United States
                       SECURITIES AND EXCHANGE COMMISSION
                             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 Fiscal Year May 31, 1998

/ /  TRANSITION  REPORT  PURSUANT  TO  SECTION  13 OR  15(d)  OF THE  SECURITIES
     EXCHANGE ACT OF 1934 For the transaction period from  _________________  to
     _________________

                                     0-23293
                            (Commission File Number)

                         WARWICK COMMUNITY BANCORP, INC.
             (Exact Name of Registrant as Specified in its Charter)
  
           Delaware                                             06-1497903      
(State or Other Jurisdiction of                              (I.R.S. Employer   
Incorporation or Organization)                            Identification Number)
                                                       

           18 Oakland Avenue,                                   10990-0591  
            Warwick, New York                                   (Zip Code)  
(Address of Principal Executive Offices)                        

                                 (914) 986-2206
               (Registrant's Telephone Number including area code)


           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  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 Registrant's  knowledge,  in definitive proxy or information  statements
incorporated  by  reference in Part III of this Form 10-K or any  amendments  to
this Form 10-K. _X_

     As of August 21,  1998,  there were  6,606,548  shares of the  Registrant's
common stock outstanding.  The aggregate market value of the Registrant's common
stock (based on closing price quoted on August 21, 1998) held by  non-affiliates
was approximately $87,262,611.

                       DOCUMENTS INCORPORATED BY REFERENCE

(1)  Portions of the  Registrant's  Annual Report to  Shareholders  for the year
     ended May 31, 1998 are  incorporated by reference into Items 1, 5, 6, 7, 7A
     and 8 of Part II hereof and Item 14 of Part IV hereof.

(2)  Portions of the definitive Proxy Statement for the Registrant's 1998 Annual
     Meeting of Shareholders are incorporated by reference into Items 10, 11, 12
     and 13 of Part III hereof.


<PAGE>


                                     PART I

ITEM 1. Business

General

     Warwick  Community  Bancorp,  Inc.  (the  "Registrant")  is a bank  holding
company  incorporated  in September 1997 under the laws of the State of Delaware
and is  registered  under  the Bank  Holding  Company  Act of 1956,  as  amended
("BHCA").  The  Registrant  was  organized  for the purpose of owning all of the
outstanding  capital stock of The Warwick Savings Bank (the "Bank"). On December
23, 1997,  the Bank  completed its  conversion  from a New York State  chartered
mutual  savings  bank to a New York State  chartered  stock  savings  bank,  the
Registrant  completed the sale of 6,414,125 shares of common stock at $10.00 per
share and the Registrant made a charitable contribution of 192,423 shares of its
common  stock  to  the  Warwick  Savings  Foundation,  a  charitable  foundation
organized by the Registrant and the Bank. The Registrant's  operations commenced
on December 23, 1997 and consist  principally of the operations of the Bank, the
Registrant's  only direct  subsidiary.  The Registrant,  the Bank and the Bank's
subsidiaries are sometimes collectively referred to herein as the "Company."

     The Bank was organized in 1875 as a New York State chartered mutual savings
bank and became a New York State  chartered  stock  savings bank on December 23,
1997. The Bank's  deposits are insured by the Bank Insurance Fund ("BIF") of the
Federal  Deposit  Insurance  Corporation  ("FDIC")  up to  the  maximum  amounts
permitted by law.

     The Bank is a community-oriented  savings bank whose principal business has
been and continues to be attracting  retail  deposits from the general public in
the area  surrounding its four branches and investing  those deposits,  together
with funds  generated  from  operations  and  borrowings,  primarily  in one- to
four-family residential mortgage loans,  mortgage-backed securities,  commercial
business  and  commercial   real  estate  loans  and  various  debt  and  equity
securities.  The Bank also  originates  home equity  loans (Good  Neighbor  Home
Loans) and lines of credit,  consumer  loans,  student  loans and its own credit
card loans. Additionally, the Bank sells Savings Bank Life Insurance.

     The Bank's  revenues  are  derived  principally  from the  interest  on its
mortgage  loans,  securities,  commercial  and  consumer  loans and, to a lesser
degree,  from  its  mortgage  banking  activities,  loan and  securities  sales,
servicing fee income and income derived from non-traditional investment products
offered through its wholly owned subsidiary,  WSB Financial Services, Inc. ("WSB
Financial").  The  Bank's  primary  sources of funds are  deposits,  borrowings,
principal and interest  payments on loans and  securities  and proceeds from the
sale of loans and securities.

Market Area

     The Bank has been,  and  intends to  continue  to be, a  community-oriented
savings  institution  offering a variety of financial services to meet the needs
of the communities it serves. The Bank maintains its headquarters in the village
of Warwick in Orange  County,  New York and  operates  three  additional  branch
offices  located in the village of Monroe,  the town of Woodbury and the town of
Wallkill,  Orange County,  New York. The Bank's primary deposit  gathering areas
are currently


                                       -2-
<PAGE>


concentrated  in  proximity  to its  full-service  banking  offices.  The Bank's
current primary  lending market  includes not only Orange County,  New York, but
also  Rockland,  Dutchess  and,  to a lesser  extent,  Westchester,  Putnam  and
Sullivan Counties, New York, by virtue of the various loan originators servicing
these areas. In addition,  with its mortgage  banking  subsidiary,  WSB Mortgage
Company of New Jersey, Inc. ("WSB Mortgage"),  and its attendant loan production
office in West Milford,  Passaic County,  New Jersey,  the Bank has expanded its
mortgage banking operations into the northeastern New Jersey market.

     Although  the Bank's  market  area is  predominantly  rural with many small
towns,  many of the  area's  residents  work in  northern  New  Jersey,  western
Connecticut and New York City. Some of the county's major employers are ShopRite
Supermarkets,  the Arden Hill  Hospital  and related life care  complex,  Horton
Memorial  Hospital,  Yellow  Freight,  the Wakefern  Corporation  and the United
States Military Academy at West Point.

     The Bank's market area grew  significantly in population  during the 1980's
as rising housing prices closer to New York City,  coupled with the abundance of
vacant  land in Orange  County,  led to a boom in housing  construction.  As the
economy  throughout  the region  declined in the late  1980's and early  1990's,
communities  surrounding the Bank's  offices,  particularly in the Warwick area,
continued to  experience  growth,  but more slowly.  The  conversion  of Stewart
International  Airport,  approximately  20 miles to the  northeast of the Bank's
main office in Warwick, into a full-service  commercial airport in 1990 gave the
Bank's market area an additional  boost.  However,  the health of the economy in
the New York City  metropolitan  area has,  and will  continue to have, a direct
impact on the economic  well-being  of residents  and  businesses  in the Bank's
market area.

Competition

     The Bank faces  substantial  competition  for both deposits and loans.  The
deregulation of the financial services industry has led to increased competition
among savings banks and other financial  institutions for a significant  portion
of the deposit and lending  activity  that had  traditionally  been the arena of
savings banks and savings and loan  associations.  The Bank competes for savings
deposits with other savings  banks,  savings and loan  associations,  commercial
banks, credit unions, money market mutual funds, insurance companies,  brokerage
firms and other financial  institutions,  many of which are substantially larger
in size than the Bank.

     The Bank's  competition  for loans comes  principally  from savings  banks,
savings and loan  associations,  commercial  banks,  mortgage  bankers,  finance
companies and other institutional  lenders, many of whom maintain offices in the
Bank's  market  area.  The  Bank's  principal  methods  of  competition  include
providing  personal  customer  service,  a variety  of  financial  services  and
competitive  loan and deposit pricing,  as well as implementing  advertising and
marketing programs.

     While the Bank is subject to competition from other financial institutions,
some of which have much greater  financial  and  marketing  resources,  the Bank
believes it benefits by its community bank orientation as well as its relatively
high  core  deposit  base.  Management  believes  that the  variety,  depth  and
stability of the  communities  in which the Bank is located  support the service
and lending activities conducted by the Bank. The relative economic stability of
the  Bank's   lending  area  is  reflected  in  the  small  number  of  mortgage
delinquencies experienced by the Bank.


                                       -3-
<PAGE>


Lending Activities

     Loan Portfolio Composition. The Bank's loan portfolio consists primarily of
conventional first mortgage loans secured by one- to four-family residences.  At
May 31,  1998,  the Bank had total gross  loans  outstanding  of $214.5  million
(before  deducting the allowance for loan losses and net deferred loan fees), of
which  $129.9  million,  or  60.6%,  were  one- to  four-family,  owner-occupied
residential  first mortgage loans.  The remainder  consisted of $34.1 million of
commercial  business and commercial  real estate loans, or 16.0% of total loans,
$15.9  million in home equity  loans,  or 7.4% of total  loans,  $2.8 million in
residential construction mortgage loans (net of undisbursed portion), or 1.3% of
total  loans,  and $14.0  million in  consumer  loans,  or 6.5% of total  loans.
Additionally,  the Bank originates  Veterans  Administration  ("VA")  guaranteed
loans and Federal Housing  Authority  ("FHA") insured loans. For the fiscal year
ended May 31, 1998, the Bank originated $3.6 million of such loans.  The Bank is
active in the origination of State of New York Mortgage  Association  ("SONYMA")
loans,  which are subject to certain customer  eligibility  requirements and are
subsequently  sold to the State of New York.  For the fiscal year ending May 31,
1998, the Bank  originated  $8.6 million in SONYMA loans.  The Bank continues to
service  these loans for such agency and,  instead of a servicing  fee, the Bank
obtains a state (franchise) income tax credit.

     The types of loans that the Bank may  originate  are subject to federal and
state  laws and  regulations.  Interest  rates  charged by the Bank on loans are
affected by the demand for such loans, the supply of money available for lending
purposes  and the  rates  offered  by  competitors.  These  factors  are in turn
affected by, among other things,  economic conditions,  monetary policies of the
federal  government,  including  the Board of Governors  of the Federal  Reserve
System ("FRB"), and legislative tax policies.


                                       -4-
<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 May 31,
                                      ---------------------------------------------------------------------------------- 
                                                1998                          1997                         1996            
                                      ------------------------     ------------------------     ------------------------ 
                                                        Percent                      Percent                      Percent  
                                                          of                           of                           of     
                                       Amount            Total      Amount            Total      Amount            Total   
                                      ---------          -----     ---------          -----     ---------          ----- 
                                                                    (Dollars in thousands)
Mortgage loans:
Conventional one-
to-four-family
  loans ...........................   $ 129,915          60.57%    $  81,803          58.56%    $  61,936          56.18%
Mortgage loans held for sale ......      17,237           8.04         4,832           3.46         5,054           4.59

VA or FHA loans ...................         595           0.28           749           0.54           376           0.34

Home equity loans .................      15,876           7.40        13,449           9.63        11,040          10.02

Residential construction loans ....       6,703           3.13         4,110           2.94           961           0.87

Undisbursed portion of
  construction loans ..............      (3,939)         (1.84)       (2,118)         (1.52)       (1,838)         (1.67)
                                      ---------        -------     ---------         ------     ---------         ------ 
     Total mortgage loans .........     166,387          77.58       102,825          73.61        77,529          70.33 
                                      ---------        -------     ---------         ------     ---------         ------ 

Consumer and  other loans:
Commercial ........................      34,114          15.91        23,418          16.76        19,385          17.59
Automobile ........................       8,352           3.89         7,738           5.54         7,496           6.80
Student ...........................       1,353           0.63         1,332           0.95         1,533           1.39
Credit card .......................       1,239           0.58         1,334           0.95         1,195           1.08
Other consumer loans ..............       3,026           1.41         3,054           2.19         3,102           2.81
                                      ---------        -------     ---------         ------     ---------         ------ 
     Total consumer and other loans      48,084          22.42        36,876          26.39        32,711          29.67
                                      ---------        -------     ---------         ------     ---------         ------ 
     Total loans ..................     214,471         100.00%      139,701         100.00%      110,240         100.00%
                                                       =======                       ======                       ====== 
Discounts, premiums and         
  deferred loan fees, net .........        (293)                        (146)                         (38)
   
Allowance for loan losses .........      (1,513)                      (1,232)                      (1,305) 
                                      ---------                    ---------                       ------  

Total loans, net ..................   $ 212,665                    $ 138,323                    $ 108,897 
                                      =========                    =========                    ========= 

<CAPTION>
                                                           At May 31,
                                      -----------------------------------------------------
                                                 1995                         1994   
                                      ------------------------     ------------------------ 
                                                        Percent                      Percent            
                                                          of                           of  
                                       Amount            Total      Amount            Total 
                                      ---------          -----     ---------          ----- 
                                                       (Dollars in thousands)
<S>                                   <C>                <C>       <C>                <C>   
Conventional one-
to-four-family
  loans ...........................   $  78,562          63.34%    $  71,762          65.42%
Mortgage loans held for sale ......       2,968           2.39            --             --

VA or FHA loans ...................         182           0.15           211           0.19

Home equity loans .................       9,714           7.83        10,051           9.16

Residential construction loans ....       2,901           2.34         1,613           1.47

Undisbursed portion of
  construction loans ..............      (1,307)         (1.05)       (1,169)         (1.06)
                                      ---------         ------     ---------         ------ 
     Total mortgage loans .........      93,020          75.00        82,468          75.18                  
                                      ---------         ------     ---------         ------ 

Consumer and  other loans:
Commercial ........................      17,772          14.33        15,472          14.10
Automobile ........................       7,483           6.03         6,621           6.04
Student ...........................       1,732           1.40         1,438           1.31
Credit card .......................       1,165           0.94         1,285           1.17
Other consumer loans ..............       2,855           2.30         2,410           2.20
                                      ---------         ------     ---------         ------ 
     Total consumer and other loans      31,007          25.00        27,226          24.82
                                      ---------         ------     ---------         ------ 
     Total loans ..................     124,027         100.00%      109,694         100.00%
                                                        ======                      ====== 
Discounts, premiums and          
  deferred loan fees, net .........        (158)                        (187)
Allowance for loan losses .........      (1,206)                        (909)
                                      ---------                     ---------      

Total loans, net ..................   $ 122,663                    $ 108,598
                                      =========                    =========
</TABLE>


     Loan Maturity.  The following table shows the  contractual  maturity of the
Bank's loans at May 31, 1998.  The table  reflects the entire  unpaid  principal
balance in the  maturity  period that  includes the final loan payment date and,
accordingly,  does not give effect to periodic principal  repayments or possible
prepayments.  Principal repayments and prepayments totaled $11.5 million,  $18.4
million and $23.4  million for the fiscal  years  ended May 31,  1998,  1997 and
1996, respectively. Additionally, since the Bank regularly sells and securitizes
residential  mortgage loans as part of its mortgage  banking  operations,  these
activities  have  resulted in $12.2  million and $30.7 million in loan sales and
securitizations,  respectively,  for the  fiscal  year  ended  in 1998  and $6.2
million and $21.6 million, respectively, for the fiscal year ended in 1997.



                                      -5-
<PAGE>


<TABLE>
<CAPTION>
                                                                                    May 31, 1998   
                                                ------------------------------------------------------------------------------------
                                                Mortgage Loans    
                                                -----------------------                Home  
                                                             Adjustable                Equity    
                                                Fixed Rate      Rate     Commercial   Lines of     Consumer    Other    Total Loans
                                                 Mortgages    Mortgages     Loans      Credit       Loans       Loans     Receivable
                                                ----------    ---------   ---------   ---------   ---------   ---------   ----------
                                                                      (In thousands)
<S>                                              <C>          <C>         <C>         <C>         <C>         <C>         <C>      
Amounts due:
Within one year ..............................   $   2,414    $      --   $   7,279   $      --   $   1,356   $      --   $  11,049
                                                 ---------    ---------   ---------   ---------   ---------   ---------   ---------
After one year:
   One to three years ........................         312           --       5,126          --       4,963       1,429      11,830
   Three to five years .......................         709           27      12,033          --       6,257          --      19,026
   Five to 10 years ..........................      24,691        2,444       4,881       1,610       9,038          --      42,664
   Over 10 years .............................      71,514       48,400       4,795       3,546         237       1,410     129,902
                                                 ---------    ---------   ---------   ---------   ---------   ---------   ---------
        Total due after one year .............      97,226       50,871      26,835       5,156      20,495       2,839     203,422
                                                 ---------    ---------   ---------   ---------   ---------   ---------   ---------
   Total amounts due .........................   $  99,640    $  50,871   $  34,114   $   5,156   $  21,851   $   2,839     214,471
                                                 =========    =========   =========   =========   =========   =========
Discounts, premiums and deferred
 loan fees, net ..............................                                                                                 (293)
Allowance for loan losses ....................                                                                               (1,513)
                                                                                                                          ---------
Loans receivable, net ........................                                                                            $ 212,665
                                                                                                                           =========
</TABLE>


     The following  table sets forth the dollar amounts in each loan category at
May 31, 1998 that are  contractually  due after May 31,  1999,  and whether such
loans have fixed interest rates or adjustable interest rates.

                                                    Due After May 31, 1999
                                            ------------------------------------
                                             Fixed       Adjustable       Total
                                            --------     ----------     --------
                                                       (In thousands)
Mortgage loans .......................      $ 97,226      $ 50,871      $148,097

Commercial loans .....................        16,136        10,699        26,835

Home equity lines of credit ..........            --         5,156         5,156

Consumer loans .......................        20,223           272        20,495

Other loans ..........................         2,839            --         2,839
                                            --------      --------      --------
Total loans ..........................      $136,424      $ 66,998      $203,422
                                            ========      ========      ========

     Origination,  Purchase, Sale and Servicing of Loans. The Bank's residential
lending   activities  are  conducted  through  its  team  of  commissioned  loan
originators,  who regularly call upon realtors,  builders and others in the real
estate business in an effort to solicit  mortgage loan  applications.  The loans
are all  self-originated,  as the  Bank  does  not use  mortgage  brokers,  with
applications  taken at the Bank's  various  branch  offices and loan  production
offices.  Thereafter, the applications are processed,  underwritten and prepared
for closing at the Monroe branch office,  and the data is electronically  linked
together  during the various  stages of the  application  process to  facilitate
tracking and monitoring at the Bank's Warwick office.

