Exhibit 13.  Portions  of the Annual  Report to  Shareholders  for the year
             ended, December 31, 1998.

          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 29 through 47 and the summary  consolidated data included
elsewhere in this report.

     On May 31, 1998, the Company  acquired The Jersey Bank for Savings ("Jersey
Bank"), which maintained two banking offices,  both located within the Company's
delineated  market  area.  At that date,  Jersey Bank had total  assets of $78.6
million and total deposits of $69.8 million.  The  transaction was accounted for
as  a  pooling-of-interests,   and  accordingly,   the  prior  period  financial
statements  presented  herein have been  restated to include  the  accounts  and
results of operations of Jersey Bank.  Each share of Jersey Bank's common stock,
including  shares  of  common  stock  that had been  converted  from  shares  of
preferred  stock,  was converted into 1.5 shares of the Company's  common stock.
Total  consideration  tendered in the transaction  amounted to 780,198 shares of
the Company's common stock.

Earnings Overview

     Net  income  for the year  ended  December  31,  1998 was $8.6  million  as
compared  with $7.9 million in 1997,  an increase of 8.6%.  For the same period,
diluted  earnings per share rose 8.2% to $1.19 in 1998 from $1.10 in 1997. Basic
earnings per share in 1998 were $1.20 as compared to $1.11 in 1997.

     The  earnings  results  for 1998  include  merger-related  charges  of $1.4
million  ($898  thousand,  or $.12 per  share,  after tax)  associated  with the
acquisition of Jersey Bank.  Excluding this  merger-related  charge,  net income
would have  increased  20.0% to $9.5 million,  or $1.32 basic earnings per share
for the year ended  December 31,  1998,  compared to $7.9 million or $1.11 basic
earnings   per  share  for  1997.   Diluted   earnings   per  share  before  the
merger-related  charge  were  $1.31 for 1998 as  compared  to $1.10 in the prior
year, an increase of 19.1%.

     The Company's strong operating performance for 1998 reflects solid loan and
deposit growth,  excellent asset quality and a continued proficiency in managing
non-interest  expenses.  As a result,  the  Company's  key earnings  performance
measures  remained strong.  The Company's  returns on average equity and average
assets before  merger-related  charges were 16.05% and 1.44%,  respectively,  in
1998 as compared to 14.95% and 1.33%,  respectively,  in 1997. Furthermore,  the
sustained  earnings and capital growth  resulted in an increase in the quarterly
dividend paid on common stock to an annualized  rate of $.40 in 1998 as compared
to $.36 in 1997, an increase of 11.1%.

     Net interest  income in 1998 was $29.0  million,  up $2.2 million,  or 8.3%
from 1997. This increase in net interest income was largely  responsible for the
growth in net income. Average interest earning assets increased $67.2 million or
12.0% from 1997,  and more than  offset a decline of 16 basis  points in the net
interest margin.  In 1998,  average total loans increased $59.5 million or 14.8%
and  average  total  deposits  increased  $54.5  million or 10.6%.  Non-interest
bearing demand deposits comprised $12.9 million or 23.6% of the increase.

     Non-interest  income was  favorably  impacted by growth in fee based income
which increased $511 thousand or 25.0% in 1998 as compared to 1997.

     The Company also managed to control  non-interest  expenses in 1998,  which
excluding  the  merger-related  charge,  increased  by $369  thousand or 2.1% as
compared to 1997, despite the Company's  continued  investment in technology and
other tools to deliver faster more efficient services to its customers.


Table 1

--------------------------------------------------------------------------------
Summary of Operating Results
--------------------------------------------------------------------------------
                                         1998           1997           1996
                                      -----------    -----------    -----------

Net income (in thousands)               $8,609         $7,925         $6,751
Basic earnings per common share           1.20           1.11           0.95
Diluted earnings per common share         1.19           1.10           0.94
Return on average total assets            1.31 %         1.33 %         1.22 %
Return on average total equity           14.53          14.95          14.09
Dividend payout ratio*                   32.81          30.08          32.19
Average total stockholders' equity to     9.00           8.89           8.68
    average total assets

* Cash dividends declared on common shares to net income.


Results of Operations

Net Interest Income                                                             

     The major source of income the Company is 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  interest
earning  assets,  it is referred to as net interest  margin,  or simply interest
margin.  Table 2 sets  forth a summary of average  interest  earning  assets and
interest bearing  liabilities for the years ended,  December 31, 1998, 1997, and
1996, together with the interest earned and paid on each major type of asset and
liability  account during such periods.  The average rates on the earning assets
and the average  cost of interest  bearing  liabilities  during such periods are
also summarized. Table 3, which presents changes in interest income and interest
expense  by  each  major  asset  and  liability  category  for  1998  and  1997,
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 volume or rates have been  allocated
based on the relationship of changes in volume and changes in 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.

                                       14
<PAGE>

Table 2
--------------------------------------------------------------------------------
Analysis of Net Interest Income
for the years ended December 31,
--------------------------------------------------------------------------------
(dollars in thousands)

<TABLE>
<CAPTION>
                                                          1998                        1997                        1996
                                             ----------------------------- -------------------------- ------------------------------
                                                 Average          Average   Average          Average   Average             Average
                                                 Balance Interest Rate      Balance Interest Rate      Balance   Interest    Rate

                                             ----------------------------- -------------------------- ------------------------------
<S>                                          <C>         <C>      <C>       <C>     <C>      <C>      <C>        <C>       <C>  
Assets
  Interest earning assets
    Loans (1)                                   $462,296 $38,904  8.42 %   $402,799 $35,380   8.78 %  $353,659    $31,367     8.87 %
    Taxable securities (4)                       132,433   8,206  6.20      137,202   8,856   6.45     142,247      9,075     6.38
    Tax-exempt securities (2)(4)                   4,428     234  5.28        2,514     129   5.13       2,919        160     5.48
    Federal funds sold                            27,318   1,474  5.40       16,061     896   5.58      13,299        710     5.34
    Interest bearing demand deposits               1,024      55  5.37        1,721      78   4.53       2,185        104     4.76
                                                 _______  ______            _______  ______            _______     ______ 
    Total interest earning assets                627,499  48,873  7.79      560,297  45,339   8.09     514,309     41,416     8.05
                                                          ______                     ______                        ______
  Non-interest earning assets
    Cash and due from banks                       17,618                     24,579                     24,687
    Allowance for loan losses                     (5,437)                    (4,636)                    (4,084)
    Other assets                                  18,336                     16,117                     16,766
                                                 _______                    _______                    _______
    Total assets                                $658,016                   $596,357                   $551,678
                                                 =======                    =======                    =======
Liabilities and stockholders' equity
  Interest bearing liabilities
    Demand deposits                             $171,546   5,573  3.25     $141,523   4,575   3.23    $118,482      3,617     3.05
    Savings deposits                             132,735   3,790  2.86      123,417   3,779   3.06     126,251      3,686     2.92
    Time deposits                                171,462   9,104  5.31      169,196   8,889   5.25     172,025      9,122     5.30
    Short-term borrowings                         14,723     807  5.48       12,844     727   5.66       8,810        513     5.82
    Long-term borrowings                           9,828     590  6.00        9,935     596   6.00         710         45     6.34
                                                 _______  ______            _______  ______            _______    _______
    Total interest bearing liabilities           500,294  19,864  3.97      456,915  18,566   4.06     426,278     16,983     3.98
                                                          ======                     ======                        ======
  Non-interest bearing liabilities
    Demand deposits                               94,568                     81,707                     73,135
    Other liabilities                              3,903                      4,738                      4,353
                                                 _______                    _______                    _______
    Total liabilities (3)                        598,765                    543,360                    503,766
    Stockholders' equity                          59,251                     52,997                     47,912
                                                 _______                    _______                    _______
    Total liabilities and stockholders' equity  $658,016                   $596,357                   $551,678
                                                 =======                    =======                    =======

Net interest income (tax-equivalent basis)                29,009  3.82               26,773   4.03                 24,433     4.07
Tax-equivalent basis adjustment                              (53)                       (29)                          (37)
                                                         _______                     _______                       ______
Net interest income                                      $28,956                    $26,744                       $24,396
                                                          ======                     ======                        ======
Net interest income as a percent of
  interest earning assets (tax-equivalent basis)                   4.62 %                     4.78 %                          4.75 %
</TABLE>

--------------------------------------------------------------------------------

(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 balances are based on  historical  cost and do not reflect
    unrealized  gains or losses.

                                       15
<PAGE>

Table 3
--------------------------------------------------------------------------------
Effect of Volume and Rate Changes on Net Interest Income
--------------------------------------------------------------------------------
(in thousands)

<TABLE>
<CAPTION>

                                      Year ended December 31,             Year ended December 31,
                                      1998 compared with 1997            1997 compared with 1996
                                        increase (decrease)               increase (decrease)
                                         due to change in:                 due to change in:
                                      -------------------------------   ----------------------------
                                                               Net                          Net
                                      Average    Average     Increase    Average  Average  Increase
                                      Volume      Rate      (Decrease)   Volume   Rate    (Decrease)
                                      --------------------------------  ----------------------------
<S>                                   <C>        <C>        <C>         <C>       <C>     <C>
Interest income

   Loans                              $5,226      $(1,702)    $3,524    $4,329    $(316)    $4,013
   Taxable securities                   (302)        (348)      (650)     (328)     109       (219)
   Tax-exempt securities                 101            4        105       (21)     (10)       (31)
   Federal funds sold                    628          (50)       578       153       33        186
   Interest bearing demand deposits      (37)          14        (23)      (20)      (6)       (26)
                                       _____        _____      _____     _____      ___      _____
    Total interest income              5,616       (2,082)     3,534     4,113     (190)     3,923
                                       _____        _____      _____     _____      ___      _____ 

Interest expense

   Demand deposits                       975           23        998       711      247        958
   Savings deposits                      285         (274)        11       (79)     172         93
   Time deposits                         120           95        215      (110)    (123)      (233)
   Short-term borrowings                 102          (22)        80       235      (21)       214
   Long-term borrowings                   (6)           -         (6)      585      (34)       551
                                       ______       _____      _____     _____      ___      _____   
    Total interest expense              1,476        (178)     1,298     1,342      241      1,583
                                       ______       _____      _____     _____      ___      _____
Change in net interest income          $4,140     $(1,904)    $2,236   $ 2,771   $ (431)    $2,340
                                        =====       =====      =====     =====      ===      =====
</TABLE>
--------------------------------------------------------------------------------
Non-performing loans are included in interest earning assets.



     Net  interest  income,  on a taxable  equivalent  basis,  amounted to $29.0
million,  an increase of $2.2 million,  or 8.4%, from $26.8 million in 1997. The
increase in net  interest  income was  principally  due to the strong  growth in
interest  earning  assets of $67.2  million  that was funded  largely by a $54.5
million growth in deposits.  The growth, which occurred  predominantly in demand
deposits,  had a positive effect on the composition  ("mix") of retail deposits.
The favorable  change in retail  deposit mix served to reduce the yield on total
deposits,  which had a favorable impact on net interest income.  The increase in
net interest income was partly offset by lower average rates on interest earning
assets, mainly loans. The net interest margin decreased 16 basis points to 4.62%
for 1998 as  compared  to 4.78% for 1997,  largely  due to the decline in market
interest rates.

     Interest income, on a taxable  equivalent  basis,  totaled $48.9 million in
1998,  an  increase  of $3.5  million  or 7.8% from $45.3  million in 1997.  The
increase  was  principally  driven by the  growth in  average  interest  earning
assets,  which more than  offset the  effects  of a decline in  interest  rates.
Average rates on interest  earning assets  decreased 30 basis points to 7.79% in
1998 as compared to 1997.  The increase in average  interest  earning assets was
principally  due to strong growth in loan  originations.  The average balance of
commercial and commercial  mortgage loans increased by $22.4 million or 12.6% to
$200.0  million in 1998, as compared to 1997.  The average  balances of consumer
loans  (comprised  mostly of home equity loans)  totaled $256.9 million in 1998,
compared to $225.2  million in 1997, an increase of $31.7 million or 14.1%.  The
increase  in average  loans  outstanding  more than  offset  the  effects of the
decrease in the average  rates  earned on those loans.  Net interest  income was
negatively  affected by a decline in the average  volume and average rate earned
on the securities portfolio. The decline in average rates was largely due to the
decline in market interest rates during 1998.

     Interest expense,  on a taxable equivalent basis,  totaled $19.9 million in
1998, an increase of $1.3 million or 7.0% over the prior comparable  period. The
increase was largely due to the $43.4 million growth in average interest bearing
liabilities,  specifically interest bearing demand deposits. The average balance
of  interest  bearing  demand  deposits  grew  $30.0  million or 21.2% to $171.5
million   in  1998  as   compared   to  1997.   Total   average   interest   and
non-interest-bearing demand deposits grew $42.9 million or 19.2%, in 1998, which
is largely  attributable  to the  Company's  continued  efforts in marketing and
sales.  In  addition,  commercial  loans  resulting  from  these  sales  efforts
generally carry compensating deposit balances in the form of demand deposits and
further  contributed to the growth.  The interest  expense  associated  with the
growth was offset,  in part, by a decrease in the average rates paid on interest
bearing  liabilities  of 9 basis points to 3.97% in 1998 as compared to 4.06% in
1997.  The  decline in average  rates was  largely due to a decline in the rates
offered on savings deposits and a more favorable retail deposit mix.

     In 1997, net interest income, on a taxable  equivalent  basis,  amounted to
$26.8 million, an increase of $2.3 million, or 9.6%, from $24.4 million in 1996.
The net interest margin increased to 4.78% in 1997 as compared to 4.75% in 1996.
The increase in net interest  income was  principally  due to growth in interest
earning  assets of $46.0  million,  which were funded  mostly with  deposits and
borrowings that increased $26.0 million and $13.3 million, respectively.

     In 1997, interest income, on a taxable equivalent basis, was $45.3 million,
an increase of $3.9 million or 9.5% from $41.4  million in 1996.  The growth was
predominantly  due to an  increase  in loan  originations.  The  increase in the
average  loan volume was partly  offset by a decrease  in the average  volume of
securities;  the  proceeds  of which  were  used to fund a  portion  of the loan
growth.  The average yield on all interest  earning  assets was 8.09% in 1997 as
compared to 8.05% in 1996, an increase of 4 basis points.

     In 1997,  interest expenses,  on a taxable equivalent basis,  totaled $18.6
million,  an increase of $1.6  million or 9.3% from $17.0  million in 1996.  The

                                       16
<PAGE>

increase was mostly due to increases in the average  volume of interest  bearing
demand  deposits  and  long-term  borrowings.  The  average  balance of interest
bearing demand  deposits was $141.5 million in 1997,  compared to $118.5 million
in 1996, an increase of $23.0 million or 19.5%. The average balance of long-term
borrowings  was $9.9  million in 1997,  compared to $710  thousand  in 1996,  an
increase of $9.2 million. Total average interest and non-interest-bearing demand
deposits,  which grew $31.6 million or 16.5%,  was attributable to the Company's
efforts in  marketing  and sales.  The  average  yield on all  interest  bearing
liabilities  was 4.06% in 1997 as  compared  to 3.98% in 1996,  an increase of 8
basis points.

Non-interest income

     Non-interest 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
and net gains on sales of assets.  The  Company  recognizes  the  importance  of
supplementing  net interest  income with other sources of income and maintains a
committee that  continually  explores new  opportunities  to build  non-interest
income. In 1998,  non-interest  income totaled $4.9 million, an increase of $154
thousand or 3.2% over 1997. In 1997,  total  non-interest  income increased $526
thousand or 12.4% over 1996.

