EXHIBIT 13

                       Annual Report to Security Holders


<PAGE>


                                     Ramapo
                             Financial Corporation

                                    [PHOTO]
                      Banking Innovation. Timeless Values.

                                                                            1997
                                                                   Annual Report


<PAGE>


                                                                          TO OUR
                                                                    SHAREHOLDERS

     Ramapo  Financial  Corporation  reported net income of  $3,205,000 in 1997,
which  produced  basic  and  diluted  earnings  of  $.40  and  $.38  per  share,
respectively.

     Net income increased 4.9% over 1996, however, pre-tax earnings in 1997 were
actually  17.9%  higher  than in 1996 when  there was a  one-time  tax credit of
$496,000.

     Pre-tax  income  reached a record  level in 1997,  which  marked  the 30th
anniversary of the founding of The Ramapo Bank.

     Shareholders  were  rewarded  with a 72.5%  increase  in the stock price in
1997.  In part,  this  favorable  development  tracked  a good  year for  stocks
generally,  but also reflected RFC's strong fundamentals and successful strategy
as a customer focused provider of financial services. Despite volatility in many
bank stocks since year end, our current price continues to reflect a significant
increase over the year ago level.

     Investment  bankers and analysts have highlighted our strong  fundamentals:
net  interest  margin,  fee  income and  expense  control.  This is an  historic
perspective.  We'd like to think that there are other strong  fundamentals  that
are the key to this  corporation's  future success.  They are: our  personalized
responsiveness to smaller  businesses and the public; the sophistication of the
talent and products  that we offer;  and the service we provide at all levels of
the company. These latter fundamentals will serve us well this year and beyond.

     The Ramapo Bank opened its eighth branch in August 1997. The new Parsippany
office is a convenient  depository for some of our existing business  customers,
and also serves as a base of operations for business  development efforts in one
of  Morris  County's  larger  municipalities.  We are  pleased  with our  steady
progress in Parsippany, which is receptive to our style of community banking.


                                    [PHOTO]

Erwin D. Knauer                Mortimer J. O'Shea            Victor C. Otley, Jr



[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]

                                                      12/31/96          12/31/97
                                                      --------          --------
Price per Common Share                                 $5.00             $8.63

[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]

                       <<PLOT POINTS TO COME>>


                                        1


<PAGE>


     We  continue  to see growth in core  deposits,  which  helps us  maintain a
strong net interest  margin  (5.31% in 1997).  Average  deposits in 1997 were up
9.9% over the previous  year.  Loan growth was modest in 1997,  and intense rate
competition among commercial lenders will continue in 1998. Ramapo will maintain
its high credit  standards in this  environment,  and we are  encouraged  by the
number of new business loans we've had the  opportunity to review and approve in
the early months of 1998. Our Retail Lending Unit has developed  enhancements to
our popular home equity  product,  and has initiated a new  marketing  campaign.
We've  also  added a  lending  officer  who  specialized  in loans to our  small
business customers.

     Brokerage  commissions earned by our INVEST affiliate increased by 20.5% in
1997,  and we  will  add  another  representative  in  1998  to  respond  to our
customers'  increased  interest in a wider array of investment  products.  We've
started  target-marketing  our customer base with direct mail offerings,  and we
will expand this activity in the coming year.  The  Commercial  Access  product,
which provides  business  customers with a computer link to account  information
and account  transactions,  has been  successfully  installed at a number of our
customers' offices.

     The  Year  2000  date  change  poses a  challenge  to most  businesses  and
especially to financial  institutions.  Ramapo has created an internal committee
to deal  with  this  issue  and is on track to  address  all Year  2000  related
problems in a timely manner.  Costs  associated  with this project have not been
material to date.  Coincidentally,  our computer system will be upgraded in 1998
to increase the effectiveness of our data processing function.

     The  banking  industry is  enjoying a period of stable  interest  rates and
financial strength. Ramapo Financial Corporation is positioned to do well in the
current economic environment. Should the national and regional economies falter,
we  believe  that  RFC  will  be  able  to  maintain  an  acceptable   level  of
profitability.  Our experienced banking professionals are doing the right things
to retain our customers,  as well as attract new customers to Ramapo. As many of
our  competitors  merge into  out-of-state  institutions,  RFC becomes a logical
banking choice for more businesses and families in our neighborhoods.

     As always,  we appreciate  hearing from you with questions or  suggestions.
Please feel free to call us at 973/305-4101.

         /s/ Victor C. Otley

         Victor C. Otley, Jr.
        Chairman of the Board


        /s/ Mortimer J. O'Shea

          Mortimer J. O'Shea
President and Chief Executive Officer


         /s/ Erwin D. Knauer

           Erwin D. Knauer
        Senior Vice President


                                        2


<PAGE>


                   SELECTED FIVE-YEAR FINANCIAL AND OTHER DATA
            (Not covered by Report of Independent Public Accountants)

     The  selected  consolidated  financial  and other data of Ramapo  Financial
Corporation  ("Corporation") set forth below does not purport to be complete and
should be read in  conjunction  with,  and is  qualified in its entirety by, the
more detailed information,  including the Consolidated  Financial Statements and
related Notes,  appearing  elsewhere  herein.  On June 30, 1993, the Corporation
sold a substantial  portion of the assets  formerly owned by Pilgrim State Bank,
which had been a subsidiary of the Corporation.

<TABLE>
<CAPTION>
====================================================================================================================================
                                                                                   At or For the Year ended December 31
------------------------------------------------------------------------------------------------------------------------------------
                                                                       1997        1996          1995          1994         1993
------------------------------------------------------------------------------------------------------------------------------------
                                                                             (Dollars in thousands, except per share data)
<S>                                                                 <C>          <C>          <C>           <C>           <C>
Financial Condition Data:
 Total assets ..................................................    $ 285,727    $ 271,524    $ 246,516     $ 238,216     $ 257,634
 Cash and cash equivalents .....................................       20,275       29,758       14,962        42,486        26,594
 Securities ....................................................       88,994       68,043       59,358        21,248         8,858
 Gross loans (net of unearned income) ..........................      169,106      165,070      160,546       164,311       186,603
 Allowance for possible loan losses ............................        4,628        5,115        4,853         6,501         7,499
 Loans held for sale ...........................................           --           --           34            34        19,611
 Total deposits ................................................      249,760      239,889      217,062       211,864       241,608
 Other borrowings ..............................................        1,677           --           --         1,292         5,916
 Stockholders' equity ..........................................       31,297       29,036       27,249        21,755         6,576

Asset Quality (1):
 Nonaccrual loans ..............................................    $     745    $   1,053    $   4,190     $   7,548     $  21,881
 Accruing loans 90 days or more delinquent .....................          112          152          141           240         1,182
------------------------------------------------------------------------------------------------------------------------------------
   Total nonperforming loans ...................................          857        1,205        4,331         7,788        23,063
------------------------------------------------------------------------------------------------------------------------------------
 Other real estate, net ........................................        2,192        2,211        4,408         9,995        10,332
------------------------------------------------------------------------------------------------------------------------------------
   Total nonperforming assets ..................................        3,049        3,416        8,739        17,783        33,395
 Restructured loans ............................................        1,475        1,540        1,702         5,983        11,035
------------------------------------------------------------------------------------------------------------------------------------
   Total nonperforming assets and restructured loans ...........    $   4,524    $   4,956    $  10,441     $  23,766     $  44,430
====================================================================================================================================
Summary of Operations:
 Total interest income .........................................    $  19,734    $  18,218    $  18,343     $  14,919     $  19,263
 Total interest expense ........................................        6,297        5,804        6,106         4,958         8,709
------------------------------------------------------------------------------------------------------------------------------------
 Net interest income ...........................................       13,437       12,414       12,237         9,961        10,554
------------------------------------------------------------------------------------------------------------------------------------
 Provision for possible loan losses ............................          480          400          500         1,221         4,440
------------------------------------------------------------------------------------------------------------------------------------
 Net interest income after provision
   for possible loan losses ....................................       12,957       12,014       11,737         8,740         6,114
------------------------------------------------------------------------------------------------------------------------------------
 Other income ..................................................        2,182        2,374        2,447         3,322         8,936
------------------------------------------------------------------------------------------------------------------------------------
 Other expense .................................................       10,028       10,054       12,148        13,324        25,018
------------------------------------------------------------------------------------------------------------------------------------
 Income (loss) before income taxes .............................        5,111        4,334        2,036        (1,262)       (9,968)
 Provision (benefit) for income taxes ..........................        1,906        1,278       (4,212)         (285)         (996)
------------------------------------------------------------------------------------------------------------------------------------
 Net income (loss) .............................................    $   3,205    $   3,056    $   6,248     $    (977)    $  (8,972)
====================================================================================================================================
</TABLE>


                                       3
<PAGE>


             SELECTED FIVE-YEAR FINANCIAL AND OTHER DATA (continued)

<TABLE>
<CAPTION>
====================================================================================================================================
                                                                                  At or For the Year ended December 31
------------------------------------------------------------------------------------------------------------------------------------
                                                                          1997        1996         1995          1994        1993
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                    <C>          <C>          <C>          <C>          <C>
Per Common Share Data:
   Net income (loss) per common share - basic .....................    $   .40      $   .38      $   .77      $  (.38)     $ (7.21)
                                      - diluted ...................        .38          .37          .76         (.38)       (7.21)
   Book value per common share ....................................       3.86         3.59         3.28         2.47         3.88
   Cash dividends declared per common share (2) ...................        .12          .04           --           --           --
Selected Operating Ratios:
   Return on average assets .......................................       1.17%        1.23%        2.56%        (.42)%      (2.58)%
   Return on average equity .......................................      10.66        11.09        27.85        (9.04)      (87.65)
   Interest rate spread(3) ........................................       4.34         4.54         4.59         4.38         2.87
   Net interest margin(3) .........................................       5.31         5.41         5.41         4.84         3.51
Asset Quality Ratios (1)(4):
   Nonperforming loans as a percentage of loans, net of
     unearned income ..............................................        .51%         .73%        2.70%        4.74%       11.18%
   Nonperforming assets as a percentage of total assets ...........       1.07         1.26         3.55         7.47        12.96
   Nonperforming assets and restructured loans
     as a percentage of total assets ..............................       1.58         1.83         4.24         9.98        17.25
   Allowance for possible loan losses as a percentage
     of loans, net of unearned income .............................       2.74         3.10         3.02         3.96         3.64
   Allowance for possible loan losses as a percentage
     of nonperforming loans .......................................     540.02       424.48       112.05        83.47        32.52
   Net charge-offs as a percentage of average loans,
     net of unearned income .......................................        .58          .09         1.36         1.29         1.75
Capital Ratios (4)(5):
   Stockholders' equity to total assets ...........................      10.93%       10.69%       11.05%        9.13%        2.55%
   Average stockholders' equity to average assets .................      10.98        11.07         9.19         4.64         2.94
   Tier 1 leverage capital ratio ..................................      10.47        10.47        10.08         9.16         2.45
   Tier 1 risk-based capital ratio ................................      15.26        14.27        13.37        12.18         2.99
   Total risk-based capital ratio .................................      16.52        15.54        14.66        13.46         5.98
====================================================================================================================================
</TABLE>

(1)  Nonperforming  assets consist of nonperforming  loans and other real estate
     ("ORE"). Nonperforming loans consist of nonaccrual loans and accruing loans
     90 days or more delinquent.  It is the policy of the Corporation to place a
     loan on nonaccrual status when, in the opinion of management,  the ultimate
     collectibility  of the principal or interest on the loan becomes  doubtful.
     As a general  rule, a commercial or real estate loan more than 90 days past
     due with  respect to principal  or interest is  classified  as a nonaccrual
     loan. Consumer loans not secured by real estate generally are not placed on
     nonaccrual status but, instead,  are charged off at 90 days past due. Prior
     to 1995, loans were considered restructured loans if, for economic or legal
     reasons,  a  concession  had been  granted to the  borrower  related to the
     borrower's financial  difficulties that the Corporation would not otherwise
     consider. As used herein, the term "restructured loan" means a restructured
     loan on accrual status. ORE includes loan collateral that has been formally
     repossessed  and  collateral  that is in the  possession of The Ramapo Bank
     ("Bank") and under its control without legal transfer of title.

(2)  For 1996, two quarterly dividends.

(3)  Interest rate spread represents the difference between the weighted average
     tax-equivalent  yield on  interest-earning  assets and the weighted average
     cost of  interest-bearing  liabilities.  Net interest margin represents net
     interest  income  on a  tax-equivalent  basis as a  percentage  of  average
     interest-earning assets.

(4)  Asset  quality  ratios and  risk-based  capital  ratios  are  end-of-period
     ratios,  except for net  charge-offs  as a percentage  of average loans and
     average  stockholders' equity to average assets, which are based on average
     daily balances.  The Tier 1 leverage  capital ratio utilizes average fourth
     quarter assets in its calculation.

(5)  For  definitions  and  information  relating to the  Corporation's  and the
     Bank's regulatory capital  requirements,  see "Management's  Discussion and
     Analysis of Financial  Condition and Results of Operations -- Liquidity and
     Capital Resources."


                                       4
<PAGE>


                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

      The following discussion and analysis of the Corporation's financial
    condition as of December 31, 1997 and 1996 and results of operations for
       the years ended December 31, 1997, 1996 and 1995 should be read in
    conjunction with the Consolidated Financial Statements and related Notes
          thereto and the other information contained elsewhere herein.

              Financial Condition and Recent Operating Environment

     General. The corporation's improvement continued in 1997, marking the third
full year of increased  profitability  since the turnaround  that began in 1994.
The Corporation incurred significant operating losses in 1992 and 1993 following
an economic  recession in New Jersey which  resulted in a decline in  commercial
and residential real estate values in the  Corporation's  market.  Nonperforming
assets increased dramatically during this period as did associated expenses. The
Corporation also incurred  significant losses on mortgage servicing  operations.
As a result,  both the Corporation and its wholly owned  subsidiary,  The Ramapo
Bank  ("Bank"),   were  placed  under  regulatory  orders  by  their  respective
regulators during those years.

     Under new leadership, the Corporation moved quickly beginning in the latter
half of 1993 to reduce  nonperforming  assets, shed unprofitable  operations and
raise capital. The successful  completion of a rights/community  equity offering
("Offering") in October,  1994, resulted in new capital of $11.7 million,  after
expenses.   Investment  of  those  funds  helped  the   Corporation  to  achieve
profitability  during the fourth quarter and thus reduced the year-to-date loss.
In 1995,  sustained  profitability  was made possible by a further  reduction in
nonperforming  assets and by an increase in the net interest margin.  During the
first  quarter of 1996,  both the  Corporation  and the Bank were  released from
regulatory  orders.  By  year-end,  nonperforming  assets were  reduced to their
lowest level since 1981,  helping the Corporation to more than double its income
before taxes compared to the prior year. Meanwhile,  the economic climate in the
Corporation's  market area showed  modest  signs of  improvement  which led to a
stabilization  of real estate values. A new branch office was opened in 1996 and
another in 1997. Net interest income grew $1.0 million in 1997 and was primarily
responsible for the 17.9% growth in pre-tax income as compared to 1996.

     The  Corporation  faces  the  future  as  a  profitable,   well-capitalized
community   bank  committed  to  providing   superior   service  to  businesses,
professionals,  and  consumers  alike.  It has managed to reduce its exposure to
large,   individual  borrower  concentrations  and  believes  that  there  is  a
significant  opportunity to expand its lending to small businesses and consumers
given the number of  companies  in the area and the  relative  affluence  of its
residents.  In addition, as a result of recent consolidations of community banks
in northern New Jersey into larger banks and  acquisitions  of larger New Jersey
banks by  out-of-state  institutions,  management  believes  that  new  business
opportunities  for the  Corporation  and the  Corporation's  ability to increase
market share have been enhanced.  The Corporation introduced two new products in
1997 aimed at its commercial  customers and is actively exploring  wholesale and
retail growth strategies.

     Significant  changes  in  individual  asset and  liability  categories  are
discussed below.

     Cash and due from  banks  declined  $2.5  million  from  $12.1  million  at
December  31, 1996 to $9.6  million at December  31,  1997,  primarily  due to a
reduction in the reserve balance required to be kept at the Federal Reserve Bank
("FRB").  Federal  funds sold dropped $7.0  million  between the two  year-ends,
although the average  balance for this category rose $1.8 million in 1997 versus
1996.  In 1996,  the average  balance of federal  funds sold  decreased by $11.1
million  compared to 1995,  chiefly  because the Corporation no longer needed to
maintain the high liquidity level it deemed prudent during more difficult times.

     The Corporation's  securities portfolio grew by $21.0 million in 1997, from
$68.0 million at December 31, 1996 to $89.0  million at December 31, 1997.  This
increase was made possible by deposit growth and the  aforementioned  reductions
in the due from  banks and  federal  funds sold  categories.  During  1996,  the
portfolio increased $8.6 million over 1995.

     Loans increased $4.0 million in 1997,  reaching $169.1 million at year end.
This follows a $4.6 million increase in 1996. Although management was encouraged
by the level of loan originations in 1997,  significant loan paydowns offset the
new loans resulting in a very modest level of growth. Other factors contributing
to the lack of meaningful  loan growth over the last few years are  management's
efforts to reduce  existing loan  concentrations  and increased  competition for
business loans.

     Other  assets  decreased  from $7.9  million at  December  31, 1995 to $5.9
million at December 31, 1997,  primarily  due to a $1.7 million  decrease in the
Corporation's deferred tax asset during that timespan.

     The Corporation's intangible assets were $621,000, $869,000 and $503,000 at
December 31, 1997, 1996, and 1995, respectively. The decrease in 1997 was mainly
due to normal  amortization.  The increase in 1996 was due to a $622,000 deposit
premium paid to another commercial bank for the purchase of deposits and accrued
interest totaling $9.7 million.

     The  Corporation  experienced  deposit  growth  of $9.9  million  and $22.8
million for the years ended December 31, 1997 and 1996,  respectively.  The 1997
increase was spread among all categories of deposits  except time deposits under
$100,000.  The branch office opened in 1996  accounted for the major part of the
increase.  The deposit  acquisition  mentioned earlier and the new branch office
were responsible for about half of the 1996 increase.



                                       5
<PAGE>


                              Results of Operations

     General. The Corporation's results of operations are dependent primarily on
its net interest income,  which is the difference between interest earned on its
loans and investments and the interest paid on interest-bearing liabilities. The
Corporation's  net income is also  affected  by the  generation  of  noninterest
income,  which  primarily  consists  of  service  fees on deposit  accounts  and
commissions earned by a brokerage  affiliate.  Net interest income is determined
by (i) the difference between yields earned on interest-earning assets and rates
paid on  interest-bearing  liabilities  ("interest  rate  spread")  and (ii) the
relative amounts of interest-earning  assets and  interest-bearing  liabilities.
The Corporation's  interest rate spread is affected by regulatory,  economic and
competitive factors that influence interest rates, loan demand and deposit flows
and general levels of nonperforming assets. In addition,  net income is affected
by the level of operating  expenses and  establishment of loan loss reserves and
ORE valuation allowances.

     The  operations  of the  Corporation  and the entire  banking  industry are
significantly affected by prevailing economic conditions,  competition,  and the
monetary and fiscal policies of governmental  agencies.  Lending  activities are
influenced  by the  demand  for and  supply of real  estate,  competition  among
lenders,  the level of interest  rates and the  availability  of funds.  Deposit
flows and costs of funds are influenced by prevailing  market rates of interest,
primarily  on  competing  investments,  account  maturities,  and the  levels of
personal income and savings in the market area.

     Prior  to  1997,  the  level  of  the  Corporation's  nonperforming  assets
significantly affected the Corporation's operating results due to the amounts of
the provisions for loan losses, which are charged against income, as well as the
expenses  and losses  related to ORE.  The  Corporation's  nonperforming  assets
increased  dramatically  beginning in 1990 and reached  their  highest  level of
$49.4 million, or 16.0% of total assets, at June 30, 1993.  Nonperforming assets
were subsequently  $3.4 million at December 31, 1996.  Despite these reductions,
expenses  related to ORE and  nonperforming  loans remained at high levels.  ORE
operating expenses and valuation adjustments totaled $1.0 million, $2.8 million,
and $2.2  million  for the  years  ended  December  31,  1996,  1995,  and 1994,
respectively,  while the  provision  for  possible  loan  losses  was  $400,000,
$500,000,  and $1.2 million for those  respective  years.  In addition,  loss of
interest income,  legal expenses and management time spent on ORE management and
disposition further reduced earnings during those years. In 1997,  nonperforming
assets  declined  further to $3.0 million,  or 1.07% of total assets,  while ORE
operating expenses and valuation adjustments totaled just $234,000.

     Because of the small  number of ORE  properties  remaining,  management  is
confident that ORE-related expenses will be further reduced in 1998.  Management
also  anticipates  that future  provisions  for possible loan losses will not be
greater than those taken in 1997 and 1996, barring unforeseen economic events.

     Net Income.  The  Corporation  had net income of $3.2  million for the year
ended  December  31, 1997  compared  to net income of $3.1  million for the year
ended  December  31,  1996.  Because  1996 net income  included  a $496,000  tax
benefit,  a  comparison  of net income  before taxes is more  indicative  of the
progress the  Corporation has made. On that basis,  the Corporation  earned $5.1
million in 1997 versus $4.3 million in 1996, a $777,000 increase.  The principal
reason for this  improvement is a $1.0 million  (8.2%)  increase in net interest
income.  Total other income  decreased  $192,000  (8.1%) and total other expense
also decreased slightly in 1997 versus 1996. In 1996, the Corporation's  pre-tax
income was $4.3  million as compared  to $2.0  million in 1995,  a $2.3  million
(112.9%)  increase.  The  primary  reason for this  increase  is a $2.1  million
reduction in other expense. Chief among the reductions is a $1.8 million drop in
ORE operating  expenses and valuation  allowances which was made possible by the
continued sales of these properties. Also significant was a $364,000 decrease in
the Federal Deposit Insurance  Corporation  ("FDIC") insurance assessment due to
lower assessment rates and to the Bank's being placed in the lowest risk capital
category for assessment purposes by the FDIC.