     The Bank originates both adjustable-rate and fixed-rate mortgage loans. Its
ability to originate  loans is dependent upon the relative  customer  demand for
fixed-rate or  adjustable-rate  mortgage loans, which is affected by the current
and expected future levels of interest  rates.  During the fiscal year ended May
31,  1998,   the  Bank   experienced   an  increase  in  both   fixed-rate   and
adjustable-rate  mortgage  loan  originations.  This  was  attributable  to  the
increased refinancing


                                      -6-
<PAGE>



activity that occurred during the 1998 fiscal year. The Bank currently holds for
its   portfolio  all   adjustable-rate,   bi-weekly   mortgage   loans  and  any
non-conforming  loans  it  originates.  Periodically,  the  Bank  considers  the
possible  sale of its  jumbo  loans;  however,  management  believes  it has the
ability  to  build   relationships  with  jumbo  mortgage  customers  to  create
cross-selling opportunities.

     The  residential  loan  products  currently  offered by the Bank include VA
guaranteed  and FHA insured  mortgage  loans, a variety of loans that conform to
the  underwriting   standards   specified  by  the  Federal  National   Mortgage
Association ("FNMA")  ("conforming  loans"),  SONYMA loans and, to a much lesser
extent,  non-conforming  loans,  i.e.,  jumbo loans.  The Bank sells most of the
conforming   mortgage   loans  it  originates  to  FNMA  in  exchange  for  FNMA
mortgage-backed  securities through purchase and guarantee programs sponsored by
FNMA.  The Bank then  sells  such FNMA  mortgage-backed  securities  to  private
investors   and  retains  the  servicing   rights.   In  those  cases  in  which
non-conforming  loans are sold to  private  institutional  investors,  servicing
rights are typically released.  SONYMA loans are all originated for sale back to
SONYMA, with servicing retained in exchange for tax credits.

     During the time  between the  processing  of a  residential  mortgage  loan
application  and the final  disposition or sale of such loan after it is closed,
the Bank is exposed to  movements  in the market  price due to changes in market
interest rates. The Bank attempts to manage this risk by utilizing forward sales
of mortgage-backed  securities and put options on mortgage-backed  securities to
securities  brokers and dealers,  as well as cash sales to FNMA.  Depending upon
market conditions, interest rate expectations,  economic data and other factors,
the Bank's Hedging  Committee,  comprised of various members of senior operating
management,  which meets daily,  attempts to cover  certain  percentages  of its
pipeline and warehouse. However, there can be no assurance that the Bank will be
successful  in its efforts to mitigate  the risk of  interest  rate  fluctuation
between the time of  origination  and the ultimate  disposition  or sale of such
loans.  At May 31, 1998,  the Bank had $7.9 million of forward sale  commitments
representing   approximately  25%  of  closed  loans  and  30-year  and  15-year
fixed-rate  conforming  loan  commitments,  at specified  interest rates at such
date.

     Currently,  the  Bank  services  all  of its  one-  to  four-family  loans,
commercial  business and commercial real estate, home equity and consumer loans.
All FHA and VA  loans  are  sold on a  servicing-released  basis,  as are  other
selected loans sold to private institutional investors.  Additionally,  the Bank
services a large volume of conforming  fixed-rate and adjustable-rate loans that
it has previously  securitized  and kept in its securities  portfolio or sold to
private  investors.  At May 31, 1998,  the Bank was servicing  $144.2 million of
residential  mortgage loans for others. For the fiscal years ended May 31, 1998,
1997 and 1996, loan servicing fees totaled $368 thousand, $335 thousand and $158
thousand,  respectively.  Loan servicing includes  collecting and remitting loan
payments,  accounting for principal and interest, making inspections as required
of   mortgaged   premises,   contacting   delinquent   mortgagors,   supervising
foreclosures  and property  dispositions  in the event of  unremedied  defaults,
ensuring the status of insurance and tax payments on behalf of the borrowers and
generally administering the loans.



                                      -7-
<PAGE>

     The following table sets forth the Bank's loan originations, repayments and
other portfolio activity for the periods indicated.

<TABLE>
<CAPTION>
                                                  For the Year Ended May 31,
                                              -----------------------------------
                                                1998         1997         1996
                                              ---------    ---------    ---------
                                                        (In thousands)
<S>                                           <C>          <C>          <C>
Mortgage loans (gross):
         At beginning of period ...........   $  89,376    $  66,489    $  83,306
         Mortgage loans originated:
         Fixed-rate mortgages .............     100,612       50,250       69,928
         Adjustable-rate mortgages ........      14,879       18,776       15,133
                                              ---------    ---------    ---------
             Total mortgage loans originated    115,491       69,026       85,061
         Principal repayments .............     (11,457)     (18,375)     (23,403)
         Sale of loans ....................     (12,214)      (6,172)      (3,731)
         Securitizations ..................     (30,685)     (21,592)     (74,744)
                                              ---------    ---------    ---------
         At end of period .................   $ 150,511    $  89,376    $  66,489
                                              =========    =========    =========

Other loans (gross):
         At beginning of period ...........   $  50,325    $  43,751    $  40,721
         Commercial loans originated ......      26,628       14,966       12,326
         Consumer loans originated ........      13,409       16,774       10,936
         Commercial repayments ............     (15,933)     (10,933)     (10,573)
         Consumer repayments ..............     (10,470)      (9,038)      (9,659)
         Other loans sold .................        --         (5,195)        --
                                              ---------    ---------    ---------
         At end of period .................   $  69,959    $  50,325    $  43,571
                                              =========    =========    =========
</TABLE>


     One- to Four-Family  Mortgage Lending.  The Bank offers both fixed-rate and
adjustable-rate mortgage and construction loans, with maturities up to 30 years,
which  are  secured  by  one- to  four-family,  owner-occupied  residences.  The
majority  of such loans are secured by property  located in Orange  County,  New
York;  however,  there are a number of loans  secured  by  property  located  in
Rockland  and  Dutchess  Counties,  New  York,  and,  to  a  lesser  extent,  in
Westchester, Putnam and Sullivan Counties, New York.

     At May 31,  1998,  the Bank's  total  gross loans  outstanding  were $214.5
million, of which $129.9 million, or 60.6%, were one- to four-family residential
mortgage  loans.  Of  the  one-  to  four-family   residential   mortgage  loans
outstanding at that date,  66.2%, or $99.6 million,  were  fixed-rate  loans and
33.8%, or $50.9 million, were adjustable-rate  loans. The interest rates for the
majority of the Bank's  adjustable-rate  mortgage loans are indexed to the yield
on one-year U.S. Treasury securities.  The Bank currently offers adjustable-rate
mortgage loan programs with interest rates that adjust either every one or three
years. An adjustable-rate  mortgage loan may carry an initial interest rate that
is less than the fully-indexed rate for the loan. All  adjustable-rate  mortgage
loans offered


                                      -8-
<PAGE>

have  lifetime  interest  rate  caps  or  ceilings.  Generally,  adjustable-rate
mortgage loans pose credit risks somewhat  greater than the credit risk inherent
in fixed-rate  loans primarily  because,  as interest rates rise, the underlying
payments of the borrowers rise,  increasing the potential for default.  The Bank
currently has no mortgage loans that are subject to negative amortization.

     Commercial Lending.  As part of the Bank's commercial lending program,  the
Bank originates various types of secured and unsecured commercial business loans
and lines of credit and  commercial  real  estate and  construction  loans.  The
Bank's commercial loan portfolio  consisted of the following types of commercial
loans at the dated indicated.

<TABLE>
<CAPTION>
                                                                                At May 31,
                                        -------------------------------------------------------------------------------------------
                                              1998               1997               1996               1995              1994
                                        ----------------    ---------------    ---------------    ---------------    --------------
                                                  Percent            Percent            Percent            Percent           Percent
                                                    of                 of                 of                 of                of   
                                                   Total              Total              Total              Total             Total 
                                        Amount     Loans    Amount    Loans    Amount    Loans    Amount    Loans    Amount   Loans
                                        ------     -----    ------    -----    ------    -----    ------    -----    ------   -----
                                                                            (Dollars in thousands)
<S>                                     <C>       <C>      <C>       <C>      <C>       <C>      <C>       <C>      <C>       <C>   
Commercial loans
 by type:
Non-farm and non- ...................   $16,862    7.86%   $10,372    7.42%   $ 8,288    7.52%   $ 6,749    5.44%   $ 5,046    4.60%
  residential
One- to four-family .................     3,094    1.44      1,157    0.83      1,161    1.05      1,387    1.12      1,593    1.45
Multi-family ........................     3,759    1.75      3,022    2.16      1,565    1.42        501    0.41        390    0.36
Farm ................................       404    0.19        318    0.23        156    0.14        471    0.38        491    0.45
Acquisition, development ............     3,791    1.77      2,781    1.99      2,414    2.19      2,819    2.27      2,393    2.18
  & construction
Term loans ..........................       367    0.17        258    0.18        108    0.10        188    0.15        494    0.45
Installment loans ...................     2,176    1.02      1,796    1.29      1,617    1.47      1,542    1.24      1,920    1.75
Demand loans ........................       608    0.28        498    0.36        444    0.40        456    0.37        627    0.57
Time loans ..........................       224    0.10        300    0.21        174    0.16        150    0.12        306    0.28
S.B.A. loans ........................       526    0.25        636    0.46        546    0.50        657    0.53        223    0.20
Lines of credit .....................     2,164    1.01      2,166    1.55      2,861    2.60      2,763    2.23      1,922    1.75
Loans and draws disbursed ...........      --      --           88    0.06       --      --         --      --         --      --
Non-accrual .........................       139    0.06         26    0.02         51    0.04         89    0.07         67    0.06
                                        -------   -----    -------   -----    -------   -----    -------   -----    -------   -----

  Total .............................   $34,114   15.90%   $23,418   16.76%   $19,385   17.59%   $17,772   14.33%   $15,472   14.10%
                                        =======   =====    =======   =====    =======   =====    =======   =====    =======   =====
</TABLE>

     Commercial  business  loans  generally  carry  greater  credit  risks  than
residential  mortgage loans because their repayment is more dependent on (i) the
underlying  financial condition of the borrower and/or the value of any property
or the cash flow  from any  property  securing  the loan or the  business  being
financed and (ii) general as well as local economic  conditions.  Mortgage loans
secured  by  commercial  real  estate  properties,  including  construction  and
development  lending,  are generally  larger and involve a higher degree of risk
than one- to four-family  residential  mortgage loans. This risk is attributable
to the uncertain realization of projected income-producing cash flows, which are
affected  by  vacancy  rates,  the  ability  to  maintain  rent  levels  against
competitively-priced  properties and the ability to collect rent from tenants on
a timely basis. Also, in the case of construction and 


                                      -9-
<PAGE>

development lending,  risk is largely dependent upon the accuracy of the initial
estimate of the property's  value at completion of  construction  or development
compared to the estimated cost (including interest payments) of construction and
other  assumptions.  In addition,  commercial  construction loans are subject to
many of the same risks as residential construction loans.

     Commercial  Business  Lending.  The  Bank  also  offers  various  types  of
short-term and medium-term  commercial business loans on a secured and unsecured
basis  to  borrowers  located  in  the  Bank's  market  area.  Borrowers  in the
commercial  market  are  generally  local  companies  engaged in  retailing  and
construction  that require  traditional  working capital financing with cyclical
repayments coming primarily from asset conversion.  These loans include time and
demand loans, term loans and lines of credit. The Bank is also an approved Small
Business  Administration  ("SBA") lender. At May 31, 1998, the Bank's commercial
business loan portfolio  amounted to $6.5 million,  or 3.0% of total gross loans
outstanding.  The largest  commercial  business loan outstanding at May 31, 1998
was a $500  thousand  loan to a borrower  whose  business  in Monroe,  New York,
specializes in industrial flooring.  In addition,  the Bank has committed a line
of credit of $2.5 million to the Warwick Valley  Telephone  Company.  At May 31,
1998, $700 thousand of such line was outstanding.

     The Bank's lines of credit are typically  established  for one year and are
subject  to  renewal  upon  satisfactory  review  of  the  borrower's  financial
statements and credit history.  Secured short-term commercial business loans are
usually  collateralized  by  real  estate  and  are  generally  guaranteed  by a
principal of the borrower. Interest on these loans is usually payable monthly at
fixed rates or rates that fluctuate  based on a spread above the prime rate. The
Bank offers term loans with terms generally not exceeding five years. Typically,
term loans have floating  interest rates based on a spread above the prime rate.
The Bank also offers business loans on a revolving  basis,  whereby the borrower
pays interest only.  Interest on such loans  fluctuates based on the prime rate.
Normally these loans require  periodic  interest  payments during the loan term,
with full  repayment  of principal  and  interest at  maturity.  The Bank offers
business and merchant credit cards to its corporate  customers;  however,  these
services are provided  through  third party  vendors.  The Bank bears the credit
risk in the case of business credit cards, but credit risk is borne by the third
party on  merchant  credit  cards,  with the Bank  receiving a fee in the latter
case.  In  approving  a  commercial  business  loan the Bank will  consider  the
borrower's  sources  of cash  flow to repay  the  loan,  a  secondary  source of
repayment and the borrower's credit standing.

     Commercial  Real  Estate  and  Construction  Lending.  The Bank  originates
commercial  real  estate  mortgage  loans  that  are  generally   secured  by  a
combination of residential  property for development  and retail  facilities and
properties  used for  business  purposes,  such as small  office  buildings  and
apartment  buildings  located in the Bank's market area.  Loans are also made to
develop land and for land  acquisition.  The Bank's loan policy and underwriting
procedures  provide that  commercial real estate loans may be made in amounts up
to the lesser of (i) 80% of the lesser of the appraised  value or purchase price
of the  property,  in the  case of  improved,  existing  commercial,  investment
property, (ii) 75% of the lesser of the appraised value or purchase price of the
property,   in  the  case  of  commercial,   multi-family  and   non-residential
construction  property,  (iii)  70% of the  lesser  of the  appraised  value  or
purchase  price of the  property,  in the case of commercial  land  development,
generally for subdivision or industrial park land development  property and (iv)
60% of the lesser of the  appraised  value or purchase  price of the property in
the case of raw land. In


                                      -10-
<PAGE>

addition to restrictions on loan to value,  the Bank's  underwriting  procedures
provide  that  commercial  real  estate  loans may be made in  amounts up to the
lesser of (i) $2.5  million or (ii) the  Bank's  current  loans-to-one  borrower
limit.  Regarding  (iii)  and (iv),  the Bank  usually  engages  in this type of
lending only with experienced  local developers  operating in the Bank's primary
market area. Such loans are typically offered for the construction of properties
that are pre-sold or for which permanent  financing has been secured. At May 31,
1998,  the Bank had $3.8 million in a variety of  acquisition,  development  and
construction  ("ADC") loans in its commercial lending area. The Bank's policy is
not to make construction loans for purposes of speculation, so that the borrower
must have secured  permanent  financing  commitments  from generally  recognized
lenders for an amount  greater than the amount of the loan.  In most cases,  the
Bank itself  provides the  permanent  financing.  While the number and volume of
this type of specialized  lending is presently limited,  it should be noted that
the Bank intends to continue to emphasize its commercial real estate,  including
ADC, loan activity as it expands its mortgage  origination  operations  into New
Jersey  through WSB  Mortgage.  The largest  commercial  real estate loan in the
Bank's  portfolio  as of May 31, 1998 was a $2.4  million loan secured by a golf
course known as Hudson National Golf Club in Croton-on-Hudson, New York.

     The Bank's commercial  mortgage loans are generally  prime-based and may be
made with terms up to ten years,  generally with a five-year or ten-year balloon
maturity  and a 30-year  amortization  schedule.  In reaching its decision as to
whether  to  make  a  commercial  real  estate  loan,  the  Bank  considers  the
qualifications of the borrower as well as the underlying  property.  Some of the
factors  considered  are: the net  operating  income of the  mortgaged  premises
before debt service and  depreciation,  the debt service ratio (the ratio of the
property's net cash flow to debt service requirements),  which must be a minimum
of 1.25, the ratio of loan amount to appraised  value and the credit  worthiness
of the borrower.

     Residential  Construction  Lending.  The  Bank  originates  loans  for  the
acquisition  and  development of property to individuals in its market area. The
Bank's  residential  construction  loans primarily have been made to finance the
construction of one- to four-family,  owner-occupied residential properties. The
Bank offers  construction to permanent financing loans with one or two closings,
and will not make  residential  construction  loans unless the borrower has been
approved  for  permanent  financing.   The  interest  rate  charged  during  the
construction  phase of the loan is based on the 30-year fixed mortgage rate. The
Bank's policies provide that construction loans may be made in amounts up to 95%
of the appraised value of the completed property.  At May 31, 1998, the Bank had
$2.8 million of residential  construction  loans (net of  undisbursed  portion),
which amounted to 1.3% of the Bank's gross loans outstanding.

     Construction  lending generally involves  additional risks to the lender as
compared with residential mortgage lending.  These risks are attributable to the
fact that  loan  funds are  advanced  upon the  security  of the  project  under
construction,   predicated  on  the  present  value  of  the  property  and  the
anticipated  future value of the property  upon  completion of  construction  or
development. Moreover, because of the uncertainties inherent in delays resulting
from  labor  problems,   materials  shortages,   weather  conditions  and  other
contingencies,  it is relatively  difficult to evaluate the total funds required
to complete a project and to establish the  loan-to-value  ratio.  If the Bank's
initial estimate of the property's  value at completion is inaccurate,  the Bank
may be confronted with a project that, when completed, has an insufficient value
to assure full repayment.



                                      -11-
<PAGE>

     Home Equity  Lending.  The Bank offers  fixed-rate,  fixed-term home equity
loans, called the Good Neighbor Home Loan, and adjustable-rate home equity lines
of credit in its market  area.  Both the loan and line of credit are  offered in
amounts up to 80% of the appraised  value of the property  (including  the first
mortgage)  with a maximum loan amount of up to $100  thousand.  The  fixed-rate,
fixed-term Good Neighbor Home Loan is offered with terms of up to 15 years.  The
home equity  line of credit is offered for terms up to 20 years,  with the first
five years being offered on a revolving  basis,  requiring  payments of interest
only;  thereafter,  the line converts to an amortizing loan. As of May 31, 1998,
$15.9 million, or 7.4%, of the Bank's gross loans, were home equity loans.

