Exhibit 13. Portion of Annual Report to Shareholders for the year ended
            December 31, 2001.


           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  Company's  consolidated  financial
statements and notes thereto on pages 29 through 47 and the summary consolidated
data included elsewhere in this report.

Earnings Summary

     Earnings  per diluted  common  share for the year ended  December  31, 2001
increased  $0.20 to $1.61 as  compared  to the  preceding  year,  an increase of
14.2%.  Earnings  per basic  common  share for the year ended  December 31, 2001
increased  $0.20 to $1.62 as  compared  to the  preceding  year,  an increase of
14.1%.  Net income for the year 2001 increased $1.3 million,  or 13.9%, to $10.5
million when compared to 2000. Two of the Company's key  performance  ratios are
return on average assets ("ROA") and return on average equity ("ROE"). For 2001,
the  Company's  ROA  increased to 1.31% from 1.24% for 2000.  The  Company's ROE
remained  strong and was  16.06%  and 16.18% for the years  ended 2001 and 2000,
respectively. As a result of the earnings performance, the Company increased the
quarterly  dividend paid on common stock to an annualized  rate of $0.54 in 2001
as  compared  to $0.50 in 2000.

     The strong earnings  performance for 2001 was driven by a $2.7 million,  or
8.7%,  increase in net interest income,  on a taxable  equivalent  basis,  which
resulted from the growth in interest earning assets and deposits and an improved
net interest  margin  ("margin").  The earnings  increase  occurred  despite the
declining  interest  rate  environment,  which gave rise to  unanticipated  loan
prepayments.  For 2001,  the margin  improved  largely  due to a decrease in the
Company's funding costs,  which based on the composition of the Company's retail
deposits,  was  favorably  affected by a decline in market  interest  rates.  In
addition,  earnings were aided by a 27.3% growth in non-interest income. An 8.0%
increase in non-interest  expenses  served to offset some of the  aforementioned
growth in income.

     Non-interest income increased $1.2 million for 2001 as compared to 2000 and
was driven by an increase in fee income from the Company's leasing operation and
growth  in the cash  surrender  values of bank  owned  life  insurance  ("BOLI")
contracts.  Non-interest expenses increased $1.7 million for 2001 as compared to
2000, of which  approximately $726 thousand was due to costs associated with the
growth and  operation  of the  Company's  leasing  subsidiary  and a full year's
impact of two new branch  offices  that  opened  during  2000.  These  expansion
programs are aimed at enhancing the Company's franchise value in its trade area.
Adjusting for the expansion programs,  non-interest  expenses grew approximately
4.6%.

     Diluted  earnings  per common  share for the year ended  December  31, 2000
increased  $0.05,  or 3.7%, to $1.41 when compared to 1999.  Basic  earnings per
common share for the year ended December 31, 2000 amounted to $1.42, an increase
of $0.05,  or 3.6%, when compared to 1999. Net income for the year 2000 declined
$379  thousand,  or 3.9%, to $9.3 million when compared to 1999. The decline was
due to the Company  benefiting  from  non-recurring  items in 1999 and incurring
costs  associated with expansion  programs in 2000. These items are described in
detail in the sections titled "non-interest income" and "non-interest expenses".
Adjusting for the major non-recurring  items in each of the periods,  net income
increased  $465  thousand,  or 5.6%,  and  diluted  earnings  per  common  share
increased $0.16, or 13.6%, in 2000 as compared to the 1999 period.

<TABLE>
<CAPTION>

Table 1
--------------------------------------------------------------------------------
Summary of Operating Results
--------------------------------------------------------------------------------
                                          2001          2000            1999
                                      -----------    -----------     -----------
<S>                                   <C>            <C>             <C>

Net income (in thousands)                 $10,540       $  9,256        $9,635
Basic earnings per common share              1.62           1.42          1.37
Diluted earnings per common share            1.61           1.41          1.36
Return on average total assets               1.31 %         1.24 %        1.39 %
Return on average total equity              16.06          16.18         15.52
Dividend payout ratio*                      33.37          35.24         35.04
Average total stockholders' equity to
    average total assets                     8.13           7.64          8.99

* Cash dividends declared on common shares to net income.
</TABLE>

<PAGE>
Results of Operations

Net Interest Income

     Net interest income represents the Company's primary source of income.  Net
interest income represents the difference between the interest the Company earns
on its assets,  principally loans and leases (herein referred to collectively as
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.  Table 2 sets  forth a summary  of
average  interest-earning assets and interest-bearing  liabilities for the years
ended December 31, 2001,  2000 and 1999,  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 2001 and 2000,  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.

                                       13
<TABLE>
<CAPTION>

Table 2
------------------------------------------------------------------------------------------------------------------------------------
Analysis of Net Interest Income
------------------------------------------------------------------------------------------------------------------------------------
for the years ended December 31,
(dollars in thousands)
                                                       2001                           2000                          1999
                                            ---------------------------  ---------------------------   ---------------------------
                                             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)                                 $579,034  $46,463   8.02 %    $536,97   $44,329    8.26 %  $494,022  $39,274     7.95 %
   Taxable securities (4)                     160,202    9,898   6.18      154,947    10,054    6.49     142,786    8,692     6.09
   Tax-exempt securities (2)(4)                11,844      808   6.82       12,251       696    5.68      11,578      650     5.61
   Federal funds sold                          13,138      557   4.24       10,944       700    6.41      12,142      596     4.92
                                             -------- --------            --------  --------            -------- --------
   Total interest-earning assets              764,218   57,726   7.55      715,113    55,779    7.80     660,528   49,212     7.45
                                                      --------                      --------                     --------

Non-interest earning assets
   Cash and due from banks                     20,216                       19,403                        18,386
   Allowance for loan and lease losses         (6,368)                      (5,953)                       (5,638)
   Other assets                                29,265                       19,829                        17,682
                                             --------                     --------                      --------
   Total assets                              $807,331                     $748,392                      $690,958
                                             ========                     ========                      ========
Liabilities and stockholders' equity
Interest-bearing liabilities
   Demand deposits                           $246,037    6,871   2.79     $231,480     7,754    3.35    $201,150    6,055     3.01
   Savings deposits                           128,987    2,801   2.17      117,037     3,624    3.10     172,005    8,653     5.03
   Short-term borrowings                       25,545    1,374   5.38       24,565     1,417    5.77      18,501    1,000     5.41
   Long-term borrowings                             -        -      -       11,707       750    6.41       1,302       83     6.36
                                             -------- --------            --------  --------            --------  -------
   Total interest-bearing liabilities         623,062   23,444   3.76      575,679    24,227    4.21     521,658   18,783     3.60
                                                      --------                      --------                     --------

Non-interest bearing liabilities
   Demand deposits                            110,576                      109,039                       102,194
   Other liabilities                            8,078                        6,470                         5,012
                                             --------                     --------                      --------
   Total liabilities (3)                      741,716                      691,188                       628,864
   Stockholders' equity                        65,615                       57,204                        62,094
                                             --------                     --------                      --------
   Total liabilities and stockholders'equity $807,331                     $748,392                      $690,958
                                             ========                     ========                      ========

Net interest income (tax equivalent basis)              34,282    3.79                31,552    3.59               30,429     3.85
Tax-equivalent basis adjustment                           (324)                         (158)                        (158)
                                                      --------                      --------                     --------
Net Interest income                                    $33,958                       $31,394                      $30,271
                                                      ========                      ========                     ========

Net interest income as a percent of
interest-earning assets (tax-equivalent basis)                    4.49 %                        4.41 %                        4.61 %

------------------------------------------------------------------------------------------------------------------------------------
<FN>
(1)Nonaccrual loans and any related interest recorded have been included in computing the average rate earned on the loan portfolio.
   When applicable, tax exempt loans are computed on a fully taxable equivalent basis using the corporate federal tax rate of 34%.
(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.
</FN>
</TABLE>

                                       14

<TABLE>
<CAPTION>
Table 3
--------------------------------------------------------------------------------------------------------
Effect of Volume and Rate Changes on Net Interest Income
--------------------------------------------------------------------------------------------------------
(in thousands)
                                       Year ended December 31,              Year ended December 31,
                                       2001 compared with 2000              2000 compared with 1999
                                         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                             $3,613     $(1,479)     $2,134        $3,522      $1,533      $5,055
  Taxable securities                   381        (537)       (156)          769         593       1,362
  Tax-exempt securities                (28)        140         112            38           8          46
  Federal funds sold                   210        (353)       (143)          (77)        181         104
                                 ---------   ---------   ---------     ---------   ---------   ---------
   Total interest income             4,176      (2,229)      1,947         4,252       2,315       6,567
                                 ---------   ---------   ---------     ---------   ---------   ---------
Interest expense
  Demand deposits                      537      (1,420)        883)          972         727       1,699
  Savings deposits                     427      (1,250)       (823)         (354)        986         632
  Time deposits                      1,768         (52)      1,716         1,003       1,026       2,029
  Short-term borrowings                 62        (105)        (43)          346          71         417
  Long-term borrowings                (750)            -      (750)          667           -         667
                                 ---------   ---------   ---------     ---------   ---------   ---------
   Total interest expense            2,044      (2,827)       (783)        2,634       2,810       5,444
                                 ---------   ---------   ---------     ----------- ---------   ---------
Change in net interest income       $2,132        $598      $2,730        $1,618       $(495)     $1,123
                                 =========   =========   =========     =========   =========   =========
--------------------------------------------------------------------------------------------------------
Non-performing loans are included in interest earning assets.

</TABLE>

     Net  interest  income,  on a taxable  equivalent  basis,  amounted to $34.3
million in 2001,  an increase of $2.7  million,  or 8.7%,  from $31.6 million in
2000.  The increase in net  interest  income was mostly due to growth in average
interest-earning  assets of $49.1  million.  The asset  growth  was  principally
funded by a $59.6 million growth in average  deposits,  which occurred mostly in
time deposits and  interest-bearing  demand. In addition,  an improvement in the
margin  of 8 basis  points  to 4.49%  for  2001 as  compared  to 4.41%  for 2000
contributed to the growth in net interest income.  The improvement in the margin
was due mostly to a decrease in the  Company's  funding  cost.  The  composition
("mix") of the Company's retail deposits  (mostly demand and savings  deposits),
which are priced off of  short-term  market  interest  rates,  benefited  from a
decline  in  short-term  market  interest  rates  and were  responsible  for the
decrease in funding costs.

     Interest income, on a taxable  equivalent  basis,  totaled $57.7 million in
2001,  an  increase  of $1.9  million  or 3.5% from $55.8  million in 2000.  The
increase was driven by the growth in average  interest-earning assets, however a
decrease in the average yields resulting from a decline in market interest rates
served to offset  some of the  benefit  of the asset  growth.  The  increase  in
average  interest-earning assets was principally due to growth in loans of $42.1
million,  or 7.8%. The average  balance of commercial  loans  increased by $24.5
million,  or 9.8%, to $274.6  million in 2001, as compared to $250.1  million in
2000. In addition,  equipment-financing  leases  generated by the Bank's leasing
subsidiary,  Interchange Capital Company L.L.C. ("ICC") grew, on average,  $11.4
million,  or 102.0%,  for 2001. The average balance of consumer loans (comprised
mostly of 1 to 4 family first  mortgages and home equity loans)  totaled  $281.7
million  in 2001,  compared  to $275.6  million  in 2000,  an  increase  of $6.1
million,  or 2.2%.  The average yield on interest  earning  assets  decreased 25
basis  points  to 7.55%  for 2001 as  compared  to 7.80% in 2000.  Lower  market
interest rates were principally responsible for the decline in the average yield
on interest  earning  assets,  which served to offset some of the benefit of the
asset growth.


<PAGE>

     Interest expense totaled $23.4 million in 2001, a decrease of $783 thousand
or 3.2% as compared to 2000.  The decrease was  principally  due to a decline in
the  average  rates paid on  interest-bearing  liabilities  of 45 basis point to
3.76% in 2001 as compared to 4.21% in 2000.  The  decrease in average  rates was
mostly  due to a  decline  in  short-term  market  interest  rates,  which had a
favorable  impact on average rates paid on interest  bearing  demand and savings
deposits.  Average  demand and savings  deposits  amounted to $485.6 million for
2001, an increase of $28.0 million,  or 6.1%, as compared to 2000, and accounted
for 66.2% of the  Company's  total deposit and  borrowing  liabilities.  Average
rates paid on interest  bearing demand and savings  deposits  decreased 68 basis
points to 2.58% for 2001 as compared to 3.26% for 2000. The benefit derived from
a decline in average  rates  helped  offset the  increase  in  interest  expense
associated  with the growth of  average  interest-bearing  liabilities  of $47.4
million  for  2001  as  compared  to the  prior  year.  The  growth  in  average
interest-bearing  liabilities  was due mostly to an increase in average time and
interest bearing demand deposits of $31.6 million or 16.6% and $14.6 million, or
6.3%,  respectively in 2001 as compared to 2000. In addition,  savings  deposits
increased $12.0 million,  or 10.2%,  for 2001 as compared to 2000. The growth in
average  interest-bearing  liabilities was partly offset by a decline in average
borrowings of $10.7 million, or 29.6%.

     Net  interest  income,  on a taxable  equivalent  basis,  amounted to $31.6
million in 2000,  an increase of $1.1  million,  or 3.7%,  from $30.4 million in
1999. The increase in net interest income was primarily due to

                                       15

     growth  in  average  interest-earning  assets of $54.6  million,  which was
largely  funded by a $44.4  million  growth in average  deposits.  The growth in
average deposits occurred mostly in  interest-bearing  demand and time deposits.
The  growth  in  interest-bearing  liabilities  along  with an  increase  in the
Company's cost of funds partly offset some of the growth in interest income. The
net interest  margin  decreased 20 basis points to 4.41% for 2000 as compared to
4.61% for 1999,  due  largely  to an  increase  in the  Company's  funding  cost
resulting from an increase in short-term  market  interest rates and a change in
the mix of retail deposits.

     Interest income, on a taxable  equivalent  basis,  totaled $55.8 million in
2000,  an  increase  of $6.6  million or 13.3% from $49.2  million in 1999.  The
increase was largely  driven by the growth in average  interest-earning  assets.
Contributing to the growth in interest income was an increase of 35 basis points
in the average yield on interest-earning  assets to 7.80% in 2000 as compared to
1999. The increase in average  interest-earning  assets was  principally  due to
growth in loans. The average balance of commercial and commercial mortgage loans
increased by $27.0 million,  or 12.1%, to $250.1 million in 2000, as compared to
$223.1 million in 1999. In addition, equipment-financing leases generated by ICC
grew $11.2  million,  on average,  for 2000 at an average lease yield of 12.36%.
The average  balance of consumer loans totaled $275.6 million in 2000,  compared
to $270.1  million in 1999, an increase of $5.5 million or 2.1%. The increase in
average  loans  outstanding  and an increase in average  loan yields of 31 basis
points had the most  significant  impact on interest  income  growth for 2000 as
compared to 1999. Also, contributing to the growth in interest income was a $1.4
million, or 15.1%, increase in interest income from investment securities, which
benefited from an average growth of $12.8 million and a 38 basis points increase
in average yield for 2000 as compared to 1999.

