SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                -----------------

                                    FORM 10-K
(MARK ONE)

|X|       ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
                                       OR

    |_|   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

         FOR THE TRANSITION PERIOD FROM _____________ TO ______________

                         COMMISSION FILE NUMBER 0-24562

                                CARNEGIE BANCORP
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

          NEW JERSEY                                          22-3257100
  (STATE OR OTHER JURISDICTION                             (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION)                         IDENTIFICATION NO.)

                    619 ALEXANDER ROAD, PRINCETON, N.J. 08540
               (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

         REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE 609-243-7500

        SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE

           SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

                           COMMON STOCK, NO PAR VALUE
                                (TITLE OF CLASS)

                        WARRANTS TO PURCHASE COMMON STOCK
                                (TITLE OF CLASS)

     INDICATE BY CHECK MARK  WHETHER THE  REGISTRANT:  (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE  SECURITIES  EXCHANGE  ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER  PERIOD THAT THE ISSUER
WAS  REQUIRED  TO FILE SUCH  REPORTS),  AND (2) HAS BEEN  SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES |X| NO |_|

     INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT  FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S  KNOWLEDGE,  IN DEFINITIVE PROXY OR INFORMATION  STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K. |X|

     AS OF FEBRUARY 28, 1998,  THERE WERE 2,753,030  SHARES OF THE  REGISTRANT'S
COMMON  STOCK,  NO PAR  VALUE  PER  SHARE,  OUTSTANDING,  AND  BASED ON THE LAST
REPORTED  SALE  PRICE OF  $33.375  PER SHARE ON THE  NASDAQ  STOCK  MARKET,  THE
AGGREGATE  MARKET VALUE OF THE  REGISTRANT'S  COMMON STOCK HELD BY THOSE PERSONS
DEEMED BY THE REGISTRANT TO BE NONAFFILIATES WAS APPROXIMATELY $85,335,403.


<PAGE>


                       DOCUMENTS INCORPORATED BY REFERENCE


                                      None










<PAGE>



                                     PART I

Item 1. Business


General

     Carnegie  Bancorp (the "Company" or  "Registrant") is a New Jersey business
corporation and a bank holding company registered with the Board of Governors of
the Federal  Reserve  System (the "FRB") under the Bank  Holding  Company Act of
1956, as amended (the "BHCA").  The Company was  incorporated on October 6, 1993
for the  purpose of  acquiring  Carnegie  Bank,  N.A.  (the  "Bank") and thereby
enabling the Bank to operate within the bank holding company structure. On April
12, 1994, the Company  acquired one hundred  percent  (100%) of the  outstanding
shares of the Bank.  The  principal  activities  of the  Company  are owning and
supervising the Bank, which engages in a commercial  banking business in Mercer,
Burlington,  Hunterdon,  Morris and Ocean counties, New Jersey and Bucks County,
Pennsylvania.  The Company  directs the policies and  coordinates  the financial
resources of the Bank.

     On  December   15,  1997,   the  Company  and   Sovereign   Bancorp,   Inc.
("Sovereign"),  the parent  company of Sovereign  Bank, a federal  savings bank,
jointly announced the execution of an Agreement and Plan of Merger,  dated as of
December  12, 1997 (the  "Merger  Agreement").  Under the  initial  terms of the
Merger  Agreement,  if the Sovereign  Market Value (as defined  below) as of the
effective  date of the merger is  greater  than or equal to $18.00 per share and
less than or equal to $22.00 per share,  each outstanding share of the Company's
Common Stock would be converted  into such number of shares of common stock,  no
par value,  of Sovereign  (the  "Sovereign  Common Stock") as would equal $35.50
divided by the average of the last reported sales prices of a share of Sovereign
Common Stock for the 15 consecutive trading day period immediately preceding the
effective date (the "Sovereign Market Value").  However, if the Sovereign Market
Value as of the effective date is less than $18.00 per share,  each share of the
Company's  Common  Stock would be  converted  into 1.972  shares  (the  "Maximum
Exchange  Ratio") of Sovereign Common Stock and if the Sovereign Market Value as
of the  effective  date is greater  than  $22.00  per  share,  each share of the
Company's  Common  Stock would be  converted  into 1.614  shares  (the  "Minimum
Exchange Ratio") of Sovereign Common Stock.

     The  Merger  Agreement  also  provides  that the  Company  has the right to
terminate the Merger Agreement if the Sovereign Market Value as of the Effective
Date (i) is less than $14.47 per share and (ii) has  declined in value since the
date of the Merger  Agreement  by an amount  which is at least 15% more than any
decline  in the  weighted  average  per share  prices of shares of common  stock
("Peer Group Common Stock") of a peer group of nine publicly-traded savings bank
holding  companies,  unless  Sovereign  elects to increase  the number of shares
issuable  in exchange  for the  Company's  Common  Stock in order to result in a
minimum  price of $28.53 of Sovereign  Common  Stock per share of the  Company's
Common Stock.

     On January  23,  1998,  Sovereign  announced  a 20% stock  dividend  to its
shareholders.  Under  the  terms of the  Merger  Agreement,  as a result  of the
dividend,  the exchange ratios and relevant  Sovereign  Market Values  discussed
above  were  adjusted  but the  value of the  consideration


<PAGE>


to be received by Carnegie  shareholders in the Merger was unchanged.  Following
Sovereign's  stock  dividend,  if the Sovereign  Market Value is greater than or
equal to $15.00  per share and less  than or equal to  $18.33  per  share,  each
outstanding  share of the  Company's  Common Stock will be  converted  into such
number of shares of Sovereign  Common Stock as shall equal $35.50 divided by the
Sovereign  Market Value. If the Sovereign  Market Value as of the effective date
is less than $15.00 per share, each share of the Company's Common Stock would be
converted into 2.366 shares (the "Adjusted Maximum Exchange Ratio") of Sovereign
Common  Stock and if the  Sovereign  Market  Value as of the  effective  date is
greater than $18.33 per share, each share of the Company's Common Stock would be
converted into 1.937 shares (the "Adjusted Minimum Exchange Ratio") of Sovereign
Common Stock.

     The  effective  date of the  adjustment in the merger  consideration  to be
received  by the  Company's  shareholders  is March 27,  1998 (the  "ex-dividend
date").  As a result of the  Sovereign  Stock  Dividend,  after March 27,  1998,
Carnegie will have the right to terminate the Merger  Agreement if the Sovereign
Market Value as of the Effective Date (i) is less than $12.06 per share and (ii)
has declined in value since the date of the Merger  Agreement by an amount which
is at least 15% more than any decline in the  weighted  average per share prices
of the Peer Group Common Stock,  unless  Sovereign elects to increase the number
of shares issuable in exchange for the Company's Common Stock in order to result
in a  minimum  price of  $28.53  of  Sovereign  Common  Stock  per  share of the
Company's Common Stock.

     The  proposed  Merger is subject  to the  approval  of  various  regulatory
authorities  and a majority  of the votes  cast by holders of Common  Stock at a
duly convened meeting of the Company's shareholders.

     Additionally,  Carnegie Bancorp's common stock purchase warrants expired on
August 18, 1997. All but 1,293 were exercised prior to the expiration date which
added  711,948 new shares of Common Stock and $8.8 million of new  Stockholders'
equity in 1997.

BUSINESS OF THE COMPANY

     The  Company's  primary  business is ownership  of the Bank.  The Bank is a
national bank, which commenced  business in 1988 as a New Jersey state chartered
commercial bank. The Bank currently  operates from its main office in Princeton,
New  Jersey and from  seven  branch  offices  in  Hamilton  Township,  Denville,
Flemington,  Marlton,  Montgomery  and Toms  River,  New Jersey  and  Langhorne,
Pennsylvania.  The deposits of the Bank are insured by the Bank  Insurance  Fund
("BIF") of the Federal Deposit  Insurance  Corporation  ("FDIC").  The Bank is a
member of the Federal Reserve System.

     The Company conducts a general commercial  banking business.  The Company's
loan products  consist  primarily of  commercial  loans (a majority of which are
secured by mortgages on owner-occupied properties),  commercial mortgages, loans
to  professionals  (a  majority  of which are  secured by  business  or personal
assets), and to a lesser extent residential mortgage loans. The Company offers a
full array of deposit  accounts  including  time  deposits,  checking  and other
demand deposit accounts, savings accounts and money market accounts. The Company
targets small businesses,  professionals,  and high net worth individuals as its
prime  customers,  and as a general


<PAGE>


course of  business,  does not  engage in high  volume,  consumer  banking.  The
Company  believes it  competes  successfully  for its target  market by offering
superior service. This service includes having loan officers intimately involved
in the loan approval  process and delivering  prompt  responses to customer loan
applications.   Because  management  believes  its  target  customers  are  more
concerned  with service and the  availability  of loans than price,  the Company
does not try to be the lowest cost source of funds in its market area.

SERVICE AREAS

     The  Company's  service  areas  consist  of  Mercer,  Morris,   Burlington,
Hunterdon and Ocean counties in New Jersey and Bucks County,  Pennsylvania.  The
Company  operates  its main  office in  Princeton,  New Jersey and seven  branch
offices in Marlton, Denville, Hamilton Township, Montgomery, Flemington and Toms
River,  New Jersey and  Langhorne,  Pennsylvania.  Each of these  locations  was
selected by management  based upon the  demographics of the area and a perceived
need for the services  rendered by the Company.  In addition,  management of the
Company is familiar with the business communities in each of these market areas.
The Company also selects branch  locations based on having a perceived "edge" or
advantage in these locations,  usually based on relationships that exist in that
market place.

COMPETITION

     The Company  operates in a highly  competitive  environment  competing  for
deposits  and  loans  with  commercial   banks,   thrifts  and  other  financial
institutions,  many of which have greater financial  resources than the Company.
Many large financial  institutions in New York City and Philadelphia compete for
the business of New Jersey  residents  and  businesses  located in the Company's
primary areas of trade.  Certain of these institutions have significantly higher
lending limits than the Company and provide  services to their  customers  which
the Company does not offer.

     Management believes the Company is able to compete on a substantially equal
basis with its competitors because it provides responsive  personalized services
through  management's  knowledge and awareness of the Company's  service  areas,
customers and business.  Management  believes that this  knowledge and awareness
provide a clear  business  advantage  in  servicing  the  commercial  and retail
banking  needs of the  professional  communities  that  comprise  the  Company's
service areas.

EMPLOYEES

     At December 31, 1997,  the Company  employed 124 full-time  employees and 3
part-time  employees.  None  of  these  employees  is  covered  by a  collective
bargaining  agreement and the Company  believes that its employee  relations are
good.


<PAGE>


                           SUPERVISION AND REGULATION

     Bank  holding  companies  and banks are  extensively  regulated  under both
federal  and state  law.  These laws and  regulations  are  intended  to protect
depositors,  not  stockholders.  To the extent  that the  following  information
describes statutory and regulatory  provisions,  it is qualified in its entirety
by reference to the particular statutory and regulatory  provisions.  Any change
in the applicable  law or regulation may have a material  effect on the business
and prospects of the Company and the Bank.

BANK HOLDING COMPANY REGULATION

     General.  As a bank holding company  registered under the BHCA, the Company
is subject to the regulation and supervision of the FRB. The Company is required
to file with the FRB annual reports and other information regarding its business
operations  and  those  of its  subsidiaries.  Under  the  BHCA,  the  Company's
activities  and those of its  subsidiaries  are limited to banking,  managing or
controlling  banks,  furnishing  services  to or  performing  services  for  its
subsidiaries or engaging in any other activity which the FRB determines to be so
closely  related to banking or managing or  controlling  banks as to be properly
incident thereto.

     The BHCA requires, among other things, the prior approval of the FRB in any
case where a bank holding company  proposes to (i) acquire all or  substantially
all of the assets of any other bank,  (ii) acquire direct or indirect  ownership
or control of more than 5% of the  outstanding  voting stock of any bank (unless
it owns a majority of such bank's voting  shares) or (iii) merge or  consolidate
with any other bank holding  company.  The FRB will not approve any acquisition,
merger,  or  consolidation  that  would  have a  substantially  anti-competitive
effect,  unless the anti-  competitive  impact of the  proposed  transaction  is
clearly  outweighed by a greater public  interest in meeting the convenience and
needs of the community to be served. The FRB also considers capital adequacy and
other financial and managerial  resources and future  prospects of the companies
and the  banks  concerned,  together  with  the  convenience  and  needs  of the
community to be served, when reviewing acquisitions or mergers.

     Additionally,  the BHCA  prohibits a bank  holding  company,  with  certain
limited exceptions, from (i) acquiring or retaining direct or indirect ownership
or control of more than 5% of the outstanding  voting stock of any company which
is not a bank or bank holding company,  or (ii) engaging  directly or indirectly
in activities  other than those of banking,  managing or controlling  banks,  or
performing  services for its subsidiaries;  unless such non-banking  business is
determined  by the FRB to be so  closely  related  to  banking  or  managing  or
controlling  banks  as  to  be  properly   incident  thereto.   In  making  such
determinations,  the FRB is  required  to weigh  the  expected  benefits  to the
public,  such  as  greater  convenience,   increased  competition  or  gains  in
efficiency, against the possible adverse effects, such as undue concentration of
resources,  decreased or unfair competition,  conflicts of interest,  or unsound
banking practices.

     There are a number of obligations and restrictions  imposed on bank holding
companies and their  depository  institution  subsidiaries by law and regulatory
policy that are designed to minimize  potential  loss to the  depositors of such
depository institutions and the FDIC insurance funds in the event the depository
institution becomes in danger of default. Under a policy of the FRB with


<PAGE>


respect to bank holding company  operations,  a bank holding company is required
to  serve  as a  source  of  financial  strength  to its  subsidiary  depository
institutions   and  to  commit   resources  to  support  such   institutions  in
circumstances  where it might not do so absent such policy. The FRB also has the
authority  under the BHCA to require a bank  holding  company to  terminate  any
activity  or to  relinquish  control  of a  non-bank  subsidiary  upon the FRB's
determination  that such  activity or control  constitutes a serious risk to the
financial  soundness  and  stability of any bank  subsidiary of the bank holding
company.

     Capital Adequacy  Guidelines for Bank Holding  Companies.  In January 1989,
the FRB adopted risk-based  capital  guidelines for bank holding companies.  The
risk-based   capital   guidelines  are  designed  to  make  regulatory   capital
requirements  more sensitive to differences in risk profile among banks and bank
holding  companies,  to account for off-balance sheet exposure,  and to minimize
disincentives  for holding liquid  assets.  Under these  guidelines,  assets and
off-balance  sheet  items  are  assigned  to broad  risk  categories  each  with
appropriate  weights.  The  resulting  capital  ratios  represent  capital  as a
percentage of total risk-weighted assets and off-balance sheet items.

     The  minimum  ratio of total  capital to  risk-weighted  assets  (including
certain off-balance sheet activities,  such as standby letters of credit) is 8%.
At least 4% of the total capital is required to be "Tier I Capital,"  consisting
of common  stockholders'  equity,  and qualifying  preferred stock, less certain
goodwill items and other  intangible  assets.  The remainder ("Tier II Capital")
may consist of (a) the allowance for loan losses of up to 1.25% of risk-weighted
assets,   (b)  excess  of  qualifying   preferred   stock,  (c)  hybrid  capital
instruments,  (d) perpetual debt, (e) mandatory convertible securities,  and (f)
subordinated  debt  and  intermediate-term  preferred  stock up to 50% of Tier I
capital.  Total capital is the sum of Tier I and Tier II capital less reciprocal
holdings of other banking  organizations'  capital  instruments,  investments in
unconsolidated  subsidiaries  and any other  deductions as determined by the FRB
(determined  on a case by case  basis  or as a matter  of  policy  after  formal
rule-making).

     Bank  holding  company  assets are given  risk-weights  of 0%, 20%, 50% and
100%. In addition,  certain  off-balance  sheet items are given  similar  credit
conversion  factors  to  convert  them to asset  equivalent  amounts to which an
appropriate  risk-weight  will  apply.  These  computations  result in the total
risk-weighted assets. Most loans are assigned to the 100% risk category,  except
for performing first mortgage loans fully secured by residential  property which
carry a 50% risk-weighting.  Most investment securities  (including,  primarily,
general  obligation  claims  of states or other  political  subdivisions  of the
United  States) are assigned to the 20% category,  except for municipal or state
revenue bonds, which have a 50% risk-weight,  and direct obligations of the U.S.
treasury  or  obligations  backed  by the  full  faith  and  credit  of the U.S.
Government,  which have a 0% risk-weight. In converting off-balance sheet items,
direct credit  substitutes  including general  guarantees and standby letters of
credit  backing  financial   obligations,   are  given  a  100%  risk-weighting.
Transaction related  contingencies such as bid bonds,  standby letters of credit
backing nonfinancial obligations,  and undrawn commitments (including commercial
credit  lines  with an  initial  maturity  or more  than  one  year)  have a 50%
risk-weighting.   Short  term   commercial   letters   of  credit   have  a  20%
risk-weighting and certain  short-term  unconditionally  cancelable  commitments
have a 0% risk-weighting.


<PAGE>


     In addition to the  risk-based  capital  guidelines,  the FRB has adopted a
minimum Tier I capital (leverage) ratio, under which a bank holding company must
maintain a minimum level of Tier I capital to average total consolidated  assets
of at least  3% in the  case of a bank  holding  company  that  has the  highest
regulatory  examination  rating and is not contemplating  significant  growth or
expansion.  All other bank holding companies are expected to maintain a leverage
ratio of at least 100 to 200 basis points above the stated minimum.

BANK REGULATION

     The Bank is a national  bank  subject to the  supervision  of, and  regular
examination by, the  Comptroller of the Currency (the "OCC"),  as well as to the
supervision  of the  FDIC.  The FDIC  insures  the  deposits  of the Bank to the
current maximum allowed by law through the BIF.

     The  operations  of the Bank are  subject  to state  and  federal  statutes
applicable to banks which are members of the Federal  Reserve  System and to the
regulations  of the FRB, the FDIC and the OCC.  Such  statutes  and  regulations
relate to required reserves against deposits,  investments,  loans,  mergers and
consolidations,  issuance of securities, payment of dividends,  establishment of
branches, and other aspects of the Bank's operations.  Various consumer laws and
regulations also affect the operations of the Bank,  including state usury laws,
laws relating to  fiduciaries,  consumer credit and equal credit and fair credit
reporting.  Under the provisions of the Federal Reserve Act, the Bank is subject
to certain  restrictions  on any  extensions  of credit to the  Company or, with
certain  exceptions,  other  affiliates,  on  investments  in the stock or other
securities of national  banks,  and on the taking of such stock or securities as
collateral.  These  regulations and restrictions may limit the Company's ability
to  obtain  funds  from  the  Bank  for its  cash  needs,  including  funds  for
acquisitions,  and the payment of dividends,  interest and  operating  expenses.
Further,  the Bank is prohibited from engaging in certain tying  arrangements in
connection with any extension of credit, lease or sale of property or furnishing
of  services.  For  example,  the Bank may not  generally  require a customer to
obtain  other  services  from the Bank or the  Company,  and may not require the
customer  to  promise  not to obtain  other  services  from a  competitor,  as a
condition  to an  extension  of  credit.  The Bank also is  subject  to  certain
restrictions  imposed by the  Federal  Reserve  Act on  extensions  of credit to
executive officers, directors, principal stockholders or any related interest of
such persons.  Extensions of credit (i) must be made on  substantially  the same
terms  (including  interest  rates and  collateral)  as,  and  following  credit
underwriting procedures that are not less stringent than those prevailing at the
time for, comparable transactions with persons not covered above and who are not
employees  and (ii) must not involve  more than the normal risk of  repayment or
present other  unfavorable  features.  In addition  extensions of credit to such
persons  beyond limits set by FRB  regulations  must be approved by the Board of
Directors.  The Bank also is subject to certain lending limits and  restrictions
on overdrafts to such persons.  A violation of these  restrictions may result in
the  assessment  of  substantial  civil  monetary  penalties  on the Bank or any
officer, director,  employee, agent or other person participating in the conduct
of the affairs of the Bank or the imposition of a cease and desist order.

     As an institution  whose deposits are insured by the FDIC, the Bank also is
subject to insurance  assessments  imposed by the FDIC.  Under  current law, the
insurance  assessment to be paid by BIF insured  institutions is as specified in
schedules  issued by the FDIC from time to time. The amount of the assessment is
determined  in part to  allow  for a  minimum  BIF  reserve  ratio  of


<PAGE>


1.25% of estimated insured deposits.  The current premium assessment schedule is
from 0% to  0.31%  of an  institution's  average  assessment  base.  The  actual
assessment  to be  paid  by  each  BIF  member  is  based  on the  institution's
assessment  risk  classification,  which is  determined  based upon  whether the
institution  is considered  "well  capitalized,"  "adequately  capitalized,"  or
"under-capitalized,"  as those  terms have been  defined in  applicable  federal
regulations  adopted to implement the prompt corrective action provisions of the
Federal Deposit Insurance Act, and whether such institution is considered by its
supervising agency to be financially sound or to have supervisory concerns.

     Recent Regulatory Enactments.  On September 30, 1996, the Deposit Insurance
Funds Act of 1996 (the  "Deposit  Act") became law.  The primary  purpose of the
Deposit Act is to  recapitalize  the Savings  Association  Insurance Fund of the
FDIC (the "SAIF") by charging all SAIF member  institutions  a one-time  special
assessment.  The Deposit Act will lead to equalization of the deposit  insurance
assessments between Bank and SAIF insured  institutions,  and will also separate
out from insurance  assessment  payments required for debt service and principal
repayment on bonds  issued by the Federal  Finance  Corporation  ("FICO") in the
mid-1980s  to fund a portion  of the  thrift  bailout.  Under the  Deposit  Act,
BIF-insured  institutions will, for the first time, be required to pay a portion
of the obligations  owed under the FICO bonds. The rate of contribution has been
set for SAIF  members  at 6.4  basis  points  on  assessed  deposits  while  BIF
institutions will only be required to pay 1.3 basis points on assessed deposits.
This  disparity  will stay in effect  until such time as the Federal  thrift and
commercial  bank  charters  are  merged  and the  deposit  insurance  funds  are
thereafter merged.  Under the Deposit Act, this may occur by January 1, 1999. At
that time, all federally  insured  institutions  should have the same total FDIC
assessment.

     On September 29, 1994,  the  Riegle-Neal  Interstate  Banking and Branching
Efficiency Act (the "Interstate Act") was enacted.  The Interstate Act generally
enhances the ability of bank holding companies to conduct their banking business
across state  boarders.  The Interstate Act has two main  provisions.  The first
provision generally provides that commencing on September 29, 1995, bank holding
companies may acquire banks located in any state regardless of the provisions of
state law. These  acquisitions  are subject to certain  restrictions,  including
caps on the total percentage of deposits that a bank holding company may control
both nationally and in any single state.

     The second major  provision of the  Interstate Act permits banks located in
different  states to merge and  continue to operate as a single  institution  in
more  than  one  state,  so long as any  state  involved  did not opt out of the
interstate bank merger provisions prior to June 1, 1997.

     A final  provision of the Interstate Act permits banks located in one state
to establish  new branches in another  state  without  obtaining a separate bank
charter in that state,  but only if the state in which the branch is located has
adopted legislation specifically allowing interstate de novo branching.

     In April,  1996, the New Jersey legislature passed legislation that permits
an out-of-state  institution to acquire an existing branch of a New Jersey-based
institution,  and thereby conduct a business in New Jersey. The legislation does
not permit  interstate de novo branches.  This  Legislation is likely to enhance
competition  in the New Jersey  marketplace  as bank holding  companies  located
outside of New Jersey become freer to acquire  institutions  located  within the
state of New Jersey.


<PAGE>


ITEM 2.  DESCRIPTION OF PROPERTY

The Company's  main offices are located at 619 Alexander  Road,  Princeton,  New
Jersey. The Company leases office space in the building.

The Company  maintains eight branches,  seven of which are leased and subject to
renewal.  The Company believes it will have no difficulty renewing each of these
leases.  The table set forth below  provides  additional  information  regarding
these leases:

BRANCH & LOCATION
     EXPIRATION DATE OF LEASE

Main Office:
     619 Alexander Road
     Princeton, New Jersey 08540        March 31, 2015
                                                  (2 five-year renewal options)

Hamilton Township Branch Office:
     One Edinburg Road
     Mercerville, New Jersey  08619     June 30, 2001
                                                  (3 five-year renewal options)

Marlton Branch Office:
     6000 West Lincoln Drive
     Marlton, New Jersey  08053         July 16, 2001
                                                  (2 five-year renewal options)

Denville Branch Office:
     125 East Main Street
     Denville, New Jersey  07834        December 31, 2002
                                                  (3 five-year renewal options)

Montgomery Branch Office:
     One Airport Plaza
     Route 206 North
     Princeton, New Jersey  08540       August 31, 2000
                                                  (2 five-year renewal options)

Toms River Branch Office:
     910 Hooper Avenue
     Toms River, New Jersey  08753      June 30, 2005
                                                  (1 five-year renewal option)



<PAGE>



Langhorne Branch Office:
     100 North Buckstown Drive
     Suite E-204
     Langhorne, PA  17047               January 31, 2002
                                                  (1 four-year renewal option)

Flemington Branch Office:
     171 Main Street
     Flemington, NJ  08822              Owned by Company

ITEM 3.  LEGAL PROCEEDINGS

The Company and the Bank are  periodically  parties to or otherwise  involved in
legal  proceedings  arising in the normal course of business,  such as claims to
enforce liens, claims involving the making and servicing of real property loans,
and other issues  incident to the Bank's  business.  Management does not believe
that there is any pending or  threatened  proceeding  against the Company or the
Bank  which,  if  determined  adversely,  would  have a  material  effect on the
business or financial position of the Company or the Bank.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted for a vote of the Registrant's shareholders during the
Fourth Quarter of 1997.

                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's Common Stock is traded over-the-counter and quoted by the National
Association of Securities Dealers through the NASDAQ National Market System. The
NASDAQ symbol for the  Company's  Common Stock is CBNJ. As of December 31, 1997,
there were 660 registered holders of Common Stock.

The  following  table  presents the sale price range and dividends per share for
the eight  quarters ended December 31, 1997. The high and low bid prices reflect
inter-dealer quotations,  without commissions, and may not necessarily represent
actual  transactions.  The high and low bid  prices and the cash  dividends  per
share have not been adjusted for stock dividends.

                            COMMON STOCK PRICE RANGE

                                    High            Low          Dividend

1997 First Quarter                  $19.63          $17.50        $0.14

     Second Quarter                  18.75           16.50         0.14

     Third Quarter                   27.50           18.25         0.14

     Fourth Quarter                  35.00           23.38         0.14


1996 First Quarter                  $18.00          $15.75         $.12

     Second Quarter                  16.25           14.25          .12

     Third Quarter                   17.13           15.00          .12

     Fourth Quarter                  20.13           16.75          .13


<PAGE>

A dividend  reinvestment  and stock purchase plan is available for  stockholders
who wish to increase their holdings.  Under the plan, quarterly dividends may be
reinvested in the Company's Common Stock at market value. In addition,  optional
cash  investments  of not less  than  $25 nor more  than  $5,000  per  quarterly
investment  period  may be  made in  Common  Stock,  at  market  value,  without
incurring a commission or fee.

ITEM 6.  SELECTED FINANCIAL DATA

SELECTED CONSOLIDATED FINANCIAL DATA

The selected  consolidated  financial data set forth at and for each of the five
years presented  below,  except for the "Performance  Ratios",  "Net charge-offs
(recoveries)  to average  loans" and  "Leverage  capital",  are derived from the
audited   consolidated   financial  statements  of  the  Company.  The  selected
consolidated  financial  information  should  be read in  conjunction  with  the
consolidated  financial  statements  of the Company and the  accompanying  notes
thereto, which are presented elsewhere herein.


