<PAGE>   1

                                  EXHIBIT 13

                       Annual Report to Security Holders




                                      25


<PAGE>   2
                   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
-----------------------------------------------------------------------------------------------------------------------------------
                                                                   1996         1995           1994           1993           1992
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                         (In thousands)
<S>                                                             <C>        <C>            <C>            <C>            <C>
FINANCIAL CONDITION DATA:
 Total assets .............................................     $271,524      $246,516       $238,216       $257,634       $451,311
 Cash and cash equivalents ................................       29,758        14,962         42,486         26,594         85,206
 Securities ...............................................       68,043        59,358         21,248          8,858         53,470
 Gross loans (net of unearned income) .....................      165,070       160,546        164,311        186,603        265,932
 Allowance for possible loan losses .......................        5,115         4,853          6,501          7,499          7,670
 Loans held for sale ......................................           --            34             34         19,611         28,728
 Total deposits ...........................................      239,889       217,062        211,864        241,608        425,400
 Other borrowings .........................................           --            --          1,292          5,916          8,591
 Stockholders' equity .....................................       29,036        27,249         21,755          6,576         13,779

ASSET QUALITY (1):
 Nonaccrual loans .........................................      $ 1,053      $  4,190       $  7,548       $ 21,881       $ 26,491
 Accruing loans 90 days or more delinquent ................          152           141            240          1,182          2,822
-----------------------------------------------------------------------------------------------------------------------------------
 Total nonperforming loans ................................        1,205         4,331          7,788         23,063         29,313
-----------------------------------------------------------------------------------------------------------------------------------
 Other real estate, net ...................................        2,211         4,408          9,995         10,332          5,304
-----------------------------------------------------------------------------------------------------------------------------------
   Total nonperforming assets .............................        3,416         8,739         17,783         33,395         34,617
 Restructured loans .......................................        1,540         1,702          5,983         11,035          4,662
-----------------------------------------------------------------------------------------------------------------------------------
   Total nonperforming assets and restructured loans ......      $ 4,956      $ 10,441       $ 23,766       $ 44,430       $ 39,279
-----------------------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS:
 Total interest income ....................................      $18,218      $ 18,343       $ 14,919       $ 19,263       $ 28,665
 Total interest expense ...................................        5,804         6,106          4,958          8,709         13,506
-----------------------------------------------------------------------------------------------------------------------------------
 Net interest income ......................................       12,414        12,237          9,961         10,554         15,159
-----------------------------------------------------------------------------------------------------------------------------------
 Provision for possible loan losses .......................          400           500          1,221          4,440         10,222
-----------------------------------------------------------------------------------------------------------------------------------
 Net interest income after provision
   for possible loan losses ...............................       12,014        11,737          8,740          6,114          4,937
-----------------------------------------------------------------------------------------------------------------------------------
 Other income .............................................        2,374         2,447          3,322          8,936         11,178
-----------------------------------------------------------------------------------------------------------------------------------
 Other expense ............................................       10,054        12,148         13,324         25,018         24,149
-----------------------------------------------------------------------------------------------------------------------------------
 Income (loss) before income taxes ........................        4,334         2,036         (1,262)        (9,968)        (8,034)
 Provision (benefit) for income taxes .....................        1,278        (4,212)          (285)          (996)        (2,192)
-----------------------------------------------------------------------------------------------------------------------------------
 Net income (loss) ........................................      $ 3,056      $  6,248       $   (977)      $ (8,972)      $ (5,842)
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                                                               5
<PAGE>   3
             SELECTED FIVE-YEAR FINANCIAL AND OTHER DATA (continued)

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
                                                                               AT OR FOR THE YEAR ENDED DECEMBER 31
---------------------------------------------------------------------------------------------------------------------------------
                                                                     1996         1995         1994          1993         1992
---------------------------------------------------------------------------------------------------------------------------------
<S>                                                              <C>          <C>          <C>            <C>           <C>
PER COMMON SHARE DATA:

 Net income (loss) per common share .........................      $  .37       $  .76       $ (.38)      $ (7.21)      $ (4.69)
 Book value per common share ................................        3.59         3.28         2.47          3.88         11.07
 Cash dividends declared per common share (2) ...............         .04           --           --            --          0.40

SELECTED OPERATING RATIOS:

 Return on average assets ...................................        1.23%        2.56%        (.42)%       (2.58)%       (1.32)%
 Return on average equity ...................................       11.09        27.85        (9.04)       (87.65)       (32.60) 
 Interest rate spread(3) ....................................        4.54         4.59         4.38          2.87          3.07
 Net interest margin(3) .....................................        5.41         5.41         4.84          3.51          3.99

ASSET QUALITY RATIOS (1)(4):

 Nonperforming loans as a percentage of loans, net of
  unearned income ...........................................         .73%        2.70%        4.74%        11.18 %        9.95 %
 Nonperforming assets as a percentage of total assets .......        1.26         3.55         7.47         12.96          7.67
 Nonperforming assets and restructured loans
  as a percentage of total assets ...........................        1.83         4.24         9.98         17.25          8.70
 Allowance for possible loan losses as a percentage
  of loans, net of unearned income ..........................        3.10         3.02         3.96          3.64          2.60
 Allowance for possible loan losses as a percentage
  of nonperforming loans ....................................      424.48       112.05        83.47         32.52         26.17
 Net charge-offs as a percentage of average loans,
  net of unearned income ....................................         .09         1.36         1.29          1.75          2.27
CAPITAL RATIOS (4)(5):
 Stockholders' equity to total assets .......................       10.69%       11.05%        9.13%         2.55 %        3.05 %
 Average stockholders' equity to average assets .............       11.07         9.19         4.64          2.94          4.05
 Tier 1 leverage capital ratio ..............................       10.47        10.08         9.16          2.45          3.01
 Tier 1 risk-based capital ratio ............................       14.27        13.37        12.18          2.99          4.43
 Total risk-based capital ratio .............................       15.54        14.66        13.46          5.98          8.13
---------------------------------------------------------------------------------------------------------------------------------
</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. Installment loans generally are not placed on nonaccrual status but,
     instead, are charged off at 90 days past due. Loans are considered
     restructured loans if, for economic or legal reasons, a concession has 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. In accordance with Statement of Financial
     Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for
     Impairment of a Loan", loans previously classified as in-substance
     foreclosure but for which the Corporation had not taken possession of the
     collateral have been reclassified to loans.
(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."


6
<PAGE>   4
                     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, 1996 and 1995 and results of operations for the years ended
    December 31, 1996, 1995 and 1994 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 termination of all regulatory orders and the opening of a new
branch office signaled the Corporation's full return to health in 1996. The
significant operating losses incurred in 1992 and 1993 followed an economic
recession in New Jersey which resulted in a decline in commercial and
residential real estate values in the Corporation's market. As the Corporation's
nonperforming assets increased during this period, so did provisions for
possible loan losses necessary to compensate for anticipated and actual loan
losses, write-downs of ORE and other assets and operating expenses associated
with the high level of problem assets. The Corporation also incurred significant
losses on mortgage servicing operations. The dramatic reduction in losses for
the year ended December 31, 1994 was primarily the result of an increased net
interest spread due to rising interest rates and the conversion of nonperforming
assets to performing assets, decreased provisions for possible loan losses and
the substantial elimination of losses on mortgage servicing operations. In
addition, 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 an increase in the net interest margin. During 1996,
nonperforming assets were reduced to a level considered normal for a healthy
institution, 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.

   Both the Corporation and its wholly owned subsidiary, the Bank, were released
from regulatory orders in the first quarter of 1996. The Corporation had been
operating under a Written Agreement with the Federal Reserve Bank of New York
("FRB") since November, 1993. Based on a limited scope inspection by the FRB as
of September 30, 1995 which noted the continued improvement in the Corporation's
operations, the Written Agreement was terminated in March, 1996.

   The Bank had been operating under a Memorandum of Understanding ("MOU")
issued by the Federal Deposit Insurance Corporation ("FDIC") and the New Jersey
Department of Banking ("State") in May, 1995. The MOU replaced a more onerous
order to cease and desist which had been jointly issued by the FDIC and State in
November, 1992. The MOU was terminated in March, 1996 as a result of the FDIC's
examination of the Bank as of December 31, 1995.

   Looking forward, the Corporation's strategic focus has been redirected toward
being a community bank serving Wayne, Clifton and neighboring communities in
Passaic, Morris and Essex counties. Accordingly, management is changing the mix
of the Bank's loans over time to that of a more traditional community bank by
emphasizing lending to small businesses, professionals and consumers. The
Corporation's exposure to large, individual borrower concentrations is expected
to be reduced. Management 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 is actively developing new products and is seeking new
branch sites in order to better serve its business and retail customers. The
Bank also participates in various lending programs of the Small Business
Administration ("SBA") and the New Jersey Economic Development Authority ("EDA")
and has been designated both a Certified Lender and a Preferred Lender by the
SBA.

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

   Although the Corporation's federal funds sold position increased by $11.9
million from $5.8 million at December 31, 1995 to $17.7 million at December 31,
1996, the average balance decreased from 1995 to 1996 by $11.1 million, from
$18.5 million to $7.4 million. This reduction in overnight funds occurred
because the Corporation no longer needed to maintain the high liquidity level it
deemed prudent during more difficult times. During 1995, the average balance
decreased a more modest $1.4 million from the 1994 average balance, marking the
beginning of the liquidity reduction effort. Funds provided from the reduction
were primarily invested in the securities portfolio, enabling the Corporation to
earn higher yields.

   The Corporation's securities portfolio increased $8.6 million in 1996, from
$59.4 million at December 31, 1995 to $68.0 million at December 31, 1996. Also,
in order to achieve certain asset/liability management objectives, the
Corporation changed the composition of the portfolio in 1996 from one holding
primarily fixed-rate securities to one holding approximately 50% fixed-rate and
50% floating-rate securities. In 1995, the Corporation's securities portfolio
nearly tripled in size, increasing $38.2 million from $21.2 million at December
31, 1994 to $59.4 million at December 31, 1995.

   Loans increased a modest $4.6 million in 1996, after having decreased $3.8
million in 1995. Loan paydowns coupled with management's efforts to reduce
existing loan concentrations, increased competition for business loans, and a
cautious economic environment are all factors which contributed to the lack of
significant loan growth during these two years.

   The Corporation's intangible assets were $869,000, $503,000 and $773,000 at
December 31, 1996, 1995, and 1994, respectively. 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. Normal amortization was
responsible for the 1995 decrease from 1994.

   The Corporation experienced deposit growth of $22.8 million and $5.2 million
for the years ended December 31, 1996 and 1995, respectively. The aforementioned
deposit acquisition and the opening of a new branch office late in 1996
accounted for about half of the 1996 increase. In both years, the greatest
amount of growth occurred in the demand deposit category.


                                                                               7
<PAGE>   5
                              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, in
prior years, gains on the sale of mortgage loans. As a result of the sale in
January 1994 of the mortgage-servicing portion of the Corporation's
mortgage-related activities, gains on sales of mortgage loans and servicing
income were significantly lower in 1996, 1995 and 1994 than in prior years and
management anticipates that income from those sources will continue to be lower
in future periods. 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.

   In recent periods, the level of the Corporation's nonperforming assets has
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 reduced to $8.7 million and $3.4 million at December 31, 1995
and 1996, respectively. The $3.4 million represents just 1.26% of total assets.
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, $2.2 million and $2.7 million for the years
ended December 31, 1996, 1995, 1994 and 1993, respectively, while the provision
for possible loan losses was $400,000, $500,000, $1.2 million and $4.4 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.

   Because of the small number of ORE properties remaining, management is
confident that ORE-related expenses will be significantly reduced in 1997 and
future years. Management also anticipates that future provisions for possible
loan losses will not be greater than those taken in 1996 and 1995, barring
unforeseen economic events.

-----------------------------------------------------
$ MILLIONS

20             17.8

15

10                            8.7

 5

 0                                           3.4
-----------------------------------------------------
               12/31/94       12/31/95       12/31/96

                  NONPERFORMING ASSETS

   NET INCOME. The Corporation had net income of $3.1 million for the year ended
December 31, 1996 compared to net income of $6.2 million for the year ended
December 31, 1995. Because 1995 net income included a $4.2 million tax benefit
due to the reversal of a valuation allowance against the Corporation's net
deferred tax asset, a comparison of net income before taxes is more indicative
of the progress the Corporation has made. On that basis, the Corporation earned
$4.3 million in 1996 versus $2.0 million in 1995, a $2.3 million (112.9%)
increase. The principal reason for this improvement 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 FDIC insurance assessment due to the Bank's being placed in the lowest risk
capital category for assessment purposes by the FDIC. The improvement in net
income before taxes began in 1995, when the Corporation earned $3.3 million more
than in 1994. Most of that improvement was due to a $2.3 million increase in net
interest and dividend income, with a $721,000 reduction in the provision for
possible loan losses making up the bulk of the remainder.

-------------------------------------------------------
$ MILLIONS
 5.0
 4.0                                         4.3
 3.0
 2.0                          2.0
 1.0
   0
(1.0)         (1.3)
(2.0)
-------------------------------------------------------
               1994           1995           1996

             NET INCOME (LOSS) BEFORE TAXES


   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 $183,000
from $12.3 million for the year ended December 31, 1995 to $12.5 million for the
year ended December 31, 1996. The increase is due to 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 drop 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 drop in the yield on
earning assets which exceeded the 12 basis point decline in the cost of
interest-bearing liabilities. In 1995, net interest income on a tax-equivalent
basis increased $2.3 million over 1994. About $1.3 million of the increase is
due to a 21 basis point rise in the net interest spread, while the remainder is
the result of a $20.0 million increase in average earning assets when comparing
1995 to 1994. Most of the net interest spread increase is due to an increase in
the Corporation's average base lending rate, which rose from 7.57% in 1994 to
8.83% in 1995. The rise in average earning assets during 1995 compared to 1994
is primarily the result of an $11.6 million increase in average stockholders'
equity due to the Offering in October 1994 and a $9.8 million decrease in
average other assets, principally ORE.