     In 1998,  service fees on deposit accounts  comprised 51.8% of non-interest
income as compared to 42.7% in 1997.  Service  fees on deposits  increased  $511
thousand  or 25.0%  in 1998 as  compared  to  1997.  During  1998,  the  Company
established a committee to perform a comprehensive review of fee income sources.
The  strategies   implemented   from  the  committee's   findings  were  largely
responsible  for the growth in service fees on deposits.  The overall  growth in
the deposit base also contributed to the increase.

     There were no gains from loan sales  during  1998,  whereas,  in 1997,  the
Company  realized  pre-tax gains of $1.1 million from the sale of two commercial
mortgage loans. The loans were sold based on management's assessment of the risk
associated  with such loans as they neared their maturity.  In 1998,  gains from
the sale of securities consisted of $876 thousand from the sale of available for
sale  securities and $145 thousand from the call before  maturity of a security.
There were no gains from the sale of securities in 1997.

     The decrease of $681  thousand,  in 1998 as compared to 1997, in collection
of  principal  in excess of  reserves  on loans  purchased  at a  discount,  was
partially  offset by an increase in other  non-interest  income of $370 thousand
for the same period. Other non-interest income includes,  but is not limited to,
income from servicing fees,  commissions  and fees and safe deposit  rental,  as
well as income from the sale of the reverse mortgage servicing portfolio.

     In 1997,  service fees on deposit accounts  comprised 42.7% of non-interest
income as compared to 39.7% in 1996.  Service  fees on deposits  increased  $355
thousand or 21.1% in 1997 as compared to 1996.

     In 1997, pre-tax gains of $1.1 million were recognized from the sale of two
commercial  mortgage  loans.  There were no gains from the sale of loans  during
1996.  There were no gains from the sale  securities in 1997. In 1996,  security
gains of $235  thousand  were  recognized  from the sale of  available  for sale
securities,  which  were  sold as part of a  securities  portfolio-restructuring
plan.

     Non-interest  income  recognized from the collection of principal in excess
of reserves on loans purchased at a discount  increased by $255 thousand in 1997
as  compared  to  1996.  All  other  non-interest  income,  which  is  comprised
principally of servicing fee income,  commissions and fees, safe deposit rentals
and miscellaneous income,  increased $57 thousand or 7.5% in 1997 as compared to
1996.

 Table 4
--------------------------------------------------------------------------------
 Non-interest Income
 for the years ended December 31,
--------------------------------------------------------------------------------
 (in thousands)

<TABLE>
<CAPTION>

                                                                 1998         1997          1996
                                                                ------       ------        ------
<S>                                                             <C>           <C>          <C>
 Service fees on deposit accounts                               $2,551       $2,040        $1,685
 Net gain on sale of securities                                  1,021            -           242
 Net gain on sale of loans                                           -        1,067             -
 Accretion of discount in connection with acquisition                -            -           511
 Net gain on sale of deposits of a branch location                   -            -           455
 Collection of acquired loans in excess of carrying value          174          855           600
 All other                                                       1,182          812           755
                                                                 _____        _____         _____
                                                                $4,928       $4,774        $4,248
                                                                 =====        =====         =====

</TABLE>


Non-interest Expenses

     Non-interest  expenses  totaled $19.4 million for 1998, an increase of $1.8
million or 10.0% from $17.6 million for 1997. The increase resulted  principally
from the merger-related  charges of $1.4 million associated with the acquisition
of Jersey Bank.  Excluding the  merger-related  charges,  non-interest  expenses
increased  $369  thousand  or 2.1% over  1997.  Initial  costs  associated  with
establishing a Real Estate Investment Trust ("REIT") subsidiary of $231 thousand
also  contributed  to the increase.  The REIT was  established to manage certain
real estate assets of the Company in an effort to take  advantage of certain tax
benefits.  Further contributing to the increase were occupancy and furniture and
equipment  costs,  which  increased  $409  thousand  due to the opening of a new
branch in Paramus and  investments  in technology.  Also,  salaries and benefits
increased $412 thousand (excluding costs associated with the REIT) due mostly to
salary increases,  promotions and the opening of the new branch in Paramus.  The
increases were partly offset by the  recognition of $474 thousand cash surrender
value  of  certain  directors'  life  insurance  policies,  which  had not  been
recognized  in prior  years.  The  amounts  had not been  recognized  due to the
statutory  receivership  of the insurer,  which gave rise to  significant  doubt
surrounding the collectibility of such amounts. In 1998,  management  determined
that the collectibility of the cash surrender value was probable since a solvent
insurance company had acquired the insurer.  In addition,  the Company benefited
from cost  savings  for the second  half of 1998 with  respect to the  synergies
arising from the merger with Jersey Bank.

     For 1997, total non-interest  expenses increased $163 thousand or 0.9% from
$17.5 million for the year ended December 31, 1996. The increase in non-interest
expenses for 1997 was  attributable to a $713 thousand  increase in salaries and
benefits due primarily to annual salary increases,  promotions and the full year
operation of the River Edge branch, which opened in the latter part of 1996. The
increase  was, in part,  offset by a $252 thousand  decline in  foreclosed  real
estate expense resulting from the workout and sale of the foreclosed real estate
during the first half of 1997. Furthermore,  the Company benefited from declines
of  $104  thousand  in  the  Federal  Deposit  Insurance   Corporation  ("FDIC")
assessment, $73 thousand in advertising and promotion expenses and $120 thousand
in occupancy and furniture and equipment  costs.  This decrease in occupancy and
furniture  and  equipment  was mainly the result of closing  two branch  offices
during 1996 and the purchase of a previously  leased branch location during 1997
coupled  with a decline  in  maintenance  costs  incurred  at all the  Company's
locations.

     One of the  Company's  goals is to control  expenses  in order to  maximize
earnings and shareholder  value.  Generally,  the efficiency ratio is one method
utilized  to  measure  a bank's  operating  expenses.  The  efficiency  ratio is
non-interest expenses, excluding the amortization of intangibles, merger-related
expenses and net expenses of foreclosed  real estate,  expressed as a percentage
of net interest income (on a fully taxable  equivalent  basis) and  non-interest
income, excluding gains. Generally, the lower

                                       17
<PAGE>

the  efficiency  ratio  the more  effective  the  Company  is in  utilizing  its
resources to generate  income.  The efficiency  ratio improved to 53.6% for 1998
compared  to 56.5% in 1997.  The  improvement  was largely  attributable  to the
growth in net interest income and non-interest  income and was offset in part by
a marginal  increase in non-interest  expenses.  The national peer group average
was 61.1% (peer group data as of September 30, 1998 - based upon the most recent
published  report by SNL  Securities).  The efficiency  ratio was 56.5% for 1997
compared to 60.0% in 1996.  The national peer group average at December 31, 1997
was 60.4% (published by SNL Securities).


Table 5
--------------------------------------------------------------------------------
Non-interest Expenses
for the years ended December 31,

--------------------------------------------------------------------------------
(in thousands)

                                                    1998       1997      1996
                                                 ---------   --------  -------- 
Salaries and benefits                             $ 9,437   $ 8,951   $ 8,238
Occupancy, furniture and equipment                  3,440     3,031     3,151
Advertising and promotion                             865       865       938
Federal Deposit Insurance Corporation assessment       75        58       162
Foreclosed real estate                                  1         -       252
Acquisition                                         1,392         -         -
Other expenses
   Stationery, printing and supplies                  255       304       376
   Professional fees                                1,184     1,216     1,088
   Communications                                     327       289       255
   Postage and shipping                               356       313       319
   Credit card processing fees                         24        63        45
   Credit services                                     74        99       147
   Amortization of premiums in connection
      with acquisitions                               384       444       444
   Provision for litigation contingency                 -         -       (33)
   Directors' fees, travel and retirement              88       607       553
   Insurance premiums                                 172       240       244
   Data Processing                                    538       548       490
   Unrealized (gain)/loss on loans held for sale      (18)       13
   All other                                          804       645       810
                                                  --------- --------  --------
                                                  $19,416   $17,655   $17,492
                                                  ========= ========  ========


Income Taxes

     In 1998,  income taxes amounted to $4.9 million as compared to $4.3 million
and $3.7 million for 1997 and 1996, respectively. The effective tax rate in 1998
was 36.3% as  compared to 35.1% for both 1997 and 1996,  respectively.  Detailed
information  on  income  taxes is  shown  in Notes 1 and 16 to the  Consolidated
Financial Statements.
 

Financial Condition


Loan Portfolio

     In 1998,  high levels of  prepayments  and  increased  competitive  factors
placed a great deal of pressure  on loan  production  for the banking  industry.
Despite  this,  the Company  continued to  experience  strong growth in its loan
portfolio.  At December 31, 1998,  total loans  amounted to $478.7  million,  up
$40.4  million  or  9.2%  over  the  previous  year.  Promotional  campaigns  in
conjunction   with  competitive  loan  rates  and  focused  sales  efforts  were
instrumental  to the loan  growth,  particularly  in the 1-4 family  residential
mortgage loan  portfolio.  First lien real estate mortgage loans increased $16.5
million or 22.6% to $89.9 million in 1998 from $73.3  million in 1997.  The loan
growth was largely in the subsidiary bank's delineated community, which confirms
the  Company's  pledge of  striving to be the  largest  community-based  banking
organization  in Bergen County,  dedicated to community  service and helping its
customers grow and prosper.

     Commercial  real  estate  mortgage  loans  amounted  to $148.9  million  at
December 31, 1998,  and  represented  31.1% of total loans as compared to $135.0
million  or 30.8%  of all  loans at the end of 1997.  These  loans  are  secured
primarily  by  first  priority  mortgage  liens  on  owner-occupied   commercial
properties.   While  a   significant   portion  of  the   Company's   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.

     In 1998,  term  federal  funds  totaling  $7.5  million  were  purchased as
short-term  investments.  The remaining  balance of $5.0 million is scheduled to
mature in the first quarter of 1999.

                                       18
<PAGE>


Table 6
--------------------------------------------------------------------------------
Loan Portfolio
at December 31,
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                              1998        1997         1996        1995        1994
                                          ----------    ----------   ----------  ---------   ----------   
<S>                                       <C>           <C>          <C>         <C>         <C>       
Amounts of loans by type (in thousands)
  Commercial and financial                 $ 64,067     $ 51,573     $ 51,908    $ 42,645    $ 36,512
  Real estate-construction                      974        4,229        4,799       2,509       3,180
  Real estate-mortgage
     1-4 family residential
           First liens                       89,852       73,309       62,170      61,374      61,718
           Junior liens                      14,322       16,795       18,645      21,803      25,507
           Available for sale                     -            -        1,195       1,106       1,086
           Home equity                      142,781      143,177      121,504     102,006      88,860
     Commercial                             148,875      134,972      117,641     100,332      90,804
  Installment
     Credit cards and related plans           2,033        2,415        2,704       2,935       3,331
     Other                                    1,200        1,702        3,494       2,805       3,133
  Lease financing                             9,613       10,101            -          55         698
  Term federal funds                          5,000            -            -           -           -
                                          ----------    ----------   ----------  ----------  ---------
          Total                            $478,717      $438,273    $384,060    $337,570    $314,829
                                          ==========    ==========   ==========  ==========  =========

Percent of loans by type
  Commercial and financial                     13.3 %        11.8 %     13.5 %       12.6 %      11.6 %
  Real estate-construction                      0.2           1.0        1.2          0.7         1.0
  Real estate-mortgage
     1-4 family residential
           First liens                         18.8          16.7       16.2         18.2        19.6
           Junior liens                         3.0           3.8        4.9          6.5         8.1
           Available for sale                     -             -        0.3          0.3         0.3
           Home equity                         29.8          32.7       31.6         30.2        28.3
     Commercial                                31.1          30.8       30.6         29.7        28.8
  Installment
     Credit cards and related plans             0.4           0.5        0.7          0.9         1.1
     Other                                      0.3           0.4        1.0          0.9         1.0
  Lease financing                               2.0           2.3          -            -         0.2
  Term federal funds                            1.1             -          -            -           -
                                          ----------    ----------   ----------  ----------  ---------
             Total                            100.0 %        100.0 %   100.0 %        100.0 %   100.0 %
                                          ==========    ==========   =========== ==========  =========



        The  following  table  sets  forth  the  maturity  distribution  of  the
Company's loan portfolio as of December 31, 1998. The table excludes real estate
loans (other than construction  loans),  lease financing and installment  loans:
(in thousands)

                                                     Due after
                                        Due in       one year     Due after
                                       one year       through        five
                                        or less      five years     years          Total
                                       ----------    ----------   -----------    ----------
Commercial and financial                 $17,623       $22,071       $24,373       $64,067
Real estate-construction                     974             -             -           974
                                       ----------    ----------   -----------    ----------
            Total                        $18,597       $22,071       $24,373       $65,041
                                       ==========    ==========   ===========    ==========


        The following table sets forth, as of December 31, 1998, the sensitivity of the amounts due after one year to
changes in interest rates:  (in thousands)

                                                     Due after
                                                     one year     Due after
                                                      through        five
                                                     five years     years
                                                     ----------   -----------
Fixed interest rate                                    $14,397       $ 3,651
Variable interest rate                                   7,674        20,722
                                                     ----------   -----------
            Total                                      $22,071       $24,373
                                                     ==========   ===========
</TABLE>


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.  Generally,  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 and provides  quarterly  reports to the
Board of Directors.

     Management  maintains a "watchlist"  system under which credit officers are
required to provide early  warning of possible  deteriorations  in loans.  These
loans may not currently be delinquent,  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.  The "watchlist" report is presented to Executive Management monthly
and to the Board of Directors on a quarterly basis.

                                       19
<PAGE>


Loan Losses

     The provision for loan losses represents management's  determination of the
amount  necessary  to bring  the  allowance  for  loan  losses  to a level  that
management considers adequate to reflect the risk of the future potential losses
inherent in the Company's loan  portfolio.  In its evaluation of the adequacy of
the allowance for loan losses,  management  considers past loan loss experience,
changes in the composition of performing and nonperforming loans, concentrations
of credit, economic conditions,  collateral coverage, the condition of borrowers
facing  financial  pressure  and the  relationship  of the current  level of the
allowance to the credit  portfolio  and to  nonperforming  loans.  However,  the
process of determining  the adequacy of the allowance is necessarily  judgmental
and  subject to changes in  external  conditions.  Accordingly,  there can be no
assurance that existing levels of the allowance will  ultimately  prove adequate
to cover actual loan losses.

     Loan loss provisions for 1998 amounted to $951 thousand, a decrease of $702
thousand from the prior year. In 1997, the loan loss provision  amounted to $1.7
million, an increase of $906 thousand from 1996. The Company's lending focus and
growth  continues to be largely in its commercial and commercial  mortgage loans
("commercial  loans").  From  1995 to 1998,  commercial  loans  increased  $70.0
million or 48.9%,  while 1-4 family residential and installment loans ("consumer
loans")  increased  $58.2  million or 30.3%.  This growth and  concentration  of
credit  towards   commercial  loans  can  change  the   characteristics  of  and
potentially  increase the inherent credit risk in the Bank's loan portfolio.  In
response  to  this  trend,  the  Company,  in  1997,  increased  the  allocation
percentage applied to performing  commercial loans to account for such risk. The
increase in the allocation,  in 1997,  along with the other  assessments made by
management,  resulted in an increase  in the  provision  for loan losses and the
related  allowance  for loan losses.  In 1998,  management  determined  that the
allowance for loan losses was at a level  sufficient to absorb  estimated losses
in the loan  portfolio,  particularly  with respect to the inherent  credit risk
associated with growth and concentration of credit.  As a result,  the provision
for loan losses was lower in 1998, as compared to 1997.