<TABLE>
<CAPTION>
                                                                               YEAR ENDED DECEMBER 31,
                                                  -----------------------------------------------------------------------------
                                                     1997             1996             1995             1994             1993
                                                  ---------        ---------        ---------        ---------        ---------
                                                                   (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                               <C>              <C>              <C>              <C>              <C>
INCOME STATEMENT DATA:
Interest income ...............................   $  32,414        $  24,464        $  18,706        $  13,555        $   9,877
Interest expense ..............................      16,037           10,884            8,464            5,149            3,639
                                                  ---------        ---------        ---------        ---------        ---------
Net interest income ...........................      16,377           13,580           10,242            8,406            6,238
Provision for loan losses .....................         446            1,609              369              650              429
                                                  ---------        ---------        ---------        ---------        ---------
Net interest income after provision for
    loan losses ...............................      15,931           11,971            9,873            7,756            5,809
Non-interest income ...........................       1,034            1,360              744              495              471
Non-interest expense ..........................      11,482           10,054            7,724            6,056            4,696
                                                  ---------        ---------        ---------        ---------        ---------
Income before income taxes ....................       5,483            3,277            2,893            2,195            1,584
Income tax expense ............................       1,858            1,133              765              656              520
                                                  ---------        ---------        ---------        ---------        ---------
Net income ....................................   $   3,625        $   2,144        $   2,128        $   1,539        $   1,064
                                                  =========        =========        =========        =========        =========

PER SHARE DATA:
Net income - basic ............................   $    1.55        $    1.10        $    1.11        $    1.11        $    0.98
           - diluted ..........................        1.42             1.00             1.08             1.11             0.98
Cash dividends (1)  ...........................        0.56             0.49             0.48             0.40             0.32
Book value ....................................       12.80            11.65            11.27             9.56             9.90
Weighted average shares outstanding:
                          - basic .............   2,336,058        1,943,760        1,925,158        1,381,622        1,090,680
                          - diluted ...........   2,544,075        2,141,255        1,964,590        1,381,622        1,090,680

BALANCE SHEET DATA:
Total assets ..................................   $ 431,886        $ 343,357        $ 250,562        $ 195,654        $ 154,363
Federal funds sold ............................       1,725             --               --               --              2,350
Loans, net ....................................     284,789          263,797          162,587          138,897          116,266
Investment securities .........................     121,471           53,374           70,577           44,920           28,728
Deposits ......................................     332,897          302,562          210,201          176,789          143,178
Stockholders' equity ..........................      35,224           23,742           21,794           18,056           10,798
Average equity to average total assets ........        7.39%            7.75%            8.84%            7.67%            7.10%

PERFORMANCE RATIOS:
Return on average assets ......................        0.94%            0.75%            0.95%            0.87%            0.81%
Return on average stockholders' equity ........       12.69%            9.68%           10.72%           11.39%           11.38%
Net interest margin (2) .......................        4.50%            5.11%            5.02%            5.16%            5.08%
Ratio of earnings to fixed charges (3)  .......        1.34             1.29             1.33             1.42             1.42

ASSET QUALITY RATIOS:
Allowance for loan losses to total loans ......        1.03%            1.00%            1.07%            1.00%            0.84%
Allowance for loan losses to non-accrual
    loans .....................................       68.19%           79.74%           43.56%           67.80%           30.44%
Non-performing loans to total loans ...........        1.51%            1.25%            2.45%            1.47%            2.75%
Non-performing assets to total assets .........        1.12%            1.11%            1.61%            1.06%            2.09%
Net charge-offs (recoveries) to average
    loans .....................................        0.06%            0.34%            0.01%            0.19%            0.28%

LIQUIDITY AND CAPITAL RATIOS:
Dividend payout ...............................       36.09%           44.42%           43.42%           35.91%           32.80%
Loans to deposits .............................       86.44%           88.07%           78.18%           79.36%           81.89%
Tier I risk-based capital .....................       11.81%            8.81%           12.04%           14.06%            9.61%
Total risk-based capital ......................       12.80%            9.79%           13.03%           15.06%           10.48%
Leverage capital ..............................        8.36%            7.20%            8.87%           10.47%            8.20%
</TABLE>
----------

(1)  Cash dividends per share have not been restated for stock dividends.

(2)  Yields  on   tax-exempt   obligations   have  been   computed  on  a  fully
     tax-equivalent basis, assuming a Federal income tax rate of 34%.

(3)  The ratio of earnings to fixed  charges is  calculated  by dividing  income
     from   continuing   operations   before  fixed  charges  and  income  taxes
     ("earnings") by fixed charges.  Fixed charges  consist of interest  expense
     and that  portion  of  rental  expense  that  the  Company  believes  to be
     representative of interest.


<PAGE>


ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

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

The Management's  Discussion and Analysis of Financial  Condition and Results of
Operations  of the  Company  analyzes  the major  elements  of its  consolidated
balance  sheets  and  statements  of  income.  This  section  should  be read in
conjunction   with  the  Company's   consolidated   financial   statements   and
accompanying notes, included herein.

OVERVIEW AND STRATEGY

On December  15,  1997,  the Company and  Sovereign  Bancorp,  Inc.,  the parent
company of  Sovereign  Bank,  jointly  announced  the  execution of a definitive
agreement for Sovereign to acquire the Company.  The terms of the agreement call
for Sovereign to exchange $35.50 in Sovereign  common stock for each outstanding
share of the Company's Common Stock.

The  December  15,  1997  announcement  indicated  the price would stay fixed at
$35.50 per the  Company's  share if  Sovereign's  average  stock price  remained
between  $18.00  and $22.00 per share  during  the  15-day  period  prior to the
closing of the transaction. If the average price of Sovereign's stock dropped to
$18.00 per share or below  during  the  pricing  period  prior to  closing,  the
Company's  shareholders would receive a fixed rate of 1.972 shares (the "Maximum
Exchange  Ratio") of  Sovereign  common  stock for each  share of the  Company's
Common Stock. Conversely, if Sovereign's average stock price is $22.00 per share
or higher, the Company's shareholders would receive a fixed rate of 1.614 shares
(the "Minimum  Exchange  Ratio") of Sovereign common stock for each share of the
Company's  Common Stock. The Company has the right to terminate the agreement if
the average  stock price of  Sovereign  during the 15-day  pricing  period falls
below $14.47 and Sovereign's decline in value is 15% greater than the percentage
decline of a group of similar  financial  institutions,  subject to  Sovereign's
right to increase  the exchange  ratio in order to result in a minimum  price of
$28.53 in Sovereign common stock.

On  January  23,  1998,   Sovereign  announced  a  20%  stock  dividend  to  its
shareholders.  This stock  dividend will not affect the value that the Company's
shareholders will receive as a result of this acquisition; although the exchange
ratio will be adjusted accordingly.  Because of Sovereign's stock dividend,  the
$18.00  price  adjusts  to  $15.00  per  share  (equivalent  to 2.366  shares of
Sovereign  for each Company  share) and the $22.00  price  adjusts to $18.33 per
share  (equivalent to 1.937 shares of Sovereign for each Company share).  If the
average price of Sovereign's stock drops to $15.00 per share or below during the
pricing  period prior to closing,  the  Company's  shareholders  would receive a
fixed rate of 2.366 shares (the "Maximum  Exchange  Ratio") of Sovereign  common
stock for each share of Company Common Stock. Conversely, if Sovereign's average
stock  price is $18.33 per share or higher,  the  Company's  shareholders  would
receive a fixed rate of 1.937 shares (the "Minimum Exchange Ratio") of Sovereign
common stock for each share of Company Common Stock.  The effective date for the
adjustment is March 27, 1998 (the ex-dividend  date).  After March 27, 1998, the
Company will have the right to  terminate  the  agreement  if the average  stock
price of  Sovereign  during the 15-day  pricing  period  falls below  $12.06 and
Sovereign's  decline in value is 15% greater  than the  percentage  decline of a
group  of  similar  financial  institutions,  subject  to  Sovereign's  right to
increase the exchange  ratio in order to result in a minimum  price of $28.53 in
Sovereign  common  stock.  The  merger is  subject  to the  approval  of various
regulatory agencies and the Company's  shareholders.  It is anticipated that the
transaction  will close in the second quarter of 1998, and will be accounted for
as a pooling of interests.

Since  Carnegie  Bank  commenced  operations  in April,  1988,  the  Company has
increased its asset base at a rapid pace.  The Company's  assets have grown from
$119.5  million at December  31, 1992 to $431.9  million at December 31, 1997, a
five year  compound  annual  growth  rate of 29.3%.  This  growth  has come both
through  the  Company's  success  in  penetrating  its  original  market  in the
Princeton, New Jersey area, and through expansion into other market areas in New
Jersey and Pennsylvania. Although the Company's emphasis has been on growth, the
Company became profitable in its second quarter of operations, and its


<PAGE>


net income was $3.6 million for the year ended December 31, 1997, a 69% increase
over net income for 1996.  As a result of the  Company's  success in  continuing
growth while maintaining profitability, and in order to provide the stockholders
with a return on their  investment,  the Company began paying cash  dividends in
the first  quarter of 1992,  and has  continued  to pay cash  dividends in every
quarter  since the first  quarter of 1992.  The  dividend per share for 1997 and
1996 was $.56 and $.49, respectively.

The new  branch  offices  opened in Toms  River,  New Jersey in  November  1995,
Montgomery, New Jersey in January 1996, Langhorne, Pennsylvania in May 1996, and
Flemington,  New Jersey in August 1996 all came into profitability in 1997. That
profitability,  together  with the  benefit of the full year effect on income of
the strong 1996 loan growth,  made 1997 a year in which net income experienced a
dramatic year over year improvement.  Also of note, in January 1997, the Company
and Regent  Bancshares  Corp.  ("Regent")  mutually  agreed to  terminate  their
proposed merger due to the  significant  delays which had been  experienced.  In
connection  with the  termination  of the proposed  merger,  and pursuant to the
terms of the Merger Agreement,  Regent paid the Company the sum of $722 thousand
in  reimbursement  for expenses  incurred by the Company in connection  with the
merger.  The  termination  of the merger  therefore did not affect the Company's
results of operation for 1996.


<PAGE>


MANAGEMENT'S DISCUSSION AND ANALYSIS  (CONTINUED)
--------------------------------------------------------------------------------

NET INCOME

The Company  earned $3.6 million,  or $1.55 per share,  on a basic  earnings per
share basis,  and $1.42 per share on a diluted  earnings per share basis for the
year ended  December 31, 1997 compared to $2.1 million,  or $1.10 per share on a
basic  earnings  per share basis and $1.00 per share on a diluted  earnings  per
share basis for the year ended  December 31, 1996. Net income for the year ended
December 31, 1995 was $2.1 million or $1.11 per share,  on a basic  earnings per
share basis,  and $1.08 per share on a diluted  earnings  per share  basis.  Net
interest  income  for 1997  increased  $2.8  million  or 20.6% to $16.4  million
compared  to $13.6  million  for 1996.  Net  interest  income for 1995 was $10.2
million.  The provision  for loan losses for 1997 was $446 thousand  compared to
$1.6  million for 1996, a decline of $1.2 million or 75.0%.  The  provision  for
1995  was  $369  thousand.  The  reduced  provision  in 1997  compared  to 1996,
reflected slower loan growth and fewer loans charged off in 1997. Loan growth in
1997, year end to year end,  totaled $21.3 million,  compared to loan growth for
1996 of $102.1  million,  and $24.0  million in 1995.  Loans charged off in 1997
totaled $216  thousand  compared to $708  thousand in 1996,  and $67 thousand in
1995.  Net interest  income after the  provision  was $15.9 million for 1997, an
increase of $3.9 million or 32.5%,  compared to $12.0  million for 1996 and $9.9
million for 1995.  Non-interest income was $1.0 million in 1997 compared to $1.4
million for 1996 and $744 thousand for 1995.  The $326 thousand or 24.0% decline
in  non-interest  income in 1997,  compared  to 1996,  reflects a decline in the
gains on the sale of other real-estate owned of $228 thousand,  and a decline in
the net gains on securities  transactions of $261 thousand offset by an increase
in service fees on deposits of $34  thousand,  and an increase in other fees and
commissions of $129 thousand.  Total  non-interest  expense was $11.5 million in
1997,  compared to $10.1 million in 1996, and $7.7 million in 1995. The increase
in  non-interest  expenses in 1997 was due  primarily to the full year effect of
the three new branch offices opened during 1996.

For 1996, net interest income  increased $3.3 million or 32.4%, due primarily to
loan growth, which was partially offset by an increase in non-interest  expenses
of $2.3 million.  Most of the increase in  non-interest  expense,  in 1996,  was
attributable  to the three new branch  offices  opened in 1996,  and the one new
branch  office  opened in November  1995.  Additionally,  the provision for loan
losses  increased  $1.2  million,  primarily  due to loan growth  including  the
purchase of $32.8 million in loan  participations from Regent National Bank, and
due to loans charged off totaling  $708  thousand in 1996,  compared to only $67
thousand in 1995. That additional  expense was partially  offset by net gains on
the sale of securities and other real estate owned of $599 thousand.

The weighted  average number of shares  outstanding,  for the basic earnings per
share  calculation  and  the  diluted  earnings  per  share   calculation,   was
substantially  higher  in 1997 at 2.3  million  and 2.5  million,  respectively,
compared to 1.9 million and 2.1 million, respectively in 1996. The 1997 increase
occurred  because 712 thousand  warrants and options were  exercised,  primarily
during the third  quarter of 1997,  which  substantially  increased  the average
number of shares  outstanding  for the year. The decline in net income per share
in  1996  was  the  result  of the  increase  in the  Company's  average  shares
outstanding  due to the exercise of stock  purchase  warrants and stock options,
totaling 39.8 thousand  shares,  and 82.6 thousand new shares issued  because of
the Company's 5% stock dividend in 1996.  For 1995, the weighted  average number
of shares  outstanding,  for the basic  earnings per share  calculation  and the
diluted  earnings  per  share  calculation,  was 1.9  million  and 2.0  million,
respectively.


<PAGE>


MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
--------------------------------------------------------------------------------

AVERAGE BALANCES AND NET INTEREST INCOME

Net  interest  income,  the primary  source of the  Company's  earnings,  is the
difference between interest and fees earned on loans and other  interest-earning
assets,  and interest paid on deposits and other  interest-bearing  liabilities.
Interest-earning assets include loans to businesses and individuals,  investment
securities,  interest-earning  deposits with other banks, and Federal funds sold
in the inter-bank market.  Interest-bearing  liabilities are comprised primarily
of interest-bearing  demand accounts,  savings accounts,  money market accounts,
time  deposits  and  borrowed  funds.   Funds   attracted  by   interest-bearing
liabilities are invested in interest-earning assets.  Accordingly,  net interest
income  depends  upon  the  volume  and  mix  of  interest-earning   assets  and
interest-bearing liabilities and the interest rates earned or paid on them.


<PAGE>


Interest on loans to and obligations of states,  municipalities and other public
entities is not subject to Federal  income  tax. As such,  the stated  (pre-tax)
yield on these assets is lower than the yields on taxable assets of similar risk
and  maturity.  In  order  to make  the  pre-tax  income  and  resultant  yields
comparable to taxable loans and investments,  a tax-equivalent  basis adjustment
was added to interest income in the following  tables.  This adjustment has been
calculated  using  the  U.S.  Federal  statutory  income  tax  rate of 34%.  The
following table  summarizes the amount that has been added to interest income as
presented in the Consolidated Condensed Statements of Income.

                                                Twelve Months Ended December 31,
                                               ---------------------------------
                                                 1997         1996         1995
                                               -------      -------      -------
Income per consolidated statements of
  income ...................................   $32,414      $24,464      $18,706
Tax equivalent basis adjustment:
  Loans ....................................        34           17            0
  Investment securities ....................       231          197          499
                                               -------      -------      -------
Interest income adjusted to fully tax-
  equivalent basis .........................    32,679       24,678       19,205
Interest expense ...........................    16,037       10,884        8,464
                                               -------      -------      -------
Net interest income adjusted to fully tax-
  equivalent basis .........................   $16,642      $13,794      $10,741
                                               =======      =======      =======

The following tables titled "Consolidated  Average Balance Sheet with Resultant
Interest  and  Average  Rates" and  "Analysis  of Changes  in  Consolidated  Net
Interest  Income" present by category the major factors that  contributed to the
changes in net interest  income for the year 1997  compared to the year 1996 and
the year 1996 compared to the same period for 1995.


<PAGE>


<TABLE>
   CONSOLIDATED AVERAGE BALANCE SHEET
WITH RESULTANT INTEREST AND AVERAGE RATES


<CAPTION>
                                                         1997                         1996                         1995
                                             ----------------------------  ---------------------------  ---------------------------
                                                       Interest                     Interest                     Interest
                                             Average   Income/    Average   Average  Income/   Average   Average  Income/   Average
                                             Balance   Expense     Rate     Balance  Expense    Rate     Balance  Expense     Rate
                                             --------  --------  --------  -------- --------  --------  -------- --------  --------
<S>                                          <C>       <C>       <C>       <C>      <C>       <C>       <C>      <C>       <C>
ASSETS
--------------------------------------------
Earning Assets:
  Federal Funds Sold ....................... $  5,250  $    284      5.41% $  1,989 $    106      5.33% $  8,040 $    475      5.91%
  Investment Securities:
    Securities available for sale:
      U. S. Gov't & Mtge-backed
        Securities .........................   32,950     2,151      6.53%   30,488    2,048      6.72%   37,146    2,384      6.42%
      State & Political Subdivisions (1) ...    7,638       680      8.91%    7,432      580      7.80%        0        0      0.00%
      Other Securities .....................    8,527       556      6.52%    6,038      378      6.26%    2,462      151      6.13%
                                             --------  --------  --------  -------- --------  --------  -------- --------  --------
                                               49,115     3,387      6.90%   43,958    3,006      6.84%   39,608    2,535      6.40%

    Securities held to maturity:
      U. S. Gov't & Mtge-backed
        Securities .........................   43,404     3,121      7.19%   18,524    1,324      7.15%        0        0      0.00%
      State & Political
        Subdivisions (1) ...................        0         0      0.00%        0        0      0.00%   18,531    1,468      7.92%
                                             --------  --------  --------  -------- --------  --------  -------- --------  --------
                                               43,404     3,121      7.19%   18,524    1,324      7.15%   18,531    1,468      7.92%

         Total Investment Securities .......   92,519     6,508      7.03%   62,482    4,330      6.93%   58,139    4,003      6.89%
                                             --------  --------  --------  -------- --------  --------  -------- --------  --------

    Loans:(2)(3)
      Comm'l Loans & Comm'l Mtgs ...........  235,361    22,666      9.63%  174,154   17,482     10.04%  119,618   12,248     10.24%
      Residential Mortgages ................   24,711     2,096      8.48%   22,239    1,911      8.59%   25,243    2,189      8.67%
      Installment Loans ....................   12,303     1,125      9.14%    9,114      849      9.32%    2,924      290      9.92%
                                             --------  --------  --------  -------- --------  --------  -------- --------  --------
         Total Loans .......................  272,375    25,887      9.50%  205,507   20,242      9.85%  147,785   14,727      9.97%
                                             --------  --------  --------  -------- --------  --------  -------- --------  --------

      Total Earning Assets .................  370,144    32,679      8.83%  269,978   24,678      9.14%  213,964   19,205      8.98%

Non-Interest Earning Assets:
  Loan Loss Reserve ........................   (2,855)                       (2,079)                      (1,562)
  Held For Sale Securities Valuation .......     (164)                         (140)                      (1,275)
  All Other Assets .........................   19,439                        18,051                       13,533
                                             --------                      --------                     --------

      Total Assets ......................... $386,564                      $285,810                     $224,660
                                             ========                      ========                     ========

LIABILITIES & EQUITY
--------------------------------------------
Interest-Bearing Liabilities:
  Savings and Money Market Accounts ........ $157,538     7,301      4.63% $ 88,998    3,519      3.95% $ 79,988    3,096      3.87%
  Time Deposits ............................  115,350     6,507      5.64%  102,450    5,576      5.44%   86,803    5,071      5.84%
  Short-term borrowings ....................   19,573     1,159      5.92%   20,804    1,160      5.58%    4,906      297      6.05%
  Long-term debt ...........................   17,302     1,070      6.18%   10,075      629      6.24%        0        0      0.00%
                                             --------  --------  --------  -------- --------  --------  -------- --------  --------

      Total Interest-Bearing
        Liabilities ........................  309,763    16,037      5.18%  222,327   10,884      4.90%  171,697    8,464      4.93%

  Demand Deposits ..........................   46,133                        40,684                       32,287
  Other Liabilities ........................    2,099                           640                          826
  Shareholders' Equity .....................   28,569                        22,159                       19,850
                                             --------                      --------                     --------

      Total Liabilities & Equity ........... $386,564                      $285,810                     $224,660
                                             ========                      ========                     ========


NET INTEREST INCOME (FULLY
  TAXABLE BASIS) ...........................           $ 16,642                     $ 13,794                     $ 10,741
                                                       ========                     ========                     ========

NET INTEREST MARGIN (FULLY
  TAXABLE BASIS) ...........................                         4.50%                        5.11%                        5.02%
                                                                 ========                     ========                     ========

EQUITY TO ASSETS RATIO .....................                         7.39%                        7.75%                        8.84%
                                                                 ========                     ========                     ========
</TABLE>

(1)  The tax-equivalent  basis adjustment was computed based on a Federal income
     tax rate of 34%.

(2)  Includes nonperforming loans.

(3)  Included in interest income are loan fees.


<PAGE>


MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
--------------------------------------------------------------------------------

The following  table presents by category the major factors that  contributed to
the changes in net interest income for each of the years ended December 31, 1997
and 1996,  as compared to each  respective  previous  period.  Amounts have been
computed on a fully tax-equivalent  basis, assuming a Federal income tax rate of
34%.

ANALYSIS OF CHANGES IN CONSOLIDATED


NET INTEREST INCOME

<TABLE>
<CAPTION>
                                                            1997 COMPARED TO 1996                      1996 COMPARED TO 1995
                                                   --------------------------------------    --------------------------------------
                                                             Increase (Decrease)                       Increase (Decrease)
                                                                   Due to                                     Due to
                                                             ------------------                        -------------------
                                                      Volume        Rate           Net         Volume         Rate           Net
                                                   ----------    ----------    ----------    ----------    ----------    ----------
                                                                                (Dollars in thousands)
<S>                                                <C>           <C>           <C>           <C>           <C>           <C>
Interest Earned On:
  Federal Funds Sold ...........................   $      174    $        4    $      178    ($     357)   ($      12)   ($     369)
  Investment Securities:
    Securities available for sale:
      U. S. Government & Agencies ..............          165           (62)          103          (427)           91          (336)
      State & Political Subdivisions ...........           16            84           100           580             0           580
      Other Securities .........................          156            22           178           219             8           227
                                                   ----------    ----------    ----------    ----------    ----------    ----------
                                                          337            44           381           372            99           471

    Securities held to maturity:
      U. S. Gov't & Mtge-backed Securities .....        1,778            19         1,797         1,324             0         1,324
      State & Political Subdivisions (1) .......            0             0             0        (1,468)            0        (1,468)
                                                   ----------    ----------    ----------    ----------    ----------    ----------
                                                        1,778            19         1,797          (144)            0          (144)

          Total Investment Securities ..........        2,115            63         2,178           228            99           327
                                                   ----------    ----------    ----------    ----------    ----------    ----------

  Loans:
      Comm'l Loans & Comm'l Mtgs ...............        6,144          (960)        5,184         5,584          (350)        5,234
      Residential Mortgages ....................          212           (27)          185          (260)          (18)         (278)
      Installment Loans ........................          297           (21)          276           614           (55)          559
                                                   ----------    ----------    ----------    ----------    ----------    ----------
          Total Loans ..........................        6,653        (1,008)        5,645         5,938          (423)        5,515
                                                   ----------    ----------    ----------    ----------    ----------    ----------

     Total Interest Income .....................        8,942          (941)        8,001         5,809          (336)        5,473
                                                   ----------    ----------    ----------    ----------    ----------    ----------

Interest Paid On:
  Savings and Money Market Accounts ............        2,710         1,072         3,782           349            74           423
  Time Deposits ................................          702           229           931           914          (409)          505
  Short-term borrowings ........................          (69)           68            (1)          962           (99)          863
  Long-term debt ...............................          451           (10)          441           629             0           629
                                                   ----------    ----------    ----------    ----------    ----------    ----------

    Total Interest Expense .....................        3,794         1,359         5,153         2,854          (434)        2,420
                                                   ----------    ----------    ----------    ----------    ----------    ----------

    Net Interest Income ........................   $    5,148    ($   2,300)   $    2,848    $    2,955    $       98    $    3,053
                                                   ==========    ==========    ==========    ==========    ==========    ==========
</TABLE>


<PAGE>


Interest income on a fully  tax-equivalent  ("FTE") basis, which adjusts for the
tax-exempt status of income earned on certain investments to express such income
as if it were taxable,  increased $8.0 million,  or 32.4%,  to $32.7 million for
1997  compared  to $24.7  million  for 1996,  and $19.2  million  for 1995.  The
improvement in interest income in 1997 was primarily due to volume  increases in
the average loan portfolio. The average balance of the loan portfolio grew $66.9
million or 32.5% to $272.4  million  compared to $205.5  million  for 1996,  and
$147.8  million for 1995.  That volume  increase  added $6.6 million to interest
income  in 1997,  which  was  partially  offset by a $1.0  million  decrease  in
interest income due to rate declines in the loan portfolio from 9.85% in 1996 to
9.50% in 1997. The average balance of the investment  portfolio  increased $30.0
million  or 48.0% to $92.5  million  compared  to the  average  balance of $62.5
million in 1996, and $58.1 million in 1995.  That volume increase in investments
added  $2.1  million  to  interest  income  in 1997.  The rate  increase  in the
investment  portfolio of 10 basis  points,  from 6.93% in 1996 to 7.03% in 1997,
added another $63.0 thousand to interest income.

Interest  expense  increased $5.1 million,  or 46.8%,  to $16.0 million for 1997
compared to $10.9 million for 1996, and $8.5 million for 1995.  Interest bearing
liabilities  increased from $222.3 million in 1996 to $309.8 million in 1997, an
increase  of $87.5  million  or 39.4%,  which  added $3.8  million  to  interest
expense.  Rate  increases from 4.90% in 1996 to 5.18% in 1997 added another $1.4
million to interest expense. Overall, interest expense increased $5.2 million in
1997 compared to a $2.4 million dollar increase in 1996.

Net interest  income for 1997  increased  $2.8 million or 20.3% to $16.6 million
compared to $13.8 million for 1996, and $10.7 million for 1995. Volume increases
accounted  for $5.1 million of the increase in net  interest  income,  partially
offset by a $2.3 million  decrease due to rate changes.  Net interest income for
1996  increased  $3.1  million  or  29.0%  to $13.8  million.  Volume  increases
accounted  for $3.0  million of the increase in net  interest  income,  and rate
changes accounted for another $98 thousand increase.

Interest income on a fully tax-equivalent ("FTE") basis, increased $5.5 million,
or 28.6%,  to $24.7  million for 1996  compared to $19.2  million for 1995.  The
improvement in interest income was primarily due to volume increases in the loan
portfolio  as the Bank  benefited  from  strong loan demand and the  purchase of
$32.8 million of loan  participations  from Regent National Bank during the last
two  quarters  of 1996,  which  produced a volume  related  increase in interest
income on loans of $5.9 million.

Interest expense for the year ended December 31, 1996 increased by $2.4 million,
or 28.2%,  to $10.9  million from $8.5  million for the year ended  December 31,
1995. The increase in interest  expense was due primarily to volume increases in
savings and money market  accounts,  time deposits and borrowed funds accounting
for $349 thousand,  $914 thousand, and $1.6 million,  respectively of the volume
related  increase in interest  expense.  These  volume  related  increases  were
partially  offset by rate  decreases in time  deposits and borrowed  funds which
accounted  for a $409  thousand and $99 thousand  decrease in interest  expense.
Rate increases in savings and money market accounts  increased  interest expense
by $74 thousand.  Volume  increases are the result of pricing  decisions made by
management  in  response  to the  need for a cost  effective  source  of  funds,
primarily to provide for loan growth.

The  Company's  net interest  margin,  which  measures net interest  income as a
percentage of average earning assets, was 4.50%,  5.11%, and 5.02% for the years
ended December 31, 1997, 1996 and 1995, respectively,  due to the combination of
factors mentioned above.


<PAGE>


MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
--------------------------------------------------------------------------------

NON-INTEREST INCOME

The Company's  non-interest  income consists of service fees on deposits,  other
fees and commissions,  gains on the sale of other real estate owned,  investment
securities gains and investment securities losses.