8
<PAGE>   6
                       RESULTS OF OPERATIONS (continued)


   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.

                                                                               9
<PAGE>   7
                        RESULTS OF OPERATIONS (continued)

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
                                                                           YEAR ENDED DECEMBER 31
-----------------------------------------------------------------------------------------------------------------------------------
                                                      1996                         1995                          1994
-----------------------------------------------------------------------------------------------------------------------------------
                                                                 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......  $    923    $    56     6.07%     $    181   $    11    6.08%   $     --  $    --     --%
  Securities:
   Taxable.............................    60,467      3,693     6.11        49,433     3,150    6.37      14,249      766   5.38
   Nontaxable (tax-equivalent basis)...     1,197        120     9.86           914       103   11.27       1,094      115  10.51
  Federal funds sold...................     7,354        397     5.40        18,470     1,093    5.92      19,937      878   4.40
  Loans (net of unearned income) (1):
   Commercial and commercial
    real estate (2)....................   112,124      9,781     8.72       112,228     9,772    8.71     125,094    9,252   7.40
   Residential real estate (3).........     8,152        702     8.61         9,349       768    8.21      12,822    1,018   7.94
   Installment.........................    39,849      3,510     8.81        36,138     3,481    9.63      33,479    2,929   8.75
-----------------------------------------------------------------------------------------------------------------------------------
    Total loans........................   160,125     13,993     8.74       157,715    14,021    8.89     171,395   13,199   7.70
-----------------------------------------------------------------------------------------------------------------------------------
    Total interest-earning assets......   230,066     18,259     7.94       226,713    18,378    8.11     206,675   14,958   7.24
-----------------------------------------------------------------------------------------------------------------------------------
 Nonearning assets:
  Cash and due from banks..............    10,157                             9,197                         9,392
  Other assets.........................    13,996                            13,829                        23,591
  Allowance for possible loan losses...    (5,345)                           (5,476)                       (6,594)
-----------------------------------------------------------------------------------------------------------------------------------
   Total nonearning assets.............    18,808                            17,550                        26,389
-----------------------------------------------------------------------------------------------------------------------------------
      Total assets.....................  $248,874                          $244,263                      $233,064
===================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY:
 Interest-bearing liabilities:
  Interest-bearing demand deposits.....  $ 27,388    $   335     1.22%     $ 23,669   $   364    1.54%   $ 23,361  $   444   1.90%
  Savings deposits.....................    74,549      2,032     2.73        76,032     1,924    2.53      90,574    2,160   2.38
  Time deposits........................    68,608      3,435     5.01        73,558     3,806    5.17      55,664    1,997   3.59
-----------------------------------------------------------------------------------------------------------------------------------
   Total interest-bearing deposits.....   170,545      5,802     3.40       173,259     6,094    3.52     169,599    4,601   2.71
  Other borrowings.....................        35          2     5.64           106        12   11.32       3,720      357   9.60
-----------------------------------------------------------------------------------------------------------------------------------
   Total interest-bearing liabilities..   170,580      5,804     3.40       173,365     6,106    3.52     173,319    4,958   2.86
-----------------------------------------------------------------------------------------------------------------------------------
 Noninterest-bearing liabilities:
  Demand deposits......................    48,048                            46,100                        46,230
  Other liabilities....................     2,695                             2,361                         2,712
-----------------------------------------------------------------------------------------------------------------------------------
   Total noninterest-bearing 
   liabilities.........................    50,743                            48,461                        48,942
 Stockholders' equity..................    27,551                            22,437                        10,803
-----------------------------------------------------------------------------------------------------------------------------------
   Total liabilities and stockholders'
    equity.............................  $248,874                          $244,263                      $233,064
===================================================================================================================================
Net interest income
 (tax-equivalent basis) ...............               12,455                           12,272                       10,000
Tax-equivalent adjustment..............                  (41)                             (35)                         (39)
-----------------------------------------------------------------------------------------------------------------------------------
 Net interest income...................              $12,414                          $12,237                      $ 9,961
===================================================================================================================================
Net interest spread
 (tax-equivalent basis) ...............                          4.54%                           4.59%                       4.38%
===================================================================================================================================
Net interest margin
 (tax-equivalent basis) ...............                          5.41%                           5.41%                       4.84%
===================================================================================================================================
Ratio of average interest-earning 
 assets to average interest-bearing 
 liabilities...........................    134.87%                           130.77%                       119.25%
===================================================================================================================================

</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.


10
<PAGE>   8
                        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

                                                                 1996 VS. 1995                                  1995 VS. 1994
-----------------------------------------------------------------------------------------------------------------------------------
                                                              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.............       $  45           $ --           $  45            $     6       $    5    $    11
  Loans (includes loans held for sale).......         212            (240)           (28)            (1,109)       1,931        822
  Securities:

   Taxable...................................         677            (134)           543              2,218          165      2,383
   Nontaxable ...............................          32             (15)            17                (20)           9        (11)
  Federal funds sold ........................        (607)            (89)          (696)               (69)         284        215
-----------------------------------------------------------------------------------------------------------------------------------
   Total interest income.....................         359            (478)          (119)             1,026        2,394      3,420
-----------------------------------------------------------------------------------------------------------------------------------

Interest expense:
  Savings deposits and interest-bearing
   demand deposits...........................          14              65             79               (359)          43       (316)
  Time deposits .............................        (254)           (117)          (371)               764        1,045      1,809
  Other borrowings...........................          (5)             (5)           (10)              (399)          54       (345)
-----------------------------------------------------------------------------------------------------------------------------------
   Total interest expense ...................        (245)            (57)          (302)                 6        1,142      1,148
-----------------------------------------------------------------------------------------------------------------------------------
  Changes in net interest income.............       $ 604           $(421)         $ 183            $ 1,020       $1,252    $ 2,272
===================================================================================================================================
</TABLE>

   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. As the chart above
illustrates, 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. De-emphasis of 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 $667,000 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.

   Total interest income on a tax-equivalent basis increased by $3.4 million
(22.9%), from $15.0 million for the year ended December 31, 1994 to $18.4
million for the year ended December 31, 1995. Almost $2.4 million of this
increase is due to an 87 basis point rise in the average earning asset yield
during 1995, which was primarily due to an increase in the Corporation's average
base lending rate from 7.57% in 1994 to 8.83% in 1995. The balance of the
increase in total interest and dividend income was due to a $20.0 million (9.7%)
increase in average earning assets, principally taxable securities.

   Interest on loans increased $822,000 (6.2%) for the year ended December 31,
1995 as compared to the year ended December 31, 1994. This increase was mainly
due to a 119 basis point increase in the average loan yield from 7.70% in 1994
to 8.89% in 1995. The aforementioned rise in the Corporation's average base
lending rate, which reflected the rise in prevailing interest rates during 1995,
is the chief cause of the yield increase. Offsetting the yield increase to some
extent was a drop in average loans outstanding of $13.7 million (8.0%) between
the periods. The bulk of the decrease in average loans outstanding was in the
commercial loan category, where new loans did not keep pace with loan paydowns
and charge-offs.

   Interest on taxable securities increased by $2.4 million (311.1%), and
interest on nontaxable securities decreased $14,000 (12.2%) on a tax-equivalent
basis for the year ended December 31, 1995 as compared to the year ended
December 31, 1994. Over $2.2 million of the increase was caused by an increase
in the average balance of taxable securities from $14.2 million in 1994 to $49.4
million in 1995. The Corporation utilized funds obtained from ORE sales, loan
paydowns and the Offering, along with a small increase in average deposits, to


                                                                              11
<PAGE>   9
                       RESULTS OF OPERATIONS (continued)


make the securities purchases. The decrease in interest on nontaxable securities
was entirely the result of a decrease in the average balance of such securities
caused by maturities.

   Interest on federal funds sold increased by $215,000 (24.5%) for the year
ended December 31, 1995 as compared to the year ended December 31, 1994. This
increase was entirely due to an increase in the average yield from 4.40% in 1994
to 5.92% in 1995. The rise in yield parallels the rise in average short-term
interest rates that occurred in 1995 as compared to 1994.

   INTEREST EXPENSE. 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 six-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. Management believes
that savings deposits will be harder to attract in future years because the
spreads between rates paid on savings and those offered by alternative
investments have widened significantly recently. Despite a rate decrease in the
interest-bearing demand category, efforts to attract new deposits proved
successful.

   Total interest expense increased $1.1 million (23.2%), from $5.0 million for
the year ended December 31, 1994 to $6.1 million for the year ended December 31,
1995. Since the average balance of total interest-bearing liabilities remained
about the same in 1995 as it was in 1994, the increase in interest expense was
almost entirely due to a rise in average rates paid. Over 90% of the increase
due to rate was in the time deposit category, where average rates paid increased
from 3.59% in 1994 to 5.17% in 1995. The vast majority of time deposits have
original maturities of one year or less and the rates paid on them in 1995
reflect the higher short-term rates that prevailed in 1995 versus 1994. In
addition, the aforementioned 7% certificate adversely affected the average time
deposit rate paid in 1995. Although the average balance of interest-bearing
deposits increased slightly in 1995 versus 1994, there was a marked shift from
lower cost savings deposits to higher-cost time deposits. Average savings
deposits decreased $14.5 million (16.1%) in 1995 as compared to 1994, while
average time deposits increased $17.9 million (32.1%) during the same period.

   The Corporation incurred interest expense on its other borrowings of $2,000,
$12,000, and $357,000 during the years ended December 31, 1996, 1995, 1994,
respectively, which consisted of interest on federal funds purchased in 1996 and
interest on subordinated debentures in 1995 and 1994. The remaining $1.3 million
of subordinated debentures were redeemed during the first quarter of 1995. See
Note 11 of Notes to Consolidated Financial Statements.

   PROVISION FOR POSSIBLE LOAN LOSSES. The provision for possible loan losses
was $400,000, $500,000 and $1.2 million for the years ended December 31, 1996,
1995 and 1994, respectively. The much reduced provisions for possible loan
losses in 1996 and 1995 reflect the overall increase in loan quality, the
continued reduction of nonperforming assets and the further reduction of loan
concentrations. Also, net charge-offs of $138,000, $2.1 million and $2.2 million
for the years ended December 31, 1996, 1995 and 1994, respectively were
dramatically lower than the $4.2 million and $7.0 million recorded in 1993 and
1992, respectively. Management has been successful in recovering $803,000 and
$1.5 million in 1996 and 1995 respectively, of loans previously charged-off and
is hopeful that continued efforts will produce similar results in the future.
The decline in charge-offs was due to a stabilizing commercial real estate
market in northern New Jersey and a decrease in the Corporation's nonperforming
loans. Commercial real estate loans and real estate construction loans made up a
significant portion of the loans outstanding during the last three fiscal years.
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 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 income fell $875,000 (26.3%) to $2.4 million for the year ended
December 31, 1995 from $3.3 million for the year ended December 31, 1994. The
decline was primarily due to a drop in mortgage related income of $330,000, a
reduction of $164,000 of SBA loan fees recognized, and the recognition in 1994
of $270,000 concerning premiums previously held in a trust from the sale of the
mortgage servicing operation. The 1994 amount also contains $170,000 of income
recognized as part of a comprehensive restructure of loans to a group of
affiliated borrowers, an event not repeated in 1995. Countering these declines
to some extent was a $127,000 (9.1%) increase in service charges on deposit
accounts.

   OTHER EXPENSE. 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. Management expects that future
valuation adjustments and direct operating expenses related to ORE will be
substantially less than they were in 1996. 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 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.

   Other expense showed a $1.2 million (8.8%) decrease in 1995, declining from
$13.3 million for the year ended December 31, 1994 to $12.1 million for for the
year ended December 31, 1995. With the exception of total ORE-related expenses
which increased $603,000 in 1995, all major categories of other expense
decreased from 1994 amounts. Salaries and employee benefits decreased $467,000,
or 9.3%, largely due to a decrease in health insurance benefits of $368,000.
Commissions were also down $76,000 for 1995 as compared to 1994. Occupancy
expense decreased $62,000 and equipment expense decreased $55,000 for the year
ended December 31, 1995 as


12
<PAGE>   10
                       RESULTS OF OPERATIONS (continued)


compared to the year ended December 31, 1994. These decreases reflect the
widespread expense controls that were instituted during 1994. Other expense
declined $1.2 million in 1995 as compared to 1994, with significant reductions
in legal fees, FDIC assessments, bonding and insurance premiums and nonloan
losses. The aforementioned increase in ORE-related expenses was due to an
increase in valuation adjustments of $987,000 to reflect current market values
less costs to sell of the remaining ORE properties. Direct net costs of
operating these properties fell by $384,000 in 1995.

<TABLE>
<CAPTION>

                                    [GRAPH]

-------------------------------------------------------
$ MILLIONS
              1994           1995           1996
<S>            <C>           <C>             <C>
15
12             13.3
 9                            12.1
 6
 3                                           10.1
 0
-------------------------------------------------------
</TABLE>
                          OTHER EXPENSES

   INCOME TAXES. The Corporation had an income tax provision of $1.3 million for
the year ended December 31, 1996 and income tax benefits of $4.2 million and
$285,000 for the years ended December 31, 1995 and 1994, respectively. 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. The 1994 benefit was the result of receiving a tax
refund greater than that anticipated at December 31, 1993.

   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, 1996, the Corporation has a state net operating loss
carryforward of $3.7 million which expires as follows: $2.2 in 2000 and $1.5 in
2001.

   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.


                           ASSET/LIABILITY MANAGEMENT

    The principal determinant of the exposure of the Corporation's earnings to
interest rate risk is the timing difference between the repricing or maturity of
the Corporation's interest-earning assets and the repricing or maturity of its
interest-bearing liabilities. The Corporation has established an Asset/Liability
Management Committee which is comprised of the Bank's Chairman of the Board,
President, four Senior Vice Presidents, and three outside directors. 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 matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific period if it
will mature or reprice within that period. The interest rate sensitivity gap is
defined as the difference between the amount of interest-earning assets maturing
or repricing within a specific time period and the amount of interest-bearing
liabilities maturing or repricing within that time period. A gap is considered
positive when the amount of interest rate sensitive assets exceeds the amount of
interest rate sensitive liabilities, and is considered negative when the amount
of interest rate sensitive liabilities exceeds the amount of interest rate
sensitive assets. Generally, during a period of rising interest rates, a
negative gap would adversely affect net interest income while a positive gap
would result in an increase in net interest income, while conversely during a
period of falling interest rates, a negative gap would result in an increase in
net interest income and a positive gap would adversely affect net interest
income.