     Interest expense totaled $24.2 million in 2000, an increase of $5.4 million
or 29.0% as compared to 1999.  Of the total  growth in  interest  expense,  $2.8
million was  predominantly due to a 61 basis point increase in the average rates
paid on  interest-bearing  liabilities,  which  increased  to  4.21%  in 2000 as
compared to 3.60% in 1999.  This  increase  in average  rates was largely due to
increases in short-term market interest rates and a growth in time deposits.  In
addition,  growth  in  average  interest-bearing  liabilities  of $54.0  million
contributed   to  the   increase   in  interest   expense   for  2000.   Average
interest-bearing  demand deposits grew $30.3 million,  or 15.1%, in 2000,  which
was largely  attributable  to the Company's  increased  efforts in marketing and
sales  during  2000.  Contributing  to the  growth in  average  interest-bearing
liabilities  was an increase in average time  deposits and  borrowings  of $18.9
million or 11.0% and $16.5 million,  or 83.2%,  respectively in 2000 as compared
to 1999. The growth in average interest-  bearing  liabilities was tempered by a
decline in average savings deposits of $11.7 million, or 9.1%.

Non-interest income

     Non-interest income consists of all income other than interest and dividend
income and is principally derived from: service charges on deposits;  loan fees;
commissions on sales of annuities and mutual funds; rental fees for safe deposit
space;  income from the  collection of principal on acquired  loans in excess of
their carrying value and net gains on sale of securities,  loans and leases. The
Company  recognizes the  importance of  supplementing  net interest  income with
other sources of income and maintains a management  committee  that explores new
opportunities to generate non-interest income.

<PAGE>

     Non-interest income for 2001 was $5.6 million, an increase of $1.2 million,
or 27.3%,  from  $4.4  million  in 2000.  The  growth  was due in part to a $407
thousand increase in syndication fees from the sale of leases. Also contributing
to the increase was income of $378  thousand  related to an increase in the cash
surrender value of BOLI contracts.  Other non-interest  income,  which increased
$563 thousand,  also  contributed  to the increase.  Other  non-interest  income
includes,  but is not limited to, income from  servicing  fees,  commissions  on
sales of annuities and mutual funds, loan fees and safe deposit rental fees. The
improvement  in other  non-interest  income  was  largely  due to  increases  in
prepayment fees from the early payoff of loans and late charges on loans of $125
thousand and $93 thousand,  respectively.  The growth in non-interest income for
2001 was reduced by a decrease of $171 thousand from the collection of principal
on  acquired  loans in excess of their  carrying  value as compared to the prior
year.

     In 2000,  non-interest  income  decreased $1.2 million to $4.4 million from
$5.6 million in 1999. The change was largely attributable to non-recurring items
during  1999.  These  non-recurring  items  included  gains  from  the  sales of
securities,  collections  of  principal  on  acquired  loans in  excess of their
carrying  value,  and sale of the  Company's  VISAtm  and  merchant  credit card
portfolio.  Adjusted  for  non-recurring  items,  non-interest  income  for 2000
increased $210 thousand, or 5.8%, as compared to 1999. The increase for 2000 was
comprised of increases in lease  syndication  fee income and service  charges on
deposits in the amount of $136 thousand and $86 thousand, respectively.

     In  2000,  the net  gain  from  the  sale of  securities  amounted  to $312
thousand,  a decrease  of $547  thousand  or 63.7% from $859  thousand  in 1999.
Included in the net gain is $311  thousand  from the sale of available  for sale
securities  and $1  thousand  from  the  sale  of a held  to  maturity  security
(scheduled  to mature  within 3 months).  In 1999,  the net gain  included  $856
thousand from the sale of available for sale securities and $3 thousand from the
sale of a held to maturity  security  (scheduled to mature within 3 months).  In
2000,  the collection of principal on acquired loans in excess of their carrying
value  decreased $453 thousand as compared to 1999.  Gains recorded on the sales
of the Company's VISAtm and merchant  credit card  portfolio of $86 thousand and
$329 thousand, respectively, occurred in 1999.
<TABLE>
<CAPTION>

 Table 4
----------------------------------------------------------------------------------------------------------
 Non-interest Income
----------------------------------------------------------------------------------------------------------
 for the years ended December 31,
 (in thousands)
                                                                                2001       2000     1999
                                                                              --------   -------- --------
<S>                                                                           <C>        <C>      <C>
 Service fees on deposit accounts                                               $2,459    $2,386    $2,300
 Net gain on sale of securities                                                    252       312       859
 Net gain on sale of loans and leases                                              550       136        86
 Net gains on sale of merchant credit card portfolio                                 -         -       329
 Collection of principal on acquired loans in excess of their carrying value        58       229       682
 Increase in cash surrender value of bank owned life insurance                     378         -         -
 All other                                                                       1,881     1,318     1,330
                                                                              --------   -------- --------
                                                                                $5,578    $4,381    $5,586
                                                                              ========   ======== ========
</TABLE>
                                       16

Non-interest Expenses

     Non-interest  expenses for 2001 increased  $1.7 million,  or 8.0%, to $22.9
million as compared to 2000.  Approximately  $726  thousand of the  increase was
attributable to the expansion of the Bank's operations,  including the full year
expense  for two new  offices  opened in the third and fourth  quarters  in 2000
(Waldwick and Ramsey,  respectively) and the growth of ICC.  Excluding the costs
related  to  the  expansion,  non-interest  expenses  for  2001  increased  $970
thousand, or 4.6%.

     The largest  component of  non-interest  expenses,  salaries and  benefits,
increased $1.3 million,  or 12.0%, for 2001 of which approximately $434 thousand
of the increase was directly related to the expansion  programs described above.
Salaries and benefits,  excluding  amounts  related to the  expansion  programs,
increased  8.0% and was due mostly to normal  promotions,  salary  increases and
higher benefit expenses. Occupancy and furniture and equipment expense increased
$437  thousand,  of which $213 thousand was related to the full year expense for
expansion activities and contributed to the growth in non-interest  expenses. In
addition,  advertising and promotional costs, which increased $125 thousand also
contributed to the growth.  Some of the  additional  costs for  advertising  and
promotion were aimed at attracting new customers that may have been discontented
as a consequence of the in-market consolidation of large financial institutions.
Other  expenses  decreased  $219  thousand  due  largely to a decline in deposit
intangible  amortization of $232 thousand served to offset some of the growth in
non-interest expenses.

<PAGE>

     Non-interest  expenses  totaled $21.2 million for 2000; an increase of $1.1
million,  or 5.6%, from $20.1 million as compared to 1999. This increase was due
mostly to the Bank's  expansion of its operations,  which included,  but was not
limited to, ICC, the Bank-Line center and two new branches, Waldwick and Ramsey,
New Jersey.

     In 2000,  salaries and benefits  increased  $769  thousand,  or 7.5%,  when
compared to the same period in 1999 due to normal  promotions,  salary increases
and the additions to staff  associated  with the new branch openings in Waldwick
and Ramsey, New Jersey.

     Occupancy and furniture and equipment  expense increased $252 thousand when
compared to the same period in 1999,  of which  approximately  $231 thousand was
due to the Bank's  expansion  of  operations.  Contributing  to the  increase in
non-interest  expenses for 2000 were higher advertising and promotional expenses
of $42  thousand.  The increase in  non-interest  expenses was also  impacted by
increases in Federal Deposit Insurance Corporation premiums, and data processing
fees of $50 thousand and $58 thousand respectively.

     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 operating expenses.  The lower the efficiency ratio the more
effective  the Company is in  utilizing  its  resources to produce  income.  The
Company's  efficiency ratio was 57.5%,  58.5%, and 56.8% in 2001, 2000 and 1999,
respectively.  The Company  outperformed  its peers as the  national  peer group
average  was 59.3% (peer  group data as of  September  30, 2001 - based upon the
most recent published report by SNL Securities). The national peer group average
was  60.6%  and  60.0%  for  2000  and  1999,  respectively  (published  by  SNL
Securities).

<TABLE>
<CAPTION>

Table 5
-------------------------------------------------------------------------
Non-interest Expenses
-------------------------------------------------------------------------
for the years ended Decembr 31,
(in thousands)

                                           2001        2000       1999
                                         --------    --------   --------
<S>                                      <C>         <C>        <C>

Salaries and benefits                    $ 12,353    $ 11,034   $ 10,265
Occupancy, furniture and equipment          4,432       3,995      3,743
Advertising and promotion                   1,251       1,126      1,084
Other expenses
 Professional fees                          1,240       1,120      1,101
 Directors' fees, travel and retirement       425         504        546
 Data Processing                              568         575        517
 All other                                  2,604       2,823      2,807
                                         --------    --------   --------
                                          $22,873     $21,177    $20,063
                                         ========    ========   ========
</TABLE>

Income Taxes

     In 2001,  income taxes amounted to $5.0 million as compared to $4.6 million
and $5.0 million for 2000 and 1999, respectively. The effective tax rate in 2001
was 32.4% as  compared  to 33.2%  and  34.0%  for 2000 and  1999,  respectively.
Detailed  information  on  income  taxes  is  shown  in  Notes  1 and  15 to the
Consolidated Financial Statements.

<PAGE>
Financial Condition

Loan Portfolio

     At December 31, 2001,  total loans amounted to $581.3 million,  an increase
of $20.4 million,  or 3.6%, over the previous year. The growth was predominately
in consumer loans and real estate mortgage loans,  which increased $12.6 million
and $6.7 million, respectively. The growth in consumer loans was attributed to a
$13.9  million  growth  in lease  financing,  which was  principally  due to the
purchases  of $16.5  million in auto leases  during  2001.  The increase in real
estate  mortgage loans  occurred  mostly in commercial  real estate,  which grew
$16.6 million to $198.3 million and represented 34.1% of total loans as compared
to $181.7  million or 32.4% of total  loans at the end of 2000.  These loans are
secured primarily by first priority mortgage liens on owner-occupied  commercial
properties.  A decline in the home equity loan  portfolio  of $12.0  million for
2001 as compared to 2000, served to offset some of the commercial  mortgage loan
growth.  The decline in the home equity loan portfolio was principally due to an
increase in principal  prepayments as a result of lower market  interest  rates.
Contributing to the loan growth was a $1.1 million increase in commercial loans.
The growth in commercial  loans was primarily due to a $9.1 million  increase in
commercial and financial loans. The growth in commercial loans was partly offset
by a decline  in the ICC  commercial  lease  portfolio,  which was mostly due to
$12.6  million  of leases  syndicated  during  2001.  The  syndication  activity
produced $534 thousand in fee income, which was included in non-interest income.
The commercial loan growth was largely within the subsidiary  Bank's  delineated
community,  which is in accordance  with the Company's  pledge of striving to be
the largest  community-based  banking  organization in Bergen County, New Jersey
dedicated to community service.

     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  North
American Industry Classification System, which exceeds 6% of its total loans.

                                       17

<PAGE>
<TABLE>
<CAPTION>
Table 6
---------------------------------------------------------------------------------------------------------------
Loan Portfolio
---------------------------------------------------------------------------------------------------------------
at December 31,

                                            2001            2000          1999            1998          1997
                                         ------------   ------------   ------------   ------------  ------------
<S>                                      <C>            <C>            <C>           <C>           <C>
Amounts of loans by type (in thousands)
  Real estate-mortgage
   1-4 family residential
    First liens                             $ 113,703      $ 110,369      $ 110,269       $ 89,852      $ 73,309
    Junior liens                                8,384         11,195          9,829         14,322        16,795
    Home equity                               130,658        142,610        144,747        142,781       143,177
   Commercial                                 198,319        181,722        166,354        148,875       134,972
   Construction                                 5,265          3,755          4,008            974         4,229
                                         ------------   ------------   ------------   ------------  ------------
                                              456,329        449,651        435,207        396,804       372,482
                                         ------------   ------------   ------------   ------------  ------------
  Commercial loans
    Commercial and financial                   85,801         76,702         63,684         64,067        51,573
    Lease financing                            15,850         23,804          1,813            791             -
                                         ------------   ------------   ------------   ------------  ------------
                                              101,651        100,506         65,497         64,858        51,573
                                         ------------   ------------   ------------   ------------  ------------
  Consumer loans
    Lease financing                            18,822          4,919          7,569          8,822        10,101
    Installment                                 4,521          5,803          3,703          3,233         4,117
                                         ------------   ------------   ------------   ------------  ------------
                                               23,343         10,722         11,272         12,055        14,218
                                         ------------   ------------   ------------   ------------  ------------
  Term federal funds                                -              -              -          5,000             -
                                         ------------    -----------   ------------   ------------  ------------
    Total                                    $581,323       $560,879       $511,976       $478,717      $438,273
                                         ============   ============   ============   ============  ============

Percent of loans by type
  Real estate-mortgage
   1-4 family residential
    First liens                                  19.6 %         19.7 %         21.5 %         18.8 %        16.7 %
    Junior liens                                  1.4            2.0            1.9            3.0           3.8
    Home equity                                  22.5           25.4           28.3           29.8          32.7
   Commercial                                    34.1           32.4           32.5           31.1          30.8
   Construction                                   0.9            0.7            0.8            0.2           1.0
                                         ------------   ------------   ------------   ------------  ------------
                                                 78.5           80.2           85.0           82.9          85.0
                                         ------------   ------------   ------------   ------------  ------------
  Commercial loans
    Commercial and financial                     14.8           13.7           12.4           13.4          11.8
    Lease financing                               2.7            4.2            0.4            0.2            -
                                         ------------   ------------   ------------   ------------  ------------
                                                 17.5           17.9           12.8           13.6          11.8
                                         ------------   ------------   ------------   ------------  ------------
Consumer loans
    Lease financing                              3.2            0.9             1.5            1.8           2.3
    Installment                                  0.8            1.0             0.7            0.7           0.9
                                        ------------    -----------    ------------   ------------  ------------
                                                 4.0            1.9             2.2            2.5           3.2
                                        ------------    -----------    ------------   ------------  ------------

  Term federal funds                              -             -                 -            1.0             -
                                        ------------    -----------    ------------   ------------  ------------
    Total                                      100.0  %       100.0  %        100.0 %        100.0 %       100.0 %
                                        ============    ===========    ============   ============  ============

</TABLE>

<TABLE>
<CAPTION>

<PAGE>

     The following table sets forth the maturity distribution of the Company's loan portfolio as of December 31, 2001.
The table excludes real estate loans (other than construction loans), and consumer loans: (in thousands)

                                                  Due after
                                     Due in       one year        Due after
                                    one year      through           five
                                     or less     five years         years          Total
                                   ---------     ----------       ---------      ---------
<S>                                <C>           <C>              <C>            <C>

Commercial and financial             $34,780        $38,923         $12,098        $85,801
Lease financing                        1,036          9,962           4,852         15,850
Real estate-construction               5,265              -               -          5,265
                                   ---------     ----------       ---------      ---------
     Total                           $41,081        $48,885         $16,950       $106,916
                                   =========     ==========       =========      =========
</TABLE>
<TABLE>
<CAPTION>
     The following table sets forth, as of December 31, 2001, 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
                                   ----------    ----------
<S>                                <C>           <C>

Fixed interest rate                  $ 31,482       $ 8,493
Variable interest rate                 17,403         8,457
                                   ----------    ----------
     Total                           $ 48,885      $ 16,950
                                   ==========    ==========

</TABLE>

                                       18

Loan Quality

     The lending activities of the Company follow the 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 as well as a sample of
smaller  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.  In addition,  the loan review officer reviews commercial leases and
consumer loans  considered  homogeneous in nature,  to identify and evaluate the
credit risks of these  portfolios.  The loan review officer reports  directly to
the  Executive  Vice  President and Chief  Financial  Officer of the Company and
provides quarterly reports to the Company's Board of Directors, ("Board").

     Management  maintains a "watchlist"  system under which credit officers are
required  to provide  early  warning  of  possible  deterioration  in the credit
quality of 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.  Identification of such financial weaknesses at an
early stage allows 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.