Total non-interest income was $1.0 million for 1997 compared to $1.4 million for
1996,  and $744 thousand for 1995, a decrease of $326 thousand or 24.0% in 1997,
and an increase of $616 or 82.8% for 1996. During 1997, service fees on deposits
increased $34 thousand to $456 thousand,  compared to $422 thousand in 1996, and
$433 thousand in 1995.  Other fees and  commissions  increased  $129 thousand or
38.1% to $468  thousand,  from $339 thousand in 1996, and $311 thousand in 1995.
The 1997  increase in service  fees on deposits  and other fees and  commissions
reflect the increase in deposit and loan balances,  primarily as a result of the
branch  expansion that occurred in late 1995 and during 1996.  Gains on the sale
of other real estate owned  declined  $228  thousand or 77.5% to $66 thousand in
1997,   compared  to  $294  thousand  in  1996,  and  none  in  1995.  In  1997,
available-for-sale  securities  were sold in the ordinary  course of business to
take  advantage  of  opportunities  to  restructure  the  portfolio,  to shorten
maturities  or improve  income,  as well as to fund loan  growth.  Net  security
gains, on these investment  transactions  declined $261 thousand or 85.6% to $44
thousand, compared to $305 thousand in 1996, and none in 1995.

Service fees on deposits  decreased  by $11  thousand in 1996  compared to 1995.
Although the average balance of deposits  increased by $33.0 million or 16.6% in
1996, the Company experienced a decline in overdraft fee income in comparison to
1995 which  accounted  for the decline in deposit fee income.  The  decrease was
offset by a $28 thousand increase in other fees and commissions.  Other fees and
commissions  increased as a result of the Company's  continued branch expansion.
The  Company  realized a $294  thousand  gain on the sale of other  real  estate
owned,  compared to none in 1995. In 1996,  available-for-sale  securities  were
sold in the ordinary  course of business to take advantage of  opportunities  to
restructure the portfolio,  to shorten  maturities or improve income, as well as
to fund loan growth.  Those 1996 sales  resulted in net  security  gains of $305
thousand, compared to none in 1995.


<PAGE>


MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
--------------------------------------------------------------------------------

NON-INTEREST EXPENSE

For the year ended December 31, 1997, total non-interest expenses increased $1.4
million,  or 13.9%,  to $11.5  million for 1997,  compared to $10.1  million for
1996,  and $7.7 million for 1995.  Of this $1.4 million  increase in 1997,  $583
thousand was attributable to salaries and benefits, and $297 thousand was due to
increases in occupancy  expenses and  furniture and  equipment  expenses.  These
increases  were  primarily  due to the full year effect on expenses of the three
new branch offices opened during 1996, the Company's  continued  growth, as well
as merit and cost of living salary and wage  adjustments.  At December 31, 1997,
the  Company  had  126  full-time  equivalent  employees  compared  to 118 as of
December 31, 1996, and 109 full-time  equivalent employees at December 31, 1995.
"Other" non-interest  expenses increased $548 thousand or 18.3%, to $3.5 million
for 1997,  compared to $3.0  million for 1996,  and $2.7  million for 1995.  The
increase  in 1997 was due to  professional  fees  increasing  by $166  thousand,
primarily due to merger related expenses, correspondent bank fees, and messenger
fees,  and system fees  increasing by $55 thousand due to the Company's  growth.
FDIC  insurance  expenses  increased by $92 thousand,  in 1997,  when the Bank's
capital ratios  temporarily  dropped to "adequately  capitalized" from the "well
capitalized"  level prior to most of the Company's  warrants being  exercised in
August 1997.  Additionally,  advertising  expenses for deposits  increased  $159
thousand in 1997,  and Other Real Estate (ORE)  expenses  increased $61 thousand
compared to 1996, as well as miscellaneous  other expense increases totaling $15
thousand.

Salaries and wages  increased  $1.1 million,  or 42.6%,  to $3.8 million in 1996
compared to $2.7 million for 1995. Employee benefits increased $166 thousand, or
24.0%,  to $858  thousand in 1996  compared  to $692  thousand  for 1995.  These
increases  were  primarily the result of opening four new branch offices in Toms
River,  New Jersey in November  1995,  Montgomery,  New Jersey in January  1996,
Langhorne,  Pennsylvania in May 1996, and Flemington, New Jersey in August 1996.
Occupancy  expenses  increased $442 thousand,  or 43.2%, to $1.5 million in 1996
compared to $1.0 million in 1995,  due  primarily to  increased  lease  expenses
incurred as a result of the full year effect  during 1996 of the  relocated  and
larger  corporate  headquarters  opened in April 1995, plus the additional lease
expenses  incurred  because of the branch  openings  noted above.  Furniture and
equipment  expenses  increased  $332  thousand,   or  56.9%,  due  primarily  to
depreciation on purchases of additional furniture and computer equipment for the
new office locations.

During  1996,  "Other"  expenses  increased  by $247  thousand,  or 9%,  to $3.0
million,  compared  to $2.7  million  for  1995.  This  increase  was due to the
continued  growth of the  Company's  deposit base,  which  resulted in increased
supplies,  communications  and  professional  expenses  partially  offset  by  a
reduction in FDIC insurance premiums.  FDIC insurance premiums decreased by $233
thousand to $2  thousand  for 1996 from $235  thousand  for 1995,  although  the
Company's  deposit base  increased by 43.9%  comparing year end 1996 to year end
1995. This decrease in FDIC insurance  premiums was due to the  recapitalization
of the FDIC's Bank  Insurance  Fund and the  subsequent  reduction  in insurance
premium rates.


<PAGE>


MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
--------------------------------------------------------------------------------

INCOME TAX EXPENSE

The income tax provision,  which includes both Federal and state taxes,  for the
years ended December 31, 1997, 1996 and 1995 was $1.9 million, $1.1 million, and
$765 thousand, respectively.

The increase in 1997 total tax expense was  primarily  the result of an increase
in operating income, and an increase in tax-exempt investment securities income.
The increase in 1996 total tax expense was  primarily  the result of an increase
in operating income, and a decrease in tax-exempt investment securities income.


<PAGE>


MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
--------------------------------------------------------------------------------

RETURN ON AVERAGE EQUITY AND AVERAGE ASSETS

Two industry measures of the performance by a banking institution are its return
on average assets and return on average equity. Return on average assets ("ROA")
measures  net  income in  relation  to total  average  assets  and  indicates  a
Company's  ability to employ its resources  profitably.  For 1997, the Company's
ROA was 0.94%,  compared to 0.75% in 1996, and 0.95% in 1995.  Return on average
equity  ("ROE")  is  determined  by  dividing   annual  net  income  by  average
stockholders'  equity and indicates  how  effectively a company can generate net
income on the capital invested by its  stockholders.  ROE increased to 12.69% in
1997,  from 9.68% in 1996 and 10.72% in 1995.  The increase in the Company's ROA
for 1997 was the result of its four new branch offices,  one opened in late 1995
and  three  throughout  1996,  coming  into  profitability   during  1997.  Also
contributing to ROA, was the significant  loan growth that occurred during 1996,
the full year effect of which was realized  during 1997. The increase in ROE was
also  the  result  of the new  branches  reaching  profitability  in  1997,  the
realization  of the full year  benefit of the loan growth that  occurred  during
1996,  and the  decreased  ratio of average  equity to average  total assets for
1997,  compared to 1996,  as the growth in assets  outpaced the growth in equity
for most of 1997, until the majority of the Company's warrants were exercised in
August 1997 bringing in $8.8 million in new equity. The Company  immediately put
some of that new  capital  "to work" by  utilizing  a leverage  strategy  in its
investment  portfolio,  whereby  approximately  $52  million of  mortgage-backed
securities were purchased using borrowed funds.

For 1996, the Company's ROA was 0.75%,  compared to 0.95% in 1995. ROE decreased
from 10.7% in 1995 to 9.68% in 1996.  This decline in the  Company's ROA and ROE
was primarily the result of branch  expansion and loan growth which  occurred in
the second half of 1996.  New branch  offices were opened  November 1995 in Toms
River,  New  Jersey,  January  1996  in  Montgomery,  New  Jersey,  May  1996 in
Langhorne,  Pennsylvania,  and August 1996 in Flemington,  New Jersey. These new
startup branches operated at a loss during 1996. Additionally,  in mid September
and  early  October  1996,   the  Company   purchased   $32.8  million  in  loan
participations from Regent National Bank. Internal loan growth during the second
half of 1996 was also strong,  growing $36.3 million.  Provisions  were made for
these new loans in accordance with the Company's loan loss policy;  however, the
full year effect of the interest income was not realized until 1997.


<PAGE>


LOAN PORTFOLIO

The Company's  target  markets for its  commercial  and consumer loans are small
businesses,  professionals  and high net worth  individuals  in the market areas
surrounding the Company's branches. Senior loan officers are intimately involved
in the  loan  approval  process,  and in  helping  meet the  financing  needs of
customers.

The Company's loan portfolio consists of commercial  mortgage loans,  commercial
and financial  loans,  residential  mortgage loans and real estate  construction
loans.  In addition,  the Company  makes a small number of consumer  installment
loans as an accommodation to its customers.

The Company's net loans at December 31, 1997 totaled $284.8 million, an increase
of $21.0 million,  or 8.0%, compared to net loans at December 31, 1996 of $263.8
million.  The increase in the  portfolio  was  concentrated  in  commercial  and
financial  loans and  commercial  mortgage  loans,  and is attributed to greater
penetration  of the  marketplace  and an  improvement  in the  general  economic
environment in New Jersey. On January 14, 1997, the Company  purchased  Regent's
remaining  interest in these loans,  a then current  principal  balance of $32.9
million, with servicing released.

Commercial and financial loans  increased to $85.7 million,  an increase of $5.8
million,  or  7.3%,  over the  December  31,  1996  balance  of  $79.9  million.
Commercial  and  financial  loans are  primarily  made to small  businesses  and
professionals for working capital purposes with maturities generally between one
and seven years. The majority of these loans are  collateralized  by real estate
consisting  of single  family  residential  properties  and  further  secured by
personal  guarantees.  The Company  generally  requires  that there be a loan to
value  ratio  not  exceeding  80% on  these  loans.  The  Company  also  reviews
borrowers'  cash flows in analyzing loan  applications.  Risks inherent in these
loans include risks that a borrower's  cash flow generated from its business may
not be  sufficient  to repay the  loans,  either  because  of  general  economic
downturns,  downturns  specific to the  borrower's  business  or  interest  rate
changes  which cause  deterioration  in a borrower's  cash flow as well as risks
associated   with  the   collateral   securing  the  loans,   such  as  possible
deterioration in value of the collateral or  environmental  contamination of the
collateral.

Commercial  mortgages  totaled $152.5 million at December 31, 1997 versus $133.9
million at December 31, 1996, an increase of $18.6 million, or 13.9%. Commercial
mortgage  loans are  granted to  professionals  such as  doctors,  lawyers,  and
accountants who purchase office  condominium units for their practices and other
small  business  persons who  purchase  commercial  real estate for use in their
businesses.  The  Company  will  generally  not  finance in excess of 75% of the
appraised  value.  In  reviewing a borrower's  qualifications,  the Company pays
particular attention to cash flow. In addition,  the Company frequently requires
personal  guarantees.  Risk factors  associated with these loans include general
economic  performance which will affect vacancy rates for commercial  properties
and the ability of  professionals  to maintain and sustain a practice as well as
the resale value which may be yielded on a particular property.

The Company originates and retains  residential  mortgage loans. The majority of
these loans are made as accommodations to existing  customers which is reflected
in the marginal  increase in 1997 when compared to 1996. Risks inherent in these
loans include the employment stability and earnings potential of the borrower as
well as potential  resale prices  associated with the collateral  securing these
loans. In addition,  residential  mortgages bear some additional risk associated
with the  personal  status of the  borrower,  such as the  borrower's  continued
marital status and health.

The Company  makes  construction  loans to  individuals  with  expertise  in the
industry or to owner occupied projects.  The loans are generally on projects for
which a sales  contract  has been  executed  and for  which  permanent  mortgage
financing is in place. In most  commercial  construction  projects,  the Company
will  generally  lend  up to  50%  of  the  cost  of  the  land  and  85% of the
construction  costs. These loans decreased in 1997 by $5.5 million, or 32.5%, to
$11.4  million at December  31, 1997 from $16.9  million at December  31,  1996.
Risks inherent in these loans include  performance of the general  economy which
will affect whether the sale of a project actually closes despite its contracted
status and the risk inherent in whether


<PAGE>


LOAN  PORTFOLIO  (CONTINUED)

the  construction  of a project will actually be completed and completed  within
budgeted compliance.  Environmental  factors may affect whether a project can be
completed and the cost associated with its completion.

The Company's net loans at December 31, 1996 totaled $263.8 million, an increase
of $101.2  million,  or 62.2%,  compared  to net loans at  December  31, 1995 of
$162.6 million. The increase in the portfolio was concentrated in commercial and
financial  loans and commercial  mortgage loans and can be attributed to greater
penetration  of the  marketplace  and an  improvement  in the  general  economic
environment  in New Jersey,  as well as to $32.8 million in loan  participations
purchased from Regent National Bank in September and October 1996.

Commercial and financial loans increased to $79.9 million,  an increase of $35.5
million, or 80.0%, over the December 31, 1995 balance of $44.4 million.

Commercial  mortgages  totaled  $133.9 million at December 31, 1996 versus $77.7
million at December 31, 1995, an increase of $56.2 million, or 72.3%.

The Company originates and retains  residential  mortgage loans. The majority of
these loans are made as accommodations to existing  customers which is reflected
in the marginal decrease in 1996 when compared to 1995.

The Company  makes  construction  loans to  individuals  with  expertise  in the
industry  or to owner  occupied  projects.  These loans  increased  in 1996 $4.4
million,  or 35.2%,  to $16.9 million at December 31, 1996 from $12.5 million at
December 31, 1995.

The  following  table  summarizes  the  components  of the loan  portfolio as of
December 31, for each of the years 1997 through 1993.

LOAN PORTFOLIO BY TYPE OF LOAN

<TABLE>
<CAPTION>
                                                                   Year Ended December 31,
                            -------------------------------------------------------------------------------------------------------
                                  1997                1996                  1995                   1994                 1993
                            ----------------    ----------------     ------------------     ------------------    -----------------
                             Amount      %       Amount      %        Amount        %        Amount        %       Amount      %
                            --------  ------    --------  ------     --------    ------     --------    ------    --------   ------
                                                                 (Dollars in thousands)
<S>                         <C>        <C>      <C>        <C>       <C>          <C>       <C>          <C>      <C>         <C>
Commercial and financial .  $ 85,737   29.80%   $ 79,907   29.99%    $ 44,432     27.03%    $ 41,917     29.88%   $ 34,451    29.38%
Real estate construction .    11,412    3.97%     16,905    6.34%      12,483      7.60%       8,399      5.99%     12,277    10.47%
Residential mortgage .....    24,527    8.52%     23,173    8.70%      25,699     15.64%      26,207(1)  18.68%     25,386(1) 21.65%
Commercial mortgage ......   152,477   52.99%    133,908   50.25%      77,701     47.28%      61,242     43.65%     42,780    36.49%
Installment ..............    13,592    4.72%     12,569    4.72%       4,026      2.45%       2,532      1.80%      2,352     2.01%
--------------------------  --------  ------    --------  ------     --------    ------     --------    ------    --------   ------

   Total Loans ...........  $287,745  100.00%   $266,462  100.00%    $164,341    100.00%    $140,297    100.00%   $117,246   100.00%
--------------------------  --------  ------    --------  ------     --------    ------     --------    ------    --------   ------

Allowance for loan losses.    (2,956)             (2,665)              (1,754)                (1,400)                 (980)
--------------------------  --------            --------             --------               --------              --------

     Net loans ...........  $284,789            $263,797             $162,587               $138,897              $116,266
--------------------------  ========            ========             ========               ========              ========
</TABLE>

(1)  Gives effect to  Carnegie's  adoption of SFAS No. 114,  effective for 1995.
     Pursuant  to SFAS No. 114,  Carnegie  reclassified  $300,000  in  substance
     foreclosure as loans at the year ends 1993 and 1994.


<PAGE>


The  following  table sets forth  total  loans by  maturity  and  interest  rate
sensitivity  at December  31,  1997 and does not  include  those loans which are
classified as non-accruing.

     LOANS OUTSTANDING - MATURITY DISTRIBUTION

                                                             December 31, 1997
                                                          ----------------------
                                                          (Dollars in thousands)
     Fixed rate loans:
       One year or less -
         Commercial and financial ...........................    $  5,551
         Real estate construction ...........................       2,373
         Residential mortgage ...............................         869
         Commercial mortgage ................................      12,467
         Installment ........................................       1,232
                                                                 --------
                       Total ................................      22,492
                                                                 --------
       Over one to five years -
         Commercial and financial ...........................      18,562
         Real estate construction ...........................           0
         Residential mortgage ...............................         812
         Commercial mortgage ................................      94,126
         Installment ........................................       1,154
                                                                 --------
                       Total ................................     114,654
                                                                 --------
       Over five years -
         Commercial and financial ...........................       8,170
         Real estate construction ...........................           0
         Residential mortgage ...............................      11,979
         Commercial mortgage ................................      18,565
         Installment ........................................         886
                                                                 --------
                       Total ................................      39,600
                                                                 --------

                       Total fixed rate loans ...............     176,746
                                                                 --------

     Floating rate loans:
       One year or less -
         Commercial and financial ...........................      46,635
         Real estate construction ...........................       9,039
         Residential mortgage ...............................       9,914
         Commercial mortgage ................................      22,259
         Installment ........................................       9,949
                                                                 --------
                       Total ................................      97,796
                                                                 --------
       Over one to five years -
         Commercial and financial ...........................       3,546
         Real estate construction ...........................           0
         Residential mortgage ...............................         546
         Commercial mortgage ................................       4,405
         Installment ........................................         371
                                                                 --------
                       Total ................................       8,868
                                                                 --------
       Over five years -
         Commercial and financial ...........................           0
         Real estate construction ...........................           0
         Residential mortgage ...............................           0
         Commercial mortgage ................................           0
         Installment ........................................           0
                                                                 --------
                       Total ................................           0
                                                                 --------

                       Total floating rate loans ............     106,664
                                                                 --------

                       Total Loans ..........................    $283,410
                                                                 ========


<PAGE>


ASSET QUALITY

Various degrees of credit risk are associated with  substantially  all investing
activities.  The lending function,  however,  carries the greatest risk of loss.
Risk elements include loans past due,  non-accrual  loans,  renegotiated  loans,
other real estate owned and loan  concentrations.  The Company closely  monitors
its loan  portfolio to minimize  the risk of  delinquency  and problem  credits.
Borrowers  are advised in writing when a loan is seven days past due.  Under the
Company's loan collection  policy,  an account  officer makes telephone  contact
with the  borrower  within  fifteen  days of the contract  payment  date.  Loans
delinquent in excess of 90 days are placed on non-accrual status, and previously
accrued interest not collected is reversed out of the Company's  interest income
account.

The following table  summarizes the composition of the Company's  non-performing
assets as of December 31, 1997 through 1993.



NON-PERFORMING ASSETS AND CONTRACTUALLY PAST DUE LOANS

<TABLE>
<CAPTION>
                                                                               December 31,
                                                      -------------------------------------------------------------
                                                         1997         1996         1995         1994         1993
                                                      ---------    ---------    ---------    ---------    ---------
<S>                                                   <C>          <C>          <C>          <C>          <C>
Non-Performing Assets (1):
Non-accruing loans
  Real estate .....................................   $     407    $     248    $     767    $     445    $   1,410
  Installment .....................................           0           27           69         --             42
  Commercial mortgage .............................         655        1,029        1,180        1,620        1,767
  Commercial and financial ........................       3,273        1,981        2,011         --           --
  Real estate construction ........................           0           57         --           --           --
                                                      ---------    ---------    ---------    ---------    ---------

Total non-accruing/non-performing loans ...........       4,335        3,342        4,027        2,065        3,219


Other real estate owned ...........................         523          473         --           --           --
                                                      ---------    ---------    ---------    ---------    ---------

Total Non-Performing Assets .......................   $   4,858    $   3,815    $   4,027    $   2,065    $   3,219
                                                      =========    =========    =========    =========    =========

Contractually Past Due Loans (2): .................   $     381    $     839    $     298    $       4    $     381
                                                      =========    =========    =========    =========    =========


Non-performing loans to total loans ...............        1.51%        1.25%        2.45%        1.47%        2.74%
Non-performing assets to total assets .............        1.12%        1.11%        1.61%        1.06%        2.09%
Allow. for loan losses to non-performing loans ....       68.19%       79.74%       43.56%       67.80%       30.44%
</TABLE>

(1)  Non-performing assets exclude loans classified as contractually past due 90
     days or more and still accruing.

(2)  Accruing loans past due 90 days or more.


<PAGE>


At the dates indicated in the foregoing table,  there were no  concentrations of
loans  exceeding 10% of the Company's total loans and the Company had no foreign
loans.

As of December 31, 1997, total non-accruing  loans amounted to $4.3 million,  an
increase of $993 thousand, or 29.7%, over the level at December 31, 1996. Of the
$4.3  million in total  non-accruing  loans,  all are secured by  commercial  or
residential  mortgages on properties which management believes retain sufficient
equity to satisfy  the loan.  Also see the  additional  discussion  in Note 7 to
Consolidated Financial Satements regarding impaired loans.

The ratio of non-performing assets to total assets remained at 1.1% while the
ratio of non-performing loans to total loans was 1.5% compared to 1.2% at
December 31, 1997 and December 31, 1996, respectively. The increase in this
ratio was attributable to the increase in the Company's non-accruing commercial
and financial portfolio which was partially offset by a decrease in the
Company's non-accruing commercial mortgage loan portfolio. The allowance for
loan losses as a percentage of non-performing loans was 68.2% compared to 79.7%
in the prior year.

If the non-accruing  loans had continued to pay interest,  interest income would
have been  increased by $405 thousand for 1997. As of December 31, 1996 and 1995
there were non-accruing  loans in the aggregate amounts of $3.3 million and $4.0
million,  respectively. If the non-accruing loans in 1996 and 1995 had continued
to pay interest,  interest  income during 1996 would have been increased by $370
thousand  and  interest  income  during 1995 would have been  increased  by $313
thousand.

The Company  attempts to maintain an  allowance  for loan losses at a sufficient
level to provide  for  potential  losses in the loan  portfolio  and off balance
sheet risks such as unused lines of credit,  letters of credit,  and commitments
to lend.  Loan losses are charged  directly to the allowance when they occur and
any recoveries  are credited to the allowance.  The allowance for loan losses is
increased  periodically  through  charges to earnings in the form of a provision
for loan losses.  The provision for loan losses is  determined  periodically  by
senior management based upon consideration of several factors including:  (1) an
ongoing review of the quality,  mix and size of the overall loan portfolio;  (2)
historical loan loss  experience;  (3) evaluation of  non-performing  loans; (4)
assessment  of economic  conditions  and their  related  effects on the existing
portfolio;  and (5) the amount and quality of collateral,  including guarantees,
securing  loans.  In addition,  management  takes into account the level of risk
inherent in the types of loans  included in the  Company's  portfolio.  Although
management attempts to set the allowance at a level deemed appropriate, numerous
factors,  including  changes in economic  conditions,  regulatory  policies  and
borrower's  performance,  could result in  additional  provisions.  For impaired
loans,  management  considers  the  sufficiency  of the value of the  underlying
collateral or the present value of the future cash flows.


<PAGE>


ASSET QUALITY (CONTINUED)

The provision for loan losses was $446 thousand,  $1.6 million and $369 thousand
for the  years  ended  December  31,  1997,  1996 and  1995,  respectively.  The
provision  for loan  losses  for these  years  reflects  management's  intent to
continue  to  maintain  the  Company's  allowance  for  loan  losses  at a level
consistent  with the increasing  size of the loan portfolio and historical  loan
loss experience.  The provision during 1997 was attributable both to an increase
in the  size of the  loan  portfolio  and a  change  in the  composition  of the
portfolio as commercial  mortgages  became a larger  component  and  residential
mortgages declined as a percentage of the portfolio.  As a general  proposition,
more  risk  is  associated  with  commercial  mortgages  than  with  residential
mortgages, although commercial mortgages are generally more profitable.

The provision of $446 thousand for the year ended December 31, 1997 decreased by
$1.2  million,  or 75.0%,  compared  to the prior year  amount of $1.6  million.
Management  believes that the Company has adequate reserves to address potential
losses in the loan portfolio.

The provision of $1.6 million for the year ended  December 31, 1996 increased by
$1.2  million,  or 336.0%,  compared to the prior year amount of $369  thousand.
Management  believed that the Company had adequate reserves to address potential
losses in the loan  portfolio  during  1996.  Although  there was an increase in
non-performing loans,  management believed that substantially all of these loans
had adequate supporting collateral.  Management also believed that the local and
regional economies were improving.


<PAGE>


The following table represents activity in the allowance for loan losses for the
five years ended December 31, 1997.

ALLOWANCE FOR LOAN LOSSES

<TABLE>
<CAPTION>
                                                                               Year Ended December 31,
                                                 ---------------------------------------------------------------------------------
                                                    1997              1996              1995              1994              1993
                                                 ---------         ---------         ---------         ---------         ---------
                                                                              (Dollars in thousands)
<S>                                              <C>               <C>               <C>               <C>               <C>
Balance - beginning of period ............       $   2,665         $   1,754         $   1,400         $     980         $     806
Provision charged to expense .............             446             1,609               369               650               429
                                                 ---------         ---------         ---------         ---------         ---------
                                                     3,111             3,363             1,769             1,630             1,235
Recoveries:
  Commercial .............................              50              --                   8                50                25
  Real estate ............................               7                10                44                 0              --
  Installment ............................               4              --                --                   0              --
                                                 ---------         ---------         ---------         ---------         ---------
Total recoveries .........................              61                10                52                50                25
                                                 ---------         ---------         ---------         ---------         ---------

Charge-offs:
  Commercial .............................            (141)             (570)               (3)             (153)             (272)
  Real estate ............................             (53)             (106)              (60)             (126)             --
  Installment ............................             (22)              (32)               (4)               (1)               (8)
                                                 ---------         ---------         ---------         ---------         ---------
Total charge-offs ........................            (216)             (708)              (67)             (280)             (280)
                                                 ---------         ---------         ---------         ---------         ---------

Net (charge-offs) recoveries .............            (155)             (698)              (15)             (230)             (255)
                                                 ---------         ---------         ---------         ---------         ---------

Balance - end of period ..................       $   2,956         $   2,665         $   1,754         $   1,400         $     980
                                                 =========         =========         =========         =========         =========

Net charge-offs as a percentage
  of average loans .......................            0.06%             0.34%             0.01%             0.19%             0.28%

Allowance for loan losses to
  period end loans .......................            1.03%             1.00%             1.07%             1.00%             0.84%

Allowance for loan losses to
  non-accrual loans ......................           68.19%            79.74%            43.56%            67.80%            30.44%
</TABLE>


<PAGE>


MANAGEMENT'S DISCUSSION (CONTINUED)
--------------------------------------------------------------------------------

The following  table details the  allocation of the allowance for loan losses to
the various categories. The allocation is made for analytical purposes and it is
not  necessarily  indicative  of the  categories in which future loan losses may
occur.  The total  allowance is  available to absorb  losses from any segment of
loans.


<PAGE>


<TABLE>
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES (1)
<CAPTION>
                                                                                     December 31,
                                                -----------------------------------------------------------------------------------
                                                          1997                         1996                          1995
                                                -----------------------       -----------------------       -----------------------
                                                 Amount            %           Amount            %           Amount            %
                                                --------       --------       --------       --------       --------       --------
                                                                                  (Dollars in thousands)
<S>                                             <C>               <C>         <C>               <C>         <C>               <C>
Commercial and financial .................      $    938          31.72%      $    743          27.88%      $    420          23.95%
Real estate construction .................            80           2.71%           177           6.64%           179          10.20%
Residential mortgage .....................           196           6.63%           209           7.84%           107           6.10%
Commercial mortgage ......................         1,187          40.17%         1,161          43.56%           845          48.18%
Installment ..............................           210           7.10%           216           8.11%           160           9.12%
Unallocated ..............................           345          11.67%           159           5.97%            43           2.45%
                                                --------       --------       --------       --------       --------       --------
                                                $  2,956         100.00%      $  2,665         100.00%      $  1,754         100.00%
                                                ========       ========       ========       ========       ========       ========
</TABLE>

(1)  The  allocation  of the allowance  for loan losses to the  respective  loan
     classifications  is not  necessarily  indicative of future losses or future
     allocations.


<PAGE>


INVESTMENT SECURITIES

The Company's  securities  portfolio is comprised of U.S. Government and Federal
agency securities, the tax-exempt issues of states and municipalities, and other
securities.  The investment  securities portfolio generates substantial interest
income and provides liquidity for the Company.