                                                                              13
<PAGE>   11
                     ASSET/LIABILITY MANAGEMENT (continued)

   The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1996 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) ......................     $50,060      $ 27,619      $ 15,615       $47,974      $18,687      $    --     $159,955
 Securities and interest-bearing
    time deposit......................         --         32,427         8,407        27,608          601           --       69,043
 Federal funds sold ..................      17,680           --            --            --           --            --       17,680
 Cash and other assets................         --            --            --            --           --         24,846      24,846
-----------------------------------------------------------------------------------------------------------------------------------
  Total assets........................     $67,740      $ 60,046      $ 24,022       $75,582      $19,288      $ 24,846    $271,524
===================================================================================================================================

LIABILITIES AND STOCKHOLDERS' EQUITY:
 Demand deposits .....................     $   --       $ 31,846      $    --        $   --       $   --       $ 58,421    $ 90,267
 Savings and time deposits (2) .......         --        101,815        36,356        11,419           32           --      149,622
 Other liabilities ...................         --            --            --            --           --          2,599       2,599
 Stockholders' equity ................         --            --            --            --           --         29,036      29,036
-----------------------------------------------------------------------------------------------------------------------------------
  Total liabilities and stockholders'
   equity ............................     $   --       $133,661      $ 36,356       $11,419      $    32      $ 90,056    $271,524
===================================================================================================================================

Interest rate-sensitive gap...........     $67,740      $(73,615)     $(12,334)      $64,163      $19,256      $(65,210)
Interest rate-sensitive gap as a
 percentage of total assets ..........        24.9%        (27.1)%        (4.5)%        23.6%         7.1%        (24.0)%
Cumulative interest rate-
 sensitive gap .......................     $67,740      $ (5,875)     $(18,209)      $45,954      $65,210
Cumulative interest rate-
 sensitive gap as a percentage
  of total assets ....................        24.9%         (2.2)%        (6.7)%        16.9%        24.0%
===================================================================================================================================
</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. 

   Certain shortcomings are inherent in the method of analysis presented in the
above table. Although certain assets and liabilities may have similar maturities
or periods of repricing, they may react in different degrees to changes in
market interest rates. The interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types of assets and liabilities may lag behind changes
in market interest rates. In the event of a change in interest rates, prepayment
and early withdrawal levels could significantly change the gaps calculated in
the above table. The ability of borrowers to service their debts may decrease in
the event of an interest rate increase. Management considers these factors in
its asset/liability software model, which is used to simulate expected and
unexpected shifts in interest rates and their effect on net interest income.


                                  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. Installment loans generally are not placed on
nonaccrual status but, instead, are charged off at 90 days past due. Loans are
considered restructured loans if, for economic or legal reasons, a concession
has been granted to the borrower related to the borrower's financial
difficulties that the creditor would not otherwise consider. The Corporation has
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.


14
<PAGE>   12
                            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
-----------------------------------------------------------------------------------------------------------------------------------
                                                                      1996          1995           1994           1993         1992
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                               (In thousands)
<S>                                                                  <C>          <C>            <C>            <C>         <C>
Delinquent loans 30 - 89 days past due...........................    $1,023        $ 3,644       $ 4,725        $ 2,303     $ 9,303
===================================================================================================================================
Nonaccrual loans:
 Commercial and commercial real estate...........................    $  866        $ 3,459       $ 6,617        $21,472     $25,343
 Residential real estate mortgage................................       104            375           509            360         634
 Installment.....................................................        63            356           422             49         514
-----------------------------------------------------------------------------------------------------------------------------------
  Total nonaccrual loans.........................................     1,053          4,190         7,548         21,881      26,491
-----------------------------------------------------------------------------------------------------------------------------------
Loans past due 90 days or more:
 Commercial and commercial real estate...........................        46             37            20            585       1,989
 Residential real estate mortgage................................        61             53           216            380         731
 Installment.....................................................        45             51             4            217         102
-----------------------------------------------------------------------------------------------------------------------------------
  Total loans past due 90 days or more ..........................       152            141           240          1,182       2,822
-----------------------------------------------------------------------------------------------------------------------------------
  Total nonperforming loans......................................    $1,205        $ 4,331       $ 7,788        $23,063     $29,313
===================================================================================================================================
ORE, net (1) ....................................................    $2,211        $ 4,408       $ 9,995        $10,332     $ 5,304
===================================================================================================================================
Total nonperforming assets.......................................    $3,416        $ 8,739       $17,783        $33,395     $34,617
===================================================================================================================================
Restructured loans...............................................    $1,540        $ 1,702       $ 5,983        $11,035     $ 4,662
===================================================================================================================================
  Total nonperforming assets and restructured loans .............    $4,956        $10,441       $23,766        $44,430     $39,279
===================================================================================================================================
</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, 1996, gross interest income of $349,000
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 $18,000. Gross interest income of $260,000
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 $243,000.

   The Corporation reduced its nonperforming assets from $8.7 million at
December 31, 1995 to $3.4 million at December 31, 1996, a $5.3 million (60.9%)
improvement. This reduction was achieved by $2.2 million in ORE sales, the
receipt of $2.2 million in principal payments, $3.0 million in charge-offs and
valuation adjustments, the return to accruing status of $1.6 million of
nonaccrual loans, offset in part by new nonaccrual loans and ORE of $1.3
million, a net increase of $416,000 in loans past due 90 days or more, and a
decrease in the valuation allowance for ORE of $2.0 million. The four loans that
comprised the restructured category at December 31, 1995 all demonstrated
performance at market rates and thus were transferred to performing status
during 1996, while one commercial real estate loan of $1.5 million that had been
on nonaccrual status was restructured.

   The dramatic reduction in nonperforming assets from $34.6 million at December
31, 1992 to $3.4 million at December 31, 1996 was primarily due to the $18.9
million in charge-offs taken in that period, as well as to management's
long-term efforts to work with its borrowers to maximize recoveries.

   Although 1996 marked the Corporation's second consecutive year of
profitability, nonperforming asset levels and related expenses caused a
significant reduction in earnings. Management is committed to reducing
nonperforming assets and related expenses to insignificant levels through
diligent loan remediation efforts and the institution of 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, 1996:

<TABLE>
<CAPTION>
====================================================================================================
                                                                        LOANS 90 DAYS     NONACCRUAL
                                                                      OR MORE PAST DUE       LOANS
----------------------------------------------------------------------------------------------------
                                                                                (In thousands)

<S>                                                                      <C>                <C>
Commercial real estate - Retail/office................................      $ --             $  504
One-to four-family residential real estate............................        61                324
Commercial and industrial.............................................        46                162
Installment...........................................................        45                 63
----------------------------------------------------------------------------------------------------
  Total...............................................................      $152             $1,053
====================================================================================================
</TABLE>

                                                                              15
<PAGE>   13
                            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, 1996, 1995
and 1994, the Corporation's restructured loans totalled $1.5 million, $1.7
million and $6.0 million, respectively. At December 31, 1996, the balance
consisted of one commercial real estate loan that had been on nonaccrual status.
At this time, management believes that the commercial real estate loan that was
classified as restructured at December 31, 1996 will not meet the criteria for
transfer to accrual status in 1997.

   In order for a restructured loan to be removed from classification as a
restructured loan, the following criteria must be satisfied: (i) the borrower
must generally have been current in meeting the restructured terms for at least
six consecutive months or until the end of the year next following the date of
restructure, whichever is later, (ii) the restructured loan must provide for
principal amortization, (iii) the restructured loan must have an interest rate
and other features that are at least equivalent to market terms and (iv)
principal and interest amounts contractually due, including arrearages, are
reasonably assured of repayment within a reasonable period of time. Inevitably,
not all restructured loans will be viable as restructured, and it may be
necessary for the Corporation to make further concessions or to liquidate the
asset at a further discount, which may require a further write-down. The
Corporation transferred all $1.7 million in loans that were classified as
restructured at December 31, 1995 to accrual status in 1996.

   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.

   The following table sets forth the types of properties which comprised the
Corporation's ORE portfolio at December 31, 1996:

<TABLE>
<CAPTION>
=================================================================
                                                    (In thousands)
<S>                                                  <C>
Commercial real estate:
  Raw land and construction projects...............        $1,764
  Retail/office....................................         1,000
-----------------------------------------------------------------
  Total commercial real estate.....................         2,764
-----------------------------------------------------------------
  Valuation allowance..............................           553
-----------------------------------------------------------------
Total..............................................        $2,211
=================================================================
</TABLE>

   Management believes that the net carrying value of ORE at December 31, 1996
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 $606,000 at December 31,
1996. These loans consisted of three residential real estate mortgage loans with
an aggregate principal balance of $393,000 and seventeen installment loans with
an aggregate principal balance of $213,000.

   ASSET CONCENTRATIONS. The Corporation's loan portfolio contains certain
concentrations of related borrowers. At December 31, 1996, the combined three
largest concentrations totalled $32.6 million, or 19.8% 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 12 loans with an aggregate balance of $15.2 million. The second
relationship consisted of 15 loans totalling $10.2 million. The third
relationship consisted of eight loans totalling $7.2 million. At December 31,
1996, all loans within these concentrations, including adversely classified
loans, were performing in accordance with their terms, and management believes
that all of these loans were properly valued on the Corporation's books.

   At December 31, 1996 and 1995, commercial real estate mortgage and
construction loans totalled $102.4 million and $97.5 million and represented
62.0% 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, 1996, 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 ..........................    $53,438           $43,516           $8,865         $105,819
Commercial real estate construction ............................      9,641             1,308              --            10,949
-------------------------------------------------------------------------------------------------------------------------------
    Total ......................................................    $63,079           $44,824           $8,865         $116,768
===============================================================================================================================
Loans with predetermined interest rates ........................    $ 9,657           $44,824           $8,865         $ 63,346
Loans with floating interest rates .............................     53,422               --               --            53,422
-------------------------------------------------------------------------------------------------------------------------------
    Total ......................................................    $63,079           $44,824           $8,865         $116,768
===============================================================================================================================
</TABLE>



16
<PAGE>   14
                            ASSET QUALITY (continued)


   ALLOWANCE FOR POSSIBLE LOAN LOSSES. The allowance for possible loan losses is
determined by management based upon their 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, 1996 of $5.1 million, or
424.5% 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
------------------------------------------------------------------------------------------------------------------------------
                                                                           1996       1995       1994       1993         1992
------------------------------------------------------------------------------------------------------------------------------
                                                                                      (Dollars in thousands)
<S>                                                                     <C>        <C>         <C>        <C>         <C>
Loans, net of unearned income (at end of period) (1) .............      $165,070   $160,580    $164,345   $206,214    $294,660
==============================================================================================================================
Average loans outstanding (2) ....................................      $160,125   $157,715    $171,395   $240,651    $310,665
==============================================================================================================================
Allowance balance (at beginning of year) .........................      $  4,853   $  6,501    $  7,499   $  7,670    $  4,489
 Loans charged off:
  Commercial and commercial real estate (3) ......................           824      3,640       2,265      4,011       6,588
  Residential real estate mortgage ...............................            18          3          49         22          20
  Installment ....................................................            99         51         182        518         645
------------------------------------------------------------------------------------------------------------------------------
   Total loans charged off .......................................           941      3,694       2,496      4,551       7,253
------------------------------------------------------------------------------------------------------------------------------
  Recoveries of loans:
   Commercial and commercial real estate, net (3) ................           783      1,511         253        275         188
   Real estate - mortgage ........................................             2          6          --          4          --
   Installment ...................................................            18         29          24         61          24
------------------------------------------------------------------------------------------------------------------------------
    Total recoveries .............................................           803      1,546         277        340         212
------------------------------------------------------------------------------------------------------------------------------
Net loans charged off ............................................           138      2,148       2,219      4,211       7,041
Provision for the period .........................................           400        500       1,221      4,440      10,222
Allowance related to loans sold ..................................            --         --          --       (400)         --
------------------------------------------------------------------------------------------------------------------------------
Allowance balance (at end of year) ...............................      $  5,115   $  4,853    $  6,501   $  7,499    $  7,670
==============================================================================================================================
Allowance for possible loan losses as a percentage of total
 outstanding loans (at end of year) ..............................          3.10%      3.02%       3.96%      3.64%       2.60%
Allowance for possible loan losses as a percentage of
 nonperforming loans (at end of year) ............................        424.48%    112.05%      83.47%     32.52%      26.17%
Net loans charged off as a percentage of average loans outstanding           .09%      1.36%       1.29%      1.75%       2.27%
==============================================================================================================================
</TABLE>


(1)  Includes loans held for sale of $0, $34,000, $34,000, $19.6 million and
     $28.7 million at December 31, 1996, 1995, 1994, 1993 and 1992,
     respectively.

(2)  Includes average loans held for sale of $32,000, $70,000, $2.6 million,
     $20.5 million, and $24.4 million at December 31, 1996, 1995, 1994, 1993 and
     1992, respectively.

(3)  Includes commercial real estate construction loans. 

   The Corporation made provisions for possible loan losses during the years
ended December 31, 1996, 1995 and 1994 of $400,000, $500,000 and $1.2 million,
respectively, in order to address the uncertainty inherent in the loan
portfolio. Beginning in 1992, as the Corporation intensified its review and
administration of problem assets, management was better able to quantify the
risks in the loan portfolio, and as a result, 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 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
--------------------------------------------------------------------------------------------------
                                                                   1996         1995         1994
--------------------------------------------------------------------------------------------------
                                                                          (In thousands)
<S>                                                              <C>          <C>           <C>
Balance at beginning of year ..............................      $ 2,611       $1,634       $  885
 Provision charged to expense .............................          780        1,850          863
 Write-downs to fair value and net losses incurred on sales       (2,838)        (873)         (64)
 Other ....................................................           --           --          (50)
--------------------------------------------------------------------------------------------------
Balance at end of year ....................................      $   553       $2,611       $1,634
==================================================================================================
</TABLE>



                                                                              17
<PAGE>   15
                            ASSET QUALITY (continued)


   Through intensive management effort, gross ORE balances have declined from
$11.6 million at December 31, 1994 to $2.8 million at December 31, 1996. The
latter total is comprised of six properties, the largest of which is valued at
$1.4 million. Management believes that future annual provisions to the valuation
allowances for ORE should be lower than the 1996 provision.