<PAGE>

Allowance for Loan and Lease Losses and Related Provision

     The   provision   for  loan  and  lease  losses   represents   management's
determination  of the amount necessary to bring the allowance for loan and lease
losses  ("ALLL") to a level that  management  considers  adequate to reflect the
risk of future  estimated  losses inherent in the Company's loan portfolio as of
the  balance  sheet  date.  In its  evaluation  of  the  adequacy  of the  ALLL,
management  considers  past  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 ALLL to the credit
portfolio  and to  nonperforming  loans.  While  the ALLL is  management's  best
estimate of loan losses  incurred as of the balance  sheet date,  the process of
determining  the adequacy of the ALLL is  essentially  judgmental and subject to
changes in external  conditions.  Accordingly,  there can be no  assurance  that
existing levels of the ALLL will ultimately  prove adequate to cover actual loan
losses.

     Loan loss provisions for 2001 amounted to $1.1 million, an increase of $325
thousand from the prior year. In 2000, the loan loss provision  amounted to $750
thousand,  a decrease of $450 thousand from 1999.  The increase in the loan loss
provision for 2001 was attributable, in part, to the increase in loan charge-off
experience. During 2001, loans charged off amounted to $964 thousand as compared
to $219  thousand  in 2000.  The  charge-offs  occurred  principally  in the ICC
commercial lease portfolio,  more specifically,  it's indirect (purchased) lease
portfolio,  which  accounted for $869 thousand,  or 92.8%,  of the  charge-offs.
Refer to the section titled "Nonperforming  Assets" for more information  about
the nonperforming lease portfolio. In 2001, management determined that the ALLL,
as set forth in Table 7, was at a level  sufficient to absorb probable losses in
the loan portfolio.

<TABLE>
<CAPTION>
Table 7
--------------------------------------------------------------------------------------------------------------------
Loan Loss Experience
--------------------------------------------------------------------------------------------------------------------
for the  years ended December 31,
(dollars in thousands)
                                              2001       2000        1999        1998        1997
                                           ---------   ---------   ---------   ---------   ---------
<S>                                        <C>         <C>         <C>         <C>         <C>

Average loans outstanding                   $579,034    $536,971    $494,022    $462,296    $402,799
                                           =========   =========   =========   =========   =========

Allowance at beginning of year                $6,154      $5,476      $5,645      $5,231      $3,968
Loans charged off
      Real estate                                 11         186         120         470         139
      Commercial and financial                     -           -       1,234          15         293
      Commercial lease financing                 949           8           -           -           -
      Consumer loans                               4          25          59         135         141
                                           ---------   ---------   ---------   ---------   ---------
        Total                                    964         219       1,413         620         573
                                           ---------   ---------   ---------   ---------   ---------

Recoveries of loans previously charged off
      Real estate                                 22          99          10          30          70
      Commercial and financial                   264          27          14          35          84
      Commercial lease financing                   8           -           -           -           -
      Consumer loans                              10          21          20          18          29
                                           ---------   ---------   ---------   ---------   ---------
        Total                                    304         147          44          83         183
                                           ---------   ---------   ---------   ---------   ---------
Net loans charged off                            660          72       1,369         537         390
                                           ---------   ---------   ---------   ---------   ---------

Additions to allowance charged to expense      1,075         750       1,200         951       1,653
                                           ---------   ---------   ---------   ---------   ---------
Allowance at end of year                      $6,569      $6,154      $5,476      $5,645      $5,231
                                           =========   =========   =========   =========   =========

Allowance to total loans                        1.13 %      1.10 %      1.07 %      1.18 %      1.19 %
Allowance to nonaccrual loans                 304.12      441.15      491.12      471.20      345.51
Allowance to nonaccrual loans and
     loans past due 90 days or more           304.12      441.15      491.12      471.20      316.07
Ratio of net charge-offs to average loans       0.11        0.01        0.28        0.12        0.10

</TABLE>
                                       19

     At  December  31,  2001,  the ratio of the ALLL to total loans was 1.13% as
compared to 1.10% at the end of the prior year. The ALLL  represented  304.1% of
nonaccrual  loans and loans past due 90 days or more at December 31, 2001,  down
from  441.1% at the end of 2000.  Each of the  ratios  were  impacted  by a $915
thousand  increase in  nonaccrual  and  restructured  loans and loans in 2001 as
compared  to the  end  of  the  year  in  2000.  Refer  to  the  section  titled
"Nonperforming  Assets"  and Table 9 for more detail on loan  delinquencies  and
nonperforming assets.

<PAGE>
<TABLE>
<CAPTION>

Table 8
------------------------------------------------------------------------------------------------------------------------------------
Allocation of Allowance for Loan and Lease Losses
------------------------------------------------------------------------------------------------------------------------------------
at December 31,
(dollars in thousands)

                                 2001                 2000                  1999               1998                  1997
                           _________________     _________________    _________________   __________________   _________________
                                  % of Loans            % of Loans           % of Loans           % of Loans          % of Loans
                                    to Total              to Total             to Total             to Total             to Total
                            Amount  Loans (1)     Amount  Loans (1)    Amount  Loans (1)   Amount   Loans (1)    Amount  Loans (1)
                           -------- --------     -------- --------    -------- --------   -------- ---------    -------- --------
<S>                        <C>      <C>          <C>      <C>         <C>      <C>        <C>      <C>          <C>      <C>

Real estate                 $ 4,028     78.5 %    $ 2,713     80.2  %  $ 2,191     85.0 %  $ 2,330     82.9 %  $ 2,628      85.0 %
Commercial and financial      1,389     14.8          931     13.6         634     12.5        917     14.4        773      11.8
Commercial lease financing      542      2.7          435      5.1          81      1.8        119      2.0        115       2.3
Consumer loans                    5      4.0           35      1.1          82      0.7         93      0.7        147       0.9
Unallocated                     605        -        2,040        -       2,488        -      2,186       -       1,568         -
                            ------- ---------    -------- --------    -------- --------   -------- ---------    -------- --------
                             $6,569    100.0 %    $ 6,154    100.0 %   $ 5,476    100.0 %  $ 5,645    100.0 %  $ 5,231     100.0 %
                            ======= =========    ======== ========    ======== ========   ======== =========    ======== ========
<FN>

(1) This  column  reflects  each  respective  class of loans as a percent of
total loans.

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

</FN>
</TABLE>
                                       20

Nonperforming Assets

     Nonperforming  assets consist of nonaccrual loans,  restructured  loans and
foreclosed assets (comprised of foreclosed real estate and repossessed  assets).
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.
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 below presents the detail of nonperforming assets and the aggregate
of loans  whose  principal  and/or  interest  has not  been  paid  according  to
contractual  terms. At December 31, 2001,  nonperforming  assets  increased $1.2
million,  or 70.3%,  as  compared  to the end of the prior  year.  The change in
nonaccrual assets is due to a $739 thousand increase in nonaccrual leases in the
Company's  equipment  lease  finance  subsidiary,  ICC.  The  delinquencies  and
charge-offs  have occurred  mostly in the two commercial  lease  portfolios that
were purchased from brokers  (indirect)  during 2000.  Based on the current best
available  information,  ICC's indirect  commercial lease  portfolio,  which has
experienced most of the charge-offs  (92.8% of all leases  charged-off in 2001),
represents the greatest  identified  risk. At December 31, 2001,  ICC's indirect
lease portfolio  amounted to $3.3 million of which $608 thousand was past due 90
days or more. At December 31, 2001, approximately $371 thousand of the Company's
ALLL was allocated for ICC's indirect lease  portfolio that was past due 90 days
or  more.  ICC  did  not  purchase  any  indirect  (brokered)  leases  in  2001.
Furthermore,  IC's  credit  policy has been  amended to exclude the purchase of
lease portfolios,  on a flow basis or in the aggregate, from indirect (brokered)
sources and the Bank's Board of Directors must approve any exceptions to policy.

     Management  is  presently  working  with its vendors and other  entities to
resolve the delinquencies.  The proposed resolution includes, but is not limited
to,  obtaining  possession of the  equipment,  which will be  re-marketed by the
vendors to new customers.  Nonperforming assets increased $58 thousand, or 3.7%,
in 2000 as compared to 1999.

     Based on the current information  available,  except for the loans included
in the table,  management  believes that there were no material probable problem
loans or leases, either individually or in the aggregate, at December 31, 2001.

<PAGE>
<TABLE>
<CAPTION>

Table 9
----------------------------------------------------------------------------------------------------------
Loan Delinquencies and Nonperforming Assets
----------------------------------------------------------------------------------------------------------
at December 31,
(dollars in thousands)

                                                       2001        2000       1999        1998      1997
                                                     ---------   --------   --------    --------  --------
<S>                                                  <C>          <C>       <C>         <C>       <C>

Loans delinquent and accruing interest
  Loans past due 30-89 days                             $1,938     $2,058       $190        $379      $832
  Loans past due 90 days or more                             -          -          -           -       141
                                                     ---------   --------   --------    --------  --------
    Total loans delinquent and accruing interest        $1,938     $2,058       $190        $379      $973
                                                     =========   ========   ========    ========  ========

Nonaccrual loans                                        $2,160     $1,395     $1,115      $1,198    $1,514
Foreclosed assets                                          492        250        250          84         -
Restructured loans                                         150          -        222         528       573
                                                     ---------   --------   --------    --------  --------
  Total nonperforming assets                            $2,802     $1,645     $1,587      $1,810    $2,087
                                                     =========   ========   ========    ========  ========
   Total nonperforming assets and loans
    past due 90 days or more                            $2,802     $1,645     $1,587      $1,810    $2,228
                                                     =========   ========   ========    ========  ========

Nonaccrual loans to total loans                           0.37 %     0.25 %     0.22 %      0.25 %    0.35 %
Nonperforming assets to total loans and
  foreclosed assets                                       0.48       0.29       0.31        0.38      0.48
Nonperforming assets to total assets                      0.34       0.21       0.22        0.26      0.33
Nonaccrual loans and loans past due 90 days
  or more to total loans                                  0.37       0.25       0.22        0.25      0.38
Nonperforming assets and loans past due 90 days
  or more to total loans and foreclosed assets            0.48       0.29       0.31        0.38      0.51
Nonperforming assets and loans past due 90 days
  or more to total assets                                 0.34       0.21       0.22        0.26      0.36

</TABLE>

                                       21

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.

<PAGE>
<TABLE>
<CAPTION>

Table 10
-----------------------------------------------------------------------------------------------------------------------------
Securities
-----------------------------------------------------------------------------------------------------------------------------
at December 31, 2001
(dollars in thousands)

                                                                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
   Mortgage-backed securities                       $   299        $1,801         $9,730      $10,371    $ 22,201        6.45 %
   Obligations of U.S. agencies                       4,000         1,977              -            -       5,977        6.71
   Obligations of states & political subdivisions       809         1,787          4,904        3,094      10,594        6.60
   Other debt securities                                  -           100              -            -         100        6.00
                                                    -------    ----------    -----------    ---------    --------    --------
                                                      5,108         5,665         14,634       13,465      38,872        6.53
                                                    -------    ----------    -----------    ---------    --------    --------

  Securities available for sale at market value
   Obligations of U.S. Treasury                       2,017             -              -            -       2,017        6.43
   Mortgage-backed securities                           607         33,631        20,151       44,128      98,517        6.50
   Obligations of U.S. agencies                       2,047         36,945         1,072            -      40,064        4.95
   Obligations of states & political subdivisions     2,072          4,955           225        3,203      10,455        7.27
                                                   --------    -----------   -----------    ---------    --------    --------
     Total                                            6,743         75,531        21,448       47,331     151,053        6.14
                                                   --------    -----------   -----------    ---------    --------    --------
                                                    $11,851        $81,196       $36,082      $60,796    $189,925
                                                   ========    ===========   ===========    =========    ========

  Weighted average yield                               6.64 %         5.74 %        6.18 %       6.80 %      6.22 %

</TABLE>

<PAGE>
<TABLE>
<CAPTION>

  The following table sets forth the carrying value of the Company's held to maturity and available for sale securities portfolios
  for the years ended, December 31:  (dollars in thousands)
                                                            2001                      2000                       1999
                                                      -----------------         -----------------         -----------------
                                                        Amount     %              Amount    %               Amount     %
                                                      --------- -------         --------- -------         --------- -------
<S>                                                   <C>       <C>             <C>       <C>             <C>       <C>

  Securities held to maturity
   Obligations of U.S. Treasury                            -       -                 -       -             $ 9,997   18.3 %
   Mortgage-backed securities                         $ 22,201    57.1 %        $ 12,646   30.8 %           20,232   37.1
   Obligations of U.S. agencies                          5,977    15.4            15,161   37.0              7,992   14.7
   Obligations of states & political subdivisions        9,855    25.3            12,813   31.2             16,195   29.7
   Other debt securities                                   839     2.2               422    1.0                124    0.2
                                                      --------- -------         --------- -------         --------- -------
                                                      $ 38,872   100.0 %        $ 41,042   100.0 %        $ 54,540  100.0 %
                                                      ========= =======         ========= =======         ========= =======


  Securities available for sale
  Obligations of U.S. Treasury                         $ 2,017     1.3 %        $  2,022     1.7 %        $  6,103     5.7 %
  Mortgage-backed securities                            98,517    63.5            79,845    66.4            67,453    62.9
  Obligations of U.S. agencies                          40,064    25.9            20,114    16.7            27,080    25.2
  Obligations of states & political subdivisions        10,455     6.7            13,741    11.4             2,941     2.7
  Other debt securities                                      -       -               620     0.5                 -       -
  Equity securities                                      3,977     2.6             3,970     3.3             3,772     3.5
                                                      --------- -------         --------- -------         --------- -------
                                                     $ 155,030   100.0 %        $120,312   100.0 %        $107,349   100.0%
                                                      ========= =======         ========= =======         ========= =======
</TABLE>

                                       22

     The Company's total  investment  portfolio  increased by $32.5 million,  or
20.2%, to $193.9 million at December 31, 2001 as compared to the prior year. The
composition  of investment  securities  shifted from  obligations  of states and
political  subdivisions  to  mortgage-backed  securities and obligations of U.S.
Agencies. Mortgage-backed securities include collateralized mortgage obligations
("CMO"). Substantially all of the mortgage-backed securities held by the Company
are issued or backed by federal agencies. Total gross unrealized gains and total
gross unrealized  losses for the investment  portfolio  amounted to $3.6 million
and $754 thousand, respectively, at December 31, 2001.

     During 2001, a shift in the  composition of the  investment  portfolio from
investments held to maturity ("HTM") to the available for sale ("AFS") portfolio
was  principally  due to market  conditions  and the  Company's  asset/liability
management  strategy.  At December 31, 2001, AFS  securities  amounted to $155.0
million, or 80.0%, of total securities, compared to $120.3 million, or 74.6%, of
total  securities at year-end  2000.  The  Company's AFS portfolio  increased by
$34.7 million,  or 28.9%,  to $155.0 million at December 31, 2001 as compared to
the prior year due to the purchase of securities.

     The Company's HTM  portfolio  decreased by $2.2 million,  or 5.3%, to $38.9
million at December  31, 2001 as compared to the prior year.  The  decrease  was
mostly due to declines in obligations  of U.S.  agencies and state and political
subdivision notes as a result of maturities and two securities amounting to $3.3
million  that  were  called  before  maturity.  A  portion  of the cash flow was
reinvested  in  mortgaged-backed  securities,  which  are  included  in the  HTM
portfolio.


<PAGE>

Deposits

     Deposits,    which   include    non-interest-bearing    demand    deposits,
interest-bearing  demand deposits,  savings and time deposits,  are an essential
and  cost-effective  funding source for the Company.  The Company attributes its
success in growing  deposits to the emphasis it places on building core customer
relationships.  The Company  offers a variety of  products  designed to meet the
financial  needs of the customers  based on their  identifiable "life  stages".
Deposits  increased  $57.6  million,  or 8.6%, to $726.5 million at December 31,
2001 as compared to the prior year.