     Net Interest Income. The largest component of the Corporation's earnings is
its net interest  income.  Net interest  income  represents  the income  earned,
principally  on loans  and  investments,  less  interest  paid,  principally  on
deposits.  Net  interest  income on a  tax-equivalent  basis  increased  by $1.1
million from $12.4 million for the year ended December 31, 1996 to $13.5 million
for the year ended December 31, 1997. The increase is due to a $1.4 million rise
caused by a $24.9 million increase in average  interest-earning assets which was
offset in part by a  $316,000  decline  due to a 20 basis  point drop in the net
interest  spread.  Most  of the  rise  in  interest-earning  assets  came in the
securities  portfolio,  which increased $17.8 million  (28.9%).  Average federal
funds sold rose $1.8  million,  while  total  loans  made up the  balance of the
increase  with a rise  of  $5.3  million.  Most of the  loan  growth  was in the
commercial loans category, which increased $5.2 million. A $1.5 million increase
in  installment  loans  was  nearly  offset  by  a  $1.4  million  reduction  in
residential  mortgage loans.  Although the Corporation is not an active mortgage
lender,  it has begun to purchase  mortgage  securities  for its  portfolio.  At
December 31, 1997,  the carrying  value of  mortgage-backed  securities  totaled
$10.6 million.  The 20 basis point drop in the net interest  spread was due to a
16 basis  point  decline in the yield on earning  assets and a four basis  point
rise in the cost of interest-bearing  liabilities.  In 1996, net interest income
on a tax-equivalent basis increased only $183,000 compared to 1995. The increase
resulted  from a $604,000  rise  caused by a $3.4  million  increase  in average
interest-earning  assets which was offset in part by a $421,000 decline due to a
five  basis  point  decrease  in the net  interest  spread.  Most of the rise in
average interest-earning assets came in the loans category, which increased $2.4
million.  Taken  together,  average  securities and federal funds sold increased
only $201,000 from 1995 to 1996. Average  installment loans rose $3.7 million in
1996  versus  1995,  partially  offset by a $1.2  million  decrease  in  average
mortgage  loans.  The five basis point drop in the net interest  spread resulted
from a 17 basis point decline in the yield on earning  assets which exceeded the
2 basis point reduction in the cost of interest-bearing liabilities.

     Average  Balances,  Interest and Average  Yields and Rates.  The  following
table sets forth  certain  information  relating  to the  Corporation's  average
interest-earning  assets  and  interest-bearing  liabilities  and  reflects  the
average  yield on  assets  and the  average  cost of  liabilities  for the years
indicated.  Such yields and costs are  derived by dividing  income or expense by
the  average  daily  balance  of assets or  liabilities,  respectively,  for the
periods indicated. The table presents information for the fiscal years indicated
with respect to the interest  rate spread,  which  financial  institutions  have
traditionally  used as an indicator  of  profitability.  Net interest  income is
affected  by  the  interest   rate  spread  and  by  the  relative   amounts  of
interest-earning assets and interest-bearing  liabilities. When interest-earning
assets approximate or exceed interest-bearing liabilities, any positive interest
rate spread will  generate  net  interest  income.  The  combined  effect of the
interest  rate spread and the relative  amounts of  interest-earning  assets and
interest-bearing  liabilities is measured by the net interest  margin,  which is
calculated   by  dividing   tax-equivalent   net  interest   income  by  average
interest-earning assets.



                                       6
<PAGE>


                        Results Of Operations (continued)

<TABLE>
<CAPTION>
====================================================================================================================================
                                                                     Year ended December 31
------------------------------------------------------------------------------------------------------------------------------------
                                                       1997                             1996                         1995
------------------------------------------------------------------------------------------------------------------------------------
                                                                 Average                          Average                    Average
                                           Average                Yield/    Average               Yield/   Average            Yield/
                                           Balance    Interest     Cost     Balance   Interest     Cost    Balance  Interest   Cost
------------------------------------------------------------------------------------------------------------------------------------
                                                                            (Dollars in thousands)
<S>                                       <C>        <C>          <C>     <C>        <C>          <C>     <C>       <C>       <C>
Assets:
 Interest-earning assets:
  Interest-bearing time deposits .......  $    899   $     52     5.78%   $    923   $    56      6.07%   $    181  $    11    6.08%
   Securities:
    Taxable ............................    75,039      4,545     6.06      60,467     3,693      6.11      49,433    3,150    6.37
    Nontaxable (tax-equivalent basis) ..     4,424        325     7.35       1,197       120      9.86         914      103   11.27
   Federal funds sold ..................     9,146        506     5.53       7,354       397      5.40      18,470    1,093    5.92
    Loans (net of unearned income) (1):
     Commercial and commercial
      real estate (2) ..................   117,372     10,308     8.78     112,124     9,781      8.72     112,228    9,772    8.71
     Residential real estate (3) .......     6,766        570     8.42       8,152       702      8.61       9,349      768    8.21
     Installment .......................    41,306      3,539     8.57      39,849     3,510      8.81      36,138    3,481    9.63
------------------------------------------------------------------------------------------------------------------------------------
      Total loans ......................   165,444     14,417     8.71     160,125    13,993      8.74     157,715   14,021    8.89
------------------------------------------------------------------------------------------------------------------------------------
      Total interest-earning assets ....   254,952     19,845     7.78     230,066    18,259      7.94     226,713   18,378    8.11
------------------------------------------------------------------------------------------------------------------------------------

 Nonearning assets:
  Cash and due from banks ..............    11,512                          10,157                           9,197
  Other assets .........................    12,200                          13,996                          13,829
  Allowance for possible loan losses ...    (4,884)                         (5,345)                         (5,476)
------------------------------------------------------------------------------------------------------------------------------------
   Total nonearning assets .............    18,828                          18,808                          17,550
------------------------------------------------------------------------------------------------------------------------------------
    Total assets .......................  $273,780                        $248,874                        $244,263
====================================================================================================================================
Liabilities and stockholders' equity:
 Interest-bearing liabilities:
  Interest-bearing demand deposits .....  $ 32,006   $    360     1.12%   $ 27,388   $   335      1.22%   $ 23,669  $   364    1.54%
  Savings deposits .....................    81,468      2,439     2.99      74,549     2,032      2.73      76,032    1,924    2.53
  Time deposits ........................    68,750      3,470     5.05      68,608     3,435      5.01      73,558    3,806    5.17
------------------------------------------------------------------------------------------------------------------------------------
   Total interest-bearing deposits .....   182,224      6,269     3.44     170,545     5,802      3.40     173,259    6,094    3.52
  Other borrowings .....................       628         29     4.62          35         2      5.64         106       12   11.32
------------------------------------------------------------------------------------------------------------------------------------
   Total interest-bearing liabilities ..   182,852      6,298     3.44     170,580     5,804      3.40     173,365    6,106    3.52
------------------------------------------------------------------------------------------------------------------------------------
 Noninterest-bearing liabilities:
  Demand deposits ......................    58,035                          48,048                          46,100
  Other liabilities ....................     2,841                           2,695                           2,361
------------------------------------------------------------------------------------------------------------------------------------
   Total noninterest-bearing
    liabilities ........................    60,876                          50,743                          48,461
 Stockholders' equity ..................    30,052                          27,551                          22,437
------------------------------------------------------------------------------------------------------------------------------------
   Total liabilities and stockholders'
    equity .............................  $273,780                        $248,874                        $244,263
====================================================================================================================================
Net interest income
 (tax-equivalent basis) ................               13,547                         12,455                         12,272
Tax-equivalent adjustment ..............                 (110)                           (41)                           (35)
------------------------------------------------------------------------------------------------------------------------------------
 Net interest income ...................             $ 13,437                        $12,414                        $12,237
====================================================================================================================================
Net interest spread
 (tax-equivalent basis) ................                          4.34%                           4.54%                        4.59%
====================================================================================================================================
Net interest margin
 (tax-equivalent basis) ................                          5.31%                           5.41%                        5.41%
====================================================================================================================================
Ratio of average interest-earning
 assets to average interest-bearing
 liabilities ...........................   139.43%                         134.87%                         130.77%
====================================================================================================================================
</TABLE>

(1)  Average balances include nonaccrual loans. Loan fees and costs are included
     in accordance  with SFAS No. 91,  "Accounting  for  Nonrefundable  Fees and
     Costs  Associated  with  Originating or Acquiring  Loans and Initial Direct
     Costs of Leases".

(2)  Includes construction loans.

(3)  Includes loans held for sale.


                                                                  7
<PAGE>


                        Results Of Operations (continued)

     Rate/Volume  Analysis.  The following table allocates the  period-to-period
changes in the Corporation's  various categories of interest income and interest
expense between changes due to changes in volume  (calculated by multiplying the
change  in   average   volume   of  the   related   interest-earning   asset  or
interest-bearing liability category by the prior year's rate) and changes due to
changes in rate (change in rate multiplied by prior year's volume).  Interest on
nontaxable securities has been adjusted to a fully  taxable-equivalent  basis by
the amount of taxes which  would have been paid at a federal  income tax rate of
34%.  Changes  due to changes in  rate-volume  (changes  in rate  multiplied  by
changes in volume) have been allocated proportionately between changes in volume
and changes in rate.

<TABLE>
<CAPTION>
====================================================================================================================================
                                                                                   Year ended December 31
------------------------------------------------------------------------------------------------------------------------------------
                                                                 1997 vs. 1996                                  1996 vs. 1995
------------------------------------------------------------------------------------------------------------------------------------
                                                                  Increase (Decrease)                     Increase (Decrease)
                                                                  Due to                                  Due to
                                                            Volume       Rate         Total       Volume         Rate        Total
------------------------------------------------------------------------------------------------------------------------------------
                                                                                      (In thousands)
<S>                                                        <C>          <C>          <C>          <C>          <C>          <C>
Interest income:
  Interest-bearing time deposits .....................     $    (1)     $    (3)     $    (4)     $    45      $    --      $    45
Loans (includes loans held for sale) .................         471          (47)         424          212         (240)         (28)
  Securities:
   Taxable ...........................................         882          (30)         852          677         (134)         543
   Nontaxable ........................................         242          (37)         205           32          (15)          17
  Federal funds sold .................................          99           10          109         (607)         (89)        (696)
------------------------------------------------------------------------------------------------------------------------------------
   Total interest income .............................       1,693         (107)       1,586          359         (478)        (119)
------------------------------------------------------------------------------------------------------------------------------------

Interest expense:
  Savings deposits and interest-bearing
   demand deposits ...................................         254          178          432           14           65           79
  Time deposits ......................................           7           28           35         (254)        (117)        (371)
  Other borrowings ...................................          24            3           27           (5)          (5)         (10)
------------------------------------------------------------------------------------------------------------------------------------
   Total interest expense ............................         285          209          494         (245)         (57)        (302)
------------------------------------------------------------------------------------------------------------------------------------
  Changes in net interest income .....................     $ 1,408      $  (316)     $ 1,092      $   604      $  (421)     $   183
====================================================================================================================================
</TABLE>

     Interest Income. In 1997, interest income on tax-equivalent basis increased
$1.6 million  (8.7%),  rising from $18.2  million for 1996 to $19.8  million for
1997. As the chart above illustrates,  volume-related  increases of $1.7 million
were  offset   slightly  by   rate-related   decreases  of   $107,000.   Average
interest-earning assets increased $24.9 million (9.6%), which more than offset a
16 basis point decline in the yield on those assets.

     The  securities  portfolio  accounted for the largest  increase in interest
income in 1997. The $1.1 million  (27.7%)  increase in interest  income resulted
from a $14.6 million rise in average taxable  securities and a $3.2 million jump
in average nontaxable securities.  These increases more than offset the five and
251 basis point reductions in the respective yields on these  securities.  Since
nonearning  assets in 1997 averaged only $20,000 more than in 1996,  the funding
for the  purchase of  securities  in 1997 came  directly  from  deposit  growth.
Federal funds sold contributed $109,000 to the interest income increase in 1997,
largely due to the $1.8 million rise in average federal funds sold  outstanding.
Rates on federal  funds sold averaged 13 basis points more in 1997 than in 1996,
reflecting prevailing daily rates.

     Loans  provided  $424,000 of 1997's  increase in interest  income.  Despite
strong loan  originations  during the year,  average loans outstanding only grew
$5.3  million  in 1997  versus  1996 due to a high level of loan  paydowns.  The
$471,000 increase in interest income related to that growth was virtually all in
the commercial and commercial real estate category.  This category of loans also
experienced  a six  basis  point  rise  in  yield  in  1997  compared  to  1996.
Installment  loans averaged almost $1.5 million more in 1997 than in 1996, but a
24 basis point  decline in the average  yield  reduced the  increase in interest
income in 1997 to just  $29,000.  The mortgage loan  portfolio  continues to pay
down,  resulting in a $1.4  million  reduction  in 1997  average  balances.  The
average yield on these mortgage loans also dropped,  contributing  to an overall
$132,000 decrease in interest income.

     Total interest income on a tax-equivalent basis decreased a modest $119,000
(.7%),  from $18.4 million for the year ended December 31, 1995 to $18.3 million
for the year ended December 31, 1996.  Volume-related increases of $359,000 were
more than offset by rate-related  decreases totaling $478,000.  Although average
interest-earning  assets increased $3.4 million in 1996 as compared to 1995, the
average  yield on those  assets  declined 17 basis  points,  largely due to a 56
basis point drop in the Corporation's average base lending rate.

     Interest on loans decreased  $28,000 (.2%) for the year 1996 as compared to
1995. A 15 basis point  decrease in the average loan yield during 1996 more than
offset the increase in average loan  balances of $2.4 million  (1.5%).  The base
lending rate decrease affected the installment  category the most,  resulting in
an 82 basis point decline in average yield in 1996 versus 1995. The  installment
category also  accounted for all of the average  balance  increase in loans,  as
efforts to attract new  consumer  loans  resulted in an increase of $3.7 million
(10.3%) in average balance.  Cessation of residential mortgage loan originations
and normal  principal  payments  caused  mortgage loans to decrease $1.2 million
(12.8%) in average  balances,  more than offsetting a 40 basis point increase in
average yield.  Above-normal  loan prepayments more than offset  commercial loan
originations, resulting in a slight drop in average balances.

     The largest increase in interest income in 1996 was in taxable  securities,
which  increased  $543,000 in 1996 versus 1995.  The $11.0  million  increase in
average balance resulted in $677,000 of additional  interest  income,  more than
offsetting  the $134,000  reduction due to the 26 basis point decline in average
yield resulting from lower prevailing  interest rates.  Funding for the purchase
of securities was provided by the $11.1 million decline in average federal funds
sold.  The reduction in federal funds sold was a result of the  diminished  need
for the abundant  liquidity  maintained  in 1995.  Overall,  interest on federal
funds sold declined $696,000 in 1996 versus 1995,  primarily due to the decrease
in average balances. A rate drop of 52 basis points, reflecting lower prevailing
overnight  rates in 1996 than in 1995,  led to an $89,000  decrease  in interest
income.



                                       8
<PAGE>


                       Results Of Operations (continued)

     Interest  Expense.  Total interest expense  increased  $494,000 (8.5%) from
$5.8  million for the year ended  December 31, 1996 to $6.3 million for the year
ended   December   31,   1997.   An  increase   of  $12.3   million  of  average
interest-bearing liabilities was responsible for $285,000 of the increase, while
the  remaining  $209,000  was due to a modest four basis  point  increase in the
average  rate paid on those  liabilities.  The bulk of the  increase  in average
interest-bearing  liabilities  came in the  interest-bearing  demand and savings
categories,   which  rose  $4.6  million   (16.9%)  and  $6.9   million   (9.3%)
respectively.  Average time deposits  increased  only $142,000 in 1997 and a new
repurchase  agreement  product made up the remainder of the increase with a rise
of  $593,000  in  other   borrowings.   Although   the  average   rate  paid  on
interest-bearing  demand  deposits  fell ten basis  points in 1997,  this had no
effect  on  average  balances  because  of the  transactional  nature  of  these
deposits.  However,  within the savings category,  there was a definite movement
towards the higher rate products in 1997,  causing a 26 basis point  increase in
the average  rate.  The average rate paid on time deposits  increased  only four
basis points in 1997.

     Total interest expense decreased  $302,000 (4.9%) from $6.1 million for the
year ended  December  31, 1995 to $5.8  million for the year ended  December 31,
1996.  A  decline  of  $2.8  million  in  average  interest-bearing  liabilities
accounted  for  $245,000  of the  decrease,  while a slight  decline in rates in
selected  deposit  categories  was the reason for the remainder of the decrease.
Decreases of $5.0 million (6.7%) and $1.5 million (2.0%) in the average balances
of time deposits and savings deposits,  respectively, were partially offset by a
$3.7 million  (15.7%)  increase in average  interest-bearing  demand balances in
1996.  One  reason  for the  decrease  in time  deposits  is that in  1995,  the
Corporation  paid a premium rate of 7% on a seven-month  certificate  of deposit
which  attracted  over $16  million in a special  one-day  promotion.  About $12
million of this was from new customers, the majority of whom did not renew their
certificates upon maturity.  These  certificates were primarily  responsible for
the 16 basis  point drop in rate on time  deposits  in 1996 as compared to 1995.
The payment of higher,  more  competitive  rates on certain savings products was
responsible for the 20 basis point increase in rate in 1996 versus 1995 and also
for keeping the decrease in average  balance to such a small level after a $14.5
million (16.1%) decline in 1995 as compared to 1994.  Despite a rate decrease in
the  interest-bearing  demand  category,  efforts to attract new deposits proved
successful.  Management  believes  that  savings  deposits  will be difficult to
attract in future years  because the spreads  between  rates paid on savings and
those offered by alternative investments have remained wide.

     The  Corporation  incurred  interest  expense  on its other  borrowings  of
$29,000,  $2,000 and $12,000 during the years ended December 31, 1997,  1996 and
1995 respectively, which consisted of interest on repurchase agreements in 1997,
interest on federal  funds  purchased  in 1996,  and  interest  on  subordinated
debentures in 1995. The remaining $1.3 million of  subordinated  debentures were
redeemed  during  the  first  quarter  of  1995.  See  Note  8 of the  Notes  to
Consolidated Financial Statements.

     Provision for Possible Loan Losses.  The provision for possible loan losses
was $480,000, $400,000, and $500,000 for the years ended December 31, 1997, 1996
and 1995, respectively.  The much reduced provisions for possible loan losses in
these years compared to provisions in 1992 to 1994 reflect the overall  increase
in loan quality, the continued reduction of nonperforming assets and the further
reduction of loan  concentrations.  Loan  charge-offs in 1997 were $1.1 million,
just slightly more than the $941,000 charged-off in 1996 but well below the $3.7
million  charged-off  in 1995. In 1997,  loan  recoveries  totaled only $134,000
compared  to  the  $803,000  and  $1.5  million  recovered  in  1996  and  1995,
respectively.  Management remains  optimistic that continued  collection efforts
will result in significant future recoveries.

     The provision for possible loan losses is determined by management based on
its analysis of certain prevailing factors,  including a review of the financial
status and credit  standing of  borrowers,  real estate  appraisals,  prior loss
experience and management's  judgment as to prevailing and anticipated  economic
conditions within the Corporation's market area. For additional information, see
"Financial  Condition and Recent  Operating  Environment  -- General" and "Asset
Quality -- Allowance for Possible Loan Losses."

     Other Income.  Other income declined  $192,000 (8.1%) from $2.4 million for
the year ended  December 31, 1996 to $2.2 million for 1997. The major reason for
the  decrease  is that  there  were  almost  $220,000  of  prior  year  interest
recoveries  and gains on sales of other real estate in 1996 and only  $26,000 of
interest  recoveries  in  1997.  Commissions  from the  Corporation's  brokerage
affiliate rose nicely in 1997,  increasing  $64,000 (20.5%) over the 1996 total,
This increase was offset in part by a $24,000 (1.7%) decrease in service charges
on deposit accounts.

     Other income  decreased just $73,000 (3.0%) for the year ended December 31,
1996 as compared to the year ended  December 31, 1995. The primary cause of this
decrease was a $123,000  (8.1%) drop in service  charges on deposit  accounts in
1996.  Management  believes that service  charges  decreased  because there were
fewer accounts,  on average, in the demand and savings categories in 1996 versus
1995, and because the average balance of these accounts  increased in 1996, thus
avoiding certain service charges.

     Other Expense.  Total other expense  declined  $26,000 from 1996 to 1997. A
$798,000  reduction in ORE  operating  expenses and  valuation  adjustments  was
almost  entirely  offset by  increases  of  $596,000,  $72,000,  and $101,000 in
salaries and employee  benefits,  occupancy  expenses,  and  equipment  expense,
respectively. Due to the small number of ORE properties left, management expects
that valuation adjustments and operating expenses related to ORE in 1998 will be
below 1997 levels.  The increase in salaries and employee benefits is the result
of several factors.  First, the average number of full-time equivalent employees
increased by 6.54  employees in 1997 versus 1996,  primarily due to the staffing
of the two newest  branch  offices.  Second,  the expense  accrual  required for
performance-based  stock  options  increased  $188,000 in 1997 compared to 1996,
largely a result of the rise in the  Corporation's  stock  price.  Merit  raises
account for the balance of the increase.  The  occupancy  and equipment  expense
increases  are almost  entirely  due to the two  newest  branch  offices;  their
combined  expense for these categories was $162,000 higher in 1997 than in 1996,
when the first of these branches opened in August.

     Other expense  decreased $2.1 million  (17.2%),  from $12.2 million for the
year ended  December 31, 1995 to $10.1  million for the year ended  December 31,
1996. The majority of this decrease, $1.8 million, was in ORE operating expenses
and valuation  adjustments,  which reflects the  maintenance  and disposition of
fewer  properties  than in 1995. A $637,000  decrease in the other  expense line
item was  partially  offset by  increases  of  $243,000,  $51,000 and $25,000 in
salaries and employee  benefits,  net occupancy  expense and equipment  expense,
respectively.  The most significant  decreases in other expense were in the FDIC
assessment and in legal expenses.  The FDIC assessment declined $364,000 in 1996
due to a reduction  in  assessment  rates and to the Bank's  being placed in the
lowest risk category for assessment  purposes by the FDIC.  Legal fees decreased
$145,000  in  1996  compared  to  1995  primarily  due to the  fewer  number  of
nonperforming  assets  being  managed in 1996.  The  increase  in  salaries  and
employee  benefits  was due to merit  raises and a  performance  bonus  accrual.
Occupancy  expense  was higher in 1996  because of the more than five  months of
rent paid for the  Bank's new  Fairfield  office  opened in 1996 and  because of
higher  than  normal  snow  removal  expenses  resulting  from the harsh  winter
weather.