   The FDIC and the State, 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, 1996, securities having a book value of $6.5 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
------------------------------------------------------------------------------------------------------------------------         
                                                               1996                   1995                  1994
------------------------------------------------------------------------------------------------------------------------         
                                                                                    (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%    $16,669       93.8%
  U.S. Government Agencies ......................       34,622       83.2      27,746       70.6          --       --
  Obligations of State and Political Subdivisions          851        2.0         883        2.2         934        5.3
  Other .........................................        6,175       14.8       6,167       15.7         160         .9
------------------------------------------------------------------------------------------------------------------------         
                                                       $41,648      100.0%    $39,328      100.0%    $17,763      100.0%
========================================================================================================================        
Held to maturity:
  U.S. Treasury .................................      $ 7,516       28.5%    $    --        -- %    $   993       28.5%
  U.S. Government Agencies ......................       17,542       66.5      19,530       97.5       1,992       57.2
  Obligations of State and Political Subdivisions        1,337        5.0         500        2.5         500       14.3
------------------------------------------------------------------------------------------------------------------------        
                                                       $26,395      100.0%    $20,030      100.0%    $ 3,485      100.0%
========================================================================================================================        
</TABLE>

   The Corporation's securities increased from $21.2 million at December 31,
1994, to $59.4 million at December 31, 1995, and to $68.0 million at December
31, 1996. The $8.6 million increase in securities during the year ended December
31, 1996 was due to the Corporation's investing the deposits acquired from
another commercial bank and loan paydown proceeds. The $38.2 million increase in
securities during the year ended December 31, 1995 was due to the Corporation's
investing excess federal funds sold as the need for such a high liquidity
position diminished.

   Overall, the Corporation's securities portfolio is high grade. The U.S.
Treasury and U.S. Government Agencies securities which comprise 87.7% of the
portfolio at December 31, 1996, carry the highest rating available by
Moody's-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 general credit rating of the municipality
or political subdivisions must be A rated. At December 31, 1996, the weighted
average maturity of all owned securities is 29.2 months, including a county
industrial development loan having a book value of $851,000 and a maturity in
2008. Also, $8.9 million and $8.0 million of securities classified as available
for sale and held to maturity, respectively, at December 31, 1996, 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 determined the appropriate classification of debt securities at the
time of purchase. During 1996 and 1995, the Corporation classified certain
purchased securities as held to maturity. At December 31, 1996, 1995 and 1994,
the Corporation had no securities held for trading purposes. See Notes 1 and 2
of Notes to Consolidated Financial Statements.

18
<PAGE>   16
                            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 31,1996:

<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..   $4,531(1)      5.56%    $30,091(2)     5.68%     $ --         --%      $ --          --%
  Obligations of State and
      Political Subdivisions       47        11.36         226       11.36       395      11.36        183       11.36
  Other ....................       --           --       6,152(3)     5.74        23       5.50         --          --
----------------------------------------------------------------------------------------------------------------------
  Total Securities .........   $4,578         5.62%    $36,469        5.73%     $418      11.04%      $183       11.36%

Held to Maturity:
  U.S. Treasury ............   $   --           --%    $ 7,516        5.80%     $ --         --%      $ --          --%
  U.S. Government Agencies..    5,815(4)      7.09      11,727        6.19        --         --         --          --
  Obligations of State and
      Political Subdivisions      162         5.40       1,175        6.62        --         --         --          --
----------------------------------------------------------------------------------------------------------------------
  Total Securities .........   $5,977         7.04%    $20,418        6.07%     $ --         --%      $ --          --%
======================================================================================================================
</TABLE>

<TABLE>
<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..    $34,622         $34,622          5.67%
  Obligations of State and
      Political Subdivisions        851             851         11.36
  Other ....................      6,175           6,175          5.74
---------------------------------------------------------------------
  Total Securities .........    $41,648         $41,648          5.79%
=====================================================================
Held to Maturity:
  U.S. Treasury ............    $ 7,516         $ 7,426          5.80%
  U.S. Government Agencies..     17,542          17,575          6.49
  Obligations of State and
      Political Subdivisions      1,337           1,338          6.47
---------------------------------------------------------------------
  Total Securities .........    $26,395         $26,339          6.29%
=====================================================================
</TABLE>


(1)Includes $4,531,000 of securities with floating rates. (2) Includes
$23,139,000 of securities with floating rates. (3) Includes $6,142,000 of
securities with floating rates. (4) Includes $495,000 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 credit requirements, 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 is 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
-------------------------------------------------------------------------------------------------------------  
                                                        1996               1995                    1994
-------------------------------------------------------------------------------------------------------------  
                                                 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 .................    $ 48,048      --%  $  46,100      --%     $ 46,230        --%
Interest-bearing demand ....................      27,388    1.22      23,669    1.54        23,361      1.90
Savings ....................................      74,549    2.73      76,032    2.53        90,574      2.38
Time .......................................      68,608    5.01      73,558    5.17        55,664      3.59
-------------------------------------------------------------------------------------------------------------  
                                                $218,593    2.65%   $219,359    2.78%     $215,829      2.13%
=============================================================================================================  
</TABLE>

   The Corporation does not rely heavily on certificates of deposit over
$100,000 as a source of funds. During 1996, certificates of deposit of $100,000
or more averaged only 1.7% 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,
1996:

<TABLE>
<CAPTION>
====================================================================================
                                                             CERTIFICATES OF DEPOSIT
------------------------------------------------------------------------------------
                                                                (in thousands)
<S>                                                          <C>
Maturity period:
   Three months or less ................................            $2,104
   Over three through twelve months ....................             2,023
   Over twelve months ..................................               338
--------------------------------------------------------------------------
      Total ............................................            $4,465
==========================================================================
</TABLE>

   In addition to deposits, at December 31,1996, the Corporation's liabilities
included $2.6 million in accrued and other liabilities. The Corporation had an
immaterial amount of federal funds purchased during 1996 and no federal funds
purchased during the years ended December 31, 1995 and 1994.

                                                                              19
<PAGE>   17
                   LIQUIDITY AND CAPITAL RESOURCES (continued)

   At December 31, 1996, the total approved loan commitments outstanding
amounted to $31.2 million and commitments under standby letters of credit
amounted to $825,000. 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, 1996 are limited to liquid assets on hand which
include cash and due from banks and interest-bearing time deposits, and
dividends from subsidiary Bank.

   The parent company's cash obligations subsequent to December 31, 1996
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
each 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,
1996, that the Corporation and Bank meet all capital adequacy requirements to
which they are subject.

   As of December 31, 1996, 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>
===================================================================
                                                        ACTUAL
                                                  AMOUNT      RATIO
-------------------------------------------------------------------
<S>                                             <C>           <C>
As of December 31, 1996:
   Total Capital (to Risk-Weighted Assets):
      Corporation...........................    $29,424,000    15.5%
      Bank..................................    $26,831,000    14.2%
   Tier 1 Capital (to Risk-Weighted Assets):
      Corporation...........................    $27,032,000    14.3%
      Bank..................................    $24,445,000    12.9%
   Tier 1 Capital (to Average Assets):
      Corporation...........................    $27,032,000    10.5%
      Bank..................................    $24,445,000     9.5%
As of December 31, 1995:
   Total Capital (to Risk-Weighted Assets):
      Corporation...........................    $26,570,000    14.7%
      Bank..................................    $23,030,000    12.7%
   Tier 1 Capital (to Risk-Weighted Assets):
      Corporation...........................    $24,237,000    13.4%
      Bank..................................    $20,713,000    11.5%
   Tier 1 Capital (to Average Assets):
      Corporation...........................    $24,237,000    10.1%
      Bank..................................    $20,713,000     8.6%
===================================================================
</TABLE>

<TABLE>
<CAPTION>
=====================================================================================================================
                                                                               FOR CAPITAL
                                                                            ADEQUACY PURPOSES
---------------------------------------------------------------------------------------------------------------------
                                                              AMOUNT                                 RATIO
---------------------------------------------------------------------------------------------------------------------
<S>                                            <C>                                       <C>
As of December 31, 1996:
   Total Capital (to Risk-Weighted Assets):
      Corporation...........................   greater than or equal to $15,148,000      greater than or equal to 8.0
      Bank..................................   greater than or equal to $15,106,000      greater than or equal to 8.0%
   Tier 1 Capital (to Risk-Weighted Assets):
      Corporation...........................   greater than or equal to $ 7,574,000      greater than or equal to 4.0
      Bank..................................   greater than or equal to $ 7,553,000      greater than or equal to 4.0%
   Tier 1 Capital (to Average Assets):
      Corporation...........................   greater than or equal to $10,321,000      greater than or equal to 4.0%
      Bank..................................   greater than or equal to $10,312,000      greater than or equal to 4.0%
As of December 31, 1995:
   Total Capital (to Risk-Weighted Assets):
      Corporation...........................   greater than or equal to $14,499,000      greater than or equal to 8.0%
      Bank..................................   greater than or equal to $14,468,000      greater than or equal to 8.0%
   Tier 1 Capital (to Risk-Weighted Assets):
      Corporation...........................   greater than or equal to $ 7,249,000      greater than or equal to 4.0%
      Bank..................................   greater than or equal to $ 7,234,000      greater than or equal to 4.0%
   Tier 1 Capital (to Average Assets):
      Corporation...........................   greater than or equal to $ 9,622,000      greater than or equal to 4.0%
      Bank..................................   greater than or equal to $ 9,610,000      greater than or equal to 4.0%
=====================================================================================================================
</TABLE>

<TABLE>
<CAPTION>
=====================================================================================================================
                                                                          TO BE WELL CAPITALIZED UNDER
                                                                      PROMPT CORRECTIVE ACTION PROVISIONS
---------------------------------------------------------------------------------------------------------------------
                                                                AMOUNT                                RATIO

---------------------------------------------------------------------------------------------------------------------
<S>                                             <C>                                     <C>
As of December 31, 1996:
   Total Capital (to Risk-Weighted Assets):
      Corporation...........................    greater than or equal to $18,935,000    greater than or equal to 10.0%
      Bank..................................    greater than or equal to $18,882,000    greater than or equal to 10.0%
   Tier 1 Capital (to Risk-Weighted Assets):
      Corporation...........................    greater than or equal to $11,361,000    greater than or equal to  6.0%
      Bank..................................    greater than or equal to $11,329,000    greater than or equal to  6.0%
   Tier 1 Capital (to Average Assets):
      Corporation...........................    greater than or equal to $12,902,000    greater than or equal to  5.0%
      Bank..................................    greater than or equal to $12,889,000    greater than or equal to  5.0%
As of December 31, 1995:
   Total Capital (to Risk-Weighted Assets):
      Corporation...........................    greater than or equal to $18,123,000    greater than or equal to 10.0%
      Bank..................................    greater than or equal to $18,085,000    greater than or equal to 10.0%
   Tier 1 Capital (to Risk-Weighted Assets):
      Corporation...........................    greater than or equal to $10,874,000    greater than or equal to  6.0%
      Bank..................................    greater than or equal to $10,851,000    greater than or equal to  6.0%
   Tier 1 Capital (to Average Assets):
      Corporation...........................    greater than or equal to $12,028,000    greater than or equal to  5.0%
      Bank..................................    greater than or equal to $12,013,000    greater than or equal to  5.0%
=====================================================================================================================
</TABLE>
   Both the Corporation and the Bank were released from regulatory orders during
the first quarter of 1996.

   The Corporation had been operating under a Written Agreement with the FRB
since November, 1993 and the Bank had been operating under a Memorandum of
Understanding issued by the FDIC and the New Jersey Department of Banking in
May, 1995.


20
<PAGE>   18
                     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


   On January 1, 1996, the Corporation adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
This statement requires that Long-Lived Assets to be held and used by the Bank
be reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The Corporation has
determined that adoption of SFAS No. 121 has not had a material effect on its
financial statements.

   The Financial Accounting Standards Board issued SFAS No. 123, "Accounting for
Stock-Based Compensation," in October, 1995. This standard permits but does not
require an entity to account for stock options and other equity instruments
awarded to employees as compensation by using a method based on the fair value
of the equity instruments. The standard also requires, effective January 1,
1996, for the Corporation to make certain pro forma disclosures. The Corporation
elected to adopt only the new disclosure requirements of this accounting
standard.

   The Corporation adopted SFAS No. 114, "Accounting by Creditors for Impairment
of a Loan", and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan
- Income Recognition and Disclosures", as of January 1, 1995. SFAS No. 114
requires 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 has previously measured the allowance for possible loan
losses using methods similar to those prescribed in SFAS No. 114. As a result of
adopting these statements, no additional allowance for possible loan losses was
required as of January 1, 1995.

   At December 31, 1996, the Corporation's impaired loans totaled $2,386,000,
the amount of its commercial nonaccrual and restructured loan portfolio. 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.

