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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

|_|      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934 For the fiscal year ended_________________

|X|      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM JUNE 1, 1998 TO
         DECEMBER 31, 1998

                                     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 IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)

       18 OAKLAND AVENUE,
       WARWICK, NEW YORK                              10990-0591
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)              (ZIP CODE)

                                 (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 March 19, 1999, there were 6,276,221 shares of the Registrant's
common stock outstanding. The aggregate market value of the Registrant's common
stock (based on closing price quoted on March 19, 1999) held by non-affiliates
was approximately $78,437,335.

                       DOCUMENTS INCORPORATED BY REFERENCE


(1)      Portions of the definitive Proxy Statement for the Registrant's 1999
         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.

         The Registrant has submitted applications to the New Jersey Department
of Banking and Insurance, the FDIC and the Federal Reserve Board to form a de
novo commercial bank in Bergen County, New Jersey. The new full-service
commercial bank will be called The Towne Center Bank, and is expected to
commence operations in the latter part of 1999. The bank will be headquartered
in Lodi, New Jersey, and will be an important component in the continuing
revitalization of Lodi's downtown area.


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. In addition, the Bank expects to open a new
branch office located in the town of Newburgh, New York, during the third
quarter of 1999. The Bank's primary deposit gathering areas are currently
concentrated in proximity to its full-service banking offices. The Bank's
current primary lending


                                       -2-


<PAGE>



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 offices in West Milford, Passaic
County, New Jersey, and Mahwah, Bergen 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 December 31, 1998, the Bank had total gross loans outstanding of
$263.5 million (before deducting the allowance for loan losses and net deferred
loan fees), of which $167.1 million, or 63.4%, were conventional one- to
four-family, owner-occupied residential first mortgage loans. The remainder
consisted of $35.4 million of commercial business and commercial real estate
loans, or 13.4% of total loans, $18.1 million in home equity loans, or 6.9% of
total loans, $9.8 million in residential construction mortgage loans (net of
undisbursed portion), or 3.7% of total loans, and $18.8 million in consumer
loans, or 7.1% of total loans. Additionally, the Bank originates Veterans
Administration ("VA") guaranteed loans and Federal Housing Authority ("FHA")
insured loans. For the seven months ended December 31, 1998, the Bank originated
$3.9 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 seven months ended December 31, 1998, the Bank originated $5.1
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,
                                    AT         -------------------------------------------------------------------------------------
                            DECEMBER 31, 1998        1998             1997            1996              1995              1994
                            -----------------        ----             ----            ----              ----              ----
                                     PERCENT           PERCENT           PERCENT          PERCENT           PERCENT          PERCENT
                                       OF                OF                 OF              OF                OF               OF
                             AMOUNT   TOTAL    AMOUNT   TOTAL    AMOUNT   TOTAL   AMOUNT   TOTAL    AMOUNT   TOTAL   AMOUNT   TOTAL
                             ------   -----    ------   -----    ------   -----   ------   -----    ------   -----   ------   -----
                                                                    (DOLLARS IN THOUSANDS)
<S>                        <C>       <C>     <C>       <C>     <C>       <C>    <C>       <C>     <C>       <C>    <C>       <C>
MORTGAGE LOANS:
Conventional one-
 to-four-family
 loans.................... $167,147  63.43%  $129,915  60.57%  $ 81,803  58.56% $ 61,936  56.18%  $ 78,562  63.34% $ 71,762  65.42%
Mortgage loans held for
 sale.....................   13,737   5.21     17,237   8.04      4,832   3.46     5,054   4.59      2,968   2.39        --     --
VA or FHA loans...........      641   0.24        595   0.28        749   0.54       376   0.34        182   0.15       211   0.19
Home equity loans.........   18,061   6.85     15,876   7.40     13,449   9.63    11,040  10.02      9,714   7.83    10,051   9.16
Residential construction
loans.....................   16,105   6.11      6,703   3.13      4,110   2.94       961   0.87      2,901   2.34     1,613   1.47
Undisbursed portion of
 construction loans.......   (6,304) (2.39)    (3,939) (1.84)    (2,118) (1.52)   (1,838) (1.67)    (1,307) (1.05)   (1,169) (1.06)
                             ------- ------    ------- ------    ------- ------   ------- ------    ------- ------   ------- ------
  Total mortgage loans....  209,387  79.45    166,387  77.58    102,825  73.61    77,529  70.33     93,020  75.00    82,468  75.18
                            -------  -----    -------  -----    -------  -----    ------  -----     ------  -----    ------  -----

CONSUMER AND  OTHER LOANS:
Commercial................   35,381  13.43     34,114  15.91     23,418  16.76    19,385  17.59     17,772  14.33    15,472  14.10
Automobile................   13,788   5.23      8,352   3.89      7,738   5.54     7,496   6.80      7,483   6.03     6,621   6.04
Student...................      332   0.13      1,353   0.63      1,332   0.95     1,533   1.39      1,732   1.40     1,438   1.31
Credit card...............    1,296   0.49      1,239   0.58      1,334   0.95     1,195   1.08      1,165   0.94     1,285   1.17
Other consumer loans......    3,345   1.27      3,026   1.41      3,054   2.19     3,102   2.81      2,855   2.30     2,410   2.20
                              -----   ----      -----   ----      -----   ----     -----   ----      -----   ----     -----   ----
 Total consumer and
  other loans.............   54,142  20.55     48,084  22.42     36,876  26.39    32,711  29.67     31,007  25.00    27,226  24.82
                             ------  -----     ------  -----     ------  -----    ------  -----     ------  -----    ------  -----
 Total loans..............  263,529 100.00%   214,471 100.00%   139,701 100.00%  110,240 100.00%   124,027 100.00%  109,694 100.00%
                                    ======            ======            ======           ======            ======           ======
Discounts, premiums and
 deferred loan fees, 
 net......................     (339)             (293)             (146)             (38)             (158)            (187)
Allowance for loan 
 losses...................   (1,727)           (1,513)           (1,232)          (1,305)           (1,206)            (909)
                             -------           -------           -------          -------           -------            -----

Total loans, net.......... $261,463          $212,665          $138,323         $108,897          $122,663         $108,598
                           ========          ========          ========         ========          ========         ========
</TABLE>


         LOAN MATURITY. The following table shows the contractual maturity of
the Bank's loans at December 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 $9.5 million,
$11.5 million, $18.4 million and $23.4 million for the seven months ended
December 31, 1998 and 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 $10.7 million and $48.9 million in loan sales and
securitizations, respectively, for the seven months ended December 31, 1998,
$12.2 million and $30.7 million, respectively, for the fiscal year ended May 31,
1998 and $6.2 million and $21.6 million, respectively, for the fiscal year ended
May 31, 1997.



                                       -5-


<PAGE>


<TABLE>
<CAPTION>
                                                                  AT DECEMBER 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..................... $  10,008  $      30  $   8,308   $      37  $   1,334   $      --  $  19,717
                                     ---------  ---------  ---------   ---------  ---------   ---------  ---------
After one year:
     One to three years.............       237         22      7,184          --      6,916         373     14,732
     Three to five years............       942         14     13,340          --     10,293          --     24,589
     Five to 10 years...............     3,277        932      3,206       1,331      9,467          --     18,213
     Over 10 years..................   128,802     47,062      3,343       5,680         --       1,391    186,278
                                     ---------  ---------  ---------   ---------  ---------   ---------  ---------
         Total due after one year...   133,258     48,030     27,073       7,011     26,676       1,764    243,812
                                     ---------  ---------  ---------   ---------  ---------   ---------  ---------
         Total amounts due.......... $ 143,266  $  48,060  $  35,381   $   7,048  $  28,010   $   1,764    263,529
                                     =========  =========  =========   =========  =========   =========
Discounts, premiums and deferred
     loan fees, net.................                                                                          (339)
Allowance for loan losses...........                                                                        (1,727)
                                                                                                         ----------
Loans receivable, net...............                                                                     $ 261,463
                                                                                                         =========
</TABLE>


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



                                          DUE AFTER DECEMBER 31, 1999
                                          ---------------------------
                                        FIXED    ADJUSTABLE       TOTAL
                                        -----    ----------       -----
                                               (IN THOUSANDS)
Mortgage loans...............          $133,258    $48,030       $181,288
Commercial loans.............            20,027      7,046         27,073
Home equity lines of credit..                --      7,011          7,011
Consumer loans...............            26,406        270         26,676
Other loans..................             1,764         --          1,764
                                       --------    -------       --------
Total loans..................          $181,455    $62,357       $243,812
                                       ========    =======       ========

         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 seven months
ended December 31, 1998, the Bank experienced an increase in fixed-rate mortgage
loan originations. This was attributable to the increased refinancing activity
that occurred during the seven months ended December 31, 1998. The Bank
currently holds for its portfolio all


                                       -6-


<PAGE>



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 December 31, 1998, the Bank had $7.0 million of forward sale
commitments representing approximately 32% 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 December 31, 1998, the Bank was servicing $189.4 million
of residential mortgage loans for others. For the seven months ended December
31, 1998 and the fiscal years ended May 31, 1998 and 1997, loan servicing fees
totaled $254 thousand, $368 thousand and $335 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 SEVEN
                                                           MONTHS ENDED          FOR THE YEAR ENDED MAY 31,
                                                           DECEMBER 31,          --------------------------
                                                               1998          1998           1997          1996
                                                               ----          ----           ----          ----
                                                                                (IN THOUSANDS)
<S>                                                         <C>           <C>            <C>           <C>      
MORTGAGE LOANS (GROSS):
     At beginning of period...............................  $ 150,511     $  89,376      $  66,489     $  83,306
     Mortgage loans originated:
     Fixed-rate mortgages.................................    109,623       100,612         50,250        69,928
     Adjustable-rate mortgages............................      4,794        14,879         18,776        15,133
                                                            ---------     ---------      ---------     ---------
         Total mortgage loans originated..................    114,417       115,491         69,026        85,061
     Principal repayments.................................     (9,475)      (11,457)       (18,375)      (23,403)
     Sale of loans........................................    (10,694)      (12,214)        (6,172)       (3,731)
     Securitizations......................................    (53,433)      (30,685)       (21,592)      (74,744)
                                                            ----------    ---------      ---------     ---------
     At end of period.....................................  $ 191,326     $ 150,511      $  89,376     $  66,489
                                                            =========     =========      =========     =========
OTHER LOANS (GROSS):

     At beginning of period...............................  $  63,959     $  50,325      $  43,751     $  40,721
     Commercial loans originated..........................     13,674        26,628         14,966        12,326
     Consumer loans originated............................     12,466        13,409         16,774        10,936
     Commercial repayments................................    (12,407)      (15,933)       (10,933)      (10,573)
     Consumer repayments..................................     (5,489)      (10,470)        (9,038)       (9,659)
     Other loans sold.....................................         --            --         (5,195)           --
                                                            ---------     ---------      ---------     ---------
     At end of period.....................................  $  72,203     $  63,959      $  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 December 31, 1998, the Bank's total gross loans outstanding were
$263.5 million, of which $191.3 million, or 72.6%, were mortgage and
construction loans secured by one- to four-family owner-occupied residences. Of
the one- to four-family residential mortgage loans outstanding at that date,
74.9%, or $143.3 million, were fixed-rate loans and 25.1%, or $48.1 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


                                       -8-


<PAGE>



rate for the loan. All adjustable-rate mortgage loans offered 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,
                                   AT        ---------------------------------------------------------------------------------------
                           DECEMBER 31, 1998      1998             1997               1996             1995             1994
                           -----------------      ----             ----               ----             ----             ----
                                    PERCENT          PERCENT           PERCENT            PERCENT          PERCENT           PERCENT
                                       OF               OF                OF                 OF              OF                 OF
                                     TOTAL            TOTAL             TOTAL              TOTAL            TOTAL             TOTAL
                           AMOUNT    LOANS   AMOUNT   LOANS   AMOUNT    LOANS    AMOUNT    LOANS   AMOUNT   LOANS   AMOUNT    LOANS
                           ------    -----   ------   -----   ------    -----    ------    -----   ------   -----   ------    -----
                                                                (DOLLARS IN THOUSANDS)
<S>                       <C>         <C>   <C>        <C>   <C>         <C>    <C>         <C>    <C>       <C>    <C>       <C>
COMMERCIAL LOANS
 BY TYPE:
Non-farm and non-
  residential............ $17,170     6.52% $16,862    7.86% $10,372     7.42%  $ 8,288     7.52%  $6,749    5.44%  $5,046    4.60%
One- to four-family......   2,142     0.81    3,094    1.44    1,157     0.83     1,161     1.05    1,387    1.12    1,593    1.45
Multi-family.............   3,988     1.51    3,759    1.75    3,022     2.16     1,565     1.42      501    0.41      390    0.36
Farm.....................     996     0.38      404    0.19      318     0.23       156     0.14      471    0.38      491    0.45
Acquisition, development
  & construction.........   4,339     1.65    3,791    1.77    2,781     1.99     2,414     2.19    2,819    2.27    2,393    2.18
Term loans...............     411     0.16      367    0.17      258     0.18       108     0.10      188    0.15      494    0.45
Installment loans........   2,435     0.92    2,176    1.02    1,796     1.29     1,617     1.47    1,542    1.24    1,920    1.75
Demand loans.............     853     0.32      608    0.28      498     0.36       444     0.40      456    0.37      627    0.57
Time loans...............      80     0.03      224    0.10      300     0.21       174     0.16      150    0.12      306    0.28
S.B.A. loans.............     328     0.13      526    0.25      636     0.46       546     0.50      657    0.53      223    0.20
Lines of credit..........   2,327     0.88    2,164    1.01    2,166     1.55     2,861     2.60    2,763    2.23    1,922    1.75
Loans and draws disbursed     194     0.07       --      --       88     0.06        --       --       --      --       --      --
Non-accrual..............     118     0.04      139    0.06       26     0.02        51     0.04       89    0.07       67    0.06
                          -------    -----  -------   -----  -------    -----   -------    -----  -------   -----  -------   -----
  TOTAL.................. $35,381    13.42% $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 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


                                       -9-


<PAGE>



(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 December 31, 1998, the Bank's
commercial business loan portfolio amounted to $6.7 million, or 2.6% of total
gross loans outstanding. The largest commercial business loan outstanding at
December 31, 1998 was a $500 thousand loan to a borrower whose business in
Monroe, New York, specializes in industrial flooring. On February 10, 1999, this
loan was classified as non-accrual. In addition, the Bank has committed a line
of credit of $2.5 million to the Warwick Valley Telephone Company. At December
31, 1998, $400 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 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


                                      -10-


<PAGE>



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 December
31, 1998, the Bank had $4.3 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 December 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 December 31, 1998, the Bank
had $9.8 million of residential construction loans (net of undisbursed portion),
which amounted to 3.7% 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.

         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,


                                      -11-


<PAGE>



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 December 31,
1998, $18.1 million, or 6.9%, 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 December 31, 1998,
the Bank's consumer loan portfolio totaled $18.8 million, or 7.1% 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 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
-------------




                                      -12-


<PAGE>



         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.

         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                                 AT MAY 31,
                                            DECEMBER     ------------------------------------------------------------
                                            31, 1998       1998         1997         1996         1995         1994
                                            --------       ----         ----         ----         ----         ----
                                                                     (DOLLARS IN THOUSANDS)
<S>         <C>                             <C>          <C>          <C>          <C>          <C>          <C>
Non-accrual mortgage loans delinquent
  more than 90 days......................   $    631     $    699     $  1,111     $    582     $  1,093     $  1,217
Non-accrual other loans delinquent
  more than 90 days......................         88          186           83           82          131           69
                                            --------     --------     --------     --------     --------     --------
Total non-accrual loans..................        719          885        1,194          664        1,224        1,286
Total 90 days or more delinquent
  and still accruing interest............      1,362          133          237          199          978          928
                                            --------     --------     --------     --------     --------     --------
Total non-performing loans...............      2,081        1,018        1,431          863        2,202        2,214
Total foreclosed real estate, net of
 related  allowance for losses...........        371          409          224          330          493          306
                                            --------     --------     --------     --------     --------     --------
Total non-performing assets..............   $  2,453     $  1,427     $  1,655     $  1,193     $  2,695     $  2,520
                                            ========     ========     ========     ========     ========     ========
Non-performing loans to total loans......       0.79%        0.47%        1.02%        0.78%        1.02%        2.02%
Total non-performing assets to total
assets...................................       0.55%        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 $90,000, $100,000 and 


                                      -13-

<PAGE>




$93,000 for the seven months ended December 31, 1998 and the fiscal years ended
May 31, 1998 and 1997, respectively.

         OTHER REAL ESTATE OWNED. At December 31, 1998, the Bank's OREO, net,
which consisted of four single-family residential properties, totaled $371
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 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 


                                      -14-


<PAGE>

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 December 31, 1998, the Bank had $545 thousand of assets classified
as Substandard and $992 thousand of assets classified as Special Mention. There
were no assets classified as Doubtful or Loss as of December 31, 1998. The $545
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 DECEMBER 31, 1998                              AT MAY 31, 1998
                              --------------------------------------------   ---------------------------------------------
                                   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...........        11     $1,263        12        $ 631           12      $ 952         12       $ 764
Multi-family..................        --         --        --           --           --         --         --          --
Commercial loans..............         4        279         6        1,404            4        533          4         211
Home equity lines of credit...        --         --         1           16           --         --          1          16
Other loans...................        16         48         8           30           13         26         11          27
                               ---------   --------   -------    ---------      -------   --------     ------    --------
         Total loans..........        31     $1,590        27       $2,081           29     $1,511         28      $1,018
                               =========     ======   =======       ======     ========     ======    =======      ======
</TABLE>


<TABLE>
<CAPTION>
                                             AT MAY 31, 1997                                AT MAY 31, 1996
                              --------------------------------------------   ---------------------------------------------
                                   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...........         7    $   475        16       $1,214           11    $   792         11        $692
Multi-family..................        --         --        --           --           --         --         --          --
Commercial loans..............         5        724         5          121            7        710          4          58
Home equity lines of credit...        --         --         2           57            1         11          2          57
Other loans...................         8         16        17           39            9         33         28          56
                                --------    ------- ---------    ---------     --------    -------  ---------   ---------
         Total loans..........        20     $1,215        40       $1,431           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
December 31, 1998, the Bank's allowance for loan and lease losses was $1.7
million, or 0.66% of total loans, as compared to $1.5 million, or 0.71%, at May
31, 1998 and $1.2 million, or 0.88%, at May 31, 1997. The Bank had
non-performing loans of $2.1 million, $1.0 million and $1.4 million at December
31, 1998, 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 SEVEN         AT OR FOR THE YEAR ENDED MAY 31,
                                                      MONHTS ENDED     ---------------------------------------------
                                                    DECEMBER 31, 1998  1998      1997       1996      1995      1994
                                                    -----------------  ----      ----       ----      ----      ----
                                                                         (DOLLARS IN THOUSANDS)
<S>                                                      <C>         <C>        <C>      <C>       <C>       <C>    
ALLOWANCE FOR LOAN LOSSES:
         Balance at beginning of period....              $1,513      $1,232     $1,305   $ 1,206   $   909   $   808
CHARGE-OFFS:
         Real estate mortgage loans........                 (30)       (151)      (119)      (24)      (61)     (195)
         Commercial loans..................                  (5)        (52)        --        --        --      (126)
         Consumer loans....................                 (64)       (122)       (94)     (125)      (47)      (58)
                                                         ------      ------     ------    ------    ------      ----
                  Total charge-offs........                 (99)       (325)      (213)     (149)     (108)     (379)
RECOVERIES:
         Real estate mortgage loans........                  --          --         --        18       123         8
         Commercial loans.................                    9          --         --        74        13        33
         Consumer loans....................                  12          14         10        16         8        24
                                                         ------      ------     ------    ------    ------      ----
                  Total recoveries.........                  21          14         10       108       144        65
         Provision for loan losses.........                 292         592        130       140       261       415
                                                         ------      ------     ------    ------    ------      ----
         Balance at end of period..........              $1,727      $1,513     $1,232    $1,305    $1,206      $909
                                                         ======      ======     ======    ======    ======      ====
         Ratio of net charge-offs during
          the period to average loans
          outstanding......................                0.04%       0.18%      0.16%     0.03%      N/A      0.29%
         Ratio of allowance for loan
          losses to total loans at 
          end of period....................                0.66%       0.71%      0.88%     1.18%     0.97%     0.83%
         Ratio of allowance for loan
          losses to non-performing 
          loans............................               82.99%     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,
                     AT DECEMBER 31,   ----------------------------------------------------------------------------------------
                         1998               1998              1997             1996              1995             1994
                         ----               ----              ----             ----              ----             ----
                               % OF              % OF              % OF              % OF              % OF             % OF
                              LOANS IN          LOANS IN          LOANS IN          LOANS IN          LOANS IN         LOANS IN
                              CATEGORY          CATEGORY          CATEGORY          CATEGORY          CATEGORY         CATEGORY
                              TO TOTAL          TO TOTAL          TO TOTAL          TO TOTAL          TO TOTAL         TO TOTAL
                     AMOUNT    LOANS   AMOUNT    LOANS   AMOUNT    LOANS   AMOUNT    LOANS   AMOUNT    LOANS   AMOUNT   LOANS
                     ------    -----   ------    -----   ------    -----   ------    -----   ------    -----   ------   -----
                                                                (DOLLARS IN THOUSANDS)
<S>                  <C>       <C>    <C>        <C>    <C>        <C>    <C>        <C>    <C>        <C>    <C>      <C>
Allowance for
mortgage
 loan loss.......... $  373    79.46% $  372     77.58% $  224     73.60% $  393     70.33% $  403     75.00% $  288   75.18%
Allowance for
consumer
 loan loss..........    375      7.12    406       6.51    436       9.64    310      12.09    311      10.67    258    10.72
Allowance for
commercial
 loan loss..........    979     13.42    735      15.91    572      16.76    602      17.58    492      14.33    363    14.10
                     ------     ----- ------      ----- ------      ----- ------      ----- ------      ----- ------    -----
 Total allowances
 for loan loss...... $1,727   100.00% $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
December 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 89% of the Bank's debt security portfolio at December 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 December 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 December 31, 1998, the amortized cost of mortgage-backed
securities totaled $61.3 million, or 13.8% of total assets. The market value of
all mortgage-backed securities totaled $62.0 million at December 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 $18.0 million and a market value of $18.1 million at December
31, 1998. A CMO is a special type of debt security in which the stream


                                      -18-


<PAGE>



of principal 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 December 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 7.20% at December 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 SEVEN          FOR THE YEAR ENDED MAY 31,
                                                                  MONTHS ENDED   --------------------------------------
                                                               DECEMBER 31, 1998      1998        1997          1996
                                                               -----------------      ----        ----          ----
                                                                                      (IN THOUSANDS)
<S>                                                                   <C>            <C>         <C>          <C>     
BEGINNING BALANCE............................................         $170,749       $126,393    $144,284     $110,333
                                                                      --------       --------    --------     --------
Debt securities purchased-- held-to-maturity.................              537          5,560         200          526
Debt securities purchased-- available-for-sale...............            9,345         44,558      23,687       18,723
Equity securities purchased-- available-for-sale.............            2,330         14,963       2,277        4,723
Mortgage-backed securities purchased-- held-to-maturity......               --             --          --           --
Mortgage-backed securities purchased-- available-for-sale....            3,995         59,644      23,221       12,101
Mortgage-backed securities formed by securitizing
         originated mortgage loans...........................           48,901         30,347      21,358       72,325

LESS:

