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


                       SECURITIES AND EXCHANGE COMMISSION
                              450 5TH STREET, N.W.
                             WASHINGTON, D.C. 20549

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

                                    FORM 10-K

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

[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
    Act of 1934 For the Year Ended March 31, 1998

                                       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 NO. 0-22499


                            BAYONNE BANCSHARES, INC.
             ------------------------------------------------------
             (Exact name of registrant as specified in its charter)


          DELAWARE                                         22-3511899
 -------------------------------                      ----------------------
 (State or other jurisdiction of                        (I.R.S. Employer
 incorporation or organization)                       Identification Number)

   
    568 BROADWAY, BAYONNE, NEW JERSEY                        07002
 ---------------------------------------                   ----------
 (Address of Principal Executive Offices)                  (Zip Code)


                                 (201) 437-1000
                         -------------------------------
                         (Registrant's Telephone Number)


Securities Registered Pursuant to Section 12(b) of the Act:   NONE
                                                              ----

Securities Registered Pursuant to Section 12(g) of the Act:

                     COMMON STOCK, PAR VALUE $.01 PER SHARE
                     --------------------------------------
                                (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 twelve months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
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 the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this form 10-K or any
amendment to this Form 10-K.   [___]

     As of March 31, 1998, the aggregate market value of the voting stock held
by persons other than the directors and executive officers of the Registrant,
computed by reference to the closing sales price of the Registrant's common
stock on the Nasdaq National Market on March 31, 1998, as reported in The Wall
Street Journal, was approximately $124.4 million. There were 9,088,581 shares of
the Registrant's Common Stock issued and outstanding as of March 31, 1998.

                       DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on September 3, 1998 are incorporated herein by
reference (Part III).


<PAGE>



                                                       INDEX

PART I                                                                      PAGE
                                                                            ----
    Item 1.   Business..................................................     1

 Additional
     Item.    Executive Officers of the Registrant......................    37

    Item 2.   Properties................................................    38

    Item 3.   Legal Proceedings.........................................    38

    Item 4.   Submission of Matters to a Vote of Security Holders.......    38

PART II

    Item 5.   Market for Registrant's Common Equity and Related
                Stockholders Matters....................................    39

    Item 6.   Selected Consolidated Financial and Other Data............    41

    Item 7.   Management's Discussion and Analysis of Financial
                Condition and Results of Operations.....................    44

    Item 7A.  Quantitative and Qualitative Disclosures About Market Risk    51

    Item 8.   Financial Statements and Supplementary Data...............    57

    Item 9.   Changes in and Disagreements With Accountants
                On Accounting and Financial Disclosure..................    60

PART III

    Item 10.  Directors and Executive Officers of the Registrant........    60

    Item 11.  Executive Compensation....................................    60

    Item 12.  Security Ownership of Certain Beneficial Owners
                and Management..........................................    60

    Item 13.  Certain Relationships and Related Transactions............    60

PART IV

    Item 14.  Exhibits, Financial Statement Schedules and
                Reports on Form 8-K.....................................    60

SIGNATURES 


<PAGE>



                                     PART I

ITEM 1. BUSINESS

GENERAL

     Bayonne Bancshares, Inc. (the "Company" or the "Bank") was incorporated in
the State of Delaware on February 4, 1997. The Company was organized in
connection with the conversion and reorganization of First Savings Bank of New
Jersey, SLA ("First Savings") from the mutual holding company structure to the
stock holding company structure (the "Conversion and Reorganization") and
acquired all of the capital stock of the Bank upon the consummation of the
Conversion and Reorganization on August 22, 1997. At March 31, 1998, the Company
had total assets of $646.1 million and total stockholders' equity of $98.6
million.

     First Savings is a New Jersey-chartered stock savings association that
conducts its operations from its main office and three branch offices located in
Bayonne, New Jersey. The Bank was originally chartered in 1889 and has been a
member of the Federal Home Loan Bank ("FHLB") System since 1945. The Bank's
deposits are insured by the Federal Deposit Insurance Corporation ("FDIC") under
the Savings Association Insurance Fund ("SAIF"). As a SAIF-insured,
state-chartered savings association, the Bank is regulated by the New Jersey
Department of Banking (the "Department") and the Office of Thrift Supervision
("OTS"). At March 31, 1998, the Bank had total assets of $636.4 million, total
deposits of $424.0 million, and stockholders' equity of $75.5 million.

     The Bank is a community oriented savings institution that is primarily
engaged in the business of attracting deposits from the general public in the
Bank's market area, and investing such deposits in one- to four-family
residential real estate mortgage loans, mortgage-backed securities and U.S.
Government and Agency obligations. At March 31, 1998, one- to four-family
residential mortgage loans totalled $187.2 million, comprising 29.0% of the
Bank's total assets, while mortgage-backed securities totalled $274.7 million,
or 42.51% of total assets, and U.S. Government and agency obligations totalled
$77.4 million, or 12.00% of total assets. To a lesser extent, the Bank also
invests in multifamily and commercial real estate loans, home equity loans, and
passbook and other consumer loans. The Bank's principal sources of funds have
been deposits, principal and interest payments on loans and mortgage-backed
securities, funds from sales of investments and borrowings and reverse
repurchase agreements. Principal sources of income have been interest received
from loans, mortgage-backed securities and other investments. The Bank's
principal expense has been interest paid on deposits, borrowings, compensation
and employee benefits, and SAIF deposit insurance premiums.

     The Bank's executive offices are located at 568 Broadway, Bayonne, New
Jersey, and its telephone number at that location is (201) 437-1000.

MARKET AREA

     The Bank is headquartered in the City of Bayonne, which is located in
northeastern New Jersey. The Bank currently conducts business from its main
office and three branch offices, all of which are located in Bayonne. The Bank's
deposit gathering base is concentrated in Bayonne, although the Bank also
receives deposits from residents of contiguous communities in Hudson County. A
significant portion of the Bank's mortgage loans are collateralized by
properties located in Bayonne, although the Bank also originates loans

                                        1


<PAGE>



collateralized by real estate located in other parts of Hudson County, and, to a
much lesser extent, other parts of New Jersey.

     The City of Bayonne has a population of approximately 64,000, and is
located at the tip of Hudson County, which is surrounded by the Newark Bay, the
Kill Van Kull, and the Lower New York Bay. Bayonne is a short distance from New
York City, Newark International Airport, major rail transportation lines,
and New Jersey's major highways. A significant number of Bayonne residents work
in and commute to New York City.

     As of March 31, 1998, the Bank was the largest savings institution
headquartered in Bayonne. The Bank encounters strong competition both in
attracting deposits and in originating real estate and other loans. Its most
direct competition for deposits has historically come from commercial and
savings banks, other savings associations and credit unions in its market area.
Competition for loans comes principally from such financial institutions, as
well as mortgage banking companies. The Bank expects continued strong
competition in the foreseeable future, including increased competition from
"super-regional" banks entering the market by purchasing large commercial banks
and savings banks. These larger institutions have greater financial and
marketing resources than the Bank. The Bank currently holds approximately 40% of
all deposits held by branches of commercial banks, credit union, and savings
associations located in Bayonne, and approximately 6% of such deposits held in
Hudson County. The Bank competes for savings deposits by offering depositors a
high level of personal service and a wide range of competitively priced
financial services. In recent years, additional strong competition has come from
stockbrokers, securities firms and mutual funds. The Bank competes for real
estate loans primarily through the interest rates and loan fees it charges and
through advertising.

LENDING ACTIVITIES

     Loan Portfolio. The principal components of the Bank's loan portfolio are
first mortgage loans secured by one- to four-family residential real estate and,
to a much lesser extent, home equity loans, multifamily real estate loans, and
passbook and other consumer loans. At March 31, 1998, the Bank's total loans
receivable totalled $240.0 million, of which $187.2 million, or 78.0%, were one-
to four-family residential real estate mortgage loans, $26.2 million, or 10.9%,
were home equity loans, and $25.8 million, or 10.7%, were multifamily and
commercial real estate loans. Consumer loans, other than home equity loans,
totaled $860,000, or 0.4%, of the Bank's loan portfolio.

                                        2


<PAGE>



     The following table sets forth the composition of the Bank's loan portfolio
in dollar amounts and as a percentage of the portfolio at the dates indicated.

<TABLE>
<CAPTION>

                                                             AT MARCH 31,(4)                                        AT MAY 31,
                                      ------------------------------------------------------------------------  ------------------
                                             1998                 1997              1996           1995                1994
                                      ------------------- ------------------  --------------- ----------------  ------------------
                                                 PERCENT            PERCENT          PERCENT          PERCENT             PERCENT
                                      AMOUNT     OF TOTAL  AMOUNT   OF TOTAL  AMOUNT OF TOTAL AMOUNT  OF TOTAL  AMOUNT    OF TOTAL
                                      --------  --------- --------  --------  ------ -------- ------  --------  ------    --------
                                                                            (DOLLARS IN THOUSANDS)
<S>                                   <C>        <C>      <C>       <C>     <C>       <C>     <C>      <C>      <C>        <C>
Real estate loans (1):
    One- to four-family residential.. $187,184     78.0%  $197,819   82.2%  $189,283   82.7%  $190,685  85.4%   $167,633    86.4%
    Multifamily and commercial.......   25,815     10.7     14,330    6.0     14,253    6.2     11,239   5.0       9,803     5.1
                                      --------   ------   --------  -----   --------  -----   -------- -----    --------   -----
      Total real estate loans........  212,999     88.7    212,149   88.2    203,536   88.9    201,924  90.4     177,436    91.5
Consumer loans:                                                                                                
    Home equity(2)...................   26,180     10.9     27,740   11.5     24,851   10.9     20,677   9.2      15,754     8.1
    Passbook.........................      371      0.2        277    0.1        322    0.1        382   0.2         289     0.2
    Other(3).........................      489      0.2        450    0.2        341    0.1        355   0.2         468     0.2
                                      --------   ------    -------   ----   --------  -----   -------- -----    --------   -----
    Total consumer loans.............   27,040     11.3     28,467   11.8     25,514   11.1     21,414   9.6      16,511     8.5
                                      --------   ------    -------   ----   --------  -----   -------- -----    --------   -----
    Total loans receivable...........  240,039   100.00%   240,616  100.0%   229,050  100.0%   223,338 100.0%    193,947   100.0%
                                      --------   =======   -------  =====   --------  =====   -------- =====    --------   =====
Less:                                                                                                          
    Unamortized discount and net                                                                               
      deferred loan fees.............   (1,621)             (1,834)           (2,043)           (2,108)           (1,904)
    Allowance for loan losses........   (2,953)             (3,158)           (2,979)           (2,677)           (2,918)
                                      --------            ---------         --------          --------          --------
      Total loans receivable, net.... $235,465            $235,624          $224,028          $218,553          $188,980
                                      ========            ========          ========          ========          ========
                                                                          
</TABLE>

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

(1)  Excludes loans to joint ventures of the Bank's subsidiaries. See
     "-Subsidiary Activities."

(2)  Includes home equity lines of credit.

(3)  Includes home improvement loans, student loans and automobile loans.

(4)  The Bank changed its fiscal year end from May 31 to March 31 in 1995.

                                                         3


<PAGE>



     Loan Maturity. The following table sets forth the maturity or period of
repricing of the Bank's loan portfolio at March 31, 1998. Demand loans, loans
having no stated schedule of repayments and no stated maturity, and overdrafts
are reported as due within one year. Adjustable and floating rate loans are
included in the period in which interest rates are next scheduled to adjust
rather than in which they contractually mature, and fixed rate loans are
included in the period in which the final contractual repayment is due. The
table does not include the effect of future principal prepayments. Principal
prepayments and scheduled principal amortization on loans totalled $36.0
million, $32.9 million and $26.3 million for the years ended March 31, 1998,
1997 and 1996, respectively.

<TABLE>
<CAPTION>

                                                                                                   BEYOND
                                        WITHIN        1-3          3-5        5-10      10-20        20
                                        1 YEAR       YEARS        YEARS       YEARS     YEARS       YEARS      TOTAL
                                        -------     --------     -------     -------    -------    -------    --------
                                                                       (IN THOUSANDS)
<S>                                     <C>         <C>         <C>         <C>         <C>         <C>        <C>
Real estate loans:
    One- to four-family residential.    $18,531     $ 7,356     $11,343     $35,715     $62,501     $51,738    $187,184
    Multifamily and commercial......      1,544         381       2,450      10,422       9,247       1,771      25,815
Consumer loans......................      2,947       7,047       1,617       6,560       8,847          22      27,040
                                        -------     -------     -------     -------     -------     -------    --------
       Total loans..................    $23,022     $14,784     $15,410     $52,697     $80,595     $53,531    $240,039
                                        =======     =======     =======     =======     =======     =======    ========
</TABLE>


     The following table sets forth at March 31, 1998 the dollar amount of loans
contractually due after March 31, 1999, and whether such loans have fixed
interest rates or adjustable interest rates.

                                                 DUE AFTER MARCH 31, 1999
                                          ------------------------------------
                                            FIXED      ADJUSTABLE     TOTAL
                                          ----------   ----------    ---------
                                                     (IN THOUSANDS)
Real estate loans:
   One- to four-family residential......    $138,854    $29,799      $168,653
   Multi-family and commercial..........      17,607      6,664        24,271
Consumer loans..........................      20,698      3,395        24,093
                                            --------    -------      --------
Total loans receivable..................    $177,159    $39,858      $217,017
                                            ========    =======      ========


     One- to Four-Family Residential Mortgage Lending. The Bank's primary
lending activity consists of the origination of one- to four-family residential
mortgage loans collateralized by owner-occupied properties located in the Bank's
market area. The Bank generally does not originate one- to four-family
residential loans collateralized by properties outside of the State of New
Jersey, and in recent years has not purchased mortgage loans collateralized by
out-of-state property. At March 31, 1998 the Bank had $187.2 million, or 78.0%,
of its total loan portfolio invested in one- to four-family residential mortgage
loans, $89.0 million, or 47.5%, of which were collateralized by properties
located in Bayonne. Beginning in the latter part of the 1994 calendar year, the
Bank began to emphasize growth of its one- to four-family residential mortgage
loan portfolio, which had declined in previous years. The Bank achieved this
growth through originations and correspondent lending in which the Bank agrees
to purchase loans from mortgage companies at the time such loans are closed. The
Bank may receive lower origination fees on loans purchased through the Bank's
correspondent relationships.

                                        4


<PAGE>



     The Bank's one- to four-family residential real estate loans generally are
originated and underwritten according to standards that qualify such loans to be
included in Federal Home Loan Mortgage Corporation ("FHLMC") and Federal
National Mortgage Association ("FNMA") purchase and guaranty programs and that
otherwise permit resale in the secondary mortgage market. The Bank has not sold
any mortgage loans since 1989. The Bank has generally retained the servicing
rights on loans it has sold and contracts with sub-servicers to perform the
servicing activities, which include collecting and remitting loan payments,
inspecting the properties and making certain insurance and tax payments on
behalf of the borrowers. As of March 31, 1998, the Bank retained servicing
rights to 853 loans sold, with an aggregate principal amount of $11.5 million.

     The Bank currently offers one- to four-family mortgage loans with terms
typically ranging from 10 to 30 years, and with adjustable or fixed interest
rates. One- to four-family residential real estate loans often remain
outstanding for significantly shorter periods than their contractual terms
because borrowers may refinance or prepay loans at their option. The average
length of time that the Bank's one- to four-family residential mortgage loans
remain outstanding varies significantly depending upon trends in market interest
rates and other factors. In recent years, the average maturity of the Bank's
mortgage loans has decreased significantly due to the unprecedented volume of
refinancing activity. Accordingly, estimates of the average length of time that
one- to four-family loans may remain outstanding cannot be made with any degree
of accuracy.

     Originations of fixed-rate mortgage loans versus ARM loans are monitored on
an ongoing basis and are affected significantly by the level of market interest
rates, customer preference, the Bank's interest rate gap position, and loan
products offered by the Bank's competitors. Although management's strategy is to
promote the origination of ARM loans, market conditions may be such that there
is greater demand for fixed-rate mortgage loans. The Bank's fixed-rate mortgage
loans amortized on a monthly basis with principal and interest due each month.
The Bank's fixed-rate loans are generally originated with terms ranging from 10
to 30 years. At March 31, 1998, of the Bank's $187.2 million in one- to
four-family mortgage loans, $138.6 million, or 74.0%, had fixed rates of
interest.

     The Bank's ARM loans are generally originated with terms of 30 years. The
Bank offers ARM loans with interest rates that adjust annually after a period of
one, three, five, seven or ten years. Interest rate adjustments on ARM loans are
limited to 2% per year and 6% over the life of the loan. The Bank's current
index on its ARM loans is the one-year Treasury Bill rate, plus a margin of 275
basis points. The Bank occasionally will originate ARM loans with initially
discounted rates, often known as "teaser rates." The Bank determines whether a
borrower qualifies for an ARM loan based on the first full interest rate
adjustment on one- and three-year ARMs and on the initial rate of five-, seven-
or ten-year ARMs with a minimum rate of 7%. One- to four-family residential ARM
loans totalled $48.6 million, or 26.0% of the Bank's total one- to four-family
mortgage loans at March 31, 1998.

     The primary purpose of offering ARM loans is to make the Bank's loan
portfolio less interest rate sensitive. ARM loans carry increased credit risk
associated with potentially higher monthly payments by borrowers as general
market interest rates increase. It is possible, therefore, that during periods
of rising interest rates, the risk of default on ARM loans may increase due to
the upward adjustment of interest costs to the borrower. Management believes
that the Bank's credit risk associated with its ARM loans is reduced because of
the annual and lifetime interest rate adjustment limitations on such loans.

                                        5


<PAGE>



     The Bank's one- to four-family residential first mortgage loans customarily
include due-on-sale clauses, which are provisions giving the Bank the right to
declare a loan immediately due and payable in the event, among other things,
that the borrower sells or otherwise disposes of the underlying real property
serving as security for the loan. Due-on-sale clauses are an important means of
adjusting the rates on the Bank's fixed-rate mortgage loan portfolio, and the
Bank has generally exercised its rights under these clauses.

     Regulations limit the amount that a savings association may lend relative
to the appraised value of the real estate securing the loan, as determined by an
appraisal at the time of loan origination. Such regulations permit a maximum
loan-to-value ratio of 100% for residential property and 90% for all other real
estate loans. The Bank makes one- to four-family real estate loans with
loan-to-value ratios of up to 90%. The Bank's lending policies generally limit
the maximum loan-to-value ratio on fixed-rate and ARM loans without private
mortgage insurance, and construction loans, to 80% of the lesser of the
appraised value or the purchase price of the property which collateralizes the
loan. For one- to four-family real estate loans with loan-to-value ratios of
between 80% and 90%, the Bank requires the first 25% of the appraised value of
the underlying collateral to be covered by private mortgage insurance. The Bank
requires fire and casualty insurance, and flood insurance in certain cases, as
well as a title guaranty regarding good title on all properties securing real
estate loans made by the Bank.

     Multifamily Residential Real Estate and Commercial Real Estate Lending. The
Bank originates multifamily residential and commercial real estate loans on a
limited basis. The Bank's multifamily loans are typically secured by residential
properties located in its market area. At March 31, 1998, such loans totaled
$25.8 million, or 10.7%, of the Bank's total loan portfolio. Of these, $11.3
million, or 43.8%, had fixed rates of interest. The Bank originates commercial
loans on a case-by-case basis, and, at March 31, 1998, such loans constituted
$9.6 million of the Bank's total loan portfolio. In the future, the Bank intends
to increase its efforts to originate commercial real estate loans within its
delineated lending area. The Bank's multifamily loans include loans
collateralized by mixed-use properties that are primarily residential, but have
some commercial use as well. Because of the increased credit risk associated
with such loans and the low level of demand for such loans in the Bank's primary
market area, the Bank does not expect multifamily and commercial lending to
constitute a significant part of loan originations in the foreseeable future.
The largest multifamily real estate loan at March 31, 1998 had an aggregate
principal balance of $1.4 million and was secured by a first mortgage on an
apartment complex located in Bayonne, New Jersey.

     The Bank makes such loans in amounts up to 80% of the appraised value of
the property if owner-occupied and up to 75% if nonowner-occupied. The Bank
generally requires a positive cash flow on all multifamily properties.
Multifamily loans are offered with fixed or adjustable interest rates, with
terms not exceeding 15 years. In an effort to reduce the Bank's interest rate
risk exposure, the Bank will emphasize the origination of adjustable-rate or
balloon multifamily and commercial real estate loans.

     Loans collateralized by multifamily and commercial real estate generally
involve a greater degree of credit risk than one- to four-family residential
mortgage loans and carry larger loan balances. This increased credit risk is a
result of several factors, including the concentration of principal in a limited
number of loans and borrowers, the effects of general economic conditions on
income producing properties, and the increased difficulty of evaluating and
monitoring these types of loans. Furthermore, the repayment of loans secured by
commercial real estate and multifamily real estate is typically dependent upon
the successful operation of the related property. If the cash flow from the
project is reduced, the borrower's ability to repay the loan can become
impaired.

                                        6


<PAGE>



     Consumer Loans. The Bank also originates consumer loans consisting
principally of home equity loans, and to a lesser extent, loans secured by
deposit accounts, and home improvement, student and automobile loans. As of
March 31, 1998, consumer loans totaled $27.0 million, or 11.3%, of the Bank's
total loan portfolio. Home equity loans, which totaled $26.2 million, or 10.9%,
of the Bank's total loan portfolio, and 96.8% of the Bank's consumer loan
portfolio, consisted primarily of fixed-rate, fixed-term home equity loans for a
specified amount, and to a lesser extent, adjustable-rate, fixed-term home
equity lines of credit. The Bank offers consumer loans other than home equity
loans, primarily as a service to its customers. Consumer loans, other than home
equity loans, are offered primarily on a fixed-rate basis with maturities
generally of less than four years. The Bank's home equity and residential second
mortgage loans are secured by the borrower's principal residence with a maximum
loan-to-value ratio, including the principal balances of both the first and
second mortgage loans, of 75% or less.

     Loan Originations, Solicitation, Processing and Commitments. Loan
originations are derived from a number of sources such as real estate agent
referrals, existing customers, borrowers, builders, attorneys, walk-in customers
and correspondent lenders. Upon receiving a loan application, the Bank obtains a
credit report and employment verification to verify specific information
relating to the applicant's employment, income and credit standing. In the case
of a real estate loan, an appraiser approved by the Bank appraises the real
estate intended to collateralize the proposed loan. An underwriter in the Bank's
loan department checks the loan application file for accuracy and completeness,
and verifies the information provided. A senior loan officer then reviews the
application and requests the appraisal. The loan application is then submitted
to, and must be approved by, the Board of Directors. For multifamily residential
and commercial real estate loans, the Bank requires that the borrower provide
operating statements, pro forma cash flow statements and, if applicable, rent
rolls. In addition, the Bank reviews the borrower's credit standing and
expertise in owning and managing the type of property that will collateralize
the loan. For one- to four-family construction loans, the Bank requires that the
borrower provide detailed construction plans and specifications. Fire and
casualty insurance, and in certain cases, flood insurance, is required at the
time the loan is made and throughout the term of the loan.

     If the loan is approved, the commitment letter specifies the terms and
conditions of the proposed loan including the amount of the loan, interest rate,
amortization term, a brief description of the required collateral, and required
insurance coverage. Commitments are typically issued for 90-day periods. The
borrower must provide proof of fire and casualty insurance on the property
serving as collateral, which insurance must be maintained during the full term
of the loan. A title guaranty, based on a title search of the property, is
required on all loans secured by real property. At March 31, 1998, the Bank had
commitments to originate $8.8 million of mortgage and consumer loans. From time
to time, the Bank has purchased mortgage loans and participation interests in
loans originated by others, although the Bank has not purchased mortgage loans
since 1989 (other than loans closed by and purchased from correspondent
lenders), and has not purchased participation interests since the 1970s. As of
March 31, 1998, the Bank had $6.4 million of mortgage loans secured by
properties located outside of New Jersey which were purchased in past years.

                                        7


<PAGE>



     The following table sets forth the Bank's loan originations and principal
repayments for the periods indicated. The Bank has not purchased or sold loans
within the last three fiscal years.

                                                      YEAR ENDED MARCH 31,
                                             -----------------------------------
                                                1998         1997        1996
                                             ----------   ---------   ----------
                                                          (IN THOUSANDS)

Loans receivable at beginning of year........  $240,616    $229,050     $223,338
                                               --------    --------     --------
Originations (1):
     Real estate:
         One- to four-family residential.....    14,329      28,620       18,248
         Multifamily and commercial..........    15,178       2,231        1,326
     Consumer loans:
         Home equity.........................     6,030       8,905       11,472
         Passbook............................       392         327          244
         Other...............................       152         298          827
                                               --------    --------     --------
              Total originations.............    36,081      40,381       32,117
Transfer of mortgage loans to foreclosed
  real estate................................       705         878           94
Repayments...................................    35,953      27,937       26,311
                                                           --------     --------
Net loan activity............................      (577)     11,566        5,712
                                               --------    --------     --------
     Loans receivable at end of year.........  $240,039    $240,616     $229,050
                                               ========    ========     ========

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

(1)  Includes loans purchased from correspondent lenders at the time of closing.

     Loan Origination Fees and Other Income. In addition to interest earned on
loans, the Bank generally receives fees in connection with loan originations.
Such loan origination fees, net of costs to originate, are deferred and
amortized using the interest method over the contractual life of the loan. Fees
deferred are recognized into income immediately upon prepayment of the related
loan. At March 31, 1998, the Bank had $1.62 million of deferred loan origination
fees. Such fees vary with the volume and type of loans and commitments made and
purchased, principal repayments, and competitive conditions in the mortgage
markets, which in turn respond to the demand and availability of money. In
addition to loan origination fees, the Bank also receives loan fees and service
charges, which consist primarily of deposit transaction account service charges
and late charges. The Bank recognized loan fees and service charges of $238,000,
$294,000, and $307,000 for the fiscal years ended March 31, 1998, 1997 and 1996,
respectively.

     Loans to One Borrower. Savings associations are subject to the same limits
as those applicable to national banks, which under current regulations restrict
loans to one borrower to an amount equal to 15% of unimpaired capital and
unimpaired surplus on an unsecured basis, and an additional amount equal to 10%
of unimpaired capital and unimpaired surplus if the loan is secured by readily
marketable collateral (generally, financial instruments and bullion, but not
real estate). The Bank's policy is to limit the maximum loans to one borrower
limit to $10.0 million at March 31, 1998. At such date, the Bank's largest
borrower had an aggregate principal outstanding balance of $7.0 million.

                                        8


<PAGE>



     Delinquencies and Classified Assets. The Bank's collection procedures
provide that when a loan is 15 days and 25 days past due, a computer generated
late charge notice is sent to the borrower requesting payment, plus a late
charge. If delinquency continues, on the first day of the second month, a
delinquent notice is mailed along with a letter advising that the mortgagors are
in violation of the terms of their mortgage contract. A representative of the
Bank attempts to contact borrowers whose loans are more than 60 days past due.
If such attempts are unsuccessful, a Bank representative personally visits the
property and attempts to contact the borrower and inspect the property. A
delinquent loan report is presented to the Board of Directors, which must
authorize any legal action. To the extent required by the Department of Housing
and Urban Development ("HUD"), the borrower is provided with notice of consumer
counseling services. It is sometimes necessary and desirable to arrange special
repayment schedules with mortgagors to prevent foreclosure or filing for
bankruptcy. The schedule is prepared by the Bank pursuant to discussions with
the borrower.

     Nonperforming Assets. Loans are reviewed on a regular basis. Real estate
loans are placed on a nonaccrual status when either principal or interest is 120
days or more past due. Delinquent consumer loans generally are not placed on
nonaccrual status, but continue to accrue until charged-off. Delinquent consumer
loans are charged-off when it appears no longer reasonable or probable that the
loan will be collected. Based on historical charge-offs in the consumer loan
portfolio, which have been relatively low in relation to the Bank's valuation
allowance, the Bank has not adopted a formal policy to stop accruing interest on
delinquent consumer loans after a certain specified time period, but instead
such loans are reviewed on a case-by-case basis. Interest accrued and unpaid at
the time a loan is placed on nonaccrual status is charged against interest
income.

     Real estate acquired by the Bank as a result of foreclosure or by deed in
lieu of foreclosure is deemed real estate owned ("REO") until such time as it is
sold. When REO is acquired, it is recorded at the lower of the unpaid principal
balance of the related loan or its estimated fair value, less estimated selling
expenses. Valuations are periodically performed, or obtained, by management and
any subsequent decline in fair market value is charged to operations. REO
totalled $330,000, $364,000 and $24,000 as of March 31, 1998, 1997 and 1996,
respectively.

                                        9


<PAGE>



     Delinquent Loans and Nonperforming Assets. The following table sets forth
information regarding loans delinquent 30 days to 89 days, 90 days to 119 days,
and 120 days or more, and REO. At March 31, 1998, REO totalled $330,000 and
consisted of 5 properties. It is the policy of the Bank to cease accruing
interest on loans 120 days or more past due and charge off all accrued interest.
For the years ended March 31, 1998, 1997, 1996, the ten-month period ended March
31, 1995 and the year ended May 31, 1994, the amount of additional interest
income that would have been recognized on nonaccrual loans if such loans had
continued to perform in accordance with their contractual terms was $385,000,
$517,000, $578,000, $460,000 and $356,000, respectively.