                                                                              21
<PAGE>   19
                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
===================================================================================================================================
                                                                                                                DECEMBER 31
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                                           1996              1995
-----------------------------------------------------------------------------------------------------------------------------------
ASSETS
  Cash and Cash Equivalents:
<S>                                                                                                   <C>               <C>
    Cash and Due from Banks ........................................................................   $ 12,078,000    $  9,160,000
    Federal Funds Sold..............................................................................     17,680,000       5,802,000
-----------------------------------------------------------------------------------------------------------------------------------
     Total Cash and Cash Equivalents................................................................     29,758,000      14,962,000
-----------------------------------------------------------------------------------------------------------------------------------
  Due from Bank - Interest-Bearing .................................................................      1,000,000       1,000,000
  Securities:
    Available for Sale, at Fair Value...............................................................     41,648,000      39,328,000
    Held to Maturity, at Cost (Fair Value $26,339,000 and $20,326,000)..............................     26,395,000      20,030,000
  Loans ............................................................................................    165,070,000     160,580,000
    Less: Allowance for Possible Loan Losses .......................................................      5,115,000       4,853,000
-----------------------------------------------------------------------------------------------------------------------------------
     Net Loans......................................................................................    159,955,000     155,727,000
  Premises and Equipment, net ......................................................................      3,260,000       2,675,000
  Other Real Estate, net ...........................................................................      2,211,000       4,408,000
  Other Assets, net ................................................................................      6,428,000       7,883,000
  Intangible Assets, net ...........................................................................        869,000         503,000
-----------------------------------------------------------------------------------------------------------------------------------
    TOTAL ASSETS....................................................................................   $271,524,000    $246,516,000
===================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
  Deposits:
    Demand - Noninterest-Bearing....................................................................   $ 58,421,000    $ 49,761,000
           - Interest-Bearing.......................................................................     31,846,000      25,740,000
    Savings.........................................................................................     80,832,000      73,348,000
    Time............................................................................................     64,325,000      64,005,000
    Certificates of Deposit over $100,000...........................................................      4,465,000       4,208,000
-----------------------------------------------------------------------------------------------------------------------------------
    Total Deposits..................................................................................    239,889,000     217,062,000
    Accrued Expenses and Other Liabilities..........................................................      2,599,000       2,205,000
-----------------------------------------------------------------------------------------------------------------------------------
    Total Liabilities...............................................................................    242,488,000     219,267,000
-----------------------------------------------------------------------------------------------------------------------------------

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY
  Class A Preferred Stock, no par value:
    Authorized shares - 1,950
    Issued shares - 717 at December 31, 1995........................................................            --          717,000
  Common Stock, $1 par value:
    Authorized shares - 15,000,000
    Issued shares - 8,160,605 at December 31, 1996 and
          8,159,855 at December 31, 1995, respectively..............................................      8,161,000       8,160,000
  Capital In Excess of Par Value....................................................................     13,103,000      13,101,000
  Retained Earnings  ...............................................................................      8,105,000       5,479,000
  Net Unrealized Holding (Losses) Gains on Securities Available for Sale, Net of Tax................        (39,000)         86,000
  Treasury Stock at Cost (63,406 shares)............................................................       (294,000)       (294,000)
-----------------------------------------------------------------------------------------------------------------------------------
    Total Stockholders' Equity......................................................................     29,036,000      27,249,000
-----------------------------------------------------------------------------------------------------------------------------------
    TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......................................................   $271,524,000    $246,516,000
===================================================================================================================================
</TABLE>

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


22
<PAGE>   20
                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
===================================================================================================================================
                                                                                                      YEAR ENDED DECEMBER 31
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                                 1996         1995          1994
-----------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
<S>                                                                                          <C>          <C>          <C>
   Loans, including Fees .................................................................   $13,993,000  $14,021,000  $13,199,000
   Securities:
     Taxable..............................................................................     3,693,000    3,150,000      766,000
     Nontaxable...........................................................................        79,000       68,000       76,000
   Other..................................................................................       453,000    1,104,000      878,000
-----------------------------------------------------------------------------------------------------------------------------------
     TOTAL INTEREST INCOME................................................................    18,218,000   18,343,000   14,919,000
-----------------------------------------------------------------------------------------------------------------------------------

INTEREST EXPENSE
   Savings and Interest-Bearing Demand Deposits...........................................     2,367,000    2,288,000    2,604,000
   Time Deposits and Certificates of Deposit over $100,000................................     3,435,000    3,806,000    1,997,000
   Other Borrowings ......................................................................         2,000       12,000      357,000
-----------------------------------------------------------------------------------------------------------------------------------
     TOTAL INTEREST EXPENSE...............................................................     5,804,000    6,106,000    4,958,000
-----------------------------------------------------------------------------------------------------------------------------------
   NET INTEREST INCOME....................................................................    12,414,000   12,237,000    9,961,000
PROVISION FOR POSSIBLE LOAN LOSSES .......................................................       400,000      500,000    1,221,000
-----------------------------------------------------------------------------------------------------------------------------------
   NET INTEREST INCOME AFTER PROVISION FOR
       POSSIBLE LOAN LOSSES...............................................................    12,014,000   11,737,000    8,740,000
-----------------------------------------------------------------------------------------------------------------------------------

OTHER INCOME
   Service Charges on Deposit Accounts....................................................     1,392,000    1,515,000    1,388,000
   Brokerage Commissions..................................................................       312,000      298,000      319,000
   (Loss) Gain on Securities Transactions, net............................................       (16,000)      33,000           --
   Other Income...........................................................................       686,000      601,000    1,615,000
-----------------------------------------------------------------------------------------------------------------------------------
     TOTAL OTHER INCOME...................................................................     2,374,000    2,447,000    3,322,000
-----------------------------------------------------------------------------------------------------------------------------------

OTHER EXPENSE
   Salaries and Employee Benefits ........................................................     4,817,000    4,574,000    5,041,000
   Net Occupancy Expense..................................................................       811,000      760,000      822,000
   Equipment Expense......................................................................       586,000      561,000      616,000
   Other Real Estate Expense - Cost of Operations, net....................................       252,000      958,000    1,342,000
                             - Valuation Adjustments......................................       780,000    1,850,000      863,000
   Other Expense .........................................................................     2,808,000    3,445,000    4,640,000
-----------------------------------------------------------------------------------------------------------------------------------
       TOTAL OTHER EXPENSE................................................................    10,054,000   12,148,000   13,324,000
-----------------------------------------------------------------------------------------------------------------------------------
   INCOME (LOSS) BEFORE INCOME TAXES......................................................     4,334,000    2,036,000   (1,262,000)
       Provision (Benefit) for Income Taxes ..............................................     1,278,000   (4,212,000)    (285,000)
===================================================================================================================================
   NET INCOME (LOSS)......................................................................   $ 3,056,000  $ 6,248,000  $  (977,000)
===================================================================================================================================
   NET INCOME (LOSS) PER COMMON SHARE ....................................................   $       .37  $       .76  $      (.38)
===================================================================================================================================
</TABLE>

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


                                                                              23
<PAGE>   21
           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, 1994, 1995 AND 1996:        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, 1993 ..........     $ 1,750,000      $1,308,000     $ 3,466,000     $   327,000      $  19,000     $(294,000)
-----------------------------------------------------------------------------------------------------------------------------------
Net Loss - 1994 .....................              --              --              --        (977,000)            --            --
Change in Net Unrealized Holding
   (Losses) Gains ...................              --              --              --              --       (331,000)           --
Mandatory Exercise of Stock Purchase
   Contracts ........................              --         352,000       4,445,000              --             --            --
Net Proceeds from Issuance of
   Common Stock .....................              --       6,500,000       5,190,000              --             --            --
-----------------------------------------------------------------------------------------------------------------------------------
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)
===================================================================================================================================
</TABLE>

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


24
<PAGE>   22
                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
===================================================================================================================================
                                                                                                    YEAR ENDED DECEMBER 31
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                            1996            1995           1994
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                    <C>             <C>            <C>
Cash Flows from Operating Activities:
   Net Income (Loss).................................................................. $  3,056,000    $  6,248,000    $  (977,000)
   Adjustments to Reconcile Net Income (Loss) to
    Net Cash Provided by Operating Activities:
     Depreciation and Amortization of Premises and Equipment..........................      485,000         444,000        465,000
     Amortization of Intangible Assets................................................      256,000         270,000        247,000
     Accretion of Securities Discount, net............................................      (96,000)       (395,000)       (15,000)
     Provision for Possible Loan Losses...............................................      400,000         500,000      1,221,000
     Provision for Possible Losses on Other Real Estate...............................      780,000       1,850,000        863,000
     Deferred Income Tax Provision (Benefit)..........................................      829,000      (4,235,000)       386,000
       Loss (Gain) on Securities Transactions, net....................................       16,000         (33,000)            --
     Loans Made or Acquired and Held for Sale.........................................     (720,000)       (321,000)    (1,548,000)
     Proceeds from Loans Held for Sale................................................      721,000         325,000     21,337,000
     Gain on Sales of Loans Held for Sale.............................................       (1,000)         (4,000)      (212,000)
     (Gain) Loss on Sale of Other Real Estate.........................................     (137,000)        (83,000)        10,000
     Decrease (Increase) in Interest Receivable.......................................      319,000        (797,000)      (224,000)
     Increase (Decrease) in Accrued Expenses and Other Liabilities....................      232,000      (1,100,000)     1,677,000
     Decrease in Other Assets.........................................................      392,000         378,000      1,894,000
-----------------------------------------------------------------------------------------------------------------------------------
       Net Cash Provided by Operating Activities......................................    6,532,000       3,047,000     25,124,000
-----------------------------------------------------------------------------------------------------------------------------------
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              --             --
   Securities Available for Sale:
     Proceeds from Maturities.........................................................    3,533,000      15,051,000      6,693,000
     Proceeds from Sales Prior to Maturity............................................   14,309,000       8,504,000      1,026,000
     Proceeds from Calls Prior to Maturity............................................    8,000,000       1,000,000            --
     Purchases........................................................................  (28,295,000)    (30,264,000)   (16,940,000)
   Securities Held to Maturity:
     Proceeds from Maturities.........................................................    3,500,000             --             --
     Proceeds from Calls Prior to Maturity............................................    4,002,000       8,925,000            --
     Purchases........................................................................  (13,863,000)    (40,443,000)    (3,485,000)
   Net (Increase) Decrease in Loans Outstanding.......................................   (5,105,000)        903,000     15,119,000
   Capital Expenditures...............................................................   (1,074,000)       (535,000)       (91,000)
   Payments Received on Other Real Estate.............................................          --        2,674,000         29,000
   Advances Made on Other Real Estate.................................................     (286,000)       (677,000)      (937,000)
   Proceeds from Sales of Other Real Estate...........................................    2,316,000       2,537,000      5,377,000
   Premium Paid for Deposits..........................................................     (622,000)             --             --
   Sale of Mortgage Operations........................................................           --              --      2,067,000
   Other..............................................................................        4,000              --             --
-----------------------------------------------------------------------------------------------------------------------------------
       Net Cash (Used in) Provided by Investing Activities............................  (13,581,000)    (33,325,000)     8,858,000
-----------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
   Net Increase (Decrease) in Total Deposits..........................................   22,827,000       5,198,000    (29,744,000)
   Redemption of Subordinated Debentures .............................................           --      (1,292,000)            --
   Redemption of Class A Preferred Stock .............................................     (717,000)     (1,033,000)      (200,000)
   Cash Dividends on Preferred Stock .................................................     (106,000)       (119,000)            --
   Cash Dividends on Common Stock ....................................................     (162,000)             --             --
   Proceeds from Stock Options and Stock Purchase Contracts Exercised ................        3,000              --        164,000
   Net Proceeds from Sale of Common Stock ............................................           --              --     11,690,000
-----------------------------------------------------------------------------------------------------------------------------------
       Net Cash Provided by (Used in) Financing Activities............................   21,845,000       2,754,000    (18,090,000)
-----------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents..................................   14,796,000     (27,524,000)    15,892,000
Cash and Cash Equivalents, Beginning of Year..........................................   14,962,000      42,486,000     26,594,000
-----------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, End of Year................................................ $ 29,758,000    $ 14,962,000   $ 42,486,000
===================================================================================================================================
Supplemental Cash Flow Disclosures:
   Cash paid during year for:
     Interest......................................................................... $  5,816,000    $  5,948,000   $  5,019,000
     Income Taxes, Net of Refunds..................................................... $   (103,000)   $   (373,000)  $ (2,565,000)
===================================================================================================================================
</TABLE>

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


                                                                              25
<PAGE>   23
                   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 seven 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. In March 1994, two other
wholly-owned subsidiaries were merged with and into the Corporation.
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 1996 and 1995, the Corporation classified certain purchased
securities as held to maturity. The Corporation had no securities held for
trading purposes at December 31, 1996 or 1995.

   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 operations. 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 the adoption of SFAS No. 114 (discussed below), loans were
considered troubled-debt restructurings if, for economic or legal reasons, a
concession has been granted to the borrower related to the borrower's financial
difficulties that the creditor would not otherwise consider. The Corporation has
restructured certain loans in instances where a determination was made that
greater economic value will be realized under new terms than through
fore-closure, 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.

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

   On January 1, 1995, the Corporation adopted SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors
for Impairment of a Loan-Income Recognition and Disclosure." SFAS No. 114 and
No. 118 are applicable to all loans 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. SFAS No. 114 and No. 118 also apply to all loans
that are classified as troubled debt restructurings.

   SFAS No. 114 and SFAS No. 118 define an impaired loan as a loan where,
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. These Statements apply to fiscal
years beginning after December 15, 1994. The Corporation evaluated impairment
under SFAS No. 114 and No. 118 for those loans that cannot be easily grouped
into homogeneous pools of loans and collectively evaluated


26
<PAGE>   24
         NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)


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.

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 $18,745,000 and $24,677,000 at December 31, 1996 and
1995, 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. See Note 13 for additional information regarding the sale
of the mortgage servicing operation.

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:

<TABLE>
<CAPTION>
=====================================================================
                                                         DECEMBER 31
---------------------------------------------------------------------
                                                        1996     1995
---------------------------------------------------------------------
                                                       (In thousands)
<S>                                                    <C>       <C>
Purchased Mortgage Servicing Rights (Note 13)....      $  83     $123
Core Deposit Premiums............................        665      151
Premiums  on  Purchased Home Equity
   Lines of Credit...............................        121      229
---------------------------------------------------------------------
                                                        $869     $503
=====================================================================
</TABLE>

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.
Amortization of intangibles totaled $256,000, $270,000 and $247,000 for 1996,
1995 and 1994, respectively, of which $40,000, $40,000 and $37,000,
respectively, 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, 1996 and 1995, the Bank had aggregate retained earnings
of $11,247,000 and $8,385,000, 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 10 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 investments is presented in Note 15.