     Consumer  Lending.  The Bank offers  various types of secured and unsecured
consumer loans,  including  automobile loans, home improvement  loans,  personal
loans,  student loans and credit cards (VISA).  The Bank's  consumer  loans have
original maturities of not more than five years.  Interest rates charged on such
loans are set at competitive rates,  taking into consideration the type and term
of the loan. Consumer loan applications are reviewed and approved in conformance
with the Bank's  Board-approved  lending  policy.  At May 31,  1998,  the Bank's
consumer loan portfolio totaled $14.0 million,  or 6.5% of the total gross loans
outstanding.

     Loan  Approval  Procedures  and  Authority.  The Bank's  Board of Directors
establishes  the  lending  policies  and  loan  approval  limits  of  the  Bank.
Conforming  residential  mortgage  loans are  approved in  accordance  with FNMA
guidelines by the Bank's  underwriting  group.  Certain conforming loans and all
non-conforming  loans are approved by either the Bank's Executive Vice President
or President.  The Board of Directors  has  established  the  following  lending
authority for commercial lending,  including commercial real estate lending: (i)
various  officers have limited  individual  authority up to $25  thousand;  (ii)
certain officers have joint authority up to $50 thousand; (iii) certain officers
have joint  authority up to $100 thousand;  and (iv) the Bank's  Commercial Loan
Committee  has  authority to approve  loans of up to $500  thousand.  All of the
aforementioned loans are subsequently ratified by the Executive Committee of the
Board of  Directors.  Loans in  excess  of $500  thousand  but not more  than $1
million must be approved by the  Executive  Committee of the Board of Directors,
which meets on a bi-weekly basis. Loans in excess of $1 million must be approved
by the full Board of  Directors of the Bank,  which meets on a bi-weekly  basis.
The approval of consumer loans generally  requires the dual authorization of two
lending officers for loans over certain amounts ($5 thousand for unsecured loans
and $10 thousand  for secured  loans).  Likewise,  home equity loans or lines of
credit also  require  dual  authorizations.  The  foregoing  lending  limits are
reviewed and reaffirmed annually by the Board of Directors.

     For all loans  originated  by the Bank,  upon  receipt of a completed  loan
application from a prospective  borrower, a credit report is ordered and certain
other  information  is  verified  by  an  independent  credit  agency,  and,  if
necessary,  additional financial  information is required to be submitted by the
borrower.  An appraisal of any real estate  intended to secure the proposed loan
is required, which currently is performed by an independent appraiser designated
and  approved  by the  Bank.  The  Board  of  Directors  annually  approves  the
independent  appraisers  used by the  Bank and  approves  the  Bank's  appraisal
policy. It is the Bank's policy to obtain title and hazard insurance on all real
estate  loans.  In  connection  with a  borrower's  request  for a renewal  of a
multi-family  or  commercial  mortgage  loan with a balloon  maturity,  the Bank
evaluates  both the  borrower's  ability to service the renewed loan applying an
interest rate that reflects  prevailing market conditions,  as well as the value
of  the  underlying  collateral  property.  The  reevaluation  of  the  property
typically 


                                      -12-
<PAGE>

requires a new appraisal,  depending upon the loan amount and other factors.  It
is the Bank's policy to note all exceptions to policy in the  respective  credit
files and report such exceptions to the original decision-making body (i.e., the
Commercial Loan Committee,  Executive  Committee or Board of Directors) prior to
closing if a condition of the original approval is not met.

Asset Quality

     Non-Performing  Loans. The Bank's management and Board of Directors perform
a monthly review of delinquent loans. The actions taken by the Bank with respect
to  delinquencies  vary  depending  on the  nature  of the  loan and  period  of
delinquency.  The Bank's  policies on  residential  mortgage  loans provide that
delinquent mortgage loans be reviewed and that a late charge notice be mailed no
later than the 15th day of delinquency,  with the delinquency charge assessed on
the 16th day.  The Bank's  collection  policies on  residential  mortgage  loans
essentially mirror those shown in the FNMA servicing agreements. On other loans,
telephone contact and various delinquency notices at different intervals are the
methods used to collect past due loans.

     It is the Bank's  general policy to  discontinue  accruing  interest on all
loans when  management has  determined  that the borrower will be unable to meet
contractual  obligations or when unsecured interest or principal payments are 90
days past due.  Generally,  when residential  mortgage or secured consumer loans
are  delinquent  90 days,  they are  classified  as  nonaccrual.  When a loan is
classified as nonaccrual,  the recognition of interest  income ceases.  Interest
previously  accrued  and  remaining  unpaid is  reversed  against  income.  Cash
payments  received  are  applied  to  principal,  and  interest  income  is  not
recognized unless management determines that the financial condition and payment
record of the  borrower  warrant the  recognition  of income.  If a  foreclosure
action is  commenced  and the loan is not  brought  current,  paid in full or an
acceptable  workout  arrangement is not agreed upon before the foreclosure sale,
the real property  securing the loan is generally sold at foreclosure.  Property
acquired by the Bank as a result of foreclosure on a mortgage loan is classified
as "real  estate  owned" and is recorded  at the lower of the unpaid  balance or
fair value less costs to sell at the date of acquisition  and  thereafter.  Upon
foreclosure,  it is the Bank's  policy to generally  require an appraisal of the
property  and,  thereafter,  appraise the property on an  as-needed  basis. 



                                      -13-
<PAGE>

     The following table sets forth  information  regarding  non-accrual  loans,
other  past due  loans and other  real  estate  owned  ("OREO').  There  were no
troubled  debt  restructurings  within the  meaning of  Statement  of  Financial
Accounting Standards ("SFAS") No. 15 at any of the dates presented below.

<TABLE>
<CAPTION>
                                                                                            At May 31,
                                                                 ------------------------------------------------------------------
                                                                  1998           1997           1996           1995           1994
                                                                 ------         ------         ------         ------         ------
                                                                                        (Dollars in thousands)
<S>                <C>                                           <C>            <C>            <C>            <C>            <C>   
Non-accrual mortgage loans delinquent
         more than 90 days ..............................        $  699         $1,111         $  582         $1,093         $1,217
Non-accrual other loans delinquent
         more than 90 days ..............................           186             83             82            131             69
                                                                 ------         ------         ------         ------         ------
Total non-accrual loans .................................           885          1,194            664          1,224          1,286
Total 90 days or more delinquent
         and still accruing interest ....................           133            237            199            978            928
                                                                 ------         ------         ------         ------         ------
Total non-performing loans ..............................         1,018          1,431            863          2,202          2,214
Total foreclosed real estate, net of related
   allowance for losses .................................           409            224            330            493            306
                                                                 ------         ------         ------         ------         ------
Total non-performing assets .............................        $1,427         $1,655         $1,193         $2,695         $2,520
                                                                 ======         ======         ======         ======         ======
Non-performing loans to total loans .....................          0.47%          1.02%          0.78%          1.78%          2.02%
Total non-performing assets to total assets .............          0.35%          0.58%          0.44%          1.04%          1.08%
</TABLE>


     Interest income that would have been recorded if the  non-accrual  mortgage
loans had been  performing in accordance  with their original  terms  aggregated
approximately  $100,000,  $93,000 and $54,000 for the years ended May 31,  1998,
1997 and 1996, respectively.

     Other Real Estate  Owned.  At May 31,  1998,  the Bank's OREO,  net,  which
consisted of five single family  residential  properties,  totaled $409 thousand
and was held directly by the Bank.

     Classified Assets.  Federal regulations and the Bank's Internal Loan Review
and Grading System, which is a part of the Bank's loan policy,  require that the
Bank  utilize an internal  asset  classification  system as a means of reporting
problem and potential problem assets.  The Bank limits its loan review procedure
to the  higher-risk  commercial  business  and  commercial  real  estate  loans,
commercial loans greater than $25,000 and jumbo residential mortgage loans.

     At each regularly  scheduled  Board of Directors  meeting,  a watch list is
presented,  showing  all  loans  listed  as  "Special  Mention,"  "Substandard,"
"Doubtful" and "Loss." 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 insured institution will sustain some loss if
the deficiencies are not corrected.  Assets  classified as Doubtful have all 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  


                                      -14-
<PAGE>

classified as Loss are those considered uncollectible and viewed as non-bankable
assets,  worthy of charge-off.  Assets which do not currently expose the Bank to
sufficient  risk  to  warrant   classification  in  one  of  the  aforementioned
categories, but possess weaknesses which may or may not be out of the control of
management, are deemed to be "Special Mention."

     When an insured  institution  classifies  one or more  assets,  or portions
thereof,  as  Substandard  or  Doubtful,  it is required to  establish a general
valuation  allowance for loan losses in an amount deemed  prudent by management.
General  valuation  allowances,  which  is a  regulatory  term,  represent  loss
allowances which have been established to recognize the inherent risk associated
with lending activities,  but which, unlike specific  allowances,  have not been
allocated to specific problem assets. When an insured institution classifies one
or more assets, or portions thereof, as Loss, it is required either to establish
a  specific  allowance  for  losses  equal to 100% of the amount of the asset so
classified or to charge-off such amount.

     The Bank's  determination  as to the  classification  of its assets and the
amount of its  valuation  allowances  is  subject  to review by the FDIC and the
Banking  Department  of the  State of New York  ("NYSBD"),  which  can order the
establishment of additional  general or specific loss  allowances.  The FDIC, in
conjunction with the other federal banking agencies,  has adopted an interagency
policy  statement  on the  allowance  for  loan and  lease  losses.  The  policy
statement   provides   guidance   for   financial   institutions   on  both  the
responsibilities  of management for the assessment and establishment of adequate
allowances and guidance for banking agency  examiners to use in determining  the
adequacy  of general  valuation  guidelines.  Generally,  the  policy  statement
recommends  that  (i)  institutions  have  effective  systems  and  controls  to
identify,  monitor and address  asset  quality  problems;  (ii)  management  has
analyzed all significant factors that affect the collectibility of the portfolio
in  a  reasonable  manner;  and  (iii)  management  has  established  acceptable
allowance  evaluation processes that meet the objectives set forth in the policy
statement.  Management  believes it has  established  an adequate  allowance for
possible  loan and  lease  losses  and  analyzes  its  process  regularly,  with
modifications  made if needed,  and reports those results four times per year at
the Bank's Board of Directors meetings.  However, there can be no assurance that
the  regulators,  in reviewing the Bank's loan  portfolio,  will not request the
Bank to  materially  increase  its  allowance  for loan and lease losses at that
time.  Although management believes that adequate specific and general loan loss
allowances have been established, actual losses are dependent upon future events
and, as such,  further  additions to the level of specific and general loan loss
allowances may become necessary.

     At May 31,  1998,  the Bank had  $631  thousand  of  assets  classified  as
Substandard  and $563 thousand of assets  classified as Special  Mention.  There
were no assets  classified  as  Doubtful  or Loss as of May 31,  1998.  The $631
thousand of loans  classified as  Substandard  were also impaired under SFAS No.
114,  "Accounting by Creditors for Impairment of a Loan," as amended by SFAS No.
118,  "Accounting  by Creditors for  Impairment of a Loan -- Income  Recognition
Disclosures,"  which the Bank  adopted in fiscal  1995.  SFAS No. 114 defines an
impaired loan as a loan for which it is probable,  based on current information,
that the lender will not collect all amounts due under the contractual  terms of
the loan agreement.


                                      -15-
<PAGE>

     The following table sets forth  delinquencies  in the Bank's loan portfolio
at the dates indicated:

<TABLE>
<CAPTION>
                                                     At May 31, 1998                                 At May 31, 1997
                                       -------------------------------------------     --------------------------------------------
                                            60-89 Days            90 Days More              60-89 Days           90 Days or More
                                       -------------------    --------------------     -------------------    ---------------------
                                                  Principal              Principal               Principal                 Principal
                                        Number     Balance     Number     Balance       Number    Balance      Number       Balance
                                       of Loans   of Loans    of Loans    of Loans     of Loans   of Loans    of Loans     of Loans
                                       --------   --------    --------    --------     --------   --------    --------     --------
                                                                     (Dollars in thousands)
<S>                                         <C>     <C>             <C>     <C>             <C>     <C>             <C>     <C>   
One- to four-family ................        12      $  952          12      $  764           7      $  475          16      $1,214
Multi-family .......................        --          --          --          --          --          --          --          --
Commercial loans ...................         4         533           4         211           5         724           5         121
Home equity lines of
   credit ..........................        --          --           1          16          --          --           2          57
Other loans ........................        13          26          11          27           8          16          17          39
                                        ------      ------      ------      ------      ------      ------      ------      ------
     Total loans ...................        29      $1,511          28      $1,018          20      $1,215          40      $1,431
                                        ======      ======      ======      ======      ======      ======      ======      ======

<CAPTION>
                                                    At May 31, 1996
                                       ----------------------------------------
                                           60-89 Days         90 Days or More
                                       ------------------   -------------------
                                                Principal              Principal
                                        Number   Balance     Number    Balance
                                       of Loans  of Loans   of Loans   of Loans
                                       --------  --------   --------   --------
                                               (Dollars in thousands)
<S>                                         <C>    <C>            <C>    <C>   
One- to four-family ................        11     $  792         11     $  692
Multi-family .......................        --         --         --         --
Commercial loans ...................         7        710          4         58
Home equity lines of credit ........         1         11          2         57
Other loans ........................         9         33         28         56
                                        ------     ------     ------     ------

     Total loans ...................        28     $1,546         45     $  863
                                        ======     ======     ======     ======
</TABLE>

     Allowance  for Loan and  Lease  Losses.  The  allowance  for loan and lease
losses is based upon  management's  periodic  evaluation  of the loan  portfolio
under  current   economic   conditions,   considering   factors  such  as  asset
classifications,  the Bank's past loss  experience,  known and inherent risks in
the portfolio,  adverse  situations  that may affect the  borrower's  ability to
repay and the estimated  value of the underlying  collateral.  The allowance for
loan and lease losses is maintained at an amount management  considers  adequate
to cover loan and lease losses that are deemed  probable and  estimable.  At May
31, 1998,  the Bank's  allowance for loan and lease losses was $1.5 million,  or
0.71% of total loans,  as compared to $1.2 million,  or 0.88%,  at May 31, 1997.
The Bank had  non-performing  loans of $1.2  million and $1.4 million at May 31,
1998 and May 31,  1997,  respectively.  The Bank will  continue  to monitor  and
modify its allowance for loan losses as conditions  dictate.  Various regulatory
agencies, as an integral part of their examination process,  periodically review
the Bank's  allowance  for loan losses.  These  agencies may require the Bank to
establish  additional  valuation  allowances,  based on their  judgments  of the
information available at the time of the examination.




                                      -16-
<PAGE>

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

<TABLE>
<CAPTION>
                                                                       At or For the
                                                                    Year Ended May 31,
                                                 -------------------------------------------------------
                                                   1998        1997        1996        1995        1994
                                                 -------     -------     -------     -------     -------
                                                                  (Dollars in thousands)
<S>                                              <C>         <C>         <C>         <C>         <C>    
Allowance for loan losses:
         Balance at beginning of period ......   $ 1,232     $ 1,305     $ 1,206     $   909     $   808
Charge-offs:
         Real estate mortgage loans ..........      (151)       (119)        (24)        (61)       (195)
         Commercial loans ....................       (52)         --          --          --        (126)
         Consumer loans ......................      (122)        (94)       (125)        (47)        (58)
                                                 -------     -------     -------     -------     -------
                  Total charge-offs ..........      (325)       (213)       (149)       (108)       (379)
Recoveries:
         Real estate mortgage loans ..........        --          --          18         123           8
         Commercial loans ....................        --          --          74          13          33
         Consumer loans ......................        14          10          16           8          24
                                                 -------     -------     -------     -------     -------
                  Total recoveries ...........        14          10         108         144          65
         Provision for loan losses ...........       592         130         140         261         415
                                                 -------     -------     -------     -------     -------
         Balance at end of period ............   $ 1,513     $ 1,232     $ 1,305     $ 1,206     $   909
                                                 =======     =======     =======     =======     =======
         Ratio of net charge-offs during the
           period to average loans outstanding      0.18%       0.16%       0.03%        N/A        0.29%
         Ratio of allowance for loan losses to
           total loans at end of period ......      0.71%       0.88%       1.18%       0.97%       0.83%
         Ratio of allowance for loan losses to
           non-performing loans ..............    123.61%      86.09%     151.22%      54.77%      41.06%
</TABLE>

     The  following  table  sets  forth the  Bank's  allowance  for loan  losses
allocated by loan category, the percent of the allocated allowances to the total
allowance  and the percent of loans in each category to total loans at the dates
indicated.

<TABLE>
<CAPTION>
                                                                            At May 31,
                                    -------------------------------------------------------------------------------------------
                                         1998               1997               1996               1995               1994
                                    ---------------    ---------------    ---------------    ---------------    ---------------
                                              % of               % of              % of                 % of              % of
                                            Loans in           Loans in           Loans in           Loans in            Loans in
                                            Category           Category           Category           Category            Category
                                            to Total           to Total           to Total           to Total            to Total
                                    Amount    Loans    Amount   Loans     Amount   Loans     Amount   Loans     Amount    Loans
                                    ------   ------    ------   ------    ------   ------    ------   ------    ------   ------
                                                                   (Dollars in thousands)
<S>                                 <C>      <C>       <C>      <C>       <C>      <C>       <C>      <C>       <C>      <C>    
Allowance for mortgage
         loan loss ..............   $  372    77.58%   $  224    73.60%   $  393    70.33%   $  403    75.00%   $  288    75.18%
Allowance for consumer
         loan loss ..............      406     6.51       436     9.64       310    12.09       311    10.67       258    10.72
Allowance for commercial
         loan loss ..............      735    15.91       572    16.76       602    17.58       492    14.33       363    14.10
                                    ------   ------    ------   ------    ------   ------    ------   ------    ------   ------
Total allowances
         for loan loss ..........   $1,513   100.00%   $1,232   100.00%   $1,305   100.00%   $1,206   100.00%   $  909   100.00%
                                    ======   ======    ======   ======    ======   ======    ======   ======    ======   ======
</TABLE>


                                      -17-
<PAGE>

Environmental Issues

     The Bank encounters certain  environmental risks in its lending activities.
Under federal and state  environmental laws, lenders may become liable for costs
of cleaning up hazardous  materials found on properties securing their loans. In
addition,  the existence of hazardous  materials may make it unattractive  for a
lender to foreclose on such properties. Although environmental risks are usually
associated  with loans  secured by  commercial  real  estate,  risks also may be
substantial for  residential  real estate loans if  environmental  contamination
makes security property unsuitable for use. As of May 31, 1998, the Bank was not
aware of any  environmental  issues  that  would  subject  the Bank to  material
liability.  No  assurance,  however,  can be given that the values of properties
securing  loans in the  Bank's  portfolio  will  not be  adversely  affected  by
unforseen environmental contamination.