Sale of debt securities-- available-for-sale.................            4,568          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........            8,783         25,764      25,375           --
Sale of mortgage-backed securities formed by securitizing
         originated mortgage loans-- trading.................           48,901         22,604      17,486       22,668
Principal repayments on mortgage-backed securities
         and debt securities.................................           16,012         16,447      10,469        3,637
Maturities and called debt securities........................            2,870         32,800      12,425       39,576
Accretion of discount/amortization of (premium)..............            (152)            809        (83)           75
Change in gross unrealized gains (losses) on
available-for-sale securities................................              919            840         720          419
                                                                      --------       --------    --------     --------
ENDING BALANCE...............................................         $155,490       $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,
                                                                    ----------------------------------------------------------------
                                              AT DECEMBER 31, 1998           1998                    1997                 1996
                                              --------------------           ----                    ----                 ----
                                             AMORTIZED    MARKET    AMORTIZED    MARKET      AMORTIZED   MARKET    AMORTIZED  MARKET
                                               COST       VALUE       COST       VALUE         COST      VALUE       COST     VALUE
                                               ----       -----       ----       -----         ----      -----       ----     -----
                                                                            (IN THOUSANDS)
<S>                                         <C>          <C>        <C>        <C>          <C>        <C>        <C>       <C>
Debt securities held-to-maturity:
  U.S. Government obligations.............  $    895     $    899   $     --   $     --     $    720   $    725   $    717  $    658
  Agency securities.......................     5,000        4,962      6,659      6,610        4,965      4,981      5,887     5,910
  Municipal bonds.........................       104          106        665        667          407        410        432       437
  Other debt obligations..................        --           --         --         --           --         --         82        83
                                            --------     --------   --------   --------     --------   --------   --------  --------
          Total debt securities
           held-to-maturity...............     5,999        5,967      7,324      7,277        6,092      6,116      7,118     7,088
                                            --------     --------   --------   --------     --------   --------   --------  --------
Debt securities available-for-sale:
  U.S. Government obligations.............     3,023        3,165      4,047      4,163        9,079      9,165     21,684    21,716
  Agency securities.......................    38,430       38,694     40,418     40,071       20,822     20,856     15,328    15,206
  Other debt obligations..................     8,045       82,300        822        851        7,991      8,029     16,203    16,256
                                            --------     --------   --------   --------     --------   --------   --------  --------
          Total debt securities
           available-for-sale.............    49,498       50,089     45,287     45,085       37,892     38,050     53,215    53,178
                                            --------     --------   --------   --------     --------   --------   --------  --------
Equity securities available-for-sale:
  Preferred stock.........................     1,112        1,120      1,102      1,122          204        204        305       277
  Common stock............................     2,275        1,941        582        576           --         --         --        --
  Mutual funds............................    14,449       16,232     13,823     14,931        5,597      6,091      8,636     8,821
                                            --------     --------   --------   --------     --------   --------   --------  --------
          Total equity securities
           available-for-sale.............    17,836       19,293     15,507     16,629        5,801      6,295      8,941     9,098
                                            --------     --------   --------   --------     --------   --------   --------  --------
          Total debt and equity 
           securities.....................    73,333       75,349     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...................................     7,018        7,145      9,720      9,872       11,062     11,029     10,395    10,322
  GNMA....................................    33,849       33,824     49,164     49,307       29,230     29,190      4,396     4,348
  FNMA....................................    20,436       21,036     22,213     22,973       32,519     33,052     52,871    53,336
  CMOs....................................    17,976       18,104     19,593     19,559        2,696      2,685      4,973     4,950
                                            --------     --------   --------   --------     --------   --------   --------  --------
          Total mortgage-backed securities
           available-for-sale.............    79,279       80,109    100,690    101,711       75,507     75,956     72,635    72,956
                                            --------     --------   --------   --------     --------   --------   --------  --------
          Total mortgage-backed 
           securities.....................    79,279       80,109    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...............................     2,878                   1,941                   1,101                   441
                                            --------                --------                --------              --------
          Total securities...............   $155,490     $155,458   $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,
                                            AT DECEMBER 31,     --------------------------------------------------------------------
                                                1998                   1998                   1997                   1996
                                                ----                   ----                   ----                   ----
                                         CARRYING   PERCENT OF   CARRYING  PERCENT OF   CARRYING   PERCENT OF  CARRYING   PERCENT OF
                                           VALUE      TOTAL       VALUE      TOTAL       VALUE       TOTAL       VALUE       TOTAL
                                           -----      -----       -----      -----       -----       -----       -----       -----
                                                                     (DOLLARS IN THOUSANDS)
<S>                                       <C>           <C>     <C>           <C>       <C>          <C>       <C>           <C>
Debt securities:
         U.S. Government
         obligations.............         $ 4,060       2.61%   $ 4,822       2.82%     $ 9,885      7.82%     $22,433       15.55%
         Agency securities.......          43,694      28.10     46,071      26.98       25,821     20.43       21,093       14.62
         Municipal bonds.........             104       0.07        665       0.39          407      0.32          432        0.30
         Other debt obligations..           8,230       5.29        851       0.50        8,029      6.35       16,338       11.32
                                          -------     ------    -------     ------      -------    ------      -------      ------
          Total debt securities..          56,088      36.07     52,409      30.69       44,142     34.92       60,296       41.79
                                          -------     ------    -------     ------      -------    ------      -------      ------
Equity securities:
         Preferred stock.........           1,120       0.72      1,122       0.66          204      0.16          277        0.19
         Common stock............           1,941       1.25        576       0.34           --        --           --          --
         Mutual funds............          16,232      10.44     14,931       8.74        6,091      4.82        8,821        6.12
                                          -------     ------    -------     ------      -------    ------      -------      ------
          Total equity 
          securities.............          19,293      12.41     16,629       9.74        6,295      4.98        9,098        6.31
                                          -------     ------    -------     ------      -------    ------      -------      ------
Mortgage-backed securities.......
         FHLMC...................           7,145       4.60      9,872       5.78       11,029      8.73       10,322        7.15
         GNMA....................          33,824      21.75     49,307      28.88       29,190     23.09        4,348        3.01
         FNMA....................          21,036      13.53     22,973      13.46       33,052     26.15       55,270       38.31
         CMOs....................          18,104      11.64     19,559      11.45        2,685      2.13        4,950        3.43
                                          -------     ------    -------     ------      -------    ------      -------      ------
          Total mortgage-backed
          securities.............          80,109      51.52    101,711      59.57       75,956     60.10       74,890       51.90
                                          -------     ------    -------     ------      -------    ------      -------      ------
          Total securities.......        $155,490     100.00%  $170,749     100.00%    $126,393    100.00%    $144,284      100.00%
                                          =======     ======    =======     ======      =======    ======      =======      ======
         Debt and equity
         securities
         available-for-sale......         $69,382      44.62%   $61,714      36.14%     $44,345     35.08%     $62,276       43.16%
         Debt and equity
         securities
         held-to-maturity........           5,999       3.86      7,324       4.29        6,092      4.82        7,118        4.94
                                          -------     ------    -------     ------      -------    ------      -------      ------
         Total debt and equity
         securities..............          75,381      48.48     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......          80,109      51.52    101,711      59.57       75,956     60.10       72,956       50.56
         Mortgage-backed
         securities
         held-to-maturity........              --         --         --         --           --        --           --          --
                                          -------     ------    -------     ------      -------    ------      -------      ------
          Total mortgage-backed
          securities.........              80,109      51.52    101,711      59.57       75,956     60.10       74,890       51.90
                                          -------     ------    -------     ------      -------    ------      -------      ------
              Total securities...        $155,490     100.00%  $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 December
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 DECEMBER 31, 1998
                              ------------------------------------------------------------------------------------------------------
                                                    MORE THAN ONE YEAR  MORE THAN FIVE YEARS       MORE THAN
                                ONE YEAR OR LESS      TO FIVE 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............   $ --          --%     $104      7.03%   $    --       --%    $    --        --%    $ 104     7.03%
 U.S. Government obligations..     895       5.70        --        --         --       --          --        --       895     5.70
 Agency securities............      --         --        --        --         --       --       5,000      7.00     5,000     7.00
                               -------              -------              -------              -------              ------
     Total held-to-maturity...     895       5.70       104      7.03         --       --       5,000      7.00     5,999     6.81
                               -------              -------              -------              -------              ------

Available-for-sale:
 Mortgage backed securities:
   Variable Rate:
     FHLMC.....................     --         --        --        --         --        --        648      7.15       648     7.15
     GNMA......................     --         --        --        --         --        --        561      6.67       561     6.67
     FNMA......................     --         --        --        --         --        --      1,041      7.44     1,041     7.44
   Fixed Rate
     FHLMC.....................     --         --         5      9.44        425      7.10      6,067      7.17     6,497     7.16
     GNMA......................     --         --         3      8.00        106      8.70     33,154      7.53    33,263     7.53
     FNMA......................     --         --       534      8.28         --        --     19,461      7.18    19,995     7.21
     CMOs......................     --         --        --        --         --        --     18,104      6.59    18,104     6.59
                               -------              -------              -------              -------              ------
     Total mortgage-backed
        securities.............     --         --       542      8.29        531      7.42     79,036      7.19    80,109     7.20
                               -------              -------              -------              -------              ------     -----

 Debt securities:
   U.S. Government obligations   1,005       8.83     2,160      6.94         --        --         --        --     3,165      7.54
   Agency securities...........     --         --        --        --     17,214      7.53     21,480      6.52    38,694      6.97
   Other debt obligations......     --         --       787      6.72         --        --      7,443      7.21     8,230      7.16
                               -------              -------              -------              -------              ------
      Total debt securities....  1,005       8.83     2,947      6.88     17,214      7.53     28,923      6.70    50,089      7.04
                               -------              -------              -------              -------              ------
 Equity Securities:
   Preferred stock.............     --         --        --        --         --        --      1,120      6.69     1,120      6.69
   Common stock ...............     --         --        --        --         --        --      1,941        --     1,941        --
   Mutual funds................     --         --        --        --         --        --     16,232      7.90    16,232      7.90
                               --------             -------              -------              -------             -------
      Total equity securities..     --         --        --        --         --        --     19,293      7.03    19,293      7.03
                               --------             -------              -------              -------             --------
      Total available-for-sale.   1,005      8.83     3,489      7.10     17,745      7.53    127,252      7.05    149,491     7.12
                                                    -------              -------              -------             --------
         TOTAL SECURITIES.....  $ 1,900      7.36   $ 3,593      7.10   $ 17,745      7.53   $132,252      7.05   $155,490     7.11
                               ========             =======             ========             ========             ========
</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 December 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 67.9% 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.


<TABLE>
<CAPTION>
                                           FOR THE SEVEN                 FOR THE YEAR ENDED MAY 31,
                                            MONTHS ENDED     -----------------------------------------------
                                         DECEMBER 31, 1998        1998            1997             1996
                                        --------------------------------------------------------------------
                                                                    (IN THOUSANDS)
<S>                                        <C>                <C>                <C>             <C>
Deposits ..............................    $ 750,323          $1,140,993         $777,214        $817,610
Withdrawals............................     (731,335)         (1,146,633)        (796,578)       (822,470)
                                           ----------         -----------        ---------       ---------
(Withdrawals) in excess of deposits....       18,988              (5,640)         (19,364)         (4,860)
Interest credited on deposits..........        5,177               7,150            7,610           8,814
                                           ---------          ----------         ---------       ---------
Net increase (decrease) in deposits....    $  24,165            $ 1, 510         $(11,754)       $  3,954
                                           ---------          ==========         =========       =========
</TABLE>


        At December 31, 1998 the Bank had $7.0 million in certificates of
deposit accounts in amounts of $100 thousand or more, maturing as follows:




                                                           WEIGHTED
                                         AMOUNT          AVERAGE RATE
                                    -------------------------------------
                                           (DOLLARS IN THOUSANDS)
Maturity Period:
    Three months or less............      $  1,717            4.74%
    Over 3 through 6 months.........         1,317            4.92
    Over 6 through 12 months........         2,324            4.92
    Over 12 months..................           625            5.29
                                          --------          ------
             Total..................      $  6,983            4.91%
                                          ========          ======






                                      -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 SEVEN MONTHS ENDED               FOR THE YEARS ENDED MAY 31,
                                                DECEMBER 31, 1998                           1998                 
                                   -------------------------------------- ---------------------------------------

                                                                WEIGHTED                                WEIGHTED 
                                                                AVERAGE                                 AVERAGE  
                                    AVERAGE  PERCENT OF TOTAL   NOMINAL    AVERAGE   PERCENT OF TOTAL   NOMINAL  
                                    BALANCE     DEPOSITS         RATE      BALANCE       DEPOSITS         RATE   
                                   --------- ----------------- ---------- ---------- ----------------- ----------
                                               (DOLLARS IN THOUSANDS)

<S>                                <C>            <C>            <C>      <C>          <C>              <C>
Checking accounts................  $ 20,801       9.23%            --     $ 19,302         9.00%           --    
                                   --------      -----           ----     --------         ----  -       ----    
Passbook accounts................    80,956      35.93           2.93%      77,999        36.35          2.95%   
NOW accounts.....................     9,023       4.00           2.23        7,498         3.50          2.23    
Interest-on-checking
accounts.........................     9,061       4.02           1.00        7,886         3.68          1.00    
                                   --------     ------                    --------       ------                  
Total passbook, NOW and
interest-on-checking accounts....    99,040      43.95           2.69      93,383        43.53           2.73     
                                   --------     ------                    --------       ------                  
Money market accounts............    33,242      14.75           3.77       25,827        12.04          3.29    
                                   --------     ------                    --------       ------                  
Certificate accounts:
  Certificates of deposit -- one
      year and less..............    52,466      23.28           4.88       55,906        26.06          5.11    
    IRA Certificates of deposit--
      one year and less..........     7,577       3.36           4.84        8,062         3.76          5.11    
    Certificates of deposit --
      more than one year.........     6,213       2.76           5.18        6,533         3.04          5.16    
    IRA Certificates of deposit--
      more than one year....          3,980       1.77           5.17        4,119         1.92          5.21    
                                   --------     ------                    --------       ------                  
Total certificates..........         70,234      31.17           4.92       74,620        34.78          5.12    
                                    -------     ------                    --------       ------                  
Escrow deposits.............          2,016       0.89           2.00        1,422         0.66          2.00    
                                   --------     ------                    --------       ------                  
Total deposits..............       $225,334     100.00%          3.29%    $214,554       100.00%         3.98%   
                                   ========     ======                    ========       ======                  
</TABLE>




<TABLE>
<CAPTION>
                                                             FOR THE YEARS ENDED MAY 31,
                                                   1997                                    1996                   
                                   -------------------------------------- ----------------------------------------
                                                                                                                  
                                                                 WEIGHTED                                WEIGHTED 
                                                                 AVERAGE                                 AVERAGE  
                                     AVERAGE  PERCENT OF TOTAL   NOMINAL    AVERAGE   PERCENT OF TOTAL   NOMINAL  
                                     BALANCE     DEPOSITS         RATE      BALANCE      DEPOSITS          RATE   
                                   ---------- ----------------- --------- ---------- ------------------ ----------
                                               (DOLLARS IN THOUSANDS)
                                                                                                                  
<S>                                 <C>          <C>              <C>       <C>          <C>             <C>
Checking accounts................   $ 18,629       8.54%             --     $18,834         8.18%            --   
                                    --------     ------           -----      ------        -----           ----   
Passbook accounts................     78,132      35.83            3.00%     77,868        33.83           3.00%  
NOW accounts.....................      7,040       3.23            2.25       7,095         3.08           2.25   
Interest-on-checking                                                                                              
accounts.........................      7,077       3.24            1.00       5,543         3.41           1.00   
                                    --------     ------                    -------        ------                  
Total passbook, NOW and                                                                                           
interest-on-checking accounts....    92,249       42.30            2.79      90,506        39.32           2.82   
                                    --------     ------                    --------       ------                  
Money market accounts............     27,017      12.39            3.27      28,674        12.46           3.26   
                                    --------     ------                    --------       ------                  
Certificate accounts:                                                                                             
  Certificates of deposit -- one                                                                                  
      year and less..............     59,118      27.11            4.98      69,453        30.17           5.74   
    IRA Certificates of deposit--                                                                                 
      one year and less..........      7,330       3.36            5.13       7,200         3.12           5.83   
    Certificates of deposit --                                                                                    
      more than one year.........      7,603       3.49            5.16       7,595         3.30           5.17   
    IRA Certificates of deposit--                                                                                 
      more than one year....           5,104       2.34            5.35       5,584         2.43           5.53   
                                    --------     ------                    --------       ------                  
Total certificates..........          79,155      36.30            5.03      89,832        39.02           5.69  
                                    --------     ------                    --------       ------                  
Escrow deposits.............           1,020       0.47            2.00       2,346         1.02           2.00   
                                    --------     ------                    --------       ------                  
Total deposits..............        $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 December 31, 1998.


<TABLE>
<CAPTION>
                              PERIOD TO MATURITY FROM DECEMBER 31, 1998                              AT MAY 31,
                         --------------------------------------------------  ---------------------------------------------------
                            LESS                                      OVER         AT
                            THAN        ONE TO        TWO TO         THREE      DECEMBER
                          ONE YEAR     TWO YEARS    THREE YEARS      YEARS      31, 1998       1998         1997         1996
                         ----------   -----------  ------------    --------    -----------   -------    ---------     ----------
                                                                       (IN THOUSANDS)
<S>                       <C>           <C>          <C>           <C>         <C>           <C>         <C>          <C>
Certificate accounts:
   3.99% or less........  $     --      $    --      $     --      $    --     $     --      $     5     $    --      $      --
   4.00% to 4.99%.......    40,150        1,609           627           38       42,424       29,709       8,505         34,167
   5.00% to 5.99%.......    24,239        1,142           962        2,228       28,571       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..........  $ 64,389      $ 2,751      $  1,589      $ 2,266     $ 70,995      $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 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


                                      -25-


<PAGE>



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 December 31, 1998, the Bank had $79.5
million in FHLBNY advances and the capability to borrow additional funds of
$47.1 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 $25.3, $27.2 million
and $23.1 million of securities sold under repurchase agreements outstanding at
December 31, 1998, May 31, 1998 and May 31, 1997, respectively.

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


<TABLE>
<CAPTION>
                                                            AT OR FOR THE SEVEN   AT OR FOR THE YEAR ENDED MAY 31,
                                                                MONTHS ENDED    -----------------------------------
                                                             DECEMBER 31, 1998       1998         1997        1996
                                                            ------------------- ----------- ------------- ---------
                                                                             (DOLLARS IN THOUSANDS)
<S>                                                                <C>             <C>           <C>         <C>
FHLBNY Advances:
         Average balance outstanding.........................      $72,343         $20,381       $11,563     $ 388
         Maximum amount outstanding at any month-end
                  during the period..........................       90,320          62,850        17,450     3,600
         Balance outstanding at end of period................       79,480          62,850         5,250     3,600
         Weighted-average interest rate during the period....        5.44%           5.54%         5.53%     5.41%
         Weighted-average interest rate at end of period.....        5.36%           5.05%         5.71%     6.00%
Other Borrowings:
         Average balance outstanding.........................      $25,907         $24,056       $19,685    $  101
         Maximum amount outstanding at any month-end
                  during the period..........................       26,370          27,500        23,300     4,700
         Balance outstanding at end of period................       25,310          27,190        23,090     4,700
         Weighted-average interest rate during the period....        5.96%           6.18%         6.20%     6.32%
         Weighted-average interest rate at end of period.....        5.87%           6.39%         6.50%     6.32%
Total Borrowings:
         Average balance outstanding.........................      $98,250         $44,437       $31,249   $   489
         Maximum amount outstanding at any month-end
                  during the period..........................      116,690          90,350        38,850     8,300
         Balance outstanding at end of period................      104,790          90,040        28,340     8,300
         Weighted-average interest rate during the period....        5.58%           5.98%         6.10%     5.60%
         Weighted-average interest rate at end of period.....        5.87%           5.45%         6.30%     6.18%
</TABLE>


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 $69 thousand, $112 thousand and $92
thousand in net income, before taxes, to the Bank's net income for the seven
months ended December 31, 1998 and the fiscal years ended May 31, 1998 and 1997,
respectively.

        Warsave was formed to acquire and hold real estate. Its single asset as
of December 31, 1998 is a two-story house situated adjacent to the Bank's
Warwick office. The building, which may


                                      -26-


<PAGE>

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. WSB Mortgage contributed
$30 thousand before taxes to the Bank's net income for the seven months ended
December 31, 1998.

Personnel
---------

         As of December 31, 1998, the Bank had 107 full-time and 37 part-time
employees. The Bank has experienced a very low turnover rate among its employees
and, as of December 31, 1998, 55 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, 1995.

         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 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


                                      -27-


<PAGE>



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.

         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 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%.


                                      -28-


<PAGE>





         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 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.


                                      -29-


<PAGE>





         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 NYSBD 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
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, effective
April 1, 1999, the minimum leverage capital requirement is 4%


                                      -30-


<PAGE>




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 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 December
31, 1998:

<TABLE>
<CAPTION>
                                                                               AT DECEMBER 31, 1998
                                                                ------------------------------------------------------
                                                                            PERCENT OF      CAPITAL         PERCENT OF
                                                                CAPITAL       ASSETS(1)    REQUIREMENT       ASSETS(1)
                                                                -------       ---------    -----------       ---------
                                                                              (DOLLARS IN THOUSANDS)
<S>                                                             <C>             <C>          <C>               <C> 
Regulatory Tier 1 leverage capital.......................       $51,106         11.99%       $17,055           4.0%
Tier 1 risk-based capital................................        51,106         22.82          8,959           4.0
Total risk-based capital.................................        55,538         23.90         17,918           8.0
</TABLE>

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

(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.



                                      -31-


<PAGE>


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 December
31, 1998:

<TABLE>
<CAPTION>
                                                                                 AT DECEMBER 31, 1998
                                                                 ----------------------------------------------------
                                                                             PERCENT OF     CAPITAL        PERCENT OF
                                                                 CAPITAL       ASSET(1)    REQUIREMENT      ASSETS(1)
                                                                 -------       --------    -----------      ---------
                                                                                 (DOLLARS IN THOUSANDS)
<S>                                                              <C>             <C>         <C>              <C> 
Regulatory Tier 1 leverage capital.......................        $82,364         18.87%      $17,462          4.0%
Tier 1 risk-based capital................................         82,364         35.88         9,181          4.0
Total risk-based capital.................................         84,796         36.94        18,362          8.0
</TABLE>

----------------------
(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 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.


                                      -32-


<PAGE>



         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 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 


                                      -33-


<PAGE>



the payments on the FICO bonds for the quarterly period beginning on July 1,
1998 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 quarterly 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 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.


                                      -34-


<PAGE>





         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.

         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 1 1999, 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 


                                      -35-


<PAGE>



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%, 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, 


                                      -36-


<PAGE>



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
$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.




                                      -37-


<PAGE>



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 December 31, 1998, of $4.6 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 FHLB 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). Currently, the FRB regulations generally require
that reserves of 3% must be maintained against aggregate transaction accounts of
$46.5 million or less (subject to adjustment by the FRB) and an initial reserve
of $1,395,000 plus 10% (subject to adjustment by the FRB between 8% and 14%)
against that portion of total transaction accounts in excess of $46.5 million.
The first $4.90 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 December 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 


                                      -38-


<PAGE>



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.

         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


                                      -39-


<PAGE>




"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.

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.


                                      -40-


<PAGE>





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 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 December 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
</TABLE>



                                      -41-


<PAGE>


<TABLE>
<CAPTION>
                                                           LEASED                 DATE                LEASE
                                                             OR                 LEASED OR           EXPIRATION
                                                            OWNED               ACQUIRED               DATE
                                                            -----               --------               ----
<S>                                                         <C>                   <C>                   <C>
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
         Wallkill, New York 10940                           Owned                 1998                 N/A

Loan Production Offices:
         263 NYS Route 17K
         Newburgh, New York                                Leased                 1998               09/20/01

         Taconic Plaza Shopping Center,
         Store #10
         Route 52
         East Fishkill,  New York                          Leased                 1997               01/31/00

         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>

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 Company's common stock commenced trading on December 23, 1997. The table
below shows the high and low sales prices of the common stock for the periods
shown, as reported on the National Market System of The Nasdaq Stock Market as
well as the dividends paid during such period.
<TABLE>
<CAPTION>

   FISCAL YEAR          QUARTER ENDING                   HIGH                   LOW           DIVIDENDS PAID
   -----------          --------------                   ----                   ---           --------------
<S>                         <C>                       <C>                   <C>                   <C>     
      1998                  March 31                  $  17.75              $  15.38              $    N/A
                             June 30                  $  18.00              $  16.25              $    N/A
                            Sept. 30                  $  17.63              $  11.50              $ 0.0400
                             Dec. 31                  $  17.13              $  10.50              $ 0.0425

       1997                  Dec. 31                   $ 17.38              $  15.63                   N/A
</TABLE>


As of February 26, 1999, there were 6,276,221 shares of the Company's common
stock outstanding and approximately 1,544 holders of record. The holders of
record include banks and brokers who act as nominees, each of whom may
represent more than one stockholder.

The Board of Directors of the Company declared two quarterly cash dividends
during the seven-month period ended December 31, 1998, as shown in the table
above. The Board will review the dividend regularly and hopes to maintain a
regular quarterly dividend in the future, based on the Company's earnings,
financial condition and other factors.


ITEM 6.  SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                  SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
                                                                           AT MAY 31,
                                       AT DECEMBER 31,  ________________________________________________________________
                                            1998          1998         1997          1996        1995(7)      1994(7)
                                            ----          ----         ----          ----        -------      -------
                                                                  (IN THOUSANDS)
<S>                                      <C>           <C>          <C>           <C>          <C>           <C>
Selected Financial Data:
    Total assets......................   $ 445,139     $ 410,394    $ 286,545     $ 274,053    $ 258,679     $ 234,048
    Loans receivable, net (1).........     261,463       212,665      138,323       108,897      122,663       108,598
    Investment securities.............     155,490       170,749      126,393       144,284      110,333       105,433
    Real estate owned, net............         371           409          224           330          493           306
    Deposits..........................     246,882       222,722      221,211       232,965      229,011       207,527
    FHLB advances.....................      79,480        62,850        5,250         3,600           --            --
    Securities sold
      under repurchase agreements.....      25,310        27,190       23,090         4,700           --            --
    Stockholders' equity..............      84,237        86,150       28,114        24,770       23,076        21,910
</TABLE>


<TABLE>
<CAPTION>

                                        FOR THE SEVEN
                                        MONTHS ENDED               FOR THE YEAR ENDED MAY 31,
                                        DECEMBER 31,    ________________________________________________________________
                                            1998          1998         1997          1996        1995(7)      1994(7)
                                            ----          ----         ----          ----        -------      -------
                                                                  (IN THOUSANDS)
<S>                                      <C>           <C>          <C>           <C>          <C>           <C>
Selected Operating Data:
    Interest income...................   $  17,311     $  23,777    $  20,691     $  18,333    $  16,253     $  15,786
    Interest expense..................       7,560         9,972        9,376         8,717        6,828         5,922
                                          --------      --------     --------      --------     --------      --------
        Net interest income...........       9,751        13,805       11,315         9,616        9,425         9,864
        Less provision for loan losses        (292)         (592)        (130)         (140)        (261)         (415)
                                          --------      --------     --------      --------     --------      --------
        Net interest income after
          provision for loan losses...       9,459        13,213       11,185         9,476        9,164         9,449
    Other income
        Service and fee income........       1,422         2,134        1,915         1,768        1,369         1,996
        Securities transactions.......         561           742          816         (356)        (429)           845
        Loan transactions.............         140            94          137           119           14           123
        Other income (loss)...........           6           169         (89)         (159)         (79)           (17)
                                          --------      --------     --------      --------     --------      --------
              Total other income, net.       2,129         3,139        2,779         2,084          875         2,947
                                          --------      --------     --------      --------     --------      --------
    Other expense
        Salaries and employee benefits       4,314         5,870        5,256         5,050        3,958         3,877
        ESOP and RRP benefits.........         922           730           --            --           --            --
        FDIC insurance................          17            28           12            53          466           456
        Occupancy and equipment.......         649         1,219        1,308         1,238        1,202         1,143
        Data processing...............         500           672          640           484          414           341
        Advertising...................         282           160          152           129          112            69
        Professional fees.............         579           583          240           325          222           270
        Contribution to
          The Warwick Savings
          Foundation..................          --         1,924           --            --           --            --
    Other operating expenses..........       1,524         2,001        1,735         1,791        1,722         1,606
                                          --------      --------     --------      --------     --------      --------
              Total other expenses....       8,787        13,187        9,343         9,070        8,096         7,762
    Income before income tax
      expense and cumulative
      effect of change in
      accounting principle............       2,801         3,165        4,621         2,490        1,943         4,634
    Income tax expense................       1,154         1,304        1,756         1,024          794         2,115
                                          --------      --------     --------      --------     --------      --------
    Income before cumulative effect
      of change in accounting principle      1,647         1,861        2,865         1,466        1,149         2,519
    Cumulative effect of change
      in accounting principle.........          --            --           --            --        (645)            --
                                          --------      --------     --------      --------     --------      --------
    Net income........................   $   1,647     $   1,861    $   2,865     $   1,466    $     504     $   2,519
                                          ========      ========     ========      ========     ========      ========
</TABLE>




<PAGE>



<TABLE>
<CAPTION>
                                                    AT OR FOR
                                                     THE SEVEN
                                                   MONTHS ENDED      AT OR FOR THE YEAR ENDED MAY 31,
                                                   DECEMBER 31,  ________________________________________________________
                                                       1998       1998        1997       1996       1995(7)    1994(7)
                                                     ---------    -----       -----      -----      -------    -------
<S>                                                   <C>        <C>         <C>        <C>         <C>        <C>
Selected Financial Ratios and Other Data (2):
    Performance Ratios:
        Return on average assets................       0.66%      0.57%       1.00%      0.56%       0.21%      1.11%
        Return on average equity................       3.29       3.72       11.02       6.29        2.32      12.11
        Average equity to average assets........      20.18      15.40        9.12       8.94        9.18       9.14
        Equity to total assets..................      18.92      20.99        9.81       9.04        8.92       9.36
        Core deposits to total deposits (3).....      71.24      68.16       66.08      63.28       59.49      77.25
        Net interest spread (4).................       3.17       3.58        3.62       3.48        3.84       3.92
        Net interest margin (5).................       4.19       4.50        4.20       3.98        4.27       4.35
        Operating expense to average assets.....       3.54       4.06        3.28       3.48        3.42       3.41
        Average interest-earning assets to
            average interest-bearing liabilities       1.32       1.28        1.17       1.14        1.14       1.16
        Efficiency ratio (6)....................      78.60      81.87       71.10      80.80       75.56      65.54
    Regulatory Capital Ratios:
        Bank:
            Tangible capital....................      11.99      13.91        9.53       9.51        9.79       9.95
            Core capital........................      22.82      25.55       19.46      17.52       16.00      20.00
            Risk-based capital..................      23.90      26.27       20.33      18.45       16.00      20.00
        Company:
            Tangible capital....................      18.87      21.44          --         --          --         --
            Core capital........................      35.88      40.07          --         --          --         --
            Risk-based capital..................      36.94      40.78          --         --          --         --
    Asset Quality Ratios:
            Non-performing loans to total loans.       0.79       0.47        1.02       0.78        1.78       2.02
            Non-performing loans to total assets       0.47       0.30        0.50       0.31        0.85       0.95
            Non-performing assets to total assets      0.55       0.35        0.58       0.44        1.04       1.08
            Allowance for loan losses
                to total loans..................       0.66       0.75        0.88       1.18        0.97       0.83
            Allowance for loan losses
                to non-performing loans.........      82.99     123.61       86.09     151.22       54.77      41.06
    Other Data:
        Branch Offices..........................          4          4           4          4           4          4
</TABLE>

----------
(1)  Loans receivable,  net,  represents total loans less net deferred loan fees
     and the allowance for loan losses.
(2)  Regulatory  Capital  Ratios  and  Asset  Quality  Ratios  are end of period
     ratios.  With the exception of period-end  ratios,  all ratios are based on
     average monthly balances during the periods indicated.
(3)  The Bank  considers the following to be core deposits:  checking  accounts,
     passbook accounts, NOW accounts and money market accounts.
(4)  The interest rate spread  represents  the  difference  between the weighted
     average yield on  interest-earning  assets and the weighted average cost of
     interest-bearing liabilities.
(5)  The net interest  margin  represents net interest income as a percentage of
     average  interest-earning  assets.  
(6)  The efficiency ratio represents non-interest expense as a percentage of the
     sum of net interest income and non- interest income  excluding any gains or
     losses on sales of assets.
(7)  The selected financial data of the Bank as of May 31, 1995 and 1994 are not
     derived from audited financial statements.