Table 7

--------------------------------------------------------------------------------
 Loan Loss Experience
 for the  years ended December 31,
--------------------------------------------------------------------------------
(dollars in thousands)
<TABLE>
<CAPTION>
                                                    1998           1997           1996           1995           1994
                                               ------------   ------------   ------------   ------------   ------------
<S>                                            <C>            <C>            <C>            <C>            <C>    
Average loans outstanding                         $462,296       $402,799       $353,659       $318,089       $293,792
                                               ============   ============   ============   ============   ============

Allowance at beginning of year                      $5,231         $3,968         $3,926         $4,079         $4,105
                                               ------------   ------------   ------------   ------------   ------------
Loans charged off
          Commercial                                    15            293              8            399            281
          Installment                                  135            141             78            108            149
          Real estate                                  470            139            770            914            647
          Lease financing                                -              -             57             89             47
                                               ------------   ------------   ------------   ------------   ------------
              Total                                    620            573            913          1,510          1,124
                                               ------------   ------------   ------------   ------------   ------------

Recoveries of loans previously charged off
          Commercial                                    35             84             75             25              -
          Installment                                   18             29             45             54             99
          Real estate                                   30             70             88             32             15
          Lease financing                                -              -              -              7              -
                                               ------------   ------------   ------------   ------------   ------------
              Total                                     83            183            208            118            114
                                               ------------   ------------   ------------   ------------   ------------
Net loans charged off                                  537            390            705          1,392          1,010
                                               ------------   ------------   ------------   ------------   ------------

Additions to allowance charged to expense              951          1,653            747          1,239            984
                                               ------------   ------------   ------------   ------------   ------------
Allowance at end of year                            $5,645         $5,231         $3,968         $3,926         $4,079
                                               ============   ============   ============   ============   ============

Allowance to total loans                              1.18 %         1.19 %         1.03 %         1.16 %         1.30 %
Allowance to nonaccrual loans                       471.20         345.51         157.02         156.35          66.04
Allowance to nonaccrual loans and
     loans past due 90 days or more                 471.20         316.07         155.49         156.35          66.04
Ratio of net charge-offs to average loans             0.12           0.10           0.20           0.44           0.34


</TABLE>


     The allowance for loan losses  represented  471.2% of nonaccrual  loans and
loans past due 90 days or more at the end of 1998,  up from 316.1% at the end of
1997. The ratio  increased  principally as a result of a slight  increase in the
allowance at year end and a $457 thousand decrease in nonaccrual loans and loans
past due 90 days or more in 1998 as compared to the end of the year in 1997.



Table 8

--------------------------------------------------------------------------------
Allocation of Allowance for Loan Losses
at December 31,
--------------------------------------------------------------------------------
(in thousands)
<TABLE>
<CAPTION>
                                        1998        1997      1996        1995      1994
                                      -------    -------    -------    --------   --------
<S>                                   <C>        <C>        <C>        <C>        <C>   
Commercial and financial              $  941     $  903     $1,051     $  965     $  994
Installment                               93        147        165        228        289
Real estate                            3,633      3,335      2,026      2,104      1,807
Unallocated                              978        846        726        629        989
                                      =======    =======    =======    ========   ========
                                      $5,645     $5,231     $3,968     $3,926     $4,079
                                      =======    =======    =======    ========   ========

</TABLE>

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

                                       20
<PAGE>

Nonperforming Assets

     Nonperforming  assets consist of nonaccrual loans,  restructured  loans and
foreclosed  real estate.  Loans are placed on  nonaccrual  status  when,  in the
opinion of management,  the future collection of interest or principal according
to contractual  term may be doubtful or when principal or interest  payments are
in arrears 90 days or more.  Foreclosed  real estate,  representing  real estate
collateral acquired by legal foreclosure procedures, is valued using independent
appraisals and the Company's  policy is to obtain revised  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. In 1998, the Company sold $409 thousand of nonperforming loans, which was
largely  responsible  for the  decline  in total  nonperforming  assets  by $277
thousand  in 1998 as  compared  to 1997.  In 1997,  total  nonperforming  assets
decreased by $1.8 million to $2.1 million in 1997 as compared to $3.9 million in
1996.  The  decrease  was due, in part,  to the sale of  foreclosed  real estate
totaling $610 thousand.  Further contributing to the decrease was a $1.0 million
decline in nonaccrual  loans which was largely due to a commercial  loan pay-off
totaling  $212  thousand  and a  charge-off  coupled  with a lump sum payment on
another commercial loan totaling $558 thousand. Based on the current information
available,  except for the loans  included in the table,  there were no material
potential problem loans,  either  individually or in the aggregate,  at December
31, 1998.



Table 9

--------------------------------------------------------------------------------
Loan Delinquencies and Nonperforming Assets
at December 31,
--------------------------------------------------------------------------------
(dollars in thousands)
<TABLE>
<CAPTION>
                                                             1998         1997         1996         1995          1994
                                                          ---------    ---------    ---------    ---------    ----------
<S>                                                       <C>           <C>         <C>          <C>          <C>    
Loans delinquent and accruing interest

  Loans past due 30-89 days                                  $379         $832         $838       $1,397        $1,513
  Loans past due 90 days or more                                -          141           25            -             -
                                                          ---------    ---------    ---------    ---------    ----------
     Total loans delinquent and accruing interest            $379         $973         $863       $1,397        $1,513
                                                          =========    =========    =========    =========    ==========

Nonaccrual loans                                           $1,198       $1,514       $2,527       $2,511        $6,177
Foreclosed real estate                                         84            -          610        1,213           880
Restructured loans                                            528          573          725        1,465           522
                                                          ---------    ---------    ---------    ---------    ----------
  Total nonperforming assets                               $1,810       $2,087       $3,862       $5,189        $7,579
                                                          =========    =========    =========    =========    ==========
    Total nonperforming assets and loans
       past due 90 days or more                            $1,810       $2,228       $3,887       $5,189        $7,579
                                                          =========    =========    =========    =========    ==========
Nonaccrual loans to total loans                               0.25 %      0.35 %       0.66 %       0.74 %        1.96 %
Nonperforming assets to total loans and
  foreclosed real estate                                      0.38        0.48         1.00         1.53          2.40
Nonperforming assets to total assets                          0.26        0.33         0.67         0.95          1.43
Nonaccrual loans and loans past due 90 days
  or more to total loans                                      0.25        0.38         0.66         0.74          1.96
Nonperforming assets and loans past due 90 days
  or more to total loans and foreclosed real estate           0.38        0.51         1.01         1.53          2.40
Nonperforming assets and loans past due 90 days
  or more to total assets                                     0.26        0.36         0.68         0.95          1.43


</TABLE>

                                       21
<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/ liability management  strategy,  or securities that may be
sold in  response  to,  among  other  things,  changes  in  interest  rates  and
prepayment  risk. Debt securities  purchased with the intent and ability to hold
until maturity are classified as "held to maturity".  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 yields (adjusted to a taxable  equivalent  basis) of "securities held to
maturity"  and  "securities  available  for sale".  Historical  cost was used to
calculate the weighted average yields.


Table 10

--------------------------------------------------------------------------------
Securities
at December 31, 1998
--------------------------------------------------------------------------------
(dollars in thousands)
<TABLE>
<CAPTION>
                                                                 After 1      After 5                          Weighted
                                                    Within     But Within   But Within    After                Average
                                                    1 Year       5 Years     10 Years   10 Years   Total       Yield
                                                  ----------  -----------  ---------  ---------  ---------   ---------
<S>                                               <C>         <C>          <C>        <C>        <C>         <C>
Securities held to maturity at amortized cost
   Obligations of U.S. Treasury                       $5,999     $ 9,993           -         -    $ 15,992       5.90 %
   Mortgage-backed securities                              -       1,031    $ 10,195   $ 7,695      18,921       6.85
   Obligations of U.S. agencies                            -       7,986           -         -       7,986       5.99
   Obligations of states & political subdivisions      6,711         787           -     3,613      11,111       5.55
   Other debt securities                                  25         124           -         -         149       6.57
                                                   ----------  -----------  ---------  --------   ---------
                                                      12,735      19,921      10,195    11,308      54,159
                                                   ----------  -----------  ---------  --------   ---------

Securities available for sale at market value
   Obligations of U.S. Treasury                       14,107      19,934           -         -     34,041        6.38
   Mortgage-backed securities                            170       3,815      10,912    28,169     43,066        6.22
   Obligations of U.S. agencies                            -       8,113         505     5,206     13,824        5.57
                                                   ----------   ---------   ---------  --------  ---------
                                                      14,277      31,862      11,417    33,375     90,931
                                                   ----------   ---------   ---------  --------  ---------
        Total                                        $27,012     $51,783     $21,612   $44,683   $145,090
                                                   ==========   =========   =========  ========  =========

Weighted average yield                                  6.07 %      6.08 %      6.50 %    6.19 %     6.18 %



The following  table set forth the carrying value of the  Corporation's  held to
maturity  and  available  for sale  securities  portfolios  for the years ended,
December 31: (dollars in thousands)

                                                           1998                     1997                       1996
                                                   ---------------------    --------------------     --------------------
                                                      Amount        %        Amount         %          Amount         %
                                                   -----------  --------    ---------     ------     ----------   -------

Securities held to maturity
     Obligations of U.S. Treasury                     $ 15,992     29.6 %    $ 22,134      36.7 %     $ 43,517      57.5 %
     Mortgage-backed securities                         18,921     34.9        28,398      47.0         22,440      29.7
     Obligations of U.S. agencies                        7,986     14.7         6,711      11.1          5,992       7.9
     Obligations of states & political subdivisions     11,111     20.5         3,049       5.0          3,581       4.7
     Other debt securities                                 149      0.3           150       0.2            150       0.2
                                                   -----------  --------    ----------    ------     ----------   -------
                                                      $ 54,159    100.0 %    $ 60,442      100.0 %    $ 75,680     100.0 %
                                                   ===========  ========    ==========    ======     ==========   =======


Securities available for sale
     Obligations of U.S. Treasury                     $ 34,041     35.5 %    $ 35,983       47.6 %    $ 31,847      47.0 %
     Mortgage-backed securities                         43,066     45.0        27,149       35.9        23,522      34.8
     Obligations of U.S. agencies                       13,824     14.4         7,012        9.3         7,970      11.8
     Equity securities                                   4,840      5.1         5,411        7.2         4,320       6.4
                                                   -----------  --------    ----------    ------     ----------    ------
                                                      $ 95,771    100.0 %    $ 75,555      100.0 %    $ 67,659     100.0 %
                                                   ===========  ========    ==========    ======     ==========   ======= 

</TABLE>



     The  Company's  total  investment  portfolio  increased by $13.9 million or
10.2% to $149.9  million at December 31, 1998 as compared to the prior year. The
growth was  principally  in U.S.  agencies,  obligations of states and political
subdivisions  and  mortgaged-backed  securities,  which includes  collateralized
mortgage  obligations ("CMO"). The growth was partly offset by a decline in U.S.
Treasury  securities  as a  result  of  maturities.  Substantially  all  of  the
mortgage-backed  securities  held by the Company are issued or backed by Federal
agencies.  At December 31, 1998, the Company's CMO portfolio did not include any
securities   deemed  as  "high  risk"  as  defined  by  the  Federal   Financial
Institutions  Examination  Council.  Total gross unrealized gains and losses for
the total  investment  portfolio  amounted to $2.7  million  and $238  thousand,
respectively, at December 31, 1998.

     The Company's held to maturity portfolio decreased by $6.3 million or 10.4%
to $54.2  million at  December  31,  1998 as  compared  to the prior  year.  The
decrease was principally due to the transfer of certain securities classified as
held to maturity by Jersey  Bank to  available  for sale.  The  securities  were
reclassified upon consummation of the acquisition because of their higher degree
of interest rate sensitivity.  Furthermore, the securities do not conform to the
Company's  investment  objectives  or to its policy for managing  interest  rate
risk.  At the date of transfer the  securities  had a book value of $8.2 million
and a market value of $8.1 million.

     The Company's  available for sale  portfolio  increased by $20.2 million or
26.8% to $95.8  million at December 31, 1998 as compared to the prior year.  The
growth was largely due to the purchase of securities  in 1998. In addition,  the
above  noted   reclassification  of  certain  securities  of  Jersey  Bank  also
contributed to the growth.

                                       22
<PAGE>


Deposits

     The Company  traditionally  relies on its  deposit  base to fund its credit
needs.  Core  deposits,  which include  non-interest  bearing  demand  deposits,
interest bearing demand accounts,  savings  deposits,  money market accounts and
time deposits in amounts under $100,000,  represented 95.8% of total deposits at
December 31, 1998 and 93.8% at December 31, 1997.

     Total deposits amounted to $598.7 million at December 31, 1998, an increase
of $58.0 million or 10.7% from year-end 1997. The most significant growth in the
deposit base occurred in  non-interest  and interest  bearing  demand  deposits,
which  increased  $12.0  million or 12.5% and $39.9 million or 25.8% at December
31, 1998, respectively,  as compared to the prior year. Time deposits marginally
increased by $2.4 million or 1.5% to $170.5 million at year-end 1998 as compared
to  year-end  1997.  The  favorable  change in mix of  deposits,  combined  with
declines in interest  rates,  reduced the overall  yield on deposits by 10 basis
points. The Company's emphasis of building core customer  relationships has been
paramount to its success in positively  changing the composition of its deposits
over the last five years. 


Table 11

--------------------------------------------------------------------------------
Deposit Summary
at December 31,
--------------------------------------------------------------------------------
(dollars in thousands)
<TABLE>
<CAPTION>
                                            1998                 1997             1996              1995             1994
                                      ------------------   ---------------  ----------------   ---------------  ----------------
                                        Amount      %       Amount     %      Amount    %      Amount     %      Amount     %
                                      ---------- -------   -------- ------  --------- ------   -------- ------  --------- ------
<S>                                  <C>         <C>       <C>      <C>     <C>       <C>      <C>      <C>     <C>       <C> 
Noninterest bearing demand            $ 107,408    17.9 %  $ 95,436  17.6 % $ 78,450   16.0 %  $70,667   14.5 % $ 67,491   14.4 %
Interest bearing demand                 194,177    32.4    154,301   28.6    121,878   24.8    114,009   23.4    106,007   22.6
Money market                             50,665     8.5     41,815    7.7     41,372    8.4     40,728    8.4     40,139    8.5
Savings                                  76,026    12.7     81,202   15.0     82,817   16.8     85,816   17.6     91,582   19.5
Time deposits less  than $100,000       145,337    24.3    134,287   24.9    139,994   28.5    158,689   32.5    152,299   32.4
Time deposits greater than $100,000*     25,119     4.2     33,724    6.2     27,126    5.5     17,315    3.6     12,281    2.6
                                      ========== =======   ======== ======  ========= ======   ======== ======  ========= ======
                                       $598,732   100.0 %  $540,765 100.0 % $491,637  100.0 %  $487,224 100.0 % $469,799  100.0 %
                                      ========== =======   ======== ======  ========= ======   ======== ======  ========= ======


</TABLE>


* The following table shows the time remaining to maturity of time  certificates
of deposit of $100,000 or more as of December 31, 1998 (in thousands)

Three months or less                         $ 11,594
Over three months through six months            6,918
Over six months through twelve months           3,239
Over twelve months                              3,368
                                             ----------
                                              $25,119
                                             ==========


Market Risk

     Market risk is generally  described as the sensitivity of income to adverse
changes in interest rates,  foreign currency  exchange rates,  commodity prices,
and other relevant  market rates or prices.  Market rate  sensitive  instruments
include:  financial  instruments  such as  investments,  loans,  mortgage-backed
securities,   deposits,  borrowings  and  other  debt  obligations;   derivative
financial  instruments,  such as  futures,  forwards,  swaps  and  options;  and
derivative commodity instruments, such as commodity futures, forwards, swaps and
options  that  are  permitted  to  be  settled  in  cash  or  another  financial
instrument.