                                       9
<PAGE>


                       Results Of Operations (continued)

     The Corporation utilizes software and related  technologies  throughout its
business that will be affected by the date change in the year 2000. During 1997,
senior management  embarked on a project to determine the full scope and related
costs of this problem to insure that the Corporation's  systems continue to meet
its internal  needs and those of its customers.  Since all of the  Corporation's
software was  purchased  rather than  developed  in-house,  the  Corporation  is
dependent on these software providers to make any programming changes needed for
the  software  to become  year 2000  compliant.  To date,  the  Corporation  has
identified  all  affected  hardware  and  software,  has  contacted  vendors  to
determine if their  software is year 2000 compliant and, if not, what plans they
have to make it so, and has begun testing the  applications  to insure year 2000
compatibility.  Minimal  costs  have  been  incurred  thus  far  for  year  2000
compliance. Management estimates that future costs incurred in this project will
not be material.

     Income Taxes. The Corporation had income tax provisions of $1.9 million and
$1.3 million for the years ended December 31, 1997 and 1996,  respectively,  and
an income tax benefit of $4.2 million for the year ended  December 31, 1995. The
1996  provision  includes the effect of the reversal of $496,000 of tax reserves
no longer deemed  necessary.  The 1995 benefit is primarily  attributable to the
reversal of a valuation  allowance  against the  Corporation's  net deferred tax
asset totaling $5.3 million.

     Because of the  significant  operating  losses in 1994,  1993 and 1992, the
Corporation  recorded a full  valuation  allowance  against its net deferred tax
asset at  December  31,  1994.  During  1995,  management  concluded  that  this
valuation allowance was no longer necessary because sufficient positive evidence
had accumulated.  Such positive evidence  included five consecutive  quarters of
profitable  operations,  significant  reductions  in the level of  nonperforming
assets and related expenses, continued strong net interest margins and operating
expense reductions.

     At December 31, 1997, the Corporation had no federal or state net operating
loss carryforwards.

     Federal income tax returns for the years 1991,  1992 and 1993 were examined
by the Internal Revenue  Service.  Audit  adjustments  assessed during 1996 as a
result of this examination were immaterial.



                                       10
<PAGE>


                               Interest Rate Risk

     Interest  rate risk is inherent in the  Corporation's  core  activities  of
lending,  investing  and  soliciting  deposits.  Because  there is a  difference
between the amount of the Corporation's  interest-earning  assets and the amount
of interest-bearing liabilities that are prepaid/withdrawn, mature or reprice in
specified  time  periods,  the  Corporation  is exposed to risk  resulting  from
interest rate fluctuations. The Corporation defines interest rate risk simply as
the risk that the Corporation's earnings will change when interest rates change.
Managing interest rate risk is the province of the Corporation's Asset/Liability
Management  Committee.  This  Committee  meets at least  monthly  to review  the
interest rate sensitivity of the Corporation's  assets and liabilities,  as well
as to regulate the  Corporation's  flow of funds and to coordinate  the sources,
uses and pricing of such funds.  The  Committee's  objective in structuring  and
pricing the  Corporation's  assets and  liabilities is to maintain an acceptable
interest  rate  spread  while  minimizing  the  negative  effects  of changes in
interest rates.

     The Corporation  monitors and controls interest rate risk through a variety
of  techniques   including  use  of  an  interest  rate  sensitivity  model  and
traditional interest rate sensitivity gap analysis. The model is used monthly to
project  future net interest  income and to estimate the effect on projected net
interest  income of various  changes in interest  rates and balance sheet growth
rates.  Through the model,  management attempts to simulate future interest rate
behavior  based  on past  behavior  and  the  current  competitive  environment.
Traditional gap analysis involves  arranging the Corporation's  interest-earning
assets and interest-bearing  liabilities by repricing periods and then computing
the  difference,  or  interest  rate  sensitivity  gap,  between  the assets and
liabilities  which  are  estimated  to  reprice  during  each  time  period  and
cumulatively through the end of each time period.

     The interest rate sensitivity model requires,  among things,  estimates of:
(1) the  magnitude  and  timing of  changes  in yields  and costs on  individual
categories  of  interest-earning  assets  and  interest-bearing  liabilities  in
response  to changes  in market  interest  rates;  (2) future  cash  flows;  (3)
prepayment and early redemption rates; and (4) balance sheet growth rates.

     Gap  analysis  requires  estimates  as to  when  individual  categories  of
interest  sensitive  assets and liabilities will reprice and assumes that assets
and liabilities  assigned to the same repricing  period will reprice at the same
time and in the same amount.  Like sensitivity  modeling,  gap analysis does not
take  into  account  the fact  that  repricing  of  assets  and  liabilities  is
discretionary and subject to competitive and other pressures.

     Changes in the estimates and assumptions made for interest rate sensitivity
modeling and gap analysis could have a significant  impact on projected  results
and  conclusions.  For  example,  the rate shocks used in the table below assume
that year-end interest rates change  immediately and that a particular change in
interest rates is reflected  uniformly  across the yield curve regardless of the
duration to maturity or  repricing  of  specific  assets and  liabilities.  Past
interest  rate behavior  suggests  that rates rarely change as described  above.
Therefore,  these  techniques may not  accurately  reflect the impact of general
interest rate movements on the Corporation's net interest income.

     The base case  information in the following  table shows an estimate of the
Corporation's net interest income for 1998 assuming that both interest rates and
the Corporation's  interest  sensitive assets and liabilities remain at December
31, 1997  levels.  The rate shock  information  shows  estimates of net interest
income for 1998  assuming rate shocks of plus 100 and 200 basis points and minus
100 and 200 basis points.  The  information  set forth in the following table is
based on  significant  estimates  and  assumptions,  and  constitutes a "forward
looking  statement"  within the meaning of that term as set forth in Rule 175 of
the Securities Act of 1933 and Rule 36-6 of the Securities Act of 1934.


================================================================================
                                                    Net Interest Income for 1998
--------------------------------------------------------------------------------
                                                                  % Change
                                                                    From
Rate Scenario                                           Amount    Base Case
--------------------------------------------------------------------------------
                                                     (Dollars in thousands)
+200 basis point rate shock.........................   $13,305     (1.47)%
+100 basis point rate shock.........................    13,358     (1.08)
Base Case ..........................................    13,504        --
-100 basis point rate shock.........................    13,196     (2.28)
-200 basis point rate shock.........................    12,736     (5.69)
================================================================================

     Although  there are more  interest-bearing  liabilities  that would reprice
with a change in interest rates than there are interest-earning  assets, a shock
and  sustained  decrease  in rates would  result in a decrease  in net  interest
income because of differences in the timing of the repricing of these assets and
liabilities.  A further  decrease in net interest income occurs when a 200 basis
point  shock  is  applied   because  certain   categories  of   interest-bearing
liabilities  cannot  absorb a 200 basis point rate decline due to their  current
rates being below 2% or because of assumed rate  floors.  When rates are assumed
to increase 100 and 200 basis points,  net interest  income  decreases  slightly
because the negative effect on net interest income of having a greater volume of
interest-bearing  liabilities reprice than interest-earning assets outweighs the
positive effect of their repricing slower than the assets.


                                       11
<PAGE>


                         Interest Rate Risk (continued)

     The following table sets forth the amounts of  interest-earning  assets and
interest-bearing liabilities outstanding at December 31, 1997 which are expected
to mature or reprice in each of the time periods shown:

<TABLE>
<CAPTION>
====================================================================================================================================
                                                          Three      Over Three     Over One
                                                         Months       Months to      Year to        Over     Noninterest-
Total                                     Immediate      or Less      One Year     Five Years    Five Years    Sensitive     Total
------------------------------------------------------------------------------------------------------------------------------------
                                                                 (Dollars in thousands)
<S>                                       <C>          <C>           <C>           <C>          <C>          <C>           <C>
Assets:
 Loans, net (1) .......................   $  44,088    $  19,496     $  19,228     $  48,667    $  32,999    $      --     $ 164,478
 Securities ...........................          --       34,026        13,062        34,328        7,578           --        88,994
 Federal funds sold ...................      10,725           --            --            --           --           --        10,725
 Cash and other assets ................          --           --            --            --           --       21,530        21,530
------------------------------------------------------------------------------------------------------------------------------------
  Total assets ........................   $  54,813    $  53,522     $  32,290     $  82,995    $  40,577    $  21,530     $ 285,727
====================================================================================================================================

Liabilities and stockholders' equity:
 Demand deposits ......................   $      --    $  34,546     $      --     $      --    $      --    $  60,367     $  94,913
 Savings and time deposits (2) ........          --      108,563        36,863         9,421           --           --       154,847
 Securities sold under agreements to
   repurchase .........................       1,677           --            --            --           --           --         1,677
 Other liabilities ....................          --           --            --            --           --        2,993         2,993
 Stockholders' equity .................          --           --            --            --           --       31,297        31,297
------------------------------------------------------------------------------------------------------------------------------------
  Total liabilities and stockholders'
   equity .............................   $   1,677    $ 143,109     $  36,863     $   9,421    $      --    $  94,657     $ 285,727
====================================================================================================================================

Interest rate sensitivity gap .........   $  53,136    $ (89,587)    $  (4,573)    $  73,574    $  40,577    $ (73,127)
Interest rate sensitivity gap as a
 percentage of total assets ...........        18.6%       (31.4)%        (1.6)%        25.7%        14.2%       (25.6)%
Cumulative interest rate
 sensitivity gap ......................   $  53,136    $ (36,451)    $ (41,024)    $  32,550    $  73,127
Cumulative interest rate
 sensitivity gap as a percentage
  of total assets .....................        18.6%       (12.8)%       (14.4)%        11.4%        25.6%
====================================================================================================================================
</TABLE>

(1)  The  allowance for possible loan losses is included in the over one year to
     five years category. No effect is given to anticipated loan prepayments.

(2)  Money market  accounts  are included in the three months or less  category,
     based on the  Corporation's  recent  experience of repricing  such deposits
     every three months or less. It is the opinion of management,  however, that
     a significant portion of these accounts is not interest sensitive.

                                  Asset Quality

     The following table sets forth, as of the dates  indicated,  the components
of the  Corporation's  delinquent loans,  nonperforming  assets and restructured
loans. Each component is discussed in greater detail below. Nonperforming assets
consist of nonaccrual loans,  accruing loans 90 days or more delinquent and ORE.
It is the Corporation's policy to place a loan on nonaccrual status when, in the
opinion of management,  the ultimate collectibility of the principal or interest
on the loan becomes  doubtful.  As a general  rule, a commercial  or real estate
loan  more  than 90 days past due with  respect  to  principal  or  interest  is
classified  as a  nonaccrual  loan.  Consumer  loans not  secured by real estate
generally are not placed on nonaccrual status but,  instead,  are charged off at
90 days past due. Prior to 1995,  loans were considered  restructured  loans if,
for economic or legal  reasons,  a  concession  had been granted to the borrower
related to the  borrower's  financial  difficulties  that the creditor would not
otherwise consider.  The Corporation had restructured certain loans in instances
where a  determination  was made that  greater  economic  value will be realized
under new terms than through foreclosure, liquidation, or other disposition. ORE
includes both loan collateral that has been formally  repossessed and collateral
that is in the bank's possession and under its control without legal transfer of
title.

     At the time of  classification  as ORE, loans are reduced to the fair value
of the collateral (if less than the loan receivable) by charge-offs  against the
allowance for possible loan losses.  ORE is carried on the books at the lower of
cost  or  fair  value,  less  estimated  costs  to  sell.  Subsequent  valuation
adjustments  to the fair value of the  collateral  are  charged or  credited  to
current operations.


                                       12
<PAGE>


                            Asset Quality (continued)

     The  following  table  sets  forth  delinquent  loans,  the  components  of
nonperforming assets, and restructured loans at the year ends indicated:

<TABLE>
<CAPTION>
====================================================================================================================================
                                                                                                December 31
------------------------------------------------------------------------------------------------------------------------------------
                                                                      1997          1996           1995           1994         1993
------------------------------------------------------------------------------------------------------------------------------------
                                                                                             (In thousands)
<S>                                                                  <C>           <C>           <C>           <C>           <C>
Delinquent loans 30 - 89 days past due .......................       $ 3,256       $ 1,023       $ 3,644       $ 4,725       $ 2,303
====================================================================================================================================
Nonaccrual loans:
 Commercial and commercial real estate .......................       $   490       $   886       $ 3,459       $ 6,617       $21,472
 Residential real estate mortgage ............................           211           104           375           509           360
 Installment .................................................            44            63           356           422            49
------------------------------------------------------------------------------------------------------------------------------------
  Total nonaccrual loans .....................................           745         1,053         4,190         7,548        21,881
------------------------------------------------------------------------------------------------------------------------------------
Loans past due 90 days or more:
 Commercial and commercial real estate .......................             8            46            37            20           585
 Residential real estate mortgage ............................           104            61            53           216           380
 Installment .................................................            --            45            51             4           217
------------------------------------------------------------------------------------------------------------------------------------
  Total loans past due 90 days or more .......................           112           152           141           240         1,182
------------------------------------------------------------------------------------------------------------------------------------
  Total nonperforming loans ..................................       $   857       $ 1,205       $ 4,331       $ 7,788       $23,063
====================================================================================================================================
ORE, net (1) .................................................       $ 2,192       $ 2,211       $ 4,408       $ 9,995       $10,332
====================================================================================================================================
Total nonperforming assets ...................................       $ 3,049       $ 3,416       $ 8,739       $17,783       $33,395
====================================================================================================================================
Restructured loans ...........................................       $ 1,475       $ 1,540       $ 1,702       $ 5,983       $11,035
====================================================================================================================================
  Total nonperforming assets and restructured loans ..........       $ 4,524       $ 4,956       $10,441       $23,766       $44,430
====================================================================================================================================
</TABLE>

(1)   Loans are classified as ORE when the Corporation has taken possession of
      the collateral, regardless of whether formal foreclosure proceedings have
      taken place.

     During the year ended December 31, 1997,  gross interest income of $326,000
would have been  recorded on loans  accounted  for on a nonaccrual  basis if the
loans had been current throughout the period. Interest on such loans included in
income during such period amounted to $4,000.  Gross interest income of $144,000
would have been  recorded on  restructured  loans if the loans had been  current
throughout the period in accordance with their original terms.  Interest on such
loans included in income during such period amounted to $114,000.

     The Corporation  further reduced its  nonperforming  assets in 1997,  going
from $3.4 million at December  31,  1996,  to $3.0 million at December 31, 1997.
The loans  past due 90 days or more and ORE  categories  had net  reductions  of
$40,000 and $19,000, respectively. Nonaccrual loan activity in 1997 included one
$55,000  mortgage loan  transferring  in from the loans past due 90 days or more
category,  $955,000 of transfers  from  performing  loans,  less  chargeoffs  of
$933,00, principal repayments of $185,000 and a $200,000 loan which was returned
to accruing status.  The one restructured loan at December 31, 1996 continued to
perform in accordance with its restructured terms during 1997.

     The  dramatic  reduction  in  nonperforming  assets  from $33.4  million at
December  31, 1993 to $3.4  million at December  31, 1996 was  primarily  due to
charge-offs  taken in that period,  ORE asset sales and  management's  long-term
efforts to work with its borrowers to maximize recoveries.

     In 1997,  ORE-related  expenses  were much lower than in  preceding  years.
Management  is  striving to keep  future  ORE-related  expenses at or below 1997
levels and has  instituted  policies and procedures to help minimize the risk of
loan quality deterioration.

     Management  believes  that the  economy  in the  Corporation's  market  has
stabilized  since 1994.  However,  a significant  increase in interest  rates or
other  changes in  economic  factors  that  adversely  affect the ability of the
Corporation's  borrowers and  prospective  purchasers of its ORE to service real
estate-related indebtedness may have a negative impact on the amounts ultimately
realized  upon  the  collection  of loans or the  disposition  of  nonperforming
assets.

     Nonaccrual and Delinquent  Loans.  When a loan is classified as nonaccrual,
interest  which was accrued but unpaid  during the year the loan was  classified
nonaccrual is reversed from income,  and any interest  which was accrued  during
the prior year but was unpaid is charged off against the  allowance for possible
loan losses.  While a loan is  classified as  nonaccrual,  all  collections  are
applied as  reductions of principal  outstanding.  Nonaccrual  loans  (including
those with partial  charge-offs) may be returned to accrual status,  even though
the loans are not current with respect to the contractual payments, provided two
criteria  are met: (i) all  principal  and interest  amounts  contractually  due
(including  arrearages) are reasonably  assured of repayment within a reasonable
period, and (ii) there is a sustained period of recent repayment performance (at
least six months) by the  borrower in  accordance  with the  contractual  terms.
Loans  that  meet  the  above  criteria  would be  classified  as past  due,  as
appropriate, until they have been brought fully current.

     The  following  table  sets  forth  the  types  of  loans   comprising  the
Corporation's nonperforming loans at December 31, 1997:

================================================================================
                                                Loans 90 Days         Nonaccrual
                                               or More Past Due         Loans
--------------------------------------------------------------------------------
                                                          (In thousands)
One-to four-family residential real estate....       $104                $216
Commercial and industrial.....................          8                 485
Installment...................................         --                  44
--------------------------------------------------------------------------------
  Total.......................................       $112                $745
================================================================================


                                       13
<PAGE>


                            Asset Quality (continued)

     Restructured Loans. The Corporation has restructured loans in cases where a
borrower  has  been  able to  demonstrate  a  reasonable  ability  to  meet  the
restructured debt service  obligation.  As used herein,  the term  "restructured
loan" means a restructured  loan on accrual  status.  At December 31, 1997, 1996
and 1995,  the  Corporation's  restructured  loans  totalled $1.5 million,  $1.5
million  and $1.7  million,  respectively.  At December  31, 1997 and 1996,  the
balance consisted of one commercial real estate loan that had been on nonaccrual
status prior to 1996.  This loan has performed in  accordance  with its modified
terms throughout 1996 and 1997.

     Impaired Loans. Accounting standards require that certain impaired loans be
measured based on the present value of expected future cash flows  discounted at
the  loans'  original  effective  interest  rate.  As  a  practical   expedient,
impairment  may be measured based on the loans'  observable  market price or the
fair  value of the  collateral  if the loan is  collateral  dependent.  When the
measure of the impaired  loan is less than the recorded  investment in the loan,
the impairment is recorded through a valuation allowance.

     The  Corporation's  impaired  loans totaled  $2,464,000  and  $2,426,000 at
December  31,  1997  and  1996,  respectively,  the  amount  of  its  commercial
nonaccrual and restructured  loan portfolios and other qualifying loans, if any,
on those dates. All such loans are collateralized with real estate and have been
written  down to the  fair  value of the  collateral.  Since  the  Corporation's
recorded  investment  in these  loans is less than or equal to the fair value of
the collateral, no valuation allowances were required.

     Other Real Estate. Other real estate includes both loan collateral that has
been formally repossessed and collateral that is in the Corporation's possession
and under its control  without  legal  transfer of title.  ORE is carried on the
books at the lower of cost or fair value, less estimated costs to sell. In years
prior to 1994,  loans  classified as  in-substance  foreclosed but for which the
Corporation had not taken possession of the collateral have been reclassified to
loans to conform to the current  presentation.  All of the  Corporation's ORE is
located in northern New Jersey.

     At December  31, 1997,  ORE  consisted of one parcel of raw land carried at
$1.4  million,  two parcels of  residential  building lots carried at a total of
$675,000,  and one residence carried at $256,000.  A general valuation allowance
of $139,000 is carried  against these  properties as an estimate of the costs to
sell them.

     Management believes that the net carrying value of ORE at December 31, 1997
equaled  the  lower  of the  assets'  balances  when  transferred  to ORE or the
estimated  fair value  (after  reduction  for  estimated  selling  costs) of the
properties  acquired.  Given current real estate and economic  conditions in the
Corporation's  market,  however,  no assurance  can be given as to the extent to
which the Corporation will realize its current carrying value, the Corporation's
ability to continue to dispose of any significant amount of ORE or the period of
time it will take for the Corporation to achieve a significant  reduction in the
amount of its ORE.

     Other.  Loans which were not classified as nonaccrual,  90 days past due or
restructured  but where known  information  about  possible  credit  problems of
borrowers caused  management to have concerns as to the ability of the borrowers
to comply with present loan repayment terms amounted to $2.4 million at December
31, 1997. These loans consisted of one residential  mortgage loan of $26,000, 21
installment loans totalling  $264,000,  and one commercial loan of $2.1 million.
The commercial loan is likely to be restructured during 1998.

     Asset  Concentrations.  The Corporation's  loan portfolio  contains certain
concentrations  of related  borrowers.  At December 31, 1997, the combined three
largest  concentrations  totalled  $31.2  million,  or 18.5% of the  total  loan
portfolio.  The large balances  outstanding on these loans may increase the risk
of  potential  loss  exposure  to the  Corporation.  The  largest  concentration
consisted of 13 loans with an  aggregate  balance of $15.0  million.  The second
relationship   consisted  of  11  loans   totalling  $8.2  million.   The  third
relationship consisted of 16 loans totalling $8.0 million. At December 31, 1997,
management believes all loans within these  concentrations,  including adversely
classified loans, were properly valued on the Corporation's books.

     At  December  31,  1997 and  1996,  commercial  real  estate  mortgage  and
construction  loans totalled  $105.7 million and $102.4 million and  represented
62.5% and  60.7%,  respectively,  of the  Corporation's  total  loan  portfolio.
Substantially  all of the commercial  real estate securing such loans is located
in northern New Jersey.  The ability of borrowers of such loans to repay them in
accordance  with their  terms,  and the  ability of the  Corporation  to realize
recoveries in the event of their default,  are highly  dependent upon conditions
in the northern New Jersey real estate industry.

     Loan Maturity Schedule.  The following table sets forth certain information
at December 31, 1997,  regarding the dollar amount of commercial  and commercial
real estate loans and commercial real estate  construction loans maturing in the
Corporation's portfolio based on their contractual terms to maturity,  including
scheduled repayments of principal. Demand loans, loans having no stated schedule
of repayments and no stated maturity,  and overdrafts are reported as due in one
year or less.