NET INCOME (LOSS) PER SHARE

   Net income (loss) per share is determined by dividing net income (loss) less
cumulative dividends on Class A Preferred Stock by the weighted average number
of common shares outstanding during each year. The effect of outstanding stock
options (see Note 11) is reflected in the computation of per common share
amounts for 1996 and 1995. Outstanding options and mandatory stock purchase
contracts (Note 9) in 1994 were antidilutive and therefore were not reflected in
the computation of the per share amount for that year. The weighted average
numbers of shares outstanding for computing net income (loss) per share were
8,205,032, 8,175,819 and 2,874,600 for the years ended December 31, 1996, 1995
and 1994, respectively.

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

   On January 1, 1996, the Corporation adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
This statement requires that Long-Lived Assets to be held and used by the Bank
be reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The Corporation has
determined that adoption of SFAS No. 121 has not had a material effect on its
financial statements.

   The Financial Accounting Standards Board issued SFAS No. 123, "Accounting for
Stock-Based Compensation," in October, 1995. This standard permits but does not
require an entity to account for stock options and other equity instruments
awarded to employees as compensation by using a method based on the fair value
of the equity instruments. The standard also requires, effective January 1,
1996, for the Corporation to make certain pro forma disclosures. The Corporation
elected to adopt only the new disclosure requirements of this accounting
standard. See Note 11.

RECLASSIFICATIONS

   Certain reclassifications have been made to the 1995 and 1994 consolidated
financial statements to conform to the 1996 presentation.

                                                                              27
<PAGE>   25
                               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, 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>

<TABLE>
<CAPTION>
===================================================================================================================================
                                                                          DECEMBER 31, 1995
-------------------------------------------------------------------------------------------------------------------------------
                                                                           (In thousands)
<S>                                             <C>                 <C>                    <C>                          <C>
AVAILABLE FOR SALE 
   U.S. Treasury:
      Maturing within 1 year ........           $ 4,516                $ 16                      $--                    $ 4,532
-------------------------------------------------------------------------------------------------------------------------------
   U.S. Government Agencies:
      Maturing 1 to 5 years .........            27,597                 156                       (7)                    27,746
-------------------------------------------------------------------------------------------------------------------------------
   States and Political Subdivisions:
      Maturing within 1 year ........                44                  --                       --                         44
      Maturing 1 to 5 years .........               213                  --                       --                        213
      Maturing 5 to 10 years ........               374                  --                       --                        374
      Maturing after 10 years .......               252                  --                       --                        252
-------------------------------------------------------------------------------------------------------------------------------
                                                    883                  --                       --                        883
-------------------------------------------------------------------------------------------------------------------------------
   Other:
      Maturing 1 to 5 years .........             6,154                  --                      (19)                     6,135
      Maturing 5 to 10 years ........                35                  --                       (3)                        32
-------------------------------------------------------------------------------------------------------------------------------
                                                  6,189                  --                      (22)                     6,167
-------------------------------------------------------------------------------------------------------------------------------
                                                $39,185                $172                     $(29)                   $39,328
===============================================================================================================================
HELD TO MATURITY
   U.S. Government Agencies:
      Maturing within 1 year ........           $ 3,004                $ 48                      $--                    $ 3,052
       Maturing 1 to 5 years.........            16,526                 245                       --                     16,771
-------------------------------------------------------------------------------------------------------------------------------
                                                 19,530                 293                       --                     19,823
-------------------------------------------------------------------------------------------------------------------------------
   States and Political Subdivisions:
      Maturing within 1 year ........               500                   3                       --                        503
-------------------------------------------------------------------------------------------------------------------------------
                                                $20,030                $296                      $--                    $20,326
===============================================================================================================================
</TABLE>


   Securities at December 31, 1996 and 1995 having a book value of $6,507,000
and $2,497,000, 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 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. Proceeds from sales and calls prior to maturity of securities available
for sale during 1995 were $9,504,000, resulting in gross gains of $8,000 and no
losses. Proceeds from calls prior to maturity of securities held to maturity
during 1995 were $8,925,000, resulting in gross gains of $25,000 and no losses.

   At its October 1995 meeting, the Financial Accounting Standards Board voted
to allow a one-time reclassification of any portion of an enterprise's held to
maturity debt security portfolio without tainting the remaining held to maturity
portfolio. In connection therewith, securities with an amortized cost of
$14,969,000 were transferred at December 31, 1995 from the held to maturity
category to the available for sale category. Upon transfer, an unrealized
holding gain of $71,800 was recorded.


28
<PAGE>   26
                                  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:

<TABLE>
<CAPTION>
=================================================================
                                                 DECEMBER 31
-----------------------------------------------------------------
                                             1996          1995
-----------------------------------------------------------------
                                                (In thousands)
<S>                                        <C>           <C>
Commercial and commercial real estate      $105,819      $ 96,469
Commercial real estate construction .        10,949        15,177
Residential real estate mortgage ....         7,443         8,806
Installment .........................        40,859        40,128
-----------------------------------------------------------------
                                           $165,070      $160,580
=================================================================
</TABLE>

   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 $32,605,000 and
$35,233,000 at December 31, 1996 and 1995, respectively. The largest borrower
concentration consists of loans to a group of affiliated borrowers with an
aggregate balance of $15,157,000 and $15,430,000 at December 31, 1996 and 1995,
respectively. A majority of these loans are 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 concentration involves loans to certain affiliated real estate
development companies whose principal owners have had a long standing and
excellent relationship with the Bank. Outstanding balances for this group at
December 31, 1996 and 1995 were $10,226,000 and $12,245,000, respectively. All
such loans were performing as of the respective year end dates.

   The third relationship consists of loans primarily for the construction or
renovation of condominium units, totaling $7,222,000 and $7,558,000 at December
31, 1996 and 1995, respectively.

   Loans for which the accrual of interest has been discontinued totaled
$1,053,000 and $4,190,000 at December 31, 1996 and 1995, respectively.
Restructured loans for which terms have been modified totaled $1,500,000 and
$1,702,000 at December 31, 1996 and 1995, respectively. At December 31, 1996,
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
---------------------------------------------------------------------------------------------------------
                                                                                        1996        1995
---------------------------------------------------------------------------------------------------------
                                                                                         (In thousands)
<S>                                                                                     <C>        <C>
Interest income which would have been recognized on nonaccrual loans .............      $349       $1,265
Contractual interest income which would have been recognized on restructured loans       260           18
Interest income received .........................................................       262)        (229)
---------------------------------------------------------------------------------------------------------
Interest income not recognized ...................................................      $347       $1,054
=========================================================================================================
</TABLE>


   The Corporation adopted SFAS No. 114, "Accounting by Creditors for Impairment
of a Loan", and SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan -- Income Recognition and Disclosures", as of January 1, 1995. SFAS No. 114
requires 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 has previously measured the allowance for possible loan
losses using methods similar to those prescribed in SFAS No. 114. As a result of
adopting these statements, no additional allowance for possible loan losses was
required as of January 1, 1995.

   The Corporation's impaired loans totaled $2,386,000 and $5,161,000 at
December 31, 1996 and 1995, respectively, the amount of its commercial
nonaccrual and restructured loan portfolios 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.



                                                                              29

<PAGE>   27
                   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
-----------------------------------------------------------------------
                                       1996         1995          1994
-----------------------------------------------------------------------
                                              (In thousands)
<S>                                  <C>          <C>           <C>
Balance, beginning of year ....      $4,853       $ 6,501       $ 7,499
   Provision charged to expense         400           500         1,221
   Recoveries of loans
     previously charged off ...         803         1,546           277
   Loans charged off ..........        (941)       (3,694)       (2,496)
-----------------------------------------------------------------------
Balance, end of year ..........      $5,115       $ 4,853       $ 6,501
=======================================================================
</TABLE>


                          NOTE 5: NONPERFORMING ASSETS


   Nonperforming assets at the indicated dates are summarized as follows:

<TABLE>
<CAPTION>
========================================================================================
                                                               DECEMBER 31, 1996
----------------------------------------------------------------------------------------
                                                              (Dollars in thousands)

                                                         90 DAYS
                                                         PAST DUE
                                                         OR MORE    NONACCRUAL    TOTAL
----------------------------------------------------------------------------------------
<S>                                                      <C>        <C>          <C>
Loans:
   Commercial and commercial real estate ..........        $ 46       $  886      $  932
   Residential real estate mortgage ...............          61          104         165
   Installment ....................................          45           63         108
----------------------------------------------------------------------------------------
      Total nonperforming loans ...................        $152       $1,053      $1,205
========================================================================================
Other real estate, net (Notes 1 and 6) ............                                2,211
----------------------------------------------------------------------------------------
      Total nonperforming assets ..................                               $3,416
========================================================================================
Ratio of total nonperforming assets to total assets                                 1.26%
========================================================================================
</TABLE>

<TABLE>
<CAPTION>
==================================================================================================
                                                                          DECEMBER 31, 1995
--------------------------------------------------------------------------------------------------
                                                                        (Dollars in thousands)

                                                                   90 DAYS
                                                                   PAST DUE
                                                                   OR MORE    NONACCRUAL     TOTAL
--------------------------------------------------------------------------------------------------
<S>                                                               <C>         <C>           <C>
Loans:
   Commercial and commercial real estate .....................       $ 37       $2,460      $2,497
   Commercial real estate construction .......................         --          999         999
   Residential real estate mortgage ..........................         53          375         428
   Installment ...............................................         51          356         407
--------------------------------------------------------------------------------------------------
      Total nonperforming loans ..............................       $141       $4,190      $4,331
==================================================================================================
Other real estate, net (Notes 1 and 6) .......................                               4,408
--------------------------------------------------------------------------------------------------
      Total nonperforming assets .............................                              $8,739
==================================================================================================
Ratio of total nonperforming assets to total assets ..........                                3.55%
==================================================================================================
</TABLE>



30
<PAGE>   28
                            NOTE 6: OTHER REAL ESTATE


   The following table summarizes the investment in other real estate by project
or property type at December 31:

<TABLE>
<CAPTION>
========================================================================================
                                                    1996                      1995
----------------------------------------------------------------------------------------
PROJECT OR PROPERTY TYPE                     NUMBER      AMOUNT         NUMBER    AMOUNT
----------------------------------------------------------------------------------------
                                                       (Dollars in thousands)
<S>                                          <C>        <C>             <C>      <C>
Commercial real estate:
  Raw land and construction
    projects .......................            3        $1,764            5      $2,667
  Retail/office ....................            3         1,000            3       4,082
----------------------------------------------------------------------------------------
      Total commercial real estate..            6         2,764            8       6,749
----------------------------------------------------------------------------------------
Residential real estate:
  One to four family ...............           --            --            2         270
----------------------------------------------------------------------------------------
    Total other real estate ........            6         2,764           10       7,019
Valuation allowance ................                       (553)                  (2,611)
----------------------------------------------------------------------------------------
                                                         $2,211                   $4,408
========================================================================================
</TABLE>

   A summary of activity in other real estate for the years ended December 31 is
as follows:

<TABLE>
<CAPTION>
================================================================================
                                                             1996           1995
--------------------------------------------------------------------------------
                                                                (In thousands)
<S>                                                        <C>           <C>
Balance, beginning of year, net ......................     $ 4,408       $ 9,995
Transfers from nonaccrual loans ......................         476           648
Transfers from accrual loans .........................          --            66
Advances .............................................         286           677
Sales of properties ..................................      (2,179)       (2,454)
Payments from borrowers -- ...........................          --        (2,674)
Charge-offs or write-downs ...........................      (2,838)         (873)
Decrease (increase) in valuation allowance ...........       2,058          (977)
--------------------------------------------------------------------------------
Balance, end of year, net ............................     $ 2,211       $ 4,408
================================================================================
</TABLE>

   An analysis of the valuation allowance for other real estate for the years
ended December 31 is as follows:

<TABLE>
<CAPTION>
===================================================================================================
                                                                   1996          1995         1994
---------------------------------------------------------------------------------------------------
                                                                            (In thousands)
<S>                                                               <C>           <C>          <C>
Balance, beginning of year .................................      $ 2,611       $1,634       $  885
  Provision charged to expense .............................          780        1,850          863
  Write-downs to fair value and net losses incurred on
    sales ..................................................       (2,838)        (873)         (64)
  Other ....................................................           --           --          (50)
---------------------------------------------------------------------------------------------------
Balance, end of year .......................................      $   553       $2,611       $1,634
===================================================================================================
</TABLE>

                        NOTE 7: 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 1996:

<TABLE>
<CAPTION>
==============================================
                                 (In thousands)
<S>                               <C>
Balance, December 31, 1995 .....        $  659
  Additions ....................         1,438
  Repayments ...................          (245)
  Resignation of officers ......            (3)
----------------------------------------------
Balance, December 31, 1996 .....        $1,849
==============================================
</TABLE>

All related party loans were current as to interest and principal at December
31, 1996.


                                                                              31
<PAGE>   29
                         NOTE 8: PREMISES AND EQUIPMENT

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

<TABLE>
<CAPTION>
========================================================================
                                                       1996        1995
------------------------------------------------------------------------
                                                        (In thousands)
<S>                                                   <C>         <C>
Land and improvements ..........................      $  286      $  286
Buildings and improvements .....................       2,815       2,743
Leasehold improvements .........................         378         578
Furniture and equipment ........................       2,726       2,131
------------------------------------------------------------------------
                                                       6,205       5,738
Less - Accumulated depreciation and
  amortization .................................       2,945       3,063
------------------------------------------------------------------------
                                                      $3,260      $2,675
========================================================================
</TABLE>


                            NOTE 9: 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"). During 1994, the remaining $4,799,000 of Equity
Contracts were exercised primarily through the surrender of $4,633,000 of the
11% subordinated debentures, with the balance consisting of cash payments. At
December 31, 1994, $1,292,000 of 11% subordinated debentures were outstanding.

   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.





