PART I

ITEM 1.  BUSINESS

   GENERAL

         Interchange  Financial  Services  Corporation  (the  "Company"),  a New
Jersey business corporation and bank holding company under Federal law, acquired
all of the outstanding  stock of Interchange  State Bank, a New Jersey chartered
bank (the "Bank" or "Interchange") in 1986.

         The  Bank,  established  in 1969,  is a  full-service  commercial  bank
headquartered  in Saddle  Brook,  New Jersey.  It offers  banking  services  for
individuals and businesses  through its twelve banking offices in Bergen County,
New Jersey.

          In addition to its commercial  lending  activities,  the Bank offers a
wide  range of  consumer  banking  services,  including:  checking  and  savings
accounts,  money-market accounts, certificates of deposit, individual retirement
accounts,  residential  mortgages,  home equity lines of credit and other second
mortgage loans, home improvement  loans,  automobile  loans,  personal loans and
overdraft  protection.   The  Bank  also  offers  a  VISA(TM)  credit  card  and
Interchange  Bank-Line--our telephone banking system. Certain Bank employees are
also licensed  insurance  agents  qualified to offer tax deferred  annuities and
related insurance  products.  The Bank also offers mutual funds to its customers
through a third party vendor.  Automated  teller  machines  (MAC(TM),  PLUS(TM),
HONOR(TM),  VISA(TM)  and  MASTERCARD(TM)  networks)  are located at nine of the
banking offices and at two supermarkets.

         The Bank is engaged in the  financing of local  business and  industry,
providing  credit  facilities  and  related  services  for  smaller  businesses,
typically  those with $1 million to $5 million in annual sales.  Commercial loan
customers of the Bank are businesses ranging from light  manufacturing and local
wholesale and  distribution  companies to  medium-sized  service firms and local
retail  businesses.  Most forms of  commercial  lending are  offered,  including
working capital lines of credit, small business administration loans, term loans
for  fixed  asset  acquisitions,   commercial   mortgages  and  other  forms  of
asset-based financing.

          In past  years,  the Bank has  taken  advantage  of  opportunities  to
purchase packages of loans. These loans were subjected to the Bank's independent
credit  analysis  prior to purchase and were,  in some cases,  purchased  with a
limited buy-back  obligation or other financial  assurance from the sellers.  In
the Bank's  experience,  there are significant  opportunities to sell the Bank's
other products and services to the borrowers whose loans are purchased.

         The Bank has expanded its service  areas from one office in 1969 to the
present twelve banking locations by opening new branches and, in 1991, acquiring
branch locations formerly operated by other  institutions.  Management  believes
that the 1991  acquisition  of the Park Ridge office of The Howard  Savings Bank
has allowed the Bank to increase its penetration of the affluent  Pascack Valley
area of Bergen County. The Company's acquisition in 1991 of the former Community
Guardian  Bank  increased  its  penetration  of the existing  market area. A new
branch was opened in Little Ferry in September, 1993, and in 1994, deposits of a
failed  thrift  institution  were  acquired  and  added to the  already  growing
deposits in that office.  In June 1996, the Bank opened a new branch in Oakland,
New  Jersey.  This  expansion  will  increase  the  Bank's  penetration  in  its
contiguous market area. In September 1996, a mini-branch in Paramus, New Jersey,
was closed. In December 1996, the branch in Clifton, New Jersey, was sold. These
branches were  eliminated in response to evaluations  of prospective  growth and
earnings contributions of the branches. Since 1984, the Bank's assets have grown
from $135 million to $505 million.

         Deposits of the Bank are insured up to $100,000  per  depositor  by the
Bank Insurance Fund administered by the FDIC.

         The Company had 175  full-time-equivalent  employees  during 1996.  Its
principal  executive  office is located at Park 80 West/Plaza Two, Saddle Brook,
New  Jersey  07663,  telephone  number  (201)703-2265.  As used  herein the term
"Company"  includes the Bank and wholly-owned  subsidiaries of the Bank,  unless
the context otherwise requires.

         The Bank's principal market for its deposit gathering activities covers
major  portions  of Bergen  County  in the  northeastern  corner  of New  Jersey
adjacent to New York City.  The principal  service areas of the Bank represent a
diversified  mix of stable  residential  neighborhoods  with a wide range of per
household  income  levels;  offices,  service  industries  and light  industrial
facilities; and large shopping malls and small retail outlets.

         For many years  Interchange  State Bank has conducted  periodic  market
research to keep aware of market  trends.  Much of this  research  affirmed that
consumer  financial needs are directly related to identifiable  life stages.  In
response to these  distinctive  preferences,  the bank has designed and marketed
"packaged"  products to appeal to these  different  segments.  Product  packages
consist  of  offering  several  deposit,  credit  and other  financial  services
together as a product unit. This encourages  customers to use multiple  products
and allows the bank to establish stronger relationships.

         The four product packages introduced to date include: GROW'N UP SAVINGS
--a  passbook  savings  account  which can be opened for a child of any age that
teaches them the good habits of saving. MONEY PLUS ACCOUNT --geared to the 24-34
year age group. This is a checking account which includes  additional  financial
benefits.  MONEY MAKER ACCOUNT--created for the 35-54 year age group. This is an
interest bearing checking account that offers higher rates  automatically as the
balance increases. PRIME TIME ACCOUNT--for the mature market which offers them a
variety of financial and non-financial  benefits available to them for a minimum
balance only. Since the predominant age of the Interchange population is between
35-54 and 55+,  the  Money  Maker and Prime  Time  Accounts  offer a variety  of
products to  accommodate  any of their  financial  needs for that stage of their
life. The Bank was among the first to offer such packaged  financial products in
its area and  management  believes  they  have  been  successful  in  attracting
deposits and building a loyal client base.

   COMPETITION

         Competition  in the  banking  and  financial  services  industry in the
Company's market area is intense.  The Bank competes  actively with national and
state-chartered  commercial  banks and other financial  institutions,  including
savings and loan  associations,  mutual  savings banks,  and credit  unions.  In
addition,  the Bank faces competition from less heavily regulated  entities such
as brokerage  institutions,  money management firms, consumer finance and credit
card companies and various other types of financial services companies.  Many of
these institutions are larger than the Bank, some are better capitalized,  and a
number pursue community banking strategies similar to those of the Bank.

          Management  believes that  opportunities  continue to exist to satisfy
the deposit and lending  demands of small and middle market  businesses.  Larger
banks  continued  to show an  appetite  for  only  the  largest  loans,  finding
themselves ill-equipped to administer smaller loans profitably.  Interchange has
the desire  and the  ability  to give  smaller  businesses  the  treatment  they
deserve.  We promise and deliver to this market the kind of preferential,  first
class attention that megabanks give  megacompanies.  Interchange meets this need
through a unique  program called Rapid Response  Banking.  The program  provides
commercial loans up to $50,000 with a streamlined  approval process that borrows
liberally from standard consumer lending  practices.  Naturally,  in due course,
many small businesses become midsize businesses,  with a corresponding change in
their financial requirements. But they do not outgrow Interchange because of our
ability to be responsive to both  constituencies.  To continue serving companies
throughout the various stages of their evolution,  Interchange  created Business
Class  Banking--a  program that grows with the customer.  Business Class Banking
supports a spectrum of  business-oriented  financial  products with  value-added
services. By designing progressive programs to accommodate the changing needs of
growing businesses,  Interchange is extending the longevity of valuable customer
relationships.

         In 1995,  Interchange State Bank installed a relational database.  This
is powerful new  technology,  designed  expressly  for the banking  industry and
generally  associated with only the largest and most forward thinking companies.
From a  marketing  point  of  view,  the  implications  of this  technology  are
significant. We can now analyze account relationships,  their activity and their
relative value to the Bank in great detail.

         Interchange has maintained an ambitious  program of primary research to
keep  abreast  of  customer  attitudes  and  preferences.  Our sales  quotas and
incentives for employees are linked  directly to bank-wide goals and are used to
motivate employees to sell the "right" products to the "right" customers.


<PAGE>


  REGULATION AND SUPERVISION

     THE COMPANY

         The Company is a bank holding  company  under the Bank Holding  Company
Act of 1956, as amended (the "Holding  Company Act"), and as such, is subject to
supervision  by the  Board of  Governors  of the  Federal  Reserve  System  (the
"Federal Reserve Board"). As a bank holding company,  the Company is required to
file an  annual  report  with the  Federal  Reserve  Board  and such  additional
information  as the Federal  Reserve  Board may require  pursuant to the Holding
Company Act and Federal  Regulation  Y. The  Federal  Reserve  Board may conduct
examinations of the Company or any of its subsidiaries.  The Holding Company Act
requires every bank holding  company to obtain the prior approval of the Federal
Reserve  Board before it may acquire all or  substantially  all of the assets of
any bank  (although  the Federal  Reserve Board may not assert  jurisdiction  in
certain bank mergers that are regulated under the Bank Merger Act), or ownership
or control of any voting shares of any bank if after such  acquisition  it would
own or control  directly or indirectly more than 5% of the voting shares of such
bank. Under certain  circumstances,  prior approval of the Federal Reserve Board
is required  under the Holding  Company  Act before a bank  holding  company may
purchase or redeem any of its equity securities.

         The Holding  Company Act also  prohibits a bank holding  company,  with
certain  limited  exceptions,  from itself  engaging in or  acquiring  direct or
indirect  interest in or control of any company  that is engaged in  non-banking
activities.  Certain  exemptions  are  available  with  respect to  subsidiaries
engaged in servicing or liquidating  activities or companies  acquired by a bank
holding  company  in  satisfaction  of  debts  previously  contracted.   Another
principal  exception to this prohibition  allows the  acquisition,  following an
application or notice process,  of interests in companies  whose  activities are
found by the Federal  Reserve Board,  by order or  regulation,  to be so closely
related to banking or managing or controlling  banks as to be a proper  incident
thereto.  Some of the activities  that have been  determined by regulation to be
closely related to banking are making or servicing  loans,  underwriting  credit
life  insurance,  performing  certain  data  processing  services,  acting as an
investment or financial  advisor and  providing  discount  securities  brokerage
services.  Other  activities  approved  by the  Federal  Reserve  Board  include
acquisition  of  a  savings  association,  consumer  financial  counseling,  tax
planning  and tax return  preparation,  futures and options  advisory  services,
check guaranty services,  collection agency and credit bureau services, and real
estate and personal property appraisals.

         The  provisions  of Section 23A of the Federal  Reserve Act and related
statutes place limits on all insured banks (including the Bank) as to the amount
of loans or  extensions  of  credit  to, or  investment  in,  or  certain  other
transactions  with,  their  parent bank  holding  companies  and certain of such
holding  companies'  subsidiaries  and as to the  amount  of  advances  to third
parties  collateralized  by  the  securities  or  obligations  of  bank  holding
companies or their subsidiaries.  In addition, loans and extensions of credit to
affiliates of the Bank generally must be secured in the prescribed amounts.

     CAPITAL ADEQUACY GUIDELINES

         The Federal  Reserve Board issued  guidelines  establishing  risk-based
capital requirements for bank holding companies and member banks. The guidelines
established  a risk-based  capital  framework  consisting of (1) a definition of
capital consisting of Tier I capital, which includes common shareholders' equity
less certain  intangibles  and a supplementary  component  called Tier II, which
includes  a  portion  of the  allowance  for loan  losses  and (2) a system  for
assigning  assets and  off-balance-sheet  items to one of the four weighted risk
categories,  with higher  levels of capital  being  required for the  categories
perceived  as  representing   the  greater  risks,  and  established  a  minimum
risk-based  capital  ratio of 8% (of  which  at  least  4% must be Tier  I).  An
institution's  risk-based capital ratio is determined by dividing its qualifying
capital by its  risk-weighted  assets.  The guidelines make  regulatory  capital
requirements  more  sensitive to  differences  in risk  profiles  among  banking
institutions,  take  off-balance  sheet items into account in assessing  capital
adequacy, and minimize disincentives to holding liquid, low-risk assets. Banking
organizations  are  generally  expected to operate with capital  positions  well
above the  minimum  rates.  Institutions  with higher  levels of risk,  or which
experience or anticipate  significant  growth, are also expected to operate well
above minimum capital standards.

         These guidelines  focus  principally on broad categories of credit risk
although the framework for assigning assets and off-balance  sheet items to risk
categories does  incorporate  elements of transfer risk. The risk-based  capital
ratio does not,  however,  incorporate other factors that may affect a company's
financial condition, such as overall interest rate exposure,  liquidity, funding
and  market  risks,  the  quality  and  level of  earnings,  investment  or loan
concentrations,  the quality of loans and investments, the effectiveness of loan
and  investment  policies  and  management's  ability  to  monitor  and  control
financial and operating risks.

         In addition to the risk-based  guidelines  discussed above, the Federal
Reserve  Board  requires  that a bank  holding  company  and bank which meet the
regulator's  highest  performance  and  operational  standards and which are not
contemplating  or experiencing  significant  growth maintain a minimum  leverage
ratio (Tier I capital as a percent of quarterly  average adjusted assets) of 3%.
For  those  financial  institutions  with  higher  levels  of risk  or that  are
experiencing or anticipating significant growth, the minimum leverage ratio will
be increased.

         The Federal Reserve Board is vested with broad enforcement  powers over
bank holding companies to forestall  activities that represent unsafe or unsound
practices or constitute violations of law. These powers may be exercised through
the issuance of cease and desist orders or other  actions.  The Federal  Reserve
Board  is  also  empowered  to  assess  civil  penalties  against  companies  or
individuals  who violate  the  Holding  Company  Act,  to order  termination  of
non-banking activities of non-banking subsidiaries of bank holding companies and
to order  termination  of ownership and control of non-banking  subsidiaries  by
bank holding  companies.  Neither the Company nor any of its affiliates has ever
been the subject of any such actions by the Federal Reserve Board.

     THE BANK

         As a New Jersey  state-chartered member bank, the Bank's operations are
subject to various requirements and restrictions of state law pertaining,  among
other things, to lending limits,  reserves,  interest rates payable on deposits,
loans, investments, mergers and acquisitions,  borrowings,  dividends, locations
of  branch  offices  and  capital  adequacy.  The  Bank is  subject  to  primary
supervision, periodic examination and regulation by the New Jersey Department of
Banking and Insurance  ("NJDBI").  If, as a result of an  examination of a bank,
the NJDBI  determines that the financial  condition,  capital  resources,  asset
quality,  earnings  prospects,  management,  liquidity,  or other aspects of the
bank's  operations  are  unsatisfactory  or that the bank or its  management  is
violating or has violated any law or regulation,  various remedies are available
to the NJDBI.  Such  remedies  include the power to enjoin  "unsafe and unsound"
practices,  to require  affirmative  action to correct any conditions  resulting
from any  violation or practice,  to issue an  administrative  order that can be
judicially enforced,  to, among other things,  direct an increase in capital, to
restrict  the  growth  of the  Bank,  to assess  civil  penalties  and to remove
officers   and   directors.   The  Bank  has  never  been  the  subject  of  any
administrative orders, memoranda of understanding or any other regulatory action
by the NJDBI. The Bank also is subject to supervisory examination by the Federal
Reserve Bank of New York.

         The Bank's deposits are insured by the Bank Insurance Fund administered
by the FDIC up to a maximum of $100,000 per depositor. For this protection, each
bank pays a semi-annual statutory assessment to, and is subject to the rules and
regulations of, the FDIC.

         The Bank's ability to pay dividends is subject to certain statutory and
regulatory  restrictions.  The New  Jersey  Banking  Act of  1948,  as  amended,
provides  that no  state-chartered  bank may pay a dividend on its capital stock
unless,  following the payment of each such  dividend,  the capital stock of the
bank will be  unimpaired,  and the bank will have a surplus of not less than 50%
of its  capital,  or, if not, the payment of such  dividend  will not reduce the
surplus of the bank.  In  addition,  the payment of  dividends is limited by the
requirement  to meet the  risk-based  capital  guidelines  issued by the Federal
Reserve Board and other regulations.

     FDIC IMPROVEMENT ACT OF 1991

         The Federal Deposit Insurance Corporation  Improvement of 1991, enacted
in December  1991  ("FDICIA"),  among other  things,  identifies  the  following
capital  standard  categories  for  financial  institutions:  well  capitalized,
adequately  capitalized,  undercapitalized,  significantly  undercapitalized and
critically  undercapitalized.  The FDIC has enacted regulations to implement the
prompt corrective action provisions of FDICIA. These regulations  establish five
classifications  based on the  capital  measures  of an  institution.  Under the
guidelines,  a "well  capitalized"  institution  is one with a total  risk-based
capital ratio of 10% or above, a Tier I risk-based  capital ratio of 6% or above
and a Tier I  leverage  ratio of 5% or above,  and is not  subject  to a capital
directive  to meet a specific  level for any  capital  measure;  an  "adequately
capitalized"  institution is one with a total risk-based  capital ratio of 8% or
above, a Tier I risk-based  ratio of 4% or above, and a Tier I leverage ratio of
4%  or  above   and   which   is  not  a  well   capitalized   institution;   an
"under-capitalized"  institution  is one that does not meet the  capital  levels
necessary  to  be  an  adequately  capitalized  institution;   a  "significantly
undercapitalized"  institution is one with a total  risk-based  capital ratio of
under 6%, a Tier I  risk-based  capital  ratio of under 3%, or a Tier I leverage
ratio of under 3%; and a "critically undercapitalized" institution is one with a
Tier I leverage ratio of 2% or less. The institution's primary regulator has the
discretion  to downgrade  the  institution  by one  classification  level if the
institution  is found to be unsafe and  unsound,  or to be engaged in unsafe and
unsound practices.

         FDICIA imposes progressively more restrictive  supervisory  constraints
on operations, management and capital distributions depending on the category in
which  an  institution  is  classified.  Pursuant  to  FDICIA,  undercapitalized
institutions  must submit  recapitalization  plans, and a company  controlling a
failing  institution  must  guarantee  (subject  to  certain  limitations)  such
institution's  compliance  with its plan in order for the plan to be accepted by
the regulators. In addition, FDICIA generally prohibits a depository institution
from making any capital distribution (including payment of a dividend) or paying
a management  fee to its holding  company if the depository  institution  is, or
would  thereby  become,  undercapitalized.  FDICIA  also  requires  the  various
regulatory  agencies to prescribe  within one year from the date of enactment of
FDICIA certain non-capital standards for safety and soundness relating generally
to operations  and  management,  asset quality and executive  compensation,  and
permits  regulatory  action against a financial  institution  that does not meet
such standards.

         The Financial  Institutions Reform Recovery and Enforcement Act of 1989
("FIRREA") and FDICIA provide the federal  banking  agencies with  significantly
expanded powers to take enforcement  action against  institutions  which fail to
comply with capital or other standards.  Such action may include the termination
of deposit insurance by the FDIC or the appointment of a receiver or conservator
for the institution.

         The Bank's  deposits  are insured by the FDIC and the Bank is therefore
subject to FDIC deposit insurance  assessments.  On September 15, 1992, the FDIC
approved  the   implementation  of  a  transition   risk-based  deposit  premium
assessment  system under which each  depository  institution is placed in one of
nine assessment  categories  based on certain capital and supervisory  measures.
The  assessment  rates  under the new  system  range  from 0.23  percent to 0.31
percent  depending  upon the  assessment  category  into  which  the  depository
institution  is placed.  In 1995,  the  Federal  Deposit  Insurance  Corporation
reduced the lower tier of the assessment from 0.23 percent to 0.04 percent.  The
reduction  of the  assessment,  effective  as of the  second  quarter  of  1995,
resulted from the Bank  Insurance Fund becoming  fully  capitalized.  The Bank's
assessment  rate was 0.04  percent at December 31,  1995.  Effective  January 1,
1996,  the FDIC further  changed the rate  structure for the BIF.  Under the new
rate structure, assessment rates will be between zero and 0.27 percent. However,
institutions  that have a zero assessment will be subject to a statutory minimum
of $2,000  per year.  In 1996,  the Bank had a zero  assessment,  subject to the
statutory minimum.  A portion of the Bank's deposits  (approximately 18 million)
are Oakar  deposits and are subject to the Savings  Association  Insurance  Fund
("SAIF")  assessment.  The SAIF  assessment  rates  were  between  0.23 and 0.31
percent in 1996 and will range  between zero and 0.27 percent in 1997.  In 1996,
the Bank had a 0.23 percent assessment rate. 

ITEM 2. PROPERTIES

          The Company  leases nine  banking  offices and one  operations/support
facility.  The lease for the mini-branch located in Paramus, New Jersey, expired
in September 1996 and was not renewed.  It owns three banking offices and leases
land on which it owns one bank building. 

ITEM 3. LEGAL PROCEEDINGS

         Interchange State Bank's (the "Bank"), a wholly owned subsidiary of the
Company,  was a party to a  lawsuit  commenced  in April  1989  (Great  American
Mortgage Corp., et al, v. Robert Utter, et al.),  filed in the Superior Court of
New Jersey alleging that the Bank was statutorily  liable for having paid checks
which bore irregular  endorsements.  Various other legal proceedings  related to
the  foregoing  were also  instituted  and, in those  actions,  the Bank pursued
various  parties whom the Bank alleged were liable to it. On August 2, 1996, the
Bank paid  $120,000  plus  prejudgment  interest  to  resolve  the final  matter
pertaining  to  these  occurrences.  The  remainder  of  a  reserve,  which  was
established in 1992, was sufficient to cover this amount.  All legal proceedings
related to these  occurrences,  involving the  potential  liability of the Bank,
have now been resolved.