<TABLE>
<CAPTION>

                                                                       AT MARCH 31,                        AT MAY 31,
                                                        ----------------------------------------------     ----------
                                                           1998        1997        1996         1995          1994
                                                        ---------    --------     -------     --------     ----------
                                                                             (IN THOUSANDS)
<S>                                                       <C>         <C>          <C>          <C>          <C>
Loans past due 30 days to 89 days:
  One- to four-family residential..................       $6,032      $4,318       $5,634       $5,743       $5,530
  Multifamily and commercial.......................          133         733          338          344          331
  Consumer loans...................................          574         473          614          644          815
                                                          ------      ------       ------       ------       ------
    Total loans past due 30 days
      to 89 days...................................        6,739       5,524        6,586        6,731        6,676
                                                          ------      ------       ------       ------       ------
Loans past due 90 days to 119 days:
  One- to four-family residential..................          561         673          492        1,678          958
  Multifamily and commercial.......................           --         114           48          163          114
  Consumer loans...................................           38         491          158           53          179
                                                          ------      ------       ------       ------       ------
    Total loans past due 90 days
      to 119 days..................................          599       1,278          698        1,894        1,251
                                                          ------      ------       ------       ------       ------
Loans past due 120 days or more(1):
  One- to four-family residential..................        2,434       3,629        4,606        3,346        5,208
  Multifamily and commercial.......................          596         615          207          150          214
                                                          ------      ------       ------       ------       ------
    Total non-accrual loans........................        3,030       4,244        4,813        3,496        5,422
                                                          ------      ------       ------       ------       ------
  Consumer loans...................................          188          87          456          194          204
                                                         -------      ------       ------       ------       ------
    Total loans past due 120 days or more..........        3,218       4,331        5,269        3,690        5,626
                                                          ------      ------       ------       ------       ------
Other nonperforming assets:
  REO..............................................          330         364           24          233        1,522
                                                          ------      ------       ------       ------       ------
    Total other nonperforming assets...............          330         364           24          233        1,522
                                                          ------      ------       ------       ------       ------
Total loans delinquent 90 days or more
  and other nonperforming assets...................       $4,147      $5,973       $5,991       $5,817       $8,399
                                                          ======      ======       ======       ======       ======
Total loans delinquent 90 days or more                           
  to net loans receivable..........................         1.62%       2.38%        2.66%        2.56%        3.64%
Total loans delinquent 90 days or more                          
  to total assets..................................         0.59%       0.97%        0.92%        1.09%        1.26%
Total loans delinquent 90 days or more and other               
  nonperforming assets to total assets.............         0.64%       1.04%        0.92%        1.14%        1.53%

</TABLE>

-----------

(1)  The Bank classifies as nonperforming only real estate loans 120 days or
     more delinquent.


                                       10


<PAGE>



     The following table sets forth information with respect to the Bank's
delinquent loans and other problem assets at March 31, 1998.

<TABLE>
<CAPTION>

                                                                  AT MARCH 31, 1998
                                                                ---------------------
                                                                 BALANCE       NUMBER
                                                                ----------     ------
                                                                  (DOLLARS IN THOUSANDS)
<S>                                                              <C>            <C>  
One- to four-family residential real estate:
    Loans 30 to 89 days delinquent............................   $6,032         41
    Loans 90 to 119 days delinquent...........................      561          8
    Loans 120 days or more delinquent.........................    2,434         36
Multifamily residential and commercial real estate:
    Loans 30 to 89 days delinquent............................      133          2
    Loans 90 to 119 days delinquent...........................       --         --
    Loans 120 days or more delinquent.........................      596          5
Consumer loans 30 to 89 days delinquent.......................      574         16
Consumer loans 90 to 119 days delinquent......................       38          2
Consumer loans 120 days or more delinquent....................      188          5
Foreclosed real estate and other repossessions................      330          5

</TABLE>

     Classification of Assets. Federal regulations provide for the
classification of loans and other assets, such as debt and equity securities,
considered by the OTS to be of lesser quality as "substandard," "doubtful," or
"loss" assets. An asset is considered "substandard" if it is inadequately
protected by the current net worth and paying capacity of the obligor or of the
collateral pledged, if any. "Substandard" assets include those characterized by
the "distinct possibility" that the savings institution will sustain "some loss"
if the deficiencies are not corrected. Assets classified as "doubtful" have all
of the weaknesses inherent in those classified "substandard," with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified as "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
that do not expose the savings institution to risk sufficient to warrant
classification in one of the aforementioned categories, but which possess some
weaknesses, are required to be designated "special mention" by management. Loans
designated as special mention are generally loans that, while current in
required payment, have exhibited some potential weaknesses that, if not
corrected, could increase the level of risk in the future. Pursuant to the
Bank's internal guidelines, all loans 90 to 119 days past due are considered
special mention, and all loans 120 days or more past due are classified
substandard, doubtful, or loss.

                                       11


<PAGE>



     The following table sets forth the aggregate amount of the Bank's special
mention and classified assets at the dates indicated.

                                                 AT MARCH 31,
                                     --------------------------------------
                                      1998      1997       1996      1995
                                     -----      -----    ------      ------
                                               (IN THOUSANDS)

Special mention...................  $4,647     $1,044    $  746      $1,671
Substandard assets................   1,250      3,523     1,588       4,731
Doubtful assets...................   1,383      2,230     4,201         323
                                    ------     ------    ------      ------
    Total special mention and
      classified assets (1).......  $7,280     $6,797    $6,535      $6,725
                                    ======     ======    ======      ======
----------------------------
(1) Includes REO.

     As of March 31, 1998, the Bank had no single special mention or classified
asset with a balance of greater than $250,000.

     Allowance for Loan Losses. Management's policy is to provide for estimated
losses on the Bank's loan portfolio based on management's evaluation of the
potential losses that may be incurred. The Bank's Asset Classification Committee
meets quarterly to review the loan portfolio and the adequacy of the allowance
for loan losses. Based upon that review, the Bank determines whether any loans
require the establishment of appropriate reserves or allowances for losses. Such
evaluation, which includes a review of all loans of which full collectability of
interest and principal may not be reasonably assured, considers, among other
matters, the estimated fair value of the underlying collateral. Other factors
considered by management include the site and risk exposure of each segment of
the loan portfolio, present indicators such as delinquency rates and the
borrower's current financial condition, and the potential for losses in future
periods. The Committee also prepares a summary classifying all delinquent loans
and non-homogenous loans as special mention, substandard, doubtful or loss. The
Committee then recommends the general allowance for loan losses in part based on
past experience, and in part based on specified loan balances within each
classification. Loans in the non-accrual status are reviewed by the Committee to
determine a specific reserve to be established against these loans. Based on the
Committee's recommendation, the Board of Directors makes determinations as to
any reserves and changes to the provision for loan losses and allowance for loan
losses. 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 make additional provisions for loan losses
based upon judgments different from those of the Bank. Both general and specific
loan loss allowances are charged against earnings; however, general loss
allowances are added back to capital in computing total risk-based capital under
OTS regulations, subject to certain limitations.

                                       12


<PAGE>



     The following table sets forth activity in the Bank's allowance for loan
losses for the periods as indicated:

<TABLE>
<CAPTION>

                                                                                        TEN MONTHS
                                                                   YEAR                    ENDED      YEAR ENDED
                                                              ENDED MARCH 31,            MARCH 31,      MAY 31,
                                                  ------------------------------------  ---------     -----------
                                                     1998         1997         1996        1995          1994
                                                  ---------    ---------     ---------   --------     -----------
                                                                       (IN THOUSANDS)
<S>                                               <C>          <C>          <C>          <C>          <C>  
Total loans outstanding .....................     $240,039     $240,616     $229,050     $223,338     $193,947
Average loans outstanding ...................      238,257      234,971      220,820      202,087      203,321
Allowance balance (at beginning of period)...        3,158        2,979        2,677        2,918        2,597
Provision for losses:                             
    Real estate .............................          169          300          405          350          483
    Consumer ................................           11           20           45         --             17
Charge-offs:                                      
    Real estate .............................         (278)        (141)        (148)        (591)        (179)
    Consumer ................................         (107)        --           --           --           --
                                                  --------     --------     --------     --------     --------
Allowance balance (at end of period) ........     $  2,953     $  3,158     $  2,979     $  2,677     $  2,918
                                                  ========     ========     ========     ========     ========
Allowance for loan losses as a percent of net     
  loans receivable at end of period .........         1.25%        1.34%        1.33%        1.22%        1.54%
Net loans charged off as a percent of average     
  loans outstanding .........................          .16%         .06%         .07%         .29%         .09%
Ratio of allowance for loan losses to total       
  loans delinquent 90 days or more at end of      
  period ....................................        77.36%       56.30%       49.92%       47.94%       42.43%
Ratio of allowance for loan losses to total                                                              
  loans delinquent 90 days or more and other      
  nonperforming assets at end of period .....        71.21%       52.87%       49.72%       46.02%       34.74%
                                                  
                                                
</TABLE>

                                       13


<PAGE>



     The following table sets forth the Bank's percent of allowance for loan
losses to total allowance for loan losses and the percent of loans to total
loans in each of the categories listed at the dates indicated.

<TABLE>
<CAPTION>

                                                                                AT MARCH 31,
                                       ---------------------------------------------------------------------------------------------
                                                    1998                            1997                            1996
                                       -------------------------------  --------------------------------- --------------------------
                                                              PERCENT                            PERCENT                    PERCENT
                                                              OF LOANS                           OF LOANS                   OF LOANS
                                                 PERCENT OF    IN EACH             PERCENT OF    IN EACH         PERCENT OF IN EACH
                                                  ALLOWANCE   CATEGORY              ALLOWANCE   CATEGORY         ALLOWANCE  CATEGORY
                                                  TO TOTAL    TO TOTAL              TO TOTAL     TO TOTAL         TO TOTAL  TO TOTAL
                                        AMOUNT    ALLOWANCE     LOANS     AMOUNT   ALLOWANCE     LOANS    AMOUNT  ALLOWANCE   LOANS
                                       --------- ----------- ---------   -------   -----------  --------- ------- --------- --------
                                                                      (DOLLARS IN THOUSANDS)
<S>                                   <C>          <C>       <C>         <C>        <C>         <C>       <C>      <C>       <C>
Balance at end of period
applicable to:     
   Mortgage loans:
     One- to four-family............  $1,792         60.7%     78.0%     $2,984       94.5%       82.2%   $2,770     93.0%    82.7%
     Multifamily residential........     777         26.3       6.7          60        1.9         5.7        59      2.0      5.9
     Commercial.....................      86          2.9       4.0           9        0.3          .3         6      0.2       .3
     Consumer.......................     298         10.1      11.3         105        3.3        11.8       144      4.8     11.1
                                      ------       ------     -----      ------     ------       -----    ------   ------    -----
       Total allowance for loan                                                                         
         losses.....................  $2,953       100.00%    100.0%     $3,158     100.00%      100.0%   $2,979   100.00%   100.0%
                                      ======       ======     =====      ======     ======       =====    ======   ======    ===== 
                                                                                                               
</TABLE>

<TABLE>
<CAPTION>

                                                      AT MARCH 31,                                 AT MAY 31,
                                                         1995                                         1994
                                       --------------------------------------------  ------------------------------------------
                                                                                                                  PERCENT
                                                      PERCENT OF       PERCENT OF                PERCENT OF       OF LOANS
                                                      ALLOWANCE         LOANS IN                  ALLOWANCE        IN EACH
                                                       TO TOTAL      EACH CATEGORY                TO TOTAL        CATEGORY
                                          AMOUNT      ALLOWANCE      TO TOTAL LOANS   AMOUNT      ALLOWANCE      TO TOTAL LOANS
                                       ------------  ------------    --------------  ----------   -----------    --------------
                                                                        (DOLLARS IN THOUSANDS)
<S>                                       <C>           <C>              <C>           <C>           <C>             <C>
Balance at end of period
applicable to:             
   Mortgage loans:
     One- to four-family............      $2,521         94.2%            85.4%        $2,784         95.4%           86.4%
     Multifamily residential........          56          2.1              5.0             49          1.7             5.1
     Commercial.....................           1           --               --              1           --              --
     Consumer.......................          99          3.7              9.6             84          2.9             8.5
                                          ------        ------           -----         ------        -----           -----
       Total valuation allowance....      $2,677        100.0%           100.0%        $2,918        100.0%          100.0%
                                          ======        =====            =====         ======        =====           =====
                                      

</TABLE>

                                                        14


<PAGE>



INVESTMENT ACTIVITIES

     General. The Bank maintains a substantial portfolio of investment-grade,
liquid investments with low credit risk. These investments are composed
primarily of mortgage-backed securities, U.S. Government and agency obligations
and municipal and agency obligations. At March 31, 1998, $335.5 million, or
51.93%, of the Company's total assets consisted of securities issued or
guaranteed by the United States Government or an agency or sponsored corporation
of the U.S. Government, or of mortgage securities collateralized by such U.S.
Government-related instruments. The Bank's investment in mortgage-backed and
other investment securities at that date exceeded its total loan portfolio of
$240.0 million. By investing in these types of assets, the Bank has been able to
significantly reduce the credit risk of its asset base in exchange for lower
yields than would typically be available on loans.

     The Bank's investments include substantial investments in mortgage-backed
securities. The Bank's mortgage-backed securities represent an interest in, or
are collateralized by, pools of mortgage loans originated by private lenders
that have been grouped by various governmental, government-related, or private
organizations. Mortgage-backed securities generally enhance the quality of the
Bank's assets by virtue of the insurance or guarantees that back them, are more
liquid than individual mortgage loans and may be used to collateralize
borrowings or other obligations of the Bank. Investments in mortgage-backed
securities, however, may involve risks not present with mortgage loans.
Mortgage-backed securities are subject to the risk that actual prepayments will
be greater than estimated prepayments over the life of the security, which may
require adjustments to the amortization of any premium or accretion of any
discount relating to such instruments, thereby reducing the net yield on such
securities. Like mortgage loans, there is also reinvestment risk associated with
the cash flows from such securities or in the event such securities are redeemed
by the issuer. In addition, the market value of such securities may be adversely
affected by changes in interest rates. At March 31, 1998, the market value of
the Bank's mortgage-backed securities was $274.7 million, which was $1.4 million
less than the amortized cost of such securities. The Bank attempts to manage its
interest rate risk, in part, by maintaining adjustable-rate, mortgage-backed
securities in its investment portfolio. At March 31, 1998, $124.7 million, or
33.42%, of the Bank's $373.1 million of investments consisted of mortgage-backed
securities with adjustable interest rates. Management is seeking to increase its
portfolio of adjustable-rate mortgage-backed securities.

     At March 31, 1998, mortgage-backed securities totaled $274.7 million, or
42.51% of the Company's total assets, U.S. Government and agency obligations
totaled $77.4 million, or 12.00% of the Company's total assets, and other
investments held to maturity, including primarily interest-earning deposits,
FHLB stock and municipal and other agency obligations, totaled $32.9 million, or
5.09% of the Company's total assets. U.S. Government and agency obligations are
generally not subject to credit risk, unlike mortgage loans, but may be subject
to interest rate risk in a fluctuating interest-rate environment.

     The Bank is required under federal regulations to maintain a minimum amount
of liquid assets that may be invested in specified short-term securities and
certain other investments. The Bank has generally maintained a portfolio of
liquid assets that exceeds regulatory requirements. The Bank's Investment
Committee meets on a regular basis to decide, based on market levels and
conditions, current economic data, political and regulatory information, and
internal needs, whether any alterations need to be made to the Bank's investment
portfolio. Based on the parameters of the investment policy, the Bank endeavors
to diversify its holdings through the purchase of short- and medium-term and
fixed- and variable-rate instruments, which provide both an adequate return as
well as some protection from interest rate risk. All

                                       15


<PAGE>



investment decisions are made by the Committee after analysis and market price
cross-checks have been completed.

     Securities are classified as either available for sale or held to maturity,
based upon the Bank's intent and ability to hold such securities. Securities
available for sale include debt and mortgage-backed securities that are held for
an indefinite period of time and are not intended to be held to maturity.
Securities available for sale include securities that management intends to use
as part of its overall asset/liability management strategy and that my be sold
in response to changes in interest rate and the resulting prepayment risk and
other factors related thereto. Securities available for sale are carried at fair
value, and unrealized gains and losses (net of related tax effects) on such
securities are excluded from earnings, but are included in stockholders' equity.
Upon realization, such gains and losses will be included in earnings. Management
determines the appropriate classification of investment and mortgage-backed
securities as either available for sale or held to maturity at the purchase
date. Investment securities and mortgage-backed securities, other than those
designated as available for sale or trading, are comprised of debt securities
that the Bank has the positive intent and ability to hold to maturity.
Securities held to maturity are carried at cost, adjusted for amortization of
premiums and accretion of discounts over the estimated lives of the securities.

     Mortgage-Backed Securities. The Bank's mortgage-backed securities are
primarily pass-through securities, which means that they provide the Bank with
payments consisting of both principal and interest as mortgages in the
underlying mortgage pool are paid off by the borrowers. The average maturity of
pass-through mortgage-backed securities varies with the maturities of the
underlying mortgage instruments and with the occurrence of unscheduled
prepayments of those mortgage instruments. Mortgage-backed securities also
include collateralized mortgage obligations ("CMOs"), which are debt obligations
collateralized by the cash flows from mortgage loans or pools of mortgage loans.

     Mortgage-backed securities may be classified into the following principal
categories, according to the issuer or guarantor:

     (i)  Securities that are backed by the full faith and credit of the United
          States Government. The GNMA, the principal U.S. Government guarantor
          of such securities, is a wholly owned U.S. Government corporation
          within the Department of Housing and Urban Development. GNMA is
          authorized to guarantee, with the full faith and credit of the U.S.,
          the timely payment of principal and interest, but not of market value,
          on securities issued by approved institutions and backed by pools of
          FHA-insured or VA-guaranteed mortgages.

     (ii) Securities that are issued by a government agency but that are not
          backed by the full faith and credit of the U.S. Government. The
          primary issuers of these securities include FNMA and FHLMC. FNMA is a
          U.S. Government-sponsored corporation owned entirely by private
          stockholders. Pass-through securities issued by FNMA are guaranteed as
          to timely payment of principal and interest by FNMA. FHLMC issues
          securities representing interests in residential mortgage loans that
          it pools. FHLMC is a U.S. Government- sponsored corporation that
          guarantees the timely payment of interest and ultimate collection of
          principal, and its stock is publicly traded.

    (iii) Securities that represent interests in, or are collateralized by,
          pools consisting principally of residential mortgage loans created by
          non-governmental issuers. These securities generally offer a higher
          rate of interest than the other two types of mortgage-backed

                                       16


<PAGE>



          securities because there are no direct or implied government
          guarantees of payment as in the former securities, although certain
          credit enhancements may exist. Securities issued by certain private
          organizations may not be readily marketable. Private mortgage-backed
          securities purchased by the Bank must be rated in one of the two
          highest rating categories by at least one nationally recognized
          statistical rating organization.

     The Bank's mortgage-backed securities are both fixed-rate and
adjustable-rate ("ARM Securities"). Unlike fixed-rate mortgage-backed
securities, ARM Securities have periodic adjustments in the coupons on the
underlying mortgages. Management believes that the adjustable-rate feature of
the mortgages underlying the ARM Securities generally will help to reduce sharp
changes in the value of the ARM Securities in response to normal interest rate
fluctuations. As the interest rates on the mortgages underlying the ARM
Securities are reset periodically (generally one to 12 months, but as long as
five years), the yields of such securities will gradually align themselves to
reflect changes in the market rates so that the market value of such securities
will remain relatively constant as compared to fixed-rate instruments.
Management believes that this, in turn, should cause the value of the ARM
Securities to fluctuate less than fixed-rate mortgage-backed securities.

     In contrast to fixed-rate mortgages, which generally decline in value
during periods of rising interest rates, ARM Securities permit the Bank to
participate in increases in interest rates through periodic adjustments in the
coupons of the mortgages that underlie the ARM Securities. Management believes
that ARM Securities should produce both higher current yields and lower price
fluctuations than fixed-rate mortgage-backed securities during such periods.
Furthermore, if prepayments of principal are made on the underlying mortgages
during periods of rising interest rates, the Bank generally will be able to
reinvest such amounts in assets with a higher yield. For certain types of ARM
Securities, the rate of amortization of principal, as well as interest payments,
can and does change in accordance with movements in a particular, pre-specified,
published interest rate index. The amount of interest due to an ARM Securities
holder is calculated by adding a specified additional amount, the "margin," to
the index, subject to limitations or "caps" on the maximum or minimum interest
that is charged to the mortgagor during the life of the mortgage or to maximum
and minimum changes in the interest during a given period. As a result, the Bank
will not benefit from increases in interest rates to the extent that interest
rates rise to the point where they cause the current coupon of adjustable rate
mortgages held as investments to exceed the maximum allowable annual (usually
100 to 200 basis points) or lifetime limits (or "cap rates") for a particular
mortgage. Fluctuations in interest rates above these levels could cause such
mortgage securities to behave more like long-term, fixed-rate debt securities.
Moreover, the value of the Bank's ARM Securities could vary to the extent that
current yields on such securities are different from market yields during
interim periods between coupon reset dates. Thus, the Bank could suffer some
principal loss if it sold such securities before the interest rates on the
underlying mortgages are adjusted to reflect current market rates.

     During periods of declining interest rates, the coupon rates on the
mortgages that underlie the Bank's ARM Securities may readjust downward,
resulting in lower yields on such securities. Further, because of this feature,
ARM Securities may have less potential for capital appreciation than fixed-rate
instruments of comparable maturities during periods of declining interest rates.
As with other mortgage-backed securities, interest rate declines may result in
accelerated prepayment of mortgages and the proceeds from such prepayment of
mortgages may be reinvested at lower prevailing interest rates. For this reason,
ARM Securities may be less effective than other fixed-rate securities as a means
of "locking in" long-term interest rates.

                                       17


<PAGE>



     If the Bank purchases mortgage-backed securities at a premium, mortgage
foreclosures and unscheduled principal prepayments may result in some loss of
the principal investment to the extent of the premium paid. On the other hand,
if mortgage-backed securities are purchased at a discount, both a scheduled
payment of principal and an unscheduled repayment of principal will increase
current and total returns.

     CMOs are securities created by segregating or partitioning cash flows from
mortgage pass-through securities or from pools of mortgage loans. CMOs provide a
broad range of mortgage investment vehicles by tailoring cash flows from
mortgages to meet the varied risk and return preferences of investors. These
securities enable the issuer to "carve up" the cash flow from the underlying
securities and thereby create multiple classes of securities with different
maturity and risk characteristics. The CMOs and other mortgage-backed securities
in which the Bank invests may have a multi-class structure ("Multi-Class
Mortgage Securities"). Multi-Class Mortgage Securities issued by private issuers
may be collateralized by whole loans or pass-through mortgage-backed securities
of private issuers. Each class has a specified maturity or final distribution
date. In one structure, payments of principal, including any principal
prepayments, on the collateral are applied to the classes in the order of their
respective stated maturities or final distribution dates, so that no payment of
principal will be made on any class until all classes having an earlier stated
maturity or final distribution date have been paid in full. In other structures,
certain classes may pay concurrently, or one or more classes may have a priority
with respect to payments on the underlying collateral up to a specified amount.
The Bank has not and will not invest in any class with residual characteristics.
Additionally, the Bank will not invest in any subordinated debt class that is
not rated in one of the two highest rating categories by at least one nationally
recognized statistical rating organization.

                                       18


<PAGE>



     Fixed- and Adjustable-Rate Mortgage Securities. The following table sets
forth selected data relating to the composition of the Bank's mortgage
securities portfolio as of the dates indicated.

<TABLE>
<CAPTION>

                                                                                       AT MARCH 31,
                                                          ----------------------------------------------------------------------
                                                                  1998                   1997                     1996
                                                          --------------------  -----------------------  -----------------------
                                                                     PERCENT                  PERCENT                  PERCENT
                                                           AMOUNT    OF TOTAL      AMOUNT     OF TOTAL      AMOUNT     OF TOTAL
                                                          ---------  ---------  ------------  ---------  ------------  ---------
                                                                                 (DOLLARS IN THOUSANDS)
<S>                                                      <C>          <C>         <C>          <C>        <C>           <C>
Pass-through certificates:
   Adjustable ........................................    $110,734     40.1%      $ 73,927      32.5%     $ 54,503       24.2%
   Fixed .............................................     139,106     50.4        116,102      51.1       129,311       57.5
                                                          --------    -----       --------     -----      --------      -----
     Total pass-through certificates .................     249,840     90.5        190,029      83.6       183,814       81.7
                                                          --------    -----       --------     -----      --------      -----
CMOs .................................................       9,512      3.4         12,751       5.6        13,664        6.1
                                                          --------    -----       --------     -----      --------      -----
Private Issues .......................................      16,688      6.1         24,661      10.8        27,448       12.2
                                                          --------    -----       --------     -----      --------      -----
Amortized cost of mortgage-backed securities .........     276,040    100.0%       227,441     100.0%      224,926      100.0%
                                                                      =====                    =====                    =====
Valuation allowance ..................................      (1,388)                 (4,461)                 (4,244)     
                                                          --------                --------                --------      
   Carrying value of mortgage-backed securities at                                                                             
    end of period.....................................    $274,652                $222,980                $220,682      
                                                          ========                ========                ========      
Mortgage-related mutual funds(1):                                                                                       
   AMF Adjustable Rate Mortgage Portfolio ............        --       --            --          --       $  2,551        3.6%
   AMF Intermediate Mortgage 
     Securities Portfolio ............................        --       --            --          --         68,889       96.4
                                                          --------    -----       --------     -----      --------      
   Amortized cost of mutual funds ....................        --       --            --          --         71,440      100.0%
                                                                                                                        =====
   Valuation allowance ...............................        --                     --                     (2,274)     
                                                          --------                --------                --------
     Carrying value of mortgage-related mutual                                                                           
      funds at end of period ..........................   $   --                  $  --                   $ 69,166      
                                                          ========                ========                ========      
</TABLE>

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

(1)  During the year ended March 31, 1997, the Bank sold intermediate and
     adjustable-rate mutual funds totaling $71.5 million, for a net loss of
     $2.9 million.

                                       19


<PAGE>



     Purchases, Sales and Repayments of Mortgage Securities. The following table
sets forth the Bank's investment, mortgage-backed and mortgage-related
securities activities for the periods indicated:

<TABLE>
<CAPTION>

                                                                                      YEAR
                                                                                 ENDED MARCH 31,
                                                                 --------------------------------------------------
                                                                     1998               1997               1996
                                                                 -------------      ------------       ------------
                                                                                  (IN THOUSANDS)
<S>                                                                   <C>               <C>                 <C>
Mortgage-backed securities at beginning
  of period...................................................        $227,441          $224,926           $ 56,629
  Purchases...................................................         120,618            91,634            174,784
  Sales.......................................................              --           (65,959)                --
  Repayments..................................................          73,150           (25,737)            (5,855)
  Discount accretion (premium) amortization...................           1,131             2,577               (632)
                                                                         -----           -------           --------
Amortized cost of mortgage-backed
  securities at end of period.................................         276,040           227,441            224,926
Valuation allowance...........................................          (1,388)           (4,461)            (4,244)
                                                                      --------        ----------          ---------
Carrying value of mortgage-backed securities
  at end of period............................................        $274,652          $222,980           $220,682
                                                                      ========          ========           ========
Mortgage-related mutual funds at
  beginning of period.........................................              --          $ 71,440           $ 67,089
  Purchases...................................................              --                --                 --
  Redemptions.................................................              --           (71,088)                --
  Dividend credited...........................................              --             2,350              4,351
  Loss on redemption..........................................              --            (2,702)                --
Mortgage-related mutual funds at end of period................              --                --             71,440
Valuation allowance...........................................              --                --             (2,274)
                                                                      --------          --------           --------
Carrying value of mortgage related mutual funds                      
 at end of period.............................................        $     --          $     --           $ 69,166
                                                                      ========          ========           ========
                                                                     
</TABLE>


                                                        20


<PAGE>



         Investment Portfolio. The following table sets forth certain
information regarding the carrying and market values of the Bank's investment
portfolio at the dates indicated:

<TABLE>
<CAPTION>

                                                                      AT MARCH 31,
                                     ------------------------------------------------------------------------------
                                               1998                       1997                      1996
                                     -------------------------  ------------------------  -------------------------
                                       CARRYING      MARKET      CARRYING      MARKET      CARRYING      MARKET
                                        VALUE         VALUE        VALUE        VALUE        VALUE       VALUE
                                     ------------  -----------  -----------  -----------  ----------  ------------
                                                                     (IN THOUSANDS)
<S>                                     <C>          <C>         <C>          <C>         <C>          <C>
Investments available for sale:
   Mortgage-backed securities .......   $ 276,040    $ 274,652   $ 227,441    $ 222,980   $ 224,926    $ 220,682
   Mortgage-related mutual funds ....        --           --          --           --        71,440       69,166
   Other investment securities ......      18,528       18,610        --           --          --           --
   U.S. Government and agency
   obligations ......................      69,965       69,516      69,945       67,634      94,868       92,873
                                        ---------    ---------   ---------    ---------   ---------    ---------
     Total amortized cost ...........     364,533      362,778     297,386      290,614     391,234      382,721
   Valuation allowance ..............      (1,755)        --        (6,772)        --        (8,513)        --
                                        ---------    ---------   ---------    ---------   ---------    ---------
     Total investments held for sale      362,778      362,778     290,614      290,614     382,721      382,721
                                        ---------    ---------   ---------    ---------   ---------    ---------
Investments held to maturity:
   Short-term mutual funds ..........           5            5         144          144       6,009        6,009
   Interest-earning deposits in other
     institutions ...................      11,900       11,900       8,500        8,500         325          325
   FHLB stock .......................       7,460        7,460       7,460        7,460       7,526        7,526
   U.S. Government and
     agency obligations .............       7,930        8,020       8,855        9,028       8,855        9,103
   Municipal and other agency               
     obligations ....................       2,344        2,474       2,422        2,527       2,500        2,571
                                        ---------    ---------   ---------    ---------   ---------    ---------
     Total investments held to
        maturity ....................      29,639       29,859      27,381       27,659      25,215       25,534
                                        ---------    ---------   ---------    ---------   ---------    ---------
Total investments ...................   $ 392,417    $ 392,637   $ 317,995    $ 318,273   $ 407,936    $ 408,255
                                        =========    =========   =========    =========   =========    =========

</TABLE>


                                       21


<PAGE>



     The table below sets forth certain information regarding the scheduled
maturities, carrying value, amortized cost, market values and weighted average
yields for the Bank's investment portfolio at March 31, 1998.

