<PAGE>
 
Management's Discussion and Analysis of Financial Condition and Results of
Operations  



General

Pamrapo Bancorp, Inc. (the "Company") owns 100% of the issued and outstanding
stock of Pamrapo Savings Bank, SLA (the "Bank"), which is the primary asset of
the Company. The Company's business is conducted principally through the Bank.


Business of the Company

The Bank's principal business has been and continues to be attracting retail
deposits from the general public and investing those deposits, together with
funds generated from operations, primarily in one-to-four family, owner occupied
residential mortgage loans. In addition, in times of low loan demand, the Bank
will invest in mortgage-backed securities to supplement its lending portfolio.
The Bank also invests, to a lesser extent, in multi-family residential mortgage
loans, commercial real estate loans, home equity and second mortgage loans and
consumer loans.

        The earnings of the Bank depend primarily upon the level of net interest
income, which is the difference between the interest earned on assets such as
loans, mortgage-backed securities, investments and other interest-earning assets
and the interest paid on liabilities such as deposits and borrowings. Net
interest income is affected by many factors, including regulatory, economic, and
competitive factors that influence interest rates, loan demand and deposit flow.
Net interest income is also affected by the amount, composition and relative
interest rates of the Bank's assets and liabilities and by the repricing of such
assets and liabilities. The Bank is vulnerable to interest rate fluctuations to
the extent that its interest-bearing liabilities mature or reprice more rapidly
than its interest-earning assets. Such asset/liability structure may result in
lower net interest income during periods of rising interest rates and may be
beneficial in times of declining interest rates. The Bank's net income is also
affected by provisions for loan losses, non-interest income, non-interest
expenses and income taxes. 


Financial Condition

The Company's consolidated assets at December 31, 1998 totaled $413.5 million,
which represents an increase of $36.8 million or 9.77% when compared to $376.7
million at December 31, 1997, primarily due to an increase in the loans
receivable.

        Securities available for sale decreased $2.2 million or 18.49% to $9.7
million at December 31, 1998 when compared with $11.9 million at December 31,
1997. The decrease during the year ended December 31, 1998, resulted primarily
from proceeds from maturities and calls of and repayments on securities
available for sale amounting to $2.3 million along with the increase in
unrealized gain on securities available for sale of $46,000 which offset
purchases of securities available for sale of $68,000.

        Investment securities held to maturity amounted to $2.0 million at
December 31, 1998 as a result of purchases of such securities.

        Mortgage-backed securities held to maturity decreased $5.7 million or
4.52% from $126.1 million at December 31, 1997 to $120.4 million at December 31,
1998. The decrease during the year ended December 31, 1998 resulted from
principal repayments of $32.2 million on mortgage-backed securities which were
sufficient to offset purchases of mortgage-backed securities of $26.7 million.

        Net loans amounted to $239.0 million and $211.2 million at December 31,
1998 and 1997, respectively, which represents an increase of $27.8 million or
13.16%. During the year ended December 31, 1998, loan originations exceeded loan
principal repayments by $28.3 million. During the year ended December 31, 1998,
the Bank transferred mortgage loans totaling $1.0 million to foreclosed real
estate. Additionally, the Bank provided $292,000 as a provision for loan losses
during the year ended December 31, 1998. At December 31, 1998 and 1997, loans
delinquent ninety days or more totaled $4.6 million or 1.92% of loans receivable
and $6.9 million or 3.27% of loans receivable, respectively.
<PAGE>
 
Management's Discussion and Analysis of Financial Condition and Results of
Operations, continued 



        Foreclosed real estate amounted to $1.2 million and $1.4 million at
December 31, 1998 and 1997, respectively. At December 31, 1998, foreclosed real
estate consisted of thirteen properties, of which ten were residential, two were
land and one was a commercial property. During the year ended December 31, 1998,
thirteen properties with a combined book value of $1.0 million were sold and
another three properties with a combined book value of $256,000 remain under
contract for sale. At December 31, 1997, foreclosed real estate consisted of
nineteen properties, of which fifteen were residential, three were land and one
was a commercial property. At December 31, 1998 and 1997, non-performing assets
totaled $5.8 million or 1.40% of total assets and $8.3 million or 2.20% of total
assets, respectively.

        Total deposits at December 31, 1998 increased $18.5 million or 6.02% to
$326.0 million compared to $307.5 million at December 31, 1997.

        Advances from the Federal Home Loan Bank of New York ("FHLB-NY") totaled
$28.6 million and $13.6 million at December 31, 1998 and 1997, respectively. The
increase of $15.0 million during the year ended December 31, 1998, resulted from
new advances from the FHLB-NY, which were used for general corporate purposes.

        Stockholders' equity amounted to $49.8 million and $48.5 million at
December 31, 1998 and 1997, respectively. During the years ended December 31,
1998 and 1997, net income of $4.4 million and $5.1 million, respectively, was
recorded and cash dividends of $3.2 million and $2.9 million, respectively, were
paid on the Company's common stock. During the year ended December 31, 1997, the
Company repurchased 318,900 shares of its common stock, at prices ranging from
$19.50 to $23.50 per share, for $7.4 million under a stock repurchase program
and reissued 5,860 shares of its common stock from treasury stock for $34,000 as
a result of the exercise of stock options by officers and employees. The Company
did not repurchase any shares during the year ended December 31, 1998.


Results of Operations For The Years Ended December 31, 1998 and 1997


Net Income

Net income decreased by $676,000 or 13.33% to $4.4 million during the year ended
December 31, 1998 compared with $5.1 million for the year ended December 31,
1997. The decrease in net income during the 1998 period was due to increases in
total interest expense of $566,000 and non-interest expenses of $1.02 million,
along with a decrease in non-interest income of $275,000, which more than offset
an increase in total interest income of $575,000 along with decreases in
provision for loan losses of $294,000 and income taxes of $316,000. 


Interest Income

Interest income on loans during the year ended December 31, 1998 increased by
$682,000 or 3.65% to $19.4 million when compared to $18.7 million during 1997.
During the years ended December 31, 1998 and 1997, the yield earned on the loan
portfolio was 8.72% and 9.10%, respectively. The average balance of loans
outstanding during the years ended December 31, 1998 and 1997, totaled $222.2
million and $205.6 million, respectively.

        Interest on mortgage-backed securities decreased $184,000 or 2.15%,
during the year ended December 31, 1998 to $8.4 million compared to $8.6 million
for 1997. During the years ended December 31, 1998 and 1997, the average balance
of mortgage-backed securities outstanding was $127.1 million and $127.0 million,
respectively. The yield earned on the mortgage-backed securities portfolio was
6.60% and 6.75% during 1998 and 1997, respectively.  

        Interest earned on investment securities decreased by $285,000 or 56.10%
to $223,000 for the year ended December 31, 1998, when compared to $508,000 for
1997. The decrease resulted from a decrease of $3.0 million or 45.15% in the
average balance of the investment securities portfolio along with a decrease of
155 basis points in the yield earned on the investment securities portfolio from
7.77% in 1997 to 6.22% in 1998.
<PAGE>
 
Management's Discussion and Analysis of Financial Condition and Results of
Operations, continued 



        Interest on other interest-earning assets increased by $363,000 or
58.93% to $979,000 during the year ended December 31, 1998 when compared to
$616,000 in 1997. During the year ended December 31, 1998, the increase in
interest on other interest-earning assets resulted from an increase in the yield
earned to 6.25% in 1998 from 5.56% in 1997, along with an increase of $4.6
million or 41.45% in the average balance of other interest-earning assets
outstanding.


Interest Expense 

Interest on deposits increased $242,000 or 2.19% to $11.3 million during the
year ended December 31, 1998 compared to $11.1 million for 1997. The increase
during 1998 was attributable to an increase of $7.7 million or 2.67% in the
average balance of interest-bearing deposits outstanding which was sufficient to
offset a decrease of two basis points in the Bank's average cost of interest-
bearing deposits to 3.81% for 1998 from 3.83% for 1997. 

        Interest on advances and other borrowed money increased $324,000 or
40.50% to $1.1 million during the year ended December 31, 1998 compared to
$800,000 for 1997. The increase during 1998 was attributable to an increase of
$5.9 million in the average balance of advances and other borrowings outstanding
which was sufficient to offset a decrease of 44 basis points in the Bank's cost
of borrowings to 6.37% for 1998 from 6.81% for 1997.


Net Interest Income

Net interest income for the years ended December 31, 1998 and 1997 remained the
same at $16.5 million. The Bank's net interest rate spread decreased from 4.17%
in 1977 to 3.91% in 1998 and its interest rate margin decreased from 4.72% in
1997 to 4.49% in 1998. These decreases primarily resulted from a one basis point
increase in the cost of average interest-bearing liabilities from 3.94% in 1997
to 3.95% in 1998, along with 25 basis point decrease in the yield on interest-
earning assets to 7.86% in 1998 from 8.11% in 1997. The level of net interest
income was maintained despite the decreases in the interest rate spread and
margin as a result of an increased level of net interest earning assets. 


Provision for Loan Losses

During the years ended December 31, 1998 and 1997, the Bank provided $292,000
and $586,000, respectively, for loan losses. At December 31, 1998 and 1997, the
Bank's loan portfolio included loans totaling $4.6 million and $6.9 million,
respectively, which were delinquent ninety days or more. The Bank maintains an
allowance for loan losses based on management's evaluation of the risks inherent
in its loan portfolio which gives due consideration to changes in general market
conditions and in the nature and volume of the Bank's loan activity. The
allowance for loan losses amounted to $2.3 million at December 31, 1998,
representing .94% of total loans and 50.00% of loans delinquent ninety days or
more compared to an allowance of $2.5 million at December 31, 1997, representing
1.15% of total loans and 36.23% of loans delinquent ninety days or more. During
the years ended December 31, 1998 and 1997, the bank charged off loans
aggregating $484,000 and $928,000, respectively. The Bank monitors its loan
portfolio and intends to continue to provide for loan losses based on its
ongoing periodic review of the loan portfolio and general market conditions.


Non-Interest Income 

Non-interest income decreased by $275,000 or 16.43% to $1.4 million during the
year ended December 31, 1998 as compared to $1.7 million for 1997. The decrease
in non-interest income during 1998 resulted primarily from gains in 1997 on
sales of mortgage-backed securities and fixed assets of $112,000 and $247,000,
respectively. No such activity took place in 1998. Partially offsetting the
aforementioned decreases were increases in fees and service charges of $79,000
and miscellaneous income of $4,000.
<PAGE>
 
Management's Discussion and Analysis of Financial Condition and Results of
Operations, continued 



Non-Interest Expenses

Non-interest expenses increased $1.0 million or 10.42% to $10.8 million during
the year ended December 31, 1998 compared to $9.8 million for 1997. Salaries and
employee benefits, occupancy, equipment and advertising expenses increased
$674,000, $243,000, $165,000 and $168,000, respectively, during the year ended
December 31, 1998, which were partially offset of decreases in legal expenses,
federal insurance premium, loss on foreclosed real estate and miscellaneous
expenses by $32,000, $3,000, $85,000 and $110,000, respectively. The 1998 non-
interest expenses include increased operating costs resulting from two Brick,
New Jersey branch offices opened after September 30, 1997 and a branch in
Jamesburg, New Jersey opened in October, 1998. 


Income Taxes 

Income tax expense totaled $2.4 million and $2.8 million during the years ended
December 31, 1998 and 1997, respectively. The decrease in 1998 resulted
primarily from a decrease in pre-tax income of $1.0 million.


Results of Operations For The Years Ended December 31, 1997 and 1996


Net Income

Net income increased by $2.1 million or 70.00% to $5.1 million during the year
ended December 31, 1997 compared with $3.0 million for the year ended December
31, 1996. The increase in net income during the 1997 period was primarily due to
a decrease in federal insurance premium of $2.5 million. The 1996 results
include a charge of $2.0 million to recapitalize the Savings Association
Insurance Fund (the "SAIF"). During the year ended December 31, 1996, a one-time
special assessment was levied amounting to 65.7 basis points on SAIF assessable
deposits held as of March 31, 1995. The after-tax charge of $1.3 million reduced
net income for the year ended December 31, 1996 by $.40 per share. In addition,
the results also reflect increases in total interest income of $361,000 and in
non-interest income of $1.0 million, along with decreases in provision for loan
losses of $59,000 and non-interest expenses of $721,000, excluding the
aforementioned special assessment, which more than offset increases in total
interest expense of $481,000 and income taxes of $1.6 million. 


Interest Income

Interest income on loans during the year ended December 31, 1997 decreased by
$492,000 or 2.56% to $18.7 million when compared to $19.2 million during 1996.
During the years ended December 31, 1997 and 1996, the yield earned on the loan
portfolio was 9.10% and 9.00%, respectively. The average balance of loans
outstanding during the years ended December 31, 1997 and 1996, totaled $205.6
million and $213.1 million, respectively.