                                      -42-


<PAGE>



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

GENERAL

Warwick Community Bancorp, Inc. (the "Company") 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. The Company
was organized at the direction of The Warwick Savings Bank (the "Bank") for the
purpose of acquiring all of the common stock of the Bank issued in connection
with the conversion of the Bank from mutual to stock form ("Conversion"). On
December 23, 1997, the Bank completed its Conversion, and the Company sold
6,414,125 shares of its common stock at a price of $10.00 per share in a
subscription offering ("Offering") to certain depositors of the Bank. In
connection with the Conversion and Offering, the Company established The Warwick
Savings Foundation ("Foundation") and made a charitable contribution of 192,423
shares of the Company's common stock to the Foundation, which resulted in a
one-time charge relating to the funding of the Foundation of $1.9 million ($1.2
million net of tax). The net proceeds from the Offering amounted to $61.5
million, and the Company contributed 50% of the net proceeds from the Offering
to the Bank in exchange for all of the issued and outstanding shares of common
stock of the Bank. The remaining net proceeds were retained by the Company and
invested primarily in federal funds, government and federal agency
mortgage-backed securities, other debt securities and equity securities. Prior
to the Offering, the Company had no significant assets, liabilities or
operations. Presently, the only significant assets of the Company are the
capital stock of the Bank, the note evidencing the loan the Company made to the
Warwick Community Bancorp, Inc. Employee Stock Ownership Plan ("ESOP") to allow
the ESOP to purchase 8% of the Company's common stock issued in the Offering and
the investment of the net proceeds of the Offering retained by the Company.

The primary business of the Company is the operation of its wholly owned
subsidiary, the Bank. The Bank's principal business has been and continues to be
attracting retail deposits from the general public in the areas 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 real estate loans and
various debt and equity securities.

The Bank's results of operations are dependent primarily on net interest income,
which is the difference between the interest income earned on its
interest-earning assets, such as loans and securities, and the interest expense
on its interest-bearing liabilities, such as deposits and borrowed funds. The
Bank also generates other income, such as service charges and other fees, which
are primarily servicing fees received from residential mortgage loans that are
sold with servicing retained. Other expenses primarily consist of employee
compensation and benefits, occupancy expenses, federal deposit insurance
premiums, net costs of real estate owned, data processing fees and other
operating expenses. The Bank's results of operations are also significantly
affected by general economic and competitive conditions (particularly changes in
market interest rates), government policies, changes in accounting standards and
actions of regulatory agencies.

While the following  discussion of financial condition and results of operations
includes the  collective  results of the Company and the Bank,  this  discussion
reflects  primarily  the Bank's  activities.  Unless  otherwise  disclosed,  the
information presented in this Annual Report reflects the financial condition and
results of operations of the Company and the Bank on a consolidated basis.

MANAGEMENT STRATEGY

The Bank has historically employed an operating strategy that emphasizes the
origination of one- to four-family residential mortgage loans in its market area
with both fixed and variable rates and, to an increasing degree over the past 10
years, its commercial lending business, with mostly prime rate-based loans
secured by real estate located mainly in Orange County, New York. Due in part to
this strategy, the Bank historically has had profitable operations, resulting in
a strong regulatory capital position. The Bank's goal of maintaining this
position has led to an overall strategy of managed growth in both deposits and
assets. The major elements of the Company's operating strategy are to: (i) grow
and diversify the Bank's loan portfolio by continuing to originate
owner-occupied residential mortgage loans, commercial business and commercial
real estate loans, construction loans and consumer loans in its market area;
(ii) complement the Bank's mortgage lending activities by investing in
mortgage-backed and other securities; (iii) maintain the Bank's relatively low
cost of funds and (iv) manage the Bank's level of interest rate risk. From time
to time, the Bank employs a leveraging strategy, whereby borrowings are used to
fund specific investments in order to provide for



<PAGE>




a reasonable net margin of return. The Bank also seeks to attract and retain
customers through extended office hours, low turnover of employees and prompt,
flexible and personalized production of a variety of loan products. In addition,
it is a goal of the Bank to increase its market share in the communities it
serves through the acquisition or establishment of branch offices and, if
appropriate, the acquisition of smaller financial institutions. Additionally, it
is a goal of the Bank to expand into new markets. For this reason, the Bank has
expanded its mortgage banking operations and lending into New Jersey, and the
Company is in the process of forming a de novo commercial bank to be
headquartered in Bergen County, New Jersey.

MANAGEMENT OF INTEREST RATE RISK

The principal objectives of the Bank's interest rate risk management activities
are to: (i) evaluate the interest rate risk included in certain balance sheet
accounts, (ii) determine the level of risk appropriate given the Bank's business
focus, operating environment, capital and liquidity requirements and performance
objectives, (iii) establish prudent asset concentration guidelines and (iv)
manage the risk consistent with Board approved policies and guidelines. Through
such management, the Bank seeks to reduce the vulnerability of its operating
results to changes in interest rates and to manage the ratio of interest rate
sensitive assets to interest rate sensitive liabilities within specified
maturities or repricing dates. The Bank closely monitors its interest rate risk
as such risk relates to its operating strategies. The extent of the movement of
interest rates, higher or lower, is an uncertainty that could have a negative
impact on the earnings of the Bank.

Historically, the Bank has been a traditional thrift lender, but differentiated
itself from other thrifts by also focusing on commercial lending since the late
1980's and commission-based mortgage banking operations since 1995. The Bank
also adopted a more competitive pricing policy, more efficient lock-in policies
to close loans faster and more streamlined Federal National Mortgage Association
("FNMA") approved processing and underwriting procedures. Additionally, the
Bank's array of products has expanded to include Federal Housing Authority
("FHA"), Veterans Administration ("VA") and State of New York Mortgage
Association ("SONYMA") loans. As a result, the Bank has invested a relatively
large amount of its earning assets in fixed-rate loans and fixed-rate
mortgage-backed securities with contractual maturities of up to 30 years. At
December 31, 1998, an aggregate of $202.5 million, or 48.65% of total earning
assets, were invested in such assets. Based upon the assumptions used in the
following table, at December 31, 1998, the Company's total interest-bearing
liabilities maturing or repricing within one year exceeded its total
interest-earning assets maturing or repricing in the same time period by $32.9
million, representing a one-year cumulative "gap," as defined below, as a
percentage of total assets of negative 7.39%. Accordingly, management views the
Company as having a manageable gap position, but still slightly vulnerable to a
rising interest rate environment.

The Bank has taken several actions, under various market conditions, designed to
manage its level of interest rate risk. These actions have included: (i)
increasing the percentage of the loan portfolio consisting of adjustable-rate
mortgage loans and prime rate-based commercial loans through originations, as
market conditions permit, (ii) selling fixed-rate loans, but retaining the
servicing rights, (iii) purchasing shorter-term investment securities and (iv)
seeking to increase the percentage of checking accounts in its deposit base.
Additionally, in the normal course of business, the Bank uses off-balance sheet
financial instruments primarily as part of mortgage banking hedging strategies.
Such instruments generally include put options purchased and forward commitments
to sell mortgage loans. As a result of interest rate fluctuations, these
financial instruments will develop unrealized gains or losses that mitigate
changes in the underlying hedged portion of the balance sheet. When effectively
used, these instruments are designed to moderate the impact on earnings as
interest rates move up or down.

GAP ANALYSIS. The matching of assets and liabilities may be analyzed by
examining the extent to which such assets or liabilities are "interest rate
sensitive" and by monitoring an institution's interest rate sensitivity "gap."
An asset or liability is said to be interest rate sensitive within a specific
time period if it will mature or reprice within that time period. The interest
rate sensitivity gap is defined as the difference between the amount of
interest-earning assets maturing or repricing within a specific time period and
the amount of interest-bearing liabilities maturing or repricing within that
same period. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities. A
gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. During a
period of rising interest rates, therefore, a negative gap would tend to
adversely affect net interest income. Conversely, during a period of falling
interest rates, a negative gap would tend to result in an increase in net
interest income.



<PAGE>


The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1998, which are
anticipated by the Bank, based upon certain assumptions, to reprice or mature in
each of the future time periods shown. Except as stated below, the amount of
assets and liabilities shown which reprice or mature during a particular period
were determined based on the earlier of term to repricing or the term to
repayment of the asset or liability. The table is intended to provide an
approximation of the projected repricing of assets and liabilities at December
31, 1998 on the basis of contractual maturities, anticipated prepayments and
scheduled rate adjustments within a three-month period and subsequent selected
time intervals. The loan amounts in the table reflect principal balances
expected to be reinvested and/or repriced as a result of contractual
amortization and anticipated early payoffs of adjustable-rate loans and
fixed-rate loans, and as a result of contractual rate adjustments on
adjustable-rate loans. For loans on one- to four-family residential properties
and mortgage-backed securities, assumed average annual prepayment rates of
10.05% and 37.66%, respectively, were utilized.



<PAGE>


<TABLE>
<CAPTION>

                                                         AT DECEMBER 31, 1998
                                    --------------------------------------------------------------
                                        MORE THAN   MORE THAN  MORE THAN  MORE THAN
                                           THREE       ONE       THREE      FIVE
                                         MONTHS TO   YEAR TO   YEARS TO   YEARS TO   MORE THAN
                            THREE MONTHS  TWELVE      THREE      FIVE        TEN        TEN
                               OR LESS    MONTHS      YEARS      YEARS      YEARS      YEARS      TOTAL
                              ---------   ------      -----      -----      -----      -----      ----
                                                        (DOLLARS IN THOUSANDS)
<S>                          <C>        <C>        <C>        <C>        <C>        <C>        <C>
Interest-earning assets:
  Mortgage loans (1)(5)..... $  24,384  $  17,403  $  10,580  $  10,914  $   8,541  $ 119,503  $ 191,325
  Other loans (1)(2)........    23,382        978     13,873     20,152     12,448      1,370     72,203
  Mortgage-backed
    securities, fixed (5)...     7,171     23,001          5         --     19,014     19,797     68,988
  Mortgage-backed
    securities, variable (5)     1,348         --         --         39         --         --      1,387
  Mutual funds and
    preferred stock.........        --     16,232         --         --         --      1,120     17,352
  Investment securities:
    held-to-maturity........       545        350        104         --         --      5,000      5,999
  Investment securities:
    available-for-sale......     1,005         --      1,075      1,873     17,214     37,818     58,985
                               -------    -------    -------    -------    -------   --------   --------
        Total interest-
          earning assets....    57,835     57,964     25,637     32,978     57,217    184,608    416,239
Net deferred loan
  fees and costs (3)........      (32)       (23)       (28)       (36)       (24)      (149)      (292)
                               -------    -------    -------    -------    -------   --------   --------
        Net interest-
          earning assets....    57,803     57,941     25,609     32,942     57,193    184,459    415,947
                               -------    -------    -------    -------    -------   --------   --------
Interest-bearing liabilities:
  Passbook accounts (4).....        --     16,456         --         --         --     65,825     82,281
  Escrow accounts...........        --         --         --         --         --      1,965      1,965
  NOW accounts..............        --         --         --         --         --     11,765     11,765
  Money market accounts.....    37,053                                          --         --     37,053
  Certificates of deposit...    21,475     43,329      4,858      1,748         --         --     71,410
  Borrowed funds............    15,230     15,100     10,460      9,000     55,000         --    104,790
                               -------    -------    -------    -------    -------   --------   --------
        Total interest-
          bearing liabilities   73,758     74,885     15,318     10,748     55,000     79,555    309,264
                               -------    -------    -------    -------    -------   --------   --------
  Interest rate
    sensitivity gap.........$ (15,955) $ (16,944)  $  10,291  $  22,194  $   2,193  $ 104,904  $ 106,683
                               =======    =======    =======    =======    =======   ========   ========
  Cumulative interest
    rate sensitivity gap....$ (15,955) $ (32,899) $ (22,608) $    (414)  $   1,779  $ 106,683
                               =======    =======    =======    =======    =======   ========
  Cumulative interest rate
    sensitivity gap as a
    percentage of total assets (3.58)%    (7.39)%    (5.08)%    (0.09)%      0.40%     23.97%
  Cumulative net interest-
    earning assets as a
    percentage of
    cumulative interest-
    bearing liabilities.....    78.37%     77.87%     86.21%     99.76%    100.77%    134.50%
</TABLE>
----------
(1)  For purposes of the gap analysis, mortgage and other loans are not reduced
     for the allowance for loan losses and non-performing loans.
(2)  For purposes of the gap analysis, second mortgage loans are included in the
     "Other Loans" category.
(3)  For purposes of the gap analysis, unearned fees and deferred loan
     origination costs are prorated.
(4)  For purposes of the gap analysis, based upon the Bank's historical
     experience, management traditionally slots 20% of the Bank's total savings
     account balances into the twelve-month time horizon. The remaining 80% are
     viewed as long-term deposits.




<PAGE>



(5)  For loans on residential properties an average annual prepayment rate of
     10.05% is utilized. Mortgage-backed securities are assumed to prepay at an
     average annual rate of 37.66%.

Certain shortcomings are inherent in the method of analysis presented in the
foregoing table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types of assets may lag behind changes in
market rates. Additionally, certain assets, such as adjustable-rate loans, have
features which restrict changes in interest rates both on a short-term basis and
over the life of the asset. Further, in the event of a change in interest rates,
prepayments and early withdrawal levels would likely deviate significantly from
those assumed in calculating the table. Finally, the ability of many borrowers
to make scheduled payments on their adjustable-rate loans may decrease in the
event of an interest rate increase.

The Company's interest rate sensitivity is also monitored by management through
the use of a model which internally generates estimates of the change in net
portfolio value ("NPV") over a range of interest rate change scenarios. NPV is
the present value of expected cash flows from assets, liabilities and
off-balance sheet contracts. The NPV ratio, under any interest rate scenario, is
defined as the NPV in that scenario divided by the market value of assets in the
same scenario. For purposes of the NPV table, prepayment speeds similar to those
used in the "gap" table were used, reinvestment rates were those in effect for
similar products being offered and rates on core deposits were modified to
reflect recent trends. The following table sets forth the Company's NPV as of
December 31, 1998, as calculated by the Company.

<TABLE>
<CAPTION>
                                               NET PORTFOLIO VALUE                 PORTFOLIO VALUE OF ASSETS
                                         ---------------------------------         -------------------------
                                              (DOLLARS IN THOUSANDS)
  RATE IN BASIS POINTS
      (RATE SHOCK)                 $ AMOUNT          $ CHANGE      % CHANGE         NPV RATIO   % CHANGE (1)
     --------------                --------          --------      --------         --------     ----------
<S>                                 <C>           <C>                 <C>            <C>          <C>
           200                     $79,675        $(7,559)            (9)%           18.86        (.71)%
           100                      85,665         (1,569)             (2)           19.65           .08
         Static                     87,234              --              --           19.57            --
          (100)                     83,328         (3,906)             (4)           18.42        (1.15)
          (200)                     77,400         (9,834)            (11)           16.94        (2.63)
</TABLE>

(1) Based upon the portfolio value of the Company's assets assuming no change in
interest rates.

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

ANALYSIS OF NET INTEREST INCOME

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

AVERAGE BALANCE SHEETS. The table on the following page sets forth certain
information relating to the Company for the seven months ended December 31, 1998
and for the years ended May 31, 1998 and 1997. The yields and costs were derived
by dividing interest income or expense by the average balance of assets or
liabilities, respectively, for the periods shown. Average balances were computed
based on month-end balances. Yields for the seven months ended December 31, 1998
are annualized. Management believes the use of average monthly balances instead
of average daily



<PAGE>



balances does not have a material effect on the information presented. The
yields include deferred fees and discounts which are considered yield
adjustments.

<TABLE>
<CAPTION>
                                                                 FOR THE YEAR ENDED MAY 31,
                       FOR THE SEVEN MONTHS ENDED         -----------------------------------------
                            DECEMBER 31, 1998                  1998                      1997
                          --------------------          -------------------       -------------------
                                           AVERAGE                    AVERAGE                    AVERAGE
                         AVERAGE           YIELD/    AVERAGE          YIELD/    AVERAGE          YIELD/
                         BALANCE INTEREST   COST     BALANCE INTEREST  COST     BALANCE INTEREST  COST
                         ------- --------   ----     ------- --------  ----     ------- --------  ----
<S>                     <C>      <C>           <C>   <C>      <C>       <C>     <C>      <C>       <C>  
Assets:
  Interest-earning assets:
    Mortgage
      loans, net(1).... $183,573 $  7,998      7.47% $131,973 $ 10,191  7.72%   $ 90,771 $  7,152  7.88%
  Consumer and
    other loans, net(1)   49,510    2,601       9.01   39,931    3,774   9.45     36,160    3,457   9.56
  Mortgage-backed
    securities.........   82,333    3,383       7.04   75,020    5,533   7.38     80,255    5,897   7.35
  Federal funds sold...       --       --         --    3,130      172   5.50        283       15   5.30
  Interest earning
    accounts at banks..      548       19       5.94      635       34   5.35        395       18   4.56
  Investment securities   82,521    3,310       6.88   56,374    4,073   7.22     61,508    4,152   6.75
                        --------  -------             -------  -------          --------  -------
      Total interest-
        earning assets.  398,485   17,311       7.45  307,063   23,777   7.74    269,372   20,691   7.68
                                  -------                      -------                    -------
      Non-interest
        earning assets.   27,349                       17,846                     15,856
                        --------                      -------                   --------
          Total assets. $425,834                     $324,909                   $285,228
                        ========                      =======                   ========
Liabilities and
  stockholders' equity:
  Interest-bearing liabilities:
    Passbook accounts.. $ 80,956 $  1,384      2.93% $ 77,999 $  2,304  2.95%   $ 78,132 $  2,323  2.97%
    Escrow deposits....    2,016       63       5.36    1,422       94   6.61      1,020       50   4.90
    NOW accounts.......   18,084      171       1.62   15,384      245   1.59     14,117      227   1.61
    Money market
      accounts.........   33,242      732       3.77   25,827      849   3.29     27,016      883   3.27
  Certificate accounts.   70,234    2,014       4.92   74,618    3,823   5.12     79,155    3,985   5.03
                        --------  -------             -------  -------          --------  -------
  Total deposits.......  204,532    4,364       3.66  195,250    7,315   3.75    199,440    7,468   3.74
  Borrowed funds.......   98,243    3,196       5.58   44,437    2,657   5.98     31,249    1,908   6.11
                        --------  -------             -------  -------          --------  -------
      Total interest-
        bearing
        liabilities....  302,775    7,560       4.28  239,687    9,972   4.16    230,689    9,376   4.06
                                  -------                      -------                    -------
  Non-interest
    bearing liabilities   37,131                       35,174                     28,528
                        --------                      -------                   --------
      Total liabilities  339,906                    274,861                    259,217
  Stockholders' Equity.   85,928                       50,048                     26,011
                        --------                      -------                   --------
      Total liabilities
        and 
        stockholders'
        equity......... $425,834                     $324,909                   $285,228
                        ========                      =======                   ========
  Net interest income/
    interest rate spread(2)      $  9,751      3.17%           $13,805  3.58%             $11,315  3.62%
                                  =======    =======           ======= ======             ======= ======
  Net interest-earning
    assets/net interest 
    margin(3).......... $ 95,710               4.19%  $67,376           4.50%    $38,683           4.20%
                        ========            ========  =======          ======   ========          ======
  Ratio of interest-earning
    assets to interest-bearing
    liabilities........                      131.61%                  128.11%                    116.77%
                                             =======                   ======                     ======
</TABLE>
----------
(1)  In computing the average balance of loans, non-accrual loans have been
     included.
(2)  Interest rate spread represents the difference between the average yield on
     interest-earning assets and the average cost of interest- bearing
     liabilities.
(3)  Net interest margin on interest-bearing assets represents net interest
     income as a percentage of average-earning assets.

RATE/VOLUME ANALYSIS. The following table presents the extent to which changes
in interest rates and changes in the volume of interest-earning assets and
interest-bearing liabilities have affected the Company's interest income and
interest expense during the periods indicated. Information is provided in each
category with respect to (i) changes attributable to changes in volume (changes
in volume multiplied by prior rate), (ii) changes attributable to changes in

<PAGE>

rate (changes in rate multiplied by prior volume) and (iii) the net change. The
changes attributable to the combined impact of volume and rate have been
allocated proportionately to the changes due to volume and the changes due to
rate.

<TABLE>
<CAPTION>
                                       SEVEN MONTHS ENDED DECEMBER 31, 1998    YEAR ENDED MAY 31, 1998
                                                    COMPARED TO                      COMPARED TO
                                       SEVEN MONTHS ENDED DECEMBER 31, 1997    YEAR ENDED MAY 31, 1997
                                            ---------------------------        -----------------------
                                                INCREASE (DECREASE)              INCREASE (DECREASE)
                                              IN NET INTEREST INCOME           IN NET INTEREST INCOME
                                                      DUE TO                           DUE TO
                                            ---------------------------        -----------------------
                                           VOLUME      RATE        NET      VOLUME      RATE        NET
                                          ---------    ----     ---------   ------     -------   --------
                                                                  (IN THOUSANDS)
<S>                                       <C>       <C>         <C>        <C>       <C>         <C>    
Interest-earning assets:
    Mortgage loans, net................   $ 2,922   $  (444)    $ 2,478    $ 3,246   $  (207)    $ 3,039
    Consumer and other loans, net......       632      (116)        516        361       (44)        317
    Mortgage-backed securities.........       615      (195)        420      (385)         21      (364)
    Federal funds sold.................     (103)         --      (103)        151          6        157
    Interest earning accounts at banks.       (2)          3          1         11          5         16
    Investment securities..............     1,529      (209)      1,320      (347)        268       (79)
                                           ------       ----     ------     ------       ----     ------

                Total..................     5,593      (961)      4,632      3,037         49      3,086
                                           ------       ----     ------     ------       ----     ------

Interest-bearing liabilities:
    Passbook accounts..................        42       (23)         19        (4)       (15)       (19)
    Escrow accounts....................        27       (27)         --         20         24         44
    NOW accounts.......................        30          2         32         20        (2)         18
    Money market accounts..............       137         92        229       (39)          5       (34)
    Certificates of deposits...........     (170)      (113)      (283)      (228)         66      (162)
    Borrowed funds.....................     2,352      (382)      1,970        805       (56)        749
                                           ------       ----     ------     ------       ----     ------

                Total..................     2,418      (451)      1,967        574         22        596
                                           ------       ----     ------     ------       ----     ------

Net change in net interest income......   $ 3,175   $  (510)    $ 2,665    $ 2,463    $    27    $ 2,490
                                           ======       ====     ======     ======       ====     ======
</TABLE>

ASSET QUALITY

NON-PERFORMING LOANS. Management and the Board of Directors perform a monthly
review of delinquent loans. The actions taken by the Bank with respect to the
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 interest or principal payments are 90 days past
due. When a loan is classified as non-accrual, 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.

OTHER REAL ESTATE OWNED. At December 31, 1998, the Bank's other real estate
owned ("OREO"), net, which consisted of four single-family residential
properties, totaled $371 thousand and was held directly by the Bank.