     The  Company  does not have  any  material  exposure  to  foreign  currency
exchange rate risk or commodity  price risk.  The Company did not enter into any
market rate sensitive  instruments for trading purposes nor did it engage in any
hedging transactions utilizing derivative financial instruments during 1998. The
Company's  real estate loan  portfolio,  concentrated  primarily in northern New
Jersey,  is subject to risks  associated with the local and regional  economies.
The  Company's  primary  source of market risk  exposure  arises from changes in
market interest rates ("interest rate risk").


Interest Rate Risk

     Interest  rate risk is generally  described as the exposure to  potentially
adverse  changes in  current  and future net  interest  income  resulting  from:
fluctuations in interest rates; product spreads; and imbalances in the repricing
opportunities  of  interest-rate-sensitive  assets and  liabilities.  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  liabilities.  The
evaluation,  which is performed  at least  monthly,  attempts to  determine  the
impact on net  interest  margin from current and  prospective  changes in market
interest rates.

     The Company  manages  interest rate risk exposure with the  utilization  of
financial modeling and simulation  techniques.  These methods assist the Company
in  determining  the effects of market rate changes on net  interest  income and
future economic value.  The objective of the Company is to maximize net interest
income within  acceptable  levels of risk established by policy.  The techniques
utilized  for  managing  exposure  to market rate  changes  involve a variety of
interest  rate,  pricing  and  volume  assumptions.  These  assumptions  include
projections  on  growth,  prepayment  and  withdrawal  levels  as well as  other
embedded options inherently found in financial instruments.  The Company reviews
and validates  these  assumptions  at least  annually,  or more  frequently,  if
economic or other conditions change. At December 31, 1998, the Company simulated
the effects on net interest income given an instantaneous  and parallel shift in
the  yield  curve  of  200  basis  points  in  either  direction.  Based  on the
simulation,  it was  estimated  that net interest  income,  over a  twelve-month
horizon,  would not  decrease by more than  10.2%.  At December  31,  1998,  the
Company was within policy limits  established for changes in net interest income
and future economic value.

     The preceding  simulation does not represent a Company  forecast and should
not be relied upon as being  indicative  of expected  operating  results.  These
hypothetical estimates are based upon numerous assumptions including: the nature
and timing of interest rate levels  including yield curve shape,  prepayments on
loans and  securities,  deposit  decay  rates,  pricing  decisions  on loans and
deposits, reinvestment/replacement of asset and liability cashflows, and others.
While  assumptions  are developed  based upon current  economic and local market
conditions,  the Company cannot make any assurances as to the predictive  nature
of these assumptions including how customer preferences or competitor influences
might change.

     Further,  as market  conditions  vary from those assumed in the simulation,
actual results will also differ due to:  prepayment/refinancing levels deviating
from those  assumed,  the  varying  impact of interest  rate  changes on caps or
floors on adjustable rate assets,  the potential effect of changing debt service
levels on customers with adjustable rate loans,  depositor early withdrawals

                                       23
<PAGE>


and  product  preference  changes,   and  other   internal/external   variables.
Furthermore,  the  simulation  does not reflect  actions that ALCO might take in
responding to anticipating  changes in interest rates or competitive  conditions
in the market place.

     In  addition  to  the  above-mentioned  techniques,  the  Company  utilizes
sensitivity  gap  as an  interest  rate  risk  measurement.  Sensitivity  gap 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.  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  expressed 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
(7.53%) at December 31, 1998. 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.


Table 12

--------------------------------------------------------------------------------
Interest Rate Sensitivity Analysis
at December 31, 1998
--------------------------------------------------------------------------------
(dollars in thousands)

<TABLE>
<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
                                                --------    --------   --------- --------  ---------  --------   --------  --------
<S>                                             <C>         <C>        <C>       <C>       <C>        <C>        <C>       <C> 
Assets

   Net loans                                    $139,587    $31,288    $48,739   $124,928   $85,294   $47,682    $(4,446) $473,072
   Investment securities                          13,897      8,253     31,752     66,362     8,692    19,075      1,899   149,930
   Cash and amounts due from banks                23,175          -          -          -         -         -     20,109    43,284
   Other noninterest earning assets                    -          -          -          -         -         -     19,078    19,078
                                                --------    --------   --------   --------  ---------  --------   -------- --------
     Total assets                                176,659     39,541     80,491    191,290    93,986     66,757    36,640   685,364
                                                --------    --------   --------   --------  ---------  --------   -------- --------

Liabilities and stockholders' equity
   Demand deposits                                32,472     32,472     64,944     86,244    42,049     43,404         -   301,585
   Savings deposits                                6,653      6,652     13,305     34,173    10,541      4,702         -    76,026
   Fixed maturity certificates of deposits        47,015     43,952     51,893     19,720     7,844         32         -   170,456
   Money market accounts                           7,599      7,599     15,200     10,898     5,038      4,331         -    50,665
   Securities sold under agreements to purchase    7,780      1,000          -          -         -          -         -     8,780
   Short-term borrowings                           6,027         27      3,714          -         -          -         -     9,768
   Other liabilities                                   -          -          -          -         -          -     5,712     5,712
   Stockholders' equity                                -          -          -          -         -          -    62,372    62,372
                                                --------    --------   --------   --------  ---------  --------  -------- --------
     Total liabilities and stockholders' equity  107,546     91,702    149,056    151,035    65,472     52,469    68,084  $685,364
                                                --------    --------   --------   --------  ---------  --------  -------- --------

GAP                                              $69,113   $(52,161)$  (68,565)   $40,255   $28,514    $14,288  $(31,444)
                                                ========    ========   ========   ========  =========  ========  ========
GAP to total assets                                10.08 %    (7.61)%   (10.00)%     5.87 %    4.16 %     2.08 %
Cumulative GAP                                   $69,113    $16,952   $(51,613)  $(11,358)  $17,156    $31,444
                                                ========    ========  =========   ========  =========  ========
Cumulative GAP to total assets                     10.08 %     2.47 %    (7.53)%    (1.66)%    2.50 %     4.59 %

</TABLE>


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.  The liquidity  position
of the  Company  over any given  period of time is a product of it's  operating,
financing  and  investing  activities.  The extent of such  activities  is 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, 1998, total deposits amounted to $598.7 million, an
increase of $58.0 million or 10.7% over the prior  comparable year. In 1998, the
Company had strong  deposit  growth,  and  therefore,  placed  less  reliance on
advances  from the Federal Home Loan Bank of New York  ("FHLB")  and  securities
sold under agreements to repurchase ("REPOS").  During 1998, the Company did not
obtain any new term-advances from the FHLB. At December 31, 1998,  advances from
the FHLB and REPOS totaled $18.5 million and represented 2.7% of total assets as
compared to $22.9 million and 3.7% of total assets, at December 31, 1997.

     In 1998,  despite  heightened  competition  for  loans and  increased  loan
prepayments,  loan production  continued to be the Company's principal investing
activity. Net loans at December 31, 1998 amounted to $473.1 million, compared to
$433.0 million at the end of 1997, an increase of $40.0 million or 9.2%.

                                       24
<PAGE>


     The Company's most liquid assets are cash and due from banks, federal funds
sold and interest  bearing demand  deposits.  At December 31, 1998, the total of
such assets amounted to $43.3 million or 6.3% of total assets, compared to $36.6
million or 5.9% of total assets at year-end 1997.

     Another  significant  liquidity source is the Company's  available for sale
securities.  At December 31, 1998,  available  for sale  securities  amounted to
$95.8 million or 63.9% of total  securities,  compared to $75.6 million or 55.6%
of total securities at year-end 1997.

     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
$57.7 million line of credit available through its membership in the FHLB

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

Capital Adequacy

     Stockholders'  equity  totaled $62.4 million and  represents  9.1% of total
assets at December 31, 1998,  compared to $56.1 million and 9.0% of total assets
at December 31, 1997. The $6.2 million  increase was primarily  attributable  to
net income of $8.6 million less cash dividends of $2.8 million.

     Guidelines  issued by the  Federal  Reserve  Board  and the FDIC  establish
capital  adequacy  guidelines  for bank holding  companies  and  state-chartered
banks. The guidelines establish a risk-based capital framework consisting of (1)
a definition  of capital and (2) a system for assigning  risk  weights.  Capital
consists of Tier 1 capital,  which  includes  common  shareholders'  equity less
certain intangibles and a supplementary  component called Tier II capital, which
includes a portion of the allowance for loan losses.  Effective October 1, 1998,
the Federal Reserve Board and the FDIC adopted an amendment to their  risk-based
capital  guidelines that permits insured  depository  institutions to include in
their Tier II capital up to 45% of the pre-tax net  unrealized  gains on certain
available for sale equity securities. All assets and off-balance-sheet items are
assigned to one of four weighted risk categories ranging from 0% to 100%. Higher
levels of capital are required  for the  categories  perceived  as  representing
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.  At December  31, 1998,  the
Company's and the Bank's Tier I risk-based  capital ratio was 13.80% and 13.34%,
respectively, well in excess of minimal capital standard.

     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.  At December 31, 1998, the Company's and the Bank's leverage ratio
was 9.08% and 8.76%, respectively.

Recent Accounting Pronouncements

     In June 1997, the Financial  Accounting  Standards  Board  ("FASB")  issued
Statement of Financial Accounting Standards No. 131, "Disclosures About Segments
of an Enterprise and Related  Information" ("SFAS 131"). SFAS 131 introduces new
standards and disclosure  requirements for the way companies report  information
about  operating  segments,  including  related product  information.  Operating
segments are defined based upon the way management organizes segments for making
operating decisions and evaluating performance.  Information such as segment net
earnings, appropriate revenues and expense items and certain balance sheet items
are required to be presented,  and such amounts are required to be reconciled to
the company's  combined  financial  information.  SFAS 131 is applicable for all
public,  for-profit  companies and became  effective for fiscal years  beginning
after December 31, 1997. This standard,  which was adopted, had no impact on the
Company.

     In  February  1998,  the FASB  issued  Statement  of  Financial  Accounting
Standards   No.  132,   "Employers'   Disclosures   About   Pensions  and  Other
Postretirement   Benefits"   ("SFAS  132").   SFAS  132  amends  the  disclosure
requirements related to pensions and other postretirement  benefits by requiring
additional  information that will facilitate financial analysis, and eliminating
certain  disclosures  that  are  considered  no  longer  useful.  SFAS  No.  132
supersedes the disclosure requirements in SFAS Nos. 87, 88, and 106 but does not
change  the  measurement  or  recognition  of these  plans.  This  Statement  is
effective for fiscal years  beginning  after  December 15, 1997. The Company has
adopted this standard.

     In June 1998, the FASB issued Statement of Financial  Accounting  Standards
No. 133,  "Accounting for Derivative  Instruments and Hedging Activities" ("SFAS
133").  SFAS 133 requires that  entities  recognize  all  derivatives  as either
assets or liabilities in the statement of financial  condition and measure those
instruments  at fair  value.  Adoption  of SFAS 133 is  required  for all fiscal
quarters of fiscal years beginning after June 15, 1999.  Adoption of SFAS 133 is
not expected to have a material impact upon the Company's consolidated financial
condition or results of operations.

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.

                                       25
<PAGE>


Year 2000 Readiness Disclosure

     This Year 2000  disclosure  falls  within  the Year  2000  Information  and
Readiness Disclosure Act of 1998.

     Many of the world's  computers  have recorded  years in a two-digit  format
and, if not  corrected,  this  problem will render such  computers  incapable of
interpreting  dates beyond the year 1999,  which could disrupt  business  ("Year
2000 issue").  A company's  exposure to uncertainties  and costs associated with
the  Year  2000  issue  depends  on a number  of  factors,  including  software,
hardware,  the industry in which it operates,  and other  entities with which it
electronically interacts.

     The  Company  has  established  a  Year  2000  Compliance   Committee  (the
"Committee")  and has adopted a Year 2000 Compliance Plan (the "Y2K Plan").  The
objectives  of the Committee and the Y2K Plan are to address the Year 2000 issue
and prepare the Company for the new  millennium.  As  recommended by the Federal
Financial  Institutions  Examination  Council,  the  Y2K  Plan  encompasses  the
following   phases:   Awareness,   Assessment,    Renovation,   Validation   and
Implementation.  These phases enable the Company to identify  risks,  develop an
action plan, and perform  adequate testing and complete  certification  that its
processing  systems will be Year 2000 ready. In the Awareness phase, the Company
defined  the Year 2000  issues,  informed  management  and  staff  and  obtained
executive  level  support and  funding.  In  addition,  the  Company  compiled a
comprehensive  list of items that may be  affected  by the Year 2000  compliance
issues.  Such items include  facilities and related  non-information  technology
systems  (embedded  technology),  computer systems,  hardware,  and services and
products provided by third parties.  In the Assessment  phase,  identified items
were  evaluated  to assess  whether the items will  function  properly  with the
century date  change.  The items were ranked in the order that they will need to
be remediated based on their mission critical nature and the potential impact to
the Company.  The  Renovation  phase  included an analysis of the items that are
affected by the Year 2000 issue,  the  identification  of problem  areas and the
repair of non-compliant  items.  The Validation phase includes  thorough testing
and  verification  of systems,  databases and utilities,  including  present and
forward date testing which includes simulating data conditions in the Year 2000.
The Implementation phase will consist of placing all the systems,  databases and
utilities that have been renovated into production. As of December 31, 1998, the
Company has completed the  Awareness,  Assessment  and  Renovation  phases and a
significant portion of the Validation phase with respect to its mission critical
applications.  The Company expects to have the Validation  phase with respect to
its  mission  critical  applications  completed  by  March  31,  1999,  and  the
Implementation phase completed by the second quarter of 1999.

     The  Company  has  begun  and  continues  to survey  and  communicate  with
counterparties,  intermediaries  and vendors ("Third  Parties") with whom it has
important  financial and  operational  relationships  to determine the extent to
which they are  vulnerable  to Year 2000 issues.  As of December  31, 1998,  the
Company has received  sufficient  information from its Third Parties to conclude
that they are in the Renovation,  Validation and Implementation  phases of their
respective  plans.  However,  as of December 31,  1998,  the Company has not yet
received   conclusive   information  from  all  Third  Parties  related  to  the
Renovation, Validation and Implementation phases to predict the outcome of their
efforts.

     There are many risks  associated  with the Year 2000 issue,  including  the
failure of the Company's  computer and non-financial  technology  systems.  Such
failures  could  have a material  adverse  effect on the  Company  and may cause
system malfunctions, incorrect or incomplete transaction processing resulting in
the inability to reconcile  accounting books and records.  In addition,  even if
the Company  successfully  remediates its Year 2000 issues,  it can be adversely
affected by failures of Third  Parties  with which the Company has  financial or
operational  relationships to remediate their own Year 2000 issues.  The failure
of Third  Parties to remediate  their Year 2000 issues in a timely  manner could
result in a material financial risk to the Company.  Such risks include business
interruption  or  shutdown,   financial  loss,   regulatory  actions  and  legal
liability.  To mitigate  Year 2000 risk,  the Company is  developing a Year 2000
specific contingency plan, which is expected to be completed by March 31, 1999.