Investment Activities

     Investment   Policies.   The  investment  policy  of  the  Bank,  which  is
established by the Board of Directors,  is contained in the Bank's Liquidity and
Funds Management Policy. It is based upon  asset/liability  management goals and
emphasizes  high credit  quality and  diversified  investments  while seeking to
optimize net interest income within  acceptable  limits of safety and liquidity.
The Bank also  considers  the  investment  advice it  receives  from some of its
outside  investment  advisers.  Recently,  the Bank has  engaged  in  leveraging
activities to enhance  returns on equity.  The policy is designed to provide and
maintain  liquidity to meet  day-to-day,  cyclical and long-term  changes in the
Bank's asset/liability structure, and to provide needed flexibility to meet loan
demand.  Approximately 86% of the Bank's debt security portfolio at May 31, 1998
is classified as available-for-sale.

     The  Bank's  investment  policy  permits  it to invest  in U.S.  government
obligations,  securities  of various  government-sponsored  agencies,  including
mortgage-backed  securities  issued/guaranteed  by FNMA,  the Federal  Home Loan
Mortgage Corporation  ("FHLMC") and the Government National Mortgage Association
("GNMA"),  certain  types of equity  securities  (such as  institutional  mutual
funds),  certificates of deposit of insured banks,  federal funds and investment
grade corporate debt securities and commercial paper.

     The Bank's  investment  policy  prohibits  investment  in certain  types of
mortgage  derivative  securities that management  considers to be high risk. The
Bank generally  purchases only short- and medium-term classes of CMOs guaranteed
by FNMA or FHLMC. At May 31, 1998, the Bank held no securities issued by any one
entity with a total carrying value in excess of 10% of the Bank's equity at that
date,  except for  obligations of the U.S.  government and  government-sponsored
agencies and certain mortgage-backed securities,  which are fully collateralized
by   mortgages   held   by   single   purpose   entities   and   guaranteed   by
government-sponsored agencies.

     Mortgage-Backed  Securities. The Bank invests in mortgage-backed securities
and uses such investments to complement its mortgage lending activities.  At May
31,  1998,  the  amortized  cost of  mortgage-backed  securities  totaled  $81.1
million,  or 19.8% of total  assets.  The  market  value of all  mortgage-backed
securities   totaled  $91.1  million  at  May  31,  1998.   All  of  the  Bank's
mortgage-backed  securities  are included in its  available-for-sale  portfolio.
Additionally,  the Bank's securities  portfolio includes CMOs, with an amortized
cost of $19.6 million and a market value of $19.6 million at May 31, 1998. A CMO
is a special type of debt security in which the stream of principal


                                      -18-
<PAGE>

and interest payments on the underlying mortgages or mortgage-backed  securities
is  used to  create  classes  with  different  maturities  and,  in some  cases,
amortization  schedules  as  well  as  a  residual  interest,  with  each  class
possessing  different  risk  characteristics.   However,   management  regularly
monitors  the risks  inherent  in its CMOs and  believes  these  securities  may
represent attractive  alternatives relative to other investments due to the wide
variety of maturity, repayment and interest rate options available.

     At May 31, 1998,  all securities in the Bank's  mortgage-backed  securities
portfolio  were  directly or indirectly  insured or guaranteed by GNMA,  FNMA or
FHLMC. The Bank's  mortgage-backed  securities  portfolio had a weighted average
yield of 7.30% at May 31, 1998.

     Mortgage-backed  securities  generally  yield  less  than  the  loans  that
underlie  such  securities  because of the cost of payment  guarantees or credit
enhancements  that reduce credit risk. In addition,  mortgage-backed  securities
are more liquid than individual  mortgage loans and may be used to collateralize
borrowings  of the  Bank.  In  general,  mortgage-backed  securities  issued  or
guaranteed  by  GNMA,  FNMA  and  FHLMC  are  weighted  at no more  than 20% for
risk-based capital purposes, compared to the 50% risk weighting assigned to most
non-securitized residential mortgage loans.

     While mortgage-backed securities carry a reduced credit risk as compared to
whole  loans,  such  securities  remain  subject to the risk that a  fluctuating
interest rate  environment,  along with other  factors,  such as the  geographic
distribution of the underlying  mortgage loans, may alter the prepayment rate of
such mortgage  loans and so affect both the  prepayment  speed and value of such
securities. In contrast to mortgage-backed pass-through securities in which cash
flow is  received  (and,  hence,  prepayment  risk is  shared)  pro  rata by all
securities  holders,  the cash  flows  from  the  mortgages  or  mortgage-backed
securities  underlying  CMOs  are  segmented  and  paid  in  accordance  with  a
pre-determined priority to investors holding various tranches of such securities
or obligations.  A particular  tranche of a CMO may therefore  carry  prepayment
risk  that  differs  from  that of both  the  underlying  collateral  and  other
tranches.  It is the  Bank's  strategy  to  purchase  tranches  of CMOs that are
categorized as "planned amortization  classes," "targeted  amortization classes"
or "very accurately defined  maturities" and are intended to produce stable cash
flows in different interest rate environments.




                                      -19-
<PAGE>

     The following table sets forth activity in the Bank's securities  portfolio
for the periods indicated.

<TABLE>
<CAPTION>
                                                                                                      For the Year
                                                                                                      Ended May 31,
                                                                                      ----------------------------------------------
                                                                                         1998              1997               1996
                                                                                      ---------         ---------          ---------
                                                                                                      (In thousands)

<S>                                                                                   <C>               <C>                <C>      
Beginning Balance ...........................................................         $ 126,393         $ 144,284          $ 110,333
                                                                                      ---------         ---------          ---------
Debt securities purchased-- held-to-maturity ................................             5,560               200                526
Debt securities purchased-- available-for-sale ..............................            44,558            23,687             18,723
Equity securities purchased-- available-for-sale ............................            14,963             2,277              4,723
Mortgage-backed securities purchased-- held-to-maturity .....................                --                --                 --
Mortgage-backed securities purchased-- available-for-sale ...................            59,644            23,221             12,101
Mortgage-backed securities formed by securitizing
         originated mortgage loans ..........................................            30,347            21,358             72,325


Less:

Sale of debt securities -- available-for-sale ...............................             9,284            18,199              7,184
Sale of equity securities-- available-for-sale ..............................             5,466             5,317              1,876
Sale of mortgage-backed securities available-for-sale .......................            25,764            25,375                 --
Sale of mortgage-backed securities formed by securitizing
         originated mortgage loans-- trading ................................            22,604            17,486             22,668
Principal repayments on mortgage-backed securities
         and debt securities ................................................            16,447            10,469              3,637
Maturities and called debt securities .......................................            32,800            12,425             39,576
Accretion of discount/amortization of (premium) .............................               809               (83)                75
Change in gross unrealized gains (losses) on available-for-sale
         securities .........................................................               840               720                419
                                                                                      ---------         ---------          ---------
Ending Balance ..............................................................         $ 170,749         $ 126,393          $ 144,284
                                                                                      =========         =========          =========
</TABLE>



                                      -20-
<PAGE>


     The following  table sets forth the amortized  cost and market value of the
Bank's securities by accounting classification category and by type of security,
at the dates indicated:

<TABLE>
<CAPTION>
                                                                                           At May 31,
                                                              ----------------------------------------------------------------------
                                                                      1998                     1997                    1996
                                                              ---------------------   ----------------------   ---------------------
                                                              Amortized    Market     Amortized     Market     Amortized     Market
                                                                 Cost       Value        Cost        Value       Cost        Value
                                                              ---------   ---------   ---------    ---------   ---------   ---------
                                                                                          (In thousands)
<S>                                                           <C>         <C>         <C>          <C>         <C>         <C>      
Debt securities held-to-maturity:
         U.S. Government obligations ......................   $      --   $      --   $     720    $     725   $     717   $     658
         Agency securities ................................       6,659       6,610       4,965        4,981       5,887       5,910
         Municipal bonds ..................................         665         667         407          410         432         437
         Other debt obligations ...........................          --          --          --           --          82          83
                                                              ---------   ---------   ---------    ---------   ---------   ---------
                  Total debt securities held-to-
                          maturity ........................       7,324       7,277       6,092        6,116       7,118       7,088
                                                              ---------   ---------   ---------    ---------   ---------   ---------
Debt securities available-for-sale:
         U.S. Government obligations ......................       4,047       4,163       9,079        9,165      21,684      21,716
         Agency securities ................................      40,418      40,071      20,822       20,856      15,328      15,206
         Other debt obligations ...........................         822         851       7,991        8,029      16,203      16,256
                                                              ---------   ---------   ---------    ---------   ---------   ---------
                  Total debt securities available-
                          for-sale ........................      45,287      45,085      37,892       38,050      53,215      53,178
                                                              ---------   ---------   ---------    ---------   ---------   ---------
Equity securities available-for-sale:
         Preferred stock ..................................       1,102       1,122         204          204         305         277
         Common stock .....................................         582         576          --           --          --          --
         Mutual funds .....................................      13,823      14,931       5,597        6,091       8,636       8,821
                                                              ---------   ---------   ---------    ---------   ---------   ---------
                  Total equity securities available-
                          for-sale ........................      15,507      16,629       5,801        6,295       8,941       9,098
                                                              ---------   ---------   ---------    ---------   ---------   ---------
                  Total debt and equity
                          securities ......................      68,118      68,991      49,785       50,461      69,274      69,364
                                                              ---------   ---------   ---------    ---------   ---------   ---------
Mortgage-backed securities trading:
         FNMA .............................................          --          --          --           --       1,992       1,934
                                                              ---------   ---------   ---------    ---------   ---------   ---------
                  Total mortgage-backed
                          securities trading ..............          --          --          --           --       1,992       1,934
                                                              ---------   ---------   ---------    ---------   ---------   ---------
Mortgage-backed securities available-for-sale:
         FHLMC ............................................       9,720       9,872      11,062       11,029      10,395      10,322
         GNMA .............................................      49,164      49,307      29,230       29,190       4,396       4,348
         FNMA .............................................      22,213      22,973      32,519       33,052      52,871      53,336
         CMOs .............................................      19,593      19,559       2,696        2,685       4,973       4,950
                                                              ---------   ---------   ---------    ---------   ---------   ---------
                  Total mortgage-backed
                          securities available-for-sale ...     100,690     101,711      75,507       75,956      72,635      72,956
                                                              ---------   ---------   ---------    ---------   ---------   ---------
                  Total mortgage-backed
                          securities ......................     100,690     101,711      75,507       75,956      74,627      74,890
                                                              ---------   ---------   ---------    ---------   ---------   ---------
Net unrealized (losses) gains on trading
                          securities ......................          --                      --                      (58)
Net unrealized (losses) gains on available-
         for-sale and trading securities ..................       1,941                   1,101                      441
                                                              ---------               ---------                --------- 
                            Total securities ..............   $ 170,749   $ 170,702   $ 126,393    $ 126,417   $ 144,284   $ 144,254
                                                              =========   =========   =========    =========   =========   =========
</TABLE>



                                      -21-
<PAGE>


     The following  table sets forth the  composition  of the Bank's  securities
portfolio at the dates indicated.

<TABLE>
<CAPTION>
                                                                                          At May 31,
                                                               ------------------------------------------------------------------
                                                                       1998                  1997                   1996
                                                               --------------------   --------------------   --------------------
                                                               Carrying   Percent of  Carrying   Percent of  Carrying   Percent of
                                                                 Value      Total       Value       Total      Value       Total
                                                               --------    --------   --------    --------   --------    --------
                                                                                       (Dollars in thousands)
<S>                                                            <C>             <C>    <C>             <C>    <C>            <C>   
Debt securities:
         U.S. Government obligations ......................    $  4,822        2.82%  $  9,885        7.82%  $ 22,433       15.55%
         Agency securities ................................      46,071       26.98     25,821       20.43     21,093       14.62
         Municipal bonds ..................................         665        0.39        407        0.32        432        0.30
         Other debt obligations ...........................         851        0.50      8,029        6.35     16,338       11.32
                                                               --------    --------   --------    --------   --------    --------
                  Total debt securities ...................      52,409       30.69     44,142       34.92     60,296       41.79
                                                               --------    --------   --------    --------   --------    --------
Equity securities:
         Preferred stock ..................................       1,122        0.66        204        0.16        277        0.19
         Common stock .....................................         576        0.34         --          --         --          --
         Mutual funds .....................................      14,931        8.74      6,091        4.82      8,821        6.12
                                                               --------    --------   --------    --------   --------    --------
                  Total equity securities .................      16,629        9.74      6,295        4.98      9,098        6.31
                                                               --------    --------   --------    --------   --------    --------
Mortgage-backed securities
         FHLMC ............................................       9,872        5.78     11,029        8.73     10,322        7.15
         GNMA .............................................      49,307       28.88     29,190       23.09      4,348        3.01
         FNMA .............................................      22,973       13.46     33,052       26.15     55,270       38.31
         CMOs .............................................      19,559       11.45      2,685        2.13      4,950        3.43
                                                               --------    --------   --------    --------   --------    --------
                  Total mortgage-backed securities ........     101,711       59.57     75,956       60.10     74,890       51.90
                                                               --------    --------   --------    --------   --------    --------
                  Total securities ........................    $170,749      100.00%  $126,393      100.00%  $144,284      100.00%
                                                               ========    ========   ========    ========   ========    ========
         Debt and equity securities available-
                      for-sale ............................    $ 61,714       36.14%  $ 44,345       35.08%  $ 62,276       43.16%
         Debt and equity securities held-to-
                      maturity ............................       7,324        4.29      6,092        4.82      7,118        4.94
                                                               --------    --------   --------    --------   --------    --------
                  Total debt and equity
                      securities ..........................      69,038       40.43     50,437       39.90     69,394       48.10
                                                               --------    --------   --------    --------   --------    --------
         Mortgage-backed securities trading ...............          --          --         --          --      1,934        1.34
         Mortgage-backed securities available-
                  for-sale ................................     101,711       59.57     75,956       60.10     72,956       50.56
         Mortgage-backed securities held-to-
                  maturity ................................          --          --         --          --         --          --
                                                               --------    --------   --------    --------   --------    --------
                  Total mortgage-backed securities ........     101,711       59.57     75,956       60.10     74,890       51.90
                                                               --------    --------   --------    --------   --------    --------

                           Total securities ...............    $170,749      100.00%  $126,393      100.00%  $144,284      100.00%
                                                               ========    ========   ========    ========   ========    ========
</TABLE>




                                      -22-
<PAGE>


     The following table sets forth certain  information  regarding the carrying
value and weighted  average  yield of the Bank's  securities at May 31, 1998, by
remaining  period to  contractual  maturity.  Actual  maturities may differ from
contractual  maturities  because certain  security issuers may have the right to
call or prepay their obligations.

<TABLE>
<CAPTION>
                                                                             At May 31, 1998
                                      ----------------------------------------------------------------------------------------------
                                                          More than One Year   More than Five       More Than
                                       One Year or Less     to Five Years    Years to Ten Years     Ten Years           Total
                                      ------------------  ------------------ ------------------ ------------------ -----------------
                                                Weighted            Weighted           Weighted          Weighted           Weighted
                                      Carrying   Average  Carrying   Average Carrying   Average Carrying  Average  Carrying  Average
                                        Value     Yield    Value      Yield    Value     Yield    Value    Yield    Value     Yield
                                      ---------  -------  --------   ------- --------   -------  -------- -------  --------  -------
                                                                     (Dollars in thousands)
<S>                                    <C>         <C>    <C>         <C>    <C>         <C>   <C>         <C>    <C>         <C> 
Held-to-maturity:
     Municipal bonds ................. $    560    3.78%  $    105    6.96%  $     --      --% $     --      -- % $    665    4.28%
     U.S. Government obligations .....      309    4.76        350    7.01         --      --        --      --        659    5.95
     Agency securities ...............       --      --      1,000    5.90      5,000    7.00        --      --      6,000    6.82
                                       --------           --------           --------          --------           --------        
              Total held-to-maturity .      869    4.13      1,455    6.24      5,000    7.00        --      --      7.324    6.51
                                       --------           --------           --------          --------           --------        
Available-for-sale:
     Mortgage backed securities:
      Variable Rate:
              FHLMC ..................       --      --         --      --         --      --       813    7.28        813    7.28
              GNMA ...................       --      --         --      --         --      --       756    6.83        756    6.83
              FNMA ...................       --      --         --      --         --      --     1,988    7.61      1,988    7.61
      Fixed Rate:
              FHLMC ..................       --      --      1,021    5.59        539    7.08     7,499    7.18      9,059    6.99
              GNMA ...................       --      --          4    8.00         43    7.71    48,504    7.58     48,551    7.58
              FNMA ...................       --      --         --      --        671    8.25    20,314    7.34     20,985    7.37
              CMOs ...................       --      --         --      --         --      --    19,559    6.65     19,559    6.65
                                       --------           --------           --------          --------           --------        
              Total mortgage-backed
                 securities ..........       --      --      1,025    5.60      1,253    7.73    99,433    7.31    101,711   7. 30
                                       --------           --------           --------          --------           --------        
     Debt securities:
       U.S. Government obligations ...    2,037    8.71      2,126    7.06         --      --        --      --      4,163    7.87
       Agency securities .............       --      --         --      --     19,814    7.49    20,257    6.92     40,071    7.20
       Other debt obligations ........       20    4.66        831    6.70         --      --        --      --        851    6.65
                                       --------           --------           --------          --------           --------        
              Total debt securities ..    2,057    8.67      2,957    6.96     19,814    7.49    20,257    6.92     45,085    7.25
                                       --------           --------           --------          --------           --------        
     Equity Securities:
       Preferred stock ...............       --      --         --      --         --      --     1,122    6.63      1,122    6.63
       Common stock ..................       --      --         --      --         --      --       576      --        576      --
       Mutual funds ..................       --      --         --      --         --      --    14,931   11.52     14,931   11.52
                                       --------           --------           --------          --------           --------        
              Total equity securities        --      --         --      --         --      --    16,629   10.79     16,629   10.79
                                       --------           --------           --------          --------           --------        
              Total available-for-sale    2,057    8.67      3,982    6.61     21,067    7.50   136,319    7.68    163,425    7.64
                                       --------           --------           --------          --------           --------        
              Total securities ....... $  2,926    7.32   $  5,437    6.51   $ 26,067    7.41  $136,319    7.68   $170,749    7.59
                                       ========           ========           ========          ========           ========        
</TABLE>

Sources of Funds

     General.   Deposits,   borrowings,   loan  and  security   repayments   and
prepayments,  proceeds from sales of securities  and cash flows  generated  from
operations  are the  primary  sources  of the Bank's  funds for use in  lending,
investing and for other  general  purposes.  Management  intends to increase its
deposit base through  competitive  pricing but continually  evaluates  wholesale
funding through Federal Home Loan Bank of New York ("FHLBNY") advances and other
sources, depending upon market conditions.