<TABLE>
<CAPTION>

                                                                                AT MARCH 31, 1998
                                               -------------------------------------------------------------------------------------
                                                                        MORE THAN ONE        MORE THAN FIVE
                                                ONE YEAR OR LESS     YEAR TO FIVE YEARS    YEARS TO TEN YEARS    MORE THAN TEN YEARS
                                               -------------------  -------------------   -------------------   --------------------
                                                          WEIGHTED             WEIGHTED              WEIGHTED              WEIGHTED 
                                               AMORTIZED   AVERAGE  AMORTIZED   AVERAGE   AMORTIZED   AVERAGE   AMORTIZED   AVERAGE 
                                                 COST      YIELD      COST       YIELD      COST       YIELD      COST       YIELD  
                                               ---------  --------  ---------  --------   ---------  --------   ---------  --------
                                                                                               (DOLLARS IN THOUSANDS)
<S>                                             <C>         <C>      <C>          <C>     <C>          <C>      <C>          <C>  
Investments available for sale:                                                                                 
    Mortgage-backed securities...............   $20,879     5.73%    $40,499      5.61    $ 7,316      5.32%     $207,346    5.77%
    Other investment securities..............     3,016     1.90       1,000      9.75         --        --        14,512    7.39 
    U.S. Government and                                                                                         
      agency obligations.....................    49,992     4.78       2,007      6.39     14,974      5.79         2,992    7.04 
                                                -------              -------               ------                --------         
      Total..................................    73,887     4.93      43,506      5.74     22,290      5.64       224,850    5.89 
                                                -------              -------               ------                --------     
    Valuation allowance......................                                                                                     
                                                                                                                                  
      Total investments available for sale...                                                                                     
                                                                                                                                  
Investments held to maturity:                                                                                   
    Short-term mutual funds..................         5     5.26          --        --        --        --             --     --  
    Interest-earning deposits                                                                                   
      in other institutions..................    11,900     6.13          --        --        --        --             --     --  
    FHLB stock...............................        --       --          --        --        --        --          7,460    7.40 
    U.S. Government, municipal and other                                                                        
      agency obligations.....................     8,030     6.73          --        --        981     5.48          1,263    7.03 
                                                -------               ------               ------                --------         
      Total investments held to maturity.....   $19,935     6.37      $   --        --     $  981     5.48       $  8,723    7.35 
                                                =======               ======               ======                ========
                                                                                
</TABLE>                                                                        
                                                                                
                                                                                
                                                                                
                                                                                
                                                       AT MARCH 31, 1998        
                                                ------------------------------  
                                                             TOTAL              
                                                ------------------------------  
                                                                       WEIGHTED 
                                                AMORTIZED    MARKET    AVERAGE  
                                                   COST       VALUE     YIELD   
                                                ---------   --------   -------  
                                                    (DOLLARS IN THOUSANDS)      
                                                                                
Investments available for sale:                                                 
    Mortgage-backed securities...............   $276,040   $274,652      5.73%  
    Other investment securities..............     18,528     18,610      6.62   
    U.S. Government and                                                         
      agency obligations.....................     69,965     69,516      5.14   
                                                --------   --------             
      Total..................................    364,533    362,778      5.66   
                                                --------   --------          
    Valuation allowance......................     (1,755)
                                                --------
      Total investments available for sale...   $362,778
                                                ========
Investments held to maturity:                 
    Short-term mutual funds..................          5          5      5.26
    Interest-earning deposits 
      in other institutions..................     11,900     11,900      6.13
    FHLB stock...............................      7,460      7,460      7.40
    U.S. Government, municipal and other 
      agency obligations.....................     10,274     10,494      6.65
                                                --------    -------   
      Total investments held to maturity.....   $ 29,639    $29,859      6.62
                                                ========    =======

                                       22  


<PAGE>


SOURCES OF FUNDS

     General. Deposits are the major source of the Bank's funds for lending and
other investment purposes. In addition to deposits, the Bank derives funds from
the amortization and prepayment of loans and mortgage-backed securities, the
maturity of investment securities, sales of mortgage securities, and operations.
Scheduled loan principal repayments are a relatively stable source of funds,
while deposit inflows and outflows and loan prepayments are influenced
significantly by general interest rates and market conditions. Borrowings may be
used on a short-term basis to compensate for reductions in the availability of
funds from other sources or on a longer term basis for general business
purposes.

     Deposits. Consumer and commercial deposits are attracted principally from
within the Bank's market area through the offering of a broad selection of
deposit instruments including noninterest-bearing demand accounts, NOW accounts,
passbook savings, money market accounts, term certificate accounts and
individual retirement accounts. Deposit account terms vary according to the
minimum balance required, the period of time during which the funds must remain
on deposit, and the interest rate, among other factors.

     The Bank regularly evaluates its internal cost of funds, surveys rates
offered by competing institutions, reviews the Bank's cash flow requirements for
lending and liquidity, and executes rate changes when deemed appropriate.
Furthermore, the Bank plans to introduce new deposit products, such as
commercial deposit accounts, and is considering expansion of its retail branch
network into surrounding communities as a means of increasing its deposit base.
The Bank anticipates establishing or purchasing several new branch offices over
the next few years. Management expects the mix of deposits to shift towards
transaction accounts as the Bank develops new products to obtain commercial
deposit accounts. Management also expects the balance of certificate of deposit
accounts to increase as the Bank introduces new deposit products, as well as
electronic banking. The Bank anticipates that the growth in deposits would be
accomplished through aggressive marketing of its retail branch network in
surrounding communities, competitive pricing of retail products and the ability
to provide loan and deposit products to commercial businesses in its market
area.

     The following table presents the deposit activity of the Bank for the
periods indicated:

                                                     YEAR ENDED MARCH 31,
                                                -------------------------------
                                                  1998        1997       1996
                                                --------   ---------  ---------
                                                        (IN THOUSANDS)
Net decrease before interest
  credited...................................   $(40,574)   $(22,099)  $(19,716)
Interest credited............................     19,980      20,814     20,760
                                                --------    --------   --------
Net (decrease) increase in deposits..........   $(20,594)   $ (1,285)  $  1,044
                                                ========    ========   ========



                                       23


<PAGE>



     At March 31, 1998, the Bank had $37.8 million in certificate accounts in
amounts of $100,000 or more maturing as follows:

                  MATURITY PERIOD                          AMOUNT
                  ---------------                      --------------
                                                       (IN THOUSANDS)

Within 12 months...................................       $20,918
Within 13 to 36 months.............................        15,061
Beyond 36 months...................................         1,822
                                                          -------
Total..............................................       $37,801
                                                          =======
                                                        


     The following table sets forth the distribution of the Bank's deposit
accounts for the periods indicated and the weighted average nominal interest
rates on each category of deposits presented.

<TABLE>
<CAPTION>

                                                             YEARS ENDED MARCH 31,
                             ---------------------------------------------------------------------------------------
                                        1998                         1997                         1996
                             --------------------------- -----------------------------  ----------------------------
                                        PERCENT  WEIGHTED            PERCENT  WEIGHTED             PERCENT  WEIGHTED
                                        OF TOTAL AVERAGE             OF TOTAL AVERAGE             OF TOTAL  AVERAGE
                              BALANCE   DEPOSITS  YIELD    BALANCE   DEPOSITS  YIELD     BALANCE  DEPOSITS   YIELD
                             ---------  ------  -------- ----------  -------- --------  --------- --------  --------
                                                            (DOLLARS IN THOUSANDS)
<S>                          <C>         <C>      <C>     <C>          <C>      <C>    <C>         <C>        <C>
Club accounts..............  $     791    0.19%    -- %   $    643     0.14%     -- %  $    671      0.15%      -- %
Noninterest-bearing
  demand...................     14,640    3.46     --       11,264     2.54      --       8,332      1.87       --
NOW accounts...............     34,074    8.04    2.44      31,576     7.11     2.44     30,288      6.80     2.44
Passbooks..................    128,711   30.39    2.92     133,817    30.13     2.92    134,940     30.29     2.92
Money market
  deposit accounts.........     13,019    3.07    2.44      15,276     3.44     2.44     14,279      3.21     2.44
Time deposits that mature:
   Within 12 months........    179,680   42.42    5.78     197,755    44.53     6.14    155,224     34.85     3.88
   Within 13 to 36 months..     45,600   10.77    6.63      50,439    11.36     7.54     90,747     20.37     4.79
   Beyond 36 months........      7,030    1.66    5.84       3,369     0.75     5.57     10,943      2.46     8.72
                             ---------   -----            --------   ------            --------    ------
       Total deposits......   $423,545   100.0%   4.42    $444,139   100.00%    4.77   $445,424    100.00%    3.67
                              ========   =====            ========   ======            ========    ======

</TABLE>

                                                        24


<PAGE>



     The following table presents, by various rate categories, the amount of
certificate accounts outstanding at the dates indicated.

                                                  AT MARCH 31,
                                      --------------------------------------
                                          1998          1997          1996
                                      ----------    -------------  ---------
                                                 (IN THOUSANDS)
Certificate accounts:
0  to 3.99%.........................   $     --       $  1,146     $  8,805
4.00 to 5.99%.......................    200,415        170,218      164,385
6.00 to 7.99%.......................      6,266         14,425       20,310
Over 8.00%..........................     25,629         65,774       63,414
                                       --------       --------     --------
   Total............................   $232,310       $251,563     $256,914
                                       ========       ========     ========


     Borrowings. Savings deposits are the primary source of funds of the Bank's
lending and investment activities and for its general business purposes. If the
need arises, however, the Bank may rely upon advances from the FHLB and the
Federal Reserve Bank discount window to supplement its supply of lendable funds
and to meet deposit withdrawal requirements. Advances from the FHLB typically
are collateralized by the Bank's stock in the FHLB and a portion of the Bank's
first mortgage loans. At March 31, 1998, the Bank had $115.0 million in FHLB
advances and reverse repurchase agreements outstanding.

     The FHLB functions as a central reserve bank providing credit for the Bank
and other member savings institutions and financial institutions. As a member,
the Bank is required to own capital stock in the FHLB and is authorized to apply
for advances on the security of such stock and certain of its home mortgages and
other assets (principally, securities that are obligations of, or guaranteed by,
the United States) provided certain standards related to creditworthiness have
been met. Advances are made pursuant to several different programs. Each credit
program has its own interest rate and range of maturities. Depending on the
program, limitations on the amount of advances are based either on a fixed
percentage of a member institution's net worth or on the FHLB's assessment of
the institution's creditworthiness. At March 31, 1998, the Bank had entered into
repurchase agreements with the FHLB and Morgan Stanley. These agreements, which
totaled $30.0 million, are scheduled to mature in November 1998 and December
2002.

                                       25


<PAGE>



     The following table sets forth certain information regarding the Bank's
borrowed funds, which include FHLB advances and lines of credit and repurchase
agreements, at or for the periods ended on the dates indicated:

                                                     YEAR ENDED MARCH 31,
                                            ------------------------------------
                                              1998         1997         1996
                                            --------      --------    ----------
                                                   (DOLLARS IN THOUSANDS)

FHLB advances and lines of credit:
   Maximum month-end balance...........     $85,000       $59,600      $99,000
   Balance at end of period............      85,000        45,000       59,600
   Average balance.....................      57,692        52,785       30,401
Weighted average interest rate on:
   Balance at end of period............        5.48%         5.56%        5.55%
   Average balance for period(1).......        5.48%         5.48%        6.73%
Repurchase agreements:
   Maximum month-end balance...........     $33,950       $90,959      $90,919
   Balance at end of period............      30,000        30,000       90,919
   Average balance.....................      29,454        65,060       28,792
Weighted average interest rate on:
   Balance at end of period............        5.81%         5.62%        5.39%
   Average balance for period..........        5.73%         5.69%        4.36%

---------

(1)  Computed on the basis of month-end balances.

SUBSIDIARY ACTIVITIES

     As of March 31, 1998, the Company had two active subsidiaries, First
Savings and Bayonne Service Corporation ("BSC"). BSC is currently engaged in the
sale of non-deposit investment products primarily to the Bank's customers and
members of the local community. As of March 31, 1998, BSC had $151,500 in
assets, and for the year ended March 31, 1998, had $203,800 of income
attributable to the sale of such annuity products.

PERSONNEL

     As of March 31, 1998, the Bank had 71 full-time employees and 55 part-time
employees. The employees are not represented by a collective bargaining unit and
the Bank considers its relationship with its employees to be good.

                                       26

<PAGE>



                           REGULATION AND SUPERVISION

GENERAL

     The Bank is subject to extensive regulation, examination and supervision by
the Department, as its chartering agency, the OTS, as its federal banking
regulator, and the FDIC, as the deposit insurer. The Bank is a member of the
FHLB System. The Bank's deposit accounts are insured up to applicable limits by
the SAIF, managed by the FDIC. The Bank must file reports with the Commissioner
of the Department (the "Commissioner"), the OTS and the FDIC concerning its
activities and financial condition in addition to obtaining regulatory approvals
prior to entering into certain transactions, such as mergers with, or
acquisitions of, other financial institutions. There are periodic examinations
by the Department, the OTS and the FDIC to test the Bank's compliance with
various regulatory requirements. This regulation and supervision establishes a
comprehensive framework of activities in which an institution can engage and is
intended primarily for the protection of the insurance fund and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such policies, whether by the Department, the OTS, the FDIC or
Congress, could have a material adverse impact on the Company, the Bank and
their operations. The Company, as a savings and loan holding company, will also
be required to file certain reports with and otherwise comply with the rules
and regulations of the OTS and the Securities and Exchange Commission (the
"SEC") under the federal securities laws.

     Any change in the regulatory structure or the applicable statutes or
regulations, whether by the Department, the OTS, the FDIC or Congress, could
have a material impact on the Company, the Bank or their operations. Congress
has recently considered various proposals to eliminate the federal thrift
charter and abolish the OTS. The outcome of such legislation is uncertain.
Therefore, the Bank is unable to determine the extent to which legislation, if
enacted, would affect its business.

     Certain of the regulatory requirements applicable to the Bank and to the
Company are referred to below or elsewhere herein. The descriptions of statutory
provisions and regulations applicable to savings associations set forth in this
Form 10-K do not purport to be complete descriptions of such statutes and
regulations and their effects on the Bank and the Company and is qualified in
its entirety by reference to such statutes and regulations.

FEDERAL REGULATION OF SAVINGS INSTITUTIONS

     Business Activities. The activities of savings institutions are governed by
the Home Owners' Loan Act, (the "HOLA"), as amended and, in certain respects,
the Federal Deposit Insurance Act ("FDI Act") and the regulations issued by the
OTS and FDIC to implement these statutes. These laws and regulations delineate
the nature and extent of the activities in which savings associations may
engage.

     Loans-to-One Borrower. Under the HOLA, savings institutions are generally
subject to the limits on loans-to-one borrower applicable to national banks.
Generally, this limit is 15% of the Bank's unimpaired capital and surplus, plus
an additional 10% of unimpaired capital and surplus, if such loan is secured by
readily-marketable collateral, which is defined to include certain financial
instruments and bullion. At March 31, 1998, the Bank's general limit on
loans-to-one borrower was $10.0 million. At March 31, 1998, the Bank's largest
aggregate amount of loans-to-one borrower consisted of $7.0 million.

                                       27


<PAGE>



     QTL Test. The HOLA requires savings institutions to meet a Qualified Thrift
Lending ("QTL") test. Under the QTL test, a savings association either must
qualify as a "domestic building and loan association" as defined in the Internal
Revenue Code, or maintain at least 65% of its "portfolio assets" (total assets
less: (i) specified liquid assets up to 20% of total assets; (ii) intangibles,
including goodwill; and (iii) the value of property used to conduct business) in
certain "qualified thrift investments" (primarily residential mortgages and
related investments, including certain mortgage-backed and related securities)
in at least nine months out of each 12 month period. A savings association that
fails the QTL test must either convert to a bank charter or operate under
certain restrictions. As of March 31, 1998, the Bank maintained 85.22% of its
portfolio assets in qualified thrift investments and, therefore, met the QTL
test. Recent legislation has expanded the extent to which education loans,
credit card loans and small business loans may be considered as "qualified
thrift investments."

     Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by a savings institution, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to shareholders
of another institution in a cash-out merger and other distributions charged
against capital. The rule establishes three tiers of institutions, which are
based primarily on an institution's capital level. An institution that exceeds
all fully phased-in regulatory capital requirements before and after a proposed
capital distribution ("Tier 1 Bank") and has not been advised by the OTS that it
is in need of more than normal supervision, could, after prior notice to, but
without the approval of the OTS, make capital distributions during a calendar
year equal to the greater of: (i) 100% of its net earnings to date during the
calendar year plus the amount that would reduce by one-half its "surplus capital
ratio" (the excess capital over its fully phased-in capital requirements) at the
beginning of the calendar year; or (ii) 75% of its net income for the previous
four quarters. Any additional capital distributions would require prior OTS
approval. In the event the Bank's capital fell below its capital requirements or
the OTS notified it that it was in need of more than normal supervision, the
Bank's ability to make capital distributions could be restricted. In addition,
the OTS could prohibit a proposed capital distribution by any institution, which
would otherwise be permitted by the regulation, if the OTS determines that such
distribution would constitute an unsafe or unsound practice.

     Liquidity. The Bank is required to maintain an average daily balance of
specified liquid assets equal to a monthly average of not less than a specified
percentage (currently 4%) of its net withdrawable deposit accounts plus
short-term borrowings. The Bank's average liquidity ratio for the year ended
March 31, 1998 was 40.65%, which exceeded the applicable requirements. The Bank
has never been subject to monetary penalties for failure to meet its liquidity
requirements.

     Assessments. Savings institutions are required by regulation to pay
assessments to the OTS and the New Jersey Department of Banking to fund the
various agencies' operations. The assessments paid by the Bank to these agencies
for the year ended March 31, 1998 totaled $162,017.

     Transactions with Related Parties. The Bank's authority to engage in
transactions with related parties or "affiliates" (i.e., any company that
controls or is under common control with an institution, including the Company
and any non-savings institution subsidiaries that the Company may establish) is
limited by Sections 23(a) and 23(b) of the Federal Reserve Act ("FRA"). Section
23(a) restricts the aggregate amount of covered transactions with any individual
affiliate to 10% of the capital and surplus of the savings institution and also
limits the aggregate amount of transactions with all affiliates to 20% of the
savings institution's capital and surplus. Certain transactions with affiliates
are required to be secured by collateral in an amount and of a type described in
Section 23(a) and the purchase of low quality assets from affiliates

                                       28


<PAGE>



is generally prohibited. Section 23B generally requires that certain
transactions with affiliates, including loans and asset purchases, must be on
terms and under circumstances, including credit standards, that are
substantially the same or at least as favorable to the institution as those
prevailing at the time for comparable transactions with non-affiliated
companies. In addition, savings institutions are prohibited from lending to any
affiliate that is engaged in activities that are not permissible for bank
holding companies and no savings institution may purchase the securities of any
affiliate other than a subsidiary.

     The Bank's authority to extend credit to executive officers, directors and
10% shareholders ("insiders"), as well as entities such persons control, is
governed by Sections 22(g) and 22(h) of the FRA and Regulation O thereunder.
Among other things, such loans are required to be made on terms substantially
the same as those offered to unaffiliated individuals and involve no more than
the normal risk of repayment. Recent legislation created an exception for loans
made pursuant to a benefit or compensation program that is widely available to
all employees of the institution and does not give preference to insiders over
other employees. Regulation O also places individual and aggregate limits on the
amount of loans the Bank may make to insiders based, in part, on the Bank's
capital position and requires certain board approval procedures to be followed.

     Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring action
against the institution and all "institution-affiliated parties," including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers or directors,
receivership, conservatorship or termination of deposit insurance. Civil
penalties cover a wide range of violations and can amount to $25,000 per day or
$1 million per day in especially egregious cases. Under the FDI Act, the FDIC
has the authority to recommend to the Director of the OTS that enforcement
action be taken with respect to a particular savings institution. If action is
not taken by the Director, the FDIC has authority to take such action under
certain circumstances. Federal and state law also establish criminal penalties
for certain violations.

     Standards for Safety and Soundness. The FDI Act requires each federal
banking agency to prescribe for all insured depository institutions standards
relating to, among other things, internal controls, information systems and
audit systems, loan documentation, credit underwriting, interest rate risk
exposure, asset growth, and compensation, fees and benefits and such other
operational and managerial standards as the agency deems appropriate. The
federal banking agencies have adopted final regulations and Interagency
Guidelines Establishing Standards for Safety and Soundness ("Guidelines") to
implement these safety and soundness standards. The Guidelines set forth the
safety and soundness standards that the federal banking agencies use to identify
and address problems at insured depository institutions before capital becomes
impaired. The Guidelines address internal controls and information systems;
internal audit system; credit underwriting; loan documentation; interest rate
risk exposure; asset growth; asset quality; earnings; and compensation, fees and
benefits. If the appropriate federal banking agency determines that an
institution fails to meet any standard prescribed by the Guidelines, the agency
may require the institution to submit to the agency an acceptable plan to
achieve compliance with the standard, as required by the FDI Act. The final
regulations establish deadlines for the submission and review of such safety and
soundness compliance plans.

     Restrictions on Investment Authority of State-Chartered Institutions.
Federal law prohibits a state-chartered savings institution from engaging as
principal on or after January 1, 1990 in any activity of a type that is not
permissible for federal savings associations unless the FDIC determines that the
activity poses no

                                       29


<PAGE>



significant risk to the SAIF and the institution is and continues to be in
compliance with its fully phased-in capital requirements. A state-chartered
savings institution may engage in those activities permissible for federal
associations in an amount in excess of that permitted for federal associations
if so authorized under applicable state law, provided that the FDIC has not
determined that doing so poses any significant risk to the SAIF and the
institution is and continues to be in compliance with its fully phased-in
capital requirements. The investment and lending authority for federal
associations is prescribed by the HOLA and implementing regulations. Those laws
and regulations prohibit a federal association from investing in real estate
(other than that used by an association for offices and related facilities) and
equity securities in companies that are not subsidiaries and limit to a
specified percentage of assets or capital an association's investment in service
corporations, consumer loans, tangible personal property, commercial loans,
corporate debt securities and nonresidential real estate loans.

     Also, effective August 9, 1990, a state-chartered savings institution is
prohibited, with a limited exception for service corporations, from directly
acquiring or retaining any equity investment of a type or in an amount that
would not be permissible for a federal association.

     Capital Requirements. The OTS capital regulations require savings
institutions to meet three capital standards: a 1.5% tangible capital standard,
a 3% leverage (core capital) ratio and an 8% risk based capital standard. Core
capital is defined as common stockholders' equity (including retained earnings),
certain non-cumulative perpetual preferred stock and related surplus, minority
interests in equity accounts of consolidated subsidiaries less intangibles other
than certain mortgage servicing rights ("MSRs") and credit card relationships.
The OTS regulations require that, in meeting the leverage ratio, tangible and
risk-based capital standards, institutions generally must deduct investments in
and loans to subsidiaries engaged as principal in activities not permissible for
a national bank. In addition, the OTS prompt corrective action regulation
provides that a savings institution that has a leverage capital ratio of less
than 4% (3% for institutions receiving the highest CAMEL examination rating)
will be deemed to be "undercapitalized" and may be subject to certain
restrictions. See "Prompt Corrective Regulatory Action."

     The risk-based capital standard for savings institutions requires the
maintenance of Tier 1 (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance-sheet assets, are multiplied by a risk-weight
factor of 0% to 100%, as assigned by the OTS capital regulation based on the
risks OTS believes are inherent in the type of asset. The components of Tier 1
(core) capital are equivalent to those discussed earlier under the 3% leverage
standard. The components of supplementary capital currently include cumulative
preferred stock, long-term perpetual preferred stock, mandatory convertible
securities, subordinated debt and intermediate preferred stock and, within
specified limits, the allowance for loan and lease losses. Overall, the amount
of supplementary capital included as part of total capital cannot exceed 100% of
core capital.

     The OTS has incorporated an interest rate risk component into its
regulatory capital rule. Under the rule, savings associations with "above
normal" interest rate risk exposure would be subject to a deduction from total
capital for purposes of calculating their risk-based capital requirements. A
savings association's interest rate risk is measured by the decline in the net
portfolio value of its assets (i.e., the difference between incoming and
outgoing discounted cash flows from assets, liabilities and off-balance-sheet
contracts) that would result from a hypothetical 200-basis point increase or
decrease in market interest rates divided by the estimated economic value of the
association's assets, as calculated in accordance with guidelines set forth by
the OTS. A savings association whose measured interest rate risk exposure
exceeds 2% must deduct an

                                       30


<PAGE>



interest rate component in calculating its total capital under the risk-based
capital rule. The interest rate risk component is an amount equal to one-half of
the difference between the institution's measured interest rate risk and 2%,
multiplied by the estimated economic value of the association's assets. That
dollar amount is deducted from an association's total capital in calculating
compliance with its risk-based capital requirement. A savings association with
assets of less than $300 million and risk-based capital ratios in excess of 12%
is not subject to the interest rate risk component, unless the OTS determines
otherwise. The rule also provides that the Director of the OTS may waive or
defer an association's interest rate risk component on a case-by-case basis. The
OTS has postponed indefinitely the date that the component will be deducted from
an institution's total capital.

     At March 31, 1998, the Bank met each of its capital requirements.

     The following table presents First Savings' capital position at March 31,
1998.

                                                                 CAPITAL
                                               EXCESS     ---------------------
                        ACTUAL   REQUIRED    (DEFICIENCY)  ACTUAL     REQUIRED
                        CAPITAL   CAPITAL       AMOUNT     PERCENT     PERCENT
                       --------  --------- -------------- ---------  ----------
                                         (DOLLARS IN THOUSANDS)

Tangible..............  $76,563    $ 9,562    $67,001      12.01%       1.50%
Core (Leverage).......  $76,563    $25,500    $51,063      12.01%       4.00%
Risk-based............  $79,501    $18,790    $60,620      33.85%       8.00%


     Thrift Rechartering Legislation. The Funds Act provides that the BIF and
SAIF will merge on January 1, 1999 if there are no more savings associations as
of that date. Various proposals to eliminate the federal thrift charter, create
a uniform financial institutions charter and abolish the OTS have been
introduced in Congress. Under some proposals, state chartered thrifts would
become subject to the same federal regulation as applies to state commercial
banks. Holding companies for savings institutions would become subject to the
same regulation as holding companies that control commercial banks, with some
limited grandfathering, including savings and loan holding company activities.
The grandfathering would be lost under certain circumstances such as a change in
control of the Company. A bill recently passed by the House of Representatives
would restrict the activities of unitary savings and loan holding companies to
those permitted for other depository institution holding companies, but
grandfather certain existing unitary savings and loan holding companies, such as
the Company, and permit such grandfathering to be passed on to certain
acquirers. The Bank is unable to predict whether such legislation would be
enacted or the extent to which the legislation would restrict or disrupt its
operations.

PROMPT CORRECTIVE REGULATORY ACTION

     Under the OTS prompt corrective action regulations, the OTS is required to
take certain supervisory actions against undercapitalized institutions, the
severity of which depends upon the institution's degree of undercapitalization.
Generally, a savings institution is considered "well capitalized" if its ratio
of total capital to risk-weighted assets is at least 10%, its ratio of Tier 1
(core) capital to risk-weighted assets is at least 6%, its ratio of core capital
to total assets is at least 5%, and it is not subject to any order or directive

                                       31


<PAGE>



by the OTS to meet a specific capital level. A savings institution generally is
considered "adequately capitalized" if its ratio of total capital to
risk-weighted assets is at least 8%, its ratio of Tier 1 (core) capital to
risk-weighted assets is at least 4%, and its ratio of core capital to total
assets is at least 4% (3% if the institution receives the highest CAMELS
rating). A savings institution that has a ratio of total capital to
risk-weighted assets of less than 8%, a ratio of Tier 1 (core) capital to
risk-weighted assets of less than 4% or a ratio of core capital to total assets
of less than 4% (3% or less for institutions with the highest examination
rating) is considered to be "undercapitalized." A savings institution that has a
total risk-based capital ratio of less than 6%, a Tier 1 capital ratio of less
than 3% or a leverage ratio that is less than 3% is considered to be
"significantly undercapitalized," and a savings institution that has a tangible
capital to assets ratio equal to or less than 2% is deemed to be "critically
undercapitalized." Subject to a narrow exception, the banking regulator is
required to appoint a receiver or conservator for an institution that is
"critically undercapitalized." The regulation also provides that a capital
restoration plan must be filed with the OTS within 45 days of the date a savings
institution receives notice that it is "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." Compliance with the plan
must be guaranteed by any parent holding company. In addition, numerous
mandatory supervisory actions become immediately applicable to an
undercapitalized institution, including, but not limited to, increased
monitoring by regulators and restrictions on growth, capital distributions and
expansion. The OTS could also take any one of a number of discretionary
supervisory actions, including the issuance of a capital directive and the
replacement of senior executive officers and directors.

INSURANCE OF DEPOSIT ACCOUNTS

     Deposits of the Bank are presently insured by the SAIF. On September 30,
1996, the President signed into law the Deposit Insurance Funds Act of 1996 (the
"Funds Act") which, among other things, imposed a special one-time assessment on
SAIF member institutions, including the Bank, to recapitalize the SAIF. The SAIF
was undercapitalized due primarily to a statutory requirement that SAIF members
make payments on bonds issued in the late 1980s by the Financing Corporation
("FICO") to recapitalize the predecessor to the SAIF. As required by the Funds
Act, the FDIC imposed a special assessment of 65.7 basis points on SAIF
assessable deposits held as of March 31, 1995, payable November 27, 1996 (the
"SAIF Special Assessment"). The SAIF Special Assessment was recognized by the
Bank as an expense in the quarter ended September 30, 1996 and was generally tax
deductible. The SAIF Special Assessment recorded by the Bank amounted to $2.9
million on a pre-tax basis and $1.8 million on an after-tax basis.

     The Funds Act also spreads the obligations for payment of the FICO bonds
across all SAIF and Bank Insurance Fund ("BIF") members. The BIF is the fund
which primarily insures commercial bank deposits. Beginning on January 1, 1997,
BIF deposits were assessed for a FICO payment of approximately 1.3 basis points,
while SAIF deposits pay approximately 6.4 basis points. Full pro rata sharing of
the FICO payments between BIF and SAIF members will occur on the earlier of
January 1, 2000 or the date the BIF and SAIF are merged. The Funds Act specifies
that the BIF and SAIF will be merged on January 1, 1999, provided no savings
associations remain as of that time.

     As a result of the Funds Act, the FDIC voted to effectively lower SAIF
assessments to 0 to 27 basis points as of January 1, 1997, a range comparable to
that of BIF members, and that assessment range has remained in effect since that
time. SAIF members will also continue to make the FICO payments described above.
The FDIC reviews its assessment schedule semiannually and management cannot
predict the level of FDIC insurance assessments on an ongoing basis or whether
the BIF and SAIF will eventually be merged.

                                       32


<PAGE>



     The Bank's assessment rate for fiscal 1998 ranged from .15% to .1575% basis
points and the premium paid for this period was $407,400. A significant increase
in SAIF insurance premiums would likely have an adverse effect on the operating
expenses and results of operations of the Bank.

     Under the FDI Act, insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC, the
Department, or the OTS. The management of the Bank does not know of any
practice, condition or violation that might lead to termination of deposit
insurance.