Debt and equity  securities  are  classified in one of three  categories and are
accounted for as follows:

Securities  are  classified at date of purchase as  securities  held to maturity
based on management's intent and the Company's ability to hold them to maturity.
Such securities are stated at cost,  adjusted for unamortized  purchase premiums
and discounts.  Securities that are bought and held  principally for the purpose
of selling them in the near term are classified as trading securities, which are
carried at market value. Realized gains and losses from marking the portfolio to
market value are included in trading revenue.  At December 31, 1997, the Company
had no securities classified as trading securities. Securities not classified as
securities  held to maturity or trading  securities are classified as securities
available for sale, and are stated at fair value. Unrealized gains and losses on
securities  available for sale are excluded from results of operations,  and are
reported  as a  separate  component  of  stockholder's  equity,  net  of  taxes.
Securities  classified as available for sale include securities that may be sold
in response to changes in interest rates,  changes in prepayment risks, the need
to  increase  regulatory  capital  or other  similar  requirements.  Due to this
classification,  the Company's stockholders' equity will be affected by changing
interest  rates as they  affect the  market  price of the  Company's  securities
available for sale.

SECURITIES AVAILABLE FOR SALE

At December  31,  1997,  the Company  classified  $52.5  million or 43.2% of its
investment portfolio as available for sale. These available-for-sale  securities
had a cost basis of $52.4  million.  The fair value  adjustment  at December 31,
1997  required  the  Company  to  increase  the  carrying  value  of  investment
securities  by $62  thousand,  increase the net  deferred  tax  provision by $25
thousand,  and increase  stockholders'  equity by $37 thousand.  The average tax
equivalent  yield on the  securities  available  for  sale as of the year  ended
December 31, 1997, was 6.90%

SECURITIES HELD TO MATURITY

At December 31, 1997, the Company  classified  $69.0 million,  or 56.8%,  of its
investment  portfolio as held to maturity based on  management's  intent and the
Company's ability to hold them to maturity. These securities are stated at cost,
adjusted for  unamortized  purchase  premiums and discounts.  As of December 31,
1997 the net unrealized  gains on these  securities was $5 thousand.  Securities
with a cost of $52.5  million were  purchased  for the held to maturity  account
during 1997.

In November 1995, the Financial  Accounting  Standards  Board ("FASB")  issued a
special  report  entitled  "A  Guide  to  Implementation  of  Statement  115  on
Accounting  for  Certain  Investments  in Debt and  Equity  Securities,"  herein
referred to as "Special  Report." The Special Report gave the Company a one-time
opportunity to reconsider its ability and intent to hold securities to maturity,
and allowed the  Company to transfer  securities  from held to maturity to other
categories   without   tainting  its  remaining   held-to-maturity   securities.
Management  evaluated all  securities  held to maturity and concluded that it is
the intent of management to hold these  securities  for an indefinite  period of
time or to utilize these  securities for tactical asset  liability  purposes and
sell them from time to time to  effectively  manage  interest  rate exposure and
resultant  prepayment  risk and liquidity  needs.  Accordingly,  on December 29,
1995,  the Company  moved all of its  securities  classified as held to maturity
with  a  carrying  value,   fair  value  and  unrealized  gain  of  $22,876,000,
$23,644,000 and $768,000, respectively, to available for sale.

The  following  tables  present  the  amortized  cost and  market  values of the
Company's investment securities portfolio for the years ended December 31, 1997,
1996 and 1995.


<PAGE>


<TABLE>
INVESTMENT SECURITIES PORTFOLIO
<CAPTION>
                                                                               Year Ended December 31, 1997 (1)
                                                          --------------------------------------------------------------------------
                                                             Securities Held to Maturity              Securities Available for Sale
                                                          --------------------------------          --------------------------------
                                                           Amortized              Market             Amortized              Market
                                                              Cost                 Value                Cost                 Value
                                                          -----------          -----------          -----------          -----------
                                                                                    (Dollars in thousands)
<S>                                                       <C>                  <C>                  <C>                  <C>
U. S. Government ...............................          $     8,037          $     8,236          $    13,068          $    13,126
Mortgage-backed agencies .......................               60,951               60,757               20,727               20,750
States & Political Subdivisions ................                 --                   --                 10,369               10,389
Other securities ...............................                 --                   --                  8,257                8,218
                                                          -----------          -----------          -----------          -----------

Total investment securities ....................          $    68,988          $    68,993          $    52,421          $    52,483
                                                          ===========          ===========          ===========          ===========

(1)  Net unrealized gains of $37 thousand, net of tax provision of $25 thousand,
     were reported as an increase to stockholders' equity at December 31, 1997.


<CAPTION>
                                                                               Year Ended December 31, 1996 (2)
                                                          --------------------------------------------------------------------------
                                                             Securities Held to Maturity              Securities Available for Sale
                                                          --------------------------------          --------------------------------
                                                           Amortized              Market             Amortized              Market
                                                              Cost                 Value                Cost                 Value
                                                          -----------          -----------          -----------          -----------
                                                                                    (Dollars in thousands)
<S>                                                       <C>                  <C>                  <C>                  <C>
U. S. Government ...............................          $     9,035          $     9,243          $     5,986          $     5,936
Mortgage-backed agencies .......................               14,229               14,015               15,524               15,306
States & Political Subdivisions ................                 --                   --                    890                  890
Other securities ...............................                 --                   --                  8,032                7,978
                                                          -----------          -----------          -----------          -----------

Total investment securities ....................          $    23,264          $    23,258          $    30,432          $    30,110
                                                          ===========          ===========          ===========          ===========

(2)  Net  unrealized  losses  of  $204  thousand,  net of tax  benefit  of  $118
     thousand,  were reported as a reduction of stockholders' equity at December
     31, 1996.

<CAPTION>
                                                                               Year Ended December 31, 1995 (3)
                                                          --------------------------------------------------------------------------
                                                             Securities Held to Maturity              Securities Available for Sale
                                                          --------------------------------          --------------------------------
                                                           Amortized              Market             Amortized              Market
                                                              Cost                 Value                Cost                 Value
                                                          -----------          -----------          -----------          -----------
                                                                                    (Dollars in thousands)
<S>                                                       <C>                  <C>                  <C>                  <C>
U. S. Government ...............................          $      --            $      --            $    10,499          $    10,565
Mortgage-backed agencies .......................                 --                   --                 36,843               36,811
States & Political Subdivisions ................                 --                   --                 19,075               19,805
Other securities ...............................                 --                   --                  3,451                3,396
                                                          -----------          -----------          -----------          -----------

Total investment securities ....................          $         0          $         0          $    69,868          $    70,577
                                                          ===========          ===========          ===========          ===========
</TABLE>

(3)  Net  unrealized  gains  of  $440  thousand,  net of tax  provision  of $269
     thousand,  were reported as an increase to stockholders' equity at December
     31, 1995.


<PAGE>


The following table shows the amortized costs and market values of the Company's
investment  securities by contractual maturity as of December 31, 1997. Expected
maturities of mortgage- backed securities may differ from contractual maturities
because borrowers have the right to prepay obligations.


<TABLE>
MATURITY SCHEDULE OF INVESTMENT SECURITIES
<CAPTION>
                                                                        Year Ended December 31, 1997
                                       --------------------------------------------------------------------------------------------
                                                Securities Held to Maturity                    Securities Available for Sale
                                       -------------------------------------------      -------------------------------------------
                                        Amortized        Market                          Amortized        Market
                                           Cost           Value           Yield            Cost            Value            Yield
                                       -----------     -----------     -----------      -----------     -----------     -----------
                                                                           (Dollars in thousands)
<S>                                    <C>             <C>             <C>              <C>             <C>             <C>
Due 1 year or less ...............            --              --              --        $     3,275     $     3,275            6.95%
Due after 1 year
      through 5 years ............            --              --              --              4,955           4,957            8.13%
Due after 5 years
      through 10 years ...........           8,037           8,237            7.70%          13,549          13,625            7.02%
Due after 10 years ...............          60,951          60,756            7.06%          30,642          30,626            6.70%
                                       -----------     -----------     -----------      -----------     -----------     -----------

Total investment
      securities .................     $    68,988     $    68,993            7.13%     $    52,421     $    52,483            6.84%
                                       ===========     ===========     ===========      ===========     ===========     ===========
</TABLE>


<PAGE>


DEPOSITS

The Company offers a variety of deposit accounts,  including checking,  savings,
money-market  and   certificates  of  deposit.   Since  1989,  the  Company  has
experienced strong growth in deposits, especially in certificates of deposit and
non-interest  bearing demand  deposits.  As of December 31, 1997 the Company did
not have any brokered  deposits and neither  solicited nor offered  premiums for
such deposits.

Deposits are obtained  primarily from the market areas which the Company serves.
The  Company  believes  that  these  market  areas  have a higher  than  average
disposable  income  and that  households  in these  areas are more  liquid  than
average.  The rate  structure  available on the Company's  loan products  varies
depending  upon the  totality of a  customer's  business  relationship  with the
Company.  The major  factor in  determining  which rates apply to any  borrowing
under this  structure is the amount and type of deposits a customer has with the
Company. The customer can obtain a reduced rate on borrowings, or reduced points
on borrowings, by having deposits equal to a certain percentage of the borrowing
in either interest or non-interest bearing accounts with the Company.

Deposits at December 31, 1997 were $332.9 million, an increase of $30.3 million,
or 10.0%, compared to total deposits of $302.6 million at December 31, 1996. The
growth in deposits  during this period was primarily due to the expansion of the
Company's branch system and its aggressive pricing on certificates of deposit in
comparison to our  marketplace.  Additionally,  a new product was  introduced in
September  1996, a seven month "no penalty"  certificate  of deposit that allows
for complete or partial  withdrawals  without  penalty.  This product is part of
"Other savings  deposits"  which grew from $68.7 million at December 31, 1996 to
$90.5  million at December 31,  1997.  Most of that growth is due to the new "no
penalty"  certificate  of deposit.  Deposits  at  December  31, 1996 were $302.6
million,  an increase of $92.4 million, or 44.0%, above total deposits of $210.2
million at December 31, 1995.

Average total deposits  increased by $86.9 million,  or 37.4%, to $319.0 million
for the twelve  months ended  December  31, 1997  compared to the 1996 full year
average of $232.1  million.  Changes in the average  deposit mix include a $15.5
million, or 39.7% increase in certificates of deposit over $100 thousand; a $2.6
million, or 4.1%, decrease in consumer certificates of deposit; a $10.1 million,
or 19.0%, decrease in money market deposit accounts; a $76.0 million, or 389.7%,
increase in regular savings; a $2.7 million,  or 16.8%,  increase in NOW account
deposits; and an $5.4 million, or 13.2%, increase in non-interest bearing demand
deposits.  The  dramatic  increase  in regular  savings  accounts  reflects  the
increase in our new "no penalty" seven month  certificate  of deposit  discussed
above, which is classified as a savings account due to its "no penalty" feature.

During 1997, the Company  primarily  utilized  growth in certificates of deposit
including  certificates  of deposit over $100 thousand,  and the growth in other
savings deposits as funding sources for the loan portfolio  growth.  The Company
has found the cost of these deposits to be lower than other available sources of
funds.  Deposits are obtained  primarily  from the market area which the Company
serves through its branch network. Although certificates of deposit of over $100
thousand may  generally be  considered  to entail  higher costs and  potentially
increased  volatility,  management  believes that these  instruments  serve as a
stable  and  cost-efficient  source of funds for the  Company.  This is in large
measure due to the Company's  marketing  strategy for  targeting  professionals,
small businesses and high net worth individuals and in part due to the Company's
policy of taking into account a customer's entire  relationship with the Company
when pricing loans. The interest rate which the borrower may receive may be less
if the borrower has significant other business  relationships  with the Company.
In light of this, the Company's  experience has been, and expectation  continues
to be, that these certificates of deposit,  although of short maturity,  will be
renewed by borrowers and continue as a stable funding source for the Company.

The following  table  summarizes  the  components of deposit  liabilities  as of
December 31, 1997, 1996 and 1995.


<PAGE>


<TABLE>
DEPOSIT LIABILITIES

<CAPTION>
                                                                               December 31,
                                       -------------------------------------------------------------------------------------------
                                                  1997                             1996                           1995
                                       ---------------------------     ---------------------------     ---------------------------
                                          Amount             %            Amount             %            Amount            %
                                       -----------     -----------     -----------     -----------     -----------     -----------
                                                                            (Dollars in thousands)
<S>                                    <C>              <C>            <C>             <C>             <C>             <C>
Demand .............................   $    56,430           16.95%    $    42,372           14.00%    $    40,944           19.48%
NOW accounts .......................        24,359            7.32%         24,663            8.15%         12,364            5.88%
Money market
  deposit accounts .................        42,076           12.64%         46,304           15.30%         54,100           25.74%
Other savings
  deposits .........................        90,546           27.20%         68,704           22.71%          3,966            1.89%
Time CDs over
  $100,000 .........................        75,745           22.75%         58,511           19.34%         44,500           21.16%
Other time deposits ................        43,741           13.14%         62,008           20.50%         54,327           25.85%
                                       -----------     -----------     -----------     -----------     -----------     -----------
Balance-end of
  period ...........................   $   332,897          100.00%    $   302,562          100.00%    $   210,201          100.00%
                                       ===========     ===========     ===========     ===========     ===========     ===========
</TABLE>


The following table is a summary of the maturity distribution of certificates of
deposit as of December 31, 1997.

MATURITY SCHEDULE OF CDS

                                                  December 31, 1997
                                       ----------------------------------------
                                          Time CDs Over          Other Time
                                            $100,000              Deposits
                                       ------------------    ------------------
                                        Amount       %        Amount       %
                                       -------    -------    -------    -------
                                                  (Dollars in thousands)
Due in 90 days or less .............   $62,180      82.09%   $11,624      26.57%
Due between 91 days and 180 days ...     9,745      12.86%     8,716      19.93%
Due between 181 days and one year ..     2,346       3.10%    10,873      24.86%
Due after one year .................     1,474       1.95%    12,528      28.64%
                                       -------    -------    -------    -------

                                       $75,745     100.00%   $43,741     100.00%
                                       =======    =======    =======    =======


<PAGE>


ASSET AND LIABILITY MANAGEMENT

Management of interest rate sensitivity is an important element of both earnings
performance and maintaining sufficient liquidity.  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 same time period.
A Gap is  positive  when the  amount  of  interest-earning  assets  maturing  or
repricing  exceeds  the  amount  of  interest-bearing  liabilities  maturing  or
repricing  within  the  same  period,   and  is  negative  when  the  amount  of
interest-bearing  liabilities  maturing  or  repricing  exceeds  the  amount  of
interest-earning   assets   maturing  or  repricing   within  the  same  period.
Accordingly,  during a period of rising interest  rates,  an institution  with a
negative  Gap position  would not be in as favorable a position,  compared to an
institution  with a positive  Gap,  to invest in higher  yielding  assets.  In a
rising  rate  environment,  a  negative  Gap  may  result  in  the  yield  on an
institution's  interest-earning  assets  increasing  at a slower  rate  than the
increase in an  institution's  cost of  interest-bearing  liabilities.  During a
period of falling  interest  rates,  an  institution  with a negative  Gap would
experience a repricing of its interest-earning  assets at a slower rate than its
interest-bearing liabilities which, consequently, may result in its net interest
income  growing  at a  faster  rate  than an  institution  with a  positive  Gap
position.

The  Company's  Asset/Liability  Management  Committee  is  composed  of certain
directors  and  officers  of the Company  (the "ALCO  Committee")  and  controls
asset/liability  management procedures.  The purpose of the ALCO Committee is to
review  and  monitor  the volume and mix of the  interest  sensitive  assets and
liabilities consistent with the Company's overall liquidity, capital, growth and
profitability goals.

As of December  31,  1997,  the  Company's  cumulative  one year  interest  rate
sensitivity Gap was negative  28.3%, as shown on the next table,  which compares
to negative  23.3% at December 31, 1996.  The change in the one year  cumulative
Gap  position  was  primarily  caused by the  increase  in the  balance of other
savings  deposits,  and time  CD's over  $100,000  of $21.8  million,  and $19.6
million,  respectively.  All but $4.2 million of this  increase is classified in
the 90 days or less category by  definition,  because most of these deposits are
subject to  immediate  repricing.  Most of this  increase  was used to fund loan
growth  which is subject to  repricing  after one year.  The  increases in other
savings deposits,  and time CD's over $100,000 were partially offset by declines
in the balances of money market accounts,  NOW accounts, and other time deposits
of $4.2 million, $0.3 million, and $11.4 million, respectively. Increases in the
average  balances of short term  borrowings  and long term debt of $31.3 million
and $15.0  million,  respectively,  were used to fund the purchase of investment
securities  held to maturity.  Using the precepts of  traditional  Gap analysis,
this type change indicates that the Company has become more liability  sensitive
in the one year time frame,  and the Company  would expect to earn more interest
income in a falling rate environment than in a rising rate environment. However,
Gap analysis  does not measure  repricing  due to the  principal  cash flow from
loans,  nor does it evaluate the  probability  that core  deposits,  such as NOW
accounts and other  savings  deposits,  will be repriced.  Although Gap analysis
defines  what is  possible,  it does not  necessarily  define what is  probable.
Management  of the Company  relies more heavily on its  quarterly  interest rate
simulation  modeling when evaluating the probable  effects of rising and falling
rates on the Company's net interest income.

Therefore,  in  addition  to the Gap  analysis,  the ALCO  Committee  relies  on
computer  simulations  to evaluate  the impact of changes in  interest  rates on
liquidity,  net interest income and operating results.  The simulations forecast
the Company's  performance  in various  interest rate  environments.  Management
believes that the simulation  model is a more effective tool than a Gap analysis
since the simulation  analysis can more accurately  reflect the impact of rising
and declining rates on each type of interest-earning  asset and interest-bearing
liability.  The Company's  tolerance for fluctuation  under the simulation model
calls for a decline in net interest income of no more than 5%, given a 200 basis
point  increase or decrease in interest  rates.  The Company as of December  31,
1997, is well within its targeted fluctuation range.


<PAGE>


The following  table reflects the interest rate  sensitivity gap position of the
Company as of December 31, 1997:


<TABLE>
INTEREST RATE SENSITIVITY ANALYSIS AT DECEMBER 31, 1997

<CAPTION>

                                                                               Maturing or Repricing in (2)
                                                     ------------------------------------------------------------------------------
                                                        Due in          Between           After            Non-
                                                        90 Days         91 Days-           One           Interest
                                                        or Less         One Year           Year          Bearing           Total
                                                     -----------      -----------      -----------     -----------      -----------
                                                                                 (Dollars in thousands)
<S>                                                  <C>              <C>              <C>             <C>              <C>
ASSETS:
  Investment securities available
    for sale ...................................     $    52,483             --               --              --        $    52,483
  Investment securities held to
    maturity ...................................            --               --             68,988            --             68,988
  Loans ........................................          73,111           47,068          163,363           4,335          287,877
  Valuation Reserves (1) .......................            --               --               --            (3,088)          (3,088)
  Non-interest earning assets ..................            --               --               --            25,626           25,626
                                                     -----------      -----------      -----------     -----------      -----------

      Total Assets .............................     $   125,594      $    47,068      $   232,351     $    26,873      $   431,886
                                                     ===========      ===========      ===========     ===========      ===========


LIABILITIES AND STOCKHOLDERS' EQUITY:
  Interest-bearing liabilities:
    Money market accounts ......................     $    42,076             --               --              --        $    42,076
    NOW accounts ...............................          24,359             --               --              --             24,359
    Other savings deposits .....................          90,546             --               --              --             90,546
    Time CD's over $100,000  ...................          62,180           12,091            1,474            --             75,745
    Other time deposits ........................          11,624           19,589           12,528            --             43,741
    Short term borrowings ......................          22,300           10,000             --              --             32,300
    Long term debt .............................            --               --             29,425            --             29,425
                                                     -----------      -----------      -----------     -----------      -----------

  Total interest-bearing liabilities ...........         253,085           41,680           43,427            --            338,192

  Non-interest bearing deposits ................            --               --               --            56,430           56,430
  Other liabilities ............................            --               --               --             2,040            2,040
  Stockholders' equity .........................            --               --               --            35,224           35,224
                                                     -----------      -----------      -----------     -----------      -----------

    Total Liabilities and
      Stockholders' Equity .....................     $   253,085      $    41,680      $    43,427     $    93,694      $   431,886
                                                     ===========      ===========      ===========     ===========      ===========

Interest Rate Sensitivity Gap ..................     ($  127,491)     $     5,388      $   188,924     ($   66,821)
                                                     ===========      ===========     ===========      ===========

Cumulative Gap .................................     ($  127,491)     ($  122,103)     $    66,821
                                                     ===========     ===========      ===========

Cumulative Gap to Total Assets .................          -29.52%          -28.27%          15.47%
                                                     ===========     ===========      ===========

</TABLE>

(1)  Valuation  reserves  include  allowance  for loan losses and deferred  loan
     fees.

(2)  The  following  are the  assumptions  that  were  used to  prepare  the Gap
     analysis:
     (A)  Securities  "available  for  sale" are  placed  in the first  maturity
          bucket since they can be sold at any time,  and are therefore  subject
          to the possibility of immediate repricing.
     (B)  Loans are spread through the maturity  buckets based on the earlier of
          their actual  maturity date or the date of their first  potential rate
          adjustment.
     (C)  Money market  accounts,  NOW accounts and Other  savings  accounts are
          subject  to  immediate  withdrawal  and  are  therefore  presented  as
          repricing in the first repricing period.
     (D)  Time deposits are spread  through the maturity  buckets based on their
          actual maturity date.


<PAGE>


MARKET RISK

     The Company's  operations may be subject to a variety of market risks,  the
most material of which is the risk of changing  interest rates.  Most generally,
interest-rate risk (IRR) is the volatility in financial performance attributable
to changes in market  interest  rates which may result in either  fluctuation of
net  interest  income,  or  changes to the  economic  value of the equity of the
Company.

     The principal  objective of the Company's IRR  management  activities is to
provide  maximum  levels of net  interest  income while  maintaining  acceptable
levels of interest rate and liquidity risk and facilitating the funding needs of
the  Company.  Consistent  with its  definition  of IRR,  the  Company  measures
earnings at risk and value at risk.

     The Company  monitors  and  measures  IRR through a variety of  techniques,
including   gap   analysis,   income-simulation   analysis   and   value-at-risk
measurement.  Gap analysis  provides an indicator of potential  IRR by comparing
the  available  repricing  on the asset  and  liability  sides of the  Company's
balance  sheet.  Gap is defined as interest  rate  sensitive  assets  (RSA) less
interest rate sensitive liabilities (RSL) in the time period specified. Although
management reviews gap analysis, it is the least relied upon of management's IRR
evaluation  tools.  Gap  analysis is a static  analysis,  and does not take into
account changes in rates and maturities  caused by changes in market rates,  for
example through prepayments.

     The Company's primary tool is an income-simulation  model which starts with
a detailed  inventory of balance sheet items contained in gap analysis  reports,
and factors in the probability of the maturity and repricing  characteristics of
assets and liabilities,  including assumed  prepayment risks.  Income simulation
attends to the relative  sensitivities  of these  balance sheet items to dynamic
rates and  projects  their  behavior  over an  extended  period of time.  Income
simulation  analysis  reflects  both  the  possibility  and  probability  of the
behavior of balance sheet items.

     Income simulation analysis,  and to a much lesser extent, Gap analysis, are
tools for  understanding  and measuring IRR from the  perspective of earnings at
risk.  Value-at-risk  analysis is the  measurement and management of IRR, from a
longer term  perspective,  to the  economic  value of the equity of the Company.
This is performed  through Net Portfolio  Value (NPV) analysis which is intended
to address the changes in equity value arising from movements in interest rates.
The NPV  analysis  first  reprices all of the assets and  liabilities  under the
current interest rate environment,  then compares this result to repricing under
a changed interest rate environment, thus evaluating the impact of immediate and
sustained  interest rate shifts across the current  interest rate yield curve to
the  market  value of the  current  balance  sheet.  As with gap  analysis,  NPV
analysis  is static.  There is no  recognition  of the  potential  for  strategy
adjustments  in a volatile  rate  environment  which  would  protect or conserve
equity values.


<PAGE>


     Changes in the estimates and assumptions made for IRR analysis could have a
significant impact on projected results and conclusions.  These analyses involve
a variety of significant estimates and assumptions, including, among others: (1)
estimates  concerning  assets and  liabilities  without  definite  maturities or
repricing  characteristics;  (2) how and when yields on interest-earning  assets
and costs of interest-bearing liabilities will change in response to movement of
market interest rates;  (3) prepayment  speeds;  (4) Future cash flows;  and (5)
discount  rates.  Therefore,  these  techniques may not  accurately  reflect the
impact of general  market  interest rate movements on the Company's net interest
income or the value of its economic equity.

     The table below sets forth the assumed  change to the  Company's  estimated
net portfolio value at December 31, 1997,  based upon an immediate and sustained
interest  rate change from the interest rate yield curve at December 31, 1997 of
plus 200 basis points and minus 200 basis points.

                                                   NET           CHANGE
                                                PORTFOLIO   -----------------
     CHANGE IN RATES                              VALUE      AMOUNT   PERCENT
     ---------------                             -------    -------   -------
     +200 basis points                           $29,940    $(7,426)   -19.9%
     Estimated Net Portfolio Value
          at December 31, 1997-base case         $37,366    $   -0-      0.0%
     -200 basis points                           $37,708    $   342      1.0%

         The table  below  sets  forth  the  estimated  change to the  Company's
estimate of its net  interest  income  based upon its  December 31, 1997 balance
sheet, assuming an interest rate change from the December 31, 1997 interest rate
yield curve of plus 200 basis points and minus 200 basis points. Such rate shift
is assumed to be gradual over the first twelve months and then sustained for the
remainder of the period.

                                                        PERCENT CHANGE
     CHANGE IN RATES                              YEAR 1     YEAR 2    TOTAL
     ---------------                             -------    -------   -------
     + 200 basis points                            +0.61%     -4.51%   -1.92%
     Base Case (Net Interest Inc., in Thou)      $18,382    $18,016  $36,398
     -200 basis points                             +0.24%     +3.95%   +2.08%

     The Company manages its IRR through use of the tools described  above,  and
its actions are taken under the guidance of the Asset/Liability Committee (ALCO)
comprised  of  senior  management,  with  oversight  provided  by the  Board  of
Directors.  The ALCO has  established a limit that projected net interest income
should  not  fluctuate  negatively  by  greater  than  5%  during  Year 1 of the
projection, when compared to the base case. As can be seen from the table above,
the Company is within this established  limit, at December 31, 1997. In addition
to these tools,  ALCO's review  includes the book and market value of assets and
liabilities,  unrealized gains and losses, market conditions and interest rates,
and cash flow needs with  regard to loan and  investment  activity  and  deposit
flow.


<PAGE>


LIQUIDITY

Among  the  ALCO  Committee  functions  is its  responsibility  to  monitor  and
coordinate  all  activities   relating  to  the  maintenance  of  liquidity  and
protection of net interest income from fluctuations in market interest rates.

Liquidity is a measurement  of the Company's  ability to meet present and future
funding obligations and commitments. The Company adjusts the liquidity levels in
order to meet funding needs for deposit outflows,  repayment of borrowings, when
applicable,  and the funding of loan  commitments.  The Company also adjusts its
liquidity level as appropriate to meet its asset/liability objectives. Principal
sources  of  liquidity  are  deposit  generation,  access  to  purchased  funds,
maturities  and  repayments  of loans and  investment  securities,  net interest
income and fee income. Liquid assets (consisting of cash, Federal funds sold and
investment  securities  classified  as available for sale)  comprised  15.9% and
13.6% of the Company's  total assets at December 31, 1997 and December 31, 1996,
respectively.  The increase in liquid assets at December 31, 1997 is a result of
the purchase of available for sale investment securities during the year.