                                      -23-
<PAGE>

     Deposits.  The Bank  offers a variety of deposit  accounts  with a range of
interest  rates and terms.  The Bank's  deposits  consist of regular  (passbook)
savings accounts,  statement savings accounts,  checking accounts, NOW accounts,
basic banking  accounts,  money market accounts and certificates of deposit.  In
recent years, the Bank has offered certificates of deposit with maturities of up
to 60  months.  At May 31,  1998,  the  Bank's  core  deposits,  which  the Bank
considers to consist of checking accounts, NOW accounts,  money market accounts,
regular savings accounts and statement  savings  accounts,  constituted 68.2% of
total  deposits.  The flow of deposits is  influenced  significantly  by general
economic  conditions,  changes in money market rates,  prevailing interest rates
and competition.  The Bank's deposits are obtained  predominantly from the areas
in  proximity  to its office  locations.  The Bank relies  primarily on customer
service and  long-standing  relationships  with  customers to attract and retain
these  deposits;  however,  market interest rates and rates offered by competing
financial  institutions  significantly  affect the Bank's ability to attract and
retain  deposits.  Certificate  accounts  in  excess  of $100  thousand  are not
actively  solicited  by the  Bank,  nor  does the Bank  use  brokers  to  obtain
deposits.

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

                                              For the Years Ended May 31,
                                      -----------------------------------------
                                         1998           1997           1996
                                      -----------    -----------    -----------
                                                   (In thousands)

Deposits ..........................   $ 1,140,993    $   777,214    $   817,610
Withdrawals .......................    (1,146,633)      (796,578)      (822,470)
                                      -----------    -----------    -----------
(Withdrawals) in excess of deposits        (5,640)       (19,364)        (4,860)
Interest credited on deposits .....         7,150          7,610          8,814
                                      -----------    -----------    -----------
Net increase (decrease) in deposits   $     1,510    $   (11,754)   $     3,954
                                      ===========    ===========    ===========

     At May 31,  1998 the  Bank  had $6.1  million  in  certificate  of  deposit
accounts in amounts of $100 thousand or more, maturing as follows:

                                                                       Weighted
                                                                        Average
                                                        Amount           Rate
                                                        ------           ----
                                                        (Dollars in thousands)

Maturity Period:
   Three months or less .......................         $2,684           4.83%
   Over 3 through 6 months ....................          1,574           4.92
   Over 6 through 12 months ...................          1,004           4.92
   Over 12 months .............................            845           5.46
                                                        ------           ----
     Total ....................................         $6,107           4.96%
                                                        ======           ====


                                      -24-
<PAGE>

     The  following  table sets  forth the  distribution  of the Bank's  deposit
accounts  and the  related  weighted  average  interest  rates  for the  periods
indicated.

<TABLE>
<CAPTION>
                                                                        For the Years Ended May 31,
                                            ---------------------------------------------------------------------------------------
                                                       1998                           1997                        1996
                                            ----------------------------  ---------------------------- ----------------------------
                                                      Percent   Weighted            Percent   Weighted           Percent   Weighted
                                                         of      Average               of      Average              of      Average
                                            Average    Total     Nominal  Average    Total     Nominal Average    Total     Nominal
                                            Balance   Deposits     Rate   Balance   Deposits     Rate  Balance   Deposits    Rate
                                            --------  --------   -------  --------  --------   ------- --------  --------   -------
                                                                             (Dollars in thousands)
<S>                                         <C>          <C>       <C>    <C>         <C>        <C>   <C>         <C>        <C>
Checking accounts .......................   $ 19,302     9.00%       --   $ 18,629     8.54%       --  $ 18,834     8.18%       --
Passbook accounts .......................     77,999    36.35      2.95%    78,132    35.83      3.00%   77,868    33.83      3.00%
NOW accounts ............................      7,498     3.50      2.23      7,040     3.23      2.25     7,095     3.08      2.25
Interest-on-checking accounts ...........      7,886     3.68      1.00      7,077     3.24      1.00     5,543     2.41      1.00
                                            --------   ------             --------   ------            --------   ------
Total passbook, NOW and interest-on-
checking accounts .......................     93,383   43. 53      2.73     92,249    42.30      2.79    90,506    39.32      2.82
                                            --------   ------             --------   ------            --------   ------
Money market accounts ...................     25,827    12.04      3.29     27,017    12.39      3.27    28,674    12.46      3.26
                                            --------   ------             --------   ------            --------   ------
Certificate accounts:
       Certificates of deposit-- one year
           and less .....................     55,906    26.06      5.11     59,118    27.11      4.98    69,453    30.17      5.74
       IRA Certificates of deposit--
           one year and less ............      8,062     3.76      5.11      7,330     3.36      5.13     7,200     3.12      5.83
       Certificates of deposit-- more
           than one year ................      6,533     3.04      5.16      7,603     3.49      5.16     7,595     3.30      5.17
       IRA Certificates of deposit--
           more than one year ...........      4,119     1.92      5.21      5,104     2.34      5.35     5,584     2.43      5.53
                                            --------   ------             --------   ------            --------   ------
Total certificates ......................     74,620    34.78      5.12     79,155    36.30      5.03    89,832    39.02      5.69
                                            --------   ------             --------   ------            --------   ------
Escrow deposits .........................      1,422     0.66      2.00      1,020     0.47      2.00     2,346     1.02      2.00
                                            --------   ------             --------   ------            --------   ------
Total deposits ..........................   $214,554   100.00%     3.98%  $218,070   100.00%     3.42% $230,192   100.00%     3.76%
                                            ========   ======             ========   ======            ========   ======
</TABLE>


     The  following  table  presents,  by interest  rate  ranges,  the amount of
certificate  accounts  outstanding  at the  dates  indicated  and the  period to
maturity of the certificate accounts outstanding at May 31, 1998.

<TABLE>
<CAPTION>
                                                 Period to Maturity from May 31, 1998                   At May 31,
                                             --------------------------------------------     -------------------------------
                                                                                   Over
                                             Less Than    One to       Two to      Three
                                             One Year    Two Years   Three Years   Years       1998        1997        1996
                                             ---------   ---------   -----------  -------     -------     -------     -------
                                                                        (In thousands)
<S>                                          <C>          <C>         <C>         <C>         <C>         <C>         <C>    
Certificate accounts:
   3.99% or less .......................     $      3     $     1     $     1     $    --     $     5     $    --     $    --
   4.00% to 4.99% ......................       28,768         941          --          --      29,709       8,505      34,167
   5.00% to 5.99% ......................       35,829       1,429       1,626       2,309      41,193      65,816      47,516
   6.00% to 6.99% ......................           --          --          --          --          --         717       3,091
   7.00% to 7.99% ......................           --          --          --          --          --          --         776
   8.00% to 8.99% ......................           --          --          --          --          --          --          --
                                             --------     -------     -------     -------     -------     -------     -------
                  Total ................     $ 64,600     $ 2,371     $ 1,627     $ 2,309     $70,907     $75,038     $85,550
                                             ========     =======     =======     =======     =======     =======     =======
</TABLE>

     Borrowings.  The Bank  historically  had not used borrowings as a source of
funds. However, the Bank became a member of the FHLBNY in 1995 and has used this
source  considerably  since then.  FHLBNY  advances  may also be used to acquire
certain  other  assets as may be deemed  appropriate  for  investment  purposes,
including  leveraging  opportunities.  This  form  of  leveraging  allows  for a
reasonable  net  margin  of  return,  the  majority  of which is locked in for a
specified period. Since the


                                      -25-
<PAGE>

locked-in  period  might cover only a part of the  investment's  term (up to its
call date in the majority of the transactions),  such a practice might result in
a limited degree of interest rate risk,  since the earlier  maturing  borrowings
are  required to be rolled over to fund the  remaining  lives of the  particular
investments.  FHLBNY advances are to be  collateralized  primarily by certain of
the Bank's mortgage loans and mortgage-backed  securities and secondarily by the
Bank's  investment  in capital  stock of the FHLBNY.  Such  advances may be made
pursuant  to  several  different  credit  programs,  each of  which  has its own
interest rate and range of  maturities.  The maximum amount that the FHLBNY will
advance to member institutions, including the Bank, fluctuates from time to time
in  accordance  with the policies of the FHLBNY.  At May 31, 1998,  the Bank had
$62.9 million in FHLBNY advances and the capability to borrow  additional  funds
of $34.0  million  from the FHLBNY  upon  complying  with the FHLBNY  collateral
requirements.

     The Bank at times sells securities  under  agreements to repurchase,  which
transactions  are treated as  financings,  and the  obligation to repurchase the
securities  sold is  reflected  as a liability  in the  statements  of financial
condition.  The dollar amount of securities underlying the agreements remains in
the asset account and are held in safekeeping.  There were $27.2 million,  $23.1
million and $4.7 of securities sold under repurchase  agreements  outstanding at
May 31, 1998, 1997 and 1996, respectively.

     The following table sets forth certain information regarding borrowed funds
for the dates indicated.

<TABLE>
<CAPTION>
                                                             At or For the Year Ended May 31,
                                                           -----------------------------------
                                                            1998          1997          1996
                                                           -------       -------       -------
                                                                   (Dollars in thousands)
<S>                                                        <C>           <C>           <C>    
FHLBNY Advances:
     Average balance outstanding ....................      $20,381       $11,563       $   388
     Maximum amount outstanding at any month-end
                       during the period ............       62,850        17,450         3,600
     Balance outstanding at end of period ...........       62,850         5,250         3,600
     Weighted-average interest rate during the period         5.54%         5.53%         5.41%
     Weighted-average interest rate at end of period          5.05%         5.71%         6.00%
Other Borrowings:
     Average balance outstanding ....................      $24,056       $19,685       $   101
     Maximum amount outstanding at any month-end
                       during the period ............       27,500        23,300         4,700
     Balance outstanding at end of period ...........       27,190        23,090         4,700
     Weighted-average interest rate during the period         6.18%         6.20%         6.32%
     Weighted-average interest rate at end of period          6.39%         6.50%         6.32%
Total Borrowings:
     Average balance outstanding ....................      $44,437       $31,249       $   489
     Maximum amount outstanding at any month-end
       during the period ............................       90,350        38,850         8,300
     Balance outstanding at end of period ...........       90,040        28,340         8,300
     Weighted-average interest rate during the period         5.98%         6.10%         5.60%
     Weighted-average interest rate at end of period          5.45%         6.30%         6.18%
</TABLE>

                                      -26-
<PAGE>


Subsidiary Activities

     The Bank has  three  wholly  owned  subsidiaries,  WSB  Financial,  Warsave
Development, Inc. ("Warsave") and WSB Mortgage. The Bank offers mutual funds and
tax deferred annuities through WSB Financial to the Bank's customers and members
of the community.  WSB Financial contributed $112 thousand, $92 thousand and $90
thousand in net  income,  before  taxes,  to the Bank's net income in the fiscal
years ended May 31, 1998, 1997 and 1996, respectively.

     Warsave was formed to acquire and hold real estate.  Its single asset as of
May 31,  1998 is a  two-story  house  situated  adjacent  to the Bank's  Warwick
office.  The building,  which may  ultimately be used for future  expansion,  is
presently rented for the purpose of generating rental income.

     WSB  Mortgage  was formed in New Jersey in 1997 for the purpose of engaging
in mortgage banking operations in New Jersey.

Personnel

     As of May 31, 1998,  the Bank had 99 full-time and 38 part-time  employees.
The Bank has experienced a very low turnover rate among its employees and, as of
May 31, 1998,  52 of the Bank's  employees  had been with the Bank for more than
five years.  The employees are not represented by a collective  bargaining unit,
and the Bank considers its relationship with its employees to be good.


                           Federal And State Taxation

Federal Taxation

     General. The following is intended only as a discussion of material federal
income tax matters and does not purport to be a comprehensive description of the
federal income tax rules applicable to the Bank or the Registrant.  The Bank has
been audited by the IRS for the tax years ending  December 31, 1993 and December
31, 1995.  For federal  income tax purposes,  the  Registrant  and the Bank file
consolidated income tax returns and 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 tax reserve for bad debts, discussed below.

     Bad Debt  Reserves.  The Bank, as a "small bank" (one with assets having an
adjusted  tax basis of $500  million or less) is permitted to maintain a reserve
for bad debts with respect to "qualifying  loans," which, in general,  are loans
secured by certain  interests in real property,  and to make,  within  specified
formula  limits,  annual  additions  to the  reserve  which are  deductible  for
purposes of computing the Bank's taxable income.  Pursuant to the Small Business
Job  Protection Act of 1996,  the Bank is now  recapturing  (taking into income)
over a multi-year  period a portion of the balance of its bad debt reserve as of
December 31, 1996.

     Distributions.  To that  the  extent  that  the  Bank  makes  "non-dividend
distributions"  to the Registrant,  , such  distributions  will be considered to
have been made from the Bank's "base year reserve," i.e., its reserve as of July
31, 1988, and then from the Bank's supplemental  reserve for losses on loans, to
the extent thereof, and an amount based on the amount distributed (but not in


                                      -27-
<PAGE>

excess of the amount of such  reserves)  will be included in the Bank's  income.
Non-dividend distributions include distributions in excess of the Bank's current
and  accumulated  earnings and profits,  as  calculated  for federal  income tax
purposes,  distributions in redemption of stock, and distributions in partial or
complete  liquidation.  Dividends  paid out of the Bank's current or accumulated
earnings and profits will not be so included in the Bank's income.

     The  amount  of  additional  taxable  income  created  from a  non-dividend
distribution  is an amount  that,  when reduced by the tax  attributable  to the
income,  is equal to the amount of the  distribution.  Thus, if the Bank makes a
non-dividend  distribution  to the  Registrant,  approximately  one and one-half
times the amount of such  distribution  (but not in excess of the amount of such
reserves)  would be  includible  in income  for  federal  income  tax  purposes,
assuming  a  34%  federal   corporate  income  tax  rate.  See  "Regulation  and
Supervision" herein for limits on the payment of dividends by the Bank. The Bank
does not intend to pay dividends that would result in a recapture of any portion
of its tax bad debt reserves.

     Corporate  Alternative  Minimum  Tax.  The Code  imposes a tax  ("AMT")  on
alternative  minimum  taxable income ("AMTI") at a rate of 20%. Only 90% of AMTI
can be offset by net operating  loss  carryovers of which the Bank currently has
none. AMTI is also adjusted by determining the tax treatment of certain items in
a manner that  negates the  deferral  of income  resulting  from the regular tax
treatment of those items.  Thus, the Bank's AMTI is increased by an amount equal
to 75% of the amount by which the Bank's adjusted  current  earnings exceeds its
AMTI  (determined  without regard to this  adjustment and prior to reduction for
net  operating  losses).  The Bank  does not  expect to be  subject  to the AMT.
Although the  corporate  environmental  tax of 0.12% of the excess of AMTI (with
certain   modifications)   over  $2.0   million  has  expired,   under   current
Administration  proposals, such tax will be retroactively reinstated for taxable
years beginning after December 31, 1997 and before January 2009.

     Elimination of Dividends;  Dividends Received Deduction. The Registrant may
exclude from its income 100% of dividends  received from the Bank as a member of
the same affiliated group of corporations.

State Taxation

     New  York  State  Taxation.  The  Bank is  subject  to the New  York  State
Franchise Tax on Banking  Corporations  in an annual amount equal to the greater
of (i) 9% of the Bank's  "entire net income"  allocable to New York State during
the  taxable  year,  or  (ii)  the  applicable   alternative  minimum  tax.  The
alternative  minimum tax is generally  the greatest of (a) 0.01% of the value of
the taxable assets allocable to New York State with certain  modifications,  (b)
3% of the Bank's  "alternative entire net income" allocable to New York State or
(c) $250.  Entire net income is similar to federal  taxable  income,  subject to
certain  modifications and alternative  entire net income is equal to entire net
income  without  certain  adjustments.  For purposes of computing its entire net
income,  the Bank is  permitted a  deduction  for an addition to the reserve for
losses on  qualifying  real property  loans.  For New York State  purposes,  the
applicable  percentage to calculate bad debt  deduction  under the percentage of
taxable income method is 32%.

     New York  State  passed  legislation  that  enabled  the Bank to avoid  the
recapture of the New York State tax bad debt reserves that otherwise  would have
occurred as a result of changes in federal law and to continue to utilize either
the federal  method or a method based on a percentage of its


                                      -28-
<PAGE>

taxable income for computing its additions to bad debt reserve. However, the New
York bad debt reserve is subject to recapture for  "non-dividend  distributions"
in a manner  similar to the  recapture  of federal  bad debt  reserves  for such
distributions.  Also,  the New York bad debt  reserve is subject to recapture in
the event that the Bank fails to satisfy certain  definitional tests relating to
its assets and the nature of its business.

     A Metropolitan  Business District  Surcharge on banking  corporations doing
business in the metropolitan district has been applied since 1982. The Bank does
all of its business within this District and is subject to this  surcharge.  For
the tax year ending December 31, 1998 the surcharge rate is 17%.

     Delaware State Taxation.  As a Delaware  holding company not earning income
in Delaware,  the Registrant is exempted from Delaware  Corporate income tax but
is required to file  annual  returns and pay annual fees and a franchise  tax to
the State of Delaware.