<TABLE>
<CAPTION>
===============================================================================================================================
                                                                   Due In One       Due after 1        Due after
                                                                  Year or Less    through 5 years       5 years         Total
-------------------------------------------------------------------------------------------------------------------------------
                                                                                           (In thousands)
<S>                                                                 <C>               <C>              <C>             <C>
Commercial and commercial real estate ..........................    $23,775           $60,989          $25,825         $110,589
Commercial real estate construction ............................      4,975             5,578               --           10,553
-------------------------------------------------------------------------------------------------------------------------------
    Total ......................................................    $28,750           $66,567          $25,825         $121,142
===============================================================================================================================
Loans with predetermined interest rates ........................    $10,336           $45,099          $21,519         $ 76,954
Loans with floating interest rates .............................     18,414            21,468            4,306           44,188
-------------------------------------------------------------------------------------------------------------------------------
    Total ......................................................    $28,750           $66,567          $25,825         $121,142
===============================================================================================================================
</TABLE>


                                       14
<PAGE>


                            Asset Quality (continued)

     Allowance for Possible Loan Losses.  The allowance for possible loan losses
is determined by management  based upon its evaluation of the known,  as well as
the inherent, risks within the Corporation's loan portfolio and is maintained at
a level considered  adequate to provide for potential loan losses. The allowance
for  possible  loan losses is  increased  by  provisions  charged to expense and
reduced by net  charge-offs.  In  establishing  the  allowance for possible loan
losses, management considers, among other factors, previous loss experience, the
performance  of  individual  loans in relation to  contract  terms,  the size of
particular   loans,   the  estimated   fair  value  of   collateral,   the  risk
characteristics of the loan portfolio  generally,  the current status and credit
standing of borrowers,  management's  judgment as to prevailing and  anticipated
real estate values and other  economic  conditions in the  Corporation's  market
area and  other  factors  affecting  credit  quality.  Management  believes  the
allowance  for  possible  loan losses at December 31, 1997 of $4.6  million,  or
540.0% of nonperforming  loans, was adequate.  Management  continues to actively
monitor the  Corporation's  asset  quality  and to charge off loans  against the
allowance for possible loan losses as it deems appropriate.  Although management
believes it uses the best  information  available  to make  determinations  with
respect to the  allowance for possible loan losses,  future  adjustments  may be
necessary if economic conditions differ  substantially from the assumptions used
in making the initial determinations.

     The following  table sets forth  summary data related to the  Corporation's
allowance for possible  loan losses,  the provision for possible loan losses and
charge-off experience for the years indicated:

<TABLE>
<CAPTION>
====================================================================================================================================
                                                                                        Year ended December 31
------------------------------------------------------------------------------------------------------------------------------------
                                                                        1997         1996         1995         1994        1993
------------------------------------------------------------------------------------------------------------------------------------
                                                                                      (Dollars in thousands)
<S>                                                                  <C>          <C>          <C>          <C>          <C>
Loans, net of unearned income (at end of year) (1) ...............   $ 169,106    $ 165,070    $ 160,580    $ 164,345    $ 206,214
====================================================================================================================================
Average loans outstanding (2) ....................................   $ 165,444    $ 160,125    $ 157,715    $ 171,395    $ 240,651
====================================================================================================================================
Allowance balance (at beginning of year) .........................   $   5,115    $   4,853    $   6,501    $   7,499    $   7,670
 Loans charged off:
  Commercial and commercial real estate (3) ......................         968          824        3,640        2,265        4,011
  Residential real estate mortgage ...............................           7           18            3           49           22
  Installment ....................................................         126           99           51          182          518
------------------------------------------------------------------------------------------------------------------------------------
   Total loans charged off .......................................       1,101          941        3,694        2,496        4,551
------------------------------------------------------------------------------------------------------------------------------------
  Recoveries of loans:
   Commercial and commercial real estate, net (3) ................         104          783        1,511          253          275
   Real estate mortgage ..........................................          --            2            6           --            4
   Installment ...................................................          30           18           29           24           61
------------------------------------------------------------------------------------------------------------------------------------
    Total recoveries .............................................         134          803        1,546          277          340
------------------------------------------------------------------------------------------------------------------------------------
Net loans charged off ............................................         967          138        2,148        2,219        4,211
Provision for the period .........................................         480          400          500        1,221        4,440
Allowance related to loans sold ..................................          --           --           --           --         (400)
------------------------------------------------------------------------------------------------------------------------------------
Allowance balance (at end of year) ...............................   $   4,628    $   5,115    $   4,853    $   6,501    $   7,499
====================================================================================================================================
Allowance for possible loan losses as a percentage of total
 outstanding loans (at end of year) ..............................        2.74%        3.10%        3.02%        3.96%        3.64%
Allowance for possible loan losses as a percentage of
 nonperforming loans (at end of year) ............................      540.02%      424.48%      112.05%       83.47%       32.52%
Net loans charged off as a percentage of average loans outstanding         .58%         .09%        1.36%        1.29%        1.75%
====================================================================================================================================
</TABLE>

(1)  Includes loans held for sale of $0, $0, $34,000,  $34,000 and $19.6 million
     at December 31, 1997, 1996, 1995, 1994 and 1993, respectively.

(2)  Includes average loans held for sale of $0, $32,000, $70,000, $2.6 million,
     and  $20.5  million  at  December  31,  1997,  1996,  1995,  1994  and 1993
     respectively.

(3)  Includes commercial real estate construction loans.

     The  Corporation  made provisions for possible loan losses during the years
ended  December 31,  1997,  1996 and 1995 of  $480,000,  $400,000 and  $500,000,
respectively,  in  order  to  address  the  uncertainty  inherent  in  the  loan
portfolio.  Beginning in 1992, the Corporation's loan charge-offs increased. The
recognition  of these  charge-offs,  coupled  with a decline in  delinquent  and
nonaccrual  loans,  enabled the  Corporation  to maintain its allowance for loan
losses during 1997, 1996 and 1995 below the level of the previous  years,  while
representing a significantly higher percentage of nonperforming loans.

     The Corporation  maintains valuation allowances for potential losses on its
portfolio of ORE.  The  following  table sets forth  summary data related to the
total valuation allowances for ORE for the years indicated:

<TABLE>
<CAPTION>
==================================================================================================================================
                                                                                                Year ended December 31
----------------------------------------------------------------------------------------------------------------------------------
                                                                                   1997                 1996                 1995
----------------------------------------------------------------------------------------------------------------------------------
                                                                                                   (In thousands)
<S>                                                                               <C>                 <C>                   <C>
Balance at beginning of year...................................................   $ 553               $ 2,611               $1,634
 Provision charged to expense..................................................     130                   780                1,850
 Write-downs to fair value and net losses incurred on sales....................    (544)               (2,838)                (873)
----------------------------------------------------------------------------------------------------------------------------------
Balance at end of year.........................................................   $ 139               $   553               $2,611
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                       15
<PAGE>


                            Asset Quality (continued)

     Gross ORE balances  have  continued to decline,  going from $7.0 million at
December  31, 1995 to $2.3  million at December  31,  1997.  The latter total is
comprised of four  properties,  the largest of which is valued at $1.4  million.
Management  is  striving  to  further  reduce  ORE  balances  in 1998.  As such,
valuation adjustments for ORE in 1998 are expected to be below the 1997 level.

     The  FDIC  and the New  Jersey  Department  of  Banking,  as part of  their
respective supervisory  functions,  periodically review the Bank's allowance for
possible loan losses and the allowance for potential ORE losses. Such regulatory
reviews may require the Bank to  increase  its  provision  for loan losses or to
recognize  further loan charge-offs or write-downs of the carrying value of ORE,
based on judgments different from those of management.

     Securities  Portfolio.  The Corporation  invests a portion of its available
funds in a variety of short-term  and  medium-term  instruments.  The securities
portfolio  provides a measure  of  liquidity  through  proceeds  from  scheduled
maturities  and is utilized for pledging  requirements  on public and  fiduciary
deposits.  At December 31, 1997, securities having a book value of $11.5 million
were pledged as  collateral  for public funds and other  purposes as required by
law.

     The  following  tables set forth the  carrying  value of the  Corporation's
available  for sale and held to  maturity  securities  portfolios  at the  dates
indicated:

<TABLE>
<CAPTION>
====================================================================================================================================
                                                                                              December 31
------------------------------------------------------------------------------------------------------------------------------------
                                                                         1997                    1996                  1995
------------------------------------------------------------------------------------------------------------------------------------
                                                                                        (Dollars in thousands)
                                                                   Amount    Percent       Amount    Percent    Amount      Percent
<S>                                                              <C>          <C>        <C>          <C>        <C>          <C>
Available for Sale:
   U.S. Treasury ...........................................     $    --         --%     $    --         --%     $ 4,532       11.5%
   U.S. Government Agencies ................................      35,793       73.7       34,622       83.2       27,746       70.6
   Obligations of State and Political Subdivisions .........       1,876        3.9          851        2.0          883        2.2
   Other ...................................................      10,887       22.4        6,175       14.8        6,167       15.7
------------------------------------------------------------------------------------------------------------------------------------
                                                                 $48,556      100.0%     $41,648      100.0%     $39,328      100.0%
====================================================================================================================================
 Held to Maturity:
   U.S. Treasury ...........................................     $11,541       28.5%     $ 7,516       28.5%     $    --        --%
   U.S. Government Agencies ................................      24,176       59.8       17,542       66.5       19,530       97.5
   Obligations of State and Political Subdivisions .........       4,721       11.7        1,337        5.0          500        2.5
------------------------------------------------------------------------------------------------------------------------------------
                                                                 $40,438      100.0%     $26,395      100.0%     $20,030      100.0%
====================================================================================================================================
</TABLE>

     The Corporation's  securities  increased from $59.4 million at December 31,
1995,  to $68.0  million at December 31, 1996,  and to $89.0 million at December
31,  1997.  The $21.0  million  increase  in  securities  during  the year ended
December  31,  1997  was due to the  Corporation's  investing  both  the net new
deposits  acquired  during the year and the excess federal funds sold. The prior
year's $8.6 million increase  resulted from investing the deposits acquired from
another commercial bank and loan paydown proceeds.

     Overall, the Corporation's  securities portfolio is high grade. At December
31, 1997,  securities  comprising  85.7% of the portfolio  carry Moody's highest
rating - Aaa. Obligations of state and political subdivisions are entirely those
of New Jersey origin.  It is the  Corporation's  policy to buy only those issues
rated A or better by Moody's;  however, in many cases, an issue is not rated due
to  its  small  size.  In  such  cases,  the  underlying  credit  rating  of the
municipality or political subdivision must be A rated. At December 31, 1997, the
weighted  average  maturity  of all owned  securities  is 4 years,  8 months.  A
further   breakdown  of  the  portfolio   reveals  that  the  $78.4  million  of
non-mortgage-backed  securities and $10.6 million of mortgage-backed  securities
have weighted  average  maturities of 2 years,  6 months and 20 years, 9 months,
respectively. Further, the mortgage-backed securities were required by policy to
project a return of half of their  principal  in seven years or less at the time
of purchase.  Also, $10.0 million and $14.0 million of securities  classified as
available  for sale and held to  maturity,  respectively,  at December 31, 1997,
were purchased with options to be called back by the issuer prior to maturity at
par value.

     The Corporation  adopted SFAS No. 115,  "Accounting for Certain Investments
in Debt and Equity  Securities," as of December 31, 1993. In connection with the
adoption the Corporation classified all of its securities as available for sale,
primarily  due  to  management's  anticipated  need  to  meet  future  liquidity
requirements.  These  securities  are carried at their  respective  fair values.
Management  determines the appropriate  classification of debt securities at the
time of  purchase.  During 1997 and 1996,  the  Corporation  classified  certain
purchased  securities as held to maturity.  At December 31, 1997, 1996 and 1995,
the Corporation had no securities held for trading  purposes.  See Notes 1 and 2
of Notes to Consolidated Financial Statements.


                                       16
<PAGE>


                            Asset Quality (continued)

     The  following  table sets forth  scheduled  maturities,  carrying  values,
market values and average yields on a tax-equivalent basis for the Corporation's
securities portfolio at December 31,1997:

<TABLE>
<CAPTION>
=========================================================================================================================
                                One Year or Less      One to Five Years     Five to Ten Years        More than Ten Years
-------------------------------------------------------------------------------------------------------------------------
                               Carrying    Average   Carrying     Average   Carrying   Average      Carrying      Average
                                 Value      Yield     Value       Yield       Value     Yield         Value        Yield
-------------------------------------------------------------------------------------------------------------------------
                                                                   (Dollars in thousands)
<S>                            <C>           <C>     <C>           <C>       <C>         <C>        <C>             <C>
Available for Sale:
  U.S. Government Agencies .   $ 4,652(1)    5.69%   $29,364(2)    5.79%     $    --       --%      $ 1,777(3)      5.51%
  Obligations of State and
   Political Subdivisions ..        50      11.36      1,315       7.16          376     11.36          135        11.36
  Other ....................       151(3)    6.25      9,325(4)    5.95           --        --        1,411(5)      6.16
-------------------------------------------------------------------------------------------------------------------------
  Total Securities .........   $ 4,853       5.77%   $40,004       5.87%     $   376     11.36%     $ 3,323         6.02%
=========================================================================================================================
 Held to Maturity:
  U.S. Treasury ............   $    --         --%   $11,541       5.87%     $    --        --%     $    --           --%
  U.S. Government Agencies .     7,229       6.06      9,880       6.56        1,890      6.90        5,177         6.77
  Obligations of State and
   Political Subdivisions ..       176       5.68      4,545       6.48           --        --           --           --
-------------------------------------------------------------------------------------------------------------------------
  Total Securities .........   $ 7,405       6.05%   $25,966       6.24%     $ 1,890      6.90%     $ 5,177         6.77%
=========================================================================================================================

<CAPTION>
=================================================================
                                   Total Investment Portfolio
-----------------------------------------------------------------
                               Carrying     Estimated     Average
                                Value      Market Value    Yield
-----------------------------------------------------------------
                                      (Dollars in thousands)
<S>                            <C>           <C>            <C>
Available for Sale:
  U.S. Government Agencies .   $35,793       $35,793        5.76%
  Obligations of State and
   Political Subdivisions ..     1,876         1,876        8.42
  Other ....................    10,887        10,887        5.98
-----------------------------------------------------------------
  Total Securities .........   $48,556       $48,556        5.91%
=================================================================
 Held to Maturity:
  U.S. Treasury ............   $11,541       $11,589        5.87%
  U.S. Government Agencies .    24,176        24,304        6.48
  Obligations of State and
   Political Subdivisions ..     4,721         4,759        6.45
-----------------------------------------------------------------
  Total Securities .........   $40,438       $40,652        6.30%
=================================================================
</TABLE>

(1)Includes   $3,638,000  of  securities  with  floating  rates.   (2)  Includes
$22,353,000 of securities  with floating  rates.  (3) Entire amount  consists of
securities  with floating  rates.  (4) Includes  $9,289,000  of securities  with
floating rates. (5) Includes $1,410,000 of securities with floating rates.

                         Liquidity and Capital Resources

     Liquidity  management  is a  continuous  process that intends to insure the
Corporation's  ability to meet present and future cash needs. In the short term,
cash is needed to meet  deposit  withdrawals,  capital  expenditures,  operating
expenses,  increases  in  other  assets  and  decreases  in  other  liabilities.
Liquidity  management for the long term  encompasses  providing  funds for asset
growth,  development  of  new  asset  products  and  recognizing  trends  in the
marketplace which may affect the Corporation's ability to attract and use funds.
Providing  sufficient  cash to meet  these  obligations  on a timely  basis at a
reasonable cost is one of the objectives of the Asset/Liability Committee.

     The Corporation's  major sources of liquidity are core deposits,  scheduled
asset maturities,  purchased funds, borrowings and net income. The Corporation's
loan and investment  portfolios are relatively  short-term,  providing funds for
redeployment.  Daily  fluctuations  in cash needs are met through  purchases and
sales of federal funds. In addition,  to meet short-term  liquidity  needs,  the
Corporation has classified certain investment  securities as available for sale.
Fluctuations  in the  Corporation's  level of deposits are monitored  closely by
management.

     The following  table sets forth the average  balances and average  interest
rates paid on deposits based on daily balances for the periods indicated:

<TABLE>
<CAPTION>
===================================================================================================================================
                                                                                        Year ended December 31
-----------------------------------------------------------------------------------------------------------------------------------
                                                                         1997                    1996                  1995
-----------------------------------------------------------------------------------------------------------------------------------
                                                                  Average    Average      Average    Average    Average     Average
                                                                  Balance     Rate        Balance     Rate      Balance       Rate
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                       (Dollars in thousands)
<S>                                                              <C>          <C>        <C>         <C>       <C>           <C>
Noninterest-bearing demand ...................................  $  58,035       --%      $ 48,048       --%    $ 46,100        --%
Interest-bearing demand ......................................     32,006     1.12         27,388     1.22       23,669      1.54
Savings ......................................................     81,468     2.99         74,549     2.73       76,032      2.53
Time .........................................................     68,750     5.05         68,608     5.01       73,558      5.17
-----------------------------------------------------------------------------------------------------------------------------------
                                                                 $240,259     2.61%      $218,593    2.65%     $219,359      2.78%
===================================================================================================================================
</TABLE>

     The  Corporation  does not rely  heavily on  certificates  of deposit  over
$100,000 as a source of funds. During 1997,  certificates of deposit of $100,000
or more  averaged  only 2.4% of total  average  deposits.  Such deposits are not
aggressively  bid  for  since  they  tend to be  extremely  rate  sensitive  and
therefore unreliable as a funding source.

     The following table indicates the amount of the Corporation's  certificates
of deposit of $100,000 or more by time  remaining  until maturity as of December
31, 1997:

================================================================================
                                                         Certificates of Deposit
--------------------------------------------------------------------------------
                                                             (In thousands)
Maturity period:
   Three months or less .......................................  $5,945
   Over three through twelve months ...........................   1,220
   Over twelve months .........................................     337
--------------------------------------------------------------------------------
      Total ...................................................  $7,502
================================================================================

     In addition to deposits, at December 31,1997, the Corporation's liabilities
included $1.7 million of securities sold under agreements to repurchase and $3.0
million in accrued and other  liabilities.  The  Corporation had no purchases of
federal  funds in 1997 and  1995,  and an  immaterial  amount of  federal  funds
purchased in 1996.



                                       17
<PAGE>


                   Liquidity and Capital Resources (continued)

     At December 31,  1997,  the total  approved  loan  commitments  outstanding
amounted  to $35.8  million  and  commitments  under  standby  letters of credit
amounted to $1,028,000.  Management  believes that the  Corporation has adequate
liquidity to meet all foreseeable obligations.

     The  Corporation,  as a separately  incorporated  holding  company,  has no
significant operations other than serving as sole stockholder of the Bank. On an
unconsolidated basis, the Corporation has no paid employees, except as described
below,  and, other than its  investment in the Bank, has no significant  assets,
liabilities or sources of income.  The only expenses incurred by the Corporation
are described below.

     The  parent  company's  resources  available  to meet its cash  obligations
subsequent  to  December  31,  1997 are  limited to liquid  assets on hand which
include  cash  and due  from  banks  and  interest-bearing  time  deposits,  and
dividends from the subsidiary Bank.

     The parent  company's  cash  obligations  subsequent  to December  31, 1997
primarily include (1) fees relating to a consulting  agreement entered into with
the former chief executive  officer,  (2) additional  equity  investments in the
Bank as may be necessary  for the Bank to maintain  certain  regulatory  capital
levels, (3) dividends on common stock, and (4) other general obligations.

     Based on current resources discussed above,  management expects to meet the
Corporation's  obligations  at the  parent  company  level  for the  foreseeable
future.

     The  Corporation  and the Bank are  subject to various  regulatory  capital
requirements  administered  by the  federal  banking  agencies.  Failure to meet
minimum  capital  requirements  can  initiate  certain  mandatory--and  possibly
additional discretionary--actions by regulators that if undertaken, could have a
direct material effect on the  Corporation's  and Bank's  financial  statements.
Under capital  adequacy  guidelines  (Corporation  and Bank) and the  regulatory
framework for prompt  corrective  action (Bank only),  the  Corporation and Bank
must meet specific  capital  guidelines  that involve  quantitative  measures of
their respective assets,  liabilities,  and certain  off-balance-sheet  items as
calculated under regulatory accounting  practices.  The Corporation's and 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  Corporation  and Bank to maintain  minimum  amounts and ratios (set
forth in the  table  below)  of total  and Tier I  capital  (as  defined  in the
regulations)  to  risk-weighted  assets (as defined),  and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December 31,
1997, that the Corporation  and Bank meet all capital  adequacy  requirements to
which they are subject.

     As of  December  31,  1997,  the  most  recent  notification  from the FDIC
categorized the Bank as "well  capitalized"  under the regulatory  framework for
prompt  corrective  action.  The Corporation was notified by the FRB that it was
"well  capitalized"  based on the FRB's  examination  as of June 30, 1996. To be
categorized as "well  capitalized"  the  Corporation  and the Bank must maintain
minimum total  risk-based,  Tier I risk-based and Tier I leverage  ratios as set
forth in the table. There are no conditions or events since those  notifications
that management believes have changed the Corporation's or the Bank's respective
category.