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

These activities are summarized below:

                                                    Years Ended December 31,
                                               --------------------------------
                                                     (Dollars in thousands)
                                                 1997        1996        1995
                                               --------    --------    --------
Cash and cash equivalents-beginning ........   $ 16,745    $ 10,207    $  6,815
Cash flows from operating activities:
  Net income ...............................      3,625       2,144       2,128
  Adjustments to reconcile net income
    to net cash provided by operating
    activities .............................      1,794       2,290         523
--------------------------------------------------------------------------------
Net cash provided by operating activities ..      5,419       4,434       2,651
Net cash (used in) investing activities ....    (90,305)    (88,630)    (49,655)
Net cash provided by financing activities ..     84,251      90,734      50,396
--------------------------------------------------------------------------------
Net increase in cash and cash equivalents ..       (635)      6,538       3,392
--------------------------------------------------------------------------------
Cash and cash equivalents-ending ...........   $ 16,110    $ 16,745    $ 10,207
--------------------------------------------------------------------------------

Net cash used in investing  activities  during the year ended  December 31, 1997
was  primarily  attributable  to a net  increase in the  purchase of  investment
securities available for sale of $67.5 million and of investment securities held
to maturity of $52.5 million.  The net cash used in 1997 to purchase  investment
securities  was  partially  offset by the  proceeds  from the sale,  maturity or
paydowns on investment securities, which totaled $52.1 million.

Net cash used in investing  activities  during the year ended  December 31, 1996
was  primarily  attributable  to a net  increase in loans made to  customers  of
$103.6  million.  The net cash used in 1996 to fund loan  growth  was  partially
offset by the  proceeds  from the  sale,  maturity  or  paydowns  on  investment
securities, net of security purchases, which totaled $16.1 million.

Net cash  provided by financing  activities  during the year ended  December 31,
1997  was  primarily  attributable  to a net  increase  in both  short-term  and
long-term borrowings of $31.3 million and $15.0 million, respectively,  combined
with a net increase in deposits of $30.3 million. Net cash provided by financing
activities during the year ended December 31, 1996 was primarily attributable to
a net  increase  in  deposits of $92.4  million,  and an  increase in  long-term
borrowings  of $14.4  million and a decrease in  short-term  borrowings of $16.5
million.


<PAGE>


LIQUIDITY (CONTINUED)

Net cash  provided by financing  activities  during the year ended  December 31,
1995 was primarily  attributable to a net increase in deposits of $33.4 million,
and an increase in short-term borrowings of $17.5 million.

In   addition   to  the   Company's   deposit   base   and  its   portfolio   of
available-for-sale securities, the Company also has several secondary sources of
liquidity.  Many of the Company's loans are originated  pursuant to underwriting
standards which make them readily marketable to other financial  institutions or
investors in the secondary market. In addition, in order to meet liquidity needs
on a temporary basis, the Company has unsecured lines of credit in the amount of
$7.0 million for the purchase of Federal funds with other financial institutions
and may borrow  funds at the Federal  Reserve  discount  window,  subject to the
Company's ability to supply collateral.

At December  31,  1997,  the Company  had an  overnight  line of credit with the
Federal Home Loan Bank-New York  ("FHLB-NY")  for  $32,497,300 of which $-0- was
advanced.  In addition,  subject to certain  requirements,  the Company may also
obtain longer term advances of up to 30% of the Company's assets.

The Company believes that its liquidity  position is sufficient to provide funds
to meet future loan demand or the possible  outflow of deposits,  in addition to
being able to adapt to changing interest rate conditions.


<PAGE>

CAPITAL RESOURCES

The Company's primary regulator,  the Federal Reserve Bank (which regulates bank
holding companies),  has issued guidelines classifying and defining bank holding
company  capital  into  the  following  components:  (1) Tier I  Capital,  which
includes tangible  stockholders'  equity for common stock and certain qualifying
perpetual  preferred  stock,  and  excludes  net  unrealized  gains or losses on
available-for-sale  securities  and  deferred  tax assets that are  dependent on
projected  taxable income greater than one year in the future,  and (2), Tier II
Capital  (Total  Capital),  which  includes a portion of the  allowance for loan
losses,  certain  qualifying  long-term  debt and preferred  stock that does not
qualify for Tier I Capital.  The risk-based capital guidelines require financial
institutions  to  maintain  specific  defined  credit risk  factors  (risk-based
assets).  The  minimum  Tier  I and  combined  Tier I and  Tier  II  capital  to
risk-weighted assets ratios are 4.0% and 8.0%, respectively. The Federal Reserve
Bank also has  adopted  regulations  which  supplement  the  risk-based  capital
guidelines to include a minimum leverage ratio of Tier I Capital to total assets
of 3.0% to 5.0%.  Regulations  have  also  been  issued  by the  Bank's  primary
regulator,  the Office of the Comptroller of the Currency,  establishing similar
capital ratios.

The following  table  summarizes the risk-based and leverage  capital ratios for
the Company and its wholly-owned  subsidiary,  Carnegie Bank, N.A. (the "Bank"),
before the unrealized  holding gains on securities  available for sale,  net, at
December 31, 1997, as well as the regulatory required minimum capital ratios:

                                          December 31, 1997    Regulatory
                                         -------------------    Required
                                         Company       Bank      Minimum
                                         -------      ------     -------
     Risk-based Capital:
       Tier I capital ratio ............  11.81%       9.42%      4.00%
       Total capital ratio .............  12.80%      10.42%      8.00%
     Leverage ratio ....................   8.36%       6.68%   3.00%-5.00%

As noted in the above table,  the Company's  capital ratios at December 31, 1997
substantially exceed the minimum regulatory requirements.

During the third quarter of 1994, the Company strengthened its capital resources
and  positioned  itself for future  growth with a  successful  public  offering,
pursuant to which the Company sold 690,000  Units,  each Unit  consisting of one
share of common  stock and one warrant to purchase  one share of common stock at
an  exercise  price of  $15.09  for a period  of  three  years  from the date of
issuance.  Net proceeds  from the  securities  offering  increased the Company's
equity by $7.9 million  during the third quarter of 1994. As of August 18, 1997,
the expiration date for the exercise of the warrants,  substantially  all of the
warrants had been exercised, increasing the Company's capital by $9.9 million.


<PAGE>


IMPACT OF INFLATION AND CHANGING PRICES

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


<PAGE>


RECENTLY ISSUED ACCOUNTING STANDARDS

ACCOUNTING FOR TRANSFERS AND SERVICING OF
FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES.

FASB has issued  SFAS No.  125,  "Accounting  for  Transfers  and  Servicing  of
Financial Assets and  Extinguishments  of  Liabilities",  as amended by SFAS No.
127,  "Deferral  of the  Effective  Date of  Certain  Provisions  of SFAS  125",
effective for transfers and servicing of financial assets and extinguishments of
liabilities   occurring   after  December  31,  1996.   Earlier  or  retroactive
application is not permitted.  This Statement provides  accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities based on consistent application of a  financial-components  approach
that focuses on control.  Adoption of this pronouncement did not have a material
impact on the Company's consolidated financial statements.

EARNINGS PER SHARE.

Issued in March, 1997, SFAS No. 128, "Earnings per Share", establishes standards
for  computing and  presenting  earnings per share (EPS) and applies to entities
with  publicly  held common  stock or potential  common  stock.  This  Statement
simplifies the standards for computing  earnings per share  previously  found in
APB  Opinion  No.  15,  "Earnings  per  Share",  and makes  them  comparable  to
international EPS standards.  It replaces the presentation of primary EPS with a
presentation  of basic EPS.  It also  requires  dual  presentation  of basic and
diluted EPS on the face of the income  statement  for all entities  with complex
capital   structures  and  requires  a  reconciliation   of  the  numerator  and
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS  computation.  This Statement is effective for financial  statements
issued for periods ending after December 15, 1997,  including  interim  periods;
earlier application is not permitted. This Statement requires restatement of all
prior-period EPS data presented.  Adoption of this  pronouncement did not have a
material impact on the Company's consolidated financial statements.

DISCLOSURE OF INFORMATION ABOUT CAPITAL STRUCTURE.

FASB has also issued SFAS No. 129,  "Disclosure  of  Information  about  Capital
Structure",  establishing standards for disclosing information about an entity's
capital  structure.  This  Statement  continues  the  previous  requirements  to
disclose certain  information  about an entity's capital  structure found in APB
Opinions No. 10, "Omnibus Opinion - 1966", and No. 15, "Earnings per Share", and
FASB Statement No. 47, "Disclosure of Long-Term Obligations",  for entities that
were subject to the requirements of those standards.  This Statement  eliminates
the exemption of nonpublic  entities  from certain  disclosure  requirements  on
Opinion  No.  15 as  provided  by FASB  Statement  No.  21,  "Suspention  of the
Reporting   of  Earnings  per  Share  and  Segment   Information   by  Nonpublic
Enterprises".  It supersedes specific disclosure requirements of Opinions No. 10
and No. 15 and Statement No. 47 and consolidates them in this Statement for ease
of retrieval and for greater visibility to nonpublic entities. This Statement is
effective for financial  statements issued for periods ending after December 15,
1997.  It contains no change in disclosure  requirements  for entities that were
previously  subject  to the  requirements  of  Opinions  No.  10 and No.  15 and
Statement  No. 47 and  therefore  its  adoption  had no effect on the  Company's
consolidated financial statements.

REPORTING COMPREHENSIVE INCOME.

FASB has also issued SFAS No. 130, "Reporting  Comprehensive Income",  effective
for fiscal years beginning  after December 15, 1997. This Statement  establishes
standards for reporting and display of  comprehensive  income and its components
in a full set of general-purpose  financial statements.  Comprehensive income is
defined as the change in equity of a business  enterprise  during a period  from
transactions  and other  events and  circumstances  from  nonowner  sources.  It
includes  all changes in equity  during a period  except  those  resulting  from
investments by owners and  distributions to owners.  An example of comprehensive
income is the unrealized gains and losses on securities  available for sale, net
of taxes. The Company will implement the disclosure requirements related to this
pronouncement beginning in 1998.


<PAGE>


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The  information  required  by  this  Item  is  contained  in  the  Registrant's
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations included herein, under the caption "Market Risk."

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Reference is hereby made to the Financial Statements filed as part of this
report, beginning on page F-1.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Following is a list of the names of all directors of the Registrant, together
with: their ages, their positions and offices with the Registrant, their
principal occupations during the past five years, and the years during which
their current consecutive terms as directors of the Registrant first commenced:

<TABLE>
<CAPTION>
        Name, Age and                       Principal Occupations
  Position with Registrant                 During Past Five Years                          Director Since(1)
  ------------------------                 ----------------------                          --------------
<S>                            <C>                                                               <C>
Theodore H. Dolci, Jr.,  41    President, Ted Dolci Excavating, Inc.                             1989

Michael E. Golden, 54,         Chairman and Chief Executive Officer, First                       1988
Vice Chairman of the Board     Colonial Securities Group, Inc., a full
                               service stock and bond brokerage; Vice
                               Chairman, Admiralty Bank (Palm Beach Gardens,
                               Florida)
</TABLE>
----------
(1)  Includes prior service on Board of Directors of the Bank.


<PAGE>


<TABLE>
<S>                            <C>                                                               <C>
Thomas L. Gray, Jr., 53,       President and Chief Executive Officer of the                      1988
President and Chief            Company and the Bank; Director, Admiralty Bank
Executive Officer              (Palm Beach Gardens, Florida)

Bruce A. Mahon,  67,           Chairman of the Board of the Company and the                      1988
Chairman of the Board          Bank; Chairman, Admiralty Bank (Palm Beach
                               Gardens, Florida)

James E. Quackenbush, 68       Retired, formerly Managing Partner, Malesard,                     1988
                               Quackenbush, Swift & Company, Certified Public
                               Accountants

Steven L. Shapiro, 57          Chairman of Alloy, Silverstein, Shapiro,                          1992
                               Adams, Mulford & Co., Certified Public
                               Accountants, Cherry Hill, New Jersey.  Mr.
                               Shapiro is Commissioner of the New Jersey
                               Casino Reinvestment Development Authority and
                               Trustee of the New Jersey Hospital
                               Foundation.  Mr. Shapiro is also a member of
                               the Executive Advisory Council of Rutgers
                               University and serves on the board of the
                               Student Loan Marketing Corporation in
                               Washington, D.C.

Shelley M. Zeiger, 62          Chairman, Zeiger Enterprises, Inc., an import an                  1992
                               export company

Mark A. Wolters, 37,           Executive Vice President of the Company and
Executive Vice President       the Bank; Director, Admiralty Bank (Palm Beach                    1994
                               Gardens, Florida)

Joseph J. Oakes, III, 55       President, Acorn Financial Services, a                            1988
                               financial services and insurance brokerage firm
</TABLE>

     No director of the Company is also a director of any other company with a
class of securities registered pursuant to Section 12 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), or subject to the
requirements of Section 15(d) of such Act or any company registered as an
investment company under the Investment Company Act of 1940.

     Following is a list of the names of all executive officers of the
Registrant who are not also directors, together with their ages, their positions
and offices with the Registrant, and their principal occupations during the past
five years:


<PAGE>


<TABLE>
<CAPTION>
        Name, Age and                       Principal Occupations
  Position with Registrant                 During Past Five Years                          Officer Since
  ------------------------                 ----------------------                          -------------
<S>                            <C>                                                               <C>
Richard P. Rosa, 46,           Chief Financial Officer of Carnegie Bank,                         1995
Chief Financial Officer        N.A., since April 1995; Director, Admiralty
                               Bank (Palm Beach Gardens, Florida); Formerly,
                               Executive Vice President and Chief Financial
                               Officer of Lakeland First Financial Group,
                               Inc. and its wholly-owned subsidiary,
                               Lakeland Savings Bank
</TABLE>

ITEM 11.  EXECUTIVE COMPENSATION

The following table sets forth a summary for the last three (3) fiscal
years of the cash and non-cash compensation awarded to, earned by, or
paid to, the Chief Executive Officer of the Company and each of the
most highly compensated executive officers who were serving as
executive officers of the Registrant at December 31, 1997 and whose
individual remuneration exceeded $100,000 for the last fiscal year
(collectively, "Named Officers").

                           SUMMARY COMPENSATION TABLE

                         Cash and Cash Equivalent Forms
                                 of Remuneration

                                                                     Long Term
                                                                    Compensation
                                                                     Securities
Name and Current              Annual    Annual     Other Annual      Underlying
Principal Position    Year    Salary    Bonus(1)  Compensation(2)     Options
------------------    ----    ------    --------  ---------------     -------

Thomas L. Gray, Jr.   1997  $210,000    $449,508     $20,900(3)        19,425
President and Chief   1996  $130,000    $173,133     $20,872            -0-
Executive Officer     1995  $130,000    $142,585     $19,409           54,475

Mark A. Wolters       1997  $100,000    $ 57,711     $14,420(3)        14,175
Executive Vice        1996  $ 80,000    $ 57,711     $14,467            -0-
President             1995  $ 80,000    $ 47,528     $12,932           13,114


Richard P. Rosa       1997  $ 85,000    $ 20,199     $ 5,000            8,925
Senior Vice
President and Chief
Financial Officer

----------
(1)  Bonuses earned for services rendered in the indicated years although
     payment may have been made in subsequent years.

(2)  Other annual compensation includes director fees, insurance premiums and
     the personal use of Company automobiles, or automobile allowance.

(3)  In 1997, Mr. Gray received $18,450 for attending meetings of the Board of
     Directors and special committees of the Board and Mr. Wolters received
     $11,550 for attending meetings of the Board of Direcors and special
     committees of the Board.


<PAGE>


                      OPTION/SAR GRANTS IN LAST FISCAL YEAR

The following table sets forth with respect to grants of stock options made
during 1997 to each of the Named Officers; (i) the name of such officer; (ii)
the number of options granted; (iii) the percent the grant represents of the
total options granted to all employees during 1997; (iv) the per share exercise
price of the options granted; (v) the expiration date of the options; and (vi)
the Black-Scholes value of the options at grant date.

<TABLE>
<CAPTION>
                                         Percent of Total
                     No. of Securities     Options/SARs       Exercise of
                        Underlying          Granted to         Base Price
                   Options/SARs Granted    Employees in        ($/Share)       Expiration      Grant Date Present
         Name               (#)            Fiscal Year          1/15/07           Date              Value (1)

<S>                        <C>                <C>               <C>             <C>                  <C>
Thomas L. Gray, Jr.        19,425             15.42%            $17.86          1/15/07              $59,810
Mark A. Wolters            14,175             11.25%            $17.86          1/15/07              $43,645
Richard P. Rosa             8,925              7.08%            $17.86          1/15/07              $27,480
</TABLE>

(1)  The values shown reflect standard application of the Black-Scholes pricing
     model using (i) a 20% stock price volatility, (ii) an expected term of five
     years, (iii) a risk-free interest rate of 6.17%, and (iv) a dividend yield
     of 3.00%. The values do not take into account risk factors such as
     non-transferability and limits on exercisability. In assessing the values
     indicated in the above table, it should be kept in mind that no matter what
     theoretical value is placed on a stock option on the date of grant, the
     ultimate value of the option is dependent on the market value of the Common
     Stock at a future date, which will depend to a large degree on the efforts
     of the named officers to bring future success to the Company for the
     benefit of all stockholders.


<PAGE>


                 AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL
                   YEAR AND FISCAL YEAR END OPTION/SAR VALUES

The following table sets forth with respect to each exercise of stock options
during 1997 by each of the Named Officers and the year-end value of unexercised
options on an aggregated basis: (i) the name of each such officer; (ii) the
number of shares received upon exercise; (iii) the aggregate dollar value
realized upon exercise; (iv) the total value of unexercised options held at
December 31, 1997 separately identifying the exercisable and unexercisable
options; and (v) the aggregate dollar value of in-the-money, unexercised options
held at December 31, 1997, separately identifying the exercisable and
unexercisable options.

<TABLE>
<CAPTION>
                                                                                            Value of Unexercised
                                                                 No. of Securities          In-the-Money Options at FY
                                                                 Underlying Unexercised     End ($) (based on $34.37
                                                                 Options at FY End (#)      per share)
                           Shares Acquired    Value              Exercisable/               Exercisable/
          Name             on Exercise (#)    Realized           Unexercisable              Unexercisable

<S>                            <C>            <C>                <C>                        <C>
Thomas L. Gray, Jr.            13,208         $291,745           73,822 / 29,584            $ 1,705,875 / $578,412

Mark A. Wolters                    --              --            32,181 / 14,247            $   742,051 / $256,907

Richard P. Rosa                    --              --             7,235 /  8,363            $   149,410 / $148,096
</TABLE>

                            COMPENSATION OF DIRECTORS

Directors of the Company receive no remuneration for their service on the Board
of Directors of the Company. Directors of the Bank, other than full-time
employees of the Bank, receive a $5,000 annual retainer, payable quarterly. All
directors of the Bank receive fees of $750 per Board meeting attended and $300
per committee meeting attended, except that the Chairman of the Audit Committee
receives $600 per Audit Committee meeting attended. In addition, Mr. Michael
Golden, in his capacity as Vice Chairman of the Bank, receives an annual stipend
of $12,000. Mr. Gray does receive Board meeting and Loan Committee (of the Bank)
meeting fees and Mr. Wolters does receive Board meeting fees.

The Company has entered into a consulting agreement with Mr. Bruce Mahon,
Chairman of the Board of the Company. Pursuant to the consulting agreement, Mr.
Mahon receives an annual consulting fee of $100,000. The consulting agreement
has a term of two years. The consulting agreement can be terminated by the
Company at any time for cause. Cause is defined in the consulting agreement as
consultant's (i) willful and continued failure to perform his duties; (ii)
fraud, misappropriation or other intentional damage to the property or business
of the Company or (iii) the consultant's admission or conviction of, or plea of
nolo contendere to, any felony that adversely affects the Company. In the event
of Mr. Mahon's death, the Company is obligated to reimburse his estate for any
unpaid fees and expenses for services rendered prior to his death. In addition,
Mr. Mahon also receives certain insurance


<PAGE>


benefits directly from the Company which are not included in the consulting
agreement.

The Company maintains a 1995 Directors Stock Option Plan ("1995 Directors
Plan"). Under the 1995 Directors' Plan, 151,315 shares of Common Stock have been
reserved for issuance, as adjusted to reflect stock dividends declared by the
Company from time to time. Directors of the Company, the Bank and any other
subsidiaries which the Company may acquire or incorporate are eligible to
participate in the 1995 Directors Plan. The 1995 Directors Plan is administered
by the Company's Board of Directors which has the power to designate which
directors will receive options and the terms of such options. No option may be
exercised more than ten years after the date of its grant.

The Company maintains the 1993 Stock Option Plan for Non-Employee Directors (the
"Outside Directors' Plan"). Under the Outside Directors' Plan, 42,000 shares of
Common Stock have been reserved for issuance, adjusted to reflect stock
dividends declared subsequent to the adoption of the Outside Directors' Plan.
Non-employee Directors of the Company, the Bank and any other subsidiaries which
the company may acquire or incorporate participate in the Outside Directors'
Plan. Each participant in the Outside Directors' Plan automatically receives an
option to purchase 5,000 shares of Common Stock effective as of the date such
participant commences his service on the Board of Directors. No option may be
exercised more than ten years after the date of its grant. The purchase price of
the shares of Common Stock subject to options under the Outside Directors' Plan
is 100% of the fair market value on the date such option is granted. There are
no more shares available for issuance under the Outside Directors' Plan.

On January 15, 1997, the Board of Directors adopted the Carnegie Bancorp 1997
Stock Option Plan which provides for grants of stock options to officers,
directors and employees of the Company.

The 1997 Plan is administered by the Company's Board of Directors, which has the
authority to designate the optionees and to determine the number of shares
subject to each option, the date of grant and the terms and conditions governing
the option, including any vesting schedule. The Board of Directors also
designates whether options granted under the 1997 Plan are non-statutory stock
options or incentive stock options. In addition, the Board is charged with the
responsibility of interpreting the 1997 Plan and making all administrative
determinations thereunder.

All directors, officers and employees of the Company or its subsidiaries are
eligible to receive options under the 1997 Plan.

The 1997 Plan authorized the Company to issue 274,000 shares of the Common Stock
pursuant to options. However, pursuant to the terms of the 1997 Plan, no options
may first become exercisable if on such date options to purchase in excess of
15% of the Company's outstanding Common Stock are then exercisable. New options
may only become exercisable for the first time if and to the extent their
exercisability will not cause exercisable options to purchase in excess of 15%
of the Company's outstanding Common Stock to be outstanding under all of the
Company's stock option plans in the aggregate.

                              EMPLOYMENT AGREEMENTS

The Company has entered into employment agreements with Mr. Thomas L. Gray, Jr.,
its President and Chief Executive Officer, and Mr. Mark A. Wolters, its
Executive Vice President. The employment agreements are intended to ensure that
the Company will be able to maintain a stable and competent management base. The
continued success of the Company depends, to a significant degree, on the skills


<PAGE>


and competence of Mr. Gray and Mr. Wolters.

The employment agreement with Mr. Gray (the "Gray Employment Agreement")
provides for a three-year term, and further provides that it will automatically
be renewed for a one-year term on each anniversary date unless, ninety days
prior to such anniversary date, either party provides written notice of its
intention not to renew. The Gray Employment Agreement provides that Mr. Gray
will receive an annual base salary of $210,000 for fiscal 1997, and that his
base salary will be reviewed annually by the Board of Directors. In addition,
the Gray Employment Agreement provides that Mr. Gray is to receive an annual
bonus of not less than 6% of the adjusted net after tax income of the Company
and such other compensation as determined by the Board of Directors. The Gray
Employment Agreement permits the Company to terminate Mr. Gray's employment for
cause at any time. The Gray Employment Agreement defines cause to mean (i)
willful and continued failure to perform duties; (ii) fraud, misappropriate or
material damage to the property or business of the Company; (iii) willful
violation of law or conviction or admission of, or plea of nolo contendere to,
any felony which would adversely affect the executive's ability to perform his
duties; or (iv) willful violation of any law, rule or regulation (other than
traffic violations or similar offenses) or final cease-and-desist order issued
by, or regulatory consent agreement with, any banking regulatory agency having
jurisdiction over the Company or any of its subsidiaries. In the event Mr. Gray
is terminated for reasons other than cause prior to the expiration of the term
of the Agreement, Mr. Gray shall be entitled to receive his base salary and
bonus for the remaining term. In addition, the Company is to maintain medical
and life insurance benefits for Mr. Gray for the remaining term. Mr. Gray may
terminate his employment upon sixty (60) days' notice to the Company. Upon the
occurrence of a change in control (as defined in the Gray Employment Agreement)
which results in Mr. Gray's involuntary termination without cause or Mr. Gray's
voluntary resignation within 18 months of such change in control because (i) he
is reassigned to a position of lesser rank or status than chief Executive
Officer; (ii) his place of employment is relocated by more than thirty miles
from its location as of the date of the Employment Agreement; or (iii) his
compensation or other benefits are reduced, Mr. Gray will be entitled to receive
his base salary and bonuses for a period of thirty (30) months after such
termination. In addition, the Company will continue to maintain Mr. Gray's
medical and dental insurance and other benefits in effect through the end of
such 30-month period.

The Company has entered into an employment agreement with Mark A. Wolters, the
Executive Vice President of the Company (the "Wolters Employment Agreement").
Pursuant to the Wolters Employment Agreement, Mr. Wolters is to be employed for
a term of three years and his employment is subject to automatic renewal of an
additional one-year term on each anniversary date unless, ninety days prior to
such anniversary date, either party provides written notice of its intention not
to renew. Mr. Wolters' annual base salary is $100,000 for fiscal 1997 and this
base salary is subject to annual review by the Board of Directors. In addition,
Mr. Wolters is entitled to receive a bonus in an amount equal to 2% of the
adjusted net after-tax income of the Company and such other compensation as
determined by the Board of Directors. The Wolters Employment Agreement permits
the Company to terminate Mr. Wolters' employment for cause. Cause is defined
under the Wolters Employment Agreement in the same manner as it is defined under
the Gray Employment Agreement. In the event Mr. Wolters is terminated for
reasons other than cause prior to the expiration of the initial three-year term,
Mr. Wolters shall be entitled to receive his base salary and bonus for the
remaining term. Mr. Wolters may terminate his employment upon sixty (60) days'
written notice to the Company. In addition, the Company shall maintain his
medical and dental insurance and other benefits for the remaining term. Upon the
occurrence of a change in control (as defined in the Wolters Employment
Agreement) and the


<PAGE>


subsequent involuntary termination of Mr. Wolters without cause or his voluntary
resignation within 18 months of such change in control because (i) he is
reassigned to a position of lesser rank or status than Executive Vice President,
(ii) his principal place of employment is moved by more than 30 miles from its
current place, or (iii) his compensation or other benefits are reduced, Mr.
Wolters will be entitled to receive his then current base salary and bonus for
18 months after such termination. In addition, the Company will continue to
maintain Mr. Wolters' medical and dental insurance and other benefits in effect
through the end of such 18-month period.

                       BOARD COMPENSATION COMMITTEE REPORT
                            ON EXECUTIVE COMPENSATION

The Company does not maintain a standing Compensation Committee. The
compensation payable to the Company's executive officers is determined by the
Board of Directors of the Company, without the participation of Messrs. Gray and
Wolters on any compensation matter directly related to them individually.

                          EXECUTIVE COMPENSATION POLICY

The Company's policy is to compensate its executives fairly and adequately for
the responsibility assumed by them for the success and direction of the Company,
the effort expended in discharging that responsibility and the results achieved
directly or indirectly from each executive's performance. "Fair and adequate
compensation" is established after careful review of:

     1. The Company's earnings;

     2. The Company's performance as compared to other companies of similar size
and market area; and

     3. Comparison of what the market demands for compensation of similarly
situated and experienced executives.

Total compensation takes into consideration a mix of base salary, bonus,
perquisites and stock options. The particular mix is established in order to
competitively attract competent professionals, retain those professionals, and
reward extraordinary achievement.

The Board of Directors also considers net income for the year and earnings per
share of the Company before finalizing officer increases for the coming year.

Based upon its current levels of compensation, the Company is not affected by
the provisions of the Internal Revenue Code which limits the deductibility to a
company of compensation in excess of $1 million paid to any of its top five
executives. Thus, the Company has no policy as to that subject.

BASE SALARY

The Board of Directors bears the responsibility for establishing base salary.


<PAGE>


Salary is minimum compensation for any particular position and is not tied to
any performance formula or standard. However, that is not to say that poor
performance will not result in termination. Acceptable performance is expected
of all executive officers as a minimum standard.

To establish salary, the following criteria are used:

     1. Position description.

     2. Direct responsibility assumed.

     3. Comparative studies of peer group compensation. Special weight is given
to local factors as opposed to national averages.