                           Regulation And Supervision

General

     The Bank is a New York State  chartered stock savings bank, and its deposit
accounts are insured up to applicable limits by the FDIC under the BIF. The Bank
is subject to extensive regulation by the NYSBD as its chartering agency, and by
the FDIC as the deposit  insurer.  The Bank must file reports with the NYSBD and
the FDIC concerning its activities and financial  condition,  and it must obtain
regulatory approval prior to entering into certain transactions, such as mergers
with, or acquisitions of, other depository institutions and opening or acquiring
branch offices.  The NYSBD and the FDIC conduct periodic  examinations to assess
the Bank's compliance with various regulatory requirements.  This regulation and
supervision  establishes  a  comprehensive  framework of  activities  in which a
savings  bank can engage and is intended  primarily  for the  protection  of the
deposit 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 regulation, whether by
the NYSBD or the FDIC or through  legislation,  could  have a  material  adverse
impact on the Registrant and the Bank and their operations and stockholders. The
Registrant is also required to file certain  reports with, and otherwise  comply
with,  the  rules  and  regulations  of the FRB and the  NYSBD and the rules and
regulations of the Securities and Exchange  Commission ("SEC") under the federal
securities laws.

     Certain  of the  laws  and  regulations  applicable  to the Bank and to the
Registrant  are summarized  below or elsewhere  herein.  These  summaries do not
purport to be complete and are qualified in their  entirety by reference to such
laws and regulations.

New York Banking Regulation

     Activity  Powers.  The Bank  derives  its  lending,  investment  and  other
activity powers primarily from the applicable provisions of the New York Banking
Law ("Banking Law") and the regulations adopted thereunder. Under these laws and
regulations,  savings  banks,  including  the Bank,  may  invest in real  estate
mortgages,  consumer and  commercial  loans,  certain types of debt 


                                      -29-
<PAGE>

securities,  including  certain  corporate debt  securities  and  obligations of
federal,  state and local  governments and agencies,  certain types of corporate
equity  securities  and certain other  assets.  A savings bank may also exercise
trust  powers  upon  approval  of the  NYSBD.  The  exercise  of these  lending,
investment  and activity  powers are limited by federal law and the  regulations
thereunder.

     Loans-to-One-Borrower  Limitations.  With certain limited exceptions, a New
York chartered  savings bank may not make loans or extend credit for commercial,
corporate or business purposes  (including lease financing) to a single borrower
and to certain entities  related to the borrower,  the aggregate amount of which
would exceed 15% of the bank's net worth,  plus an additional  10% of the bank's
net worth if secured by the requisite  collateral.  The Bank currently  complies
with all applicable loans-to-one-borrower limitations.

     Community  Reinvestment  Act. The Bank is also subject to provisions of the
Banking Law that, like the provisions of the federal Community  Reinvestment Act
("CRA"),   impose   continuing  and  affirmative   obligations  upon  a  banking
institution  organized in the State of New York to serve the credit needs of its
local  community  ("NYCRA").  The  obligations of the NYCRA are similar to those
imposed by the CRA,  and the New York  Banking  Board  adopted new  regulations,
effective  December 10, 1997, to implement  the NYCRA,  which  regulations  were
consistent  with the  federal  regulations  implementing  the CRA.  The New York
Banking   Board   replaced   its   prior   process-focused    regulations   with
performance-focused   regulations   that  were  intended  to  parallel  the  CRA
regulations of the federal  banking  agencies and to promote  consistency in CRA
evaluations by considering more objective criteria.  The new regulations require
a  biennial  assessment  of a bank's  compliance  with the  NYCRA,  utilizing  a
four-tiered  rating system, and require the NYBD to make available to the public
such rating and a written  summary of the  assessment  results.  Pursuant to the
NYCRA,  a bank must file with the NYSBD an annual NYCRA report and copies of all
federal CRA reports.  The Bank's latest NYCRA  rating,  received by letter dated
April 27, 1998 from the Banking Department, was a rating of "Satisfactory."  The
NYCRA  also  requires  the  Superintendent  of  Banks  of the  State of New York
("Superintendent")  to consider a bank's  NYCRA  rating when  reviewing a bank's
application  to  engage  in  certain  transactions,   including  mergers,  asset
purchases and the  establishment of branch offices or automated teller machines,
and  provides  that such  assessment  may serve as a basis for the denial of any
such application.

     Dividends.  Under the Banking Law,  the Bank may declare and pay  dividends
only out of the net profits of the Bank. The approval of the  Superintendent  is
required if the total of all dividends declared in any calendar year will exceed
the net profits for that year plus the retained net profits of the preceding two
years less any  required  transfer  to surplus or a fund for the  retirement  of
preferred stock. In addition, dividends may not be declared, credited or paid if
the effect thereof would cause the Bank's capital to be reduced below the amount
required by the Superintendent or the FDIC.


     Enforcement.  Under the Banking Law, the  Superintendent may issue an order
to a New  York-chartered  banking  institution to appear and explain an apparent
violation of law, to discontinue  unauthorized  or unsafe  practices and to keep
prescribed  books and accounts.  Upon a finding by the  Superintendent  that any
director,  trustee or officer of any banking  organization has violated any law,
or has continued  unauthorized or unsafe practices in conducting the business of
the banking  organization  after having been notified by the  Superintendent  to
discontinue such practices, the Superintendent may remove such director, trustee
or officer  from office after notice and an  opportunity  to be heard.  The Bank
does not know of any past or current practice, condition or 


                                      -30-
<PAGE>

violation that might lead to any proceeding by the Superintendent or the Banking
Department against the Bank or any of its directors or officers.

Federal Banking Regulation

     Capital  Requirements.  FDIC regulations require BIF-insured banks, such as
the Bank, to maintain  minimum levels of capital.  The  regulations  establish a
minimum  leverage  capital  requirement  of not less than 3.0% Tier 1 capital to
total assets for banks in the strongest financial and managerial condition, with
a rating of 1 (the highest  examination  rating of the FDIC for banks) under the
Uniform Financial  Institutions  Rating System. For all other banks, the minimum
leverage capital requirement is 3% plus an additional cushion of at least 100 to
200  basis  points.  The FDIC and the  other  federal  banking  regulators  have
proposed  amendments to their minimum  capital  regulations  to provide that the
minimum  leverage  capital  ratio  for a  depository  institution  that has been
assigned  the  highest  composite  rating  of  1  under  the  Uniform  Financial
Institutions  Rating  System  will be 3% and that the minimum  leverage  capital
ratio for any other depository  institution will be 4%, unless a higher leverage
capital ratio is warranted by the  particular  circumstances  or risk profile of
the  depository  institution.  Tier 1 capital is  comprised of the sum of common
stockholders' equity (excluding the net unrealized appreciation or depreciation,
net  of  tax,  from  available-for-sale  securities),  non-cumulative  perpetual
preferred  stock  (including  any related  surplus)  and  minority  interests in
consolidated  subsidiaries,  minus all intangible  assets (other than qualifying
servicing rights), and any net unrealized loss on marketable equity securities.

     The FDIC  also  requires  that  savings  banks  meet a  risk-based  capital
standard.  The risk-based  capital  standard  requires the  maintenance of total
capital (which is defined as Tier 1 capital and Tier 2 capital) to risk-weighted
assets of at least 8% and Tier 1 capital to risk-weighted assets of at least 4%.
In determining the amount of risk-weighted  assets, all assets, plus certain off
balance sheet items, are multiplied by a risk-weight of 0% to 100%, based on the
risks  the FDIC  believes  are  inherent  in the  type of  asset  or  item.  The
components of Tier 1 capital are equivalent to those  discussed  above under the
3% leverage  requirement.  The  components of Tier 2 capital  currently  include
cumulative  perpetual  preferred stock,  certain  perpetual  preferred stock for
which  the  dividend  rate  may be  reset  periodically,  mandatory  convertible
securities,  subordinated debt,  intermediate  preferred stock and allowance for
possible loan losses.  Allowance  for possible loan losses  includible in Tier 2
capital is limited to a maximum of 1.25% of risk-weighted  assets.  Overall, the
amount of Tier 2 capital  that may be included in total  capital  cannot  exceed
100% of Tier 1 capital.

     The  federal  banking  agencies,  including  the FDIC,  have  also  adopted
regulations to require an assessment of an institution's exposure to declines in
the  economic  value of a bank's  capital due to changes in interest  rates when
assessing the bank's capital adequacy.  Under such a risk assessment,  examiners
will evaluate a bank's capital for interest rate risk on a  case-by-case  basis,
with  consideration of both quantitative and qualitative  factors.  According to
the  agencies,  applicable  considerations  include  the  quality  of the bank's
interest rate risk management  process,  the overall financial  condition of the
bank and the  level of other  risks at the bank for  which  capital  is  needed.
Institutions  with  significant  interest  rate  risk  may be  required  to hold
additional capital.  The agencies also issued a joint policy statement providing
guidance  on  interest  rate risk  management,  including  a  discussion  of the
critical  factors  affecting the  agencies'  evaluation of interest rate risk in
connection with capital adequacy.  The agencies determined not to proceed with a
previously 


                                      -31-
<PAGE>

issued proposal to develop a supervisory  framework for measuring  interest rate
risk and an explicit capital component for interest rate risk.

     The following table shows the Bank's leverage ratio,  its Tier 1 risk-based
capital ratio, and its total risk-based capital ratio, at May 31, 1998:

                                               At May 31, 1998
                               ------------------------------------------------
                                          Percent of      Capital    Percent of
                               Capital     Assets(1)    Requirement   Assets(1)
                               -------     ---------    -----------   ---------
                                           (Dollars in thousands)

Regulatory Tier 1             
   leverage capital            $53,397        13.91%      $15,352         4.0%
Tier 1 risk-based capital       53,397        25.55         8,360         4.0
Total risk-based capital        54,910        26.27        16,721         8.0

----------
(1)  For purpose of calculating  Regulatory Tier 1 leverage capital,  assets are
     adjusted total average assets.  In calculating Tier 1 risked-based  capital
     and total risk-based capital, assets are total risk-weighted assets.

As the preceding  table shows,  the Bank exceeded the minimum  capital  adequacy
requirements at the date indicated.

     The  following  table shows the  Registrant's  leverage  ratio,  its Tier 1
risk-based  capital ratio,  and its total  risk-based  capital ratio, at May 31,
1998:

                                               At May 31, 1998
                               ------------------------------------------------
                                          Percent of      Capital    Percent of
                               Capital     Assets(1)    Requirement   Assets(1)
                               -------     ---------    -----------   ---------
                                           (Dollars in thousands)

Regulatory Tier 1             
   leverage capital            $84,985        21.44%      $15,855         4.0%
Tier 1 risk-based capital       84,985        40.07         8,484         4.0
Total risk-based capital        86,498        40.78        16,968         8.0

----------
(1)  For purpose of calculating  Regulatory Tier 1 leverage capital,  assets are
     adjusted total average assets.  In calculating Tier 1 risked-based  capital
     and total risk-based capital, assets are total risk-weighted assets.

As the  preceding  table shows,  the  Registrant  exceeded  the minimum  capital
adequacy requirements at the date indicated.

     Activity  Restrictions on State-Chartered  Banks. Section 24 of the Federal
Deposit  Insurance  Act,  as amended  ("FDIA"),  which was added by the  Federal
Deposit  Insurance  Corporation  Improvement Act of 1991  ("FDICIA"),  generally
limits the activities and investments of state-chartered  FDIC insured banks and
their  subsidiaries to those permissible for federally  chartered national banks
and their subsidiaries,  unless such activities and investments are specifically
exempted by Section 24 or consented to by the FDIC.

     Section 24 provides an exception  for  investments  by a bank in common and
preferred  stocks  listed on a  national  securities  exchange  or the shares of
registered  investment  companies if (1) the bank held such types of investments
during the 14-month  period from  September 30, 1990 through  November 26, 1991,
(2) the state in which the bank is chartered  permitted  such  investments as of
September 30, 1991, and (3) the bank notifies the FDIC and obtains approval from
the FDIC to make


                                      -32-
<PAGE>

or retain such investments.  Upon receiving such FDIC approval, an institution's
investment in such equity securities will be subject to an aggregate limit up to
the amount of its Tier 1 capital.  The Bank  received  approval from the FDIC to
retain and acquire  such  equity  investments  subject to a maximum  permissible
investment  equal to the  lesser of 100% of the  Bank's  Tier 1  capital  or the
maximum  permissible  amount  specified  by the  Banking  Law.  Section  24 also
contains  an  exception  for  certain  majority  owned  subsidiaries,   but  the
activities of such  subsidiaries are limited to those permissible for a national
bank,  permissible under Section 24 of the FDIA and the FDIC regulations  issued
pursuant thereto, or as approved by the FDIC.

     Any  bank  that  held  an   impermissible   investment  or  engaged  in  an
impermissible  activity  and that did not receive  FDIC  approval to retain such
investment  or to continue  such  activity  was required to submit to the FDIC a
plan for  divesting of such  investment  or activity as quickly and prudently as
possible.  Before  making a new  investment  or engaging in a new  activity  not
permissible for a national bank or otherwise permissible under Section 24 or the
FDIC regulations thereunder, an insured bank must seek approval from the FDIC to
make such  investment or engage in such activity.  The FDIC will not approve the
activity  unless such bank meets its minimum capital  requirements  and the FDIC
determines  that the activity  does not present a  significant  risk to the FDIC
insurance funds.

     Enforcement.  The FDIC has  extensive  enforcement  authority  over insured
savings banks,  including the Bank. This enforcement  authority includes,  among
other things,  the ability to assess civil money  penalties,  to issue cease and
desist  orders  and  to  remove  directors  and  officers.  In  general,   these
enforcement  actions may be  initiated  in response  to  violations  of laws and
regulations and to unsafe or unsound practices.

     The FDIC is  required,  with certain  exceptions,  to appoint a receiver or
conservator   for  an   insured   state   bank  if  that  bank  is   "critically
undercapitalized." For this purpose, "critically  undercapitalized" means having
a ratio of tangible  capital to total  assets of less than 2%. The FDIC may also
appoint  a  conservator  or  receiver  for a  state  bank  on the  basis  of the
institution's  financial  condition or upon the  occurrence  of certain  events,
including:  (i)  insolvency  (whereby  the  assets of the bank are less than its
liabilities to depositors and others); (ii) substantial dissipation of assets or
earnings  through  violations  of law or  unsafe  or  unsound  practices;  (iii)
existence  of  an  unsafe  or  unsound  condition  to  transact  business;  (iv)
likelihood that the bank will be unable to meet the demands of its depositors or
to pay its  obligations in the normal course of business;  and (v)  insufficient
capital,  or the  incurring  or likely  incurring  of losses  that will  deplete
substantially  all of the institution's  capital with no reasonable  prospect of
replenishment of capital without federal assistance.

     Deposit  Insurance.  Pursuant to FDICIA,  the FDIC established a system for
setting  deposit  insurance  premiums based upon the risks a particular  bank or
savings  association posed to its deposit insurance funds.  Under the risk-based
deposit insurance  assessment  system, the FDIC assigns an institution to one of
three capital categories based on the institution's financial information, as of
the reporting period ending six months before the assessment period,  consisting
of (1) well capitalized, (2) adequately capitalized or (3) undercapitalized, and
one of three supervisory  subcategories  within each capital group. With respect
to the capital  ratios,  institutions  are  classified as well  capitalized,  or
adequately capitalized using ratios that are substantially similar to the prompt
corrective  action capital ratios discussed below. Any institution that does not
meet these two  definitions is deemed to be  undercapitalized  for this purpose.
The  supervisory  subgroup  to which an  institution  is  assigned 


                                      -33-
<PAGE>

is based on a supervisory  evaluation  provided to the FDIC by the institution's
primary  federal  regulator  and  information  that  the FDIC  determines  to be
relevant  to the  institution's  financial  condition  and the risk posed to the
deposit insurance funds (which may include, if applicable,  information provided
by the institution's state supervisor). An institution's assessment rate depends
on the capital category and supervisory category to which it is assigned.  Under
the  final  risk-based   assessment  system,  there  are  nine  assessment  risk
classifications (i.e., combinations of capital groups and supervisory subgroups)
to which different  assessment rates are applied.  Assessments rates for deposit
insurance  currently  range from 0 basis points to 27 basis points.  The capital
and  supervisory  subgroup  to which an  institution  is assigned by the FDIC is
confidential  and may not be  disclosed.  A  bank's  rate of  deposit  insurance
assessments  will depend upon the category and  subcategory to which the bank is
assigned  by the FDIC.  Any  increase  in  insurance  assessments  could have an
adverse effect on the earnings of the Bank.

     Under the Deposit Insurance Funds Act of 1996 ("Funds Act"), the assessment
base for the  payments on the bonds ("FICO  bonds")  issued in the late 1980s by
the Financing  Corporation to  recapitalize  the now defunct Federal Savings and
Loan Insurance  Corporation was expanded to include,  beginning January 1, 1997,
the deposits of BIF-insured  institutions,  such as the Bank. Until December 31,
1999,  or such  earlier  date on which the last  savings  association  ceases to
exist, the rate of assessment for BIF-assessable  deposits shall be one-fifth of
the rate imposed on deposits insured by the Savings  Association  Insurance Fund
("SAIF").  The annual rate of assessments for the payments on the FICO bonds for
the semi-annual  period beginning on July 1, 1997 was 0.0126% for BIF-assessable
deposits  and  0.0630%  for   SAIF-assessable   deposits  and  was  0.0122%  for
BIF-assessable deposits and 0.0610% for SAIF-assessable  deposits for the period
beginning on July 1, 1998.

     Under the FDIA,  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
management  of the Bank does not know of any  practice,  condition  or violation
that might lead to termination of deposit insurance.

     Transactions with Affiliates of the Bank.  Transactions  between an insured
bank,  such as the Bank,  and any of its  affiliates is governed by Sections 23A
and 23B of the Federal  Reserve  Act. An  affiliate  of a bank is any company or
entity that controls, is controlled by or is under common control with the bank.
Currently,  a subsidiary of a bank that is not also a depository  institution is
not treated as an  affiliate  of the bank for  purposes of Sections 23A and 23B,
but the FRB has proposed  treating any  subsidiary  of a bank that is engaged in
activities not  permissible  for bank holding  companies  under the Bank Holding
Company  Act of 1956,  as amended  ("BHCA"),  as an  affiliate  for  purposes of
Sections  23A and 23B.  Generally,  Sections 23A and 23B (i) limit the extent to
which the bank or its subsidiaries may engage in "covered transactions" with any
one affiliate to an amount equal to 10% of such institution's  capital stock and
surplus,  and limit on all such  transactions  with all  affiliates to an amount
equal to 20% of such  capital  stock and surplus and (ii)  require that all such
transactions  be on terms  that are  consistent  with  safe  and  sound  banking
practices. The term "covered transaction" includes the making of loans, purchase
of assets,  issuance of  guarantees  and other  similar  types of  transactions.
Further,  most  loans  by a bank  to any of its  affiliate  must be  secured  by
collateral in amounts  ranging from 100 to 130 percent of the loan  amounts.  In
addition,  any covered  transaction by a bank with an affiliate and any purchase
of assets or  services  by a bank


                                      -34-
<PAGE>

from an affiliate must be on terms that are  substantially the same, or at least
as  favorable,  to  the  institution  as  those  that  would  be  provided  to a
non-affiliate.