FEDERAL HOME LOAN BANK (FHLB) SYSTEM

     The Bank is a member of the FHLB System, which consists of 12 regional
FHLBs. The FHLB provides a central credit facility primarily for member
institutions. The Bank, as a member of the FHLB, is required to acquire and hold
shares of capital stock in the FHLB in an amount at least equal to 1% of the
aggregate principal amount of its unpaid residential mortgage loans and similar
obligations at the beginning of each year, or 1/20 of its advances (borrowings)
from the FHLB, whichever is greater. The Bank was in compliance with this
requirement, with an investment in FHLB stock at March 31, 1998 of $7.46
million. FHLB advances must be secured by specified types of collateral, and all
long-term advances may only be obtained for the purpose of providing funds for
residential housing finance. At March 31, 1998, the Bank had $115.0 million in
FHLB advances and repurchase agreements.

     The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest on
advances to their members. For the years ended March 31, 1998, 1997 and 1996,
dividends from the FHLB to the Bank amounted to approximately $511,900, $477,900
and $186,000, respectively.

FEDERAL RESERVE SYSTEM

     The Federal Reserve Board regulations require savings institutions to
maintain noninterest-earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The Federal Reserve Board
regulations generally required for most of 1997 that reserves be maintained
against aggregate transaction accounts as follows: for accounts aggregating
$49.3 million or less (subject to adjustment by the Federal Reserve Board), the
reserve requirement was 3%; and for accounts greater than $49.3 million, the
reserve requirement was $1.48 million (subject to adjustment by the Federal
Reserve Board between 8% and 14%) against that portion of total transaction
accounts in excess of $49.3 million. The first $4.4 million of otherwise
reservable balances (subject to adjustment by the Federal Reserve Board), were
exempted from the reserve requirements. The Bank maintained compliance with the
foregoing requirements. For 1998, the Federal Reserve Board has decreased from
$49.3 to $47.8 million the amount of transaction accounts subject to the 3%
reserve requirement and increased the amount of exempt reservable balances from
$4.4 million to $4.7 million. The balances maintained to meet the reserve
requirements imposed by the Federal Reserve Board may be used to satisfy
liquidity requirements imposed by the OTS. FHLB System members are also
authorized to borrow from the Federal Reserve "discount window," but Federal
Reserve Board regulations require institutions to exhaust all FHLB sources
before borrowing from a Federal Reserve Bank.

                                       33


<PAGE>



NEW JERSEY LAW

     The Commissioner regulates, among other things, the Bank's internal
business procedures as well as its deposit, lending and investment activities.
The Commissioner must approve changes to the Bank's Certificate of
Incorporation, establishment or relocation of branch offices, mergers and the
issuance of additional stock. In addition, the Commissioner conducts periodic
examinations of the Bank. Certain of the areas regulated by the Commissioner are
not subject to similar regulation by the FDIC.

     Recent federal and state legislative developments have reduced distinctions
between commercial banks and SAIF-insured savings institutions in New Jersey
with respect to lending and investment authority, as well as interest rate
limitations. As federal law has expanded the authority of federally chartered
savings institutions to engage in activities previously reserved for commercial
banks, New Jersey legislation and regulations ("parity legislation") have given
New Jersey chartered savings institutions, such as the Bank, the powers of
federally chartered savings institutions.

     New Jersey law provides that, upon satisfaction of certain triggering
conditions, as determined by the Commissioner, insured institutions or savings
and loan holding companies located in a state that has reciprocal legislation in
effect on substantially the same terms and conditions as stated under New Jersey
law may acquire, or be acquired by, New Jersey insured institutions or holding
companies on either a regional or national basis. New Jersey law explicitly
prohibits interstate branching.

HOLDING COMPANY REGULATION

     The Company is a non-diversified unitary savings and loan holding company
within the meaning of the HOLA. As such, the Company is subject to OTS
regulations, examinations, supervision and reporting requirements. In addition,
the OTS has enforcement authority over the Company and its non-savings
institution subsidiaries. Among other things, this authority permits the OTS to
restrict or prohibit activities that are determined to be a serious risk to the
subsidiary savings institution. The Bank must notify the OTS 30 days before
declaring any dividend to the Company.

     As a unitary savings and loan holding company, the Company generally is not
restricted under existing laws as to the types of business activities in which
it may engage, provided that the Bank continues to be a QTL. See "Federal
Regulation of Savings Institutions - QTL Test" for a discussion of the QTL
requirements. Upon any non-supervisory acquisition by the Company of another
savings association, the Company would become a multiple savings and loan
holding company (if the acquired institution is held as a separate subsidiary)
and would be subject to extensive limitations on the types of business
activities in which it could engage. The HOLA limits the activities of a
multiple savings and loan holding company and its non-insured institution
subsidiaries primarily to activities permissible for bank holding companies
under Section 4(c)(8) of the Bank Holding Company ("BHC") Act, subject to the
prior approval of the OTS, and to other activities authorized by OTS regulation.
Recently proposed legislation would treat all savings and loan holding companies
as bank holding companies and limit the activities of such companies to those
permissible for bank holding companies.

     The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5% of
the voting stock of another savings institution, or holding company thereof,
without prior written approval of the OTS. The HOLA also prohibits a savings and
loan holding company from acquiring more than 5% of a company engaged in
activities other than those

                                       34


<PAGE>



authorized for savings and loan holding companies under the HOLA or acquiring or
retaining control of a depository institution that is not insured by the FDIC.
In evaluating applications by holding companies to acquire savings institutions,
the OTS must consider the financial and managerial resources and future
prospects of the company and institution involved, the effect of the acquisition
on the risk to the insurance funds, the convenience and needs of the community,
and competitive factors.

     The OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, except: (i) the approval of interstate supervisory
acquisitions by savings and loan holding companies, and (ii) the acquisition of
a savings institution in another state if the laws of the state of the target
savings institution specifically permit such acquisitions. The states vary in
the extent to which they permit interstate savings and loan holding company
acquisitions.

                           FEDERAL AND STATE TAXATION

FEDERAL TAXATION

     General. The Bank and the Company will report their income on a calendar
year basis using the accrual method of accounting and will be subject to federal
income taxation in the same manner as other corporations with some exceptions,
including particularly the Bank's reserve for bad debts discussed below. The
following discussion of tax matters is intended only as a summary and does not
purport to be a comprehensive description of the tax rules applicable to the
Bank or the Company. The Bank was last audited by the IRS in 1991 and has not
been audited by the New Jersey Division of Taxation ("DOT") in the past five
years.

     Bad Debt Reserve. Historically, savings institutions such as the Bank that
met certain definitional tests primarily related to their assets and the nature
of their business ("qualifying thrifts") were permitted to establish a reserve
for bad debts and to make annual additions thereto, which may have been deducted
in arriving at their taxable income. The Bank's deductions with respect to
"qualifying real property loans," which are generally loans secured by certain
interest in real property, were computed using an amount based on the Bank's
actual loss experience.

     In August 1996, the provisions repealing the current thrift bad debt rules
were passed by Congress as part of "The Small Business Job Protection Act of
1996." The new rules eliminate the 8% of taxable income method for deducting
additions to the tax bad debt reserves for all thrifts for tax years beginning
after December 31, 1995. These rules also require that all thrift institutions
recapture all or a portion of their bad debt reserves added since the base year
(last taxable year beginning before January 1, 1988). The Bank has previously
recorded a deferred tax liability equal to the bad debt recapture and as such,
the new rules will have no effect on net income or federal income tax expense.

     For the tax years beginning after December 31, 1995, the Bank is not
permitted to maintain a tax reserve for bad debts. As of March 31, 1998, the
Bank had an excess amount subject to recapture equal to $2.6 million. The new
rules allowed an institution to suspend the bad debt reserve recapture for the
1996 and 1997 tax years if the institution's lending activity for those years
was equal to or greater than the institution's average mortgage lending activity
for the six taxable years preceding 1996. For this purpose, only home purchase
and home improvement loans were included and the institution could elect to have
the tax years with the highest and lowest lending activity removed from the
average calculation. If an institution

                                       35


<PAGE>



is permitted to postpone the reserve recapture, it must begin its six year
recapture no later than the 1998 tax year. The unrecaptured base year reserves
will not be subject to recapture as long as the institution continues to carry
on the business of banking. In addition, the balance of the pre-1988 bad debt
reserves continues to be subject to provisions of current laws referred to below
that require recapture in the case of certain excess distributions to
shareholders.

     Distributions. To the extent that the Bank makes "non-dividend
distributions" to the Company that are considered as made (i) from the reserve
for losses on qualifying real property loans, to the extent the reserve for such
losses exceeds the amount that would have been allowed under the experience
method, or (ii) from the supplemental reserve for losses on loans ("Excess
Distributions"), then an amount based on the amount distributed will be included
in the Bank's taxable income. Non-dividend distributions include distributions
in excess of the Bank's current and accumulated earnings and profits,
distributions in redemption of stock, and distributions in partial or complete
liquidation. However, dividends paid out of the Bank's current or accumulated
earnings and profits, as calculated for federal income tax purposes, will not be
considered to result in a distribution from the Bank's bad debt reserve. Thus,
any dividends to the Company that would reduce amounts appropriated to the
Bank's bad debt reserve and deducted for federal income tax purposes would
create a tax liability for the Bank. The amount of additional taxable income
created from an Excess Distribution is an amount that, when reduced by the tax
attributable to the income, is equal to the amount of the distribution. The Bank
does not intend to pay dividends that would result in a recapture of any portion
of its bad debt reserve.

     Corporate Alternative Minimum Tax. The Internal Revenue Code of 1986 (the
"Code"), as amended, imposes a tax on alternative minimum taxable income
("AMTI") at a rate of 20%. The excess of the bad debt reserve deduction using
the percentage of taxable income method over the deduction that would have been
allowable under the experience method is treated as a preference item for
purposes of computing the AMTI. Only 90% of AMTI can be offset by net operating
loss carryovers, of which the Bank currently has none. AMTI is increased by an
amount equal to 75% of the amount by which the Bank's adjusted current earnings
exceed its AMTI (determined without regard to this preference and prior to
reduction for net operating losses). In addition, for taxable years beginning
after December 31, 1986 and before January 1, 1996, an environmental tax of
0.12% of the excess of AMTI (with certain modifications) over $2.0 million was
imposed on corporations, including the Bank, whether or not an Alternative
Minimum Tax ("AMT") was paid. The Bank does not expect to be subject to the AMT.

     Dividends Received Deduction and Other Matters. The Company may exclude
from its income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. The corporate dividends received deduction is
generally 70% in the case of dividends received from unaffiliated corporations,
except that if the Company or the Bank own more than 20% of the stock of a
corporation distributing a dividend, then 80% of any dividends received may be
deducted.

STATE AND LOCAL TAXATION

     State of New Jersey. The Bank files New Jersey income tax returns. For New
Jersey income tax purposes, savings institutions are presently taxed at a rate
equal to 3% of taxable income. For this purpose, "taxable income" generally
means federal taxable income, subject to certain adjustments (including the
addition of net interest income on state and municipal obligations). The Bank is
not currently under audit with respect to its New Jersey income tax returns.

                                       36


<PAGE>



     The Company is required to file a New Jersey income tax return because it
does business in New Jersey. For New Jersey tax purposes, the Company is
presently taxed at a rate equal to 9% of taxable income. For this purpose,
"taxable income" generally means federal taxable income subject to certain
adjustments (including addition of interest income on state and municipal
obligations). However, if the Company meets certain requirements, it may be
eligible to elect to be taxed as a New Jersey Investment Company at a tax rate
presently equal to 2.25% (25% of 9%) of taxable income.

     Delaware Taxation. As a Delaware holding company not earning income in
Delaware, the Company is exempt from Delaware corporate income tax, but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware.

ADDITIONAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT

     The following table sets forth certain information regarding the executive
officers of the Company and the Bank who are not directors or named executive
officers.

                                    AGE AT     
       NAME                     MARCH 31, 1998             POSITION
--------------------------  ------------------- ------------------------------
Eugene V. Malinowski, CPA             58          Chief Financial Officer and
                                                        Vice President

James E. Collins                      49          Vice President of the Bank

Donald Mindiak                        39            Controller of the Bank

Thomas M. Coughlin, CPA               38           Corporate Secretary and
                                                 Treasurer of the Company and
                                                        the Bank
















                                       37


<PAGE>



ITEM 2. PROPERTIES

     The Bank conducts its business through its main office and three full
service branch offices, all located in Bayonne, New Jersey. The following table
sets forth certain information concerning the main office and each branch office
of the Bank at March 31, 1998. The aggregate net book value of the Bank's
premises and equipment was $5.4 million at March 31, 1998. The Bank owns all of
its properties.

                                                           NET BOOK VALUE
                                                           OF PROPERTY OR
                                                              LEASEHOLD
                                        YEAR               IMPROVEMENTS AT
        LOCATION                      ACQUIRED             MARCH 31, 1998
-----------------------------    -------------------     ------------------
EXECUTIVE/MAIN OFFICE:

568 Broadway                            1945                 $  584,600
Bayonne, New Jersey  07002

BRANCH OFFICES:

171 Broadway
Bayonne, New Jersey  07002              1987                  1,160,300

441-447 Broadway(1)
Bayonne, New Jersey  07002            1973/1994               1,163,800

949 Broadway                            
Bayonne, New Jersey  07002              1990                  1,265,400  

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

(1)  Includes Financial Center building acquired in 1994 with a net book value
     of $697,300 at March 31, 1998.

     In addition to the properties described above and the Bank's REO, the Bank
owns a 12-lot parcel of undeveloped land in Bayonne. The property was acquired
in 1987 for possible construction of executive offices. As of March 31, 1998,
the property was carried at $611,000.

ITEM 3. LEGAL PROCEEDINGS

     The Bank is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business. Such
routine legal proceedings, in the aggregate, are believed by management to be
immaterial to the Company's financial condition or results of operations.

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

     The Company submitted the Bayonne Bancshares, Inc. 1998 Stock-Based
Incentive Plan (the "Incentive Plan") to shareholders for approval at a special
meeting of shareholders held on March 27, 1998 (the "Special Meeting"). Holders
of 7,174,740 shares were present in person or by proxy at the Special Meeting.
The shareholders approved the Incentive Plan, with 4,851,032 shares voted for
the Incentive Plan, 1,980,327 shares voted against the Incentive Plan, and
343,384 shares voted to abstain from voting on the Incentive Plan.

                                       38


<PAGE>



                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     In January 1995, the Bank reorganized into the mutual holding company
structure by forming Bayonne Bankshares, M.H.C., a federally-chartered mutual
holding company (the "Mutual Holding Company"). In connection with its mutual
holding company reorganization, the Bank issued 1,659,485 shares of its common
stock (the "Bank Common Stock") to the Mutual Holding Company and sold 1,358,015
shares of Bank Common Stock to the public at a price of $10.00 per share. In
August 1997, the Company and the Bank consummated the second-step conversion of
the Bank by selling 4,869,190 shares of the common stock of the Company (the
"Company Common Stock") to the public at a price of $10.00 per share, exchanging
approximately 1,410,735 shares of Bank Common Stock held by public shareholders
for Company Common Stock at a ratio of 2.933 shares of Company Common Stock for
each share of Bank Common Stock, and canceling the shares of Bank Common Stock
held by the Mutual Holding Company.

     The Company Common Stock is traded on the Nasdaq National Market under the
symbol "FSNJ." At March 31, 1998, there were 9,088,581 shares of Company Common
Stock outstanding.

                                       39


<PAGE>



     The following table sets forth the high and low trading prices of the
Company Common Stock since the consummation of the Conversion and Reorganization
in August 1997 and of the Bank Common Stock subsequent to the completion of the
1995 MHC Reorganization, together with the cash dividends declared during the
periods indicated.

                                                            CASH DIVIDENDS
                                  HIGH(1)          LOW(1)   DECLARED(1)(2)
                              ----------------   ---------  ----------------
     FISCAL YEAR ENDED
      MARCH 31, 1998
---------------------------
First Quarter                      $ 9.21          $ 7.93        $.0425
Second Quarter                      13.06            9.20         .0425
Third Quarter                       13.38           11.63         .0425
Fourth Quarter                      14.88           12.06         .0425

     FISCAL YEAR ENDED
      MARCH 31, 1997
---------------------------
First Quarter                      $ 5.20          $ 4.69        $.0425
Second Quarter                       5.46            4.77         .0425
Third Quarter                        7.84            5.20         .0425
Fourth Quarter                       8.35            7.16         .0425

     FISCAL YEAR ENDED
      MARCH 31, 1996
---------------------------
First Quarter                      $ 4.69          $ 3.75        $.0425
Second Quarter                       5.71            4.43         .0425
Third Quarter                        6.65            5.71         .0425
Fourth Quarter                       5.80            4.80         .0425

     FISCAL YEAR ENDED
      MARCH 31, 1995
---------------------------
Fourth Quarter                     $ 3.88          $ 3.41        $.0425

----------

(1)  The price of the Bank Common Stock and the cash dividends declared by the
     Bank have been restated to reflect the 2.933 exchange ratio applied in
     connection with the exchange of Bank Common Stock for Company Common Stock.

(2)  The Mutual Holding Company waived receipt of all dividends declared by the
     Bank. The aggregate amount of all dividends waived by the Mutual Holding
     Company as of August 22, 1997 was $2.1 million.

                                       40


<PAGE>



ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

     Set forth below are selected financial and other data of the Company. This
information is derived in part from and should be read in conjunction with the
Consolidated Financial Statements of the Company and the Notes thereto presented
elsewhere in this Form 10-K. Prior to August 22, 1997, the Company had no
significant assets, liabilities or operations and, accordingly, the data prior
to such time represents the financial condition and results of operations of the
Bank.

<TABLE>
<CAPTION>

                                                                AT MARCH 31,(4)                          AT MAY 31,
                                           ----------------------------------------------------------   ------------
                                               1998           1997           1996            1995           1994
                                           ------------   ------------   ------------    ------------   ------------
SELECTED CONSOLIDATED FINANCIAL                                                 (IN THOUSANDS)
CONDITION DATA:
<S>                                          <C>            <C>            <C>             <C>            <C>
Total assets............................     $646,058       $577,004       $651,945        $512,126       $547,550
Cash and cash equivalents...............       16,617         15,472         11,791           6,111         47,839
Loans receivable, net:
  Real estate...........................      208,723        207,262        198,658         197,240        172,552
  Consumer..............................       26,742         28,362         25,370          21,314         16,428
                                               ------       --------       --------        --------       --------
     Total loans receivable, net(1).....      235,465        235,624        224,028         218,554        188,980
U.S. Government and agency
  obligations, net of valuation
  allowance(2)..........................       77,446         76,489        101,729         148,062        146,806
Mortgage securities, net(3).............      274,652        222,980        289,848         117,205        141,271
Deposits................................      423,545        444,139        445,424         444,380        471,681
Borrowed funds..........................      115,380         75,598        151,334          15,032             --
Stockholders' equity....................       98,649         48,079         49,519          46,625         34,066

</TABLE>

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

(1)  Excludes loans to joint ventures of the Bank's subsidiaries. See "Business
     of the Bank -- Subsidiary Activities."

(2)  At March 31, 1998, 1997, 1996 and 1995, and May 31, 1994, $69.5 million,
     $67.6 million, $92.9 million, $64.3 million and $64.1 million of such
     securities, respectively, net of valuation allowance, were classified as
     available for sale, and $7.9 million, $8.9 million, $8.9 million, $83.7
     million and $82.7 million, respectively, of such securities were classified
     as held to maturity.

(3)  Includes mortgage-backed securities and mutual funds that invest primarily
     in mortgage-backed securities, net of valuation allowance. At March 31,
     1998, 1997, 1996 and 1995, and May 31, 1994, all such securities were
     available for sale.

(4)  At the time of the Bank's reorganization into the mutual holding company
     structure in 1995 (the "1995 MHC Reorganization), the Bank changed its
     fiscal year end from May 31 to March 31.

                                       41


<PAGE>

<TABLE>
<CAPTION>

                                                                                    
                                                                                    
                                                                                           TEN MONTHS    YEAR ENDED
                                                           YEARS ENDED MARCH 31,             ENDED         MAY 31,
                                                     ---------------------------------      MARCH 31,    ---------
                                                      1998          1997         1996        1995(1)        1994
                                                     -------      -------      -------      ---------     -------
                                                                 (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                  <C>          <C>           <C>          <C>          <C>  
SELECTED CONSOLIDATED OPERATING DATA:                
Total interest and dividend income.............      $40,860      $41,126       $37,309      $28,431      $35,616
Total interest expense.........................       24,872       27,469        23,842       15,831       20,795
                                                     -------      -------       -------      -------      -------
  Net interest income..........................       15,988       13,657        13,467       12,600       14,821
Provisions for loan losses.....................          180          320           450          350          500
                                                     -------      -------       -------      -------      -------
  Net interest income after                          
     provision for loan losses.................       15,808       13,337        13,017       12,250       14,321
                                                      ------      -------       -------      -------      -------
Other income (loss):                                 
  Loan fees and service charges................          238          294           307          285          428
  Deposit fees.................................          611          576           327          256          305
  Gain (loss) on sale of securities                  
    available for sale, net(2).................           (5)      (2,878)       (2,217)        (547)         262
  Income from subsidiary.......................          204          168           251           85           18
  Gain (loss) on sale of real estate                 
    acquired in settlement of loans............           (9)         (92)           (7)          --           62
  Other........................................          304          136           126           49          705
                                                     -------      -------       -------      -------      -------
     Total other income (loss).................        1,343       (1,796)       (1,213)         128        1,780
                                                     -------      -------       -------      -------      -------
Operating expenses:                                  
  Compensation and employee benefits...........        5,619        7,184         5,821        4,674        4,735
  Occupancy and equipment......................        1,179        1,201         1,211        1,000        1,045
Data processing service expense................          821          707           683          488          575
  SAIF assessment(3)...........................           --        2,895            --           --           --
  Federal insurance premiums...................          569          974         1,163          990        1,210
  Other........................................        1,982        1,641         1,937        1,799        1,951
                                                     -------      -------       -------      -------      -------
     Total operating expenses..................       10,170       14,602        10,815        8,951        9,516
                                                      ------      -------       -------      -------      -------
Income/(Loss) before income tax expense              
  and cumulative effect of accounting changes          6,981       (3,061)          989        3,427        6,585
Income tax expense.............................        2,602          154           374        1,236        2,247
                                                     -------      -------       -------      -------      -------
Income/(Loss) before cumulative effect          
  of accounting changes........................        4,379       (3,215)          615        2,191        4,338
Cumulative effect of accounting changes:        
  Income taxes.................................           --           --            --           --          400
  Postretirement benefits......................           --           --            --           --       (1,216)
  Investments..................................           --           --            --           --          471
                                                     -------      -------       -------      -------      -------
     Net income/(loss).........................      $ 4,379      $(3,215)     $    615      $ 2,191      $ 3,993
                                                     =======      =======      ========      =======      =======
Basic earnings per share.......................      $  0.49      $ (0.37)     $   0.07       N/A(4)       N/A(4)
                                                     =======      =======      ========
Diluted earnings per share.....................      $  0.49      $ (0.37)     $   0.07       N/A(4)       N/A(4)
                                                     =======      =======      ========
                                                 
                                                                                         (continued on next page)

</TABLE>
                                                        42


<PAGE>

<TABLE>
<CAPTION>

                                                                                           
                                                                         YEARS                    
                                                                         ENDED                    TEN MONTHS        YEAR ENDED
                                                                       MARCH 31,                    ENDED             MAY 31,
                                                            -------------------------------        MARCH 31,        ----------
                                                            1998         1997          1996         1995(1)            1994
                                                            -----        ----          ----       ----------        ----------
<S>                                                          <C>          <C>            <C>         <C>              <C>
SELECTED FINANCIAL RATIOS AND OTHER DATA:
PERFORMANCE RATIOS:
   Equity to assets at period end.....................      15.27%        8.33%        7.60%         9.10%            6.22%
   Net interest rate spread (difference 
     between average yield on interest-earning 
     assets and average cost of
     interest-bearing liabilities)....................       2.18         1.99         2.16          2.92             2.52
   Net interest margin (net interest income as a   
     percentage of average interest-earning assets)...       2.72         2.28         2.48          3.12             2.71
   Return on average assets (net income        
     divided by average total assets).................       0.72        (0.52)        0.11          0.52             0.71
   Return on average equity (net income divided by  
     average equity)..................................       5.82        (6.56)        1.20          7.06            10.22
   Dividend payout ratio(5)...........................      24.64%       N/A(4)       238.0%        N/A(4)           N/A(4)
   Stockholders' equity to average assets ratio 
     (average stockholders' equity divided by 
     average total assets).............................     12.39         7.90         9.08          7.30             6.92
   Total other income to average assets...............       0.22        (0.29)        (.21)         0.03             0.31
   Total operating expenses to average assets(6)......       1.68         1.87         1.91          1.76             1.68
   Net interest income to total operating expense(6)..       1.57x        1.18x        1.25x         1.41x            1.56x
   Net interest income after provision for loan
     losses, to total operating expense(6)............       1.55x        1.15x        1.20x         1.37x            1.51x
   Average interest-earning assets to
     average interest-bearing liabilities.............       1.13x        1.06x        1.07x         1.05x            1.05x
ASSET QUALITY RATIOS:
   Loans 90 days or more past due to net loans........       1.62%        2.38%        2.66%         2.55%            3.64%
   Loans 90 days past due and other                    
     nonperforming assets to total assets.............       0.64         1.08         1.00          1.29             1.53
   Allowance for loan losses to loans 90 days past      
     due and other nonperforming assets...............      71.21        50.66        45.54         40.62            34.74
   Allowance for loan losses as a percent of net     
     loans receivable at end of period................       1.25         1.34         1.33          1.22             1.54
REGULATORY CAPITAL RATIOS:
   Tangible capital(7)................................      12.01%        8.99%        8.48%        10.83%            6.22%
   Core capital(7)....................................      12.01%        8.99%        8.48%        10.83%            6.22%
   Risk-based capital(7)..............................      33.85%       25.31%       26.10%        32.21%           20.61%
NUMBER OF FULL-SERVICE OFFICES........................          4            4            4             4                4

</TABLE>

----------

(1)  At the time of the Bank's 1995 MHC Reorganization, the Bank changed its
     fiscal year end from May 31 to March 31.

(2)  The loss on securities available for sale in 1997 and 1996 resulted from
     the sale of investment securities as part of the Bank's restructuring of
     its investment portfolio.

(3)  Reflects the SAIF Special Assessment of $2.9 million as of September 30,
     1996.

(4)  Not applicable.

(5)  Aggregate dividends per share divided by net income per share.

(6)  Total operating expense does not include income tax expense, the provision
     for loan losses or the SAIF Special Assessment.

(7)  Excludes unrealized losses on available for sale securities. If such
     unrealized losses were included at March 31, 1998, then both tangible and
     core capital would have been 11.82%, and risk-based capital would have been
     33.34%.


                                       43

<PAGE>


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

GENERAL

     On January 9, 1995, the Bank completed a minority stock offering in
connection with its mutual holding company reorganization whereby the Bank
issued 1,358,015 shares of common stock to the public at $10.00 per share for a
total of $13.6 million, which represented a minority ownership of approximately
45% of the Bank based upon an evaluation by an independent appraiser. In
December 1996, the Board of Directors of Bayonne Bankshares, M.H.C. (the "MHC"),
the Mutual Holding Company of the Bank, adopted a plan of conversion to convert
the MHC to stock form and to reorganize the Bank by forming the Company to
become the holding company of the Bank.

     On August 22, 1997, the Company consummated the Conversion and
Reorganization of the Bank and the MHC by selling 4,869,190 shares of common
stock to certain depositors and borrowers of the Bank at a price of $10.00 per
share. In addition, approximately 1,410,735 shares of common stock of the Bank
held by public stockholders were exchanged for common stock of the Company at a
ratio of 2.933 shares of common stock of the Company for each share of the Bank.

     The aggregate amount of capital raised in the offering, before expenses of
the offering and before the internal funding of the ESOP, was $48,691,900. The
aggregate amount of the other expenses and fees incurred in the Conversion and
Reorganization was approximately $2,426,000 and the Company received
approximately $42.6 million in net cash proceeds from the offering.

     The reported net income for the fiscal year ended March 31, 1998 was $4.4
million, or $.49 per diluted share compared to a loss of $3.2 million, or $.37
per diluted share for the year ended March 31, 1997. The improvement in the
earnings reflects management's efforts in repositioning the Bank's balance
sheet, the utilization of $46.5 million of net capital raised by the Company in
August 1997 and the reduction of interest expense resulting from the runoff
during the year of approximately $44.0 million in long-term, high cost
certificates of deposit. Financial results showed improvements in the following
areas:

     o    Net interest income rose by 17%;

     o    The provision for loan losses declined by 44%;

     o    Non-interest income increased $3.1 million from a loss of $1.8 million
          in fiscal 1997 to income of $1.3 million in fiscal 1998, resulting
          from non-recurring losses in the available for sale portfolio in 1997;
          and

     o    Operating expenses, adjusted for the SAIF assessment, the supplemental
          executive retirement plan expense, and other non-recurring items in
          fiscal 1997, declined by approximately 2%.

     In 1998, the Company expects to achieve its growth objectives through
increasing loan volume and diversifying its lending activity, primarily in the
commercial lending area. Management believes that a continuing focus on
initiating and building a quality commercial lending effort will produce
positive results for the Bank.

     The Company's results of operations depend primarily on net interest
income, which is the difference between the interest income earned on the
Company's interest-earning assets, such as loans and investments,

                                       44


<PAGE>



and the interest expense on its interest-bearing liabilities, such as deposits
and borrowings. The Company also generates non-interest income such as income
from secondary marketing activities, loan servicing and other fees. The
Company's operating expenses consist primarily of compensation and employee
benefits, occupancy and equipment expenses, data processing service expenses and
deposit insurance premiums. The Company's results of operations are also
significantly affected by general economic and competitive conditions,
particularly changes in market interest rates, government policies and actions
of regulatory agencies.

COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED MARCH 31, 1998 AND
MARCH 31, 1997

     General. Total assets were $646.1 million at March 31, 1998, an increase of
$69.1 million or 12.00% compared to $577.0 million at March 31, 1997.

     Investment securities available for sale increased by $72.2 million to a
balance of $362.8 million at March 31, 1998, compared to a balance of $290.6
million at March 31, 1997. This increase reflects purchases of mortgage-backed
securities in connection with the deployment of the proceeds of the $46.5
million in equity capital raised in August 1997 in the second-step conversion
and the increase in borrowings during the year.