        Interest on mortgage-backed securities increased $1.3 million or 17.81%
during the year ended December 31, 1997 to $8.6 million compared to $7.3 million
for 1996. During the year ended December 31, 1997, the average balance of
mortgage-backed securities outstanding increased $18.5 million or 17.05% to
$127.0 million when compared to $108.5 million for 1996. The yield earned on the
mortgage-backed securities portfolio remained the same at 6.75% during 1997 and
1996. The increase in the average balance of mortgage-backed securities during
1997 resulted primarily from purchases of mortgage-backed securities which more
than offset principal repayments.

        Interest earned on investment securities decreased by $398,000 or 43.93%
to $508,000 for the year ended December 31, 1997, when compared to $906,000 for
1996. The decrease resulted from a decrease of $5.2 million or 44.21% in the
average balance of the investment securities portfolio, which more than offset
an increase of four basis points in the yield earned on the investment
securities portfolio from 7.73% in 1996 to 7.77% in 1997.

        Interest on other interest-earning assets amounted to $616,000 and
$614,000 during the years ended December 31, 1997 and 1996, respectively. The
yield earned on other interest-earning assets increased from 4.87% in 1996 to
5.56% in 1997, which more than offset a decrease of $1.5 million or 12.06% in
the average balance of other interest-earning assets outstanding. 
<PAGE>
 
Management's Discussion and Analysis of Financial Condition and Results of
Operations, continued 



Interest Expense 

Interest on deposits decreased $113,000 or 1.01% to $11.1 million during the
year ended December 31, 1997 compared to $11.2 million for 1996. The decrease
during 1997 was attributable to a decrease of one basis point in the Bank's
average cost of interest-bearing deposits to 3.83% for 1997 from 3.84% for 1996,
along with a decrease of $2.0 million or .69%, in the average balance of
interest-bearing deposits outstanding.

        Interest on advances and other borrowed money increased
$594,000 or 288.35% to $800,000 during the year ended December 31, 1997 compared
to $206,000 for 1996. The increase during 1997 was attributable to an increase
of $8.4 million in the average balance of advances and other borrowings
outstanding, along with an increase of 70 basis points in the Bank's cost of
borrowings to 6.81% for 1997 from 6.11% for 1996. 


Net Interest Income 

Net interest income for the year ended December 31, 1997, decreased $120,000 or
 .72% from $16.7 million for 1996 to $16.5 million for 1997. The Bank's net
interest rate spread decreased from 4.23% in 1996 to 4.17% in 1997 and its
interest rate margin decreased from 4.81% in 1996 to 4.72% in 1997. These
decreases primarily resulted from a seven basis point increase in the cost of
average interest-bearing liabilities from 3.87% in 1996 to 3.94% in 1997, which
was sufficient to offset a one basis point increase in the yield on interest-
earning assets to 8.11% in 1997 from 8.10% in 1996.


Provision for Loan Losses 

During the years ended December 31, 1997 and 1996, the Bank provided $586,000
and $644,000, respectively, for loan losses. At December 31, 1997 and 1996, the
Bank's loan portfolio included loans totaling $6.9 million and $10.5 million,
respectively, which were delinquent ninety days or more. The Bank maintains an
allowance for loan losses based on management's evaluation of the risks inherent
in its loan portfolio which gives due consideration to changes in general market
conditions and in the nature and volume of the Bank's loan activity. The
allowance for loan losses amounted to $2.5 million at December 31, 1997,
representing 1.15% of total loans and 36.23% of loans delinquent ninety days or
more compared to an allowance of $2.8 million at December 31, 1996, representing
1.32% of total loans and 26.69% of loans delinquent ninety days or more. During
the years ended December 31, 1997 and 1996, the Bank charged off loans
aggregating $928,000 and $638,000, respectively. The Bank monitors its loan
portfolio and intends to continue to provide for loan losses based on its
ongoing periodic review of the loan portfolio and general market conditions.

Non-Interest Income 

Non-interest income increased by $1.0 million or 157.54% to $1.7 million during
the year ended December 31, 1997 as compared to $650,000 for 1996. The increase
in non-interest income during 1997 resulted primarily from increases in fees and
service charges of $409,000, gain on sales of mortgage-backed securities of
$112,000, gain on sale of fixed assets of $247,000 and miscellaneous income of
$257,000. The increase during the 1997 period in the fees and service charges
resulted from a revised service fees schedule on various depository services.
During the year ended December 31, 1997, the proceeds from sales of mortgage-
backed securities totaled $7.6 million at a net gain of $112,000. During the
year ended December 31, 1997, the Bank sold its office building in Hoboken, New
Jersey for $815,000 at a gain of $247,000. During the 1997 period, the increase
in the miscellaneous income resulted primarily from commissions earned on the
sales of annuities and mutual funds by Pamrapo Service Corp., Inc., a subsidiary
of the Bank.


Non-Interest Expense 

Non-interest expenses decreased $2.7 million or 21.89% to $9.8 million during
the year ended December 31, 1997 compared to $12.5 million for 1996. On
September 30, 1996, legislation was enacted which, among other things, imposed a
one-time special assessment on SAIF member institutions, including the Bank. The
special assessment levied amounted to 65.7 basis points on SAIF assessable
deposits held as of March 31, 1995. The Bank, during the 1996 period, took a
charge of $2.0 million as a result of such assessment. Non-interest expenses,
excluding the above-mentioned one-time SAIF assessment of $2.0, decreased
$721,000 or 6.86% to $9.8 million during the year ended December 31, 1997
compared to $10.5 million for the year ended
<PAGE>
 
Management's Discussion and Analysis of Financial Condition and Results of
Operations, continued 



December 31, 1996. Salaries and employee benefits, legal expenses, federal
insurance premium and loss on foreclosed real estate decreased $188,000,
$387,000, $469,000 and $76,000, respectively, during the year ended December 31,
1997, which were partially offset by increases in occupancy, equipment,
advertising and miscellaneous expenses of $82,000, $91,000, $75,000, and
$152,000, respectively. Non-interest expenses during the year ended December 31,
1996 include a non-recurring expense of $300,000 related to the 1996 Annual
Meeting of Stockholders.


Income Taxes 

Income tax expense totaled $2.8 million and $1.2 million during the years ended
December 31, 1997 and 1996, respectively. The increase in 1997 resulted
primarily from an increase in pre-tax income of $3.7 million from 1996 and a
reduction, during the 1996 period, of income tax expense of $250,000 resulting
from the exercise of non-statutory stock options.


Liquidity and Capital Resources 

The Bank's primary sources of funds are deposits, amortization and prepayments
of loan and mortgage-backed securities principal, FHLB-NY advances, maturities
of investment securities and funds provided by operations. While scheduled loan
and mortgage-backed securities amortization and maturities of investment
securities are a relatively predictable source of funds, deposit flows and loan
and mortgage- backed securities prepayments are greatly influenced by market
interest rates, economic conditions and competition.

        The Bank is required to maintain minimum levels of liquid assets as
defined by the Office of Thrift Supervision ("OTS") regulations. This
requirement, which may vary from time to time, depending upon economic
conditions and deposit flows, is based upon a percentage of deposits and short-
term borrowings. The required ratio currently is 4.00%. The Bank's liquidity
averaged 10.54% during December, 1998. The Bank adjusts its liquidity levels in
order to meet funding needs for deposit outflows, payments of real estate taxes
from escrow accounts on mortgage loans, repayment of borrowings, when
applicable, and loan funding commitments. The Bank also adjusts it liquidity
level as appropriate to meet its asset/liability objectives. In addition, the
Bank invests its excess funds in federal funds and overnight deposits with the
FHLB-NY, which provides liquidity to meet lending requirements. Interest-bearing
deposits in other banks at December 31, 1998 and 1997 amounted to $15.5 million
and $2.9 million, respectively.

        The Bank's liquidity, represented by cash and cash equivalents, is a
product of its operating, investing and financing activities.

        These activities are summarized below:

<TABLE> 
<CAPTION> 
                                                                                 Year Ended December 31,
                                                                                 -----------------------
(In Thousands)                                                                       1997       1998
--------------------------------------------------------------------------------------------------------
<S>                                                                              <C>        <C>   
Cash and cash equivalents-- beginning                                              $ 21,143   $ 13,307
--------------------------------------------------------------------------------------------------------
Operating activities:
        Net income                                                                    5,071      4,395
        Adjustments to reconcile net income to net cash
                provided by operating activities                                      1,547      3,728
--------------------------------------------------------------------------------------------------------
Net cash provided by operating activities                                             6,618      8,123
Net cash (used in) investing activities                                             (22,106)   (23,764)
Net cash provided by financing activities                                             7,652     30,381
--------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents                                 (7,836)    14,740
--------------------------------------------------------------------------------------------------------
Cash and cash equivalents-- ending                                                 $ 13,307   $ 28,047
--------------------------------------------------------------------------------------------------------
</TABLE>

The primary source of cash from operating activities during each period was net
income.
<PAGE>
 
Management's Discussion and Analysis of Financial Condition and Results of
Operations, continued 



        The primary sources of investing activities of the Bank are lending and
investment in mortgage-backed securities. In addition to funding new loan
production and the purchases of mortgage-backed securities through operations
and financing activities, new loan production and the purchase of mortgage-
backed securities were also funded by principal repayments on existing loans and
mortgage-backed securities. The primary sources of financing activities during
the 1998 period were net increases in deposits of $18.5 million and advances
from the FHLB-NY of $15.0 million.

        Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term investments,
such as federal funds and interest-earning deposits. If the Bank requires funds
beyond its ability to generate them internally, borrowing agreements exist with
the FHLB-NY, which provide an additional source of funds. At December 31, 1998
and 1997, advances from the FHLB-NY amounted to $28.6 million and $13.6 million,
respectively.

        The Bank anticipates that it will have sufficient funds available to
meet its current loan commitments. At December 31, 1998, the Bank has
outstanding commitments to originate loans of $11.6 million. Certificates of
deposit scheduled to mature in one year or less, at December 31, 1998, totaled
$127.6 million. Management believes that, based upon historical experience, a
significant portion of such deposits will remain with the Bank.

        At December 31, 1998, the Bank exceeded each of the three OTS capital
requirements. The Bank's tangible, core and risk-based capital ratios were
10.05%, 10.05% and 21.23%, respectively. The Bank qualifies as "well-
capitalized" under the prompt corrective action regulations of the OTS.


Impact of Inflation and Changing Prices 

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

        Unlike most industrial companies, virtually all of the assets and
liabilities of the Bank are monetary in nature. As a result, interest rates have
a more significant impact on the Bank's performance than the effects of general
levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the prices of goods and services because
such prices are affected by inflation to a larger extent than interest rates.


Impact of the Year 2000 Issue

The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Bank's
computer programs that would have date sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000. This could result in a
system failure or miscalculations causing disruptions of operations, including
among other things, a temporary inability to process transactions, or engage in
similar normal business activities.

        Based on a recent assessment, the Bank has determined that it will be
required to modify or replace portions of its software so that its computer
systems will properly utilize dates beyond December 31, 1999. The Bank presently
believes that with modifications to existing software and conversion to new
software, the Year 2000 Issue can be mitigated. However, if such modifications
and conversions are not made, or are not completed timely, the Year 2000 Issue
may have a material adverse impact on the operations of the Bank.