     The growth in the deposit base occurred  mostly in interest  bearing demand
deposits,  which increased $52.5 million for 2001 as compared to the prior year.
During  2001,  the  Company's  overall  yield on deposits  decreased by 28 basis
points to 3.12% due mostly to a decline in interest rates.

     Time deposits  amounted to $215.2 million at December 31, 2001, an increase
of $6.7 million,  or 3.2%,  from year-end  2000,  which was  principally in time
deposits  less  than  $100,000.  Time  deposits  greater  than  $100,000,  which
represents an alternate source of wholesale  funding for the Company,  decreased
$720 thousand, or 3.4%, for 2001 as compared to 2000. Time deposits greater than
$100,000  represented  2.8% of total  deposits at December  31, 2001 and 3.2% at
December 31, 2000.  The Company's  yield on total time  deposits  decreased by 3
basis points to 5.57% for 2001 as compared to 2000.

     Interest  bearing demand  deposits,  which comprised the largest segment of
the Company's total  deposits,  amounted to $282.2 million at December 31, 2001,
an increase of $52.5 million,  or 22.8%, from year-end 2000. The Company's yield
on interest  bearing demand  deposits  decreased by 56 basis points to 2.79% for
2001 as compared to 2000.

     Contributing to the growth in deposits and positively impacting the overall
yield  on  deposit  liabilities  was  a  $1.7  million,  or  1.6%,  increase  in
non-interest bearing demand at December 31, 2001 as compared to year-end 2000.
<TABLE>
<CAPTION>
Table 11
------------------------------------------------------------------------------------------------------------------------------------
Deposit Summary
------------------------------------------------------------------------------------------------------------------------------------
at December 33,
(dollars in thousands)
                                               2001                2000              1999             1998               1997
                                          ---------------   ---------------    ---------------   ---------------   ---------------
                                            Amount     %      Amount     %       Amount    %       Amount    %      Amount     %
                                          -------- ------   -------- ------    -------- ------   -------- ------   -------- ------
<S>                                       <C>      <C>      <C>      <C>       <C>      <C>      <C>      <C>       <C>      <C>

Non-interest bearing demand               $109,416   15.1 %  $107,702  16.1 %  $102,392  17.1 %  $107,408   17.9 % $95,436   17.6 %
Interest bearing demand                    282,173   38.8    229,713   34.3     213,970  35.8     194,177   32.4   154,301   28.6
Money market                                47,569    6.5      56,646   8.5      49,256   8.2      50,665    8.5    41,815    7.7
Savings                                     72,092    9.9      66,270   9.9      70,907  11.8      76,026   12.7    81,202   15.0
Time deposits less  than $100,000          194,754   26.9     187,330  28.0     141,444  23.6     145,337   24.3   134,287   24.9
Time deposits greater than $100,000         20,479    2.8      21,199   3.2      21,023   3.5      25,119    4.2    33,724    6.2
                                          -------- ------   -------- ------    -------- ------   -------- ------  -------- ------
                                          $726,483  100.0 %  $668,860 100.0 %  $598,992 100.0 %  $598,732  100.0% $540,765  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, 2001:
(in thousands)

Three months or less                       $12,015
Over three months through six months         3,538
Over six months through twelve months        2,804
Over twelve months                           2,122
                                           -------
                                           $20,479
                                           =======

                                       23
<PAGE>

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 2001. 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 quarterly,  and presented to the Board,
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 of equity. 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, 2001, the Company simulated
the effects on net interest income given an instantaneous  and parallel shift in
the yield  curve of up to 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 11%. At December 31, 2001, the Company
was within  policy  limits  established  for changes in net interest  income and
future economic value of equity.

     The simulation  described  above 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 and
product preference changes; and other internal/external variables.  Furthermore,
the  simulation  does not  reflect  actions  that ALCO might take in response to
anticipated  changes in interest rates or  competitive  conditions in the market
place.

<PAGE>
     In  addition  to  the  above-mentioned  techniques,  the  Company  utilizes
sensitivity gap analysis 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 analysis 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
(16.06%) at December  31,  2001.  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.

     At December 31, 2001,  interest-bearing  demand deposits grew $54.2 million
as compared to the prior year. For gap purposes,  45.0% of the  interest-bearing
demand  deposits are assumed to mature within one year,  while most of the funds
were  invested in assets with  maturities  greater than one year.  The growth in
interest-bearing  demand  deposits in conjunction  with the maturity  assumption
consequently  increased the Company's cumulative one-year gap beyond the Board's
policy limit of (15%).  In  accordance  with the Board  established  policy this
occurrence  was  reported to the Board and will be  monitored  by the Company to
determine whether corrective measures are appropriate.

     Certain  shortcomings are inherent in the method of GAP 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 sensitivity gap
position and establishing its ongoing asset/liability strategy.

                                       24
<TABLE>
<CAPTION>
Table 12
------------------------------------------------------------------------------------------------------------------------------------
Interest Rate Sensitivity Analysis
------------------------------------------------------------------------------------------------------------------------------------
at December 31, 2001
(dollars in thousands)
                                                                                                                   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                                       $141,145    $38,276   $63,225   $187,460  $92,306    $56,991  $  (4,649)  $574,754
  Investment securities                             22,834     12,377    26,020     55,324   51,035     24,282      2,030    193,902
  Cash and amounts due from banks                        -          -    15,168          -        -          -     24,914     40,082
                                                  --------   --------   --------  --------  -------  ---------  ---------   --------
  Total assets                                     163,979     50,653   104,413    242,784  143,341     81,273     44,506    830,949
                                                  --------   --------   --------  --------  -------  ---------  ---------   --------

Liabilities and stockholders' equity
  Demand deposits                                   57,533     40,107    80,216    105,352   52,447     55,934          -    391,589
  Savings deposits                                   6,308      6,308    12,616     32,405    9,996      4,459          -     72,092
  Fixed maturity certificates of deposits           46,670     69,466    76,259     15,365    7,473          -          -    215,233
  Money market accounts                             14,856      5,773    11,545      8,278    3,827      3,290          -     47,569
  Securities sold under agreements to repurchase       200      2,500     4,000          -        -          -          -      6,700
  Short-term borrowings                             11,100          -     7,000          -        -          -          -     18,100
  Other liabilities                                      -          -         -          -        -          -     11,433     11,433
  Stockholders' equity                                   -          -         -          -        -          -     68,233     68,233
                                                  --------   --------   --------  --------  -------   --------- ---------   --------
   Total liabilities and stockholders' equity      136,667    124,154   191,636    161,400   73,743     63,683     79,666   $830,949
                                                  --------   --------   --------  --------  --------  --------- ---------   --------

Gap                                                $27,312   $(73,501) $(87,223)  $ 81,384  $69,598    $17,590   $(35,160)
                                                  ========   ========   ========  ========  ========  ========= =========
Gap to total assets                                   3.29 %    (8.85)%  (10.50)%     9.79 %   8.38 %     2.12 %

Cumulative Gap                                     $27,312   $(46,189)$(133,412)  $(52,028) $17,570    $35,160
                                                  ========   ========   ========  ========  =======   =========
Cumulative Gap to total assets                        3.29 %    (5.56)%  (16.06)%    (6.26)%   2.11 %     4.23 %

</TABLE>


<PAGE>
Liquidity

     A  fundamental  component of the Company's  business  strategy is to manage
liquidity  to  ensure  the  availability  of  sufficient  resources  to meet all
financial  obligations  and  to  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 its
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, 2001, total deposits amounted to $726.5 million, an
increase of $57.6 million,  or 8.6%, over the prior comparable year. At December
31, 2001, advances from the FHLB, overnight borrowings and securities sold under
agreements to repurchase  totaled  $24.8 million and  represented  3.0% of total
assets as compared to $31.5  million and 4.1% of total  assets,  at December 31,
2000. In 2001, the Company's  deposit  liabilities  grew faster than its earning
assets, which resulted in a less of a reliance for borrowings.

     Loan production continued to be the Company's principal investing activity.
Net loans at December 31, 2001 amounted to $574.8 million,  an increase of $20.0
million, or 3.6%, compared to the same period in 2000.

     The  Company's  most liquid  assets are cash and due from banks and federal
funds sold.  At December  31, 2001,  the total of such assets  amounted to $22.2
million, or 2.7%, of total assets,  compared to $33.2 million, or 4.3%, of total
assets at year-end  2000.  The decrease in liquid  assets,  principally  federal
funds sold, was driven by the growth in loans and investments.

     Another  significant  liquidity source is the Company's  available for sale
securities.  At December 31, 2001,  available  for sale  securities  amounted to
$155.0 million,  or 80.0%, of total securities,  compared to $120.3 million,  or
74.6%, of total securities at year-end 2000.

     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
$79.9 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 present funding requirements.

Capital Adequacy

     Stockholders'  equity  totaled $68.2  million,  or 8.2%, of total assets at
December  31,  2001,  compared to $62.0  million,  or 8.0%,  of total  assets at
December 31, 2000. The $6.2 million growth was largely attributable to increases
in net income and other comprehensive income of $10.5 million and $630 thousand,
respectively.  The  increase  was offset in part by stock  repurchases  and cash
dividends of $1.7 million and $3.5 million, respectively, during 2001.

     Guidelines  issued by the Federal  Reserve  Board and the  Federal  Deposit
Insurance  Corporation  ("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   stockholders'   equity  less  certain   intangibles,   and  a
supplementary  component called Tier 2 capital,  which

                                       25

<PAGE>

includes a portion of the allowance for loan and lease 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 2 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, 2001,
the  Company's  and the Bank's Tier 1  risk-based  capital  ratio was 11.74% and
11.43%, respectively, well in excess of minimum capital standards.

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


<PAGE>

     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 1 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, 2001, the Company's and the Bank's leverage ratio
was 8.09% and 7.93%, respectively.

Effects of Inflation and Changing Prices

     The financial  statements and related  financial data presented herein have
been prepared in accordance with accounting principles generally accepted in the
United  States of  America  within  the  banking  industry,  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.


Significant Accounting Policy

Allowance  for loan and lease  losses:  The  allowance for loan and lease losses
("ALLL") is  established  through  periodic  charges to income.  Loan losses are
charged against the ALLL when management  believes that the future collection of
principal is unlikely.  Subsequent recoveries, if any, are credited to the ALLL.
If the ALLL 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 and lease losses is increased.

     The Company's  ALLL is an amount  considered  adequate to absorb  estimated
losses on  existing  loans and  leases  that may become  uncollectible  based on
management's  evaluations  of the size and current risk  characteristics  of the
loan and lease portfolio as of the balance sheet date. 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.

Recently issued accounting pronouncements

     In July 2001 the  Financial  Accounting  Standards  Board  ("FASB")  issued
Statement of Financial  Accounting  Standards  No. 141  "Business  Combinations"
("SFAS 141"),  which provides guidance on accounting for a business  combination
at the date a business combination is completed.  The Statement requires the use
of the purchase  method of accounting  for all business  combinations  initiated
after June 30,  2001,  thereby  eliminating  the use of the pooling of interests
method.  Also,  it provides  new  criteria  that  determine  whether an acquired
intangible asset should be recognized separately from goodwill.  The adoption of
SFAS 141 did not  have any  impact  on the  financial  position  or  results  of
operations of the Company.

     In July 2001,  the FASB issued SFAS No. 142 "Goodwill and Other  Intangible
Assets" ("SFAS 142") which provides  guidance on how to account for goodwill and
intangible assets after the acquisition is complete. The most substantive change
represented  by this  Statement is that  goodwill  will no longer be  amortized;
instead,  it will be evaluated for  impairment on an annual basis.  Identifiable
intangible  assets will  continue to be  amortized  over their  useful lives and
reviewed  for  impairment  in  accordance  with  SFAS  121  "Accounting  for the
Impairment of Long-Lived  Assets and for  Long-Lived  Assets to be disposed Of"
The Statement will apply to existing goodwill and intangible  assets,  beginning
with fiscal years  starting after December 15, 2001. The Company was required to
implement SFAS No. 142 on January 1, 2002, and it has been  determined  that the
adoption of this statement will not have a material  impact on its  consolidated
financial position or results of operations.


<PAGE>


     The Company  adopted SFAS No. 140,  "Accounting for Transfers and Servicing
of Financial Assets and  Extinguishments  of Liabilities - a replacement of FASB
Statement   No.  125,"  which  revises  the   standards   for   accounting   for
securitizations and other transfers of financial assets and collateral. SFAS No.
140  is  effective  for   transfers  and  servicing  of  financial   assets  and
extinguishments   of  liabilities   occurring  after  March  31,  2001  and  for
disclosures  relating to  securitization  transactions and collateral for fiscal
years ending after  December 15, 2000.  The Company's  pledged assets to secured
parties   cannot  be  sold  or  repledged  by  those  parties,   therefore,   no
reclassification  of  pledged  assets  on the  consolidated  balance  sheet  was
necessary for such transactions.  The Company's adoption of SFAS No. 140 did not
have a material effect on its financial statements.

                                       26

     In June  2000,  the FASB  issued  SFAS No.  138,  "Accounting  for  Certain
Derivative  Instruments and Certain Hedging  Activities"  ("SFAS 138"). SFAS 138
amends SFAS No. 133,"Accounting for Derivative  Instruments and Certain Hedging
Activities",  ("SFAS  133")  which  establishes  standards  for  accounting  and
reporting of derivative  instruments,  including certain derivative  instruments
embedded in other contracts and hedging activities. The Company adopted SFAS 133
and SFAS 138 on January 1, 2001.  The  adoption of SFAS 133 and SFAS 138 did not
have any  impact on the  financial  position  or results  of  operations  of the
Company because the Company did not have any derivative activity.


Forward Looking Statements

     In  addition  to  discussing  historical  information,  certain  statements
included in or incorporated into this report relate to the financial  condition,
results of  operations  and  business  of the Company  which are not  historical
facts,  but which are "forward-looking  statements"  within the  meaning of the
Private  Securities  Litigation Reform Act of 1995. When used herein,  the words
"anticipate"  "believe,"   "estimate," "expect,"  "will"  and  other  similar
expressions are generally intended to identify such forward-looking  statements.
Such  statements  are intended to be covered by the safe harbor  provisions  for
forward-looking  statements  contained  in such Act, and we are  including  this
statement  for  purposes  of  invoking  these  safe  harbor  provisions.   These
forward-looking statements include, but are not limited to, statements about the
operations of the Company,  the adequacy of the  Company's  allowance for losses
associated with the loan portfolio,  the prospects of continued loan and deposit
growth,  and improved credit  quality.  The  forward-looking  statements in this
report involve  certain  estimates or  assumptions,  known and unknown risks and
uncertainties,  many of which are beyond the control of the Company, and reflect
what we currently  anticipate  will happen in each case.  What actually  happens
could differ  materially from what we currently  anticipate will happen due to a
variety of factors, including, among others, (i) increased competitive pressures
among  financial  services   companies;   (ii)  changes  in  the  interest  rate
environment,  reducing interest margins or increasing  interest rate risk; (iii)
deterioration in general economic conditions, internationally, nationally, or in
the State of New Jersey;  (iv) the occurrence of acts of terrorism,  such as the
events of September  11, 2001,  or acts of war; (v)  legislation  or  regulatory
requirements  or changes  adversely  affecting the business of the Company,  and
(vi)  losses  in  the  Company's  leasing  subsidiary   exceeding   management's
expectations,  and (vii)  other risks  detailed in reports  filed by the Company
with the  Securities  and Exchange  Commission.  Readers  should not place undue
expectations on any forward-looking statements. We are not promising to make any
public announcement when we consider forward-looking statements in this document
to be no longer accurate, whether as a result of new information,  what actually
happens in the future or for any other reason.