<TABLE>
<CAPTION>
====================================================================================================================================
                                                                              For Capital           To Be Well Capitalized Under
                                                       Actual              Adequacy Purposes     Prompt Corrective Action Provisions
------------------------------------------------------------------------------------------------------------------------------------
                                                 Amount      Ratio        Amount         Ratio          Amount          Ratio
------------------------------------------------------------------------------------------------------------------------------------
<S>                                            <C>           <C>       <C>              <C>         <C>               <C>
As of December 31, 1997:
   Total Capital (to Risk-Weighted Assets):
      Corporation...........................   $31,854,000   16.5%     >|=$15,417,000   >|=8.0%     >|=$19,271,000    >|=10.0%
      Bank..................................   $29,405,000   15.3%     >|=$15,377,000   >|=8.0%     >|=$19,221,000    >|=10.0%
   Tier 1 Capital (to Risk-Weighted Assets):
      Corporation...........................   $29,417,000   15.3%     >|=$ 7,708,000   >|=4.0%     >|=$11,563,000    >|= 6.0%
      Bank..................................   $26,975,000   14.0%     >|=$ 7,688,000   >|=4.0%     >|=$11,533,000    >|= 6.0%
   Tier 1 Capital (to Average Assets):
      Corporation...........................   $29,417,000   10.5%     >|=$11,234,000   >|=4.0%     >|=$14,042,000    >|= 5.0%
      Bank..................................   $26,975,000    9.6%     >|=$11,219,000   >|=4.0%     >|=$14,024,000    >|= 5.0%
------------------------------------------------------------------------------------------------------------------------------------
As of December 31, 1996:
   Total Capital (to Risk-Weighted Assets):
      Corporation...........................   $29,424,000   15.5%     >|=$15,148,000   >|=8.0%     >|=$18,935,000    >|=10.0%
      Bank..................................   $26,831,000   14.2%     >|=$15,106,000   >|=8.0%     >|=$18,882,000    >|=10.0%
   Tier 1 Capital (to Risk-Weighted Assets):
      Corporation...........................   $27,032,000   14.3%     >|=$ 7,574,000   >|=4.0%     >|=$11,361,000    >|= 6.0%
      Bank..................................   $24,446,000   12.9%     >|=$ 7,553,000   >|=4.0%     >|=$11,329,000    >|= 6.0%
   Tier 1 Capital (to Average Assets):
      Corporation...........................   $27,032,000   10.5%     >|=$10,321,000   >|=4.0%     >|=$12,902,000    >|= 5.0%
      Bank..................................   $24,446,000    9.5%     >|=$10,312,000   >|=4.0%     >|=$12,889,000    >|= 5.0%
====================================================================================================================================
</TABLE>


                                       18
<PAGE>


                     Impact of Inflation and Changing Prices


     The Consolidated  Financial  Statements and Notes thereto  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  the changes in the relative
purchasing power of money over time due to inflation. The impact of inflation is
reflected in the increased  cost of the  Corporation's  operations.  Unlike most
industrial  companies,  nearly all the assets and liabilities of the Corporation
are monetary in nature. As a result, interest rates have a greater impact on the
Corporation's  performance  than do the effects of general  levels of inflation.
Interest  rates do not  necessarily  move in the same  direction  or to the same
extent as the prices of goods and services.

                       Impact of New Accounting Standards

     The Corporation  adopted SFAS No. 128, "Earnings Per Share", as of December
31, 1997. In accordance with the standard,  net income per share is expressed in
two ways - basic and diluted. Basic earnings per share is calculated by dividing
the weighted  average common shares  outstanding into income available to common
shareholders.  Diluted  earnings  per share  gives  effect to the  Corporation's
outstanding  stock options,  which would dilute  earnings per share if they were
exercised.  All prior annual and interim  periods  presented in this report have
been restated in the new format.

     In June,  1997,  the FASB issued two additional  Statements.  SFAS No. 130,
"Reporting  Comprehensive  Income",  establishes  standards  for  reporting  and
display of comprehensive income and its components (revenues,  expenses,  gains,
and losses) in a full set of general-purpose financial statements. The Statement
is  effective  for fiscal years  beginning  after  December  15,  1997;  earlier
application  is  permitted.  The  Corporation  has  elected  not to  adopt  this
Statement  prior to its effective  date and has not determined  which  financial
statement  will  be  utilized  to  display   comprehensive  income.  The  second
Statement,  SFAS No.  131,  "Disclosures  about  Segments of an  Enterprise  and
Related  Information",   requires  that  a  public  business  enterprise  report
financial and descriptive  information about its reportable  operating segments.
The Statement  becomes  effective for fiscal years  beginning after December 15,
1997; earlier application is permitted. The Corporation has elected not to adopt
this Statement  prior to its effective date and has not determined if it has any
reportable segments.


                                       19
<PAGE>


                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
===================================================================================================================================
                                                                                                              December 31
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                                      1997                 1996
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                              <C>                  <C>
ASSETS
  Cash and Cash Equivalents:
    Cash and Due from Banks ..............................................................       $   9,550,000        $  12,078,000
    Federal Funds Sold ...................................................................          10,725,000           17,680,000
-----------------------------------------------------------------------------------------------------------------------------------
     Total Cash and Cash Equivalents .....................................................          20,275,000           29,758,000
-----------------------------------------------------------------------------------------------------------------------------------
  Due from Bank - Interest-Bearing .......................................................                  --            1,000,000
  Securities:
    Available for Sale, at Fair Value ....................................................          48,556,000           41,648,000
    Held to Maturity, at Cost (Fair Value $40,652,000 and $26,339,000) ...................          40,438,000           26,395,000
  Loans ..................................................................................         169,106,000          165,070,000
    Less: Allowance for Possible Loan Losses .............................................           4,628,000            5,115,000
-----------------------------------------------------------------------------------------------------------------------------------
     Net Loans ...........................................................................         164,478,000          159,955,000
  Premises and Equipment, net ............................................................           3,246,000            3,260,000
  Other Real Estate, net .................................................................           2,192,000            2,211,000
  Other Assets, net ......................................................................           5,921,000            6,428,000
  Intangible Assets, net .................................................................             621,000              869,000
-----------------------------------------------------------------------------------------------------------------------------------
    TOTAL ASSETS .........................................................................       $ 285,727,000        $ 271,524,000
-----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
  Deposits:
    Demand - Noninterest-Bearing .........................................................       $  60,367,000        $  58,421,000
           - Interest-Bearing ............................................................          34,546,000           31,846,000
    Savings ..............................................................................          84,973,000           80,832,000
    Time .................................................................................          62,372,000           64,325,000
    Certificates of Deposit over $100,000 ................................................           7,502,000            4,465,000
-----------------------------------------------------------------------------------------------------------------------------------
    Total Deposits .......................................................................         249,760,000          239,889,000
  Securities Sold Under Agreements to Repurchase .........................................           1,677,000                   --
  Accrued Expenses and Other Liabilities .................................................           2,993,000            2,599,000
-----------------------------------------------------------------------------------------------------------------------------------
    Total Liabilities ....................................................................         254,430,000          242,488,000
-----------------------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY
  Class A Preferred Stock, no par value:
    Authorized shares - 1,950, none issued ...............................................                  --                   --
  Common Stock, $1 par value:
    Authorized shares - 15,000,000
    Issued shares - 8,107,074 at December 31, 1997 and
          8,160,605 at December 31, 1996 .................................................           8,107,000            8,161,000
  Capital In Excess of Par Value .........................................................          12,901,000           13,103,000
  Retained Earnings ......................................................................          10,339,000            8,105,000
  Net Unrealized Holding Losses on Securities Available for Sale, Net of Tax .............             (50,000)             (39,000)
  Treasury Stock at Cost (63,406 shares at December 31, 1996) ............................                  --             (294,000)
-----------------------------------------------------------------------------------------------------------------------------------
    Total Stockholders' Equity ...........................................................          31,297,000           29,036,000
-----------------------------------------------------------------------------------------------------------------------------------
    TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ...........................................       $ 285,727,000        $ 271,524,000
===================================================================================================================================
</TABLE>

The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.



                                       20
<PAGE>


                        CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
===================================================================================================================================
                                                                                                   Year ended December 31
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                            1997            1996           1995
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                     <C>             <C>             <C>
INTEREST INCOME
   Loans, including Fees .........................................................      $14,417,000     $13,993,000     $14,021,000
   Securities:
     Taxable......................................................................        4,545,000       3,693,000       3,150,000
     Nontaxable...................................................................          214,000          79,000          68,000
   Other..........................................................................          558,000         453,000       1,104,000
-----------------------------------------------------------------------------------------------------------------------------------
     TOTAL INTEREST INCOME........................................................       19,734,000      18,218,000      18,343,000
-----------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
   Savings and Interest-Bearing Demand Deposits...................................        2,799,000       2,367,000       2,288,000
   Time Deposits and Certificates of Deposit over $100,000........................        3,469,000       3,435,000       3,806,000
   Other Borrowings ..............................................................           29,000           2,000          12,000
-----------------------------------------------------------------------------------------------------------------------------------
     TOTAL INTEREST EXPENSE.......................................................        6,297,000       5,804,000       6,106,000
-----------------------------------------------------------------------------------------------------------------------------------
   NET INTEREST INCOME............................................................       13,437,000      12,414,000      12,237,000
PROVISION FOR POSSIBLE LOAN LOSSES ...............................................          480,000         400,000         500,000
-----------------------------------------------------------------------------------------------------------------------------------
   NET INTEREST INCOME AFTER PROVISION FOR
       POSSIBLE LOAN LOSSES.......................................................       12,957,000      12,014,000      11,737,000
-----------------------------------------------------------------------------------------------------------------------------------
OTHER INCOME
   Service Charges on Deposit Accounts............................................        1,368,000       1,392,000       1,515,000
   Brokerage Commissions..........................................................          376,000         312,000         298,000
   (Loss) Gain on Securities Transactions, net....................................          (14,000)        (16,000)         33,000
   Other Income...................................................................          452,000         686,000         601,000
-----------------------------------------------------------------------------------------------------------------------------------
     TOTAL OTHER INCOME...........................................................        2,182,000       2,374,000       2,447,000
-----------------------------------------------------------------------------------------------------------------------------------
OTHER EXPENSE
   Salaries and Employee Benefits ................................................        5,413,000       4,817,000       4,574,000
   Net Occupancy Expense..........................................................          883,000         811,000         760,000
   Equipment Expense..............................................................          687,000         586,000         561,000
   Other Real Estate Expense - Cost of Operations, net............................          104,000         252,000         958,000
                             - Valuation Adjustments..............................          130,000         780,000       1,850,000
   Other Expense .................................................................        2,811,000       2,808,000       3,445,000
-----------------------------------------------------------------------------------------------------------------------------------
       TOTAL OTHER EXPENSE........................................................       10,028,000      10,054,000      12,148,000
-----------------------------------------------------------------------------------------------------------------------------------
   INCOME BEFORE INCOME TAXES.....................................................        5,111,000       4,334,000       2,036,000
       Provision (Benefit) for Income Taxes ......................................        1,906,000       1,278,000      (4,212,000)
-----------------------------------------------------------------------------------------------------------------------------------
   NET INCOME.....................................................................      $ 3,205,000     $ 3,056,000     $ 6,248,000
===================================================================================================================================
   NET INCOME PER COMMON SHARE - Basic ...........................................      $       .40     $       .38     $       .76
                               - Diluted .........................................      $       .38     $       .37     $       .75
===================================================================================================================================
</TABLE>

The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.


                                       21
<PAGE>


           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
===================================================================================================================================
                                                                                                            Net
                                                                                                         Unrealized
                                                                                                          Holding
                                                                                                      (Losses) Gains
For the years ended                       Class A                        Capital         Retained      on Securities
December 31, 1995, 1996 and 1997:        Preferred        Common      in Excess of       Earnings        Available       Treasury
                                           Stock           Stock        Par Value        (Deficit)       for Sale          Stock
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                    <C>             <C>             <C>             <C>             <C>             <C>
BALANCE, December 31, 1994 .........   $  1,750,000    $  8,160,000    $ 13,101,000    $   (650,000)   $   (312,000)   $   (294,000)
-----------------------------------------------------------------------------------------------------------------------------------
Net Income - 1995 ..................             --              --              --       6,248,000              --              --
Redemption of Preferred Stock ......     (1,033,000)             --              --              --              --              --
Cash Dividends on Preferred Stock
   Redeemed ........................             --              --              --        (119,000)             --              --
Change in Net Unrealized Holding
   (Losses) Gains, Net of Tax ......             --              --              --              --         398,000              --
-----------------------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1995 .........        717,000       8,160,000      13,101,000       5,479,000          86,000        (294,000)
-----------------------------------------------------------------------------------------------------------------------------------
Net Income - 1996 ..................             --              --              --       3,056,000              --              --
Redemption of Preferred Stock ......       (717,000)             --              --              --              --              --
Cash Dividends on Preferred Stock
   Redeemed ........................             --              --              --        (106,000)             --              --
Cash Dividends on Common Stock,
   $.04 per Share ..................             --              --              --        (324,000)             --              --
Stock Options Exercised ............             --           1,000           2,000              --              --              --
Change in Net Unrealized Holding
   (Losses) Gains, Net of Tax ......             --              --              --              --        (125,000)             --
-----------------------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1996 .........             --       8,161,000      13,103,000       8,105,000         (39,000)       (294,000)
-----------------------------------------------------------------------------------------------------------------------------------
Net Income - 1997 ..................             --              --              --       3,205,000              --              --
Cash Dividends on Common Stock,
   $.12 per Share ..................             --              --              --        (971,000)             --              --
Stock Options Exercised ............             --          10,000          28,000              --              --              --
Change in Net Unrealized Holding
   (Losses) Gains, Net of Tax ......             --              --              --              --         (11,000)             --
Retirement of Treasury Stock .......             --         (64,000)       (230,000)             --              --         294,000
===================================================================================================================================
BALANCE, December 31, 1997 .........   $         --    $  8,107,000    $ 12,901,000    $ 10,339,000    $    (50,000)   $         --
===================================================================================================================================
</TABLE>

The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.



                                       22
<PAGE>


                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
===================================================================================================================================
                                                                                                Year ended December 31
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                      1997               1996               1995
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                              <C>                <C>                <C>
Cash Flows from Operating Activities:
   Net Income .............................................................      $  3,205,000       $  3,056,000       $  6,248,000
   Adjustments to Reconcile Net Income to
    Net Cash Provided by Operating Activities:
     Depreciation and Amortization of Premises and Equipment ..............           571,000            485,000            444,000
     Amortization of Intangible Assets ....................................           258,000            256,000            270,000
     Accretion of Securities Discount, net ................................          (100,000)           (96,000)          (395,000)
     Provision for Possible Loan Losses ...................................           480,000            400,000            500,000
     Provision for Possible Losses on Other Real Estate ...................           130,000            780,000          1,850,000
     Deferred Income Tax Provision (Benefit) ..............................           883,000            829,000         (4,235,000)
     Loss (Gain) on Securities Transactions, net ........................            14,000             16,000            (33,000)
     Loans Made or Acquired and Held for Sale .............................                --           (720,000)          (321,000)
     Proceeds from Loans Held for Sale ....................................                --            721,000            325,000
     Gain on Sales of Loans Held for Sale .................................                --             (1,000)            (4,000)
     Gain on Sale of Other Real Estate ....................................           (22,000)          (137,000)           (83,000)
     (Increase) Decrease in Interest Receivable ...........................           (47,000)           319,000           (797,000)
     Increase (Decrease) in Accrued Expenses and Other Liabilities ........           473,000            232,000         (1,100,000)
     (Increase) Decrease in Other Assets ..................................          (481,000)           392,000            378,000
-----------------------------------------------------------------------------------------------------------------------------------
       Net Cash Provided by Operating Activities ..........................         5,364,000          6,532,000          3,047,000
-----------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
   Purchase of Time Deposit from Bank .....................................                --         (1,000,000)        (1,000,000)
   Maturity of Time Deposit from Bank .....................................         1,000,000          1,000,000                 --
   Securities Available for Sale:
     Proceeds from Maturities .............................................         3,890,000          3,533,000         15,051,000
     Proceeds from Sales Prior to Maturity ................................        11,072,000         14,309,000          8,504,000
     Proceeds from Calls Prior to Maturity ................................                --          8,000,000          1,000,000
     Purchases ............................................................       (21,798,000)       (28,295,000)       (30,264,000)
   Securities Held to Maturity:
     Proceeds from Maturities .............................................         6,451,000          3,500,000                 --
     Proceeds from Calls Prior to Maturity ................................         1,000,000          4,002,000          8,925,000
     Purchases ............................................................       (21,497,000)       (13,863,000)       (40,443,000)
   Net (Increase) Decrease in Loans Outstanding ...........................        (5,131,000)        (5,105,000)           903,000
   Capital Expenditures ...................................................          (558,000)        (1,074,000)          (535,000)
   Payments Received on Other Real Estate .................................                --                 --          2,674,000
   Advances Made on Other Real Estate .....................................          (997,000)          (286,000)          (677,000)
   Proceeds from Sales of Other Real Estate ...............................         1,038,000          2,316,000          2,537,000
   Premium Paid for Deposits ..............................................           (10,000)          (622,000)                --
   Other ..................................................................            (2,000)             4,000                 --
-----------------------------------------------------------------------------------------------------------------------------------
       Net Cash Used in Investing Activities ..............................       (25,542,000)       (13,581,000)       (33,325,000)
-----------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
   Net Increase in Total Deposits .........................................         9,871,000         22,827,000          5,198,000
   Redemption of Subordinated Debentures ..................................                --                 --         (1,292,000)
   Redemption of Class A Preferred Stock ..................................                --           (717,000)        (1,033,000)
   Cash Dividends on Preferred Stock ......................................                --           (106,000)          (119,000)
   Cash Dividends on Common Stock .........................................          (891,000)          (162,000)                --
   Proceeds from Stock Options Exercised ..................................            38,000              3,000                 --
   Increase in Securities Sold under Agreements to Repurchase .............         1,677,000                 --                 --
-----------------------------------------------------------------------------------------------------------------------------------
       Net Cash Provided by Financing Activities ..........................        10,695,000         21,845,000          2,754,000
-----------------------------------------------------------------------------------------------------------------------------------
Net (Decrease) Increase in Cash and Cash Equivalents ......................        (9,483,000)        14,796,000        (27,524,000)
Cash and Cash Equivalents, Beginning of Year ..............................        29,758,000         14,962,000         42,486,000
-----------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, End of Year ....................................      $ 20,275,000       $ 29,758,000       $ 14,962,000
===================================================================================================================================
Supplemental Cash Flow Disclosures:
   Cash paid during year for:
     Interest .............................................................      $  6,321,000       $  5,816,000       $  5,948,000
     Income Taxes, Net of Refunds .........................................      $  1,479,000       $   (103,000)      $   (373,000)
===================================================================================================================================
</TABLE>

The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.


                                       23
<PAGE>


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

   Note 1: Nature of Operations and Summary of Significant Accounting Policies

Nature of Operations

     Ramapo Financial Corporation ("Corporation") owns The Ramapo Bank ("Bank"),
a full service  commercial bank with eight branches located in suburban northern
New  Jersey.  The  Bank's  primary  source  of  revenue  is  providing  loans to
customers,   who  are  predominately  small  and  middle-market  businesses  and
middle-income individuals.

Principles of Consolidation

     The  consolidated   financial   statements  include  the  accounts  of  the
Corporation,  the Bank and subsidiaries of the Bank.  Intercompany  transactions
and balances have been eliminated.

Use of Estimates

     The  preparation  of financial  statements  in  conformity  with  generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that  affect the  reported  amounts of assets and  liabilities  and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting period. Actual results could differ from those estimates.

Securities

     Debt  securities  that the  Corporation  has both the  positive  intent and
ability to hold to maturity are carried at amortized  cost. Debt securities that
the  Corporation  does not have both the positive  intent and ability to hold to
maturity, and all marketable equity securities, are classified as either trading
or available  for sale and carried at fair value.  Unrealized  holding gains and
losses on securities  classified as available for sale are carried as a separate
component of stockholders' equity, net of tax.

     Management determines the appropriate  classification of debt securities at
the time of purchase and reevaluates  such  designation as of each balance sheet
date.  During  1997 and  1996,  the  Corporation  classified  certain  purchased
securities  as held to maturity.  The  Corporation  had no  securities  held for
trading purposes at December 31, 1997 or 1996.

     The  amortized  cost of debt  securities  classified as held to maturity or
available  for sale is adjusted for  amortization  of premiums and  accretion of
discounts to maturity.  Realized  gains and losses,  and declines in value other
than temporary,  are included in net securities  gains (losses) on the statement
of income.  The cost of securities sold is based on the specific  identification
method.

     Fair value is determined by reference to quoted market  prices.  See Note 2
for the estimated fair values of the Corporation's investment portfolio.

Loans

     Loans are stated at their principal amount, net of unearned income, if any.
Interest  income on loans is  credited  to  income  based on  principal  amounts
outstanding at applicable  interest rates.  Loan origination and commitment fees
and certain  costs are deferred and the net amount is amortized as an adjustment
of the related loan's yield.

Nonaccrual Loans

     The  accrual  of  interest  income  on  loans  is  discontinued  when it is
determined  that such loans are either doubtful of collection or are involved in
a protracted  collection  process.  When  interest  accruals  are  discontinued,
accrued but  uncollected  interest  credited  to income in the  current  year is
generally  reversed from income and interest  which was accrued during the prior
year but was unpaid,  if any, is charged off against the  allowance for possible
loan losses.  While a loan is classified as nonaccrual,  collections of interest
and principal are applied as reductions of principal outstanding.

     Nonaccrual loans (including those with partial charge-offs) can be returned
to accrual  status,  even though the loans are not current  with  respect to the
contractual  payments,  provided two criteria  are met:  (1) all  principal  and
interest amounts contractually due (including arrearages) are reasonably assured
of repayment within a reasonable  period, and (2) there is a sustained period of
repayment  performance  (at least six months) by the borrower in accordance with
the contractual terms. Loans that meet the above criteria would be classified as
past due, as appropriate, until they have been brought fully current.

Restructured Loans

     Prior to 1995, loans were considered  troubled-debt  restructurings if, for
economic or legal reasons, a concession had been granted to the borrower related
to the borrower's  financial  difficulties that the creditor would not otherwise
consider.  The Corporation had  restructured  certain loans in instances where a
determination  was made that greater  economic  value will be realized under new
terms than through foreclosure,  liquidation, or other disposition.  Interest is
recognized on restructured loans such that a constant effective interest rate is
applied to the carrying amount of the loan in each period between  restructuring
and maturity.  A restructured loan that has demonstrated  repayment  performance
(for a period of six months either before or after the  restructuring  date) and
has an  effective  yield  at  least  equal  to a  market  rate  at the  time  of
restructuring  is classified as performing in the reporting  period  immediately
following the year it was disclosed as  restructured.  At December 31, 1997, the
Corporation had one remaining restructured loan with a balance of $1.5 million.

Allowance for Possible Loan Losses

     The allowance  for possible  loan losses is maintained at a level  believed
adequate by management to absorb loan losses on loans currently outstanding. The
allowance  is  increased  by  provisions  charged to expense  and reduced by net
charge-offs.  The level of the allowance is based on management's  evaluation of
the inherent risks in the loan portfolio after  consideration  of prevailing and
anticipated economic conditions in the market area, appraised collateral values,
the  current  status  and  financial  condition  of  borrowers,  and prior  loss
experience. The region in which the Bank operates had been affected by depressed
real estate values and a general downturn in economic  conditions prior to 1993.
Since then,  real estate  values have  improved  modestly and  remained  stable.
Certain business sectors have expanded,  though overall business growth has been
flat. Changes in the economy affecting the region in which the Bank operates may
result in increased levels of nonperforming assets, provisions for possible loan
losses, and charge-offs.