        The Bank has initiated formal communications with all of its significant
suppliers and vendors to determine the extent to which the Bank is vulnerable to
those third parties failure to remediate their own Year 2000 Issues. The Bank
will utilize both internal and external resources to reprogram, or replace, and
test the software for Year 2000 modifications. The Bank expects to complete the
Year 2000 project no later than March 31, 1999. The Bank is in the process of
determining the costs and time associated with the Year 2000 project. The Bank
does not expect that the total cost of the Year 2000 project will have a
material adverse impact on the financial condition or operations of the Bank. To
date, the Bank has not incurred or expensed any material amount related to the
assessment of, and preliminary efforts in connection with, its Year 2000 project
and the development of a remediation plan.
<PAGE>
 
Pamrapo Bancorp, Inc. and Subsidiaries 

Consolidated Statements of Financial Condition

<TABLE> 
<CAPTION> 


                                                                                                       December 31,
                                                                                        -----------------------------------------
                                                                         Note(s)                   1997                  1998
---------------------------------------------------------------------------------------------------------------------------------
<S>                                                                   <C>                      <C>                <C>   
Assets
Cash and amounts due from depository institutions                                               $ 10,406,794         $ 12,547,045
Interest-bearing deposits in other banks                                                           2,900,000           15,500,000
---------------------------------------------------------------------------------------------------------------------------------
  Total cash and cash equivalents                                       1 and 17                  13,306,794           28,047,045

Securities available for sale                                       1,2,9 and 17                  11,849,202            9,651,512
Investment securities held to maturity                              1,3,9 and 17                           -            1,998,142
Mortgage-backed securities held to maturity                         1,4,9 and 17                 126,108,914          120,400,191
Loans receivable                                                    1,5,9 and 17                 211,156,095          239,009,990
Foreclosed real estate                                                         1                   1,354,347            1,237,097
Investment in real estate                                                      1                     285,310              270,539
Premises and equipment                                                1,6 and 10                   3,482,178            4,695,440
Federal Home Loan Bank of New York stock                                       9                   2,979,400            3,097,200
Interest receivable                                                   1,7 and 17                   2,495,200            2,364,340
Deferred tax asset                                                      1 and 14                   1,369,891            1,237,626
Excess of cost over assets acquired                                            1                     303,250              181,949
Other assets                                                                  14                   2,023,581            1,283,086
---------------------------------------------------------------------------------------------------------------------------------
  Total assets                                                                                  $376,714,162         $413,474,157
--------------------------------------------------------------------------------------------------------------------------------- 

Liabilities and stockholders' equity
Liabilities
Deposits                                                                8 and 17                $307,472,000         $325,985,283
Advances from Federal Home Loan Bank of New York                        9 and 17                  13,583,100           28,583,100
Other borrowed money                                                   10 and 17                     273,623              252,535
Advance payments by borrowers for taxes and insurance                                              2,837,836            2,911,061
Other liabilities                                                             13                   4,014,488            5,969,273
---------------------------------------------------------------------------------------------------------------------------------
  Total liabilities                                                                              328,181,047          363,701,252
---------------------------------------------------------------------------------------------------------------------------------

Commitments and contingencies                                          16 and 17                           -                    -
 
Stockholders' equity                                           1,11,12,13 and 14
Preferred stock; authorized 3,000,000 shares;
 issued and outstanding - none                                                                             -                    -
Common stock; par value $.01; authorized 7,000,000
 shares; shares issued 3,450,000; shares
 outstanding 2,842,924                                                                                34,500               34,500
Paid-in capital in excess of par value                                                            18,906,768           18,906,768
Retained earnings - substantially restricted                                                      43,007,228           44,217,856
Accumulated other comprehensive income -
 unrealized gain on securities available for sale, net                                                10,553               39,715
Treasury stock, at cost; 607,076 shares                                                          (13,425,934)         (13,425,934)
----------------------------------------------------------------------------------------------------------------------------------
  Total stockholders' equity                                                                      48,533,115           49,772,905
----------------------------------------------------------------------------------------------------------------------------------
  Total liabilities and stockholders' equity                                                    $376,714,162         $413,474,157
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

See notes to consolidated financial statements.  
<PAGE>
 
Pamrapo Bancorp, Inc. and Subsidiaries  

Consolidated Statements of Income   


<TABLE>
<CAPTION>

                                                                                Year Ended December 31,
                                                                      -----------------------------------------          
                                                       Note(s)             1996          1997          1998
---------------------------------------------------------------------------------------------------------------
<S>                                                    <C>             <C>           <C>           <C>
Interest income:
        Loans                                          1 and 5          $19,191,106   $18,699,348   $19,380,581
        Mortgage-backed securities                           1            7,323,334     8,572,270     8,388,483
        Investments                                          1              905,838       507,895       223,459
        Other interest-earning assets                                       614,239       616,023       978,661
---------------------------------------------------------------------------------------------------------------
                Total interest income                                    28,034,517    28,395,536    28,971,184
---------------------------------------------------------------------------------------------------------------
Interest expense:
        Deposits                                             8           11,174,695    11,062,108    11,303,534
        Advances and other borrowed money                                   205,937       799,585     1,124,396
---------------------------------------------------------------------------------------------------------------
                Total interest expense                                   11,380,632    11,861,693    12,427,930
---------------------------------------------------------------------------------------------------------------
Net interest income                                                      16,653,885    16,533,843    16,543,254
Provision for loan losses                              1 and 5              644,466       585,555       291,856
---------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses                      16,009,419    15,948,288    16,251,398
---------------------------------------------------------------------------------------------------------------
Non-interest income:
        Fees and service charges                                            431,924       841,389       920,465
        Gain on sale of mortgage-backed securities     2 and 4                    -       111,583             -
        Gain on sale of fixed assets                                              -       246,652             -
        Miscellaneous                                                       217,881       474,674       478,693
---------------------------------------------------------------------------------------------------------------
                Total non-interest income                                   649,805     1,674,298     1,399,158
---------------------------------------------------------------------------------------------------------------
Non-interest expenses:
        Salaries and employee benefits                       13           5,082,192     4,893,655     5,567,768
        Net occupancy expense of premises              6 and 16             778,225       859,895     1,102,791
        Equipment                                             6             775,360       866,005     1,031,297
        Advertising                                                         114,580       189,779       358,144
        Legal                                                               516,292       128,607        96,681
        Federal insurance premium                            15           2,684,879       193,368       189,879
        Loss on foreclosed real estate                        1             283,187       207,389       122,736
        Amortization of intangibles                           1             121,300       121,300       121,301
        Miscellaneous                                                     2,179,858     2,332,215     2,221,779
---------------------------------------------------------------------------------------------------------------
                Total non-interest expenses                              12,535,873     9,792,213    10,812,376
---------------------------------------------------------------------------------------------------------------
Income before income taxes                                                4,123,351     7,830,373     6,838,180
Income taxes                                           1 and 14           1,158,483     2,759,170     2,443,477
---------------------------------------------------------------------------------------------------------------
Net income                                                              $ 2,964,868   $ 5,071,203   $ 4,394,703
---------------------------------------------------------------------------------------------------------------
Basic earnings per common share                               1         $      0.90   $      1.74   $      1.55
---------------------------------------------------------------------------------------------------------------
Diluted earnings per common stock                             1         $      0.90   $      1.74   $      1.55
---------------------------------------------------------------------------------------------------------------
Dividends per common share                                    1         $      0.90   $      1.00   $      1.12
---------------------------------------------------------------------------------------------------------------
</TABLE> 

See notes to consolidated financial statements.  
<PAGE>
 
Pamrapo Bancorp, Inc. and Subsidiaries  


Consolidated Statements of Comprehensive Income     



<TABLE>
<CAPTION>
                                                                        Year Ended December 31,
                                                              --------------------------------------------
                                                                 1996              1997            1998
----------------------------------------------------------------------------------------------------------
<S>                                                           <C>               <C>             <C>
Net income                                                    $2,964,868        $5,071,203      $4,394,703
Other comprehensive income, net of income taxes:
 Unrealized holdings gain (loss) on securities 
  available for sale, net of income tax expense (benefit) 
  of ($91,550), $123,638 and $16,500, respectively              (155,781)          210,965          29,162
 Less reconciliation adjustment for realized gains, 
  net of income tax expense (benefit) of ($2,038)                      -            (3,477)              -
----------------------------------------------------------------------------------------------------------
 Other comprehensive income                                     (155,781)          207,488          29,162
----------------------------------------------------------------------------------------------------------
Comprehensive income                                          $2,809,087        $5,278,691      $4,423,865  
----------------------------------------------------------------------------------------------------------
</TABLE> 
<PAGE>
 
Pamrapo Bancorp, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders' Equity


<TABLE> 
<CAPTION> 

                                                                            Accumulated
                                                                                Other
                                                                            Comprehensive
                                                                               Income -
                                                                             Unrealized      Debt of
                                                   Paid-in     Retained      (Loss) Gain    Employee
                                                  Capital in   Earnings -    on Securities    Stock
                                       Common     Excess of   Substantially    Available     Ownership     Treasury
                                        Stock     Par Value   Restricted     For Sale, Net     Plan          Stock         Total
----------------------------------------------------------------------------------------------------------------------------------
<S>                               <C>         <C>            <C>           <C>            <C>           <C>           <C>        
Balance - December 31, 1995       $    34,500  $18,906,768    $41,284,431   $  (41,154)   $  (148,781)  $  (660,335)   $59,375,429
Net income for the year ended                                                                               
 December 31, 1996                          -            -      2,964,868            -              -             -      2,964,868
Reduction in debt of Employee                                                                            
 Stock Ownership Plan                       -            -              -            -        148,781             -        148,781
Purchase of treasury stock                  -            -              -            -              -    (6,179,188)    (6,179,188)
Sale of treasury stock                      -            -       (331,960)           -              -       659,933        327,973
(Increase) in unrealized loss on                                                                             
 securities available for   sale,                                                                              
 net of income taxes                        -            -              -     (155,781)             -             -       (155,781)
Cash dividends                              -            -     (2,973,121)           -              -             -     (2,973,121)
----------------------------------------------------------------------------------------------------------------------------------
Balance - December 31, 1996            34,500   40,944,218       (196,935)           -     (6,179,590)   53,508,961     18,906,768
Net income for the year ended
    December 31, 1997                       -            -      5,071,203            -              -             -      5,071,203
Purchase of treasury stock                  -            -              -            -              -    (7,369,153)    (7,369,153)
Sale of treasury stock                      -            -        (88,470)           -              -       122,809         34,339
Decrease in unrealized loss on
  securities available for sale,
  net of income taxes                       -            -              -      207,488              -             -        207,488
Cash dividends                              -            -     (2,919,723)           -              -             -     (2,919,723)
----------------------------------------------------------------------------------------------------------------------------------
Balance - December 31, 1997            34,500   18,906,768     43,007,228       10,553              -   (13,425,934)    48,533,115
Net income for the year
 ended December 31, 1998                    -            -      4,394,703            -              -             -      4,394,703
Increase in unrealized gain on 
  securities available for sale,
  net of income taxes                       -            -              -       29,162              -             -         29,162
Cash dividends                              -            -     (3,184,075)           -              -             -     (3,184,075)
----------------------------------------------------------------------------------------------------------------------------------
Balance - December 31, 1998        $   34,500  $18,906,768    $44,217,856   $   39,715              -  $(13,425,934)   $49,772,905
----------------------------------------------------------------------------------------------------------------------------------
</TABLE> 

See notes to consolidated financial statements.
<PAGE>
 
Pamrapo Bancorp, Inc. and Subsidiaries  


Consolidated Statements of Cash Flows                         


<TABLE> 
<CAPTION> 
                                                                                         Year Ended December 31,
                                                                       ----------------------------------------------------------
                                                                            1996                   1997                  1998
---------------------------------------------------------------------------------------------------------------------------------
<S>                                                                    <C>                    <C>                   <C>
Cash flows from operating activities:
  Net income                                                           $  2,964,868           $  5,071,203          $  4,394,703
  Adjustments to reconcile net income to net cash provided
    by operating activities:
      Depreciation of premises and equipment and
        investment in real estate                                           324,807                350,147               508,690
      Amortization of deferred fees, premiums and discounts, net           (217,913)              (185,294)             (151,141)
      Provision for loan losses                                             644,466                585,555               291,856
      Provision for losses on foreclosed real estate                        166,003                144,747                73,206
      (Gain) loss on sale of foreclosed real estate                           1,810                (46,433)              (57,254)
      Gain on sales of fixed assets                                               -               (246,652)                    -
      Gain on sales of securities available for sale                              -                 (5,519)                    -
      Gain on sales of mortgage-backed securities held to maturity                -               (106,064)                    -
      Deferred income taxes                                                 131,066                  5,023               115,765
      Decrease in interest receivable                                       277,213                181,843               130,860
      (Increase) decrease in other assets                                (1,259,706)              (124,106)              740,495
      Amortization of intangibles                                           121,300                121,300               121,301
      Reduction in debt of Employee Stock Ownership Plan                    148,781                      -                     -
      Increase in other liabilities                                          73,532                872,689             1,954,785
---------------------------------------------------------------------------------------------------------------------------------
         Net cash provided by operating activities                        3,376,227              6,618,439             8,123,266
---------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:            
  Proceeds from maturities and calls of securities available for sale     7,000,000              5,000,000             1,000,000
  Proceeds from repayments of securities available for sale               1,827,985              1,718,879             1,270,255
  Purchases of securities available for sale                             (3,049,198)               (65,220)              (67,833)
  Proceeds from sale of securities available for sale                             -              3,992,226                     -
  Proceeds from maturities of investment securities held to maturity         99,000                      -                     -
  Purchases of investment securities held to maturity                             -                      -            (1,998,125)
  Principal repayments on mortgage-backed securities held to maturity    12,504,961             16,228,312            32,197,982
  Purchases of mortgage-backed securities held to maturity              (12,679,914)           (49,297,672)          (26,725,908)
  Proceeds from sales of mortgage-backed securities held to maturity              -              3,640,635                     -
  Proceeds from sales of student loans                                      770,672                685,386               817,555
  Purchase of mortgage loans                                               (108,500)              (391,550)           (1,785,275)
  Net change in loans receivable                                          8,729,960             (3,976,415)          (27,236,899)
  Proceeds from sales of foreclosed real estate                             401,761                798,889               588,869
  Additions to premises and equipment                                      (224,655)              (755,387)           (1,707,181)
  Proceeds from sales of fixed assets                                             -                315,312                     -
  Additions to investment in real estate                                     (6,900)                     -                     -
  Redemption (purchase) of Federal Home Loan Bank of New York stock          93,200                      -              (117,800)
---------------------------------------------------------------------------------------------------------------------------------
         Net cash provided by (used in) investing activities           $ 15,358,372           $(22,106,605)         $(23,764,360)
---------------------------------------------------------------------------------------------------------------------------------
</TABLE> 

See notes to consolidated financial statements.