     4. Earnings performance of the Company resulting in availability of funds
for payment of salary expense.

     5. Competitive level of salary to be maintained to attract and retain
qualified and experienced executives.

ANNUAL BONUSES

Each year the Board establishes the parameters for the award of a bonus and the
size of the pool of available bonus money. The current parameters are related to
the Company's net income after taxes.

STOCK OPTIONS

Stock option awards are determined by the Board's Stock Option Committee.

The Stock Option Committee meets to evaluate meritorious performance of all
officers and employees for consideration to receive stock options.

The Stock Option Committee makes awards based upon the following criteria:

     1. Position of the officer or employee in the Company.

     2. The benefit which the Company has derived as a result of the efforts of
the award candidate under consideration.

     3. The Company's desire to encourage long-term employment of the award
candidate.

PERQUISITES

Perks, such as company automobiles and their related expenses, country club
memberships, auxiliary insurance benefits and other perks which the Board may
approve from time to time are determined and awarded pursuant to evaluation
under the same criteria used to establish base salary.


<PAGE>


The Company has long believed that a strong, explicit link should exist
between executive compensation and the value delivered to shareholders.
The bonus program and the stock option awards both provide competitive
compensation while mirroring the Company's performance. Since the bonus
is based on a direct, explicit link to the Company's performance, it is
directly and explicitly linked to the value received by shareholders.
The Company's profitability inures to the benefit of shareholders, and
is a direct result of the direction established by management.

                        MEMBERS OF THE BOARD OF DIRECTORS

     Bruce A. Mahon                            James E. Quackenbush
     Theodore H. Dolci, Jr.                    Steven L. Shapiro
     Thomas L. Gray, Jr.                       Mark A. Wolters
     Michael E. Golden                         Shelly M. Zeiger
     Joseph J. Oakes, III


<PAGE>


                                PERFORMANCE GRAPH

Set forth below is a graph and table comparing the yearly  percentage  change in
the  cumulative  total  shareholder  return on the Commpany's  Common Stock
against (1) the cumulative total return on the NASDAQ Total U.S. Bank Index, and
(2) the cumulative total return on the SNL $250M-$500M Bank Index for the period
commencing September 8, 1994, the date on which the Company commenced trading on
the NASDAQ National Market, and ending December 31, 1997.

Cumulative total return on the Company's Common Stock, the NASDAQ Total U.S.
Index and the SNL $250M-$500M Bank Index equals the total increase in value
since September 8, 1994, assuming reinvestment of all dividends. The graph and
table were prepared assuming that $100.00 was invested on September 8, 1994, in
the Company's Common Stock, the NASDAQ Total U.S. Index and the SNL $250M-$500M
Bank Index.

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

                                               PERIOD ENDING
                            ---------------------------------------------------
INDEX                          9/8/94  12/31/94  12/31/95   12/31/96  12/31/97
-------------------------------------------------------------------------------
Carnegie Bancorp               100.00     78.04    125.76     154.45    305.61
NASDAQ - Total US              100.00     98.13    138.79     170.70    209.47
SNL $250M-$500M Bank Index     100.00     97.22    131.20     170.36    294.65


The NASDAQ Total US Index consists of all NASDAQ National Market and SmallCap
Stocks. The SNL $250M-$500M Bank Index consists of all publicly traded banks
with assets between $250M and $500M


<PAGE>


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth, as of February 28, 1998, certain information
concerning the ownership of shares of common Stock by (i) each person who is
known by the company to own beneficially more than five percent (5%) of the
issued and outstanding Common Stock, (ii) each director and nominee for director
of the Company, (iii) each named executive officer described in the section
captioned "Executive compensation", and (iv) all directors and officers as a
group. Except as otherwise indicated, each individual named has sole investment
and voting power with respect to the securities shown.

                                                  No. of Shares
                                                   Beneficially       Percent
Name of Beneficial Owner                            Owned (1)         of Class
------------------------                          --------------      --------

John Hancock Advisers, Inc.                         137,659(2)          5.00%
101 Huntington Avenue
Boston, Massachusetts 02199

Name of Directors and Executive Officers
----------------------------------------

Bruce A. Mahon                                       51,357(4)          1.84%
Thomas L. Gray, Jr.                                 116,201(5)          4.07%
Mark A. Wolters                                      49,609(6)          1.77%
Theodore H. Dolci, Jr.                               34,521(3)          1.24%
Michael E. Golden                                    77,143(7)          2.76%
Joseph J. Oakes, III                                 42,824(3)(8)       1.54%
James E. Quackenbush                                 54,415(3)(9)       1.96%
Steven L. Shapiro                                    29,663(10)         1.07%
Shelley M. Zeiger                                    31,750(11)         1.14%
Richard P. Rosa                                      22,285(12)          .80%
All Directors and Executive Officers                509,768            16.93%
  As a Group


<PAGE>


(1)  Beneficially owned shares include shares over which the named person
     exercises either sole or shared voting power or sole or shared investment
     power. It also includes shares owned (i) by a spouse, minor children or by
     relatives sharing the same home, (ii) by entities owned or controlled by
     the named person, and (iii) by other persons if the named person has the
     right to acquire such shares within 60 days by the exercise of any right or
     option. Unless otherwise noted, all shares are owned of record and
     beneficially by the named person, either directly or through the company's
     Dividend Reinvestment Plan.

(2)  Based solely upon the most recent Schedule 13G filed by John Hancock
     Advisers, Inc. received by the Company.

(3)  Includes 23,341 shares purchasable pursuant to options which are
     exercisable within sixty (60) days.

(4)  Includes 2,808 shares beneficially owned by Mr. Mahon's spouse. Also
     included are 36,683 shares purchasable pursuant to options which are
     exercisable within sixty (60) days

(5)  Includes 734 shares held by Mr. Gray's former spouse as guardian for his
     minor son, 1,350 shares held in a self-directed IRA, 2,126 shares under the
     Bank's 401(k) Plan and 78,678 shares purchasable pursuant to options which
     are exercisable within sixty (60) days.

(6)  Includes 35,725 shares purchasable pursuant to options which are
     exercisable within sixty (60) days, 1,062 shares held in an IRA account and
     2,120 shares under the Bank's 401(k) Plan.

(7)  Includes 8,424 shares held in a Profit Sharing Plan of which Mr. Golden is
     the beneficiary, 5,643 shares in a retirement account and 9,004 shares held
     in a self-directed IRA. Also includes 40,515 shares purchasable pursuant to
     options which are exercisable within sixty (60) days.

(8)  Includes 7,116 shares held in a Keogh Plan of which Mr. Oakes is the
     beneficiary and 11,086 shares in a retirement account.

(9)  Includes 15,495 shares held in Mr. Quackenbush's self-directed IRA and
     9,866 shares in the name of The Fairhurst Trust, of which Mr. Quackenbush's
     spouse is co-trustee and beneficiary and 100 shares in Mr. Quackenbush's
     spouse's self-directed IRA.

(10) Includes 4,282 shares held in Mr. Shapiro's self-directed IRA and 1,207
     shares held in a voluntary Pension Plan of which Mr. Shapiro is trustee and
     beneficiary. Also includes 21,257 shares purchasable pursuant to options
     which are exercisable within sixty (60) days.

(11) Includes 1,348 shares held by Mr. Zeiger's spouse and minor child, and
     21,257 shares purchasable pursuant to options which are exercisable within
     sixty (60) days.

(12) Includes 5,116 shares held in Mr. Rosa's self-directed IRA, 99 shares under
     the Bank's 401(k)


<PAGE>


     Plan and 7,609 shares held in the name of Morris Area community foundation
     of which Mr. Rosa is Finance Chairman. Also includes 9,466 shares
     purchasable pursuant to options which are exercisable within sixty (60)
     days.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The Bank has made in the past and, assuming continued satisfaction of generally
applicable credit standards, expects to continue to make loans to directors,
executive officers and their associates (i.e., corporations or organizations for
which they serve as officers or directors or in which they have beneficial
ownership interests of ten percent or more). These loans have all been made in
the ordinary course of the Bank's business on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with other persons and do not involve more than the
normal risk of collectability or present other unfavorable features.

Michael E. Golden is the Vice Chairman of the Board of the Company and is also
the Chairman and CEO of First Colonial Securities Group, Inc. ("FCSG, Inc."). On
October 6, 1997, the Company retained Janney Montgomery Scott Inc. and FCSG,
Inc. (collectively, the "co-advisors") to act as financial advisors to the
Company's Board of Directors in evaluating and responding to an unsolicited
expression of interest to acquire the Company and to advise the Board with
respect to potential strategic alternatives available to the Company. The
Company paid a non-refundable advisory fee of $25,000 to the co-advisors upon
retaining the co-advisors, and $100,000 upon execution of the Merger Agreement
with Sovereign Bancorp Inc. on December 12, 1997. Under the terms of the
Company's engagement of the co-advisors, half of the foregoing fees were paid to
FCSG, Inc. Additionally, each co-advisor would be entitled to receive a payment
equal to one-half of 1.5% of the aggregate consideration received by the Company
or its shareholders upon consummation of the Merger, less its respective portion
of the $125,000 fee already paid during 1997.

                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

 (a)(1)  Financial Statements

         Consolidated Balance Sheets
         Consolidated Statements of Income
         Consolidated Statements of Changes in Stockholders' Equity
         Consolidated Statements of Cash Flows
         Notes to Consolidated Financial Statements

 (a)(2)  Financial Statement Schedules

         None

 (a)(3)  Exhibits


<PAGE>


Exhibit
Number    Description of Exhibits
------    -----------------------
(2)       Agreement and Plan of Merger dated as of December 12, 1997
            between the Company and Sovereign
            Bancorp, Inc. (Filed herewith)
3(i)      Certificate of Incorporation of the Company(1)
3(ii)     Bylaws of the Company(1)
4(i)      Warrant Agreement/Form of Warrant Certificate(2)
4(ii)     Form of Stock Certificate(2)
10(i)     1993 Employee Stock Option Plan(1)
10(ii)    1993 Stock Option Plan for Non-Employee Directors(1)
10(iii)   1995 Directors' Stock Option(3)
10(iv)    1995 Employee Stock Option Plan(3)
10(v)     1997 Stock Option Plan(4)
10(vi)    Employment Agreement between the Registrant and Thomas L. Gray, Jr.(5)
10(vii)   Employment Agreement between the Registrant and Mark A. Wolters(6)
10(viii)  Consulting Agreement between the Registrant and Bruce A. Mahon(7)
21        Subsidiaries of the Company (Filed herewith)
23        Consent of Coopers & Lybrand L.L.P. (Filed herewith)
27        Financial Data Schedule (Filed herewith)

----------
(1)  Incorporated by reference from Exhibits 2(a) to 99(b) from the Registrant's
     Registration Statement on Form S-4, Registration No. 33-72088.

(2)  Incorporated by reference from Registrant's Registration Statement on Form
     SB-2, Registration No. 33-80426 (Exhibit 4(i))

(3)  Incorporated by reference from Registrant's Registration Statement on Form
     S-4, Registration No. 33-65197 (Exhibits 10(a) and 10(b)).

(4)  Incorporated by reference to Exhibit 10(v) of Registrant's Annual Report on
     Form 10-K for the year ended December 31, 1996.

(5)  Incorporated by reference to Exhibit 10(vi) of Registrant's Annual Report
     on Form 10-K for the year ended December 31, 1996.

(6)  Incorporated by reference to Exhibit 10(vii) of Registrant's Annual Report
     on Form 10-K for the year ended December 31, 1996.

(7)  Incorporated by reference to Exhibit 10(viii) of Registrant's Annual Report
     on Form 10-K for the year ended December 31, 1996.

<PAGE>


(b)  Reports on Form 8-K.

The Registrant has filed the following reports on Form 8-K during the quarter
ended December 31, 1997.

Date                                      Item Reported
----                                      -------------

December 31, 1997   Current Report on Form 8-K filed reporting the issuance of a
                    press release dated December 15, 1997 regarding the signing
                    of the Agreement andPlan of Merger between the Company and
                    Sovereign Bancorp, Inc.


<PAGE>


                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                      CARNEGIE BANCORP

                                      By:   /s/
                                          --------------------------------
                                          Thomas L. Gray, Jr.,
                                          President and Chief
                                          Executive Officer
March 31, 1998

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

  /s/
---------------------------------                             March 31, 1998
Theodore H. Dolci, Jr.

  /s/
---------------------------------                             March 31, 1998
Michael E. Golden

  /s/
---------------------------------                             March 31, 1998
Thomas L. Gray, Jr.
(Principal Executive Officer)

  /s/
---------------------------------                             March 31, 1998
Bruce A. Mahon

  /s/
---------------------------------                             March 31, 1998
Joseph J. Oakes, III

  /s/
---------------------------------                             March 31, 1998
James E. Quackenbush

  /s/
---------------------------------                             March 31, 1998
Steven L. Shapiro

  /s/
---------------------------------                             March 31, 1998
Mark A. Wolters

  /s/
---------------------------------                             March 31, 1998
Shelley M. Zeiger

<PAGE>


---------------------------------                             March 31, 1998
Richard P.
Rosa
(Principal Financial Officer
 and Principal Accounting Officer)


<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS
--------------------------------------------------------------------------------

To the Board of Directors and Stockholders of
Carnegie Bancorp:

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

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable  assurance about whether the  consolidated  financial  statements are
free of material  misstatement.  An audit  includes  examining  on a test basis,
evidence supporting the amounts and disclosures in the 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  consolidated  financial  position  of
Carnegie  Bancorp  and  Subsidiaries  as of  December  31, 1997 and 1996 and the
consolidated  results of their  operations  and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity  with generally
accepted accounting principles.




                                                 COOPERS & LYBRAND L.L.P.

Princeton, New Jersey
February 2,1998

<PAGE>


<TABLE>
CARNEGIE BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

<CAPTION>
                                                                                                                  December 31,
                                                                                                          -------------------------
                                                                                                             1997            1996
                                                                                                          ---------       ---------
                                                                                                            (Dollars in thousands)
<S>                                                                                                       <C>             <C>
ASSETS
Cash and cash equivalents:
  Cash and due from banks .........................................................................       $  14,385       $  16,745
  Federal funds sold ..............................................................................           1,725               0
---------------------------------------------------------------------------------------------------       ---------       ---------
                 Total cash and cash equivalents ..................................................          16,110          16,745
---------------------------------------------------------------------------------------------------       ---------       ---------
Investment Securities:
  Available for sale ..............................................................................          52,483          30,110
  Held to maturity (market value $68,993 at December 31, 1997
    and $23,258 at December 31, 1996) .............................................................          68,988          23,264
---------------------------------------------------------------------------------------------------       ---------       ---------
                 Total investment securities ......................................................         121,471          53,374
---------------------------------------------------------------------------------------------------       ---------       ---------
Loans, net of allowance for loan losses of $2,956 at December 31, 1997
  and $2,665 at December 31, 1996 .................................................................         284,789         263,797
Premises and equipment, net .......................................................................           4,235           4,482
Other real estate owned ...........................................................................             523             473
Accrued interest receivable and other assets ......................................................           4,758           4,486
---------------------------------------------------------------------------------------------------       ---------       ---------
                 Total Assets .....................................................................       $ 431,886       $ 343,357
===================================================================================================       =========       =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
  Non-interest bearing demand deposits ............................................................       $  56,430       $  42,372
  Interest bearing deposits:
    Savings deposits ..............................................................................         156,981         139,671
    Other time deposits ...........................................................................          43,741          62,008
    Certificates of deposit $100,000 and over .....................................................          75,745          58,511
---------------------------------------------------------------------------------------------------       ---------       ---------
                 Total deposits ...................................................................         332,897         302,562
---------------------------------------------------------------------------------------------------       ---------       ---------
Short-term borrowings .............................................................................          32,300           1,000
Long-term debt ....................................................................................          29,425          14,425
Accrued interest payable and other liabilities ....................................................           2,040           1,628
---------------------------------------------------------------------------------------------------       ---------       ---------
                 Total liabilities ................................................................         396,662         319,615
---------------------------------------------------------------------------------------------------       ---------       ---------
Commitments and contingencies
Stockholders' equity:
  Common stock, no par value, authorized 5,000,000 shares;
    issued and outstanding 2,751,816 at December 31, 1997
    and 1,940,942 at December 31, 1996 ............................................................          13,759           9,705
  Capital surplus .................................................................................          19,486          12,711
  Undivided profits ...............................................................................           1,942           1,530
  Net unrealized holding gains (losses) on securities available for
    sale ..........................................................................................              37            (204)
---------------------------------------------------------------------------------------------------       ---------       ---------
                 Total stockholders' equity .......................................................          35,224          23,742
---------------------------------------------------------------------------------------------------       ---------       ---------
                 Total Liabilities and
                      Stockholders' Equity ........................................................       $ 431,886       $ 343,357
===================================================================================================       =========       =========

</TABLE>

See accompanying notes to consolidated financial statements.


                                      F-1
<PAGE>


<TABLE>
CARNEGIE BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME



<CAPTION>
                                                                                                Year Ended December 31,
                                                                                   ------------------------------------------------
                                                                                     1997                1996                1995
                                                                                   --------            --------            --------
                                                                                     (Dollars in thousands, except per share data)
<S>                                                                                <C>                 <C>                 <C>
Interest income:
  Loans, including fees ................................................           $ 25,853            $ 20,225            $ 14,727
  Federal funds sold ...................................................                284                 106                 475
  Investment securities:
    Taxable ............................................................              5,828               3,750               2,535
    Tax-exempt .........................................................                449                 383                 969
------------------------------------------------------------------------           --------            --------            --------
                Total interest income ..................................             32,414              24,464              18,706
------------------------------------------------------------------------           --------            --------            --------
Interest expense:
  Savings deposits .....................................................              7,301               3,519               3,096
  Other time deposits ..................................................              3,445               3,448               2,947
  Certificates of deposit $100,000 and over ............................              3,062               2,128               2,124
  Short-term borrowings ................................................              1,159               1,160                 297
  Long-term debt .......................................................              1,070                 629                --
------------------------------------------------------------------------           --------            --------            --------
                Total interest expense .................................             16,037              10,884               8,464
------------------------------------------------------------------------           --------            --------            --------

                Net interest income ....................................             16,377              13,580              10,242

Provision for loan losses ..............................................                446               1,609                 369
------------------------------------------------------------------------           --------            --------            --------
                Net interest income after provision
                  for loan losses ......................................             15,931              11,971               9,873
------------------------------------------------------------------------           --------            --------            --------
Non-interest income:
  Service fees on deposits .............................................                456                 422                 433
  Other fees and commissions ...........................................                468                 339                 311
  Gain on sale of other real-estate owned ..............................                 66                 294                --
  Investment securities gains ..........................................                150                 399                 132
  Investment securities losses .........................................               (106)                (94)               (132)
------------------------------------------------------------------------           --------            --------            --------
                Total non-interest income ..............................              1,034               1,360                 744
------------------------------------------------------------------------           --------            --------            --------
Non-interest expense:
  Salaries and wages ...................................................              4,296               3,826               2,683
  Employee benefits ....................................................                971                 858                 692
  Occupancy expense ....................................................              1,548               1,466               1,024
  Furniture and equipment ..............................................              1,130                 915                 583
  Other ................................................................              3,537               2,989               2,742
------------------------------------------------------------------------           --------            --------            --------
                Total non-interest expense .............................             11,482              10,054               7,724
------------------------------------------------------------------------           --------            --------            --------
                Income before income taxes .............................              5,483               3,277               2,893
Income tax expense .....................................................              1,858               1,133                 765
------------------------------------------------------------------------           --------            --------            --------

                Net Income .............................................           $  3,625            $  2,144            $  2,128
========================================================================           ========            ========            ========

Per Common Share:
  Basic Earnings per Share .............................................           $   1.55            $   1.10            $   1.11
  Diluted Earnings per Share ...........................................           $   1.42            $   1.00            $   1.08
========================================================================           ========            ========            ========

Weighted Average Shares Outstanding
(in thousands)
  Basic ................................................................              2,336               1,944               1,925
  Diluted ..............................................................              2,544               2,141               1,965
========================================================================           ========            ========            ========
</TABLE>

See accompanying notes to consolidated financial statements.


                                      F-2
<PAGE>


<TABLE>
CARNEGIE BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY





<CAPTION>
                                                                                                  Unrealized
                                                                                               Holding Gain (Loss)         Total
                                                   Common        Capital       Retained      on Securities Available   Stockholders'
                                                    Stock        Surplus       Earnings          For Sale, Net             Equity
                                                 ------------  ------------   ------------    ---------------------     ------------
                                                                            (Dollars in thousands)
<S>                                                 <C>          <C>             <C>                 <C>               <C>
Balance,
December 31, 1994                                     $8,160       $10,249         $1,333              ($1,686)          $18,056
  5% stock dividend issued
  (82,637 shares)                                        413           496           (909)                  --                 -
  Net income                                              --            --          2,128                   --             2,128
  Cash dividend ($ .48 per share)                         --            --           (839)                  --              (839)
   Issuance of 39,814 common shares for
          options and warrants exercised                 199           124             --                   --               323
   Increase in fair value adjustment -
         securities available for sale, net               --            --             --                2,126             2,126
---------------------------------------------------------------------------------------------------------------------------------

Balance,
December 31, 1995                                      8,772        10,869          1,713                  440            21,794
  5% stock dividend issued
  (87,518 shares)                                        438           984         (1,422)                  --                 -
  Net income                                              --            --          2,144                   --             2,144
  Cash dividend ($ .49 per share)                         --            --           (905)                  --              (905)
   Issuance of 98,983 common shares for
          options and warrants exercised                 495           858             --                   --             1,353
   Increase (decrease) in fair value adjustment -
         securities available for sale, net               --            --             --                 (644)             (644)
---------------------------------------------------------------------------------------------------------------------------------

Balance,
December 31, 1996                                      9,705        12,711          1,530                 (204)           23,742
  5% stock dividend issued
  (98,926 shares)                                        495         1,360         (1,855)                  --                 -
  Net income                                              --            --          3,625                   --             3,625
  Cash dividend ($ .56 per share)                         --            --         (1,358)                  --            (1,358)
   Issuance of 711,948 common shares for
          options and warrants exercised               3,559         5,274             --                   --             8,833
   Tax benefit on exercised options                       --           141             --                   --               141
   Increase (decrease) in fair value adjustment -
         securities available for sale, net               --            --             --                  241               241
---------------------------------------------------------------------------------------------------------------------------------

Balance,
December 31, 1997                                    $13,759       $19,486         $1,942                  $37           $35,224
=================================================================================================================================
</TABLE>



See accompanying notes to consolidated financial statements.


                                      F-3
<PAGE>


<TABLE>
CARNEGIE BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

<CAPTION>
                                                                                                Year Ended December 31,
                                                                                      ---------------------------------------------
                                                                                        1997               1996              1995
                                                                                      ---------         ---------         ---------
                                                                                                 (Dollars in thousands)
<S>                                                                                   <C>               <C>               <C>
Cash flows from operating activities:
  Net income .................................................................        $   3,625         $   2,144         $   2,128
  Adjustments to reconcile net income to net cash
    provided by (used in) operating activities:
      Depreciation and amortization ..........................................            1,146             1,002               539
      Provision for loan losses ..............................................              446             1,609               369
      Accretion of investment discount .......................................             (200)               (9)              (18)
      Amortization of investment premium .....................................              475               356               356
      Gain on sale of available-for-sale securities ..........................             (150)             (399)             (132)
      Loss on sale of available-for-sale securities ..........................              106                94               132
      Gain on sale of other real estate owned ................................              (66)             (294)             --
      Loss on disposal of equipment ..........................................               40              --                 321
      Decrease (increase) in deferred taxes ..................................               67              (838)            1,219
      (Increase) decrease in accrued interest receivable
        and other assets .....................................................             (482)              208            (2,521)
      Increase in accrued interest payable and
        other liabilities ....................................................              412               561               258
------------------------------------------------------------------------------        ---------         ---------         ---------
        Net cash provided by operating activities ............................            5,419             4,434             2,651
------------------------------------------------------------------------------        ---------         ---------         ---------
Cash flows from investing activities:
  Proceeds from sale of securities available-for-sale ........................           42,134            36,283            18,619
  Proceeds from maturities and principal paydowns of
    securities available-for-sale ............................................            3,355            10,946             3,802
  Proceeds from maturities and principal paydowns of
    securities held-to-maturity ..............................................            6,574             1,636              --
  Purchase of securities available-for-sale ..................................          (67,458)           (7,763)          (45,040)
  Purchase of securities held-to-maturity ....................................          (52,549)          (24,972)             --
  Net increase in loans made to customers ....................................          (22,194)         (103,630)          (24,111)
  Cash collected on previously charged-off loans .............................               61                10                52
  Additions to premises and equipment ........................................             (939)           (1,762)           (2,977)
  Proceeds from sale of other real estate owned ..............................              711               622              --
------------------------------------------------------------------------------        ---------         ---------         ---------
        Net cash used in investing activities ................................          (90,305)          (88,630)          (49,655)
------------------------------------------------------------------------------        ---------         ---------         ---------
Cash flows from financing activities:
  Net increase in deposits ...................................................           30,335            92,361            33,412
  Increase (decrease) in short-term borrowings ...............................           31,300           (16,500)           17,500
  Increase in long-term borrowings ...........................................           15,000            14,425              --
  Proceeds from common stock issued on exercise of
    options and warrants .....................................................            8,974             1,353               323
  Cash paid for dividends ....................................................           (1,358)             (905)             (839)
------------------------------------------------------------------------------        ---------         ---------         ---------
        Net cash provided by financing activities ............................           84,251            90,734            50,396
------------------------------------------------------------------------------        ---------         ---------         ---------
Net change in cash and cash equivalents ......................................             (635)            6,538             3,392
Cash and cash equivalents as of beginning of year ............................           16,745            10,207             6,815
------------------------------------------------------------------------------        ---------         ---------         ---------

Cash and cash equivalents as of end of year ..................................        $  16,110         $  16,745         $  10,207
==============================================================================        =========         =========         =========

SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
  Interest ...................................................................        $  15,666         $  10,653         $   8,219
  Income taxes ...............................................................        $   1,701         $   1,377         $   1,014
Transfer of investment securities held to maturity to investment
  securities available for sale ..............................................             --                --           $  22,876
==============================================================================        =========         =========         =========
</TABLE>

See accompanying notes to consolidated financial statements.


                                      F-4
<PAGE>

CARNEGIE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Carnegie  Bancorp ("the Company"),  a bank holding company,  was incorporated on
October  6, 1993 with  authorized  capital of  5,000,000  shares of no par value
common stock. On April 12, 1994, the Company  acquired 100 percent of the shares
of Carnegie Bank,  N.A.  ("the Bank").  The  transaction  was accounted for in a
manner similar to that of a pooling of interests.

The Company's primary business is ownership of the Bank.  Carnegie Bank, N.A. is
a  national  bank,  which  commenced  business  in  1988  as a  state  chartered
commercial bank. The Bank currently  operates from its main office in Princeton,
New Jersey and from seven branch offices in Hamilton,  Denville,  Marlton,  Toms
River, Montgomery and Flemington,  New Jersey and Langhorne,  Pennsylvania.  The
deposits  of the Bank are  insured  by the Bank  Insurance  Fund of the  Federal
Deposit  Insurance  Corporation.  Carnegie Bank, N.A. is a member of the Federal
Reserve System and Federal Home Loan Bank-New York.

Carnegie  conducts  a  general  commercial  banking  business.  Carnegie's  loan
products consist primarily of commercial loans,  commercial mortgages,  loans to
professionals  secured by business or personal  assets,  and to a lesser extent,
residential  mortgage loans.  Carnegie  offers a full array of deposit  accounts
including time deposits,  checking and other demand  deposit  accounts,  savings
accounts  and  money  market  accounts.   Carnegie  targets  small   businesses,
professionals,  and high net worth individuals as its prime customers,  and does
not engage in high volume, consumer banking.

The  accounting  and reporting  policies of the Company  conform with  generally
accepted accounting principles and general practice within the banking industry.
The preparation of financial  statements  requires  management to make estimates
and assumptions  that affect the reported  amounts of assets and liabilities and
disclosures of contingent  assets and liabilities as of the financial  statement
date and the  reported  amounts of revenues and  expenses  during the  reporting
period.  Since  management's  judgment involves making estimates  concerning the
likelihood  of future  events,  the  actual  results  could  differ  from  those
estimates  which  will have a  positive  or  negative  effect  on future  period
results.  The policies which  materially  affect the  determination of financial
position, results of operations and cash flows are summarized below.

