated  maturities  of less that ten  years.  These  securities  are  readily
marketable  and provide the Company with a cash flow stream to fund asset growth
or liability maturities.

     A  significant  portion  of the  Company's  assets  has  been  funded  with
certificates  of deposit  ("CD"),  including  jumbo CDs.  Unlike  other  deposit
products  such as  checking  and  savings  accounts,  CDs carry a high degree of
interest rate  sensitivity  and therefore,  their renewal will vary based on the
competitiveness  of the Company's  interest rates.  The Company has attempted to
price its CDs to be competitive at the shorter  maturities (i.e.,  maturities of
less than one year) in order to better match the  repricing  characteristics  of
portfolio  loans.  At September  30, 1998,  approximately  46% of the  Company's
deposits were CDs.

     The Company utilizes borrowings from the Federal Home Loan Bank ("FHLB") in
managing  its  interest  rate risk and as a tool to augment  deposits in funding
asset growth.  The Company may utilize these funding sources to better match its
longer term repricing  assets (i.e.,  between one and five years).  At September
30, 1998, approximately 28.5% of the Company's liabilities were FHLB borrowings.

The nature of the Company's current operations is such that it is not subject to
foreign  currency  exchange or commodity price risk.  Additionally,  neither the
Company nor the Savings Bank owns any trading assets. At September 30, 1998, the
Company did not have any  hedging  transactions  in place such as interest  rate
swaps, caps, or floors.

                                       19
<PAGE>

GAP analysis is a useful measurement of asset and liability management; however,
it is difficult to predict the effect of changing interest rates based solely on
this measure. An additional analysis required by the OTS and generated quarterly
is the OTS Interest Rate Exposure Report.  This report forecasts  changes in the
Company's market value of portfolio equity ("MVPE") under  alternative  interest
rate environments. The MVPE is defined as the net present value of the Company's
existing assets,  liabilities and off-balance sheet instruments.  The calculated
estimates of change in MVPE at June 30, 1998 are as follows:

          MVPE 
               -----------------------------------------------------------------


----------------------------- -------------------------- -----------------------
Change in Interest Rate                  Amount                   % Change
----------------------------- -------------------------- -----------------------
+400 Basis Points                       $51,592                    -13%
----------------------------- -------------------------- -----------------------
+300 Basis Points                       $54,913                     -7%
----------------------------- -------------------------- -----------------------
+200 Basis Points                       $58,067                     -1%
----------------------------- -------------------------- -----------------------
+200 Basis Points                       $60,003                     +2%
----------------------------- -------------------------- -----------------------
Flat Rate                               $58,838                      0%
----------------------------- -------------------------- -----------------------
-100 Basis Points                       $55,836                     -5%
----------------------------- -------------------------- -----------------------
-200 Basis Points                       $49,964                    -15%
----------------------------- -------------------------- -----------------------
-300 Basis Points                       $44,698                    -24%
----------------------------- -------------------------- -----------------------
-400 Basis Points                       $39,547                    -33%
----------------------------- -------------------------- -----------------------


Management   believes  that  the   assumptions   utilized  in   evaluating   the
vulnerability of the Company's earnings and capital to changes in interest rates
approximate  actual  experience;  however,  the interest rate sensitivity of the
Company's  assets and liabilities as well as the estimated  effect of changes in
interest rates on MVPE could vary  substantially  if different  assumptions  are
used or actual  experience  differs from the experience on which the assumptions
were based.


In the event the Company should  experience a mismatch in its desired GAP ranges
or an excessive  decline in its MVPE  subsequent  to an immediate  and sustained
change in interest  rate,  it has a number of options  which it could utilize to
remedy such mismatch.  The Company could  restructure  its investment  portfolio
through sale or purchase of securities with more favorable repricing attributes.
It could also emphasize loan products with  appropriate  maturities or repricing
attributes,  or it could  attract  deposits or obtain  borrowings  with  desired
maturities.


                                       20
<PAGE>


                    TF FINANCIAL CORPORATION AND SUBSIDIARIES

                                     PART II

      ITEM 1.                    LEGAL PROCEEDINGS
                                 Neither the  Corporation  nor the Savings  Bank
                                 was  engaged  in  any  legal  proceeding  of  a
                                 material  nature at August 14, 1998.  From time
                                 to time,  the  Corporation  is a party to legal
                                 proceedings in the ordinary  course of business
                                 wherein it enforces  its  security  interest in
                                 loans.

      ITEM 2.                    CHANGES IN SECURITIES AND USE OF PROCEEDS

                                 Not applicable.

      ITEM 3.                    DEFAULTS UPON SENIOR SECURITIES

                                 Not applicable.

      ITEM 4.                    SUBMISSION  OF  MATTERS  TO  A VOTE OF SECURITY
                                 HOLDERS

                                 Not applicable.

      ITEM 5.                    OTHER INFORMATION


      ITEM 6.                    EXHIBITS AND REPORTS ON FORM 8-K

                                 (a)     Exhibits

                                 None

                                 (b)     Reports on Form 8-K

                                 None




                                       21
<PAGE>





                                   SIGNATURES
Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
Registrant  has duly  caused  this  Report  to be  signed  on its  behalf by the
undersigned, thereunto duly authorized.


                                      TF FINANCIAL CORPORATION



                                      /s/John R. Stranford  
                                      ------------------------------------------
Date:      November 20, 1998          John R. Stranford
                                      President and CEO
                                      (Principal Executive Officer)



                                      /s/William C. Niemczura  
                                      ------------------------------------------
Date:      November 20, 1998          William C. Niemczura
                                      Senior Vice President and
                                      Chief Financial Officer
                                      (Principal Financial & Accounting Officer)


                                       22