         The  Company is also a party to routine  litigation  involving  various
aspects of its business,  none of which,  in the opinion of  management  and its
legal counsel, is expected to have a material adverse impact on the consolidated
financial condition, results of operations or liquidity of the Company.

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

          No matters were  submitted  during the three months ended December 31,
1996, to a vote of the Company's  security  holders through the  solicitation of
proxies or otherwise.

EXECUTIVE OFFICERS

          The following table sets forth the names,  ages, and present positions
of the principal executive

officers:
<TABLE>

<S>                                        <C>         <C>   
NAME                                        AGE         POSITIONS HELD WITH THE COMPANY AND THE BANK
----                                        ---         --------------------------------------------
ANTHONY S. ABBATE . . . . . . . . . . . .   57           President and Chief Executive Officer
ROBERT N. HARRIS. . . . . . . . .  . . .    64           Executive Vice President and Chief Financial 
                                                           Officer(retired 12/31/96)
RICHARD N. LATRENTA . . . . . . . . . . .   43           Senior Vice President--Lending
FRANK R. GIANCOLA . . . . . . . . . . . .   43           Senior Vice President--Retail Banking
ANTHONY J. LABOZZETTA. . . . . . . . . .    33           Senior Vice President--Treasurer
</TABLE>



BUSINESS EXPERIENCE

          ANTHONY S. ABBATE,  President and Chief Executive  Officer of the Bank
since 1981;  Senior Vice President and Controller  from October 1980;  President
and Chief Executive Officer of Home State Bank 1978-1980. Engaged in the banking
industry since 1959.

          ROBERT N. HARRIS, Executive Vice President and Chief Financial Officer
of the Bank since 1983;  Senior Vice  President and Chief  Financial  Officer of
Bergen State Bank  1978-1983.  Engaged in the banking  industry  since 1965. Mr.
Harris retired effective December 31, 1996.

          RICHARD N. LATRENTA,  Senior Vice  President-Lending of the Bank since
1984; Senior Loan Officer since 1982; Assistant Vice President since 1980; other
positions with the Bank since 1976. Engaged in the banking industry since 1972.

          FRANK R. GIANCOLA,  Senior Vice President-Retail Banking since January
1,  1993;  Senior  Vice  President-Operations  of the  Bank  from  1984;  Senior
Operations  Officer from 1982; Vice  President/Branch  Administrator  from 1981.
Engaged in the banking industry since 1971.

          ANTHONY J. LABOZZETTA,  Senior Vice President--Treasurer since January
1, 1997;  Treasurer  from 1995.  Engaged in the  banking  industry  since  1989.
Formerly a senior manager with an international accounting firm.

          Officers are elected annually and serve at the discretion of the board
of  directors.  Management is not aware of any family  relationship  between any
director or executive officer.

                                    PART II

ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON STOCK

   The common stock is traded on the American  Stock Exchange under the symbol
"ISB." A cash  dividend of  $0.1675,  $0.1725 and $0.185 was paid on each common
share outstanding in each quarter during 1994, 1995 and 1996, respectively.  The
following table sets forth, for the periods indicated, the reported high and low
sales prices: 
<TABLE>
<CAPTION>

                                                                          High         Low
                                                                        -------       ------
                 <S>                                                    <C>            <C>    

                 1994

                     First quarter ..............................         $16.50      $14.00
                     Second quarter .............................          16.625      14.25
                     Third quarter ..............................          16.75       15.375
                     Fourth quarter .............................          16.375      14.75

                 1995

                     First quarter ..............................         $17.375     $14.625
                     Second quarter .............................          20.125      16.50
                     Third quarter ..............................          23.00       19.00
                     Fourth quarter .............................          21.625      20.25

                 1996

                     First quarter ..............................         $22.25      $19.875
                     Second quarter .............................          20.625      19.25
                     Third quarter ..............................          22.125      18.75
                     Fourth quarter .............................          25.00       21.375

The number of stockholders of record as of December 31, 1996, was 1,098.
</TABLE>


<PAGE>
<TABLE>
ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA
<CAPTION>
                                                                         Y E A R S    E N D E D    D E C E M B E R  31,
                                                                    ----------------------------------------------------
                                                                      1996      1995      1994       1993         1992
                                                                    ----------------------------------------------------
SUMMARY EARNINGS (IN THOUSANDS)
<S>                                                                  <C>       <C>        <C>       <C>         <C>    
    Interest income ..........................................       $37,284   $36,995    $32,612   $29,267     $31,258
    Interest expense .........................................        14,599    15,150     11,006    10,237      14,379 
                                                                      ------    ------     ------    ------      ------ 
       Net interest income ...................................        22,685    21,845     21,606    19,030      16,879      
    Provision for loan losses ................................           700     1,200        944     1,065       2,237
                                                                     -------   -------   --------   -------    --------
       Net interest income after provision for loan losses ...        21,985    20,645     20,662    17,965      14,642
    Noninterest income .......................................         4,272     4,579      3,571     4,861       5,104
    Noninterest expenses .....................................        16,382    15,651     15,535    14,897      13,552
                                                                     -------   -------   --------   -------    --------
       Income before cumulative effect of change in
          accounting principle and income taxes ..............         9,875     9,573      8,698     7,929       6,194
    Income taxes .............................................         3,456     3,293      3,062     2,887       2,473
                                                                     -------   -------   --------   -------    --------
       Income before cumulative effect of
          change in accounting principle .....................         6,419     6,280      5,636     5,042       3,721
    Cumulative effect of change in accounting principle ......          --        --         --        (205)       --
                                                                     -------   -------   --------   -------    --------
       Net income ............................................       $ 6,419   $ 6,280    $ 5,636   $ 4,837     $ 3,721
                                                                     =======   =======   ========   =======    ========
PER SHARE DATA
    Income before cumulative effect of change
       in accounting principle ...............................       $2.26     $2.19      $1.95     $1.71       $1.71
    Cumulative effect of change in accounting principle ......         --        --         --      (0.07)        --
    Net income ...............................................        2.26      2.19       1.95      1.64        1.71
    Cash dividends declared ..................................        0.73      0.69       0.67      0.67        0.67
    Book value-end of year ...................................       15.62     14.21      11.56     10.92        9.95
    Tangible book value-end of year ..........................       15.16     13.53      11.67     10.92        9.95

    Weighted average shares outstanding (in thousands) .......       2,838     2,832      2,832     2,832       1,969

PER SHARE DATA RESTATED (1)
    Income before cumulative effect of change
       in accounting principle ...............................       $1.51     $1.46      $1.30     $1.14       $1.14
    Cumulative effect of change in accounting principle ......         --        --         --      (0.05)        --
    Net income ...............................................        1.51      1.46       1.30      1.09        1.14
    Cash dividends declared ..................................        0.49      0.46       0.44      0.44        0.44
    Book value-end of year ...................................       10.41      9.47       7.71      7.28        6.63
    Tangible book value-end of year ..........................       10.11      9.02       7.78      7.28        6.63

    Weighted average shares outstanding (in thousands) .......       4,257     4,248      4,248     4,248       2,954

BALANCE SHEET DATA-END OF YEAR (IN THOUSANDS)
    Total assets .............................................      $504,689  $491,457   $479,312  $421,659    $404,064
    Securities held to maturity and
       securities available for sale .........................       118,628   142,233    148,781   118,939      96,480
    Loans ....................................................       351,793   311,164    290,654   266,992     269,214
    Allowance for loan losses ................................         3,653     3,647      3,839     3,905       4,100
    Total deposits ...........................................       430,013   436,452    424,170   385,430     369,327
    Long-term borrowings......................................         9,983      --        5,000      --          --
    Total stockholders' equity ...............................        44,361    40,241     35,129    33,305      31,555

SELECTED PERFORMANCE RATIOS
    Return on average total assets ...........................          1.31%     1.32%      1.25%     1.23%       0.93%
    Return on average total stockholders' equity .............         15.18     16.66      16.58     15.63       16.25
    Dividend payout ratio ....................................         32.36     32.28      35.47     41.39       46.73
    Average total stockholders' equity to average total assets          8.61      7.90       7.52      7.90        5.74
    Net yield on interest earning assets (taxable equivalent)           4.97      4.93       5.13      4.98        4.55
    Noninterest expenses to average assets ...................          3.34      3.28       3.44      3.65        3.40
    Noninterest income to average assets .....................          0.87      0.96       0.79      1.19        1.28

ASSET QUALITY RATIOS-END OF YEAR
    Nonaccrual loans to total loans ..........................          0.59%     0.81%      2.13%     1.47%       1.97%
    Nonperforming assets to total assets .....................          0.68      1.06       1.58      1.25        1.79
    Allowance for loan losses to nonaccrual loans ............        175.29    145.24      62.15     99.77       77.31
    Allowance for loan losses to total loans .................          1.04      1.17       1.32      1.46        1.52
    Net charge-offs to average loans for the year ............          0.21      0.48       0.37      0.48        0.63

LIQUIDITY AND CAPITAL RATIOS
    Average loans to average deposits ........................         74.78%    68.60%     66.69%    70.34%      73.78%
    Total stockholders' equity to total assets ...............          8.79      8.19       7.33      7.90        7.81
    Tier I capital to risk-weighted assets ...................         13.29     13.16      12.56     12.98       12.32
    Total capital to risk-weighted assets ....................         14.42     14.41      13.81     14.23       13.57
    Tier I leverage ratio ....................................          8.66      7.98       7.57      7.96        7.89
----------
<FN>
(1)    On February 27, 1997, the Company declared a 3 for 2 stock split to be distributed on April 17, 1997, to shareholders 
       of record as of March 20, 1997.
       The restated per share data reflects the effects of the stock split.
</FN>
</TABLE>


ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
           RESULTS OF OPERATIONS

          This  section  presents  management's  discussion  and analysis of the
consolidated  results of  operations  and  financial  condition  of  Interchange
Financial  Services  Corporation  (the  "Company").  The discussion and analysis
should be read in conjunction  with the  consolidated  financial  statements and
notes  thereto  on pages 36 through 60 and the  summary  consolidated  data
included elsewhere in this report. 

OVERVIEW OF RESULTS

         In 1996,  the Company  reported net income of $6.4 million or $2.26 per
common  share,  as compared  with $6.3 million or $2.19 per common share in 1995
and $5.6 million or $1.95 per common share in 1994.

         Net  income  for 1996 was  favorably  affected  by an  increase  in net
interest  income of $840 thousand or 3.8%, as compared to 1995 due largely to an
improved net interest  margin.  The net interest margin increased 4 basis points
in 1996, as compared to 1995,  and was  augmented by growth in average  interest
earning assets from 1995 levels.  The growth  occurred in loans which  generally
are the higher yielding assets for the Company. The net interest margin was also
positively affected by growth in noninterest bearing liabilities of $6.2 million
or 9.5%, from 1995 levels of $65.2 million. Furthermore, net interest income was
positively  affected  by a  favorable  change in average  rate paid on  interest
bearing liabilities resulting from a favorable shift in the mix of the Company's
interest bearing liabilities.

         In  addition,  net  income  for 1996  was  beneficially  affected  by a
decrease of $500  thousand in the provision for loan losses as compared to 1995.
The  decrease  is  mainly  attributable  to  improved  trends  with  respect  to
nonperforming  loans and a decline in charge-off  experience in 1996 as compared
to 1995.

         Net income for 1996 includes the effects of the following pretax gains:
A net gain of $455  thousand  resulting  from the sale of the deposits of one of
the  Company's  branch  locations;  a net gain of $235 thousand from the sale of
available-for-sale  ("AFS") securities;  and, a gain of $261 thousand related to
the  collection  of  principal on a loan in excess of its  carrying  value.  The
aforementioned  gains did not serve to  increase  net  income for 1996 over 1995
mainly  due to a net  gain of $828  thousand  in 1995  related  to the sale of a
portion of the subsidiary bank's loan servicing portfolio.

         The  benefits  obtained  from the  improved  net  interest  income  and
decrease in the provision for loan losses were  partially  offset by an increase
of $731 thousand or 4.7% in operating expenses for 1996, as compared to 1995.

         Net  income  for  1995  was  favorably   impacted  by  an  increase  in
noninterest income of $1.0 million,  or 28.2%, as compared to 1994. The increase
was  attributable  to the  sale  of a  portion  of the  subsidiary  bank's  loan
servicing  portfolio that generated a net gain of $828 thousand.  Net income was
also  positively  affected by an increase  in  interest  income of $4.4  million
resulting from an increase in average  interest  earning assets combined with an
increase in average yields for those assets.  The positive  effect on net income
derived  from  interest  earning  assets  was  mostly  offset by a $4.1  million
increase in interest  expense in 1995  compared to 1994. An increase in interest
bearing liabilities,  specifically certificates of deposit, compounded by rising
interest rates was primarily responsible for the increase in interest expense.

         In  1995,  net  income  also  benefited  from  the  nominal  growth  in
noninterest expenses of $116 thousand,  or .7%, as compared to 1994. The nominal
increase was due to a $750  thousand,  or 5.1%,  increase in operating  expenses
offset by a $250  thousand  reduction  to a  previously  established  litigation
reserve  and  a  $384  thousand   decrease  in  the  Federal  Deposit  Insurance
Corporation  ("FDIC")  assessment.  The assessment was reduced from 23 cents per
thousand to 4 cents per thousand on  qualified  deposits as a result of the Bank
Insurance  Fund  ("BIF")  becoming  fully  capitalized.  The  reduction  in  the
assessment became effective in the second quarter of 1995.


<PAGE>

<TABLE>
Table 1
-------------------------------------------------------------------------------
SUMMARY OF OPERATING RESULTS
-------------------------------------------------------------------------------
<CAPTION>

                                                   1996         1995          1994
                                                   ----         ----          ----
<S>                                              <C>           <C>          <C>    

Net income (in thousands) ...............         $6,419       $6,280       $5,636
Earnings per share ......................           2.26         2.19         1.95
Return on average total assets ..........           1.31%        1.32%        1.25%
Return on average total equity ..........          15.18        16.66        16.58
Dividend payout ratio* ..................          32.36        32.28        35.47
Average total stockholders' equity to ...           8.61         7.90         7.52
    average total assets
<FN>
*Cash dividends declared on common and preferred shares to net income
</FN>

</TABLE>


         
NET INTEREST INCOME

         NET INTEREST  INCOME IS THE  DIFFERENCE  BETWEEN THE INTEREST A COMPANY
EARNS ON ITS ASSETS,  PRINCIPALLY LOANS AND INVESTMENT SECURITIES,  AND INTEREST
IT PAYS ON ITS  DEPOSITS AND  BORROWINGS.  WHEN  EXPRESSED  AS A  PERCENTAGE  OF
AVERAGE  ASSETS,  IT IS REFERRED TO AS NET INTEREST  MARGIN,  OR SIMPLY INTEREST
MARGIN.  TABLE 3, WHICH PRESENTS CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
BY MAJOR ASSET AND LIABILITY CATEGORY FOR 1996 AND 1995,  ILLUSTRATES THE IMPACT
OF AVERAGE  VOLUME  GROWTH  (ESTIMATED  ACCORDING  TO PRIOR YEAR RATES) AND RATE
CHANGES  (ESTIMATED ON THE BASIS OF PRIOR YEAR VOLUMES).  CHANGES NOT DUE SOLELY
TO CHANGES IN EITHER  BALANCES OR RATES HAVE BEEN  ALLOCATED TO SUCH  CATEGORIES
BASED ON THE  RESPECTIVE  PERCENTAGE  CHANGES IN AVERAGE  BALANCES  AND  AVERAGE
RATES.

         Figures are adjusted to a taxable  equivalent  basis to  recognize  the
income from tax-exempt assets as if the interest was taxable, thereby allowing a
uniform comparison to be made between yields on assets.


<PAGE>


<TABLE>
Table 2
--------------------------------------------------------------------------------
ANALYSIS OF NET INTEREST INCOME
for the years ended December 31,
--------------------------------------------------------------------------------
(in thousands)
<CAPTION>

                                                                                                        1996
                                                                                 ---------------------------------------------------
                                                                                      AVERAGE                       AVERAGE
                                                                                      BALANCE       INTEREST         RATE
                                                                                 ---------------------------------------------------
<S>                                                                              <C>               <C>               <C>    

ASSETS

    Interest earning assets
        Loans (1) .......................................................            $ 325,530     $  29,132          8.95%
        Taxable securities (4) ..........................................              120,571         7,623          6.32
        Tax-exempt securities (2) .......................................                2,919           159          5.45
        Federal funds sold ..............................................                7,705           407          5.28
                                                                                       -------      --------          

        TOTAL INTEREST EARNING ASSETS ...................................              456,725        37,321          8.17
                                                                                                    --------          

    Noninterest earning assets
        Cash and due from banks .........................................               23,474
        Allowance for loan losses .......................................               (3,734)
        Other assets ....................................................               14,532
                                                                                        ------

        TOTAL ASSETS ....................................................            $ 490,997
                                                                                       =======

LIABILITIES AND STOCKHOLDERS' EQUITY

    Interest bearing liabilities
        Demand deposits .................................................            $ 114,848         3,575          3.11
        Savings deposits ................................................              110,205         3,184          2.89
        Time deposits ...................................................              138,923         7,282          5.24
        Short-term borrowings ...........................................                8,810           513          5.82
        Long-term borrowings ............................................                  710            45          6.34
                                                                                     ---------        ------

        TOTAL INTEREST BEARING LIABILITIES ..............................              373,496        14,599          3.91
                                                                                                      ------

    Noninterest bearing liabilities
        Demand deposits .................................................               71,324
        Other liabilities ...............................................                3,888
                                                                                        ------

        Total liabilities (3) ...........................................              448,708
        Stockholders' equity ............................................               42,289
                                                                                       -------
       
        TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ......................            $ 490,997
                                                                                       =======

Net interest income (tax-equivalent basis) ..............................                              22,722         4.26
Tax-equivalent basis adjustment .........................................                                 (37)
                                                                                                       ------
NET INTEREST INCOME .....................................................                           $  22,685
                                                                                                       ======

NET INTEREST INCOME AS A PERCENT OF
    INTEREST EARNING ASSETS (TAX-EQUIVALENT BASIS) ......................                                             4.97 %
                                                                                                                     
<PAGE>

Table 2 (Continued)
--------------------------------------------------------------------------------
ANALYSIS OF NET INTEREST INCOME
for the years ended December 31,
--------------------------------------------------------------------------------
(in thousands)
<CAPTION>

                                                                                                        1995
                                                                                 ---------------------------------------------------
                                                                                      AVERAGE                       AVERAGE
                                                                                      BALANCE       INTEREST         RATE
                                                                                 ---------------------------------------------------
<S>                                                                              <C>               <C>               <C>    

ASSETS

    Interest earning assets
        Loans (1) .......................................................            $ 291,981     $  27,427          9.39 %
        Taxable securities (4) ..........................................              144,156         9,138          6.34
        Tax-exempt securities (2) .......................................                1,081            74          6.85
        Federal funds sold ..............................................                6,366           374          5.87
                                                                                      --------       -------

        TOTAL INTEREST EARNING ASSETS ...................................              443,584        37,013          8.34
                                                                                                     -------          

    Noninterest earning assets
        Cash and due from banks .........................................               20,781
        Allowance for loan losses .......................................               (3,865)
        Other assets ....................................................               16,518
                                                                                       -------

        TOTAL ASSETS ....................................................            $ 477,018
                                                                                       =======

LIABILITIES AND STOCKHOLDERS' EQUITY

    Interest bearing liabilities
        Demand deposits .................................................            $ 102,397         3,141          3.07
        Savings deposits ................................................              111,959         3,515          3.14
        Time deposits ...................................................              146,133         7,857          5.38
        Short-term borrowings ...........................................                7,845           506          6.45
        Long-term borrowings ............................................                1,932           131          6.78
                                                                                     ---------        ------

        TOTAL INTEREST BEARING LIABILITIES ..............................              370,266        15,150          4.09
                                                                                                      ------

    Noninterest bearing liabilities
        Demand deposits .................................................               65,164
        Other liabilities ...............................................                3,903
                                                                                        ------

        Total liabilities (3) ...........................................              439,333
        Stockholders' equity ............................................               37,685
                                                                                       -------
       
        TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ......................            $ 477,018
                                                                                       =======

Net interest income (tax-equivalent basis) ..............................                              21,863        4.25
Tax-equivalent basis adjustment .........................................                                 (18)
                                                                                                       ------
NET INTEREST INCOME .....................................................                           $  21,845
                                                                                                       ======

NET INTEREST INCOME AS A PERCENT OF
    INTEREST EARNING ASSETS (TAX-EQUIVALENT BASIS) ......................                                            4.93%