Principles of Consolidation - The consolidated  financial statements include the
accounts of the Company, Carnegie Bank, N.A., and TMRF, LLC, a limited liability
company  formed to acquire,  hold,  operate and  dispose of real  property.  All
significant  intercompany  accounts and  transactions  have been  eliminated  in
consolidation.

Reclassifications  - Certain amounts in the financial  statements  presented for
prior periods have been reclassified to conform with 1997 presentation.

Statement of Cash Flows - The  statement  of cash flows is  presented  using the
indirect  method of  presentation.  Cash  equivalents,  for the purposes of this
statement  are  defined  as  cash  and due  from  banks  and  other  short  term
investments with an original maturity of 90 days or less.

Investment  Securities - Effective January 1, 1994 the Company adopted Statement
of Financial  Accounting  Standards No. 115, "Accounting for Certain Investments
in Debt  and  Equity  Securities,"  ("SFAS  115").  SFAS  115  requires  that an
enterprise  classify  its  investments  in debt and  readily  marketable  equity
securities  as  either  securities  held to  maturity  (carrying  amount  equals
amortized cost), securities available for sale (carrying amounts equal estimated
fair value;  unrealized  gains and losses  recorded in a separate  component  of
stockholders'  equity,  net of taxes) or  trading  securities  (carrying  amount
equals  estimated  fair  value;  unrealized  gains and  losses  included  in the
determination of net income).

The Company has  evaluated all of its  investments  in debt  securities  and has
classified  them as either held to maturity or available for sale.  Any security
which is a U.S. Government security,  U.S. Government agency security, an agency
mortgage-backed  security,  or an obligation of a state or political subdivision
may be placed in the  held-to-maturity  category if acquired with the intent and
ability to maintain the security in the portfolio until  maturity.  Premiums and
discounts  on  these  securities  are  amortized  or  accreted  on a basis  that
approximates the effective yield method.  Realized gains and losses from sale of
securities  available for sale are determined on a specific  identification cost
basis.


                                      F-5
<PAGE>


Loans - Loans are  stated at  principal  amounts  outstanding,  net of  unearned
discount and net deferred loan  origination  fees and costs.  Interest income on
loans is accrued  and  credited  to  interest  income  monthly  as earned.  Loan
origination fees and certain direct loan origination  costs are deferred and the
net amount is amortized as an adjustment of the related  loan's yield.  Net loan
fees are generally amortized over the contractual lives of the related loans.

Loans  are  reported  as  non-accrual  if they are past due as to  principal  or
interest payments for a period of more than ninety days.  Exceptions may be made
if a loan is adequately  collateralized and in the process of collection. At the
time  a  loan  is  placed  on  a  non-accrual  status,  previously  accrued  and
uncollected  interest is reversed against interest income in the current period.
Only after  collection  of loan  principal  is assured is interest on such loans
recognized  as income.  A loan is  returned to an accrual  status  when  factors
indicating  doubtful  collectibility  no  longer  exist  and  the  borrower  has
performed  satisfactorily  under the contractual  terms of the loan for a period
not less than six months.

In May 1993, SFAS No. 114 "Accounting by Creditors for Impairment of a Loan" was
issued and  subsequently  amended by SFAS No. 118  "Accounting  by Creditors for
Impairment of a Loan-Income  Recognition  and  Disclosures.  " These  statements
specify how  allowances  for credit  losses  related to certain  loans should be
determined.  They require impaired loans,  including troubled debt restructured,
to be  measured  based  on the  present  value of  expected  future  cash  flows
discounted at the loan's effective rate, the loan's  observable market price, or
the  fair  value of the  collateral  if the loan is  collateral  dependent.  The
implementation  of these  statements  did not have a  significant  impact on the
Company's financial statements.

Allowance  for  Loan  Losses  -  An  allowance  for  loan  losses  is  generally
established  through  charges to earnings  in the form of a  provision  for loan
losses.  Loans which are determined to be uncollectible  are charged against the
allowance  account  and  subsequent  recoveries,  if any,  are  credited  to the
account.  In  establishing an appropriate  allowance,  an assessment of the loan
portfolio including past loan experience,  economic conditions and other factors
that, in management's judgment, warrant current recognition,  are considered. In
addition,  various regulatory agencies, as an integral part of their examination
process, periodically review the Bank's allowance for loan losses. Such agencies
may require the Bank to  recognize  additions  to the  allowance  based on their
judgments of information available to them at the time of their examination.  It
is  reasonably  possible  that the above  factors may change  significantly  and
therefore affect management's  determination of the allowance for loan losses in
the near term.

Impaired  Loans - In May 1993,  the FASB  issued SFAS No.  114,  "Accounting  by
Creditors  for  Impairment  of a Loan SFAS No. 114 as  amended by SFAS No.  118,
"Accounting  by  Creditors  for  Impairment  of a  Loan-Income  Recognition  and
Disclosure," was effective for fiscal years beginning after December 15,1994 and
generally  requires all  creditors to account for impaired  loans at the present
value of the  expected  future  cash flows  discounted  at the loan's  effective
interest rate or at the loan's fair value based upon the  underlying  collateral
if the loan is collateral dependent.

Factors  influencing  management's  recognition of impairment include decline in
collateral  value;  lack of performance  under  contract loan  agreement  terms,
including evaluation of late payments or non-payment;  lack of performance under
other  creditor's  agreements  or  obligations  (i.e.  non-payment  of taxes and
non-payment  of loans  to  other  creditors);  financial  decline  significantly
different from status at loan  inception;  litigation or bankruptcy of borrower;
significant change in ownership or loss of guarantors to the detriment of credit
quality.

All impaired  loans as recognized  under the above  evaluation are considered to
have some  probability  that contract  principal,  interest,  or both may not be
repaid in full.  Non-accrual  loans are those  impaired  loans where  management
recognizes some probability that contract principal may not be repaid in full.

Management does not carry loans in excess of 90 days delinquent on accrual,  and
all such loans are classified as  non-accrual.  Exceptions may be made if a loan
is adequately collateralized and in the process of collection. As such, SFAS No.
114 has not impacted credit risk analysis.

Charge-off  policy - An asset which no longer retains any value to the Bank will
be charged off  immediately.  Assets whose value has depreciated will be charged
off in part. Potential recovery against these assets is considered marginal, and
recovery  is  expected  to be  long-term.  All  charge-offs  must be approved by
management and reported to the Board of Directors.  Generally, Bank policy is to
aggressively pursue any likely recovery against charged-off assets.


                                      F-6
<PAGE>


Accounting  policy for interest  income  recognition - Impaired  loans may be on
accrual if  management  does not  foresee  loss of  principal  in part or whole.
Interest on impaired loans is not capitalized  and funded by the Bank.  Impaired
loans on  non-accrual  are  recognized  as those which may sustain  some loss of
principal  due to impairment  of credit or  collateral  quality.  On such loans,
payments by the borrower  are recorded by the Bank as a reduction of  principal,
and interest is not accrued as income.  Interest  income will only be recognized
after principal is repaid in full.

Homogeneous  loans - Management  evaluates all loans on an individual  basis for
impairment and application of SFAS No. 114.

Other Real Estate Owned - Other real estate  owned  includes  property  acquired
through foreclosure and is carried at the lower of cost or fair value less costs
to dispose.  When the property is acquired,  any excess of the loan balance over
the fair value less  costs to  dispose  is  charged  to the  allowance  for loan
losses.  Subsequent  write-downs,  it any, are included in non-interest expense.
Carrying costs associated with the operation and maintenance of the property are
expensed as incurred  through  current  income and included in the other expense
category, net of any associated income.

Premises and  Equipment,  Net - Premises and equipment are stated at cost,  less
accumulated  depreciation  and  amortization.  Depreciation  is  computed  on  a
straight-line  basis over the  estimated  useful lives of the assets.  Leasehold
improvements  are  amortized  on a  straight-line  basis over the shorter of the
terms  of the  leases  or  the  estimated  useful  lives  of  the  improvements.
Expenditures  for  maintenance  and repairs are charged to expenses as incurred.
Gains and losses on dispositions are reflected in current operations.

Income Taxes - The Company follows the asset and liability  method of accounting
for income taxes. Under the asset and liability method,  deferred tax assets and
liabilities  are  recognized  for the future tax  consequences  attributable  to
differences  between the financial statement carrying amounts of existing assets
and  liabilities  and their  respective  tax  basis.  Deferred  tax  assets  and
liabilities  are measured  using enacted tax rates  expected to apply to taxable
income in the years in which  temporary  differences,  which are inherent in the
tax filing  process,  are  expected to be  recovered  or settled.  The effect on
deferred tax assets and liabilities of a change in the tax rate is recognized in
income in the current period that includes the enacted date.

Earnings  Per Common  Share  ("EPS") - Earnings  per common share is computed by
dividing net income by the weighted  average  number of common shares and common
share  equivalents  (when  dilutive)  outstanding  during each year after giving
retroactive effect to stock dividends declared.  Basic EPS excludes dilution and
is  computed  by  dividing  income  available  to  common  stockholders  by  the
weighted-average number of common shares outstanding for the period. Diluted EPS
reflects  the  potential  dilution  that  could  occur  if  securities  or other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings of the
Company. The common share equivalents of options and warrants in the computation
of diluted  earnings per share is computed  utilizing the Treasury Stock method.
For  purposes of this  computation,  the average  market  price of common  stock
during each  three-month  quarter included in the period being reported upon, is
used, when dilutive.


                                      F-7
<PAGE>


CARNEGIE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(2) EARNINGS PER SHARE ("EPS")

Following is the  reconciliation of the numerators and denominators of the basic
and diluted EPS computations:

                                                 Year Ended December 31, 1997
                                            -----------------------------------
                                              Income       Shares     Per-Share
                                            (Numerator) (Denominator)   Amount
                                            ----------- ------------   --------
NET INCOME                                     $3,625
                                            ---------

BASIC EPS
Income available to common shareholders         3,625        2,336       $1.55
                                                                      ========

EFFECT OF DILUTIVE SECURITIES
Options and Warrants                                           208
                                            ---------   ----------

DILUTED EPS
Income available to common shareholders
     + assumed conversions                     $3,625        2,544       $1.42

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

                                                 Year Ended December 31, 1996
                                            -----------------------------------
                                             Income        Shares     Per-Share
                                            (Numerator) (Denominator)   Amount
                                            ----------- ------------   --------
NET INCOME                                     $2,144
                                            ---------

BASIC EPS
Income available to common shareholders         2,144        1,944       $1.10
                                                                      ========

EFFECT OF DILUTIVE SECURITIES
Options and Warrants                                           197
                                            ---------   ----------

DILUTED EPS
Income available to common shareholders
     + assumed conversions                     $2,144        2,141       $1.00
                                            ==========  ===========   ========

                                                 Year Ended December 31, 1995
                                            ---------------------------------
                                              Income       Shares     Per-Share
                                            (Numerator) (Denominator)   Amount
                                            ----------- ------------   --------
NET INCOME                                     $2,128
                                            ---------

BASIC EPS
Income available to common shareholders         2,128        1,925       $1.11
                                                                      ========

EFFECT OF DILUTIVE SECURITIES
Options and Warrants                                            40
                                            ---------   ----------

DILUTED EPS
Income available to common shareholders
     + assumed conversions                     $2,128        1,965       $1.08
                                            =========   ==========    ========


Options and  warrants  to purchase  825  thousand  shares of common  stock at an
average  exercise  price of $14.02 per share were  outstanding  during the first
eight  months of 1995 but were not  included in the  computation  of diluted EPS
because the  exercise  price was greater  than the average  market  price of the
common shares.


                                      F-8
<PAGE>


CARNEGIE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(3)  CASH AND DUE FROM BANKS

The Company  maintains various deposits in other banks. At December 31, 1997 and
1996 average cash balances reserved to meet Federal  Regulatory  requirements of
$2,373,000 and $1,202,000  respectively,  were maintained at the Federal Reserve
Bank of Philadelphia.







                                      F-9
<PAGE>


(4) INVESTMENT SECURITIES
--------------------------------------------------------------------------------

The following is a comparative summary of investment securities at December 31:

                                             Gross       Gross
                                Amortized  Unrealized  Unrealized      Market
                                  Cost       Gains       Losses        Value
                               ----------  ---------   ---------    ----------
(Dollars in thousands)
1997
Securities available for sale:
  U.S. Government ............   $13,068        $58     $    --       $13,126
  Mortgage-backed securities .    20,727        115         (92)       20,750
  Obligations of State and
        Political Subdivisions    10,369         20          --        10,389
  Other securities ...........     8,257         --         (39)        8,218
                               ----------  ---------   ---------    ----------
                                 $52,421       $193       ($131)      $52,483
                               ==========  =========   =========    ==========

Securities held to maturity:
  U.S. Government ............    $8,037       $199          --        $8,236
  Mortgage-backed securities .    60,951         53        (247)       60,757
                               ----------  ---------   ---------    ----------
                                 $68,988       $252       ($247)      $68,993
                               ==========  =========   =========    ==========

1996
Securities available for sale:
  U.S. Government ............    $5,986      $   -        ($50)       $5,936
  Mortgage-backed securities .    15,524         49        (267)       15,306
  Obligations of State and
        Political Subdivisions       890         --          --           890
  Other securities. ..........     8,032         --         (54)        7,978
                               ----------  ---------   ---------    ----------
                                 $30,432        $49       ($371)      $30,110
                               ==========  =========   =========    ==========

Securities held to maturity:
  U.S. Government ............    $9,035       $208    $     --        $9,243
  Mortgage-backed securities .    14,229         --        (214)       14,015
                               ----------  ---------   ---------    ----------
                                 $23,264       $208       ($214)      $23,258
                               ==========  =========   =========    ==========


The following table shows the amortized costs and market values of the Company's
investment  securities by contractual maturity as of December 31, 1997. Expected
maturities of mortgage-backed  securities may differ from contractual maturities
because borrowers have the right to prepay obligations.

                                            Year Ended December 31, 1997
                                     -----------------------------------------
                                       Securities Held    Securities Available
                                         to Maturity            for Sale
                                     -------------------   -------------------
                                     Amortized   Market    Amortized   Market
                                        Cost      Value       Cost      Value
                                     --------    -------   --------    -------
                                                (Dollars in thousands)
Due 1 year or less ................   $  --      $  --      $ 3,275    $ 3,275
Due after 1 year through 5 years ..      --         --        4,956      4,957
Due after 5 years through 10 years      8,037      8,236     13,549     13,625
Due after 10 years ................    60,951     60,757     23,661     23,646
Federal Home Loan Bank stock ......      --         --        6,441      6,441
Federal Reserve Bank stock ........      --         --          539        539
                                     ------------------------------------------
                                      $68,988    $68,993    $52,421    $52,483
                                     ==========================================

Securities held to maturity and available for sale of $89,054,000 as of December
31, 1997 and  $19,220,000  as of December 31, 1996 were pledged to secure public
deposits and for other purposes as required or permitted by law.


                                      F-10
<PAGE>


CARNEGIE BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED)


(5)     LOANS
--------------------------------------------------------------------------------

Loans at December 31, 1997 and 1996 consist of the following:

                                            1997           1996
                                        -----------    ------------
                                           (Dollars in thousands)

       Commercial and financial .......    $85,737         $79,907
       Real estate construction .......     11,412          16,905
       Residential mortgage ...........     24,527          23,173
       Commercial mortgage ............    152,477         133,908
       Installment ....................     13,592          12,569
       ------------------------------------------------------------
             Total loans ..............    287,745         266,462
       Less allowance for loan losses .      2,956           2,665
       ------------------------------------------------------------

             Loans, net ...............   $284,789        $263,797
       ============================================================

Included in loans  receivable at December 31, 1997 and 1996 are loans  amounting
to $4,335,000 and $3,342,000 respectively,  on which the accrual of interest has
been  suspended.  Interest  income that would have been  accrued had these loans
been  current  aggregated  $405,000  and $370,000 at December 31, 1997 and 1996,
respectively.

As of December  31,  1997 and 1996 the Bank had no loans to any single  customer
that exceeded 10% of the Bank's loan portfolio.






                                      F-11
<PAGE>


CARNEGIE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED)

(6) ALLOWANCE FOR LOAN LOSSES
--------------------------------------------------------------------------------

An  analysis  of the  allowance  for loan  losses for 1997,  1996 and 1995 is as
follows:


                                              1997         1996         1995
                                            ---------   ----------   ----------
                                                   (Dollars in thousands)

       Balance, beginning of year ......      $2,665       $1,754       $1,400
       Provision charged to operations .         446        1,609          369
       Recoveries ......................          61           10           52
       Loans charged off. ..............        (216)        (708)         (67)
       ---------------------------------   ----------   ----------   ----------

       Balance, end of year ............      $2,956       $2,665       $1,754
       =================================   ==========   ==========   ==========









                                      F-12
<PAGE>


CARNEGIE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(7) ACCOUNTING FOR LOAN IMPAIRMENT

Loans aggregated for evaluation under SFAS No. 114 are those loans risk rated by
the Bank as  substandard  and  doubtful.  At December  31,  1997,  the  recorded
investment in loans for which impairment has been recognized totaled $4,863,000.
These loans have corresponding valuation allowance of $473,000. The total amount
of impaired loans measured using the present value of expected future cash flows
amounted to $1,785,000 and the total amount of impaired loans measured using the
fair value of the loan's collateral  amounted to $3,078,000.  For the year ended
December  31,  1997,  the average  recorded  investment  in  impaired  loans was
approximately  $4,927,000.  The  Company  recognized  $123,000  of  interest  on
impaired  loans on a cash  basis,  during the portion of the year that they were
impaired.

At December 31, 1996, the recorded  investment in loans for which impairment has
been recognized  totaled $4,175,000 of which $1,070,000 related to loans with no
valuation  allowance  because the Bank expects repayment in full, and $3,105,000
is related to loans with a corresponding  valuation  allowance of $315,000.  The
total  amount of impaired  loans  measured  using the present  value of expected
future cash flows  amounted to $714,000 and the total  amount of impaired  loans
measured using the fair value of the loan's  collateral  amounted to $3,461,000.
For the year ended  December  31,  1996,  the  average  recorded  investment  in
impaired loans was approximately  $3,523,000.  The Company recognized $15,000 of
interest on impaired loans on a cash basis,  during the portion of the year that
they were impaired.






                                      F-13
<PAGE>

CARNEGIE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(8) LOANS TO RELATED PARTIES
--------------------------------------------------------------------------------

Loans to related parties include loans made to certain  officers,  directors and
their  affiliated  interests.  An analysis of the activity of such related party
loans for 1997 is as follows:



                                                           1997
                                                        ---------
                                                  (Dollars in thousands)
    Balance, beginning of year                            $4,302
        Additions                                            563
        Payments and other adjustments                    (1,412)
    -------------------------------------------------------------

    Balance, end of year                                  $3,453
    =============================================================







                                      F-14
<PAGE>


CARNEGIE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(9) PREMISES AND EQUIPMENT
--------------------------------------------------------------------------------

The  components  of  premises,  furniture  and  equipment at December 31 were as
follows:


                                                 1997          1996
                                               ----------    ----------
                                                (Dollars in thousands)
      Land and buildings ..................       $  738        $  407
      Leasehold improvements ..............        2,382         2,361
      Furniture and equipment .............        4,570         4,049
      -------------------------------------    ----------    ----------
                                                   7,690         6,817
      Less accumulated depreciation and
            amortization ..................        3,455         2,335
      -------------------------------------    ----------    ----------

            Premises and equipment, net ...       $4,235        $4,482
      =================================================================









                                      F-15
<PAGE>


(9) INCOME TAXES

The  components  of the  provision  for  income  tax  expense  reflected  in the
financial statements are as follows:

                                                     Year Ended December 31,
                                              ---------------------------------
                                                 1997        1996       1995
                                              ---------   ---------   ---------
                                                     (Dollars in thousands)
     Consolidated Statements of Income
     ---------------------------------------
     Current:  Federal .....................    $1,716      $1,382        $693
               State and local .............       218         201         109
     ---------------------------------------  ---------   ---------   ---------
               Total current income taxes ..     1,934       1,583         802
     ---------------------------------------  ---------   ---------   ---------
     Deferred: Federal .....................       (60)       (366)        (16)
               State and local .............       (16)        (84)        (21)
     ---------------------------------------  ---------   ---------   ---------
               Total deferred income taxes .       (76)       (450)        (37)
     ---------------------------------------  ---------   ---------   ---------
               Total .......................    $1,858      $1,133        $765
     =======================================  =========   =========   =========

     Consolidated Statements of Changes in
     Stockholders' Equity
     =======================================
     Deferred tax attributable to unrealized
          (gains) or losses on available for
          sale securities                        ($143)       $388     ($1,250)
     ==========================================================================


A reconciliation between the reported income tax expense and the amount computed
by multiplying income before income tax by the Federal statutory income tax rate
is as follows:

                                                 1997        1996       1995
                                              ---------   ---------   ---------
                                                     (Dollars in thousands)
     Expected statutory income tax expense .    $1,865      $1,114        $984
     Increase (decrease) in taxes resulting
         from:
       State taxes on income, net of
         federal tax benefit ...............       144          77          58
       Tax-exempt income, net ..............      (146)       (120)       (279)
       Other, net ..........................        (5)         62           2
     ---------------------------------------  ---------   ---------   ---------
     Total income tax provision ............    $1,858      $1,133        $765
     =======================================  =========   =========   =========


Deferred tax assets and  liabilities  as of December 31, 1997 and 1996 consisted
of the following:

                                                 1997       1996
                                              ---------  ----------
                                              (Dollars in thousands)
     Deferred tax assets:
       Unrealized loss on available for sale
         securities ........................     $  --        $118
       Allowance for possible loan losses ..       992         834
       Loan fees ...........................        53         314
       Loan interest income ................       250         150
       Other ...............................       151          72
     ---------------------------------------  ---------   ---------
               Total deferred tax assets ...     1,446       1,488
     Deferred tax liabilities ..............       (15)        (15)
     Unrealized gain on available for
       sale securities .....................       (25)         --
     ---------------------------------------  ---------   ---------
     Net deferred tax assets ...............    $1,406      $1,473
     =======================================  =========   =========

Net deferred tax assets are included in other assets as of December 31, 1997 and
1996.  Management believes that it is more likely than not that the deferred tax
assets will be  realized,  therefore,  no valuation  allowance  was recorded for
deferred tax assets at December 31, 1997 or 1996.



                                      F-16
<PAGE>


CARNEGIE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(11) OTHER NON-INTEREST EXPENSE
--------------------------------------------------------------------------------

Other  non-interest  expense for the years ended  December 31,  consisted of the
following:


                                               1997        1996      1995
                                             ---------  ---------  ---------
                                                  (Dollars in thousands)
    Communications and supplies ...........      $648       $690       $552
    Professional and other fees ...........     1,202        799        747
    Business development ..................       307        294        267
    FDIC assessment insurance .............        94          2        235
    Advertising and shareholder relations .       271        224        198
    Directors' and Advisory Board fees ....       265        271        241
    Other .................................       750        709        502
    ---------------------------------------  ---------  ---------  ---------

                                               $3,537     $2,989     $2,742
                                             =========  =========  =========






                                      F-17
<PAGE>


CARNEGIE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(12) COMMITMENTS AND CONTINGENCIES

Future minimum lease payments under non-cancelable  operating leases at December
31, 1997 are as follows:

                            Year ending December 31,
                             (Dollars in thousands)

      1998...............................................  $   897
      1999...............................................      900
      2000...............................................      896
      2001...............................................      858
      2002...............................................      741
      Thereafter.........................................    8,116
      ------------------------------------------------------------
      Total minimum lease payments.......................  $12,408
      ------------------------------------------------------------

The lease agreements on the Company's  branch locations  provide for the payment
of real  estate  taxes and other  expenses in addition to the base rent which is
subject to annual escalation based upon a consumer price index.

Rental expense amounted to $963,000 for 1997, $924,000 for 1996 and $667,000 for
1995.

The  Company is subject to claims and  lawsuits  which  arise  primarily  in the
ordinary  course of business.  Based upon  information  currently  available and
advice received from legal counsel  representing  the Company in connection with
such claims and lawsuits,  it is the opinion of Management  that the disposition
or ultimate  determination  of such claims and lawsuits will not have a material
adverse  effect  on the  results  of  operation  and  cash  flows as well as the
consolidated financial position of the Company.





                                      F-18
<PAGE>


CARNEGIE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(13) CAPITAL COMPLIANCE

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

The following  table  summarizes the risk-based and leverage  capital ratios for
the Company and the Bank at December 31, 1997 and December 31, 1996,  as well as
the regulatory required minimum capital ratios:

                                                     Regulatory Requirements
                                                   ----------------------------
                              Company     Bank     Minimum   "Well Capitalized"
                              -------     ----     -------   ------------------

As of December 31, 1997
--------------------------------------------------------------------------------
  Risk-based capital:
    Tier I capital ratio ...   11.81%     9.42%     4.00%             6.00%
    Total capital ratio ....   12.80%    10.42%     8.00%            10.00%
Leveraged ratio ............    8.36%     6.68%   3.00%-5.00%   5.00% or greater

As of December 31, 1996
--------------------------------------------------------------------------------
  Risk-based capital:
    Tier I capital ratio ...    8.81%     8.55%     4.00%             6.00%
    Total capital ratio ....    9.79%     9.53%     8.00%            10.00%
Leveraged ratio ............    7.20%     6.98%   3.00%-5.00%   5.00% or greater
--------------------------------------------------------------------------------


As of December 31,  1997,  the most recent  notification  from the Office of the
Comptroller of the Currency categorized the Bank as "well capitalized" under the
regulatory  framework for prompt  corrective  action. To be categorized as "well
capitalized",   the  Bank  must  maintain  minimum  total  risk-based,   Tier  I
risk-based,  and Tier I leverage  ratios as set forth in the table above.  As of
December 31, 1997  management  of the Company  considers the Company to be "well
capitalized".



                                      F-19
<PAGE>


CARNEGIE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(14) BENEFIT PLANS

Savings Plan - In 1994 the Company  approved a savings plan under Section 401(k)
of the Internal Revenue Code. All full-time employees over the age of twenty-one
who have  completed  one year of  continuous  employment  with the  Company  are
eligible to participate in the plan. Under the plan,  employee  contributions of
up to 6% of gross salary are matched in part or total at the  discretion  of the
Company.  Such matching  becomes vested when the employee  reaches five years of
credited service.  Total savings plan expense was $30,000 for 1997,  $20,000 for
1996 and $13,000 for 1995.

Stock Option Plans - The Company maintains stock option plans, pursuant to which
an aggregate of 386,135  shares of Common Stock have been  reserved for issuance
to certain key employees and the directors of the Company and its  subsidiaries.
Under these plans the options are granted at not less than the fair market value
of the Company's Common Stock on the date of grant, and expire not more than ten
years  after  the  date of  grant.  All  options  granted  to  employees  become
exercisable at the rate of 25% per year  commencing on the date of grant,  as do
options granted to directors  under the 1995 Stock Option Plan for  non-employee
directors.  Options  granted to  directors  under the 1997 Stock Option Plan are
subject to a vesting  restriction  prohibiting  their  exercise if such options,
when combined with all other  exercisable  options  outstanding under all of the
Company's  stock  options  plans,   would  cause  the  total  number  of  shares
purchasable under exercisable options to exceed 15% of the Company's outstanding
Common Stock. These vesting  restrictions will lapse for each option holder on a
proportionate  basis as either the number of outstanding shares increases or the
number of outstanding exercisable options decreases.

                                                       Options Outstanding
                                                  -----------------------------
                                                  Shares        Price per share
                                                  ------        ---------------

Balance, December 31, 1994
  (112,112 shares exercisable) .........          141,318          $7.84-10.95
  Additional options issued -
    5% stock dividend ..................            5,781              --
  Options exercised ....................          (39,604)          7.47-10.66
  Options canceled .....................          (10,097)            11.50
--------------------------------------------------------------------------------
Balance, December 31, 1995
  (83,752 shares exercisable) ..........           97,398          $8.65-10.66*
  Granted ..............................          163,421             13.10
  Additional options issued -
    5% stock dividend ..................            4,587              --
  Options exercised ....................             (867)            10.15
  Options canceled .....................           (5,802)            10.15
--------------------------------------------------------------------------------
Balance, December 31, 1996
  (177,023 shares exercisable) .........          258,737          $8.24-13.10**
 Granted ...............................          120,000             18.75
 Additional options issued -
   5% stock dividend ...................           27,443              --
 Options exercised .....................          (20,045)         $8.25-11.88
--------------------------------------------------------------------------------
Balance, December 31, 1997
  (309,191 shares exercisable) .........          386,135          $9.67-17.86
--------------------------------------------------------------------------------

   * The weighted average price per share was $10.51 as of December 31, 1995.