32
<PAGE>   30
                              NOTE 10: INCOME TAXES


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

<TABLE>
<CAPTION>
====================================================================================================
                                                                     1996         1995        1994
---------------------------------------------------------------------------------------------------
                                                                       (In thousands)
<S>                                                                 <C>         <C>           <C>
Current
  Federal ....................................................      $  449      $    21       $(671)
  State ......................................................          --            2          --
Deferred .....................................................         829        1,039         386
---------------------------------------------------------------------------------------------------
Total current and deferred ...................................       1,278        1,062        (285)
---------------------------------------------------------------------------------------------------
Benefit of reduction in deferred tax asset valuation
  allowance ..................................................          --       (5,274)         --
---------------------------------------------------------------------------------------------------
Total provision (benefit) for income taxes ...................      $1,278      $(4,212)      $(285)
====================================================================================================
</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
-------------------------------------------------------------------------------------
                                                                   1996         1995
-------------------------------------------------------------------------------------
                                                                     (In thousands)
<S>                                                               <C>          <C>
Allowance for possible losses on loans and other real
  estate ...................................................      $1,802       $2,138
Gain on restructured loans .................................         299          307
Depreciation and amortization ..............................         173         (314)
Net nonaccrual interest charge-offs ........................         (74)        (162)
Accrued liabilities not currently deductible ...............         148          100
Federal and state net operating loss carryforwards .........         222        1,847
Alternative minimum tax credits ............................         750          311
Net holding (gains) losses on securities available for
  sale .....................................................          26          (57)
Other ......................................................         (64)           8
-------------------------------------------------------------------------------------
                                                                   3,282        4,178
Valuation allowance ........................................          --           --
-------------------------------------------------------------------------------------
     Net deferred tax asset included in Other Assets .......      $3,282       $4,178
=====================================================================================
</TABLE>

   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, 1996, the Corporation has a state net operating loss
carryforward of $3.7 million which expires as follows: $2.2 million in 2000 and
$1.5 million in 2001.


   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>
========================================================================================================
                                                                          1996         1995        1994
--------------------------------------------------------------------------------------------------------
                                                                                 (In thousands)
<S>                                                                     <C>          <C>           <C>
Statutory provision (benefit) ....................................      $1,474       $   692       $(429)
Reduction in Federal taxes resulting from tax-exempt income ......         (15)          (23)        (31)
State taxes on income, net of Federal tax benefit ................         327           122          --
Reversals of accruals no longer required .........................        (496)           --          --
Tax refund greater than receivable recorded ......................          --           (81)       (285)
(Decrease) increase in valuation allowance for deferred tax
   assets ........................................................          --        (5,274)        920
Other ............................................................         (12)          352        (460)
--------------------------------------------------------------------------------------------------------
                                                                        $1,278       $(4,212)      $(285)
========================================================================================================
</TABLE>


                                                                              33
<PAGE>   31
                          NOTE 11: STOCKHOLDERS' EQUITY

   PREFERRED STOCK

   On December 28, 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 May, 1996, the 12,000 options exercisable at $18.125 per share under the
1982 Incentive Stock Option Plan expired. Under the 1986 Nonstatutory Stock
Option Plan, 100,000 shares of common stock are available for grant and no
previously granted options are outstanding.

   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 exercise of these options was conditioned upon the successful
completion of a common stock offering ("Offering"), which was achieved on
October 13, 1994, when 6,500,000 shares of common stock were sold at $2 per
share resulting in gross proceeds of $13,000,000. After offering expenses, $11.7
million of new capital was raised, of which $7.5 million was contributed to the
Bank's capital.

   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 annual meeting of stockholders held on May 16, 1995, 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.

   As of December 31, 1996, 1,268,964 shares were reserved for future issuance
under the Option Agreement and these three Plans.


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

<TABLE>
<CAPTION>
===================================================================================================================================
                                                        1996                        1995                            1994
-----------------------------------------------------------------------------------------------------------------------------------
                                              NUMBER          PRICE        NUMBER           PRICE          NUMBER        PRICE
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                          <C>          <C>              <C>         <C>                <C>        <C>
Balance, beginning of year................    545,434                      230,934                         12,000
Options granted...........................    262,100     $4.81 - $ 4.88   320,000     $3.50 - $  3.81    218,934    $2.00 - $ 2.63
Options exercised.........................       (750)        $3.81             --           --                --         --
Options cancelled.........................    (39,250)     3.81 -  18.13    (5,500)         3.81               --         --
-----------------------------------------------------------------------------------------------------------------------------------
Balance, end of year......................    767,534      2.00 -   4.88   545,434      2.00 -  18.13     230,934     2.00 -  18.13
===================================================================================================================================

Options exercisable, end of year..........    304,736     $2.00 - $ 4.88   139,375     $2.00 - $18.13      12,000       $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 $108,000, $120,000 and $0 for 1996, 1995, and 1994, 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 pro forma amounts indicated below:

<TABLE>
<CAPTION>
=============================================================
                                      1996            1995
-------------------------------------------------------------
<S>                                <C>             <C>
Net Income:
   As reported...............      $3,056,000      $6,248,000
   Pro forma ................      $2,880,000      $6,117,000
Income per share:
   As reported...............      $      .37      $      .76
   Pro forma ................      $      .35      $      .74
=============================================================
</TABLE>



34
<PAGE>   32
                    NOTE 11: 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 1996 and 1995, respectively; dividend yield of
2.5% for both years; expected volatility of 25% and 29% for all options;
risk-free interest rates of 6.9% and 6.1% for the Employee Plan options, and
6.5% and 6.4% for the Directors' Plan options; and expected lives of 7.8 and 7.7
years for the Employee Plan options and 6.5 and 6.3 years for the Directors'
Plan options.


   The following table summarizes information about stock options outstanding at
December 31, 1996:

<TABLE>
<CAPTION>
=============================================================================
EXERCISE     NUMBER OUTSTANDING      NUMBER EXERCISABLE          REMAINING
  PRICE     AT DECEMBER 31, 1996    AT DECEMBER 31, 1996     CONTRACTUAL LIFE
-----------------------------------------------------------------------------
<S>         <C>                     <C>                      <C>
 $2.00              85,000                 42,500                 4.2 years
  2.32              71,244                 17,811                 4.2
  2.63              62,690                     --                 4.2
  3.50              65,000                 65,000                 8.4
  3.81             221,500                110,750                 8.4
  4.81             249,500                 62,375                 9.5
  4.88              12,600                  6,300                 9.3
-----------------------------------------------------------------------------
                   767,534                304,736
=============================================================================
</TABLE>


                     NOTE 12: COMMITMENTS AND CONTINGENCIES


   The consolidated balance sheets as of December 31, 1996 and 1995 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 $31,163,000 and $28,247,000 to its borrowers as of December
31, 1996 and 1995, 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 $825,000
and $620,000 as of December 31, 1996 and 1995, 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 $183,000, $154,000 and $202,000, for 1996,
1995 and 1994, 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 $72,000.

   At December 31, 1996, aggregate annual minimum rental commitments under
noncancelable leases having an initial or remaining term of more than one year
are as follows:

<TABLE>
======================================
<S>                         <C>
1997 .............          $  209,000
1998 .............             181,000
1999 .............             136,000
2000 .............              95,000
2001 .............              96,000
Thereafter .......             552,000
--------------------------------------
                            $1,269,000
======================================
</TABLE>

   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
1997.

   Cash and due from banks includes certain reserve balances maintained in
accordance with requirements of the Bank's regulatory authorities. The reserve
balances aggregated $4,299,000 and $3,172,000 at December 31, 1996 and 1995,
respectively.


                       NOTE 13: SALE OF MORTGAGE SERVICING


   In January 1994, the Bank sold substantially all of the mortgage servicing
portion of its mortgage-related activities. The sale price was equivalent to
 .57% of the unpaid principal balance of loans within the servicing portfolio
which were less than sixty days past due. Under the terms of the agreement, a
portion of the purchase price was held in a trust for a period of eleven months,
at which time the purchase price would be adjusted based upon specified
prepayment rates. In December 1994, the purchase price was adjusted in
accordance with the terms of the agreement, and the Corporation recorded
$270,000 of income previously held in the trust.



                                                                              35
<PAGE>   33
                             NOTE 14: 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, 1996, 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,
1996, 1995 and 1994 were $167,000, $146,000 and $120,000, 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 15: 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, 1996 and 1995, were as follows:

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

<TABLE>
<CAPTION>
========================================================================================================================
                                                                DECEMBER 31, 1996                 DECEMBER 31, 1995
------------------------------------------------------------------------------------------------------------------------
                                                            CARRYING        ESTIMATED         CARRYING        ESTIMATED
                                                             VALUE         FAIR VALUE          VALUE         FAIR VALUE
------------------------------------------------------------------------------------------------------------------------
<S>                                                        <C>             <C>               <C>             <C>
Cash and cash equivalents...............................   $29,758,000     $29,758,000       $14,962,000     $14,962,000
Securities available for sale at fair value (Note 2) ...    41,648,000      41,648,000        39,328,000      39,328,000
Securities held to maturity (Note 2) ...................    26,395,000      26,339,000        20,030,000      20,326,000
========================================================================================================================
</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, 1996                 DECEMBER 31, 1995
------------------------------------------------------------------------------------------------------------------
                                                        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     $  1,001,000   $  1,005,000
Gross loans, including accrued interest............    166,336,000     164,050,000      162,028,000    162,271,000
Deposits, including accrued interest...............    240,704,000     240,848,000      217,890,000    218,096,000
==================================================================================================================
</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
$31,163,000 and $28,247,000 at December 31, 1996 and 1995, respectively, and are
generally priced at market at time of funding. Standby letters of credit
totaling $825,000 and $620,000 as of December 31, 1996 and 1995, 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 12
for additional discussion relating to these off-balance-sheet activities. At
December 31, 1996 and 1995, fees related to the unexpired terms of letters of
credit were not significant.


36
<PAGE>   34
                           NOTE 16: 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
each 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,
1996, that the Corporation and the Bank meet all capital adequacy requirements
to which they are subject.

   As of December 31, 1996, 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>
====================================================================
                                                        ACTUAL
--------------------------------------------------------------------
                                                 AMOUNT        RATIO
--------------------------------------------------------------------
<S>                                             <C>           <C>
As of December 31, 1996:
   Total Capital (to Risk-Weighted
Assets):
      Corporation...........................    $29,424,000    15.5%
      Bank..................................    $26,831,000    14.2%
   Tier 1 Capital (to Risk-Weighted Assets):
      Corporation...........................    $27,032,000    14.3%
      Bank..................................    $24,446,000    12.9%
   Tier 1 Capital (to Average Assets):
      Corporation...........................    $27,032,000    10.5%
      Bank..................................    $24,446,000     9.5%
--------------------------------------------------------------------
As of December 31, 1995:
   Total Capital (to Risk-Weighted Assets):
      Corporation...........................    $26,570,000    14.7%
      Bank..................................    $23,030,000    12.7%
   Tier 1 Capital (to Risk-Weighted Assets):
      Corporation...........................    $24,237,000    13.4%
      Bank..................................    $20,713,000    11.5%
   Tier 1 Capital (to Average Assets):
      Corporation...........................    $24,237,000    10.1%
      Bank..................................    $20,713,000     8.6%
====================================================================
</TABLE>

<TABLE>
<CAPTION>
=======================================================================================================================
                                                                               FOR CAPITAL
                                                                            ADEQUACY PURPOSES
-----------------------------------------------------------------------------------------------------------------------
                                                                AMOUNT                                  RATIO
-----------------------------------------------------------------------------------------------------------------------
<S>                                             <C>                                      <C>
As of December 31, 1996:
   Total Capital (to Risk-Weighted
Assets):
      Corporation...........................    greater than or equal to $15,148,000      greater than or equal to 8.0%
      Bank..................................    greater than or equal to $15,106,000      greater than or equal to 8.0%
   Tier 1 Capital (to Risk-Weighted Assets):
      Corporation...........................    greater than or equal to $ 7,574,000      greater than or equal to 4.0%
      Bank..................................    greater than or equal to $ 7,553,000      greater than or equal to 4.0%
   Tier 1 Capital (to Average Assets):
      Corporation...........................    greater than or equal to $10,321,000      greater than or equal to 4.0%
      Bank..................................    greater than or equal to $10,312,000      greater than or equal to 4.0%
-----------------------------------------------------------------------------------------------------------------------
As of December 31, 1995:
   Total Capital (to Risk-Weighted Assets):
      Corporation...........................    greater than or equal to $14,499,000      greater than or equal to 8.0%
      Bank..................................    greater than or equal to $14,468,000      greater than or equal to 8.0%
   Tier 1 Capital (to Risk-Weighted Assets):
      Corporation...........................    greater than or equal to $ 7,249,000      greater than or equal to 4.0%
      Bank..................................    greater than or equal to $ 7,234,000      greater than or equal to 4.0%
   Tier 1 Capital (to Average Assets):
      Corporation...........................    greater than or equal to $ 9,622,000      greater than or equal to 4.0%
      Bank..................................    greater than or equal to $ 9,610,000      greater than or equal to 4.0%
======================================================================================================================
</TABLE>

<TABLE>
<CAPTION>
=====================================================================================================================
                                                                      TO BE WELL CAPITALIZED UNDER
                                                                    PROMPT CORRECTIVE ACTION PROVISIONS
---------------------------------------------------------------------------------------------------------------------
                                                               AMOUNT                                RATIO
---------------------------------------------------------------------------------------------------------------------
<S>                                             <C>                                     <C>
As of December 31, 1996:
   Total Capital (to Risk-Weighted
Assets):
      Corporation...........................    greater than or equal to $18,935,000    greater than or equal to 10.0%
      Bank..................................    greater than or equal to $18,882,000    greater than or equal to 10.0%
   Tier 1 Capital (to Risk-Weighted Assets):
      Corporation...........................    greater than or equal to $11,361,000    greater than or equal to  6.0%
      Bank..................................    greater than or equal to $11,329,000    greater than or equal to  6.0%
   Tier 1 Capital (to Average Assets):
      Corporation...........................    greater than or equal to $12,902,000    greater than or equal to  5.0%
      Bank..................................    greater than or equal to $12,889,000    greater than or equal to  5.0%
---------------------------------------------------------------------------------------------------------------------
As of December 31, 1995:
   Total Capital (to Risk-Weighted Assets):
      Corporation...........................    greater than or equal to $18,123,000    greater than or equal to 10.0%
      Bank..................................    greater than or equal to $18,085,000    greater than or equal to 10.0%
   Tier 1 Capital (to Risk-Weighted Assets):
      Corporation...........................    greater than or equal to $10,874,000    greater than or equal to  6.0%
      Bank..................................    greater than or equal to $10,851,000    greater than or equal to  6.0%
   Tier 1 Capital (to Average Assets):
      Corporation...........................    greater than or equal to $12,028,000    greater than or equal to  5.0%
      Bank..................................    greater than or equal to $12,013,000    greater than or equal to  5.0%
=====================================================================================================================
</TABLE>


   Both the Corporation and the Bank were released from regulatory orders during
the first quarter of 1996. The Corporation had been operating under a Written
Agreement with the FRB since November, 1993 and the Bank had been operating
under a Memorandum of Understanding issued by the FDIC and the New Jersey
Department of Banking in May, 1995.