<PAGE>

                                                                                                                      

Table 2 (Continued)
--------------------------------------------------------------------------------
ANALYSIS OF NET INTEREST INCOME
for the years ended December 31,
----------------------------------------------------------------------------------
(in thousands)
<CAPTION>

                                                                                                        1994
                                                                                 ---------------------------------------------------
                                                                                      AVERAGE                       AVERAGE
                                                                                      BALANCE       INTEREST         RATE
                                                                                 ---------------------------------------------------
<S>                                                                              <C>               <C>               <C>    

ASSETS

    Interest earning assets
        Loans (1) .......................................................            $ 272,399     $  23,537          8.64%
        Taxable securities (4) ..........................................              137,484         8,604          6.26
        Tax-exempt securities (2) .......................................                1,561            78          4.93
        Federal funds sold ..............................................               10,406           412          3.96
                                                                                       -------      --------         
        TOTAL INTEREST EARNING ASSETS ...................................              421,850        32,631          7.74
                                                                                                                      
    Noninterest earning assets
        Cash and due from banks .........................................               20,120
        Allowance for loan losses .......................................               (3,832)
        Other assets ....................................................               13,793
                                                                                        ------

        TOTAL ASSETS ....................................................            $ 451,931
                                                                                        ======

LIABILITIES AND STOCKHOLDERS' EQUITY

    Interest bearing liabilities
        Demand deposits .................................................            $ 100,309         2,612          2.60
        Savings deposits ................................................              122,083         3,191          2.61
        Time deposits ...................................................              124,791         4,832          3.87
        Short-term borrowings ...........................................                5,361           289          5.39
        Long-term borrowings ............................................                1,192            82          6.80
                                                                                     ---------        ------

        TOTAL INTEREST BEARING LIABILITIES ..............................              353,736        11,006          3.11
                                                                                                      ------

    Noninterest bearing liabilities
        Demand deposits .................................................               61,271
        Other liabilities ...............................................                2,924
                                                                                        ------

        Total liabilities (3) ...........................................              417,931
        Stockholders' equity ............................................               34,000
                                                                                       -------
       
        TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ......................            $ 451,931
                                                                                       =======

Net interest income (tax-equivalent basis) ..............................                              21,625        4.63
Tax-equivalent basis adjustment .........................................                                 (19)
                                                                                                       ------
NET INTEREST INCOME .....................................................                           $  21,606
                                                                                                       ======

NET INTEREST INCOME AS A PERCENT OF
    INTEREST EARNING ASSETS (TAX-EQUIVALENT BASIS) ......................                                            5.13%

----------
<FN>
(1)  Nonaccrual  loans and any related  interest  recorded have been included in
     computing the average rate earned on the loan portfolio.
(2)  Computed on a fully taxable  equivalent  basis using the corporate  federal
     tax rate of 34%.
(3)  All deposits are in domestic bank offices.
(4)  The average rate was computed on a market value basis. Had the average rate
     been computed on a historical cost basis,  the average rate would have been
     6.35%, 6.27% and 6.19% in 1996, 1995 and 1994, respectively.
</FN>
</TABLE>
<PAGE>
--------------------------------------------------------------------------------
<TABLE>
Table 3
--------------------------------------------------------------------------------
EFFECT OF VOLUME AND RATE CHANGES ON NET INTEREST INCOME
--------------------------------------------------------------------------------
(in thousands)
<CAPTION>

                                                           YEAR ENDED DECEMBER 31,                 Year ended December 31,
                                                           1996 COMPARED WITH 1995                 1995 compared with 1994
                                                             INCREASE (DECREASE)                     increase (decrease)
                                                              DUE TO CHANGE IN:                       due to change in:
                                                      --------------------------------------   -------------------------------------
                                                                                    NET                                            
                                                      AVERAGE     AVERAGE        INCREASE      Average        Average     Increase
                                                      VOLUME       RATE         (DECREASE)      Volume         Rate      (Decrease)
                                                      --------------------------------------  --------------------------------------
<S>                                                  <C>          <C>           <C>           <C>             <C>         <C>
Interest income
        Loans ..................................      $ 3,150       $(1,445)      $ 1,705       $ 1,762       $ 2,128     $ 3,890
        Taxable securities .....................       (1,486)          (29)       (1,515)          423           111         534
        Tax-exempt securities ..................          126           (41)           85           (34)           30          (4)
        Federal funds sold .....................           79           (46)           33          (160)          122         (38)
                                                      -------       -------       -------       -------       -------     -------
              TOTAL INTEREST INCOME ............        1,869        (1,561)          308         1,991         2,391       4,382
                                                      -------       -------       -------       -------       -------     -------


Interest expense
        Demand deposits ........................          387            47           434            54           475         529
        Savings deposits .......................          (54)         (277)         (331)         (264)          588         324
        Time deposits ..........................         (376)         (199)         (575)          922         2,103       3,025
        Short-term borrowings ..................           63           (56)            7           152            65         217
        Long-term borrowings ...................          (78)           (8)          (86)           49          --            49
                                                      -------       -------       -------       -------       -------     -------
              TOTAL INTEREST EXPENSE ...........          (58)         (493)         (551)          913         3,231       4,144
                                                      -------       -------       -------       -------       -------     -------

CHANGE IN NET INTEREST
        INCOME .................................      $ 1,927       $(1,068)      $   859       $ 1,078       $  (840)    $   238
 
                                                     =======       =======       =======       =======       =======     =======
<FN>

CHANGES IN INTEREST  INCOME OR EXPENSE NOT ARISING  SOLELY AS A RESULT OF VOLUME
OR RATE VARIANCES ARE ALLOCATED  BASED ON THE  RELATIONSHIP OF CHANGES IN VOLUME
AND CHANGES IN RATE.
NONPERFORMING LOANS ARE INCLUDED IN INTEREST EARNING ASSETS.

</FN>


</TABLE>

         Net interest  income,  on a taxable  equivalent  basis,  totaled  $22.7
million in 1996,  an  increase of $859  thousand  or 3.9% from $21.9  million in
1995.  Net interest  income  benefited  from a $13.1 million or 3.0% increase in
average interest earning assets from 1995 levels of $443.6 million. The benefits
derived from the increased volume were partly offset by an unfavorable change in
average yield on interest  earning assets from 8.34% in 1995 to 8.17% in 1996, a
decrease  of 17 basis  points.  Net  interest  income  also  benefited  from the
marginal  growth in interest  bearing  liabilities  and the continued  growth in
noninterest   bearing  demand  deposits.   In  1996,  average  interest  bearing
liabilities increased $3.2 million or .9%, while noninterest bearing liabilities
increased  $6.2  million or 9.5%,  from 1995 levels of $370.3  million and $65.2
million, respectively.  Furthermore, net interest income was positively affected
by a favorable change in average rate paid on interest bearing  liabilities from
4.09% in 1995 to 3.91% in 1996, a decrease of 18 basis points.

         The growth in interest  earning assets  stemmed  largely from increased
loans,  particularly,  commercial and  commercial  mortgage  loans,  as well as,
consumer loans (comprised mostly of home equity loans).  The average balances of
commercial  and  commercial  mortgage  loans  totaled  $102.1  million and $46.1
million in 1996,  respectively,  compared to $91.3  million and $37.6 million in
1995,  respectively,  an increase of $10.8  million or 11.8% and $8.5 million or
22.6%, respectively. The average balances of consumer loans (comprised mostly of
home equity loans) totaled $135.7 million in 1996, compared to $119.5 million in
1995, an increase of $16.2 million or 13.6%.

         The growth in  noninterest  bearing  demand  deposits  is  attributable
largely  to the  Company's  marketing  effort  along with a more  focused  sales
approach in the lending area.  The loans  resulting  from this effort  generally
carry compensating  balances in the form of noninterest bearing demand accounts.
The  favorable  reduction  in average  rate paid on  interest  bearing  deposits
resulted,  in part, from a planned business strategy which did not allow certain
high cost certificates of deposits to renew at the high rates.

         In 1995, net interest income, on a taxable  equivalent  basis,  totaled
$21.9  million,  an increase of $238  thousand,  or 1.1%,  from $21.6 million in
1994.  The  increase was driven by a $21.7  million or 5.2%  increase in average
interest  earning assets from 1994 levels of $421.9  million.  In addition,  net
interest  income was  positively  affected by an  increase  in average  yield on
interest  earning  assets from 7.74% in 1994 to 8.34% in 1995, an increase of 60
basis points.  The benefits  derived from the positive changes in average volume
and average rate on interest  earning assets were largely offset by the negative
impacts of  increases  in average  volume and average  rate on interest  bearing
liabilities.  Average interest bearing  liabilities  increased $16.5 million, or
4.7%, from 1994 levels of $353.7 million. More significantly,  as illustrated in
Table 3, the 98 basis  point  increase  in the  average  rate  paid on  interest
bearing  liabilities,  from 3.11% in 1994 to 4.09% in 1995,  had a more  adverse
impact on net interest income.

         In 1995, the growth in the average  balance of certificates of deposits
("CDs") was largely  responsible for the $913 thousand increase in interest paid
due to volume  growth.  In 1995,  the  average  balance of CDs  increased  $21.3
million or 17.1% and the average  balance of savings  accounts  decreased  $10.1
million or 8.3%. The increase in CDs was the result of higher  interest rates in
the second half of 1994 and the first half of 1995, increasing the popularity of
CDs.  Rising  interest  rates  increased  the  costs  of the  Company's  deposit
liabilities, particularly time deposits, and was responsible for $3.2 million of
the increase in interest expense.

         Overall  for 1995,  the  improved  yields on interest  earning  assets,
combined with the growth in average loans and  investments,  generated a rise in
interest  income of $4.4 million over 1994.  Conversely,  the increased costs of
interest  bearing  liabilities,  along with the  increase  in average  balances,
increased interest expense by $4.1 million, thereby,  counteracting the positive
benefits derived from interest earning assets.

LOAN LOSSES

         The provision for loan losses represents management's  determination of
the amount  necessary  to bring the  allowance  for loan  losses to the level it
considers  adequate to reflect the risk of future losses in the loan  portfolio.
Factors considered in the evaluation include:  past loss experience;  changes in
the  composition  of  nonperforming  loans;  the  condition of borrowers  facing
financial  pressure;  the  relationship of the current level of the allowance to
the portfolio and to nonperforming loans; and existing economic conditions.

         Loan loss provisions for 1996 amounted to $700 thousand,  a decrease of
$500 thousand from the previous year. In 1995, the loan loss provision  amounted
to $1.2 million,  an increase of $256  thousand  from 1994.  The decrease in the
provision  for  loan  losses   reflects,   in  part,  the  positive   trends  in
nonperforming  loans.  In  addition,  it reflects  the  decrease  in  charge-off
experience  during 1996.  Net loans  charged-off  against the allowance for loan
losses in 1996 amounted to $694  thousand,  down $698 thousand from $1.4 million
in 1995.

         See sections on Loan Portfolio and Loan Quality beginning on page 22 of
this report for  additional  discussions  pertaining  to the  allowance for loan
losses.


<PAGE>


<TABLE>
Table 4
--------------------------------------------------------------------------------
 LOAN LOSS EXPERIENCE
 for the  years ended December 31,
--------------------------------------------------------------------------------
(dollars in thousands)
<CAPTION>

                                                         1996             1995              1994            1993              1992
                                                      ---------        ----------        ---------       ---------         ---------
<S>                                                   <C>              <C>               <C>              <C>              <C>    

Average loans outstanding .....................        $325,530         $291,981         $272,399         $262,222         $272,002
                                                       ========         ========         ========         ========         ========

Allowance at beginning of year ................        $  3,647         $  3,839         $  3,905         $  4,100         $  3,566
                                                       --------         --------         --------         --------         --------
Loans charged off
          Commercial ..........................               8              399              281              138              756
          Installment .........................              67              108              149              613              283
          Real estate .........................             770              914              647              560              792
          Lease financing .....................              57               89               47             --               --
                                                       --------         --------         --------         --------         --------
              Total ...........................             902            1,510            1,124            1,311            1,831
                                                       --------         --------         --------         --------         --------

Recoveries of loans
     previously charged off
          Commercial ..........................              75               25             --               --                 73
          Installment .........................              45               54               99               42               20
          Real estate .........................              88               32               15                9               35
          Lease financing .....................            --                  7             --               --               --
                                                       --------         --------         --------         --------         --------
              Total ...........................             208              118              114               51              128
                                                       --------         --------         --------         --------         --------

Net loans charged off .........................             694            1,392            1,010            1,260            1,703
                                                       --------         --------         --------         --------         --------

Additions to allowance charged
    to expense ................................             700            1,200              944            1,065            2,237
                                                       --------         --------         --------         --------         --------

Allowance at end of year ......................        $  3,653         $  3,647         $  3,839         $  3,905         $  4,100
                                                       ========         ========         ========         ========         ========

Allowance to total loans ......................            1.04%            1.17%            1.32%            1.46%            1.52%

Allowance to nonaccrual loans .................          175.29           145.24            62.15            99.77            77.31

Allowance to nonaccrual loans and
     loans past due 90 days or more ...........          173.21           145.24            62.15            95.92            71.96

Ratio of net charge-offs to average
     loans ....................................            0.21             0.48             0.37             0.48             0.63

</TABLE>

          The allowance for losses represented 106.8% of nonperforming assets at
year-end up from 70.3% At the end of 1995. 

          The  ratio  increased  as a  result  of a  $1.8  million  decrease  in
nonperforming  assets in 1996 as  compared  to the end of the year in 1995.  The
decrease  resulted largely from a third quarter 1996 sale of approximately  $1.9
million of nonperforming  loans which resulted in a charge-off of $380 thousand.
The Company had valuation  allowances on the  nonperforming  loans sufficient to
cover the charge-offs.
<PAGE>

<TABLE>
Table 5
--------------------------------------------------------------------------------
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
at December 31,
-------------------------------------------------------------------------------
(in thousands)
<CAPTION>

                                                           1996             1995             1994             1993             1992
                                                          ------           ------           ------           ------           -----
<S>                                                       <C>             <C>               <C>             <C>              <C>
Commercial and financial ......................           $2,199           $1,993           $1,985           $2,822           $1,933
Installment ...................................              137              215              278              324              352
Real estate ...................................              591              813              611              592              885
Unallocated ...................................              726              626              965              167              930
                                                          ------           ------           ------           ------           ------

                                                          $3,653           $3,647           $3,839           $3,905           $4,100
                                                          ======           ======           ======           ======           ======

</TABLE>


          The above  allocation is intended for analytical  purposes and may not
be indicative of the categories in which future loan losses occur.

NONINTEREST INCOME

          Noninterest  income  consists of all income  other than  interest  and
dividend income and is derived from: fees on bank transactions and credit cards;
commissions  on sales of  annuities  and mutual  funds;  rental of safe  deposit
space; net gains on sales of assets; and the accretion of discount in connection
with an  acquisition.  Noninterest  income  totaled  $4.3  million  for 1996,  a
decrease of $307  thousand or 6.7% from $4.6 million for 1995.  For 1995,  total
noninterest  income  increased  $1.0  million or 28.2% from $3.6 million for the
year ended December 31, 1994. The elements that significantly contributed to the
changes in noninterest income are highlighted below.

          In 1996,  noninterest  income was positively  affected by a net pretax
gain of $455  thousand  resulting  from the sale of the  deposits  of one of the
Company's branch locations. The sale was in response to the Company's evaluation
of the prospective growth and earnings  contribution of the branch.  Noninterest
income  also  benefited  from a $235  thousand  net pretax gain from the sale of
available-for-sale  ("AFS")  securities.  The securities  were sold as part of a
securities  portfolio  restructuring  plan aimed at  improving  the  portfolio's
return while reducing its risk. In addition, noninterest income benefited from a
$261 thousand gain related to the collection of principal on a loan in excess of
its carrying value.  The benefits  described above did not result in an increase
to noninterest  income in 1996 over 1995 largely because of a net pretax gain in
1995 of $828  thousand  pertaining  to the sale of a portion  of the  subsidiary
bank's  loan  servicing  portfolio.  Consequently,  noninterest  income for 1996
decreased,  in large part, because the discount connected with an acquisition of
a failed  financial  institution  has been fully  accreted.  Discount  accretion
contributed  $249  thousand  less to  noninterest  income in 1996 as compared to
1995.

          The  increase  of $1.0  million  in  noninterest  income  for  1995 as
compared to 1994 is due largely to the subsidiary  bank selling a portion of its
loan servicing portfolio which generated a gain of $828 thousand.
<PAGE>

<TABLE>
 Table 6
--------------------------------------------------------------------------------
 NONINTEREST INCOME
 for the years ended December 31,
--------------------------------------------------------------------------------
 (in thousands)
<CAPTION>

                                                                                     1996                 1995                1994
                                                                                     ----                 ----                ----
<S>                                                                                <C>                 <C>                  <C>   

Service fees on deposit accounts ...................................              $ 1,579              $ 1,474              $ 1,496
Service fees on loan accounts ......................................                   69                  280                  258
Service fees on credit cards .......................................                  240                  168                  155
Net gain/(loss) on sale of loans
         available for sale ........................................                 --                     22                  (14)
Net gain/(loss) on sale of securities ..............................                  242                   15                   (5)
Commission on annuity and
         mutual funds sales ........................................                   66                  138                  228
Accretion of discount in
         connection with acquisition ...............................                  511                  760                  760
Collection of acquired loans in
         excess of carrying value ..................................                  600                  406                  313
Rental on safe deposit boxes .......................................                  148                  142                  138
Net gain on sale of branch .........................................                  455                 --                   --
Net gain on sale of loan servicing rights ..........................                 --                    828                 --
All other ..........................................................                  362                  346                  242
                                                                                  -------              -------              -------

                                                                                  $ 4,272              $ 4,579              $ 3,571
                                                                                  =======              =======              =======

</TABLE>



<PAGE>

NONINTEREST EXPENSES

          Noninterest  expenses totaled $16.4 million for 1996. This represented
an increase of $731  thousand or 4.7% from total  noninterest  expenses of $15.7
million for 1995. For 1995, total noninterest  expenses  increased $116 thousand
or .7% from $15.5  million for the year ended  December 31,  1994.  The elements
that  significantly  contributed  to the  changes in  noninterest  expenses  are
highlighted below.

         Affecting the change in  noninterest  expenses for 1996 was an increase
of $389  thousand or 5.4% in salaries and related  expenses.  For the most part,
the increase resulted from promotions and normal annual salary  adjustments.  An
increase of $244 thousand or 5.6% in other noninterest expenses also contributed
to the  change.  The  increase  reflects  a $250  thousand  reduction  of  other
noninterest  expenses in 1995 for the reversal of a reserve related to a settled
lawsuit.  Furthermore,  noninterest  expenses  were  adversely  affected  by  an
increase of $198 thousand or 366.7% in foreclosed real estate expenses.  For the
most part,  gains and losses  from the  disposition  of  foreclosed  real estate
contributed to the change in foreclosed real estate expense. In 1996, foreclosed
real  estate  expense  included  net losses of $87  thousand  pertaining  to the
disposition of foreclosed  real estate as compared to net gains of $127 thousand
for 1995.  In 1996,  noninterest  expenses  were  favorably  affected  by a $343
thousand or 68.2% decrease in insurance premiums paid by the Company to the FDIC
for deposit insurance. The decrease reflects the reduction in premium as the BIF
attained target reserve levels.

         The change in  noninterest  expenses  for 1995 as  compared to 1994 was
minimal, largely because normal increases in noninterest expenses were offset by
a $384 thousand or 43.3%  decrease in insurance  premiums paid by the Company to
the FDIC for deposit insurance during 1995. In addition, noninterest expenses in
1995 were  favorably  affected  by a $250  thousand  reduction  of a  litigation
reserve in connection with a settled lawsuit.


<TABLE>
Table 7
--------------------------------------------------------------------------------
Noninterest Expenses
for the years ended December 31,
--------------------------------------------------------------------------------
(in thousands)
<CAPTION>

                                                                                     1996          1995        1994    
                                                                                    ------        ------      ------
<S>                                                                                 <C>          <C>         <C>   

Salaries and benefits ................................................              $7,643        $7,254       $6,879
Net occupancy and furniture
   and equipment .....................................................               2,920         2,777        2,540
Other expenses
   Advertising and promotion .........................................                 773           673          701
   Stationery, printing and supplies .................................                 359           281          275
   Federal Deposit Insurance Corporation
      assessment .....................................................                 160           503          887
   Professional fees .................................................               1,117         1,321        1,254
   Communications ....................................................                 246           217          192
   Postage and shipping ..............................................                 301           282          250
   Credit card processing fees .......................................                 199           156          161
   Credit services ...................................................                 145           156          208
   Foreclosed real estate expense ....................................                 252            54          102
   Amortization of premiums in
      connection with acquisitions ...................................                 444           444          403
   Provision for litigation contingency ..............................                 (33)         (250)        --
   Directors' fees, travel and retirement ............................                 553           536          399
   Insurance premiums ................................................                 204           256          332
   Unrealized loss/(gain) on loans held for sale .....................                  13           (60)          85
   All other .........................................................               1,086         1,051          867
                                                                                  --------      --------     --------

                                                                                  $ 16,382      $ 15,651     $ 15,535
                                                                                  ========      ========     ========
</TABLE>



<PAGE>

INCOME TAXES

          In 1996,  income  taxes  amounted to $3.5  million as compared to $3.3
million and $3.1 million for 1995 and 1994, respectively. The effective tax rate
in  1996  was  35.0%  as  compared  to  34.4%  and  35.2%  for  1995  and  1994,
respectively. Detailed information on income taxes is shown in Notes 1 and 15 to
the Consolidated Financial Statements.