<PAGE>

<TABLE>
<CAPTION>
Table 13
------------------------------------------------------------------------------------------------------------------
Quarterly Common Stock Price Range
------------------------------------------------------------------------------------------------------------------
for the years ended December 31,

The Company's common stock is quoted on the NASDAQ National Market System under the symbol "IFCJ."


                                    High          Low         Cash
                                    Sales        Sales      Dividends
                                    Price        Price      Declared
                                 ------------ ------------ ------------
<S>                              <C>          <C>          <C>

1999
          First quarter               $ 17.50     $ 16.00       $ 0.120
          Second quarter                17.38       15.50         0.120
          Third quarter                 19.63       16.63         0.120
          Fourth quarter                18.13       16.13         0.120

2000
          First quarter               $ 17.50     $ 13.63       $ 0.125
          Second quarter                14.38       12.13         0.125
          Third quarter                 13.75       12.00         0.125
          Fourth quarter                15.00       12.94         0.125

2001
          First quarter               $ 18.88     $ 13.75       $ 0.135
          Second quarter                18.35       14.94         0.135
          Third quarter                 18.62       17.36         0.135
          Fourth quarter                19.72       17.55         0.135

The number of stockholders of record as of February 15, 2002 was 1,129.
-----------------------------------------------------------------------
</TABLE>
                                       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, 2001 and 2000 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,  2001.  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  auditing  standards  generally
accepted in the United States of America.  Those standards  require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

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



/s/ Deloitte & Touche, LLP
___________________________
Deloitte & Touche LLP
Parsippany, New Jersey
January 17, 2002

                                       28

<PAGE>
<TABLE>
<CAPTION>
Interchange Financial Services Corporation
-------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
-------------------------------------------------------------------------------------------------------------
December 31,
(dollars in thousands)

                                                                                     2001          2000
                                                                                -----------    -----------
<S>                                                                             <C>            <C>

Assets
Cash and due from banks                                                            $ 22,211       $ 22,100
Federal funds sold                                                                        -         11,050
                                                                                -----------    -----------
Total cash and cash equivalents                                                      22,211         33,150
                                                                                -----------    -----------

Securities held to maturity at amortized cost (estimated market value
      of $39,580 and $41,400 for 2001 and 2000, respectively)                        38,872         41,042
                                                                                -----------    -----------
Securities available for sale at estimated market value (amortized cost
     of $152,935 and $119,306 for 2001 and 2000, respectively)                      155,030        120,312
                                                                                -----------    -----------

Loans                                                                               581,323        560,879
Less:  Allowance for loan and lease losses                                            6,569          6,154
                                                                                -----------    -----------
Net loans                                                                           574,754        554,725
                                                                                -----------    -----------

Bank owned life insurance                                                            15,378              -
Premises and equipment, net                                                          10,235         11,239
Foreclosed assets                                                                       492            250
Accrued interest receivable and other assets                                         13,977          9,526
                                                                                -----------    -----------
Total assets                                                                       $830,949       $770,244
                                                                                ===========    ===========


Liabilities
Deposits
    Non-interest bearing                                                           $109,416       $107,702
    Interest bearing                                                                617,067        561,158
                                                                                -----------    -----------
Total deposits                                                                      726,483        668,860
                                                                                -----------    -----------

Securities sold under agreements to repurchase                                        6,700         18,500
Short-term borrowings                                                                18,100         13,000
Accrued interest payable and other liabilities                                       11,433          7,900
                                                                                -----------    -----------
Total liabilities                                                                   762,716        708,260
                                                                                -----------    -----------

Commitments and contingent liabilities

Stockholders' equity:
Common stock, without par value; 15,000,000 shares authorized;
    6,460,433 and  6,530,498 shares issued and outstanding for
    2001 and 2000, respectively                                                       5,397          5,397
Capital surplus                                                                      20,993         21,077
Retained earnings                                                                    54,758         47,735
Accumulated other comprehensive income                                                1,156            526
                                                                                -----------     ----------
                                                                                     82,304         74,735
Less:  Treasury stock                                                                14,071         12,751
                                                                                -----------     ----------
Total stockholders' equity                                                           68,233         61,984
                                                                                -----------    -----------
Total liabilities and stockholders' equity                                         $830,949       $770,244
                                                                                ===========    ===========

-------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
</TABLE>
                                       29

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

                                                                   2001         2000        1999
                                                                  --------    --------    --------
<S>                                                               <C>         <C>         <C>

Interest income
Interest and fees on loans                                         $46,175     $44,329     $39,274
Interest on federal funds sold                                         557         700         596
Interest and dividends on securities
  Taxable interest income                                            9,890       9,796       8,432
  Interest income exempt from federal income taxes                     532         537         492
  Dividends                                                            248         259         260
                                                                   -------     --------    -------
Total interest income                                               57,402      55,621      49,054
                                                                   -------     --------    -------

Interest expense
Interest on deposits                                                22,070      22,060      17,700
Interest on securities sold under agreements to repurchase             526       1,235         392
Interest on short-term borrowings                                      848         182         608
Interest on long-term borrowings                                         -         750          83
                                                                   -------     -------     -------
Total interest expense                                              23,444      24,227      18,783
                                                                   -------     -------     -------

Net interest income                                                 33,958      31,394      30,271
Provision for loan and lease losses                                  1,075         750       1,200
                                                                   -------     -------     -------
Net interest income after provision for loan and lease losses       32,883      30,644      29,071
                                                                   -------     -------     -------

Non-interest income
Service fees on deposit accounts                                     2,459       2,386       2,300
Net gain on sale of securities                                         252         312         859
Net gain on sale of loans and leases                                   550         136          86
Other                                                                2,317       1,547       2,341
                                                                   -------     -------     -------
Total non-interest income                                            5,578       4,381       5,586
                                                                   -------     -------     -------

Non-interest expenses
Salaries and benefits                                               12,353       11,034      10,265
Occupancy                                                            3,275        2,939       2,698
Furniture and equipment                                              1,157        1,056       1,045
Advertising and promotion                                            1,251        1,126       1,084
Foreclosed real estate                                                  37           17           6
Other                                                                4,800        5,005       4,965
                                                                   -------     --------    --------
Total non-interest expenses                                         22,873       21,177      20,063
                                                                   -------     --------    --------

Income before income taxes                                          15,588       13,848      14,594
Income taxes                                                         5,048        4,592       4,959
                                                                   -------     --------    --------
Net income                                                         $10,540     $  9,256    $ 9,635
                                                                   =======     ========    ========

Basic earnings per common share                                      $1.62        $1.42       $1.37
                                                                   =======     ========    ========

Diluted earnings per common share                                    $1.61        $1.41       $1.36
                                                                   =======     ========    ========
-------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
</TABLE>
                                       30

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

                                                                                      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, 1999                                                    35,482        $1,192  $5,397 $21,256  $ (955) $62,372
Comprehensive income
  Net Income                                                        $9,635     9,635                                          9,635
  Other comprehensive income, net of taxes
   Unrealized losses on AFS debt securities                         (1,354)
   Less:  gains on disposition of securities
   (excludes equities)                                                           (90)
   Unrealized gains securities transferred from HTM
     to AFS - Acquisition                                               23
   Unrealized loss on equity securities                                (18)
   Less:  gains on disposition of equity securities                   (428)
                                                              ------------
  Other comprehensive loss                                          (1,867)                 (1,867)                          (1,867)
                                                              ------------
Comprehensive income                                                $7,768
                                                              ============

    Dividends on common stock                                                 (3,376)                                        (3,376)
    Issued 14,489 shares of common stock in connection
      with Executive Compensation Plan                                                                          62     184      246
    Exercised 7,836 option shares                                                                              (74)    121       47
    Purchased 494,360 shares of common stock                                                                        (8,781)  (8,781)
                                                                           --------- ------------- ------- ------- ------- --------
    Balance at December 31, 1999                                              41,741          (675)  5,397  21,244  (9,431)  58,276

Comprehensive income
 Net Income                                                         $9,256     9,256                                          9,256
 Other comprehensive income, net of taxes
  Unrealized  gains on AFS debt securities                           1,262
  Less: gains on disposition of equity securities                      (61)
                                                              ------------
 Other comprehensive income                                          1,201                   1,201                            1,201
                                                              ------------
Comprehensive income                                               $10,457
                                                              ============
Dividends on common stock                                                     (3,262)                                        (3,262)
Issued 11,406 shares of common stock in connection
  with Executive Compensation Plan                                                                              (6)    196      190
Exercised 16,634 option shares                                                                                (161)    281      120
Purchased 225,640 shares of common stock                                                                            (3,797)  (3,797)
                                                                           --------- ------------- ------- ------- ------- --------
Balance at December 31, 2000                                                  47,735           526   5,397  21,077 (12,751)  61,984

Comprehensive income
  Net Income                                                       $10,540    10,540                                         10,540
  Other comprehensive income, net of taxes
   Unrealized gains on AFS debt securities                             602
   Add: losses on disposition of securities                             28
                                                              ------------
  Other comprehensive income                                           630                     630                              630
                                                              ------------
Comprehensive income                                               $11,170
                                                              ============

Dividends on common stock                                                     (3,517)                                        (3,517)
Issued 14,880 shares of common stock in connection
   with Executive Compensation Plan                                                                            (14)    255      241
Exercised 8,817 option shares                                                                                  (70)    152       82
Purchased 93,762 shares of common stock                                                                             (1,727)  (1,727)
                                                                           --------- ------------- ------- ------- ------- --------
Balance at December 31, 2001                                                 $54,758        $1,156 $5,397  $20,993 $(14,071)$68,233
                                                                           ========= ============= ======= ======= ======= ========


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

                                       31

<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flow

INTERCHANGE FINANCIAL SERVICES CORPORATION
----------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
----------------------------------------------------------------------------------------------------------------------------
For the Years Ended, December 31,
(in thousands)
                                                                                             2001       2000        1999
                                                                                         ----------- ----------- -----------
<S>                                                                                      <C>         <C>         <C>
Cash flows from operating activities
Net income                                                                                  $ 10,540     $ 9,256     $ 9,635
Adjustments to reconcile net income to net cash provided by operating activities
  Depreciation and amortization                                                                1,486       1,377       1,400
  Amortization of securities premiums                                                          1,044         371         675
  Accretion of securities discounts                                                             (326)       (297)       (178)
  Amortization of premiums in connection with acquisition                                         81         312         312
  Increase in cash surrender value of Bank Owned Life Insurance                                 (378)          -           -
  Provision for loan and lease losses                                                          1,075         750       1,200
  Net gain on sale of  loans and leases                                                         (550)       (136)        (86)
  Net gain on sale of merchant credit card portfolio                                               -           -        (329)
  Net gain on sale of securities                                                                (252)       (313)       (859)
  Net gain on sale of foreclosed real estate                                                       -           -         (36)
  Net loss on disposal of fixed assets                                                             -           -           2
Decrease (increase) in operating assets
  Accrued interest receivable                                                                    443        (396)        (72)
  Deferred taxes                                                                                (185)       (186)     (1,059)
  Other                                                                                       (5,337)       (789)      1,442
(Decrease) increase in operating liabilities
  Accrued interest payable                                                                      (478)        737         (32)
  Other                                                                                        4,010       1,712        (229)
                                                                                           --------- ----------- -----------
Cash provided by operating activities                                                         11,173      12,398      11,786
                                                                                           --------- ----------- -----------
Cash flows from investing activities
(Payments for) proceeds from
  Net originations of loans and leases                                                       (15,303)    (38,030)    (25,751)
  Purchase of loans and leases                                                               (18,760)    (13,548)    (15,196)
  Repayment of term federal funds                                                                  -           -       5,000
  Sale of loans and leases                                                                    13,267       2,739       1,155
  Sale of merchant credit card portfolio                                                           -           -         329
  Purchase of AFS securities                                                                 (99,767)    (55,687)    (56,347)
  Maturities of AFS securities                                                                46,339      11,135      16,152
  Sale of AFS securities                                                                      19,348      33,902      26,193
  Sale of foreclosed real estate                                                                   -           -         120
  Purchase of HTM securities                                                                 (18,548)    (11,479)    (18,949)
  Maturities of HTM securities                                                                18,699      22,958      16,402
  Sale of HTM securities                                                                       2,003       2,002       2,003
  Purchase of Bank Owned Life Insurance                                                      (15,000)          -           -
  Purchase of fixed assets                                                                    (1,652)     (2,122)     (1,769)
  Sale of fixed assets                                                                         1,260           -           3
                                                                                           --------- ----------- -----------
Cash used in investing activities                                                            (68,114)    (48,130)    (50,655)
                                                                                           --------- ----------- -----------
Cash flows from financing activities

Proceeds from (payments for)
  Deposits in excess of withdrawals                                                           57,623      69,868         260
  Securities sold under agreements to repurchase and other borrowings                         55,592      57,300      57,906
  Retirement of securities sold under agreement to repurchase and
          other borrowings                                                                   (62,292)    (69,206)    (33,048)
  Dividends                                                                                   (3,517)     (3,262)     (3,376)
  Common stock issued                                                                            241         190         246
  Treasury stock                                                                              (1,727)     (3,797)     (8,781)
  Exercise of option shares                                                                       82         120          47
                                                                                           --------- ----------- -----------
Cash provided by financing activities                                                         46,002      51,213      13,254
                                                                                           --------- ----------- -----------

(Decrease) increase in cash and cash equivalents                                            (10,939)     15,481     (25,615)
Cash and cash equivalents, beginning of year                                                  33,150      17,669      43,284
                                                                                           --------- ----------- -----------
Cash and cash equivalents, end of year                                                       $22,211     $33,150     $17,669
                                                                                           ========= =========== ===========
Supplemental disclosure of cash flow information:
Cash paid for:
  Interest                                                                                   $23,922     $16,907     $18,815
  Income taxes                                                                                 1,409       4,645       7,028

Supplemental disclosure of non-cash investing and financing activities:
  Loans transferred to foreclosed real estate and other repossessed assets                       242           -         250
  Decrease (increase) - market valuation of securities available for sale                     (1,089)     (2,057)      2,949
  Reclassification of long-term borrowings to short-term borrowings                                -      13,000           -

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

</TABLE>
                                       32

<PAGE>


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Nature of Business and Summary of Significant Accounting Policies

     The following is a  description  of the business of  Interchange  Financial
Services  Corporation  and  subsidiaries  (the  "Company")  and its  significant
accounting and reporting  policies used in the  preparation of the  consolidated
financial statements:

Nature of Business

     The  Company,  a New Jersey  business  corporation,  is a  registered  bank
holding company whose principal  subsidiary is Interchange Bank (the "Bank"),  a
New Jersey state bank and member of the Federal Reserve Bank System. 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  available  funding
exceeds loan demand,  the Bank generally invests in debt securities.  Currently,
the Bank conducts operations typical of a community bank in the northeast region
of New Jersey  (primarily  Bergen County).  In addition,  the Bank is engaged in
providing its customers a broad range of financial  services,  such as equipment
leasing, mutual funds and annuities, brokerage services, conventional insurance,
internet banking and title insurance.


Summary of Significant  Accounting  Policies  Principles of  consolidation:  The
accompanying  consolidated  financial  statements  include  the  accounts of the
Company,  including its wholly-owned  subsidiaries.  The consolidated  financial
statements  have been  prepared in accordance  with  accounting  principles  and
practices  generally accepted in the United States of America within the banking
industry.   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 2001.


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 and lease 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 and federal funds sold, all of which mature within ninety
days.


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  (accumulated other comprehensive  income [loss]).  Gains and losses from
the sale of these  securities are determined  using the specific  identification
method and are reported in non-interest income.