<PAGE>




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


<TABLE>
<CAPTION>
                                                        AT               AT MAY 31,
                                                   DECEMBER 31, __________________________________________
                                                       1998     1998        1997        1996        1995
                                                     ---------  -----       -----       -----       -----
                                                                   (DOLLARS IN THOUSANDS)
<S>                                                <C>         <C>         <C>        <C>         <C>   
Non-accrual mortgage loans delinquent
    more than 90 days.........................     $  631      $  699      $1,111     $  582      $1,093
Non-accrual other loans delinquent
    more than 90 days.........................         88         186          83         82         131
                                                   ------      ------      ------     ------      ------

        Total non-accrual loans...............        719         885       1,194        664       1,224
        Total 90 days or more
            delinquent and still accruing.....      1,362         133         237        199         978
                                                   ------      ------      ------     ------      ------

        Total non-performing loans............      2,081       1,018       1,431        863       2,202
        Total foreclosed real estate,
            net of related allowance for losses       371         409         224        330         493
                                                   ------      ------      ------     ------      ------

        Total non-performing assets...........     $2,453      $1,427      $1,655     $1,193      $2,695
                                                   ======      ======      ======     ======      ======

Non-performing loans to total loans...........      0.79%       0.47%       1.02%      0.78%       1.78%
Non-performing assets to total assets.........      0.55%       0.35%       0.58%      0.44%       1.04%
</TABLE>

COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1998 AND DECEMBER 31, 1997

Total assets increased $104.3 million to $445.1 million at December 31, 1998
from $340.8 million at December 31, 1997, reflecting the Company's ongoing
strategy of managed growth. This increase in total assets was primarily the
result of increases in the Company's interest-earning assets, as the Company
grew both its loan and investment securities portfolios. The asset growth was
also funded through borrowings, which increased $76.8 million to $104.8 million
at December 31, 1998. At December 31, 1998, the Company had $25.3 million in
securities sold under repurchase agreements and $79.5 million in term loans from
the Federal Home Loan Bank of New York ("FHLBNY"). Deposit liabilities increased
by $33.4 million to $246.9 at December 31, 1998 from $213.5 million at December
31, 1997, primarily due to increases in demand checking accounts, money market
accounts and NOW accounts.

Asset growth was concentrated in mortgage loans, net which increased $61.3
million to $194.6 million at December 31, 1998 from $133.3 million at December
31, 1997. Other loans, net, showed an increase of $11.8 million to $53.1 million
at December 31, 1998 from $41.3 million at December 31, 1997. Total securities
were $155.5 million at December 31, 1998 compared to $127.6 million at December
31, 1997. Securities held-to-maturity at December 31, 1998 totaled $6.0 million
as compared to $5.4 million at December 31, 1997. Securities available-for-sale
at December 31, 1998 totaled $149.5 million as compared to $122.2 million at
December 31, 1997. This increase is primarily the result of the Bank's
utilization of additional wholesale leveraging transactions in order to enhance
earnings. 

Bank premises and equipment, net, increased $3.0 million, or 93.8%, from $3.2
million at December 31, 1997 to $6.2 million at December 31, 1998. This increase
was primarily the result of the costs associated with the opening of the
Company's newly constructed full-service branch facility located in the Town of
Wallkill, and from the upgrading and replacement of much of the Company's
electronic data processing hardware and software in connection with the
Company's Year 2000 compliance plan. The FHLBNY stock portfolio increased by
$2.9 million in conjunction with both the Company's larger asset size and the
utilization of wholesale leveraging transactions.

Total stockholders' equity decreased $2.0 million at December 31, 1998 from
$86.2 million at December 31, 1997. This decrease was primarily attributable to
the $4.6 million in open market purchases of the Company's common stock in
conjunction with the establishment of the Recognition and Retention Plan of the
Company ("RRP"). Also contributing to this decrease was the payment of the
Company's cash dividend to shareholders of $545 thousand. The decrease in total
stockholders' equity was partially offset by net income of $1.6 million for the
seven months ended December 31, 1998.



<PAGE>


COMPARISON OF OPERATING RESULTS FOR THE SEVEN MONTHS ENDED DECEMBER 31, 1998 AND
1997

GENERAL. Net income for the seven months ended December 31, 1998 totaled $1.6
million, or $0.28 per share, as compared to a net loss of $112 thousand for the
comparable period in 1997. The seven months ended December 31, 1997 included a
one-time after-tax charge of $1.2 million for the establishment of the
Foundation in connection with the Bank's Conversion in December 1997. Excluding
the one-time charge for the Foundation, net income for the seven months ended
December 31, 1997 would have been $1.0 million. Earnings per share results are
not available for the seven months ended December 31, 1997 since the Company did
not complete its Offering until December 23, 1997.

NET INTEREST INCOME. Net interest income for the seven months ended December 31,
1998 increased $2.7 million, or 38.0%, to $9.8 million, from $7.1 million for
the seven months ended December 31, 1997.

Net interest margin is net interest income expressed as a percentage of total
average earnings assets. For the seven months ended December 31, 1998 the net
interest margin was 4.19% as compared to 4.39% for the seven months ended
December 31, 1997. This decrease was primarily attributable to the 41 basis
point decrease in the average yield earned on interest-earnings assets coupled
with the 47 basis point increase in the average rate paid on money-market
accounts, as compared to the seven months ended December 31, 1997. Excluding
money-market accounts, the rates paid on other interest-bearing liabilities
decreased, which resulted in a net increase in the average rate paid on
interest-bearing liabilities of 12 basis points as compared to the 1997 period.
This reflects the continuation of the lower interest rate environment during
1998. Average interest-earning assets increased $121.8 million from $276.7
million for the seven months ended December 31, 1997 to $398.5 million for the
seven months ended December 31, 1998, while average interest-bearing liabilities
increased $72.4 million from $230.4 million to $302.8 million for the same
period. Supplementing the increase in average interest-bearing liabilities,
funding for the increase in average interest-earning assets was primarily
provided by a $55.6 million increase in average equity, which included the
infusion of capital derived from the Offering, from $30.3 million for the seven
months ended December 31, 1997, to $85.9 million for the comparable period ended
December 31, 1998.

INTEREST INCOME. For the seven months ended December 31, 1998, interest income
totaled $17.3 million as compared to $12.7 million for the seven months ended
December 31, 1997. The $4.6 million, or 36.2%, increase was primarily
attributable to a $2.5 million, or 45.5%, increase in the amount of interest
earned on the Bank's mortgage loan portfolio, which resulted primarily from an
increase in the average balance of the Company's mortgage loans from $120.0
million for the seven months ended December 31, 1997 to $183.6 million for the
seven months ended December 31, 1998 as home purchasers and existing homeowners
capitalized on the opportunities afforded by lower mortgage loan interest rates.
The increase in interest income was also attributable, to a lesser extent, to
growth in the Bank's commercial and consumer loan portfolios. Interest earned on
other loans during the seven months ended December 31, 1998 increased by $516
thousand, compared to the seven months ended December 31, 1997. The growth
experienced resulted from strong loan demand as discussed above. Interest earned
on mortgage-backed and investment securities increased by $1.7 million over the
same period, and resulted largely from the Bank's utilization of additional
wholesale leveraging transactions in order to enhance earnings. Total interest
income was further bolstered by increases in interest and dividends earned on
securities, which were derived mainly from such wholesale leveraging
transactions.

The average yield on interest-earning assets decreased to 7.45% for the seven
months ended December 31, 1998, as compared to 7.86% for the seven months ended
December 31, 1997. This was primarily due to the lower yields earned on the
Bank's loan and investment securities portfolios due to lower long-term interest
rates during the seven months ended December 31, 1998.

INTEREST EXPENSE. Interest expense for the seven months ended December 31, 1998
was $7.6 million, compared to $5.6 million for the seven months ended December
31, 1997. This increase was due primarily to an increase of $64.6 million in the
average balance of borrowed funds, a 47 basis point increase in the average rate
paid on money market accounts, and a $7.1 million increase in the average
balance of money market accounts. These increases were partially offset by a
$5.6 million decrease in the average balance of certificate accounts and by a 66
basis point decrease in the average rate paid on borrowed funds. The increase in
interest expense is primarily attributable to increases in the interest paid on
borrowings associated with the aforementioned wholesale leveraging transactions,
which increased by $2.0 million.

PROVISION FOR LOAN LOSSES. The provision for loan losses for the seven months
ended December 31, 1998 decreased to $292 thousand, as compared to $384 thousand
for the seven months ended December 31, 1997. This decrease 


<PAGE>




resulted from management's assessment of the growth in the loan portfolio, the
level of the Bank's allowance for possible loan losses and its assessment of the
local economy and market conditions. For the seven months ended December 31,
1998, loan charge-offs, net of recoveries, aggregated $77 thousand. At December
31, 1998, the allowance for possible loan losses totaled $1.7 million, and the
ratio of such allowance to non-performing loans was 82.99%.

OTHER INCOME. Other income, consisting of service and fee income and gains and
losses on securities and loan transactions, increased by $547 thousand, or
31.2%, to $2.1 million for the seven months ended December 31, 1998, as compared
to $1.6 million for the seven months ended December 31, 1997. This increase was
primarily attributable to an increase of $367 thousand in sales of securities,
an increase of $201 thousand in service and fee income due to the growth in
checking account deposits during 1998 and an increase of $74 thousand in loan
sales, partially offset by a $95 thousand reduction in other income associated
with write-offs of leasehold improvements and equipment that resulted from the
closing of the Company's full-service leased branch and the simultaneous opening
of the Company's new full-service branch in the Town of Wallkill.

OTHER EXPENSE. Other expense increased by $317 thousand to $8.8 million for the
seven months ended December 31, 1998, as compared to $8.5 million for the seven
months ended December 31, 1997. This increase resulted primarily from an
increase in salaries and benefits of $1.1 million attributable to additions to
staff necessary to attract and service a growing number of loan account and
deposit account customers. Professional fees increased $336 thousand primarily
as a result of ongoing consultation and audit activities in connection with the
Company's new legal structure following the Offering and the Bank's Conversion.
Advertising expense increased $176 thousand in order to support the Company's
branch relocation and grand opening, and to promote the Bank's name in the
highly competitive mortgage loan and commercial loan arenas. Other expenses for
the seven months ended December 31, 1998 decreased by $1.9 million, the amount
of the one-time charge for the establishment of the Foundation included in other
expense for the seven months ended December 31, 1997.

PROVISION FOR INCOME TAXES. The provision for income taxes increased from $72
thousand for the seven months ended December 31, 1997 to $1.2 million for the
seven months ended December 31, 1998. This increase was attributable to
the increase in pre-tax income.




<PAGE>



COMPARISON OF FINANCIAL CONDITION AT MAY 31, 1998 AND MAY 31, 1997

Total assets increased $123.9 million to $410.4 million at May 31, 1998, from
$286.5 million at May 31, 1997, reflecting the Company's ongoing strategy of
managed growth. This increase in total assets was primarily the result of
increases in the Company's interest-earning assets, as the Company grew both its
loan and investment securities portfolios. The asset growth was also funded
through borrowings, which increased $61.7 million to $90.0 million at May 31,
1998, and from the $61.5 million in net proceeds raised by the Company in the
Offering. At May 31, 1998, the Company had $27.2 million in securities sold
under repurchase agreements and $62.9 million in term loans from the FHLBNY.
Deposit liabilities increased by $1.5 million to $222.7 million at May 31, 1998
from $221.2 million at May 31, 1997, primarily due to increases in demand
checking accounts, NOW accounts and money market accounts, offset by the decline
in time certificates.

Asset growth was concentrated in mortgage loans, net, which increased $50.8
million to $148.2 million at May 31, 1998 from $97.4 million at May 31, 1997.
Other loans, net, showed an increase of $11.1 million to $47.2 million at May
31,1998 from $36.1 million at May 31, 1997. Total securities were $170.7 million
at May 31, 1998 compared to $126.4 million at May 31, 1997. Securities
held-to-maturity at May 31, 1998 totaled $7.3 million as compared to $6.1
million at May 31,1997. Securities available-for-sale at May 31, 1998 totaled
$163.4 million as compared to $120.3 million at May 31, 1997. This increase is
primarily the result of the Bank's utilization of additional wholesale leverage
transactions in order to enhance earnings.

Other assets increased $2.6 million, or 92.9%, from $2.8 million at May 31, 1997
to $5.4 million at May 31, 1998. This increase was primarily the result of an
increase in capitalizable costs associated with the Bank's new full-service
branch facility located in the Town of Wallkill that opened for business on July
27, 1998. Upon being placed into service, approximate costs of $2.3 million,
relating to land improvements, the construction of the building and the purchase
of furniture and equipment, were reclassified to "Bank premises and equipment,
net."

Total stockholders' equity increased $58.0 million to $86.1 million at May 31,
1998 from $28.1 million at May 31, 1997. This increase was primarily
attributable to the $61.5 million in net proceeds raised by the Company in the
Offering in connection with the Bank's Conversion.

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

GENERAL. Net income for the fiscal year ended May 31, 1998, which included a
one-time after-tax charge of $1.2 million for the establishment of the
Foundation, totaled $1.9 million, or $0.30 per share, as compared to $2.9
million for the comparable 1997 fiscal year. However, excluding the one-time
charge for the Foundation, net income for the fiscal year ended May 31, 1998
would have increased 5.2% to $3.1 million, or $0.49 per share. Earnings per
share results are not available for the fiscal year ended May 31, 1997 because
the Company did not complete its Offering until December 1997.

NET INTEREST INCOME. Net interest margin is net interest income expressed as a
percentage of total average earning assets. For the fiscal year ended May 31,
1998 the net interest margin was 4.50%, as compared to 4.20% for the fiscal year
ended May 31, 1997. This increase was primarily attributable to the $37.7
million increase in average interest-earning assets from $269.4 million over the
fiscal year ended May 31, 1997 to $307.1 million over the fiscal year ended May
31, 1998, while average interest-bearing liabilities increased $9.0 million from
$230.7 million to $239.7 million over the same period. Supplementing the
increase in average interest-bearing liabilities, funding for the increase in
average interest-earning assets was primarily provided by a $24.0 million
increase in average retained earnings, which included the infusion of capital
derived from the Offering, from $26.0 million for the fiscal year ended May 31,
1997, to $50.0 million for the comparable period ended May 31, 1998.

Net interest income for the fiscal year ended May 31, 1998 increased $2.5
million, or 22.0%, to $13.8 million, from $11.3 million for the fiscal year
ended May 31, 1997.

The increase in interest income resulted primarily from the significant growth
of the mortgage loan portfolio, as home purchasers and existing homeowners
capitalized on the opportunities afforded by lower mortgage loan interest rates.
Concurrently, the more modest increase in interest expense resulted primarily
from an increase in interest on borrowed funds, coupled with a decrease in time
deposit interest expense.




<PAGE>


INTEREST INCOME. For the fiscal year ended May 31, 1998 interest income totaled
$23.8 million, as compared to $20.7 million for the fiscal year ended May 31,
1997. The $3.1 million, or 14.9%, increase in 1998 was primarily attributable to
a $3.0 million, or 42.5%, increase in the amount of interest earned on the
Bank's mortgage loan portfolio, which resulted primarily from an increase in the
average balance of the Company's mortgage loans from $90.7 million for the
fiscal year ended May 31, 1997 to $132.0 million for the fiscal year ended May
31, 1998. Interest earned on other loans and on federal funds sold during the
fiscal year ended May 31, 1998 increased by $317 thousand and $157 thousand,
respectively, compared to the fiscal year ended May 31, 1997. Those increases,
however, were largely offset by a $443 thousand decrease in interest earned on
mortgage-backed and investment securities over the same period.

The increase in the average yield on interest-earning assets to 7.74% for the
fiscal year ended May 31, 1998, as compared to 7.68% for the fiscal year ended
May 31, 1997, resulted in part from the sale of relatively lower yielding
securities, and the purchase of higher yielding securities with portions of the
proceeds from such sales, in connection with the Company's restructuring of its
investment securities portfolio during the summer of 1997. However, the
improvement in yield derived from investments was partially offset by lower
yields earned on the Bank's loan portfolios due to lower long-term interest
rates at the start of 1998.

INTEREST EXPENSE. Interest expense for the fiscal year ended May 31, 1998 was
$10.0 million, compared to $9.4 million for the fiscal year ended May 31, 1997,
due primarily to an increase of $13.2 million in the average balance of borrowed
funds, a 171 basis point increase in the average rate paid on escrow deposits
and a $402 thousand increase in the average balance of escrow deposits in
connection with the increase in the Company's mortgage loans and additional
wholesale leverage transactions entered into during the 1998 fiscal year. These
increases were partially offset by a $4.2 million decrease in the average
balance of total interest-bearing deposits and by a 13 basis point decrease in
the average rate paid on borrowed funds.

PROVISION FOR LOAN LOSSES. The provision for loan losses for the fiscal year
ended May 31, 1998 increased to $592 thousand, as compared to $130 thousand for
the fiscal year ended May 31, 1997. This increase resulted from management's
assessment of the growth in the loan portfolio, the level of the Bank's
allowance for possible loan losses and its assessment of the local economy and
market conditions. For the fiscal years ended May 31, 1998 and 1997, loan
charge-offs, net of recoveries, aggregated $311 thousand and $203 thousand,
respectively. At May 31, 1998 and 1997, the allowance for possible loan losses
totaled $1.5 million and $1.2 million, respectively, and the ratio of such
allowance to non-performing loans was 123.61% at May 31, 1998, as compared to
86.09% at May 31, 1997.

OTHER INCOME. Other income, consisting of service and fee income and gains and
losses on securities and loan transactions, increased by $360 thousand, or
13.0%, to $3.1 million for the fiscal year ended May 31, 1998, as compared to
$2.8 million for the fiscal year ended May 31, 1997. This increase was primarily
attributable to an increase of $219 thousand in service and fee income due to
the growth in checking account deposits during 1998 and an increase of $258
thousand in other income associated with increased loan and loan servicing
activity, which was partially offset by a $74 thousand reduction on sales of
securities and a $43 thousand reduction on loan sales.

OTHER EXPENSE. Other expense increased by $3.9 million to $13.2 million for the
fiscal year ended May 31, 1998, as compared to $9.3 million for the fiscal year
ended May 31, 1997. This increase resulted primarily from an expense of $1.9
million relating to the Company's contribution to the Foundation and an expense
of $730 thousand relating to the first year's allocation of shares under the
ESOP which was established in connection with the Conversion and the Offering.
Salaries and employee benefits expense also increased $615 thousand, or 11.7%,
due to higher levels of expenses incurred in connection with the employee
benefit plans established in connection with the Conversion and the Offering and
normal salary increases. Professional fees increased $343 thousand primarily as
a result of various consultation and audit activities in connection with the
Conversion and the Offering.

PROVISION FOR INCOME TAXES. The provision for income taxes decreased $452
thousand from $1.8 million for the fiscal year ended May 31, 1997 to $1.3
million for the fiscal year ended May 31, 1998. This decrease was primarily
attributable to the tax benefit derived from the Company's contribution to the
Foundation.

COMPARISON OF FINANCIAL CONDITION AT MAY 31, 1997 AND MAY 31, 1996

         Total assets increased $12.4 million to $286.5 million at May 31, 1997,
from $274.1 million at May 31, 1996, reflecting the Company's ongoing strategy
of managed growth. The asset growth was funded primarily through borrowings,
which increased $20.0 million to $28.3 million at May 31, 1997. As of May 31,
1997, the Company had $23.1 million in securities sold under repurchase
agreements and $5.2 million in term loans from the FHLBNY. Deposit liabilities
declined by $11.8 million to $221.2 million at May 31, 1997 form $233.0 million
at May 31, 1996, primarily due to continued decreases in rollovers of a February
1995 offering of a nine-month certificate of deposit account ("Premium
Certificates"), initially priced slightly above local market rates to provide
the Bank with additional liquidity at the time of the failure of Nationar, one
of the Bank's correspondent banks. FHLBNY advances and other borrowings are used
by the Bank as an alternative to traditional retail deposits and take the form
of overnight advances, repriced daily, and one-month lines of credit, repriced
monthly.

         Asset growth was concentrated in mortgage loans, net, which increased
$25.5 million to $97.4 million at May 31, 1997 from $71.9 million at May 31,
1996. This loan growth (net of amortizations and satisfactions) contrasts to a
decrease of $17.6 million for the year ended May 31, 1996. In addition, other
loans, net, increased $4.1 million to $36.1 million at May 31, 1997 from $32.0
million at May 31, 1996. Total securities were $126.4 million at May 31, 1997
compared to $144.3 million at May 31, 1996, reflecting the reinvestment of funds
from the securities portfolio into higher yielding loans. Securities
held-to-maturity at May 31, 1997 totaled $6.1 million as compared to $7.1
million at May 31, 1996. Securities available-for-sale at May 31, 1997 totaled
$120.3 million as compared to $135.2 million at May 31, 1996. The Company's
available-for-sale portfolio was adjusted for an unrealized gain of $1.1 million
($500 thousand after-tax) for the fiscal year ended May 31, 1997.

         Other assets decreased by $4.3 million to $2.8 million at May 31, 1997,
primarily due to the satisfactory liquidation of the Company's $3.9 million
claim against the Superintendent of Bank of the State of New York, as receiver
for Nationar, regarding the Superintendent's seizure of Nationar in early
February, 1995.

         As a result of adopting Statement of Financial Accounting Standards No.
122, the Banks capitalized $444 thousand of originated mortgage servicing rights
during fiscal year 1996.

         Total net worth increased $3.3 million to $28.1 million at May 31, 1997
from $24.8 million at May 31, 1996, resulting from net income of $2.8 million
and approximately $500 thousand of unrealized appreciation on securities
available for sale, net of taxes.


COMPARISON OF OPERATING RESULTS FOR THE FISCAL YEARS ENDED MAY 31, 1997 AND 1996

         GENERAL. Net income for the fiscal year ended May 31, 1997 was $2.9
million, compared to $1.5 million for the fiscal year ended May 31, 1996. The
increase of $1.3 million resulted primarily from an 18% increase in the
Company's net interest margin and greater profits on sales of mortgage


<PAGE>


-backed securities. Also contributing to the increase in net income was a
decline in the Company's provision for income taxes due to a change in tax
regulations from an effective tax rate of 41% in fiscal 1996 to 38% in fiscal
1997.

         NET INTEREST INCOME. Net interest income for the fiscal year ended May
31, 1997 increased $1.7 million, or 17.7% to $11.3 million. This increase
reflects the overall rise in the Company's average interest rate spread of 14
basis points to $3.62%, and a rise in the Company's net interest margin of 22
basis points to 4.20% for the 1997 fiscal year, as well as a greater increase in
interest-earning assets than interest-bearing liabilities.

         Market interest rates were slightly higher in the 1997 fiscal year
across the entire U.S. Treasury yield curve than in the 1996 fiscal year. While
the Company realized a higher overall yield of nine basis points on its average
interest-earning assets, yields on the Company's interest-bearing liabilities
declined by five basis points.

         INTEREST INCOME. Interest income totaled $20.7 million for the fiscal
year ended May 31, 1997, compared to $18.3 million for the fiscal year ended May
31, 1996. This increase of $2.4 million, or 13.1%, reflects an increase of more
than $3.3 million in interest and dividends on securities due to the
securitization of approximately $50 million of the Company's mortgages in April
and May of 1996, offset, in part, by a decrease in the average yield on the
Company's mortgage-backed securities of 89 basis points. The increase in
interest was offset, in part, by a decline of over $600 thousand in interest
income on mortgage and other loans due to the decreased volume of such loans
resulting mainly from such securitization, mitigated somewhat by an increase of
13 basis points in the average yield on such loans. Interest income on federal
funds sold decreased substantially in the fiscal year ended May 31, 1997, as
compared to the prior years, due to management's focus on extending maturities
slightly, in its efforts to increase yield in a flattening yield curve
environment.

         INTEREST EXPENSE. Interest expense on deposits and borrowings increased
$660 thousand to $9.4 million for the fiscal year ended May 31, 1997, compared
to $8.7 million for the fiscal year ended May 31, 1996. This increase reflects
an increase in average interest-bearing liabilities of $18.8 million during the
1997 fiscal year and a decrease in the average rate paid on such liabilities of
five base points over the same period. The increase in average interest-bearing
liabilities is primarily attributable to an increase in the average balance of
borrowed funds to $31.2 million for the 1997 fiscal year from $489 thousand for
the 1996 fiscal year. Average certificate of deposit accounts declined by
approximately $10.7 million in fiscal year 1997, partially due to the maturity
of the Premium Certificates which was attributable to the Company's decision not
to offer premium rates in a highly competitive rate environment. While there was
a 12% decline in average certificate of deposit accounts, there was a 22%
decline in interest expense associated with such accounts, from $5.1 million in
the fiscal year ended May 31, 1996 to $4.0 million in the 1997 fiscal year. As a
result, the Company's total cost of funds decreased by five base points, from
4.11% to 4.06%, despite the increases in market interest rates in fiscal year
1997.

         PROVISION FOR LOAN LOSSES. the provision for loan losses decreased to
$130 thousand for the fiscal year ended May 31, 1997 from $140 thousand for the
fiscal year ended May 31, 1996, although there was an increase in non-performing
loans (consisting of loans over 90 days past due and non-

<PAGE>

accrual loans) to $1.4 million at May 31, 1997, from $863 thousand at May 31,
1996. At May 31, 1997, the percentage of the allowance for loan losses to total
loans was 0.88%, as compared to 1.18% as of May 31, 1996. However, management's
analysis indicated that the majority of the non-performing loans were one to
four - family residential mortgage loans. Moreover, management believes that
most of these loans are adequately secured by properties affording low
loan-to-value ratios, based upon current evaluations. In addition, management
performs a quarterly in-depth analysis of its allowance for loan losses. Based
upon loan types and volumes, loan review and classification systems, and the
factors described above and various other factors, management has made regular
determinations that its allowance and monthly provisions are adequate.

         OTHER INCOME. Other income, net, for the fiscal year ended May 31, 1997
increased $696 thousand to $2.8 million from $2.1 million for the fiscal year
ended May 31, 1996. This increase was primarily attributable to increased gains
on sales of mortgage-backed securities, emanating form the Company's mortgage
banking operation. Total service and fee income increased 8% to $1.9 million in
the fiscal year ended May 31, 1997, due to service charges and other fees
reflecting increased loan and loan servicing activity, as well as increases in
certain transaction fees during the 1997 fiscal year.

         OTHER EXPENSES. Other expenses increased $273 thousand to $9.3 million
for the fiscal year ended May 31, 1997 from $9.1 million for the fiscal year
ended May 31, 1996. The increase in other expenses primarily reflects increases
in salaries and employee benefits and occupancy costs. Salaries and employee
benefits expense increased $206 thousand to $5.3 million for the 1997 fiscal
year compared to $5.0 million for the 1996 fiscal year. This increase was
primarily attributable to a general increase in salaries. Data processing in
costs and advertising costs increased by $156 thousand, or 32%, and $23
thousand, or 18%, respectively. The Company's ratio of other expenses to average
assets decreased to 3.28% in the 1997 fiscal year from 3.48% in the 1996 fiscal
year.

         PROVISIONS FOR INCOME TAXES. The provision for income taxes increased
$732 thousand from $1.0 million for the fiscal year ended May 31, 1996 to $1.8
for the fiscal year ended May 31, 1997. This increase was primarily attributable
to the increase of $2.1 million, or 86%, in pre-tax income, offset by savings
due to a change in the Bank's effective tax rate from 41% in fiscal 1996 to 38%
in fiscal 1997.