Loan Impairment

     All loans are  individually  evaluated for impairment with the exception of
larger groups of smaller  homogeneous loans that are collectively  evaluated for
impairment.  These loan groups may include,  but are not limited to, residential
mortgages and consumer installment loans.

     A loan is considered  impaired when,  according to current  information and
events, it is unlikely that the creditor will be able to collect all amounts due
according to the  contractual  terms of the loan  agreement.  Impairment  can be
measured by the present value of expected cash flows (net of estimated  costs to
sell) discounted at the loan's effective  interest rate or the fair value of the
collateral  if the loan is  collateral  dependent.  If the value of the impaired
loan is less than the recorded investment in the loan, the Bank will be required
to establish a valuation  allowance,  or adjust existing  valuation  allowances,
with a  corresponding  charge or credit to the  provision  for loan losses.  The
Corporation  evaluated  impairment for those loans that cannot be easily grouped
into homogeneous pools of loans and collectively evaluated for impairment. These
loans generally are commercial and real estate development loans.  Because these
loans are  collateral-dependent,  the Bank  primarily uses the fair value of the
collateral to determine  impairment of loans.  See Notes 3 and 4 for  additional
information regarding impairment of loans.



                                       24
<PAGE>


         Note 1: Summary Of Significant Accounting Policies (continued)


Loan Servicing

     The  Corporation  services  its  portfolio  of real estate loans as well as
loans sold to  investors.  The total of such loans  serviced  which are owned by
investors  and  therefore  are not  included  in the  accompanying  consolidated
balance sheets amounted to approximately $15,300,000 and $18,745,000 at December
31, 1997 and 1996, respectively. Fees earned for servicing loans are reported as
income when the related  mortgage  payments are collected.  Loan servicing costs
are charged to expense as incurred.

Premises and Equipment

     Premises and equipment are stated at cost less accumulated depreciation and
amortization.  Depreciation  and  amortization  are provided on a  straight-line
basis  over  estimated  useful  lives of ten to fifty  years for  buildings  and
improvements,  three to eight years for  furniture and  equipment,  and over the
shorter of the useful life or lease term for leasehold improvements.

Other Real Estate

     Other real  estate  ("ORE")  includes  both loan  collateral  that has been
formally repossessed and collateral that is in the Corporation's  possession and
under its control  without legal transfer of title.  ORE is carried on the books
at the lower of cost or fair value,  less  estimated  costs to sell.  Subsequent
valuation  adjustments to the fair value of the collateral are  charged/credited
to current  operations.  Carrying costs, such as maintenance and property taxes,
are charged to expense as incurred.

Intangible Assets

     Categories of net intangible assets are as follows:

================================================================================
                                                                 December 31
--------------------------------------------------------------------------------
                                                               1997         1996
--------------------------------------------------------------------------------
                                                                (In thousands)
Purchased Mortgage Servicing Rights ..................         $ 43         $ 83
Core Deposit Premiums ................................          565          665
Premiums  on  Purchased Home Equity
   Lines of Credit ...................................           13          121
--------------------------------------------------------------------------------
                                                               $621         $869
================================================================================

Intangible assets are being amortized over the following periods:

   Core Deposit Premiums.................... 10 years
   Premium on Purchased Home Equity
       Lines of Credit...................... 7 years

   Purchased Mortgage Servicing Rights...... Estimated average term of the loans
                                             serviced,  adjusted  for  estimated
                                             prepayments.

     In  November,  1996,  the Bank  purchased  deposits  and  accrued  interest
totaling  $9,695,000 from another  commercial bank and paid a deposit premium of
$622,000.  In addition,  $10,000 of deposit premium relating to this transaction
was paid in 1997.  Amortization of intangibles  totaled  $258,000,  $256,000 and
$270,000 for 1997,  1996 and 1995,  respectively,  of which $40,000 in each year
consisted of the amortization of purchased mortgage servicing rights.

Dividend Restrictions

     New Jersey state law permits the payment of dividends  from the Bank to the
Corporation to the extent that the Bank will have a surplus of not less than 50%
of its  capital  stock or if not,  payment of the  dividend  will not reduce its
surplus. At December 31, 1997 and 1996, the Bank had aggregate retained earnings
of $13,662,000 and $11,247,000,  respectively, available under state law.

Income Taxes

The Corporation, the Bank and subsidiaries of the Bank file a consolidated
Federal income tax return.  The Corporation  recognizes  deferred tax assets and
liabilities  for the expected  future tax  consequences of events that have been
recognized in the Corporation's  financial statements or tax returns. Under this
method,  deferred  tax  assets  and  liabilities  are  determined  based  on the
difference between the financial statement carrying amounts and the tax bases of
assets and liabilities. See Note 9 for additional information on income taxes.

Fair Value of Financial Instruments

     SFAS No.  107,  "Disclosure  about  Fair Value of  Financial  Instruments,"
requires that the Corporation  disclose  estimated fair values for its financial
instruments.  The fair value and the methodology of estimating fair value of the
other financial  instruments for the Corporation are disclosed in the applicable
notes to the accompanying financial statements. A summary of carrying values and
fair values of financial instruments is presented in Note 13.

Statement Of Cash Flows

     Cash and cash equivalents,  for purposes of reporting cash flows,  includes
cash on hand,  noninterest bearing balances due on demand from other banks, cash
items in process of collection (generally overnight) and federal funds sold.

New Financial Accounting Standards

     In June,  1997,  the FASB issued two additional  statements.  SFAS No. 130,
"Reporting  Comprehensive  Income",  establishes  standards  for  reporting  and
display of comprehensive income and its components  (revenues,  expenses,  gains
and losses) in a full set of general-purpose financial statements. The Statement
is  effective  for fiscal years  beginning  after  December  15,  1997;  earlier
application  is  permitted.  The  Corporation  has  elected  not to  adopt  this
Statement  prior to its effective  date and has not determined  which  financial
statement  will  be  utilized  to  display   comprehensive  income.  The  second
Statement,  SFAS No.  131,  "Disclosures  about  Segments of an  Enterprise  and
Related  Information",   requires  that  a  public  business  enterprise  report
financial and descriptive  information about its reportable  operating segments.
The Statement  becomes  effective for fiscal years  beginning after December 15,
1997; earlier application is permitted. The Corporation has elected not to adopt
this Statement  prior to its effective date and has not determined if it has any
reportable segments.


                                       25
<PAGE>


         Note 1: Summary Of Significant Accounting Policies (continued)

Net Income Per Share

     The Corporation  adopted SFAS No. 128, "Earnings Per Share", as of December
31, 1997. In accordance with the standard,  net income per share is expressed in
two ways - basic and diluted.  All prior annual and interim periods presented in
this report have been restated in the new format.  The following table shows the
calculation  of both basic and  diluted net income per share for the years ended
1997, 1996, and 1995:

<TABLE>
<CAPTION>
====================================================================================================================================
                                                                                Year ended December 31
------------------------------------------------------------------------------------------------------------------------------------
                                                                  1997                                          1996
------------------------------------------------------------------------------------------------------------------------------------
                                                              Weighted Avg.                                 Weighted Avg.
                                                  Income         Shares       Per Share        Income          Shares      Per Share
                                               (Numerator)    (Denominator)     Amount      (Numerator)     (Denominator)    Amount
------------------------------------------------------------------------------------------------------------------------------------
<S>                                            <C>              <C>              <C>        <C>                <C>            <C>
Income from continuing operations .........    $3,205,000                                   $3,056,000
Less: Preferred stock dividends ...........            --                                      (12,000)
------------------------------------------------------------------------------------------------------------------------------------
Net Income Per Share - Basic:
Income available to common shareholders....    $3,205,000       8,100,055        $.40       $3,044,000         8,096,961      $.38
====================================================================================================================================
Effect of Dilutive Securities:
Options granted to employees ..............                       274,436                                         84,783
Options granted to nonemployee directors...                        35,386                                         16,312
------------------------------------------------------------------------------------------------------------------------------------
Net Income Per Share - Diluted:
Income available to common shareholders
   plus assumed conversions ...............    $3,205,000       8,409,877        $.38       $3,044,000         8,198,056      $.37
====================================================================================================================================

<CAPTION>
==========================================================================================
                                                            Year ended December 31
------------------------------------------------------------------------------------------
                                                                     1995
------------------------------------------------------------------------------------------
                                                                 Weighted Avg.
                                                     Income         Shares       Per Share
                                                  (Numerator)    (Denominator)    Amount
------------------------------------------------------------------------------------------
<S>                                               <C>              <C>            <C>
Income from continuing operations .........       $6,248,000
Less: Preferred stock dividends ...........          (96,000)
------------------------------------------------------------------------------------------
Net Income Per Share - Basic:
Income available to common shareholders....       $6,152,000       8,096,449      $.76
==========================================================================================
Effect of Dilutive Securities:
Options granted to employees ..............                           74,234
Options granted to nonemployee directors...                            5,136
------------------------------------------------------------------------------------------
Net Income Per Share - Diluted:
Income available to common shareholders
   plus assumed conversions ...............       $6,152,000       8,175,819      $.75
==========================================================================================
</TABLE>

Reclassifications

     Certain  reclassifications have been made to the 1996 and 1995 consolidated
financial statements to conform to the 1997 presentation.

                               Note 2: Securities

     The  following is a summary of available  for sale  securities  and held to
maturity securities at the dates indicated:

<TABLE>
<CAPTION>
====================================================================================================================================
                                                                         December 31, 1997
------------------------------------------------------------------------------------------------------------------------------------
                                         Historical Cost   Gross Unrealized Gains    Gross Unrealized Losses    Estimated Fair Value
------------------------------------------------------------------------------------------------------------------------------------
                                                                          (In thousands)
<S>                                         <C>                    <C>                        <C>                     <C>
AVAILABLE FOR SALE
   U.S. Government Agencies:
      Maturing within 1 year ...........    $  4,654               $  4                       $  (5)                  $  4,653
      Maturing 1 to 5 years ............      29,431                 33                        (100)                    29,364
      Maturing after 10 years ..........       1,771                  5                          --                      1,776
------------------------------------------------------------------------------------------------------------------------------------
                                              35,856                 42                        (105)                    35,793
------------------------------------------------------------------------------------------------------------------------------------
   States and Political Subdivisions:
      Maturing within 1 year ...........          50                 --                          --                         50
      Maturing 1 to 5 years ............       1,312                  3                          --                      1,315
      Maturing 5 to 10 years ...........         426                 --                          --                        426
      Maturing after 10 years ..........          85                 --                          --                         85
------------------------------------------------------------------------------------------------------------------------------------
                                               1,873                  3                          --                      1,876
------------------------------------------------------------------------------------------------------------------------------------
   Other:
      Maturing within 1 year ...........         151                 --                          --                        151
      Maturing 1 to 5 years ............       9,348                  4                         (27)                     9,325
      Maturing after 10 years ..........       1,410                  1                          --                      1,411
------------------------------------------------------------------------------------------------------------------------------------
                                              10,909                  5                         (27)                    10,887
------------------------------------------------------------------------------------------------------------------------------------
                                            $ 48,638               $ 50                       $(132)                  $ 48,556
====================================================================================================================================
HELD TO MATURITY
   U.S. Treasury:
      Maturing 1 to 5 years ............    $ 11,541               $ 66                       $ (18)                  $ 11,589
------------------------------------------------------------------------------------------------------------------------------------
   U.S. Government Agencies:
      Maturing within 1 year ...........       7,229                 14                          --                      7,243
      Maturing 1 to 5 years ............       9,880                 35                          (5)                     9,910
      Maturing 5 to 10 years ...........       1,890                 17                          --                      1,907
      Maturing after 10 years ..........       5,177                 67                          --                      5,244
------------------------------------------------------------------------------------------------------------------------------------
                                              24,176                133                          (5)                    24,304
------------------------------------------------------------------------------------------------------------------------------------
   States and Political Subdivisions:
      Maturing within 1 year ...........         176                 --                          --                        176
      Maturing 1 to 5 years ............       4,545                 38                          --                      4,583
------------------------------------------------------------------------------------------------------------------------------------
                                               4,721                 38                          --                      4,759
------------------------------------------------------------------------------------------------------------------------------------
                                            $ 40,438               $237                       $ (23)                  $ 40,652
====================================================================================================================================
</TABLE>



                                       26
<PAGE>


                                             Note 2: Securities (continued)

<TABLE>
<CAPTION>
====================================================================================================================================
                                                                         December 31, 1996
------------------------------------------------------------------------------------------------------------------------------------
                                         Historical Cost   Gross Unrealized Gains    Gross Unrealized Losses    Estimated Fair Value
------------------------------------------------------------------------------------------------------------------------------------
                                                                          (In thousands)
<S>                                         <C>                    <C>                        <C>                     <C>
AVAILABLE FOR SALE
   U.S. Government Agencies:
      Maturing within 1 year ...........    $  4,533               $ 1                        $  (3)                  $  4,531
      Maturing 1 to 5 years ............      30,145                28                          (82)                    30,091
------------------------------------------------------------------------------------------------------------------------------------
                                              34,678                29                          (85)                    34,622
------------------------------------------------------------------------------------------------------------------------------------
   States and Political Subdivisions:
      Maturing within 1 year ...........          47                --                           --                         47
      Maturing 1 to 5 years ............         226                --                           --                        226
      Maturing 5 to 10 years ...........         395                --                           --                        395
      Maturing after 10 years ..........         183                --                           --                        183
------------------------------------------------------------------------------------------------------------------------------------
                                                 851                --                           --                        851
------------------------------------------------------------------------------------------------------------------------------------
   Other:
      Maturing 1 to 5 years ............       6,159                 8                          (15)                     6,152
      Maturing 5 to 10 years ...........          25                --                           (2)                        23
------------------------------------------------------------------------------------------------------------------------------------
                                               6,184                 8                          (17)                     6,175
------------------------------------------------------------------------------------------------------------------------------------
                                            $ 41,713               $37                        $(102)                  $ 41,648
====================================================================================================================================
HELD TO MATURITY
   U.S. Treasury:
      Maturing 1 to 5 years ............    $  7,516               $16                        $(106)                  $  7,426
------------------------------------------------------------------------------------------------------------------------------------
   U.S. Government Agencies:
      Maturing within 1 year ...........       5,815                36                           --                      5,851
      Maturing 1 to 5 years ............      11,727                19                          (22)                    11,724
------------------------------------------------------------------------------------------------------------------------------------
                                              17,542                55                          (22)                    17,575
------------------------------------------------------------------------------------------------------------------------------------
   States and Political Subdivisions:
      Maturing within 1 year ...........         162                --                           --                        162
      Maturing 1 to 5 years ............       1,175                 3                           (2)                     1,176
------------------------------------------------------------------------------------------------------------------------------------
                                               1,337                 3                           (2)                     1,338
------------------------------------------------------------------------------------------------------------------------------------
                                            $ 26,395               $74                        $(130)                  $ 26,339
====================================================================================================================================
</TABLE>

     Securities at December 31, 1997 and 1996 having a book value of $11,541,000
and $6,507,000, respectively, were pledged as collateral for public deposits and
for other purposes as required by law.

     Proceeds from sales and calls prior to maturity of securities available for
sale during 1997 were $11,072,000,  resulting in gross gains of $1,000 and gross
losses of $15,000.  Proceeds from calls prior to maturity of securities  held to
maturity during 1997 were $1,000,000,  resulting in no gains or losses. Proceeds
from sales and calls prior to maturity of  securities  available for sale during
1996 were  $22,309,000,  resulting in gross gains of $25,000 and gross losses of
$43,000.  Proceeds from calls prior to maturity of  securities  held to maturity
during 1996 were $4,002,000, resulting in gross gains of $2,000 and no losses.



                                       27
<PAGE>


                                  Note 3: Loans

     The Bank grants various  commercial and consumer loans,  principally within
New  Jersey.  A  substantial  portion of the Bank's  commercial  loan  portfolio
consists of loans for which the purpose was to acquire or develop real estate or
for which the primary source of repayment is the  liquidation of the real estate
held as collateral. Accordingly, a substantial portion of the borrowers' ability
to honor their loans is dependent on the success of the real estate  industry in
the Bank's market area. The Bank's commercial loan portfolio also includes loans
which  may be at least  partially  secured  by real  estate  but for  which  the
expected source of repayment is the cash flow from the borrower's business.

     The  composition  of the loan  portfolio,  net of  unearned  income,  is as
follows:

================================================================================
                                                                December 31
--------------------------------------------------------------------------------
                                                            1997          1996
--------------------------------------------------------------------------------
                                                              (In thousands)
Commercial and commercial real estate...................  $ 110,589     $105,819
Commercial real estate construction.....................     10,553       10,949
Residential real estate mortgage........................      6,179        7,443
Installment.............................................     41,785       40,859
--------------------------------------------------------------------------------
                                                          $ 169,106     $165,070
================================================================================

     The  Bank's  loan  portfolio  has  certain   concentrations  of  affiliated
borrowers.  The  three  largest  concentrations,  all of which are  involved  in
commercial and residential  real estate  development  and management,  aggregate
$31,245,000  and  $32,605,000 at December 31, 1997 and 1996,  respectively.  The
largest  borrower  concentration  consists  of loans  to a group  of  affiliated
borrowers with an aggregate  balance of $15,011,000  and $15,157,000 at December
31, 1997 and 1996,  respectively.  A majority of these loans is secured by first
mortgages on commercial properties where third-party loan payments paid directly
to the Bank are the primary source of repayment.

     A second  relationship  consists of loans primarily for the construction or
renovation of condominium units,  totaling $8,209,000 and $7,222,000 at December
31, 1997 and 1996, respectively.

     The third  concentration  involves loans to certain  affiliated real estate
development   companies  whose   principal   owners  have  had  a  long-standing
relationship with the Bank.  Outstanding balances for this group at December 31,
1997 and 1996 were $8,025,000 and $10,226,000, respectively. One commercial loan
of $2.1 million from these  concentrations  became  nonperforming  subsequent to
December 31, 1997.

     Loans for which the  accrual  of  interest  has been  discontinued  totaled
$745,000  and   $1,053,000   at  December  31,  1997  and  1996,   respectively.
Restructured  loans for which terms have been modified  totaled  $1,475,000  and
$1,540,000  at December 31, 1997 and 1996,  respectively.  At December 31, 1997,
the   Corporation  had  no  commitments  to  advance  funds  to  borrowers  with
restructured terms.

     Interest income that would have been  recognized on nonaccrual  loans under
the original terms of such loans,  contractual  interest  income on restructured
loans that would have been  recognized  under the original  terms of such loans,
and the interest income actually received, are summarized below:

<TABLE>
<CAPTION>
=================================================================================================================================
                                                                                                                  Year ended
                                                                                                                  December 31
---------------------------------------------------------------------------------------------------------------------------------
                                                                                                              1997          1996
---------------------------------------------------------------------------------------------------------------------------------
                                                                                                                (In thousands)
<S>                                                                                                            <C>           <C>
Interest income which would have been recognized on nonaccrual loans......................................     $326          $349
Contractual interest income which would have been recognized on restructured loans........................      144           260
Interest income received..................................................................................     (118)         (262)
---------------------------------------------------------------------------------------------------------------------------------
Interest income not recognized............................................................................     $352          $347
=================================================================================================================================
</TABLE>

     Accounting  standards require that certain impaired loans be measured based
on the present  value of expected  future  cash flows  discounted  at the loans'
original  effective interest rate. As a practical  expedient,  impairment may be
measured  based on the loans'  observable  market price or the fair value of the
collateral if the loan is collateral dependent. When the measure of the impaired
loan is less  than the  recorded  investment  in the  loan,  the  impairment  is
recorded through a valuation allowance.

     The  Corporation's  impaired  loans totaled  $2,464,000  and  $2,426,000 at
December  31,  1997  and  1996,  respectively,  the  amount  of  its  commercial
nonaccrual and restructured  loan portfolios and other qualifying loans, if any,
on those dates. All such loans are collateralized with real estate and have been
written  down to the  fair  value of the  collateral.  Since  the  Corporation's
recorded  investment  in these  loans is less than or equal to the fair value of
the collateral, no valuation allowances were required.


                                       28
<PAGE>


                   Note 4: Allowance For Possible Loan Losses

     The  level of the  allowance  is based on  management's  evaluation  of the
inherent  risks in the loan  portfolio  after  consideration  of prevailing  and
anticipated  economic  conditions  in the market  area,  the current  status and
credit  standing of borrowers,  and prior loss  experience.  The adequacy of the
allowance is reviewed no less frequently than quarterly by senior management and
the respective Boards of Directors of the Bank and the Corporation.

     Considerable  uncertainty exists as to the ultimate  performance of certain
loans  as  a  result  of  recent  economic  conditions  in  the  region.   These
uncertainties could result in the Corporation's experiencing increased levels of
nonperforming  loans,  greater charge-offs and increased provisions for possible
loan losses in subsequent periods when losses become known.

     The  following  summarizes  the activity in the allowance for possible loan
losses:

<TABLE>
<CAPTION>
========================================================================================
                                                               Year ended December 31
----------------------------------------------------------------------------------------
                                                            1997       1996        1995
----------------------------------------------------------------------------------------
                                                                   (In thousands)
<S>                                                       <C>         <C>        <C>
Balance, beginning of year............................... $ 5,115     $ 4,853    $ 6,501
   Provision charged to expense..........................     480         400        500
   Recoveries of loans previously charged off ...........     134         803      1,546
   Loans charged off.....................................  (1,101)       (941)    (3,694)
----------------------------------------------------------------------------------------
Balance, end of year..................................... $ 4,628     $ 5,115    $ 4,853
========================================================================================
</TABLE>

                        Note 5: Loans to Related Parties

     Loans to related  parties  include  loans made to directors  and  executive
officers  (and  their   affiliated   interests)  of  the   Corporation  and  its
subsidiaries.

The following analysis shows the activity of related party loans during 1997:

================================================================================
                                                                  (In thousands)

Balance, December 31, 1996........................................   $1,849
  Additions ......................................................      459
  Repayments .....................................................     (326)
  Resignation of officers.........................................       (1)
--------------------------------------------------------------------------------
Balance, December 31, 1997 .......................................   $1,981
================================================================================

All related party loans were current as to interest and principal at December
31, 1997.