     Based on current  information,  the Company  does not  anticipate  that the
overall  costs related to the  implementation  of the Y2K Plan to be material in
any  single  year.  The  Company  estimates  that  the  total  external  cost of
implementing its Y2K Plan will amount to approximately  $170 thousand.  The Year
2000 costs  include all  activities  undertaken  on Year 2000  related  matters,
including,  but not limited to, renovation,  validation,  third party review and
contingency  planning.  However,  costs for  compensation  and  benefits  of the
Company's internal employees have not yet been determined but is not expected to
be material. Through the year ended 1998, the Company has expended approximately
$20  thousand  on the Year 2000  project.  All Year 2000  remediation  costs are
expensed in the period incurred.

                                       26
<PAGE>

Forward Looking Statements

     We discuss certain  matters in this report which are not historical  facts,
but which are  "forward  looking  statements"  within the meaning of the Private
Securities  Litigation  Reform Act of 1995. These "forward  looking  statements"
include,  but are not limited to, the adequacy of the allowance for loan losses,
profitability,  interest  rate risk,  market risk,  liquidity  and the year 2000
readiness  disclosure.  The "forward looking  statements" in this report reflect
what we currently  anticipate  will happen in each case.  What actually  happens
could  differ  materially  from what we  currently  anticipate  will happen as a
result of, but not limited  to,  changes in economic  condition,  interest  rate
fluctuations,   levels  of  loan   growth  and   quality   and  the   successful
implementation of its Year 2000 Plan, which includes capital expenditures, costs
of remediation and testing,  the timetable for  implementing the remediation and
testing phases of Year 2000 planning, the possible impact of third parties' Year
2000  issues  on the  Company,  management's  assessment  of  contingencies  and
possible  scenarios in its Year 2000 planning.  We are not promising to make any
public  announcement when we think "forward looking statements" in this document
are no longer accurate,  whether as a result of new  information,  what actually
happens in the future or for any other reason.


Table 13

--------------------------------------------------------------------------------
Quarterly Common Stock Price Range
for the years ended December 31,
--------------------------------------------------------------------------------

The  common  stock is listed on the  American  Stock  Exchange  under the symbol
"ISB."
<TABLE>
<CAPTION>
                                                                High              Low
                                                                Sales            Sales            Cash
                                                                Price            Price          Dividends
                                                             ------------      -----------     ------------
<S>                                                          <C>               <C>             <C>                 
1996
       First quarter (1)(2)(3) . . . . . . . . . . .           $ 9.42           $ 8.41           $0.083
       Second quarter (2)(3) . . . . . . . . . . . .             9.17             8.55            0.083
       Third quarter (2) (3). . . . . . . . . . . . . .          9.83             8.33            0.083
       Fourth quarter (2)(3). . . . . . . . . . . . . .          8.34             9.50            0.083

1997
       First quarter (2)(3) . . . . . . . . . . . . . . .     $ 14.67           $10.61           $0.09
       Second quarter (3). . . . . . . . . . . . . .            17.58            11.92            0.09
       Third quarter (3) . . . . . . . . . . . . . . . .        16.67            14.67            0.09
       Fourth quarter (3) . . . . . . . . . . . . . . .         21.58            14.75            0.09

1998
       First quarter (3) . . . . . . . . . . . . . . .        $ 21.25           $18.17           $0.10
       Second quarter . . . . . . . . . . . . . .               23.25            19.25            0.10
       Third quarter  . . . . . . . . . . . . . . . .           20.88            15.31            0.10
       Fourth quarter  . . . . . . . . . . . . . . .            17.75            14.06            0.10

The number of stockholders of record as of February 24, 1999 was 1,342
</TABLE>

--------------------------------------------------------------------------------
(1)   On  February  22,  1996,  the Company  declared a 5% Stock  Dividend to be
      distributed on April 19, 1996 to shareholders of record on March 20, 1996.
      The high and low sales prices and the cash dividends have been restated to
      reflect the effects of the stock dividend.

(2)   On February  27,  1997,  the Company  declared a 3 for 2 Stock Split to be
      distributed on April 17, 1997 to shareholders of record on March 20, 1997.
      The high and low sales prices and the cash dividends have been restated to
      reflect the effects of the stock split.

(3)   On February  26,  1998,  the Company  declared a 3 for 2 Stock Split to be
      distributed on April 17, 1998 to shareholders of record on March 20, 1998.
      The high and low sales prices and the cash dividends have been restated to
      reflect the effects of the stock split.

                                       27
<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, 1998 and 1997 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,  1998.  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, 1998 and 1997, and the results
of their  operations  and their  cash  flows for each of the three  years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles.

/S/ Deloitte & Touche LLP
Parsippany, New Jersey
January  20, 1999

                                       28
<PAGE>



Interchange Financial Services Corporation

--------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
December 31,
--------------------------------------------------------------------------------
(dollars in thousands)
<TABLE>
<CAPTION>
                                                                                       1998               1997
                                                                                   --------------     --------------
<S>                                                                                <C>                <C>          
Assets
Cash and due from banks                                                                 $ 20,109           $ 19,215
Federal funds sold                                                                        23,175             15,400
Interest bearing demand deposits                                                               -              1,968
                                                                                   --------------     --------------
Total cash and cash equivalents                                                           43,284             36,583
                                                                                   --------------     --------------

Securities held to maturity at amortized cost (estimated market value
      of $54,761 and $60,834 for 1998 and 1997, respectively)                             54,159             60,442
                                                                                   --------------     --------------
Securities available for sale at estimated market value (amortized cost
     of $93,872 and $73,640 for 1998 and 1997, respectively)                              95,771             75,555
                                                                                   --------------     --------------

Loans                                                                                    478,717            438,273
Less:  Allowance for loan losses                                                           5,645              5,231
                                                                                   --------------     --------------
Net loans                                                                                473,072            433,042
                                                                                   --------------     --------------

Premises and equipment, net                                                                9,871              9,548
Foreclosed real estate                                                                        84                  -
Accrued interest receivable and other assets                                               9,123              9,880
                                                                                   ==============     ==============
Total assets                                                                            $685,364           $625,050
                                                                                   ==============     ==============


Liabilities
Deposits
    Non-interest bearing                                                                $107,408            $95,436
    Interest bearing                                                                     491,324            445,329
                                                                                   --------------     --------------
Total deposits                                                                           598,732            540,765
                                                                                   --------------     --------------

Securities sold under agreements to repurchase                                             8,780             13,028
Short-term borrowings                                                                      9,768                  -
Accrued interest payable and other liabilities                                             5,712              5,248
Long-term borrowings                                                                           -              9,879
                                                                                   --------------     --------------
Total liabilities                                                                        622,992            568,920
                                                                                   --------------     --------------

Commitments and contingent liabilities

Stockholders' equity:
Common stock,  without par value;  15,000,000 shares  authorized;  7,200,133 and
    7,139,880 shares issued and outstanding in
    1998 and 1997, respectively                                                            5,397              5,396
Capital surplus                                                                           21,256             21,557
Retained earnings                                                                         35,482             29,698
Accumulated other comprehensive income                                                     1,192              1,185
                                                                                   --------------     --------------
                                                                                          63,327             57,836
Less:  Treasury stock                                                                        955              1,706
                                                                                   --------------     --------------
Total stockholders' equity                                                                62,372             56,130
                                                                                   ==============     ==============
Total liabilities and stockholders' equity                                              $685,364           $625,050
                                                                                   ==============     ==============
</TABLE>

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

                                      29
<PAGE>



Interchange Financial Services Corporation

--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31,
--------------------------------------------------------------------------------
(in thousands except per share data)
<TABLE>
<CAPTION>
                                                                                 1998              1997             1996
                                                                              ------------      -----------      ------------
<S>                                                                           <C>               <C>              <C>   
Interest income
Interest and fees on loans                                                        $38,904          $35,380           $31,367
Interest on federal funds sold                                                      1,474              896               710
Interest on interest bearing deposits                                                  55               78               104
Interest and dividends on securities
    Taxable interest income                                                         7,934            8,626             8,894
    Interest income exempt from federal income taxes                                  181              100               123
    Dividends                                                                         272              230               181
                                                                              ------------      -----------      ------------
Total interest income                                                              48,820           45,310            41,379
                                                                              ------------      -----------      ------------

Interest expense
Interest on deposits                                                               18,467           17,243            16,425
Interest on securities sold under agreements to repurchase                            806              685               267
Interest on short-term borrowings                                                       1               42               246
Interest on long-term borrowings                                                      590              596                45
                                                                              ------------      -----------      ------------
Total interest expense                                                             19,864           18,566            16,983
                                                                              ------------      -----------      ------------

Net interest income                                                                28,956           26,744            24,396
Provision for loan losses                                                             951            1,653               747
                                                                              ------------      -----------      ------------
Net interest income after provision for loan losses                                28,005           25,091            23,649
                                                                              ------------      -----------      ------------

Non-interest income

Service fees on deposit accounts                                                    2,551            2,040             1,685
Net gain on sale of securities                                                      1,021                -               242
Net gain on sale of loans                                                               -            1,067                 -
Net gain on sale of branch                                                              -                -               455
Accretion of discount in connection with acquisition                                    -                -               511
Other                                                                               1,356            1,667             1,355
                                                                              ------------      -----------      ------------
Total non-interest income                                                           4,928            4,774             4,248
                                                                              ------------      -----------      ------------

Non-interest expenses

Salaries and benefits                                                               9,437            8,951             8,238
Occupancy                                                                           2,405            2,152             2,370
Furniture and equipment                                                             1,035              879               781
Advertising and promotion                                                             865              865               938
Federal Deposit Insurance Corporation assessment                                       75               58               162
Foreclosed real estate                                                                  1                -               252
Acquisition                                                                         1,392                -                 -
Other                                                                               4,206            4,750             4,751
                                                                              ------------      -----------      ------------
Total non-interest expenses                                                        19,416           17,655            17,492
                                                                              ------------      -----------      ------------

Income before income taxes                                                         13,517           12,210            10,405
Income taxes                                                                        4,908            4,285             3,654
                                                                              ------------      -----------      ------------
Net income                                                                        $ 8,609          $ 7,925           $ 6,751
                                                                              ============      ===========      ============

Basic earnings per common share                                                    $1.20            $1.11             $0.95
                                                                                   =====            =====             =====
Diluted earnings per common share                                                  $1.19            $1.10             $0.94
                                                                                   =====            =====             =====  
</TABLE>

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

                                      30
<PAGE>

Interchange Financial Services Corporation
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Years Ended December 31,
--------------------------------------------------------------------------------
(in thousands except share data)
<TABLE>
<CAPTION>
                                                                                       Accumulated
                                                                                          Other
                                                               Comprehensive Retained Comprehensive Common  Capital  Treasury
                                                                 Income      Earnings   Income       Stock  Surplus  Stock    Total

                                                               ------------- -------- ------------ -------- -------- ------- -------
<S>                                                            <C>           <C>      <C>          <C>      <C>      <C>     <C>
Balance at January 1, 1996                                                   $22,482       $673     $5,053  $17,580  $ (6)  $45,782
Comprehensive income     
   Net Income                                                     $6,751       6,751                                          6,751
   Other comprehensive income, net of taxes
     Unrealized  losses on debt securities                          (447)
     Unrealized gains on equity securities                            30
                                                                ------------
   Other comprehensive income                                       (417)                  (417)                               (417)
                                                                ------------
Comprehensive income                                               $6,334
                                                                ============
Dividends on common stock                                                     (2,173)                                        (2,173)
5% common stock dividend                                                      (2,903)                  225    2,678               -
Fractional shares on 5% common stock dividend                                                                    (4)             (4)
Issued 17,708 shares of common stock in connection with
   Executive Compensation Plan                                                                          13      148             161
Purchase 17,232 shares of treasury stock                                                                              (131)    (131)
Reissuance of 10,355 shares of treasury stock under Dividend
   Reinvestment Plan (1)                                                                                                79       79
                                                                             -------- ------------ -------- -------- ------- -------
Balance at December 31, 1996                                                  24,157        256      5,291   20,402    (58)  50,048
Comprehensive income
   Net Income                                                      $7,925      7,925                                          7,925
   Other comprehensive income, net of taxes
    Unrealized gains on debt securities                               330
    Unrealized gains on equity securities                             599
                                                                -----------
   Other comprehensive income                                         929                   929                                 929
                                                                -----------
Comprehensive income                                               $8,854
                                                                ===========
Dividends on common stock                                                     (2,384)                                        (2,384)
Fractional shares on 3 for 2 stock split                                                                         (3)             (3)
Issued 12,822 shares of common stock in connection
   with Executive Compensation Plan                                                                      9      159             168
Exercised 73,519 option shares                                                                          55      377             432
Purchased 12,200 shares in exchange for option shares                                                                 (163)    (163)
Purchased 390 shares of treasury stock                                                                                  (3)      (3)
Reissuance of 8,153 shares of treasury stock under the
   Dividend Reinvestment Plan (1)                                                                                       61       61
Issued 12,738 common shares under Dividend Reinvestment Plan (1)                                         9      113             122
Issued 229,562 shares of common stock in merger with
   Washington Interchange Corporation                                                                  170    2,765           2,935
Acquired and retired 187,283 shares of common stock held by
   Washington Interchange Corporation                                                                 (138)  (2,256)     -   (2,394)
Purchased 121,826 shares of common stock                                                                            (1,543)  (1,543)
                                                                ------------ -------- ------------ -------- -------- ------- -------
Balance at December 31, 1997                                                  29,698      1,185      5,396   21,557 (1,706)  56,130
Comprehensive income
   Net Income                                                      $8,609      8,609                                          8,609
   Other comprehensive income, net of taxes
     Unrealized gains on debt securities                              207
     Unrealized losses securities transferred from held to
         maturity to available to sale - Acquisition                  (17)
     Unrealized gain on equity securities                             343
     Less:  gains on disposition of equity securities                (526)
                                                                 -----------
   Other comprehensive income                                           7                     7                                   7
                                                                 -----------
Comprehensive income                                                $8,616
                                                                 ===========

Dividends on common stock                                                     (2,825)                                        (2,825)
Fractional shares on 3 for 2 stock split and merger shares                                                       (5)             (5)
Forfeiture of bonus stock                                                                                              (49)     (49)
Issued 12,769 shares of common stock in connection
   with Executive Compensation Plan                                                                              70    162      232
Exercise of 50,394 option shares                                                                         1     (366)   638      273
                                                                             -------- ------------ -------- ------- -------- -------
Balance at December 31, 1998                                                 $35,482     $1,192     $5,397  $21,256 $ (955) $62,372
                                                                             ======== ============ ======== ======= ======== =======
</TABLE>
--------------------------------------------------------------------------------
All share data has been  adjusted  for the  effects  of the 3 for 2 stock  split
issued on April 17, 1998 to shareholders of record on March 20, 1998

(1)  Common  shares  issued  as  part  of  Jersey  Bank  for  Savings'  Dividend
     Reinvestment Plan

See notes to consolidated financial statements.