<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

The Bank's primary sources of funds are retail deposits, wholesale funding from
FHLBNY or other bank borrowings, securities sold under repurchase agreements,
principal and interest payments on loans and securities and, to a lesser 
extent, proceeds from the sale of securities. While maturities and scheduled
amortization of loans and securities provide an indication of the timing of the
receipt of funds, changes in interest rates, economic conditions and competition
strongly influence mortgage prepayment rates and deposit flows, reducing the
predictability of the timing of sources of funds.

The Bank has no required regulatory liquidity ratios or balances to maintain,
however, it does adhere to a Liquidity and Funds Management Policy approved by
its Board of Directors, which sets minimum internal guidelines for liquidity
purposes.

As a member of the FHLBNY, the Bank has the availability of two lines of credit
for borrowings in the amounts of $17.0 million each, one on an overnight basis
and the other on a 30-day term basis. In accordance with the FHLBNY's credit
policy, the Bank now has total credit facilities available of nearly $126.6
million, inclusive of the aforementioned amounts, before the delivery of
qualifying collateral is required. Additionally, the Bank has other sources of
liquidity if the need arises. One source is to borrow up to $5 million from a
commercial bank on an unsecured basis and the other is the ability to sell
securities under repurchase agreements in an amount up to $10 million from a
securities investment company.

The primary investing activities of the Bank are the origination of one- to
four-family residential mortgage loans, commercial real estate and commercial
business loans, a variety of consumer loans, and the purchase of mortgage-backed
securities and debt and equity securities. During the seven months ended
December 31, 1998 and the fiscal years ended May 31, 1998, and 1997, the Bank's
disbursements for loan originations totaled $140.6 million, $164.1 million and
$100.6 million, respectively. Purchases of mortgage-backed securities totaled
$52.9 million, $59.6 million and $23.2 million for the seven months ended
December 31, 1998 and the fiscal years ended May 31, 1998 and 1997,
respectively. Other debt and equity securities purchased during the seven months
ended December 31, 1998 and the fiscal years ended May 31, 1998 and 1997, were
$12.2 million, $65.1 million and $26.0 million, respectively. The Bank's
investing activities are funded primarily by borrowings, net deposit inflows,
sales of loans and securities and principal repayments on loans and securities.
The Bank increased borrowings at December 31, 1998 and May 31, 1998 by $14.8
million and $61.7 million, respectively, to fund its investments.

At December 31, 1998, the Company's total approved loan origination commitments
outstanding totaled $67.6 million and the unadvanced/unused portion of
commercial lines of credit totaled $5.4 million. The Company believes it will
have sufficient funds available to meet its current originations and other
lending commitments. Certificates of deposit scheduled to mature in one year or
less from December 31, 1998 totaled $64.8 million. Based on historical
experience and pricing strategy, management believes that a significant portion
of such deposits will remain with the Bank.

At December 31, 1998, the Company had cash and due from banks of $10.5 million
and securities available for sale of $149.5 million. Management believes these
amounts, together with the Company's borrowing capabilities, to be more
than adequate to meet its short-term cash needs.




<PAGE>



REGULATORY CAPITAL POSITION

The Bank is subject to minimum regulatory capital requirements imposed by the
Federal Deposit Insurance Corporation which vary according to an institution's
capital level and the composition of its assets. An insured institution is
required to maintain Tier I capital of not less than 3.00% of total assets plus
an additional amount of at least 100 to 200 basis points ("leverage capital
ratio"). An insured institution must also maintain a ratio of total capital to
risk-based assets of at least 8.00%. Although the minimum leverage capital ratio
is 3.00%, the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") stipulates that an institution with less than a 4.00% leverage
capital ratio is deemed to be an "undercapitalized" institution, which results
in the imposition of regulatory restrictions. The Bank's capital ratios qualify
it to be deemed "well capitalized" under FDICIA. In addition, the Company's
capital ratios exceed the minimum regulatory capital requirements imposed by the
Federal Reserve Board, which are substantially similar to the requirements of
the FDIC. See Note 13 to the Notes to Consolidated Financial Statements for the
Bank's and the Company's regulatory capital position as of December 31, 1998 and
May 31, 1998.

YEAR 2000 COMPLIANCE

The Year 2000 issue is the result of the inability of certain computer systems
to recognize the year 2000. Many existing computer programs and systems were
initially programmed with six digit dates that provided only two digits to
identify the calendar year in the date field without considering the upcoming
change in the century. As a result, such programs and systems may recognize a
date using "00" as the year 1900 instead of the year 2000, which could result in
system failures or miscalculations. Like most financial service providers, the
Company and its operations may be significantly affected by the Year 2000 issue
due to the nature of financial information. Software, hardware and equipment
both within and outside the Company's direct control and with whom the Company
electronically or operationally interfaces (i.e., third party vendors providing
data processing, information system management, maintenance of computer systems
and credit bureau information) are likely to be affected. Furthermore, if
computer systems are not adequately changed to identify the year 2000, many
computer applications could fail or create erroneous results. As a result, many
calculations which rely upon the date field information, such as interest,
payment or due dates and other operating functions, may generate results which
could be significantly misstated, and the Company could experience a temporary
inability to process transactions, send invoices or engage in similar normal
business activities. In addition, under certain circumstances, failure to
adequately address the Year 2000 issue could adversely affect the viability of
the Company's suppliers and creditors and the creditworthiness of its borrowers.
Thus, if not adequately addressed, the Year 2000 issue could result in a
material adverse impact upon the Company's products, services and competitive
condition and, therefore, its results of operations, and could be deemed to
imperil the safety and soundness of the Bank.

The FDIC, the Bank's primary federal regulator, along with the other federal
bank regulatory agencies, has published substantive guidance on the Year 2000
issue and has included Year 2000 compliance as a substantive area of
examination. These publications, in addition to providing guidance as to
examination criteria, have outlined requirements for the creation and
implementation of a compliance plan and target dates for testing and
implementation of corrective actions. As a result of the oversight by and
authority vested in the federal bank regulatory agencies, a financial
institution that does not become Year 2000 compliant could be subject to
administrative remedies similar to those imposed on financial institutions
otherwise found not to be operating in a safe and sound manner, including
remedies available under prompt corrective action regulations.

The Company has developed and is implementing a plan (the "Plan") to address the
Year 2000 issue and its effects on the Company. The Plan includes five
components which address issues involving awareness, assessment, renovation,
validation and implementation. The Company has completed the awareness,
assessment and renovation phases of the Plan. During the awareness and
assessment phases of the Plan, the Company inventoried all material information
systems and those of third-party vendors. The Company is now actively involved
in the validation and implementation phases of the Plan. Under regulatory
guidelines issued by the federal banking regulators, the Bank and the Company
are required to substantially complete testing of core mission critical internal
systems by March 31, 1999, and testing of both internally and externally
supplied systems must be complete, and all renovation must be substantially
complete, by June 30, 1999. In accordance with those guidelines, the Company
will complete testing of its mission critical systems prior to March 31, 1999.
The Company expects to meet the deadlines noted above.

As part of the Plan, the Company has had formal communications with all of its
significant suppliers to determine the extent to which the Company is vulnerable
to those third parties' failure to remedy their own Year 2000 issue and has 


<PAGE>



been following the progress of those vendors with their Year 2000 compliance
status. The Company presently believes that with modifications to existing
software and conversions to new software and hardware where necessary, the Year
2000 issue will be mitigated without causing a material adverse impact on the
operations of the Company or the Bank. At this time, the Company anticipates
most of its hardware and software to become Year 2000 compliant, tested and
operational within the FDIC's suggested time frame. However, if such
modifications and conversions are not made, or are not timely completed, the
Year 2000 issue could have an impact on the operations of the Company or the
Bank.

Despite its best efforts to ensure Year 2000 compliance, it is possible that one
or more of the Company's internal or external systems may fail to operate or to
operate correctly. At this time, while the Company expects to become Year 2000
compliant, the probability of such likelihood cannot be determined. In the event
that system failures related to the Year 2000 issue occur, the Company has
developed contingency plans, which involve, among other actions, utilization of
an alternate service provider or alternate products available through the
current vendor.

The Company has reviewed its customer base to determine whether they pose
significant Year 2000 risks. The Company's customer base consists primarily of
individuals who utilize the Company's services for personal, household or
consumer uses. Individually, such customers are not likely to pose significant
Year 2000 risks directly. It is not possible at this time to gauge the indirect
risks which could be faced if the employers of such customers encounter
unresolved Year 2000 issues.

Monitoring and managing the Year 2000 issue will result in additional direct and
indirect costs to the Company. Direct costs include potential charges by
third-party software vendors for product enhancements, costs involved in testing
software products for Year 2000 compliance and any resulting costs for
developing and implementing contingency plans for critical software products
that are not enhanced. Indirect costs will principally consist of time devoted
by existing employees in monitoring software vendor progress, testing enhanced
software products and implementing any necessary contingency plans. The Company
estimates that total costs related to the Year 2000 issue will not exceed
$165,000. Both direct and indirect costs of addressing the Year 2000 issue will
be charged to earnings as incurred. To date, over 76% of the total estimated
costs associated with the Year 2000 have already been expensed.

IMPACT OF INFLATION AND CHANGING PRICES

The Financial Statements and Notes thereto presented herein have been prepared
in accordance with generally accepted accounting principles, which require the
measurement of financial position and operating results in terms of historical
dollars without considering the changes in the relative purchasing power of
money over time due to inflation. Unlike industrial companies, nearly all of the
assets and liabilities of the Bank are monetary in nature. As a result, interest
rates have a greater impact on the Bank's performance than do the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the price of goods and services.

IMPACT OF NEW ACCOUNTING STANDARDS

See Note 1 to Notes to the Consolidated Financial Statements.




<PAGE>


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information required by this item appears under the caption "Management of
Interest Rate Risk" under Item 7 above.


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

<TABLE>
<CAPTION>
                                  CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

                       ASSETS                            DECEMBER 31,         MAY 31,            MAY 31,
                                                             1998              1998               1997
                                                           ---------         --------           --------
<S>                                                     <C>               <C>               <C>
ASSETS:
    Cash on hand and in banks......................     $  10,511,429     $  11,190,124     $  10,366,711
        Federal funds sold.........................                --                --         1,315,000
    Securities-
        Available-for-sale, at fair value..........       149,490,983       163,425,416       120,301,288
    Held-to-maturity, at amortized cost (fair value
        of $5,967,296, $7,276,933 and $6,116,184,
        respectively)..............................         5,998,931         7,323,818         6,091,684
                                                          -----------       -----------       -----------
                Total securities...................       155,489,914       170,749,234       126,392,972
                                                          -----------       -----------       -----------
    Mortgage loans, net............................       194,596,355       148,242,725        97,440,203
    Mortgage loans held-for-sale...................        13,736,722        17,237,483         4,831,500
    Other loans, net...............................        53,130,139        47,184,643        36,051,438
    Mortgage servicing rights......................         1,463,503         1,051,496           835,079
    Accrued interest receivable....................         2,505,976         2,462,632         2,096,627
    Federal Home Loan Bank stock...................         4,632,800         3,392,500         1,731,300
    Bank premises and equipment, net...............         6,173,210         3,105,380         2,425,831
    Other real estate owned, net...................           370,772           409,363           223,782
    Other assets...................................         2,527,833         5,368,319         2,834,743
                                                          -----------       -----------       -----------
                Total assets.......................     $ 445,138,653     $ 410,393,899     $ 286,545,186
                                                          ===========       ===========       ===========
        LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
    Deposits.......................................     $ 246,886,382     $ 222,721,609     $ 221,211,137
    Mortgage escrow funds..........................         1,965,266         2,265,878         1,397,584
    Securities sold under agreements to repurchase.        25,310,000        27,190,000        23,090,000
    Federal Home Loan Bank advances................        79,480,000        62,850,000         5,250,000
    Accrued expenses and other liabilities.........         7,259,910         9,216,802         7,482,034
                                                          -----------       -----------       -----------
              Total liabilities....................       360,901,558       324,244,289       258,430,755
                                                          -----------       -----------       -----------
COMMITMENTS AND CONTINGENCIES (NOTE 14)
    STOCKHOLDERS' EQUITY:
        Preferred stock, $.01 par value;
        5,000,000 shares authorized; none issued...                --                --                --
    Common stock, $.01 par value; 15,000,000
        shares authorized; 6,606,548
        shares issued..............................            66,065            66,065                --
    Additional paid-in capital.....................        63,374,087        63,386,358                --
    Retained earnings - subject to restrictions....        30,457,837        29,355,454        27,494,509
        Accumulated other comprehensive
          income, net..............................         1,726,918         1,164,946           619,922
        Less- Unallocated common stock held
          by ESOP..................................       (7,207,901)       (7,823,213)                --
        Less- Unearned common stock held by RRP....       (4,179,911)                --                --
                                                          -----------       -----------       -----------
              Total stockholders' equity...........        84,237,095        86,149,610        28,114,431
                                                          -----------       -----------       -----------
              Total liabilities and
                stockholders' equity...............     $ 445,138,653     $ 410,393,899     $ 286,545,186
                                                          ===========       ===========       ===========
</TABLE>



 The accompanying notes are an integral part of these consolidated statements.



<PAGE>


<TABLE>
<CAPTION>

                        CONSOLIDATED STATEMENTS OF INCOME


                                                   FOR THE SEVEN        FOR THE YEAR ENDED MAY 31,
                                                   MONTHS ENDED   ______________________________________
                                                 DECEMBER 31, 1998   1998          1997           1996
                                                   -------------   --------      --------       --------
<S>                                               <C>           <C>           <C>           <C>         
INTEREST INCOME:
    Interest on mortgage loans..................  $  7,997,827  $ 10,191,223  $  7,151,702  $  8,098,219
    Interest on other loans.....................     2,601,115     3,772,844     3,457,460     2,833,349
    Interest on securities......................     6,692,647     9,605,844    10,049,163     6,728,913
    Interest on federal funds sold..............            --       172,638        14,504       321,903
    Interest on short-term money market
      instruments...............................        19,122        34,116        18,290        34,870
                                                    ----------    ----------    ----------    ----------
                Total interest income...........    17,310,711    23,776,665    20,691,119    18,333,036
                                                    ----------    ----------    ----------    ----------
INTEREST EXPENSE:
    Time deposits...............................     2,014,269     3,822,525     3,984,829     5,108,712
    Money market deposits.......................       732,363       848,801       882,979       936,218
    Savings deposits............................     1,554,955     2,549,228     2,550,704     2,580,121
    Mortgagors' escrow funds....................        62,905        93,689        49,588        68,165
    Borrowed funds..............................     3,195,698     2,657,220     1,908,062        23,882
                                                    ----------    ----------    ----------    ----------
                Total interest expense..........     7,560,190     9,971,463     9,376,162     8,717,098
                                                    ----------    ----------    ----------    ----------
                Net interest income.............     9,750,521    13,805,202    11,314,957     9,615,938
PROVISION FOR LOAN LOSSES.......................     (291,550)     (592,450)     (130,000)     (140,000)
                                                    ----------    ----------    ----------    ----------
    Net interest
    Income after provision for loan losses......     9,458,971    13,212,752    11,184,957     9,475,938
                                                    ----------    ----------    ----------    ----------
OTHER INCOME (LOSS):
    Service and fee income......................     1,422,223     2,134,419     1,915,139     1,767,610
    Securities transactions.....................       560,927       742,248       816,304       356,266
    Net gain on sale of loans...................       139,699        94,036       137,403       118,807
    Other income (loss).........................         6,458       169,198      (89,079)     (158,713)
                                                    ----------    ----------    ----------    ----------
                Total other income, net.........     2,129,307     3,139,901     2,779,767     2,083,970
                                                    ----------    ----------    ----------    ----------
OTHER EXPENSES:
    Salaries and employee benefits..............     4,314,391     5,870,423     5,255,869     5,049,942
    ESOP and RRP benefits.......................       921,630       729,529            --            --
    FDIC insurance..............................        16,679        27,836        12,447        53,226
    Occupancy...................................       648,892     1,219,397     1,307,727     1,237,485
    Data processing.............................       500,222       672,484       639,654       483,572
    Advertising.................................       282,072       159,797       152,529       129,227
    Professional fees...........................       578,954       583,311       240,513       325,392
    Contribution to The Warwick Savings
      Foundation................................            --     1,924,230            --            --
    Other.......................................     1,524,117     2,000,434     1,734,616     1,791,244
                                                    ----------    ----------    ----------    ----------
                Total other expenses............     8,786,957    13,187,441     9,343,355     9,070,088
                                                    ----------    ----------    ----------    ----------
                Income before provision for
                  income taxes..................     2,801,321     3,165,212     4,621,369     2,489,820
PROVISION FOR INCOME TAXES......................     1,153,897     1,304,267     1,755,866     1,024,240
                                                    ----------    ----------    ----------    ----------
    Net Income..................................  $  1,647,424  $  1,860,945  $  2,865,503  $  1,465,580
                                                    ==========    ==========    ==========    ==========
WEIGHTED AVERAGE:
    Common shares...............................     5,943,073     6,112,610           N/A           N/A
    Dilutive stock options......................            --            --           N/A           N/A
                                                    ----------    ----------
                                                     5,943,073     6,112,610           N/A           N/A
                                                    ==========    ==========
EARNINGS PER SHARE SINCE
  CONVERSION:
    Basic.......................................  $        .28  $        .10           N/A           N/A
                                                    ==========    ==========
    Diluted.....................................  $        .28  $        .10           N/A           N/A
                                                    ==========    ==========
</TABLE>

 The accompanying notes are an integral part of these consolidated statements.




<PAGE>

<TABLE>
<CAPTION>


                                   CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY


                                                                                ACCUMULATED    UNALLOCATED    UNEARNED
                                                                                   OTHER         COMMON        COMMON
                                    COMMON   ADDITIONAL      RETAINED          COMPREHENSIVE  STOCK HELD BY  STOCK HELD   COMPREHEN-
                                     STOCK PAID-IN CAPITAL   EARNINGS           INCOME, NET     NET ESOP       BY RRP    SIVE INCOME
                                     ----- ---------------   --------           -----------     --------       ------    -----------

<S>                              <C>         <C>          <C>                  <C>           <C>           <C>            <C>
BALANCE, MAY 31, 1995            $     --    $    --      $  23,163,426        $  (87,288)   $     --      $         --
    Net income............             --         --          1,465,580               --           --                --   $1,465,580
    Unrealized appreciation on
        securities
        available-for-sale, net        --         --               --              228,755                                   228,755
                                  --------    ----------  -------------         ---------    ---------       ----------   ----------
    Comprehensive income                                                                                                  $1,694,335
                                                                                                                          ==========
BALANCE, MAY 31, 1996                   --         --       24,629,006             141,467         --                --
    Net income............              --         --        2,865,503                 --          --                --   $2,865,503
    Unrealized appreciation on
        securities
        available-for-sale, net         --         --          --                  478,455                                   478,455
                                  --------    ----------  ----------             ---------   ---------       ----------   ----------
    Comprehensive income
                                                                                                                          $3,343,958
                                                                                                                          ==========
BALANCE, MAY 31, 1997                   --         --       27,494,509            619,922         --                 --
    Net Income............              --         --        1,860,945                 --         --                 --   $1,860,945
    Unrealized appreciation
        on securities
        available-for-sale, net         --         --           --                 545,024         --                --      545,024
                                                                                                                          ----------
    Comprehensive income                --         --           --                     --          --                --   $2,405,969
                                                                                                                          ==========
    Issuance of 6,414,125
        shares of $.01 par value
        common stock in initial
        public offering, net of
        conversion related
        expenses..........          64,141    61,421,084         --                     --          --              --
    Issuance of 192,423
        shares of $.01
        par value common
        stock to The Warwick
        Savings Foundation           1,924    1,922,306          --                     --         --               --
    Purchase of common
        stock by ESOP                 --           --            --                     --     (8,509,774)          --
    Allocation of ESOP stock          --         42,968          --                     --        686,561           --
                                  --------   ----------   ----------             ---------     ----------    ---------    ----------
BALANCE, MAY 31, 1998              66,065    63,386,358   29,355,454              1,164,946    (7,823,213)          --
    Net income............           --            --      1,647,424                    --         --               --    $1,647,424
    Unrealized appreciation
        on securities-
        available-for-sale, net      --            --           --                  561,972        --               --       561,972
                                                                                                                          ----------
    Comprehensive income             --            --           --                      --         --               --    $2,209,396
                                                                                                                          ==========
    Allocation of ESOP stock         --       (12,271)          --                      --     615,312              --
    Cash dividends paid              --            --      (545,041)                    --         --               --
    Purchase of common stock
        by RRP............           --            --           --                      --         --       (4,635,038)
Earned portion of RRP.....           --            --           --                      --         --          455,127
                                  --------  -----------  -----------           -----------    -----------    ---------
BALANCE, DECEMBER 31, 1998        $66,065   $63,374,087  $30,457,837           $ 1,726,918    $(7,207,901) $(4,179,911)
                                  ========  ===========  ===========           ===========    ===========    =========

</TABLE>


 The accompanying notes are an integral part of these consolidated statements.



<PAGE>



<TABLE>
<CAPTION>
                                       CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                    FOR THE SEVEN       FOR THE YEAR ENDED MAY 31,
                                                    MONTHS ENDED   ____________________________________
                                                  DECEMBER 31, 1998   1998         1997          1996
                                                    -------------    -------      -------       -------
<S>                                                <C>              <C>          <C>            <C> 
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net income                                      $  1,647,424    $ 1,860,945   $  2,865,503  $   1,465,580
    Adjustments to reconcile net income to net cash                                             
            provided by operating activities-                                                   
        Depreciation                                     302,698        455,354        459,171        428,008
        Charitable contribution of Warwick                                                      
            Community Bancorp, Inc. common                                                      
            stock to The Warwick Savings Foundation           --      1,924,230             --             --
        Amortization of premium /(accretion) of                                                 
            discount on investment securities            152,097       (822,694)        74,453        (12,413)
        Net increase in accrued interest receivable      (43,344)      (366,005)      (154,589)       140,166
        Net (increase) decrease in mortgage                                                     
            servicing rights and other assets          2,467,070     (2,935,574)     4,111,000     (2,165,524)
        Provision for loan losses                        291,550        592,450        130,000        140,000
        Net gain on sales of loans                      (139,699)       (94,036)      (137,403)      (118,807)
        Net gain on sale of securities                  (560,927)      (742,249)      (816,304)      (356,266)
        Net increase (decrease) in accrued                                                      
            interest payable                            (750,248)       274,104         10,496       (174,460)
        Net increase (decrease) in accrued expenses                                             
            and other liabilities                     (1,206,644)     1,460,664        706,750      1,539,027
                                                      ----------    -----------     ----------    -----------
                Net cash provided by operating                                                  
                activities                             2,159,977      1,607,189      7,249,077        885,311
                                                      ----------    -----------     ----------    -----------
CASH FLOWS FROM INVESTING ACTIVITIES:                                                           
    Proceeds from maturities and calls of securities   2,870,000     32,800,000     12,424,922     39,576,296
    Purchases of securities                          (65,108,278)  (155,073,028)   (70,743,474)  (108,398,408)
    Proceeds from sales of trading securities                                                   
        and securities available-for-sale             62,251,711     63,117,707     66,376,202     31,727,463
    Principal repayments from mortgage-backed
        securities                                    16,012,368     16,446,960     10,469,393      3,637,431
    Purchases of Federal Home Loan Bank stock         (1,240,300)    (1,661,200)      (553,200)      (267,600)
    Net (increase) decrease in loans                 (48,619,389)   (74,341,710)   (29,187,635)    14,537,389
    Purchases of banking premises and equipment, net  (3,509,305)    (1,128,283)      (240,610)        60,174
                                                      ----------    -----------     ----------    -----------
                Net cash used in investing 
                  activities                         (37,343,193)  (119,839,554)   (11,454,402)   (19,127,255)
                                                      ----------    -----------     ----------    -----------
CASH FLOWS FROM FINANCING ACTIVITIES:                                                           
    Net increase (decrease) in deposits               24,164,773      1,510,472   (11,649,533)      (882,800)
    Net increase (decrease) in mortgage escrow funds    (300,612)       868,294        395,059      3,051,380
    Increase in borrowed funds                        14,750,000     61,700,000     20,040,000      8,300,000
    Cash dividends paid on common stock                 (545,041)            --             --             --
    Purchase of common stock by ESOP                          --     (8,509,774)            --             --
    ESOP allocation                                      615,312        686,561             --             --
    Proceeds from issuance of common stock                    --     64,141,250             --             --
    Payments for conversion costs                             --     (2,656,025)            --             --
    Purchase of common stock by RRP                   (4,635,038)            --             --             --
    Earned portion of RRP                                455,127             --             --             --
                                                      ----------    -----------     ----------    -----------
                Net cash provided by financing                                                  
                    activities                        34,504,521    117,740,778      8,785,526     10,468,580
                                                      ----------    -----------     ----------    -----------
                Increase (decrease) in cash and                                                 
                    cash equivalents                    (678,695)      (491,587)     4,580,201     (7,773,364)
CASH AND CASH EQUIVALENTS, beginning of year          11,190,124     11,681,711      7,101,510     14,874,874
                                                      ----------    -----------     ----------    -----------
CASH AND CASH EQUIVALENTS, end of year              $ 10,511,429  $  11,190,124  $  11,681,711    $ 7,101,510
                                                    ============    ===========     ==========    ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
    Cash paid during the year for-
            Interest on deposits and borrowed
            funds                                   $ 8,310,438   $ 9,697,360    $  9,365,666     $ 8,891,558
            Income taxes                              2,803,896     1,312,041       2,117,500              --
</TABLE>

The accompanying notes are an integral part of these consolidated statements.



<PAGE>



                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     The following is a description of the significant accounting policies
     followed by Warwick Community Bancorp, Inc. and subsidiary (the "Company")
     in the preparation of its consolidated financial statements:

     BASIS OF PRESENTATION

     The accompanying consolidated financial statements include the accounts of
     the Company and its wholly owned subsidiary, The Warwick Savings Bank (the
     "Bank"). All significant intercompany balances and transactions are
     eliminated in consolidation.

     As more fully discussed in Note 2, Warwick Community Bancorp, Inc., a
     Delaware corporation, was organized by the Bank for the purpose of
     acquiring all of the capital stock of the Bank pursuant to the conversion
     of the Bank from a New York chartered mutual savings bank to a New York
     chartered stock savings bank. The Company is subject to the financial
     reporting requirements of the Securities Exchange Act of 1934, as amended.

     CHANGE OF FISCAL YEAR

     During 1998 the Company changed its fiscal year from May 31 to December 31.

     USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

     In preparing the consolidated financial statements, management is required
     to make estimates and assumptions that affect the reported assets and
     liabilities as of the date of the consolidated statements of financial
     condition. The same is true of revenues and expenses reported for the
     period. Actual results could differ from those
     estimates.

     CASH AND CASH EQUIVALENTS

     The Company generally considers short-term instruments, with original
     maturities of three months or less, measured from their acquisition date,
     and highly liquid instruments readily convertible to known amounts of cash
     to be cash
     equivalents.

     For purposes of reporting cash flows, cash and cash equivalents include
     cash on hand, amounts due from banks and federal funds sold. Generally,
     federal funds sold are sold for one-day periods.

     SECURITIES

     The Company classifies its securities as trading securities,
     available-for-sale securities, or held-to-maturity securities in accordance
     with Statement of Financial Accounting Standards ("SFAS") No. 115,
     "Accounting for Certain Investments in Debt and Equity Securities." Trading
     securities are debt and equity securities that are bought principally for
     the purpose of selling them in the near term, and securities classified as
     held-to-maturity consist of debt securities which the Company has the
     positive intent and ability to hold to maturity and are carried at
     amortized cost. Securities considered neither trading nor held-to-maturity
     are classified as available-for-sale securities and are carried at fair
     value with unrealized gains and losses excluded from earnings and reported
     as a separate component of stockholders' equity (net of related deferred
     taxes). Trading securities are carried at fair value with unrealized gains
     and losses included in earnings.

     Federal Home Loan Bank stock is considered restricted stock under SFAS No.
     115 and, accordingly, is carried at cost.





<PAGE>



     LOANS

     Loans are stated at the principal amount outstanding, net of unearned
     income. Loans are placed on non-accrual status when management has
     determined that the borrower will be unable to meet contractual principal
     or interest obligations or when unsecured interest or principal payments
     are 90 days past due. When a loan is classified as non-accrual, 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.

     ALLOWANCE FOR LOAN LOSSES

     The allowance for loan losses is a significant estimate based upon
     management's periodic evaluation of the loan portfolio under current
     economic conditions, considering factors such as the Company'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. Establishing the allowance for loan losses
     involves significant management judgment, utilizing the best available
     information at the time of review. Those judgments are subject to further
     review by various sources, including the Bank's regulators. While
     management estimates loan losses using the best available information,
     future adjustments to the allowance may be necessary based on changes in
     economic and real estate market conditions, further information obtained
     regarding known problem loans, the identification of additional problem
     loans, and other factors.

     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. The Company applies
     the impairment criteria to all loans, except for large groups of smaller
     balance homogenous loans that are collectively evaluated for impairment,
     such as residential mortgage and consumer installment loans. At December
     31, 1998 and May 31, 1998 and 1997, in addition to the non-accrual loans
     discussed in Notes 4 and 5, there were $544,953, $630,946 and $504,265,
     respectively, of loans identified by the Company as impaired, as defined
     under SFAS No. 114, with no specific reserves for losses.

     MORTGAGE LOANS HELD-FOR-SALE

     Mortgage loans originated and intended for sale in the secondary market are
     carried at the lower of cost or estimated fair value in the aggregate, with
     net unrealized losses (if any) reported in earnings. Realized gains and
     losses on
     sales of loans are based on the cost of the specific loans sold.

     LOAN ORIGINATION FEES AND RELATED COSTS

     Loan fees and certain direct loan origination costs are deferred, and the
     net fee or cost is recognized in income using the level-yield method over
     the contractual life of the loans. Unamortized fees and costs on loans sold
     or prepaid prior to contractual maturity are recognized as an adjustment to
     income in the year such loans are sold or
     prepaid.

     MORTGAGE SERVICING RIGHTS

     The cost of mortgage servicing rights (purchased or originated rights with
     related loans sold) is amortized in proportion to, and over the period of,
     estimated net servicing revenues. Impairment of mortgage servicing rights
     is assessed based on the fair value of those rights. For purposes of
     measuring impairment, the servicing rights are stratified based on the
     following predominant risk characteristics of the underlying loans: (a)
     loan type and (b) origination or securitization date.





<PAGE>



     BANK PREMISES AND EQUIPMENT

     Bank premises and equipment are carried at cost less accumulated
     depreciation and amortization. Depreciation is computed on the
     straight-line method over the estimated useful lives of the related assets.
     Equipment under capital leases is amortized on the straight-line method
     over the shorter of the lease term or the estimated useful life of the
     asset. Repairs and maintenance, as well as renewals and replacements of a
     routine nature, are expensed while costs incurred to improve or extend the
     life of existing assets are capitalized.

     OTHER REAL ESTATE OWNED

     Other real estate owned ("OREO") represents properties acquired through
     legal foreclosure. Prior to transferring a real estate loan to OREO, the
     loan is written down to the lower of the recorded investment in the loan or
     the fair value of the property. Any resulting write-downs are charged to
     the allowance for loan losses. Thereafter, the property is carried at the
     lower of cost or fair value less costs to sell, with any adjustments
     recorded as an increase or decrease to the allowance for losses on OREO.

     INTEREST INCOME

     Interest income includes interest income on loans and investment securities
     and dividend income received on investment securities.

     The operations of the Company are substantially dependent on its net
     interest income, which is the difference between the interest income earned
     on its interest-earning assets and the interest expense paid on its
     interest-bearing liabilities. Like most savings institutions, the Company's
     earnings are affected by changes in market interest rates and the economic
     factors beyond its control. Decreases in the Company's average interest
     rate spread could adversely affect the Company's net interest income.

     INCOME TAXES

     Deferred tax assets and liabilities are recognized for the future tax
     effects attributable to "temporary differences" (differences between the
     financial statement carrying amounts of existing assets and liabilities and
     their respective tax bases) and tax loss and tax credit carry forwards.
     Deferred tax assets are reduced by a valuation allowance if, based on an
     analysis of available evidence, management determines that it is more
     likely than not that some portion or all of the deferred tax assets will
     not be realized. Deferred tax assets and liabilities are measured using
     enacted tax rates expected to apply to taxable income in the years in which
     the temporary differences are expected to be recovered or settled. The
     effect on deferred tax assets and liabilities of a change in tax laws or
     rates is recognized in income in the period that includes the enactment
     date of the change.

     EMPLOYEE STOCK OWNERSHIP PLAN

     The Company follows AICPA Statement of Position 93-6, "Employers'
     Accounting for Employee Stock Ownership Plans" ("SOP 93-6"), to account for
     the Warwick Community Bancorp, Inc. Employee Stock Ownership Plan ("ESOP").
     SOP 93-6 requires that compensation expense be recognized for shares
     committed to be released to directly compensate employees equal to the fair
     value of the shares committed. In addition, SOP 93-6 requires that
     leveraged ESOP debt and related interest expense be reflected in the
     employer's financial statements. The application of SOP 93-6 will result in
     fluctuations in compensation expense as a result of changes in the fair
     value of the Company's common stock; however, any such compensation expense
     fluctuations will result in an offsetting adjustment to paid-in capital.
     Therefore, total capital will not be affected.




<PAGE>



     STOCK OPTIONS

     The Company follows SFAS No. 123, "Accounting for Stock-Based
     Compensation." SFAS No. 123 applies to all transactions in which an entity
     acquires goods or services by issuing equity instruments or by incurring
     liabilities where the payment amounts are based on the entity's common
     stock price, except for employee stock ownership plans. SFAS No. 123
     established a fair value-based method of accounting for stock-based
     compensation arrangements with employees, rather than the intrinsic
     value-based method that is contained in Accounting Principles Board Opinion
     No. 25, "Accounting for Stock Issued Employees" ("APB No. 25"). SFAS No.
     123 does not require an entity to adopt the new fair value-based method for
     purposes of preparing its basic financial statements; an entity is allowed
     to continue to use the APB No. 25 method for preparing its basic financial
     statements. The Company has chosen to continue to use the APB No. 25
     method; however, SFAS No. 123 requires presentation of pro forma net income
     and earnings per share information, in the notes to the financial
     statements, as if the fair value-based method had been adopted.

     EARNINGS PER SHARE

     The Company adopted SFAS No. 128, "Earnings Per Share." Basic earnings per
     share excludes dilution and is computed by dividing net income by the
     weighted average number of common shares outstanding for the period,
     adjusted for the unallocated portion of the shares held by the ESOP in
     accordance with SOP 93-6 and unearned shares held by the RRP. Diluted
     earnings per share, which reflects the potential dilution that could occur
     if outstanding stock options were exercised and resulted in the issuance of
     common stock that then shared in the earnings of the Company, is computed
     by dividing net income by the weighted average number of common shares and
     dilutive instruments. As of December 31, 1998 and May 31, 1998, the Company
     has no securities that could be converted into common stock nor does the
     Company have any contracts that could result in the issuance of common
     stock.

     COMPREHENSIVE INCOME

     The Company adopted SFAS No. 130 "Reporting Comprehensive Income" in 1998.
     All comparative financial statements provided for earlier periods have been
     reclassified to reflect application of the provisions of this Statement.

     Comprehensive income includes net income and all other changes in equity
     during a period except those resulting from investment by owners and
     distributions to owners. Other comprehensive income includes revenues,
     expenses, gains, and losses that under generally accepted accounting
     principles are included in comprehensive income but
     excluded from net income.

     Comprehensive income and accumulated other comprehensive income are
     reported net of related income taxes. Accumulated other comprehensive
     income for the Company consists solely of unrealized holding gains or
     losses on available-for-sale securities.

     PENSIONS AND OTHER POSTRETIREMENT BENEFITS

     The Bank adopted SFAS No. 132, "Employer's Disclosures About Pensions and
     other Postretirement Benefits." SFAS No. 132 only addresses disclosure and
     does not change any of the measurement or recognition provisions provided
     for in previously issued accounting standards. SFAS No. 132 did not affect
     the Bank's results of operations or financial condition.

     NEW ACCOUNTING PRONOUNCEMENTS

     In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
     No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
     which is effective prospectively for the Company on January 1, 2000. SFAS
     No. 133 standardizes the accounting for derivative instruments, including
     certain derivative instruments embedded in other contracts. Under SFAS No.
     133, entities are required to carry all derivative instruments in the
     statement of financial position at fair value. The accounting for changes
     in the fair value (i.e., gains or losses) of a derivative instrument
     depends on whether it has been designated and qualifies as part of a



<PAGE>



     hedging relationship and, if so, on the reason for holding it. If certain
     conditions are met, entities may elect to designate a derivative instrument
     as a hedge of exposures to change in fair values, cash flows or foreign
     currencies. If the hedge exposure is a fair value exposure, the gain or
     loss on the derivative instrument is recognized in earnings in the period
     of change together with the offsetting loss or gain on the hedge item
     attributable to the risk being hedged. If the hedged exposure is a cash
     flow exposure, the effective portion of the gain or loss on the derivative
     instrument is reported initially as a component of other comprehensive
     income (outside earnings) and subsequently reclassified into earnings when
     the forecasted transaction affects earnings. Any amounts excluded from the
     assessment of hedge effectiveness as well as the ineffective portion of the
     gain or loss is reported in earnings immediately. Accounting for foreign
     currency hedges is similar to the accounting for fair value and cash flow
     hedges. If the derivative instrument is not designated as a hedge, the gain
     or loss is recognized in earnings in the period of change. The Company has
     not determined the impact that SFAS No. 133 will have on its financial
     statements.

     In October 1998, the FASB issued SFAS No. 134, "Accounting for
     Mortgage-Backed Securities Retained After the Securitization of Mortgage
     Loans Held for Sale by a Mortgage Banking Enterprise." SFAS No. 134
     conforms the subsequent accounting for securities retained after the
     securitization of mortgage loans by a mortgage banking enterprise with the
     subsequent accounting for securities retained after the securitization of
     other types of assets by a nonmortgage banking enterprise. SFAS No. 134 is
     effective for fiscal years beginning after December 15, 1998 and will not
     impact the Company's accounting or disclosures.

     RECLASSIFICATIONS

     Certain reclassifications were made to the accompanying May 31, 1998 and
     1997 financial statements to conform
     to December 31, 1998 presentation.

2.   CONVERSION TO STOCK FORM OF OWNERSHIP

     On July 10, 1997, the Board of Trustees of the Bank adopted a proposed Plan
     of Conversion ("Plan") to convert the Bank from a New York mutual savings
     bank to a New York stock savings bank and to become a wholly owned
     subsidiary of the Company. The Company completed its initial public
     offering on December 23, 1997 and sold 6,414,125 shares of common stock,
     resulting in proceeds of $61,485,225 net of expenses totaling $2,656,025.
     The Company used $30,742,613, or 50%, of the net proceeds to purchase all
     of the outstanding stock of the Bank. The Company also loaned $8,509,774 to
     the ESOP, which purchased 528, 523 shares of the Company's stock.

     As part of the Plan, the Bank and the Company formed The Warwick Savings
     Foundation and donated 192,423 shares of the Company's common stock valued
     at $1,924,230. The Company recorded a contribution expense charge and a
     corresponding deferred tax benefit of $769,692 for this donation. The
     formation of this private charitable foundation is to further the Bank's
     commitment to the communities that it serves.

     The Company may not declare or pay cash dividends on or repurchase any of
     its shares of common stock if the effect thereof would cause stockholders'
     equity to be reduced below applicable regulatory capital maintenance
     requirements, the amount required for the liquidation account, or if such
     declaration and payment would otherwise
     violate regulatory requirements.




<PAGE>



3.   SECURITIES

     A summary of securities at December 31, 1998 and May 31, 1998 and 1997
follows:
<TABLE>
<CAPTION>

                                                                     DECEMBER 31, 1998
                                                     ------------------------------------------------
                                                                   GROSS          GROSS         ESTIMATED
                                                     AMORTIZED  UNREALIZED     UNREALIZED         FAIR
                                                       COST        GAINS         LOSSES           VALUE
                                                    ----------- ----------     ----------      ----------
<S>                                            <C>            <C>               <C>          <C>
Securities available-for-sale:
    Debt securities-
        U.S. Government and agency
            obligations                        $ 41,452,955   $    405,865      $      --    $ 41,858,820
        Industrial and financial                  8,044,770        185,230             --       8,230,000
        Collateralized mortgage
            obligations                          17,976,540        127,369             --      18,103,909
                Mortgage-backed securities       61,302,215        846,005      (142,688)      62,005,532
                                                -----------      ---------       --------     -----------
                Total debt securities           128,776,480      1,564,469      (142,688)     130,198,261
    Common stock                                  2,275,592         19,213      (353,955)       1,940,850
    Preferred stock                               1,111,654          8,596             --       1,120,250
    Mutual fund shares                           14,449,062      1,828,467       (45,907)      16,231,622
                                                -----------      ---------       --------     -----------
                Total securities
                    available-for-sale          146,612,788      3,420,745      (542,550)     149,490,983
                                                -----------      ---------       --------     -----------
Securities held-to-maturity:
    U.S. Government and agency obligations        5,895,145          3,943        (37,500)      5,861,588
    Obligations of state and political
        subdivisions                                103,786          1,922             --         105,708
                                                -----------      ---------       --------     -----------
                Total securities
                    held-to-maturity              5,998,931          5,865       (37,500)       5,967,296
                                                -----------      ---------       --------     -----------
                Total securities               $152,611,719   $  3,426,610  $   (580,050)    $155,458,279
                                                ===========      =========       ========     ===========

                                                                       MAY 31, 1998
                                                     ------------------------------------------------
                                                                   GROSS          GROSS         ESTIMATED
                                                     AMORTIZED  UNREALIZED     UNREALIZED         FAIR
                                                       COST        GAINS         LOSSES           VALUE
                                                    ----------- ----------     ----------      ----------
Securities available-for-sale:
    Debt securities-
        U.S. Government and agency
<S>                                            <C>             <C>            <C>            <C>         
            obligations                        $ 44,464,532    $   433,987    $ (664,499)    $ 44,234,020
        Industrial and financial                    822,419         28,270            --          850,689
        Collateralized mortgage obligations      19,592,884          6,060       (40,380)      19,558,564
        Mortgage-backed securities               81,097,563      1,192,142      (137,495)      82,152,210
                                                -----------      ---------       --------     -----------
                Total debt securities           145,977,398      1,660,459      (842,374)     146,795,483
    Common stock                                    582,215             --        (5,678)         576,537
    Preferred stock                               1,101,654         20,346             --       1,122,000
    Mutual fund shares                           13,822,573      1,122,698       (13,875)      14,931,396
                                                -----------      ---------       --------     -----------
                Total securities 
                   available-for-sale           161,483,840      2,803,503      (861,927)     163,425,416
                                                -----------      ---------       --------     -----------
Securities held-to-maturity:
    U.S. Government and agency obligations        6,658,864         14,551        (63,450)      6,609,965
    Obligations of state and political
        subdivisions                                664,954          2,014             --         666,968
                                                -----------      ---------       --------     -----------
                Total securities held-to-maturity 7,323,818         16,565       (63,450)       7,276,933
                                                -----------      ---------       --------     -----------
                Total securities               $168,807,658    $ 2,820,068    $ (925,377)    $170,702,349
                                               ============    ===========    ===========    ============
</TABLE>



<PAGE>




<TABLE>
<CAPTION>
                                                                       MAY 31, 1997
                                                     ------------------------------------------------
                                                                   GROSS          GROSS         ESTIMATED
                                                     AMORTIZED  UNREALIZED     UNREALIZED         FAIR
                                                       COST        GAINS         LOSSES           VALUE
                                                    ----------- ----------     ----------      ----------
<S>                                            <C>              <C>            <C>           <C>         
Securities available-for-sale:
    Debt securities-
        U.S. Government and agency
            obligations                        $ 29,901,648   $    160,787     $ (40,877)    $ 30,021,558
        Public utilities                            999,340             --        (7,710)         991,630
        Industrial and financial                  6,991,615         51,779        (5,700)       7,037,694
        Collateralized mortgage obligations       2,695,832             --       (11,354)       2,684,478
        Mortgage-backed securities               72,811,663        770,367      (310,970)      73,271,060
                                                -----------      ---------      ---------     -----------
                Total debt securities           113,400,098        982,933      (376,611)     114,006,420
    Preferred stock                                 203,518          1,011           (29)         204,500
    Mutual fund shares                            5,597,002        493,366             --       6,090,368
                                                -----------      ---------      ---------     -----------
                Total securities
                    available-for-sale          119,200,618      1,477,310      (376,640)     120,301,288
                                                -----------      ---------      ---------     -----------
Securities held-to-maturity:
U.S. Government and agency obligations            5,684,812         38,720       (16,932)       5,706,600
Obligations of state and political
    subdivisions                                    406,872          2,712             --         409,584
                                                -----------      ---------      ---------     -----------
            Total securities held-to-maturity     6,091,684         41,432       (16,932)       6,116,184
                                                -----------      ---------      ---------     -----------
            Total securities                   $125,292,302     $1,518,742     $(393,572)    $126,417,472
                                                ===========      =========      =========     ===========
</TABLE>


A summary of the carrying value of debt securities at December 31, 1998 by
contractual maturity is shown below. Actual maturities may differ from
contractual maturities because certain security issuers may have the right to
call or prepay their obligations.

<TABLE>
<CAPTION>
                                                      AFTER ONE    AFTER FIVE
                                       ONE YEAR        THROUGH       THROUGH      AFTER TEN
                                        OR LESS      FIVE YEARS     TEN YEARS       YEARS         TOTAL
                                        -------       ---------     --------      --------       -------

<S>                                     <C>            <C>            <C>            <C>            <C> 
Available-for-sale-
    U.S. Government and
        agency obligations              $  1,004,690   $  2,160,320   $ 17,214,110   $ 21,479,700   $ 41,858,820
    Industrial and financial                    --          787,500           --        7,442,500      8,230,000
    Collateralized mortgage
        obligations                             --             --             --       18,103,909     18,103,909
    Mortgage-backed securities                  --            7,824        993,395     61,004,313     62,005,532
                                        ------------   ------------   ------------   ------------   ------------

            Total available-for-sale    $  1,004,690   $  2,955,644   $ 18,207,505   $108,030,422   $130,198,261
                                        ============   ============   ============   ============   ============

Held-to-maturity-
    U.S. Government and
        agency obligations              $    895,145   $       --     $       --     $  5,000,000   $  5,895,145
    Obligations of state and
        political subdivisions                  --          103,786           --             --          103,786
                                        ------------   ------------   ------------   ------------   ------------

            Total held-to-maturity      $    895,145   $    103,786   $       --     $  5,000,000   $  5,998,931
                                        ============   ============   ============   ============   ============

</TABLE>




<PAGE>



Proceeds from sales of securities (trading and available-for-sale) are
summarized as follows:
<TABLE>
<CAPTION>

                                          FOR THE SEVEN                   YEARS ENDED MAY 31,
                                          MONTHS ENDED       _____________________________________________
                                        DECEMBER 31, 1998      1998              1997             1996
                                          -------------      --------          --------         --------
<S>                                       <C>              <C>             <C>              <C>        
Proceeds from sales                       $62,251,711      $63,117,707     $66,376,202      $31,727,463
                                          ===========      ===========     ===========      ===========

Gross gains on sales                      $   608,807      $  922,582      $ 1,046,199      $   545,577
                                          ===========      ==========      ===========      ===========

Gross losses on sales                     $    47,880      $ 180,333       $   229,895      $   189,311
                                          ===========      =========       ===========      ===========
</TABLE>


No securities held-to-maturity were sold during the seven months ended December
31, 1998 and the three years ended May 31, 1998.

4.   MORTGAGE LOANS

     A summary of mortgage loans at December 31, 1998 and May 31, 1998 and 1997
follows:

<TABLE>
<CAPTION>
                                                       DECEMBER 31,        MAY 31,          MAY 31,
                                                           1998             1998             1997
                                                        ----------        ---------       ----------
<S>                                                   <C>              <C>              <C>
Conventional 1-4 family residential
  loans originated                                    $ 165,329,367    $ 127,812,039    $ 79,096,961
Conventional 1-4 family residential
  loans purchased                                         1,817,407        2,103,550       2,706,457
Loans partially guaranteed by VA or insured by FHA          641,317          594,827         748,520
Home equity loans                                        18,060,877       15,875,753      13,449,077
Construction loans                                       16,104,749        6,703,046       4,109,840
                                                        -----------      -----------     -----------

                                                        201,953,717      153,089,215     100,110,855
Undisbursed portion of construction loans                (6,303,688)      (3,939,460)     (2,117,833)
Net deferred loan fees                                     (680,668)        (535,434)       (328,740)
Allowance for loan losses                                  (373,006)        (371,596)       (224,079)
                                                      -------------    -------------   -------------

                                                      $ 194,596,355    $ 148,242,725   $  97,440,203
                                                      =============    =============   =============
</TABLE>


     The Bank has sold certain conventional mortgage loans without recourse and
     has retained the related servicing rights. The remaining principal balances
     of mortgage loans serviced for others, which are not included in the
     accompanying consolidated financial statements, were approximately
     $189,378,000, $144,283,000 and $122,311,000 at December 31, 1998 and May
     31, 1998 and 1997, respectively.

     Mortgage loans on non-accrual status at December 31, 1998 and May 31, 1998
     and 1997 were approximately $631,000, $699,000 and $1,111,000,
     respectively. Interest income that would have been recorded if the loans
     had been performing in accordance with their original terms aggregated
     approximately $90,000, $100,000, $93,000 and $54,000 during the seven
     months ended December 31, 1998 and years ended May 31, 1998, 1997 and 1996,
     respectively.




<PAGE>



5.   OTHER LOANS

     A summary of other loans at December 31, 1998 and May 31, 1998 and 1997
follows:
<TABLE>
<CAPTION>

                                                    DECEMBER 31,            MAY 31               MAY 31,
                                                        1998                 1998                 1997
                                                      ---------            ---------            ---------
<S>                                                <C>                  <C>                 <C>         
Commercial                                         $ 35,380,711         $ 34,113,671        $ 23,417,939
Automobile                                           13,787,879            8,351,918           7,738,516
Student                                                 332,407            1,352,784           1,331,569
Credit card                                           1,295,868            1,239,391           1,334,548
Other consumer loans                                  3,345,476            3,025,549           3,053,852
                                                     ----------           ----------          ----------

                                                     54,142,341           48,083,313          36,876,424
Net deferred loan costs                                 341,844              242,704             182,590
Allowance for loan losses                           (1,354,046)          (1,141,374)         (1,007,576)
                                                     ----------           ----------          ----------

                                                   $ 53,130,139         $ 47,184,643        $ 36,051,438
                                                   ============         ============        ============
</TABLE>


     Commercial loans on non-accrual status at December 31, 1998 and May 31,
     1998 and 1997 were approximately $55,000, $159,000 and $26,000,
     respectively. Consumer loans in arrears three months or more were
     approximately $33,000, $27,000 and $96,000 at December 31, 1998 and May 31,
     1998 and 1997, respectively. Interest income that would have been recorded
     if the loans had been performing in accordance with their original terms
     was not material during the seven months ended December 31, 1998 and the
     years ended May 31, 1998, 1997 and 1996.

6.   ALLOWANCE FOR LOAN LOSSES

   The activity in the allowance for loan losses is as follows:

<TABLE>
<CAPTION>
                                            FOR THE SEVEN                 YEARS ENDED MAY 31,
                                            MONTHS ENDED     ____________________________________________
                                          DECEMBER 31, 1998     1998             1997             1996
                                            -------------     --------         --------         ---------

<S>                                        <C>              <C>              <C>             <C>        
Balance at beginning of period             $ 1,512,970      $ 1,231,655      $ 1,304,765     $ 1,206,486
    Provision for loan losses                  291,550          592,450          130,000         140,000
    Charge-offs                               (98,752)        (325,524)        (213,042)       (149,877)
    Recoveries                                  21,284           14,389            9,932         108,156
                                             ---------        ---------        ---------       ---------

Balance at end of period                   $ 1,727,052      $ 1,512,970      $ 1,231,655     $ 1,304,765
                                           ===========      ===========      ===========     ===========
</TABLE>


7.   MORTGAGE SERVICING RIGHTS

     Mortgage servicing rights as of December 31, 1998 and May 31, 1998 and 1997
consist of the following:

<TABLE>
<CAPTION>
                                                      DECEMBER 31,           MAY 31,             MAY 31,
                                                          1998                1998                1997
                                                       -----------         -----------         ----------

<S>                                                   <C>                <C>                 <C>        
Mortgage Servicing Rights                             $ 1,586,734        $ 1,180,858         $   885,992
Less-Accumulated amortization                           (123,231)          (129,362)            (50,913)
                                                        ---------          ---------            --------

                                                      $ 1,463,503        $ 1,051,496         $   835,079
                                                      ===========        ===========         ===========
</TABLE>


     The Bank capitalized originated mortgage servicing rights of $535,238,
     $342,720 and $216,047 for the seven months ended December 31, 1998 and the
     years ended May 31, 1998 and 1997, respectively.