     Interest  and  dividends  are  accrued  and  credited  to income as earned.
Purchase  premiums and  discounts are  recognized  in interest  income using the
interest method over the terms of the securities.


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. 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.

     Direct finance  leases have terms ranging from three to seven years.  Under
direct  finance lease  accounting,  the balance sheet includes the gross minimum
lease payments receivable,  unguaranteed estimated residual values of the leased
equipment, and capitalized indirect costs, reduced by unearned lease income.

<PAGE>

     The lease residual values represent the expected  proceeds from the sale of
leased  equipment at the end of the term of the lease and are  determined on the
basis  of  analyses  prepared  by  the  Banks  equipment  leasing   subsidiary,
Interchange Capital Company L.L.C. ("ICC"), based upon professional  appraisals,
historical  experience  and  industry  data.  Management  reviews the  estimated
residual  values on a periodic  basis,  and  impairments  in value,  if any, are
recognized as an immediate charge to 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 the Bank 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 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 commercial  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.  One-to-four family  residential  mortgage
loans and consumer loans with small balances are pooled  together as homogeneous
loans and,  accordingly,  a "Accounting by Creditors for Impairment of a Loan."


Allowance  for loan and lease  losses:  The  allowance for loan and lease losses
("ALLL") is  established  through  periodic  charges to income.

                                       33

<PAGE>

Loan  losses are  charged  against the ALLL when  management  believes  that the
future collection of principal is unlikely.  Subsequent recoveries,  if any, are
credited to the ALLL. If the ALLL 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 and lease
losses is increased.

     The Company's  ALLL is an amount  considered  adequate to absorb  estimated
losses on  existing  loans and  leases  that may become  uncollectible  based on
managemen's  evaluations  of the size and current risk  characteristics  of the
loan and lease portfolio as of the balance sheet date. 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.

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   assets:   Foreclosed  assets  consist  of  real  estate  and  other
repossessed assets and are carried at the lower of cost or estimated fair value,
less estimated  selling costs, at time of foreclosure or  repossession.  When an
asset is acquired, the excess of the carrying amount over fair value, if any, is
charged to the ALLL.  Subsequent  valuations are performed  periodically and the
carrying  value is adjusted by a charge to  foreclosed  asset expense to reflect
any  subsequent  declines  in the  estimated  fair value.  As a result,  further
declines in the asset values may result in increased  foreclosed  asset expense.
Routine  holding  costs are charged to  foreclosed  asset  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 enacted tax rates
expected to apply in the  period(s) in which the deferred tax asset or liability
is expected to be settled or realized.  The effect on deferred taxes of a change
in tax rates is recognized  in income in the period in which 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.

<PAGE>

Earnings per common share:  Basic  earnings per common share  represents  income
available  to common  stockholders  divided  by the  weighted-average  number of
common shares outstanding  during the period.  Diluted earnings per common share
reflects  additional  common shares that would have been outstanding if dilutive
potential  common  shares had been issued,  as well as any  adjustment to income
that would result from the assumed issuance. Potential common shares that may be
issued by the  Company  relate  solely to  outstanding  stock  options,  and are
determined using the treasury stock method.


Recently issued accounting pronouncements: In July 2001 the Financial Accounting
Standards Board ("FASB") issued Statement of Financial  Accounting Standards No.
141 "Business  Combinations" ("SFAS 141"), which provides guidance on accounting
for a business combination at the date a business combination is completed.  The
Statement requires the use of the purchase method of accounting for all business
combinations  initiated after June 30, 2001, thereby  eliminating the use of the
pooling of interests  method.  Also,  it provides new  criteria  that  determine
whether an  acquired  intangible  asset  should be  recognized  separately  from
goodwill.  The  adoption  of SFAS 141 did not have any  impact on the  financial
position or results of operations of the Company.

     In July 2001,  the FASB issued SFAS No. 14 "Goodwill and Other  Intangible
Assets" ("SFAS 142") which provides  guidance on how to account for goodwill and
intangible assets after the acquisition is complete. The most substantive change
represented  by this  Statement is that  goodwill  will no longer be  amortized;
instead,  it will be evaluated for  impairment on an annual basis.  Identifiable
intangible  assets will  continue to be  amortized  over their  useful lives and
reviewed  for  impairment  in  accordance  with  SFAS  121 "Accounting  for the
Impairment of Long-Lived  Assets and for  Long-Lived  Assets to be disposed Of."
The Statement will apply to existing goodwill and intangible  assets,  beginning
with fiscal years  starting after December 15, 2001. The Company was required to
implement SFAS No. 142 on January 1, 2002, and it has been  determined  that the
adoption of this statement will not have a material  impact on its  consolidated
financial position or results of operations.

     The Company  adopted SFAS No. 140,  "Accounting for Transfers and Servicing
of Financial Assets and  Extinguishments  of Liabilities - a replacement of FASB
Statement   No.  125,"  which  revises  the   standards   for   accounting   for
securitizations and other transfers of financial assets and collateral. SFAS No.
140  is  effective  for   transfers  and  servicing  of  financial   assets  and
extinguishments   of  liabilities   occurring  after  March  31,  2001  and  for
disclosures  relating to  securitization  transactions and collateral for fiscal
years ending after  December 15, 2000.  The Company's  pledged assets to secured
parties   cannot  be  sold  or  repledged  by  those  parties,   therefore,   no
reclassification  of  pledged  assets  on the  consolidated  balance  sheet  was
necessary for such transactions.  The Company's adoption of SFAS No. 140 did not
have a material effect on its financial statements.


     In June  2000,  the FASB  issued  SFAS No.  138,  "Accounting  for  Certain
Derivative  Instruments and Certain Hedging  Activities"  ("SFAS 13"). SFAS 138
amends SFAS No. 133,"Accounting for Derivative  Instruments and Certain Hedging
Activities",  ("SFAS  133")  which  establishes  standards  for  accounting  and
reporting of derivative  instruments,  including certain derivative  instruments
embedded in other contracts and hedging activities. The Company adopted SFAS 133
and SFAS 138 on January 1, 2001.  The  adoption of SFAS 133 and SFAS 138 did not
have any  impact on the  financial  position  or results  of  operations  of the
Company because the Company did not have any derivative activity.


Note 2.  Acquisitions

     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 seven to ten years.  Amortization in
2001,  2000 and 1999,  which is included in non-interest  expenses,  amounted to
$81,000, $313,000 and $313,000, respectively. At December 31, 2001, all acquired
premiums were fully amortized.

Note 3.  Restrictions on Cash and Due from Banks

     The Bank is required to maintain a reserve balance with the Federal Reserve
Bank of New York  based upon the level of its  deposit  liability.  The  average
amount of this reserve balance for 2001 and 2000 was approximately $775,000.

                                       34
<PAGE>

Note 4.  Securities Held to Maturity and Securities Available for Sale
<TABLE>
<CAPTION>

    Securities held to maturity and securities available for sale consist of the following: (in thousands)

                                                       -------------------------------------------------------
                                                                         December 31, 2001
                                                       -------------------------------------------------------
                                                                        Gross          Gross       Estimated
                                                        Amortized     Unrealized    Unrealized       Market
                                                          Cost          Gains         Losses         Value
                                                       ----------    -----------   -----------    -----------
<S>                                                    <C>           <C>           <C>            <C>
Securities held to maturity
 Mortgage-backed securities                              $ 22,201         $  300          $  9       $ 22,492
 Obligations of U.S. agencies                               5,977            181             -          6,158
 Obligations of states & political subdivisions             9,855            244            23         10,076
 Other debt securities                                        839             15             -            854
                                                       ----------    -----------   -----------    -----------
                                                           38,872            740            32         39,580
                                                       ----------    -----------   -----------    -----------
Securities available for sale
 Obligations of U.S. Treasury                               1,999             18             -          2,017
 Mortgage-backed securities                                97,022          1,808           313         98,517
 Obligations of U.S. agencies                              39,944            529           409         40,064
 Obligations of states & political subdivisions             9,993            462             -         10,455
 Equity securities                                          3,977              -             -          3,977
                                                       ----------    -----------   -----------    -----------
                                                          152,935          2,817           722        155,030
                                                       ----------    -----------   -----------    -----------
   Total securities                                      $191,807         $3,557          $754       $194,610
                                                       ==========    ===========   ===========    ===========

                                                       -------------------------------------------------------
                                                                         December 31, 2000
                                                       -------------------------------------------------------
                                                                        Gross         Gross         Estimated
                                                        Amortized     Unrealized    Unrealized       Market
                                                          Cost          Gains         Losses         Value
                                                       ----------    -----------   -----------    -----------
Securities held to maturity
 Mortgage-backed securities                               $12,646         $   96          $ 48       $ 12,694
 Obligations of U.S. agencies                              15,161            244             8         15,397
 Obligations of states & political subdivisions            12,813            137            64         12,886
 Other debt securities                                        422              1             -            423
                                                       ----------    -----------   -----------    -----------
                                                           41,042            478           120         41,400
                                                       ----------    -----------   -----------    -----------
Securities available for sale
 Obligations of U.S. Treasury                               1,996             26             -          2,022
 Mortgage-backed securities                                79,242            758           155         79,845
 Obligations of U.S. agencies                              19,924            194             4         20,114
 Obligations of states & political subdivisions            13,562            237            58         13,741
 Other debt securities                                        612              8             -            620
 Equity securities                                          3,970              -             -          3,970
                                                       ----------    -----------   -----------    -----------
                                                          119,306          1,223           217        120,312
                                                       ----------    -----------   -----------    -----------

   Total securities                                      $160,348         $1,701          $337       $161,712
                                                       ==========    ===========   ===========    ===========

</TABLE>


<PAGE>
<TABLE>
<CAPTION>

At December 31, 2001, the contractual  maturities of securities held to maturity and securities available for sale are as follows:
(in thousands)

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

  Within 1 year                                            $ 5,108         $ 5,180        $  6,608       $  6,743
  After 1 but within 5 years                                 5,665           5,885          74,617         75,532
  After 5 but within 10 years                               14,634          14,908          21,267         21,448
  After 10 years                                            13,465          13,607          46,466         47,330
  Equity securities                                              -               -           3,977          3,977
                                                       -----------     -----------     -----------    -----------
  Total                                                    $38,872         $39,580        $152,935       $155,030
                                                       ===========     ===========     ===========    ===========

See notes to consolidated financial statements.

</TABLE>

                                       35

     Gross  realized  gains  from  the  sale of  securities  available  for sale
amounted  to  $141,000,   $341,000   and  $860,000  in  2001,   2000  and  1999,
respectively.  Gross realized  losses from the sale of securities  available for
sale  amounted  to  $19,000,   $31,000  and  $4,000  in  2001,  2000  and  1999,
respectively. These amounts are included in net gain on sale of securities.

     Proceeds from the sale or call of securities  held to maturity  amounted to
$5.3 million for the year ended  December 31, 2001 and $2.0 million for the same
periods in 2000 and 1999,  which resulted in realized gains of $130,000,  $2,000
and $3,000 for those periods, respectively. The securities were either scheduled
to mature within 3 months or were called before maturity.

     Securities  with  carrying  amounts of $44.6  million and $49.3  million at
December  31,  2001 and 2000  respectively  were  pledged  for public  deposits,
Federal Home Loan Bank advances, securities sold under repurchase agreements and
other purposes required by law.

<PAGE>
Note 5.  Loans
<TABLE>
<CAPTION>

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

                                                   -------------------------
                                                         December 31,
                                                   -------------------------
                                                      2001         2000
                                                   -----------   -----------
<S>                                                <C>           <C>

Real estate
  Residential                                         $252,745      $264,174
  Commercial                                           198,319       181,722
  Construction                                           5,265         3,755

Commercial
  Commercial and financial                              85,801        76,702
  Lease financing                                       15,850        23,498

Consumer
  Lease financing                                       18,822         5,225
  Installment                                            4,521         5,803
                                                   -----------   -----------
                                                       581,323       560,879
Allowance for loan and lease losses                      6,569         6,154
                                                   -----------   -----------
Net loans                                             $574,754      $554,725
                                                   ===========   ===========

</TABLE>


<TABLE>
<CAPTION>
Notperforming 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,
                                                   ----------------------------------------
                                                       2001          2000           1999
                                                   -----------    -----------   -----------
<S>                                                <C>            <C>           <C>
Nonaccrual loans
  Residential real estate                               $  385         $  419        $  398
  Commercial real estate                                   596            367           409
  Commercial and financial                                  40            305           308
  Commercial lease financing                             1,043            304             -
  Consumer                                                  96              -             -
                                                   -----------    -----------   -----------
                                                         2,160          1,395         1,115
                                                   -----------    -----------   -----------
Troubled debt restructurings
  Commercial and financial                                 150             -            222
                                                   -----------    -----------   -----------

Total nonperforming assets                              $2,310         $1,395        $1,337
                                                   ===========    ===========   ===========

Interest income that would have been recorded
  during the year on nonaccrual loans outstanding
  at year-end in accordance with original terms           $231           $143          $120

Interest income included in net income during
  the year on nonaccrual loans outstanding
  at year-end                                             $143            $93           $74

</TABLE>


<PAGE>

     At December 31, 2001, 2000 and 1999, there were no loans or leases 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.

     Certain  officers  and  directors  of  the  Company  and  their  affiliated
companies are customers of 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.

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

                                   ------------------------
                                   Years Ended December 31,
                                   ------------------------
                                      2001         2000
                                   -----------  -----------
  <S>                              <C>          <C>

  Balance at beginning of year          $7,367       $7,354
  Additions                                858          491
  Reductions                            (2,092)        (478)
                                   -----------  -----------
  Balance at end of year                $6,133       $7,367
                                   ===========  ===========

</TABLE>

                                       36

Note 6.  Allowance for Loan and Lease Losses
<TABLE>
<CAPTION>
     The Company's recorded investment in impaired loans is as follows: (in thousands)

                                                          -----------------------------------------------
                                                                                 December 31,
                                                          -----------------------------------------------
                                                                   2001                        2000
                                                          ----------------------   ----------------------

                                                          Investment     Related   Innvestment   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                          $ 190          $ 5        $298           $7
            Commercial real estate                              596           10         367           10
        Without a related allowance for loan losses               -            -           -            -
                                                          ---------    ---------   ---------    ---------
                                                               $786         $ 15        $665          $17
                                                          =========    =========   =========    =========

---------------------------------------------------------------------------------------------------------------
The impairment of the above loans was measured based on the fair value of collateral.
</TABLE>


<PAGE>
<TABLE>
<CAPTION>
The following table sets forth-certain information about impaired loans: (in thousands)

                                                          ------------------------
                                                          Years Ended December 31,
                                                          ------------------------
                                                              2001         2000
                                                          -----------  -----------
<S>                                                       <C>          <C>

Average recorded investment                                      $806         $677
                                                          ===========  ===========
Interest income recognized during time period
  that loans were impaired, using cash-basis
  method of accounting                                           $52          $41
                                                          ===========  ===========

</TABLE>

<TABLE>
<CAPTION>
Changes in the allowance for loan and lease losses are summarized as follows: (in thousands)

                                                          -------------------------------------
                                                                   Year Ended December 31,
                                                          -------------------------------------
                                                             2001         2000         1999
                                                          -----------  -----------  -----------
<S>                                                       <C>          <C>          <C>

Balance at beginning of year                                   $6,154       $5,476       $5,645
Additions (deductions)
     Provision charged to operations                            1,075          750        1,200
     Recoveries on loans previously charged                       304          147           44
     Loans charged off                                           (964)        (219)      (1,413)
                                                          -----------  -----------  -----------
Balance at end of year                                         $6,569       $6,154       $5,476
                                                          ===========  ===========  ===========

-----------------------------------------------------------------------------------------------
<FN>
For years ended December 31, 2001, 2000 and 1999, the provisions charged to expense for federal
income tax purposes amounted to approximately $660,000, $72,000, and $1,369,000, respectively.
</FN>
</TABLE>


Note 7.  Premises and Equipment, net
<TABLE>
<CAPTION>
    Premises and equipment are summarized as follows: (in thousands)

                                                            --------------------
                                                                 December 31,
                                                            --------------------
                                                              2001        2000
                                                            ---------  ---------
<S>                                                         <C>        <C>

Land                                                          $ 1,698    $ 1,980
Buildings                                                       2,195      3,019
Furniture, fixtures and equipment                               7,190      6,397
Leasehold improvements                                          9,486      9,047
                                                            ---------  --------
                                                               20,569     20,443
Less: accumulated depreciation and amortization                10,334      9,204
                                                            ---------  ---------
   Net book value                                             $10,235    $11,239
                                                            =========  =========
</TABLE>

<PAGE>

Note 8.  Deposits
<TABLE>
<CAPTION>
    Deposits are summarized as follows: (in thousands)

                                                          ------------------------
                                                                 December 31,
                                                          ------------------------
                                                              2001         2000
                                                          -----------  -----------
<S>                                                       <C>          <C>

Non-interest bearing demand deposits                         $109,416     $107,702
Interest bearing demand deposits                              282,173      229,712
Money market deposits                                          47,569       56,646
Savings deposits                                               72,092       66,270
Time deposits                                                 215,233      208,530
                                                          -----------  -----------
                                                             $726,483     $668,860
                                                          ===========  ===========
</TABLE>

     At December 31, 2001 and 2000,  the  carrying  amounts of  certificates  of
deposit  that  individually   exceed  $100,000  amounted  to  $20,479,000,   and
$21,199,000,  respectively. Interest expense relating to certificates of deposit
that individually exceed $100,000 was approximately $1,470,000,  $1,156,000, and
$1,371,000 in 2001, 2000, and 1999, respectively.