     Net loans at March 31, 1998 decreased slightly to $235.5 million from
$235.6 million at March 31, 1997, as originations of $36.1 million of
commercial, consumer and residential loans were offset by the acceleration of
mortgage prepayments, primarily in the last quarter of the year, and by
amortization of mortgage loans.

     Total deposits declined to $423.5 million at March 31, 1998 compared to
$444.1 million at March 31, 1997, due primarily to the maturing of approximately
$44.0 million of long-term, high rate certificates of deposit. Reduced interest
expense and replacement of a portion of these funds into lower yielding
certificates of deposit had a positive effect on the Bank's net interest margin
for the year ended March 31, 1998. Long-term borrowings increased to $115.0
million, or 53.3%, at March 31, 1998 compared to $75.0 million at March 31,
1997. These borrowings were used to fund the purchase of mortgage-backed
securities and to fund the runoff during the year of the long-term high cost
certificates of deposit.

     Stockholders' equity totaled $98.6 million at March 31, 1998 compared to
$48.1 million at March 31, 1997, primarily as the result of the $46.5 million
increase in capital from the completion of the Bank's second step conversion in
August 1997 and net income from operations of $4.4 million for the fiscal year
ended March 31, 1998.

     Interest and Dividend Income. Total interest and dividend income decreased
by $266,000 to $40.9 million for the year ended March 31, 1998, from $41.1
million for the year ended March 31, 1997. This decrease was primarily due to
the decrease in average balances of interest-earning assets to $587.4 million
compared to $599.3 million for the year ended March 31, 1997, partially offset
by an increase in the average yield on interest-earning assets to 6.96% for the
year ended March 31, 1998 compared to 6.86% for the year ended March 31, 1997.
The average balance of mortgage-backed securities increased by $44.2 million, or
20.7%, to $257.4 million for the year ended March 31, 1998 from $213.2 million
for the year ended March 31, 1997. The average balance of U.S. government and
agency obligations decreased by $13.7 million to $69.6 million from $83.3
million at March 31, 1997.

                                       45


<PAGE>



     Interest Expense. Total interest expense decreased by $2.6 million, or
9.5%, to $24.9 million for the year ended March 31, 1998 compared to $27.5
million for the year ended March 31, 1997. The decrease related to interest
expense on borrowings which decreased by $1.8 million to $4.9 million for the
year ended March 31, 1998, compared to $6.7 million for the prior fiscal year.
Interest expense on savings deposits also decreased by $834,000, or 4.0%, to
$20.0 million at March 31, 1998 compared to $20.8 million at March 31, 1997,
primarily on the rollover of high yielding 10-year certificates of deposit.
Interest expense also decreased as a result of the decrease in the average
balance of interest-bearing liabilities of $44.0 million to $520.3 million at
March 31, 1998 from $564.3 million at March 31, 1997 and a decrease in the yield
on interest-bearing liabilities of 9 basis points to 4.78% at March 31, 1998
from 4.87% for the comparable prior year.

     Net Interest Income. Net interest income for the year ended March 31, 1998
was $16.0 million compared to $13.7 million for the comparable prior year, an
increase of $2.3 million or 17.1%. The increase was primarily due to the decline
of $2.6 million in interest expense, the majority of which was accounted for by
the $32.7 million decline in average borrowings during the year. The net
interest margin was 2.72% for the fiscal year ended March 31, 1998, an increase
of 44 basis points from the 2.28% net interest margin reported for the
prior year.

     Provision for Loan Losses. For the year ended March 31, 1998, the Company's
provision for loan losses was $180,000 compared to $320,000 for the same prior
year period. The decrease of $140,000 is attributable to a decrease in
non-performing assets of $1.8 million, or 30.6%, to $4.1 million at March 31,
1998 compared to $6.0 million at March 31, 1997. In addition, the provision for
loan losses was increased by approximately $200,000 for the year ended March 31,
1997 for a loan to one borrower that became delinquent in the fourth fiscal
quarter of fiscal 1997.

     Management of the Company is responsible for the determination of the level
of the allowance for loan losses. The allowance for loan losses is maintained at
levels sufficient to provide for estimated losses based on evaluating known and
inherent risks in the loan portfolio and upon management's continuing analysis
of the factors underlying the quality of the loan portfolio. These factors
include changes in the size and the composition of the loan portfolio, actual
loan loss experience, current and anticipated economic conditions, detailed
analysis for individual loans for which full collectability may not be assured,
and determination of the existence of realizable value of the collateral
guarantees securing the loan. In addition, various regulatory agencies
periodically review the bank loans for loan losses. Such agencies may require
the Bank to provide additions to the allowance based on information available to
them at the time of their examination. Although management uses the best
information available, further adjustments to the allowance may be necessary due
to economic, operating, regulatory and other conditions beyond the Company's
control.

     Non-Interest Income. Non-interest income totaled $1.3 million for the
fiscal year ended March 31, 1998 compared to a loss of $1.8 million for the
prior fiscal year. Excluding losses on securities available for sale and sales
of real estate, which totaled $14,000 and $3.0 million for the years ended March
31, 1998 and March 31, 1997, respectively, non-interest income increased by
15.6% for the year ended March 31, 1998 from the year ended 1997 as a result of
increased deposit fees of $35,000 and income of $36,000 from the sale of mutual
funds and annuities by Bayonne Service Corp., the Bank's subsidiary.

     Operating Expenses. Operating expenses for the year ended March 31, 1998
were $10.2 million compared to $14.6 million for the year ended March 31, 1997,
which included $4.7 million of non-recurring expenses, such as the one-time SAIF
assessment of $2.9 million and a $1.8 million supplemental executive

                                       46


<PAGE>



retirement plan expense, during the fiscal year ended March 31, 1997. Adjusting
for these non-recurring items, operating expenses for the year ended March 31,
1998 decreased approximately 2.0%. This increase reflects lower administrative
expenses of $165,000 and deposit insurance premiums of $405,000, offset by
higher data processing expenses of $114,000 and other operating expenses of
$341,000 relating to converting to a fully publicly- owned stock company.

     Provision for Income Taxes. Income tax expense was $2.6 million for the
year ended March 31, 1998 compared to $154,000 for the year ended March 31,
1997, due to the significant increase in income before income taxes for the year
ended March 31, 1998 compared to a pre-tax loss for the prior fiscal year and a
valuation reserve of $973,000 being established in fiscal 1997 relative to
certain deferred tax assets.

COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED MARCH 31, 1997 AND
MARCH 31, 1996.

     General. The Bank experienced a loss from operations of $3.2 million for
the year ended March 31, 1997, compared to net income of $615,000 for the year
ended March 31, 1996. The loss in fiscal 1997 was primarily attributable to
three items. First, on September 30, 1996, the Bank paid a one-time special
assessment of $2.9 million ($1.9 million after tax) to recapitalize the SAIF.
Second, as part of the Bank's repositioning of its investment portfolio, it sold
mutual funds totaling $71.5 million and U.S. Treasury securities totaling
$25.0 million at a loss of $2.9 million during the year ended March 31, 1997.
The Bank does not anticipate any further significant sales of investment
securities. See "Risk Factors - Effects of Restructuring of Investment
Portfolio." Third, the Bank provided an additional $1.8 million ($1.1 million
after tax) in employee benefit expense during the quarter ended March 31, 1997
to provide for one-time retirement benefit payments for two executive officers
under the Bank's supplemental executive retirement agreements.

     The Bank maintained a Supplemental Executive Retirement Income-Deferred
Compensation Agreement ("SERP") on behalf of Mr. Patrick F.X. Nilan and certain
other executive officers to provide the executives, upon their retirement, with
benefits that they would have been entitled to receive under the First Savings
Bank of New Jersey Pension Plan ("Pension Plan") upon retirement but for
limitations imposed on the Pension Plan by the Code. Pursuant to the terms of
the SERP, benefits are payable upon retirement either in equal monthly
installments for life, with a minimum of 120 payments, or in a lump-sum payment
at the Bank's discretion. Upon evaluation of the ongoing liability to fund the
SERP, the Bank determined to pay both Mr. Patrick F.X. Nilan and another
executive officer who retired in August 1996 their benefits due under the SERP
in a lump-sum payment. The lump-sum payments represented the present value of
the executives' accrued annual benefits under the SERP based on a current
actuarial valuation. The Bank determined that paying these benefits in a lump
sum would benefit the Bank over time by saving the annual accruals that would
otherwise be required to fund the SERP agreements.

     Interest and Dividend Income. Total interest and dividend income increased
by approximately $3.8 million, or 10.2%, to $41.1 million for the year ended
March 31, 1997, from $37.3 million for the year ended March 31, 1996. The
increase was primarily due to the increase in average balances of interest
earning assets to $599.3 million, compared to $543.9 million for the year ended
March 31, 1996. The average balance of loans increased $14.2 million, or 6.4%,
to $235.0 million for the year ended March 31, 1997, from $220.8 million for the
year ended March 31, 1996. That increase was partially offset by a decrease in
the average yield on mortgage loans of 22 basis points over the same period, to
8.50% for fiscal 1997. The average balance of mortgage-backed securities
increased by $109.0 million to $213.2 million for the year ended

                                       47


<PAGE>



March 31, 1997, and the yield on mortgage-backed securities increased 38 basis
points to 5.83% for the year ended March 31, 1997, compared to 5.45% for the
comparable period in 1996.

     Interest Expense. Total interest expense increased by $3.7 million, to
$27.5 million, for the year ended March 31, 1997, compared to $23.8 million for
the year ended March 31, 1996. The increase was related to an increase in
interest expense on borrowings, which totaled $6.7 million for the year ended
March 31, 1997, compared to $3.1 million for the prior fiscal year. The
increased interest expense on borrowings reflects the increase on average
borrowings for the year ended March 31, 1997 to $120.6 million, compared to
$61.4 million for the prior fiscal year and the full year impact of the Bank's
borrowings from the FHLB to fund a substantial amount of the $147.0 million of
mortgage-backed securities purchased in December 1995.

     Net Interest Income. Net interest income increased by $190,000, or 1.4%, to
$13.7 million for the year ended March 31, 1997, compared to $13.5 million for
the comparable period in 1996. The increase was primarily due to additional
income earned on a $55.4 million increase in average interest-earning assets,
which was partially offset by a 17 basis point increase in average cost of
interest-bearing liabilities to 4.87% from 4.70%, and the additional interest
expense on the $59.1 million in FHLB borrowings for the year ended March 31,
1997 compared to 1996.

     Provision for Loan Losses. The Bank maintains an allowance for loan losses
based on management's periodic evaluation of known and inherent risks in the
loan portfolio, the Bank's past loan loss experience, adverse situations that
may affect the borrower's ability to repay loans, estimated value of the
underlying loan collateral, and current and expected economic conditions.

     For the year ended March 31, 1997, the Bank provided $320,000 for loan
losses compared to $450,000 for the prior fiscal year. The Bank periodically
reviews the loan portfolio and maintains the allowance for loan losses at a
level that is adequate to provide for loan losses and other known impairments in
the loan portfolio although there can be no assurance that such loan losses will
not exceed estimated amounts. Of the total provision, $200,000 was made in March
1997, as 12 mortgage loans to one borrower with outstanding balances of $1.4
million were placed on non-accrual status. This provision was considered prudent
based on discussions with the borrower and the inability to formulate a plan for
timely repayment of principal and interest.

     Non-Interest Income/(Loss). Non-interest income activities resulted in a
loss of $1.8 million for the year ended March 31, 1997, compared to a loss of
$1.2 million for the year ended March 31, 1996, representing a change of
$583,000 or 48.1%. Losses on the sale of securities available for sale increased
by $661,000, to $2.9 million for the year ended March 31, 1997, compared to $2.2
million for the year ended March 31, 1996, primarily due to the loss of $2.8
million on the sale of intermediate- and adjustable-rate mutual funds in fiscal
1997.

     Operating Expenses. Total operating expenses increased by $3.8 million, or
35.0%, to $14.6 million for the year ended March 31, 1997, compared with $10.8
million for the year ended March 31, 1996. Compensation and employee benefits
expense increased by $1.4 million, primarily due to the provision of $1.8
million for the one-time payments to be made to two executive officers under the
Bank's terminated supplemental executive retirement agreements. Other operating
expenses increased by approximately $2.7 million as a result of the one-time
SAIF Special Assessment. Offsetting these increases were decreases in employee
salaries and related employee benefits of $388,000 and advertising expenses of
$107,000.

                                       48


<PAGE>



     Income Taxes. Income tax expense was $154,000 for the year ended March 31,
1997, compared to $374,000 for the year ended March 31, 1996. The provision for
income taxes for fiscal 1997 resulted from the loss on the sale of mutual funds
not being available as a current deduction in computing income tax expense.

IMPACT OF INFLATION AND CHANGING PRICES

     The consolidated financial statements and notes thereto presented herein
have been prepared in accordance with GAAP, which requires the measurement of
financial position and operating results in terms of historical dollar amounts
without considering the changes in the relative purchasing power of money over
time due to inflation. The impact of inflation is reflected in the increased
cost of the Company's operations. Unlike industrial companies, nearly all of the
assets and liabilities of the Company are monetary in nature. As a result,
interest rates have a greater impact on the Company's performance than do the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or to the same extent as the price of goods and services.

IMPACT OF NEW ACCOUNTING STANDARDS

     In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting No. 130, "Reporting Comprehensive Income"
("SFAS 130"), SFAS 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. Under SFAS 130, comprehensive income is divided into net
income and its components in a full set of general purpose financial statements.
Other comprehensive income includes items previously recorded directly in
equity, such as unrealized gains or losses on securities available for
sale. SFAS 130 is effective for interim and annual periods, requires earlier
periods to be reclassified to reflect application of the provisions of the
Statement. The adoption of SFAS 130 is not expected to have a significant impact
on the Company.

PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT

     In addition to historical information, this Form 10-K may include certain
forward looking statements based on current management expectations. The
Company's actual results could differ materially from those management
expectations. Factors that could cause future results to vary from current
management expectations include, but are not limited to, general economic
conditions, legislative and regulatory changes, monetary and fiscal policies of
the federal government, changes in tax policies, rates and regulations of
federal and state tax authorities, changes in interest rates, deposit flows, the
cost of funds, demand for loan products, demand for financial services,
competition, changes in the quality or composition of the Bank's loan and
investment portfolios, changes in accounting principles, policies or guidelines,
and other economic, competitive, governmental and technological factors
affecting the Company's operations, markets, products, services and prices.

LIQUIDITY AND CAPITAL RESOURCES

     The Company's primary sources of funds are deposits, principal and interest
payments on loans and mortgage-backed securities, FHLB and other borrowings and,
to a lesser extent, investment maturities and proceeds from the sale of loans.
While scheduled amortization of loans is a predictable source of funds,

                                       49


<PAGE>



deposit flows and mortgage prepayments are greatly influenced by general
interest rates, economic conditions, and competition. The Company has other
sources of liquidity if a need for additional funds arises, including an
overnight line of credit and advances from the FHLB. The Company utilizes the
overnight line from time to time to fund short-term liquidity needs. The Company
also borrowed $115.0 million at March 31, 1998 through FHLB advances and
securities sold under agreements to repurchase, an increase of $40.0 million
from $75.0 million at March 31, 1997. These borrowings were used to fund a
wholesale leverage strategy designed to improve returns on invested capital.

     The Company's cash needs for the year ended March 31, 1998 were principally
provided by principal payments on loans and mortgage-backed securities sold
under agreements to repurchase. The cash provided was principally used for
investing activities, which included the purchase of investment and
mortgage-backed securities and the origination of loans.

     For the year ended March 31, 1998, the cash needs of the Company were
primarily satisfied by investment maturities, principal payments on loans and
mortgage-backed securities, borrowings through securities sold under agreements
to repurchase and proceeds from common stock subscriptions. The cash was
principally utilized for loan originations and purchases of investment and
mortgage-backed securities.

     Federal regulations require the Bank to maintain levels of liquid assets.
The required percentage has varied from time to time based upon economic
conditions and savings flows and is currently 4% of net withdrawable savings
deposits and borrowings payable on demand or in one year or less during the
preceding calendar month. Liquid assets for purposes of this ratio include cash,
accrued interest receivable, certain time deposits, U.S. Treasury and Government
agencies and maturities of less than five years. The levels of these assets are
dependent on the Bank's operating, financing, lending and investing activities
during any given period. As of March 31, 1998 and 1997 the Bank's liquidity
ratios were 40.65% and 34.8%, both in excess of the minimum regulatory
requirement.

     At March 31, 1998, the Bank exceeded all of its regulatory capital
requirements with tangible capital of $76.6 million, or 12.0%, of total adjusted
assets, which is above the required level of $9.6 million, or 1.5%; core capital
of $76.6 million, or 12.0% of total adjusted assets, which is above the required
level of $25.5 million, or 4.0%; and risk-based capital of $79.5 million, or
33.9% of risk-weighted assets, which is above the required level of $18.8
million or 8.0%. The Bank is considered a "well capitalized" institution under
the Office of Thrift Supervision's prompt corrective action regulations.

IMPACT OF YEAR 2000

     The Bank relies on computers for the daily conduct of its business and for
data processing. There is concern among industry experts that on January 1, 2000
computers will be unable to "read" the new year and there may be widespread
computer malfunctions. The Bank generally relies on independent third parties to
provide data processing services to the Bank, and has been advised by its data
processing service center that the issue is being addressed. The Bank recognized
that a comprehensive and coordinated plan of action was needed to ensure
readiness to perform Year 2000 processing. A Year 2000 Committee has been formed
to implement the Year 2000 project, policies, and document readiness of the Bank
to accommodate Year 2000 processing, and to track and test progress towards full
compliance. The Bank contracts with service bureaus to provide the majority of
its data processing and is dependent upon purchased application software. In-
house applications are limited to word-processing and spreadsheet functions. The
Bank is in the process of ensuring that external vendors and servicers are
adequately addressing the system and software issues related

                                       50


<PAGE>



to Year 2000 by obtaining written system certifications that the systems are
fully Year 2000 compliant or that the vendor has a plan to become fully
compliant in the very near future. Beginning in the third quarter of the
calendar year of 1998, the Bank will coordinate with primary service end-to-end
tests which allows the Bank to simulate daily processing on sensitive century
dates. In its evaluation, the Bank will ensure that critical operations will
continue if servicers or vendors are unable to achieve the Year 2000
requirements. The Committee completed a system inventory and obtained vendor
certification. The Committee identified critical applications and developed
detailed plans for hardware/system upgrades and system replacements where
necessary. The Committee has budgeted $250,000 for hardware system upgrades and
system replacements, which has been approved by the Board of Directors. All
upgrades are scheduled to be substantially implemented by June 30, 1998 to allow
for adequate system testing.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

SENSITIVITY TO INCREASES IN INTEREST RATES

     The Bank's profitability, like that of most financial institutions, is
dependent to a large extent upon its net interest income, which is the
difference between its interest income on interest-earning assets, such as loans
and investments, and its interest expense on interest-bearing liabilities, such
as deposits and borrowings. One method of analyzing an institution's exposure to
interest rate risk is by measuring the change in the institution's Net Portfolio
Value ("NPV") under various interest rate scenarios. NPV is the present value of
expected cash flows from assets, liabilities and off-balance-sheet contracts. An
NPV Ratio, in any interest rate scenario, is defined as the NPV in that scenario
divided by the market value of assets in the same scenario. The sensitivity
measure is the decline in the NPV Ratio, in basis points, caused by a 2%
increase or decrease in rates, whichever produces a larger decline. The higher
an institution's sensitivity measure is, the greater its exposure to interest
rate risk is considered to be. As of March 31, 1998, the Bank's sensitivity
measure, as measured by the OTS, indicated that a 2% increase in interest rates
would cause a 215 basis point decline in the Bank's NPV Ratio. This NPV Ratio
sensitivity measure exceeds the thresholds at which the Bank could be required
to hold additional risk-based capital under OTS regulations.

     The Bank's recent results of operations were adversely affected by the
increase in interest rates experienced during 1995 and 1996, and by the increase
in the Bank's short-term borrowings and fixed-rate mortgage loans and
mortgage-backed securities. In particular, the Bank's liabilities have repriced
from an average cost of 4.00% for the year ended May 31, 1994 to 4.78% for the
year ended March 31, 1998. Conversely, the average yield earned on
interest-earning assets has only increased 44 basis points over the same time
period, from 6.52% for the year ended May 31, 1994, to 6.96% for the year ended
March 31, 1998. This upward repricing of liabilities, without a corresponding
upward repricing of assets, has resulted in the compression in the Bank's
average interest rate spread, which was reduced to 2.18% for the year ended
March 31, 1998, from 2.52% for the year ended May 31, 1994. However, the Bank's
net interest margin increased to 2.72% from 2.71% for the same periods. Further,
the Bank's interest rate spread increased to 2.18% at March 31, 1998 from 2.16%
at March 31, 1996 as a result of the Bank's repositioning of its investment
portfolio.

     Despite the Bank's recent improvement in its interest rate spread, net
interest income could still be adversely affected in a rising interest rate
environment, as liabilities would continue to reprice to higher market rates
more quickly than assets. This effect would be compounded because the prepayment
speeds of the Bank's long-term fixed-rate assets would decrease in a rising
interest rate environment. At March 31, 1998, $139.1 million, or 50.4% of the
Bank's $276.0 million of mortgage-backed securities had fixed-rates

                                       51


<PAGE>



of interest. In addition, $138.5 million, or 74.0%, of the Bank's one- to four-
family mortgage loans had fixed-rates of interest. To reduce the Bank's exposure
to interest rate risk in a changing interest rate environment, the Bank has more
recently sought to invest in mortgage securities that have adjustable rates
and/or relatively short expected terms, and to offer fixed-rate one- to
four-family mortgage loans with terms of 15 years or less and adjustable-rate
one- to four-family mortgage loans. See "Business of the Bank-Lending
Activities" and "Investment Activities."

MANAGEMENT OF INTEREST RATE RISK

     The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate sensitivity
gap is defined as the difference between the amount of interest-earning assets
maturing or repricing within a specific time period and the amount of
interest-bearing liabilities maturing or repricing within that time period. A
gap is considered positive when the amount of interest rate sensitive assets
exceeds the amount of interest rate sensitive liabilities. A gap is considered
negative when the amount of interest rate sensitive liabilities exceeds the
amount of interest rate sensitive assets.

     The Bank's deposit accounts typically react more quickly to changes in
market interest rates than interest-earning assets such as mortgage loans,
because of the relatively shorter maturities of deposits. When interest rates
are rising, interest expense will increase more rapidly than interest income if
a higher volume of interest-bearing liabilities than interest-earning assets
reprice to higher interest rates. In a falling interest rate environment,
interest income will increase more rapidly than interest expense if a higher
volume of interest-bearing liabilities than interest-earning assets reprice to
lower interest rates.

     Management seeks to manage the Bank's interest rate risk exposure by
monitoring the levels of interest rate sensitive assets and liabilities, and has
sought to improve its interest rate spread. To reduce the potential volatility
of the Bank's earnings in a changing interest rate environment, the Bank has
invested in mortgage securities that have adjustable rates and/or relatively
short expected terms. At March 31, 1998, $124.7 million, or 33.42%, of the
Bank's $373.1 million of investments consisted of mortgage-backed securities
with adjustable interest rates. The Bank has also sought to reduce the term of
its interest-earning assets by offering fixed-rate one- to four-family mortgage
loans with terms of 15 years or less. Such loans constituted $4.3 million, or
30.1%, of the Bank's total originations of one- to four- family mortgage loans
during the year ended March 31, 1998. The Bank also originates adjustable-rate
one- to four-family mortgage loans. Of the Bank's one- to four-family mortgage
loans originated during the year ended March 31, 1998, $6.2 million, or 43.4%,
had adjustable rates of interest. The Bank also maintains relatively high levels
of liquidity, which assets may be reinvested more quickly in response to changes
in market interest rates. In addition, the Bank manages its interest-bearing
liabilities by offering competitive interest rates on deposit accounts and
pricing certificates of deposit to provide customers with incentives to choose
certificates of deposit with longer terms. In the current interest rate
environment, however, longer-term certificates of deposit tend to be less
attractive to depositors.

     In a rising interest rate environment, the Bank's net interest income would
be adversely affected, as liabilities would reprice to higher market rates more
quickly than assets. This effect would be compounded because the prepayment
speeds of the Bank's long-term fixed-rate assets would decrease in a rising
interest rate environment. Although the Bank could reduce its exposure to
interest rate risk by investing a larger

                                       52


<PAGE>



portion of its assets in short-term securities and adjustable-rate mortgage
securities and by pursuing other strategies such as hedging and interest rate
swap programs, management believes that the benefits of such a strategy would be
outweighed by the cost of such programs, as well as by the loss of earnings from
concentrating on short-term and adjustable-rate investments, which typically
offer lower yields.

     The Bank has an Asset-Liability Management Committee which meets and
reports monthly to the Board of Directors. The primary responsibility of the
Asset-Liability Committee is to determine and monitor the level of interest rate
risk that the Bank determines to be acceptable, and establish strategies and
procedures to keep that risk within its specified limits. To that end, the
Committee reviews and approves pricing and fee structures for all asset and
liability products, and analyzes cash flow projections to calculate their
collective impact on growth, capital, net interest income and market value of
portfolio equity. The Committee regularly reviews the results of operations and
makes recommendations to the Board of Directors, based on such analyses, to
enhance both the Bank's interest rate risk position as well as its
profitability.

     Net Portfolio Value. In 1993, the OTS adopted a rule which would
incorporate an interest rate risk ("IRR") component into its risk-based capital
rules. The IRR component is a dollar amount that would be deducted from
regulatory capital for the purpose of calculating an institution's risk-based
capital requirement. IRR is measured in terms of the sensitivity of the
institution's NPV to changes in interest rates. NPV is the difference between
incoming and outgoing discounted cash flows from assets, liabilities and
off-balance sheet contracts. An institution's IRR would be measured as the
change to its NPV as a result of a hypothetical 200 basis point instantaneous
change in market interest rates. Under the adopted OTS rule, a resultant change
in NPV of more than 2% of the estimated market value of an institution's assets
would require the institution to deduct from its capital 50% of that excess
change. In March 1995, the OTS announced that application of the revised rule
was being suspended until further notice. Each calendar quarter, the OTS
calculates the Bank's estimated NPV and the estimated effect on NPV of
instantaneous and permanent 1% to 4% (100 to 400 basis points) increases and
decreases in market interest rates. The calculations are based upon the OTS's
assumptions regarding loan prepayment rates, deposit turnover and other factors
affecting the repricing of assets and liabilities.

     The following table presents the Bank's NPV as of March 31, 1998.

        CHANGE IN   
     INTEREST RATES
     IN BASIS POINTS                                      NPV AS % OF PORTFOLIO
      (RATE SHOCK)               NET PORTFOLIO VALUE         VALUE OF ASSETS
--------------------  ---------------------------------- -----------------------
                                                    %        NPV        %
                       AMOUNT       $ CHANGE      CHANGE    RATIO    CHANGE
                      ----------   -----------  --------  --------- ---------
                       (DOLLARS IN THOUSANDS)

         400           $47,596      $(37,921)    (44.0)%     8.06%    (5.10)%
         300            57,966       (26,921)    (32.0)      9.58     (3.58)
         200            68,205       (16,682)    (20.0)     11.01     (2.15)
         100            77,586        (7,301)     (9.0)     12.25     (0.91)
      Static            84,887            --      --        13.16         --
        (100)           89,758         4,871       6.0      13.71       0.55
        (200)           93,808         8,921      11.0      14.14       0.98
        (300)           98,603        13,716      16.0      14.64       1.48
        (400)          105,471        20,584      24.0      15.38       2.22
                                                                 
                  
                                       53


<PAGE>



     Based upon the above calculations, the Bank is in compliance with the
risk-based capital requirements of the regulations as of March 31, 1998. Based
upon such calculations, a 200 basis point increase in interest rates would
result in a 20.0% reduction in the value of the Bank's discounted cash flows,
and the Bank would have been required to deduct $16.7 million from total capital
for purposes of calculating the Bank's risk-based capital. As of March 31, 1998,
without taking into effect the IRR component, the Bank had $79.5 million of
risk-based capital, which exceeded the OTS minimum requirements by $60.7
million.

     Certain shortcomings are inherent in the methodology used in the above
interest rate risk measurements. Modeling changes in NPV require the making of
certain assumptions which may or may not reflect the manner in which actual
yields and costs respond to changes in market interest rates. In this regard,
the NPV Table presented assumes that the composition of the Company's interest
sensitive assets and liabilities existing at the beginning of a period remains
constant over the period being measured and also assumes that a particular
change in interest rates is reflected uniformly across the yield curve
regardless of the duration to maturity or repricing of specific assets and
liabilities. Accordingly, although the NPV Table provides an indication of the
Company's interest rate risk exposure at a particular point in time, such
measurements are not intended to and do not provide a precise forecast of the
effect of changes in market interest rates on the Company's net interest income
and will differ from actual results.

ANALYSIS OF NET INTEREST INCOME

     Net interest income represents the difference between income on
interest-earning assets and expense on interest-bearing liabilities. Net
interest income also depends on the relative amounts of interest-earning assets
and interest-bearing liabilities and the interest rate earned or paid on them.

                                       54


<PAGE>


AVERAGE BALANCE SHEET

     The following table sets forth certain information relating to the Bank's
average balance sheet and reflects the average yield on assets and average cost
of liabilities for the periods indicated and the average yields earned and rates
paid. Such yields and costs are derived by dividing income or expense by the
average balance of assets or liabilities, respectively, for the periods
presented. Average balances are derived from month-end balances.