<PAGE>



8.   BANK PREMISES AND EQUIPMENT

     A summary of bank premises and equipment at December 31, 1998 and May 31,
1998 and 1997 follows:

<TABLE>
<CAPTION>
                                                      DECEMBER 31,           MAY 31,             MAY 31,
                                                          1998                1998                1997
                                                        ---------           ---------           ---------

<S>                                                  <C>                <C>                 <C>         
Land                                                 $  1,995,899       $  1,169,109        $    340,587
Buildings and improvements                              4,151,428          2,745,075           2,720,751
Equipment                                               3,385,022          2,684,039           2,522,432
Furniture and fixtures                                    779,095            647,091             584,896
                                                       ----------          ---------           ---------

                                                       10,311,444          7,245,314           6,168,666
Less-Accumulated depreciation                         (4,138,234)        (4,139,934)         (3,742,835)
                                                       ----------          ---------           ---------

                                                     $  6,173,210       $  3,105,380        $  2,425,831
                                                     ============       ============        ============
</TABLE>


9.   DEPOSITOR ACCOUNTS

     Deposit account balances and stated interest rates at December 31, 1998 and
     May 31, 1998 and 1997 are summarized as follows:

<TABLE>
<CAPTION>
                              DECEMBER 31,                MAY 31,                   MAY 31,
                                  1998     DECEMBER 31,    1998       MAY 31,        1997        MAY 31,
                              STATED RATES     1998    STATED RATES    1998      STATED RATES     1997
                                ---------    ---------   --------     -------      ---------    --------

<S>                            <C>        <C>           <C>         <C>           <C>        <C>         
  Demand checking accounts           --%  $ 33,380,334        --%   $ 26,743,222         --% $ 23,854,838
  Negotiable order of
    withdrawal
    accounts (NOW)             1.00-2.25    22,761,492  1.00-2.25     17,557,881   1.00-2.25   15,023,912
  Savings accounts             2.00-3.25    82,696,147  2.00-3.25     80,650,580        3.00   80,175,311
  Money market accounts        2.35-4.23    37,052,916  2.35-3.50     26,863,318   2.35-3.50   27,119,239
  Time certificates            4.20-5.15    70,995,493  4.50-5.00     70,906,608   4.30-5.50   75,037,837
                                           -----------               -----------              -----------

      Total deposits                      $246,886,382              $222,721,609             $221,211,137
                                          ============              ============             ============
</TABLE>

     Time certificate balances at December 31, 1998 and May 31, 1998 and 1997
     are summarized by remaining period to contractual maturity as follows:

<TABLE>
<CAPTION>
                                                       DECEMBER 31,           MAY 31,            MAY 31,
                                                           1998                1998               1997
                                                        ----------           --------`         ----------

<S>                                                   <C>                 <C>                 <C>        
Under one year                                        $64,390,436         $64,599,733         $69,248,768
One year to under three years                           4,857,712           3,998,068           3,792,718
Three years and over                                    1,747,345           2,308,807           1,996,351
                                                       ----------          ----------          ----------

                                                      $70,995,493         $70,906,608         $75,037,837
                                                      ===========         ===========         ===========
</TABLE>


The aggregate amount of time certificates in denominations of $100,000 or more
was approximately $5,983,000, $6,107,000 and $5,174,000 at December 31, 1998 and
May 31, 1998 and 1997, respectively.



<PAGE>




10.  INCOME TAXES

     The tax effects of temporary differences that give rise to the Bank's
     deferred tax assets and deferred tax liabilities, on a combined basis, for
     federal and state tax purposes at December 31, 1998 and May 31, 1998 and
     1997, are as
     follows:

<TABLE>
<CAPTION>
                                                                    DECEMBER 31,     MAY 31,        MAY 31,
                                                                        1998          1998           1997
                                                                      ---------      -------        -------
                                                                                 (000'S OMITTED)
<S>                                                                   <C>           <C>           <C>  
Deferred tax assets:
    Charitable contribution benefit                                    $  437        $  496       $    --
    Allowance for loan losses                                             650           620           504
    Accrued post-retirement benefits                                      676           646           618
    Other deductible temporary differences                                235            49           141
                                                                       ------        ------        ------

                Total gross deferred tax assets                         1,998         1,811         1,263
                                                                       ------        ------        ------

Deferred tax liabilities:
    Bad debt reserves for income tax purposes in
        excess of the base-year reserves                                  269           289           289
    Net unrealized gain on securities available-for-sale                1,179           755           438
    Other taxable temporary differences                                    91           170           479
                                                                       ------        ------        ------

                Total gross deferred tax liabilities                    1,539         1,214         1,206
                                                                       ------        ------        ------

                Net deferred tax asset (included in other assets)      $  459        $  597        $   57
                                                                       ======        ======        ======
</TABLE>


     Management believes that it is more likely than not that it will realize
the net deferred tax asset.

     Provision for income taxes is comprised of the following:

<TABLE>
<CAPTION>
                                       SEVEN                          YEARS ENDED MAY 31,
                                    MONTHS ENDED         _________________________________________________
                                  DECEMBER 31, 1998         1998               1997               1996
                                    -------------        ----------         ----------          ---------
<S>                                 <C>                <C>                <C>                <C>
Current:
    Federal                         $   757,888        $ 1,636,872        $ 1,302,494        $   945,021
    State                               257,791            445,276            450,864            350,741
                                      ---------          ---------          ---------          ---------

                                      1,015,679          2,082,148          1,753,358          1,295,762
                                      ---------          ---------          ---------          ---------

Deferred:
    Federal                             103,086          (614,224)            109,410          (198,026)
    State                                35,132          (163,657)          (106,902)           (73,496)
                                      ---------          ---------          ---------          ---------

                                        138,218          (777,881)              2,508          (271,522)
                                      ---------          ---------          ---------          ---------

                                    $ 1,153,897        $ 1,304,267        $ 1,755,866        $ 1,024,240
                                    ===========        ===========        ===========        ===========
</TABLE>





<PAGE>



     The provision for income taxes for the seven months ended December 31, 1998
     and the years ended May 31, 1998, 1997 and 1996 differs from that computed
     at the federal statutory rate as follows:

<TABLE>
<CAPTION>
                                                     SEVEN               YEARS ENDED MAY 31,
                                                   MONTHS ENDED  _______________________________________
                                                 DECEMBER 31, 1998 1998           1997           1996
                                                   ------------- ---------     -----------     --------
<S>                                             <C>            <C>           <C>             <C>        
Tax at federal statutory rate                   $   952,449    $ 1,076,172   $ 1,571,265     $   846,539
State taxes, net of federal income tax benefit      294,979        218,379       322,566         182,981
Reversal of New York State deferred taxes                --             --     (164,817)              --
Other                                              (93,531)          9,716        26,852         (5,280)
                                                  ---------      ---------     ---------       ---------

        Total income tax expense                $ 1,153,897    $ 1,304,267   $ 1,755,866     $ 1,024,240
                                                ===========    ===========   ===========     ===========

Effective rate                                       41.19%         41.21%        37.99%          41.14%
</TABLE>

     As a thrift institution, the Bank is subject to special provisions in the
     federal and New York State tax laws regarding its allowable tax bad debt
     deductions and related tax bad debt reserves. These deductions historically
     have been determined using methods based on loss experience or a percentage
     of taxable income. Tax bad debt reserves are maintained for qualifying real
     property loans and for non-qualifying loans in amounts equal to the excess
     of allowable deductions over actual bad debt losses and other reserve
     reductions. A supplemental reserve is also maintained. The qualifying and
     non-qualifying loan reserves consist of a defined base-year amount, plus
     additional amounts ("excess reserves") accumulated after the base year.
     SFAS No. 109 requires recognition of deferred tax liabilities with respect
     to such excess reserves, as well as any portion of the base-year amount or
     the supplemental reserve which is expected to become taxable (or
     "recaptured") in the foreseeable future.

     Certain amendments to the federal tax bad debt provisions were enacted in
     July 1996. The federal amendments include elimination of the
     percentage-of-taxable-income method for tax years beginning after December
     31, 1995 and imposition of a requirement to recapture into taxable income
     (over a six-year period) the qualifying and qualifying qualifying loan
     reserves in excess of the base-year amounts. However, such recapture
     requirements were suspended for each of the two successive taxable years
     beginning January 1, 1996 in which the Bank originates a minimum amount of
     certain residential loans during such years that is not less than the
     average of the principal amounts of such loans made by the Bank during its
     six taxable years preceding January 1, 1996. The Bank previously
     established, and will continue to maintain, a deferred tax liability with
     respect to such excess federal reserves.

     The New York State amendments enacted in August of 1996 redesignate the
     Bank's State bad debt reserves at May 31, 1997 as the base-year amount and
     also provide for future additions to the base-year reserve using the
     percentage-of-taxable-income method, subject to certain limitations. This
     change effectively eliminated the excess New York State reserves for which
     a deferred tax liability had been recognized, and accordingly, the Bank
     reduced its deferred tax liability by $164,817 (with a corresponding
     reduction in income tax expense) during the year ended May 31, 1997.

     In accordance with SFAS No. 109, deferred tax liabilities have not been
     recognized with respect to the base-year and supplemental reserves, since
     the Bank does not expect that these amounts will become taxable in the
     foreseeable future. Under the tax laws as amended, events that would result
     in taxation of these reserves include: (i) reductions in the reserves for
     purposes other than tax bad debt losses, (ii) failure of the Bank to
     maintain a specified qualifying-assets ratio or meet other thrift
     definition tests for New York State tax purposes and (iii) certain stock
     redemptions, partial or complete liquidation or distribution in excess of
     post-1951 earnings and profits. The reserve balance of $4,713,000 at
     December 31, 1987 has not been subject to deferred taxes.



<PAGE>



11.  BENEFIT PLANS

     PENSION PLAN

     All eligible employees of the Bank are included in a noncontributory
     defined benefit pension plan administered by Actuarial Pension Analysts,
     Inc. Under the terms of the Pension Plan, participants vest 100% upon
     completion of five years of service as defined in the plan document. The
     Bank's policy is to fund the consulting actuary's
     recommended contribution.

   The following table sets forth the Pension Plan's change in benefit
obligation:

                                                DECEMBER 31,             MAY 31,
                                                    1998                  1998
                                                 ----------            ---------

  Benefit obligation at beginning of period     $ 4,551,471          $ 4,119,052
  Service cost                                       94,760              277,347
  Interest cost                                     113,093              302,451
  Benefits paid                                    (44,372)            (147,379)
                                                  ---------            ---------

  Benefit obligation at end of period           $ 4,714,952          $ 4,551,471
                                                ===========          ===========


      The following table sets forth the Pension Plan's change in Plan Assets:

<TABLE>
<CAPTION>

                                                     DECEMBER 31,             MAY 31,
                                                         1997                  1998
                                                      ----------            ----------

<S>                                                  <C>                  <C>        
Fair value of Plan Assets at beginning of period     $ 5,820,424          $ 4,990,430
  Actual return on Plan Assets                         (288,905)              963,112
  Benefits paid                                         (44,372)            (133,118)
                                                       ---------            ---------

  Fair value of Plan Assets at end of period         $ 5,487,147          $ 5,820,424
                                                       =========            =========

  Funded status                                      $   772,195          $ 1,268,953
  Unrecognized prior service cost                       (36,759)             (38,937)
  Unrecognized actuarial gain                          (641,225)          (1,096,860)
                                                       ---------            ---------

  Prepaid cost                                       $    94,211          $   133,156
                                                     ===========          ===========
</TABLE>

<TABLE>
<CAPTION>

                                                       SEVEN                YEARS ENDED MAY 31,
                                                   MONTHS ENDED     ___________________________________
                                                 DECEMBER 31, 1998   1998          1997           1996
                                                   ------------    --------      ---------      --------
<S>                                                 <C>           <C>           <C>            <C>      
Net pension cost includes the following components:
    Service costs--benefits earned
      during the period                             $  94,760     $ 277,347     $ 228,068      $ 176,483
    Interest cost on projected benefit obligation     113,093       302,451       275,763        266,739
    Actual return on assets                         (166,730)     (393,466)     (357,442)      (321,582)
    Amortization of transition assets                 (4,356)      (21,266)      (33,311)       (33,311)
    Amortization of prior service cost                  2,178       (6,534)       (6,534)        (6,024)
                                                     --------      --------      --------       --------
                Net pension cost                    $  38,945     $ 158,532     $ 106,544      $  82,305
                                                    =========     =========     =========      =========
Major assumptions utilized as follows:
    Discount rate                                       7.50%         7.50%         7.50%          7.50%
    Rate of increase in compensation levels              5.50          5.50          5.50           5.50
    Expected long-term rate of return
      on Plan assets                                     8.00          8.00          8.00           8.00
</TABLE>



<PAGE>



     POSTRETIREMENT BENEFITS OTHER THAN PENSIONS

     The Bank also provides postretirement health care (medical and dental)
     benefits and life insurance benefits to certain retirees if they meet
     certain age and length of service requirements prior to retirement. For
     retirees who retire after April 24, 1996, the continuation of such benefits
     is conditioned upon the retiree contributing a portion of the cost of such
     benefits. For retirees who have retired before April 25, 1996, such
     benefits are not conditioned upon retiree contributions.

     At December 31, 1998, the actuarial and accrued liabilities for
     postretirement health care and life insurance benefits, none of which have
     been funded, were as follows:

                                                                 DECEMBER 31,
                                                                     1998
                                                                   --------

Accumulated Postretirement Benefit Obligation (APBO):
    APBO at beginning of period                                 $ 1,273,995
    Service cost                                                     36,872
    Interest cost                                                    53,311
    Actuarial loss                                                   63,335
    Benefits paid                                                     (556)
                                                                  ---------

    APBO at end of period                                       $ 1,426,957
                                                                ===========

Funded status as of December 31, 1998:
    Funded status                                               $ 1,426,957
    Unrecognized net actuarial loss                                (37,836)
    Unrecognized prior service cost                                 260,780
                                                                  ---------

    Accrued postretirement benefit cost                         $ 1,649,901
                                                                ===========

    Effect of 1% increase in health care cost trend rate--
        accumulated postretirement benefit obligation           $   207,000
                                                                ===========

    Effect of 1% decrease in health care cost trend rate--
        accumulated postretirement benefit obligation           $ (168,500)
                                                                ===========


     Net periodic postretirement benefit cost is included in the following
components:
<TABLE>
<CAPTION>

                                               SEVEN               YEARS ENDED MAY 31,
                                            MONTHS ENDED   __________________________________
                                          DECEMBER 31, 1998   1998        1997         1996
                                          -----------------  --------    --------     --------
<S>                                           <C>          <C>          <C>          <C>      
Service cost--benefits attributed to
    service during period                     $  36,872    $  63,209    $  59,341    $  72,156
Interest cost on accumulated postretirement
    Benefit obligation                           53,311       91,391      101,806      102,074
Amortization of prior service cost              (20,557)     (35,240)        --           --
Amortization of (gains) losses                    2,861        4,904      (17,141)      13,845
                                              ---------    ---------    ---------    ---------

                Net periodic postretirement
                    benefit cost              $  72,487    $ 124,264    $ 144,006    $ 188,075
                                              =========    =========    =========    =========

</TABLE>



<PAGE>



     The accumulated postretirement benefit obligation was determined using the
     projected unit cost method, as required by SFAS No. 106, and a discount
     rate of 6.74% in 1998, 8.00% in 1997 and 7.50% in 1996. The assumed rate of
     increase in future health care costs was 9.0% in 1998, 9.50% in 1997 and
     10.00% in 1996, gradually decreasing to 5.0% in the year 2006 and remaining
     at that level thereafter.

     401(K) PLAN

     The Bank has a 401(k) plan (the "401(k) Plan") covering full-time employees
     who satisfy the eligibility requirements and elect to participate in the
     401(k) Plan. The 401(k) Plan provides for employer matching contributions
     subject to a specified maximum. Amounts charged to operations for the seven
     months ended December 31, 1998 and the years ended May 31, 1998, 1997 and
     1996 were approximately $40,000, $110,000, $86,000 and $65,000,
     respectively.

     BENEFIT RESTORATION PLAN

     The Bank adopted the Benefit Restoration Plan of The Warwick Savings Bank
     ("BRP") to provide certain designated employees with the benefits that
     would be due to such employees under the Pension Plan, the 401(k) Plan and
     the ESOP if such benefits were not limited under the Internal Revenue Code.
     Expense related to the BRP included in the consolidated statements of
     income is approximately $98,000 and $70,000 for the seven months ended
     December 31, 1998 and the year ended May 31, 1998, respectively.

     EMPLOYEE STOCK OWNERSHIP PLAN

     The Company has established an ESOP for eligible employees. Generally,
     full-time employees of the Company or the Bank who have been credited with
     at least 1,000 hours during a twelve-month period are eligible to
     participate.

     The ESOP borrowed $8,509,774 at an interest rate of 8.00% from the Company
     and used the funds to purchase 528,523 shares of the Company's common stock
     in connection with the Conversion. Generally, the loan is repaid
     principally from the Bank's discretionary contributions to the ESOP over a
     10-year period. At December 31, 1998 and May 31, 1998, the loan had an
     outstanding balance of $7,163,741 and $8,014,720, respectively. Shares
     purchased with the loan proceeds are held in a suspense account for
     allocation among participants as the loan is paid. Contributions to the
     ESOP and shares released from the loan collateral in an amount proportional
     to the repayment of the ESOP loan are allocated among participants on the
     basis of compensation, as described in the plan, in the year of allocation.
     Benefits generally become 100% vested after seven years of vesting service
     and are immediately vested on death, retirement or disability. In addition,
     in the event of a change in control, as defined in the plan, any unvested
     portion of benefits shall vest immediately. Forfeitures are used to reduce
     employer contributions. Benefits are payable upon death, retirement,
     disability, or separation from service based on vesting status and share
     allocations made.

     As of December 31, 1998 and May 31, 1998, 52,824 and 31,016 shares,
     respectively, were allocated to participants and 0 and 13,213 shares,
     respectively, were committed to be released. As shares are released from
     collateral, the shares become outstanding for earnings per share
     computations. As of December 31, 1998, the fair market value of the 444,683
     unearned shares was $6,559,074.

     RECOGNITION AND RETENTION PLAN

     The Company maintains the Recognition and Retention Plan of Warwick
     Community Bancorp, Inc. (the "RRP"). The RRP acquired an aggregate of
     264,261 shares of the Company's common stock in open market purchases, all
     of which have been awarded to eligible directors, directors emeritus,
     officers and employees of the Company and the Bank. Such amounts represent
     deferred compensation and have been accounted for as a reduction of
     stockholders' equity. Awards generally vest at a rate of 20% per year,
     commencing one year from the date of award. Awards become 100% vested upon
     termination of employment due to death or disability.

     The Company recorded expenses for the ESOP and RRP of $921,630 and
     $729,529, respectively, for the seven months ended December 31, 1998 and
     for the year ended May 31, 1998.



<PAGE>




     STOCK OPTION PLAN

     The Company maintains the Stock Option Plan of Warwick Community Bancorp,
     Inc. (the "Stock Option Plan"). Under the Stock Option Plan, stock options
     (which generally expire ten years from the date of grant) have been granted
     to eligible employees, directors and officers of the Company and the Bank.
     Each option entitles the holder to purchase one share of the Company's
     common stock at an exercise price equal to the fair market value of the
     stock at the date of grant. Options generally become exercisable at a rate
     of 20% per year, commencing one year from the date of grant. However, all
     options become 100% exercisable upon termination of employment due to death
     or disability.

     The following table presents options granted, exercised or expired during
     the seven months ended December 31, 1998:

                                             SHARES      OPTION PRICE PER SHARE
                                             ------      ----------------------

Balance at May 31, 1998                          --               $  --
Options granted                             561,552               17.00
Options exercised                                --                  --
Options expired or terminated                    --                  --
-------------------------------------------------------------------------------

Balance at December 31, 1998                561,552              $17.00
-------------------------------------------------------------------------------

     No options are currently exercisable. The fair value of the options granted
     during 1998 was $6.96. The fair value of each option was estimated on the
     date granted using the Black-Scholes option pricing model. The following
     weighted-average assumptions were used for grants in 1998: risk free
     interest rate of 5.59%; expected dividend yield of $.08; expected life of
     seven years; and expected volatility of 25.68%.

     The Company accounts for these plans under APB Opinion No. 25, under which
     no compensation cost has been recognized. Had compensation cost for these
     plans been determined consistent with FASB Statement No. 123, the Company's
     net income and earnings per share would have been reduced to the following
     pro forma amounts:

                                                 SEVEN MONTHS ENDED
                                                  DECEMBER 31, 1998
                                                   ---------------

Net Income (Loss):             As Reported        $   1,647,424
                               Pro Forma            (2,262,454)
Basic EPS:                     As Reported                  .28
                               Pro Forma                  (.38)



<PAGE>



12.  BORROWED FUNDS AND REPURCHASE AGREEMENTS

     Securities sold under agreements to repurchase at December 31, 1998 and May
     31, 1998 and 1997 which were transacted with a major securities firm are as
     follows:
<TABLE>
<CAPTION>

         DECEMBER 31, 1998                    MAY 31, 1998                        MAY 31, 1997
   -----------------------------      ----------------------------       ---------------------------------
   AMOUNT      RATE     MATURITY      AMOUNT       RATE   MATURITY       AMOUNT       RATE        MATURITY
   ------      ----     --------      ------       ----   --------       ------       ----        --------

<S>            <C>      <C>         <C>            <C>     <C>          <C>            <C>        <C>
$ 4,700,000    6.32%    05/24/99    $   490,000    5.64%   06/15/98     $   705,000    5.69%      06/18/97
  1,000,000     6.65    06/19/99      4,000,000     5.64   06/15/98       4,685,000     5.69      06/18/97
  4,700,000     6.65    06/30/99      1,300,000     5.95   06/19/98       1,300,000     6.00      06/19/97
  4,700,000     6.53    08/02/99      1,300,000     6.40   06/19/98       1,300,000     6.40      06/19/98
    365,000     5.10    09/15/00      5,000,000     5.69   06/30/98       4,700,000     6.65      07/01/98
  3,000,000     5.10    09/15/00      4,700,000     6.32   05/24/99       1,000,000     6.65      06/19/99
  1,945,000     5.22    09/17/01      1,000,000     6.65   06/19/99       4,700,000     6.32      05/24/99
  4,900,000     4.70    10/05/01      4,700,000     6.65   06/30/99       4,700,000     6.53      08/01/99
 ----------                                                              ----------
$25,310,000                           4,700,000     6.53   08/02/99     $23,090,000
 ----------                          ----------                          ----------
 ----------                                                              ----------
                                    $27,190,000
                                     ==========
</TABLE>
   Information relating to borrowings under repurchase agreements is summarized
as follows:
<TABLE>
<CAPTION>

                                                                               YEARS ENDED MAY 31,
                                                SEVEN MONTHS ENDED    _______________________________________
                                                 DECEMBER 31, 1998    1998           1997            1996
                                                 -----------------    ----           ----            ----
<S>                                             <C>                <C>           <C>            <C>        
Average balance during the year                 $25,907,593        $24,056,648   $19,685,315    $   101,075
Average interest rates during the year                5.87%              6.18%         6.20%          6.32%
Maximum month-end balance
    during the year                             $26,370,000        $27,500,000   $23,300,000    $ 4,700,000
Securities underlying agreement at year-end:
        Amortized cost                           35,638,720         37,729,203    25,470,851      5,000,000
        Estimated market value                   35,925,935         38,071,150    25,508,437      4,981,000
</TABLE>




<PAGE>



   Federal Home Loan Bank advances are as follows at December 31, 1998 and May
31, 1998 and 1997:

<TABLE>
<CAPTION>
DECEMBER 31, 1998:                      AVAILABLE         OUTSTANDING             RATE        MATURITY
                                         -------           --------              -------      ---------
<S>                                     <C>               <C>                     <C>                  
    Revolving line of credit            $16,982,150       $ 5,230,000             5.13%           Daily
    Repricing line of credit             16,982,150        10,000,000              5.63         Monthly
    Term loans                                                250,000              6.96        06/19/00
                                                            5,000,000              5.79        12/18/01
                                                            4,000,000              5.26        11/18/03
                                                           10,000,000              5.47        05/29/08
                                                            5,000,000              5.63        04/30/08
                                                            5,000,000              5.26        04/30/08
                                                           10,000,000              5.48        02/26/08
                                                           20,000,000              5.06        01/30/08
                                                            5,000,000              5.15        11/12/08
                                                           ----------

                                                          $79,480,000
                                                           ==========
</TABLE>

<TABLE>
<CAPTION>
MAY 31, 1998:                            AVAILABLE           OUTSTANDING      RATE      MATURITY
                                         ---------           -----------      ----      --------
<S>                                     <C>               <C>                <C>        <C>     
    Revolving line of credit            $16,982,150       $ 7,600,000        5.81%           Daily
    Repricing line of credit             16,982,150                --                      Monthly
    Term loans                                                250,000         6.96        06/19/00
                                                            5,000,000         5.79        12/18/01
                                                           20,000,000         5.02        01/30/08
                                                           10,000,000         5.79        02/26/08
                                                            5,000,000         5.26        04/30/08
                                                            5,000,000         5.63        04/30/08
                                                           10,000,000         5.47        05/29/01
                                                           ----------

                                                          $62,850,000
                                                           ==========
</TABLE>

<TABLE>
<CAPTION>


MAY 31, 1997:                            AVAILABLE           OUTSTANDING      RATE      MATURITY
                                         ---------           -----------      ----      --------
<S>                                     <C>               <C>                <C>         <C>
    Revolving line of credit            $14,417,000       $        --           --%           Daily
    Repricing line of credit             14,417,000                --           --         Monthly
    Term loans                                                250,000         6.96        06/19/00
                                                            5,000,000         5.79        12/18/01
                                                          -----------

                                                          $ 5,250,000
                                                          ===========
</TABLE>


     FHLB advances are made at fixed rates and are collateralized by all FHLB
     stock owned by the Bank in addition to a blanket pledge of eligible assets
     in an amount required to be maintained so that the estimated fair value of
     such eligible assets exceeds, at all times, 110% of the outstanding
     advances.

13.  REGULATORY CAPITAL REQUIREMENTS

     The Company is subject to various regulatory capital requirements
     administered by the federal banking agencies. Failure to meet minimum
     capital requirements can result in the initiation of certain mandatory and
     possibly additional discretionary actions by regulators that, if
     undertaken, could have a direct material effect on the Company's financial
     statements. Under capital adequacy guidelines and the regulatory framework
     for prompt corrective action, the Company must meet specific capital
     guidelines that involve quantitative measures of the Company's assets,
     liabilities, and certain off-balance sheet items calculated under
     regulatory accounting practices. The Company's capital amounts and
     classification are also subject to qualitative judgments by the regulators
     about components, risk weightings, and other factors.