                                       37

Note 9. Securities Sold Under Agreements to Repurchase and Short-term Borrowings
<TABLE>
<CAPTION>
    Securities sold under agreements to repurchase and short-term  borrowings
    are summarized as follows: (in thousands)

                                                          ------------------------
                                                               December 31,
                                                          ------------------------
                                                              2001         2000
                                                          -----------  -----------
<S>                                                       <C>          <C>

Securities sold under agreements to repurchase                 $6,700      $18,500
Federal Funds Purchased                                        11,100            -
Federal Home Loan Bank advances                                 7,000       13,000
                                                          -----------  -----------
                                                              $24,800      $31,500
                                                          ===========  ===========
</TABLE>

     Federal Home Loan Bank ("FHLB")  advances,  which amounted to $7,000,000 at
December 31, 2001, was comprised of one borrowing that has a fixed rate of 6.28%
maturing in October 2002 and is  collateralized by U.S. Treasury and U.S. agency
securities.  In addition,  the Bank has a $79,911,000  line of credit  available
through its membership in the FHLB of New York.


<PAGE>

Note 10.  Benefit Plans

     In 1993, the Bank  established a  non-contributory  defined benefit pension
plan covering all eligible employees (the "Pension Plan"). The funding policy is
to contribute  an amount that is at least the minimum  required by law. The plan
assets  are  invested  through a Trust  Company  in a fixed  income  and  equity
(balanced)   fund.  The  fund   performance  is  reviewed   periodically  by  an
administrative committee comprised of the President, the Chief Financial Officer
and the Human Resources Director. 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 Bank established a supplemental plan covering all
eligible employees (the "Supplemental Plan") that provides for retirement income
that would have been paid but for the  limitation  under the  qualified  Pension
Plan.

     Effective August 1, 1994, the Company established a retirement plan for all
directors of the Bank who are not employees of the Company or of any  subsidiary
or  affiliate  of  the  Company  (the  "Directors'  Plan").  As a part  of  this
Directors' 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 based on the greater of the cash value of the life  insurance  policy or
annuity  contract or an amount  determined by  multiplying  the Bank's  standard
annual  retainer fees (currently  $10,000) at the director's  retirement date by
the director's years of service.

     Net pension cost of each plan consists of the following:  (in thousands)
<TABLE>
<CAPTION>
                                                 Pension Plan              Supplemental Plan         Directors' Plan
                                           -------------------------   -------------------------   -------------------------
                                             2001     2000    1999       2001     2000    1999       2001     2000    1999
                                           -------  -------  -------   -------  -------  -------   -------  -------  -------
<S>                                        <C>      <C>      <C>       <C>      <C>      <C>       <C>      <C>      <C>

Service cost                                 $ 249     $197     $251      $ 19      $24      $25      $ 49     $ 57     $ 61
Interest cost                                  116       95       85        14       17       14        94       88       80
Expected return on plan assets                (100)     (88)     (85)        -        -        -         -        -        -
Amortization of prior service cost               -        -        -         8        8        8         -        -       92
Recognized net actuarial gain                  (18)     (27)      (8)       (7)       -        -         -        -        -
                                           -------  -------  -------  --------  -------  ------- ---------  -------  -------
Net periodic benefit cost                    $ 247     $177     $243      $ 34      $49      $47     $ 143     $145     $233
                                           =======  =======  =======  ========  =======  ======= =========  =======  =======

</TABLE>

                                       38

<PAGE>

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

                                                  Pension Plan               Supplemental Plan           Directors' Plan
                                            --------------------------   -------------------------   -------------------------
                                                2001           2000          2001          2000          2001          2000
                                            -----------    -----------   -----------    ----------   -----------    ----------
<S>                                         <C>            <C>           <C>            <C>          <C>            <C>
Change in pension obligation
Pension obligation at beginning of year          $1,626         $1,233        $ 274          $ 215       $ 1,259       $ 1,251
Service cost                                        249            197           19             24            49            57
Interest cost                                       116             95           14             18            94            88
Plan ammendments                                     36              -          (36)             -             -             -
Actuarial (gain) loss                                 7            131           17             17             9           (28)
Benefits paid                                       (34)           (30)           -              -             -             -
Other                                                 -               -           -              -             -          (109)
                                            -----------    -----------   -----------    ----------   -----------    ----------
Pension obligation at end of year                 2,000          1,626           288           274         1,411         1,259
                                            -----------    -----------   -----------    ----------   -----------    ----------

Change in plan assets
Fair value of plan assets at beginning of year    1,198          1,088             -             -             -             -
Actual return on plan assets                         50            113             -             -             -             -
Employer contribution                               187             27             -             -             -             -
Benefits paid                                       (34)           (30)            -             -             -             -
                                          --------------   -----------   -----------    ----------   -----------    ----------
Fair value of plan assets at end of year          1,401          1,198             -             -             -             -
                                          --------------   -----------   -----------    ----------   -----------    ----------

Funded Status                                      (599)          (428)         (288)         (274)       (1,411)       (1,259)
Unrecognized net actuarial (gain) loss             (277)          (351)           33             9           (64)          (73)
Unrecognized prior service cost                      32             (5)           22            65             -             -
                                          --------------   -----------   -----------    ----------   -----------    ----------
Accrued pension cost                             $ (844)        $ (784)       $ (233)        $(200)      $ 1,475)      $(1,332)
                                          ==============   ===========   ===========    ==========   ===========    ==========


Weighted-average assumptions (1)
Discount rate                                      7.25  %        8.00  %       7.25  %       8.00  %       7.25  %       8.00  %
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

------------------------------------------------------------------------------------------------------------------------------
<FN>
(1)  Weighted average assumptions were applied at the beginning of the period.
</FN>
</TABLE>



<PAGE>

     In 1976, the Bank  established a Capital  Investment Plan (the "Investment
Plan")  which  permits  employees to make basic  contributions  up to 4% of base
compensation.  In 1998, the Investment  Plan was amended to permit  employees to
make basic contributions up to 6% of base compensation. Additional contributions
up to 10% of  compensation  may be made when coupled  with basic  contributions.
Under the Investment  Plan, the Bank provides a matching  contribution  equal to
50% of the basic  contribution of each participant.  The Capital Investment Plan
offers  employees a choice of 9 investment  funds ranging from  conservative  to
aggressive.  Both employee and bank matching contributions are invested in these
funds  according  to  the  employees'  elections.  The  investment  choices  are
administered by a Trust Company.  The fund options are reviewed  periodically by
an  administrative  committee  comprised of the President,  the Chief  Financial
Officer and the Human Resources  Director.  In addition,  the Bank makes a fixed
contribution  on behalf of each  participant  equal to 1% of such  participant's
base  compensation,  which is in the form of the  Company's  stock.  The  Bank's
contribution to the Investment Plan amounted to $236,000,  $165,000 and $163,000
in 2001, 2000 and 1999, respectively.


                                       39

Note 11.  Stock Option and Incentive 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 options to purchase 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.  Pursuant to the Stock Plan,  incentive  stock  options or  non-qualified
stock options may be granted to employees.

     In  2000,  the  Company  adopted  a  stock  option  plan,  titled "Outside
Director's  Incentive  Compensation  Plan" (the  "Director's  Stock  Plan") that
covers  those  members of the Board of  Directors  of the  Company  who have not
served as a full-time employee of the Company or any of its subsidiaries  during
the prior twelve-month  period. Under this plan, a maximum of 100,000 options to
purchase  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. Only  non-qualified  stock options are granted under the
Directo's Stock Plan.

     The status of options  granted  under the Stock Plan and  Director's  Stock
Plan as of December 31, and changes during each of the three years then ended is
summarized below:
<TABLE>
<CAPTION>

                                                             2001                    2000                    1999
                                                      ---------------------   ---------------------   ---------------------
                                                                  Weighted-               Weighted-               Weighted-
                                                                   Average                 Average                 Average
                                                                  Exercise                Exercise                Exercise
Incentive Stock Options                                Options      Price      Options      Price      Options      Price
---------------------------------------------         ---------   ---------   ---------   ---------   ---------   ---------
<S>                                                   <C>         <C>         <C>         <C>         <C>         <C>

Outstanding at January 1                                184,729     $ 15.09     152,988     $ 13.85     110,824     $ 11.91
Granted                                                  63,000       16.19      57,250       16.50      58,750       16.97
Exercised                                                (8,817)       9.26     (16,634)       7.36      (7,836)       6.05
Forfeited                                                (9,584)      16.86      (8,875)      17.36      (8,750)      17.30
                                                      ---------               ---------               ---------
Outstanding at December 31                              229,328       15.54     184,729       15.09     152,988       13.85
                                                      =========               =========                 =======

Options exercisable at December 31                      123,155       14.82      83,560       12.93      71,238        9.79
                                                      =========               =========                 =======

Weighted-average fair value of options granted
    during the year ended December 31 (per option)        $4.28                   $4.46                   $5.03

</TABLE>


<PAGE>

<TABLE>
<CAPTION>
                                                              2001                    2000
                                                      ---------------------   ---------------------
                                                                  Weighted-                Weighted-
                                                                   Average                  Average
                                                                  Exercise                 Exercise
Non-Qualified Stock Options                            Options      Price      Options      Price
---------------------------------------------         ---------   ---------   ---------   ---------
<S>                                                   <C>         <C>         <C>         <C>

Outstanding at January 1                                 11,000     $ 14.00           -           -
Granted                                                  11,000       17.30      11,000     $ 14.00
Exercised                                                     -           -           -           -
Forfeited                                                     -           -           -           -
                                                      ---------   ---------   ---------   ---------
Outstanding at December 31                               22,000       15.65      11,000       14.00
                                                      =========               =========
Options exercisable at December 31                        3,663       14.00           -           -
                                                      =========               =========

Weighted-average fair value of options granted
    during the year ended December 31 (per option)        $4.00                   $3.76
</TABLE>



<PAGE>
<TABLE>
<CAPTION>

The following table summarizes  information  about options  outstanding  under the Stock Plan and
Director's Stock Plan at December 31, 2001:

                             Options Outstanding                                  Options Exercisable
----------------------------------------------------------------------------  ----------------------------

                                                  Weighted-
                                                  Average       Weighted-                      Weighted-
            Range of                             Remaining      Average                        Average
            Exercise                Number      Contractual     Exercise         Number        Exercise
             Prices              Outstanding        Life         Price         Exercisable       Price
------------------------------   -------------  -------------  -------------  -------------  -------------
<S>                              <C>            <C>            <C>            <C>            <C>

Incentive Stock Options
              $ 5 - $10                 31,578       2.31            $ 7.48          31,578         $ 7.48
              $15 - $20                197,750       7.77             16.82          91,577          17.35
                                 -------------                                -------------
                                       229,328                                      123,155
                                 -------------                                -------------

Non-Qualified Stock Options
              $10 - $15                 11,000       8.32             14.00           3,663          14.00
              $15 - $20                 11,000       9.32             17.30               -              -
                                 -------------                                -------------
Total                                  251,328                                      126,818
                                 =============                                =============
</TABLE>

                                       40

     The fair value of each option grant is estimated on the date of grant using
the  Black-Scholes  option-pricing  model  with the  following  weighted-average
assumptions used for grants in 2001, 2000 and 1999, respectively: dividend yield
of 2.66%,  3.21%,  2.76%;  expected  volatility  of 22.02%,  23.89% and  22.63%;
risk-free  interest  rate of 5.03%,  6.48% and 5.31%;  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.

     If  compensation  cost for Stock Plan and Director's  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)

<TABLE>
<CAPTION>
                                                  2001      2000        1999
                                               ---------  ---------  ---------
<S>                                            <C>        <C>        <C>

Net Income
      As reported                                $10,540     $9,256     $9,635
      Pro-forma                                   10,451      9,174      9,572

Diluted earnings per common share
      As reported                                  $1.61      $1.41      $1.36
      Pro-forma                                     1.60       1.40       1.36

</TABLE>

Stock-based compensation

     Pursuant to the Stock Plan,  restricted  stock is awarded to key  employees
providing for the award of Interchange's common stock subject to certain vesting
and  restrictions.  The awards are recorded at fair market  value and  amortized
into salary expense over the vesting period.  The following table sets forth the
changes in restricted stock awards  outstanding for the years ended December 31,
2001, 2000 and 1999.

<TABLE>
<CAPTION>

Restricted Stock Awards                         2001        2000         1999
-----------------------                       --------    --------     --------
<S>                                            <C>        <C>          <C>

Outstanding at beginning of year                23,203      24,172       21,591
Granted                                         14,880      11,406       14,489
Vested                                         (12,583)    (12,375)     (11,908)
Forfeited                                            -           -            -
                                              --------    --------     --------

Outstanding at end of year                      25,500      23,203       24,172
                                              ========    ========     =========

</TABLE>



     The  amount of  compensation  costs  related  to  restricted  stock  awards
included in salary expense in 2001, 2000 and 1999 amounted to $184,722, $167,939
and $144,908, respectively.

                                       41

<PAGE>

Note 12.  Stockholders'  Equity and Regulatory  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 levels
that involve  quantitative  measures of their assets,  liabilities,  and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Compan's 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 1 capital to risk-weighted assets and Tier 1 capital to average assets.
Management believes, as of December 31, 2001, that the Company and the Bank meet
all capital adequacy requirements to which they are subject.