                                      31
<PAGE>
INTERCHANGE FINANCIAL SERVICES CORPORATION
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended, December 31,
--------------------------------------------------------------------------------
(in thousands)
<TABLE>
<CAPTION>
                                                                                   1998         1997        1996
                                                                                ----------   ---------   ----------
<S>                                                                             <C>          <C>         <C>       
Cash flows from operating activities

Net income                                                                       $ 8,609     $ 7,925      $ 6,751
Adjustments to reconcile net income to net cash provided by operating activities
    Depreciation and amortization                                                  1,374       1,182        1,052
    Amortization of securities premiums                                              964         818        1,066
    Accretion of securities discounts                                               (168)       (126)         (75)
    Amortization of premiums in connection with acquisition                          384         444          444
    Accretion of discount in connection with acquisition                               -           -         (511)
    Provision for loan losses                                                        951       1,653          747
    Net gain on sale of  loans                                                         -      (1,067)           -
    Net gain on sale of securities                                                (1,021)          -         (242)
    Net (gain) loss on sale of foreclosed real estate                                  -          (6)          87
    Reduction in carrying value of foreclosed real estate                              -           -           43
    (Increase) decrease in carrying value of loans available for sale                  -         (17)          13
    Net loss on disposal of fixed assets                                               3           -           20
Decrease (increase) in operating assets

    Net repayment (origination) of loans available for sale                            -          22         (102)
    Accrued interest receivable                                                     (270)        305          446
    Deferred taxes                                                                   228        (768)         138
    Other                                                                            437      (1,942)       1,089
(Decrease) increase in operating liabilities

    Accrued interest payable                                                         (88)        111          208
    Other                                                                            552         543           74
                                                                                ----------   ---------   ----------
Cash provided by operating activities                                             11,955       9,077       11,248
                                                                                ----------   ---------   ----------

Cash flows from investing activities
(Payments for) proceeds from
    Net originations of loans                                                    (31,848)    (40,239)     (45,978)
    Purchase of loans                                                             (4,627)    (19,247)      (2,150)
    Purchase of term federal funds                                                (7,500)          -            -
    Repayment of term federal funds                                                2,500           -            -
    Sale of loans                                                                    409       5,945        1,365
    Purchase of securities available for sale                                    (28,688)    (15,438)     (35,413)
    Maturities of securities available for sale                                   16,971       4,386        7,578
    Sale of securities available for sale                                          1,622           -       38,349
    Sale of foreclosed real estate                                                     -         616          652
    Purchase of securities held to maturity                                      (30,435)    (21,948)     (23,497)
    Maturities of securities held to maturity                                     26,808      41,167       25,979
    Sale of securities held to maturity                                                -           -        6,008
    Washington Interchange Merger                                                      -          37            -
    Purchase of fixed assets                                                      (1,703)     (3,464)      (1,507)
    Sale of fixed assets                                                               4          13            -
                                                                                ----------   ---------   ----------
Cash used in investing activities                                                (56,487)    (48,172)     (28,614)
                                                                                ----------   ---------   ----------

Cash flows from financing activities
Proceeds from (payments for)
    Deposits in excess of withdrawals                                             57,967      49,128       14,115
    Securities sold under agreements to repurchase and other borrowings           17,300      17,128       27,828
    Retirement of securities sold under agreement to repurchase and 
      other borrowings                                                           (21,659)    (20,454)     (12,499)
    Sale of deposits                                                                   -           -       (9,702)
    Dividends                                                                     (2,825)     (2,384)      (2,173)
    Common stock issued                                                              226         345          156
    Treasury stock                                                                   (49)     (1,543)         (52)
    Exercise of option shares                                                        273         269            -
                                                                                ----------   ---------   ----------
Cash provided by financing activities                                             51,233      42,489       17,673
                                                                                ----------   ---------   ----------
Increase in cash and cash equivalents                                              6,701       3,394          307
Cash and cash equivalents, beginning of year                                      36,583      33,189       32,882
                                                                                ==========   =========   ==========
Cash and cash equivalents, end of year                                           $43,284     $36,583      $33,189
                                                                                ==========   =========   ==========

Supplemental disclosure of cash flow information: Cash paid for:
    Interest                                                                     $19,953     $18,456      $16,771
    Income taxes                                                                   3,844       4,985        3,637

Supplemental disclosure of non-cash investing activities:

    Loans transferred to foreclosed real estate                                       84           -          179
    Loans transferred from available for sale to held to maturity                      -       1,190            -
    Decrease (increase) - market valuation of securities available for sale           15      (1,551)         618
    Amortization of valuation allowance - securities transferred from available
        for sale to held to maturity                                                   1          36           25
    Washington Interchange merger                                                      -         504            -
</TABLE>
--------------------------------------------------------------------------------
See notes to consolidated financial statements.

                                      32
<PAGE>



                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. 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 used in the  preparation of the
consolidated financial statements:

   Nature of Business

     Interchange  Financial Services  Corporation (the "Company"),  a New Jersey
business  corporation,  is a  holding  company  whose  principal  subsidiary  is
Interchange  Bank (the "Bank"),  formerly known as  Interchange  State 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  operations  typical of a community bank in the northeast region of New
Jersey (primarily Bergen County).

   Principles of consolidation

     The accompanying  consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. Significant intercompany accounts
and  transactions  have been eliminated in  consolidation.  Certain prior period
amounts  have  been  reclassified  to  conform  with  the  financial   statement
presentation of 1998.  These  reclassifications  have no effect on stockholders'
equity or net income as previously reported.

     Prior  period  financial  statements  have been  restated  to  include  the
accounts  and results of  operations  of The Jersey  Bank for  Savings  ("Jersey
Bank"),  which was  acquired  by the Company in 1998 in a  transaction  that was
accounted for as a pooling-of-interests.

Use of Estimates

     The  preparation  of financial  statements  in  conformity  with  generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that  affect the  reported  amounts of assets and  liabilities  and
disclosures of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amount of revenues and expenses during the
reporting  period.  Actual results could differ from those  estimates.  The most
significant  estimates  pertain to the  allowance  for loan  losses and the fair
value of financial instruments.

 Cash and cash equivalents

     For the purposes of  presentation  in the  consolidated  statements of cash
flows, cash and cash equivalents  include cash on hand,  amounts due from banks,
interest bearing demand deposits and federal funds sold.

Securities held to maturity and securities available for sale

     Debt  securities  purchased  with the  intent  and  ability  to hold  until
maturity are classified as securities  held to maturity and are carried at cost,
adjusted for the amortization of premiums and accretion of discounts. Management
determines  whether the security  will be  classified as held to maturity at the
time of purchase.

     All other  securities,  including  equity  securities,  are  classified  as
securities available for sale.  Securities  classified as available for sale may
be sold prior to  maturity  in  response  to,  but not  limited  to,  changes in
interest  rates,  changes in prepayment risk or for  asset/liability  management
strategies.  These securities are carried at fair value and any unrealized gains
and losses are reported,  net of taxes, as a separate component of stockholders'
equity.  Gains and losses from the sale of these securities are determined using
the specific identification method.

Loans

     Generally,  loans are carried at the principal amounts outstanding,  net of
unearned discount and deferred loan origination fees and costs.  Interest income
is accrued and credited to income as earned at the  applicable  interest  rates.
Origination  fees and certain  direct loan  origination  costs are  deferred and
amortized  to  interest  income  over  the  estimated  life  of the  loan  as an
adjustment to the yield.

     Mortgage  loans  held for sale are  carried at lower of  aggregate  cost or
market  value.  Gains and  losses on loans  sold are  included  in  non-interest
income.

     Loans are placed on nonaccrual  status when, in the opinion of  management,
the future  collection of interest or principal  according to contractual  terms
may be doubtful or when principal or interest payments are in arrears 90 days or
more.  Amounts  accrued are evaluated  for  collectibility.  Interest  income on
nonaccrual  loans is recognized on a cash basis, to the extent there is no doubt
of the future collection of principal. Loans are returned to accrual status when
management  deems that  collection of principal  and interest is reasonable  and
probable.

     Loans are  considered  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.

     All commercial and commercial  mortgage loans are evaluated for impairment.
One-to-four  family  residential  mortgage  loans and consumer  loans with small
balances are pooled  together as  homogeneous  loans and,  accordingly,  are not
covered by Statement of  Financial  Accounting  Standards  114.  "Accounting  by
creditors for  Impairment of a Loan." All  nonaccrual  commercial and commercial
mortgage  loans  as  well  as  non-homogeneous  one-to-four  family  residential
mortgage loans and consumer loans are considered impaired.

     The impairment of a loan is 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 underlying  collateral.  The fair value of  collateral,  reduced by costs to
sell on a discounted  basis,  is utilized if a loan is  collateral  dependent or
foreclosure is probable.

     The Bank acquired the assets and liabilities of a failed  institution  from
the Federal Deposit  Insurance  Corporation (the "FDIC") in July 1991, 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.

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  future  collection  of  principal  is  unlikely.  Subsequent
recoveries,  if  any,  are  credited  to  the  allowance.  If the  allowance  is
considered  inadequate to absorb future loan losses on existing loans, based on,
but not limited to,  increases in the size of the loan  portfolio,  increases in
charge-offs or changes in the risk  characteristics of the loan portfolio,  then
the provision for loan losses is increased.

     The Company's allowance is an amount considered adequate to absorb possible
losses on existing  loans that may become  uncollectible  based on  management's
evaluations of the size and current risk  characteristics of the loan portfolio.
The  evaluations  consider such factors as changes in the composition and volume
of the loan portfolio,  the impact of changing economic conditions on the credit
worthiness of the borrowers,  review of specific  problem loans and management's
assessment of the inherent risk and overall quality of the loan portfolio.

                                       33
<PAGE>

Premises and equipment

     Premises and equipment are stated at cost,  less  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.  Maintenance and repairs are charged to
expenses as incurred, while renewals and major improvements are capitalized.

Foreclosed real estate

     Foreclosed  real estate is carried at the lower of cost or  estimated  fair
value, less estimated selling costs, at time of foreclosure.  When a property is
acquired,  the excess of the carrying amount over fair value, if any, is charged
to  the  allowance  for  loan  losses.   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 foreclosed
real estate expense as incurred.

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 tax 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

     Basic earnings per common share is computed by dividing income available to
common  shareholders,  less  dividends on the  preferred  stock,  if any, by the
weighted  average  number of common  shares  outstanding  during  the  reporting
period.  Diluted  earnings per common share is computed similar to that of basic
earnings per common share  except that the  denominator  is increased to include
the number of additional  common shares that would have been  outstanding if all
potentially  dilutive  common  shares,  stock  options,  were issued  during the
reporting period.

Recently issued accounting pronouncements

     In June 1998, the FASB issued Statement of Financial  Accounting  Standards
No. 133,  "Accounting for Derivative  Instruments and Hedging Activities" ("SFAS
133").  SFAS 133 requires that  entities  recognize  all  derivatives  as either
assets or liabilities in the statement of financial  condition and measure those
instruments  at fair  value.  Adoption  of SFAS 133 is  required  for all fiscal
quarters of fiscal years beginning after June 15, 1999.  Adoption of SFAS 133 is
not expected to have a material impact upon the Company's consolidated financial
condition or results of operations.


Note 2.  Acquisitions

     On May 31, 1998, the Company  completed its acquisition of Jersey Bank. The
transaction was accounted for as a pooling of interests,  and  accordingly,  all
financial  information presented herein has been restated to the earliest period
presented.  Each of the shares of Jersey's  common  stock,  including  shares of
common  stock  that had been  converted  from  shares of  preferred  stock,  was
converted  into 1.5 shares of the Company's  common stock.  Total  consideration
tendered in the transaction  amounted to 780,198 shares of the Company's  common
stock.

     In 1994,  the Bank assumed the deposit  liabilities  of  Volunteer  Federal
Savings  Association of Little Ferry,  New Jersey.  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
1998,  1997 and 1996,  which is included in non-interest  expenses,  amounted to
$383,000, $444,000 and $444,000, respectively.

Note 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 1998 and 1997 was approximately  $750,000 and
$7,310,000,  respectively.  In 1998, the Company  implemented a strategy whereby
certain deposits were reclassified as non-transactional accounts for the purpose
of calculating the minimum reserve requirement. As a result, the average reserve
balance for 1998 decreased by $6,560,000, as compared to 1997.

                                      34
<PAGE>


Note 4.  Securities Held to Maturity and Securities Available for Sale

Securities  held to maturity and  securities  available  for sale consist of the
following: (in thousands)
<TABLE>
<CAPTION>
                                                             ----------------------------------------------------------------
                                                                                    December 31, 1998
                                                             ----------------------------------------------------------------
                                                                                  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                                  $ 15,992            $ 180               -         $ 16,172
    Mortgage-backed securities                                      18,921              227             $23           19,125
    Obligations of U.S. agencies                                     7,986              175               -            8,161
    Obligations of states & political subdivisions                  11,111               48               6           11,153
    Other debt securities                                              149                1               -              150
                                                             --------------   --------------  --------------   --------------
                                                                    54,159              631              29           54,761
                                                             --------------   --------------  --------------   --------------

Securities available for sale
    Obligations of U.S. Treasury                                    33,264              777               -           34,041
    Mortgage-backed securities                                      42,824              398             156           43,066
    Obligations of U.S. agencies                                    13,687              190              53           13,824
    Equity securities                                                4,097              743               -            4,840
                                                             --------------   --------------  --------------   --------------
                                                                    93,872            2,108             209           95,771
                                                             --------------   --------------  --------------   --------------
       Total securities                                           $148,031           $2,739            $238         $150,532
                                                             ==============   ==============  ==============   ==============


                                                             ----------------------------------------------------------------
                                                                                    December 31, 1997
                                                             ----------------------------------------------------------------
                                                                                  Gross           Gross          Estimated
                                                               Amortized       Unrealized      Unrealized         Market
                                                                 Cost             Gains          Losses            Value
                                                             --------------   --------------  --------------   --------------
Securities held to maturity
    Obligations of U.S. Treasury                                  $ 22,134            $ 122               -         $ 22,256
    Mortgage-backed securities                                      28,398              200            $ 96           28,502
    Obligations of U.S. agencies                                     6,711              166               -            6,877
    Obligations of states & political subdivisions                   3,049                -               -            3,049
    Other debt securities                                              150                -               -              150
                                                             --------------   --------------  --------------   --------------
                                                                    60,442              488              96           60,834
                                                             --------------   --------------  --------------   --------------
Securities available for sale
    Obligations of U.S. Treasury                                    35,452              605              74           35,983
    Mortgage-backed securities                                      26,871              308              30           27,149
    Obligations of U.S. agencies                                     6,954               70              12            7,012
    Equity securities                                                4,363            1,048               -            5,411
                                                             --------------   --------------  --------------   --------------
                                                                    73,640            2,031             116           75,555
                                                             --------------   --------------  --------------   --------------
       Total securities                                           $134,082           $2,519            $212         $136,389
                                                             ==============   ==============  ==============   ==============


</TABLE>


At December 31, 1998, the contractual  maturities of securities held to maturity
and securities available for sale are as follows: (in thousands)
<TABLE>
<CAPTION>

                                                      Securities                          Securities
                                                   Held to Maturity                   Available for Sale
                                             ------------------------------      -----------------------------
                                               Amortized         Market           Amortized         Market
                                                 Cost            Value               Cost           Value
                                             --------------   -------------      -------------   -------------
<S>                                          <C>              <C>                <C>              <C>    
Within 1 year                                      $12,735         $12,767            $14,191         $14,277
After 1 but within 5 years                          19,921          20,268             30,944          31,862
After 5 but within 10 years                         10,195          10,231             11,234          11,417
After 10 years                                      11,308          11,495             33,406          33,375
Equity securities                                        -               -              4,097           4,840
                                             --------------   -------------      -------------   -------------
                        Total                      $54,159         $54,761            $93,872         $95,771
                                             ==============   =============      =============   =============
</TABLE>

                                       35
<PAGE>


     Gross  realized  gains  from  the  sale of  securities  available  for sale
amounted to $876,000  and $452,000 in 1998 and 1996,  respectively,  while gross
realized losses amounted to $217,000 in 1996. There were no gross realized gains
in 1997 and there were no gross realized  losses in 1998 or 1997.  These amounts
are included in net gains on sale of securities.  Also, included in net gains on
sale of securities for 1998 is a gain of $145,000  realized from the call before
maturity of a security.