<TABLE>
<CAPTION>

                                                                                   YEARS ENDED MARCH 31
                                              --------------------------------------------------------------------------------------
                                                         1998                         1997                         1996
                                              ---------------------------- ---------------------------- ----------------------------
                                                                   AVERAGE                      AVERAGE                     AVERAGE
                                      ACTUAL                      ANNUALIZED                   ANNUALIZED                 ANNUALIZED
                                     MARCH 31, AVERAGE             YIELD/   AVERAGE             YIELD/   AVERAGE            YIELD/
                                       1998   BALANCE  INTEREST    COST    BALANCE  INTEREST    COST    BALANCE  INTEREST   COST
                                     --------- -------  -------- ---------- -------  -------- ---------- -------  -------- ---------
                                                                                                       
<S>                                  <C>       <C>        <C>        <C>    <C>       <C>         <C>   <C>       <C>         <C>
Interest-earning assets:                                                                                
 Mortgage loans(1).................  $208,723  $202,301   $17,117    8.46%  $205,744  $17,482     8.50% $197,206  $17,203     8.72%
 Consumer and other loans..........    26,742    30,842     2,628    8.52     29,227    2,462     8.42    23,614    1,993     8.44
 Mortgage-backed securities                  
  available for sale...............   274,652   257,351    15,490    6.02    213,222   12,422     5.83   104,186    5,674     5.45
 Mutual funds available for sale...        --        --        --      --     36,557    2,350     6.43    67,775    4,351     6.42
 Other investments available                 
   for sale(2).....................    88,126    72,012     3,809    5.29     83,311    4,375     5.25    75,180    4,007     5.33
 Investment securities and                   
   overnight Deposits with                   
   financial institutions(3) ......    29,639    24,864     1,816    4.31     31,199    2,035     6.52    75,889    4,082     5.38  
                                     --------  --------   -------    ----   -------- --------    -----  --------  -------     ----  
      Total interest-earning                 
        assets.....................   627,882   587,370    40,860    6.96    599,260   41,126     6.86   543,850   37,310     6.86
Noninterest-earning assets.........    18,176    19,339                       20,846                      21,031
                                     --------  --------                     --------                    --------
      Total assets.................  $646,058  $606,709                     $620,106                    $564,881
                                     ========  ========                     ========                    ========
                                                                                                        
Interest-bearing liabilities:                
 Deposits(4).......................  $423,545  $432,684    19,980    4.62   $443,726   20,814     4.69  $446,300   20,761     4.65%
 Advances from FHLB and                      
   other borrowings................   115,380    87,652     4,892    5.59    120,557    6,655     5.52    61,410    3,082     5.02
                                     --------  --------   -------           --------  -------           --------  -------
      Total interest-bearing                 
        liabilities................   538,925   520,336    24,872    4.78    564,283   27,469     4.87   507,710   23,843     4.70
Noninterest-bearing liabilities....     8,484    11,194                        6,838                       5,861
                                     --------  --------                     --------                    --------
      Total liabilities............   547,409   531,530                      571,121                     513,571
Stockholders' equity...............    98,649    75,179                       48,985                      51,310
                                     --------  --------                     --------                    --------
      Total liabilities and                  
        stockholders' equity.......  $646,058  $606,709                     $620,106                    $564,881 
                                     ========  ========                     ========                    ========   
Net interest income................                       $15,988                     $13,657                     $13,467
                                                          =======                     =======                     =======
Net interest rate spread(5)........                                 2.18%                         1.99%                       2.16%
                                                                    ====                          ====                        ====
Net interest margin(6).............                                 2.72%                         2.28%                       2.48%
                                                                    ====                          ====                        ====
Ratio of average interest-                   
  earning assets to average                  
  interest-bearing liabilities.....                                 1.11x                         1.06x                       1.07x
                                                                    ====                          ====                        ====

</TABLE>

-----------

(1)  Includes one- to four-family residential real estate loans and commercial
     real estate loans.

(2)  Includes United States Government and agency obligations.

(3)  Includes primarily short-term mutual funds, interest-earning deposits in
     other institutions, FHLB stock, and municipal and other agency obligations.

(4)  At March 31, 1998, 1997 and 1996, included noninterest-bearing demand
     accounts of $14.7 million, $11.3 million and $8.3 million, respectively.

(5)  Net interest rate spread represents the difference between the average
     yield on interest-earning assets and the average cost of interest-bearing
     liabilities.

(6)  Net interest margin represents net interest income as a percentage of
     average interest-earning assets.


                                       55


<PAGE>



RATE VOLUME ANALYSIS

     Net interest income can also be analyzed in terms of the impact of changing
interest rates on interest-earning assets and interest-bearing liabilities and
changing the volume or amount of these assets and liabilities. The following
table represents the extent to which changes in interest rates and changes in
the volume of interest-earning assets and interest-bearing liabilities have
affected the Bank's interest income and interest expense during the periods
indicated. Information is provided in each category with respect to (i) changes
attributable to changes in volume (change in volume multiplied by prior rate),
(ii) changes attributable to changes in rate (changes in rate multiplied by
prior volume), and (iii) the net change. Changes attributable to the combined
impact of volume and rate have been allocated proportionately to the changes due
to volume and the changes due to rate. Changes for the ten months ended March
31, 1995 have been calculated based on annualized interest income and expenses.

<TABLE>
<CAPTION>

                                                                      YEAR ENDED                            YEAR ENDED
                                                                   MARCH 31, 1998 VS.                    MARCH 31, 1997 VS.         
                                                                      YEAR ENDED                            YEAR ENDED              
                                                                    MARCH 31, 1997                        MARCH 31, 1996            
                                                           ---------------------------------     ---------------------------------  
                                                                 INCREASE                              INCREASE                     
                                                                (DECREASE)                            (DECREASE)                    
                                                                  DUE TO                                DUE TO                      
                                                           --------------------                  ---------------------              
                                                            VOLUME       RATE         NET         VOLUME       RATE         NET     
                                                           ---------   --------    ---------     ---------   ---------   ---------  
                                                                                        (IN THOUSANDS)
<S>                                                          <C>          <C>        <C>           <C>        <C>        <C>        
Interest-earning assets:
    Mortgage loans.....................................      $  (290)     $ (75)     $  (365)      $   725    $(446)     $   279    
    Consumer and other loans...........................          137         29          166           474       (5)         469    
    Mortgage-backed securities
      available for sale...............................        2,651        417        3,068         6,326      422        6,748    
    Mutual funds available for sale....................       (2,350)        --       (2,350)       (2,008)       7       (2,001)   
    Other investments available for sale...............         (536)       (30)        (566)          429      (61)         368    
    Investment securities and overnight deposits
      with financial institutions and other ...........         (446)       227         (219)       (2,778)     731       (2,047)   
                                                             -------      -----      -------       -------    -----      -------    
       Total...........................................         (834)       568         (266)        3,168      648        3,816    
                                                             -------      -----      -------       -------    -----      -------    
Interest-bearing liabilities:
    Deposits...........................................         (521)      (313)        (834)         (122)     175           53    
    Advances from FHLB
      and other borrowings.............................       (1,900)       137       (1,763)        3,238      335        3,573    
                                                             -------      -----      -------       -------    -----      -------    
       Total...........................................       (2,421)      (176)      (2,597)        3,116      510        3,626    
                                                             -------      -----      -------       -------    -----      -------    
Net change in net interest income......................      $(1,587)     $(744)     $(2,331)      $    52    $ 138      $   190    
                                                             =======      =====      =======       =======    =====      =======    
</TABLE>

<TABLE>
<CAPTION>


                                                                                                
                                                                   YEAR ENDED MARCH 31,         
                                                                 1996 VS. TEN MONTHS ENDED      
                                                                       MARCH 31,1995            
                                                             -------------------------------    
                                                                    INCREASE                    
                                                                   (DECREASE)                   
                                                                     DUE TO                     
                                                             ----------------------             
                                                              VOLUME        RATE      NET       
                                                             ---------   ---------- --------    
                                                                       (IN THOUSANDS)           
<S>                                                          <C>         <C>         <C>        
Interest-earning assets:                                                                        
    Mortgage loans.....................................      $ 1,356     $  (351)    $ 1,005    
    Consumer and other loans...........................          275          (6)        269    
    Mortgage-backed securities                                                                  
      available for sale...............................        2,789         (27)      2,762    
    Mutual funds available for sale....................         (245)        246           1    
    Other investments available for sale...............          649        (177)        472    
    Investment securities and overnight deposits                                                
      with financial institutions and other ...........       (1,050)       (266)     (1,316)   
                                                             -------     -------     -------    
       Total...........................................        3,774        (581)      3,193    
                                                             -------     -------     -------    
Interest-bearing liabilities:                                                                   
    Deposits...........................................         (446)      2,453       2,007    
    Advances from FHLB                                                                          
      and other borrowings.............................        2,823          17       2,840    
                                                             -------     -------     -------    
       Total...........................................        2,377       2,470       4,847    
                                                             -------     -------     -------    
Net change in net interest income......................      $ 1,397     $(3,051)    $(1,654)   
                                                             =======     =======     =======    

</TABLE>

                                                            56


<PAGE>                           
                                 
                                 
                                 
ITEM 8. FINANCIAL STATEMENTS     


                            BAYONNE BANCSHARES, INC.
                                AND SUBSIDIARIES

                   Index to Consolidated Financial Statements


                                                                           PAGE
                                                                          NUMBER
                                                                          ------
Independent Auditors' Report of KPMG Peat Marwick LLP .................     F-1

Consolidated Financial Statements:

  Consolidated Statements of Financial Condition --
     March 31, 1998 and 1997 ..........................................     F-2

  Consolidated Statements of Operations -- Years ended
     March 31, 1998, 1997 and 1996 ....................................     F-3

  Consolidated  Statements of Stockholders' Equity -- Years
     ended March 31, 1998, 1997 and 1996 ..............................     F-4

  Consolidated Statements of Cash Flows -- Years ended
     March 31, 1998, 1997 and 1996 ....................................     F-5

Notes to Consolidated Financial Statements ............................     F-6


                                       57


<PAGE>


                          INDEPENDENT AUDITORS' REPORT


The Board of Directors and Stockholders
Bayonne Bancshares, Inc.:

     We have audited the consolidated financial statements of Bayonne
Bancshares, Inc. and subsidiaries as listed in the accompanying index. 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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Bayonne
Bancshares, Inc. and subsidiaries as of March 31, 1998 and 1997, and the results
of their operations and their cash flows for the years ended March 31, 1998,
1997 and 1996 in conformity with generally accepted accounting principles.


                                               /s/  KPMG Peat Marwick LLP



Short Hills, New Jersey
April 27, 1998

                                       F-1



<PAGE>


                            BAYONNE BANCSHARES, INC.
                                AND SUBSIDIARIES

                 Consolidated Statements of Financial Condition

                             March 31, 1998 and 1997

                                 (in thousands)

                                                              1998        1997
                                                            --------    -------
                                     ASSETS
Cash and cash equivalents:
  Cash on hand and in banks ..............................  $  4,712      6,828
  Deposits with financial institutions ...................    11,900      8,500
  AMF short-term fund ....................................         5        144
                                                            --------    -------
           Total cash and cash equivalents ...............    16,617     15,472

Securities available for sale at market value
  (notes 4 and 10) .......................................   362,778    290,614
Securities held to maturity, estimated market value
  of $10,494 and $11,555 at March 31, 1998 and 1997,
  respectively (note 5) ..................................    10,274     11,277
Loans receivable, net (notes 6 and 10) ...................   235,465    235,624
Accrued interest receivable, net (note 7) ................     4,089      3,720
Federal Home Loan Bank stock, at cost ....................     7,460      7,460
Real estate acquired in settlement of loans ..............       330        364
Office properties and equipment, net (note 8) ............     5,351      5,812
Prepaid expenses .........................................       672        816
Other assets (note 11) ...................................     3,022      5,845
                                                            --------    -------
           Total assets ..................................  $646,058    577,004
                                                            ========    =======

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities:
  Deposits (note 9) ......................................   423,545    444,139
  Borrowings (notes 4 and 10) ............................   115,000     75,000
  Employee Stock Ownership Plan (ESOP) debt (note 12) ....       380        598
  Advance payment by borrowers for taxes and insurance ...     3,754      1,539
  Accrued expenses and other liabilities .................     4,730      7,649
                                                            --------    -------
           Total liabilities .............................   547,409    528,925
                                                            --------    -------
Stockholders' equity (notes 2, 3 and 12):
  Common stock, $0.01 par value. Authorized 20,000,000
    shares; issued and outstanding 9,088,581 and 8,991,079
    shares at March 31, 1998 and 1997, respectively ......        91         90
  Additional paid-in capital .............................    60,246     12,643
  Unallocated ESOP shares ................................    (4,081)      (598)
  Unamortized MRP shares .................................      (220)      (378)
  Retained earnings - substantially restricted ...........    43,702     40,658
  Net unrealized loss on securities available for
    sale, net of tax .....................................    (1,089)    (4,336)
                                                            --------    -------
           Total stockholders' equity ....................    98,649     48,079

Commitments and contingencies (note 14)...................
                                                            --------    -------
           Total liabilities and stockholders' equity ....  $646,058    577,004
                                                            ========    =======


          See accompanying notes to consolidated financial statements.


                                      F-2


<PAGE>


<TABLE>
                                       BAYONNE BANCSHARES, INC.
                                           AND SUBSIDIARIES

                                 Consolidated Statements of Operations

                           For the Years ended March 31, 1998, 1997 and 1996

                                            (in thousands)
<CAPTION>

                                                                             1998       1997       1996
                                                                           -------     ------     ------
<S>                                                                        <C>         <C>        <C>   
Interest and dividend income:
    Loans .............................................................    $19,745     19,944     19,196
    Securities available for sale .....................................     19,299     19,147     14,032
    Securities held to maturity .......................................      1,210      1,240      3,827
    Deposits with financial institutions ..............................        606        795        254
                                                                           -------     ------     ------
        Total interest and dividend income ............................     40,860     41,126     37,309
                                                                           -------     ------     ------
Interest expense:
    Interest on deposits (note 9) .....................................     19,980     20,814     20,760
    Interest on borrowings ............................................      4,892      6,655      3,082
                                                                           -------     ------     ------
         Total interest expense .......................................     24,872     27,469     23,842
                                                                           -------     ------     ------
         Net interest income ..........................................     15,988     13,657     13,467
Provision for loan losses (note 6) ....................................        180        320        450
                                                                           -------     ------     ------
         Net interest income after provision for loan losses ..........     15,808     13,337     13,017
                                                                           -------     ------     ------
Noninterest income (loss):
    Loan fees and service charges .....................................        238        294        307
    Loss on securities available for sale, net (note 4) ...............         (5)    (2,878)    (2,217)
    Loss on sales of real estate acquired in settlement of loans ......         (9)       (92)        (7)
    Loss from real estate operations, net .............................       --          (26)       (25)
    Other .............................................................      1,119        906        729
                                                                           -------     ------     ------
         Total noninterest income (loss) ..............................      1,343     (1,796)    (1,213)
                                                                           -------     ------     ------
Operating expenses:
    Compensation and employee benefits (notes 12 and 13) ..............      5,619      7,184      5,821
    Occupancy .........................................................        771        773        802
    Equipment .........................................................      1,229      1,135      1,092
    Advertising and promotion .........................................         97         69        176
    Federal insurance premiums ........................................        569        974      1,163
    SAIF assessment (note 17) .........................................       --        2,895       --
    Other .............................................................      1,885      1,572      1,761
                                                                           -------     ------     ------
         Total operating expenses .....................................     10,170     14,602     10,815
                                                                           -------     ------     ------
         Income (loss) before income tax expense ......................      6,981     (3,061)       989
Income tax expense (note 11) ..........................................      2,602        154        374
                                                                           -------     ------     ------
         Net income (loss) ............................................    $ 4,379     (3,215)       615
                                                                           =======     ======     ======
Basic earnings (loss) per share (note 20) .............................    $  0.49      (0.37)      0.07
                                                                           =======     ======     ======
Diluted earnings (loss) per share (note 20) ...........................    $  0.49      (0.37)      0.07
                                                                           =======     ======     ======


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

                                                 F-3


<PAGE>


<TABLE>
                                                     BAYONNE BANCSHARES, INC.
                                                         AND SUBSIDIARIES

                                         Consolidated Statements of Stockholders' Equity

                                        For the years ended March 31, 1998, 1997 and 1996

                                                          (in thousands)

<CAPTION>
                                                                                                                 Net
                                                                                                 Retained     unrealized
                                                                            Unallo-    Unamor-   earnings--    loss on      Total
                                                                Additional   cated      tized     substan-    securities    stock-
                                                      Common     paid-in     ESOP        MRP       tially      available   holders'
                                                      stock      capital    shares     shares    restricted    for sale     equity
                                                      -----      -------    ------     ------    ----------    --------     ------
<S>                                                   <C>        <C>        <C>         <C>        <C>         <C>          <C>   
Balance at March 31, 1995 .........................   $  89      11,721     (1,032)       --       44,669      (8,822)      46,625
                                                                                                                         
  Net income for the year .........................     --          --         --         --          615         --           615
  Amortization of ESOP ............................     --          110        217        --          --          --           327
  Common stock issued to MRP ......................       1         581        --       (582)         --          --           --
  Amortization of MRP .............................     --           20        --         87          --          --           107
  Dividends declared at $0.50 per share ...........     --          --         --         --         (709)        --          (709)
  Net change in unrealized losses on                                                                                     
    securities available for sale, net                                                                                   
    of income tax expense of $1,016 ...............     --          --         --         --          --        2,554        2,554
                                                      -----      ------     ------      ----       ------      ------       ------
Balance at March 31, 1996 .........................      90      12,432       (815)     (495)      44,575      (6,268)      49,519
                                                                                                                         
  Net loss for the year ...........................     --          --         --         --       (3,215)        --        (3,215)
  Amortization of ESOP ............................     --          156        217        --          --          --           373
  Amortization of MRP .............................     --           37        --        117          --          --           154
  Dividends declared at $0.50 per share ...........     --          --         --         --         (702)        --          (702)
  Exercise of stock options .......................     --           18        --         --          --          --            18
  Net change in unrealized losses on                                                                                     
    securities available for sale, net                                                                                   
    of income tax expense of $657 .................     --          --         --         --          --        1,932        1,932
                                                      -----      ------     ------      ----       ------      ------       ------
Balance at March 31, 1997 .........................      90      12,643       (598)     (378)      40,658      (4,336)      48,079
                                                                                                                         
  Net income for the year .........................     --          --         --         --        4,379         --         4,379
  Amortization of ESOP ............................     --          562        412        --          --          --           974
  Amortization of MRP .............................     --          224        --        158          --          --           382
  Dividends declared at $0.2525 per share .........     --          --         --         --       (1,335)        --        (1,335)
  Exercise of stock options .......................       1         351        --         --          --          --           352
  Net change in unrealized losses on                                                                                     
    securities available for sale, net                                                                                   
    of income tax benefit of $1,771 ...............     --          --         --         --          --        3,247        3,247
  Establishment of secondary ESOP (Note 12)........     --          --      (3,895)       --          --          --        (3,895)
  Issuance and exchange of common stock as a                                                                             
    result of the conversion/reorganization .......     --       46,466        --         --          --          --        46,466
                                                      -----      ------     ------      ----       ------      ------       ------
Balance at March 31, 1998 .........................   $  91      60,246     (4,081)     (220)      43,702      (1,089)      98,649
                                                      =====      ======     ======      ====       ======      ======       ======


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

                                                               F-4


<PAGE>


<TABLE>
                                              BAYONNE BANCSHARES, INC.
                                                  AND SUBSIDIARIES

                                        Consolidated Statements of Cash Flows

                                  For the Years ended March 31, 1998, 1997 and 1996

                                                   (in thousands)

<CAPTION>
                                                                                     1998         1997         1996
                                                                                   --------     --------     --------
<S>                                                                                <C>            <C>             <C>
Cash flows from operating activities:
    Net income (loss) ..........................................................   $  4,379       (3,215)         615
    Adjustments to reconcile net income (loss) to net cash
       provided by operating activities:
         Depreciation of office properties and equipment .......................        510          705          528
         Loss on securities available for sale, net ............................          5        2,878        2,217
         Loss on sales of real estate acquired in settlement of loans ..........          9           92            7
         Provision for loan losses .............................................        180          320          450
         Proceeds from sales of real estate acquired in settlement of loans ....        671          446          296
         Amortization of ESOP and MRP shares ...................................      1,356          527          435
         Amortization (accretion) of premiums and discounts on
            investment securities and mortgage-backed securities ...............      1,111          (44)          15
         Net decrease (increase) in deferred loan fees .........................        213          209          (65)
         Net (increase) decrease in accrued interest receivable, net ...........       (369)          24         (540)
         Net decrease (increase) in prepaid expenses ...........................        144         (353)         363
         Net decrease (increase) in other assets ...............................      1,051       (1,360)         345
         Net (decrease) increase in accrued expenses and other liabilities .....     (2,919)       3,074         (241)
                                                                                   --------     --------     --------
              Total adjustments ................................................      1,962        6,518        3,810
                                                                                   --------     --------     --------
              Net cash provided by operating activities ........................      6,341        3,303        4,425
                                                                                   --------     --------     --------
Cash flows from investing activities:
    Increase in loans receivable ...............................................       (577)     (13,003)      (5,953)
    Purchase of investments held to maturity ...................................       --           --        (10,000)
    Principal payments and maturities of investments held to maturity ..........        975           78       42,853
    Principal payments and proceeds from maturities of securities
       available for sale ......................................................     74,139       25,725        5,000
    Proceeds from sales of securities available for sale .......................       --        159,548       25,871
    Purchases of securities available for sale .................................    142,675)     (94,260)    (187,221)
    Sale (purchase) of Federal Home Loan Bank stock ............................       --             66       (5,612)
    Purchases of premises and equipment ........................................        (49)        (517)        (141)
                                                                                   --------     --------     --------
              Net cash (used in) provided by investing activities ..............    (68,187)      77,637     (135,203)
                                                                                   --------     --------     --------
Cash flows from financing activities:
    Net (decrease) increase in deposits ........................................    (20,594)      (1,285)       1,044
    Net increase (decrease) in advance payments by borrowers
       for taxes and insurance .................................................      2,215          446         (199)
    Increase (decrease) in borrowings ..........................................     40,000      (75,519)     136,519
    Payment on ESOP debt .......................................................       (218)        (217)        (217)
    Net proceeds of stock offering .............................................     46,466         --           --
    Stock options exercised ....................................................        352           18         --
    Dividends paid .............................................................     (1,335)        (702)        (690)
    Establishment of secondary ESOP ............................................     (3,895)        --           --
                                                                                   --------     --------     --------
              Net cash provided by (used in) financing activities ..............     62,991      (77,259)     136,457
                                                                                   --------     --------     --------
Net increase in cash and cash equivalents ......................................      1,145        3,681        5,679
Cash and cash equivalents at beginning of year .................................     15,472       11,791        6,112
                                                                                   --------     --------     --------
Cash and cash equivalents at end of year .......................................   $ 16,617       15,472       11,791
                                                                                   ========     ========     ========
Supplemental schedule of noncash investing and financing activities:
    Real estate acquired in settlement of loans ................................   $    646          878           94
                                                                                   ========     ========     ========
    Taxes paid (received) ......................................................   $  1,580        1,150         (210)
                                                                                   ========     ========     ========
    Interest paid ..............................................................   $ 24,494       27,193       23,780
                                                                                   ========     ========     ========
    Transfer from HTM to AFS ...................................................   $   --           --         50,000
                                                                                   ========     ========     ========
    Implementation of MRP ......................................................   $   --           --            682
                                                                                   ========     ========     ========


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

                                                        F-5


<PAGE>


                            BAYONNE BANCSHARES, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                          March 31, 1998, 1997 and 1996


(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      PRINCIPLES OF CONSOLIDATION

      The consolidated financial statements include the accounts of Bayonne
      Bancshares, Inc. (the Company) and its subsidiaries, First Savings Bank of
      New Jersey (the Bank), Bayonne Old Mill Service Corp., Bayonne Service
      Corp. and The Final Bayonne Service Corp. As of March 31, 1998, Bayonne
      Service Corp. and The Final Bayonne Service Corp. are inactive, and
      Bayonne Service Corp. through the Bayonne First Investment Center sells
      non-insured investment products such as annuities and mutual funds. All
      significant intercompany balances and transactions have been eliminated in
      consolidation.

      BUSINESS

      The Company provides a full range of banking services to individual and
      corporate customers in New Jersey. The Company is subject to competition
      from other financial institutions and to the regulations of certain
      Federal and state agencies and undergoes periodic examinations by those
      regulatory authorities.

      The following are the significant accounting policies which were followed
      in preparing and presenting these consolidated financial statements.

      BASIS OF FINANCIAL STATEMENT PRESENTATION

      The consolidated financial statements have been prepared in conformity
      with generally accepted accounting principles. In preparing the
      consolidated financial statements, management is required to make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities as of the dates of the consolidated statements of financial
      condition and operations. Actual results could differ significantly from
      those estimates.

      Material estimates that are particularly susceptible to significant change
      in the near term relate to the determination of the allowance for loan
      losses and the valuation of real estate acquired in connection with
      foreclosures or in satisfaction of loans. In connection with the
      determination of the allowance for loan losses, and the valuation of real
      estate acquired in connection with foreclosures or in satisfaction of
      loans, management generally obtains independent appraisals for significant
      properties.


                                       F-6


<PAGE>


                            BAYONNE BANCSHARES, INC.
                                AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued


(1), CONTINUED

      A substantial portion of the Company's loans are secured by real estate in
      the New Jersey market. In addition, although not significant, real estate
      owned is located in that same market. Accordingly, as with most financial
      institutions in the market area, the ultimate collectibility of a
      substantial portion of the Company's loan portfolio and the recovery of
      the carrying amount of real estate owned are susceptible to changes in
      market conditions.

      INVESTMENT AND MORTGAGE-BACKED SECURITIES

      Securities are classified as either available for sale or held to
      maturity, based upon the Company's intent and ability to hold such
      securities. Securities available for sale include debt and mortgage-backed
      securities that are held for an indefinite period of time and are not
      intended to be held to maturity. Securities available for sale include
      securities that management intends to use as part of its overall
      asset/liability management strategy and that may be sold in response to
      changes in interest rates and resultant prepayment risk and other factors
      related thereto. Securities available for sale are carried at fair value,
      and unrealized gains and losses (net of related tax effects) on such
      securities are excluded from earnings but are included in stockholders'
      equity. Upon realization, such gains and losses will be included in
      earnings using the specific identification method. Management determines
      the appropriate classification of investment and mortgage-backed
      securities as either available for sale or held to maturity at the
      purchase date. Investment securities and mortgage-backed securities, other
      than those designated as available for sale or trading, are comprised of
      debt securities that the Company has the positive intent and ability to
      hold to maturity. These securities held to maturity are carried at cost,
      adjusted for amortization of premiums and accretion of discounts using the
      level-yield method over the estimated lives of the securities.

      LOANS RECEIVABLE

      Loans are carried at their unpaid principal amount, less unearned
      discounts, net of deferred loan origination fees and costs and commitment
      fees. Unearned discounts are recognized over the contractual lives of the
      loans using the level-yield method.

      The accrual of interest income and amortization of deferred fee income on
      loans is generally discontinued when a loan is past due 120 days or more,
      or when certain factors indicate reasonable doubt as to the timely
      collectibility of such income. Real estate loans are placed on a
      non-accrual status when either principal or interest is 120 days or more
      past due. Delinquent consumer loans generally are not placed on
      non-accrual status, but continue to accrue until charged-off. Delinquent
      consumer loans are charged-off when it appears no longer reasonable or
      probable that the loan will be collected. Interest accrued and unpaid at
      the time a loan is placed on non-accrual status is charged against
      interest income. Interest income is recognized subsequently only in the
      period collected. Loans are returned to an accrual status when factors
      indicating doubtful collectibility on a timely basis no longer exist.


                                       F-7


<PAGE>


                            BAYONNE BANCSHARES, INC.
                                AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued


(1), CONTINUED

      ALLOWANCE FOR LOAN LOSSES

      A provision for loan losses is charged to operations based on management's
      evaluation of the credit risk in its portfolio. Such evaluation includes a
      review of all loans for which full collectibility may not be reasonably
      assured and considers, among other matters, the estimated net realizable
      value of the underlying collateral, economic conditions and other matters
      which warrant consideration.

      Management believes that the allowance for losses on loans is adequate.
      While management uses available information to recognize losses on loans,
      future additions to the allowance may be necessary based on changes in
      economic conditions in their market area. In addition, various regulatory
      agencies, as an integral part of their examination process, periodically
      review the Company's allowance for loan losses. Such agencies may require
      the Company to recognize additions to the allowance based on their
      judgments about information available to them at the time of their
      examination.

      LOAN IMPAIRMENT

      The Company defined the population of impaired loans to include nonaccrual
      commercial and commercial mortgage loans. Smaller balance homogeneous
      loans that are collectively evaluated for impairment such as residential
      mortgage loans are specifically excluded from the impaired loan portfolio.
      A loan is impaired when, based on current information and events, it is
      probable that a creditor will be unable to collect all amounts due
      according to the contractual terms of the loan agreement.

      LOAN ORIGINATION FEES AND COSTS

      Loan origination fees, net of certain direct loan origination costs, are
      deferred and amortized into income over the lives of the related loans as
      an adjustment to the related loan yields.

      LOAN SERVICING

      The Company services real estate loans for investors which are not
      included in the accompanying consolidated statements of financial
      condition. Net fees earned for servicing loans are reported as income when
      the related mortgage loan payments are collected and are not significant.
      Loan servicing costs are charged to expense as incurred.


                                       F-8


<PAGE>


                            BAYONNE BANCSHARES, INC.
                                AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued


(1), CONTINUED

      REAL ESTATE ACQUIRED IN SETTLEMENT OF LOANS

      When properties are acquired through foreclosure or by deed in lieu of
      foreclosure, they are transferred at estimated fair value, and any
      required write-downs are charged to the allowance for loan losses.
      Subsequently, such properties are carried at the lower of the adjusted
      cost or fair value less estimated selling costs. Estimated fair value of
      the property is generally based on an appraisal. Subsequent declines in
      estimated fair value, if any, are charged to operations through an
      increase to the allowance for real estate losses. Provisions for real
      estate losses were zero for the years ended March 31, 1998, 1997 and 1996.
      Certain costs incurred in preparing properties for sale are capitalized.
      Expenses of holding foreclosed properties, net of other income, are
      charged to operations as incurred. Gains and losses from sales of such
      properties are recognized as incurred.

      OFFICE PROPERTIES AND EQUIPMENT

      Depreciation on office properties and equipment, exclusive of land, is
      computed using the straight-line method over the estimated useful lives of
      the assets. Maintenance and repairs are charged to expense, improvements
      are capitalized and gains or losses on disposals are credited or charged
      to operations. The Company depreciates buildings over a period of 10 to 40
      years and equipment over a period of 3 to 10 years.

      INCOME TAXES

      The Company accounts for income taxes based upon the asset and liability
      method which requires that deferred tax assets and liabilities be
      recognized for the future tax consequences attributable to differences
      between the financial statement carrying value amounts of existing assets
      and liabilities and their respective tax basis.