                                                                              37
<PAGE>   35
     NOTE 17: CONDENSED FINANCIAL STATEMENTS OF RAMAPO FINANCIAL CORPORATION
                              (PARENT COMPANY ONLY)


<TABLE>
<CAPTION>
========================================================================================================
                                 BALANCE SHEETS                                           DECEMBER 31
--------------------------------------------------------------------------------------------------------
                                                                                     1996          1995
--------------------------------------------------------------------------------------------------------
                                                                                       (In thousands)
<S>                                                                                <C>           <C>
Assets
   Cash and Due from Banks......................................................   $    76       $   273
   Interest-Bearing Time Deposits ..............................................     2,469         3,083
   Investment in Bank Subsidiary (Equity Method) ...............................    26,450        23,713
   Other Assets ................................................................       847           488
--------------------------------------------------------------------------------------------------------
     TOTAL ASSETS ..............................................................   $29,842       $27,557
========================================================================================================
Liabilities - Other
   Other Liabilities ...........................................................   $   806       $   308
========================================================================================================
Stockholders' Equity
   Class A Preferred Stock .....................................................        --           717
   Common Stock ................................................................     8,161         8,160
   Capital in Excess of Par Value ..............................................    13,103        13,101
   Retained Earnings ...........................................................     8,105         5,479
   Net Unrealized Holding (Losses) Gains on Securities Available for Sale ......       (39)           86
   Treasury Stock ..............................................................      (294)         (294)
--------------------------------------------------------------------------------------------------------
     Total Stockholders' Equity ................................................    29,036        27,249
--------------------------------------------------------------------------------------------------------
     TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ................................   $29,842       $27,557
========================================================================================================
</TABLE>

<TABLE>
<CAPTION>
================================================================================================
                    STATEMENTS OF OPERATIONS                          YEAR ENDED DECEMBER 31
------------------------------------------------------------------------------------------------
                                                                  1996        1995         1994
------------------------------------------------------------------------------------------------
                                                                        (In thousands)
<S>                                                             <C>          <C>          <C>
Operating Income
   Mortgage Application and Servicing Fees ...............      $   --       $   --       $  151
   Rental Income from Subsidiary Bank ....................         180          165          180
   Interest on Time Deposit at Subsidiary Bank ...........         124          195           70
   Dividends from Subsidiary Bank ........................         324           --           --
   Other Income ..........................................          58            1           90
------------------------------------------------------------------------------------------------
     Total Operating Income ..............................         686          361          491
------------------------------------------------------------------------------------------------
Operating Expenses .......................................         559          603        1,383
Income (Loss) before Income Taxes and Equity in
   Undistributed Income (Loss) of Subsidiaries ...........         127         (242)        (892)
Income Tax (Benefit) Provision ...........................         (67)           5           --
------------------------------------------------------------------------------------------------
Income (Loss) before Equity in Undistributed Income (Loss)
   of Subsidiaries .......................................         194         (247)        (892)
Equity in Undistributed Income (Loss) of Subsidiaries ....       2,862        6,495          (85)
------------------------------------------------------------------------------------------------
   Net Income (Loss) .....................................      $3,056       $6,248       $ (977)
================================================================================================
</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.




38
<PAGE>   36
     NOTE 17: CONDENSED FINANCIAL STATEMENTS OF RAMAPO FINANCIAL CORPORATION
                        (PARENT COMPANY ONLY) (Continued)


<TABLE>
<CAPTION>
=======================================================================================================================
                         STATEMENTS OF CASH FLOWS                                         YEAR ENDED DECEMBER 31
-----------------------------------------------------------------------------------------------------------------------
                                                                                      1996          1995        1994
-----------------------------------------------------------------------------------------------------------------------
                                                                                               (In thousands)
<S>                                                                                 <C>          <C>            <C>
Cash Flows from Operating Activities:
  Net Income (Loss) ...........................................................     $ 3,056       $ 6,248       $  (977)
  Adjustments to Reconcile Net Income (Loss) to Net Cash
    Provided by Operating Activities:
       Equity in Undistributed (Income) Loss of Subsidiaries ..................      (2,862)       (6,495)           85
       Depreciation and Amortization ..........................................         115           116           118
       Dividends Declared but Not Paid ........................................        (162)           --            --
       (Increase) Decrease in Other Assets ....................................        (474)          193         1,550
       Increase (Decrease) in Other Liabilities ...............................         498           147          (670)
-----------------------------------------------------------------------------------------------------------------------
      Net Cash Provided by Operating Activities ...............................         171           209           106
-----------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
  Additional Equity Investment in Subsidiary ..................................          --            --        (7,500)
=======================================================================================================================
Net Cash Used In Investing Activities .........................................          --            --        (7,500)
-----------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
   Redemption of Subordinated Debentures ......................................          --        (1,292)           --
   Redemption of Class A Preferred Stock ......................................        (717)       (1,033)         (200)
   Cash Dividends on Preferred Stock ..........................................        (106)         (119)           --
   Cash Dividends on Common Stock .............................................        (162)           --            --
   Proceeds from Stock Options and Stock Purchase Contracts Exercised .........           3            --           164
   Proceeds from Sale of Common Stock .........................................          --            --        11,690
-----------------------------------------------------------------------------------------------------------------------
Net Cash (Used In) Provided By Financing Activities ...........................        (982)       (2,444)       11,654
-----------------------------------------------------------------------------------------------------------------------
Net (Decrease) Increase in Cash and Cash Equivalents ..........................        (811)       (2,235)        4,260
Cash and Cash Equivalents, Beginning of Year ..................................       3,356         5,591         1,331
-----------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, End of Year ........................................     $ 2,545       $ 3,356       $ 5,591
=======================================================================================================================
</TABLE>

   The parent company's resources available to meet its cash obligations
subsequent to December 31, 1996 are limited to liquid assets on hand which
include cash and due from banks and interest-bearing time deposits, and
dividends from subsidiary Bank.

   The parent company's cash obligations subsequent to December 31, 1996
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 its
obligations at the parent company level for the foreseeable future.


                                                                              39
<PAGE>   37
           NOTE 18: SUPPLEMENTARY STATEMENTS OF OPERATIONS INFORMATION

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

<TABLE>
<CAPTION>
===============================================================
                                         YEAR ENDED DECEMBER 31
---------------------------------------------------------------
                                       1996      1995      1994
---------------------------------------------------------------
                                             (In thousands)
<S>                                  <C>       <C>       <C>
Legal* ..........................    $  312    $  457    $  532
Postage and freight .............       167       171       202
Stationery and printing .........       248       198       137
FDIC insurance assessment .......        34       398       684
Audit and examinations ..........       174       259       288
Telephone .......................       152       165       214
Consulting fees .................       212       325       349
Credit reports/appraisal fees ...       125       156       244
Bonding and insurance ...........       207       241       353
Amortization of intangible assets       256       270       247
Advertising .....................       231       137       168
Other losses ....................        19        51       232
All other expenses ..............       671       617       990
---------------------------------------------------------------
                                     $2,808    $3,445    $4,640
===============================================================
</TABLE>

* Includes $288,000, $360,000 and $543,000 for 1996, 1995 and 1994,
respectively, paid to a law firm of which two directors of the Corporation are
principals. Payments are higher than total recorded expense in 1994 due to the
difference in the timing of cash payments and expense accruals.



40
<PAGE>   38
              NOTE 19: QUARTERLY FINANCIAL INFORMATION (Unaudited)

   The following quarterly financial information for the years ended December
31, 1996 and 1995 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>
==============================================================================================================
                                                                                 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 ...................       $  .06          $  .07           $  .09            $  .14
===============================================================================================================
</TABLE>

<TABLE>
<CAPTION>
===============================================================================================================
                                                                                 1995
---------------------------------------------------------------------------------------------------------------
                                                                          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............................     $4,399          $4,610           $4,729            $4,605
Total interest expense ..........................      1,357           1,612            1,692             1,445
---------------------------------------------------------------------------------------------------------------
  Net interest income............................      3,042           2,998            3,037             3,160
Provision for possible loan losses...............        450             225              125              (300)(B)
---------------------------------------------------------------------------------------------------------------
  Net interest income after provision for
   possible loan losses .........................      2,592           2,773            2,912             3,460
Total other income ..............................        719             577              545               606
Total other expense .............................      2,868           2,840            2,906             3,534
Net income ......................................        405             466              502             4,875(C)
Net income per common share .....................     $  .05          $  .05           $  .06            $  .59
===============================================================================================================
</TABLE>

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

(B)  Due to a $1.1 million loan recovery in the fourth quarter, the Corporation
     recaptured $300,000 of loan loss provisions previously charged to
     operations in 1995.

(C)  Includes tax benefits of $4.3 million, primarily due to the reversal of a
     valuation allowance against the Corporation's net deferred tax asset.


                                                                              41
<PAGE>   39
                        [ARTHUR ANDERSEN LLP LETTERHEAD]


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, 1996 and 1995, and the related consolidated statements of operations,
changes in stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1996. 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, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles.


                                                  /s/ Arthur Andersen LLP

Roseland, New Jersey
January 15, 1997


42
<PAGE>   40
                          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

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
Retired

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

MORTIMER J. O' SHEA
President and Chief Executive Officer



                                 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

ROBERT SFERRAZZA

LARS SWANSON

TODD ULLRICH

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

ASSISTANT SECRETARIES


VIRGINIA L. HUFF
--------------------------------------------------------------------------------

ASSISTANT TREASURERS


KELLY KAPUSTA

BARBARA REDDING MASSENZIO

PAULA MCKOWEN

CYNTHIA MURILLO

GENEVIEVE RESTIVO

PAMELA TIPPER

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

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

JAMES A. CODIROLI
Retired

JOHN A. DEMETRIUS, CPA
President
Demetrius & Co., L.L.C.

STEVEN GERBER, ESQ.
Gerber & Samson

JEROLD P. GOLDBERG, CPA
Financial Consultant

LOUIS D. MARCH
President
March Associates, Inc.

JOHN J. SCURA, II, ESQ.
John J. Scura, Attorney at Law

MICHAEL J. SHENKER, CPA
Sax Macy Fromm & Co., PC

GEORGE P. STRUBLE, ESQ.
Sabbath, Struble, Ragno, Petrie, Oroho and Spinato, P.C.



                                                                              43
<PAGE>   41
<TABLE>
     <S>                                                                <C>

                                                       CORPORATE INFORMATION
     -------------------------------------------------------------------------------------------------------------------


                          FORM 10-K                                           ANNUAL MEETING OF 
                                                                                 STOCKHOLDERS
  
        The Corporation's annual report, on Form 10-K,                    Tuesday, May 6, 1997,4:00 p.m.
    required to be filed with the Securities and Exchange                        Radisson Hotel
       Commission, is available on written request to:                           690 Rt. 46 East
                                                                            Fairfield, New Jersey 07004
            Mr. Walter A. Wojcik, Jr., Treasures
                Ramapo Financial Corporation
                 64 Mountain View Boulevard
                  Wayne, New Jersey 07470
  


                                                                           
                   TRANSFER AGENT                                                    INQUIRIES                   
       Chase Mellon Shareholder Services, L.L.C.                           All other information--contact:
         85 Challenger Road, Overpeck Center                             Janet M. Maloy, Corporate Secretary
          Ridgefield Park, New Jersey 07660                                  Ramapo Financial Corporation                       
                                                                              64 Mountain View Boulevard 
                                                                               Wayne, New Jersey 07470
                                                                                    (201) 305-4102  

</TABLE>

<TABLE>
<S>                                                 <C>

                                                   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, 1996, there were 1,822 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 $.02 per share were declared in each of the third and fourth quarters of 1996.
</TABLE>


        <TABLE>
        <S>                   <C>          <C>       <C>      <C>      <C>       <C>     <C>      <C>
        ------------------------------------------------------------------------------------------------
                                     First               Second             Third            Fourth
                                    Quarter              Quarter            Quarter          Quarter
        ------------------------------------------------------------------------------------------------
                               High         Low       High      Low      High      Low     High     Low
        ------------------------------------------------------------------------------------------------    
        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
        1995 . . . . . . .    3 5/8        2 11/16   4 1/16   3 1/4    4 11/16   3 5/8    4 9/16   3 7/8

       </TABLE>

<TABLE>
   <C>              <C>                             <C>                                   <C>
   -----------------------------------------------------------------------------------------------------------------
   MARKET           Dillon, Read & Co., Inc.        Legg Mason Wood Walker Inc.           Sandler O'Neill & Partners
   MAKERS           FIA Capital Group Inc.          McConnell Budd & Downes               Sherwood Securities Corp.
                    Gruntal & Co. Incorporated      Nash Weiss/Div of Shatkin Inv.        Smith Barnes Inc.
                    Herzog, Heine, Geduld, Inc.     Ryan Beck & Co. Inc.                  Tucker Anthony Incorporated
                                                    
</TABLE>