  ** The weighted  average  exercise price of options  outstanding was $12.00 at
     December 31, 1996.


                                      F-20

<PAGE>




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

                        Options Outstanding             Options Exercisable
                ----------------------------------   -------------------------
                              Wgtd. Avg.  Wgtd. Avg.                Wgtd. Avg.
    Exercise       Number     Remaining   Exercise      Number       Exercise
     Prices     Outstanding  Contr. Life    Price    Exercisable       Price
    --------    -----------  -----------  --------   -----------    ----------

     $ 9.67        95,128        5.8       $ 9.67       95,128        $ 9.67
     $11.88       165,007        7.5       $11.88      119,958        $11.88
     $17.86       126,000        9.0       $17.86       94,105        $17.86
------------------------------------------------------------------------------
$9.67 to $17.86   386,135        7.6       $13.29      309,191        $13.02

As permitted by SFAS No. 123,  "Accounting  for Stock-Based  Compensation",  the
Company has chosen to apply APB Opinion No. 25,  "Accounting for Stock Issued to
Employees" and related  Interpretations in accounting for its Stock Option Plan.
Accordingly,  no compensation cost has been recognized for options granted under
the Stock Option Plan. Had compensation cost for the Company's Stock Option Plan
been determined based on the fair value at the grant dates,  consistent with the
method  prescribed  by SFAS No. 123, the  Company's  net income and earnings per
share would have been as follows.  However, the initial impact of the new rules,
as per SFAS No. 123, may not be representative of the effect on income in future
years because the options vest over several years and  additional  option grants
may be made each year.

                                     1997                       1996
                           ------------------------    -----------------------
                           As Reported    Pro Forma    As Reported   Pro Forma
                           -----------    ---------    -----------   ---------
                              (Dollars in thousands, except per share data)
Net income .............     $3,625        $3,291        $2,144        $1,822
Per Common Share:
Net income - basic .....     $ 1.55        $ 1.41        $ 1.10        $ 0.94
Net income - diluted ...     $ 1.42        $ 1.29        $ 1.00        $ 0.85

The weighted  average fair value of options granted was $3.35 for 1997 and $3.94
for 1996.  The fair value of each option grant is estimated on the date of grant
using the Black-Scholes  option pricing model. The weighted average  assumptions
used for grants made in 1997 and 1996 are as follows:

                                               1997 Grants       1996 Grants
                                               -----------       -----------
Dividend yield .............................        3.00%            3.00%
Expected  volatility .......................       20.00%           20.00%
Risk-free interest rate ....................        6.26%            6.49%
Expected option life .......................    3-5 Years          5 Years




                                      F-21
<PAGE>


CARNEGIE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(15) DIVIDEND LIMITATIONS

Funds  for the  payment  of cash  dividends  by the  Company  are  derived  from
dividends  paid by the Bank to the  Company.  Accordingly,  restrictions  on the
Bank's  ability  to pay cash  dividends  directly  affect  the  payment  of cash
dividends  by the  Company.  The Bank is subject to certain  limitations  on the
amount  of cash  dividends  that it may pay  under the  National  Bank Act.  The
approval of bank regulatory authorities is required if dividends declared in any
year by a national  bank exceed the Bank's net  profits for that year,  combined
with the retained profits of the Bank for the two immediately  preceeding years.
At December 31, 1997 the Bank could declare dividends aggregating  approximately
$8,019,000 without regulatory approval.




                                      F-22
<PAGE>


CARNEGIE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(16) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK OR
CONCENTRATIONS OF CREDIT RISK

The Company is a party to  financial  instruments  with  off-balance  sheet risk
transacted in the normal  course of business to meet the financing  needs of its
customers.  These financial instruments include commitments to extend credit and
standby  letters  of credit,  which are  conditional  commitments  issued by the
Company to guarantee the  performance  of an obligation or service of a customer
to a third party.  Those instruments  involve,  to varying degrees,  elements of
credit  and  interest  rate  risk in  excess  of the  amount  recognized  in the
financial statements.

Credit  policies  and  procedures  including  collateral   requirements,   where
applicable,  for  commitments to extend credit and standby letters of credit are
the same as those  applicable to loans and the credit risk associated with these
instruments  is  considered  in  management's  assessment of the adequacy of the
allowance for loan losses.

The Company's predominant focus has been in commercial lending within the states
of New  Jersey  and  Pennsylvania.  As a  result,  the  Bank's  credit  risk  is
concentrated  in these  states and is  dependent  on general  economics of these
states as well as housing and commercial development starts,  building occupancy
rates and real estate values.

Financial instruments whose contract amounts represent credit risk which are not
reflected in the accompanying  financial  statements as of December 31, 1997 and
1996 consist of the following:

                                                       1997         1996
                                                      -------      -------
                                                     (Dollars in thousands)
     Commercial and other unused commitments ....     $36,945      $30,062
     Home equity unused lines ...................       8,983        7,489
     Standby letters of credit ..................       3,633        8,329
     ---------------------------------------------------------------------
                                                      $49,561      $45,880
     ---------------------------------------------------------------------

     Rate structure:
       Variable rate ............................     $42,546      $38,195
       Fixed rate ...............................       7,015        7,685
     Range of fixed rate instruments:
       High .....................................       16.00%       16.00%
       Low ......................................        6.60%        6.00%




                                      F-23
<PAGE>


CARNEGIE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(17) SHORT-TERM BORROWINGS

At December  31,  1997,  1996,  and 1995  short-term  borrowings  consist of the
following:

                                           1997         1996          1995
                                        ----------   ----------    ----------
                                                (Dollars in thouands)
   Overnight Federal funds purchased
    - balance ........................  $     --     $    1,000    $   11,500
    - weighted average rate ..........        --           7.38%         5.26%
    - maturity date ..................        --      01/02/97      01/02/96
    - maximum amount outstanding at
       any month's end................  $   10,400   $12,400       $   11,500
   Term advances from FHLB-NY
    - balance ........................  $   10,000         --      $    6,000
    - weighted average rate ..........        6.27%        --            5.80%
    - maturity date ..................   04/22/98          --       01/22/96
    - maximum amount outstanding at
       any month's end................  $   10,000   $22,500       $   10,000
   Securities sold under repurchase
      agreement with Morgan Stanley
    - balance ........................  $   22,300         --            --
    - weighted average rate ..........        6.05%        --            --
    - maturity date ..................   01/20/98          --            --
    - maximum amount outstanding at
       any month's end................  $   23,360         --            --

At December 31, 1997, the Bank had overnight lines of credit with the Federal
Home Loan Bank-New York ("FHLB-NY") for $32,497,300 of which $-0- was advanced.
The Bank also had other overnight lines of credit with other institutions
amounting to $7,000,000 of which $-0- was advanced at December 31, 1997. The
average amount of short-term borrowings for 1997, 1996, and 1995 was
$19,573,000, $20,804,000, and $4,906,000, respectively.

The Bank may obtain  advances  from the FHLB-NY  which are  collateralized  by a
blanket assignment of the Bank's unpledged  qualifying  mortgage loan portfolio,
mortgage-backed  security portfolio and investments in the stock of the FHLB-NY.
The maximum  amount that the  FHLB-NY  will  advance,  for  purposes  other than
meeting  withdrawals,  fluctuates  from  time  to time in  accordance  with  the
policies of the FHLB-NY



                                      F-24
<PAGE>

(18) LONG-TERM DEBT
--------------------------------------------------------------------------------

At December 31, long-term debt consists of the following:

                                                        1997          1996
                                                      -------       -------
                                                      (Dollars in thousands)
     6.27% fixed rate term borrowing with
           FHLB-NY, due 4/22/98 ...............       $  --         $10,000
     6.50% fixed rate repurchase agreement
           with Salomon Bros., due 4/19/99 ....         4,425         4,425
     5.91% fixed rate repurchase agreement
           with Salomon Bros., due 7/22/02 ....        12,500          --
     5.84% fixed rate repurchase agreement
           with Salomon Bros., due 8/13/02 ....        12,500          --
                                                      -------       -------
                                                      $29,425       $14,425
                                                      =======       =======

The Company had no long-term debt at December 31, 1995.





                                      F-25
<PAGE>


CARNEGIE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(19) STOCK WARRANTS

On August 16, 1994 the Company issued, through a public offering, 690,000 units.
Each unit consisted of one share of common stock and one warrant to purchase one
share of common stock at an exercise price of $15.09 for a period of three years
from the date of issuance.  As of August 18, 1997, the  expiration  date for the
exercise of the warrants, substantially all of the warrants had been exercised.








                                      F-26
<PAGE>


CARNEGIE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(20) FAIR VALUE OF FINANCIAL INSTRUMENTS

Statement of Financial  Accounting  Standards No. 107, ("SFAS 107")  "Disclosure
About Fair Value of Financial  Instruments,"  requires that the Company disclose
estimated  fair  values  for its  financial  instruments.  The  fair  value of a
financial instrument is the amount at which the instrument could be exchanged in
a current transaction  between willing parties,  other than a forced liquidation
sale. Fair value estimates, methods and assumptions are set forth below.

Cash and cash  equivalents,  accrued  interest  receivable and accrued  interest
payable - The carrying amounts for cash and cash  equivalents,  accrued interest
receivable  and accrued  interest  payable  approximate  fair value because they
mature or are due in three months or less.

Securities available for sale - The fair value for securities available for sale
are based on quoted market  prices or dealer  prices,  if  available.  If quoted
market  prices are not  available,  fair value is estimated  using quoted market
prices for similar securities.

Loans  receivable  -  The  fair  value  of  loans  receivable  is  estimated  by
discounting  the future cash flows,  using the  current  rates at which  similar
loans would be made to borrowers  with similar  credit  ratings and for the same
remaining maturities of such loans.

Deposits - The fair value of demand and savings  accounts is equal to the amount
payable  on demand at the  reporting  date.  The fair value of  certificates  of
deposit is  estimated  using rates  currently  offered  for  deposits of similar
remaining  maturities.  The fair value estimates do not include the benefit that
results from the low-cost  funding provided by deposit  liabilities  compared to
the cost of borrowing funds in the market.

Borrowed money - The fair value of borrowed  money is estimated  using the rates
currently  available  to the Bank for debt  with  similar  terms  and  remaining
maturities.  The carrying amounts for short term borrowed money  approximate the
fair value because of the short term nature of these instruments which mature in
less than four months.

Commitments  to  originate  loans - The fair value of  commitments  to originate
loans is estimated using fees currently charged to enter into similar agreements
taking  into  account  the  remaining  terms of the  agreements  and the present
creditworthiness  of the counterparties.  For fixed rate loan commitments,  fair
value also considers the difference  between  current levels of interest and the
committed rates. As of December 31, 1997 and December 31, 1996 the fair value of
these commitments was immaterial.

The  carrying  amounts  and  estimated  fair values of the  Company's  financial
instruments at December 31, 1997 and December 31, 1996 are as follows:



                                      F-27
<PAGE>


                                        December 31, 1997     December 31, 1996
                                      --------------------  --------------------
                                      Carrying  Estimated   Carrying  Estimated
                                       Amount   Fair Value   Amount   Fair Value
                                      --------  ----------  --------  ----------
                                               (Dollars in thousands)
Financial Assets:
  Cash and cash equivalents ......... $ 16,110   $ 16,110   $ 16,745   $ 16,745
  Securities available for sale .....   52,483     52,483     30,110     30,110
  Securities held to maturity .......   68,988     68,993     23,264     23,258
  Loans, net ........................  284,789    284,732    263,797    259,658
  Accrued interest receivable .......    2,770      2,770      1,994      1,994

Financial Liabilities:
  Deposits:
    Non-interest bearing demand
    deposits ........................ $ 56,430   $ 56,430   $ 42,372   $ 42,372
    Savings deposits ................  156,981    156,981    139,671    139,671
    Certificates of deposit and other
    time deposits ...................  119,486    119,452    120,519    121,198
  Short-term borrowings .............   32,300     32,300      1,000      1,000
  Long-term debt ....................   29,425     29,610     14,425     14,473
  Accrued interest payable ..........      688        688        715        715

Limitations  - The fair value  estimates  are made at a  discrete  point in time
based on the relevant market  information  and  information  about the financial
instruments.  Fair value  estimates  are based on  judgements  regarding  future
expected loss experience,  current economic conditions,  risk characteristics of
various financial instruments, and other factors. These estimates are subjective
in nature and involve  uncertainties  and matters of significant  judgement and,
therefore,  cannot be determined  with precision.  Changes in assumptions  could
significantly  affect the estimates.  Further,  the foregoing  estimates may not
reflect the actual amount that could be realized if all or substantially  all of
the financial instruments were offered for sale. This is due to the fact that no
market exists for a sizable  portion of the loan,  deposit and off balance sheet
instruments.

In addition,  the fair value estimates are based on existing  on-and-off balance
sheet  financial  instruments  without  attempting  to estimate the value of the
anticipated  future  business,  and the value of assets and liabilities that are
not considered financial instruments. In addition, the tax ramifications related
to the  realization  of the  unrealized  gains and losses can have a significant
effect  on fair  value  estimates  and have not  been  considered  in any of the
estimates.

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


                                      F-28
<PAGE>


CARNEGIE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(21) MERGER AGREEMENT

On December  15,  1997,  the Company and  Sovereign  Bancorp,  Inc.,  the parent
company of  Sovereign  Bank,  jointly  announced  the  execution of a definitive
agreement for Sovereign to acquire the Company.  The terms of the agreement call
for Sovereign to exchange $35.50 in Sovereign  common stock for each outstanding
share of the Company's common stock..

The  December  15,  1997  announcement  indicated  the price would stay fixed at
$35.50 per the  Company's  share if  Sovereign's  average  stock price  remained
between  $18.00  and $22.00 per share  during  the  15-day  period  prior to the
closing of the transaction. If the average price of Sovereign's stock dropped to
$18.00 per share or below  during  the  pricing  period  prior to  closing,  the
Company's  shareholders would receive a fixed rate of 1.972 shares (the "Maximum
Exchange  Ratio") of  Sovereign  common  stock for each  share of the  Company's
common stock. Conversely, if Sovereign's average stock price is $22.00 per share
or higher, the Company's shareholders would receive a fixed rate of 1.614 shares
(the "Minimum  Exchange  Ratio") of Sovereign common stock for each share of the
Company's  common stock. The Company has the right to terminate the agreement if
the average  stock price of  Sovereign  during the 15-day  pricing  period falls
below $14.47 and Sovereign's decline in value is 15% greater than the percentage
decline of a group of similar  financial  institutions,  subject to  Sovereign's
right to increase  the exchange  ratio in order to result in a minimum  price of
$28.53 in Sovereign common stock.

On  January  23,  1998,   Sovereign  announced  a  20%  stock  dividend  to  its
shareholders.  This stock  dividend will not affect the value that the Company's
shareholders will receive as a result of this acquisition; although the exchange
ratio will be adjusted accordingly.  Because of Sovereign's stock dividend,  the
$18.00  price  adjusts  to  $15.00  per  share  (equivalent  to 2.366  shares of
Sovereign  for each share of the Company) and the $22.00 price adjusts to $18.33
per  share  (equivalent  to 1.937  shares  of  Sovereign  for each  share of the
Company). If the average price of Sovereign's stock drops to $15.00 per share or
below during the pricing  period prior to closing,  the  Company's  shareholders
would  receive a fixed rate of 2.366 shares (the  "Maximum  Exchange  Ratio") of
Sovereign common stock for each share of the Company's common stock. Conversely,
if Sovereign's  average stock price is $18.33 per share or higher, the Company's
shareholders  would receive a fixed rate of 1.937 shares (the "Minimum  Exchange
Ratio") of Sovereign  common stock for each share of the Company's common stock.
The effective date for the adjustment is March 27, 1998 (the ex-dividend  date).
After March 27, 1998, the Company will have the right to terminate the agreement
if the average stock price of Sovereign  during the 15-day  pricing period falls
below $12.06 and Sovereign's decline in value is 15% greater than the percentage
decline of a group of similar  financial  institutions,  subject to  Sovereign's
right to increase  the exchange  ratio in order to result in a minimum  price of
$28.53 in  Sovereign  common  stock.  The merger is subject to the  approval  of
various regulatory  agencies and the Company's  shareholders.  It is anticipated
that the  transaction  will  close in the second  quarter  of 1998,  and will be
accounted for as a pooling of interests.



                                      F-29
<PAGE>

CARNEGIE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(22) CASH DIVIDEND

In January 1998 the Board of Directors declared a cash dividend. Stockholders of
record on February 18, 1998 received a $.14 per share cash dividend on March 18,
1998.









                                      F-30
<PAGE>

CARNEGIE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(23) SUMMARY OF QUARTERLY RESULTS (UNAUDITED)

The following  summarizes the results of operations  during 1997, on a quarterly
basis, for Carnegie Bancorp and Subsidiaries.

<TABLE>
                                                                                                  1997
                                                                    ---------------------------------------------------------------
                                                                     Fourth             Third            Second             First
                                                                     Quarter           Quarter           Quarter           Quarter
                                                                    ---------         ---------         ---------         ---------
                                                                             (Dollars in thousands, except per share data)

<S>                                                                 <C>               <C>               <C>               <C>
Interest income ...........................................         $   8,724         $   8,483         $   7,762         $   7,445
Interest expense ..........................................             4,319             4,191             3,882             3,645
                                                                    ---------         ---------         ---------         ---------
Net interest income .......................................             4,405             4,292             3,880             3,800
Provision for loan losses .................................               100                50               150               146
                                                                    ---------         ---------         ---------         ---------
Net interest income after provision for
      loan losses .........................................             4,305             4,242             3,730             3,654
Net security transactions .................................               135                 0                 0               (91)
Other non-interest income .................................               263               247               202               278
Other non-interest expense ................................             3,134             2,917             2,738             2,693
                                                                    ---------         ---------         ---------         ---------
Income before income taxes ................................             1,569             1,572             1,194             1,148
Income taxes ..............................................               563               526               388               381
                                                                    ---------         ---------         ---------         ---------

Net income ................................................         $   1,006         $   1,046         $     806         $     767
                                                                    =========         =========         =========         =========

Net income per share:
      Basic ...............................................         $    0.37         $    0.43         $    0.38         $    0.37
      Diluted .............................................         $    0.35         $    0.40         $    0.34         $    0.33

</TABLE>



                                      F-31
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(24) PARENT COMPANY FINANCIAL INFORMATION

Condensed financial information for Carnegie Bancorp, parent company only, is as
follows:

                                                               BALANCE SHEETS
                                                               AT DECEMBER 31,
                                                          ----------------------
                                                            1997           1996
                                                          -------        -------
                                                          (Dollars in thousands)
ASSETS
Cash and cash equivalents ........................        $ 6,989        $   161
Investments in subsidiaries ......................         28,113         22,973
Other assets .....................................            145            676
                                                          -------        -------
TOTAL ASSETS .....................................        $35,247        $23,810
                                                          =======        =======

LIABILITIES AND EQUITY CAPITAL
Other liabilities ................................        $    23        $    68
Equity capital ...................................         35,224         23,742
                                                          -------        -------
TOTAL LIABILITIES AND EQUITY CAPITAL .............        $35,247        $23,810
                                                          =======        =======

<TABLE>
<CAPTION>
                                                                  CONDENSED STATEMENTS OF INCOME
                                                                      YEAR ENDED DECEMBER 31,
                                                               -----------------------------------
                                                                  1997         1996         1995
                                                               ---------    ---------    ---------
                                                                      (Dollars in thousands)
<S>                                                            <C>          <C>          <C>
Interest income from subsidiaries ..........................   $     114    $     107    $     173
Securities gains/(losses)  .................................          22            0            0
Other operating income .....................................          38            0            4
                                                               ---------    ---------    ---------
Total Operating Income .....................................         174          107          177

Operating expenses .........................................         198          143          179
                                                               ---------    ---------    ---------
Income Before Taxes and Undistributed Income ...............         (24)         (36)          (2)

Applicable income taxes ....................................           0           60            0
                                                               ---------    ---------    ---------
Income Before Undistributed Income From Subsidiaries .......         (24)         (96)          (2)

Equity in undistributed income of subsidiaries .............       3,649        2,240        2,130
                                                               ---------    ---------    ---------
NET INCOME .................................................   $   3,625    $   2,144    $   2,128
                                                               =========    =========    =========
</TABLE>


<TABLE>
<CAPTION>
                                                                     STATEMENTS OF CASH FLOWS
                                                                      YEAR ENDED DECEMBER 31,
                                                               -----------------------------------
                                                                  1997         1996         1995
                                                               ---------    ---------    ---------
<S>                                                            <C>          <C>          <C>
Cash Flows from Operating Activities:
Net Income .................................................   $   3,625    $   2,144    $   2,128
Adjustments to reconcile net income to net cash provided by
    operating activities:
  (Gain) or loss on sales of assets ........................         (22)           0            0
  Equity in undistributed (earnings) losses of subsidiaries       (3,649)      (2,240)      (2,130)
  Net change in other liabilities ..........................         (45)         (45)          63
  Net change in other assets ...............................         531         (593)           5
                                                               ---------    ---------    ---------
Net cash provided (used) by operating activities ...........         440         (734)          66

Cash Flows from Investing Activities:
Purchases of held-to-maturity and available-for-sale
  securities ...............................................       4,250            0            0
Sales and maturities of held-to-maturity and
  available-for-sale securities ............................       4,272            0            0
Payments for investments in and advances to subsidiaries ...       1,250        3,300            0
                                                               ---------    ---------    ---------
Net cash provided (used) by investing activities ...........      (1,228)      (3,300)           0

Cash Flows from Financing Activities:
Proceeds from issuance of common stock .....................       8,833        1,353          323
Dividends paid .............................................       1,358          905          840
Other, net .................................................         141            0            0
                                                               ---------    ---------    ---------
Net cash provided (used) by financing activities ...........       7,616          448         (517)

Net increase (decrease) in cash and cash equivalents .......       6,828       (3,586)        (451)
Cash and cash equivalents at beginning of period ...........         161        3,747        4,198
                                                               ---------    ---------    ---------
Cash and cash equivalents at end of period .................   $   6,989    $     161    $   3,747
                                                               =========    =========    =========
</TABLE>




                                      F-32
<PAGE>


CARNEGIE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)

(25) RECENTLY ISSUED ACCOUNTING STANDARDS

ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL  ASSETS AND  EXTINGUISHMENTS
OF LIABILITIES.

FASB has issued  SFAS No.  125,  "Accounting  for  Transfers  and  Servicing  of
Financial Assets and  Extinguishments  of  Liabilities",  as amended by SFAS No.
127,  "Deferral  of the  Effective  Date of  Certain  Provisions  of SFAS  125",
effective for transfers and servicing of financial assets and extinguishments of
liabilities   occurring   after  December  31,  1996.   Earlier  or  retroactive
application is not permitted.  This Statement provides  accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities based on consistent application of a  financial-components  approach
that focuses on control.  Adoption of this pronouncement did not have a material
impact on the Company's consolidated financial statements.

EARNINGS PER SHARE.

Issued in March, 1997, SFAS No. 128, "Earnings per Share", establishes standards
for  computing and  presenting  earnings per share (EPS) and applies to entities
with  publicly  held common  stock or potential  common  stock.  This  Statement
simplifies the standards for computing  earnings per share  previously  found in
APB  Opinion  No.  15,  "Earnings  per  Share",  and makes  them  comparable  to
international EPS standards.  It replaces the presentation of primary EPS with a
presentation  of basic EPS.  It also  requires  dual  presentation  of basic and
diluted EPS on the face of the income  statement  for all entities  with complex
capital   structures  and  requires  a  reconciliation   of  the  numerator  and
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS  computation.  This Statement is effective for financial  statements
issued for periods ending after December 15, 1997,  including  interim  periods;
earlier application is not permitted. This Statement requires restatement of all
prior-period EPS data presented.  Adoption of this  pronouncement did not have a
material impact on the Company's consolidated financial statements.

DISCLOSURE OF INFORMATION ABOUT CAPITAL STRUCTURE.

FASB has also issued SFAS No. 129,  "Disclosure  of  Information  about  Capital
Structure",  establishing standards for disclosing information about an entity's
capital  structure.  This  Statement  continues  the  previous  requirements  to
disclose certain  information  about an entity's capital  structure found in APB
Opinions No. 10, "Omnibus Opinion - 1966", and No. 15, "Earnings per Share", and
FASB Statement No. 47, "Disclosure of Long-Term Obligations",  for entities that
were subject to the requirements of those standards.  This Statement  eliminates
the exemption of nonpublic  entities  from certain  disclosure  requirements  on
Opinion  No.  15 as  provided  by FASB  Statement  No.  21,  "Suspention  of the
Reporting   of  Earnings  per  Share  and  Segment   Information   by  Nonpublic
Enterprises".  It supersedes specific disclosure requirements of Opinions No. 10
and No. 15 and Statement No. 47 and consolidates them in this Statement for ease
of retrieval and for greater visibility to nonpublic entities. This Statement is
effective for financial statements issued for periods ending after December


                                      F-33
<PAGE>

(25) RECENTLY ISSUED ACCOUNTING STANDARDS (CONTINUED)

15, 1997.  It contains no change in  disclosure  requirements  for entities that
were  previously  subject to the  requirements of Opinions No. 10 and No. 15 and
Statement  No. 47 and  therfore  its  adoption  had no  effect on the  Company's
consolidated financial statements.

REPORTING COMPREHENSIVE INCOME.

FASB has also issued SFAS No. 130, "Reporting  Comprehensive Income",  effective
for fiscal years beginning  after December 15, 1997. This Statement  establishes
standards for reporting and display of  comprehensive  income and its components
in a full set of general-purpose  financial statements.  Comprehensive income is
defined as the change in equity of a business  enterprise  during a period  from
transactions  and other  events and  circumstances  from  nonowner  sources.  It
includes  all changes in equity  during a period  except  those  resulting  from
investments by owners and  distributions to owners.  An example of comprehensive
income is the unrealized gains and losses on securities  available for sale, net
of taxes. The Company will implement the disclosure requirements related to this
pronouncement beginning in 1998.




                                      F-34
<PAGE>


                                CARNEGIE BANCORP
                               INDEX TO EXHIBITS


Exhibit
Number       Description of Exhibits
------       -----------------------
(2)          Agreement and Plan of Merger dated as of December 12, 1997
               between the Company and Sovereign
             Bancorp, Inc. (Filed herewith)
3(i)         Certificate of Incorporation of the Company(1)
3(ii)        Bylaws of the Company(1)
4(i)         Warrant Agreement/Form of Warrant Certificate(2)
4(ii)        Form of Stock Certificate(2)
10(i)        1993 Employee Stock Option Plan(1)
10(ii)       1993 Stock Option Plan for Non-Employee Directors(1)
10(iii)      1995 Directors' Stock Option(3)
10(iv)       1995 Employee Stock Option Plan(3)
10(v)        1997 Stock Option Plan(4)
10(vi)       Employment Agreement between the Registrant and Thomas L. Gray(5)
10(vii)      Employment Agreement between the Registrant and Mark A. Wolters(6)
10(viii)     Consulting Agreement between the Registrant and Bruce A. Mahon(7)
21           Subsidiaries of the Company (Filed herewith)
23           Consent of Coopers & Lybrand L.L.P. (Filed herewith)
27           Financial Data Schedule (Filed herewith)

----------

(1)  Incorporated by reference from Exhibits 2(a) to 99(b) from the Registrant's
     Registration Statement on Form S-4, Registration No. 33-72088.

(2)  Incorporated by reference from Registrant's Registration Statement on Form
     SB-2, Registration No. 33-80426 (Exhibit 4(i))

(3)  Incorporated by reference from Registrant's Registration Statement on Form
     S-4, Registration No. 33-65197 (Exhibits 10(a) and 10(b)).

(4)  Incorporated by reference to Exhibit 10(v) of Registrant's Annual Report on
     Form 10-K for the year ended December 31, 1996.

<PAGE>

(5)  Incorporated by reference to Exhibit 10(vi) of Registrant's Annual Report
     on Form 10-K for the year ended December 31, 1996.

(6)  Incorporated by reference to Exhibit 10(vii) of Registrant's Annual Report
     on Form 10-K for the year ended December 31, 1996.

(7)  Incorporated by reference to Exhibit 10(viii) of Registrant's Annual Report
     on Form 10-K for the year ended December 31, 1996.