<PAGE>



     Quantitative measures established by regulation to ensure capital adequacy
     require the Company and the Bank to maintain minimum amounts and ratios
     (set forth in the table below) of total and Tier 1 capital (as defined in
     the regulations) to risk weighted assets (as defined) and of Tier 1 capital
     (as defined) to average assets (as defined). Management believes, as of
     December 31, 1998, that the Company and the Bank meet all capital adequacy
     requirements to which it is subject.

     The most recent notification from the Federal Deposit Insurance Corporation
     categorized the Bank as well capitalized under the regulatory framework for
     prompt corrective action. To be categorized as well capitalized, the Bank
     must maintain minimum total risk-based, Tier 1 risk-based, Tier 1 leverage
     ratios as set forth in the table. There are no conditions or events since
     that notification that management believes have changed the institution's
     category.

     The Bank's actual capital amounts and ratios are presented in the following
     table (000's omitted):

<TABLE>
<CAPTION>
                                                                                           TO BE WELL
                                                                                        CAPITALIZED UNDER
                                                               FOR CAPITAL ADEQUACY     PROMPT CORRECTIVE
                                               ACTUAL                PURPOSES           ACTION PROVISIONS
                                           ---------------       ----------------       -----------------
                                         AMOUNT      RATIO       AMOUNT       RATIO   AMOUNT        RATIO
                                         ------      -----       ------       -----   -------      ------
<S>                                       <C>        <C>         <C>           <C>     <C>          <C>  
As of December 31, 1998:
    Total Capital
          (to risk weighted assets)       $55,538    23.90%      $17,918      >8.0%    $22,937     >10.0%
    Tier 1 Capital
          (to risk weighted assets)        51,106     22.82        8,959       >4.0     13,438       >6.0
    Tier 1 Capital
          (to average assets)              51,106     11.99       17,055       >4.0     21,319       >5.0
</TABLE>


<TABLE>
<CAPTION>

                                                                                           TO BE WELL
                                                                                        CAPITALIZED UNDER
                                                               FOR CAPITAL ADEQUACY     PROMPT CORRECTIVE
                                               ACTUAL                PURPOSES           ACTION PROVISIONS
                                           ---------------       ----------------       -----------------
                                         AMOUNT      RATIO       AMOUNT       RATIO   AMOUNT        RATIO
                                         ------      -----       ------       -----   -------      ------
<S>                                       <C>        <C>         <C>           <C>     <C>          <C>  
As of May 31, 1998:
    Total Capital
          (to risk weighted assets)       $54,910    26.27%      $16,721       >8.0%   $20,901      >10.0%
    Tier 1 Capital
          (to risk weighted assets)        53,397     25.55        8,360       >4.0     12,540       >6.0
    Tier 1 Capital
          (to average assets)              53,397     13.91       15,352       >4.0     19,190       >5.0

</TABLE>


<TABLE>
<CAPTION>
                                                                                                   TO BE WELL
                                                                                                CAPITALIZED UNDER
                                                               FOR CAPITAL ADEQUACY             PROMPT CORRECTIVE
                                               ACTUAL                PURPOSES                   ACTION PROVISIONS
                                           ---------------       ----------------               -----------------
                                         AMOUNT      RATIO       AMOUNT       RATIO           AMOUNT        RATIO
                                         ------      -----       ------       -----           ------        -----
<S>                                       <C>        <C>         <C>          <C>             <C>          <C>  
As of May 31, 1997:
    Total Capital
          (to risk weighted assets)       $28,726     20.33%     $11,302      >8.0%           $14,127      >10.0%
    Tier 1 Capital                                                                                                   
          (to risk weighted assets)        27,495     19.46        5,651      >4.0              8,476      > 6.0
    Tier 1 Capital                                                                                                   
          (to average assets)              27,495      9.53       11,535      >4.0             14,419      > 5.0
</TABLE>


<PAGE>


   The Company's actual capital amounts and ratios are presented in the
following table (000's omitted):

<TABLE>
<CAPTION>
                                                                                                      TO BE WELL
                                                                                                   CAPITALIZED UNDER
                                                               FOR CAPITAL ADEQUACY                PROMPT CORRECTIVE
                                               ACTUAL                PURPOSES                      ACTION PROVISIONS
                                           ---------------       ----------------                  -----------------
                                         AMOUNT      RATIO       AMOUNT       RATIO              AMOUNT        RATIO
                                         ------      -----       ------       -----              ------        -----
<S>                                       <C>        <C>         <C>          <C>                <C>           <C>  
As of December 31, 1998:
    Total Capital
          (to risk weighted assets)       $84,796    36.94%      $18,362      >8.0%              $22,953       >10.0%
    Tier 1 Capital
          (to risk weighted assets)        82,364     35.88        9,181      >4.0                13,772       > 6.0
    Tier 1 Capital
          (to average assets)              82,364     18.87       17,462      >4.0                21,828       > 5.0
</TABLE>


<TABLE>
<CAPTION>
                                                                                           TO BE WELL
                                                                                        CAPITALIZED UNDER
                                                               FOR CAPITAL ADEQUACY     PROMPT CORRECTIVE
                                               ACTUAL                PURPOSES           ACTION PROVISIONS
                                           ---------------       ----------------       -----------------
                                         AMOUNT      RATIO       AMOUNT       RATIO     AMOUNT      RATIO
                                         ------      -----       ------       -----     ------      -----
<S>                                       <C>        <C>         <C>          <C>       <C>         <C>  
As of May 31, 1998:
    Total Capital
          (to risk weighted assets)       $86,498    40.78%      $16,968      >8.0%     $21,211     >10.0%
    Tier 1 Capital
          (to risk weighted assets)        84,985     40.07        8,484      >4.0       12,726     > 6.0
    Tier 1 Capital
          (to average assets)              84,985     21.44       15,855      >4.0       19,818     > 5.0
</TABLE>

14.  COMMITMENTS AND CONTINGENCIES

     Lease Commitments

     Rental expense included in the statements of income was approximately
     $89,000, $281,000, and $267,000 for the seven months ended December 31,
     1998 and for the years ended May 31, 1998 and 1997, respectively.

     In 1993, the Bank entered into an agreement with a company to provide data
     processing services. Such agreement expires in July 2000. The commitment
     for future payments fluctuates with the level of service provided. The
     costs incurred in connection with this agreement are included in data
     processing expenses in the accompanying statements of income.




<PAGE>



     Loan Commitments

     Loan commitments and unused lines of credit as of December 31, 1998 are as
     follows (with comparative totals as of May 31, 1998):

<TABLE>
<CAPTION>
                                                    COMMITMENTS       UNUSED
                                                   TO ORIGINATE      LINES OF
                                                       LOANS          CREDIT             TOTAL
                                                     ---------        ------            ------
<S>                                                <C>            <C>                   <C>        
Mortgage loans                                     $42,356,606    $            --       $42,356,606
Construction loans                                  16,449,066                 --        16,449,066
Commercial loans                                        20,000          5,358,847         5,378,847
Other loans                                          8,785,813                 --         8,785,813
                                                    ----------          ---------        ----------

        Total as of December 31, 1998              $67,611,485        $ 5,358,847       $72,970,332
                                                    ==========          =========        ==========

        Total as of May 31, 1998                   $55,496,658        $ 5,558,603       $61,055,261
                                                    ==========          =========        ==========
</TABLE>


     Commitments to extend credit are agreements to lend to a customer as long
     as there is no violation of any condition established in the contract.
     Commitments generally have fixed expiration dates or other termination
     clauses and may require payment of a fee. Since commitments may expire, the
     total commitment amounts do not necessarily represent future cash
     requirements.

     The Banks exposure to credit loss in the event of nonperformance by the
     other party to the loan commitments is represented by their contractual
     amount. The Bank controls the credit risk of loan commitments through
     credit approvals, limits and monitoring procedures. The amount of
     collateral obtained, if deemed necessary, is based on management's credit
     evaluation of the borrower.

     Concentration of Credit Risk

     The Bank grants residential mortgage loans, construction loans, commercial
     loans and consumer loans to customers located primarily in Orange County,
     New York and the surrounding counties of Rockland and Dutchess in New York.
     The borrowers' ability to repay loan principal and accrued interest is
     dependent upon, among other things,
     the economic conditions prevailing in the Bank's lending area.

     Hedging

     In the normal course of business, the Bank uses off-balance sheet financial
     instruments primarily as part of mortgage banking hedging strategies. Such
     instruments generally include put options purchased and forward commitments
     to sell mortgage loans. As a result of interest rate fluctuations, these
     off-balance sheet financial instruments will develop unrealized gains or
     losses that mitigate changes in the underlying hedged portion of the
     balance sheet. When effectively used, these off-balance sheet financial
     instruments are designed to moderate the impact on earnings as interest
     rates move up or down.

     Litigation

     The Bank is involved in legal proceedings incurred in the normal course of
     business. In the opinion of management, none of these proceedings are
     expected to have a material effect on the consolidated financial position
     or results of operations of the Bank.




<PAGE>



15.  DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS

     The following methods and assumptions were used to estimate the fair value
     of each class of financial instruments for which it is practicable to
     estimate that value:

     CASH AND DUE FROM BANKS AND FEDERAL FUNDS SOLD

     For these short-term instruments, the carrying amount is a reasonable
     estimate of fair value.

     ACCRUED INTEREST AND FHLB STOCK

     The carrying amount is a reasonable estimate of fair value.

     SECURITIES

     Fair values for securities are based on quoted market prices or dealer
     quotes. If a quoted market price is not available, fair value is estimated
     using quoted market prices for similar securities.

     LOANS, NET

     For certain homogeneous categories of loans, such as some residential
     mortgages and other consumer loans, fair value is estimated using the
     quoted market prices for securities backed by similar loans, adjusted for
     differences in loan characteristics.

     For other loan types, fair value is based on the credit and interest rate
     characteristics of individual loans. These loans are stratified by type,
     maturity, interest rate, underlying collateral where applicable, and credit
     quality ratings. Fair value is estimated by discounting scheduled cash
     flows through estimated maturities using discount rates which in
     management's opinion best reflect current market interest rates that would
     be charged on loans with similar characteristics and credit quality. Credit
     risk concerns are reflected by adjusting cash flow forecasts, by adjusting
     the discount rate or by adjusting both.

     DEPOSITOR ACCOUNTS

     The fair value of demand deposits, savings accounts, and certain money
     market deposits is the amount payable on demand at the reporting date. The
     fair value of fixed-maturity certificates of deposit is estimated using the
     rates currently offered for deposits of similar remaining maturities.

     BORROWINGS

     The estimated fair value of FHLB advances and borrowings under repurchase
     agreements is based on the discounted value of their contractual cash
     flows. The discount rate used in the present value computation is estimated
     by comparison to the current interest rates charged by the FHLB and other
     major securities firms for borrowings of similar remaining maturities.

     MORTGAGE ESCROW FUNDS AND BORROWED FUNDS

     The carrying amount is a reasonable estimate of fair value.




<PAGE>



     The following is a summary of the carrying values and estimated fair values
     of the Bank's financial assets and liabilities at December 31, 1998 and May
     31, 1998 and 1997 (000's omitted):
<TABLE>
<CAPTION>

                                            DECEMBER 31, 1998       MAY 31, 1998         MAY 31, 1997
                                            -----------------       ------------         ------------
                                          CARRYING     FAIR     CARRYING     FAIR     CARRYING     FAIR
                                            VALUE      VALUE      VALUE      VALUE      VALUE      VALUE
                                           -------    -------    -------    -------    -------    -------
<S>                                       <C>        <C>        <C>        <C>        <C>        <C>     
Financial assets:
    Cash on hand and in banks             $ 10,511   $ 10,511   $ 11,190   $ 11,190   $ 10,367   $ 10,367
    Federal funds sold                          --         --         --         --      1,315      1,315
    Securities                             155,490    155,458    170,749    170,702    126,393    126,417
    Loans, net                             261,463    262,666    212,665    215,186    138,323    139,126
    Accrued interest receivable              2,506      2,506      2,463      2,463      2,097      2,097
    Federal Home Loan Bank stock             4,633      4,633      3,393      3,393      1,731      1,731
Financial liabilities:
    Demand, NOW, statement
        savings and passbook, and
        money market accounts             $175,891   $175,891   $151,815   $151,815   $146,173   $146,173
    Time certificate accounts               70,995     71,090     70,907     70,907     75,038     75,003
    Mortgage escrow funds                    1,965      1,965      2,266      2,266      1,398      1,398
    Borrowed funds                         104,790    107,142     90,040     90,040     28,340     28,340
    Accrued interest payable                   736        736      1,486      1,486      1,211      1,211
</TABLE>

16.  WARWICK COMMUNITY BANCORP, INC.-PARENT COMPANY ONLY FINANCIAL STATEMENTS

     The following statements of financial condition as of December 31, 1998 and
     May 31, 1998, the statements of income for the seven months ended December
     31, 1998 and for the year ended May 31, 1998, and the related statements of
     cash flows for the seven months ended December 31, 1998 and the year ended
     May 31, 1998, reflect the Company's investment in its wholly owned
     subsidiary, the Bank, using the equity method of accounting.




<PAGE>



<TABLE>
<CAPTION>
                                         STATEMENTS OF FINANCIAL CONDITION
                                       (000'S OMITTED EXCEPT SHARE AMOUNTS)

                                                                    DECEMBER 31, 1998MAY 31, 1998
                                                                      -------------   ----------

<S>                                                                      <C>             <C>     
                    ASSETS
Assets:
    Cash and cash equivalents                                            $ 18,941        $ 19,976
    Investment securities available for sale                                4,503           2,901
    Accrued interest receivable                                                13             262
    Other assets                                                              819             783
    ESOP loan to the trustee of the ESOP                                    7,164           8,015
    Investment in The Warwick Savings Bank                                 53,044          54,503
                Total assets                                             $ 84,484        $ 86,440
                                                                         ========        ========

          LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
    Other liabilities                                                    $     --        $    252
    Income taxes payable                                                      247              39
                                                                         --------        --------

                Total liabilities                                             247             291
                                                                         --------        --------

Stockholders' equity:
    Preferred stock, $.01
        par value; 5,000,000
        shares authorized; none issued                                       --               --
    Common stock, $.01
        par value; 15,000,000
        shares authorized,
        6,606,548 shares issued                                                66              66
    Additional paid-in capital                                             63,374          63,386
    Retained earnings -
        subject to restrictions                                            30,458          29,355
    Accumulated other comprehensive income, net                             1,727           1,165
    Less - Unallocated common stock held by ESOP                          (7,208)         (7,823)
    Less - Unearned common stock held by RRP                              (4,180)              --
                                                                         --------        --------

                Total stockholders' equity                                 84,237          86,149
                                                                         --------        --------

                Total liabilities and stockholders' equity               $ 84,484        $ 86,440
                                                                         ========        ========

</TABLE>




<PAGE>



<TABLE>
<CAPTION>
                                       STATEMENTS OF INCOME (000'S OMITTED)

                                                                SEVEN MONTHS ENDED      YEAR ENDED
                                                                 DECEMBER 31, 1998     MAY 31, 1998
                                                                   -------------        ----------
<S>                                                                   <C>                  <C>    
Interest income:
    ESOP loan to the trustee of the ESOP                              $   379              $   262
    Investment securities                                                 163                   24
                                                                      -------              -------
                Total interest income                                     542                  286
Interest expense                                                           --                    --
                                                                      -------              -------
    Net interest income before provision for loan losses                  542                  286
Provision for loan losses                                                  --                    --
                                                                      -------              -------
    Net interest income after provision for loan losses                   542                  286
                                                                      -------              -------
Non-interest income:
    Gain on sale of investment securities                                  --                   28
Non-interest expense                                                      116                2,054
                                                                      -------              -------
    Income (loss) before provision for income taxes
    and undistributed earnings of subsidiary bank                         426              (1,740)
Equity in undistributed earnings of subsidiary bank                     1,431                2,941
Income tax expense/(benefit)                                              210                (660)
                                                                      -------              -------
    Net income                                                        $ 1,647              $ 1,861
                                                                      =======              =======
</TABLE>


<TABLE>
<CAPTION>
                                             STATEMENTS OF CASH FLOWS
                                                  (000'S OMITTED)
                                                                        SEVEN MONTHS ENDED    YEAR ENDED
                                                                         DECEMBER 31, 1998   MAY 31, 1998
                                                                          --------------      ----------
<S>                                                                           <C>               <C>     
Cash flows from operating activities:
    Net income                                                                 $ 1,647          $  1,861
    Adjustments to reconcile net income to net cash
        provided by operating activities-
            Undistributed earnings of subsidiary bank                           (1,431)           (2,941)
            Charitable contribution to The Warwick Savings
                Foundation                                                          --             1,924
            Gain on sale of securities                                              --               (30)
    (Increase) decrease in assets-
        Accrued interest receivable                                                249              (262)
        Other assets                                                               (36)             (783)
    Increase (decrease) in liabilities-
        Other liabilities                                                         (252)              252
        Income taxes payable                                                       208                39
                                                                              --------          --------
                Net cash provided by operating activities                          385                60
                                                                              --------          --------
Cash flows from investing activities:
    Payment made to purchase 100% of the outstanding
        stock of the Bank                                                           --           (30,743)
    Purchases of securities available for sale                                  (1,726)           (4,592)
    Proceeds from sale of securities available for sale                             --             1,781
                                                                              --------          --------
                Net cash used in investing activities                           (1,726)          (33,554)
                                                                              --------          --------
Cash flows from financing activities:
    (Increase) decrease in ESOP loan receivable                                    851            (8,015)
    Proceeds from issuance of common stock                                          --            61,485
    Dividends paid on common stock                                                (545)               --
                                                                              --------          --------
                Net cash provided by financing activities                          306            53,470
                                                                              --------          --------
                Net increase (decrease) in cash and cash equivalents            (1,035)           19,976
Cash and cash equivalents, beginning of year                                    19,976                --
                                                                              --------          --------
Cash and cash equivalents, end of year                                        $ 18,941          $ 19,976
                                                                              ========          ========
</TABLE>


17.  QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)




<PAGE>



     The following is a summary of the quarterly results of operations for the
     period ended December 31, 1998 and the year ended May 31, 1998 (000's
     omitted):

<TABLE>
<CAPTION>
                                                               THREE MONTHS ENDED
                                                   ------------------------------------------
                                                   DECEMBER 31,SEPTEMBER 30,JUNE 30,     MARCH 31,
                                                       1998    1998           1998         1998
                                                     ------------------      -------     ---------
<S>                                               <C>          <C>            <C>          <C>    
Total interest income                             $ 7,582      $ 7,201        $ 7,267      $ 6,364
Total interest expense                              3,369        3,184          2,778        2,608
Net interest income                                 4,213        4,017          4,489        3,756
Provision for loan losses                             125          125            125          125
Non-interest income                                   813        1,044          1,123          767
Non-interest expense and
  provision for income taxes                        4,304        4,202          4,126        3,468
Net income                                            597          734          1,361          930
Basic earnings per common share                       .10          .12            .22          .16
Diluted earnings per common share                     .10          .12            .22          .16
</TABLE>

<TABLE>
<CAPTION>
                                                               THREE MONTHS ENDED
                                                   ------------------------------------------
                                                      MAY 31,FEBRUARY 28, NOVEMBER 30,  AUGUST 31,
                                                       1998    1998           1997         1997
                                                     ------------------      -------     ---------

<S>                                               <C>          <C>            <C>          <C>    
Total interest income                             $ 7,046      $ 6,208        $ 5,291      $ 5,232
Total interest expense                              2,844        2,335          2,434        2,359
Net interest income                                 4,202        3,873          2,857        2,873
Provision for loan losses                             125          104             60          303
Non-interest income                                   987          764            711          678
Non-interest expense and
provision for income taxes                          3,835        5,133          2,814        2,710
Net income                                          1,229        (600)            694          538
Basic earnings per common share                       .20        (.10)            N/A          N/A
Diluted earnings per common share                     .20        (.10)            N/A          N/A

</TABLE>



<PAGE>



18.  FINANCIAL INFORMATION (UNAUDITED)

     The following is unaudited specified financial information as of and for
     the seven months ended December 31, 1997 (000's omitted):

                                                                 DECEMBER 31,
                                                                     1997
                                                                   ---------

Assets:
    Cash and cash equivalents                                     $  22,543
    Securities                                                      127,563
    Loans, net                                                      180,197
    Other assets                                                     10,506
                                                                  ---------

    Total assets                                                  $ 340,809
                                                                  =========

Liabilities and Stockholders' Equity
    Depositor accounts                                            $ 213,514
    Borrowed funds                                                   28,005
    Other liabilities                                                13,101
                                                                  ---------

    Total liabilities                                               254,620
    Stockholders' Equity                                             86,189
                                                                  ---------

    Total liabilities and
        stockholders' equity                                      $ 340,809
                                                                  =========


                                                                 FOR THE SEVEN
                                                                 MONTHS ENDED
                                                                 DECEMBER 31,
                                                                     1997
                                                                   ---------

Total interest income                                             $  12,679
Total interest expense                                                5,592
Net interest income                                                   7,087
Provision for loan losses                                               384
Non-interest income                                                   1,582
Non-interest expense and
    provision for income taxes                                        8,397
Net (loss)                                                       $    (112)





<PAGE>


REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors & Stockholders of
Warwick Community Bancorp, Inc:

We have audited the accompanying consolidated statements of financial condition
of Warwick Community Bancorp, Inc. and subsidiaries as of December 31, 1998 and
May 31, 1998 and 1997, and the related consolidated statements of income,
changes in stockholders' equity and cash flows for the seven months ended
December 31, 1998 and for each of the years in the three-year period ended May
31, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Warwick Community Bancorp, Inc.
and subsidiaries as of December 31, 1998 and May 31, 1998 and 1997, and the
results of their operations and their cash flows for the seven months ended
December 31, 1998 and for each of the years in the three-year period ended May
31, 1998, in conformity with generally accepted accounting principles.

                                                 /s/ Arthur Andersen LLP

New York, New York
February 3, 1999





<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 10, inclusive, and under the caption
"Compliance with Section 16(a) of the Exchange Act" on page 21 of the
Registrant's Proxy Statement ("Proxy Statement") for its 1999 Annual Meeting of
Shareholders to be held on April 20, 1999 and is incorporated herein by
reference.


ITEM 11. EXECUTIVE COMPENSATION

         The information required by this item appears on pages 14 through 20,
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 pages 3 and 4, inclusive, 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
"Transactions with Certain Related Persons" on pages 20 and 21, inclusive, of
the Registrant's Proxy Statement and is
incorporated herein by reference.




                                      -43-


<PAGE>


                                     PART IV

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

(a)      1.       The following consolidated financial statements of the
                  Registrant and its subsidiaries, and the independent auditors'
                  report thereon, are filed as a part of this report:

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

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

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

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

                           Notes to Consolidated Financial Statements


         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.       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)

                  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 (2)

                  10.2     Employment Agreement by and between Warwick Community
                           Bancorp, Inc. and Ronald J. Gentile (2)



                                      -44-


<PAGE>



                  10.3     Employment Agreement by and between Warwick Community
                           Bancorp, Inc. and Arthur W. Budich (2)

                  10.4     Employment Agreement by and between Warwick Community
                           Bancorp, Inc. and Nancy L. Sobotor-Littell (2)

                  10.5     Employee Retention Agreement by and between The
                           Warwick Savings Bank and Laurence D. Haggerty (2)

                  10.6     Employee Retention Agreement by and between The
                           Warwick Savings Bank and Donna M. Lyons (2)

                  10.7     Employee Retention Agreement by and between The
                           Warwick Savings Bank and Barbara A. Rudy (2)

                  10.8     Employee Retention Agreement by and between The
                           Warwick Savings Bank and Arthur S. Anderson (2)

                  10.9     Recognition and Retention Plan of Warwick Community
                           Bancorp, Inc. (3)

                  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. (2)

                  10.11    Stock Option Plan of Warwick Community Bancorp,
                           Inc.(3)

                  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
                           (2)

                  10.14    Loan Agreement by and between the Warwick Community
                           Bancorp, Inc. Employee Stock Ownership Trust and
                           Warwick Community Bancorp, Inc.(2)

                  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 (2)

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

                  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 (2)

                  10.19    First Amendment to Employment Agreement by and
                           between Warwick Community Bancorp, Inc. and Timothy
                           A. Dempsey.

                  10.20    First Amendment to Employment Agreement by and
                           between Warwick Community Bancorp, Inc. and Ronald J.
                           Gentile

                  10.21    First Amendment to Employment Agreement by and
                           between Warwick Community Bancorp, Inc. and Arthur W.
                           Budich

                  10.22    First Amendment to Employment Agreement by and
                           between Warwick Community Bancorp, Inc. and Nancy L.
                           Sobotor-Littell

                  11.1     Statement re: Computation of per share earnings

                  21.1     Subsidiaries of the Registrant



                                      -45-


<PAGE>



                  27.1     Financial Data Schedule (EDGAR filing only)

                  99.1     Proxy Statement for the 1999 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 Exhibits to the Registrant's
         Annual Report on Form 10-K for the fiscal year ended May 31, 1998.

(3)      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.


                                      -46-


<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: March 30, 1999                   BY: /s/ Timothy A. Dempsey
                                           -------------------------------------
                                                Timothy A. Dempsey
                                                Chairman of the Board and
                                                Chief Executive Officer




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


                                      -47-


<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                          Chairman of the Board and Chief                March 30, 1999
-------------------------------------           Executive Officer and Director
Timothy A. Dempsey
                                                President and Chief Operating                  March 30, 1999
/s/ Ronald J. Gentile                           Officer and Director
-------------------------------------
Ronald J. Gentile
                                                Director                                       March 30, 1999
/s/ Frances M. Gorish
-------------------------------------
Frances M. Gorish
                                                Director                                       March 30, 1999
/s/ R. Michael Kennedy
-------------------------------------
R. Michael Kennedy
                                                Director                                       March 30, 1999
/s/ Fred M. Knipp
-------------------------------------
Fred M. Knipp
                                                Director                                       March 30, 1999
/s/ Emil R. Krahulik
-------------------------------------
Emil R. Krahulik
                                                Director                                       

-------------------------------------
Thomas F. Lawrence, Jr.
                                                Director                                       March 30, 1999
/s/ Henry L. Nielsen, Jr.
-------------------------------------
Henry L. Nielsen, Jr.
                                                Director                                       March 30, 1999
/s/ John W. Sanford III
-------------------------------------
John W. Sanford III

/s/ Robert N. Smith
-------------------------------------
Robert N. Smith                                 Director                                       March 30, 1999

</TABLE>


                                      -48-