      PENSION PLANS

      The Company maintains a noncontributory defined benefit pension plan for
      the benefit of all eligible employees. It is the Bank's policy to fund the
      plan in an amount equal to at least the minimum contribution required by
      the Employee Retirement Income Security Act of 1974 (ERISA).

      OTHER POSTRETIREMENT BENEFIT PLANS

      In addition to the Company's defined benefit plan, the Company provides a
      retiree medical insurance plan to its retirees. The plan is first
      available to retirees at the age of 60 years and with 30 years of service
      to the Company. The Company recognizes expense associated with retirement
      medical insurance plan based upon the accrual method through the use of
      actuarial determined data.


                                       F-9


<PAGE>


                            BAYONNE BANCSHARES, INC.
                                AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued


(1), CONTINUED

      CONSOLIDATED STATEMENTS OF CASH FLOWS

      The Company considers all highly liquid debt instruments with original
      maturities of three months or less to be cash equivalents. For purposes of
      the consolidated statements of cash flows, cash equivalents consist of
      deposits in other financial institutions and short-term mutual funds.

      EARNINGS PER SHARE

      Basic earnings per common share is calculated by dividing net income by
      the average daily number of common shares outstanding during the period.
      Common stock equivalents are not included in the calculation.

      Diluted earnings per common share is computed similar to that of the basic
      earnings per share except that the denominator is increased to include the
      number of additional common shares that would have been outstanding if all
      potential dilutive common shares were issued.

      As discussed in Note 2, the Company completed a conversion and
      reorganization, which included the exchange of previously outstanding
      shares for new shares of the stock holding company, Bayonne Bancshares,
      Inc., at an exchange ratio of 2.933 to 1. All historic share and per share
      information has been adjusted to reflect this change unless otherwise
      noted.

      RECLASSIFICATIONS

      Certain reclassifications have been made to the 1997 and 1996 amounts to
      conform to the 1998 presentation.

(2) PLAN OF REORGANIZATION AND STOCK ISSUANCE

      In December 1993, the Board of Directors of the Bank unanimously adopted
      the Plan of Reorganization from a Mutual Savings and Loan Association to a
      Mutual Holding Company and Stock Issuance Plan, which plan was
      subsequently amended (as amended, the Plan). Pursuant to the Plan, the
      Bank reorganized from a New Jersey chartered mutual savings and loan
      association into a Federal mutual holding company and concurrently formed
      a New Jersey chartered capital stock savings and loan association
      subsidiary.

      Following the completion of the reorganization, all depositors who had
      membership or liquidation rights with respect to the Bank as of the
      effective date of the reorganization will continue to have such rights
      solely with respect to the holding company so long as they continue to
      hold deposit accounts with the Bank. In addition, all persons who become
      depositors of the Bank subsequent to the reorganization will have such
      membership and liquidation rights with respect to the holding company.
      Borrower members of the Bank at the time of the reorganization will have
      the same membership rights in the holding company that they had in the
      Bank immediately prior to the reorganization so long as their existing
      borrowings remain outstanding. Borrowers will not receive membership
      rights in connection with any new borrowings made after the
      reorganization.


                                      F-10


<PAGE>


                            BAYONNE BANCSHARES, INC.
                                AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued


(2), CONTINUED

      As part of the reorganization, the Bank was authorized to offer stock in
      one or more offerings, up to a maximum of 49.9% of the issued and
      outstanding shares of its common stock.

      On January 9, 1995, the Bank completed its minority stock offering whereby
      the Bank issued 1,358,015 shares at $10 per share (3,983,058 shares at
      $3.41 after the exchange ratio discussed below) for a total of $13.6
      million, which represents a minority ownership of 45% of the Bank based
      upon its valuation by an independent appraiser. The net proceeds of the
      stock offering (IPO), after reflecting offering expenses of $1.6 million,
      were $12.0 million. The initial proceeds were added to the Bank's general
      funds to be used for general corporate purposes.

      In December 1996, the Board of Directors of Bayonne Bancshares, M.H.C.,
      the mutual holding company of the Bank, adopted a proposed Plan of
      Conversion to convert Bayonne Bancshares, M.H.C. to stock form and to
      reorganize Bayonne Bancshares, M.H.C., and the Bank by forming a new stock
      Delaware corporation to become the parent company of the Bank.

      On August 22, 1997, Bayonne Bancshares, Inc. completed the Conversion and
      Reorganization of First Savings Bank of New Jersey, SLA and its former
      mutual holding company by selling 4,869,190 shares of common stock to
      certain depositors and borrowers of the Bank at a price of $10.00 per
      share. In addition, approximately 1,410,735 shares of common stock with
      the Bank held by public stockholders were exchanged for common stock of
      Bayonne Bancshares, Inc. at a ratio of 2.933 shares of common stock of the
      Company for each share of the Bank. All historical share and per share
      information has been adjusted to reflect the exchange ratio unless
      otherwise noted. The net proceeds of the stock offering, after reflecting
      offering expenses of $2,426,000 and contribution of $200,000 from its
      former mutual holding company were $46,466,000.

      The Bank has established a liquidation account in an amount equal to its
      equity as reflected in the statement of financial condition prior to the
      completion of the conversion. The liquidation account will be maintained
      for the benefit of eligible account holders and supplemental eligible
      account holders who continue to maintain their accounts at the Bank after
      the conversion. The liquidation account will be reduced annually, to the
      extent that eligible account holders and supplemental eligible account
      holders have reduced their qualifying deposits as of each anniversary
      date. Subsequent increases will not restore an eligible account holder's
      or supplemental eligible account holder's interest in the liquidation
      account. In the event of a complete liquidation of the Bank, each eligible
      account holder and supplemental eligible account holder will be entitled
      to receive a distribution from the liquidation account in an amount
      proportionate to the current adjusted qualifying balances for accounts
      then held. The balance of the liquidation account at March 31, 1998 was
      $41.3 million.


                                      F-11


<PAGE>


                            BAYONNE BANCSHARES, INC.
                                AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued


(2), CONTINUED

      Subsequent to the conversion, the Company may not declare or pay cash
      dividends on or repurchase any of its shares of common stock if the effect
      thereof would cause equity to be reduced below applicable regulatory
      capital maintenance requirements or if such declaration and payment would
      otherwise violate regulatory requirement.

(3) REGULATORY MATTERS

      Capital distributions, in the form of any dividend paid or other
      distribution in cash or in kind, are limited by the OTS. A Tier 1
      association, which is defined as an association that has capital
      immediately prior to a proposed capital distribution that is equal to or
      greater than the amount of its fully phased-in capital requirement, is
      authorized to make capital distributions during a calendar year up to the
      higher of 100% of its net income to date during the calendar year plus the
      amount that would reduce by one-half its surplus capital ratio at the
      beginning of the calendar year, or 75% of its net income over the most
      recent four-quarter period. The Bank is a Tier 1 association.

      The Financial Institutions Reform, Recovery and Enforcement Act of 1989
      (FIRREA) was signed into law on August 9, 1989 and the regulations for
      savings institutions' minimum capital requirements went into effect on
      December 7, 1989. In addition to its capital requirements, FIRREA includes
      provisions for changes in the Federal regulatory structure for
      institutions, including a new deposit insurance system, increased deposit
      insurance premiums, and restricted investment activities with respect to
      non-investment grade corporate debt and certain other investments. FIRREA
      also increases the required ratio of housing-related assets in order to
      qualify as a savings institution.

      The foregoing capital ratios are based in part on specific quantitative
      measures of assets, liabilities and certain off-balance sheet items are
      calculated under regulatory accounting practices. Capital amounts and
      classifications are also subject to qualitative judgments by the OTS about
      capital components, risk weightings and other factors.

      Management believes that, as of March 31, 1998, the Bank meets all capital
      adequacy requirements to which it is subject. Further, the most recent OTS
      notification categorized the Bank as a well-capitalized institution under
      the prompt corrective action regulations. There have been no conditions or
      events since that notification that management believes have changed the
      Bank's capital classification.


                                      F-12


<PAGE>


                            BAYONNE BANCSHARES, INC.
                                AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued


(3), CONTINUED

      The following is a summary of the Bank's actual capital amounts and ratios
      as of March 31, 1998 and 1997, compared to the OTS minimum capital
      adequacy requirements and classification as a well-capitalized
      institution:

<TABLE>
<CAPTION>
                                                                  OTS Requirements
                                                      ------------------------------------------
                                                                                   For
                                                                               Classification
                                  Association              Minimum                as Well-
                                     Actual            Capital Adequacy         Capitalized
                              -------------------     ------------------     -------------------
                               Amount      Ratio       Amount     Ratio       Amount      Ratio
                              -------     -------     -------    -------     -------     -------
                                                    (dollars in thousands)
 
<S>                           <C>          <C>       <C>           <C>       <C>          <C> 
March 31, 1998:
   Tangible capital ........  $76,563      12.01     $ 9,562       1.50      $   --          --
   Tier I (core) capital ...   76,563      12.01      25,500       4.00       31,875        5.00
   Risk-based capital:
     Tier I ................   76,563      32.60         --         --        14,091        6.00
     Total .................   79,501      33.85      18,790       8.00       23,486       10.00

March 31, 1997:
   Tangible capital ........  $52,260       8.99     $ 8,720       1.50      $   --          --
   Tier I (core) capital ...   52,260       8.99      17,440       3.00       29,067        5.00
   Risk-based capital:
     Tier I ................   52,260      24.06         --         --        13,034        6.00
     Total .................   54,975      25.31      17,379       8.00       21,724       10.00

</TABLE>


      The following provides a reconciliation of the Bank's stockholders' equity
      to regulatory capital at March 31, 1998 (in thousands):

         Stockholders' equity ......................................    $75,539
         Plus: Unrealized loss on securities 
               available for sale, net of tax ......................      1,184
         Less: Investments in subsidiaries .........................       (160)
                                                                         -------
               Tangible/core capital ...............................     76,563
         Plus: Allowance for loan losses ...........................      2,938
                                                                         -------
               Total risk based capital ............................     $79,501
                                                                         =======

      The Federal Deposit Insurance Corporation Improvement Act (FDICIA) was
      signed into law on December 19, 1991. Regulations implementing the prompt
      corrective action provisions of FDICIA became effective on December 19,
      1992. In addition to the prompt corrective action requirements, FDICIA
      includes significant changes to the legal and regulatory environment for
      insured depository institutions, including reductions in insurance
      coverage for certain kinds of deposits, increased supervision by the
      Federal regulatory agencies, increased reporting requirements for insured
      institutions, and new regulations concerning internal controls, accounting
      and operations.


                                      F-13


<PAGE>


                            BAYONNE BANCSHARES, INC.
                                AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued


(3), CONTINUED

      New Jersey banking statutes further restrict the amounts of dividends paid
      by the Company or the Bank on its common stock to an amount which,
      following the payments of such dividends, will not reduce paid-in capital
      and retained earnings to an amount less than 50% of common stock or the
      payment of such dividend will not reduce the statutory surplus of the
      Bank.

      During the year ended March 31, 1998, the Company declared cash dividends
      to holders of common stock of the Bank amounting to $0.2525 per share. The
      Bank's mutual holding company waived the receipt of the cash dividends
      paid by the Bank through August 1997. Total cumulative waived dividends
      amount to $2.1 million through August 22, 1997, the date of the
      reorganization of the Bank into a stock corporation.

(4) SECURITIES AVAILABLE FOR SALE

      Securities available for sale at March 31, 1998 and 1997 are summarized as
      follows (in thousands):

                                                    Gross      Gross
                                      Amortized  unrealized  unrealized  Market
                                         cost       gains      losses     value
                                      ---------  ----------  ----------  -------
March 31, 1998:
  U.S. Government and agency
    obligations ....................   $ 69,965       --         449     69,516
  Mortgage-backed securities:
    GNMA ...........................     63,423        49        175     63,297
    FNMA ...........................     68,472       190        273     68,389
    FHLMC ..........................    117,945        83      1,084    116,944
    CMOs (FHLMC and FNMA) ..........      9,512       --          84      9,428
      Private issue ................     16,688       --          94     16,594
  Other investment securities ......     18,528       137         55     18,610
                                       --------       ---      -----    -------
                                       $364,533       459      2,214    362,778
                                       ========       ===      =====    =======


                                      F-14


<PAGE>


                            BAYONNE BANCSHARES, INC.
                                AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued


(4), CONTINUED

                                                    Gross      Gross
                                      Amortized  unrealized  unrealized  Market
                                         cost       gains      losses     value
                                      ---------  ----------  ----------  -------
March 31, 1997:
  U.S. Government and agency
    obligations ....................   $ 69,945       --        2,311     67,634
  Mortgage-backed securities:
    GNMA ...........................     30,110       --          398     29,712
    FNMA ...........................     41,767       71          229     41,609
    FHLMC ..........................    118,152       43        2,820    115,375
    CMOs (FHLMC and FNMA) ..........     12,751       --          430     12,321
    Private issue ..................     24,661       --          698     23,963
                                       --------      ---        -----    -------
                                       $297,386      114        6,886    290,614
                                       ========      ===        =====    =======


      The amortized cost and market value of securities available for sale at
      March 31, 1998 by contractual maturity are shown below (in thousands).
      Expected maturities will differ from contractual maturities because
      borrowers may have the right to call or prepay obligations with or without
      penalties.

                                                             Amortized    Market
                                                                cost      value
                                                              --------    ------
        Due after one year through five years ............    $ 51,999    51,797
        Due after five years through ten years ...........      14,974    14,740
        Due after ten years ..............................       2,992     2,979
                                                              --------    ------
        Mortgage-backed securities .......................     276,040   274,652
        Other investment securities ......................      18,528    18,610
                                                              --------   -------
                                                              $364,533   362,778
                                                              ========   =======


                                      F-15


<PAGE>


                            BAYONNE BANCSHARES, INC.
                                AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued


(4), CONTINUED

      During the years ended March 31, 1998, 1997 and 1996, proceeds from sales
      of securities available for sale of $0, $159.5 million and $25.9 million,
      respectively, were received, resulting in gross gains of $0, $486,000 and
      $296,000, respectively, and gross losses of $0, $3.4 million and $2.5
      million, respectively.

      Pledged securities, under reverse repurchase agreements and advances
      included above, amount to $72.7 million and had an estimated market value
      of $72.7 million at March 31, 1998. The securities are predominantly
      United States Government agency securities and are under the joint control
      of the Bank and the counter party to the agreements at year end.

(5) SECURITIES HELD TO MATURITY

      Securities held to maturity at March 31, 1998 and 1997 are summarized as
      follows (in thousands):


                                                    Gross      Gross
                                      Amortized  unrealized  unrealized  Market
                                         cost       gains      losses     value
                                      ---------  ----------  ----------  -------
March 31, 1998:
  Tax-exempt obligations .........     $ 2,344       130         --       2,474
  U.S. Government and                                       
    agency obligations ...........       7,930        90         --       8,020
                                       -------       ---        ----     ------
                                       $10,274       220         --      10,494
                                       =======       ===        ====     ======

March 31, 1997:                                             
  Tax-exempt obligations .........       2,422       105         --       2,527
  U.S. Government and                                       
    agency obligations ...........       8,855       174          1       9,028
                                       -------       ---        ----     ------
                                       $11,277       279          1      11,555
                                       =======       ===        ====     ======


                                         F-16


<PAGE>


                            BAYONNE BANCSHARES, INC.
                                AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued


(5), CONTINUED

      The amortized cost and market value of securities held to maturity at
      March 31, 1998 by contractual maturity are shown below (in thousands).
      Expected maturities will differ from contractual maturities because
      borrowers may have the right to call or prepay obligations with or without
      penalties.

                                                             Amortized    Market
                                                                cost      value
                                                              -------    -------
      Due with one year ..................................    $ 8,030      8,120
      Due after one year through five years ..............        --         --
      Due after five years through ten years .............        981      1,055
      Due after ten years ................................      1,263      1,319
                                                              -------    -------
                                                              $10,274     10,494
                                                              =======    =======

(6) LOANS RECEIVABLE, NET

      A summary of loans receivable at March 31, 1998 and 1997 is as follows
      (in thousands):

                                                               1998       1997
                                                             --------   -------
      Real estate loans:
        One- to four-family residential ..................   $187,184   197,819
        Multifamily and commercial .......................     25,815    14,330
                                                             --------   -------
          Total real estate loans ........................    212,149   212,149
                                                             --------   -------
      Consumer loans:
        Home equity loans ................................     26,180    27,740
        Passbook .........................................        371       277
        Other ............................................        489       450
                                                             --------   -------
          Total consumer loans ...........................    270,040    28,467
                                                             --------   -------
          Total loans ....................................    240,039   240,616
      Unearned discounts and deferred fees ...............     (1,621)   (1,834)
      Allowance for loan losses ..........................     (2,953)   (3,158)
                                                             --------   -------
                                                             $235,465   235,624
                                                             ========   =======


                                      F-17


<PAGE>


                            BAYONNE BANCSHARES, INC.
                                AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued


(6), CONTINUED

      A summary of the activity in the allowance for loan losses for the years
      ended March 31, 1998, 1997 and 1996 is as follows (in thousands):

                                                      1998       1997      1996
                                                     ------     -----     -----
      Allowance for loan losses
        at beginning of year ..................      $3,158     2,979     2,677
      Provision for loan losses ...............         180       320       450
      Charge-offs, net ........................        (385)     (141)     (148)
                                                     ------     -----     -----
      Allowance for loan losses
        at end of year ........................      $2,953     3,158     2,979
                                                     ======     =====     =====

      Nonaccrual loans totaled $3.0 million, $4.2 million and $4.8 million at
      March 31, 1998, 1997 and 1996, respectively. The amount of interest income
      on nonaccrual loans, which would have been recorded had these loans
      continued to pay interest at the original contract rate, was approximately
      $385,000, $517,000 and $468,000 for the years ended March 31, 1998, 1997
      and 1996, respectively. In addition, at March 31, 1998, 1997 and 1996,
      loans receivable 120 days delinquent and accruing interest totaled
      $188,000, $87,000 and $456,000 respectively.

      The recorded investment in loans receivable considered impaired under the
      provisions of SFAS 114, as adopted, was approximately $1,758,000 and
      $2,399,000 at March 31, 1998 and 1997, respectively. Specific allowances
      associated with impaired loans totalled $479,000 and $716,000 at March 31,
      1998 and 1997, respectively.

      At March 31, 1998 and 1997, loans to officers and directors amounted to
      approximately $1.3 million and $1.4 million, respectively. All loans were
      performing according to their terms.

      At March 31, 1998, 1997 and 1996, first mortgage loans serviced by the
      Bank for investors amounted to approximately $11.5 million, $14.4 million
      and $18.1 million, respectively.

(7) ACCRUED INTEREST RECEIVABLE

      A summary of accrued interest receivable at March 31, 1998 and 1997 is as
      follows (in thousands):

                                                                 1998      1997
                                                                ------    -----
      Loans .................................................   $1,470    1,608
      Mortgage-backed securities ............................    1,526    1,207
      Investment securities .................................    1,093      905
                                                                ------    -----
                                                                $4,089    3,720
                                                                ======    =====


                                      F-18


<PAGE>


                            BAYONNE BANCSHARES, INC.
                                AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued


(8) OFFICE PROPERTIES AND EQUIPMENT, NET

      Office properties and equipment at March 31, 1998 and 1997 are summarized
      as follows (in thousands):

                                                        1998       1997
                                                      -------    ------
      Land ........................................   $ 1,693     1,693
      Building and improvements ...................     5,260     5,253
      Furniture, equipment and automobiles ........     3,293     3,251
                                                      -------    ------
                                                       10,246    10,197
      Less accumulated depreciation
        and amortization ..........................     4,895     4,385
                                                      -------    ------
                                                      $ 5,351     5,812
                                                      =======     =====

(9) DEPOSITS

      Deposits at March 31, 1998 and 1997 are summarized as follows 
      (in thousands):

<TABLE>
<CAPTION>
                                                 1998                                       1997
                             -----------------------------------------   -----------------------------------------
                             Interest    Weighted                        Interest   Weighted
                               rate      average                           rate      average
                               range      rate      Amount       %         range      rate      Amount        %
                             --------   --------   --------   --------   --------   --------   --------   --------
<S>                            <C>        <C>      <C>          <C>        <C>        <C>      <C>          <C>   
Types of deposits:
  Passbooks ...............    2.92%      2.92%    $128,711     30.4       2.92%      2.92%    $133,817     30.13 
  NOW accounts ............    2.44       2.44       34,074      8.0       2.44       2.44       31,576      7.11 
  Money market                                                                                                 
    deposit accounts ......    2.44       2.44       13,019      3.1       2.44       2.44       15,277      3.44 
  Noninterest-bearing                                                                                          
    demand ................     --         --        14,640      3.5        --         --        11,264      2.54 
  Club accounts ...........     --         --           791       .2        --         --           642      0.14 
                                                   --------    -----                           --------    ------
                                                    191,235     45.2                            192,576     43.36 
Certificates of deposit ... 3.21-9.40    5.95       232,310     54.8     3.21-9.50    6.41      251,563     56.64 
                            =========    ====      --------    ------    =========    ====     --------    ------
     Total deposits .......                        $423,545    100.00                          $444,139    100.00 
                                                   ========    ======                          ========    ======
</TABLE>


      Certificates of deposit at March 31, 1998 have scheduled maturities as
      follows (in thousands):

          Within one year ...............................    $179,680
          One to three years ............................      45,600
          Three to five years ...........................       7,030
          Thereafter ....................................         --
                                                             --------
                                                             $232,310
                                                             ========


                                      F-19

<PAGE>

                            BAYONNE BANCSHARES, INC.
                                AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued


(9), CONTINUED

      Interest expense on deposits for the years ended March 31, 1998, 1997 and
      1996 is comprised of the following (in thousands):


                                                      1998      1997      1996
                                                    -------    ------    ------
      Regular, club and certificates
        of deposit ..............................   $18,763    19,671    19,611
      NOW and money market checking .............     1,217     1,143     1,149
                                                    -------    ------    ------
                                                    $19,980    20,814    20,760
                                                    =======    ======    ======

      Time deposits of $100,000 or more totaled approximately $37.8 million and
      $45.7 million as of March 31, 1998 and 1997, respectively.

(10) BORROWINGS

      Short-term borrowings are summarized as follows (in thousands):

                                                       1998          1997
                                                     --------       ------
      FHLB advances ..............................   $ 85,000       45,000
      Securities sold under agreements
        to repurchase ............................     30,000       30,000
                                                     --------       ------
          Total borrowings .......................   $115,000       75,000
                                                     ========       ======

      The FHLB advances are as follows at March 31, 1998 (in thousands):


                           Available      Drawn       Rate      Maturity
                           ---------      -----       ----      --------
      Term loans: .......   $10,000      10,000      5.590%     Jan. 1999
                             25,000      25,000      5.565      Nov. 2001
                             50,000      50,000      5.420      Feb. 2008
                            -------      ------
         Total ..........   $85,000      85,000
                            =======      ======


                                      F-20


<PAGE>


                            BAYONNE BANCSHARES, INC.
                                AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued


(10), CONTINUED

      The advances are secured by certain mortgage loans under a blanket
      collateral agreement. The maximum amount outstanding under such agreements
      during fiscal 1998 was $85 million and the average amount outstanding for
      fiscal 1998 was $57,692,000.

      The securities sold under agreements to repurchase at March 31, 1998 are
      as follows (in thousands):


      Counter party                           Amount       Rate     Maturity
      -------------                          -------       ----     ---------
      Morgan Stanley ....................    $15,000      5.90%     Dec. 2002
      FHLB of New York ..................     15,000      5.72      Nov.1998
                                             -------
           Total ........................    $30,000
                                             =======

      The securities sold under agreements to repurchase are secured by U.S.
      Government and agency obligations and mortgage-backed securities. The
      maximum amount outstanding under such agreements during fiscal 1998 was
      $33,950,000 and the average amount outstanding for fiscal 1998 was
      $29,454,000.

(11) INCOME TAXES

      Income tax expense for the years ended March 31, 1998, 1997 and 1996 is
      comprised of the following components (in thousands):


                                                   1998        1997       1996
                                                  ------       ----       ----
      Current income tax expense:
        Federal ..............................    $  836        579        87
        State ................................       305         80        15
                                                  ------       ----       ---
                                                   1,141        659       102
                                                  ------       ----       ---
      Deferred income tax expense (benefit):
        Federal ..............................     1,517       (476)      257
        State ................................       (56)       (29)       15
                                                  ------       ----       ---
                                                   1,461       (505)      272
                                                  ------       ----       ---
         Total income tax expense ............    $2,602        154       374
                                                  ======        ===       ===


                                      F-21


<PAGE>


                            BAYONNE BANCSHARES, INC.
                                AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued


(11), CONTINUED

      A reconciliation between the expected amount computed using the applicable
      statutory Federal income tax rate and the effective income tax expense
      (benefit) for the years ended March 31, 1998, 1997 and 1996 is as follows
      (in thousands):

                                                      1998       1997      1996
                                                     ------     -------    ----
Income (loss) before income taxes ................   $6,981     (3,061)     989
Applicable statutory Federal tax rate ............       34%        34%      34%
Expected Federal income tax expense
  (benefit) ......................................    2,373     (1,041)     336
State tax net of Federal benefit .................      165         34       19
Decrease in Federal income tax benefit
  resulting from -- tax-exempt income ............      (20)       (21)     (31)
Valuation allowance ..............................       --        973       --
Other ............................................       84        209       49
                                                     ------     ------      ---
                                                     $2,602        154      373
                                                     ======        ===      ===

      The tax effects of temporary differences that give rise to significant
      portions of the deferred tax asset at March 31, 1998 and 1997 are as
      follows (in thousands):


                                                    Federal     State     Total
                                                    -------     -----     ------
March 31, 1998:
  Deferred tax assets:
    Allowance for loan losses ...................    $  989       90      1,079
    Loan fees ...................................       486       44        530
    Deferred directors' compensation ............        85        7         92
    Uncollected interest ........................       131       12        143
    Unrealized loss on securities
       available for sale .......................       611       55        666
    Postretirement benefits .....................       732       67        799
    Other .......................................       957      147      1,104
    Valuation allowance .........................      (919)     (54)      (973)
                                                      -----      ---      -----
                                                      3,072      368      3,440
  Deferred tax liabilities:
    Tax reserve for loan losses .................       596       54        650
    Depreciation ................................        54        5         59
    Other .......................................        94        8        102
                                                      -----      ---      -----
       Net deferred tax asset ...................    $2,328      301      2,629
                                                     ======      ===      =====


                                      F-22


<PAGE>


                            BAYONNE BANCSHARES, INC.
                                AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued


(11),  CONTINUED

                                                    Federal     State     Total
                                                    -------     -----     ------
March 31, 1997:
  Deferred tax assets:
    Allowance for loan losses ...................    $1,162       68      1,230
    Loan fees ...................................       486       29        515
    Deferred directors' compensation ............       108        6        114
    Uncollected interest ........................       179       11        190
    Retirement plan .............................     1,268       75      1,343
    Capital loss carryforwards ..................       919       54        973
    Unrealized loss on securities
       available for sale .......................     2,273      133      2,406
    Postretirement benefits .....................       720       42        762
    Other .......................................       166       10        176
    Valuation allowance .........................      (919)     (54)      (973)
                                                     ------      ---      -----
                                                      6,362      374      6,736
  Deferred tax liabilities:
    Tax reserve for loan losses .................       766       46        812
    Depreciation ................................        68        4         72
    Other .......................................        21        1         22
                                                     ------      ---      -----
       Net deferred tax asset ...................    $5,507      323      5,830
                                                     ======      ===      =====



      The valuation allowance was $973,000 at March 31, 1998 and 1997. The
      valuation allowance relates to realized capital losses on securities
      which the Company may not utilize to offset taxable income.

      Management believes that it is more likely than not that the net deferred
      tax asset will be realized based upon taxable income in the carryback
      period and the probability of future operations generating sufficient
      taxable income. However, there can be no assurance about the level of
      future earnings.

      Under tax law that existed prior to 1996, the Company was generally
      allowed a special bad debt deduction in determining income for tax
      purposes. The deduction was based on either a specified experience formula
      or a percentage of taxable income before such deduction ("reserve
      method"). Legislation was enacted in August 1996 which repealed the
      reserve method for tax purposes. As a result, the Company must instead use
      the direct charge-off method to compute its bad debt deduction. The
      legislation also requires the Company to recapture its post-1987 net
      additions to its tax bad debt reserves. The Company has previously
      provided for this liability in the consolidated financial statements.


                                      F-23


<PAGE>


                            BAYONNE BANCSHARES, INC.
                                AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued


(11), CONTINUED

      Pursuant to SFAS 109, the Company is generally not required to provide
      deferred taxes for the difference between book and tax bad debt expense
      taken in years prior to or ending on December 31, 1987. The tax bad debt
      expense deducted in those years (net of charge-off and recoveries) created
      an approximate $11.5 million tax loan loss reserve which could be
      recognized as taxable income and create a tax liability of up to $4.1
      million under current income tax rates, if one of the following occurs:
      the Company's retained earnings represented by this reserve are used for
      purposes other than to absorb losses from bad debts, including excess
      dividends or distributions in liquidation; the Company redeems its stock;
      the Company fails to meet the definition provided by the Code for a bank;
      or there is a change in the Federal tax law.

(12) BENEFIT PLANS

      (A) PENSION PLAN

            The Company has a qualified, noncontributory defined benefit pension
            plan covering all eligible employees. Retirement benefits are based
            upon a formula utilizing years of service and average monthly
            compensation, as defined. It is the Company's policy to fund the
            maximum amount that can be deducted for Federal income tax purposes.