                         Note 6: Premises and Equipment

     At December 31, premises and equipment consists of the following:

================================================================================
                                                                1997       1996
--------------------------------------------------------------------------------
                                                                (In thousands)
Land and improvements.......................................  $   286    $   286
Buildings and improvements..................................    2,810      2,815
Leasehold improvements......................................      358        378
Furniture and equipment.....................................    2,975      2,726
--------------------------------------------------------------------------------
                                                                6,429      6,205
Less - Accumulated depreciation and amortization............    3,183      2,945
--------------------------------------------------------------------------------
                                                               $3,246    $ 3,260
================================================================================


                                       29
<PAGE>


                                Note 7: Deposits

     The following is an expected  maturity  distribution  of time deposits less
than $100,000 as of December 31:

===============================================================================
                                                            1997          1996
-------------------------------------------------------------------------------
                                                              (In thousands)
Due in three months or less.............................  $17,454       $18,804
Due between three months and one year...................   35,834        34,408
Due over one year.......................................    9,084        11,113
-------------------------------------------------------------------------------
                                                          $62,372       $64,325
===============================================================================

As of  December  31,  1997 and  1996,  there  were  $7,502,000  and  $4,465,000,
respectively,  of  certificates  of deposits over  $100,000.  Such  certificates
totalling $7,165,000 and $4,127,000,  respectively,  had remaining maturities of
one year or less on those dates.

                            Note 8: Other Borrowings

     In June 1985, the Corporation  issued 11% subordinated  debentures due June
1995 with mandatory  stock purchase  contracts  exercisable not later than June,
1994 ("Equity Contracts").  On February 1, 1995, the Corporation redeemed, prior
to maturity,  the  remaining  $1,292,000 of  subordinated  debentures at par, in
accordance  with  provisions  of  the  original  issuance  and  with  regulatory
approval.



                                       30
<PAGE>


                              Note 9: Income Taxes

   The current and deferred amounts of the provision (benefit) for income taxes
as of December 31 are as follows:

<TABLE>
<CAPTION>
====================================================================================================================================
                                                                                              1997            1996           1995
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                        (In thousands)
<S>                                                                                         <C>             <C>             <C>
Current
  Federal .........................................................................         $   880         $   449         $    21
  State ...........................................................................             143              --               2
Deferred ..........................................................................             883             829           1,039
------------------------------------------------------------------------------------------------------------------------------------
Total current and deferred ........................................................           1,906           1,278           1,062
------------------------------------------------------------------------------------------------------------------------------------
Benefit of reduction in deferred tax asset valuation allowance ....................              --              --          (5,274)
Total provision (benefit) for income taxes ........................................         $ 1,906         $ 1,278         $(4,212)
====================================================================================================================================
</TABLE>

     Deferred income taxes reflect the impact of temporary  differences  between
amounts of assets and  liabilities  for  financial  reporting  purposes  and for
income tax purposes.

     Cumulative  temporary  differences giving rise to a significant  portion of
deferred tax assets and liabilities are as follows:.

<TABLE>
<CAPTION>
==================================================================================================================================
                                                                                                                 Deferred Asset
                                                                                                                   (Liability)
                                                                                                                   December 31
----------------------------------------------------------------------------------------------------------------------------------
                                                                                                              1997            1996
----------------------------------------------------------------------------------------------------------------------------------
                                                                                                                (In thousands)
<S>                                                                                                          <C>            <C>
Allowance for possible losses on loans and other real estate..............................................   $1,530         $1,802
Gain on restructured loans................................................................................      299            299
Depreciation and amortization.............................................................................      161            173
Net nonaccrual interest recoveries (charge-offs)..........................................................       15            (74)
Accrued liabilities not currently deductible..............................................................      266            148
State net operating loss carryforward, net of reserves ...................................................       --            222
Alternative minimum tax credits...........................................................................      266            750
Net holding losses on securities available for sale.......................................................       33             26
Other.....................................................................................................     (126)           (64)
----------------------------------------------------------------------------------------------------------------------------------
    Net deferred tax asset included in Other Assets                                                          $2,444         $3,282
==================================================================================================================================
</TABLE>

At December 31, 1997, the Corporation had no federal or state net operating loss
carryforwards.  A  reconciliation  of  income  taxes  calculated  at the  U.  S.
statutory  rate  of 34% to the  actual  income  tax  provision  (benefit)  is as
follows:

<TABLE>
<CAPTION>
==================================================================================================================================
                                                                                               1997            1996         1995
----------------------------------------------------------------------------------------------------------------------------------
                                                                                                          (In thousands)
<S>                                                                                           <C>             <C>          <C>
Statutory  provision......................................................................    $1,738          $1,474       $   692
Reduction in Federal taxes resulting from tax-exempt income...............................       (55)            (15)          (23)
State taxes on income, net of Federal tax benefit.........................................       313             327           122
Reversals of accruals no longer required..................................................        --            (496)           --
Tax refund greater than receivable recorded...............................................        --              --           (81)
Decrease in valuation allowance for deferred tax assets...................................        --              --        (5,274)
Other.....................................................................................       (90)            (12)          352
----------------------------------------------------------------------------------------------------------------------------------
                                                                                              $1,906          $1,278       $(4,212)
==================================================================================================================================
</TABLE>


                                       31
<PAGE>


                          Note 10: Stockholders' Equity

     Preferred Stock

     During 1993,  the  Corporation  amended its  Certificate  of  Incorporation
approving  the  authorization  of 1,950 shares of Class A  Cumulative  Preferred
Stock  ("Preferred  Stock"),  without  par  value.  Under  the  terms  of a debt
restructuring  with a lender,  these  shares were  exchanged  for the  remaining
principal balance of a note payable of $1,950,000.

     During 1995, the  Corporation  redeemed 1,033 shares of Preferred Stock and
paid cumulative  dividends on that stock of approximately  $108,000.  Cumulative
dividends  of $11,000  were also paid in 1995 with  respect to the 200 shares of
redeemable  Preferred  Stock that were  redeemed on November 30, 1994. In March,
1996, the  Corporation  redeemed the remaining 717 shares of Preferred Stock and
paid  cumulative  dividends  on  that  stock  of  approximately   $106,000.  All
redemptions and dividend payments received regulatory approval.

     Stock Options

     In 1994,  concurrent with an employment  contract,  the Corporation entered
into a nonstatutory  stock option  agreement  ("Option  Agreement") with the new
president and CEO. Pursuant to the Option Agreement,  the Corporation granted an
option to purchase  shares of common stock up to an aggregate  exercise price of
$500,000.  The options were granted in three separate tiers as follows: (1) Tier
1 options having an aggregate  exercise price of $170,000  exercisable at $2 per
share,  (2) Tier 2  options  having  an  aggregate  exercise  price of  $165,000
exercisable  at $2.32  per share  and (3) Tier 3  options  having  an  aggregate
exercise price of $165,000 exercisable at $2.63 per share.

     Twenty-five  percent of the Tier 1, 2 and 3 options become exercisable one,
two and three years,  respectively,  after March 17, 1994 (the effective  date).
The remaining options for each tier become exercisable in 25% increments on each
of the three subsequent  anniversaries  from the applicable  effective date. The
Option Agreement  further provides that the vesting schedule will be accelerated
and all options will become  exercisable  upon a "change in control," as defined
in the contract.  All unexercised  options expire seven years from the effective
date. In addition,  exercise of the options is also subject to the Corporation's
achieving  certain annual  performance  standards  relating to profitability and
return on equity.

     At the 1995 annual meeting of  stockholders,  two  additional  stock option
plans were approved.  The first, the Ramapo Financial  Corporation 1995 Employee
Stock  Option Plan  ("Employee  Plan"),  provides  for the granting of incentive
stock options and nonqualified  stock options to officers and other employees of
the  Corporation  and its  subsidiaries.  The maximum number of shares of common
stock of the  Corporation,  $1 par  value,  that may be made  subject to options
granted  pursuant to the Employee Plan is 750,000.  Options shall have a term of
no more than ten years from the date of grant.  Exercisability of the options is
determined  by a committee of the Board of  Directors  at the time of grant;  in
general,  no  option  may be  exercisable  within  six  months of the date it is
granted.  The minimum  exercise  price per share for each option  granted is the
last sale price for such shares on NASDAQ on the date of grant.

     The second plan, the Ramapo  Financial  Corporation  1995 Stock Option Plan
for  Nonemployee  Directors  ("Directors'  Plan"),  provides for the granting of
nonqualified  stock options to nonemployee  directors of the Corporation and its
subsidiaries.  The maximum number of shares of common stock, $1 par value,  that
may be made  subject to  options  granted  pursuant  to the  Directors'  Plan is
200,000.  In accordance with the terms of the Directors'  Plan, a one-time grant
of years of service  options was made  effective  May 16, 1995  totaling  65,000
shares subject to option. Such options became exercisable six months after their
grant.  The exercise  price of $3.50 per share was  determined  by the last sale
price on the date of grant.  The Directors'  Plan also provides for annual grant
options to be granted in 1996 and annually  thereafter on the date of the annual
meeting  of  stockholders  until  May  16,  2005,  the  expiration  date  of the
Directors' Plan. Each eligible  director will  automatically be annually granted
such an option to purchase  1,800 shares.  A total of 50% of such options become
exercisable  six  months  from  the date of grant  with the  remainder  becoming
exercisable eighteen months from the date of grant. The exercise price per share
will be determined by the last sale price on the date of grant.

     In  February,  1997,  the Board of Directors  voted to  terminate  the 1986
Nonstatutory  Stock  Option  Plan,  which had  100,000  shares  of common  stock
reserved for future issuance and no previously granted options  outstanding.  As
of December 31, 1997,  1,158,309  shares were reserved for future issuance under
the Option Agreement and these two Plans.

     Option activity for the years ended December 31 is summarized as follows:

<TABLE>
<CAPTION>
====================================================================================================================================
                                                          1997                         1996                           1995
------------------------------------------------------------------------------------------------------------------------------------
                                                Number         Price          Number          Price          Number        Price
------------------------------------------------------------------------------------------------------------------------------------
<S>                                           <C>          <C>               <C>          <C>               <C>       <C>
Balance, beginning of year................      767,534                      545,434                        230,934
Options granted...........................      272,600    $5.69 - $6.00     262,100      $4.81 - $ 4.88    320,000   $3.50 - $ 3.81
Options exercised.........................       (9,875)    3.50 -  4.81        (750)         3.81             --           --
Options cancelled.........................       (5,250)    4.81 -  6.00     (39,250)      3.81 -  18.13     (5,500)       3.81
------------------------------------------------------------------------------------------------------------------------------------
Balance, end of year......................    1,025,009     2.00 -  6.00     767,534       2.00 -   4.88    545,434    2.00 -  18.13
Options exercisable, end of year                543,444    $2.00 - $6.00     304,736      $2.00 - $ 4.88    139,375   $2.00 - $18.13
====================================================================================================================================
</TABLE>

     The Corporation applies Accounting  Principles Board Opinion 25 and related
Interpretations  in  accounting  for its stock  option  plans.  Accordingly,  no
compensation  cost has been  recognized  for its fixed stock option  plans.  The
compensation cost that has been charged against income for its performance-based
plan was $296,000, $108,000 and $120,000 for 1997, 1996, and 1995, respectively.
Had compensation cost for the  Corporation's  stock option plans been determined
based on the fair value at the grant date for awards  granted after December 31,
1994 under those plans  consistent with the method of SFAS No. 123,  "Accounting
of Stock Based  Compensation," the Corporation's net income and income per share
would have been reduced to the proforma amounts indicated below:

--------------------------------------------------------------------------------
                                            1997          1996           1995
--------------------------------------------------------------------------------
                                                 (Dollars in thousands)
Net Income:
   As reported ....................      $   3,205      $   3,056      $   6,248
   Proforma .......................      $   2,912      $   2,880      $   6,117
Income per share - basic:
   As reported ....................      $     .40      $     .38      $     .76
   Proforma .......................      $     .36      $     .35      $     .74
Income per share - diluted:
   As reported ....................      $     .38      $     .37      $     .75
   Proforma .......................      $     .35      $     .35      $     .74
================================================================================


                                       32
<PAGE>


                    Note 10: Stockholders' Equity (continued)

     The fair value of each option grant is estimated on the date of grant using
the  Black-Scholes  option-pricing  model  with the  following  weighted-average
assumptions used for grants in 1997, 1996 and 1995, respectively: dividend yield
of 1.4% for 1997 and 2.5% for 1996 and 1995; expected volatility of 28%, 25% and
29% for all options;  risk-free  interest  rates of 6.5%,  6.9% and 6.1% for the
Employee Plan options,  and 6.6%, 6.5% and 6.4% for the Directors' Plan options;
and expected  lives of 8.0, 7.8 and 7.7 years for the Employee  Plan options and
6.4, 6.5 and 6.3 years for the Directors' Plan options.

     The weighted average fair values at grant-date for options awarded in 1997,
1996 and 1995 were $2.42, $1.60 and $1.26, respectively.

     The following table summarizes  information about stock options outstanding
at December 31, 1997:

================================================================================
    Exercise                                                    Remaining
     Price       Number Outstanding      Number Exercisable     Contractual Life
--------------------------------------------------------------------------------
     $2.00             85,000                 63,750              3.2 years
      2.32             71,244                 35,622              3.2
      2.63             62,690                 15,672              3.2
      3.50             60,000                 60,000              7.4
      3.81            218,750                163,375              7.4
      4.81            245,125                121,875              8.5
      4.88             12,600                 12,600              8.3
      5.69             12,600                  6,300              9.3
      6.00            257,000                 64,250              9.4
--------------------------------------------------------------------------------
                    1,025,009                543,444              7.3
================================================================================

                     Note 11: Commitments and Contingencies

     The  consolidated  balance  sheets as of December  31, 1997 and 1996 do not
reflect various commitments relating to financial  instruments which are used in
the normal course of business.  These instruments  include commitments to extend
credit and letters of credit. These financial  instruments carry various degrees
of credit risk,  which is defined as the possibility  that a loss may occur from
the failure of another party to perform  according to the terms of the contract.
Management   does  not  anticipate   that  the  settlement  of  these  financial
instruments will have a material adverse effect on the  Corporation's  financial
position or results of operations.

     Commitments to extend credit are legally binding loan  commitments with set
expiration  dates.  They  are  intended  to be  disbursed,  subject  to  certain
conditions,  upon request of the borrower. In the normal course of business, the
Corporation often receives a fee for providing a commitment. The Corporation was
committed to advance $35,799,000 and $31,163,000 to its borrowers as of December
31, 1997 and 1996, respectively.  The majority of such commitments expire within
one year. These commitments  include a $300,000 revolving line of credit, at the
Bank's base rate, to a related party.

     Standby  letters of credit are provided to  customers  to  guarantee  their
performance,  generally  in the  production  of  goods  and  services  or  under
contractual  commitments in the financial  markets.  The Corporation has entered
into standby letters of credit contracts with its customers totaling  $1,028,000
and $825,000 as of December  31, 1997 and 1996,  respectively,  which  generally
expire within one year.

     The Corporation and its subsidiaries lease land, buildings and equipment in
several  locations for their banking  facilities  under  operating  leases which
expire at various dates through 2009 but which contain certain renewal  options.
Total rent expense was approximately $232,000, $183,000, and $154,000, for 1997,
1996 and 1995, respectively.

     On  March  1,  1995,  the  Corporation  entered  into a  five-year  license
agreement with its banking  software  provider.  Minimum future annual  payments
under this agreement are expected to be approximately $76,000.

     At December 31, 1997,  aggregate  annual minimum rental  commitments  under
noncancelable  leases having an initial or remaining  term of more than one year
are as follows:

================================================================================
1998................................................................. $  202,000
1999.................................................................    152,000
2000.................................................................     95,000
2001.................................................................     96,000
2002.................................................................     98,000
Thereafter...........................................................    455,000
--------------------------------------------------------------------------------
                                                                      $1,098,000
================================================================================

     It is expected  that in the normal  course of  business  leases that expire
will  be  renewed  or  replaced  by  leases  of  other  properties;  thus  it is
anticipated  that future  minimum  lease  commitments  will not be less than the
amount shown for 1998.

     Cash and due from banks includes  certain  reserve  balances  maintained in
accordance with requirements of the Bank's regulatory  authorities.  The reserve
balances  aggregated  $299,000  and  $4,299,000  at December  31, 1997 and 1996,
respectively.

     The Corporation may, in the ordinary course of business,  become a party to
litigation  involving  collection  matters,  contract  claims  and  other  legal
proceedings relating to the conduct of its business.  In management's  judgment,
the consolidated  financial position or results of operations of the Corporation
will not be  materially  affected  by the final  outcome  of any  present  legal
proceedings.



                                       33
<PAGE>


                             Note 12: Benefit Plans

     The Corporation and its subsidiaries  have a savings plan for all employees
under which the Corporation is required to match employee contributions up to 5%
of each participant's annual compensation.

     In 1989, the Corporation and its subsidiaries adopted a supplemental income
plan for certain key employees  which  required the  Corporation  to make annual
contributions  to the plan for a period of five  years.  The  types of  benefits
which  may  be  granted  under  the  supplemental  income  plan  include  (a)  a
pre-retirement   death  benefit  payable  in  ten  annual  installments  if  the
participant dies during active employment,  (b) a severance benefit payable in a
lump sum if termination occurs other than through death,  retirement,  permanent
disability  or  termination  for specified  causes and (c) a retirement  benefit
payable in ten annual installments  following retirement after attainment of age
65.  At  December  31,  1997,  seven  current  and  former  employees  or  their
beneficiaries were  participating in this plan. The Corporation  accrues for the
liability during the period of active employment,  in accordance with accounting
for deferred compensation contracts.

     Charges to operations  for the above plans for the years ended December 31,
1997, 1996 and 1995 were $165,000, $167,000 and $146,000, respectively.

     Other than the benefit provided by the  supplemental  income plan described
above,  the Corporation  does not provide any  post-retirement  benefits for its
employees.

                  Note 13: Fair Value of Financial Instruments

     The  following is a summary of fair value versus the carrying  value of the
Corporation's financial instruments.  For the Corporation, as for most financial
institutions,  the bulk of its assets and liabilities  are considered  financial
instruments.  Many of the Corporation's  financial instruments lack an available
trading market as  characterized  by a willing buyer and willing seller engaging
in an exchange  transaction.  It is also the Corporation's  general practice and
intent to hold its financial  instruments  to maturity and not engage in trading
or sales  activities.  Therefore,  significant  estimations  and  present  value
calculations were used by the Corporation for the purpose of this disclosure.

     Estimated  fair values have been  determined by the  Corporation  using the
best available data and an estimation  methodology suitable for each category of
financial  instruments.  For those loans and  deposits  with  floating  interest
rates,  it is assumed  that  estimated  fair values  generally  approximate  the
recorded book balances.

The estimation  methodologies  used, the estimated fair values, and the recorded
book balances at December 31, 1997 and 1996, were as follows:

     Financial  instruments  actively  traded in the secondary  market have been
valued using available market prices.

<TABLE>
<CAPTION>
===================================================================================================================================
                                                                           December 31, 1997                 December 31, 1996
-----------------------------------------------------------------------------------------------------------------------------------
                                                                       Carrying        Estimated         Carrying        Estimated
                                                                        Value         Fair Value          Value         Fair Value
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                   <C>             <C>               <C>             <C>
Cash and cash equivalents.........................................    $20,275,000     $20,275,000       $29,758,000     $29,758,000
Securities available for sale at fair value (Note 2) .............     48,556,000      48,556,000        41,648,000      41,648,000
Securities held to maturity (Note 2) .............................     40,438,000      40,652,000        26,395,000      26,339,000
===================================================================================================================================
</TABLE>

     Financial  instruments  with stated  maturities  have been  valued  using a
present value  discounted  cash flow method with a discount  rate  approximating
current market for similar assets and liabilities.  Financial  instrument assets
with  variable  rates  and  financial  instrument  liabilities  with  no  stated
maturities  have an  estimated  fair value  equal to both the amount  payable on
demand and the recorded book balance.

<TABLE>
<CAPTION>
====================================================================================================================================
                                                                           December 31, 1997                 December 31, 1996
------------------------------------------------------------------------------------------------------------------------------------
                                                                       Carrying       Estimated        Carrying        Estimated
                                                                        Value         Fair Value         Value         Fair Value
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                  <C>             <C>              <C>           <C>
Due from bank - interest-bearing..................................   $         --    $         --     $  1,001,000  $  1,001,000
Gross loans, including accrued interest...........................    170,317,000     169,689,000      166,336,000   164,050,000
Deposits, including accrued interest..............................    250,550,000     250,682,000      240,704,000   240,848,000
Securities sold under agreements to repurchase ...................      1,677,000       1,677,000               --            --
====================================================================================================================================
</TABLE>

Changes in assumptions or estimation methodologies may have a material effect on
these estimated fair values.

     There  is no  material  difference  between  the  notional  amount  and the
estimated  fair value of  off-balance-sheet,  unfunded  loan  commitments  which
totaled $35,799,000 and $31,163,000 at December 31, 1997 and 1996, respectively,
and are generally priced at market at time of funding. Standby letters of credit
totaling $1,028,000 and $825,000 as of December 31, 1997 and 1996, respectively,
are based on fees charged for similar agreements and are also assumed to have no
material difference in fair value to  off-balance-sheet  value. See also Note 11
for additional  discussion relating to these  off-balance-sheet  activities.  At
December 31, 1997 and 1996,  fees related to the  unexpired  terms of letters of
credit were not significant.



                                       34
<PAGE>


                           Note 14: Regulatory Capital

     The  Corporation  and the Bank are  subject to various  regulatory  capital
requirements  administered  by the  federal  banking  agencies.  Failure to meet
minimum  capital  requirements  can  initiate  certain  mandatory--and  possibly
additional discretionary--actions by regulators that if undertaken, could have a
direct material effect on the  Corporation's  and Bank's  financial  statements.
Under capital  adequacy  guidelines  (Corporation  and Bank) and the  regulatory
framework for prompt  corrective  action (Bank only),  the  Corporation and Bank
must meet specific  capital  guidelines  that involve  quantitative  measures of
their respective assets,  liabilities,  and certain  off-balance-sheet  items as
calculated under regulatory accounting  practices.  The Corporation's and 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 Corporation and the Bank to maintain minimum amounts and ratios (set
forth in the  table  below)  of total  and Tier I  capital  (as  defined  in the
regulations)  to  risk-weighted  assets (as defined),  and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December 31,
1997, that the Corporation and the Bank meet all capital  adequacy  requirements
to which they are subject.