NEW PRONOUNCEMENTS

          In June 1996, the FASB issued SFAS No. 125,  "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS No.
125"). SFAS No. 125 establishes accounting and reporting standards for transfers
and servicing of financial assets and  extinguishments  of liabilities  based on
consistent  application  of a  financial  components  approach  that  focuses on
control.  Under this approach, an entity,  subsequent to a transfer of financial
assets,  must  recognize the financial and servicing  assets it controls and the
liabilities it has incurred,  derecognize financial assets when control has been
surrendered,  and  derecognize  liabilities  when  extinguished.  Standards  for
distinguishing  transfers of financial assets that are sales from those that are
secured  borrowings  are  provided in SFAS No.  125. A transfer  not meeting the
criteria for a sale must be accounted for as a secured  borrowing with pledge of
collateral.

          SFAS No. 125 requires that  liabilities  and  derivatives  incurred or
obtained by transferors  as part of a transfer of financial  assets be initially
measured at fair value, if practicable.  It additionally requires that servicing
assets  and other  retained  interests  in  transferred  assets be  measured  by
allocating  the previous  carrying  amount  between the assets sold, if any, and
retained  interests,  if any, based on their relative fair values at the date of
transfer.  Servicing  assets and liabilities  must be  subsequently  measured by
amortization  in  proportion  to and over the period of estimated  net servicing
income or loss and assessed for asset impairment, or increased obligation, based
on their fair value.

          SFAS No. 125 is effective  for  transfers  and  servicing of financial
assets and extinguishments of liabilities occurring after December 31, 1996, and
is to be  applied  prospectively.  Earlier  or  retroactive  application  is not
permitted.  The Company is currently  reviewing the impact of the implementation
of SFAS No. 125 on its consolidated financial statements.

          In December  1996,  the FASB issued  SFAS No.  127,  "Deferral  of the
Effective  Date of Certain  Provisions of FASB  Statement No. 125." SFAS No. 127
amends SFAS No. 125 by deferring for one year the effective date of paragraph 15
of SFAS No. 125 addressing secured borrowings and collateral, and for repurchase
agreement, dollar roll, security lending and similar transactions, of paragraphs
9 through  12 and 237(b) of SFAS No.  125.  

EFFECTS OF  INFLATION  AND  CHANGING PRICES

          The financial  statements and related  financial data presented herein
have been prepared in accordance with generally accepted  accounting  principles
which require the  measurement  of financial  position and operating  results in
terms  of  historical  dollars  without  considering  changes  in  the  relative
purchasing power of money over time due to inflation.

          Unlike  most  industrial  companies,  virtually  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  do  general  levels  of  inflation.  Interest  rates  do  not
necessarily move in the same magnitude as the prices of goods and services. 

LOAN PORTFOLIO

          Despite a surge in competition  during 1996,  the Company  experienced
strong growth in its loan portfolio.  At December 31, 1996, total loans amounted
to $351.8 million, up $40.6 million or 13.1% over the previous year. Promotional
campaigns in conjunction  with  competitive loan rates and focused sales efforts
were  instrumental  to the  $18.7  million  increase  in the  home  equity  loan
portfolio. A team-sales approach implemented during 1996 helped meet the demands
of our business  customers and contributed to the $9.8 million and $15.3 million
increases in commercial and commercial mortgage loans, respectively.

          In 1995,  total loans increased $20.5 million from the 1994 level. The
increase was largely the result of promotional  campaigns and  competitive  loan
rates as well as the ability of the  Company to  identify  and meet the needs of
its business customers.

          Commercial  real estate  mortgage  loans amounted to $112.2 million at
December  31,  1996,  and  represented  31.9% of total  loans  compared to $96.9
million  or 31.2%  of all  loans at the end of 1995.  These  loans  are  secured
primarily  by  first  priority  mortgage  liens  on  owner-occupied   commercial
properties.  While  approximately  84% of all loans are  collateralized  by real
estate  located  in  northern  New  Jersey,   the  Company  does  not  have  any
concentration  of loans in any single  industry  classified  under the  Standard
Industrial  Classification  Code which  exceeds 4% of its total loans.  
<PAGE>

<TABLE>
Table 8
--------------------------------------------------------------------------------
LOAN PORTFOLIO
at December 31,
--------------------------------------------------------------------------------
<CAPTION>


                                                               1996            1995           1994          1993             1992
                                                             -------        --------       --------      ---------         --------

<S>                                                          <C>            <C>             <C>            <C>              <C>

AMOUNTS OF LOANS BY TYPE (in thousands)

     Commercial and financial ......................         $51,908        $42,106         $36,512         $35,380         $39,107
     Real estate-construction ......................           3,414          1,484           1,917             207             993
     Real estate-mortgage
        1-4 family residential
           First liens .............................          40,426         42,088          43,229          55,982          54,559
           Junior liens ............................          18,254         20,919          25,266          38,771          47,349
           Available for sale ......................           1,195          1,106           1,086          15,751          11,392
           Home equity .............................         119,876        101,133          88,147          50,197          59,513
        Commercial .................................         112,233         96,910          87,728          60,771          44,692
     Installment
        Credit cards and related plans .............           2,666          2,902           3,314           4,039           4,311
        Other ......................................           1,821          2,461           2,757           3,918           4,166
     Lease financing ...............................            --               55             698           1,976           3,132
                                                             -------       --------        --------        --------        --------

                TOTAL ..............................        $351,793       $311,164        $290,654        $266,992        $269,214
                                                            ========       ========        ========        ========        ========


PERCENT OF LOANS BY TYPE

     Commercial and financial ......................          14.8%        13.5%             12.6%           13.2%           14.4%
     Real estate-construction ......................           1.0          0.5               0.7             0.1             0.4
     Real estate-mortgage
        1-4 family residential
           First liens .............................          11.5         13.5              14.9            21.0            20.3
           Junior liens ............................           5.2          6.7               8.7            14.5            17.6
           Available for sale ......................           0.3          0.4               0.4             5.9             4.2
           Home equity .............................          34.1         32.5              30.3            18.8            22.1
        Commercial .................................          31.9         31.2              30.2            22.8            16.6
     Installment
        Credit cards and related plans .............           0.7          0.9               1.1             1.5             1.6
        Other ......................................           0.5          0.8               0.9             1.5             1.6
     Lease financing ...............................           --           --                0.2             0.7             1.2
                                                           --------      -------          -------          ------          -------

                TOTAL ..............................         100.0%       100.0%            100.0%          100.0%          100.0%
                                                           ========      =======          ========         =======         =======
</TABLE>


<PAGE>


<TABLE>
Table 8a

     The following  table sets forth the maturity  distribution of the Company's
loan portfolio as of the December 31, 1996. The table excludes real estate loans
(other than  construction  loans),  lease financing and installment  loans:  (in
thousands)
<CAPTION>

                                                                                      Due after
                                                                 Due in               one year          Due after
                                                                 one year             through             five
                                                                 or less             five years           years             Total
                                                                 --------            -----------       ------------        --------


<S>                                                              <C>                 <C>                 <C>                <C>    
Commercial and financial ...........................             $13,430             $36,681             $ 1,797            $51,908
Construction .......................................               3,414                --                  --                3,414
                                                                 -------             -------             -------            -------

            Total ..................................             $16,844             $36,681             $ 1,797            $55,322
                                                                 =======             =======             =======            ======
</TABLE>


<TABLE>



Table 8b

          The  following  table  sets  forth,  as  of  December  31,  1996,  the
sensitivity of the amounts due after one year to changes in interest rates:  (in
thousands)
<CAPTION>
                                                                                     Due after                 
                                                                                     one year         Due after                  
                                                                                      through          five       
                                                                                     five years        years      
                                                                                     ----------        -------    
                                                                                                                  
<S>                                                                                 <C>               <C>                         
Fixed interest rate .................................................                $ 8,385           $   399   
Variable interest rate ..............................................                 28,296             1,398    
                                                                                     -------           -------    
                                                                                                                  
                                                                                                                  
            Total ...................................................                $36,681           $ 1,797    
                                                                                     =======           =======    
                                                                                        
</TABLE>  
                                                                               



<PAGE>


LOAN QUALITY

          The lending  activities of the Company are guided by the basic lending
policy  established  by the Company's  Board of  Directors.  Loans must meet the
tests of a  prudent  loan,  which  include  criteria  regarding  the  character,
capacity  and  capital of the  borrower,  collateral  provided  for the loan and
prevailing economic conditions.  The Company obtains an independent appraisal of
real property,  within regulatory guidelines,  when it is considered the primary
collateral for a loan.

         The Company  employs a full-time  loan review officer who evaluates the
credit risk for substantially all large commercial loans. This review process is
intended to identify adverse  developments in individual credits,  regardless of
whether  such credits are also  included on the  watchlist  discussed  below and
whether  or not the  loans  are  delinquent.  The loan  review  officer  reports
directly to the President of the Company.

          Management  maintains a "watchlist" system under which credit officers
are required to provide early warning of possible deteriorations in loans. These
loans may not be delinquent currently,  but may present indications of financial
weakness,  such as  deteriorating  financial  ratios of the borrowers,  or other
concerns at an early stage to allow early  implementation  of responsive  credit
strategies.

NONPERFORMING ASSETS

          Nonperforming  assets consist of nonaccrual loans,  restructured loans
and foreclosed  real estate.  Foreclosed real estate,  representing  real estate
collateral acquired by legal foreclosure procedures, is valued using independent
appraisals and the Company's policy is to review such appraisals  annually.  The
Company  intends to dispose of each  property at or near its current  valuation.
However,  there  can be no  assurance  that  disposals  will  be made as soon as
anticipated or at expected values.

          Table 9 presents the detail of nonperforming  assets and the aggregate
of loans  whose  principal  and/or  interest  has not  been  paid  according  to
contractual  terms.  (See  discussion of loan losses on page 17.) Other than the
loans  included in the table,  there were no material  potential  problem loans,
either individually or in the aggregate, at December 31, 1996.


<PAGE>

<TABLE>
Table 9
--------------------------------------------------------------------------------
LOAN DELINQUENCIES AND NONPERFORMING ASSETS
at December 31,
--------------------------------------------------------------------------------
(dollars in thousands)
<CAPTION>

                                                                           1996        1995          1994         1993         1992
                                                                           ----        ----          ----         ----         ----
<S>                                                                       <C>          <C>          <C>          <C>          <C> 
Loans delinquent and accruing interest

      Loans past due 30-89 days ...................................       $  772       $  853       $  805       $  600       $1,838

      Loans past due 90 days or more ..............................           25         --           --            157          395
                                                                          ------       ------       ------       ------       ------

          Total loans delinquent and accruing interest ............       $  797       $  853       $  805       $  757       $2,233
                                                                          ======       ======       ======       ======       ======


Nonaccrual loans ..................................................       $2,084       $2,511       $6,177       $3,914       $5,303

Foreclosed real estate ............................................          610        1,213          880        1,342        1,655

Restructured loans ................................................          725        1,465          522         --            285
                                                                          ------       ------       ------       ------       ------

          Total nonperforming assets ..............................       $3,419       $5,189       $7,579       $5,256       $7,243
                                                                          ======       ======       ======       ======       ======

          Total nonperforming assets and loans
              past due 90 days or more ............................       $3,444       $5,189       $7,579       $5,413       $7,638
                                                                          ======       ======       ======       ======       ======



Nonaccrual loans to total loans ...................................        0.59%        0.81%        2.13%        1.47%        1.97%

Nonperforming assets to total loans and
      foreclosed real estate ......................................        0.97         1.66         2.60         1.96         2.67

Nonperforming assets to total assets ..............................        0.68         1.06         1.58         1.25         1.79

Nonaccrual loans and loans past due 90 days
      or more to total loans ......................................        0.60         0.81         2.13         1.52         2.12

Nonperforming assets and loans past due 90 days
      or more to total loans and foreclosed real estate ...........        0.98         1.66         2.60         2.02         2.82

Nonperforming assets and loans past due 90 days
      or more to total assets .....................................        0.68         1.06         1.58         1.28         1.89

</TABLE>


<PAGE>



SECURITIES HELD TO MATURITY AND SECURITIES AVAILABLE FOR SALE

          The Company  identifies as "securities  available for sale" securities
used as part of its asset and liability management strategy,  or securities that
may be sold in response to, among other  things,  changes in interest  rates and
prepayment risk. See Notes 1 and 4 of Notes to Consolidated Financial Statements
for additional information concerning securities.

          Table 10 presents a summary of the contractual maturities and weighted
average (adjusted to a taxable  equivalent basis) of securities held to maturity
and securities available for sale.


<TABLE>
Table 10
--------------------------------------------------------------------------------
SECURITIES
at December 31, 1996
--------------------------------------------------------------------------------
(dollars in thousands)
<CAPTION>

                                                                            After 1     After 5                            Weighted
                                                              Within      But Within  But Within     After                  Average
                                                               1 Year      5 Years     10 Years    10 Years      Total       Yield
                                                              --------     --------    --------    --------    ---------    ------
Securities held to maturity at amortized cost

<S>                                                           <C>         <C>          <C>         <C>         <C>             <C> 
    Obligations of U.S. Treasury ..........................    $29,116     $14,401        --          --      $ 43,517        6.28 %
    Obligations of U.S. agencies ..........................       --         5,992      $4,090      $  995      11,077        6.70
    Obligations of states & political subdivisions ........      3,471        --          --           110       3,581        5.79
    Other debt securities .................................       --            50         100       5,051       5,201        6.22
                                                               --------    --------    --------    --------    --------
                                                                32,587      20,443       4,190       6,156      63,376
                                                               --------    --------    --------    --------    --------


Securities available for sale at market value

    Obligations of U.S. Treasury ..........................       --        31,847        --          --        31,847         6.37
    Obligations of U.S. agencies ..........................       --         3,995       9,553       3,885      17,433         6.62
    Other debt securities .................................       --          --          --         2,009       2,009         7.02
                                                               --------    --------    --------    --------    --------
                                                                  --        35,842       9,553       5,894      51,289
                                                               --------    --------    --------    --------    --------


         Total ............................................    $32,587     $56,285     $13,743     $12,050    $114,665
                                                               ========    ========    ========    ========   =========

Weighted average yield ....................................      6.33%       6.33%       6.63%       6.55%       6.39%


<FN>
The weighted average yields above were calculated using an historical cost basis
for held to maturity  securities and a market value basis for available for sale
securities.  Had the  historical  cost  basis been used for  available  for sale
securities,  the weighted  average yield for the after one but within five years
category  would have changed from 6.33% to 6.32% and the weighted  average yield
for the  obligations  of U.S.  Treasury  (AFS)  category would have changed from
6.37% to 6.35%.  All other  available  for sale  categories  did not change as a
result of applying historical cost basis to the table.
</FN>

</TABLE>
<PAGE>


DEPOSITS

          The  Company  traditionally  relies  on its  deposit  base to fund its
credit needs. Core deposits,  which include noninterest bearing demand deposits,
interest bearing demand accounts,  savings  deposits,  money market accounts and
time deposits in amounts under $100,000,  represented 96.0% of total deposits at
December 31, 1996, and 97.3% at December 31, 1995.

          Total  deposits  amounted to $430  million at  December  31,  1996,  a
decrease  of $6.4  million  or  1.5%  from  year  end  1995.  The  decrease  was
attributable to the departure of $9.7 million of deposits in connection with the
sale of the Clifton Branch (See discussion  pertaining to noninterest  income on
page 19). In addition,  approximately  $9.4 million of high cost certificates of
deposits were not renewed as part of a planned business strategy.  A new branch,
opened in June 1996 with  deposit  balances  of  approximately  $7.0  million at
December 31, 1996, offset some of the planned outflows discussed above.


<TABLE>
Table 11
--------------------------------------------------------------------------------
DEPOSIT SUMMARY AT DECEMBER 31,
--------------------------------------------------------------------------------
(dollars in thousands)
<CAPTION>

                                               1996              1995             1994              1993              1992
                                         ---------------   -----------------  --------------   ----------------   --------------

<S>                                     <C>         <C>    <C>        <C>    <C>        <C>    <C>        <C>   <C>        <C>  
Noninterest bearing demand ..........   $ 76,340    17.8%  $ 69,213   15.8%  $ 66,435   15.7%  $ 59,170   15.3%  $ 49,908   13.5%

Interest bearing demand .............    117,461    27.3    110,813   25.4    101,873   24.0     92,115   23.9     87,253   23.7

Money market ........................     39,815     9.3     38,716    8.9     37,816    8.9     43,483   11.3     37,923   10.3

Savings .............................     66,778    15.5     71,170   16.3     75,906   17.9     70,062   18.2     63,168   17.1

Time deposits less  than $100,000 ...    112,466    26.1    134,866   30.9    134,097   31.6    110,457   28.7    121,295   32.8

Time deposits greater than $100,000 .     17,153     4.0     11,674    2.7      8,043    1.9     10,143    2.6      9,780    2.6
                                        --------    ----    --------  ----    -------- ----    --------   ----    -------- ----

                                        $430,013   100.0%  $436,452  100.0%  $424,170  100.0%  $385,430  100.0%  $369,327  100.0%
                                        ========    ====   ========   ====   ========  ====    ========  ====    ======== ====




* The following table shows the time remaining to maturity of time  certificates
of deposit of $100,000 or more as of December 31, 1996 (in thousands)

Three months or less .........................................           $10,209
Over three months through six months .........................             3,439
Over six months through twelve months ........................             2,288
Over twelve months ...........................................             1,217
                                                                         -------
                                                                         $17,153
                                                                         =======
</TABLE>


<PAGE>


INTEREST RATE SENSITIVITY

          FLUCTUATIONS IN MARKET INTEREST RATES CAN HAVE A SIGNIFICANT INFLUENCE
ON  NET  INTEREST  INCOME.  THEREFORE,  MANAGING  THE  COMPANY'S  INTEREST  RATE
SENSITIVITY  IS A PRIMARY  OBJECTIVE OF THE  COMPANY'S  SENIOR  MANAGEMENT.  THE
COMPANY'S  ASSET/LIABILITY  COMMITTEE  ("ALCO") IS RESPONSIBLE  FOR MANAGING THE
EXPOSURE TO CHANGES IN MARKET INTEREST  RATES.  ALCO ATTEMPTS TO MAINTAIN STABLE
NET  INTEREST  MARGINS  BY  PERIODICALLY  EVALUATING  THE  RELATIONSHIP  BETWEEN
INTEREST-RATE  SENSITIVE ASSETS AND  INTEREST-RATE  SENSITIVE  LIABILITIES.  THE
EVALUATION  ATTEMPTS TO DETERMINE THE IMPACT ON NET INTEREST MARGIN FROM CURRENT
AND PROSPECTIVE CHANGES IN MARKET INTEREST RATES.

          INTEREST RATE  SENSITIVITY  IS DETERMINED BY ANALYZING THE  DIFFERENCE
BETWEEN THE AMOUNT OF INTEREST  EARNING  ASSETS  MATURING OR REPRICING  WITHIN A
SPECIFIC TIME PERIOD AND THE AMOUNT OF INTEREST BEARING LIABILITIES  MATURING OR
REPRICING  WITHIN THAT SAME PERIOD OF TIME.  THIS  DIFFERENCE,  OR  "SENSITIVITY
GAP,"  PROVIDES AN  INDICATION OF THE EXTENT TO WHICH THE COMPANY'S NET INTEREST
INCOME  MAY BE  AFFECTED  BY  FUTURE  CHANGES  IN  MARKET  INTEREST  RATES.  THE
CUMULATIVE  GAP POSITION AS A PERCENTAGE  OF TOTAL ASSETS  PROVIDES ONE RELATIVE
MEASURE OF THE COMPANY'S INTEREST RATE EXPOSURE.

          The  cumulative  gap between  the  Company's  interest-rate  sensitive
assets and its interest-rate  sensitive  liabilities repricing within a one-year
period was (12.22%) at December 31, 1996. Since the cumulative gap was negative,
the Company has a "negative  gap" position  which  theoretically  will cause its
assets to reprice  more  slowly  than its  deposit  liabilities.  In a declining
interest rate  environment,  interest  costs may be expected to fall faster than
the  interest  received on earning  assets,  thus  increasing  the net  interest
spread.  If interest  rates  increase,  a negative  gap means that the  interest
received on earning  assets may be  expected  to  increase  more slowly than the
interest paid on the Company's liabilities therefore decreasing the net interest
spread.