     Prohibitions   Against  Tying  Arrangements.   Banks  are  subject  to  the
prohibitions of 12 U.S.C. ss. 1972 on certain tying  arrangements and extensions
of credit by  correspondent  banks.  In general,  a  depository  institution  is
prohibited,  subject to certain exceptions, from extending credit to or offering
any other service,  or fixing or varying the consideration for such extension of
credit or service,  on the condition  that the customer  obtain some  additional
service from the institution or certain of its affiliates or not obtain services
of a competitor of the institution.

     Uniform  Real Estate  Lending  Standards.  Pursuant to FDICIA,  the federal
banking  agencies  adopted  uniform   regulations   prescribing   standards  for
extensions  of credit that are secured by liens on  interests  in real estate or
made for the  purpose of  financing  the  construction  of a  building  or other
improvements to real estate.  Under the joint regulations adopted by the banking
agencies,  all financial  institutions  must adopt and maintain written policies
that  establish  appropriate  limits and standards for extensions of credit that
are secured by liens or  interests in real estate or are made for the purpose of
financing permanent  improvements to real estate.  These policies must establish
loan  portfolio  diversification   standards,   prudent  underwriting  standards
(including   loan-to-value   limits)  that  are  clear  and   measurable,   loan
administration   procedures,   and   documentation,   approval   and   reporting
requirements. The real estate lending policies must reflect consideration of the
Interagency   Guidelines   for  Real  Estate  Lending   Policies   ("Interagency
Guidelines") that have been adopted by the federal bank regulators.

     The  Interagency  Guidelines,  among  other  things,  require a  depository
institution  to establish  internal  loan-to-value  limits for real estate loans
that are not in  excess  of the  following  supervisory  limits:  (i) for  loans
secured by raw land, the supervisory  loan-to-value limit is 65% of the value of
the collateral;  (ii) for land development loans (i.e., loans for the purpose of
improving  unimproved  property  prior  to  the  erection  of  structures),  the
supervisory  limit is 75%; (iii) for loans for the  construction  of commercial,
multi-family or other  non-residential  property,  the supervisory limit is 80%;
(iv) for loans  for the  construction  of one- to  four-family  properties,  the
supervisory  limit is 85%; and (v) for loans secured by other improved  property
(e.g.,  farmland,  completed  commercial  property  and  other  income-producing
property including non-owner occupied, one- to four-family property),  the limit
is 85%.  Although no supervisory  loan-to-value  limit has been  established for
owner-occupied,  one to  four-family  and home  equity  loans,  the  Interagency
Guidelines  state that for any such loan with a loan-to-value  ratio that equals
or exceeds 90% at origination,  an institution should require appropriate credit
enhancement  in the form of either  mortgage  insurance  or  readily  marketable
collateral.

     Community  Reinvestment  Act. Under the CRA, as implemented by FDIC and FRB
regulations,  a  savings  bank  has  a  continuing  and  affirmative  obligation
consistent  with its safe and sound  operation  to help meet the credit needs of
its entire community,  including low and moderate income neighborhoods.  The CRA
does not  establish  specific  lending  requirements  or programs for  financial
institutions nor does it limit an institution's  discretion to develop the types
of products  and  services  that it believes  are best suited to its  particular
community.  The CRA requires the FDIC, in connection  with its  examination of a
savings  institution,  to assess the institution's  record of meeting the credit
needs of its community and to take such record into account in its evaluation of
certain applications by such institution.



                                      -35-
<PAGE>

     In April 1995,  the FDIC and the other  federal  banking  agencies  amended
their  CRA  regulations.   Among  other  things,  the  amended  CRA  regulations
substitute  for the prior  process-based  assessment  factors  a new  evaluation
system that would rate an institution based on its actual performance in meeting
community needs. In particular,  the proposed system would focus on three tests:
(a) a lending test, to evaluate the institution's  record of making loans in its
service areas; (b) an investment test, to evaluate the  institution's  record of
investing in community  development  projects,  affordable housing, and programs
benefitting low or moderate income individuals and businesses; and (c) a service
test, to evaluate the  institution's  delivery of services through its branches,
ATMs, and other offices. Small banks would be assessed pursuant to a streamlined
approach focusing on a lesser range of information and performance standards.

     The  CRA  requires  the  FDIC  to  provide  a  written   evaluation  of  an
institution's CRA performance utilizing a four-tiered  descriptive rating system
and requires public disclosure of an institution's CRA rating. The Bank's latest
CRA rating,  received  from the FDIC by letter dated  February  20, 1996,  was a
rating of "satisfactory."

     Safety and Soundness Standards.  Pursuant to the requirements of FDICIA, as
amended by the Riegle  Community  Development and Regulatory  Improvement Act of
1994, each federal banking  agency,  including the FDIC, has adopted  guidelines
establishing  general standards relating to internal  controls,  information and
internal audit systems, loan documentation,  credit underwriting,  interest rate
exposure,  asset growth,  asset quality,  earnings,  and compensation,  fees and
benefits.  In general, the guidelines require,  among other things,  appropriate
systems and practices to identify and manage the risks and  exposures  specified
in the guidelines.  The guidelines prohibit excessive  compensation as an unsafe
and unsound  practice and describe  compensation  as excessive  when the amounts
paid are  unreasonable  or  disproportionate  to the  services  performed  by an
executive officer,  employee,  director, or principal shareholder.  In addition,
the FDIC adopted  regulations to require a bank that is given notice by the FDIC
that it is not satisfying any of such safety and soundness standards to submit a
compliance plan to the FDIC. If, after being so notified, a bank fails to submit
an acceptable  compliance plan or fails in any material  respect to implement an
accepted  compliance plan, the FDIC may issue an order directing  corrective and
other actions of the types to which a significantly undercapitalized institution
is subject under the "prompt  corrective action" provisions of FDICIA. If a bank
fails to comply with such an order,  the FDIC may seek to enforce  such an order
in judicial proceedings and to impose civil monetary penalties.

     Prompt  Corrective  Action.  FDICIA  also  established  a system  of prompt
corrective action to resolve the problems of undercapitalized  institutions. The
FDIC,  as well as the other  federal  banking  regulators,  adopted  regulations
governing the  supervisory  actions that may be taken  against  undercapitalized
institutions.  The regulations  establish five  categories,  consisting of "well
capitalized,"  "adequately  capitalized,"   "undercapitalized,"   "significantly
undercapitalized"  and  "critically  undercapitalized."  The FDIC's  regulations
defines the five capital categories as follows:  Generally,  an institution will
be treated as "well  capitalized" if its ratio of total capital to risk-weighted
assets is at least 10%, its ratio of Tier 1 capital to  risk-weighted  assets is
at least 6%, its ratio of Tier 1 capital to total  assets is at least 5%, and it
is not subject to any order or directive by the FDIC to meet a specific  capital
level. An institution  will be treated as "adequately  capitalized" if its ratio
of total  capital  to  risk-weighted  assets is at least 8%, its ratio of Tier 1
capital to risk-weighted  assets is at least 4%, and its ratio of Tier 1 capital
to total assets is at least 4% (3% if the bank receives the highest rating under
the   Uniform   Financial   Institutions   Rating   System)  and  it  is  not  a
well-capitalized  institution.  An institution that has total risk-based capital
of less than 8%, 


                                      -36-
<PAGE>

Tier 1 risk-based-capital  of less than 4% or a leverage ratio that is less than
4% (or less  than 3% if the  institution  is rated a  composite  "1"  under  the
Uniform  Financial  Institutions  Rating  System)  would  be  considered  to  be
"undercapitalized."  An institution  that has total  risk-based  capital of less
than 6%, Tier 1 capital of less than 3% or a leverage ratio that is less than 3%
would be considered to be "significantly  undercapitalized,"  and an institution
that has a tangible  capital to assets  ratio  equal to or less than 2% would be
deemed to be "critically undercapitalized."

     The  severity  of the action  authorized  or required to be taken under the
prompt corrective action regulations  increases as a bank's capital deteriorates
within the three  undercapitalized  categories.  All banks are  prohibited  from
paying dividends or other capital distributions or paying management fees to any
controlling  person  if,  following  such   distribution,   the  bank  would  be
undercapitalized.  The FDIC is required to monitor  closely the  condition of an
undercapitalized   bank  and  to  restrict   the  growth  of  its   assets.   An
undercapitalized  bank is required to file a capital  restoration plan within 45
days of the date the bank  receives  notice  that it is within  any of the three
undercapitalized  categories,  and the plan  must be  guaranteed  by any  parent
holding company.  The aggregate liability of a parent holding company is limited
to the lesser of: (i) an amount  equal to the five  percent of the bank's  total
assets at the time it became  "undercapitalized,"  and (ii) the  amount  that is
necessary (or would have been  necessary) to bring the bank into compliance with
all capital  standards  applicable  with  respect to such bank as of the time it
fails to comply with the plan. If a bank fails to submit an acceptable  plan, it
is  treated  as if it were  "significantly  undercapitalized."  Banks  that  are
significantly  or  critically  undercapitalized  are subject to a wider range of
regulatory requirements and restrictions.

     The FDIC has a broad range of grounds under which it may appoint a receiver
or conservator for an insured  depositary bank. If one or more grounds exist for
appointing a conservator  or receiver for a bank,  the FDIC may require the bank
to issue additional debt or stock, sell assets, be acquired by a depository bank
holding company or combine with another  depository bank. Under FDICIA, the FDIC
is  required  to  appoint  a  receiver  or  a   conservator   for  a  critically
undercapitalized   bank  within  90  days  after  the  bank  becomes  critically
undercapitalized  or to take such other  action  that would  better  achieve the
purposes of the prompt corrective action provisions. Such alternative action can
be renewed for successive 90-day periods.  However,  if the bank continues to be
critically  undercapitalized  on average during the quarter that begins 270 days
after it first became critically undercapitalized, a receiver must be appointed,
unless the FDIC makes certain findings that the bank is viable.

Loans to a Bank's Insiders

     Federal Regulation.  A bank's loans to its executive  officers,  directors,
any owner of 10% or more of its stock (each,  an  "insider")  and any of certain
entities  affiliated to any such person (an  "insider's  related  interest") are
subject to the  conditions  and  limitations  imposed  by  Section  22(h) of the
Federal  Reserve  Act  and  the  FRB's  Regulation  O  thereunder.  Under  these
restrictions, the aggregate amount of the loans to any insider and the insider's
related interests may not exceed the  loans-to-one-borrower  limit applicable to
national  banks,  which  is  comparable  to  the   loans-to-one-borrower   limit
applicable to the Bank's loans for commercial,  corporate or business  purposes.
All loans by a bank to all such persons and related  interests in the  aggregate
may not  exceed the bank's  unimpaired  capital  and  unimpaired  surplus.  With
certain  exceptions,  loans to an  executive  officer,  other than loans for the
education of the  officer's  children and certain loans secured by the officer's
residence,  may not  exceed  the lesser of (a)  $100,000  or (b) the  greater of

                                      -37-
<PAGE>

$25,000 or 2.5% of the bank's capital and unimpaired surplus.  Regulation O also
requires  that any  proposed  loan to an insider or a related  interest  of that
insider be approved in advance by a majority  of the board of  directors  of the
bank,  with any interested  director not  participating  in the voting,  if such
loan,  when aggregated with any existing loans to that insider and the insider's
related  interests,  would  exceed  either (a)  $500,000  or (b) the  greater of
$25,000 or 5% of the bank's  unimpaired  capital and  surplus.  Generally,  such
loans  must be made on  substantially  the same  terms  as,  and  follow  credit
underwriting  procedures  that  are not  less  stringent  than,  those  that are
prevailing  at the time for  comparable  transactions  with  other  persons.  An
exception  is made for  extensions  of credit  made  pursuant  to a  benefit  or
compensation  plan of a bank that is widely  available  to employees of the bank
and that  does not  give any  preference  to  insiders  of the bank  over  other
employees of the bank.

     In addition,  provisions  of the BHCA  prohibit  extensions  of credit to a
bank's insiders and their related  interests by any other institution that has a
correspondent  banking  relationship  with the bank,  unless such  extension  of
credit is on  substantially  the same terms as those  prevailing at the time for
comparable  transactions  with other  persons and does not involve more than the
normal risk of repayment or present other unfavorable features.

     New  York  Regulation.  Applicable  New  York law  imposes  conditions  and
limitations  on a stock  savings  bank's loans to its  directors  and  executive
officers that are comparable in most respects to the conditions and  limitations
imposed under federal law, as discussed  above.  However,  there are a number of
differences. For example, the New York law does not affect loans to shareholders
owning 10% or more of the savings bank's stock.

Federal Home Loan Bank System

     The Bank is a member of the FHLBNY, which is one of the 12 regional Federal
Home Loan Banks that  comprise  the FHLB  system.  Each of the Federal Home Loan
Banks are subject to supervision  and regulation by the Federal  Housing Finance
Board  ("FHFB"),  and each acts as a central credit  facility  primarily for its
member institutions.  As a member of the FHLBNY, the Bank is required to acquire
and hold  shares of capital  stock in the FHLBNY in an amount at least  equal to
the greater of 1% of the aggregate  unpaid principal of its home mortgage loans,
home purchase contracts,  and similar obligations at the beginning of each year,
or 1/20 of its advances (borrowings) from the FHLBNY. The Bank was in compliance
with this  requirement  with an  investment  in FHLBNY stock at May 31, 1998, of
$3.4 million.

     Each FHLB serves as a reserve or central  bank for its member  institutions
within its assigned region.  Each is funded primarily from proceeds derived from
the sale of consolidated  obligations of the FHLB System.  It offers advances to
members in accordance  with policies and procedures  established by the FHFB and
the board of directors of the FHLB.  Long-term advances may only be made for the
purpose of providing funds for residential housing finance.

Federal Reserve System

     Under   FRB    regulations,    the   Bank   is    required    to   maintain
non-interest-earning  reserves against its transaction  accounts  (primarily NOW
and regular  checking  accounts).  The FRB  regulations  generally  require that
reserves of 3% must be  maintained  against  aggregate  transaction  accounts of
$47.8 million or less (subject to adjustment by the FRB) and an initial  reserve
of


                                      -38-
<PAGE>

$1,434,000  plus 10%  (subject  to  adjustment  by the FRB  between  8% and 14%)
against that portion of total  transaction  accounts in excess of $47.8 million.
The first $4.47 million of otherwise reservable balances (subject to adjustments
by the  FRB)  are  exempted  from  the  reserve  requirements.  The  Bank  is in
compliance with the foregoing  requirements.  Because required  reserves must be
maintained in the form of either vault cash, a non-interest-bearing account at a
Federal Reserve Bank or a pass-through account as defined by the FRB, the effect
of this reserve requirement is to reduce the Bank's interest-earning assets.

Holding Company Regulation

     Federal  Regulation.  The Registrant is subject to examination,  regulation
and periodic  reporting  under the BHCA, as administered by the FRB. The FRB has
adopted capital adequacy guidelines for bank holding companies on a consolidated
basis  substantially  similar  to those of the FDIC for the Bank.  As of May 31,
1998,  the  Registrant's  total  capital and Tier 1 capital  ratios exceed these
minimum capital requirements.

     The  Registrant  is  required  to obtain the prior  approval  of the FRB to
acquire  all, or  substantially  all, of the assets of any bank or bank  holding
company.  Prior FRB approval is required for the Registrant to acquire direct or
indirect  ownership  or  control of any  voting  securities  of any bank or bank
holding company if, after giving effect to such acquisition,  it would, directly
or indirectly, own or control more than 5% of any class of voting shares of such
bank or bank holding company.

     A bank holding company, such as the Registrant, is required to give the FRB
prior written  notice of any purchase or redemption  of its  outstanding  equity
securities  if the gross  consideration  for the  purchase or  redemption,  when
combined with the net  consideration  paid for all such purchases or redemptions
during the preceding 12 months, will be equal to 10% or more of the Registrant's
consolidated  net worth. The FRB may disapprove such a purchase or redemption if
it determines that the proposal would constitute an unsafe and unsound practice,
or would violate any law, regulation,  FRB order or directive,  or any condition
imposed by, or written  agreement with, the FRB. Such notice and approval is not
required for a bank holding company that would be treated as "well  capitalized"
under  applicable  regulations  of the FRB, that has received a composite "1" or
"2" rating at its most recent bank holding  company  inspection  by the FRB, and
that is not the subject of any unresolved supervisory issues.

     The status of the Registrant as a registered bank holding company under the
BHCA does not exempt it from  certain  federal  and state  laws and  regulations
applicable to corporations  generally,  including,  without limitation,  certain
provisions of the federal securities laws.

     In addition,  a bank holding company is generally  prohibited from engaging
in,  or  acquiring  direct  or  indirect  control  of any  company  engaged  in,
non-banking  activities.  One of the principal exceptions to this prohibition is
for activities  found by the FRB to be so closely related to banking or managing
or controlling banks as to be a proper incident  thereto.  Some of the principal
activities that the FRB has determined by regulation to be so closely related to
banking as to be a proper incident  thereto are: (i) making or servicing  loans;
(ii) performing  certain data  processing  services;  (iii)  providing  discount
brokerage services;  (iv) acting as fiduciary,  investment or financial advisor,
(v) leasing personal or real property;  (vi) making  investments in corporations
or projects designed primarily to promote community welfare; and (vii) acquiring
a savings and loan association.



                                      -39-
<PAGE>

     Under the Financial  Institutions Reform,  Recovery, and Enforcement Act of
1989  ("FIRREA"),  depository  institutions  are  liable to the FDIC for  losses
suffered or anticipated by the FDIC in connection with the default of a commonly
controlled depository institution or any assistance provided by the FDIC to such
an institution in danger of default. This law would have potential applicability
if  the  Registrant  ever  acquired  as  a  separate   subsidiary  a  depository
institution in addition to the Bank.