     There were no sales of securities  held to maturity during the years ended,
December  31,  1998 and  1997.  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 that resulted in realized gains of $7,000.

     During 1998, securities with a book value totaling $8.2 million,  which had
previously been classified by Jersey Bank as held to maturity,  were transferred
to available for sale upon the consummation of the acquisition. These securities
were  reclassified  to available  for sale because they have a higher  degree of
interest  rate  sensitivity  and do not  conform  to  the  Company's  investment
objectives  or to its policy for managing  interest  rate risk.  The transfer of
these securities was done in conformance with Statement of Financial  Accounting
Standards  No.115,  "Accounting  for  Certain  Investments  in Debt  and  Equity
Securities".  At the date of transfer,  the market value of these securities was
$8.1 million.

     Securities  with  carrying  amounts of $25.1  million and $28.4  million at
December  31, 1998 and 1997,  respectively,  were  pledged for public  deposits,
Federal Home Loan Bank advances, securities sold under repurchase agreements and
other purposes required by law.


Note 5.  Loans

     The  composition  of the loan  portfolio  is  summarized  as  follows:  (in
thousands)

                                                 -------------------------------
                                                           December 31,
                                                 -------------------------------
                                                    1998               1997
                                                 ------------       ------------
Commercial and financial                            $64,067            $51,573
Real estate
    Residential                                     246,955            233,281
    Commercial                                      148,875            134,972
    Construction                                        974              4,229
Installment                                           3,233              4,117
Lease financing                                       9,613             10,101
Term federal funds                                    5,000                  -
                                                 ------------       ------------
                                                    478,717            438,273
Allowance for loan losse                              5,645              5,231
                                                 ------------       ------------
Net loans                                          $473,072           $433,042
                                                 ============       ============


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

                               -------------------------------------------------
                                                    D e c e m b e r 31,
                               -------------------------------------------------
                                   1998               1997              1996
                               ------------       ------------      ------------
Nonaccrual loans

    Commercial and financial     $ 266              $ 126             $ 820
    Residential real estate        583                892             1,521
    Commercial real estate         346                479               173
    Installment                      3                 17                13
                                -----------       ------------      ------------
                                $1,198             $1,514            $2,527
                                ===========       ============      ============

Troubled debt restructurings
    Commercial and financial      $528               $573              $725
                                ===========       ============      ============

Interest income that would have
    been recorded during the 
    year on  nonaccrual loans 
    outstanding at year-end in
    accordance with 
    original terms                $147               $147              $277

Interest income included in net 
    income during the year on 
    nonaccrual loans outstanding
    at year-end                    $71                $81              $138




     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 $141,000 and $25,000 at December 31, 1997 and 1996, respectively.

There were no such loans at December 31, 1998.

     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 non-affiliated borrowers and suppliers.

     The following table  summarizes  activity with respect to these loans:  (in
thousands)

                                                  -----------------------------
                                                    Years Ended December 31,

                                                  -----------------------------
                                                        1998            1997
                                                  --------------  -------------
Balance at beginning of year                            $10,160         $7,056
Less:  former directors                                  (3,574)             -
Additions                                                 2,014          5,359
Reductions                                                 (977)        (2,255)
                                                  ==============  =============
Balance at end of year                                   $7,623        $10,160
                                                  ==============  =============


                                       36
<PAGE>

Note 6.  Allowance for Loan Losses

     The  Company's  recorded  investment in impaired  loans is as follows:  (in
thousands)
<TABLE>
<CAPTION>
                                                         ---------------------------------------------------------------
                                                                                     December 31,
                                                         ---------------------------------------------------------------
                                                                     1998                               1997
                                                         -----------------------------      ----------------------------
                                                          Investment       Related           Investment      Related
                                                              in          Allowance              in         Allowance
                                                           Impaired        for Loan           Impaired      for Loan
                                                             Loans          Losses             Loans         Losses
                                                         --------------  -------------      ------------- --------------
<S>                                                      <C>             <C>                <C>           <C>             
Impaired loans

     With a related allowance for loan losses
        Commercial and financial                                 $ 748           $ 91               $699            $97
        Commercial real estate                                     346             52                479             72
     Without a related allowance for loan losses
        Commercial and financial                                     4              -                  -              -
                                                         ==============  =============      ============= ==============
                                                                $1,098           $143             $1,178           $169
                                                         ==============  =============      ============= ==============
</TABLE>

--------------------------------------------------------------------------------
The  impairment  of the above  loans  was  measured  based on the fair  value of
collateral.


The following table sets forth certain  information  about impaired  loans:  (in
thousands)

                                                 ------------------------------
                                                     Years Ended December 31,
                                                 ------------------------------
                                                     1998             1997
                                                  ------------    -------------
Average recorded investment                         $1,247           $1,221
                                                  ============    =============

Interest income recognized during time period
  that loans were impaired, using cash-basis
  method of accounting                                 $74              $67
                                                  ============    =============



Changes  in the  allowance  for loan  losses  are  summarized  as  follows:  (in
thousands)

<TABLE>
<CAPTION>
                                                                      ----------------------------------------------
                                                                                 Year Ended December 31,
                                                                      ----------------------------------------------
                                                                         1998             1997             1996
                                                                      ------------     ------------     ------------
<S>                                                                   <C>              <C>              <C>    
Balance at beginning of year                                               $5,231           $3,968           $3,926
Additions (deductions)
     Provision charged to operations                                          951            1,653              747
     Recoveries on loans previously charged off                                83              183              208
     Loans charged off                                                       (620)            (573)            (913)
                                                                      ------------     ------------     ------------
Balance at end of year                                                     $5,645           $5,231           $3,968
                                                                      ============     ============     ============
</TABLE>

--------------------------------------------------------------------------------
For years ended  December 31, 1998,  1997 and 1996,  the  provisions  charged to
expense for federal  income tax  purposes  amounted to  approximately  $537,000,
$390,000, and $705,000, respectively.



Note 7.  Premises and Equipment, net

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

                                            -----------------------------------
                                                       December 31,
                                            -----------------------------------
                                                 1998                 1997
                                            --------------       --------------
Land                                           $1,588               $1,588
Buildings                                       3,187                3,097
Furniture, fixtures and equipment               5,807                5,726
Leasehold improvements                          6,813                5,999
                                            --------------       --------------
                                               17,395               16,410
Less: accumulated depreciation and amortization 7,524                6,862
                                            --------------       --------------
                                               $9,871               $9,548
                                            ==============       ==============



Note 8.  Deposits

    Deposits are summarized as follows: (in thousands)

                                             -----------------------------------
                                                           December 31,
                                             -----------------------------------
                                                 1998                1997
                                             ---------------    ----------------
Non-interest bearing demand deposits           $107,408             $95,436
Interest bearing demand deposits                194,177             154,301
Money market deposits                            50,665              41,815
Savings deposits                                 76,026              81,202
Time deposits                                   170,456             168,011
                                             ---------------    ----------------
                                               $598,732            $540,765
                                             ===============    ================


     At December 31, 1998 and 1997,  the  carrying  amounts of  certificates  of
deposit  that  individually   exceed  $100,000  amounted  to  $25,119,000,   and
$33,724,000,  respectively.  Interest  expense  related  to  such  deposits  was
approximately  $1,616,000,  $1,627,000,  and $1,113,000 in 1998, 1997, and 1996,
respectively.


                                       37
<PAGE>


Note 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,
                                                   -----------------------------
                                                       1998             1997
                                                   ------------    -------------
Securities sold under agreements to repurchase        $8,780          $13,028
Federal Home Loan Bank advances                        9,768                -
                                                   ============    =============
                                                     $18,548          $13,028
                                                   ============    =============

     The  Bank  has a  $57.7  million  line  of  credit  available  through  its
membership in the Federal Home Loan Bank of New York ("FHLB").

Note 10.  Long-term Borrowings

     In  1997,   long-term  borrowings  were  comprised  of  two  FHLB  advances
consisting of a $3.9 million advance with a 20-year  amortization  term, a fixed
interest rate of 6.31%  maturing in November  1999;  and a $6.0 million  advance
that has a fixed rate of 5.72%  maturing in December 1999 and is  collateralized
by U.S. Treasury securities. The FHLB has had an option to call the $6.0 million
advance  since  December  1998.  These  borrowings  are  recorded as  short-term
borrowings in 1998.

Note 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. The plan assets consist of
investments in fixed income funds and equity mutual funds.  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 for each
director with 5 years or more of service, 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  Company  owns  the  life  insurance  policies  or  annuity  contracts.
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.

     Net pension cost of each plan consists of the following: (in thousands)

The following are the components of the net periodic  benefit cost for the years
ended December 31,
<TABLE>
<CAPTION>
                                         Pension Plan        Supplemental Plan      Directors' Plan
                                   ------------------------ ------------------- -----------------------
                                    1998     1997    1996   1998   1997  1996    1998     1997   1996
                                   -------- ------- ------- ------ ----- ------- -------- ------ ------
<S>                                <C>      <C>     <C>     <C>    <C>   <C>     <C>      <C>    <C>   
Service cost                          $222    $195    $179    $22    $13   $12      $59     $47    $40
Interest cost                           65      53      37     12      4     3       76      71     69
Expected return on plan assets         (71)    (51)    (41)     -      -     -        -       -      -
Amortization of prior service cost       -       -       -      8      1     1      147     147    147
Recognized net actuarial gain           (6)      -       -      -      -     -
                                   -------- ------- ------- ------ ----- ------- -------- ------ ------
Net periodic benefit cost             $210    $197    $175    $42    $18   $16     $282    $265   $256
                                   ======== ======= ======= ====== ===== ======= ======== ====== ======
</TABLE>

                                       38
<PAGE>

         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
                                              --------------------   ---------------------  -----------------------
                                                 1998      1997         1998       1997         1998        1997
                                              ---------  ---------   ----------- ---------  ------------ ----------
<S>                                           <C>        <C>         <C>         <C>        <C>          <C>
Change in pension obligation
Pension obligation at beginning of year           $1,013     $710          $ 70      $ 50        $ 1,074     $ 931
Service cost                                         222      195            22        13             59        47
Interest cost                                         65       53            12         4             76        71
Actuarial (gain) loss (1)                            (74)       -            15         -            (15)        -
Benefits paid                                         (3)      (4)            -         -              -         -
Other (1)                                              -       59            81         3              -        25
                                              ---------- ---------   ----------- ---------  ------------ ----------
Pension obligation at end of year                  1,223    1,013           200        70          1,194     1,074
                                              ---------- ---------   ----------- ---------  ------------ ----------

Change in plan assets
Fair value of plan assets at beginning of year       738      644             -         -              -         -
Actual return on plan assets                         164       97             -         -              -         -
Employer contribution                                165        -             -         -              -         -
Change in market value                                 -        1             -         -              -         -
Benefits paid                                         (3)      (4)            -         -              -         -
                                              ----------- --------   ----------- ---------  ------------ ----------
Fair value of plan assets at end of year           1,064      738             -         -              -         -
                                              ----------- --------   ----------- ---------  ------------ ----------

Funded Status                                       (159)    (275)         (200)      (70)        (1,194)   (1,074)
Unrecognized net actuarial (gain) loss              (227)     (65)           16         1             39        54
Unrecognized prior service cost                       (5)      (6)           81         7             92       239
Adjustment for additional liability                    -        -             -         -              -      (293)
                                              =========== ========   =========== =========  ============= =========
Accrued pension cost                              $ (391)   $(346)       $ (103)    $ (62)      $ (1,063) $ (1,074)
                                              =========== ========   =========== =========  ============= =========


Weighted-average assumptions (2)
Discount rate                                       7.25%    7.25%         7.25%     7.25%          7.25%     7.25%
Expected return on plan assets                      8.00     8.00          8.00      8.00           8.00      8.00
Rate of compensation increase                       5.00     5.00          N/A       N/A            N/A       N/A
</TABLE>

--------------------------------------------------------------------------------
(1)    The breakdown of these items was not available for 1997.  Therefore,  the
       net  difference  is  included  in Other in order to arrive at the pension
       obligation at the end of the year.

(2)    Weighted average assumptions were applied at the beginning of the period.


     The  Company  has a Capital  Investment  Plan (the  "Plan")  which  permits
employees to make basic  contributions up to 4% of base  compensation.  In 1998,
the Plan was amended to permit  employees to make basic  contributions up to 6%.
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 $167,000 and $133,000 in 1998 and 1997, respectively.

                                      39
<PAGE>


Note 12.  Stock Option Plan

     In 1989, the Company adopted a stock option plan, retitled the Stock Option
and Incentive Plan of 1997 (the "Stock Plan") that covers certain key employees.
Under this plan, as amended,  a maximum of 637,875 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  according to a
vesting schedule, starting one year from the date of grant.

     If  compensation  cost for Stock Plan awards had been measured based on the
fair  value of the stock  options  awarded  at the grant  dates,  net income and
diluted  earnings  per common  share  would have been  reduced to the  pro-forma
amounts below for the years ended December 31: (in thousands except share data)

                                            1998          1997          1996
                                         ----------     ---------    ----------
     Net income:

       As reported                         $8,609        $7,925        $6,751

       Pro-forma                            8,572         7,919         6,748


     Diluted earnings per common share

       As reported                          $1.19         $1.10          $.94

       Pro-forma                             1.18          1.10           .94


     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 1998, 1997 and 1996, respectively: dividend yield
of 2.20%,  2.25%,  3.95%;  expected  volatility  of 23.33%,  21.94% and  21.78%;
risk-free  interest  rate of 5.62%,  5.51% and 6.26%;  and  expected  lives of 7
years.  The effects of applying these  assumptions in determining  the pro-forma
net income may not be  representative of the effects on pro-forma net income for
future years.


A summary of the Stock Plan's  status as of December 31, and changes  during the
years then ended is presented below:
<TABLE>
<CAPTION>
                                                        1998                  1997                   1996
                                                 -------------------    ------------------    -------------------
                                                            Weighted-             Weighted-              Weighted-
                                                             Average               Average                Average
                                                            Exercise              Exercise               Exercise
                                                   Shares     Price      Shares     Price      Shares     Price
                                                 ---------  --------    --------  --------    --------  ---------
<S>                                              <C>        <C>         <C>       <C>         <C>       <C>
Outstanding at January 1                          121,935    $ 6.62     195,604    $ 6.21     177,296     $ 5.99
Granted                                            49,875     18.17       2,250     16.00      18,308       8.36
Exercised                                         (50,394)     5.27     (75,919)     5.85           -          -
Forfeited                                         (10,592)    12.05           -         -
                                                 ---------              --------              --------
Outstanding at December 31                        110,824     11.91     121,935      6.62     195,604       6.21
                                                 =========              ========              ========
Options exercisable at December 31                 58,440      7.29     107,479      6.22     177,296       5.99
                                                 =========              ========              ========
Weighted-average fair value of options granted
   during the year ended December 31 (per option)   $5.98                 $4.29                 $1.85


         The following table summarizes  information  about options  outstanding
under the Stock Plan at December 31, 1998:

                    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
---------------  --------------    -----------    ----------       ------------------------
  Under  $5              4,570        0.96            $4.71             4,570        $4.71
  $ 5 - $10             58,629        5.34             7.47            53,120         7.38
  $15 - $20             47,625        9.06            18.07               750        16.00
                 ==============                                    ===========
                       110,824                                         58,440
                 ==============                                    ===========

</TABLE>


     Occasionally, the Company will acquire shares of its common stock and place
them in treasury stock. The shares are intended to be issued for the exercise of
stock options and the grants of restricted stock to executive management.  There
were 74,500 and 134,025  shares of common stock held in treasury at December 31,
1998 and 1997, respectively.