     As of December  31,  2001,  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 1 risk-based and Tier 1
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, 2001:
  Total Capital (to Risk Weighted Assets):
   The Company                                    $73,700         12.89 %      $45,727          8.00 %          N/A           N/A
   The Bank                                        71,916         12.58         45,733          8.00        $57,166         10.00 %
  Tier 1 Capital (to Risk Weighted Assets):
   The Company                                     67,131         11.74         22,864          4.00            N/A           N/A
   The Bank                                        65,347         11.43         22,866          4.00         34,299          6.00
  Tier 1 Capital (to Average Assets):
   The Company                                     67,131          8.09         24,901          3.00            N/A           N/A
   The Bank                                        65,347          7.93         24,727          3.00         41,212          5.00

As of December 31, 2000:
  Total Capital (to Risk Weighted Assets):
   The Company                                    $67,632         12.92 %      $41,864          8.00 %          N/A           N/A
   The Bank                                        67,165         12.83         41,865          8.00        $52,331         10.00 %
  Tier 1 Capital (to Risk Weighted Assets):
   The Company                                     61,478         11.75         20,932          4.00            N/A           N/A
   The Bank                                        61,011         11.66         20,932          4.00         31,398          6.00
  Tier 1 Capital (to Average Assets):
   The Company                                     61,478          8.02         22,992          3.00            N/A           N/A
   The Bank                                        61,011          7.99         22,917          3.00         38,196          5.00

</TABLE>

                                       42
<PAGE>

Shares of common stock

     On April 26, 2001, the Company's Board of Directors authorized a program to
repurchase up to 300,000 shares of the Company's outstanding common stock on the
open market or in privately  negotiated  transactions.  As of December 31, 2001,
the  Company  has  purchased  93,762  shares  at a total  cost of  approximately
$1,727,000.

     On June 2, 1999, the Company's  Board of Directors  authorized a program to
repurchase up to 10 percent,  or approximately  720,000 shares, of the Company's
outstanding  common  stock  on  the  open  market  or  in  privately  negotiated
transactions.  The Company  completed  the  purchases  pursuant to this  program
during  the  first  quarter  of  2000.  The  total  cost  of the  purchases  was
approximately $12,578,000, of which $3,797,000 was purchased in 2000.

     The  repurchased  shares are held as treasury stock and will be principally
used for the exercise of stock options,  restricted stock awards under the Stock
Plan and other general  corporate  purposes.

     The following table summarizes the activity in common shares:

<TABLE>
<CAPTION>
                                             Shares        Shares
                                             Issued      in Treasury
                                           ---------     -----------
<S>                                        <C>         <C>

Balance at December 31, 1999               6,728,098         546,535
  Purchase of treasury stock                (225,640)        225,640
  Issuance of stock from treasury             28,040         (28,040)
                                           ---------     -----------

Balance at December 31, 2000               6,530,498         744,135
  Purchase of treasury stock                 (93,762)         93,762
  Issuance of stock from treasury             23,697         (23,697)
                                          ----------     -----------

Balance at December 31, 2001               6,460,433         814,200
                                          ===========    ===========

</TABLE>

Note 13.  Earnings Per Common 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>
                                                  2001                            2000                           1999
                                      -----------------------------   -----------------------------   -----------------------------
                                                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                         $10,540     6,519     $1.62      $9,256     6,540     $1.42      $9,635     7,031     $1.37
                                                          =========                       =========                       =========


Effect of Dilutive Shares
Options issued                                         29                              18                              31
                                                ---------                       ---------                       ---------

Diluted Earnings per Common Share
Income available to common
   shareholders                         $10,540     6,548     $1.61      $9,256     6,558     $1.41      $9,635     7,062     $1.36
                                      ========= ========= =========   ========= ========= =========   ========= ========= =========

</TABLE>



<PAGE>

Note 14.  Other Non-interest Expenses
<TABLE>
<CAPTION>

      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, are as follows:  (in thousands)


                                                  2001      2000     1999
                                               --------- --------- ---------
<S>                                            <C>       <C>       <C>

Professional fees                                 $1,240    $1,120    $1,101

</TABLE>
                                       43

15.   Income Taxes
<TABLE>
<CAPTION>

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

                                            2001          2000        1999
                                         ---------     ---------   ---------
      <S>                                <C>           <C>         <C>
       Federal:  current                    $4,908        $5,264      $5,114
                 deferred                      (96)         (789)       (316)
       State:    current                       236           117         161
                 deferred                        -             -           -
                                         ---------     ---------   ---------
                                            $5,048        $4,592      $4,959
                                         =========     =========   =========

</TABLE>
<TABLE>
<CAPTION>

     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)
                                                                      2001        2000
                                                                   ---------   ---------
<S>                                                                <C>         <C>
Deferred tax assets
 Excess of book over tax allowance for loan losses                   $ 2,244      $2,099
 Excess of book over tax depreciation                                    111         359
 Excess of book over tax provision for benefit plan expense              873         791
 Core deposit premium                                                    250         276
 Other                                                                   378         242
                                                                   ---------   ---------
    Total deferred tax assets                                          3,856       3,767
                                                                   =========   =========


Deferred tax liabilities
 Unrealized gains-securities available for sale                          712         342
 Loan origination fees                                                   195         200
 Other                                                                   217         219
                                                                   ---------   ---------
   Total deferred tax liabilities                                      1,124         761
                                                                   ---------   ---------
   Net deferred tax assets                                            $2,732      $3,006
                                                                   =========   =========

</TABLE>

<PAGE>

     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 $2,732,000
will be  principally  realized  through  future  reversals  of existing  taxable
temporary  differences  and, to a lesser  extent,  future taxable income and tax
planning strategies.

<TABLE>
<CAPTION>

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

                                             -------------------------
                                                    December 31,
                                             -------------------------
                                              2001     2000      1999
                                             ------   ------   -------
<S>                                          <C>      <C>       <C>

Expected provision at statutory rate            35 %     35 %      35 %
Difference resulting from:
  State income tax, net of federal benefit       1        1         1
  Interest income exempt from federal taxes     (2)      (2)       (1)
  Other                                         (2)      (1)       (1)
                                             ------   ------   -------
                                                32 %     33 %      34 %
                                             ======   ======   =======
</TABLE>

Note 16.  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, 2001,  undistributed net assets
of the Bank were $66,448,716 of which  $62,130,966 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 17.   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.

<TABLE>
<CAPTION>

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

                                     2001       2000
                                  ---------  ---------
<S>                               <C>        <C>

Home equity loans                   $63,616    $60,697
Other loans                          64,647     50,313
Standby letters of credit             2,155        440
                                  ---------  ---------
                                   $130,418   $111,450
                                  =========  =========

</TABLE>

     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)


2002                                $ 1,537
2003                                  1,487
2004                                  1,367
2005                                  1,255
2006                                    938
thereafter                            5,403
                                  ---------
Total minimum lease payments        $11,987
                                  =========

<PAGE>

     Rent  expense  for  all  leases  amounted  to   approximately   $1,524,000,
$1,405,000 and $1,256,000 in 2001, 2000, and 1999, respectively.

     A director of the Company  provided legal  services  through his affiliated
firm. Fees paid for these services amounted to approximately $309,000,  $335,000
and $325,000 in 2001, 2000, and 1999, 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

Note 18.   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.

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

                                      ----------------------------------------------------------
                                                             December 31,
                                      ----------------------------------------------------------
                                                2001                                2000
                                      -------------------------        -------------------------
                                        Carrying        Fair             Carrying        Fair
                                         Amount         Value             Amount         Value
                                      -----------   -----------        -----------   -----------
<S>                                   <C>           <C>                    <C>         <C>
Financial Assets:
  Cash and cash equivalents              $ 22,211      $ 22,211           $ 33,150      $ 33,150
  Securities held to maturity              38,872        39,580             41,042        41,400
  Securities available for sale           155,030       155,030            120,312       120,312
  Loans, net                              574,754       577,847            554,725       561,819
                                      -----------   -----------        -----------   -----------
                                         $790,867      $794,668           $749,229      $756,681
                                      ===========   ===========        ===========   ===========
Financial liabilities:
  Deposits                               $726,483      $729,281           $668,860      $669,533
  Short-term borrowings                    24,800        24,800             31,500        31,500
                                      -----------  ------------        -----------   -----------
                                         $751,283      $754,081           $700,360      $701,033
                                      ===========  ============        ===========   ===========

</TABLE>

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


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


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 ALLL.


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.


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, 2001 and 2000, the estimated fair values of these off-balance-sheet
financial instruments were immaterial.

                                       45

<PAGE>

Note 19. Parent Company Only Information (in thousands)
<TABLE>
<CAPTION>
                                                                         --------------------------------
                                                                                    December 31,
                                                                         --------------------------------
Condensed balance sheets                                                     2001      2000       1999
                                                                         ---------- ---------- ----------
<S>                                                                      <C>        <C>        <C>
Assets
  Cash                                                                      $   721    $   467    $   641
  Investment in subsidiaries
   Bank                                                                      66,449     61,517     58,944
   Other                                                                        142        142        646
  Dividends receivable                                                        2,072        816          -
                                                                         ---------- ---------- ----------
   Total assets                                                             $69,384    $62,942    $60,231
                                                                         ========== ========== ==========
Liabilities
  Dividends payable                                                         $   871    $   815    $   805
  Loans from subsidiaries                                                         -          -      1,000
  Other liabilities                                                             280        142        150
                                                                         ---------- ---------- ----------
                                                                              1,151        957      1,955
                                                                         ---------- ---------- ----------
Stockholders' equity
  Common stock                                                                5,397      5,397      5,397
  Capital Surplus                                                            20,993     21,077     21,244
  Retained earnings                                                          54,758     47,736     41,741
  Accumulated other comprehensive income                                      1,156        526       (675)
                                                                         ---------- ---------- ----------
                                                                             82,304     74,736     67,707
Less:  Treasury stock                                                        14,071     12,751      9,431
                                                                         ---------- ---------- ----------
   Total stockholders' equity                                                68,233     61,985     58,276
                                                                         ---------- ---------- ----------
   Total liabilities and stockholders' equity                               $69,384    $62,942    $60,231
                                                                         ========== ========== ==========
---------------------------------------------------------------------------------------------------------
                                                                         -------------------------------
                                                                            Years Ended December 31,
                                                                         -------------------------------
Condensed statements of income                                               2001      2000       1999
                                                                         ---------- ---------- ---------
Dividends from subsidiary bank                                              $ 6,467    $ 8,587    $8,641
Dividends on equity securities                                                    -          -         8
Net gain on sale of securities                                                   20          -       714
Management fees                                                                   -          -        39
Other income                                                                     21          -         -
                                                                         ---------- ---------- ---------
   Total revenues                                                             6,508      8,587     9,402
                                                                         ---------- ---------- ---------
Interest on short-term borrowings                                                 -         77        92
Operating expenses                                                              270        122       448
                                                                         ---------- ---------- ---------
Income before equity in undistributed earnings of subsidiaries                6,238      8,388     8,862
Equity in undistributed earnings of subsidiaries                              4,302        868       773
                                                                         ---------- ---------- ---------
   Net income                                                               $10,540    $ 9,256    $9,635
                                                                         ========== ========== =========
 --------------------------------------------------------------------------------------------------------
                                                                         -------------------------------
                                                                             Years Ended December 31,
                                                                         -------------------------------
Condensed statements of cash flows                                          2001       2000       1999
                                                                         ---------- ---------- ---------
Cash flows from operating activities:
  Net income                                                               $ 10,540    $ 9,256   $ 9,635
  Adjustments to reconcile net income
   to net cash provided by operating activities
   Net gain on sale of securities                                               (20)         -      (714)
   Decrease (increase) in other assets                                       (1,277)      (816)    1,618
   Increase in dividends payable                                                 56         11        86
   Increase (decrease) in other liabilities                                     138         (8)        7
  Equity in undistributed income of subsidiaries                             (4,302)      (868)     (774)
                                                                         ---------- ---------- ---------
   Net cash provided by operating activities                                  5,135      7,575     9,858
                                                                         ---------- ---------- ---------
Cash flows from investing activities:
  Sale of securities available for sale                                          40          -     1,292
                                                                         ---------- ---------- ---------
   Net cash provided by investing activities                                     40          -     1,292
                                                                         ---------- ---------- ---------
Cash flows from financing activities:
  Cash dividends paid                                                        (3,517)    (3,262)   (3,376)
  Loan from subsidiary                                                            -          -     1,000
  Repayment of loan from subsidiary                                               -     (1,000)        -
  Treasury stock                                                             (1,727)    (3,797)   (8,781)
  Common stock issued                                                           241        190       246
  Exercise of option shares                                                      82        120        47
                                                                         ---------- ---------- ---------
   Net cash used in financing activities                                     (4,921)    (7,749)  (10,864)
                                                                         ---------- ---------- ---------
Net increase/(decrease) in cash                                                 254      (174)       286
Cash at beginning of year                                                       467       641        355
                                                                         ---------- ---------- ---------
Cash at end of year                                                           $ 721     $ 467      $ 641
                                                                         ========== ========== =========
</TABLE>
                                       46

<PAGE>
<TABLE>
<CAPTION>

Note 20.  Quarterly Financial Data (unaudited)  (in thousands except per share data)
----------------------------------------------------------------------------------------------------------------
                                                                        First     Second     Third      Fourth
                          2001                                         Quarter   Quarter    Quarter     Quarter
-------------------------------------------------------------------- ---------- ---------- ---------- ----------
<S>                                                                  <C>        <C>        <C>        <C>

 Interest income                                                        $14,602    $14,551    $14,243    $14,007
 Interest expense                                                         6,486      6,140      5,668      5,151
 Net Interest income                                                      8,116      8,411      8,575      8,856
 Provision for loan losses                                                  180        200        210        485
 Net gain on sale of securities                                              65         54        129          5
 Non-interest income, excluding net gain on sale of securities            1,159      1,101      1,336      1,730
 Non-interest expenses                                                    5,686      5,732      5,697      5,758
 Income before income taxes                                               3,474      3,634      4,133      4,348
 Net income                                                               2,331      2,474      2,793      2,942

 Basic earnings per common share                                           0.36       0.38       0.43       0.45
 Diluted earnings per common share                                         0.36       0.38       0.43       0.45
----------------------------------------------------------------------------------------------------------------
                                                                        First     Second      Third     Fourth
                          2000                                         Quarter   Quarter     Quarter    Quarter
-------------------------------------------------------------------- ---------- ---------- ---------- ----------

 Interest income                                                       $12,906     $13,623    $14,462    $14,631
 Interest expense                                                        5,326       5,773      6,546      6,583
 Net Interest income                                                     7,580       7,850      7,916      8,048
 Provision for loan losses                                                 300         300        150          -
 Net gain on sale of securities                                             97           -          -        215
 Non-interest income, excluding net gain on sale of securities             870         973      1,231        996
 Non-interest expenses                                                   5,414       5,118      5,376      5,269
 Income before income taxes                                              2,833       3,405      3,621      3,990
 Net income                                                              1,890       2,292      2,417      2,657

 Basic earnings per common share                                          0.29        0.35       0.37       0.41
 Diluted earnings per common share                                        0.29        0.35       0.37       0.41

</TABLE>

Note 21. Subsequent events

     On January 16,  2002,  the Company  completed  the  acquisition  of certain
assets and  assumption of certain  liabilities  of Monarch  Capital  Corporation
("Monarch").  In this asset purchase  transaction,  the Company acquired certain
loans and leases valued at approximately  $13,700,000.  In addition, the Company
assumed certain  liabilities  (borrowings) of Monarch,  valued at  approximately
$13,200,0000,  which had been used to fund the loans and  leases.  The  purchase
price was  $2,252,000  payable  partly in cash and  partly in shares of  Company
stock, subject to certain  adjustments.  The Company intends to use the acquired
leases as part of its leasing  business and to pay-off the assumed  liabilities.
The leases  acquired from Monarch will be  transferred to ICC and the loans will
be  transferred  to the  Bank.  Subsequent  to the  transaction  Monarch  ceased
operations,  except for the  collection of certain loans and leases not acquired
by the Company.

                                       47