         Certain  shortcomings are inherent in the method of analysis  presented
in  Table  12 .  Although  certain  assets  and  liabilities  may  have  similar
maturities  or  periods of  repricing,  they may react in  different  degrees to
changes  in market  interest  rates.  The rates on  certain  types of assets and
liabilities may fluctuate in advance of changes in market rates,  while rates on
other types of assets and liabilities may lag behind changes in market rates. In
the event of a change in interest rates,  prepayment and early withdrawal levels
could deviate  significantly  from those assumed in calculating  the table.  The
ability of  borrowers  to service  their  debt may  decrease  in the event of an
interest rate increase.  Management  considers  these factors when reviewing its
gap position and establishing its ongoing asset/liability strategy.


<PAGE>

<TABLE>
Table 12
--------------------------------------------------------------------------------
INTEREST RATE SENSITIVITY ANALYSIS
at December 31, 1996
--------------------------------------------------------------------------------
(dollars in thousands)
<CAPTION>

                                                                                                                  NON-
                                            3           6        6 MOS TO    1 TO 3     3 TO 5       OVER       INTEREST
SUBJECT TO RATE CHANGE WITHIN              MONTHS     MONTHS     1 YEAR      YEARS      YEARS      5 YEARS      SENSITIVE     TOTAL
-----------------------------------------------------------------------------------------------------------------------------------

Assets

<S>                                     <C>         <C>          <C>      <C>         <C>         <C>         <C>          <C>      
    Net loans .......................   $ 109,837   $  20,152    18,210   $  64,953   $  49,089   $  87,395   $  (1,496)   $ 348,140
    Investment securities ...........      71,655       8,031     8,150      14,429       6,017      10,346        --        118,628
    Cash and amounts due from banks .        --          --        --          --          --          --        24,322       24,322
    Other noninterest earning assets.        --          --        --          --          --          --        13,599       13,599
                                        ---------   --------- ---------   ---------   ---------   ---------   ---------    ---------

        Total assets ................     181,492      28,183    26,360      79,382      55,106      97,741      36,425      504,689
                                        ---------   --------- ---------   ---------   ---------   ---------   ---------    ---------

Liabilities and stockholders' equity
    Demand deposits .................     117,461        --        --          --          --          --        76,340      193,801
    Savings deposits* ...............      13,356        --        --          --        53,422        --         --          66,778
    Fixed maturity certificates of
       deposits .....................      34,756      28,112    37,223      12,745       6,038          26       --         118,900
    Variable rate certificates of
       deposits .....................      10,719        --        --          --          --          --         --          10,719
    Money market accounts ...........      39,815        --        --          --          --          --         --          39,815
    Securities sold under agreements
       to repurchase ................       1,000        --      10,050        --          --          --         --          11,050
    Short-term borrowings ...........       5,200        --        --          --          --          --         --           5,200
    Long-term borrowings ............        --          --        --         9,983        --          --         --           9,983
    Other liabilities ...............        --          --        --          --          --          --         4,082        4,082
    Stockholders' equity ............        --          --        --          --          --          --        44,361       44,361
                                          -------     -------   -------      ------     -------      ------     -------      -------
        Total liabilities and
          stockholders' equity ......     222,307      28,112    47,273      22,728      59,460          26     124,783    $ 504,689
                                          -------     -------   -------      ------     -------      ------     -------     ========

GAP .................................   $ (40,815)         71  $(20,913)    $56,654     $(4,354)    $97,715   $ (88,358)
                                         ========     =======  =========    ========    ========   =========   =========
GAP to total assets .................       (8.09)%      0.01%    (4.14)%     11.23%      (0.86)%     19.36%    (17.51)%
Cumulative GAP ......................   $ (40,815)    (40,744)  (61,657)    $(5,003)    $(9,357)    $88,358
                                         =========    =======  =========    ========    ========    ========
Cumulative GAP to total assets ......       (8.09)%     (8.08)%  (12.22)%     (0.99)%     (1.85)%     17.51%

<FN>


*Based on past experience with these  accounts,  management  believes that these
balances are not interest rate sensitive.  Accordingly, 80% of such balances has
been allocated to the "3 to 5 years"  category.  However,  there is no assurance
that these balances will actually remain insensitive to interest rate changes in
the future.
</FN>

</TABLE>
<PAGE>


LIQUIDITY


          A  FUNDAMENTAL  COMPONENT  OF THE  COMPANY'S  BUSINESS  STRATEGY IS TO
MANAGE LIQUIDITY TO ENSURE THE AVAILABILITY OF SUFFICIENT  RESOURCES TO MEET ALL
FINANCIAL OBLIGATIONS AND FINANCE PROSPECTIVE BUSINESS OPPORTUNITIES.  LIQUIDITY
MANAGEMENT  IS CRITICAL TO THE STABILITY OF THE COMPANY.  LIQUIDITY  LEVELS OVER
ANY GIVEN PERIOD OF TIME ARE A PRODUCT OF THE COMPANY'S OPERATING, FINANCING AND
INVESTING  ACTIVITIES.  THE EXTENT OF SUCH  ACTIVITIES  ARE OFTEN SHAPED BY SUCH
EXTERNAL FACTORS AS COMPETITION FOR DEPOSITS AND LOAN DEMAND.

          Traditionally,  financing for the Company's  loans and  investments is
derived primarily from deposits,  along with interest and principal  payments on
loans and  investments.  At December 31, 1996,  total deposits  amounted to $430
million,  a decrease of $6.4 million or 1.5% over the prior  comparable year. In
1996,  the  Company  supplemented  the more  traditional  funding  sources  with
borrowings  from  the  Federal  Home  Loan  Bank of New York  ("FHLB")  and with
securities sold under agreements to repurchase ("REPOS").  At December 31, 1996,
advances from the FHLB and REPOS  amounted to $15.2  million and $11.1  million,
respectively,  as compared to $9.2 million and $1.7  million,  respectively,  at
December 31, 1995.

          In 1996,  loan  production  continued  to be the  Company's  principal
investing  activity.  Net loans at December 31, 1996 amounted to $348.1 million,
compared to $307.5  million at the end of 1995,  an increase of $40.6 million or
13.2%.  

          The  Company's  most  liquid  assets  are cash and due from  banks and
federal funds sold. At December 31, 1996,  the total of such assets  amounted to
$24.3  million or 4.8% of total  assets,  compared  to $25.2  million or 5.1% of
total  assets at year-end  1995.  

          Another    significant    liquidity    source    is   the    Company's
available-for-sale  ("AFS")  securities.  At December 31, 1996,  AFS  securities
amounted  to $55.3  million  or 46.6% of  total  securities,  compared  to $67.5
million or 47.5% of total  securities  at  year-end  1995.  

          In addition to the  aforementioned  sources of liquidity,  the Company
has  available  various  other  sources of  liquidity,  including  federal funds
purchased from other banks and the Federal  Reserve  discount  window.  The Bank
also has a $49.1 million line of credit available  through its membership in the
Federal Home Loan Bank of New York.

         Management  believes that the Company's sources of funds are sufficient
to meet its funding requirements.

CAPITAL ADEQUACY

         Stockholders' equity totaled $44.4 million and represents 8.8% of total
assets at December 31, 1996,  compared to $40.2 million and 8.2% of total assets
at December 31, 1995. The $4.1 million  increase was primarily  attributable  to
net income of $6.4 million less cash dividends of $2.1 million.

         Guidelines  issued by the Federal  Reserve Board and the FDIC establish
capital  adequacy  guidelines  for bank holding  companies  and  state-chartered
non-member  banks.  The  guidelines  establish a  risk-based  capital  framework
consisting  of (1) a definition of capital  consisting of Tier 1 capital,  which
includes   common   shareholders'   equity  less  certain   intangibles   and  a
supplementary  component  called  Tier  II,  which  includes  a  portion  of the
allowance  for  loan  losses,   and  (2)  a  system  for  assigning  assets  and
off-balance-sheet items to one of the four weighted risk categories, with higher
levels of capital being  required for the categories  perceived as  representing
the greater risks. An  institution's  risk-based  capital ratio is determined by
dividing its qualifying capital by its risk-weighted assets. The guidelines make
regulatory  capital  requirements more sensitive to differences in risk profiles
among  banking  institutions,  take  off-balance-sheet  items  into  account  in
assessing  capital  adequacy,  and minimize the  disincentive to holding liquid,
low-risk assets.  Banking  organizations are generally  expected to operate with
capital positions well above the minimum rates.  Institutions with higher levels
of risk, or which experience or anticipate significant growth, are also expected
to operate well above minimum capital standards.

         These guidelines focus  principally on broad categories of credit risk,
although the framework for assigning assets and off-balance  sheet items to risk
categories does  incorporate  elements of transfer risk. The risk-based  capital
ratio does not,  however,  incorporate other factors that may affect a company's
financial condition, such as overall interest rate exposure,  liquidity, funding
and  market  risks,  the  quality  and  level of  earnings,  investment  or loan
concentrations,  the quality of loans and investments, the effectiveness of loan
and  investment  policies  and  management's  ability  to  monitor  and  control
financial and operating risks.

         In addition to the risk-based  guidelines  discussed above, the Federal
Reserve  Board and the FDIC require  that a bank holding  company and bank which
meet the regulators'  highest  performance and operation standards and which are
not contemplating or experiencing significant growth maintain a minimum leverage
ratio (Tier I capital as a percent of quarterly  average adjusted assets) of 3%.
For  those  financial  institutions  with  higher  levels  of risk  or that  are
experiencing or anticipating significant growth, the minimum leverage ratio will
be increased.


Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

Independent Auditors' Report
Consolidated Balance Sheets
Consolidated Statements of Income

Consolidated Statements of Changes in Stockholders Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements

ITEM 9.  CHANGES  IN  AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
            FINANCIAL  DISCLOSURE 

                                      NONE

                                    PART III

ITEM 10.  DIRECTORS  AND  EXECUTIVE OFFICERS

          a.  Directors

          The  information  contained in the Company's  1996 Proxy  Statement is
incorporated herein by reference in response to this item.

          b. Executive Officers  

          Information  required by this item is contained in Part I of this Form
10-K in the section entitled "Executive Officers."

          c. Compliance with Section 16(a)

          Information  contained in the section entitled "Section 16 Compliance"
of the Company's  1996 Proxy  Statement is  incorporated  herein by reference in
response to this item.

ITEM 11.  EXECUTIVE COMPENSATION

          Information contained in the section entitled "Executive Compensation"
of the Company's  1996 Proxy  Statement is  incorporated  herein by reference to
this item.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

          The information  contained in the section  entitled "Amount and Nature
of Beneficial  Ownership" of the Company's 1996 Proxy  Statement is incorporated
herein by reference in response to this item.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

          The information  contained in the section entitled  "Transactions with
management"  of the Company's  1996 Proxy  Statement is  incorporated  herein by
reference in response to this item.



                                     PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES AND REPORTS ON FORM 8-K

         a.  Financial Statements and Schedules

              The financial  statements and schedules listed in the accompanying
              Index to Consolidated Financial Statements and Schedules are filed
              as part of this Annual Report on Form 10-K

         b.   Reports on Form 8-K

               No  reports  on Form 8-K were  filed by the  Company  during  the
               quarter ended  December 31, 1996. 

          c. Exhibits 

               3.(a)Certificate  of   incorporation   and   amendments   thereto
                    (incorporated herein by reference to Registration  Statement
                    No.33-49840, exhibit 3 (a)) 

                 (b)By-laws    (incorporated   herein   by   reference   to
                    Registration Statement No. 33-49840, exhibit 3(b))

              10. Material contracts

                    (a)  Agreement for legal services between Andora,  Palmisano
                         & Geaney and the Company dated April 27, 1996.

                    (b)  Lease for  Washington  Township,  N.J.,  Branch Office,
                         dated  April 13,  1972 and  amended  December  21, 1972
                         (incorporated   herein  by  reference  to  Registration
                         Statement No. 33-49840, exhibit 10(h)).

                    (c)  Lease for Lodi, N.J., Branch Office,  dated January 25,
                         1985 (incorporated  herein by reference to Registration
                         Statement No. 33-49840, exhibit 10(i)). 

                    (d)  Lease for Elmwood Park, N.J., Retail Lending Processing
                         Center,  dated June 22, 1992 and amended June 28, 1994,
                         (incorporated  herein  by  reference  to the  Company's
                         Annual  Report on Form 10-K filed  with the  Commission
                         for the year 1992).

                    (e)  Amendment to lease for Elmwood Park, New Jersey, Retail
                         Lending   Processing   Center,   dated  June  28,  1994
                         (incorporated  herein  by  reference  to the  Company's
                         Annual  Report on Form 10-K filed  with the  Commission
                         for the year 1994).

                    (f)  Executive Compensation Plans and Arrangements

                    (1)  1989  Stock  Option  Plan  is  incorporated  herein  by
                         reference  to  Registration   Statement  No.  33-49840,
                         exhibit 10(j).

                    (2)  Management  Incentive Plan is incorporated by reference
                         to Part III, Item 11, of the Company's definitive Proxy
                         Statement for its 1997 Annual  Meeting of  Stockholders
                         which will be filed with the  Commission not later than
                         120 days after December 31, 1996

                    (3)  Directors'  Retirement Program  (incorporated herein by
                         reference to the  Company's  Annual Report on Form 10-K
                         filed with the Commission for the year 1994).

                    (4)  Executives'  Supplemental  Pension  Plan  (incorporated
                         herein by reference to the  Company's  Annual Report on
                         Form 10-K filed with the Commission for the year 1994).

                    (5)  Deferred   Compensation   Plan  for  Robert  N.  Harris
                         (incorporated  herein  by  reference  to the  Company's
                         Annual  Report on Form 10-K filed  with the  Commission
                         for the year 1994).

              11.  Statement of Computation of Per Share Earnings

              21.  Subsidiaries of Registrant

              23.  Independent Auditors' Consent


<PAGE>


                                   SIGNATURES

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

                                     Interchange Financial Services Corporation

                                     /s/Anthony Labozzetta                     
                                     ---------------------------------
                                        Anthony Labozzetta,
                                        Senior Vice President/Treasurer

March 27, 1997

         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this  report has been  signed  below by the  following  persons on behalf of the
Company and in the capacities and on the dates indicated:

/s/Anthony S. Abbate                 /s/James E. Healey
----------------------------------   -----------------------------------------
Anthony S. Abbate   March 27, 1997    James E. Healey          March 27, 1997
   Director                             Director
   President and 
   Chief Executive Officer

/s/Anthony D. Andora                 /s/Anthony Labozzetta
----------------------------------   -----------------------------------------
Anthony D. Andora   March 27, 1997    Anthony Labozzetta       March 27, 1997
   Director                             Senior Vice President and Treasurer
   Chairman of the Board

/s/Donald L. Correll                 /s/Nicholas R. Marcalus
----------------------------------   -----------------------------------------
Donald L. Correll   March 27, 1997    Nicholas R. Marcalus     March 27, 1997
   Director                             Director

/s/Anthony R. Cosia                  /s/Eleanore S. Nissley
----------------------------------   -----------------------------------------
Anthony R. Cosia     March 27, 199    Eleanore S. Nissley      March 27, 1997
   Director                             Director

/s/John J. Eccleston                 /s/Jeremiah F. O'Connor
----------------------------------   -----------------------------------------
John J. Eccleston    March 27, 1997   Jeremiah F. O'Connor     March 27, 1997
   Director                             Director

/s/David R. Ficca                    /s/Robert P. Rittereiser
----------------------------------   -----------------------------------------
David R. Ficca       March 27, 1997   Robert P. Rittereiser     March 27, 1997
   Director                             Director

                                     /s/Benjamin Rosenzweig
                                     -----------------------------------------
                                     Benjamin Rosenzweig        March 27,1997
                                        Director

<PAGE>

            INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES

                                                                      Page No.
                                                                   in Form 10-K

                              Financial Statements

Independent Auditors' Report relating to the Consolidated Financial
     Statements and Notes thereto......................................... 36

Consolidated Balance Sheets at December 31, 1996 and 1995................. 37

Consolidated Statements of Income for the Years Ended
     December 31, 1996, 1995 and 1994..................................... 38

Consolidated Statements of Changes in Stockholders' Equity
     for the Years Ended December 31, 1996, 1995 and 1994................. 39

Consolidated Statements of Cash Flows for the Years Ended
     December 31, 1996, 1995 and 1994..................................... 40

Notes to Consolidated Financial Statements................................ 42

                                   Schedules

Schedules to the consolidated financial statements required by Article 9 of
Regulation S-X are not required under the related instructions or are
inapplicable and, therefore, have been omitted.

<PAGE>
INDEPENDENT AUDITORS' REPORT





Board of Directors and Stockholders
Interchange Financial Services Corporation
Saddle Brook, New Jersey


We have audited the  accompanying  consolidated  balance  sheets of  Interchange
Financial  Services  Corporation and subsidiaries (the "Company") as of December
31, 1996 and 1995 and the related consolidated  statements of income, changes in
stockholders'  equity,  and cash flows for each of the three years in the period
ended  December  31,  1996.  These  consolidated  financial  statements  are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion,  the consolidated  financial  statements  present fairly, in all
material  respects,  the financial  position of Interchange  Financial  Services
Corporation  and  subsidiaries as of December 31, 1996 and 1995, and the results
of their  operations  and their  cash  flows for each of the three  years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles.

Deloitte & Touche LLP
Parsippany, New Jersey
January  20, 1997

                                      
<PAGE>


<TABLE>

Interchange Financial Services Corporation
-----------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
December 31,
-----------------------------------------------------------------------------------------------
(dollars in thousands)

<CAPTION>
                                                                                                           1996               1995
                                                                                                        --------           ---------

<S>                                                                                                     <C>               <C>    

Assets
Cash and due from banks ....................................................................            $ 24,322            $ 25,151
                                                                                                        --------            --------


Securities held to maturity at amortized cost (estimated
     market value of $63,619 and $75,611) ..................................................              63,376              74,688
                                                                                                        --------            --------
Securities available for sale at estimated market value (amortized
     cost of $54,871 and $66,604) ..........................................................              55,252              67,545
                                                                                                        --------            --------

Loans ......................................................................................             351,793             311,164
Less:  Allowance for loan losses ...........................................................               3,653               3,647
                                                                                                        --------            --------
Net loans ..................................................................................             348,140             307,517
                                                                                                        --------            --------

Premises and equipment, net ................................................................               5,151               5,510
Foreclosed real estate .....................................................................                 610               1,213
Accrued interest receivable and other assets ...............................................               7,838               9,833
                                                                                                        --------            --------

Total assets ...............................................................................            $504,689            $491,457
                                                                                                        ========            ========


Liabilities
Deposits
    Noninterest bearing ....................................................................            $ 76,340            $ 69,213
    Interest bearing .......................................................................             353,673             367,239
                                                                                                        --------            --------
Total deposits .............................................................................             430,013             436,452

Securities sold under agreements to repurchase .............................................              11,050               1,704
Short-term borrowings ......................................................................               5,200               9,200
Accrued interest payable and other liabilities .............................................               4,082               3,860
Long-term borrowings .......................................................................               9,983                --
                                                                                                        --------            --------

Total liabilities ..........................................................................             460,328             451,216
                                                                                                        --------            --------

Commitments and contingent liabilities

Stockholders' equity
Common stock, without par value; 5,000,000 shares authorized;
    2,839,602 shares issued and outstanding in 1996
    and 2,831,730 in 1995 ..................................................................               4,733               4,495
Capital surplus ............................................................................              14,931              12,110
Retained earnings ..........................................................................              24,429              22,990
Unrealized gain-securities available for sale, net of taxes ................................                 268                 646
                                                                                                        --------            --------

Total stockholders' equity .................................................................              44,361              40,241
                                                                                                        --------            --------

Total liabilities and stockholders' equity .................................................            $504,689            $491,457
                                                                                                        ========            ========

-----------------------------------------------------------------------------------------------
See notes to consolidated financial statements
</TABLE>

<PAGE>

<TABLE>
Interchange Financial Services Corporation
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31,
--------------------------------------------------------------------------------
(in thousands except per share data)
<CAPTION>


                                                                                          1996            1995             1994
                                                                                       -----------     -----------      -----------
<S>                                                                                   <C>              <C>               <C>    

Interest income
Interest and fees on loans ..................................................          $ 29,132          $ 27,427          $ 23,537
Interest on federal funds sold ..............................................               407               374               412
Interest and dividends on securities
   Taxable interest income ..................................................             7,465             8,969             8,469
   Interest income exempt from federal income taxes .........................               122                56                59
   Dividends ................................................................               158               169               135
                                                                                       --------          --------          --------

Total interest income .......................................................            37,284            36,995            32,612
                                                                                       --------          --------          --------

Interest expense
Interest on deposits ........................................................            14,041            14,513            10,635
Interest on securities sold under agreements to repurchase ..................               267                12                17
Interest on short-term borrowings ...........................................               246               494               272
Interest on long-term borrowings ............................................                45               131                82
                                                                                       --------          --------          --------

Total interest expense ......................................................            14,599            15,150            11,006
                                                                                       --------          --------          --------

Net interest income .........................................................            22,685            21,845            21,606
Provision for loan losses ...................................................               700             1,200               944
                                                                                       --------          --------          --------
Net interest income after provision
    for loan losses .........................................................            21,985            20,645            20,662
                                                                                       --------          --------          --------

Noninterest income
Service fees on deposit accounts ............................................             1,579             1,474             1,496
Net gain/(loss) on sale of securities .......................................               242                15                (5)
Net gain/(loss) on sale of loans available for sale .........................              --                  22               (14)
Net gain on sale of loan servicing rights ...................................              --                 828              --
Net gain on sale of branch ..................................................               455              --                --
Accretion of discount in connection with acquisition ........................               511               760               760
Other .......................................................................             1,485             1,480             1,334
                                                                                       --------          --------          --------

Total noninterest income ....................................................             4,272             4,579             3,571
                                                                                       --------          --------          --------

Noninterest expenses
Salaries and benefits .......................................................             7,643             7,254             6,879
Net occupancy ...............................................................             2,200             2,080             1,887
Furniture and equipment .....................................................               720               697               653
Advertising and promotion ...................................................               773               673               701
Federal Deposit Insurance Corporation assessment ............................               160               503               887
Foreclosed real estate expense ..............................................               252                54               102
Other .......................................................................             4,634             4,390             4,426
                                                                                       --------          --------          --------

Total noninterest expenses ..................................................            16,382            15,651            15,535
                                                                                       --------          --------          --------

Income before income taxes ..................................................             9,875             9,573             8,698

Income taxes ................................................................             3,456             3,293             3,062
                                                                                       --------          --------          --------


Net income ..................................................................          $  6,419          $  6,280          $  5,636
                                                                                       ========          ========          ========

Net income per common share .................................................          $   2.26          $   2.19          $   1.95
                                                                                       ========          ========          ========

----------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.