                                       40
<PAGE>


Note 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 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
weighting, 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, 1998, that the Company and the Bank meet
all capital adequacy requirements to which they are subject.

     As of December  31,  1998,  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.

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

<TABLE>
<CAPTION>
                                                                                                                 To Be Well
                                                                                                              Capitalized Under
                                                                                   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, 1998:
     Total Capital (to Risk Weighted Assets):
       The Company                                 $66,474        15.12 %         $35,149        8.00 %           N/A         N/A
       The Bank                                     63,777        14.59            34,976        8.00         $43,721       10.00 %
     Tier 1 Capital (to Risk Weighted Assets):
       The Company                                  60,646        13.80            17,575        4.00             N/A         N/A
       The Bank                                     58,312        13.34            17,488        4.00          26,232        6.00
     Tier 1 Capital (to Average Assets):
       The Company                                  60,646         9.08            20,041        3.00             N/A         N/A
       The Bank                                     58,312         8.76            19,979        3.00          33,299        5.00

As of December 31, 1997:
     Total Capital (to Risk Weighted Assets):
       The Company                                 $59,299        14.44 %         $32,852        8.00 %           N/A         N/A
       The Bank                                     57,448        14.05            32,705        8.00         $40,882       10.00 %
     Tier 1 Capital (to Risk Weighted Assets):
       The Company                                  54,166        13.19            16,426        4.00             N/A         N/A
       The Bank                                     52,338        12.80            16,353        4.00          24,529        6.00
     Tier 1 Capital (to Average Assets):
       The Company                                  54,166         8.79            18,482        3.00             N/A         N/A
       The Bank                                     52,338         8.53            18,403        3.00          30,672        5.00

</TABLE>
                                      41

<PAGE>


Note 14.  Earnings Per Share

     The  reconciliation  of the  numerators and  denominators  of the basic and
diluted earnings per common share  computations for the years ended December 31,
are as follows: (in thousands except per share data)
<TABLE>
<CAPTION>
                                               1998                           1997                          1996
                                   ----------------------------  ----------------------------  --------------------------------
                                             Weighted    Per               Weighted     Per                Weighted     Per
                                             Average    Share               Average    Share               Average     Share
                                    Income    Shares    Amount    Income    Shares    Amount    Income     Shares      Amount
                                   -------- ---------- --------  -------- ---------- --------  --------- -----------  ---------
<S>                                <C>       <C>       <C>       <C>      <C>        <C>       <C>       <C>          <C>    
Basic Earnings per Common Share
Income available to common
   shareholders                     $8,609     7,189    $1.20     $7,925    7,132     $1.11      $6,751       7,124     $0.95
                                                       ========                      ========                         =========
Effect of Dilutive Shares
Options issued to management                      48                           90                                66
                                            ----------                    ----------                     -----------
Diluted Earnings per Common Share
Income available to common
   shareholders                     $8,609     7,237    $1.19      $7,925   7,222     $1.10      $6,751       7,190     $0.94
                                   ======== ========== ========= ======== ========== ========  ========= =========== ========== 


                                       42
<PAGE>

Note 15.  Other Non-interest Expenses

     Expenses included in other  non-interest  expenses which exceed one percent
of the aggregate of total interest income and non-interest  income for the years
ended, December 31, as follows: (in thousands)

                                             1998      1997      1996
                                            -------   -------   -------

Professional fees                           $ 1,184   $1,216    $1,088
Data Processing                                 538      548       490 
Directors' fees, travel and retirement           88      607       553





Note 16.   Income Taxes

     Income tax  expense  for the years  ended  December  31, is  summarized  as
follows: (in thousands)
                                                      1998           1997         1996
                                                    ----------     ---------    ---------
Federal:  current                                      $4,399        $4,304       $3,150
          deferred                                      (344)         (600)         142
State:    current                                        315           752          354
          deferred                                       538          (171)           8
                                                    ----------     ---------    ---------
                                                       $4,908        $4,285       $3,654
                                                    ==========     =========    =========
</TABLE>

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>
                                                                     1998         1997
                                                                   ---------    ---------
<S>                                                                <C>          <C>           

Deferred tax assets
   Excess of book over tax allowance for loan losses                 $1,567       $1,584
   Excess of book over tax depreciation                                 263          222
   Excess of book over tax provision for benefit plan expense           571          631
   Core deposit premium                                                 179          157
   Other                                                                 59           33
                                                                   ---------    ---------
     Total deferred tax assets                                        2,639        2,627
                                                                   ---------    ---------

Deferred tax liabilities
   Unrealized gains - securities available for sale                     707          731
   Loan origination fees                                                294           97
   Other                                                                103           95
                                                                   ---------    ---------
     Total deferred tax liabilities                                   1,104          923
                                                                   ---------    ---------
     Net deferred tax assets                                         $1,535       $1,704
                                                                   =========    =========

</TABLE>


     Under  present tax law,  banks with average total assets under $500 million
are  permitted  to compute a tax bad debt  deduction  based on an  average  loss
experience  ratio,  while banks with over $500  million in average  total assets
must compute a tax bad debt  deduction  based on actual  losses.  The Company is
required to use the actual loss method when  calculating  the bad debt deduction
for tax  purposes.  The Company is also  required  to amortize  its tax bad debt
reserves, which have accumulated under the average loss method in taxable income
over a four-year period.  However, since the difference between the average loss
experience  method and the actual loss  method has been  recorded as a temporary
difference, this change will have no effect on the Company's statement of income
in future years.

     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:

                                                   ----------------------------
                                                             December 31,
                                                   ----------------------------
                                                    1998       1997      1996
                                                   ------     ------    ------
Expected provision at statutory rate                   34 %       34 %      34 %
Difference resulting from:
   State income tax, net of federal benefit             2          3         2
   Interest income exempt from federal taxes           (1)        (2)       (1)
   Merger related expenses                              1          -         -
                                                   =======    =======    ======
                                                       36 %       35 %      35 %
                                                   =======    =======    ======

                                      43
<PAGE>


Note 17.  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, 1998,  undistributed net assets
of the Bank were $59,591,000 of which  $55,274,000 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.

Note 18.   Commitments and Contingent Liabilities

     The Company has contingent  liabilities  and outstanding  commitments  that
include 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)

                                                   1998            1997
                                              ---------------  -------------
            Credit card loans                        $ 6,019        $ 5,468
            Home equity loans                         55,435         49,174
            Other loans                               55,516         50,230
            Standby letters of credit                  1,700          1,449
                                              ---------------  -------------
                                                    $118,670       $106,321
                                              ===============  =============


      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)

                           1999                                  $1,130
                           2000                                     955
                           2001                                     742
                           2002                                     580
                           2003                                     461
                           thereafter                             2,435
                                                                 ------ 
                           Total minimum lease payments          $6,303
                                                                 ======     


     Rent expense for all leases amounted to approximately $1,101,000,  $981,000
and $1,090,000 in 1998, 1997, and 1996, respectively.

     In 1998, the Company did not lease real estate from affiliates. In 1997 and
1996,  certain real estate was leased from one and two companies,  respectively,
that were  affiliated with directors of the Company.  Rental expense  associated
with such leases was $30,000 and $143,000 for the years ended  December 31, 1997
and 1996,  respectively.  A director of the Company also provided legal services
through  his  affiliated  firm.  Fees  paid  for  these  services   amounted  to
approximately  $331,000,   $382,000  and  $375,000  in  1998,  1997,  and  1996,
respectively.

     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.

                                       44
<PAGE>


Note 19.   Fair Value of Financial Instruments

     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 the Company in
immediate  settlement  of  the  financial   instruments  would  realize  amounts
different from the fair value estimates.


The following table sets forth the carrying amounts and estimated fair values of
the Company's financial instruments: (in thousands)

                                         -------------------------------------
                                                       December 31,
                                         -------------------------------------
                                               1998                  1997
                                         ----------------  -------------------
                                         Carrying  Fair      Carrying   Fair
                                         Amount    Value     Amount     Value
                                        ---------- --------- --------- --------
    Financial assets:
      Cash and cash equivalents          $43,284   $43,284     $36,583   $36,583
      Securities held to maturity         54,159    54,761      60,442    60,834
      Securities available for sale       95,771    95,771      75,555    75,555
      Loans, net                         473,072   475,272     433,042   433,831
                                         -------- ---------   --------- --------
                                        $666,286  $669,088    $605,622  $606,803
                                         ======== =========   ========= ========

    Financial liabilities:
      Deposits                           $598,732 $599,375    $540,765  $540,472
      Short-term borrowings                18,548   18,548      13,028    13,028
      Long-term borrowings                      -        -       9,879     9,872
                                         -------- ---------   --------- --------
                                         $617,280 $617,923    $563,672  $563,372
                                         ======== =========   ========= ========


     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,
interest  bearing  demand  deposit 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.

Securities held to maturity 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. 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.

     In prior  years,  the  Company in  addition  to the above,  valued  certain
homogenous  loan  categories  on a pool basis  using  quoted  market  prices for
similar loans sold.

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   approximate   the  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, 1998 and 1997, the
estimated  fair values of these  off-balance-sheet  financial  instruments  were
immaterial.

                                      45
<PAGE>


Note 20. Parent Company Information (in thousands)
<TABLE>
<CAPTION>

                                                             ------------------------------
                                                                       December 31,
                                                             ------------------------------
Condensed balance sheets                                       1998        1997      1996
                                                             --------   --------  --------
<S>                                                          <C>        <C>        <C>    
Assets
   Cash                                                        $ 355           -       $ 6
   Securities available for sale                               1,321      $2,372     1,375
   Investment in subsidiaries
     Bank                                                     59,591      53,673    48,688
     Other                                                       646         646       142
   Dividends receivable                                          720         570       525
   Other assets                                                  602        (418)      (21)
                                                             --------   --------  --------
     Total assets                                            $63,235     $56,843   $50,715
                                                             ========   ========  ========

Liabilities
   Dividends payable                                         $   720       $ 570     $ 525
   Other liabilities                                             143         143       142
                                                             --------   --------  --------
                                                                 863         713       667
                                                             --------   --------  --------

Stockholders' equity
   Common stock                                                5,397       5,396     5,291
   Capital Surplus                                            21,256      21,557    20,402
   Retained earnings                                          35,482      29,698    24,157
   Accumulated other comprehensive income                      1,192       1,185       256
                                                             --------   --------  --------
                                                              63,327      57,836    50,106
   Less:  Treasury stock                                         955       1,706        58
                                                             --------   --------  --------
     Total stockholders' equity                               62,372      56,130    50,048
                                                             --------   --------  --------
     Total liabilities and stockholders' equity              $63,235     $56,843   $50,715
                                                             ========   ========  ========

--------------------------------------------------------------------------------------------

                                                             ------------------------------
                                                                Years Ended December 31,

                                                             ------------------------------

Condensed statements of income                                 1998        1997      1996
                                                             --------   --------  --------
Dividends from subsidiary bank                                $2,556      $3,798    $3,400
Dividends on equity securities                                    37          35         -
Net gain on sale of securities                                   876           -         -
Management fees                                                   39          40        45
                                                             --------   --------  --------
     Total revenues                                            3,508       3,873     3,445
                                                             --------   --------  --------
Operating expenses                                               643         366       206
                                                             --------   --------  --------
Income before equity in undistributed earnings of subsidiaries 2,865       3,507     3,239
Equity in undistributed earnings of subsidiaries               5,744       4,418     3,512
                                                             --------   --------  --------
     Net income                                               $8,609      $7,925    $6,751
                                                             ========   ========  ========

--------------------------------------------------------------------------------------------

                                                             ------------------------------
                                                                Years Ended December 31,
                                                             ------------------------------
Condensed statements of cash flows                             1998       1997       1996
                                                             --------   --------  --------
Cash flows from operating activities:
   Net income                                                $8,609       $7,925    $6,751
   Adjustments to reconcile net income
     to net cash provided by operating activities
     Net gain on sale of securities                            (876)           -         -
     Increase in other assets                                (1,048)         (45)      (39)
     Increase in dividends payable                              150           45        40
     Increase in other liabilities                                -            1         -
   Equity in undistributed income of subsidiaries            (5,744)      (4,418)   (3,512)
                                                             --------   --------  --------
     Net cash provided by operating activities               $1,091        3,508     3,240
                                                             --------   --------  --------

Cash flows from investing activities:
   Purchase of securities available for sale                      -            -    (1,323)
   Sale of securities available for sale                      1,622            -         -
   Washington Interchange merger                                  -           37         -
                                                             --------   --------  --------
     Net cash provided by (used in) investing activities      1,622           37    (1,323)
                                                             --------   --------  --------

Cash flows from financing activities:

   Cash dividends paid                                      (2,801)       (2,287)   (2,077)
   Treasury stock                                              (49)       (1,543)        -
   Common stock issued                                         226           279       156
   Exercise of option shares                                   266             -         -
                                                            --------   ---------  --------
     Net cash used in financing activities                  (2,358)       (3,551)   (1,921)
                                                            --------   ---------  --------
Net increase/(decrease) in cash                                355            (6)       (4)
Cash at beginning of year                                        -             6        10
                                                            --------   ---------  --------
Cash at end of year                                           $355         $   -    $    6
                                                            ========   =========  ========
</TABLE>

                                      46

<PAGE>


Note 21.  Quarterly  Financial Data  (unaudited) (in thousands  except per share
data)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
                                                            First            Second           Third           Fourth
                           1998                            Quarter          Quarter          Quarter          Quarter
--------------------------------------------------------------------------------------------------------------------------
<S>                                                       <C>              <C>              <C>               <C> 

 Interest income                                           $11,923          $12,242          $12,502          $12,153
 Interest expense                                            4,916            5,053            5,135            4,760
 Net interest income                                         7,007            7,189            7,367            7,393
 Provision for loan losses                                     219              212              210              310
 Net gain on sale of securities                                  -                -               94              927
 Income before income taxes                                  3,068            2,238            3,922            4,289
 Net income                                                  1,977            1,428            2,547            2,657

 Basic earnings per common share                              0.28             0.20             0.35             0.37
 Diluted earnings per common share                            0.27             0.20             0.35             0.37

--------------------------------------------------------------------------------------------------------------------------
                                                            First            Second           Third           Fourth
                           1997                            Quarter          Quarter          Quarter          Quarter
--------------------------------------------------------------------------------------------------------------------------

 Interest income                                           $10,819          $11,187          $11,499          $11,805
 Interest expense                                            4,351            4,622            4,766            4,827
 Net interest income                                         6,468            6,565            6,733            6,978
 Provision for loan losses                                     620              517              210              306
 Income before income taxes                                  3,285            3,119            2,934            2,872
 Net income                                                  2,133            2,024            1,904            1,864

 Basic earnings per common share                              0.30             0.28             0.27             0.26
 Diluted earnings per common share                            0.29             0.28             0.27             0.26

</TABLE>

                                      47
<PAGE>