<PAGE>
 
Pamrapo Bancorp, Inc. and Subsidiaries  


Consolidated Statements of Cash Flows, continued



<TABLE> 
<CAPTION> 
                                                                                         Year Ended December 31,
                                                                       ------------------------------------------------------
                                                                       1996                    1997                  1998
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                               <C>                   <C>                    <C> 
Cash flows from financing
 activities:
  Net increase in deposits                                          $ 1,884,656            $ 6,686,580            $18,513,283
  Advances from Federal Home Loan Bank of New York                    7,000,000             14,000,000             15,000,000
  Repayment of advances from Federal Home Loan
   Bank of New York                                                 (11,000,000)            (4,000,000)                     -
  Repayment of other borrowings                                        (166,761)               (19,471)               (21,088)
  (decrease) increase in advance payments
   by borrowers for taxes and insurance                                 (34,111)             1,239,732                 73,225
  Cash dividends paid                                                (3,318,121)            (2,919,723)            (3,184,075)
  Purchase of treasury stock                                         (6,179,188)            (7,369,153)                     -
  Proceeds from sales of treasury stock                                 327,973                 34,339                      -
-----------------------------------------------------------------------------------------------------------------------------
    Net cash (used in) provided by financing activities             (11,485,552)             7,652,304             30,381,345
-----------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents                  7,249,047             (7,835,862)            14,740,251
Cash and cash equivalents - beginning                                13,893,609             21,142,656             13,306,794
-----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents - ending                                  $21,142,656            $13,306,794            $28,047,045
-----------------------------------------------------------------------------------------------------------------------------
Supplemental information:
  Dividend payable                                                  $  (345,000)           $         -            $         -
-----------------------------------------------------------------------------------------------------------------------------
  Unrealized gain (loss) on securities available for sale, net      $  (155,781)           $   207,488            $    29,162
-----------------------------------------------------------------------------------------------------------------------------
  Transfer from loans receivable to foreclosed real estate          $ 2,175,779            $ 1,419,449            $   992,471
-----------------------------------------------------------------------------------------------------------------------------
  Loans to facilitate sales of foreclosed real estate               $ 1,077,800            $ 1,163,700            $   504,900
-----------------------------------------------------------------------------------------------------------------------------
  Mortgage loan in connection with sale of building                 $         -            $   500,000            $         -
-----------------------------------------------------------------------------------------------------------------------------
  Cash paid during the period for:
   Income taxes, net of refunds                                     $ 1,941,053            $ 2,034,382            $ 2,434,309
-----------------------------------------------------------------------------------------------------------------------------
   Interest on deposits and borrowings                              $11,421,978            $11,781,550            $12,245,397
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>

See notes to consolidated financial statements. 

<PAGE>
 
Pamrapo Bancorp, Inc. and Subsidiaries 


Notes to Consolidated Financial Statements 



1. Summary of Significant Accounting Policies


Basis of consolidated financial statement presentation 

The consolidated financial statements include the accounts of the Corporation
and its wholly owned subsidiary, Pamrapo Savings Bank, S.L.A. (the "Savings
Bank") and the Savings Bank's wholly owned subsidiary, Pamrapo Service Corp.,
Inc. (the "Service Corp."). The Corporation's business is conducted principally
through the Savings Bank. All significant intercompany accounts and transactions
have been eliminated in consolidation.

The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of the
consolidated statement of financial condition and revenues and expenses for the
period then ended. Actual results could differ significantly from those
estimates. Material estimates that are particularly susceptible to significant
changes relate to the determination of the allowance for loan losses, the
valuation of foreclosed real estate, the assessment of prepayment risks
associated with mortgage-backed securities and the determination of the amount
of deferred tax assets which are more likely than not to be realized. Management
believes that the allowance for loan losses is adequate, foreclosed real estate
is appropriately valued, prepayment risks associated with mortgage-backed
securities are properly recognized and all deferred tax assets are more likely
than not to be recognized. While management uses available information to
recognize losses on loans and foreclosed real estate, future additions to the
allowance for loan losses or further writedowns of foreclosed real estate may be
necessary based on changes in economic conditions in the market area.
Additionally, assessments of prepayment risks related to mortgage-backed
securities are based upon current market conditions, which are subject to
frequent change. Finally, the determination of the amount of deferred tax assets
more likely than not to be realized is dependent on projections of future
earnings, which are subject to frequent change.

In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Savings Bank's allowance for loan
losses and foreclosed real estate valuations. Such agencies may require the
Savings Bank to recognize additions to the allowance for loan losses or
additional writedowns on foreclosed real estate based on their judgments about
information available to them at the time of their examination.


Cash and cash equivalents

Cash and cash equivalents include cash and amounts due from depository
institutions, federal funds sold and interest-bearing deposits in other banks
having original maturities of three months or less. Generally, federal funds
sold are sold for one-day periods.


Investment and mortgage-backed securities

Investments in debt securities that the enterprise has the positive intent and
ability to hold to maturity are classified as held-to-maturity securities and
reported at amortized cost. Debt and equity securities that are bought and held
principally for the purpose of selling them in the near term are classified as
trading securities and reported at fair value, with unrealized holding gains and
losses included in earnings. Debt and equity securities not classified as
trading securities nor as held-to-maturity securities are classified as
available for sale securities and reported at fair value, with unrealized
holding gains or losses, net of deferred income taxes, reported in a separate
component of stockholders' equity.

Premiums and discounts on all securities are amortized/accreted using the
interest method. Interest and dividend income on securities, which includes
amortization of premiums and accretion of discounts, is recognized in the
consolidated financial statements when earned. The adjusted cost basis of an
identified security sold or called is used for determining security gains and
losses recognized in the consolidated statements of income.


Loans receivable

Loans receivable are stated at unpaid principal balances, less the allowance for
loan losses and net deferred loan origination fees and discounts.

The Savings Bank defers loan origination fees and certain direct loan
origination costs and accretes such amounts as an adjustment of yield over the
contractual lives of the related loans. Discounts on loans purchased are
recognized as income by use of the level-yield method over the terms of the
respective loans.

Uncollectible interest on loans is charged off, or an allowance is established
based on management's evaluation. An allowance is established by a charge to
interest income equal to all interest previously accrued, and income is
subsequently recognized only to the extent that cash payments are received
until, in management's judgment, the borrower's ability to make periodic
interest and principal payments is probable, in which case the loan is returned
to an accrual status.
<PAGE>
 
Notes to Consolidated Financial Statements, continued 



Allowance for loan losses

An allowance for loan losses is maintained at a level considered adequate to
absorb loan losses. Management of the Savings Bank, in determining the allowance
for loan losses, considers the risks inherent in its loan portfolio and changes
in the nature and volume of its loan activities, along with the general economic
and real estate market conditions.

The Savings Bank utilizes a two tier approach:
(1) identification of impaired loans and the establishment of specific loss
allowances on such loans; and (2) establishment of general valuation allowances
on the remainder of its loan portfolio. The Savings Bank maintains a loan review
system which allows for a periodic review of its loan portfolio and the early
identification of potential impaired loans. Such system takes into
consideration, among other things, delinquency status, size of loans, type of
collateral and financial condition of the borrowers. Specific loan loss
allowances are established for identified loans based on a review of such
information and/or appraisals of the underlying collateral. General loan loss
allowances are based upon a combination of factors including, but not limited
to, actual loan loss experience, composition of loan portfolio, current economic
conditions and management's judgment.

Although management believes that adequate specific and general loan loss
allowances are established, actual losses are dependent upon future events and,
as such, further additions to the allowance for loan losses may be necessary.

An impaired loan is evaluated based on the present value of expected future cash
flows discounted at the loan's effective interest rate, or as a practical
expedient, at the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. A loan evaluated for impairment
is deemed to be impaired when, based on current information and events, it is
probable that the Savings Bank will be unable to collect all amounts due
according to the contractual terms of the loan agreement. An insignificant
payment delay, which is defined as up to ninety days by the Savings Bank, will
not cause a loan to be classified as impaired. A loan is not impaired during a
period of delay in payment if the Savings Bank expects to collect all amounts
due, including interest accrued at the contractual interest rate for the period
of delay. Thus, a demand loan or other loan with no stated maturity is not
impaired if the Savings Bank expects to collect all amounts due, including
interest accrued at the contractual interest rate, during the period the loan is
outstanding. All loans identified as impaired are evaluated independently. The
Savings Bank does not aggregate such loans for evaluation purposes. Payments
received on impaired loans are applied first to accrued interest receivable and
then to principal.

Foreclosed real estate and investment in real estate

Real estate acquired by foreclosure or deed in lieu of foreclosure is initially
recorded at the lower of cost or estimated fair value at date of acquisition and
subsequently carried at the lower of such initially recorded amount or estimated
fair value less estimated costs to sell. Costs incurred in developing or
preparing properties for sale are capitalized. Expenses of holding properties
and income from operating properties are recorded in operations as incurred or
earned. Gains and losses from sales of such properties are recognized as
incurred.

Real estate held for investment is carried at cost less accumulated
depreciation. Income and expense of operating the property are recorded in
operations.


Premises and equipment 

Premises and equipment are comprised of land, at cost, and buildings, building
improvements, leaseholds and furnishings and equipment, at cost, less
accumulated depreciation and amortization. Significant renewals and betterments
are charged to the property and equipment account. Maintenance and repairs are
expensed in the year incurred. Rental income is netted against occupancy expense
in the consolidated statements of income.


Income taxes 

The Corporation, Savings Bank and Service Corp. file a consolidated federal
income tax return. Income taxes are allocated to the Corporation, Savings Bank
and Service Corp. based on their respective income or loss included in the
consolidated income tax return. Separate state income tax returns are filed by
the Corporation, Savings Bank and Service Corp.

Federal and state income taxes have been provided on the basis of reported
income. The amounts reflected on the Corporation's and subsidiaries' tax returns
differ from these provisions due principally to temporary differences in the
reporting of certain items for financial reporting and income tax reporting
purposes.

Deferred income tax expense or benefit is determined by recognizing deferred tax
assets and liabilities for the estimated future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax basis. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences
<PAGE>
 
Notes to Consolidated Financial Statements, continued 



are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in earnings in the period
that includes the enactment date. The realization of deferred tax assets is
assessed and a valuation allowance provided, when necessary, for that portion of
the asset which is not likely to be realized. Management believes, based upon
current facts, that it is more likely than not that there will be sufficient
taxable income in future years to realize the deferred tax assets.


Interest-rate risk

The Savings Bank is principally engaged in the business of attracting deposits
from the general public and using these deposits, together with borrowings and
other funds, to invest in securities, to make loans secured by real estate and,
to a lesser extent, make consumer loans. The potential for interest-rate risk
exists as a result of the generally shorter duration of the Savings Bank's
interest-sensitive liabilities compared to the generally longer duration of its
interest-sensitive assets. In a rising interest rate environment, liabilities
will reprice faster than assets, thereby reducing net interest income. For this
reason, management regularly monitors the maturity structure of the Savings
Bank's assets and liabilities in order to measure its level of interest-rate
risk and to plan for future volatility.


Disclosures about fair value of financial instruments 

The following methods and assumptions were used in estimating the fair value of
its financial instruments:

Cash and cash equivalents and interest receivable: The carrying amounts reported
in the consolidated financial statements for cash and cash equivalents and
interest receivable approximate their fair values.

Securities: The fair value of securities, as well as commitments to purchase
securities, is determined by reference to quoted market prices, where available.
If quoted market prices are not available, fair values are based on quoted
market prices of comparable instruments.

Loans receivable: For certain homogeneous categories of loans, such as
residential mortgages, fair value is estimated using the quoted market prices
for securities backed by similar loans, adjusted for differences in loan
characteristics. For other types of loans, fair value is estimated by
discounting the future cash flows, using the current rates at which similar
loans would be made to borrowers with similar credit ratings and for the same
remaining maturities, of such loans.

Deposits: The carrying amounts reported in the consolidated financial statements
for non-interest-bearing demand, NOW, Money Market, savings and club accounts
approximates their fair values. For fixed-maturity certificates of deposit, fair
value is estimated using the rates currently offered for deposits of similar
remaining maturities.

Advances from Federal Home Loan Bank of New York and other borrowed money: Fair
value is estimated using rates currently offered for liabilities of similar
remaining maturities, or when available, quoted market prices.

Commitments to extend credit: The fair value of commitments is estimated using
the fees currently charged to enter into similar agreements, taking into account
the remaining terms of the agreements and the present creditworthiness of the
counterparties. For fixed-rate loan commitments, fair value also considers the
difference between current levels of interest rates and the committed rates.

Excess of cost over assets acquired

The cost in excess of the fair value of net assets (goodwill) acquired through
the acquisition of certain assets and assumption of certain liabilities of
branch offices is being amortized to expense over a ten year period by use of
the straight-line method.


Net income per common share

Basic net income per common share is based on the weighted average number of
common shares actually outstanding. Diluted net income per share is calculated
by adjusting the weighted average number of shares of common stock outstanding
to include the effect of stock options, if dilutive, using the treasury stock
method.