            The following table sets forth the plan's funded status and amounts
            recognized as of March 31, 1998 and 1997 (in thousands):


                                                              1998         1997
                                                             ------       ------
Actuarial present value of benefit obligations 
  accumulated benefit obligations:
    Vested ..............................................    $1,809       4,292
    Non-vested ..........................................        10          11
                                                             ------       -----
                                                             $1,819       4,303
                                                             ======       =====
Projected benefit obligation for service
  rendered to date ......................................     3,351       5,935
Plan assets at fair value ...............................     2,880       6,067
                                                             ------       -----
        (Deficit) excess of plan assets over
           projected benefit obligation .................      (471)        132
Unrecognized net loss (gain) ............................       501        (227)
Unrecognized net transition liability ...................        16          23
                                                             ------       -----
        Prepaid (accrued) pension cost ..................    $   46         (72)
                                                             ======       =====

                                      F-24


<PAGE>


                            BAYONNE BANCSHARES, INC.
                                AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued


(12), CONTINUED

      The components of net pension expense for the years ended March 31, 1998,
      1997 and 1996 are as follows (in thousands):

                                                         1998     1997     1996
                                                        -----     ----     ----
      Service cost -- benefits earned
        during the period ........................      $ 204      265      219
      Interest cost on projected benefit
        obligation ...............................        353      402      361
      Actual return on plan assets ...............       (188)    (177)    (365)
      Net amortization and deferral ..............       (134)    (228)      (6)
      Recognition of loss due to settlement
        of liabilities ...........................        257      --        --
                                                        -----     ----     ----
    Net pension expense ..........................      $ 492      262      209
                                                        =====      ===      ===

      Assumptions used to develop the net periodic pension cost for the years
      ended March 31, 1998, 1997 and 1996 are as follows:

                                                       1998      1997      1996
                                                       ----      ----      ----
      Discount rate ...............................    7.5%       7%        7%
      Expected long-term rate of return
        on assets .................................    7.5        7         7
      Rate of increase in compensation
        levels ....................................    5          5         5
                                                       ===       ===       ===

      Patrick F.X. Nilan, as President of the Company, retired as of July 1,
      1997. Upon evaluation of the SERP agreement with Mr. Nilan and one other
      retired executive, the Company and the two participating individuals
      agreed to terminate the SERP agreement and pay the benefits due under the
      SERP in a lump-sum payment as of March 31, 1997. Based on the agreement
      between the parties to terminate the SERP, the Company recorded an
      additional $1.8 million in employee benefit expense during the year ended
      March 31, 1997.


                                      F-25


<PAGE>


                            BAYONNE BANCSHARES, INC.
                                AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued


(12), CONTINUED

      (B) EMPLOYEE STOCK OWNERSHIP PLAN

            The Company has a 1995 ESOP for the benefit of employees who meet
            the eligibility requirements, which include having completed five
            years of service with the Company. The ESOP Trust purchased 318,644
            shares of common stock in the Company's initial public offering with
            proceeds from a loan from an unaffiliated lender. The Company makes
            cash contributions to the ESOP on an annual basis sufficient to
            enable the ESOP to make the required loan payments to the
            unaffiliated lender.

            The note payable referred to above bears interest at the lender's
            prime rate, which was 8.50% at March 31, 1998, with interest and
            principal payable quarterly in installments over five years. The
            loan is secured by the shares of the stock purchased.

            As the debt is repaid, shares are released from collateral and
            allocated to qualified employees based on the proportion of debt
            service paid in the year although rights to the shares do not vest
            until the fifth year. Shares pledged as collateral are reported as
            deferred ESOP shares in the consolidated statements of financial
            position. As shares are released from collateral, the Bank reports
            compensation expense equal to the current market price of the
            shares, and the shares become outstanding for earnings per share
            computations.

            In August 1997, the ESOP purchased approximately 8% of the Company
            Common Stock issued in the Conversion and Reorganization. In order
            to fund this purchase, the ESOP borrowed approximately $3.9 million
            from the Company. The loan will be repaid principally from the
            Company's or the Bank's contributions to the ESOP over a period of
            15 years and the collateral for the loan is the Common Stock
            purchased by the ESOP. Subject to receipt of any necessary
            regulatory approvals or options, the Bank may make contributions to
            the ESOP for repayment of the loan, as the participants are all
            employees of the Bank, or to reimburse the Company for contributions
            it makes. Although contributions to the ESOP are discretionary, the
            Company or the Bank intend to make annual contributions to the ESOP
            in an aggregate amount at least equal to the principal and interest
            requirement on the debt. The interest rate for the loan is 8.5%, the
            prime rate published in the Wall Street Journal on August 21, 1997.

            Accordingly, during the years ended March 31, 1998 and 1997, the
            unallocated ESOP shares were amortized by $412,000 and $217,000,
            respectively. At March 31, 1998, 111,525 shares were unallocated and
            had a fair value of $7.2 million. At March 31, 1997, 65,185 shares
            were unallocated and had a fair value of $1.6 million.

      (C) MANAGEMENT RECOGNITION PLAN

            During July 1995, subsequent to stockholder approval, 159,323 shares
            of the Company's Common Stock was acquired by the Management
            Recognition Plan of which 131,460 shares were awarded during Fiscal
            1996.


                                      F-26


<PAGE>


                            BAYONNE BANCSHARES, INC.
                                AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued


(12), CONTINUED

            A Committee of the Board of Directors of the Bank and the Company
            comprised of non-employee directors administers the Recognition Plan
            and makes awards to executive officers pursuant to the Plan. Awards
            under the Recognition Plan become immediately vested in the event of
            death, disability, retirement or a change in control of the Bank or
            its successor; however, in the event of retirement, if the
            participant continued to perform services as a Director or
            consultant on behalf of the Bank, the Company, or an affiliate or,
            in the case of a retiring Director, as a consulting director,
            unvested awards continue to vest in accordance with their original
            vesting schedule until the recipient ceases to perform such
            services, at which time any unvested awards lapse.

            Officers, directors and employees of the Company were awarded a
            total of 131,460 shares of Company Common Stock during the fiscal
            year ended March 31, 1996. Of the total 131,460 shares of Company
            Common Stock acquired by the 1995 Recognition Plan, 69,269 shares of
            the Company Common Stock are presently unearned.

      (D) STOCK OPTION PLANS

            At the 1995 annual meeting of the Company's stockholders a stock
            option plan was approved authorizing 398,307 shares available to be
            granted to certain directors, officers and employees of the Bank.
            Options granted under the plan during August, 1995 amount to 330,596
            shares and are exercisable at $4.43 per share. The options vest over
            a five-year term, and expire after ten years from the date of grant.
            Options exercised during the years ended March 31, 1998 and 1997
            were 3,168 and none, respectively.

            In October 1995, the Financial Accounting Standards Board (FASB)
            issued Statement of Financial Accounting Standards No. 123,
            "Accounting for Stock-Based Compensation" (SFAS 123). This statement
            establishes financial accounting and reporting standards for
            stock-based employee compensation plans. SFAS 123 encourages all
            entities to adopt the "fair value based method" of accounting for
            employee stock compensation plans. However, SFAS 123 also allows an
            entity to continue to measure compensation cost under such plans
            using the "intrinsic value based method" as described in APB No. 25.
            Under the fair value based method, compensation cost is measured at
            the grant date based on the value of the award and is recognized
            over the service period, usually the vesting period. Fair value is
            determined using an option pricing model that takes into account the
            stock price at the grant date, the exercise price, the expected life
            of the option, the volatility of the underlying stock and the
            expected dividends on it, and the risk-free interest rate over the
            expected life of the option.


                                      F-27


<PAGE>


                            BAYONNE BANCSHARES, INC.
                                AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued


(12), CONTINUED

            The Bank continues to recognize compensation expense using the
            method prescribed in APB No. 25. Had compensation cost been
            determined consistent with SFAS 123 for options granted during
            fiscal 1996, the Bank's fiscal 1998, 1997 and 1996 compensation cost
            would have increased by $40,000, $40,000 and $26,000, respectively.
            As a result, net income (loss) and net income per share for fiscal
            1998, 1997 and 1996 would have been changed to $4.3 million or $.48 
            per diluted share, ($3.3) million or ($.37) per diluted share and
            $589,000 or $0.07 per diluted share, respectively. The stock option
            plan's fair value of options granted is estimated on the date of
            grant using the Black-Scholes option-pricing model with the
            following assumptions used for the grants issued during 1996:
            dividend yield of 3.85%, expected volatility 23.79%; risk-free
            interest rate of 6.18%, and expected lives of 5 years. There were no
            option plans prior to 1996.

            In March 1998, the Company's stockholders approved the 1998
            Stock-Based Incentive Plan authorizing the granting of options to
            purchase common stock, option related awards and awards of common
            stock (collectively "awards"). The maximum number of shares reserved
            for awards under the incentive plan is 681,687 shares with 486,919
            shares reserved for the purchase pursuant to the exercising options
            and options related awards granted under the Incentive Plan. The
            maximum number of shares reserved for the award of shares ("stock
            awards") is 104,768 shares. All officers, other employees and
            outside directors are eligible to receive awards under the Incentive
            Plan. The options vest over a five-year term and expire after ten
            years from the date of grant. The Incentive Plan also provides for
            a committee of non-employee directors of the Company with the
            ability to condition or restrict the vesting or exercisability of
            any Award upon the achievement of performance targets or goals as
            set forth under the Incentive Plan. There were no determinations
            made regarding the granting of awards or options under the Incentive
            Plan as of March 31, 1998.

            The Company adopted the Bank's existing 1995 Stock Option Plan and
            1995 Recognition Plan (collectively the "Plans") as plans of the
            Company upon consummation of the Conversion and Reorganization and
            issued Common Stock in lieu of Bank Common Stock to the Plans
            pursuant in their terms. As of the effective date of the Conversion
            and Reorganization, rights outstanding under the Plans were assumed
            by the Company and constitute rights only for shares of Company
            Common Stock, with each such right being for a number of shares of
            Common Stock equal to the number of shares of Bank Common Stock that
            were available thereunder immediately prior to such effective date
            multiplied by the exchange ratio of 2.933 (the "Exchange Ratio").
            The price of each right has been adjusted to reflect the Exchange
            Ratio so that the aggregate purchase price of the right is
            unaffected, but there is no change in the other terms and conditions
            of the rights. The Company has amended the Plans to reflect that it
            has adopted the Plans and that there will be no adverse effect upon
            the rights outstanding thereunder.


                                      F-28


<PAGE>


                            BAYONNE BANCSHARES, INC.
                                AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued


(13) POSTRETIREMENT BENEFITS

      The following table sets forth the net periodic postretirement benefit
      cost and accumulated postretirement benefit obligation (APBO) as
      determined by the plan actuaries as of the latest actuarial valuation date
      is as follows (in thousands):

                                                             1998        1997
                                                           -------      ------
      Accumulated postretirement benefit
        obligation (APBO) ..............................   $(1,719)     (1,900)
      Fair value of assets .............................      --          --
                                                           -------      ------
        Projected benefit obligation ...................    (1,719)     (1,900)
      Accumulated net unrecognized gain ................      (539)       (523)
                                                           -------      ------
        Net postretirement accrued benefit cost ........   $(2,258)     (2,423)
                                                           =======      ====== 


      Net postretirement benefit costs for the years ended March 31, 1998, 1997
      and 1996 are as follows (in thousands):

                                                       1998      1997      1996
                                                       ----      ----      ----
      Service cost ................................    $ 66        82        65
      Interest cost on accumulated post-
        retirement benefit obligation .............     116       122       114
      Amortization of unrecognized
        net gain ..................................     (28)      (77)      (14)
                                                       ----       ---       ---
                                                       $154       127       165
                                                       ====       ===       ===

      For measurement purposes, the cost of medical benefits was projected to
      increase at a rate of 13% in 1994, thereafter decreasing 1% per year (9%
      in 1998) until a stable 4% medical inflation rate is reached. The present
      value of the accumulated benefit obligation assumed a 7.5% discount rate
      compounded annually on March 31, 1998 and 1997. The plan is unfunded as of
      March 31, 1998, as the Company funds the plan on a cash basis.

(14) COMMITMENTS AND CONTINGENCIES

      The Company is a party to commitments to extend credit in the normal
      course of business to meet the financial needs of its customers.
      Commitments to extend credit are agreements to lend money to a customer as
      long as there is no violation of any condition established in the
      contract. Commitments to fund mortgage loans generally have fixed
      expiration dates or other termination clauses, whereas home equity lines
      of credit have no expiration date. Since some commitments are expected to
      expire without being drawn upon, the total commitment amounts do not
      necessarily represent future cash requirements. The Company evaluates each
      customer's creditworthiness on a case-by-case basis. Collateral is not
      required by the Company for loan commitments. The Bank's loans are located
      primarily in the State of New Jersey.


                                      F-29


<PAGE>


                            BAYONNE BANCSHARES, INC.
                                AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued


(14), CONTINUED

      At March 31, 1998 and 1997, the Company had loan commitments of $8.835
      million and $3.6 million, respectively, consisting primarily of fixed rate
      loans which are not included in the accompanying consolidated financial
      statements. The commitments at March 31, 1998 have commitment periods that
      range from 90 to 120 days and interest rates that range from 5.75% -
      15.00%. There is no exposure to credit loss in the event the other party
      to commitments to extend credit does not exercise its right to borrow
      under the commitment.

      In the normal course of business, the Company may be a party to various
      outstanding legal proceedings and claims. In the opinion of management,
      the financial position of the Company will not be materially affected by
      the outcome of such legal proceedings and claims.

(15) FAIR VALUE OF FINANCIAL INSTRUMENTS

      The fair value of a financial instrument is the amount at which the asset
      or obligation could be exchanged in a current transaction between willing
      parties, other than in a forced or liquidation sale. Fair value estimates
      are made at a specific point in time based on relevant market information
      and information about the financial instrument. Such estimates do not
      include any premium or discount that could result from offering for sale
      at one time the Bank's entire holdings of a particular financial
      instrument. Because no market value exists for a significant portion of
      the financial instruments, fair value estimates are based on judgments
      regarding future expected loss experience, current economic conditions,
      risk characteristics of various financial instruments, and other
      assumptions, many of which involve circumstances outside the control of
      management. Because of the uncertainties surrounding these factors and
      assumptions, the reported fair values represent estimates only and,
      therefore, cannot be compared to the historical accounting model. Changes
      in assumptions or methodologies could significantly affect the estimates
      of fair value.

      Fair value estimates presented are based on both on- and off-balance-sheet
      financial instruments and no attempt has been made to estimate the value
      of anticipated future business and the value of assets and liabilities
      that are not considered financial instruments. In addition, the tax
      consequences related to the realization of the unrealized gains and losses
      can have a potential effect on fair value estimates and have not been
      considered in any of the estimates. The fair value information supplements
      the basic consolidated financial statements and other traditional
      financial data presented throughout the consolidated financial statements,
      and the aggregate fair value of financial instruments presented does not
      represent the underlying value of the Company taken as a whole and should
      not be compared with the fair value of other financial institutions, which
      may differ depending on the assumptions used and the valuation techniques
      employed.

      The following methods and assumptions were used to estimate the fair value
      of significant financial instruments at March 31, 1998 and 1997:


                                      F-30


<PAGE>


                            BAYONNE BANCSHARES, INC.
                                AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued


(15), CONTINUED

            FINANCIAL ASSETS

            The carrying amount of cash and cash equivalents is considered to
            approximate fair value. The fair values of securities available for
            sale and investment securities are based on quoted market prices.
            The fair value of loans represents the present value of the
            estimated future cash flows discounted at estimates of market
            interest rates adjusted for criteria discussed above. Fair value of
            significant nonperforming loans is generally based on appraisals of
            collateral securing such loans. If such appraisals are not
            available, estimated cash flows are discounted employing a rate that
            incorporates the risk associated with such cash flows. The fair
            value of the FHLB and FHLMC stock is the same as its carrying value.

            FINANCIAL LIABILITIES

            The carrying amounts of deposit liabilities payable on demand are
            considered to approximate fair value. The fair value of fixed
            maturity deposits was estimated by discounting estimated future cash
            flows using rates currently offered for deposit products with
            similar maturities. Long-term borrowing fair values are discounted
            using rates available on borrowings with similar terms and
            maturities.

            OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS

            The fair value of commitments to extend credit is estimated using
            the fees currently charged to enter into similar arrangements. The
            fair value of letters of credit is based on the estimated costs to
            terminate them or otherwise settle the obligations with the
            counterparts.

            The carrying amounts and related fair values at March 31, 1998 and
            1997 are as follows (in thousands):

                                                                   1998
                                                          ----------------------
                                                          Carrying        Fair
                                                           amount         value
                                                          --------       -------
            Financial assets:
              Cash and cash equivalents ..............    $ 16,617        16,617
              Securities available for sale ..........     362,778       362,778
              Securities held to maturity ............      10,274        10,494
              Net loans ..............................     235,465       234,661
              FHLB stock .............................       7,460         7,460
            Financial liabilities:
              Deposits ...............................     423,545       424,451
              Borrowings .............................     115,380       113,548
                                                          ========       =======

                                      F-31


<PAGE>



                            BAYONNE BANCSHARES, INC.
                                AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued


(15), CONTINUED

                                                                  1997
                                                       ----------------------
                                                       Carrying        Fair
                                                        amount         value
                                                       --------       -------
        Financial assets:
           Cash and cash equivalents ..............    $ 15,472        15,472
           Securities available for sale ..........     290,614       290,614
           Securities held to maturity ............      11,277        11,555
           Net loans ..............................     235,624       241,587
           FHLB stock .............................       7,460         7,460
        Financial liabilities:
           Deposits ...............................     444,139       447,970
           Borrowings .............................      75,598        73,238
                                                        =======        ======

(16) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

      The following table summarizes certain fiscal 1998 and 1997 quarterly
      financial data:

                                                      Quarter Ended
                                        ----------------------------------------
                                        Mar. 31,   Dec. 31,   Sept. 30  June 30,
                                          1998       1997       1997      1997
                                        -------     ------     ------    ------
                                         (In thousands, except per share data)

Interest income ......................  $10,538     10,137     10,293     9,892
Interest expense .....................    6,075      6,053      6,429     6,315
Net interest income ..................    4,463      4,084      3,864     3,577
Provision for loan losses ............       45         45         45        45
Noninterest income ..... .............      364        298        283       398
Operating expenses ...................    2,517      2,489      2,564     2,600
Income before tax expense ............    2,265      1,848      1,538     1,330
Net income for the quarter ...........    1,391      1,181        969       838
Basic earnings per share .............     0.16       0.13       0.11      0.09
Diluted earnings per share ...........     0.16       0.13       0.11      0.09


                                                      Quarter Ended
                                        ----------------------------------------
                                        Mar. 31,   Dec. 31,   Sept. 30  June 30,
                                          1997       1996       1996      1996
                                        -------     ------     ------    ------
                                         (In thousands, except per share data)

Interest income ......................  $ 9,917      9,647     10,712    10,850
Interest expense .....................    6,170      6,672      7,491     7,136
Net interest income ..................    3,747      2,975      3,221     3,714
Provision for loan losses ............      230         30         30        30
Noninterest income (loss) ............      142        690     (2,958)      330
Operating expenses ...................    4,047      2,572      5,428     2,555
Income (loss) before tax expense .....     (388)     1,063     (5,195)    1,459
Net income (loss) for the quarter ....     (244)       667     (4,557)      919
Basic earnings (loss) per share ......    (0.03)      0.08      (0.52)     0.11
Diluted earnings (loss) per share ....    (0.03)      0.08      (0.52)     0.10


                                      F-32


<PAGE>


                            BAYONNE BANCSHARES, INC.
                                AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued


(17) INSURANCE FUNDS LEGISLATION

      On September 30, 1996, legislation was enacted which, among other things,
      imposed a special one-time assessment on deposits insured by the Savings
      Associations Insurance Fund (SAIF) to recapitalize SAIF and spread the
      obligations for payment of Financing Corporation (FICO) bonds across all
      SAIF and Bank Insurance Fund (BIF) members. The Federal Deposit Insurance
      Corporation (FDIC) special assessment being levied amounts to 65.7 basis
      points on SAIF assessable deposits held as of March 31, 1995. The Company
      recorded a $2.9 million charge (before tax-effect) as a result of the FDIC
      special assessment. This legislation will eliminate the substantial
      disparity between the amount that BIF and SAIF member institutions had
      been paying for deposit insurance premiums.

      Beginning on January 1, 1997, BIF members will pay a portion of the FICO
      payment equal to 1.29 basis points per $100 in BIF-insured deposits,
      compared to 6.44 basis points per $100 in SAIF-insured deposits, and will
      pay a pro rata share (approximately 2.4 basis points per $100 in deposits)
      of the FICO payment on the earlier of January 1, 2000 or the date upon
      which the last savings association ceases to exist. The legislation also
      requires BIF and SAIF to be merged by January 1, 1999, provided that
      subsequent legislation is adopted to eliminate the savings association
      charter and no savings associations remain as of that time.

(18) RECENT ACCOUNTING PRONOUNCEMENTS

      In June 1997, the FASB issued Statement of Financial Accounting Standards
      No. 130, "Reporting Comprehensive Income". This statement establishes
      standards for reporting and display of comprehensive income and its
      components (revenues, expenses, gains and losses) in a full set of general
      purpose financial statements. This Statement is effective for fiscal years
      beginning after December 31, 1997. Reclassification of financial
      statements for earlier periods provided for comparative purposes is
      required. The Company has determined that the impact of this statement
      will not have a material effect on the Company's operations.

(19) RELATED-PARTY TRANSACTIONS

      The Company has paid amounts of $27,000, $31,000 and $16,000 for the years
      ended March 31, 1998, 1997 and 1996, respectively, to a director of the
      Company for legal services in connection with the acquisition of real
      estate on foreclosed loans. The Company has also paid amounts of $20,000,
      $20,000 and $20,000 for the years ended March 31, 1998, 1997 and 1996,
      respectively, to a director for inspection fees of properties maintained
      by the Company in the real estate portfolio.

(20) EARNING PER COMMON SHARE

      The Bank adopted Statement of Financial Accounting Standards No. 128,
      "Earnings Per Share (SFAS 128)," on March 31, 1998. All earnings per share
      data for previous periods have been restated to conform with the
      provisions of SFAS 128.


                                      F-33


<PAGE>


                            BAYONNE BANCSHARES, INC.
                                AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued


(20), CONTINUED

      The following table summarizes the computation of basic earnings and
      diluted earnings per common share for the years ended March 31, 1998,
      1997, and 1996:

                                                 1998        1997        1996
                                                 ----        ----        ----
                                                     (in thousands, except
                                                        per share data)
                                                      
Earnings available to common shareholders ... $    4,379  $   (3,215)       615
Weighted average common shares outstanding ..  8,865,966   8,777,648  8,670,496
Plus common stock equivalents ...............     97,546      38,924     25,133
Diluted weighted average shares outstanding .  8,963,512   8,816,572  8,695,629
Earnings per common share:                               
  Basic .....................................       0.49       (0.37)      0.07
  Diluted ...................................       0.49       (0.37)      0.07
                                               =========   =========  =========
                                                 
(21) PARENT COMPANY INFORMATION

                            BAYONNE BANCSHARES, INC.

                           Consolidated Balance Sheet

                                 March 31, 1998

                                 (in thousands)

                                     ASSETS

      Cash and cash equivalents ...............................    $ 1,160
      Investments and securities available for sale ...........      8,741
      Investments in subsidiaries .............................     75,539
      Due from subsidiaries ...................................     13,179
      Other assets ............................................        335
                                                                   -------
          Total assets ........................................    $98,954
                                                                   =======


                      LIABILITIES AND SHAREHOLDERS' EQUITY

      Accrued expenses ........................................    $    35
      Accrued income taxes payable ............................        270
                                                                   -------
                                                                       305
      Total shareholders' equity ..............................     98,649
                                                                   -------
          Total liabilities and shareholders' equity ..........    $98,954
                                                                   =======


                                      F-34


<PAGE>


                            BAYONNE BANCSHARES, INC.
                                AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued


(21), CONTINUED


                            BAYONNE BANCSHARES, INC.

                        Consolidated Statement of Income

                  Period August 22, 1997 through March 31, 1998

                                 (in thousands)


      Operating income:
        Interest from subsidiaries ............................    $  835
        Other interest ........................................       253
                                                                   ------
          Total operating income ..............................     1,088
                                                                   ------
      Operating expenses:
        MRP expenses ..........................................       278
        Management fees by subsidiary .........................        35
                                                                   ------
          Total operating expenses ............................       313
                                                                   ------
          Income before taxes and equity in
            undistributed earnings of subsidiary ..............       775
      Federal and state income tax ............................       306
                                                                   ------
                                                                      469
      Equity in undistributed earnings of
        subsidiaries ..........................................     2,473
                                                                   ------
          Net income ..........................................    $2,942
                                                                   ======


                                      F-35


<PAGE>


                            BAYONNE BANCSHARES, INC.
                                AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued


(21), CONTINUED


                            BAYONNE BANCSHARES, INC.

                      Consolidated Statement of Cash Flows

                  Period August 22, 1997 through March 31, 1998

                                 (in thousands)


Cash flows from operating activities:
    Net income ..................................................      $  2,942
    Adjustments to reconcile net income to net cash
       provides by operating activities:
          Increase in accrued interest receivable, net ..........          (320)
          Increase in other assets ..............................           (15)
          Amortization of MRP shares ............................           278
          Increase in accrued expenses and other
              liabilities .......................................           305
          Equity in undistributed net income of
              subsidiaries ......................................        (2,473)
              Net cash provided by operating activities .........           717

Cash flows from investing activities:
    Purchases of securities available for sale ..................        (8,647)
    Advances to subsidiaries ....................................       (13,179)
    Capital contributions to subsidiaries .......................       (23,371)
                                                                       --------
              Net cash used in investing activities .............       (45,197)

Cash flows from financing activities:
    Dividends paid ..............................................        (1,158)
    Stock options exercised .....................................           315
    Proceeds from issuance of common stock ......................        46,483
                                                                       --------
              Net cash provided by financing activities .........        45,640

Increase in cash and due from banks .............................         1,160
Cash and due from banks at beginning of period ..................          --
                                                                       --------
Cash and due from banks at end of period ........................      $  1,160
                                                                       ========


                                      F-36

<PAGE>


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

     None.

                                    PART III

ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT

     Information concerning Directors and Executive Officers of the Company is
incorporated herein by reference from the Company's Proxy Statement for the
Annual Meeting of Shareholders to be held on September 3, 1998, at the section
titled "Information With Respect to the Nominees, Continuing Directors and
Executive Officers of the Company."

ITEM 11. EXECUTIVE COMPENSATION

    Information concerning executive compensation is incorporated herein by
reference from the Company's Proxy Statement for the Annual Meeting of
Shareholders to be held on September 3, 1998, at the section titled "Executive
Compensation."

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

    Information concerning security ownership of certain owners and management
is incorporated herein by reference from the Company's Proxy Statement for the
Annual Meeting of Shareholders to be held on September 3, 1998, at the sections
titled "Security Ownership of Certain Beneficial Owners" and "Information With
Respect to the Nominees, Continuing Directors and Executive Officers of the
Company."

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

    Information concerning certain relationships and related transactions is
incorporated herein by reference from the Company's Proxy Statement for the
Annual Meeting of Shareholders to be held on September 3, 1998, at the section
titled "Transactions With Certain Related Persons."


                                     PART IV

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

     (a)(1) FINANCIAL STATEMENTS

               These documents are listed in the Index to Consolidated Financial
               Statements under Item 8.

     (a)(2) FINANCIAL STATEMENT SCHEDULES

               No financial statement schedules are filed because the required
               information is not applicable or is included in the consolidated
               financial statements or related notes.


                                       60


<PAGE>


     (a)(3) EXHIBITS

             3.1    Certificate of Incorporation of Bayonne Bancshares, Inc.*

             3.2    Bylaws of Bayonne Bancshares, Inc.*

             4.0    Stock Certificate of Bayonne Bancshares, Inc.*

            10.1    Form of First Savings Bank of New Jersey, SLA and Bayonne 
                      Bankshares, M.H.C. 1995 Stock Option Plan*

            10.2    Form of First Savings Bank of New Jersey, SLA and Bayonne 
                      Bankshares, M.H.C. 1995 Recognition and Retention Plan*

            10.3    Form of First Savings Bank of New Jersey, SLA 1995 Employee
                      Stock Ownership Plan and Trust*

            10.4    Form of Supplemental Executive Retirement Income-Deferred 
                      Compensation Agreement between First Savings Bank of 
                      New Jersey, SLA and certain executive officers*

            10.5    Form of Employment Agreement between First Savings Bank of
                      New Jersey, SLA and certain executive officers*

            10.6    Form of Employment Agreement between Bayonne Bancshares, 
                      Inc. and certain executive officers*

            10.7    Form of Change in Control Agreement between First Savings 
                      Bank of New Jersey, SLA and certain executive officers*

            10.8    Form of Change in Control Agreement between Bayonne 
                      Bancshares, Inc. and certain executive officers*

            10.9    Form of First Savings Bank of New Jersey, SLA Employee 
                       Severance Compensation Plan*

            10.10   Form of Bayonne Bancshares, Inc. 1998 Stock-Based 
                      Incentive Plan**

            11.0    Computation of earnings per share (filed herewith under
                      Item 8)

            21.0    Subsidiary information is incorporated herein by reference
                      to "Part I -- Subsidiary Activities."

            27.0    Financial Data Schedule (filed herewith)


                                       61


<PAGE>


     (b) REPORTS ON FORM 8-K

          The Company did not file a Current Report on Form 8-K during the last
          quarter of fiscal 1998.

---------

 *  Incorporated by reference into this document from the Exhibits to the Form
    S-1 Registration Statement, and all amendments thereto, originally filed
    with the SEC on March 13, 1997 (File No. 333-23199).

**  Incorporated by reference into this document from the Proxy Statement for
    the Special Meeting of Shareholders, filed with the SEC on February 24, 1998
    (File No. 0-22499).


                                       62



<PAGE>


                                   SIGNATURES

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


                                           BAYONNE BANCSHARES, INC.


Date: June 25, 1998                        By: /s/ MICHAEL NILAN
                                               --------------------------------
                                               Michael Nilan
                                               Director, President and Chief
                                               Executive Officer


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


By: /s/ PATRICK F.X. NILAN
    --------------------------------
    Patrick F.X. Nilan
    Chairman of the Board

Date: June 25, 1998



By: /s/ MICHAEL NILAN                      By: /s/ EUGENE V. MALINOWSKI
    --------------------------------           --------------------------------
    Michael Nilan                              Eugene V. Malinowski
    Director, President and Chief              Vice President and Chief
    Executive Officer                          Financial Officer (Principal 
    (Principal Executive Officer)              Financial and Accounting Officer)

Date: June 25, 1998                        Date: June 25, 1998



By: /s/ JOSEPH L. WISNIEWSKI               By: /s/ FREDERICK WHELPLY
    --------------------------------           --------------------------------
    Joseph L. Wisniewski                       Frederick Whelply
    Director                                   Director

Date: June 25, 1998                        Date: June 25, 1998



By: /s/ JAMES F. SISK                      By: /s/ PATRICK D. CONAGHAN
    --------------------------------           --------------------------------
    James F. Sisk                              Patrick D. Conaghan
    Director                                   Director

Date: June 25, 1998                        Date: June 25, 1998


                                       63