     Subsidiary  banks  of  a  bank  holding  company  are  subject  to  certain
quantitative and qualitative  restrictions imposed by the Federal Reserve Act on
any  extension  of credit to,  purchase  of assets from or issuance of letter of
credit on behalf of the bank  holding  company or its  subsidiaries,  and on the
investment in or  acceptance of stocks or securities of such holding  company or
its subsidiaries as collateral for loans. In addition, provisions of the Federal
Reserve Act and FRB  regulations  limit the amounts of, and  establish  required
procedures and credit  standards with respect to, loans and other  extensions of
credit to  officers,  directors  and  principal  shareholders  of the Bank,  the
Registrant,  any  subsidiary  of the  Registrant  and related  interests of such
persons.  Moreover,  banks  are  prohibited  from  engaging  in  certain  tie-in
arrangements  (with the bank's  parent  holding  company  or any of the  holding
company's  subsidiaries)  in connection  with any extension of credit,  lease or
sale of property or furnishing of services.

     New York  Regulation.  Under the Banking Law,  certain  companies owning or
controlling  banks are regulated as a bank holding company.  For the purposes of
the Banking  Law,  the term "bank  holding  company,"  is defined  generally  to
include any  "company"  that,  directly or  indirectly,  either (a) controls the
election  of a majority  of the  directors  or (b) owns,  controls or holds with
power to vote more than 10% of the voting stock of a bank holding company or, if
the company is a banking  institution,  another banking  institution,  or 10% or
more of the voting stock of each of two or more banking  institutions.  The term
"company" is defined to include  corporations,  partnerships  and other types of
business  entities,  chartered  or  doing  business  in New  York,  and the term
"banking  institution"  is defined to include  commercial  banks,  stock savings
banks and stock savings and loan associations.  A company controlling,  directly
or  indirectly,  only one  banking  institution  will not be deemed to be a bank
holding  company for the purposes of the Banking Law. Under the Banking Law, the
prior approval of the New York Banking Board is required before:  (1) any action
is taken that  causes  any  company to become a bank  holding  company;  (2) any
action is taken that causes any banking institution to become or to be merged or
consolidated  with a subsidiary of a bank holding company;  (3) any bank holding
company acquires direct or indirect  ownership or control of more than 5% of the
voting  stock  of a  banking  institution;  (4)  any  bank  holding  company  or
subsidiary  thereof acquires all or substantially all of the assets of a banking
institution;  or (5) any action is taken that causes any bank holding company to
merge or consolidate  with another bank holding company.  Additionally,  certain
restrictions  apply to New York  State  bank  holding  companies  regarding  the
acquisition of banking  institutions  that have been chartered for five years or
less and are located in smaller communities.  Directors,  officers and employees
of a New York State bank holding  company are subject to  limitations  regarding
their  affiliation with securities  underwriting or distribution  firms and with
other bank holding  companies,  and directors and executive officers are subject
to limitations  regarding  loans obtained from certain of the holding  company's
banking subsidiaries.  Although the Registrant is not a bank holding company for
purposes of the Banking Law, any future  acquisition of ownership,  control,  or
the power to vote 10% or more of the voting stock of another banking institution
or bank holding company would cause it to become such.



                                      -40-
<PAGE>

Acquisition of the Registrant

     Federal  Restrictions.  Under  the  federal  Change  in  Bank  Control  Act
("CBCA"),  a notice  must be  submitted  to the FRB if any person  (including  a
company),  or group  acting  in  concert,  seeks to  acquire  10% or more of the
Registrant's  shares of Common Stock outstanding,  unless the FRB has found that
the acquisition will not result in a change in control of the Registrant.  Under
the CBCA,  the FRB has 60 days within which to act on such notices,  taking into
consideration certain factors,  including the financial and managerial resources
of the acquiror,  the  convenience  and needs of the  communities  served by the
Registrant and the Bank, and the anti-trust  effects of the  acquisition.  Under
the BHCA,  any company  would be required to obtain prior  approval from the FRB
before it may obtain "control" of the Registrant within the meaning of the BHCA.
Control  generally is defined to mean the ownership or power to vote 25% more of
any class of voting  securities  of the  Registrant or the ability to control in
any manner the election of a majority of the Registrant's directors.

     New York Change in Bank Control Restrictions.  In addition to the CBCA, the
Banking Law  generally  requires  prior  approval of the New York Banking  Board
before any action is taken that causes any company to acquire direct or indirect
control of a banking institution that is organized in the State of New York. For
this  purpose,   the  term   "company"  is  defined  to  include   corporations,
partnerships and other types of business  entities,  chartered or doing business
in New York, and an individual or  combination of individuals  acting in concert
and residing or doing  business in New York,  and the term  "control" is defined
generally to mean the power to direct or cause the  direction of the  management
and policies of the banking  institution and is presumed to exist if the company
owns,  controls  or holds with power to vote 10% or more of the voting  stock of
the banking institution.

Interstate Banking and Branching

     In the past,  interstate banking was limited under the BHCA to those states
that permitted  interstate  banking by statute.  New York was one of a number of
states that permitted, subject to the reciprocity conditions of the Banking Law,
out-of-state  bank holding  companies to acquire New York banks.  By 1995,  most
states had adopted statutes permitting multistate bank holding companies.

     The  Riegle-Neal  Interstate  Banking and Branching  Efficiency Act of 1994
("Interstate  Banking  Act") was enacted on September  29, 1994. As of September
29, 1995,  the Interstate  Banking Act permitted  approval under the BHCA of the
acquisition by a bank holding company that is well  capitalized and managed of a
bank  outside of the  holding  company's  home state  regardless  of whether the
acquisition was permitted under the law of the state of the bank to be acquired.
The FRB may not approve an  acquisition  under the BHCA that would result in the
acquiring  holding  company  controlling  more than 10% of the  deposits  in the
United States or more than 30% of the deposits in any particular state.

     In the past,  branching across state lines was not generally available to a
state bank, such as the Bank. While out-of-state  branches were authorized under
the Banking Law, similar authority was not generally available under the laws of
most other states. Beginning June 1, 1997, the Interstate Banking Act, permitted
the responsible federal banking agencies to approve merger transactions  between
banks  located in different  states,  regardless  of whether the merger would be

                                      -41-
<PAGE>

prohibited under state law.  Accordingly,  the Interstate  Banking Act permits a
bank to have branches in more than one state.

     Before any bank  acquisition can be completed,  prior approval  thereof may
also  be  required  to  be  obtained  from  other  agencies  having  supervisory
jurisdiction over the bank to be acquired, including the Banking Department. The
Interstate Banking Act will facilitate the consolidation of the banking industry
that has taken  place over recent  years and will allow the  creation of larger,
presumably more efficient, banking networks.

ITEM 2.  Properties


     The Bank conducts its business through its main office in Warwick, New York
and its three branch offices located in Monroe, Woodbury and Wallkill, New York.
Management  believes that the Bank's current facilities are adequate to meet the
present and immediately foreseeable needs of the Bank and the Registrant.

     The following sets forth the Bank's branches and loan production offices at
May 31, 1998.

<TABLE>
<CAPTION>
                                                    Leased                 Date                Lease 
                                                      or                 Leased or           Expiration
                                                     Owned               Acquired               Date
                                                     -----               --------               ----
<S>                                                <C>                     <C>                <C>
Main Office:                                       
         18 Oakland Avenue
         Warwick, New York 10990                     Owned                 1972                  N/A     
                                                                                                         
Branches:                                                                                                
         591 Route 17M                               
         Monroe, New York 10950                      Owned                 1976                  N/A     
                                                                                                         
         556 Route 32                                                                                    
         Highland Mills, New York 10930              Owned                 1979                  N/A     
                                                                                                         
         1 Industrial Avenue
         Walkill, New York  10940                    Owned                 1998                  N/A
                                                                                                         
Loan Production Offices:                                                                                 
                                                                                                         
         Taconic Plaza Shopping Center,                                                                  
         Store #10                                  
         Route 52                                                                                        
         East Fishkill,  New York                   Leased                 1997               01/31/99   
                                                                                                         
         151 South Main Street, Suite 104                                                              
         New City, New York                         Leased                 1997               04/30/99   
                                                                                                         
         1435 Union Valley Road, 1st Floor                                                               
         West Milford, New Jersey                   Leased                 1997               04/30/99   
                                                                                                         
         45 Whitney Road
         Mahwah, New Jersey                         Leased                 1998               05/01/99
</TABLE>

                                      -42-
<PAGE>

ITEM 3.  Legal Proceedings

     The Registrant is not involved in any pending legal  proceedings other than
routine legal proceedings occurring in the ordinary course of business, which in
the aggregate involve amounts which management  believes to be immaterial to the
financial condition and results of operations of the Registrant.


ITEM 4. Submission of Matters to a Vote of Security Holders

None.

                                     PART II

ITEM 5. Market for the  Registrant's  Common  Equity and  Related  Stockholders'
Matters

     The information required by this item appears under the caption "Market for
Common Stock" on page 21 of the  Registrant's  Annual Report to Shareholders for
the year ended May 31, 1998 and is incorporated herein by reference.


ITEM 6.  Selected Financial Data

     The  information  required  by this  item  appears  on pages 8  through  9,
inclusive,  of the Registrant's Annual Report to Shareholders for the year ended
May 31, 1998 and is incorporated herein by reference.


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

     The  information  required  by this item  appears on pages 10  through  21,
inclusive,  of the Registrant's Annual Report to Shareholders for the year ended
May 31, 1998 and is incorporated herein by reference.


ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk

     The  information  required  by this item  appears on pages 11  through  13,
inclusive,  of the Registrant's Annual Report to Shareholders for the year ended
May 31, 1998 and is incorporated herein by reference.


ITEM 8.  Financial Statements and Supplementary Data

     The  information  required  by this item  appears on pages 22  through  44,
inclusive,  of the Registrant's Annual Report to Shareholders for the year ended
May 31, 1998 and is incorporated herein by reference.



                                      -43-
<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

     The information  required by this item appears under the caption  "Election
of Directors" on pages 5 through 9, inclusive, and under the caption "Compliance
with Section  16(a) of the Exchange  Act" on page 19 of the  Registrant's  Proxy
Statement ("Proxy  Statement") for its 1998 Annual Meeting of Shareholders to be
held on September 22, 1998 and is incorporated herein by reference.


ITEM 11.  Executive Compensation

     The  information  required  by this item  appears on pages 13  through  19,
inclusive,  of the  Registrant's  Proxy Statement and is incorporated  herein by
reference.


ITEM 12.  Security Ownership of Certain Beneficial Owners and Management

     The  information  required by this item appears  under the captions  "Stock
Ownership  of  Certain  Beneficial  Owners" on page 3 and  "Stock  Ownership  of
Management" on pages 4 and 5, inclusive, of the Registrant's Proxy Statement and
is incorporated herein by reference.


ITEM 13.  Certain Relationships and Related Transactions


     The  information  required by this item appears under the caption  "Certain
Relationships  and Related  Transactions" on page 19 of the  Registrant's  Proxy
Statement and is incorporated herein by reference.



                                      -44-
<PAGE>

                                     PART IV

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

(a)  The following documents are filed as a part of this report:

     1.   The following  consolidated financial statements of the Registrant and
          its  subsidiaries,  and  the  independent  auditors'  report  thereon,
          included on pages 22 through 44 of the  Registrant's  Annual Report to
          Shareholders  for the fiscal year ended May 31, 1998, are incorporated
          herein by reference:

                    Consolidated Statements of Financial Condition as of May 31,
                    1998 and 1997;

                    Consolidated  Statements  of Income for Each of the Years in
                    the Three-Year Period Ended May 31, 1998;

                    Consolidated  Statements of Changes in Stockholders'  Equity
                    for Each of the Years in the Three-Year Period Ended May 31,
                    1998;

                    Consolidated  Statements of Cash Flows for Each of the Years
                    in the Three-Year Period Ended May 31, 1998;

                    Notes to Consolidated Financial Statements

          The remaining  information appearing in the Registrant's Annual Report
          to  Shareholders  is not  deemed  to be filed as part of this  report,
          except as expressly provided herein.

     2.   All schedules are omitted because they are not required or applicable,
          or the required  information  is shown in the  consolidated  financial
          statements or the notes thereto.

     3.   Exhibits

     (a)  The  following  exhibits are filed as part of this  report,  except as
          otherwise indicated.

          3.1  Certificate of Incorporation of Warwick Community  Bancorp,  Inc.
               (1)

          3.2  Bylaws of Warwick Community Bancorp, Inc. (1)

          4.1  Certificate of Incorporation of Warwick Community Bancorp,  Inc.
               (See Exhibit 3.1 hereto)

          4.2  Bylaws of  Warwick  Community  Bancorp,  Inc.  (See  Exhibit  3.2
               hereto)

          4.3  Restated Organization Certificate of The Warwick Savings Bank (1)

          4.4  Bylaws of The Warwick Savings Bank, as amended (1)



                                      -45-
<PAGE>

          4.5  Stock Certificate of Warwick Community Bancorp, Inc. (1)

          10.1 Employment  Agreement by and between Warwick  Community  Bancorp,
               Inc. and Timothy A. Dempsey

          10.2 Employment  Agreement by and between Warwick  Community  Bancorp,
               Inc. and Ronald J. Gentile

          10.3 Employment  Agreement by and between Warwick  Community  Bancorp,
               Inc. and Arthur W. Budich

          10.4 Employment  Agreement by and between Warwick  Community  Bancorp,
               Inc. and Nancy L. Sobotor-Littell

          10.5 Employee  Retention  Agreement by and between The Warwick Savings
               Bank and Laurence D. Haggerty

          10.6 Employee  Retention  Agreement by and between The Warwick Savings
               Bank and Donna M. Lyons

          10.7 Employee  Retention  Agreement by and between The Warwick Savings
               Bank and Barbara A. Rudy

          10.8 Employee  Retention  Agreement by and between The Warwick Savings
               Bank and Arthur S. Anderson

          10.9 Recognition and Retention Plan of Warwick Community Bancorp, Inc.
               (2)

         10.10 Trust  Agreement  between  Warwick  Community  Bancorp,  Inc. and
               Orange  County Trust  Company for the  Recognition  and Retention
               Plan of Warwick Community Bancorp, Inc.

         10.11 Stock Option Plan of Warwick Community Bancorp, Inc.(2)

         10.12 Warwick  Community  Bancorp,  Inc.  Employee Stock Ownership Plan
               (1)

         10.13 Trust  Agreement  between  Warwick  Community  Bancorp,  Inc. and
               Marine  Midland  Bank for the  Warwick  Community  Bancorp,  Inc.
               Employee Stock Ownership Plan

         10.14 Loan  Agreement  by and between the  Warwick  Community  Bancorp,
               Inc.   Employee  Stock  Ownership  Trust  and  Warwick  Community
               Bancorp, Inc.

         10.15 Benefit Restoration Plan of The Warwick Savings Bank (1)

         10.16 Grantor Trust  Agreement by and between The Warwick  Savings Bank
               and Marine Midland Bank for the Benefit  Restoration  Plan of The
               Warwick Savings Bank

         10.17 The Warwick Savings Bank 401(k) Savings Plan (1)

                                      -46-
<PAGE>

         10.18 Trust  Agreement  between  The  Warwick  Savings  Bank and Marine
               Midland  Bank for The Warwick  Savings  Bank 401(k)  Savings Plan
               Employer Stock Fund

          11.1 Statement re: Computation of per share earnings

          13.1 1998 Annual Report to Shareholders

          21.1 Subsidiaries of the Registrant

          27.1 Financial Data Schedule (EDGAR filing only)

          99.1 Proxy Statement for the 1998 Annual Meeting of Shareholders

----------
(1)  Incorporated  herein  by  reference  to the  Exhibits  to the  Registrant's
     Registration   Statement  on  Form  S-1,   filed  on  September  19,  1997,
     Registration No. 333-36021.

(2)  Incorporated  herein by  reference  to the  Registrant's  definitive  Proxy
     Statement for the Special Meeting of Stockholders held on June 24, 1998.



(b) No reports on Form 8-K have been filed during the last quarter of the period
covered by this report.



                                      -47-
<PAGE>

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

                                  WARWICK COMMUNITY BANCORP, INC.



Dated: August 31, 1998            BY:  /s/ Timothy A. Dempsey
                                      ------------------------------------
                                           Timothy A. Dempsey
                                           President and Chief Executive Officer




                                  BY: /s/ Arthur W. Budich
                                      ------------------------------------
                                          Arthur W. Budich
                                          Senior Vice President, Treasurer
                                          and Chief Financial Officer


                                      -48-
<PAGE>


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

<TABLE>
<CAPTION>
Signature                          Title                                        Date
---------                          -----                                        ----
<S>                                <C>                                          <C>
/s/ Timothy A. Dempsey             President and Chief Executive Officer and    August 31, 1998
----------------------------       Director
Timothy A. Dempsey                                                                     
                                                                                               
/s/ Ronald J. Gentile              Executive Vice President and Chief           August 31, 1998
----------------------------       Operating Officer and Director 
Ronald J. Gentile                                               
                                                                                               
/s/ Frances M. Gorish              Director                                     August 31, 1998
----------------------------
Frances M. Gorish                                                                              
                                                                                               
/s/ R. Michael Kennedy             Director                                     August 31, 1998
----------------------------
R. Michael Kennedy                                                                             
                                                                                               
/s/ Fred M. Knipp                  Director                                     August 31, 1998
----------------------------
Fred M. Knipp                                                                                  
                                                                                               
/s/ Emil R. Krahulik               Director                                     August 31, 1998
----------------------------
Emil R. Krahulik                                                                               
                                                                                               
/s/ Thomas F. Lawrence, Jr.        Director                                     August 31, 1998
----------------------------
Thomas F. Lawrence, Jr.                                                                        
                                                                                               
/s/ Henry L. Nielsen, Jr.          Director                                     August 31, 1998
----------------------------
Henry L. Nielsen, Jr.                                                                          
                                                                                               
/s/ John W. Sanford III            Director                                     August 31, 1998
----------------------------
John W. Sanford III                                                                            
                                                                                               
/s/ Robert N. Smith                Director                                     August 31, 1998
----------------------------
Robert N. Smith                    
</TABLE>



                                      -49-