Comprehensive income 

Effective January 1, 1998, the Corporation adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income". SFAS
No. 130 requires the reporting of comprehensive income in addition to net income
from operations. Comprehensive income is a more inclusive financial reporting
methodology that includes disclosure of certain financial information that
historically has not been recognized in the calculation of net income. As
required, the provisions of SFAS No. 130 have been retroactively applied to
previously reported periods. The application of SFAS No. 130 had no material
effect on the Corporation's consolidated financial condition or operations.
<PAGE>
 
Notes to Consolidated Financial Statements, continued 



Impact of recent accounting standards 

In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" which
addresses the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and hedging activities. SFAS
No. 133 supersedes SFAS No. 80, "Accounting for Futures Contracts", SFAS No.
105, "Disclosure of Information about Financial Instruments with Off-Balance-
Sheet Risk and Financial Instruments with Concentrations of Credit Risk", and
SFAS No. 119, "Disclosure about Derivative Financial Instruments and Fair Value
of Financial Instruments".

It amends SFAS No. 107, "Disclosures about Fair Value of Financial Instruments"
to include in SFAS No. 107 the disclosure provisions about concentrations of
credit risk from SFAS No. 105. SFAS No. 133 is effective for all fiscal quarters
of fiscal years beginning after June 15, 1999. As the Corporation does not have
any derivative instruments or similar contracts, the adoption of SFAS No. 133
will have no impact on the Corporation's financial condition or results of
operations.


Reclassification

Certain amounts for periods have been reclassified to conform to the current
period's presentation.

 
2. Securities Available for Sale

<TABLE>
<CAPTION>
                                                                                        December 31, 1997
                                                          -------------------------------------------------------------------------
                                                                                       Gross Unrealized                
                                                            Amortized          ---------------------------------          Carrying
                                                              Value                Gains               Losses              Value
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                       <C>                  <C>                  <C>                 <C>
U.S. Government (including agencies):
 Due after one year through five years                    $  1,999,000         $     16,620         $          -        $ 2,015,620
 After ten years                                             1,000,000                1,920                    -          1,001,920
-----------------------------------------------------------------------------------------------------------------------------------
                                                             2,999,000               18,540                    -          3,017,540

Mortgage-backed securities                                   7,712,311               18,925              153,928          7,577,308
Mutual funds                                                 1,114,418                4,289                    -          1,118,707
Equity security                                                  7,020              128,627                    -            135,647
-----------------------------------------------------------------------------------------------------------------------------------
                                                          $ 11,832,749         $    170,381         $    153,928        $11,849,202
-----------------------------------------------------------------------------------------------------------------------------------

<CAPTION>
                                                                                        December 31, 1998
                                                          -------------------------------------------------------------------------
                                                                                       Gross Unrealized                  
                                                            Amortized          ---------------------------------          Carrying
                                                              Value                Gains               Losses              Value
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                       <C>                  <C>                  <C>                 <C>
U.S. Government (including agencies):
 Due in one year or less                                  $  1,999,632         $     17,248         $          -        $ 2,016,880
Mortgage-backed securities                                   6,400,494                8,767              102,056          6,307,205
Mutual funds                                                 1,182,251                                     6,024          1,176,227
Equity security                                                  7,020              144,180                    -            151,200
-----------------------------------------------------------------------------------------------------------------------------------
                                                          $  9,589,397         $    170,195         $    108,080        $ 9,651,512
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE> 
 
There were no sales of securities available for sale during the years ended
December 31, 1996 and 1998. Proceeds from the sales of securities available for
sale during the year ended December 31, 1997 totalled $3,992,226. Gross gains of
$32,399 and gross losses of $26,880 were realized on those sales.


<PAGE>
 
Notes to Consolidated Financial Statements, continued 


 
3. Investment Securities Held To Maturity

<TABLE> 
<CAPTION> 
                                                                                        December 31, 1998
                                                          --------------------------------------------------------------------------
                                                                                        Gross Unrealized             
                                                              Amortized        ---------------------------------      Estimated Fair
                                                               Value               Gains              Losses              Value
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                       <C>                  <C>                  <C>                  <C>
U.S. Government (including agencies):
 Due after ten years                                      $  1,998,142         $          -         $         17         $ 1,998,125
------------------------------------------------------------------------------------------------------------------------------------
</TABLE> 

There were no sales of investment securities held to maturity during the years
ended December 31, 1996, 1997 and 1998.

4. Mortgage-Backed Securities Held To Maturity

<TABLE> 
<CAPTION> 
                                                                                        December 31, 1997
                                                          --------------------------------------------------------------------------
                                                                                        Gross Unrealized          
                                                              Amortized        ---------------------------------      Estimated Fair
                                                               Value               Gains              Losses              Value
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                       <C>                  <C>                  <C>                  <C>
Federal Home Loan Mortgage Corporation                    $ 91,984,480         $  1,184,211         $     91,719        $ 93,076,972
Federal National Mortgage Association                       25,991,878              511,087               32,940          26,470,025
Government National Mortgage Association                     8,132,556               98,617                1,378           8,229,795
------------------------------------------------------------------------------------------------------------------------------------
                                                          $126,108,914         $  1,793,915         $    126,037        $127,776,792
------------------------------------------------------------------------------------------------------------------------------------

<CAPTION>
                                                                                        December 31, 1998
                                                          --------------------------------------------------------------------------
                                                                                        Gross Unrealized            
                                                              Amortized        ---------------------------------      Estimated Fair
                                                               Value               Gains              Losses              Value
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                       <C>                  <C>                  <C>                  <C>
Federal Home Loan Mortgage Corporation                    $ 91,292,670         $  1,223,045         $     66,695        $ 92,449,020
Federal National Mortgage Association                       23,856,520              311,870               31,897          24,136,493
Government National Mortgage Association                     5,251,001               83,732                    -           5,334,733
------------------------------------------------------------------------------------------------------------------------------------
                                                          $120,400,191         $  1,618,647         $     98,592        $121,920,246
------------------------------------------------------------------------------------------------------------------------------------
</TABLE> 

 
There were no sales of mortgage-backed securities during the years ended
December 31, 1996 and 1998. During the year ended December 31, 1997, proceeds
from the sales of mortgage-backed securities held to maturity totalled
$3,640,635 and resulted in gross gains and losses of $115,069 and $9,005,
respectively. The securities sold had an outstanding principal balance of less
than fifteen percent of their original principal balances and, as provided for
in SFAS No. 115, were permitted to be sold out of the held to maturity
portfolio.

<PAGE>
 
Notes to Consolidated Financial Statements, continued 

 

5. Loans Receivable

<TABLE> 
<CAPTION> 
                                                                       December 31,
                                                          -------------------------------------
                                                              1997                 1998
-----------------------------------------------------------------------------------------------
<S>                                                       <C>                  <C>
Real estate mortgage:
 One-to-four family                                       $120,344,198         $138,885,292
 Multi-family                                               32,872,720           33,717,925
 Commercial                                                 21,323,826           21,259,215
 FHA insured and
  VA guaranteed                                              1,085,808              761,245
-----------------------------------------------------------------------------------------------
                                                           175,626,552          194,623,677
-----------------------------------------------------------------------------------------------
Real estate construction                                     2,031,948            5,073,807
-----------------------------------------------------------------------------------------------
Land                                                           605,862            2,184,263
-----------------------------------------------------------------------------------------------
Consumer:
 Passbook or certificate                                       431,303              458,476
 Home improvement                                              440,314              508,026
 Equity and second mortgage                                 33,586,539           39,184,421
 Student education                                             752,973               53,604
 Automobile                                                  1,210,292            1,273,202
 Personal                                                    1,444,871            2,033,009
-----------------------------------------------------------------------------------------------
                                                            37,866,292           43,510,738
-----------------------------------------------------------------------------------------------
  Total                                                    216,130,654          245,392,485
-----------------------------------------------------------------------------------------------
Less:
 Loans in process                                              570,700            2,408,762
 Allowance for loan losses                                   2,475,000            2,300,000
 Deferred loan fee and discounts                             1,928,859            1,673,733
-----------------------------------------------------------------------------------------------
                                                             4,974,559            6,382,495
-----------------------------------------------------------------------------------------------
                                                          $211,156,095         $239,009,990
-----------------------------------------------------------------------------------------------
</TABLE>

At December 31, 1996, 1997 and 1998, loans serviced by the Savings Bank for the
benefit of others totalled approximately $7,593,000, $4,943,000 and $3,772,000,
respectively.

At December 31, 1996, 1997 and 1998, nonaccrual loans for which interest has
been discontinued totalled approximately $6,928,000, $5,041,000 and $3,446,000,
respectively. During the years ended December 31, 1996, 1997 and 1998, the
Savings Bank recognized interest income of approximately $172,000, $144,000 and
$97,000, respectively, on these loans. Interest income that would have been
recorded, had the loans been on accrual status, would have amounted to
approximately $665,000, $491,000 and $333,000 for the years ended December 31,
1996, 1997 and 1998, respectively. The Savings Bank is not committed to lend
additional funds to the borrowers whose loans have been placed on nonaccrual
status.

The following is an analysis of the allowance for loan losses:

<TABLE>
<CAPTION>
                                                                                                    December 31,
                                                                                     ----------------------------------------
                                                                                        1996          1997          1998
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                 <C>           <C>           <C>
Balance, beginning                                                                   $2,725,000    $2,800,000   $ 2,475,000
Provisions charged to operations                                                        644,466       585,555       291,856
Recoveries credited to allowance                                                         68,906        17,144        16,773
Loan losses charged to allowance                                                       (638,372)     (927,699)     (483,629)
-----------------------------------------------------------------------------------------------------------------------------
                                                                                     $2,800,000    $2,475,000   $ 2,300,000
-----------------------------------------------------------------------------------------------------------------------------
</TABLE> 
 
Impaired loans and related amounts recorded in the allowance for loan losses are
summarized as follows:

<TABLE> 
<CAPTION> 
                                                                               December 31,
                                                                         ------------------------
                                                                           1997          1998
-------------------------------------------------------------------------------------------------
<S>                                                                      <C>           <C>
Recorded investment in impaired loans:
    With recorded allowances                                             $1,490,362    $1,172,293
    Without recorded allowances                                           3,361,451     2,277,547
-------------------------------------------------------------------------------------------------
    Total impaired loans                                                  4,851,813     3,449,840
-------------------------------------------------------------------------------------------------
Related allowance for loan losses                                           616,349       671,110
-------------------------------------------------------------------------------------------------
    Net impaired loans                                                   $4,235,464    $2,778,730
-------------------------------------------------------------------------------------------------
</TABLE> 
 
The activity with respect to loans to directors, officers and associates of such
persons, is as follows:

<TABLE> 
<CAPTION> 
                                                                                              Year Ended December 31,
                                                                                     ----------------------------------------
                                                                                        1996          1997          1998
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                  <C>           <C>          <C>
Balance, beginning                                                                   $2,939,661    $3,341,861   $ 3,121,209
Loans originated                                                                      1,034,065       522,580     1,314,400
Collection of principal                                                                (631,865)     (743,232)   (1,376,837)
-----------------------------------------------------------------------------------------------------------------------------
Balance, ending                                                                      $3,341,861    $3,121,209   $ 3,058,772
-----------------------------------------------------------------------------------------------------------------------------
</TABLE> 

 
<PAGE>
 
Notes to Consolidated Financial Statements, continued 



6. Premises and Equipment

<TABLE> 
<CAPTION> 
                                                                                                         December 31,
                                                                                                   ------------------------
                                                                                                      1997          1998
---------------------------------------------------------------------------------------------------------------------------
<S>                                                                                                <C>           <C>
Land                                                                                               $  701,625    $  701,625
---------------------------------------------------------------------------------------------------------------------------
Buildings and improvements                                                                          2,988,834     2,996,805
Less accumulated depreciation                                                                       1,242,349     1,348,149
---------------------------------------------------------------------------------------------------------------------------
                                                                                                    1,746,485     1,648,656
---------------------------------------------------------------------------------------------------------------------------
Leasehold improvements                                                                                413,741     1,578,184
Less accumulated depreciation                                                                           8,382        96,807
---------------------------------------------------------------------------------------------------------------------------
                                                                                                      405,359     1,481,377
---------------------------------------------------------------------------------------------------------------------------
Furnishings and equipment                                                                           4,100,874     4,635,642
Less accumulated amortization                                                                       3,472,165     3,771,860
---------------------------------------------------------------------------------------------------------------------------
                                                                                                      628,709       863,782
---------------------------------------------------------------------------------------------------------------------------
                                                                                                   $3,482,178    $4,695,440
---------------------------------------------------------------------------------------------------------------------------
</TABLE>

Depreciation expense for the years ended December 31, 1996, 1997 and 1998
totalled approximately $311,000, $335,000 and $509,000, respectively.
Depreciation charges are computed on the straight-line method over the following
estimated useful lives:

Buildings and improvements      10 to 50 years
Leasehold improvements          10 years
Furnishings and equipment       3 to 10 years

7. Interest Receivable

<TABLE> 
<CAPTION> 
                                                           December 31,
                                                   ---------------------------
                                                      1997            1998
------------------------------------------------------------------------------
<S>                                                 <C>            <C>
Loans, net of allowance
  for uncollected interest
  of approximately $281,000
  and $204,000, respectively                        $1,580,275      $1,506,519
Mortgage-backed securities                             829,217         789,271
Investments and other
  interest-earning assets                               85,708          68,550
------------------------------------------------------------------------------
                                                    $2,495,200      $2,364,340
------------------------------------------------------------------------------
</TABLE> 
 

8. Deposits

<TABLE> 
<CAPTION> 
                                                                           December 31,
                                      ----------------------------------------------------------------------------------
                                                           1997                                    1998
                                      ----------------------------------------------------------------------------------
                                        Weighted                                  Weighted
                                      Average Rate   Amount           Percent   Average Rate   Amount            Percent
------------------------------------------------------------------------------------------------------------------------
<S>                                   <C>        <C>                  <C>       <C>       <C>                   <C>
Demand:
 Non-interest-bearing demand             0.00%   $ 14,855,660            4.83      0.00%  $ 17,379,472             5.33
 NOW                                     2.00%     19,917,411            6.48      2.00%    22,373,617             6.86
------------------------------------------------------------------------------------------------------------------------
                                                   34,773,071           11.31               39,753,089            12.19
 
Money Market                             2.75%     22,213,618            7.22      3.00%    22,853,641             7.01
Savings and club                         2.84%    109,475,872           35.61      2.25%   111,715,515            34.27
Certificates of deposit 4.96%                     141,009,439           45.86      5.02%   151,663,038            46.53
------------------------------------------------------------------------------------------------------------------------
                                         3.61%   $307,472,000          100.00      3.46%  $325,985,283           100.00
------------------------------------------------------------------------------------------------------------------------
</TABLE>


<PAGE>
 
Notes to Consolidated Financial Statements, continued 

The scheduled maturities of certificates of deposit are as follows:

<TABLE>
<CAPTION>
  
                                                                                  December 31,
(In Thousands)                                                          -----------------------------
Maturity Period                                                               1997           1998
----------------------------------------------------------------------------------------------------- 
<S>                                                                    <C>             <C>
One year or less                                                         $     117,901    $   127,627
After one to three years                                                        20,183         20,219
After three years                                                                2,925          3,817
----------------------------------------------------------------------------------------------------- 
                                                                         $     141,009    $   151,663
----------------------------------------------------------------------------------------------------- 
                                                                     
Certificates of deposit of $100,000 or more                          
by the time remaining until maturity are as follows:                 
                                                                     
<CAPTION>                                                            

                                                                     
                                                                                December 31,    
(In Thousands)                                                          -----------------------------
Maturity Period                                                                1997           1998
----------------------------------------------------------------------------------------------------- 
<S>                                                                     <C>               <C>    
Three months or less                                                     $       7,160    $     9,094
After three through six months                                                   8,096          6,110
After six through twelve months                                                  6,611         10,387
After twelve months                                                              4,551          3,991
----------------------------------------------------------------------------------------------------- 
                                                                         $      26,418    $    29,582
----------------------------------------------------------------------------------------------------- 
                                                                                  
A summary of interest on deposits follows:                                        
                                                                                  
<CAPTION>                                                                         

                                                                                  
                                                                Year Ended December 31,
                                                    --------------------------------------------
                                                          1996            1997           1998
------------------------------------------------------------------------------------------------ 
<S>                                                 <C>             <C>             <C>             
Demand                                                $ 1,078,983   $     993,986    $ 1,045,139
Savings and club                                        3,166,105       3,077,839      2,834,378
Certificates of deposit                                 6,939,953       7,002,181      7,437,359
------------------------------------------------------------------------------------------------ 
                                                       11,185,041      11,074,006     11,316,876
Less penalties for                                  
        early withdrawal                            
        of certificates of                          
        deposit                                           (10,346)        (11,898)       (13,342)
------------------------------------------------------------------------------------------------ 
                                                      $11,174,695   $  11,062,108    $11,303,534
------------------------------------------------------------------------------------------------ 
</TABLE> 

 
9. Advances From Federal Home Loan Bank of New York

<TABLE> 
<CAPTION> 
 
                                         December 31,
                         ------------------------------------------------                        
                                  1997                  1998
                         ------------------------------------------------                        
                         Weighted                 Weighted
Maturing                 Average                  Average
by                       Interest                 Interest
------------------------------------------------------------------------
<S>                     <C>        <C>          <C>        <C>           
December 31,               Rate        Amount        Rate       Amount
1999                       6.47%    $ 3,000,000      6.47%   $ 3,000,000
2000                       6.27%      5,000,000      6.27%     5,000,000
2001                       5.10%        243,100      5.10%       243,100
2002                       6.51%      5,000,000      6.51%     5,000,000
2003                       4.62%        340,000      5.36%    15,340,000
                           6.34%    $13,583,100      5.83%   $28,583,100
</TABLE>

At December 31, 1997 and 1998, the advances were secured by pledges of the
Savings Bank's investments in the capital stock of the Federal Home Loan Bank of
New York totalling $2,979,400 and $3,097,200, respectively, mortgage-backed
securities with carrying values of $12,876,000 and $9,784,000, respectively, and
a blanket assignment of the Savings Bank's unpledged qualifying mortgage loans,
mortgage-backed securities and investment securities portfolios.


10. Other Borrowed Money

                                    December 31,
              ---------------------------------------------------------   
                         1997                    1998
              ---------------------------------------------------------   
                Interest                      Interest
                  Rate       Amount             Rate        Amount
----------------------------------------------------------------------- 
Mortgage loan   8.00%      $   273,623         8.00%    $   252,535
----------------------------------------------------------------------- 

The mortgage loan is payable in 144 equal monthly installments of $3,518 through
February 1, 2007 and is secured by premises with a carrying value of $399,000
and $393,000 at December 31, 1997 and 1998, respectively.


11. Stock Repurchase Program

During the years ended December 31, 1996 and 1997, the Corpo-ration repurchased
294,036 and 318,900 shares, respectively, of its own common stock, at prices
ranging from $18.75 to $23.50 per common share, at a total cost of $6,179,188
and $7,369,153, respectively, under stock repurchase programs approved by the
Corporation's Board of Directors.
<PAGE>
 
Notes to Consolidated Financial Statements, continued 



12. Regulatory Capital

For the purpose of granting to eligible account holders a priority in the event
of future liquidation, the Savings Bank, at the time of conversion, established
a special account in an amount equal to its total retained earnings of $18.4
million at June 30, 1989. In the event of a future liquidation of the converted
Savings Bank (and only in such event), an eligible account holder who continues
to maintain his deposit account shall be entitled to receive a distribution from
the special account. The total amount of the special account is decreased (but
never increased) in an amount proportionately corresponding to decreases in the
deposit account balances of eligible account holders as of each subsequent year
end. After conversion, no dividends may be paid to stockholders if such
dividends would reduce the retained earnings of the converted Savings Bank below
the amount required by the special account.

The Savings Bank is 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 Savings Bank. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Savings Bank must meet
specific capital guidelines that involve quantitative measures of the Savings
Bank's assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Savings Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy
require the Savings Bank to maintain minimum amounts and ratios of Total and
Tier 1 capital (as defined in the regulations) to risk-weighted assets (as
defined), and of Tier 1 capital to assets (as defined). The following tables
levels at the dates presented:

<TABLE>
<CAPTION>
                                                                  December 31,
                                                             -----------------------
(In thousands)                                                 1997            1998
------------------------------------------------------------------------------------
<S>                                                          <C>             <C>           
GAAP capital                                                 $45,395         $42,948
Less: Investment in and advances to                         
      non-includable subsidiary                               (1,305)         (1,315)
      Excess of cost over assets acquired                       (303)           (182)
      Unrealized gain on securities                         
      available for sale                                         (10)            (40)
------------------------------------------------------------------------------------
Core and tangible capital                                     43,777          41,411
Add:  general valuation allowance,                             
      as limited                                               1,856           1,609
------------------------------------------------------------------------------------
      Total regulatory capital                               $45,633         $43,020
------------------------------------------------------------------------------------
</TABLE> 
<PAGE>
 
Notes to Consolidated Financial Statements, continued 



<TABLE> 
<CAPTION> 
 
                                                                            December 31, 1997
                                                    -----------------------------------------------------------------------    
                                                                                                     To Be Well Capitalized
                                                                                                          Under Prompt
                                                                                  Minimum Capital           Corrective
                                                          Actual                    Requirements        Actions Provisions
                                                    -----------------------------------------------------------------------
(Dollars in Thousands)                                  Amount  Ratio               Amount  Ratio         Amount  Ratio
--------------------------------------------------------------------------------------------------------------------------- 
<S>                                                <C>          <C>             <C>         <C>       <C>          <C>      
Total Capital                                                                                                     
        (to risk-weighted assets)                   $  45,633    25.15%         $   14,513    8.00%    $   18,142   10.00%
Tier 1 Capital                                                                                                    
        (to risk-weighted assets)                      43,777    24.13%                  -       -         10,885    6.00%
Core (Tier 1) Capital                                                                                             
        (to adjusted total assets)                     43,777    11.67%             15,005    4.00%        18,756    5.00%
Tangible Capital                                                                                                  
        (to adjusted total assets)                     43,777    11.67%              5,627    1.50%             -       -
---------------------------------------------------------------------------------------------------------------------------  

<CAPTION> 
                                                                            December 31, 1997
                                                    -----------------------------------------------------------------------    
                                                                                                     To Be Well Capitalized
                                                                                                          Under Prompt
                                                                                  Minimum Capital           Corrective
                                                          Actual                    Requirements        Actions Provisions
                                                    -----------------------------------------------------------------------
(Dollars in Thousands)                                  Amount  Ratio               Amount  Ratio         Amount  Ratio
--------------------------------------------------------------------------------------------------------------------------- 
<S>                                                <C>        <C>             <C>         <C>       <C>          <C> 
Total Capital
        (to risk-weighted assets)                   $  43,020  21.23%         $   16,214  8.00%        $  20,267  10.00%
Tier 1 Capital
        (to risk-weighted assets)                      41,411  20.43%                  -     -            12,160   6.00%
Core (Tier 1) Capital
        (to adjusted total assets)                     41,411  10.05%             16,481  4.00%           20,601   5.00%
Tangible Capital
        (to adjusted total assets)                     41,411  10.05%              6,181  1.50%                -      -
--------------------------------------------------------------------------------------------------------------------------- 
</TABLE> 

As of August 7, 1998, the most recent notification from the New Jersey
Department of Banking and Insurance, the Savings Bank was categorized as well
capitalized under the regulatory framework for prompt corrective action. There
are no conditions existing or events which have occurred since notification that
management believes have changed the institution's category.


13. Benefit Plans

Pension Plan ("Plan") 

The Savings Bank has a non-contributory defined benefit pension plan covering
all eligible employees. The benefits are based on years of service and
employees' compensation. The Savings Bank's funding policy is to contribute
annually the maximum amount that can be deducted for federal income tax
purposes. The Plan's assets consist primarily of mutual funds and bank deposits.
<PAGE>
 
Notes to Consolidated Financial Statements, continued 


 
The following tables set forth the Plan's funded status and components of net
periodic pension cost:

<TABLE>
<CAPTION>

 
                                                                                December 31,
                                                                     -------------------------------------
                                                                          1997                1998
----------------------------------------------------------------------------------------------------------  
<S>                                                                 <C>                   <C>   
Actuarial present value                                                 
        of benefit obligation                                           
        including vested                                                
        benefits of $2,522,509 (1997)                                   
        and $2,508,543 (1998)                                        $    2,581,863        $   2,567,569
----------------------------------------------------------------------------------------------------------  
Projected benefit obligation                                         $   (3,275,432)       $  (3,257,298)
Plan assets at fair value                                                 3,120,434            3,211,549
----------------------------------------------------------------------------------------------------------  
Projected benefit obligation                                            
        in excess of plan assets                                           (154,998)             (45,749)
Unrecognized net loss                                                       129,314               27,815
----------------------------------------------------------------------------------------------------------  
Accrued pension cost                                                    
        included in other liabilities                                $      (25,684)       $     (17,934)
----------------------------------------------------------------------------------------------------------   
</TABLE> 
 
Net periodic pension cost included the following components:

<TABLE> 
<CAPTION> 
 
                                                                Year Ended December 31,
                                                 -------------------------------------------------
                                                       1996               1997               1998
--------------------------------------------------------------------------------------------------   
<S>                                             <C>             <C>                   <C>   
Service cost                                    $    165,174        $   175,878        $  198,522
Interest cost                                        202,020            225,244           243,409
Actual return on                                                                    
 plan assets                                        (116,162)          (201,209)         (255,023)
Net amortization                                                                    
 and deferral                                         (8,606)            36,391                 -
--------------------------------------------------------------------------------------------------   
Net periodic pension cost                       $    242,426        $   236,304        $  186,908
--------------------------------------------------------------------------------------------------   
</TABLE> 
 
Assumptions used in the accounting for the Plan are as follows:

<TABLE> 
<CAPTION> 
                                                                Year Ended December 31,
                                                     ------------------------------------------------
                                                       1996                 1997               1998
----------------------------------------------------------------------------------------------------- 
<S>                                             <C>                     <C>             <C> 
Discount rate                                          7.50%                7.50%               7.50%
Rate of increase in compensation                       4.00%                4.00%               4.00%
Long-term rate of return on                          
        plan assets                                    8.00%                8.00%               8.00%
----------------------------------------------------------------------------------------------------- 
</TABLE> 

Savings and Investment Plan ("SIP")

The Savings Bank sponsors a SIP pursuant to Section 401(k) of the Internal
Revenue Code, for all eligible employees. Employees may elect to save up to 10%
of their compensation of which the Savings Bank will match 50% of the employee's
contribution. The SIP expense amounted to approximately, $109,000, $103,000 and
$113,000 for the years ended December 31, 1996, 1997 and 1998, respectively.