</TABLE>

<PAGE>

<TABLE>
Interchange Financial Services Corporation
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------------
(in thousands except share data)
<CAPTION>

                                                                                           Unrealized
                                                                                           Gain/(Loss)
                                                                                           on Securities
                                      Preferred    Common       Capital      Retained        Available     Treasury
                                       Stock        Stock       Surplus      Earnings        for Sale       Stock          Total
                                      --------     --------     ---------    ----------      --------      --------      ----------
<S>                                   <C>          <C>         <C>           <C>            <C>           <C>            <C>

Balance at January 1, 1994 ........   $  5,000    $  4,495    $ 11,333       $15,100                       $(2,623)       $33,305
Net income ........................                                            5,636                                        5,636
Dividends on common stock
   at $0.67 per share .............                                           (1,887)                                      (1,887)
Dividends on preferred stock ......                                             (112)                                        (112)
Unrealized loss on securities
   available for sale,
   net of income taxes ............                                                           $(1,813)                     (1,813)
                                       --------    --------    --------      --------        --------      --------      --------

Balance at December 31, 1994 ......      5,000       4,495      11,333        18,737           (1,813)      (2,623)        35,129
Net income ........................                                            6,280                                        6,280
Dividends on common stock
   at $0.69 per share .............                                           (1,942)                                      (1,942)
Dividends on preferred stock ......                                              (85)                                         (85)
Purchase of 32,000 preferred shares                                                                         (1,600)        (1,600)
Retirement of 100,000 shares of
   preferred stock ................     (5,000)                    777                                       4,223             --
Increase in market valuation-
   securities available for sale,
   net of income taxes ............                                                             2,459                       2,459
                                        --------    --------    --------     --------        --------      --------      --------

Balance at December 31, 1995 ......       --         4,495      12,110        22,990              646          --          40,241

Net income ........................                                            6,419                                        6,419
Dividends on common stock
   at $0.73 per share .............                                           (2,077)                                      (2,077)
5% common stock dividend ..........                    225       2,678        (2,903)                                          --
Fractional shares of 5% common
   stock dividend .................                                 (5)                                                        (5)
Issued 7,498 shares of common
   stock in connection with
   incentive plan .................                     13         148                                                        161
Decrease in market valuation-
   securities available for sale,
   net of tax effect ..............                                                              (378)                       (378)
                                        --------    --------    --------      --------         --------    --------       --------

Balance at December 31, 1996 ......   $   --      $  4,733    $ 14,931      $ 24,429          $   268    $     --         $44,361
                                        ========    ========    ========     ========          ========    ========       ========
See notes to Consolidated Financial Statements
</TABLE>


<PAGE>

<TABLE>
INTERCHANGE FINANCIAL SERVICES CORPORATION
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31,
--------------------------------------------------------------------------------
(in thousands)
<CAPTION>

                                                                                      1996          1995         1994
                                                                                   ---------     ---------    ---------
<S>                                                                                <C>           <C>          <C>    

CASH FLOWS FROM OPERATING ACTIVITIES

   Net income ...................................................................   $  6,419    $  6,280    $  5,636
   Adjustments to reconcile net income to net cash
      provided by (used in) operating activities
         Depreciation and amortization of fixed assets ..........................        984         859         831
         Amortization of securities premiums ....................................      1,030       1,452       1,543
         Accretion of securities discounts ......................................        (65)        (53)        (11)
         Amortization of premium in connection with acquisitions ................        444         444         403
         Accretion of discount in connection with acquisition ...................       (511)       (760)       (760)
         Provision for loan losses ..............................................        700       1,200         944
         Net loss (gain) on sale of foreclosed real estate ......................         87        (127)       (209)
         Net (gain) loss on sale of securities ..................................       (242)        (15)          5
         Net (gain) loss on sale of loans available for sale ....................       --           (22)         14
         Reduction in carrying value of foreclosed real estate ..................         43        --           122
         Decrease (increase) in carrying value of loans available for sale ......         13         (80)         85
         Loss on disposal of fixed assets .......................................         20          26        --
   (Increase) decrease in operating assets
         Net origination of loans available for sale ............................       (102)       (755)    (15,451)
         Proceeds from sale of loans available for sale .........................       --           837       2,129
         Premium in connection with acquisition .................................       --          --        (1,724)
         Accrued interest receivable ............................................        404         144        (917)
         Deferred income taxes ..................................................        161        (134)        (76)
         Other ..................................................................      1,148         694      (1,898)
   Increase (decrease) in operating liabilities
         Accrued interest payable ...............................................        119         162          72
         Other ..................................................................        103         387         619
                                                                                    --------    --------    --------
            NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES .................     10,755      10,539      (8,643)
                                                                                    --------    --------    --------

CASH FLOWS FROM INVESTING ACTIVITIES
    (Payments for) proceeds from
         Net origination of loans ...............................................    (40,117)    (20,470)      1,377
         Purchase of loans ......................................................     (2,150)     (1,251)    (42,244)
         Sale of loans ..........................................................      1,365        --         1,809
         Purchase of securities available for sale ..............................    (27,513)     (5,905)     (1,895)
         Maturities of securities available for sale ............................        885       2,396       2,907
         Sale of securities available for sale ..................................     38,349       2,484         305
         Sale of securities held to maturity ....................................      6,008        --          --
         Purchase of securities held to maturity ................................    (19,515)     (3,999)    (23,618)
         Maturities of securities held to maturity ..............................     24,084      14,000      16,000
         Sale of foreclosed real estate .........................................        644         678       1,136
         Foreclosed real estate .................................................          8        (285)       (106)
         Purchase of fixed assets ...............................................       (601)     (1,862)       (667)
         Sale of fixed assets ...................................................       --             4        --
                                                                                    --------    --------    --------
            NET CASH USED IN INVESTING ACTIVITIES ...............................    (18,553)    (14,210)    (44,996)
                                                                                    --------    --------    --------

CASH FLOWS FROM FINANCING ACTIVITIES
   Proceeds from (payments for)
         Deposits in excess of withdrawals ......................................      3,263      12,282      12,272
         Securities sold under agreements to repurchase .........................     16,828       1,704         295
         Other borrowings .......................................................     11,000       4,200      18,000
         Retirement on other borrowings .........................................     (5,017)       --          --
         Retirement of securities sold under agreement to repurchase and
            other borrowings ....................................................     (7,482)    (11,702)     (2,000)
         Sale of deposit accounts ...............................................     (9,702)       --          --
         Acquisition of deposit accounts ........................................       --          --        26,468
         Dividends ..............................................................     (2,077)     (2,027)     (1,999)
         Treasury stock .........................................................       --        (1,600)       --
         Common stock issued ....................................................        156        --          --
                                                                                    --------    --------    --------
            NET CASH PROVIDED BY FINANCING ACTIVITIES ...........................      6,969       2,857      53,036
                                                                                    --------    --------    --------

Decrease in cash and cash equivalents ...........................................       (829)       (814)       (603)
Cash and cash equivalents at beginning of year ..................................     25,151      25,965      26,568
                                                                                    --------    --------    --------

CASH AND CASH EQUIVALENTS AT END OF YEAR ........................................   $ 24,322    $ 25,151    $ 25,965
                                                                                    ========    ========    ========
<PAGE>

Supplemental disclosure of cash flow information 
Cash paid for:
         Income taxes ...........................................................   $  3,410    $  3,346    $  3,527
         Interest ...............................................................     14,480      14,988      10,934

Supplemental non-cash investing activities
         Loans transferred to foreclosed real estate ............................        179         599         481
         Securitization of loans reclassified to securities available for sale ..         --          --      27,888
         Decrease (increase)-market valuation of securities available for sale           559      (3,812)      2,810
         Amortization of valuation allowance-securities transferred from
            available for sale to held to maturity ..............................         25        --          --
         Securities transferred from available for sale to held to maturity .....         --       5,466        --
         Securities transferred from held to maturity to available for sale .....         --      40,888        --
--------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements
</TABLE>


<PAGE>



                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The  consolidated  financial  statements  have been prepared in accordance  with
generally  accepted  accounting  principles  and  practices  within the  banking
industry.  The  following is a  description  of the  Company's  business and its
significant accounting and reporting policies:

   NATURE OF BUSINESS AND SIGNIFICANT ESTIMATES

         Interchange  Financial  Services  Corporation  (the  "Company"),  a New
Jersey business corporation,  is a holding company whose principal subsidiary is
Interchange  State Bank (the  "Bank").  The Bank is  principally  engaged in the
business of attracting  commercial and retail deposits and investing those funds
into  commercial  business and commercial  mortgage loans as well as residential
mortgage and consumer  loans.  When demand for loans is low, the Bank invests in
debt securities.  Currently,  the Bank conducts  community banking operations in
the northeast region of New Jersey (primarily Bergen county).

         The Company uses certain accounting estimates in the preparation of its
consolidated financial statements. As a result, actual results could differ from
those estimates.

         The  most  significant  estimate  pertains  to the  allowance  for loan
losses.  The borrowers'  ability to meet contractual  obligations and collateral
value are the most significant  assumptions used to arrive at the estimate.  The
risks associated with such estimates arise when unforeseen conditions affect the
borrowers ability to meet the contractual  obligations of the loan and result in
a decline in the value of the supporting collateral. Such unforeseen changes may
have an adverse effect on the financial position of the Company.

         Additionally,  the Company is exposed to significant  changes in market
interest  rates.  Such  changes  could  have an  adverse  effect on the  earning
capacity  and  financial  position  of  the  Company,   particularly,  in  those
situations  in which a mismatch  exists  between the  maturities or repricing of
assets and supporting liabilities.

  PRINCIPLES OF CONSOLIDATION

         The  consolidated  financial  statements  include  the  accounts of the
Company and its subsidiaries. Significant intercompany accounts and transactions
have been eliminated in consolidation.

  CASH AND CASH EQUIVALENTS

         For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks and federal funds sold.

  SECURITIES HELD TO MATURITY AND SECURITIES AVAILABLE FOR SALE

         Debt  securities  which the Company has the positive intent and ability
to hold until  maturity  are  classified  as held to  maturity  ("HTM")  and are
carried at cost,  adjusted for the  amortization  of premiums  and  accretion of
discounts  on  a  level-yield  method  over  the  contractual  maturity  of  the
instruments. Investment securities to be held for indefinite periods of time and
not intended to be held to maturity are classified as available for sale ("AFS")
and are  carried  at market  value.  The  unrealized  gains and  losses on these
securities are reported,  net of taxes, as a separate component of stockholders'
equity.  Management  determines the appropriate  classification of securities at
the time of purchase.

         Securities  classified  as AFS include  securities  used as part of the
Company's  asset and liability  management  strategy,  or securities that may be
sold in  response  to,  among  other  things,  changes  in  interest  rates  and
prepayment  risk.  Gains  and  losses  from  the sale of  these  securities  are
determined using the specific identification method. 

LOANS

         Loans are stated at  principal  amounts  outstanding,  net of  unearned
discount.  Interest  income is accrued and credited at the  applicable  interest
rates.  Origination fees and certain direct origination costs have been deferred
and are recognized  over the life of the applicable loan as an adjustment to the
yield. At December 31, 1996,  approximately 84% of all loans are  collateralized
by real estate located in northern New Jersey, the Company's market area.

         Loans  are  placed  on  nonaccrual  status  when,  in  the  opinion  of
management, there is doubt as to the collectibility of interest or principal, or
when  principal  or  interest  payments  are in arrears  90 days or more,  or if
management considers collection of such amounts to be doubtful.  Amounts accrued
are  evaluated  for  collectibility.  Interest  is  subsequently  recognized  on
nonaccrual  loans  only to the extent  that cash is  received  and the  ultimate
repayment  of principal  is not in doubt.  Loans are returned to accrual  status
when  management  deems that  collection of principal and interest is reasonable
and probable.

         Mortgage  loans  available  for sale are carried at lower of  aggregate
cost or market value.

         In July 1991, the Bank acquired the assets and  liabilities of a failed
institution  from the Federal Deposit  Insurance  Corporation (the "FDIC") which
was  accounted  for  using the  purchase  method  of  accounting.  Consideration
received from the FDIC was assigned to the fair value of the loans acquired, the
allowance  for loan  losses and  acquisition  costs.  Excess  consideration  was
accreted into income over a five-year period which ended in August 1996.

         Effective  January 1, 1995, the Company adopted  Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan"
("SFAS No. 114"), as amended by Statement of Financial  Accounting Standards No.
118,  "Accounting by Creditors for Impairment of a Loan-Income  Recognition  and
Disclosures"  ("SFAS No.  118").  Under SFAS No. 114, a loan is  impaired  when,
based on current  information and events, it is probable that a creditor will be
unable to collect all amounts due  according  to  contractual  terms of the loan
agreement.  The  collection  of all amounts due according to  contractual  terms
means that both the contractual  interest and principal  payments of a loan will
be  collected as scheduled  in the loan  agreement.  SFAS No. 114 requires  that
impaired  loans be measured  based on the present value of expected  future cash
flows  discounted  at the  loan's  effective  interest  rate or, as a  practical
expedient,  at the  loan's  observable  market  price or the  fair  value of the
collateral.  The fair  value of  collateral,  as  reduced  by costs to sell on a
discounted  basis, is utilized if a loan is collateral  dependent or foreclosure
is probable.  All  commercial  and  commercial  mortgage loans are evaluated for
impairment under SFAS No. 114. All nonaccrual commercial and commercial mortgage
loans are  considered  impaired.  The  adoption  of these  rules did not have an
impact on the Company's financial condition and results of operations.

   ALLOWANCE FOR LOAN LOSSES

         The allowance for loan losses is established through charges to income.
Loan losses are charged  against the allowance  for loan losses when  management
believes that the  collectibility  of principal is unlikely.  If, as a result of
loans charged off or increases in the size or risk  characteristics  of the loan
portfolio,  the  allowance is below the level  considered  by  management  to be
adequate to absorb future loan losses on existing loans,  the provision for loan
losses is  increased  to the level  considered  necessary to provide an adequate
allowance.  The allowance is an amount that management believes will be adequate
to absorb possible losses on existing loans that may become  uncollectible based
on evaluations of the  collectibility  of the loans.  The evaluations  take into
consideration  such  factors  as  changes  in the  nature and volume of the loan
portfolio,  overall  portfolio  quality,  review of specific  problem  loans and
economic conditions that may affect the borrowers' ability to pay.

  PREMISES AND EQUIPMENT

         Premises  and  equipment  are  stated  at  cost,   net  of  accumulated
depreciation and amortization.  Depreciation and amortization are computed using
the  straight-line  method.  Premises and  equipment  are  depreciated  over the
estimated useful lives of the assets.  Leasehold improvements are amortized over
the term of the  lease,  if  shorter.  Estimated  lives  are 30 to 40 years  for
premises  and 3 to 20  years  for  furniture  and  equipment.  Expenditures  for
maintenance and repairs are expensed as incurred. The cost of major renewals and
improvements is capitalized.

  FORECLOSED REAL ESTATE

         Real estate properties acquired through foreclosure are recorded at the
lower of cost or estimated fair value,  less estimated selling costs, at time of
foreclosure.  Subsequent valuations are performed  periodically and the carrying
value is adjusted by a charge to foreclosed  real estate  expense to reflect any
subsequent  declines in the estimated fair value. As a result,  further declines
in real estate values may result in increased  foreclosed  real estate  expense.
Routine holding costs are charged to expense as incurred.

  INCOME TAXES

         The Company  utilizes the asset and liability method for accounting for
income taxes.  Deferred tax assets and liabilities are recognized for the future
tax  consequences  attributable to differences  between the financial  statement
carrying  amounts of existing assets and  liabilities  and their  respective tax
bases. Deferred tax assets and liabilities are measured using current rates. The
effect on deferred taxes of a change in tax rates is recognized in income in the
period the change occurs.  Deferred tax assets are reduced,  through a valuation
allowance, if necessary, by the amount of such benefits that are not expected to
be realized based on current available evidence.

   PER SHARE AMOUNTS

         Earnings  per common  share is computed by  dividing  net income,  less
dividends on the preferred stock by the weighted average number of common shares
outstanding  of 2,838,161  during 1996 and 2,831,730  during 1995 and 1994.  The
potential dilution from the exercise of stock options is not material.

   2.  ACQUISITIONS

On February 25, 1994,  the Bank  assumed the deposit  liabilities,  amounting to
$26,468,000,  of Volunteer  Federal  Savings  Association  of Little Ferry,  New
Jersey.  The Bank  received  $24,744,000  in cash  representing  the  difference
between the  deposits  assumed,  net of  $1,724,000  premium paid as part of the
transaction.

         The premiums paid to acquire the deposits in the Volunteer  transaction
and in a 1991 branch  acquisition are being amortized over a period ranging from
five  to  seven  years.  Amortization  in  1996,  1995  and  1994,  included  in
noninterest   expenses,   amounted  to   $444,000,   $444,000,   and   $403,000,
respectively.

3.   RESTRICTIONS ON CASH AND DUE FROM BANKS

The subsidiary  bank is required to maintain a reserve  balance with the Federal
Reserve Bank based upon the level of its deposit  liability.  The average amount
of this  reserve  balance  for 1996 and 1995 was  approximately  $8,164,000  and
$6,803,000, respectively.


<PAGE>

4.  SECURITIES HELD TO MATURITY AND SECURITIES AVAILABLE FOR SALE

<TABLE>
         Securities  held to  maturity  and  securities  available  for sale are
summarized as follows: (in thousands)
<CAPTION>
                                                      ----------------------------------------------
                                                                   DECEMBER 31,1996
                                                      ----------------------------------------------
                                                                     GROSS      GROSS     ESTIMATED
                                                      AMORTIZED    UNREALIZED UNREALIZED   MARKET
                                                       COST          GAINS     LOSSES      VALUE
                                                      ---------    ---------- ----------  ---------
<S>                                                   <C>         <C>         <C>        <C>   

SECURITIES HELD TO MATURITY:

     OBLIGATIONS OF U.S. TREASURY .................   $ 43,517      $ 248       --     $ 43,765
     OBLIGATIONS OF U.S. AGENCIES .................     11,077         74       $ 22     11,129
     OBLIGATIONS OF STATES & POLITICAL SUBDIVISIONS      3,581          1          9      3,573
     OTHER DEBT SECURITIES ........................      5,201       --           49      5,152
                                                      --------   --------   --------   --------
                                                        63,376        323         80     63,619
                                                      --------   --------   --------   --------

SECURITIES AVAILABLE FOR SALE:

     OBLIGATIONS OF U.S. TREASURY .................     31,640        453        246     31,847
     OBLIGATIONS OF U.S. AGENCIES .................     17,321        124         12     17,433
     OTHER DEBT SECURITIES ........................      1,998         11       --        2,009
     EQUITY SECURITIES ............................      3,912         51       --        3,963
                                                      --------   --------   --------   --------
                                                        54,871        639        258     55,252
                                                      --------   --------   --------   --------

             TOTAL SECURITIES .....................   $118,247      $ 962      $ 338   $118,871
                                                      ========   ========   ========   ========

                                                     ----------------------------------------------
                                                                   DECEMBER 31,1995
                                                      ---------------------------------------------
                                                                     GROSS      GROSS     ESTIMATED
                                                      AMORTIZED   UNREALIZED  UNREALIZED   MARKET
                                                        COST         GAINS     LOSSES      VALUE
                                                      ---------   ---------- ----------  ---------
 
Securities held to maturity:

     Obligations of U.S. Treasury ................   $ 65,223     $  942      $  26   $ 66,139
     Obligations of U.S. agencies ................      8,037          7       --        8,044
     Obligations of states & politica subdivisions      1,278       --         --        1,278
     Other debt securities .......................        150       --         --          150
                                                     --------   --------   --------   --------
                                                       74,688        949         26     75,611
                                                     --------   --------   --------   --------

Securities available for sale:

     Obligations of U.S. Treasury ................     40,888      1,466        184     42,170
     Obligations of U.S. agencies ................     23,282       --          341     22,941
     Equity securities ...........................      2,434       --         --        2,434
                                                     --------   --------   --------   --------
                                                       66,604      1,466        525     67,545
                                                     --------   --------   --------   --------

             Total securities ....................   $141,292    $ 2,415      $ 551   $143,156
                                                     ========   ========   ========   ========
</TABLE>
<PAGE>

         At December 31, 1996, the contractual  maturities of securities held to
maturity and securities available for sale are as follows: (in thousands)
<TABLE>
<CAPTION>

                                 
                                                                     Securities Held to                          Securities
                                                                          Maturity                            Available for Sale
                                                                ----------------------------            ---------------------------
                                                                                   Estimated                               Estimated
                                                                Amortized            Market             Amortized            Market
                                                                  Cost               Value                 Cost              Value
                                                                ---------           --------             ---------         ---------
<S>                                                              <C>                <C>                  <C>                 <C>

Within 1 year ......................................             $32,587             $32,719                --                  --
After 1 but within 5 years .........................              20,443              20,590             $35,581             $35,842
After 5 but within 10 years ........................               4,190               4,205               9,522               9,553
After 10 years .....................................               6,156               6,105               5,856               5,894
Equity securities ..................................                --                  --                 3,912               3,963
                                                                 -------             -------             -------             -------

                                                                 $63,376             $63,619             $54,871             $55,252
                                                                 =======             =======             =======             =======

</TABLE>
         Proceeds  from  the  sale of  securities  available  for  sale  totaled
$38,349,000,  $2,484,000, and $305,000 during the years ended december 31, 1996,
1995 and 1994, respectively. Gains of $452,000 and $16,000 were realized in 1996
and 1995, respectively,  and losses of $217,000, $1,000 and $5,000 were realized
in 1996, 1995 and 1994, respectively.