     As of December  31,  1997,  the most recent  notification  from the Federal
Deposit   Insurance   Corporation   ("FDIC")   categorized  the  Bank  as  "well
capitalized"  under the regulatory  framework for prompt corrective  action. The
Corporation was notified by the Federal Reserve Bank of New York ("FRB") that it
was "well capitalized" based on the FRB's examination as of June 30, 1996. To be
categorized as "well  capitalized"  the  Corporation  and the Bank must maintain
minimum total  risk-based,  Tier I risk-based and Tier I leverage  ratios as set
forth in the table. There are no conditions or events since those  notifications
that management believes have changed the Corporation's or the Bank's respective
category.

<TABLE>
<CAPTION>
====================================================================================================================================
                                                                              For Capital           To Be Well Capitalized Under
                                                       Actual              Adequacy Purposes     Prompt Corrective Action Provisions
------------------------------------------------------------------------------------------------------------------------------------
                                                 Amount      Ratio        Amount         Ratio          Amount          Ratio
------------------------------------------------------------------------------------------------------------------------------------
<S>                                            <C>           <C>       <C>              <C>         <C>               <C>
As of December 31, 1997:
   Total Capital (to Risk-Weighted Assets):
      Corporation...........................   $31,854,000   16.5%     >|=$15,417,000   >|=8.0%     >|=$19,271,000    >|=10.0%
      Bank..................................   $29,405,000   15.3%     >|=$15,377,000   >|=8.0%     >|=$19,221,000    >|=10.0%
   Tier 1 Capital (to Risk-Weighted Assets):
      Corporation...........................   $29,417,000   15.3%     >|=$ 7,708,000   >|=4.0%     >|=$11,563,000    >|= 6.0%
      Bank..................................   $26,975,000   14.0%     >|=$ 7,688,000   >|=4.0%     >|=$11,533,000    >|= 6.0%
   Tier 1 Capital (to Average Assets):
      Corporation...........................   $29,417,000   10.5%     >|=$11,234,000   >|=4.0%     >|=$14,042,000    >|= 5.0%
      Bank..................................   $26,975,000    9.6%     >|=$11,219,000   >|=4.0%     >|=$14,024,000    >|= 5.0%
------------------------------------------------------------------------------------------------------------------------------------
As of December 31, 1996:
   Total Capital (to Risk-Weighted Assets):
      Corporation...........................   $29,424,000   15.5%     >|=$15,148,000   >|=8.0%     >|=$18,935,000    >|=10.0%
      Bank..................................   $26,831,000   14.2%     >|=$15,106,000   >|=8.0%     >|=$18,882,000    >|=10.0%
   Tier 1 Capital (to Risk-Weighted Assets):
      Corporation...........................   $27,032,000   14.3%     >|=$ 7,574,000   >|=4.0%     >|=$11,361,000    >|= 6.0%
      Bank..................................   $24,446,000   12.9%     >|=$ 7,553,000   >|=4.0%     >|=$11,329,000    >|= 6.0%
   Tier 1 Capital (to Average Assets):
      Corporation...........................   $27,032,000   10.5%     >|=$10,321,000   >|=4.0%     >|=$12,902,000    >|= 5.0%
      Bank..................................   $24,446,000    9.5%     >|=$10,312,000   >|=4.0%     >|=$12,889,000    >|= 5.0%
====================================================================================================================================
</TABLE>


                                       35
<PAGE>


     Note 15: Condensed Financial Statements of Ramapo Financial Corporation
                              (Parent Company Only)

<TABLE>
<CAPTION>
===================================================================================================================================
                                                           BALANCE SHEETS                                      December 31
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                                        1997                 1996
-----------------------------------------------------------------------------------------------------------------------------------
Assets                                                                                                       (In thousands)
<S>                                                                                                   <C>                  <C>
   Cash and Due from Banks ...............................................................            $     57             $     76
   Interest-Bearing Time Deposits ........................................................               2,904                2,469
   Investment in Bank Subsidiary (Equity Method) .........................................              28,855               26,450
   Other Assets ..........................................................................                 672                  847
-----------------------------------------------------------------------------------------------------------------------------------
     TOTAL ASSETS ........................................................................            $ 32,488             $ 29,842
===================================================================================================================================
Liabilities - Other ......................................................................            $  1,191             $    806
===================================================================================================================================
Stockholders' Equity
   Common Stock ..........................................................................               8,107                8,161
   Capital in Excess of Par Value ........................................................              12,901               13,103
   Retained Earnings .....................................................................              10,339                8,105
   Net Unrealized Holding Losses on Securities Available for Sale ........................                 (50)                 (39)
   Treasury Stock ........................................................................                  --                 (294)
-----------------------------------------------------------------------------------------------------------------------------------
     Total Stockholders' Equity ..........................................................              31,297               29,036
-----------------------------------------------------------------------------------------------------------------------------------
     TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ..........................................            $ 32,488             $ 29,842
===================================================================================================================================
</TABLE>

<TABLE>
<CAPTION>
===================================================================================================================================
                                                        STATEMENTS OF INCOME                    Year ended December 31
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                     1997                1996                1995
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                                        (In thousands)
<S>                                                                                 <C>                 <C>                 <C>
Operating Income
   Rental Income from Subsidiary Bank ..................................            $   180             $   180             $   165
   Interest on Time Deposit at Subsidiary Bank .........................                117                 124                 195
   Dividends from Subsidiary Bank ......................................                971                 324                  --
   Other Income ........................................................                  7                  58                   1
-----------------------------------------------------------------------------------------------------------------------------------
     Total Operating Income ............................................              1,275                 686                 361
-----------------------------------------------------------------------------------------------------------------------------------
Operating Expenses .....................................................                580                 559                 603
-----------------------------------------------------------------------------------------------------------------------------------
Income (Loss) before Income Taxes and Equity in
   Undistributed Income of Subsidiaries ................................                695                 127                (242)
Income Tax (Benefit) Provision .........................................                (94)                (67)                  5
-----------------------------------------------------------------------------------------------------------------------------------
Income (Loss) before Equity in Undistributed Income
   of Subsidiaries .....................................................                789                 194                (247)
Equity in Undistributed Income of Subsidiaries .........................              2,416               2,862               6,495
-----------------------------------------------------------------------------------------------------------------------------------
   Net Income ..........................................................            $ 3,205             $ 3,056             $ 6,248
===================================================================================================================================
</TABLE>

No Federal  income tax is  applicable to the income  received from  subsidiaries
since the parent company and subsidiaries file a consolidated Federal income tax
return.



                                       36
<PAGE>


     Note 15: Condensed Financial Statements of Ramapo Financial Corporation
                        (Parent Company Only) (Continued)


<TABLE>
<CAPTION>
===================================================================================================================================
                                                      STATEMENTS OF CASH FLOWS                    Year ended December 31
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                        1997               1996              1995
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                                        (In thousands)
<S>                                                                                   <C>                <C>                <C>
Cash Flows from Operating Activities:
  Net Income ..............................................................           $ 3,205            $ 3,056            $ 6,248
  Adjustments to Reconcile Net Income to Net Cash
    Provided by Operating Activities:
       Equity in Undistributed Income of Subsidiaries .....................            (2,416)            (2,862)            (6,495)
       Depreciation and Amortization ......................................                48                115                116
       Dividends Declared but Not Paid ....................................               (80)              (162)                --
       Decrease (Increase) in Other Assets ................................               127               (474)               193
       Increase in Other Liabilities ......................................               385                498                147
-----------------------------------------------------------------------------------------------------------------------------------
      Net Cash Provided by Operating Activities ...........................             1,269                171                209
-----------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities ......................................                --                 --                 --
===================================================================================================================================
Cash Flows from Financing Activities:
       Redemption of Subordinated Debentures ..............................                --                 --             (1,292)
       Redemption of Class A Preferred Stock ..............................                --               (717)            (1,033)
       Cash Dividends on Preferred Stock ..................................                --               (106)              (119)
       Cash Dividends on Common Stock .....................................              (891)              (162)                --
       Proceeds from Stock Options Exercised ..............................                38                  3                 --
-----------------------------------------------------------------------------------------------------------------------------------
Net Cash Used In Financing Activities .....................................              (853)              (982)            (2,444)
-----------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents ......................               416               (811)            (2,235)
Cash and Cash Equivalents, Beginning of Year ..............................             2,545              3,356              5,591
-----------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, End of Year ....................................           $ 2,961            $ 2,545            $ 3,356
===================================================================================================================================
</TABLE>

     The  parent  company's  resources  available  to meet its cash  obligations
subsequent  to  December  31,  1997 are  limited to liquid  assets on hand which
include  cash  and due  from  banks  and  interest-bearing  time  deposits,  and
dividends from subsidiary Bank.

     Based on current resources discussed above,  management expects to meet its
obligations at the parent company level for the foreseeable future.



                                       37
<PAGE>


             Note 16: Supplementary Statements of Income Information

     Major categories of other expense for the indicated periods are as follows:

<TABLE>
<CAPTION>
==================================================================================================================================
                                                                                                    Year ended December 31
----------------------------------------------------------------------------------------------------------------------------------
                                                                                            1997              1996           1995
----------------------------------------------------------------------------------------------------------------------------------
                                                                                                          (In thousands)
<S>                                                                                        <C>               <C>            <C>
Legal* ..................................................................................  $  196            $  312         $  457
Postage and freight .....................................................................     158               167            171
Stationery and printing..................................................................     288               248            198
FDIC insurance assessment................................................................      29                34            398
Audit and examinations ..................................................................     150               174            259
Telephone ...............................................................................     194               152            165
Consulting fees .........................................................................     260               212            325
Credit reports/appraisal fees ...........................................................     103               125            156
Bonding and insurance ...................................................................     156               207            241
Amortization of intangible assets .......................................................     258               256            270
Advertising..............................................................................     235               231            137
All other expenses ......................................................................     784               690            688
----------------------------------------------------------------------------------------------------------------------------------
                                                                                           $2,811            $2,808         $3,445
==================================================================================================================================
</TABLE>

* Includes $181,000, $288,000 and $360,000 for 1997, 1996 and 1995,
respectively, paid to a law firm of which two directors of the Corporation are
principals.


                                       38
<PAGE>


              Note 17: Quarterly Financial Information (Unaudited)

     The following quarterly financial  information for the years ended December
31,  1997 and 1996 is  unaudited.  However,  in the opinion of  management,  all
adjustments,  which include normal  recurring  adjustments  necessary to present
fairly the results of  operations  for the periods,  are  reflected.  Results of
operations for the periods are not necessarily  indicative of the results of the
entire year or any other interim period.

<TABLE>
<CAPTION>
====================================================================================================================================
                                                                                                      1997
------------------------------------------------------------------------------------------------------------------------------------
                                                                                               Three Months Ended
                                                                          March 31         June 30      September 30     December 31
------------------------------------------------------------------------------------------------------------------------------------
                                                                                  (In thousands, except per share amounts)
<S>                                                                        <C>             <C>              <C>            <C>
Total interest income.................................................     $4,735          $4,907           $4,994         $5,098
Total interest expense ...............................................      1,512           1,544            1,577          1,664
------------------------------------------------------------------------------------------------------------------------------------
  Net interest income.................................................      3,223           3,363            3,417          3,434
Provision for possible loan losses....................................        120             120              120            120
------------------------------------------------------------------------------------------------------------------------------------
  Net interest income after provision for
   possible loan losses ..............................................      3,103           3,243            3,297          3,314
Total other income ...................................................        515             548              560            559
Total other expense ..................................................      2,472           2,483            2,558          2,515
Net income............................................................     $  714          $  822           $  816         $  853
Net income per common share - basic ..................................     $  .09          $  .10           $  .10         $  .11
                            - diluted ................................     $  .09          $  .10           $  .10         $  .10
====================================================================================================================================

<CAPTION>
====================================================================================================================================
                                                                                                      1996
------------------------------------------------------------------------------------------------------------------------------------
                                                                                               Three Months Ended
                                                                          March 31         June 30      September 30     December 31
------------------------------------------------------------------------------------------------------------------------------------
                                                                                  (In thousands, except per share amounts)
<S>                                                                        <C>             <C>              <C>            <C>
Total interest income.................................................     $4,385          $4,536           $4,600         $4,697
Total interest expense ...............................................      1,392           1,437            1,478          1,497
------------------------------------------------------------------------------------------------------------------------------------
  Net interest income.................................................      2,993           3,099            3,122          3,200
Provision for possible loan losses....................................        120              40              120            120
------------------------------------------------------------------------------------------------------------------------------------
  Net interest income after provision for
   possible loan losses ..............................................      2,873           3,059            3,002          3,080
Total other income ...................................................        715             549              589            536
Total other expense ..................................................      2,763           2,633            2,327          2,346
Net income............................................................     $  503          $  592           $  767         $1,194(A)
Net income per common share - basic...................................     $  .06          $  .07           $  .09         $  .15
                            - diluted ................................     $  .06          $  .07           $  .09         $  .14
====================================================================================================================================
</TABLE>

(A)  Includes  the effect of the  reversal of $496,000 of tax reserves no longer
     deemed necessary.


                                       39
<PAGE>


                               ARTHUR ANDERSEN LLP

To the Stockholders and
Board of Directors of
Ramapo Financial Corporation:

     We have  audited the  accompanying  consolidated  balance  sheets of Ramapo
Financial Corporation (a New Jersey corporation) and subsidiaries as of December
31, 1997 and 1996, and the related consolidated statements of income, changes in
stockholders'  equity and cash  flows for each of the three  years in the period
ended December 31, 1997. These financial  statements are the  responsibility  of
the  Corporation's  management.  Our  responsibility is to express an opinion on
these financial statements based on our audits.

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

     In our opinion,  the consolidated  financial  statements  referred to above
present  fairly,  in all material  respects,  the  financial  position of Ramapo
Financial Corporation and subsidiaries as of December 31, 1997 and 1996, and the
results of their  operations and their cash flows for each of the three years in
the period ended  December 31,  1997,  in  conformity  with  generally  accepted
accounting principles.


                                        /s/ Arthur Andersen LLP


Roseland, New Jersey
January 16, 1998


                                       40
<PAGE>


                          RAMAPO FINANCIAL CORPORATION
              Officers & Directors of Ramapo Financial Corporation

================================================================================

OFFICERS

Mortimer J. O'Shea
President and
Chief Executive Officer

Erwin D. Knauer
Senior Vice President

Walter A. Wojcik, Jr.
Treasurer

Janet M. Maloy
Corporate Secretary

Lars Swanson
Assistant Vice President/
Assistant Secretary

Virginia Huff
Assistant Secretary

Steven Kurdyla
Chief Auditor

Joseph Mancini
Senior Auditor

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

DIRECTORS

Victor C. Otley, Jr.
Chairman of the Board
Attorney
Williams, Caliri, Miller & Otley
A Professional Corporation

Mortimer J. O'Shea
President and
Chief Executive Officer

Donald W. Barney
Vice President and Treasurer
Union Camp Corporation

James R. Kaplan
Chairman, CEO and President
Cornell Dubilier Electronics, Inc.

Erwin D. Knauer
President
The Ramapo Bank

Louis S. Miller
CPA, Retired

Richard S. Miller
Attorney
Williams, Caliri, Miller & Otley
A Professional Corporation


                                 THE RAMAPO BANK
                     Officers & Directors of The Ramapo Bank

================================================================================

OFFICERS

Mortimer J. O'Shea
Chairman of the Board and
Chief Executive Officer

Erwin D. Knauer
President

Detlef H. Felschow
Senior Vice President

Paul E. Fitzgerald
Senior Vice President

R. Peter Mack
Senior Vice President

William Olb
Senior Vice President

Walter A. Wojcik, Jr.
Senior Vice President and
Treasurer

Janet M. Maloy
Corporate Secretary

Steven Kurdyla
Chief Auditor

Joseph Mancini
Senior Auditor

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

VICE
PRESIDENTS

Robert Bowlby
Roger Cook
Scott D. Mc Laughlin
Janyth Primrose
Ronald Severino
Carole Zicker

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

ASSISTANT
VICE
PRESIDENTS


Walter N. Alesandro
Dawn Chase
Marilyn B. Kaplan
Karen Mergenthaler
Nancy Shaulis
Kevin C. Pashke
Emilio Ramil
George Reissner
Rose Marie Sabatini
Robert Sferrazza
Lars Swanson
Todd Ullrich

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

ASSISTANT
SECRETARIES

Virginia L. Huff

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

ASSISTANT
TREASURERS

Kathleen Bozzo
Aladel Habbab
Laura Humble
Kelly Kapusta
Barbara Redding Massenzio
Paula McKowen
Cynthia Murillo
Alberta Pino
Genevieve Restivo

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

Neil M. Fried
Investment Officer

Christopher Eigen
Assistant Operations Officer

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

DIRECTORS

Mortimer J. O'Shea
Chairman of the Board and
Chief Executive Officer

Donald W. Barney
Vice President and Treasurer
Union Camp Corporation

Vincent R. D'Accardi
Owner
Lake Developers Inc.

James R. Kaplan
Chairman, CEO and President
Cornell Dubilier Electronics, Inc.

Erwin D. Knauer
President
The Ramapo Bank

Solomon W. Masters
President
ERA Masters Realtors

Louis S. Miller
CPA, Retired

Richard S. Miller
Attorney
Williams, Caliri, Miller & Otley
A Professional Corporation

Victor C. Otley, Jr.
Attorney
Williams, Caliri, Miller & Otley
A Professional Corporation

================================================================================

BUSINESS
DEVELOPMENT COUNCIL

John A. Demetrius, CPA
President
Demetrius & Co., L.L.C.

Robert Garofalo, Esq.
Garofalo & Pryor, PA

Louis D. March
President & Owner
March Associates, Inc.

John J. Scura, II, Esq.
John J. Scura, Attorney at Law

Gerard J. Donnelly, Jr.
President, Donnelly Industries, Inc.




                                       41
<PAGE>


                              CORPORATE INFORMATION
================================================================================
                                    FORM 10-K

                 The Corporation's annual report, on Form 10-K,
              required to be filed with the Securities and Exchange
                 Commission, is available on written request to:
                      Mr. Walter A. Wojcik, Jr., Treasurer
                          Ramapo Financial Corporation
                           64 Mountain View Boulevard
                             Wayne, New Jersey 07470

                                ANNUAL MEETING OF
                              STOCKHOLDERS Monday,
                            April 27, 1998, 4:00 p.m.
                                 Radisson Hotel
                                 690 Rt. 46 East
                           Fairfield, New Jersey 07004

                                 TRANSFER AGENT
                    Chase Mellon Shareholder Services, L.L.C.
                       85 Challenger Road, Overpeck Center
                        Ridgefield Park, New Jersey 07660

                                    INQUIRIES
                        All other information - contact:
                       Janet M. Maloy, Corporate Secretary
                          Ramapo Financial Corporation
                           64 Mountain View Boulevard
                             Wayne, New Jersey 07470
                                 (973) 305-4102


                          MARKET AND STOCK INFORMATION
--------------------------------------------------------------------------------
Ramapo Financial  Corporation's  shares are traded on the NASDAQ National Market
tier of the NASDAQ Stock  Market  under the symbol RMPO.  The stock is quoted in
the Wall Street Journal's and other publications'  NASDAQ National Market Issues
listings.  As of December 31, 1997,  there were 1,725  stockholders of record of
the common stock.

The following table sets forth, for the calendar periods indicated, the high and
low market  quotations as reported by NASDAQ.  Cash  dividends of $.03 per share
were  declared in each  quarter of 1997.  Cash  dividends of $.02 per share were
declared in each of the third and fourth quarters of 1996.

<TABLE>
<CAPTION>
========================================================================================================================
                                      First                 Second                   Third                  Fourth
                                     Quarter                Quarter                 Quarter                 Quarter
                                 ---------------------------------------------------------------------------------------
                                  High      Low          High      Low           High      Low          High      Low
------------------------------------------------------------------------------------------------------------------------
<S>                              <C>        <C>          <C>      <C>            <C>      <C>           <C>       <C>
1997                              6 3/8     5            6 5/8    5 5/8          8 3/8    6 3/16        10        7 3/4
1996                             4 11/16    3 3/4        5 3/8    4 9/16         5 1/16   4 7/16         5 1/2    4 7/8
========================================================================================================================
</TABLE>

================================================================================
MARKET
MAKERS

FIA Capital Group Inc.

Gruntal & Co. Incorporated

Herzog, Heine, Geduld, Inc.

Legg Mason Wood Walker Inc.

Mayer & Schweitzer Inc.

McConnell Budd & Downes

M.H. Myerson & Co.

Oppenheimer & Co. Inc.

Nash Weiss/Div of Shatkin Inv.

Ryan Beck & Co. Inc.

Sandler O'Neill & Partners

SBC Warburg Inc.

Sherwood Securities Corp.

Smith Barney Inc.

Tucker Anthony Incorporated


                                       42


<PAGE>




                                     [LOGO]

                                     Ramapo
                             Financial Corporation

                             CORPORATE HEADQUARTERS
                           64 Mountain View Boulevard
                            Wayne, New Jersey 07470


                                     [LOGO]
                                      The
                                     Ramapo
                                      Bank

                                 MOUNTAIN VIEW
                           64 Mountain View Boulevard
                            Wayne, New Jersey 07470

                                     VALLEY
                                1400 Valley Road
                            Wayne, New Jersey 07470


                                   PACKANACK
                                 1445 Route 23
                            Wayne, New Jersey 07470



                                 CLIFTON/NUTLEY
                                 6 Main Avenue
                           Clifton, New Jersey 07014


                                 NORTH HALEDON
                             475 High Mountain Road
                        North Haledon, New Jersey 07508



                                     BUTLER
                            Meadtown Shopping Center
                                    Route 23
                            Butler, New Jersey 07405



                                   FAIRFIELD
                               250 Passaic Avenue
                          Fairfield, New Jersey 07004



                                   PARSIPPANY
                         120 Rt. 46 East (Baldwin Ave.)
                          Parsippany, New Jersey 07054