Supplemental Executive Retirement Plan ("SERP") 

The Savings Bank has an unfunded non-qualified deferred retirement plan for
certain employees. A participant who retires at age 65, (the "Normal Retirement
Age") is entitled to an annual retirement benefit equal to 75% of his
compensation reduced by his retirement plan annual benefits. Participants
retiring before the Normal Retirement Age receive the same benefits reduced by a
percentage based on years of service to the Savings Bank and the number of years
prior to the Normal Retirement Age that participant retires. The SERP expense
amounted to approximately $76,000, $174,000 and $174,000 for the years ended
December 31, 1996, 1997 and 1998, respectively.

Stock option plan ("SOP") 

The following table summarizes the transactions in the SOP:

<TABLE> 
<CAPTION> 
 
                                                      Number                    Price           
                                                    of Shares                 Per Share
-------------------------------------------------------------------------------------------
<S>                                                 <C>             <C> 
Balance - December 31, 1995                            62,790              $5.75 - $6.375
Exercised                                              56,930               5.75 -  6.375
Balance - December 31, 1996                             5,860               5.75 -  6.375
Exercised                                               5,860               5.75 -  6.375
Balance - December 31, 1997                     
        and 1998                                            -                           -
-------------------------------------------------------------------------------------------
</TABLE>


14. Income Taxes

The Savings Bank qualifies as a savings institution under the provisions of the
Internal Revenue Code and was therefore, prior to January 1, 1996, permitted to
deduct from taxable income an allowance for bad debts based upon eight percent
of taxable income before such deduction, less certain adjustments. Retained
earnings at December 31, 1998, include approximately $6,900,000 of such bad
debt, which, in accordance with SFAS No. 109, "Accounting for Income Taxes," is
considered a permanent difference between the book and income tax basis of loans
receivable, and for which income taxes have not been provided. If such amount is
used for purposes other than for bad debt losses, including distributions in
liquidation, it will be subject to income tax at the then current rate.

Refundable income taxes of approximately $323,000 and $413,000 at December 31,
1997 and 1998, respectively, are reflected in the consolidated statements of
financial condition under the caption "Other Assets".
<PAGE>
 
Notes to Consolidated Financial Statements, continued 



The tax effects of existing temporary differences which give rise to significant
portions of deferred tax assets and deferred tax liabilities are as follows:

<TABLE>
<CAPTION>
                                                                 December 31,
                                                          ------------------------                                   
Deferred tax assets                                          1997          1998
----------------------------------------------------------------------------------
<S>                                                      <C>           <C> 
Allowance for loan losses                                 $  638,125    $  647,743
Deferred loan fees                                           512,087       388,234
Depreciation                                                  13,631        22,224
Reserve for uncollected interest                             100,634        73,232
Benefit plans                                                110,670       128,593
Other                                                            644             -
----------------------------------------------------------------------------------
                                                           1,375,791     1,260,026
----------------------------------------------------------------------------------
Deferred tax liabilities                              
----------------------------------------------------------------------------------
Unrealized gain on securities                         
 available for sale                                            5,900        22,400
----------------------------------------------------------------------------------
Net deferred tax assets                                   $1,369,891    $1,237,626
----------------------------------------------------------------------------------  

<CAPTION> 

The components of income taxes are summarized as follows:
 
                                                       Year Ended December 31,
                                           ---------------------------------------                                       
                                              1996          1997          1998
----------------------------------------------------------------------------------  
<S>                                      <C>            <C>             <C> 
Current                                     $1,027,417    $2,754,147    $2,327,712
Deferred                                       131,066         5,023       115,765
----------------------------------------------------------------------------------  
                                            $1,158,483    $2,759,170    $2,443,477
----------------------------------------------------------------------------------    

<CAPTION> 

The following table presents a reconciliation between the reported income taxes
and the income taxes which would be computed by applying the normal federal
income tax rate of 34% to income before income taxes:
 
                                                      Year Ended December 31,
                                             -----------------------------------------   
                                                1996          1997          1998
--------------------------------------------------------------------------------------    
<S>                                         <C>            <C>          <C>          
Federal income tax                            $1,401,939    $2,662,327    $2,324,981
Increases (reductions)                       
 in income taxes                             
 resulting from:                             
  Exercise of non-                           
   statutory stock                           
   options                                      (315,680)      (86,391)            -
  New Jersey savings                         
   institution tax,                          
   net of federal                            
   income tax effect                              83,714       158,661       137,242
  Other items, net                               (11,490)       24,573       (18,746)
--------------------------------------------------------------------------------------    
Effective income tax                          $1,158,483    $2,759,170    $2,443,477
--------------------------------------------------------------------------------------    
</TABLE>


15. Legislative Matter

On September 30, 1996, legislation was enacted which, among other things,
imposed a special one-time assessment on Savings Association Insurance Fund
("SAIF") member institutions, including the Savings Bank, to recapitalize the
SAIF and spread the obligation for payment of Financial Corporation ("FICO")
bonds across all SAIF and Bank Insurance Fund ("BIF") members. The special
assessment levied amounted to 65.7 basis points on SAIF assessable deposits held
as of March 31, 1995. The special assessment was recognized in the third quarter
of 1996 and is tax deductible. The Savings Bank took a charge of $2,023,000 as a
result of the special assessment. This legislation will eliminate the
substantial disparity between the amount that BIF and SAIF members had been
paying for deposit insurance premiums. Currently, the FDIC has estimated that,
in addition to normal deposit insurance premiums, BIF members will pay a portion
of the FICO payment equal to 1.3 basis points on BIF-insured deposits compared
to 6.4 basis points by SAIF members on SAIF-insured deposits.

The FDIC has lowered SAIF assessments to a range comparable to that of BIF
members, although SAIF members must also make the FICO payments described above.
Management cannot predict the precise level of FDIC insurance assessments on an
ongoing basis.


16. Commitments and Contingencies 

The Savings Bank is party to financial instruments with off- balance sheet risk
in the normal course of business primarily to meet the financing needs of its
customers. These financial instruments are commitments to originate loans. The
commitments involve, to varying degrees, elements of credit and interest rate
risk in excess of the amount recognized in the consolidated statement of
financial condition. The Savings Bank's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for commitments to
extend credit is represented by the contractual notional amount of those
instruments. The Savings Bank uses the same credit policies in making
commitments as it does for on-balance sheet instruments.

Commitments to originate loans are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require
<PAGE>
 
Notes to Consolidated Financial Statements, continued 



payment of a fee. Since commitments may expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash requirements.
The Savings Bank evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary by the Savings
Bank, upon extension of credit is based on management's credit evaluation of the
counterparty. Collateral held varies but primarily includes residential real
estate and income-producing commercial properties.

The Savings Bank had loan commitments outstanding as follows:

<TABLE> 
<CAPTION> 
                                                           December 31,
                                                  ------------------------------
                                                      1997               1998
--------------------------------------------------------------------------------
<S>                                               <C>               <C> 
To originate loans                                $ 9,674,000       $ 11,583,000
--------------------------------------------------------------------------------
</TABLE> 

At December 31, 1998, all the outstanding commitments to originate loans are at
fixed interest rates which range from 6.125% to 10.0%. All commitments are due
to expire within ninety days.

At December 31, 1998, undisbursed funds from approved lines of credit under a
homeowners' equity lending program amounted to approximately $1,523,000. Unless
they are specifically cancelled by notice from the Savings Bank, these funds
represent firm commitments available to the respective borrowers on demand. The
interest rate charged for any month on funds disbursed under this program is
1.75% above the prime rate.

Rental expenses related to the occupancy of premises totalled $70,000, $98,000
and $280,000 for the years ended December 31, 1996, 1997 and 1998, respectively.
At December 31, 1998, minimum non-cancellable obligations under lease agreements
with original terms of more than one year are as follows:

<TABLE> 
<CAPTION> 
    December 31,                                     Amount
--------------------------------------------------------------------------------
    <S>                                           <C> 
    1999                                          $   257,000
    2000                                              260,000
    2001                                              263,000
    2002                                              284,000
    2003                                              230,000
    Thereafter                                      1,196,000
--------------------------------------------------------------------------------
                                                  $ 2,490,000
--------------------------------------------------------------------------------
</TABLE> 

The Savings Bank is also a party to litigation which arises primarily in the
ordinary course of business. In the opinion of management, the ultimate
disposition of such litigation should not have a material effect on the
consolidated financial position of the Savings Bank or the Corporation.


17. Fair Values of Financial Instruments 

The carrying amounts and fair value of the Corporation's financial instruments
are as follows:

<TABLE>
<CAPTION>
                                                                             December 31,
                                                     ----------------------------------------------------------------
                                                                   1997                               1998
                                                     ----------------------------------------------------------------
(In Thousands)                                       Carrying Value     Fair Value      Carrying Value     Fair Value
---------------------------------------------------------------------------------------------------------------------
<S>                                                  <C>                <C>             <C>                <C>
Financial Assets                                                              
        Cash and cash equivalents                         $ 13,307        $ 13,307           $ 28,047        $ 28,047
        Securities available for sale                       11,849          11,849              9,652           9,652
        Investment securities held to maturity                   -               -              1,998           1,998
        Mortgage-backed securities held to maturity        126,109         127,777            120,400         121,920
        Loans receivable                                   211,156         216,349            239,010         246,848
        Interest receivable                                  2,495           2,495              2,364           2,364
Financial Liabilities                                                                                       
        Deposits                                           307,472         308,345            325,985         326,826
        Advances and other borrowed money                   13,857          13,980             28,836          28,372
Commitments                                                                                                 
        To originate loans                                   9,674           9,674             11,583          11,583
        Unused lines of credit                                 761             761              1,523           1,523
---------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
 
Notes to Consolidated Financial Statements, continued 



The fair value estimates are made at a discrete point in time based on relevant
market information and information about the financial instruments. Fair value
estimates are based on judgments regarding future expected loss experience,
current economic conditions, risk characteristics of various financial
instruments and other factors. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and, therefore, cannot
be determined with precision. Changes in assumptions could significantly affect
the estimates. Further, the foregoing estimates may not reflect the actual
amount that could be realized if all or substantially all of the financial
instruments were offered for sale.

In addition, the fair value estimates were based on existing on-and-off balance
sheet financial instruments without attempting to value anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. Other significant assets and liabilities that are not
considered financial assets and liabilities include mortgage servicing rights,
premises and equipment and advances from borrowers for taxes and insurance. In
addition, the tax ramifications related to the realization of the unrealized
gains and losses can have a significant effect on fair value estimates and have
not been considered in any of the estimates.

Finally, reasonable comparability between financial institutions may not be
likely due to the wide range of permitted valuation techniques and numerous
estimates which must be made given the absence of active secondary markets for
many of the financial instruments. This lack of uniform valuation methodologies
introduces a greater degree of subjectivity to these estimated fair values.

18. Parent Corporation Financial Information

The following condensed financial statements of the Corporation should be read
in conjunction with the Notes to Consolidated Financial Statements.