         Proceeds  from the sale of  securities  held to maturity  (scheduled to
mature within 3 months)  totaled  $6,008,000  during the year ended december 31,
1996. Gains of $7,000 were realized in 1996.

         Securities with carrying  amounts of $26.1 Million and $11.1 Million at
December  31, 1996 and 1995,  respectively,  were  pledged for public  deposits,
securities sold under repurchase agreements and other purposes required by law.

5.  LOANS

<TABLE>
The composition of the loan portfolio is summarized as follows:  (in thousands)
<CAPTION>
                                                                                             --------------------------------------
                                                                                                          December 31,        
                                                                                             --------------------------------------
                                                                                                 1996                       1995
                                                                                             -------------              ------------
<S>                                                                                          <C>                          <C>    

Commercial and financial .................................................                     $ 51,908                     $ 42,106
Real Estate
   Residential ...........................................................                      178,556                      164,140
   Commercial ............................................................                      112,233                       96,910
   Construction ..........................................................                        3,414                        1,484
   Available for sale ....................................................                        1,195                        1,106
Installment ..............................................................                        4,487                        5,363
Lease financing ..........................................................                         --                             55
                                                                                               --------                     --------
                                                                                                351,793                      311,164
Allowance for loan losses ................................................                        3,653                        3,647
                                                                                               --------                     --------

NET LOANS ................................................................                     $348,140                     $307,517
                                                                                       ========                     ========

</TABLE>

<TABLE>


<PAGE>

Nonperforming loans include loans which are accounted for on a nonaccrual basis and troubled debt
restructurings.  Nonperforming loans are as follows: (in thousands)
<CAPTION>

                                                                                -------------------------------------------------
                                                                                               D e c e m b e r 31,
                                                                                -------------------------------------------------
                                                                                     1996                1995              1994
                                                                                ------------        -------------      ------------
<S>                                                                               <C>                 <C>               <C> 

Nonaccrual loans

   Commercial and financial .........................................               $  820               $  621               $3,159
   Residential real estate ..........................................                1,078                1,646                2,430
   Commercial real estate ...........................................                  173                  235                  588
   Installment ......................................................                   13                    9                 --
                                                                                    ------               ------               ------

                                                                                    $2,084               $2,511               $6,177
                                                                                    ======               ======               ======

Troubled debt restructurings

   Commercial and financial .........................................               $  725               $1,000               $  277
   Commercial real estate ...........................................                 --                    465                  245
                                                                                    ------               ------               ------

                                                                                    $  725               $1,465               $  522
                                                                                    ======               ======               ======

Interest  income  that would have been
  recorded during the year on nonaccrual
  loans outstanding at year-end in
  accordance with original terms ....................................               $  242               $  254               $  669

Interest income included in net income
   during the year on nonaccrual loans
   outstanding at year-end ..........................................               $  124               $  114               $  398

</TABLE>

         Nonaccrual loans acquired in a 1991 transaction, with an estimated fair
value of $452,000,  and $1,060,000 at December 31, 1995 and 1994,  respectively,
are not included in the preceding  table. At the acquisition  date,  these loans
were not performing according to their original terms and were discounted from a
face value of $978,000 and $2,773,000, respectively. There were no such loans at
December 31, 1996.

         Loans on which  interest is accruing and included in income,  but which
were contractually past due 90 days or more as to principal or interest payments
amounted to $25,000 at December 31,  1996.  There were no such loans at December
31, 1994 and 1995.

         Officers and  directors of the Company and their  affiliated  companies
are customers and are engaged in  transactions  with the Company in the ordinary
course of  business on  substantially  the same terms as those  prevailing  with
other borrowers and suppliers.

         The following  table  summarizes  activity with respect to these loans:
(in thousands) 
<TABLE>
<CAPTION>

                                                        ---------------------------------
                                                             Years Ended December 31,
                                                        ---------------------------------
                                                          1996                   1995
                                                        ----------             ----------

<S>                                                        <C>                    <C>   
             Balance at beginning of year                  $2,938                 $3,503
             Additions                                        268                    339
             Reductions                                      (421)                  (904)
                                                        ----------             ----------

             Balance at end of year                        $2,785                 $2,938
                                                        ==========             ==========
</TABLE>

<PAGE>
6.  ALLOWANCE FOR LOAN LOSSES

The Company's recorded investment in impaired loans is as follows:

<TABLE>
<CAPTION>
                                                                      ----------------------------------------------------------
                                                                                                December 31,
                                                                      ----------------------------------------------------------
                                                                                   1996                            1995
                                                                       -------------------------       --------------------------
                                                                                           RELATED                         Related
                                                                                          ALLOWANCE                       Allowance
                                                                                          FOR LOAN                         for Loan
                                                                         INVESTMENT         LOSSES         Investment       Losses
                                                                         ----------       ---------        ----------     ---------
<S>                                                                      <C>              <C>              <C>            <C>   

Impaired loans

   With a related allowance for loan losses
      Commercial and Financial .................................           $1,559           $  361           $  455           $  232
      Commercial real estate ...................................              173               26            1,834               68

   Without a related allowance for loan losses
      Commercial and Financial .................................               50             --                 18             --
                                                                           ------           ------           ------           ------
                                                                           $1,782           $  387           $2,307           $  300
                                                                           ======           ======           ======           ======

-----------------------------------------------------------------------------------------------------------------------------------
All the above loans were measured  based on the fair value of collateral  except
for one Commercial and Financial loan in 1996 with a $558,000 loan balance and a
$279,000  related  allowance  which  was  measured  using the  present  value of
expected cash flows.
</TABLE>

<TABLE>

The following table sets forth certain information about impaired loans:
(in thousands)
<CAPTION>
                                                    ------------------------
                                                    Years Ended December 31,
                                                    ------------------------
                                                       1996          1995
                                                    -----------    ----------
<S>                                                 <C>           <C>    


Average recorded investment                             $2,112        $2,485
                                                    ===========    ==========

Interest income recognized during 
   time period that loans were impaired:
     Recognized using cash-basis method
          of accounting                                   $126          $141
     Recognized by other methods                             -            -
                                                    -----------    ----------
                                                          $126          $141
                                                    ===========    ==========

</TABLE>
         Changes in the allowance for loan losses are summarized as follows: (in
thousands)
                                                    ------------------------
                                                    Years Ended December 31,
                                                    ------------------------
                                                  1996        1995        1994
                                                  ----        ----        -----

Balance at beginning of year ...............    $ 3,647     $ 3,839     $ 3,905
Additions (deductions)
     Provision charged to operations .......        700       1,200         944
     Recoveries on loans previously
          charged off ......................        208         118         114
     Loans charged off .....................       (902)     (1,510)     (1,124)
                                                -------     -------     -------
Balance at end of year .....................    $ 3,653     $ 3,647     $ 3,839
                                                =======     =======     =======

For years ended  December 31, 1996,  1995 and 1994,  the  provisions  charged to
expense for federal  income tax  purposes  amounted to  approximately  $694,000,
$1,392,000, and $1,010,000, respectively.
<PAGE>

7.  PREMISES AND EQUIPMENT, NET

Premises and equipment are summarized as follows:  (in thousands)

                                                         -----------------------
                                                                  December 31,
                                                          ----------------------
                                                           1996            1995
                                                         --------         ------

Land ...........................................         $   743         $   743
Buildings ......................................           1,062           1,062
Furniture, fixtures and equipment ..............           3,817           3,864
Leasehold improvements .........................           4,954           4,715
                                                         -------         -------
                                                          10,576          10,384
Less accumulated depreciation and
     amortization ..............................           5,425           4,874
                                                         -------         -------
                                                         $ 5,151         $ 5,510
                                                         =======         =======

8.  DEPOSITS

Deposits are summarized as follows:  (in thousands)

                                                       -------------------------
                                                               December 31,
                                                       -------------------------
                                                           1996          1995
                                                         --------      ---------

Noninterest bearing demand deposits ..............       $ 76,340       $ 69,213
Interest bearing demand deposits .................        117,461        110,813
Money market deposits ............................         39,815         38,716
Savings deposits .................................         66,778         71,170
Time deposits ....................................        129,619        146,540
                                                         --------       --------
                                                         $430,013       $436,452
                                                         ========       ========

         At december 31, 1996 and 1995, the carrying  amounts of certificates of
deposit  that  individually   exceed  $100,000  amounted  to  $17,153,000,   and
$11,674,000,  respectively.  Interest  expense  related  to  such  deposits  was
approximately  $692,000,  $568,000,  and  $312,000  in  1996,  1995,  and  1994,
respectively.

9.  SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND SHORT-TERM BORROWINGS

         Securities   sold  under   agreements  to  repurchase   and  short-term
borrowings are summarized as follows: (in thousands)

                                                           --------------------
                                                                December 31,
                                                           --------------------
                                                              1996        1995
                                                             ------      ------

Securities sold under agreements to repurchase .........     $11,050     $ 1,704
Federal funds purchased ................................       5,200       4,200
Advances from the Federal Home Loan
    Bank of New York ...................................        --         5,000
                                                             -------     -------

                                                             $16,250     $10,904
                                                             =======     =======

         The Bank has a $49.1  million  line of  credit  available  through  its
membership in the Federal Home Loan Bank of New York.

10.  LONG-TERM  BORROWINGS

          Long-term  borrowings are comprised of two Federal Home Loan Bank (the
"FHLB")   advances   consisting  of  a  $4.0  million  advance  with  a  20-year
amortization  term, a fixed interest rate of 6.31% and matures in November 1998;
and a $6.0 million advance, collateralized by U.S. Treasury securities, that has
a fixed  interest  rate of 5.72% and matures in December  1999.  The FHLB has an
option to call the $6.0 million advance after December 1998.
<PAGE>

11.  BENEFIT PLANS

         In 1993, the Company  established a  non-contributory  defined  benefit
pension  plan  covering  all  eligible  employees.  The  funding  policy  is  to
contribute  an amount that is at least the minimum  required by law.  Retirement
income  is based on years of  service  under the plan and,  subject  to  certain
limits,  on final average  compensation.  Effective January 1, 1994, the Company
established a supplemental  plan that provides for retirement  income that would
have been paid but for the limitation under the qualified plan.

         Effective August 1, 1994, the Company established a retirement plan for
all directors of the Company or the Bank who are not employees of the Company or
of any  subsidiary  or  affiliate of the  Company.  As a part of this Plan,  the
Company  contributes  annually to a life insurance policy or annuity contract as
follows:

                       YEARS OF SERVICE              AMOUNT CONTRIBUTED
                       ----------------              ------------------
                           6........                      $5,000
                           7........                       6,000
                           8........                       7,000
                           9........                       8,000
                           10.......                       9,000
                           11 or more                     10,000

The life  insurance  policies  or annuity  contracts  are owned by the  Company.
Retirement  income to a director who has completed five years of service through
ten  years of  service  will be based  on the cash  value of the life  insurance
policy or annuity  contract.  After ten years of service,  the retirement income
will be the  greater of the cash value of the life  insurance  policy or annuity
contract or an amount  determined by multiplying  the standard  annual  retainer
fees  (currently  $11,000) at the  director's  retirement  day by the director's
years of service.


<PAGE>


<TABLE>

Net pension cost of each plan consist of the following:  (in thousands)
<CAPTION>

                                                                 Pension Plan            Supplemental Plan        Directors' Plan
                                                             -----------------------   ----------------------    ------------------
                                                             1996     1995     1994     1996   1995    1994     1996    1995   1994
                                                             ----     ----     ----     ----   ----    ----     ----    ----   ----
<S>                                                         <C>      <C>      <C>       <C>    <C>     <C>     <C>     <C>     <C>

Service cost of benefits during period ..................    $179     $134     $195      $12    $10     $14    $ 40    $ 39    $ 17

Interest cost on projected benefit
   obligation ...........................................      37       22       14        3      2       1      69      66      26

Actual return on plan assets ............................     (51)     (65)      (5)     --      --      --      --      --      --

Net amortization or deferral ............................      10       39       (7)       1    --        1     147     147      61

                                                            -----    -----    -----    -----   -----   -----   -----   -----   -----
Net pension cost ........................................    $175     $130     $197      $16    $12     $16    $256    $252    $104
                                                            =====    =====    =====    =====   =====   =====   =====   =====   =====

</TABLE>

         The following table sets forth the funded status, as of December 31, of
the plans and amounts  recognized in the Company's  Consolidated  Balance Sheets
and  the  major  assumptions  used  to  determine  these  amounts:  (dollars  in
thousands)

<TABLE>
<CAPTION>
                                                            Pension Plan            Supplemental Plan           Directors' Plan
                                                       ----------------------     --------------------        --------------------
                                                         1996          1995         1996         1995          1996         1995
                                                       -------       --------     --------     -------       --------     -------
<S>                                                    <C>          <C>          <C>           <C>            <C>           <C>

Accumulated benefit obligation,
    Vested .......................................       $  32        $  27         --            --           $ 931         $ 921
    Non-vested ...................................         376          275        $  29         $  19          --            --
                                                         -----        -----        -----         -----         -----         -----
                                                         $ 408        $ 302        $  29         $  19         $ 931         $ 921
                                                         =====        =====        =====         =====         =====         =====

Projected benefit obligation .....................       $ 710        $ 527        $  50         $  38         $ 931         $ 921

Plan assets at fair value ........................         644          488         --            --            --            --
                                                         -----        -----        -----         -----         -----         -----

Projected benefit obligation in
   excess of plan assets .........................          66           39           50            38           931           921

Unrecognized prior service cost ..................           6            7           (8)           (9)         (387)         (535)

Unrecognized net gain/(loss) .....................          77           37            2            (1)          (29)          (30)

Adjustment for additional liability ..............        --           --           --            --             416           565
                                                         -----        -----        -----         -----         -----         -----

Accrued pension cost included in
   the balance sheet .............................       $ 149        $  83        $  44         $  28         $ 931         $ 921
                                                         =====        =====        =====         =====         =====         =====

Major assumptions:

   Discount rate .................................         7.5%         7.5%         7.5%          7.5%          7.5%          7.5%
   Expected rate of increase in future
      compensation ...............................         5.0          5.0          5.0           5.0           N/A           N/A
   Expected long-term rate of return
      on assets ..................................         8.0          8.0          N/A           N/A           N/A           N/A

</TABLE>


         The Company has a Capital  Investment  Plan (the "Plan")  which permits
employees to make basic contributions up to 4% of base compensation.  Additional
contributions  up to 10% of  compensation  may be made when  coupled  with basic
contributions.  Under the Plan,  the  Company  provides a matching  contribution
equal to 50% of the basic  contribution of each  participant.  In addition,  the
Company makes a fixed  contribution on behalf of each participant equal to 1% of
such  participant's base  compensation.  The Company's  contribution to the Plan
amounted  to  $119,000,   $115,000,   and  $98,000  in  1996,   1995  and  1994,
respectively.  

12. STOCK OPTION PLAN 

          In 1989, the Company adopted a stock option plan covering  certain key
employees.  Under this plan, as amended,  a maximum of 283,500  shares of common
stock may be granted at fair market value at the date of grant.  Options granted
expire if not  exercised  within ten years of date of grant and are  exercisable
starting one year from the date of grant.

         In October  1995,  the  Financial  Accounting  Standards  Board  issued
Statement No. 123.  "Accounting for Stock-Based  Compensation"  (SFAS 123). SFAS
123 requires expanded disclosures of stock-based compensation  arrangements with
employees, and encourages, but does not require compensation cost to be measured
based  on the  fair  value  of the  equity  instrument  awarded.  Companies  are
permitted, however, to continue to apply Accounting Principles Board Opinion No.
25 ("APB 25"), which recognizes  compensation  cost based on the intrinsic value
of the equity instrument  awarded.  The Company will continue to apply APB 25 to
its stock-based compensation awards to employees.

         If compensation  cost for Plan awards had been determined based on fair
value at the grant  dates,  net income and  earnings  per share  would have been
reduced to the pro-forma amounts below for the years ended December 31, 1996 and
1995: (no options were granted in 1995) (in thousands except share data)

                                                     -------------------------
                                                          December 31,
                                                     -------------------------
                                                        1996           1995
                                                     ----------     ----------

Net income:

    As reported ..........................             $6,419         $6,280
    Pro-forma ............................              6,412          6,280

Net income per share:

    As reported ..........................              $2.26          $2.19
    Pro-forma ............................               2.26           2.19

The pro-forma  effect of applying FAS 123 is not  necessarily  indicative of the
effect on reported net income for future years.

         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 the periods ending  December 31, 1996:  expected
volatility,  22.26%;  expected lives, 7 years;  risk-free  interest rate, 6.26%;
expected  dividend  yield,  2.45%.  

          A summary of the Plan's status and changes during the years then ended
is presented below: (in thousands except share data)

<TABLE>
<CAPTION>
                                                                 ----------------------------------------------------------
                                                                                       December 31,
                                                                 ----------------------------------------------------------
                                                                            1996                           1995
                                                                 ---------------------------    ---------------------------
                                                                                   WEIGHTED-                    Weighted-
                                                                                   AVERAGE                       Average
                                                                                   EXERCISE                      Exercise
                                                                     SHARES          PRICE          Shares        Price
                                                                     ------        --------         ------       --------      
<S>                                                                 <C>           <C>              <C>            <C>

Outstanding at January 1 ........................................    67,464         $13.22           67,464       $13.22
Granted .........................................................     8,139          18.81             --           --
                                                                     ------                          ------       ------

Outstanding at December 31 ......................................    75,603          13.82           67,464        13.22
                                                                     ======                          ======       ======

Options exercisable at December 31 ..............................    65,260          13.12           55,406        12.58
                                                                     ======                          ======       ======

Weighted-average fair value of options granted during
     the year ended December 31 (per option) ....................     $5.10                             --
</TABLE>
<PAGE>


          The following table summarizes  information about options  outstanding
under the Plan at December 31, 1996:

<TABLE>
<CAPTION>

                   OPTIONS OUTSTANDING                                          OPTIONS EXERCISABLE
--------------------------------------------------------------------        ----------------------------
                                         WEIGHTED-
                                          AVERAGE         WEIGHTED-                           WEIGHTED-
    RANGE OF                             REMAINING        AVERAGE                             AVERAGE
    EXERCISE             NUMBER         CONTRACTUAL       EXERCISE              NUMBER        EXERCISE
     PRICES            OUTSTANDING         LIFE             PRICE            EXERCISABLE       PRICE
------------------    ------------      ------------     ------------        ------------   -------------
<S>                    <C>             <C>              <C>                  <C>             <C>    

     10 - 15               35,701         2.96              10.60                35,701         10.60
     15 - 20               39,900         7.23              16.71                29,559         16.18
                      ------------                                          ------------

                           75,601                                                65,260
                      ============                                          ============

</TABLE>


13.  CAPITAL

     The  Company  and the  Bank  are  subject  to  various  regulatory  capital
requirements  administered  by the  federal  banking  agencies.  Failure to meet
minimum  capital  requirements  can  initiate  certain  mandatory--and  possibly
additional  discretionary--actions by regulators that, if undertaken, could have
a direct material effect on the Company's  financial  statements.  Under capital
adequacy  guidelines,  the  Company  and the Bank  must  meet  specific  capital
guidelines that involve quantitative measures of the their assets,  liabilities,
and certain  off-balance-sheet  items as calculated under regulatory  accounting
practices.   The  Company  and  the  Bank's  capital   amounts  and  the  Bank's
classification  under the regulatory framework for prompt corrective action, are
also subject to qualitative  judgments by the regulators about components,  risk
weightings, and other factors.

      Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios of total
and Tier I capital to risk-weighted assets and Tier I capital to average assets.
Management believes, as of December 31, 1996, that the Company and the Bank meet
all capital adequacy requirements to which it is subject.

      As of December 31,  1996,  the most recent  notification  from the Federal
Reserve  Bank  categorized  the Bank as well  capitalized  under the  regulatory
framework for prompt  corrective  action. To be categorized as well capitalized,
the Bank must maintain  minimum total  risk-based,  Tier I risk-based and Tier I
leverage ratios as set forth in the following table.  There are no conditions or
events  since that  notification  that  management  believes  have  changed  the
institution's category.


<PAGE>

<TABLE>
<CAPTION>

          The Company's  capital amounts and ratios are as follows:  (dollars in
thousands)

                                                                                                                  Capitalized
                                                                                           For Capital          Prompt Corrective
                                                                      Actual            Adequacy Purposes       Action Provisions
                                                                 ---------------        --------------------     ----------------
                                                                 Amount    Ratio        Amount      Ratio        Amount     Ratio
                                                                 ------    -----        ------      -----        ------     -----
<S>                                                             <C>        <C>          <C>         <C>         <C>        <C>
                                          
As of December 31, 1996:
   Total Capital (to Risk Weighted Assets):
      The Company ........................................      $46,720    14.42%      $25,918      8.00%          N/A      N/A
      The Bank ...........................................       45,391    14.07        25,813      8.00       $32,266     10.00%
   Tier 1 Capital ( to Risk Weighted Assets):
      The Company ........................................       43,067    13.29        12,959      4.00           N/A      N/A
      The Bank ...........................................       41,738    12.94        12,906      4.00        19,359      6.00
   Tier 1 Capital (to Average Assets):
      The Company ........................................       43,067     8.66        14,925      3.00           N/A      N/A
      The Bank ...........................................       41,738     8.39        14,925      3.00        24,875      5.00

As of December 31, 1995:
   Total Capital (to Risk Weighted Assets):
      The Company ........................................      $41,963    14.41%      $23,304      8.00%          N/A      N/A
      The Bank ...........................................       41,952    14.40        23,304      8.00       $29,130     10.00%
   Tier 1 Capital ( to Risk Weighted Assets):
      The Company ........................................       38,322    13.16        11,652      4.00           N/A      N/A
      The Bank ...........................................       38,311    13.15        11,652      4.00        17,478      6.00
   Tier 1 Capital (to Average Assets):
      The Company ........................................       38,322     7.98        14,409      3.00           N/A      N/A
      The Bank ...........................................       38,311     7.98        14,409      3.00        24,014      5.00


</TABLE>


14.  OTHER NONINTEREST EXPENSES

Expenses included in other noninterest  expenses which exceed one percent of the
aggregate of total interest income and noninterest income in 1996, 1995 and 1994
are as follows:  (in thousands)


<TABLE>
<CAPTION>
                                                                  1996           1995          1994
                                                                 ------         ------        ------
<S>                                                              <C>            <C>           <C>    

Professional fees                                                $1,117         $1,321        $1,254
Amortization of premiums in
     connection with acquisitions                                   444            444           403
Directors' fees, travel and retirement                              553            536           399

</TABLE>


15. INCOME TAXES

Income tax expense for the years ended December 31, is summarized as follows: 
 (in thousands)

<TABLE>
<CAPTION>
                                          

                                              1996         1995           1994
                                            -------      -------         ------
<S>                                        <C>           <C>            <C>   

Federal:  current ...................       $2,955       $ 3,168        $ 2,913
          deferred ..................          154          (122)           (62)

State:
          current ...................          339           259            225
          deferred ..................            8           (12)           (14)
                                            ------       -------        -------

                                            $3,456       $ 3,293        $ 3,062
                                            ======       =======        =======

</TABLE>
<PAGE>
          The effects of  temporary  differences  that give rise to  significant
portions of the Company's deferred tax assets and liabilities as of December 31,
are as follows: (in thousands) 

<TABLE>
<CAPTION>


                                                                                                       1996             1995
                                                                                                     --------          -----
<S>                                                                                                 <C>              <C>    

Deferred tax assets

     Excess of book over tax allowance for loan losses .................................             $  958           $  752
     Excess of book over tax depreciation ..............................................                264              201
     Accrued lawsuit settlement not reflected
         on tax return .................................................................               --                 81
     Loan origination fees .............................................................               --                192
     Excess of book over tax provision for
         benefit plan expense ..........................................................                408              259
     Core deposit premium ..............................................................                105             --
     Unrealized loss on other assets ...................................................                 10              183
     Other .............................................................................               --                126
                                                                                                     ------           ------
         Total deferred tax assets .....................................................              1,745            1,794
                                                                                                     ------           ------

Deferred tax liabilities

     Unrealized gains - securities available for sale ..................................                151              356
     Loan origination fees .............................................................                 34             --
     Other .............................................................................                 79             --
                                                                                                     ------           ------
         Total deferred tax liabilities ................................................                264              356
                                                                                                     ------           ------

         Net deferred tax assets .......................................................             $1,481           $1,438
                                                                                                     ======           ======

</TABLE>

          Net   deferred  tax  assets  are  included  in  other  assets  on  the
consolidated  balance sheet. It is more likely than not that deferred tax assets
of $1.5 million will be principally realized through carryback to taxable income
in prior years and future  reversals of existing taxable  temporary  differences
and, to a lesser  extent,  future  taxable  income and tax planning  strategies.

          The  provision  for income taxes  differs from the expected  statutory
provision as follows: 

<TABLE>
<CAPTION>

                                                                       December 31,
                                                                   --------------------
                                                                   1996    1995    1994
                                                                   ----    ----    ----
<S>                                                                <C>    <C>      <C>


Expected provision at statutory rate ...........................    34%     34%     34%

Difference resulting from:

    State income tax, net of federal benefit ...................     2       1       2
    Interest income exempt from federal taxes ..................    (1)     (1)     (1)
                                                                   ---     ---     ---
                                                                    35%     34%     35%
                                                                   ===     ===     ===

</TABLE>

16.  PREFERRED  STOCK 

          On September 15, 1995,  the Company  exercised its right to redeem all
of its preferred  stock,  not held as Treasury  Stock,  at $50 per share. At the
same time the Company  elected to cancel these shares  together  with the shares
held as Treasury  Stock.  The  cancellation  included all of the 100,000  shares
issued in 1987.


<PAGE>



17.  PARENT COMPANY INFORMATION (in thousands)

<TABLE>
<CAPTION>

                                                                                                            December 31,
                                                                                                     -------------------------
                                                                                                       1996            1995
                                                                                                     ---------       ---------
<S>                                                                                                  <C>              <C>  

CONDENSED BALANCE SHEETS 
Assets                                                                                                          

   Cash ..............................................................................               $      6        $    10
   Securities available for sale .....................................................                  1,375           --
   Investment in subsidiaries
     Bank ............................................................................                 43,001         40,231
     Other ...........................................................................                    142            142
   Dividends receivable ..............................................................                    525            485
   Other assets ......................................................................                    (21)          --
                                                                                                     --------        -------

      Total assets ...................................................................               $ 45,028        $40,868
                                                                                                     ========        =======

Liabilities

   Dividends payable .................................................................               $    525        $   485
   Other liabilities .................................................................                    142            142
                                                                                                     --------        -------
                                                                                                          667            627
                                                                                                     --------        -------

Stockholders' equity

   Common stock ......................................................................                  4,733          4,495
   Surplus ...........................................................................                 14,931         12,110
   Retained earnings .................................................................                 24,429         22,990
   Unrealized gain - securities available for sale,
     net of taxes ....................................................................                    268            646
                                                                                                     --------        -------

                                                                                                       44,361         40,241
                                                                                                     --------        -------

      Total liabilities and stockholders' equity .....................................               $ 45,028        $40,868
                                                                                                     ========        =======
</TABLE>
<TABLE>
<CAPTION>



                                                                                                    -------------------------------
                                                                                                       Years Ended December 31,
                                                                                                   ---------------------------------
CONDENSED STATEMENTS OF INCOME ...............................................................         1996         1995        1994
                                                                                                   --------      -------     -------
<S>                                                                                                <C>          <C>          <C>    

Dividends from subsidiary bank ...............................................................     $  3,400      $ 3,627     $ 1,999
Management fees ..............................................................................           45           44         120
                                                                                                   --------      -------     -------

      Total revenues .........................................................................        3,445        3,671       2,119
                                                                                                   --------      -------     -------

Operating expenses ...........................................................................          206          142         133
                                                                                                   --------      -------     -------


Income before equity in undistributed 
   earnings of subsidiaries                                                                           3,239        3,529       1,986
Equity in undistributed earnings of subsidiaries .............................................        3,180        2,751       3,650
                                                                                                   --------      -------     -------

      Net income .............................................................................     $  6,419      $ 6,280     $ 5,636
                                                                                                   ========      =======     =======
</TABLE>


<PAGE>

<TABLE>
<CAPTION>



                                                                                  -----------------------------------------
                                                                                            Years Ended December 31,
                                                                                  -----------------------------------------
CONDENSED STATEMENTS OF CASH FLOWS                                                   1996           1995        1994
                                                                                  ---------      ---------     --------
<S>                                                                                <C>           <C>         <C> 

Cash flows from operating activities:
   Net income ..........................................................            $ 6,419      $ 6,280      $ 5,636
   Adjustments to reconcile net income
     to net cash provided by (used in)
     operating activities
      (Increase)/decrease  in other assets .............................                (39)          97            1
      Increase in dividends payable ....................................                 40           13         --
      (Decrease)/increase in other liabilities .........................               --            (12)          12
   Equity in undistributed income of subsidiaries ......................             (3,180)      (2,751)      (3,650)
                                                                                    -------      -------      -------

      Net cash provided by operating activities ........................              3,240        3,627        1,999
                                                                                    -------      -------      -------

Cash flows from investing activities:
   Purchase of available for sale securities ...........................             (1,323)        --           --
                                                                                    -------      -------      -------

Cash flows from financing activities:
   Cash dividends paid .................................................             (2,077)      (2,027)      (1,999)
   Treasury stock ......................................................               --         (1,600)        --
   Proceeds from issuance of common stock ..............................                156         --           --
                                                                                    -------      -------      -------

      Net cash used in financing activities ............................             (1,921)      (3,627)      (1,999)
                                                                                    -------      -------      -------

Net decrease in cash ...................................................                 (4)        --           --
Cash at beginning of year ..............................................                 10           10           10
                                                                                    -------      -------      -------
Cash at end of year ....................................................            $     6      $    10      $    10
                                                                                    =======      =======      =======
</TABLE>


18.  RESTRICTIONS OF SUBSIDIARY BANK DIVIDENDS

          Under New Jersey state law,  the Bank may declare a dividend  only if,
after payment thereof, its capital would be unimpaired and its remaining surplus
would equal 50 percent of its capital.  At December 31, 1996,  undistributed net
assets of the Bank were  $43,001,000 of which  $38,683,000 was available for the
payment  of  dividends.  In  addition,  payment of  dividends  is limited by the
requirement to meet the capital  guidelines  issued by the Board of Governors of
the Federal Reserve System.

19.  COMMITMENTS  AND CONTINGENT  LIABILITIES  

          The Company has  outstanding  commitments  and contingent  liabilities
including  agreements  to extend  credit  which  arise in the  normal  course of
business and which are not shown in the accompanying financial statements.

          Loan  commitments  are made to accommodate  the financial needs of the
Company's  customers.  Standby  letters  of credit  commit  the  Company to make
payments on behalf of customers when certain specified future events occur. They
are issued primarily to support performance bonds. Both arrangements have credit
risks  essentially the same as that involved in extending loans to customers and
are subject to the normal credit policies of the Company.

          A  summary  of  commitments  to  extend  credit at  December  31,  are
summarized as follows: (in thousands)

                                                          1996        1995
                                                        -------      ------

           CREDIT CARD LOANS                            $  6,631    $  6,985
           HOME EQUITY LOANS                              43,204      41,089
           OTHER LOANS                                    38,041      21,444
           STANDBY LETTERS OF CREDIT                         444       1,258
                                                       ---------     -------
                                                         $88,320     $70,776
                                                       =========     =======

<PAGE>


          The minimum annual rental under  non-cancelable  operating  leases for
premises and  equipment,  exclusive of payments for  maintenance,  insurance and
taxes, is summarized as follows: (in thousands)

                           1997                                 $   868
                           1998                                     818
                           1999                                     714
                           2000                                     558
                           2001                                     346
                           THEREAFTER                               822
                                                                 -------

                           TOTAL MINIMUM LEASE PAYMENTS          $4,126
                                                                 =======

         Rent  expense  for all leases  amounted  to  approximately  $1,024,000,
$985,000 and $884,000 in 1996, 1995, and 1994, respectively.

          In 1996,  the Company  leased  certain real estate from two  companies
(three  companies in 1995 and 1994)  affiliated  with  directors of the company.
Rental expense  associated with such leases was $143,000,  $157,000 and $167,000
for the years  ended  december  31,  1996,  1995,  and 1994,  respectively.  The
aggregate  minimum  rental  commitments  through  2003  under  these  leases was
approximately  $708,000 at december  31,  1996.  A director of the Company  also
provided  legal  services  through  his  affiliated  firm.  Fees  paid for these
services  amounted to  approximately  $375,000,  $323,000  and $427,000 in 1996,
1995, and 1994, respectively.

          Interchange   State  Bank's  (the  "bank"),  a  wholly  owned
subsidiary  of the  Company  was a party to a lawsuit  commenced  in April  1989
(Great American  Mortgage  Corp., Et al, v. Robert Utter, et al.),  filed in the
Superior Court of New Jersey alleging that the Bank was  statutorily  liable for
having  paid  checks  which bore  irregular  endorsements.  Various  other legal
proceedings related to the foregoing were also instituted and, in those actions,
the Bank  pursued  various  parties  whom the Bank alleged were liable to it. On
August 2, 1996, the Bank paid $120,000 plus prejudgment  interest to resolve the
final matter pertaining to these occurrences.  The remainder of a reserve, which
was  established  in 1992,  was  sufficient  to cover  this  amount.  All  legal
proceedings  related to these occurrences,  involving the potential liability of
the Bank, have now been resolved.

          The Company is also a party to routine  litigation  involving  various
aspects of its business,  none of which,  in the opinion of  management  and its
legal counsel, is expected to have a material adverse impact on the consolidated
financial condition, results of operations or liquidity of the Company.

20.  QUARTERLY FINANCIAL DATA (UNAUDITED) (IN THOUSANDS EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>

                                                                    FIRST              SECOND              THIRD             FOURTH
                        1996                                       QUARTER            QUARTER             QUARTER            QUARTER
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                <C>               <C>                  <C>                <C>   

INTEREST INCOME ........................................             $9,207             $9,232             $9,262             $9,583
INTEREST EXPENSE .......................................              3,748              3,645              3,577              3,629
NET INTEREST INCOME ....................................              5,459              5,587              5,685              5,954
PROVISION FOR LOAN LOSSES ..............................                250                150                150                150
NET GAIN ON SALE OF SECURITIES .........................                235               --                 --                    7
INCOME BEFORE INCOME TAXES .............................              2,480              2,274              1,982              3,139
NET INCOME .............................................              1,612              1,478              1,288              2,041

NET INCOME PER COMMON SHARE ............................               0.57              0.52               0.45               0.72

------------------------------------------------------------------------------------------------------------------------------------
                                                                      First             Second              Third            Fourth
                        1995                                         Quarter            Quarter            Quarter           Quarter
------------------------------------------------------------------------------------------------------------------------------------

Interest income ........................................             $9,094             $9,250             $9,347             $9,304
Interest expense .......................................              3,625              3,827              3,843              3,855
Net interest income ....................................              5,469              5,423              5,504              5,449
Provision for loan losses ..............................                225                375                225                375
Net gain on sale of securities .........................               --                   15               --                 --
Income before income taxes .............................              2,161              2,320              2,177              2,915
Net income .............................................              1,405              1,565              1,415              1,895

Net income per common share ............................               0.49               0.54               0.49               0.67

</TABLE>

<PAGE>


21.   FAIR VALUE OF FINANCIAL INSTRUMENTS (in thousands)

          Fair value estimates of the Company's  financial  instruments are made
at a  particular  point  in time,  based  on  relevant  market  information  and
information  about the  financial  instrument.  Fair  values  are most  commonly
derived from quoted market prices. In the event market prices are not available,
fair value is  determined  using the present  value of  anticipated  future cash
flows.  This method is sensitive to the various  assumptions  and estimates used
and the resulting fair value  estimates may be  significantly  affected by minor
variations in those assumptions or estimates.  In that regard, it is likely that
amounts different from the fair value estimates would be realized by the Company
in immediate settlement of the financial instruments.

<TABLE>
<CAPTION>

                                                                 ---------------------------------------------------------
                                                                                     December 31,
                                                                 ---------------------------------------------------------
                                                                            1996                               1995
                                                                 -----------------------------      ----------------------
                                                                  CARRYING          FAIR             Carrying        Fair
                                                                   AMOUNT           VALUE             Amount        Value
                                                                 ---------       ---------          --------    ---------
<S>                                                              <C>            <C>                <C>           <C>    

Financial assets:
  Cash and cash equivalents ............................           $ 24,322      $ 24,322           $ 25,151      $ 25,151
  Securities held to maturity ..........................             63,376        63,319             74,688        75,611
  Securities available for sale ........................             55,252        55,252             67,545        67,545
  Loans, net ...........................................            348,140       350,702            307,517       313,097
                                                                   --------      --------           --------      --------
                                                                   $491,090      $493,595           $474,901      $481,404
                                                                   ========      ========           ========      ========


Financial liabilities:
  Deposits .............................................           $430,013      $430,229           $436,452      $436,699
  Short-term borrowings ................................             16,250        16,250             10,904        10,904
  Long-term borrowings .................................              9,983         9,981               --            --
                                                                   --------      --------           --------      --------
                                                                   $456,246      $456,460           $447,356      $447,603
                                                                   ========      ========           ========      ========

</TABLE>


<PAGE>


          The  methods  and  significant   assumptions  used  to  determine  the
estimated fair values of the Company's financial instruments are as follows:

CASH AND CASH EQUIVALENTS  

          Cash and cash equivalents include cash on hand, amounts due from banks
and federal funds sold. The estimated fair values of these financial instruments
approximate  their  carrying  values  since they mature  overnight or are due on
demand.

INVESTMENT SECURITIES AND SECURITIES AVAILABLE FOR SALE

          Estimated  fair values are based  principally on quoted market prices,
where  available,  or dealer  quotes.  In the event quoted market prices are not
available, fair values are estimated using market prices of similar securities.

LOANS 

          The loan portfolio is segregated into various  categories for purposes
of estimating fair value. Certain homogenous loan categories have been valued on
a pool basis using quoted market prices for similar loans sold.  The fair values
of certain  loans that  reprice  frequently  and have no  significant  change in
credit risk is assumed to equal their carrying  values.  The fair value of other
types of loans is estimated by discounting  the future cash flows using interest
rates that are currently being offered for loans with similar terms to borrowers
with similar credit quality.  The fair value of nonperforming loans is estimated
using  methods  employed by  management  in  evaluating  the  allowance for loan
losses.

DEPOSITS 

          The estimated fair values of deposits with no stated maturity, such as
demand  deposits,  savings,  NOW and money market  accounts are, by  definition,
equal to the amount payable on demand at the reporting  date. The fair values of
fixed-rate  certificates  of  deposit  are based on  discounting  the  remaining
contractual   cash  flows  using  interest  rates  currently  being  offered  on
certificates of deposit with similar attributes and remaining maturities.

SHORT-TERM  BORROWINGS  

          The fair  value of  short-term  borrowings  is  assumed  to equal  the
carrying value in the financial statements, as these instruments are short-term.

LONG-TERM  BORROWINGS 

          Fair value estimates of long-term  borrowings are based on discounting
the remaining  contractual  cash flows using rates which are comparable to rates
currently being offered for borrowings with similar remaining maturities.

OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS 

          The fair values of commitments  to extend credit and unadvanced  lines
of credit are  estimated  based on an  analysis of the  interest  rates and fees
currently charged to enter into similar transactions,  considering the remaining
terms of the commitments and the  credit-worthiness  of the potential borrowers.
At  December   31,  1996  and  1995,   the   estimated   fair  values  of  these
off-balance-sheet financial instruments were immaterial.