Statements of Financial Condition

<TABLE>
<CAPTION>
                                                                December 31,
                                                        ---------------------------
                                                             1997           1998
-----------------------------------------------------------------------------------
<S>                                                     <C>            <C>            
Assets
Cash and cash equivalents                               $  2,933,564   $  6,667,981
Investment in subsidiary                                  45,394,268     42,947,572
Refundable income taxes                                      184,216         72,878
Other assets                                                 108,622        169,972
-----------------------------------------------------------------------------------
Total assets                                            $ 48,620,670   $ 49,858,403
-----------------------------------------------------------------------------------

Liabilities and stockholders' equity
Liabilities
Other liabilities                                       $     87,555   $     85,498
-----------------------------------------------------------------------------------
Total liabilities                                             87,555         85,498
-----------------------------------------------------------------------------------
Stockholders' equity
Common stock                                                  34,500         34,500
Paid-in-capital in excess of par value                    18,906,768     18,906,768
Retained earnings - substantially restricted              43,017,781     44,257,571
Treasury stock, at cost                                  (13,425,934)   (13,425,934)
-----------------------------------------------------------------------------------
Total stockholders' equity                                48,533,115     49,772,905
-----------------------------------------------------------------------------------
Total liabilities and stockholders' equity              $ 48,620,670   $ 49,858,403
-----------------------------------------------------------------------------------
</TABLE> 
<PAGE>
 
Notes to Consolidated Financial Statements, continued 



<TABLE> 
<CAPTION> 
Statements of Income

                                                                  Year Ended December 31,
                                                        -----------------------------------------
                                                             1996           1997          1998
-------------------------------------------------------------------------------------------------
<S>                                                     <C>           <C>             <C>     
Dividends from subsidiary                               $  8,400,000   $  7,000,000   $ 7,000,000
Interest income                                              305,752         65,885         5,587
-------------------------------------------------------------------------------------------------
  Total income                                             8,705,752      7,065,885     7,005,587
Expenses                                                     663,855        411,584       207,704
-------------------------------------------------------------------------------------------------
                                                           8,041,897      6,654,301     6,797,883
Equity in undistributed earnings of subsidiary            (5,485,098)    (1,767,114)   (2,475,858)
-------------------------------------------------------------------------------------------------
Income before income taxes (benefit)                       2,556,799      4,887,187     4,322,025
Income taxes (benefit)                                      (408,069)      (184,016)      (72,678)
-------------------------------------------------------------------------------------------------
Net income                                              $  2,964,868   $  5,071,203   $ 4,394,703
-------------------------------------------------------------------------------------------------

Statements of Cash Flows
                                                                 Year Ended December 31,
                                                        -----------------------------------------
                                                             1996           1997          1998
-------------------------------------------------------------------------------------------------
<S>                                                     <C>           <C>            <C>      
Cash flows from operating activities:
 Net income                                             $  2,964,868   $  5,071,203   $ 4,394,703
 Adjustments to reconcile net income to net
  cash provided by operating activities:
   Equity in undistributed earnings of subsidiary          5,485,098      1,767,114     2,475,858
   (increase) decrease in refundable income taxes           (408,219)       340,834       111,338
   (Increase) in other assets                                (31,649)       (23,778)      (61,350)
   Increase (decrease) in other liabilities                       94         25,410        (2,057)
-------------------------------------------------------------------------------------------------
    Net cash provided by operating activities              8,010,192      7,180,783     6,918,492
-------------------------------------------------------------------------------------------------
Cash flows from investing activities:
 Decrease in loans receivable                              3,000,000      3,000,000             -
-------------------------------------------------------------------------------------------------
    Net cash provided by investing activities              3,000,000      3,000,000             -
-------------------------------------------------------------------------------------------------
Cash flows from financing activities:
 Cash dividends paid                                      (3,318,121)    (2,919,723)   (3,184,075)
 Purchase of treasury stock                               (6,179,188)    (7,369,153)            -
 Sale of treasury stock                                      327,973         34,339             -
-------------------------------------------------------------------------------------------------
    Net cash (used in) financing activities               (9,169,336)   (10,254,537)   (3,184,075)
-------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents       1,840,856        (73,754)    3,734,417
Cash and cash equivalents - beginning                      1,166,462      3,007,318     2,933,564
-------------------------------------------------------------------------------------------------
Cash and cash equivalents - ending                      $  3,007,318   $  2,933,564   $ 6,667,981
-------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
 
 
Notes to Consolidated Financial Statements, continued 



19. Quarterly Financial Data (Unaudited)

<TABLE>
<CAPTION>
 
(In Thousands, except for per share amounts)     First   Second    Third   Fourth
Year Ended December 31, 1997                    Quarter  Quarter  Quarter  Quarter
-----------------------------------------------------------------------------------
<S>                                              <C>      <C>      <C>      <C>
Interest income                                  $6,937   $7,134   $7,134   $7,191
Interest expense                                  2,796    2,976    3,026    3,064
-----------------------------------------------------------------------------------
                Net interest income               4,141    4,158    4,108    4,127
Provision for loan losses                           150      150      150      136
Non-interest income                                 397      284      373      620
Non-interest expenses                             2,313    2,281    2,401    2,797
Income taxes                                        762      751      665      581
-----------------------------------------------------------------------------------
Net income                                       $1,313   $1,260   $1,265   $1,233
-----------------------------------------------------------------------------------
Basic earnings per common share                  $ 0.42   $ 0.44   $ 0.44   $ 0.44
-----------------------------------------------------------------------------------
Diluted earnings per common share                $ 0.42   $ 0.44   $ 0.44   $ 0.44
-----------------------------------------------------------------------------------
Dividends per common share                       $ 0.25   $ 0.25   $ 0.25   $ 0.25
-----------------------------------------------------------------------------------

<CAPTION>
 
(In Thousands, except for per share amounts)    First    Second   Third    Fourth
Year Ended December 31, 1998                    Quarter  Quarter  Quarter  Quarter
-----------------------------------------------------------------------------------
<S>                                              <C>      <C>      <C>      <C>
Interest income                                  $7,207   $7,105   $7,248   $7,411
Interest expense                                  3,034    3,037    3,090    3,267
-----------------------------------------------------------------------------------
                Net interest income               4,173    4,068    4,158    4,144
Provision for loan losses                            75       75       75       67
Non-interest income                                 339      303      362      395
Non-interest expenses                             2,616    2,671    2,730    2,795
Income taxes                                        666      585      623      569
-----------------------------------------------------------------------------------
Net income                                       $1,155   $1,040   $1,092   $1,108
-----------------------------------------------------------------------------------
Basic earnings per common share                  $ 0.41   $ 0.36   $ 0.38   $ 0.40
-----------------------------------------------------------------------------------
Diluted earnings per common share                $ 0.41   $ 0.36   $ 0.38   $ 0.40
-----------------------------------------------------------------------------------
Dividends per common share                       $ 0.28   $ 0.28   $ 0.28   $ 0.28
-----------------------------------------------------------------------------------
</TABLE>


<PAGE>
 
Independent Auditors' Report  



To The Board of Directors and Stockholders

Pamrapo Bancorp, Inc.

We have audited the consolidated statements of financial condition of Pamrapo
Bancorp, Inc. (the "Corporation") and Subsidiaries as of December 31, 1997 and
1998 and the related consolidated statements of income, comprehensive income,
changes in stockholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1998. These consolidated financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. 

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

In our opinion, the above mentioned consolidated financial statements present
fairly, in all material respects, the financial position of Pamrapo Bancorp,
Inc. and Subsidiaries as of December 31, 1997 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.

                                        /s/ Radice & Co., LLC


February 8, 1999
<PAGE>
 
Pamrapo Bancorp, Inc. and Subsidiaries  


Selected Consolidated Financial Condition and Other Data
of the Corporation



<TABLE>
<CAPTION>
                                                                                    At December 31,
                                                 ----------------------------------------------------------------------------------
(Dollars in thousands)                             1994              1995              1996              1997              1998
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                        <C>               <C>               <C>               <C>               <C>
Financial Condition data:
Total amount of:
Assets                                            $384,085          $371,365          $362,910          $376,714          $413,474
Loans receivable                                   222,472           218,140           207,405           211,156           239,010
Securities available for sale                       19,471            28,427            22,232            11,849             9,652
Mortgage-backed securities                         114,032            96,565            96,727           126,109           120,400
Investment securities                                2,096                99                 -                 -             1,998
Deposits                                           305,910           298,901           300,785           307,472           325,985
Advances and other borrowed money                   17,930             8,043             3,876            13,857            28,836
Stockholders' equity                                55,372            59,375            53,509            48,533            49,773

<CAPTION>
                                                                               Year Ended December 31,
                                                 ----------------------------------------------------------------------------------
                                                   1994              1995              1996              1997              1998
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                        <C>               <C>               <C>               <C>               <C>
Operating data:
Interest income                                   $ 30,466          $ 29,571          $ 28,035          $ 28,396          $ 28,971
Interest expense                                    10,626            11,456            11,381            11,862            12,428
-----------------------------------------------------------------------------------------------------------------------------------
Net interest income                                 19,840            18,115            16,654            16,534            16,543
Provision for loan losses                              495               411               644               586               292
Non-interest income                                    785               735               649             1,674             1,399
Non-interest expenses                                9,116             9,808            12,536             9,792            10,812
Income taxes                                         3,836             3,003             1,158             2,759             2,443
-----------------------------------------------------------------------------------------------------------------------------------
  Net income                                      $  7,178          $  5,628          $  2,965          $  5,071          $  4,395
-----------------------------------------------------------------------------------------------------------------------------------
Net income per share
  Basic                                           $   2.21          $   1.67          $   0.90          $   1.74          $   1.55
  Diluted                                             2.12              1.65              0.90              1.74              1.55
-----------------------------------------------------------------------------------------------------------------------------------
Dividends per share                               $   .485          $    .80          $    .90          $   1.00          $   1.12
-----------------------------------------------------------------------------------------------------------------------------------
Dividend payout ratio                                21.97%            48.33%           100.28%            57.58%            72.45%
-----------------------------------------------------------------------------------------------------------------------------------

<CAPTION>
                                                                                    At December 31,
                                                 ----------------------------------------------------------------------------------
                                                   1994              1995              1996              1997              1998
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                        <C>               <C>               <C>               <C>               <C>
Selected Financial Ratios:
Return on average assets                              1.82%             1.49%             0.81%             1.37%             1.13%
Return on average equity                             13.43%             9.71%             5.27%            10.34%             8.96%
Average equity/average assets                        13.55%            15.40%            15.33%            13.28%            12.64%
Interest rate spread                                  4.86%             4.51%             4.23%             4.17%             3.91%
Net yield on average interest-earning
 assets                                               5.30%             5.10%             4.81%             4.72%             4.49%
Non-interest expenses to average assets               2.31%             2.61%             3.41%             2.65%             2.79%
Equity/total assets                                  14.42%            15.99%            14.74%            12.88%            12.04%
Capital ratios:
  Tangible                                           11.56%            13.69%            12.59%            11.67%            10.05%
  Core                                               11.56%            13.69%            12.59%            11.67%            10.05%
  Risk-based                                         24.59%            28.53%            26.35%            25.15%            21.23%
Non-performing loans to total assets                  3.34%             2.93%             2.89%             1.84%             1.11%
Non-performing loans to loans receivable              5.77%             4.98%             5.06%             3.27%             1.92%
Non-performing assets to total assets                 3.63%             3.32%             3.44%             2.20%             1.40%
Allowance for loan losses to
 non-performing loans                                28.45%            25.09%            26.69%            36.23%            50.00%
Average interest-earning  assets/average
  interest-bearing liabilities                        1.16x             1.18x             1.17x             1.16x             1.17x
Net interest income after provision for
 loan losses to non-interest expenses                 2.12x             1.81x             1.28x             1.63x             1.50x
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

<PAGE>
 
Pamrapo Bancorp, Inc. and Subsidiaries  


Stockholder Information



Market for Common Stock and Related Matters

Pamrapo Bancorp, Inc.'s common stock is presently quoted on the National
Association of Securities Dealers Automated Quotation's National Market System
under the symbol "PBCI." At March 11, 1999, 2,842,924 shares of the
Corporation's outstanding common stock were held by approximately 2,100 persons
or entities. 

        The following table sets forth the high and low closing sales price per
common share for the periods indicated. Such prices do not necessarily reflect
retail markups, markdowns or commissions.
 
--------------------------------------------------- 
                                     Closing Prices
Quarter Ended                        High      Low
---------------------------------------------------
March 31,1997                       $23.75   $19.00
June 30,1997                         21.00    18.50
September 30, 1997                   25.50    19.75
December 31,1997                     27.25    21.00
March 31, 1998                       28.75    22.75
June 30, 1998                        30.00    26.75
September 30, 1998                   33.63    22.75
December 31, 1998                    26.75    22.13
---------------------------------------------------
 
Dividends were paid as follows:
 
---------------------------------------------------
March, 1997                                  $  .25
June, 1997                                      .25
September, 1997                                 .25
December, 1997                                  .25
March, 1998                                     .28
June, 1998                                      .28
September, 1998                                 .28
December, 1998                                  .28
---------------------------------------------------

        Future dividend policy will be determined by the Board of Directors
after giving consideration to the Corporation's financial condition, results of
operations, tax status, industry standards, economic conditions and other
factors. Dividends will also depend upon dividend payments by the Bank to the
Corporation, which is its primary source of income. The Board may also consider
the payment of stock dividends from time to time, in addition to, or in lieu of
cash dividends.

        Under federal regulations, the Bank may not declare or pay a cash
dividend on any of its common stock if the effect thereof would cause the Bank's
regulatory capital to be reduced below the amount required for the liquidation
account or the regulatory capital requirements imposed by the Office of Thrift
Supervision ("OTS"). The Bank must provide at least 30 days advance notice to
the OTS before declaring a dividend.